FOMC Minutes
A meeting of the Federal Open Market Committee was held in
the offices of the Board of Governors of the Federal Reserve System
in Washington on Tuesday, December 3, 1963, at 9:30 a.m.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Hayes, Vice Chairman
Balderston
Bopp
Clay
Irons
Mills
Mitchell
Robertson
Scanlon
Shepardson
Messrs. Hickman, Wayne, Shuford, and Swan, Alternate
Members of the Federal Open Market Committee
Messrs. Ellis and Deming, Presidents of the Federal
Reserve Banks of Boston and Minneapolis,
respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hexter, Assistant General Counsel
Mr. Noyes, Economist
Messrs. Baughman, Brill, Eastburn, Furth, Garvy,
Green, Holland, Koch, and Tow, Associate
Economists
Mr. Stone, Manager, System Open Market Account
Mr. Coombs, Special Manager, System Open Market
Account
Mr. Molony, Assistant to the Board of Governors
Mr. Cardon, Legislative Counsel, Board of Governors
Mr. Broida, Assistant Secretary, Board of Governors
Mr. Williams, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Yager, Chief, Gcvernment Finance Section,
Division of Research and Statistics, Board of
Governors
Miss Eaton, Secretary, Office of the Secretary,
Board of Governors
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Mr. Patterson, First Vice President, Federal
Reserve Bank of Atlanta
Messrs. Mann, Ratchford, Taylor, Jones, Parsons,
and Grove, Vice Presidents of the Federal
Reserve Banks of Cleveland, Richmond,
Atlanta, St. Louis, Minneapolis, and San
Francisco, respectively
Mr. Eisenmenger, Director of Research, Federal
Reserve Bank of Boston
Mr. Cooper, Manager, Securities Department,
Federal Reserve Bank of New York
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Committee held on October 22, 1963, were
approved.
Upon motion duly made and seconded,
and by unanimous vote, the action of
members of the Federal Open Market Committee on November 22, 1963, in approving
increases of $50 million each in
reciprocal currency arrangements with the
Swiss National Bank and the Bank for
International Settlements. effective as
of Monday, November 25, 1963, was approved,
ratified, and confirmed.
Befcre this meeting there had been distributed to the members
of 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
November 12 through November 27, 1963, together with a supplemental
report covering November 28 through December 2, 1963.
Copies of these
reports have been placed in the files of the Committee.
Supplementing the written reports, Mr. Coombs stated that the
Treasury gold stock would remain unchanged for the sixteenth week in a
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row.
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The Stabilization Fund now had on hand $65 million of gold,
which should be enough to meet demands for at least the next week or
so.
Over the past few months the Russian gold acquired by the
Stabilization Fund had been quickly absorbed in purchases by the
French, the Argentines, and the Austrians.
In fact, on Thursday,
November 21, the day before President Kennedy's
assassination, the
Stabilization Fund was out of gold completely, although there was in
prospect a sizable distribution from the London Gold Pool early in
December.
To bridge the gap,
the Federal Reserve Bank of New York
arranged for the Treasury a gold swap with the Bank for International
Settlements in the amount of $30 million, which was paid into the
Stabilization Fund on Friday, November 22.
Consequently, it was
possible to avoid a reduction in the gold stock on the following
Wednesday.
This gold swap would be reversed today, Mr. Coombs said,
when the Stabilization Fund took delivery on the U.
Gold Pool's November acquisitions,
S.
share of the
amounting to $68 million.
Mr. Coombs commented that temporary gold swaps with the Bank
for International Settlements had proved to be another useful piece
of machinery.
There had been no idea that gold swaps would serve
a
purpose such as this when they first had been developed on an
exploratory basis a year or so ago.
Over the past ten days, Mr. Coombs continued, the System's
gross drawings on the swap network had built up still
further.
The
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Account was now in debt to the Swiss to the extent of $150 million,
the Dutch for $80 million, the Germans for $102 million, the
Canadians for $20 million, and the Belgians for $10 million, making
a gross total of $362 million.
The swap drawing with France was
excluded from this accounting since it was fully covered by forward
purchases of French francs.
The Italians had drawn $50 million,
leaving the Account in a net debtor position of $312 million.
During
the past three or four days, however, the Account had maintained its
position pretty well in all currencies except the German mark.
Mr. Coombs thought German banks and industrial firms might.
make further efforts before the end of the year to improve their
year-end balance sheet positions.
There were a good many rumors, he
said, about impaired liquidity positions of a number of German firms,
and these firms were trying to protect themselves.
This would tend
to result in a flow of dollars to the Bundesbank and the Account
might have to draw further on the German swap to mop up these dollars.
On the other hand, the German Government might be making sizable payments in December for military procurement in the United States,
possibly totaling as much as $150 million.
Part of these payments
might be available for reducing some of the System's swap drawings.
In any case, there was reason to expect a return flow of dollars from
Germany after the year end; the present discount on the one-month mark
indicated that forward cover was being sought for this purpose.
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-5In the case of the Swiss franc, Mr. Coombs continued, some
further window dressing might also develop and some additional swap
drawings in moderate volume might be required in consequence.
He
was hopeful, however, that in the Swiss as well as in the German case
it would be possible to make steady progress in paying off the System's
swap drawings after the turn of the year.
He was even more hopeful
that the Account could extricate itself after the year-end from it.s
debtor position in Dutch guilders.
It might be possible to repay the
Canadian drawing in December, when the Canadian dollar generally tends
to be weak.
With respect to drawings by other central banks, Mr. Coombs
thought that the Bank of Italy might make another sizable drawing during
December.
The Bank of England might also wish to draw on the swap line
to help finance their heavy year-end debt payments to the U. S. and
Canada.
Following this report, Mr. Coombs responded to questions by
Mr. Ellis regarding certain recent operations of the Gold Pool.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the System Open Market Account transactions in foreign currencies during
the period November 12 through December
2, 1963, were approved, ratified, and
confirmed.
Mr. Coombs recommended a renewal on a 6-month basis of the
existing $50 million swap arrangement with the National Bank of Belgium,
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which had last been renewed on June 20, 1963, and which matured on
December 20, 1963.
Renewal of the swap arrangement
with the National Bank of Belgium for
a further 6-month period was approved.
Mr. Coombs said that he thought the time had now come when the
System might appropriately suggest to the Bank of France an increase
in the swap line from $100 million to $150 million or, preferably, to
$200 million.
As he had mentioned at the Committee meeting of
November 12, 1963, there were recent indications that the French might
be sympathetic to an increase, and he suspected that they might be
even more sympathetic after the events of the past 10 days.
He
recommended that the Committee authorize regotiations with the Bark of
France along those lines.
If the negotiations were successful, he
thought. it would be desirable to announce them simultaneously with an
announcement of the recent increases in the swap lines with the Bank
for International Settlements and the Swiss National Bank.
With an
increase in the French swap line, he thought the swap network would be
pretty well rounded out for the time being, both as to geographical
coverage and in terms of over-all amounts.
Mr. Mills asked why the United States should make the advance
in negotiating an increase in the French swap line.
Given the state of
relationships between the French Government and the United States
Government, he thought it would be preferable to let the French make
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the advance.
He saw no urgent reason for increasing the swap line; it
was simply a matter of convenience and tidying up the arrangements.
The whole tide of events as described today, he said, appeared to be
moving rather rapidly to the point where foreign central banks would
be drawing on the swap arrangements to strengthen their currencies.
In reply, Mr. Coombs commented that he hoped the tide would
move in the direction indicated.
The proposed negotiation, he added,
was not between the French Government and the U. S. Government, but
between the Federal Reserve and the Bank of France.
The swap arrange-
ments were divorced from politics.
Mr. Mills commented that the central banks were creatures of
their governments, and he found it difficult to make a distinction.
Mr. Mills then asked whether the statement Mr. Coombs had made
at the time the Japanese arrangement was entered into, to the effect
that such an arrangement would round out the swap network, had been
intended to imply that the arrangements would be complete only in a
geographic sense, or also that they would be complete in terms of
dollar amounts of individual swap lines.
Mr. Coombs replied that he
had meant complete in the geographic sense, and that he had left open
the possibility of later recommendations for increases in individual
swap lines.
Thereupon, negotiation of an increase in the swap line with the Bank
of France from $100 million to $200
million was authorized.
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Mr. Coombs noted that earlier in the meeting the Committee
had ratified the increases, effective November 25, of $50 million
each in the swap lines with the Swiss National Bank and the Bank for
International Settlements.
These increases raised the total amount
of individually authorized lines from $1.95 billion to $2.05 billion.
He recommended that a corresponding change be made in limit on the
aggregate anount of foreign currencies held under reciprocal currency
arrangements, as specified in the first paragraph of the Committee's
continuing authority directive for foreign currency operations.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the continuing authority directive was
amended as follows:
The Federal Reserve Bank of New York is authorized and
directed to purchase and sell through spot transactions any
or all of the following currencies in accordance with the
Guidelines on System Foreign Currency Operations reaffirmed
by the Federal Open Market Committee on March 5, 1963, as
amended May 28, 1963; provided that the aggregate amount of
foreign currencies held under reciprocal currency arrangements shall not exceed $2.05 billion equivalent at any one
time, and provided further that the aggregate amount of
fcreign currencies held as a result of outright purchases
shall not exceed $150 million equivalent at any one time:
Pounds sterling
French francs
German marks
Italian lire
Netherlands guilders
Swiss francs
Belgian francs
Canadian dollars
Austrian schillings
Swedish kronor
Japanese yen
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The Federal Reserve Bank of New York is also authorized
and directed to operate in any or all of the foregoing
currencies in accordance with the Guidelines and up to a
combined total of $150 million equivalent, by means of:
(a) purchases through forward transactions, for
the purpose of allowing greater flexibility
in covering commitments under reciprocal
currency agreements;
(b) purchases and sales through forward as well
as spot transactions, for the purpose of
utilizing its holdings of one currency for
the settlement of commitments denominated in
other currencies; and
(c) purchases through spot transactions and sales
through forward transactions, for the purpose
of restraining short-term outflows of funds
induced by arbitrage considerations.
The Federal Reserve Bank of New York is also authorized
and directed to make purchases through spot transactions,
including purchases from the U. S. Stabilization Fund, and
concurrent sales through forward transactions to the U. S.
Stabilization Fund, of any of the foregoing currencies in
which the U. S. Treasury has outstanding indebtedness, in
accordance with the Guidelines and up to a total of $100
million equivalent. Purchases may be at rates above par,
and both purchases and sales are to be made at the same
rates.
Before this meeting there had been distributed to the members
of the Committee a report from the Manager of the System Open Market
Account covering open market operations in U. S. Government securities
and bankers' acceptances for the period November 12 through November 27,
1963, together with a supplemental report covering the period
November 28 through December 2, 1963.
Copies of these reports have
been placed in the files of the Committee.
