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, June 18, 1963, at 9:30 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Bopp
Clay
Irons
Mills
Mitchell
Scanlon
Shepardson
Messrs. Hickman, Wayne, and Shuford, Alternate
Members of the Federal Open Market Committee
Messrs. Bryan and Deming, Presidents of the
Federal Reserve Banks of Atlanta and
Minneapolis, respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hexter, Assistant General Counsel
Mr. Noyes, Economist
Messrs. Baughman, Furth, Garvy, Green, 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
Messrs. Latham, Hilkert, and Hemmings, First
Vice Presidents of the Federal Reserve
Banks of Boston, Philadelphia, and
San Francisco, respectively
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Messrs. Mann, Taylor, Jones, Parsons, and
Grove, Vice Presidents of the Federal
Reserve Banks of Cleveland, Atlanta,
St. Louis, Minneapolis, and San Francisco,
respectively
Mr. Parthemos, Assistant Vice President,
Federal Reserve Bank of Richmond
Mr. Cooper, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Eisenmenger, Acting Director of Research,
Federal Reserve Bank of Boston
There had been distributed preliminary and revised drafts of
minutes of the meeting of the Federal Open Market Committee held on
May 28, 1963.
The revised draft incorporated amendments to the
Committee's Guidelines for System Foreign Currency Operations reflecting
the following actions that had been taken by the Committee at the May 28
meeting:
(1) adoption of a working rule that, in the absence of excep
tional circumstances, drawings under a reciprocal currency arrangement
should be fully liquidated within twelve months; and (2) authorization
to the Federal Reserve Bank of New York to utilize its holdings of a
currency for the purpose of settling commitments denominated in other
currencies, up to a combined total of $50 million equivalent.
The
revised draft also incorporated an appropriate amendment to the con
tinuing authority directive to the New York Reserve Bank on foreign
currency operations covering the second of these two Committee actions.
The revised draft of minutes further incorporated an amendment to the
Guidelines flowing from action taken by the Committee at its meeting
on March 5, 1963, authorizing the New York Reserve Bank to purchase
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6/18/63
specified currencies through forward transactions up to a combined
total of $25 million equivalent for the purpose of allowing greater
flexibility in covering commitments under reciprocal currency agree
ments.
This action was reflected at the time in the continuing
authority directive but not in the Guidelines.
It was noted that approval by the Committee of the minutes
of the May 28 meeting would serve to ratify the foregoing amendments
to the Guidelines and to the continuing authority directive.
would follow that reference to these amendments
It
would be included in
the entry for the record of policy actions of the Open Market Committee
covering the meeting of the Committee on May 28, 1963.
Thereupon, upon motion duly made
and seconded, and by unanimous vote, the
minutes of the meeting of the Federal
Open Market Committee held on May 28, 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 May 28 through
June 12, 1963, together with a supplementary report covering the period
June 13 through June 17, 1963.
Copies of these reports have been
placed in the files of the Committee.
In comments supplementing the written reports, Mr. Coombs
summarized current and prospective developments with respect to the
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U. S. gold stock along with conditions in the London gold market.
Turning to System foreign currency operations, he noted that
the System had completed repayment of its Swiss franc drawing under
the swap arrangement with the Swiss National Bank through transactions
conforming to the procedure authorized by the Committee at its meet
ing on May 28, 1963.
He also noted that negotiations had been completed
for liquidation on June 20, 1963, of the drawing of $16 million of
Swiss francs that remained outstanding under the swap arrangement with
the Bank for International Settlements.
In further comments, Mr. Coombs said that announcement of the
increase from $50 million to $500 million in the swap facility with
the Bank of England, pursuant to the Committee's authorization at the
meeting on May 28, had been generally well received by central banks.
However, certain foreign Treasury officials apparently were continuing
to press to bring the System's swap arrangements under some form of
international surveillance.
He had taken the position, Mr. Coombs
said, that drawings against swap facilities were purely a matter of
bilateral relationships and that the integrity of the Federal Reserve
System was an adequate safeguard against the abuse of such swap
facilities.
Further, the Federal Reserve System had published two
articles at approximately six-month intervals giving a full story of
System swap arrangements and operations thereunder.
He thought, however,
that it might be useful on the occasion of the monthly meetings of the
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Bank for International Settlements at Basle to advise the participants
confidentially on Federal Reserve drawings and repayments under such
arrangements, subject to prior concurrence by the other central banks
that were parties to the respective swap agreements.
Such a procedure
would serve t.o dispel rumors that might otherwise be circulated as to
the extent of Federal Reserve commitments in various currencies.
It was suggested in the alternative that the purpose might be
served by comments in the course of conversations with central bankers
attending the meetings, as and when that seemed desirable, rather than
to put the matter within the framework of a regular reporting basis.
Mr. Coombs agreed that the alternative procedure would serve the purpose,
adding that during the course of the monthly meetings he was in conver
sation with representatives of the central banks attending the meetings.
It was the consensus that the alternative procedure would not be
inappropriate, assuming that information concerning drawings and repay
ments under System swap arrangements would not be divulged except after
clearance with the central banks that were parties to the particular
reciprocal currency agreements.
Proceeding with his review of System foreign currency operations,
Mr. Coombs referred to the recent strengthening of the dollar rate
against the Netherlands guilder, which had resulted in a termination of
System operations in that area.
He also described prospective develop
ments that might afford an opportunity for repayment of part of the
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System's drawings of guilders under its swap arrangement with the
Netherlands Bank.
Mr. Coombs noted that the continued strength of the German
mark had resulted in drawings by the System of $100 million equivalent
of marks in four instalments under the swap arrangement with the
German Federal Bank, and disbursement of $90 million equivalent of the
marks thus drawn.
It was Mr. Coombs' view, for reasons stated, that
the System should continue its operations
in support of the dollar
against the mark, drawing if necessary the full $150 million equivalent
of marks available under the swap arrangement with the German Federal
Bank.
Under certain circumstances, a case might even be made for
negotiating an increase in the swap facility, but on balance he felt
that the System would be well advised to limit its drawings to no more
than $150 million and invite the Treasury to deal with any further flow
of funds into Germany.
Further, if no reversal of the present situation
was seen over the next three months, he was inclined to feel that the
System should suggest to the Treasury and the German Federal Bank the
possibility of funding the System's swap drawings indirectly through
additional issues by the Treasury of bonds denominated in German marks.
An alternative would be purchases of gold by the German Federal Bank.
In further explanation of his views in this regard, Mr. Coombs
said that if the System should run through the remaining $60 million of
marks available under the swap arrangement with the German Federal Bank
and a substantial speculative flow of money into Germany developed, a
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case possibly could be made for increasing the swap facility.
System operations were intended to deal with financial
However,
flows that were
expected to be reversible, and as yet there was no sign of a turning
of the tide of flows into Germany.
Therefore, if the System exhausted
the remaining $60 million equivalent of German marks available uncer
the swap facility, it might still be faced with the possibility of
continuing market operations in support of the dollar for an indeter
minate length of time.
In such a situation, it might be well to call
a halt to System operations.
Mr. Coombs concluded his comments with remarks on the recent
weakening of the Italian lira and prospective developments in that
regard.
Thereupon, upon motion duly made
and seconded, and by unanimous vote, the
System Open Market Account transactions
in foreign currencies during the period
May 28 through June 17, 1963, were approved,
ratified, and confirmed.
Mr. Coombs pointed out that the $250 million swap arrangement
with the Bank of Canada would mature June 26, the $50 million swap
arrangement with the Bank of Sweden would mature July 17, and the swap
arrangements with the Bank of Italy, the Swiss National Bank, and the
Bank for International Settlements, in the amounts of $150 million,
$100 million, and $100 million, respectively, would all mature
July 18, 1963.
He recommended renewal of these swap arrangements,
each for a further period of three months.
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Renewal of the aforementioned swap
arrangements, as recommended by Mr. Coombs,
was approved unanimously.
Mr. Coombs noted that a System drawing of $25 million equivalent
of guilders under the swap arrangement with the Netherlands Bank would
mature July 11, 1963, and he recommended renewal of the drawing for a
further three months if that should prove necessary.
Renewal of the drawing if necessary, as
recommended by Mr. Coombs, was noted without
objection.
Mr. Coombs pointed out that the Bank of England's drawing of
$25 million under its swap arrangement with the Federal Reserve System
would mature July 16, 1963.
If the Bank of England should so request,
he recommended that a three-month renewal of the drawing be granted.
The granting of a renewal of the drawing,
if requested by the Bank of England, was noted
without objection.
This concluded the consideration of System foreign currency
operations and related matters.
Before this meeting there had been distributed to the members
of the Committee a report covering open market operations in U. S.
Government securities and bankers' acceptances for the period May 27
through June 12, 1963, and a supplementary report covering the period
June 13 through June 17, 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:
6/18/63
The money market continued steadily firm in the period
since the last meeting of the Committee. There were only
slight further price and yield adjustments to the recent shift
in System policy while, during the course of the period, there
was an astonishingly enthusiastic reception for the Treasury's
sale of 4 per cent bonds of 1970.
Turning first to the sale of the 4 per cent bonds, it may
be premature to attempt to draw any firm conclusions about this
operation, but one or two points do seem to emerge. Clearly,
the $100,000 figure for subscriptions to be allotted in full
was set at too high a level; moreover, by indicating this full
allotment figure in advance of accepting subscriptions, some
sizable speculative interest was encouraged. More fundamentally,
the episode illustrates the great difficulty in setting price
and other terms on Treasury offerings when the market is in a
period of transition. In this case, the market's shift toward
expectations of somewhat higher rates had for the time being
about run its course--although it seemed at the time when the
Treasury had to set its terms that the underlying atmosphere
was still very cautious and called for terms that would be
regarded as attractive by investors.
As regards System operations and the money market, the
recent period has afforded an excellent example of the uncer
tainties that lurk behind bank reserve statistics and the
projections of such data. Once again, market tone proved to
In terms
be the most reliable part of our "guidance system."
of actual reserves--or rather, in terrs of current estimates
of actual reserves--free reserves were somewhat lower in the
past few weeks than in the preceding three-week interval, but
the money market had, if anything, a slightly easier consistency.
Member bank borrowings averaged a little lower, and while Federal
funds traded at 3 per cent most of the time, there were fewer
occasions on which really substantial reserve needs remained
to be satisfied at the discount window.