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In supplementation of the written reports, Mr. Stone commented
as follows:
In the first half of the period since the Committee's
November 12 meeting--that is, in the week and a half prior
to the assassination--the markets were enjoying an appreciable improvement in atmosphere from the heavy tone that had
characterized the preceding several weeks. That tone was
just beginning to brighten at about the time of the
November 12 meeting following the sizable purchase of
Treasury bills undertaken by the Trading Desk for various
trust fund accounts on November 8. Soon afterward, the
market drew added strength from the Treasury's November 13
announcement of a $100 million reduction in the forthcoming
3-month bill issue in light of current international rate
relationships, and from the publication of improved balance
of payments data for the third quarter of 1963. In
combination, these developments suggested to the market
that international factors did not call for a further
firming of credit policy or hardening of short-term rates
and that the upward rate movement of earlier weeks may have
been overdone. As the period progressed, sizable System
purchases of bills to supply reserves cut down dealers'
large inventories and added to the market's feeling of
confidence.
Under these influences,
the bid rate on 3-
month bills declined from 3.58 per cent on November 13 to
3.47 per cent by November 22. The 6-month bill was down
from a high point of 3.69 per cent on November 12-13 to
3.64 per cent by November 22,
In recent days both rates
have undergone the customary seasonal rise, with the average issuing rates for 3- and 6-month bills at 3.53 and 3,67
per cent,
respectively, in yesterday's auction.
The improvement in atmosphere that developed in the
bill market also spread to coupon-bearing issues of all
maturities as the lower prices that had emerged in recent
weeks attracted moderate investor interest and as dealers
sought to cover short positions in some issues. By
November 22, prices of a number of intermediate- and
longer-term Treasury issues were roughly 1/4 to 1/2 point
higher than on November 8, and dealer positions had worked
down to the point where they could no longer be regarded
as unusually large. The new 18-month 3-7/8 per cent note,
which was bid at a shade under par in when-issued trading
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on November 8, climbed to a par bid by the November 15 payment date and was quoted slightly abcve par by November 22.
Since that time prices have drifted slightly lower in
relatively light activity.
The Committee of course knows of the splendid performance put on by the market both when the shattering news of
the President's assassination was received and when the
market reopened the following Tuesday. Among the major
factors contributing to that kind of performance was a
feeling that there was no reason for any marked change in
financial values--or if there was, no one had any convictions
as to the direction such a change should take. Another
important factor was the relatively unruffled performance of
the foreign exchange markets. I should like also to record
a rather fundamental influence that underlay the calm
atmosphere of the market on Tuesday, when the enormity of
what had happened over the week-end was fully comprehended.
This fundamental influence was a strong and active sense of
individual responsibility on the part of virtually every
participant in the market. Everyone, in those circumstances,
sought to act constructively and to avoid any action that
might have adverse effects on the market. Finally, the
swift and smooth accession of Mr. Johnson to the presidency
imparted a strong sense of continuity and contributed
substantially to the calm and confident atmosphere that
enveloped the market on that critical Tuesday.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions in
Government securities and bankers'
acceptances during the period November
12 through December 2, 1963, were
approved, ratified, and confirmed.
Mr. Stone then noted that he and Mr. Farrell, Director of the
Board's Division of Bank Operations, had distributed a memorandum
dated November 27, 1963 to the Committee on procedures with respect to
allocations of the System Open Market Account.
(Note:
A copy of this
memorandum has been placed in the files of the Committee.)
The purpose
was to call to the Committee's attention the fact that the procedure
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adopted by the Committee in September 1963 might result, over the
next few weeks, in some Federal Reserve Bank or Banks incurring a
reserve deficiency on days other than statement dates.
He summarized
three alternatives set forth in the memorandum that seemed to be
available to the Committee.
Chairman Martin observed that the meeting scheduled for that
afternoon between the Board of Governors and Federal Reserve Bank
Presidents seemed to him to provide an appropriate opportunity to
discuss this matter, and he asked Mr. Stone to be present at that
meeting.
Secretary's Note: The discussion of this
subject in the afternoon meeting between
the Board of Governors and the Presidents
of the Federal Reserve Banks is reported
in the minutes of that meeting. As
indicated in those minutes, the meeting
of the Federal Open Market Committee was
reconvened following this discussion.
Upon motion duly made and seconded, and by
unanimous vote, the procedures with respect
to allocations of the System Open Market
Account were revised, effective December 3,
1963, as follows:
1. Securities in the System Open Market Account shall be
reallocated on the last business day of each statement week
and of each month by means of adjustments proportionate to the
adjustments that would have been required to equalize approximately the average combined reserve ratios of the 12 Federal
Reserve Banks based on the most recent available five business
days' reserve ratio figures.
2. The Board's staff shall calculate, in the morning of
each business day, the reserve ratios of each Bank after
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allowing for the indicated effects of the settlement of the
Interdistrict Settlement Fund for the preceding day. If
these calculations should disclose a deficiency in the
reserve ratio of any Bank, the Board's staff shall inform
the Manager of the System Open Market Account, who shall
make a special adjustment as of the previous day to restore
the combined reserve ratio of that Bank to the average of
all the Banks or to such higher level as may be necessary
to eliminate the deficiency in note or deposit reserves.
However, such adjustments shall not be made beyond the point
where a deficiency would be created at. any other Bank. Such
adjustments shall be offset against the participation of the
Bank or Banks best able to absorb the additional amount or,
at the discretion of the Manager, against the participation
of the Federal Reserve Bank of New York. The Board's staff
and the Bank or Banks concerned shall then be notified of
the amounts involved and the Interdistrict Settlement Fund
shall be closed after giving effect to the adjustments as
of the preceding business day.
3. Until the next reallocation the Account shall be
apportioned on the basis of the ratios determined in para-
graph 1, after allowing for any adjustments as provided for
in paragraph 2.
4.
Profits and losses on the sale of securities from
the Account shall be allocated cn the day of delivery of
the securities sold on the basis of each Bank's current
holding at the opening of business on that day.
Chairman Martin then called for the staff economic and financial
reports, supplementing the written reports that had been distributed
prior to the meeting, copies of which have been placed in the files of
the Committee.
Mr. Noyes commented on economic conditions as follows:
Obviously the assassination of President Kennedy was an
event of great economic as well as human and political
significance. But it would be presumptuous at this point for
me to even attempt to assess the longer range economic
implications of the resulting changes in our national leader-
ship. A few facts of economic significance about events of
the last ter days may be noted. We have seen a rapid return
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to normalcy in markets of all kinds. This suggests to me
that there is some depth and resilience on both sides of both
financial and product markets. Such a situation is certainly
a healthy one, for which we can all be grateful. It
encourages us to believe that the economy will continue to
adjust rationally to economically significant developments
as they actually transpire--whether they stem from private
or public sources. In other words, it seems reasonable to
conclude that the economy will respond to either stimulative
or restraining changes in policy in the normal ways in which
one would expect a free enterprise economy to adjust.
Specifically, the behavior of markets during this crisis
would seem to me to confirm that the response to any change
in monetary policy at this time in either direction would be
al.ong the lines one would normally expect from such a policy
change--not perverse or of an exaggerated magnitude.
We do not yet have enough information to measure the
immediate economic impact of the President's death and the
period of national mourning that followed. It is obvious
that retail sales were adversely affected in both the weeks
ending November 23d and 30th. The effect was probably large
enough to cause sales for November as a whole to be below
anticipated levels. This seems to be widely understood,
however, and it is doubtful that the relatively poor showing
will have much effect on business confidence when it is
confirmed by the official figures in 10 days or so.
By and large, the additional data that have become
available since the last meeting, almost all of which relates
to October, tends to support the favorable appraisal of the
outlook that is becoming more widely accepted as each day
passes. Auto sales in the first 20 days of November were
off a little, but are still at a high rate. Housing starts
brke out on the high side in October--and even if they were
attributable in large part to unusually favorable weather,
it is hard not to be impressed by the fact that builders
were prepared to start so many units in any kind of weather.
Orders for steel continue strong, especially from the auto
industry, but appliance and construction demand is also
well maintained.
We have all said from time to time that price developments will bear close watching and we are watching them as
closely as we know how. In the staff they have been
intensively reviewed at both the domestic and international
levels. There is no doubt that international commodity
prices have strengthened, in part because of shortfalls in
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output, especially in Iron Curtain countries. There is also
no doubt that several important continental countries are
confronted with serious internal inflationary developments.
Further, it is clear that the net change in domestic prices,
while very moderate on the average, is upward. The latest
change in the consumer price index is described as largely
seasonal, but it is up a little, as was the latest change
in the wholesale prices. Firming seems to be the word that
best characterizes recent price developments, and this
firmer tone in the markets for their products has contributed to the more optimistic outlook of many businessmen.
In fact, it is doubtful that we could have achieved the
present levels of output and investment without some
improvement in the price outlook, as viewed by the businessman. The situation still does not seem to me to be one that
can properly be characterized as inflationary, and expectations could shift rapidly, as they have during other recent
winters.
This leads me directly to the one word of caution that
seems appropriate at this time. No matter what we do to the
figures by way of statistical adjustment, we cannot eliminate
the actual seasonal midwinter decline in the pace of economic
activity. Even though the seasonally adjusted figures
continue to rise, we know that the actual rates of output and
employment in some lines are almost certain to go down in
January and February, and that these actual declines carry
with them a lessening of confidence in the outlook, no matter
how often we remind people that they are "only" seasonal.
Therefore, any move toward lesser ease at this time is likely
to coincide in the eyes of observers with the midwinter lull
in general economic activity.
There is some advantage in
deferring any significant change in policy until we see how
the economy, and the current wave of business optimism,
survives the rigors of winter.
Mr. Koch made the following statement on financial developments:
I shall summarize briefly today recent financial developments and then talk a little about the course of some of the
broad indicators of monetary policy since about midyear.
Domestic financial markets took the tragic news of
President Kennedy's assassination fairly smoothly, very
smoothly if one excludes the sharp decline of stock prices in
a brief period on that fateful Friday afternoon and the sharp
rebound on the following Tuesday. Since then, stock prices
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have risen further, suggesting business and financial confidence in the new administration. The Government
securities market performed very well, with retail selling
small and with bond and bill yields both steady at levels
somewhat. below their highs for the current expansion.
Looking beyond the most immediate past, one of the
most striking developments has been the marked pickup in
business borrowing from banks. Such borrowing has averaged
from a half to three-quarters of a billion dollars more
than seasonal in each of the last three months. Outstanding real estate and consumer loans at banks have also experienced sharp further advances.
But with reserves less readily available, prior to
November banks met their increased loan demands by reducing
their Government security portfolios substantially. In
November bank holdings of Governments increased, but
perhaps temporarily due to new Treasury financing. Banks
also are curtailing their acquisitions, of municipal securities somewhat. This is a typical course of bank portfolio
adjustments in a period of business expansion with lessened
reserve availability.
Capital market financing by corporations and municipalities dropped off in November, but the new issue calendar
for corporations in December will again be large, partly for
seasonal reasons. Corporate and municipal bond yields, like
Government yields, have changed little since the death of
the President.
Morey supply growth has continued at a rapid pace,
approximating a billion dollars in the first half of November. This followed a rise of a similar amount in October.
More recent data on required reserves behind private deposits
suggest a further moderate rise in the money supply in the
last half of November. Growth in time and savings deposits
of individuals slackened a bit in November, reflecting in
part earlier than usual withdrawals of Christmas Club
accounts, but the larger banks continue to bid aggressively
for certificate of deposit money from corporations.
As for bank reserve positions, they seem to have been
under slightly less pressure than earlier. Free reserves,
for example, have averaged about $100 million recently, as
compared with about $50 million for a few weeks in October.
Moreover, preliminary estimates of free reserves have
generally been above final revised figures, and these early
figures were probably a more accurate indicator of the money
market conditions that actually prevailed than were the later
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ones, which involved mainly increased required reserves at
the country banks. Required reserves behind private
deposits continue to average significantly above the guide-
line figures computed from a late July base.
But this
excess has developed in large part because of a sharp
decline in Government deposits. Total reserves have
increased at a seasonally adjusted annual rate of less than
1-1/2 per cent since midyear. Since borrowings are up over
this period, nonborrowed reserves are actually down from
midyear.
Let me now turn to the interrelationships among the
various broad indicators of monetary policy, namely, bank
reserves, bank credit, the money supply, and interest rates.
The recent course of these indicators deserves separate
attenton, first, from midyear through October and, second,
in November alone.
Growth in total reserves and in bank credit slackened
markedly from midyear through October. Total loans and
investments at commercial banks, for example, increased at
a seasonally adjusted annual rate of 5-1/2 per cent over
the three months ending with October, as compared with
7-1/2 per cent earlier in the year, and 9 per cent last
year.
On the other hand, growth in required reserves behind
private deposits and in the money supply picked up after
July. The money supply increase averaged about 3-1/2 per
cent on an annual rate basis over the three months ending
with October, as compared with 3-1/4 per cent earlier in
the year and 1-1/2 per cent in 1962. Interest rates continued a moderate upward trend through October.
How can these changes be reconciled? In the first
place, the increased rate of rise in the narrowly defined
money supply occurred despite the slackening in bank credit
expansion, It reflected in the main sharply reduced U. S.
Government deposits and a somewhat reduced rate of increase
in time and savings deposits, neither of which are included
in the money supply. The interest rate rise reflected the
reduced rates of expansion in savings and in bank credit-with loans rising more than seasonally but with banks
liquidating Governments contraseasonally. The rise also
reflected expectations of higher rates and possibly a less
easy monetary policy,
The relationships among bank reserves, bank credit,
money and interest rates had to be different after October,
if only because Government deposits had declined sharply to
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If growth in the money supply were to continue
a low level.
at the pre-November rate, the expansion in total reserves and
bank credit had to be larger, or time and savings deposit
growth had to slacken markedly.
As we have seen, the course of the major monetary policy
indicators did follow a more consistent course in November,
with total reserves and bank credit expanding sharply along
with the money supply. The main reason for this difference in
November from earlier months seems to me to lie in Government
financial behavior with Treasury balances no longer being
drawn down and with new Federal financing, in part underwritten
by the banks, on the rise. With monetary policy unchanged and
in practice following a free reserve guide that put reserves
into the market to preserve a relatively steady tone and feel
of the money market, the larger over-all demands for bank
financing and cash balances--on the part of the Treasury as
well as the general public--were met without further upward
pressure on interest rates. Contributing to this stability
of rates was also the changed market expectations as to
official attitudes about appropriate short-term rate levels.
Prior to November the reduced rate of expansion in total
reserves and bank credit had led me to believe that perhaps a
slightly easier monetary policy was appropriate. November
developments suggest that some easing may actually have
occurred
In any case, with the political and economic
outlook still uncertain, recent developments suggest to me
a course of watchful waiting, maintaining approximately the
current monetary posture, at least until we can see how
strong are the cyclical demands for bank credit and money
after the seasonal forces shift from expansion to contraction
after about Christmas. If these cyclical demands prove very
strong ard lead to financial excesses or upward price pressures,
they will warrant curbing. If they are not strong and if the
seasonal contraction is marked, additional monetary stimula-
tion may well be called for.
Mr. Furth made the following statement on the balance of payments:
In the field of international finance, as in all others,
developments during the past few weeks have been overshadowed
by the death of President Kennedy and the advent of a new
administration.
Until the third week of November, U. S. international
payments seemed to present the same moderately encouraging
12/3/63
-19-
picture as during the third quarter and the month of October.
The disappointingly large deficit for the week ending
November 20--$150 million--reportedly was in large measure
due to window-dressing operations of a Canadian bank whose
fiscal year ended on November 30; and the result for the
following week--a deficit of $90 million--obviously gives
no clues as to the future.
In Continental Europe, moves toward tighter monetary
policies contradicted statements made at the recent Working
Party 3 meeting but nevertheless did not come unexpectedly.
The tightening countries, France and Belgium, had large
reserve gains but presumably more at the expense of other
European countries than of the United States.
In the absence of material changes in the world
economic situation, of which no signs are as yet visible,
the future course of the U. S. payments balance will depend
mainly upon future policy actions of the new U. S. administration and the market reactions to them. The decisive question
obviously concerns possible departures of the new administration's policies from those of the Kennedy administration.
President Kennedy's policy line on international finance
may be understood as a system of very gradual moves, aiming
as much as possible toward economic expansion rather than
restriction.
Thus, on non-Government current account, curtailment
of imports was avoided and stress was laid on expansion of
exports, not only through the traditional and not very
effective methods of export promotion but also in two more
basic ways. First, the administration supported the
maintenance of conditions conducive to wage and price
stability by exerting moral suasion on labor to avoid wage
cost increases and on business to avoid price increases.
President Kennedy's interventions in the railroad dispute this
year and in the steel price move last year were the most
conspicuous instances.
Second, the insistence on trade liberalization, expressed
in the Trade Agreements Act and the forthcoming "Kennedy
round" of tariff negotiations, was designed to improve the
U. S. trade balance. Since U. S. exports greatly exceed
U. S.. imports, an equal percentage increase in both exports
and imports would significantly raise our export surplus.
On Government account, stress was laid on avoiding
reductions in total expenditures for military and economic
aid--with rather minor exceptions for some defense outlays
overseas. Instead, spending was deflected from foreign to
12/3/63
-20-
domestic recipients, thus simultaneously improving the
payments balance and stimulating domestic production.
This
is the rationale of the increased preference for domestic
suppliers of goods and services for the armed forces abroad,
of the agreements for countervailing foreign purchases of
U. S. armaments, and of the comprehensive tying of economic
aid to exports of U. S. goods and services.
Finally, on non-Government capital account, the administration avoided direct capital controls and instead proposed
to curb long-term outflows through the interest equalization
tax. The tax would tend to make domestic placement of funds
relatively more attractive than placement abroad, thus again
combining the two goals of international and domestic policy.
The proposed tax cut was also expected to make domestic
investment more attractive and in this way help to offset
the deterioration on current account usually accompanying a
faster rate of economic expansion. The most recent efforts
at direct promotion of foreign investment in this country
are designed to serve the same purpose.
The only nonexpansionary measure, the modest raising of
short-term rates through debt management support of Federal
Reserve actions, was so designed as to avoid any serious
restrictive effect by minimizing as far as possible a rise
in long-term rates or any reduction in the over-all availability of money and credit.
How far can the new administration be expected to follow
those same lines? The first public messages of President
Johnson reveal firm determination to abide by the principles
that guided President Kennedy. This will exclude any radical
innovation, such as explicit or implicit devaluation by means
of changes in the dollar-gold relation or in the system of
fixed par values, or any establishment of exchange controls
or other direct restrictions on current or capital transactions.
But the new administration seems to put greater emphasis
on curbing Government expenditures. It may therefore also
take a firmer line on Government expenditures abroad, without
abandoning either the defense of Europe and Asia, or the
principle of international assistance to developing nations.
Moreover, the new administration perhaps enjoys more goodwill
with leaders of American business, and may therefore be better
able to use its influence against price increases.
Labor, on the other hand, will perhaps be more critical
of efforts to intervene in wage disputes, and the risk of
crippling strikes may slightly increase.
12/3/63
-21-
Foreign governments and markets apparently are reserving judgment. But if the new administration can hold the
cost and price line at home, persuade the Congress to pass
the income tax cut and the interest equalization tax, and
reduce Government expenditures abroad--then foreigners will
certainly continue their collaboration, limited as always
by the real or imagined interests of their own countries.
In this situation, the relations of the Federal Reserve
with foreign central banks are likely to be particularly
important. The world knows that the management and the
policies of the Federal Reserve will not suffer from
discontinuity, whatever may happen in the Executive and the
Legislative Branch. This assurance should serve to minimize difficulties in money and capital markets as well as
in the attitudes and policies of foreign monetary authorities--as effectively as it did in November.
Chairman Martin then called for the usual go-around of comments
and views on economic conditions and monetary policy beginning with
Mr. Hayes, who presented the following statement:
Before trying to summarize my impressions of the current business and credit situation, I would emphasize that
none of us can foresee all the consequences of President
Kennedy's tragic death, and we would therefore do well, I
think, to reserve judgment in some degree and await the
unfolding of events. However, I do believe we can find
much satisfaction in the calm and wisdom that seem to have
characterized the political transition to date and in the
widespread evidence of continuing optimism on the part of
both businessmen and consumers. Also, we appear to have
gotten by with a minimum of disturbance to the dollar's
position abroad, thanks in part to prompt action on this
side to enlist the aid of the principal foreign central
banks and to their swift and wholehearted cooperation in
holding rates firm.
Subject to the general reservation already mentioned,
business prospects for the immediate months ahead continue
to look strong. The more complete statistics now available
for October bear out previous impressions of a distinct
pick-up, with good gains in industrial production, employment, personal income, retail sales, new orders for durable
goods and housing starts. Fragmentary data suggest that the
12/3/63
-22-
improvement was maintained in November. Expectations of
good gains in business spending on plant and equipment
are supported not only by the latest figures on capital
appropriations but also by increasingly frequent comments
by businessmen to the effect that practical capacity operation is being attained in a growing number of lines. The
probability of passage of the tax bill at a relatively early
date appears to have been enhanced, if anything, by the
change in the Presidency.
It is clear that we are not yet out of the woods with
respect to the balance of payments problem,, despite the
sharp iprovement of the third quarter. November seems
likely to show an uncomfortably large deficit, somewhat
above that of October, with both months having been affected
adversely by window-dressing activities of the Canadian banks.
It is also possible that some of the term loan commitments
reported this summer and fall are reflected in larger capital
outflows in recent weeks.