These developments were, in good part, a reflection of a
shift in basic reserve availability toward the money center
banks. The New York City banks, in particular, had a much
smaller basic reserve deficiency than in the previous period,
and accordingly were able to reduce both their net purchases
of Federal funds and their borrowings from the Reserve Bank.
Thus, while the countrywide supply of Federal funds may have
been somewhat lower than in the previous three weeks, the
demand was also appreciably less, and resulted on balance in
a slightly more comfortable tone in the money market.
Apart from these geographic shifts in basic reserve
availability, which rather complicated the interpretation of
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7/18/63
the significance of given reserve levels, System operations
were further complicated during the recent period by an
extraordinarily persistent series of "misses" in the day-to
day reserve projections. Sizable misses are of course not
unusual, but one can often depend on a rough balancing out
from day to d y between over-estimates and under-estimates
of the various reserve factors. In the recent period, however,
there was a strong tendency for actual reserve levels to fall
short of the projections, particularly the projections of
float and the Treasury balance at the Reserve Banks.
As
regards the Treasury balance, there has been some tendency
for daily expenditures to fall short of estimates and for
revenues to run higher. As for the misbehavior of float,
we have no ready explanation but some work is being done to
re-examine past patterns to see if more reliable projections
can be eveloped.
Treaury bill
rates, after moving upward following the
policy shift in the latter half of May, have hovered around
3 per cent in the case of the 3-month issue, while the 6-month
bill has moved around 3.08 per cent.
In the Treasury bond market, there have been few develop
ments of any significance, apart from the activity surrounding
Over the past three weeks prices of most issues
the new 4's.
have been down somewhat, with declines mainly in the maturities
close to the new 1970 issue.
The limited extent of the decline reflected in part the
favorable technical position of the market following the heavy
purchases of bonds by the Treasury in the latter part of May
as it grappled with the problem of the debt ceiling. At the
moment at least, the bond market atmosphere seems fairly steady
and more confident than it was three weeks ago, when the market
was still adjusting to the lower level of reserve availability.
The situation in the corporate and municipal markets has
been mixed. In the corporate area there has been a continuing
tug of war, with underwriters bidding strongly for a limited
supply of new issues and then being content to distribute the
Rates on new and
bonds slowly to rather reluctant investors.
In the
outstanding issues have remained about unchanged.
tax-exempt market, on the other hand, the rate trend has been
upward.
The calendar of new issues has remained large, and
dealer inventories have been kept from rising only by virtue
of continuing price concessions.
The reserve projections for the three weeks ahead indicate
that unusually large amounts of reserves will be needed. The
New York projections suggest a need of over $700 million, while
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the Board staff estimates indicate a need of about $1.2
billion. And both sets of estimates have recently been on
the low side of actual results. Under the circumstances,
I should like to recommend that the limit on changes in
the Account over the next three weeks be raised from $1
billion to $1.5 billion.
I hope it will not be necessary
to operate on that scale. But it would be well to be
prepared if we should have to do so.
During discussion based on Mr. Stone's report, it was noted that
projected reserve drains exceeded $1 billion in the three weeks ending
July 10, with an indication that part of the drain would reflect an
increase in U. S. Government deposits at the Federal Reserve Banks.
Question was raised whether it would not be reasonable for the Treasury
to leave the Government deposits at a somewhat lower level, thus reliev
ing the pressure on the System to provide reserves.
Mr. Stone commented
that System-Treasury discussions had resulted in general agreement on
the desirability of keeping Treasury balances at the Reserve Banks
rather constant at a level of about $900 million.
In the preceding
statement week, the balances had fallen relatively below, but they had
already been restored to around the $900 million level, thus resulting
in a reserve drain.
Mr. Mitchell referred to Mr. Stone's comment that in the past
period the tone of the market had once again proved to be the most
reliable part of the Desk's "guidance system."
He inquired whether the
Manager felt that he was operating in conformity with the Committee's
directive in following the tone of the market as a primary guide.
Mr. Stone pointed out that the Committee's instructions called for
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maintaining about the same degree of money market firmness.
He
regarded the reserve projections as one part of the apparatus employed in
measuring the tone and feel of the market, not only in terms of what
was happening at the moment but in days ahead.
In that sense, the
reserve projections entered into the operations of the Desk.
There
had been a number of occasions on which the estimates pointed to free
reserve levels over $200 million.
If the Desk had been guided by those
estimates alone, presumably it would not have undertaken any open market
operations, but the market itself suggested that those figures were not
accurate.
The market acted as if there were fewer reserves around.
Therefore, despite the estimates the Desk went in and bought bills
rather heavily.
Asked whether it was fair to infer that the Desk had
operated according to the tone and feel of the market and not according
to the reserve projections,
not be separated so sharply.
Mr. Stone replied that these factors could
The Desk operated primarily on the basis
of tone and feel of the market, but the reserve estimates were used as
an indication of the market tone that the Desk was likely to be con
fronted with three or four days hence.
If the reserve projections had
given the appearance of being more accurate, there might have been
marginal changes in the Desk's operations.
On some days the Desk might
have bought a little less or sold a little more, but the general thrust
of the Desk's operations would have been about the same.
6/18/63
-13Thereupon, upon motion duly made and
seconded, and by unanimous vote, the open
market transactions in Government secur
ities and bankers' acceptances during the
period May 28 through June 17, 1963, were
approved, ratified, and confirmed.
The Chairman then called for the staff economic and financial
reports beginning with Mr. Noyes, who presented the following statement
on economic developments:
Most of the recent information on the performance of
the economy suggests that the broad observation we have
used so often in the last two years may again be appro
priate. The economy is generally expanding, with resources
available for further expansion.
Unemployment, especially among teen-agers, has con
tinued to creep upward. Despite the high level of auto
sales, the performance of retail trade as a whole has been
a little disappointing--in that there has been practically
no further advance since last November. Concern is expressed
that in the absence of a tax cut the current upward thrust
may falter when the stimulus recently provided by steel in
ventory accumulation is reversed.
On the other hand, some sectors are more active than
was generally anticipated. Construction activity, especially
the construction of multi-family private residences, has held
up better than many expected, and most recently has been
rising.
If the prospects for capital investment were any stronger,
they might well be a cause for concern rather than comfort.
Plant and equipment spending in the second half implied by
the latest Commerce-SEC survey would be up 7 per cent from
the 1962 level for the same period. A higher rate would raise
a question as to whether capital spending plans were realistic
in relation to recent developments in final demand and, there
fore, likely to be sustained.
Furthermore, it is increasingly difficult to summarize
the total pattern of price developments as one of price
stability. Wholesale prices were up in May, and the prospects
seem to be that these prices will increase further--perhaps by
a larger amount--in June.
It seems to me that it would be
wrong to describe recent price developments in the aggregate
as alarming or even inflationary, but at the same time one
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would be reluctant to see any more upward price pressure
than has prevailed.
While we may all wish devoutly for a higher rate of
economic activity--and a lower level of unemployment--it
is hard to see how developments of recent weeks could
realistically have been more favorable to the achievement
of these goals. The activity mix certainly has not been
In this case we might have liked a
ideal--it never is.
little larger volume of final purchases by consumers and
a little less buying of steel for inventory. But the over
all rate of progress seems to have been about as large as
the economy could handle without raising more questions
than it answered for the ultimate objective of sustained
expansion.
It now appears that real GNP increased at an annual
rate of about 4-1/2 to 5 per cent during the first half
of 1963. Without suggesting that we can be at all com
placent with respect to the future, it does appear that
this rate is as sustainable, and perhaps more sustainable,
than either a higher or lower rate would have been. At
least one can say that any sizeable additions over and
above the increase in total demand that actually occurred
would have had to be fortunately selective not to have
created problems and that any considerable shortfall would
have had to be similarly well placed if it were not to raise
questions as to the future.
My own judgment is that a continuation of about the
recent rate of expansion, rather than either an acceleration
or deceleration, is the optimum to which policy should be
directed. As I said before, one would hope that the composi
tion might shift in several ways--and certainly that we might
achieve lower rates of unemployment--but neither a faster nor
a slower over-all pace of expansion would seem likely to con
trioute to the achievement of our objective in the longer run.
If one accepts this broad objective, what sort of a
monetary policy would contribute to its achievement? My guess
is that it might be necessary to let credit markets ease a
little in response to the usual summer doldrums, accentuated
this year by steel inventory adjustment, which now looks as
Then, if Government
if it might lie immediately ahead of us.
and business spending plans materialize in the early fall, in
the magnitudes now foreseen, some lessening of ease at that
time would be both a natural and desirable result of rising
credit demand.
For the time being, since the economy shows no evident
signs of a significant change of pace, neither a substantially
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tighter or easier policy would be called for to maintain
the present rate of progress.
The case for a change, if
any, would seem to rest primarily on other than domestic
considerations.
Mr. Koch presented the following statement on financial
developments:
It is still too early to trace satisfactorily the
effects of the recent slight further lessening in monetary
ease on the course of bank credit and the money supply.
Thus far, the effects have been concentrated mainly in the
money market, although free reserves have been somewhat
lower and borrowings larger at country as well as city banks,
suggesting a spreading of less easy reserve positions through
out the banking system.
In the money market, short-term interest rates have
risen about 10 basis points or so, mainly in response to
reduced bank reserve availability.
Free reserves since mid
May have averaged $100 to $150 million less than earlier.
The Federal funds rate has continued to bump against the
3 per cent discount rate, and New York commercial bank
lending rates to Government security dealers have ranged
between 3-1/4 and 3-1/2 per cent.
At the same time, actual required reserves behind
private deposits have inched up relative to the guideline
since May 22, after having declined in the preceding month.
In the next couple of weeks they may drop sharply again,
for the Treasury is expected to accumulate a very large
end-of-fiscal year balance, thus temporarily tending to
drain off private deposits and reduce required reserves
During this period, the Account
behind such deposits.
Management might well try to provide as many reserves as
possible, within its bill rate and money market constraints,
to cover the sharp rise in Treasury deposits, so that private
deposits do not fall so far below the guideline that it would
be difficult to recoup later.
As for bank credit and money, both continue to show
moderate movements. Although total loans and investments
rose again in May and early June, after their sharp April
contraction, the rise has been less pronounced than it was
in either the first quarter of this year or in the autumn of
last year.
The money supply showed no change in May but probably
rose a little in early June. Since January, the money supply
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has grown at a seasonally adjusted annual rate of about
2 per cent. Moreover, the demand deposit component of
the money supply has shown no change over this period, all
of the growth in the total being due to a rise in currency
in circulation. Interestingly enough, in our guideline
projections we allow for growth in time and savings deposits
but not for growth in currency in circulation.