Since our last meeting, we have
had further evidence, in the form of a discount rate increase
by the Bank of France, that the serious inflationary trend in
major European countries can be expected to bring credit
restrictions despite these countries' desire not to invite an
inflow of capital, particularly from the United States. We
should also have in mind that the Federal Reserve is now a net
user of.the swaps to the extent of somewhat more than $300
million, and it would be well to try to recoup a good portion
of this in preparation for future crises.
Coming to the credit situation, I was struck at our last
meeting by the wide divergence between two schools of thought
as to the significance of credit data of the past year or so.
Whereas some members of the Committee and staff feared that
the recert growth of total reserves has been inadequate and
that the banks are coming under excessive pressure as rising
loan demands have forced them to dispose of investments, other
members pointed to evidence that total bank credit has kept on
growing at a surprisingly rapid pace despite our various moves
toward less ease, that banks are still looking avidly for
loans, ard that over-all nonbank liquidity has risen rapidly
without interruption.
I have taken a closer look than usual at the available
credit statistics to try to assess these wide differences in
interpretation. It seems to me that the case for inadequate
total reserve growth has hinged too much on the data for a
single mcnth--October--when total bank credit did show only
12/3/63
-23-
weak expansion, partly reflecting the timing of prior
Treasury financings and possibly also a sharp drop in
Treasury deposits. A much stronger showing would have
been made if reserve growth through September had been
considered, and partial data for November suggest a
strong pick-up in credit expansion last month. Thus the
case for a recent slowdown in bank credit growth cannot
yet be considered as established, though it is possible
that a slowdown is in the making--as might in fact be
reasonably expected after successive System moves toward
lesser case.
It is also not clear whether the large excess in
seasonally adjusted required reserves against private
deposits above the Board's guideline curing November can
be regarded as an indication of quickening bank credit
growth. In part, at least, it would seem to reflect an
unusually sharp rise in reserves required against demand
This could be an indication
rather than time deposits.
of a continuing shift in emphasis toward demand deposits
that can occur as the economy gains momentum and that would
imply larger reserve needs even if the rate of bank credit
growth were to remain constant or to slow down somewhat.
The data do undoubtedly support the view that the composition of bank credit growth is changing, with increased
business lending being accompanied by some net liquidation
of governments, and perhaps by a somewhat reduced rate of
purchase of municipals. As for bank liquidity positions,
banks outside of New York appear to have suffered greater
impairment of liquidity in the past year than have the New
York City banks. Certainly the New York banks are still
actively seeking loans both here and abroad. Money supply
and total nonbank liquidity have grown more rapidly this year
thanlast year--although the expected increase in Treasury
deposits before the year-end may tend to dampen this trend.
The implications of all this for policy are not wholly
clear.
It would seem, however, that the focus of policy
should be primarily on the effects of reserve changes as
manifested in credit flows, credit market conditions and
over-all liquidity rather than in recent changes in the rate
of reserve growth.
Cumulative bank credit expansion in this
upswing has been far greater than that over corresponding
periods of earlier business expansion. On the other hand,
12/3/63
-24-
we cannot judge the appropriateness of the rate of bank
credit expansion solely in terms of past cyclical patterns;
it must be assessed in the light of the strength and nature
of the business expansion and the over-all credit and
liquidity requirements of an economy moving toward fuller
resource utilization.
The change in composition of bank
credit growth in recent months seems to me quite normal as
the economy gains momentum. There is, however, some ground
for caution in the fact that this gathering momentum could
bring a rather substantial switch from time to demand deposits,
with consequent pressure on credit markets and on the banks'
willingness to lend and invest.
I am forced to conclude that we can better than ever
afford to place major emphasis on the over-all feel of the
credit and money markets and on measures of total credit
expansion, and less emphasis on actual rates of reserve
growth
For the immediate future it would seem well to
maintain a steady policy while cbservi.ng developments both
at home and in our international payments. This would mean
keeping the Federal funds rate steadily at 3-1/2 per cent
and encouraging a 3-month bill rate close to the discount
rate, with variations on either side. At this time of
seasonal pressures, it might range as high as 3.60 per cent.
The discount rate should not be changed, and I should think
we could continue the directive as modified at our recent
telephone meeting. I do think it not unlikely, however,
that we shall sooner or later be forced by a continuing
balance of payments problem, against a background of an
improving domestic economy, to take further steps in the
direction of greater credit restriction.
Mr. Ellis said that New England marufacturing output and
employment continued a sidewise movement.
The index of manufacturing
output was up only 1 point in a year-to-year comparison.
In the past
year only one of the five major components of the index had showed
any real growth--transportation equipment, which was up 7 per cent.
This increase was largely offset in the total index by declines in
other components.
Total employment remained about unchanged, while
manufacturing employment showed further weakness, being 2.5 per cent
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12/3/63
below a year earlier in October.
Advance plans in October for new
heavy construction were higher than a year ago.
Cumulative starts
for the first 10 months of the year showed a 9 per cent gain over a
year ago, compared with a 3 per cent gain nationally.
In contrast to the United States pattern, Mr. Ellis continued,
business loan demand in New England had risen less than seasonally in
the past 2 months.
There was a greater than seasonal spurt in demand
deposits in November.
District weekly reporting banks were on the
selling side of the Federal funds market.
The shifting to municipals
had been at least temporarily reversed.
The change in the Administration appeared to have resulted in
generally improved business expectations, Mr. Ellis said, with a
feeling that the political climate wculd be more favorable to business.
He thought that labor might press its demands more strongly than under
the previous Administration, and that prices would firm.
Turning to monetary policy, Mr. Ellis observed that 10 days
earlier there had been widespread confidence that business trends
would be strongly up during the next 6 months.
Business loans at
banks and the money supply were expanding sharply, prices were firm,
and business orders rising.
The President's assassination caused
everyone to review the situation again and to attempt to assess the
economic significance of the tragedy.
that the business outlook had improved.
Mr. Ellis was inclined to agree
Nevertheless, he thought it
12/3/63
-26-
would be improper to make any change in monetary policy at this
meeting, particularly since the next meeting was only two weeks away,
and since there would be heavy seasonal needs for reserves before
Christmas.
It seemed easier to conclude that there should be no
change in policy, Mr. Ellis continued, than to specify just what
that conclusion implied.
He advocated a " s easonally adjusted and
cyclically adjusted no change."
If market demands tended to push up
interest rates in a customary seasonal rise, rates should be free to
reflect these demands.
To him, "no change" did not mean that Federal
Reserve credit would be supplied in unlimited amounts to hold rates
at present levels if strong and increasing demands by borrowers
materialized.
As targets, Mr. Ellis said, he would suggest net free reserves
below $100 million, Federal funds consistently at 3-1/2 per cent, and
the 90-day bill rate fluctuating above or below the discount rate.
He
would suggest no change in the discount rate at present, but he observed
that the French action in raising their discount rate shortly after the
last meeting of the Committee indicated their determination to use
monetary policy in fighting inflation.
With respect to the directive, Mr. Ellis said that he would
be inclined to delete the reference in the second paragraph to
"cushioning any unsettlement that might arise in money markets stemming
from the death of President Kennedy."
He proposed including in the
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12/3/63
first paragraph a reference to the uncertainties resulting from the
change in the Administration, because, as Mr. Noyes had indicated,
this was an event of great economic significance.
Mr. Irons said that during October conditions in the Eleventh
District were steady at a very high level, and the indications for
the first two weeks of November were for continued economic strength.
Data for the last part of November undoubtedly would show some slackening of activity in retail trade, industry, and other sectors as a
result of the cessation of business for several days following the
President's assassination.
There were signs of a recent pick-up in
retail trade, however, if one could judge by the crowds and parking
problems in shopping centers.
interest in Christmas shopping.
There seemed to be a beginning of
Automobile registrations were at a
record high, and construction was very strong.
had been improved by recent rains.
to repcrt;
Agricultural conditions
On the whole, there was little new
it would be necessary to observe developments during the
next four or five weeks.
Mr. Irons commented that loans, investments, and deposits at
District banks recently were all up in fairly sizable amounts.
The
increase in bank loans was general among types of loans, and the rise
in investments was mainly in holdings of Government securities.
deposits also were up, but not so much as a year ago.
Time
Several District
banks had been active buyers of Federal funds, Mr. Irons continued, and
12/3/63
-28-
compared with the period 3 weeks earlier, District banks were borrowing more from the Federal Reserve Bank; they were swinging from
moderate-to-low borrowing to substantial borrowing.
There had been
an increase in week-end borrowing, particularly by large city banks,
who were coming in on Friday afternoon and going out on the following
Monday or Tuesday, and this pushed the average borrowing figures up.
Nationally, Mr. Irons said, the economic picture was strong.
Activity was not surging but the situation was probably healthier
than if it were.
in policy.
He thought this was not a time to make any change
He saw no strong reasons for a policy change, even apart
from the recent tragedy.
ably satisfactory.
Interest rate relationships seemed reason-
He thought that seasonal requirements for reserves
should be met, but reserves should not be provided to excess.
Some
increase in discounting might occur.
This was a period, Mr. Irons said, during which the Desk
should give particular attention to the feel of the market.
He had
in min' pretty much the same statistical limits as Mr. Ellis had
mentioned--free reserves in the zero to $100 million range, the bill
rate moving around 3-1/2 per cent but not too far above or below the
level, and the Federal funds rate at 3-1/2 per cent.
change the discount rate at this time.
He would not
As to the directive, he did
not think any change was necessary unless the Committee wanted to take
out the reference to President Kennedy's death.
He would be reluctant
12/3/63
-29-
to put in a clause referring to the change in Administration such as
Mr. Ellis had suggested.
The Committee might keep this in mind but
he thought there was no place for it in the directive.
Mr. Swan said that economic activity in the Twelfth District
continued to rise in October and presumably also in early November.
As in the nation, there seemed to be no marked indications to date
that reassessments of the last two weeks were likely to check the
possibility of further gains.
Total emplcyment had increased in
October, and for a change the increase was greater than that in labor
force; the unemployment rate, seasonally adjusted, had declined by
0.1 per cent.
Developments with respect to construction activity in
October were mixed, with housing starts rising but construction
employment down for the second month in a row.
District manufacturing
showed gains in October and seemed to have continued at a good pace
in the first part of November.
With respect to banking developments, Mr. Swan reported that
Twelfth District banks had shared in the rather large rise in loans
that occurred in other parts of the country.
Through November 20,
weekly reporting banks showed a substantial loan increase, half of
which was in business loans.
Demand deposits had risen but time de-
posits declined primarily because of Christmas club payments.
There
was some indication of a slightly tighter reserve position, but no
substantial change.
12/3/63
-30With respect to policy, Mr. Swan said he concurred in the view
already expressed that the Committee would not want to make any change
at this time.
He thought it was still necessary for the Committee to
do what it could to see that the confidence reflected in the current
situation was not affected adversely.
The Committee would meet again
in two weeks, and could assess the situation then.
Mr. Swan added that he also felt there was some problem in
defining "no change."
He thought the Committee would want to take
care of seasonal demands between now and Christmas.
factor
But if seasonal
were expected to have an effect in the market and no effort
were made to offset them, this would amount to a change in policy.
He preferred to avoid this course if possible.
He also would want to
avoid any possibility of inferences by the market of a shift to a
tighter policy.
While the bill rate might well fluctuate around the
discount rate, Mr. Swan said, he would hope that it would not be above
the discount rate for any sustained period of time.
change The directive.
He would not
He agreed with Mr. Irons that the suggested
change in the first paragraph was inappropriate, and preferred to
retain the clause that had been inserted in the second paragraph
relating to the President's death.
Mr. Deming said that in the business survey taken by the
Minneapolis Bank in late November, mostly just before President
Kennedy's death, there was little appreciable change in sentiment
12/3/63
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from earlier surveys this year dating back some months.
Approximtely
two-thirds felt that business activity would continue to move ahead
moderately in the weeks immediately ahead.
However, a few reporters
from the rural areas expressed some concern with lower cattle prices
and their impact on farm incomes.
Personal incomes in the Ninth District were relatively strong
in October, up from September and above October a year ago in about
the same proportions as national figures.
Bank debits continued to
run substantially higher than a year ago.
Construction activity was
strong, and this seemed to be true also of over-all retail sales.
District department store people were optimistic about prospective,
Christmas ss.les and brisk activity in car and farm machinery sales
around the District had been reported to the Bank in recent weeks.
In general, Mr. Deming said, he would characterize the business trend in the Ninth District as roughly paralleling that of the
nation--expansion with prospects for continued improvement in the
weeks ahead.
In District banking, total bank credit expansion both in
October and in the early weeks of November was approximately in line
with the usual seasonal patterns.
However, within that total, loans
expanded above the usual seasonal pattern while investments were not
quite so strong as usual.
A major portion of the total loan advance
was in commercial and industrial loans.
12/3/63
-32Mr. Deming said he agreed with these who had suggested that
there be no change in policy for the forthcoming two weeks; he thought
this was the course of wisdom in the present situation.
with Mr. Irons with respect to the directive.
He also agreed
He did not think it
propez to insert a reference in the first paragraph to the change in
Administration, and he thought the phrasing of the second paragraph
was appropriate for implementing a policy of no change.
He concurred
in the guidelines Mr. Ellis had laid down, with this amendment:
he
would like to see the bill rate fluctuating around the 3-1/2 per cent
discount rate, but not too far.
He thought 3.60 might be too far on
the upside.
Mr. Scanlon reported that economic activity in the Seventh
District was continuing the gradual improvement he had reported at
recent meetings.
Confidence and moderate optimism were widespread and
appeared to have been affected only nomentarily by the assassination
of President Kennedy and the transfer of executive responsibilities
to President Johnson.
Capital expenditures were expected by midwest manufacturers
of producers' durable goods to exceed the McGraw-Hill estimate of a
4 per cent rise for 1964. For example, the decline indicated by the
survey for railroad equipment contrasted with an appreciable increase
expected by industry sources.
-33-
12/3/63
Total credit at weekly reporting banks in the Seventh District
rose strongly in the first three weeks of November with both loans and
investments participating in the rise.
Business loans had continued to
rise faster than in corresponding periods of other recent years.
On policy, Mr. Scanlon said he believed it was desirable to do
everything possible to maintain an atmosphere of stability in the money
markets in the next few weeks.
meeting seasonal pressures.
To him, th.is would mean providing for
Like Mr. Irons and others, he would recom-
mend no change in the directive and would not favor changing the discount rate.
Mr. Clay said that following a Governmental transition such
as this country had experienced recently there would appear to be
considerable merit in maintaining the general monetary posture unchanged unless circumstances dictated otherwise.
In his opinion this
view had merit despite the fact that the changeover had been made in
a very orderly manner and there was no evidence that the course of
economic and financial events had been altered.
Reviewing other considerations, Mr. Clay said, there seemed
to be no compelling reason to change policy at this time.
When the
Committee last met developments in the credit markets were a matter
of some concern, as interest rates had moved to a markedly higher
level in the short-term area with upward pressure on interest rates
throughout the maturity structure. However, subsequent developments
altered that situation and interest rates receded somewhat.
-34-
12/3/63
Thinking in terms of those later credit market developments
rather than those existing at the time of the last meeting, Mr. Clay
said, policy for the period ahead might appropriately continue essentially unchanged.
Weighing the various factors in the international
situation, present policy seemed satisfactory--with any injection of
restraint and upward pressure on interest rates to be avoided.
Sus-
taining economic growth in this country continued to require the
assistance of public policy.
In keeping with this view, the domestic
situation also called for an avoidance of any reduction of reserve
availability and upward pressure on interest rates.
Rather, member
bank reserves should be provided in sufficient volume to permit commercial bank credit to expand on a seasonally adjusted basis.
So
far as the 90-day Treasury bill rate was concerned, Mr. Clay said,
it would be well to think of 3-1/2 per cent as about the upper end
of the yield range.
No change should be made in the discount rate,
and the economic policy directive might appropriately be left in its
present form,
Mr. Wayne reported that Fifth District business continued to
expand, with October statistics quite good.
All categories of non-
farm employment except services advanced as did most categories of
factory man-hours.
Gains were particularly strong in textiles,
apparel, transportation equipment, and primary metals.
Bank debits
remained close to September's record level, and coal production rose
12/3/63
-35-
to the best levels of the year.
Building permits slipped below the
September all-time high but remained higher than in any other month.
Current clues, Mr. Wayne said, suggested that November showed a
similar rise.
Department store sales rebounded after sagging in
October, and rates of insured unemployment remained low.
Respondents
in the Reserve Bank's opinion survey displayed renewed optimism.
On
balance, they reported further gains in nfw orders, backlogs, shipments, wages, and prices but no rise in employment or hours.
Con-
struction firms were said to be working at or near capacity with
wages and material prices tending upward.
Flue-cured tobacco sales
were still 9 per cent below last year's levels.
Mr. Wayne observed that since the present period of business
expansion started in February 1961 the American economy had passed
through five major periods of crisis.
These were the abortive Cuban
invasion, the building of the Berlin Wall, the stock market debacle
of May 1962, the Cuban missile crisis, and now the death of the
President.
The fact that the economy surmounted these crises without
panic, without any major emergency measures, and with little apparent
effect on business activity could be taken as evidence of substantial
basic strength and equilibrium.
The final economic reaction to the
latest crisis was, of course, yet to develop but the initial reaction
of the financial markets tended to be reassuring.
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12/3/63
Before the events of November 22 the business picture was
distinctly encouraging, Mr. Wayne continued.
The increases in machine
tool orders, housing starts, production and sale of automobiles, and
personal income in October were outstanding.
Lesser but significant
advances were shown by orders for durable goods, industrial production,
With comparative stability in employment and
and total retail sales.
unemployment in October and no major development of an unfavorable
nature in October or the early part of November, Mr. Wayne said, this
all added up to a picture of considerable business strength with
moderate growth.
If recent events did not cause any significant change
in the trends, which seemed to be the best guess at present, then the
outlook was for continuing strength and some improvement in the near
future.
Mr. Wayne commented that the Commttee's current policy and
operating organization and procedures had been severely tested in the
past two weeks, and all of them had come through the crisis with a
highly creditable record.
In his judgment the System could appropri-
ately derive a modest but deep sense of accomplishment from this performance.
In particular, Mr. Wayne said, the domestic and foreign
Desks were to be commended for their alertness and their preparation
for all eventualities.
Before the crisis it had seemed to him that
the Committee's policy was an appropriate one in view of the circumstances.
The crisis apparently had caused no significant change in
12/3/63
-37-
basic conditions, although such a change could develop later.
In the
meantime, any substantial change in monetary policy would be premature
and could be misinterpreted, coming so early in the new Administration
without any obvious justification.
Also, the Committee would meet
again in two weeks instead of the usual three and would then have a
little better perspective on recent events.
For these reasons, Mr.
Wayne said, he would favor a continuation of recent policy, meaning
by that the policy pursued week before last rather than last week.
He
believed, however, that in the current directive the Committee should
continue the authority to the Desk to take appropriate action to
cushion any
nsettlement which might arise from the recent crisis,
as was given in last week's special directive.
Mr. Wayne thought no
change in the discount rate seemed appropriate under present circumstances.
Mr. Mills said that in his opinion the purely seasonal
expansionary developments in the supply of reserves and in bank
credit that were now being experienced must be viewed in their true
character as superficial and temporary, and they should not be permitted to obscure more basic factors.
In his judgment, Mr. Mills
said, a correct appraisal of these factors called for a less
restrictive credit policy.
12/3/63
-38Mr. Mills then presented the following statement:
The change in the Administration of the Federal Government is in itself a good reason for relaxing the cumulative
financial pressures resulting from a restrictive Federal
Reserve System credit policy and for relieving at the same
time the inevitable financial tensions that accompanied this
tragic episode in our history. However, the rationale arguing
for an easier policy goes beyond any connection with the
assassination of President Kennedy and was outlined to this
Committee in the comments I submitted both at its last regular
meeting and at the special "telephone" meeting.
The reported understanding reached with foreign officials
and governments that countervailing interest rate actions will
not be taken to lift their domestic levels of interest rates
significantly above those now prevailing in the United States,
gives tacit assurance that the current objective of Federal
Reserve System policy-making to mount an interest rate offensive against an outflow of gold and dollars can be modified.
Accordingly, long past due attention can now be paid to
domestic economic considerations without serious possibility
that a more liberal provision of reserves to the commercial
banking system will produce unwanted balance of payments repercussions in the field of competitive international interest
rates.
Under all of these circumstances, it is desirable to in.crease the supply of reserves at the disposal of the commercial
banking system so as to expand the aailability of credit and,
it so doing, also give a psychological stimulus to the financial
community at a critical time. If the adoption of an easier
credit policy should impair the efforts that have been made to
strengthen the nation's adverse balance of payments defenses,
I reiterate my previous statements to the Committee that recourse should be made to the imposition of selective controls
over short- and long-term capital movements out of the United
States, and that the Federal Reserve System should no longer
be compelled to serve as the chosen policy instrument to combat
our balance of payments difficulties in the various financial
areas in which it has been operating to that end.
Speaking on the subject of controls, official aversion to
the use of selective controls over capital movements abroad has
been evinced as being contrary to the principle of a free capital
market in the United States. Instead, an artificial interest
rate structure has been constructed, ostensibly to help preserve
that principle--all under the auspices of Federal Reserve System
12/3/63
-39-
and U. S. Treasury policy-making officials. In my opinion,
a hard-handed control over interest rates and the U. S.