Time and savings deposit growth at commercial banks in
May and early June was probably at a seasonally adjusted
annual rate of about 13 to 14 per cent, as compared with 17
to 18 per cent earlier. The inflow of savings at saving
and loan associations also slackened in April and May, but
that at mutual savings banks continued large.
The capital markets reacted to the modest recent change
in monetary policy with relative indifference. Municipal
yields--a special case--rose sharply, but yields on new high
grade corporate issues actually declined a few basis points.
Yields on longer term U. S. Government notes and bonds had
steadied before the Treasury's announcement on June 6 of its
new intermediate-term cash financing, the public response to
which can only be termed spectacular.
As for the future, the third quarter is likely to provide
seasonally light corporate and municipal calendars of new pub
lic issues, although private placements may continue large.
Federal Government borrowing in the last half of the year may
Cash receipts
be considerably less than anticipated earlier.
have been larger than expectations and expenditures are lower.
New financing in the months ahead may well be only a little
higher than during the second half of 1962. This may have a
bullish effect on bond prices when it is fully realized by the
market
Finally, I should like to make two comments on the reg
ular staff reserve memorandum that is distributed before each
meeting. First, we have made another change in the base period
in recognition of the shift in policy adopted at the May 7
meeting. Both because the change in policy was not effective
until after the Treasury refinancing was completed about a week
later and for technical reasons explained in the memorandum, we
are now considering the week ending May 22 as the zero base from
which to compute cumulative changes of actual required reserves
from the guideline.
We are continuing to include a 3 per cent annual growth
trend in the guideline computation. The staff has considered
the suggestion occasionally made that this growth allowance
be reduced somewhat, perhaps to 2 per cent, but has decided
against a change essentially for the following reason. With
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actual required reserves behind time and savings deposits
currently increasing at a seasonally adjusted annual rate
of 13 to 14 per cent, a 3 per cent increase in required
reserves behind total private deposits provides reserves
to support less than a 1 per cent annual rate of increase
in demand deposits. A 2 per cent increase in required
reserves behind total deposits, assuming continuance of the
current rate of growth of time deposits, would necessitate
demand deposit contraction at an annual rate of about 1/2
of 1 per cent. Although it is no doubt true that some of
the recent growth in time and savings deposits has provided
essentially the same stimulus to spending as the growth in
demand deposits, the staff did not consider it appropriate
to use a guideline figure that implied demand deposit
contraction.
Moreover, the new time and savings deposits of commer
cial banks, as well as those at mutual savings banks and
shareholdings at saving and loan associations, appear to have
more the characteristics of real savings rather than money.
This is suggested by the lack of increase in the turnover of
these deposits and shareholdings since their increased rate
of growth began a year and a half ago. Personal time and
savings deposits at commercial banks still apparently turn
over about once every two years, and deposits at savings
banks and shareholdings at saving and loan associations
about once every four years. These turnover rates have been
very stable at these low levels for many years.
Low and stable time deposit turnover rates do not, of
course, tell us how much of the recent growth in these
deposits has come from shifts out of demand deposits. Nor do
they tell us how much of the recent growth represents, in
essence, money rather than savings. They do suggest, however,
that the new time deposits are not being used as transactions
balances any more than the old ones were. The new time deposits
could, of course, still have arisen as a result of shifts out of
demand deposits, with the remaining demand deposits turning over
more rapidly. According to our demand deposit turnover figures,
this is apparently what has taken place, to some extent at least.
The relevance of all this for monetary policy is that a somewhat
greater degree of restraint on the narrowly defined money supply
is probably needed now than earlier in order to achieve the same
broad economic objectives.
6/18/63
-18Mr. Furth presented the following statement with respect to
the U. S. balance of payments and related matters:
The U. S.
payments position remains unfavorable. In
May, the deficit, tentatively estimated at $330 million, was
somewhat higher than in April or in the average of the first
quarter. The preliminary and fragmentary weekly figures for
the first two weeks of June indicate a similar deficit this
month.
Detailed data are available only through April, and some
of those are preliminary or fragmentary. But they permit some
idea of what has been happening.
The cumulative deficit in those four months was about
$1,050 million
A surplus on trade and nonmilitary services
of about $2,250 million was offset by net Government expendi
tures for foreign aid and defense of perhaps $1,850 million
and direct investments of perhaps $500 million, leaving a
combined deficit on these accounts perhaps as small as $100
million. But in addition we know of recorded movements of
financial capital, including $550 million of net acquisition
of portfolio securities, primarily foreign bond issues, and
$150 million net extension of bank-reported credits. This
leaves perhaps $250 million unaccounted for, including pre
sumably classified expenditures abroad of some U. S. Govern
ment agencies and under-reporting of imports of goods and
services as well as unreported movements of private capital.
This year, as in most previous years, the U. S. deficit
thus reflected, as the IMF paper on the U. S. payments bal
ance puts it, an exchange of liquidity for foreign assets.
But this year some of these exchanges involved assets of
On two recent occasions, for in
rather similar character.
stance, sums flowing into European countries as proceeds
from foreign government bonds acquired by U. S. residents
have, for all practical purposes, been reinvested in U. S.
bonds issued by the Treasury in the currency of the country
involved--with only two differences. From the U. S. payments
point of view, it is probably unfavorable that the foreign
bonds were acquired by U. S. private investors but the
Treasury bonds by foreign monetary authorities; it is favor
able, on the other hand, that the U. S. bonds bear lower
interest rates than the foreign bonds.
Abroad, the recovery in Europe from the winter set-back
seems to continue. Less welcome from the point of view of
the U. S. payments balance is the resumption of heavy flows
6/18/63
-19-
of private capital, particularly into Germany.
In the
field of foreign policy, two developments may have an
impact on flows of funds from the United States.
The
first is the tendency of foreign countries to take
restrictive, or cease expansionary, policies; the latest
example is the increase in the discount rate of the Bank
of Sweden. The second is their effort to find ways to
restrict the inflow of U. S. investment capital, insofar
as it involves control over domestic industries.
The
Canadian budget promises a tax reform pointing in that
direction, and France has finally induced the European
Economic Community to look into the alleged danger of
"alienation" of European enterprises to U. S. capital.
Last time, the understanding way was mentioned in
which the IMF delegation treated the U. S. payments
problem. This time, the BIS may be added to the list.
The annual report of the BIS has been widely quoted and
misunderstood. As I read it, the essence of its views
on the subject is contained in the following sentences:
"Contributions to equilibrium are needed
from a reduction in net capital exports and in
government dollar expenditures abroad. The
authorities have indicated that a tighter mon
etary policy will be feasible as the economy
expands with the aim of reducing capital ex
Such a
ports and attracting capital imports.
policy would have to be directed mainly to
longer term investment funds, as short-term
interest differentials have largely been
eliminated and as substantial attraction of
liquid funds from London would not be desirable."
At this point the Chairman called for the usual go-around of
comments and views on economic developments and monetary policy begin
ning with Mr. Hayes, who presented the following statement:
The domestic economy appears to have expanded further
in May. Industrial production and residential construction
continued to show strength, and retail sales recovered from
what turned out to be a very small April dip. Manufacturers'
sales expectations have taken a sharp turn for the better,
while business plans for spending in the second half of 1963
seem to be a bit stronger. These various factors provide a
6/18/63
-20-
reasonable basis for expecting continued expansion during
the rest of the year. On the other hand, the surge of
teen-agers into the labor force kept unemployment high in
May and may cause further deterioration this month.
Commercial bank credit expanded strongly in May, but
weekly data suggest some lessening of the pace of advance
in late May and early June. So far, bank credit components
have not reflected an adjustment to the firmer money market
conditions or the past month, nor do they point to any
noticeable revision in anticipations regarding the future
Thus, the banks have been investing even
course of rates.
more heavily than in the previous month ir real estate loans,
consumer loans, and other securities, while business loans
have been unu..ually weak. Also, time deposits have con
tinued to increase rapidly while the money supply has risen
very little
Recent balance of payments developments have been quite
disappointing, with the May deficit of around $300 million
exceeding the heavy April deficit. To a considerable extent
this high May figure (as well as the large 5-month aggregate)
reflects an upsurge of foreign security placements, primarily
by Canadian borrowers. There may be some diminution of long
term borrowings and direct investment in the months ahead;
but I think we must face the fact that the continuance of an
over-all deficit at anything like its present level constitutes
a threat of the first magnitude to the dollar despite the recent
calm atmosphere in the exchange and gold markets.
While only $202 million of the 5-month deficit of about
$1-1/4 billion was settled in gold, we can hardly expect such
a low proportion to persist in the future. For one thing,
there has been a substantial rise in foreign private dollar
holdings so far this year, but this appears to be mainly the
result of an increase in the liabilities of American banks to
the branches abroad, probably reflecting Euro-dollar market
activity. Also a sizable part of the deficit has been financed
through Treasury borrowings abroad, and there is a limit to the
willingness of the European countries to undertake such financ
ing, especially in the absence of convincing evidence that the
deficit is being gradually reduced. I hope that the members of
the Committee have had an opportunity to read Mr. Coombs' force
ful memorandum on the "Present Position of the Dollar," expres
sing the judgment that we have reached a critical phase and that
the dollar has become vulnerable to a break in confidence which
might occur almost without warning.
The thinking of the European
monetary authorities is pretty accurately reflected in the Annual
Report just released by the Bank for International Settlements,
6/18/63
-21-
which strongly urges higher interest rates in this country
and incidentally holds out no hope that our problem will be
eased by further interest rate declines in Europe.
In considering appropriate future policy actions, we
must of course give careful attention to the timing of the
Treasury's program of financing over the next few months.
It is quite clear that the Treasury's calendar is crowded
and that there will be only a few brief periods when we
will have reasonable freedom to act. The first and most
satisfactory of these periods is from about Thursday of this
week, June 20, when payment for the surprisingly successful
new 4 per cent bonds will be made, until the week of July 8,
when the July one-year bill will probably be auctioned. With
new cash financing and announcement of the August refunding
expected later in July, it would appear that unless we move
in the near future we shall be "locked in" until September,
and even that month may be pre-empted, since another advance
refunding may be carried out at that time.
As I indicated at the last meeting, I believe that we
made the right move in open market policy on May 7 and that
the resulting firmer tone in the money market has been widely
accepted as appropriate to the country's international and
domestic outlook. In my judgment it has had a wholesome effect
in causing growing expectation of a subsequent discount rate
increase while at the same time demonstrating our cautious
solicitude for the state of the domestic economy. After six
weeks of this somewhat greater degree of firmness, I think we
can well afford to move a little further on this road in
preparation for discount rate action. I would hope that we
could get the 90-day bill rate above 3 per cent and keep it
there; and in view of the continuing heavy corporate demand
for bills and the relatively low level of dealer positions,
this objective may well call for somewhat larger borrowings
and somewhat lower free reserves than the average of the past
Free reserves might well have to drop below
three weeks.
$100 million.
The directive might appropriately be changed slightly to
reflect this modest additional move toward greater firmness in
the money market following completion of the Treasury financing,
and to place less emphasis on reserve expansion.
As for the discount rate, it seems to me clear that the
time for decision is at hand. While it would be reassuring,
before making our move, to have a more emphatic demonstration
of strength in the domestic economy and a clearer picture in
regard to the stimulative effects of the tax bill now in the
6/18/63
-22-
Ways and Means Committee, the continued gravity of the
international payments position leaves us little choice,
especially in the light of the Treasury's calendar, as I
have already suggested. An increase of 1/2 per cent in
the discount rate in the near future could be expected to
serve two very important purposes:
(1) to signal to
foreign monetary authorities and to the world in general
that the System is ready to use traditional tools of
monetary policy to defend the international position of
the dollar, and (2) to achieve a level of short-term market
rates that s ould cause a substantial repatriation of short
term funds.
At this juncture we would probably do well to
try to hold down the impact of our action on long-term rates,
because of the uncertainties in the domestic economy--even
though at a later date we may conclude that our international
problems call for an all-out defense affecting interest rates
and credit availability throughout the maturity range. We
might consider softening the impact of the discount rate
move on long-term rate expectations by using longer maturities
to the extent practicable when reserves must be provided, as
they must in very considerable volume over the next few weeks,
and perhaps by some use of swaps between long and short
maturities.
Apart from even-keel considerations there is another
reason why late June would seem to be a highly appropriate
time for discount rate action. It is my understanding that
the President will probably make a forceful speech on the
entire balance of payments program early in July, with
emphasis on the need for stronger Government action in
several directions. This would help to make our own move
both more acceptable and more effective. It seems to me that
prior rather than subsequent action by the System is somewhat
preferable from the standpoint of the System's posture of
independence within the Government. As for foreign reactions,
I am confident that the British and Canadian authorities would
be sympathetic, even though it is conceivable they might find
themselves under considerable pressure to make some rate adjust
ments of their own. In any case, it is the international financial
position of all three countries, vis-a-vis the Continent, that
is of crucial significance, and we should welcome any strengthening
of this position. We have strong reason to believe that the
Continental European central banks, which have long urged a
tightening of credit policy by the Federal Reserve, would not
frustrate such action by competitive tightening of their own
Incidentally, we also have some hope that
credit policies.
6/18/63
-23
the European central banks might be willing, at least
temporarily, to restrain borrowing activities by their
commercial banks in the Euro-dollar market to help
minimize any upward effect on Euro-dollar rates of our
own action.
It would seem to me highly desirable that an increase
in the discount rate be accompanied by a further relaxation
of the interest rate ceilings imposed by Regulation Q. In
particular, the 90-day ceiling, which is already decidedly
restrictive, might well be increased to 3-1/2 per cent and
the 6-month ceiling to 3-3/4 per cent. Action along these
lines would give strong support toward our objectives in the
area of short-term capital flows.
Mr. Irons reported that in the Eleventh District the component
parts of the economy had shown mixed movements recently, with probably
a little net improvement.
financial picture.
There had been no significant change in the
Loans were up a bit, time and savings deposits
showed a further advance, demand deposits were down somewhat, and in
vestments were off a little.
Total bank credit showed a slight decline.
Demands of banks for funds, either through the Federal funds market or the
discount window, were relatively unchanged.
As for some time, District
banks were net purchasers of Federal funds in the most recent period.
Borrowings from the Reserve Bank ranged generally in the $5-$10 million
area.
In summary, Mr. Irons said, the District showed little change
in economic and financial factors, and there had been no noticeable
change in general attitudes.
Neither businessmen nor bankers were
expecting a strong economic upsurge, but they were confident of the
continuation of a good level of business activity.
-24
6/18/63
Turning to monetary policy, Mr. Irons said he was inclined to
feel that it would be desirable, with one possible exception, to
maintain the same degree of money market firmness that had been main
tained during the past three weeks.
He was quite satisfied with
market conditions and with the operations of the Desk during a period
that had been rather difficult due to factors mentioned by the Account
Manager.
He was rather glad to see the three-month bill rate drop back
to a level slightly below the discount rate.
To repeat, he would con
sider it in order to maintain for the next three weeks the degree of
firmness that had been achieved.
Mr. Irons went on to say that he had read the Coombs memorandum
referred to by Mr. Hayes.
His problem was a lack of personal knowledge
of the exact situation in Europe with regard to the degree of confidence
in the dollar.
If a substantial loss of confidence in the dollar was
imminent, or if there were other elements in the picture that would call
for action on the discount rate, he would favor such action.
This kind
of move would have some shock element; perhaps, in fact, an increase to
as high a rate as 4 per cent ought to be considered from that standpoint.
The only reason that he saw for raising the discount rate at this time,
however, would be the existence of a serious and almost imminent loss of
confidence in the dollar about which something must be done.
If this was
actually the situation, he did not think the System should feel restricted
from taking action even at a time when the Treasury was in the market,
6/18/63
-25
because the threat externally would be more serious than the problem of
the Treasury.
To summarize, if the conditions that he had mentioned
were imminent,
firm action on the part of the System would be in order.
If they were not imminent, he would favor continuing the monetary policy
that had been in effect during the past three weeks.
Mr. Deming noted that employment in the Ninth District, which
was weak early in the year due to weather conditions, rose more than
seasonally in April and May, and apparently this stronger trend was
continuing in June.
The District had been running slightly below year
ago employment levels but probably would go ahead of them in June.
Production had grown appreciably faster than employment, and the
improvement was broadly based.
In April the industrial power use
index was 10 per cent ahead of the previous year, and almost 6 per cent
ahead of January.
Ore shipments had been relatively slow, partly because
the Great Lakes opened up late and partly because stocks at mills were
high.
Agricultural prospects were excellent, with the moisture situation
very good.
Respondents to the Reserve Bank's most recent survey of attitudes
gave the most optimistic appraisal of the business outlook since April
and May of last year.
Seventy-four per cent saw improvement as probable
or certain, and only 2 per cent saw a decline as likely.
The balance,
of course, foresaw continued stability.
As to District banking developments, loans were up more than
6/18/63
-26
seasonally in May, with particular strength at country banks.
Country
bank loan-deposit ratios hit a postwar high in May, a point above the
previous peak of May 1960.
City bank loan-deposit ratios were still
5 points below the May 1960 peak, but. they were 5 points above the
December 1961 level.
As to monetary policy, Mr. Deming said he had gone through about
the same thought processes as Mr. Irons and had come to about the same
conclusions.
It seemed to him that the Desk had done quite a good job
during a rather difficult period, and he would like to maintain as
nearly as possible the current degree of money market firmness.
If the
degree of international confidence in the dollar had reached as low a
point as suggested by Mr. Coombs' memorandum and the comments of
Mr. Hayes, the System probably should take some action of a dramatic
and drastic nature.
Personally, however, he was not completely convinced
that such action was necessary at this particular time, and he would
prefer not to change the discount rate now.
If firm action was deemed
to be required by the international situation, the usual considerations
of even keel should not preclude the System from taking such action even
during a period of Treasury financing.
the open priods
under such
In other words, he would regard
for monetary policy actions as broader and more extended
conditions than would normally be the case.
Absent a real
dollar crisis, though, he would maintain monetary policy about as at
present, with no change in the discount rate.
6/18/63
-27
Mr. Scanlon said that although business indicators showed mixed
signs, it was believed that business activity in the Seventh District
would improve gradually through the second half of 1963 despite a
probable sharp decline in steel output and a possible slowing in the
auto industry.
This view was shared generally by business economists
in the District.
Local steel economists were now estimating that about 5 million
tons of "excess"
inventories would have been accumulated by the end of
the second quarter.
About 70 per cent of this accumulation was expected
to be liquidated in the second half of 1963, assuming the absence of a
steel strike.
The auto industry continued at a good rate, although the
inventory of used cars was relatively high.
Loans at District weekly reporting banks rose in May, while
investments declined.
Total bank credit showed only a slight increase,
in contrast to large increases, concentrated in investments, in the
same month in 1961 and 1962.
Business loans declined slightly, in
contrast to both the normal seasonal trend and the national experience.
Mr. Scanlon said that perhaps, if given more time to study and
analyze Mr. Coombs' memorandum, he might feel differently, but at the
moment he found himself in agreement with the views expressed by
Messrs. Irons and Deming.
In a crisis he would favor a strong move,
regardless of the Treasury financing calendar, but in the absence of
more convincing evidence of such a crisis he came out at about the
-28
6/18/63
same place policywise as three weeks ago.
This meant that he would
favor no change in monetary policy right now, with no change in the
directive or the discount rate.
Mr. Clay noted that the continued expansion of domestic economic
activity was encouraging.
The performance of the business upswing had
to be viewed, however, in essentially the same way as for some time
past.
Despite the considerable advance in activity, the domestic
economy still had a lot of room for further expansion in terms of the
availability of manpower and other resources.
In substantial part
because of the relationship between resources and aggregate demand,
price developments had been favorable.
These relationships of demand,
resources, activity, and prices were basic considerations
to the formula
tion of public policy so far as domestic economic activity was concerned.
While the domestic economy continued to expand, Mr. Clay added,
there were important questions concerning the thrust of the upswing
ahead.
One was the uncertainty as to the extent of steel strike hedg
ing and the resulting readjustment to be expected in steel and related
industries
from a reversal of this factor.
Another question concerned
consumer spending performance as a source of expansion in view of the
modest increase in that sector in recent months.
A third question
arose from developments in business capital outlays; the June Commerce
SEC survey indicated that the most recent quarter once again had fallen
below the previous survey results.
While total expenditures for the
6/18/63
-29
year were essentially unchanged from the March survey, it might be
significant that anticipated outlays by manufacturing firms were down
somewhat from the earlier projection.