Government securities market, is a far more reprehensible
form of official financial control than the use of selective
controls over outward capital movements because it strikes a
blow at the very heart of a free financial market. I plead
once again for a policy return to free market principles in
the formulation and conduct of Federal Reserve System monetary
and credit policy, which policy should include the resurrection
of the 'bills only" policy of yesteryear.
Mr. Robertson made the following statement:
I have been deeply gratified by the way in which financial markets, both at home and abroad, have come through the
tragic shock of the President's assassination. I appreciate
that some part of that response is a credit to the well-timed
action of the Committee's operating officers, and I should
like to add my own note of commendation to them.
More broadly, I have been quite satisfied with financial developments
throughout the three weeks since our last
meeting. It seems to me there has been a little less tension
evident in the money market, and I think that is as it should
be. I think our own actions to supply reserves in timely
fashion have been a constructive force here--along with the
Treasury action to reduce pressure on the bill rate by cutting
two bill auctions and permitting payment by 50 per cent tax
and loan account credit for a third.
Recent bank loan expansion strikes me as an encouraging
sign--particularly so since it has been accompanied by an improvement in general business indicators, by a persisting rough
stability in wholesale and commodity price indexes, and by recent balance of payments figures that suggest we may be continuing, on a net basis, the sharply improved performance reported
for the third quarter.
In these circumstances I would favor supplying sufficient
reserves over the next two weeks to accommodate whatever may
materialize in the way of private demands for money and bank
loans. I think this is a particularly good rule to follow in
the next two or three weeks of climactic seasonal pressures,
for the exact dimensions of such demands cannot be forecast
precisely, and we only create needless disruption of financial
processes if we instigate counter pressures against what turn
out to be purely temporary or seasonal bulges in market demands.
12/3/63
-40-
I would remind the Committee that both last year and
the year before we acted at the last meeting of the year to
tighten policy in the face of what appeared to be an upswing in credit demand, only to see the upswing abate after
the turn of the year. This time we should wait, to be sure
a similar pattern is not ahead of us this year, before trying to adapt our policy to what we assume 1964 will bring.
The policy I have in mind would not call for any change
in the committee directive, apart from dropping the phraseology concerning President Kennedy's death that was adopted
at the special telephone meeting last week.
Mr. Shepardson said that the general economic outlook seemed
to him to be encouraging.
The change in Government after the tragedy
had been accomplished with unusual calm.
At this season of the year
the Committee would expect to supply needed seasonal reserves, and
he thought that could be accomplished with existing policy.
As to the directive, Mr. Shepardscn said that the phrase regarding the death of President Kennedy conceivably could be eliminated.
On the other hand, only a short time had elapsed and with another meeting scheduled in two weeks he thought
directive as it was.
the Committee might leave the
He concurred in the guidelines suggested by
Mr. Ellis.
Mr. Mitchell said he agreed that this was not a time for the
Committee to make a change in its policy.
However, the question was
whether this implied no change in bill rates or in bank reserves.
The Treasury's monetary policy appeared to be aimed at a bill rate
peg, and this evidently was what the market expected the Committee's
policy to be.
While he did not think the Committee's policy had to
be the same as the Treasury's, it would be helpful if it were.
12/3/63
-41Mr. Mitchell said he did not care much for the peg and he would
be happy to join with those people at the table who were prepared to let
the bill rate fluctuate, if they would take the same position in January
when the bil. rate would be tending downward.
This would be the most
wholesome position for the Committee to adopt, Mr. Mitchell said, but
he was practical enough to realize that the Committee could not get too
far away from the Treasury's policy.
Mr. Mitchell said he had a feeling of apprehension about the
projected role of monetary policy.
It seemed to him that everyone
agreed that it would be all right to cut taxes to achieve fuller
resource utilization, but there were quite a few people who thought
it improper to use monetary policy to this end.
Some members of the
Committee seemed ready to move towards credit restraint as soon as
there was evidence of growth, long before a satisfactory rate of
resource utilization had been achieved.
In Mr. Mitchell's judgment
the economy was not ready for a policy of restraint, and the Committee
should not use monetary policy to prevent the economy from achieving
the goal set for fiscal policy unless there was very strong reason
for doing so.
Mr. Hickman said his thought was that the tragedy of November
22 had not changed the economic outlook significantly, either domestically or internationally.
However, the reaction of consumers and
businessmen had been such that economic developments in November would
12/3/63
-42-
be more difficult than usual to measure and appraise.
The unusual
holiday and some part-time operations immediately following the event
were likely to produce widely varying effects on statistical series,
depending upon the way in which the particular series was adjusted for
working days.
It would, therefore, be difficult for the Committee to
interpret information on current developments until well after the
turn of the year.
For this reason, Mr. Hickman said, it was all the more important for the Committee to turn back to the situation as it was revealed
in the data through mid-November.
On the basis of that evidence, the
present configuration of business was such that the main danger--to
the extent that there was one--stemmed not from feebleness of demand
but from developing exuberance.
The flow of business news showed
clearly that one after another of the areas of doubt or weakness had
simply melted away.
A good illustration was provided by manufacturers' new orders,
Mr. Hickman said.
The preliminary report for October for durable
goods showed further advance to the level of last April's position,
prior to the steel retrenchment.
Current orders for machine tools
were especially strong, particularly for cutting tools, which is the
major component of this series.
New orders of steel producers report-
ing directly to the Cleveland Federal Reserve Bank on a confidential
basis were more robust than had been anticipated just three weeks ago.
12/3/63
-43Construction activity and housing starts provided additional
evidence of strength.
Housing starts in October were up 8 per cent
from September and 22 per cent from a year ago, an impressive showing
despite the well-known volatility of this series.
Retail sales pro-
vided still another instance of unusual strength.
Despite the un-
certainties of early Fall and the poor showing of department store
sales in October, the October figures for total retail sales reached
a new record, and reports for November prior to the national tragedy
were especially strong.
Even the Fourth District problem industry,
bituminous coal, had shown signs of increased activity in recent
Reports on corporate profits for both the second and third
months.
quarters were considerably stronger than in other recent calendar
quarters.
Soft spots in the economy were almost impossible to find
although high unemployment remained an unsolved problem.
In view of the solidity of the business expansion a tax cut
enactment could conceivably produce a reinforced stimulus, Mr. Hickman
said, which in turn could provide a serious problem of short-term
balance.
Such a possibility was by no means so remote as it seemed
a short time ago.
Mr. Hickman felt that because of the upward thrust of the
economy and the uncertainties of statistical measures monetary policy
would be most difficult to formulate over the next two months.
Clearly, no change was indicated at the mcment. he said, but the
12/3/63
-44-
Comittee should be continuously alert to the possibility of moving
from its present position to one of outright restraint.
For the next
two weeks, Mr. Hickman continued, he would like to see the Federal
funds rate at 3-1/2 per cent all of the time, and the bill rate at
the same level or slightly higher.
He would prefer to achieve the
bill rate objective by a lower level of free reserves than had obtained
since the last meeting rather than by Treasury intervention in the
money market and Desk operations in the bond market.
To achieve this,
he judged that it might be necessary to allow free reserves to go
below $50 million, which would not be undesirable in view of general
business and bank loan demand.
The System should feel gratified
about the manner in which the recent potential crisis was handled by
those responsible for the management of its domestic and foreign
accounts, he concluded.
Mr. Bopp said that labor force measures for the Third
District recently had been performing somewhat better than other
indicators of economic activity.
Labor demand appeared to be hold-
ing at fairly satisfactory levels, but manufacturing output and
employment were not and sales at department stores were lagging badly.
Continuing tightness characterized Third District banking.
The basic reserve deficit of reserve city banks set a new recent-year
record; and in the week of November 20 borrowing by reserve city banks
reached the highest level of 1962 or 1963.
Country bank borrowing
since the last Committee meeting also had been on an uptrend.
12/3/63
-45For the next three weeks, Mr. Bopp continued, policy should
be directed toward maintaining a tone of .teadiness and stability
in the money and credit markets and in the foreign exchange market.
The transition to a new Administration seemed to have been made
smoothly but had naturally resulted in some uncertainties as to future
He would supply reserves as necessary to meet seasonal demand
trends.
and to avoid any reduction in the availability of bank credit.
He
would suggest no change in the discount rate, and no change in the
directive except to delete the reference to the death of President
Kennedy.
Mr. Patterson reported that there apparently had been no letdown in the economic expansion nor in the growth of bank credit that
had been characteristic of the Sixth District during the preceding
months of 1953.
So far, there was little, if any, evidence that the
events connected with the President's assassination had altered the
existing economic trends.
Personal income for the firs' three quarters of 1963 in each
of the Sixth District States had increased at a greater rate from 1962
than that of the nation as a whole, according to estimates made by the
Atlanta Bank's Research Department.
The final income figures for the
year probably would show an even higher rate of increase for the year
1963 than the 7.4 per cent increase for the first three quarters in
1963 partly because of the especially favorable farm situation. In
12/3/63
-46-
October and
ovember, cotton harvests were exceptionally large and
currently large harvests of corn, soybeans, and sugar cane were being
marketed at favorable prices.
Manufacturing activity also continued
to expand.
About the only factor offsetting these elements of income
growth had been a weakening in construction employment in certain
parts of the District.
In Mississippi, construction employment had
been falling for the past 6 months largely because of the completion
of a large oil refinery at Pascagoula whose construction had utilized
approximately 3,000 construction workers for about 2 years.
Although
production at the refinery, with a capacity to utilize 100,000 barrels
of crude oil per day from offshore Louisiana wells, began in October,
only 330 workers would be regularly employed.
Construction employment
also was weak in Florida, but there were increases in Louisiana and
Tennessee.
Against this background of expanding income, Mr. Patterson
said, consumer spending had been strong.
Automobile sales had been
at a record high, and this had been reflected in an expansion of
consumer instalment credit.
Bank credit, according to preliminary estimates, increased
more than seasonally through the first three weeks of November.
Total
deposits also expanded correspondingly, although most of the deposit
increase was concentrated in demand deposits.
Business loans at the
weekly reporting banks in leading cities increased substantially.
12/3/63
-47Demand for nonbank credit also continued to be large.
For
example, well over $120 million in municipal securities were sold by
State and local governmental units during October.
The major part
of the securities were to finance public housing--45 per cent--and
for highway construction--25 per cent.
In an effort to determine the response of consumers and businessmen to the upsetting events of the preceding week, the Bank's
Research Department staff had made a spot survey late last week.
The responses indicated that there was little immediate effect that
could be discerned, but that uncertainty had been introduced into
the current economic and financial scene.
Department stores had, of course, experienced slow sales
over the week-end and automobile dealers had been adversely affected.
Sales, however, had rebounded by Tuesday or Wednesday.
Bankers
reported that business was being carried on as usual; loans in process Friday appeared to be going through, and there were no significant changes in deposit withdrawals that could be related to the
tragedy.
Mortgage bankers and savings and loan officials reported
no cancellation of mortgage plans, nor increased withdrawals.