The record of the third quarter
should afford a better insight into the strength and pace of the
business upswing that was under way.
The Committee, Mr. Clay continued, had reduced the degree of
reserve availability and encouraged an upward movement of interest rates
in recent weeks in an endeavor to reduce the outflow of funds.
It also
had been suggested that this change in policy should be carried further.
In view of domestic economic conditions, however, it would appear well
to him to avoid further credit restraint at this time.
for no change in the Reserve Bank discount rate.
This would call
The directive, as
adopted at the May 28 meeting, would be appropriate for a continuation
of present policy, except for the words "putting increased emphasis on"
in the second line of the first paragraph.
Perhaps the words "putting
continued emphasis on" or some similar wording could be substituted.
Otherwise the wording would seem to have a cumulative impact that prob
ably would be inconsistent with continuation of the specific instructions
in the last paragraph.
Mr. Clay went on to say that a reading of Mr. Coombs' memorandum
had caused him to re-examine all of the information available to him
relating to the international position of the dollar.
After such re
examination, however, he could not find a basis for what seemed to him
6/18/63
-30
a sudden shift of emphasis on the state of the dollar.
If there was
additional information that could be brought to bear on the question,
he would like to have it.
As he read it,
the memorandum did not set
forth any such specific reasons to suggest immediate vulnerability of
the dollar.
The Open Market Committee had already assumed a posture
that would afford the System a basis for moving toward tighter credit
conditions.
If the situation was reaching crisis proportions, there
should be no hesitancy to make a dramatic move.
tion available to him did not reflect factors
such a move at this time.
However, the informa
that would seem to require
On the basis of the information at his
disposal, therefore, he would favor continuing the present monetary
policy.
Mr. Wayne reported that Fifth District business continued to
advance slowly.
The statistical picture gained additional strength in
April from a substantial rise in contract awards, and in May from better
than-seasonal declines in unemployment, a slight rise in department store
sales, and continuing good levels of bituminous coal output and shipments.
The Reserve Bank's latest survey also reflected moderate gains.
The
respondents were now about evenly divided between those who expected
some improvement in the near future and those who expected no significant
change, with the latter group showing a substantial increase in the past
few weeks.
On balance their collective appraisal of the recent past
suggested small gains in employment, in construction activity, and in
6/18/63
-31
retail trade, including automobile sales.
Manufacturers in the survey
indicated a rise in new orders and shipments, accompanied by small in
creases in backlogs, employment, and hours.
Reports from the textile
industry also showed some gains in new orders and a slightly firmer
price situation.
outlook.
Recent rains had greatly improved the agricultural
In the past three weeks reserve city banks in the District
felt increased pressures, which they met with increased borrowings at
the discount window and moderately heavier purchases of Federal funds.
In the country as a whole, Mr. Wayne noted, business activity in
May continued to show moderate improvement, thanks largely to a sharp
increase in outlays for construction and continued high production of
automobiles and steel.
Steel orders had already dropped rather sharply,
and steel production had begun to ease off.
Barring some unforeseen
development, steel production for the remainder of the year would quite
likely be at levels significantly below those of the past three months.
In view of the behavior of steel, it seemed unlikely that manufacturers'
new and unfilled orders were currently continuing to increase as rapidly
as they did from January through April.
The May figures on employment
and unemployment indicated that after seasonal adjustments there was a
slight decline in total employment and a small rise in unemployment.
All of these major indicators seemed to be saying that the improvement
thus far had remained quite moderate and that there was no basis for
expecting any quickening in the tempo in the near future if, indeed, the
present pace could be maintained.
6/18/63
-32
Turning to monetary policy, Mr. Wayne observed that conditions
in the money market had returned approximately to those prevailing
three weeks ago after some significant tightening for a few days,
perhaps due in part to market reactions, to Treasury problems with the
debt ceiling, and to difficulties encountered by the Desk in making
accurate projections.
The market seemed to be fully aware that there
had been a small move toward less ease, but there was little evidence
that it expected any further move of consequence in that direction in
the immediate future.
In the next few months the economy must adjust
to a lower level of steel production, to the seasonal decline in
automobile
production, and to some rather heavy borrowing by the
Treasury.
It did not seem to him that the momentum that had been
attained by the current improvement in business activity was sufficient
to justify the risk that would be involved in imposing the additional
burden of adjusting to any substantial reduction in credit availability,
short of a situation of actual crisis in this country's international
accounts.
He had read the Coombs memorandum and had listened to Mr.
Hayes' statement this morning, but he saw nothing in the picture to
justify a dramatic change in policy at this time, and a change in the
discount rate would be regarded as a dramatic move.
He continued to
believe that a change in the discount rate should be reserved for a
crisis situation, if it occurred, with the change so dramatic as to be
clearly indicative of what the System intended.
There might be a
-33-
6/18/63
question whether a change of 1/2 per cent would constitute such a move.
In the present circumstances, however, he would favor renewing the
current policy dire-tive in essence, and he would not change the dis
count rate.
Mr. Mills presented the following statement:
The excellent paper that Mr. Coombs has prepared on the
subject of the festering balance of payments problem afflicting
the international financial position of the United States cor
rectly diagnoses capital movements as being its root cause.
Such being the case, higher interest rates are not the right
cure to prescribe, both because of their inefficacy and because
their adoption by policy measures would inevitably unduly
restrict the availability of domestic credit, exert downward
pressure on the money supply, and work consequential damage
on the economy. As I endeavored to emphasize at the Committee's
last meeting, a higher interest rate structure in the United
States mig..t offer some temporary relief to the balance of
payments problem, but only up to the point when our foreign
allies should raise their interest rates as counteroffensive
measures to defend their reserves against the losses of gold
In that event, the entire
and dollars induced by our actions.
rainbow-chasing policy would have ended in failure. As pos
sibilities for reducing official disbursements of United States
dollars abroad and obtaining further repayments on foreign
advances appear to be limited, official United States control
over capital outflows under Treasury administration is the
logical and correct action necessary to curb our losses of
reserves.
The heavy movements of borrowed funds to Canada and Japan,
dollar loans by Belgian and Italian authorities on the London
market, and announcements of future foreign loans to be made
in the New York market evidence the crying need for sterner
measures than a defensive interest rate structure to correct
In fact, foreign observers cannot be blamed if
the situation.
they take a cynical and skeptical attitude to the approach thus
far taken by the United States to its balance of payments dif
ficulties. Until stern measures are adopted, it is reasonable
to expect further foreign loans to be negotiated in the United
the
cheapest market available and one in which it
States as
would be nigh to impossible to officially produce a high enough
domestic long-term interest rate structure as to make borrowings
6/18/63
-34-
abroad more attractive. Moreover, it is probable that some
foreign analysts are influenced by statements of authorities
of the stature of Paul Samuelson, who has publicly called for
devaluation of the United States dollar, and reason that loans
made in the United States are not only cheap interest-wise but
conceivably can be repaid at below their original debt burden
if devaluation should be compelled by financial difficulties
whose correction had been delayed too long. Repeated pro
nouncements from official quarters that our capital markets
will be kept open, and in the face of intolerable balance of
payments deficits, can only lead to further doubts abroad about
the financial policies being followed in this country and their
sustainability.
The balance of payments situation is indeed critically
serious and must be confronted aggressively. If there is no
hope of meeting the problem by adoption of appropriate controls
over capital outflows, and even limitations on tourist expendi
tures, then the final defense must resort to higher interest
I am personally of the opinion that development of a
rates.
higher interest rate structure, and an increase in the discount
rate at this time, will in the long run have harmful economic
consequences, but if the Committee decides on that course, I
shall reluctantly bow to the inevitable.
Mr. Shepardson said it seemed to him that the general movement
of the domestic economy was encouraging.
A period of normal summer
slowdown was approaching, of course, and this would not argue for any
further monetary policy action toward less ease at this time as far as
the domestic economy was concerned.
Like others who had spoken, however,
he was concerned about the international situation, and he was not sure
whether the System could afford to sit tight until a crisis had actually
occurred.
He did not know just how imminent or serious the threat of a
crisis might be; if any further enlightenment was available, he would
like to have it.
On balance, though, he would be inclined to try to
anticipate a crisis by taking less severe action than would be called
for after the crisis actually had occurred.
6/18/63
-35
For the moment, Mr. Shepardson continued, he felt that it
would be desirable to continue present monetary policy, which he would
understand to contemplate a degree of reserve availability such as to
provide a fluctuation around the three per cent guideline, with some
overages as well as shortfalls.
However, if it became clear that the
international situation was truly alarming, he felt that the System
should seriously consider the possibility of acting in such manner as
might seem to be required prior to the actual eruption of a crisis.
Mr. Mitchell said that on the domestic situation he found
himself close to the position expressed by Mr. Wayne.
He concurred in
the comment of Mr. Noyes to the effect that there would be a case for
letting credit markets ease a little in deference to the summer
doldrums, particularly if accentuated by a steel inventory adjustment.
The Committee's action of May 7 in deciding to move toward a lesser
degree of ease was in his judgment a mistake.
While there had been a
good first half this year, the accelerating factors during that period,
particularly the steel situation, had not succeeded in communicating
themselves to the economy generally, notably to consumer spending.
One
could be fairly sure that there was going to be some decelerating in the
steel industry, and this could spread more easily than the accelerating
effects apparently had spread in the first half of the year.
Accordingly,
as far as the domestic economy was concerned, the Open Market Committee
should be cautious about making any policy changes, even slight,
in the
6/18/63
-36
direction of tightening.
It might well be that the domestic economy
would not achieve a satisfactory level of operations as far as un
employment was concerned until there was a tax cut and some structual
changes occurred.
In the interim, monetary policy ought to do whatever
it could to keep the domestic economy moving at a relatively high level.
One should not forget that the present level of interest rates was
high, not low, by historical standards.
Mr. Mitchell said his reading of the Annual Report of the
Bank for International Settlements suggested to him the view conveyed
by the excerpt Mr. Furth had read; namely, that this country was doing
about everything it could to maintain the competitiveness of short-term
rates and that this particular goal of monetary policy was appropriate.
Further, the Federal Reserve had built a link of relationships to other
central banks in the past year and a half that had provided a first
line of dollar defense.
What would be gained, then, from a tightening
of monetary policy as far as the international situation was concerned?
The thing that remained to be done was to deal with the basic balance
of payments deficit arising from this country's trading and investing
position.
Admittedly interest rates in this country were lower than
interest rates abroad, but he did not believe the disparity could be
eliminated by raising interest rates here without forcing the domestic
economy into a substantial downturn, one that would quickly require a
complete reversal of monetary policy.
As far as he could see, Mr. Mills
6/18/63
-37
came to the only logical conclusion regarding the capital outflow
problem.
He would not accept that solution as yet, however, because
he was not convinced that events had moved to the stage of crisis.
Further, he felt that adjustments in Europe through inflation were
proceeding and that they were not going to be halted.
He also felt
that political uncertainties in Europe might become sufficiently acute
that the United States would become a haven for investors before too
long.
In summary, Mr. Mitchell expressed the view that monetary policy
should not be used to crush the domestic economy.
He was rather puzzled
about any suggestion for raising the discount rate to 4 per cent.
This
seemed to imply that once such action was taken the job would have been
done and everyone could rest easily, but in his view the consequences
for the domestic economy would be so serious that the Administration and
the Federal Reserve System would have to face a whole new series of
problems.
The ideal would be to provide some evidence that this country
intended to conform to monetary discipline, while not going so far as to
injure the dcmestic economy.
Basically, the only solution to the inter
national problem consistent with a good solution domestically lay in a
rapidly expanding domestic economy, and in his view this could not be
accomplished through a policy of monetary restraint.
As he had said,
he felt that the Committee should not have decided on the policy change made
in May.
He would like to move back toward a little more ease.
6/18/63
-38
Mr. Hickman noted that business developments of the past few
weeks generally had been reassuring.
However, developments in the
steel industry would pose an important test for business in the months
immediately ahead.
Revised April figures for retail sales, and preliminary figures
for May, confirmed the generally favorable performance of the consumer
sector.
Total retail sales for the first five months of 1963 were
5-1/2 per cent above those of the corresponding five months a year ago,
and 2 per cent above the immediately preceding five months, after
seasonal adjustment.
Likewise, the most recent Commerce-SEC survey of
capital spending, which indicated modest increases for the third and
fourth quarters, provided added reassurance of support from the business
sector.
Auto sales and output continued at near-record levels in May
and early June.
The seasonally adjusted rate of unemployment rose slightly in
May, due largely to an influx of teen-agers into the labor force.
The
comparable rate for adult male workers, however, remained at a favorable
4.4 per cent level, which compared with 5.1 per cent only three months
ago.
Moreover, the May figure for adult male workers was at its lowest
level, except for one month, in the three past years.
Developments in the Fourth District, Mr. Hickman said, confirmed
the strength of business activity in the nation.
The most recent data
for the District indicated substantial advances in construction contracts,
6/18/63
-39
electric power output, and bank debits.
The insured unemployment rate
in the District had improved even further through early June, although
at a slackening pace.
The steel situation, as indicated earlier, was now approaching
the point where it would provide an important test for the general trend
of business activity in the nation.
Although declining steel output
would act as a drag on the economy in coming months, it appeared likely
that the economy would be able to absorb the adjustment without changing
direction.
The Reserve Bank's staff economists and other analysts in
the Fourth District were in agreement that a reduction in steel output
even as large as last year's could be absorbed without a decline in the
Board's production index, averaged over the third quarter; most observers
expected the index to rise in the fourth quarter in any event.
This year,
with business confidence stronger and the reduction in steel output
expected to be no larger, and possibly less than last year's, the down
drag from steel should be absorbed at least equally successfully.
Total
steel output for the year was still projeced at approximately 106 million
ingot tons.
As had already been reported, the balance of payments situation
did not improve in May, which portended a second quarter record no better
than that of the first quarter.
The dollar still appeared to be under
pressure despite a slight improvement in the foreign exchanges.
Capital
outflows remained large, in Mr. Hickman's opinion, because of the relatively
favorable terms of financing in this country and the ready availability of
funds.
6/18/63
-40
In regard to policy, Mr. Hickman said it seemed to him the
point had now been reached where the effects of the slight shift towards
less ease adopted several weeks ago had been fully absorbed by the
market, the financial community, and the national economy.
that another step in the same direction was now needed.
He believed
With the
Treasury due to come back into the market for funds late in July, this
action should be taken promptly.
He would recommend a bill rate in the
3-1/4 - 3-1/2 per cent range, with free reserves around $100 million,
or lower if needed to bring about an appropriate upward adjustment in
the term structure of interest rates.
This would pave the way for an
increase in the discount rate, possibly before the next meeting of this
Committee.
The directive should be reworded to call for increased firm
ness in the money market, rather than a continuation of the same degree
of firmness.
Mr. Hickman went on to say that the foregoing remarks reflected
his views before reading Mr. Coombs' memorandum.
Having read that
memorandum, he was more than ever convinced that the System should move
promptly toward a 91-day bill rate in the range of 3-1/4 - 3-1/2 per
cent.
This would not solve the country's balance of payments difficulties,
but it would help to overcome them, and it would put those who could help
most on notice that the situation required urgent attention.
In Mr.
Hickman's opinion an increase of 1/2 per cent in the bill rate would
have little effect on the business situation.
He felt that business
6/18/63
-41
would level off and then increase in any event in the months to come
unless there should be a dollar crisis, which all possible steps should
be taken to avoid.
Mr. Bopp reported that developments in the Third District in
the past three weeks had been disappointing.
Because of the timing of
today's meeting, many figures for May were not available.
The most
current data, however, all reflected deterioration or a continuation
of depressed levels.
Earlier hopes for improvement in unemployment claims had been
partly dashed by the latest figures.
Advance indications presaged some
decrease in the Philadelphia help-wanted index for May.
Steel produc
tion, which never did match the national rise, had dropped more from its
top than the national index.
Perhaps symbolic of conditions in the District was the behavior
of department store sales.
They had fallen below the comparable totals
of 1962, and indeed in this respect had turned in the nation's worst
performance.
The estimated May index indicated a small improvement over
April, but not enough to foreshadow any change in the downward average
movement that began late in 1962.
Although special causes
(including a
transit strike and the loss of one department store) accounted for some
of this poor performance, a review of Third District information indicated
that in large part the disappointing store sales results had been associated
with generally sluggish business in the District.
-42-
6/18/63
A progressive tightening appeared to be taking place at Third
District banks.
The basic reserve position of reserve city banks fell
from plus $26.6 million in mid-May to minus $93.6 million in early June.
Country bank borrowing at the discount window rose progressively from
about $600,000 to $3.5 million, the highest figure reached this year on
a weekly average basis.
Data available for the last half of May and
first week in June indicated that bank credit at reporting banks in
creased while total deposits adjusted fell.
The loan increase was
about double that occurring in the same period last year.
Loans to
sales finance companies and to other financial institutions rose, as did
real estate and "all other" loans.
Business loans, however, had remained
quite sluggish.
With conditions as they were in the Third District, Mr. Bopp
said, he started with a natural bent toward a policy of monetary ease.
Looking at the larger picture, it appeared to him that the national
economy was continuing a moderate, unsatisfactory rate of progress
characterized by unacceptable levels of unemployment and resource
utilization.
Recent developments had, if anything, made this fact
clearer and seemed likely to dispel the more extreme forms of optimism
that had circulated in the past few weeks.
This view of the national
economy, therefore, reinforced his preference for ease.
The outlook for the balance of payments, of course, was not good,
Mr. Bopp added.
On the other hand, prevailing levels of short-term rates
6/18/63
-43
did not offer strong incentives for significant movements of funds on a
covered basis.
For this reason, he believed further tightening would not
be appropriate at this time.
The Committee had taken a position of less
ease than he would prefer, but he would not now recommend a reversal of
that position.
Debt management policies had accomplished very recently
some of the results that he would like to see achieved by monetary
policy.
The improved tone of the money and capital markets that had
resulted from the new cash offering seemed to him desirable (although
the speculative overtones of the issue were, of course, disturbing).
As these effects wore off, he would hope that the Desk could prevent
any sharp shift in the tone of the market.
Perhaps it would be necessary
to rely on the law of averages to produce "misses" on the easier side.
In the meantime, however, he would like to see a reserve supply somewhat
more plentiful than had been the case in recent weeks.
Mr. Bopp expressed the view that a change in the discount rate
would not be in order at this time.
Some change in the first sentence
of the directive might be appropriate to avoid a cumulative emphasis on
the balance of payments.
This could be accomplished by substituting
"maintaining" for "putting increased emphasis on."
Having read the Coombs memorandum rather hastily, Mr. Bopp said,
a point occurred to him that might deserve some thought.
If there should
be a dollar crisis, he assumed the tendency would be to think in terms
of some dramatic credit-tightening action.
This would have reverberations
6/18/63
-44
in the United States and the rest of the world.
An alternative would
be to resort to the International Monetary Fund and other drawings to
work through the crisis.
Two or three decades from now, others might
look back and say that this would have been the preferable course.
Mr. Bryan commented that Sixth District figures were sufficiently
close to national trends to make a detailed recital of District statistics
unnecessary.
Both in the District and in the nation, the broad dif
fusion of gains shown by economic indicators was impressive.
Also
reassuring was the moderate uptrend in plant and equipment spending,
coming at a time when the economy would probably be disturbed by a
let-down in steel.
In the meantime, the money supply (narrowly defined) exhibited
about a 2.6 per cent increase measured against year-ago figures.
The
total money supply (including time deposits) exhibited a 7.7 per cent
increase from year-ago figures.
Total liquid assets and personal-type
savings continued to show persistent and sharp uptrends.
These factors
probably went a long way toward explaining why the rate reaction to the
System's recent policy shift had been modest and probably indicated
that forces that had kept interest rates remarkably steady for so long
were still at work.
In the light of what he considered a satisfactory economic trend
and prospect, even though no boom was apparent, Mr. Bryan believed that
System policy should be "firm"
but not "tight."
He conceived that to
6/18/63
-45
have been the System's posture, on average, over the past few weeks.
In that sense, he believed monetary policy should continue unchanged.
Tightness should develop, if at all,
modestly expanding reserve base.
from market demand against a
If he were to state an instruction
in terms of free reserves, he would say that the Committee ought to aim
at a level (daily average basis) falling within a range of $100 million
to $200 million, but preferably toward the lower end of that range.
However, he would like to point out that what he regarded as more basic
reserve figures still exhibited an overage from December, when policy
shifted--an overage as measured against even a 3 per cent growth factor.
This point was discussed in the staff memorandum on reserves.