Security dealers and brokers reported that the disturbances in the
securities market that started Friday seemed to be a signal for a
greater number of persons to try to enter the market when the exchanges were opened on Tuesday.
12/3/63
-48The respondents, Mr. Patterson said, emphasized that valid
assessment of the long-run effects could rot be made now.
However,
some of them believed that long-run spending plans and credit demands
would be affected in the future.
Their inability to specify just
what these effects would be or how they would materialize suggested
that the uneasiness that existed could be dispelled fairly quickly
if economic conditions continued to be "normal."
On the other hand,
the replies suggested that there might develop a tendency to relate
future unfavorable economic developments to the assassination and
the subsequent events even when such relationship did not exist.
Mr. Shuford said that while the expansion in business activity
in the Eighth District had moderated this fall, the District had
experienced a substantial improvement over
the year as a whole.
Bank
debits had continued to rise since mid-summer, but employment and
industrial use of electric power had changed little.
Business loans at weekly reporting banks in the District had
risen 8 per cent more than seasonally since mid-year, Mr. Shuford
observed.
The largest net borrowers had been food processors and
commodity dealers seeking funds to finance the marketing and processing of the large crops this year.
Despite strong credit demands,
member bank reserve positions had remained comfortable.
Borrowings
from the Federal Reserve Bank had been relatively small and District
banks had been net sellers of Federal funds on most days.
12/3/63
-49The Eighth District agricultural situation was good, and
crops were unusually large.
Recent estimates for major crops
pointed to a significant increase in farm income in the last part
of the year.
Corn production was estimated to be up 13 per cent,
soybeans 4 per cent, rice 14 per cent, tobacco 3 per cent, and cotton
13 per cent.
The marketings of these crops were already having an
expansionary impact on country bank deposits in the District.
With respect to policy, Mr. Shuford said he favored no change
for the reasons already mentioned by others.
In view of the recent
change in the Executive Branch, he agreed that at this time the Committee should maintain about the same position that had prevailed for
the last few weeks unless there was some strong reason for making a
change, and he saw no such reason.
He would subscribe to the views
of Mr. Irons and others with respect to continuing to supply seasonal
needs for reserves and with respect to a short-term rate fluctuating
around 3-1/2 per cent.
While he felt a bill rate at this level would
be appropriate, he would not be discouraged if it went up a bit above
3-1/2 per cent for a short period of time during the remainder of the
year in view of the seasonal situation.
By the same reasoning, he
would not be disturbed if the bill rate declined after the turn of
the year.
Mr. Shuford favored no change in policy and no change in
the discount rate.
He preferred to leave the directive as it was for
the next two weeks because he thought the Committee would have some
difficulty in trying to improve it.
-50-
12/3/63
Mr. Balderston said that he would favor continuation of
current policy until the next meeting and would leave the directive
unchanged.
In trying to appraise the impact of the recent substantial
shift of demand deposits from the Treasury to the private sector, he
continued, he had become less disturbed about the current up-sweep in
the rate of increase of money supply growth.
To avoid being misled
by deposit shifts he had examined figures for the year 1963 to date.
The annual rate of growth in the money supply so far this year was
4 per cent, a substantial rate.
But personal incomes were up over 5
per cent, the industrial production index 6 per cent, and constant
price GNP 4 per cent.
Thinking about the near future, he recalled
that deposit turnover had risen 7.7 per cent, and average hourly
earnings had risen 3 per cent despite the nationwide concern with
keeping our economy competitive.
State and local government bond
sales were up 5 per cent, and seasonally adjusted housing starts had
risen by more than 20 per cent.
Mr. Balderston observed that he had found only one weakness-a drop in net realized income of farmers for the second year in a row,
this time of 5 per cent.
He suggested that after the turn of the year
the Committee would want to make a searching appraisal of what had
happened and what was likely to happen.
Chairman Martin said that he had little to add to the discussion.
He wanted to join in commending the foreign exchange and open
12/3/63
-51-
market Desks for their performance in the period just past; it seemed
to him that the System had performed well, and he believed that this
was generally recognized.
Although he did not think the matter was of great importance,
the Chairman continued, he personally felt that it was not necessary
to delete the phrase relating to the death of the President from the
directive, particularly since only a short time had elapsed.
The Com-
mittee would meet again in two weeks and that might be a good time to
delete the phrase.
But he had no objection to doing so at this meet-
ing if that was the preference of the Committee.
On the broad question of policy, the Chairman said, he had
one comment to make with respect to the apprehensions that Mr. Mitchell
had expressed, namely, that those Committee members who were talking
about a firmer policy from time to time were not talking about restraining the economy but sustaining it.
There could, of course, be dis-
agreement on how to achieve this objective, but the problem was one
of possibly having too much credit available at various times.
The Chairman then suggested that the Committee vote on a
proposal that there should be no change in policy and no change in
the directive.
All members of the Committee except Mr. Mills indicated that
they favored no change in policy for the forthcoming two weeks.
12/3/63
-52Thereupon, upon motion duly made
and seconded, the Federal Reserve Bank
of New York was authorized ar.d directed,
until otherwise directed by the Committee,
to execute transactions in the System
Account in accordance with the following
current economic policy directive:
It is the Federal Open Market Committee's current
policy to accommodate moderate growth in bank credit, while
maintaining conditions in the money market that would contribute to continued improvement in the capital account of
the U. S. balance of payments. This. policy takes into.consideration the fact that domestic economic activity is expanding further, although with a margin of underutilized
resources; and the fact that the balance of payments position
is still adverse despite a tendency to reduced deficits. It
also recognizes the increases in bank credit, money supply,
and the reserve base of recent months.
To implement this policy, System open market operations
shall be conducted with a view to cushioning any unsettlement
that might arise in money markets stemming from the death of
President Kennedy and to maintaining about the same conditions
in the money market as have prevailed in recent weeks, while
accommodating moderate expansion in aggregate bank reserves.
Votes for this action: Messrs. Martin,
Hayes, Balderston, Bopp, Clay, Irons, Mitchell,
Robertson, Scanlon, and Shepardson.
against this action:
Vote
Mr. Mills.
In connection with his favorable vote on the directive Mr.
Hayes observed that he agreed with the Chairman that while the matter
was not too important it was desirable to retain the phrase relating
to the President's death since the money and securities markets were
still in quite a sensitive condition.
12/3/63
-53Mr. Mills said he had dissented both on the consensus favor-
ing no policy change and on the directive for the reasons he had set
forth in his comments earlier in the meeting.
Reverting to the
Chairman's remarks about sustaining the economy, he observed that to
him this meant giving the economy sustenance by providing additional
reserves.
In response to a question by the Chairman, Mr. Stone indicated
that he did not think any change was necessary in the Committee's continuing authority directive with respect to the $1 billion limitation
on the change in the aggregate amount of U. S. Government securities
held in the System Open Market Account during any period between meetings of the Committee.
Chairman Martin noted that a request had been received from
Congressman Patman for lists of the names of individuals who had
attended the last three meetings of the Committee.
that this request should be complied with.
It was his view
He asked if there were
any objections to doing so, and no objections were expressed.
Mr. Mills said that in connection with this subject he would
like to note that a large number of persons attended Committee meetings.
He thought some might share his concern about such events as
the publication in Sylvia Porter's letter giving the hour and time of
the Open Market Committee's recent telephone meeting.
The Chairman
observed that Miss Porter had also reported another Committee meeting
12/3/63
-54-
which had not actually been held, indicating that her information was
not completely accurate.
However, he continued, he shared Mr. Mills'
concern and he believed it behooved all of those present to be very
careful about what was said outside the room.
Chairman Martin then suggested that the Committee discuss possible publication of its minutes for some past period.
He noted that
a memorandum on this subject from Messrs. Young and Sherman, dated
September 28, 1963, had been distributed to the Committee.
He recog-
nized there were a great many conflicting points of view on this matter.
He would simply say at the outset that his own judgment had not changed;
he felt that if the Committee could find some suitable means of releasing the minutes for 1951-1960 it would be a worthwhile way of
making public information on how the Committee operated.
He realized
that releasing these minutes could make some problems for the Committee.
But the more he lived with this subject the more convinced he became
that a great many people misunderstood the nature and the conduct of
the Committee's meetings.
Publication of the minutes would not com-
pletely dispel such misunderstanding, but it would give a better basis
for understanding than was now available in published materials.
He
doubted that the minutes could get much public attention--the general
public probably would not be greatly interested.
But he felt it was
important to clarify the decision-making process of the Committee.
He
thought it should be made clear that consideration was given to many
12/3/63
-55-
factors affecting monetary policy, and that this was not a one-man
operation, but that differing views were expressed and the decisions
taken were general decisions.
Making the minutes available seemed to
him the best way of giving insight into the conduct of the meetings
and into the detailed nature of the views expressed.
The Chairman commented that the particular dates for which
minutes were released did not seem to be a vital matter.
The 1951-
1960 period he had mentioned was important in the Committee's history
and embraced the Treasury-Federal Reserve Accord.
The year 1960 seemed
a good terminal point; the minutes for that year had already been made
available to the Joint Economic Committee.
Mr. Hayes said that he was reluctant to differ because he
thought the Chairman had a better feel than he for the reality of the
demand for this kind of information.
But the more he had thought about
the subject the more he had tended to feel that the Committee would do
well not to give the minutes out.
He was not quite sure why this
was
the time at which the Committee should do so; nothing had happened to
suggest the desirability of now changing past policy on the matter.
The Committee had given the 1960 minutes to a Congressional Committee,
but it also had objected to the publication of excerpts from these
minutes.
The point had been made that the public deserved more under-
standing of Federal Reserve operations.
He recognized the truth of
this statement, but he was not sure that publication of the minutes
12/3/63
-56-
would be the most effective way of giving the desired understanding.
There were other mechanisms; more frequent statements of the nature
of policy, to his mind, would be more enlightening than making the
minutes publ.c.
He did not think the minutes would add a great deal
to what was already publicly known.
If the minutes were published, Mr, Hayes continued, he thought
it should be only with a considerable time lag.
He was concerned that
if publication was once started there would be agitation for reducing
the lag and a tendency to do so.
He thought there always would be
advocates for the Committee's releasing everything, including statements of actions on the day they were taken.
central bank could not operate that way.
But in his judgment a
It seemed to Mr. Hayes that
the principles still held that Chairman Martin had outlined in his
letter to Mr. Patman of last year, in which the Chairman had explained
why the Committee's internal deliberations were not matters of public
concern.
There were dangers of embarrassment, Mr. Hayes said, in connection with the Committee's discussions of dealings with central
banks abroad.
And there was the further question of whether the pos-
sibility of publication of the minutes might inhibit discussion at
meetings, although he was not too concerned on this score because he
had confidence in the integrity of the people around the table.
On
12/3/63
-57-
balance, unless the Committee felt there was overwhelming political
pressure to make the minutes available, he leaned toward not publishing them.
Chairman Martin said that he would like to emphasize that
there had been no pressure on this subject.