He still
believed, as he had recently been saying, that it would be preferable to
fall back to a 2 per cent growth rate in seasonally adjusted reserves
despite the case presented by Mr. Koch.
Total reserves, incidentally, had been exhibiting a slightly
greater borrowed component, Mr. Bryan noted.
ment as appropriate in existing circumstances.
He regarded this develop
Since the increas
in
borrowings presented no policing problems at the moment, and a change
in the discount rate would be taken as an announcement of a considerable,
even a drastic shift to a policy of restraint, he would not presently
consider an increase in the discount rate as desirable, particularly
when considered in the light of the situation with respect to manpower,
materiel and productive capacity.
6/18/63
-46
Mr. Bryan commended Mr. Coombs' memorandum for its contribution
to Committee thinking.
Essentially, he pointed out, the argument made
in the memorandum rested for validity on points that he (Mr. Bryan)
was not fully in a position to judge.
It appeared, however, that an
interest rate adjustment, as referred to in the memorandum, would have
to exert a substantial impact on capital outflows without at the same time
creating offsetting domestic repercussions, and Mr. Bryan was not certain
in his own mind whether these dual objectives could be achieved.
Second,
it seemed that if such action were to influence capital outflows, there
must be an assumption that European rates would not follow U. S. rates
upward, and he was not entirely sanguine on that score.
From his read
ings, there appeared to be developing in Europe--as elsewhere in the
world--a new wave of nationalism, though perhaps in somewhat different
form from the nationalism of the past.
Further, the measures mentioned
in the Coombs memorandum might have a desirable technical result, but of
a relatively temporary nature, and Mr. Bryan was skeptical of the value
of good temporary results.
He was by no means philosophically convinced
that the Federal Reserve System had performed a good service through its
program of foreign currency operations.
These operations had been tech
nically successful and capably handled, but he wondered if it might not
have been better just to lose gold.
Things of a more fundamental nature
had to be done about the balance of payments.
In a further comment, Mr. Bryan noted that the Coombs memorandum
had suggested that it might be possible to raise the short-term rate
6/18/63
-47
toward 3-1/2 per cent and at the same time prevent a proportionate--or
perhaps even any notable--increase in long-term rates.
whether this could be done.
rate curve as
Mr. Bryan doubted
The rate curve was already quite flat; a
flat as the memorandum seemed to contemplate could easily
lead to the unfunding of the public debt with a large volume of long-term
Government securities being offered to the Federal Reserve System.
Mr. Shuford reported that business activity in the major cities
of the Eignth District continued to improve moderately from April to May.
However, the level of business activity was only slightly higher than a
year ago.
Preliminary figures suggested that employment in the major
labor markets rose from April to May.
Bank deposits rose rapidly in
April and May and business loans had increased since March, regaining
the growth lost early in 1963.
Generally speaking, business conditions
in the District were roughly parallel to those in the nation.
Altogether,
the improvement that had been seen recently was encouraging, even though
there was no evidence of an economic boom.
Mr. Shuford noted that the balance of payments situationregardless of whether it had approached crisis proportions--was serious.
As he had observed on other occasions, the real correction lay in areas
other than monetary policy.
He would like to see additional and more
positive actions taken in some of those areas.
A meeting of the problem
through increasing short-term rates would appear to afford only temporary
relief and might prolong the fundamental corrections toward which the
6/18/63
-48
country should be working.
At the same time, monetary policy had a role
to play; in his view it had already played a significant role.
he recognized that most of the fundamental
range in nature.
Also,
corrections were longer
Therefore, if it appeared that a crisis situation
was approaching, he would be willing to consider an increase of some
magnitude in the discount rate, either 1/2 or 3/4 per cent.
If the
situation had developed to a point of urgency, and if a significant move
seemed necessary to safeguard confidence in the dollar, he would certainly
think it desirable to consider taking such a measure.
However, he
hesitated to conclude that a crisis situation had been reached; if
additional facts were available, it would be helpful to have them.
Before reaching any final conclusion on the discount rate, he would
prefer to wait and hear a full discussion.
Therefore, Mr. Shuford said, he would prefer to continue the
degree of money market firmness that had existed over the past three
weeks.
He would prefer no change in the discount rate unless it should
be decided that a crisis situation clearly was approaching.
Mr. Latham reported that basically the New England economy
continued to show improvement, although still lagging behind the national
rate of growth.
Bankers and businessmen generally reflected cautious
optimism, expressing the opinion that the local economy was at a high
level, moving slowly but steadily upward.
5/18/63
-49
Purchasing agents reported higher production and increased
new orders in May, with fewer decreases compared with April.
Personal
incomes appeared to have slowed in growth rate, although still running
ahead of last year.
May department store sales were good and were running generally
3 per cent above a year ago in early June.
New car sales and registra
tions continued at high levels, with dealers optimistic.
Savings deposits resumed their upward trend after the April
dividend lull, with new deposits exceeding withdrawals at mutual savings
banks, where the annual growth rate was running at about 7 per cent.
Loans continued at high levels at member banks, with loan-to
deposit and liquidity ratios at 68.8 and 13.4 compared with 65.9 and
17.9, respectively, a year ago.
Loans and investments in municipals
continued to rise at the expense of both short and longer term
Governments.
The
sentiment expressed by officials of the District's larger
banks was in favor of current System policy, with the feeling generally
that money had been too easy.
Mr. Hemmings reported that a number of key indicators of economic
activity in the Twelfth District showed gains.
The employment situation
appeared to have improved slightly in May, while the unemployment rate
in California and Washington, which together account for 80 per cent of
total Twelfth District employment, dropped slightly below the April level
-50
6/18/63
of 6 per cent.
Lumber prices had risen because of a widespread strike
in the Pacific Northwest and an increase in new orders.
Steel produc
tion was up more in May and fell less in June than nationally, and there
was a continuing high level of construction activity in most District
States.
Consumer buying was strong in May, with department store sales
up 8 per cent from April.
New car registrations in California were
down in the first half of May compared with April, but nevertheless reached a
record for this particular period.
A number of savings and loan associations in Southern California
and Arizona had announced cuts in dividend rates to take effect either in
July or September.
Generally speaking the reduction would be from 4.8
There were some indications that reductions
per cent to 4.5 per cent.
also might occur at savings and loan associations in the San Francisco
area in the third quarter.
From May 15 to June 5, business loans at District banks declined
more than in the corresponding period a year ago, but security holdings
increased in contrast to the decline nationally and more than offset the
decrease in total loans.
Time deposits were up more than in the corre
sponding period a year ago.
of Federal
The larger banks continued to be net sellers
funds, and net sales increased somewhat during the past week.
Mr. Balderston observed that the international situation presented
not only the question of what should be done but when.
The indication of
increasing unwillingness of foreign central banks to hold dollars, as
6/18/63
51
referred to in Mr. Coombs' memorandum, was not a new or surprising
development.
Foreign bankers who had visited here during the past
year had been indicating clearly that they were holding dollars with
increasing reluctance.
As to Mr. Shepardson's admonition against waiting for an actual
crisis to occur to trigger defensive action, Mr. Balderston indicated
that he agreed in principle.
It appeared that the System would be well
advised to take suitable action as early as it could find ways of taking
such action.
He also hoped that steps might be taken toward some reduc
tion of the flow of Government spending abroad for military purposes
and toward confining foreign aid to essential projects that the United
States could afford under present conditions.
As to the outflow of
private capital, he believed that direct controls would not work because
of the opportunities for avoidance.
that would not have many leaks.
He could not imagine any controls
Further, he believed that widespread
discussion of direct controls would serve to precipitate developments
such as the Committee was worried about this morning.
deterrents could be administered more effectively.
Possibly tax
That might be a more
feasible approach if such deterrents could be placed in effect without
extended debate chat might precipitate a crisis.
As to monetary policy, Mr. Balderston indicated that he con
sidered the question of timing to be most difficult.
For the forthcoming
three weeks, however, he would favor continuing within the general scope
6/18/63
-52
of the policy adopted on May 7, but with enough further lessening of
ease to encourage the bill rate to move about 3 per cent.
Looking at
the recent behavior of the stock market, the increase in farm land
values over the past year, the sporadic price advances reported during
recent weeks;, the continued upward movement of time and savings deposits,
and the continued upward movement of wage rates and fringe benefits,
it appeared that the economy had more liquidity than it could make use
of effectively.
Flooding the country with liquidity would not put to
work the younger folks who had recently left school and wanted jobs,
which unfortunately had been priced out of their reach.
Chairman Martin commented that he was more and more convinced
that domestic and international considerations could not be separated
at this juncture.
In his opinion, the shift in policy toward slightly
less ease at the May 7 meeting was appropriate; the situation would be
even more difficult if monetary policy was not in its present posture.
Further, he did not believe that the domestic economy would suffer from
a lesser degree of monetary ease.
Instead, he felt that it would benefit,
strange as that might seem--and the balance of payments position would
at least temporarily be improved.
Whether it would be improved over the
longer run was, as Mr. Bryan has suggested, a different story, but the
System could not be responsible for all of the factors in the current
situation.
The views presented in Mr. Coombs' memorandum involved, of
course, an element of judgment.
One could not be sure whether Mr. Coombs
6/18/63
-53
had accurately assessed the present situation, and probably this would
not be known for some time.
He (the Chairman) had been talking crisis
himself for perhaps 15 months.
It might take another 15 months before
a crisis actually occurred, if it did occur.
indications, including reports in the press,
However, there were
of an ebbing of confidence
in the dollar at this juncture.
In further comments, the Chairman pointed out that no one could
foretell how much effect changes in monetary policy out of deference to
the international position of the dollar might have on the domestic
economy.
Nevertheless, there were some inconsistencies in the present
debate that he felt should be pointed out.
For example, the argument
was made that higher interest rates would not achieve any results from
the standpoint of the balance of payments, but on the other hand it was
maintained that higher interest rates would be disruptive to the domestc
economy.
In his opinion, one could never know about this sort of thing
in the absence of experimentation.
Personally, he would hate to see an
abrupt move on the discount rate in an actual crisis situation, feeling
that it would be sounder to move in an orderly way and try to let the
traditional forces operate unless it became clear that they would not
work.
The fact must be faced, Chairman Martin continued, that timing
was a key problem.
In his opinion, the System should not necessarily
feel bound by the traditional even keel policy during periods that the
6/18/63
-54
Treasury was in the market.
When it came to the question of timing,
he noted, it must be realized that everyone was likely to have dif
ferent judgments.
It might be that a payments crisis would come,
although he was not convinced that it was here now.
However, while
he did not pretend to know the right timing for System policy action,
he was convinced that the country ought not to take a step such as
devaluation of the dollar or the institution of direct controls before
interest rates had been given some chance to have a play on capital
flows.
Unfortunately, he felt that he detected around the country a
growing sentiment that devaluation was the answer, or that direct controls
were the answer.
This was disheartening to him.
He hoped that there
would not be such an experiment before indirect controls and market
forces were given an opportunity.
If direct controls were used, the
trend toward nationalism about which the Committee had been talking was
apt to become worldwide overnight.
The United States was the last strong
citadel of multilateral nondiscriminatory trade and convertible currencies
as world policies.
Its leadership in the world stood on that fact.
Chairman Martin added that although the time might be at hand
for cutting back on foreign aid and military expenditures abroad, the
System was not in a position to take such steps.
In terms of capital
flows, however, he had some feeling that a modest change in interest
rates at some point would do more to restore confidence.
Economists,
he thought, had never quite come to grips with the item of confidence and
the things that go with it.
Things ought to be locigal, but the market
6/18/63
-55
is never logical and people are never logical.
It seemed important to
try to find a middle ground.
The Chairman said that personally he would be inclined to move
modestly toward less ease.
He added, parenthetically, that he questioned
the use of the word "tightness" at this juncture.
Never had he seen a
period when there was so much loose speculation with money.
The practice
of American banks in using the Euro-dollar market was growing all the
time, and this was due primarily to interest rate differentials.
This
should be a matter of concern to the Federal Reserve System.
To repeat, the Chairman said, he was convinced that no considera
tion should be given to moves such as devaluation of the dollar or direct
capital controls until there had been a testing to see whether the domestic
economy was going to be set back by moves in the area of indirect controls.
As to today's meeting, Chairman Martin noted that the majority
opinion within the Committee seemed to favor no change in the present
monetary policy although it might be a rather close call,
insofar as the
current position was concerned, between no change in policy and slightly
less ease.
The Chairman added the comment, in this connection, that it was
hardly appropriate to start talking about tight money until net free
reserves gave way to net borrowed reserves.
He also expressed the view
that there were many tenuous elements in the current situation.
No matter
whether one looked at the stock market or the real estate market, small
6/18/63
-56
business activities, or some of the fringe activities of defense opera
tions, there was a speculative movement around the country that was in
a way reminiscent of the 1929 period.
He did not believe that this
situation was likely to come to a head within the next six or nine months,
and he hoped that he was too pessimistic with regard to the international
situation, but he felt that the monetary and credit situation in this
country was not healthy.
Wherever one looked, there was too much credit
available, whether it was in the area of consumer instalment credit or
real estate credit or some other area, and this was a hazard that must
be recognized.
He would only propose today that the problem be kept
closely in mind.
The Chairman then suggested that a vote to be taken on the basis
of no change in present monetary policy during the forthcoming three
weeks, which would be signified by making no change in the current economic
policy directive.
Accordingly, upon motion duly made
and seconded, the Federal Reserve Bank of
New York was authorized and directed, until
otherwise directed by the Committee, to ex
ecute transactions in the System Account in
accordance with the following current economic
policy directive:
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. balance of payments.
This policy
takes into consideration the continuing adverse balance of pay
ments position and its cumulative effects and the improved
domestic business outlook, as well as the increases in bank
6/18/63
-57
credit, money supply, and the reserve base in recent months.
At the same time, however, it recognizes the continuing
underutilization of resources.
To implement this policy, System open market operations
shall be conducted with a view to continuing the degree of
firmness in the money market that has prevailed recently,
while accommodating moderate reserve expansion.
Votes for this action:
Messrs. Martin,
Bopp, Clay, Irons, Mills, Scanlon, and
Shepardson.
Votes against this action:
Messrs. Hayes, Balderston, and Mitchell.
Messrs. Hayes and Balderston dissented because they felt that
the Committee should move in the direction of slightly less ease, while
Mr. Mitchell dissented because he favored a return to the greater degree
of ease that had existed prior to the shift of policy decided upon by
the Committee on May 7, 1963.
Chairman Martin said that, as indicated
by his earlier comments, his inclination was to move toward less ease.
He would have so voted if he had thought it would serve any purpose to
take that position at this time.
It was noted that the Account Manager had recommended, in his
oral report today, that the continuing authority directive to the
Federal Reserve Bank of New York be amended to raise from $1 billion
to $1.5 billion the limit on changes in the System Open Market Account
during the next three weeks.
Upon motion duly made and seconded,
and by unanimous vote, section 1(a) of the
continuing authority directive was amended
so as to authorize and direct the Federal
Reserve Bank of New York, to the extent
necessary to carry out the current economic
policy directive:
6/18/63
-58
(a)
To buy or sell United States Government securities
in the open market, from or to Government securities dealers
and foreign and international accounts maintained at the
Federal Reserve Bank of New York, on a cash, regular, or de
ferred delivery basis, for the System Open Market Account at
market prices and, for such Account, to exchange maturing
United States Government securities with the Treasury or allow
them to mature without replacement; provided that the aggregate
amount of such securities held in such Account (including
forward commitments, but not including such special short-term
certificates of indebtedness as may be purchased from the
Treasury under paragraph 2 hereof) shall not be increased or
decreased by more than $1.5 billion during any period between
meetings of the Committee.
Mr. Hayes stated that there had been several points made during
today's discussion that he felt warranted some comment.
First, the
Annual Report of the Bank for International Settlements did contain the
sentences that. were read by Mr. Furth.
Reading the full report, however,
or at least the sections on interest rates, he felt that clearly the
atmosphere was one of favoring a less easy monetary policy in the United
States.
This was also the thinking of European central bankers with whom
he (Mr. Hayes) had been in contact.
As to direct capital controls, Mr. Hayes expressed agreement with
the observations of Chairman Martin and Mr. Balderston.
This would be a
futile thing to get into if the System had not done everything possible
to avoid such controls through the use of conventional monetary instruments.
It represented indulgence in wishful thinking, Mr. Hayes felt,
to hope that inflation and political upsets in Europe could be relied
upon to solve the U. S. balance of payments problem.
With reference to
the suggestion that European central banks just be allowed to take U. S.
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gold, he could think of nothing that would be much more likely to
trigger a loss of confidence by U. S. citizens generally.
With reference
to the question of short-term rates, he warned against placing too much
reliance on the fact that covered rates were now fairly well in balance.
This represented overemphasis on one phase of the short-term rate
picture.
A great many flows were going on without reference to the
covered rates.
As to the suggestion that a move on the part of the System
should be one intended to have some lasting effect, Mr. Hayes said that
if a higher short-term rate structure could be achieved, possibly that
would have lasting effects for years in the balance of payments area.
As to long-term rates, he had only suggested softening the effects of
a policy move at this time to see whether they could be confined mostly
to the short-term area.
If so, obviously this would have advantages for
the domestic economy.
On the question whether any change in the discount rate should
be in the order of one-half per cent or one per cent,
Mr.Hayes said he
came out clearly in his own mind that an increase of one-half per cent
would be vastly preferable.
The necessity of having to make a larger
adjustment might be obviated by making a smaller move sooner.
An increase
of one-half per cent would provide a strong signal of what the System
intended, especially since the discount rate had been at 3 per cent
for such a long time.
It should have the effect of encouraging actions
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-60
by other parts of the Government as effectively as a larger increase,
but it would be less conducive to a move on the prime rate.
It would
do less to complicate the Treasury's problem, to engender political
difficulties, and to generate offsetting actions abroad.
As to whether there was indeed a payments crisis at hand,
Mr. Hayes noted that no one could tell for certain about the timing.
As Mr. Balderston said, this had been developing slowly over a period
of time.
Mr. Hayes was rather surprised that some of the Committee
members seemed to feel that something might have been happening during
the past few weeks about which they had not been informed.
It was a matter
of judgment as to when a process that had been developing over a long
period of time would get to the breaking point.
He agreed with what
Mr. Shepardson and Mr. Balderston had said about anticipating rather
than waiting.
A mild move would run much less risk of harm to the
domestic economy than a severe move, and he could not see why anyone
would want to wait until the last moment before doing anything.
It was
human nature, of course, to want to pass the buck to someone else to
solve a problem, but he could see signs that the Government in general
was increasingly aware of the seriousness of the problem.
The System
should not fail to be among the ranks of those who were ready to do
their part.
Mr. Mitchell did not agree that the System could make any policy
move that would change the fundamental relationship of the two ends of
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-61
the interest rate structure.
In order for that to occur, the marginal
efficiency of capital in this country must rise, and no policy the
System could adopt would make that happen.
What could develop was an
artificial structure in which interest rates would be fixed, as they
had been at the short end.
This was one reason why people had so much
money; there was no reason to fund under the existing rate structure.
Mr. Mitchell agreed that the question of timing was an important point.
In his view there should be either a structural change at home or def
inite evidence that the economy was on its way before it would be
appropriate to use the kind of medicine Mr. Hayes was advocating.
It
would never solve the question of the marginal efficiency of capital in
this country.
Mr. Hickman commented that the marginal efficiency of capital
involved an equating of expected future returns and present costs.
The
expectational element depended in part on the degree of concern about
the balance of payments situation.
vestment
If this was a factor deterring in
it would appear that a firmer monetary policy would raise the
marginal efficiency of capital.
In other words, decisions to invest
involved judgments as to the future, which included concern about the
precarious position of the dollar.
It seemed to him that there was much
to be said on both sides of the question.
The raising of interest rates
might deter some investment, but at the same time it would represent a
forward step in dealing with the balance of payments problem.
Failure
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-62
to take action might result in undermining the quality of credit and lay
the groundwork for a recession in the future.
In his opinion, an unduly
easy monetary policy was not going to help unemployment or promote the
longer run utilization of capital in this country.
The discussion concluded with further comments by the Chairman
and other members of the Committee, reflecting their views on various
aspects of the domestic credit situation and the balance of payments
problem.
It
was agreed that the next meeting of the Open Market Committee
would be held on Tuesday, July 9, 1963.
The meeting then adjourned.
Secretary
Cite this document
Federal Reserve (1963, June 17). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19630618
@misc{wtfs_fomc_minutes_19630618,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1963},
month = {Jun},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19630618},
note = {Retrieved via When the Fed Speaks corpus}
}