The question of whether
this was an appropriate time to publish the minutes was within the
Committee's discretion; no commitments had been made.
Mr. Ellis said that he agreed the Committee should give more
rather than less information to scholars.
He was enthusiastically in
favor of making available more complete descriptions of policy, because
he thought there was a legitimate need for such descriptions by
scholars and others.
At the same time, he felt that scholars should
be provided with a complete rationale of the use of all policy instruments, including discount rate and reserve requirement changes as well
as oper market operations.
Because he had this objective in mind, he
thought. the Committee would do itself a disservice if it released Open
Market Committee minutes.
A true scholar would be frustrated by
omissions from these minutes of much of the complete policy record.
Also, publication of some past minutes would place the Federal Reserve
on the defensive with respect to such questions as why not publish the
minutes on a current basis, and why not publish the minutes of the
Board of Governors concerning other aspects of monetary policy.
12/3/63
-58-
Prospect of publication might also raise questions within the Committee with respect to the amount of detail that should be included
in
the minutes.
Mr. Ellis thought the Committee might be deceiving itself if
it felt it could win supporters for the System by this means.
The
record would still be incomplete; potential defenders of the System
were apt to sit back, and attackers would find more ammunition to use
against the System.
In the long run, Mr. Ellis said, almost any written material
might appropriately become public information.
If the Committee
decided to publish the minutes he would urge a longer lag than 3
years.
He did not mean to be wholly negative on the issue; his intent
was to suggest that the Committee direct its efforts to the goal of
providing a more complete rationale of System policy actions.
Mr. Irons said that he had swung back and forth in his thinking on this subject.
He believed the Committee had to distinguish
between the submission of minutes to Congress and their general publication.
He suspected the Committee would have to submit its minutes
to Congress if the demand was pressed.
He thought there was a gradual
erosion in process with respect to supplying materials to critics.
Whatever they were given would leave them unhappy; if they were supplied with minutes after a 10-year lag they would want them with a
5-year lag, and so forth.
This gradual erosion of the central bank's
12/3/63
-59-
position was going on in a lot of other areas and this should be
kept in mind.
If the Committee did publish the minutes, Mr. Irons continued,
they would not be a best seller.
The public generally was not in-
terested in this sort of reading material, and the minutes would have
only limited use.
If both Congress and the general public were ex-
cluded from consideration there would not be too many readers left,
except the group of academicians who like to pore through such material.
The question then was whether satisfaction of this group warranted
publication.
Even to a scholar the minutes would become pretty dull
after he had read them for a year or so.
Mr. Irons said he was not
being critical of the minutes, but those for successive meetings
inevitably involved a great deal of repetition.
Another problem was
that the minutes by no means reflected fully the work, thought, and
general preparation that lay behind them.
This raised the question
of whether supporting memoranda and other Committee materials should
be made publicly available to give a complete picture.
Publication
of the minutes was a first step that could lead to requests for other
policy record's, such as the minutes of the meetings of the Federal
Reserve Bank directors regarding discount rate actions, those of the
Board of Governors regarding approval of such actions, and so forth.
Mr. Irons said that he realized that he was being pretty
negative in his comments, and he wondered if there were alternatives
12/3/63
-60-
to the release of Committee minutes.
For example, would it be pos-
sible to employ some capable person whose intellectual honesty was
unquestioned to author a set of volumes on the history of the Federal
Reserve System, giving him access to the minutes and other materials?
Choice of such a person would always be open to criticism, but the
possibility was worth giving some thought to.
If the Committee decided to release the minutes in some form
or other, Mr. Irons said, he would suggest doing so on a limited
basis.
Perhaps a copy or two could be put on the shelves of each
Federal Reserve Bank library for use of scholars.
the 1951-1960 period would be excellent.
For such a purpose
It represented a 10-year
period from the date of the Accord, and the gap from 1960 to date
was good.
ever.
He did not think that this would solve the problem, how-
The Committee undoubtedly would be criticized for not making
minutes for the last two years available.
Mr. Swan said that he was in substantial agreement with the
opinions already expressed.
He thought that reasonably current
explanations of policy and descriptions of the Committee's processes
and procedures were desirable goals, and he noted that some progress
towards them had already been made.
However, he doubted that publica-
tion of the minutes would help to accomplish those ends.
It would
put the Committee on the defensive because the minutes would be used
12/3/63
-61-
primarily by System critics.
more current release.
There would be pressure for more and
In Mr. Swan's judgment 3-5 years was too short
a lag.
On the other hand, Mr. Swan said, there was a legitimate
question of whether such information was ever to be made available.
The System might want to face this question in terms of the possibility of releasing Open Market Committee and perhaps Board minutes on
suitable occasions with a very long time lag.
Surely, Mr. Swan said,
after a period as long as 20 to 25 years such records were strictly
historical documents.
It could thus be recognized that in due course
these materials would be made available to people with a legitimate
interest.
To go beyond such a procedure would create many more pro-
blems than it would solve.
However, the Committee should be consider-
ing doing something in terms of articles on a continuing basis.
Mr. Deming said that he had been thinking on the same lines
as Mr. Irons.
He felt that for a variety of reasons it would be well
to attempt to get some assistance in writing a System history.
It
should be possible to work out a procedure that would provide an
objective set of histories and under which the System would be protected against charges of self-interest.
Perhaps the professional
societies might be asked to select scholars for the work and foundations asked to provide funds.
The System could then make records
available to such scholars as were selected, up almost to a current
12/3/63
date.
-62This would be a monumental and time-consuming task, Mr.
said, but it
might be broken down into separate economic,
Deming
political,
and social h:.stories of the System.
With respect to the minutes of the Open Market Committee and
other policy-making bodies of the System, Mr. Deming continued, rather
than publication he would favor their deposit in various places after
a time lag of a decade or more; at the present time he would suggest
a cut-off at 1950.
He saw no reason for the System to make its records
generally available all over the United States, but their deposit in
Federal Reserve libraries would be appropriate.
On the other hand,
he would give scholars designated to write a history access to all
materials almost up to the present.
He thought it was valid to say
that the great mass of people--including academicians--do not understand how the System functions but he also thought they would be
helped more by a series of histories than by such raw materials as
the minutes.
He had in mind very detailed histories, not works of
100 pages or so.
With respect to the distinction between making materials
available to the general public and to the Congress, Mr. Deming said,
he did not know whether the System was required to supply detailed
minutes of the Open Market Committee or the Board or other System
groups to Congress, but he hoped it was not, at least not without a
specific legislative change.
He thought the answer to this question
12/3/63
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was not clear, and the Committee should resist such submission as
long as it possibly could on all the grounds that had already been
mentioned.
He felt it was not a negative approach for the System to
keep its current minutes reasonably confidential but to throw open
its records to scholars competent to write System history.
Mr. Scanlon said he fully agreed that a better understanding
was needed of the Committee's operations and problems.
He also shared
Mr. Irons' view that the questions of responding to Congressional requests for the minutes and of making them publicly available were
separate.
Unlike Mr. Deming, he thought the Committee had no choice
with respect to meeting Congressional requests; it would have to make
the records available by some means if asked.
As to supplying in-
formation to the public, Mr. Scanlon said, he doubted that the
minutes as now prepared were a good vehicle for the purpose.
were incomplete in
wires,
and all
that they did not include the memoranda, the daily
of the other materials that the Committee considered
in preparing to make its decisions.
redundant to readers.
information
They
They also would appear highly
He would hope for a better vehicle for getting
to the public.
A history of the System might be useful,
or perhaps some kind of an annual report with a time lag of about 5
years.
He would be willing to give a little on the time lag.
If a
decision were made to release the minutes to the public, he would
favor limiting the distribution of copies to Federal Reserve Bank
12/3/63
-64-
libraries and National Archives.
He did not think it would be desir-
able to spend a lot of money to make wide public distribution.
Mr. Clay expressed the view that publication of the minutes
as soon as 3 years after the meetings might well result in an unconscious speaking for the record by participants and would change the
nature of the meetings in an undesirable way.
He did not consider the
minutes a very good public relations document; it would be difficult
to get useful information from them regarding the nature of System
He thought that the Chairman's letter of last year tc
operations.
Mr. Patman gave very good reasons for withholding the minutes.
This
letter, in fact, was a better public relations document than the
minutes, because it portrayed an organization capable of withstanding pressure.
Such an organization was desired by everyone, what-
ever their policy views.
The
Longer the time lag before publication, Mr. Clay continued,
the less effect there would be on the nature of the meetings; but also
the greater would be the reduction in the public relations value of the
minutes.
If the Committee decided to publish the minutes, Mr. Clay
favored a limited edition with a lag of at least 5 years.
He thought
publication would best be at a time when there was no outside pressure
for it.
The present was a good time, since there was no pressure on
the Committee now.
12/3/63
-65Mr. Wayne said that the Committee was a public body charged
with public responsibility, and accordingly, he thought that the
official records of its deliberations were properly viewed as public
documents.
He was not considering the matter in terms of public
relations at all; as historical documents the minutes should be made
available to competent historians.
He was prepared to concede the
desirability of a time lag in publication, and recognized that there
would be pressure to reduce the lag.
Some might even argue that the
Committee should release its minutes on a current basis.
But he did
not believe this was the sort of thing the Committee was dealing with.
The question before the Committee was whether or not it could work
out some method of making documents of historical value available to
competent historians with an appropriate time lag.
He thought the
Committee could rationalize the 10-year time period.
It seemed to
him that the minutes should be made available at the National Archives,
the repository for national historical documents.
He added that he
found much merit in the suggestion that the Committee attempt to find
a competent historian to prepare a System history.
Mr. Wayne continued by remarking that he had recently reviewed
back minutes of the Committee and had not found them entirely dull from
the standpoint of economic history.
Nor had he found anything of which
the Committee need be ashamed; the minutes spoke of careful, competent
deliberations.
He believed they should be made available to competent
12/3/63
-66-
scholars.
Microfilming was not expensive; microfilm copies might be
placed in the National Archives and in the libraries of the Board, the
Federal Reserve Banks, and the greater universities.
As to the time lag, Mr. Wayne said, he thought it would take
very close to a 5-year lag if members were to avoid any tendency to
record.
speak for the
He also considered this lag appropriate in
light of the fact that the Administration changed every 4 years.
A
lag of 3 years seemed to him the minimum, and he would prefer 5 years.
Mr. Mills said that he agreed in every respect with the position
Chairman Martin had taken.
He thought the Committee should publish the
minutes for the period 1951-60.
For those who were fearful of criticism
but at the same time would be willing to produce the minutes at the request of Congress, he would point out that the only occasions that Congress had to request the minutes stemmed from criticisms of System
policy, so the Committee was just fostering the criticism.
Publication
of the full minutes would, in his view, serve as an antidote to
criticism and would win adherents to offset the critics.
Mr. Robertson said he found himself in accord with Mr. Wayne.
The Federal Reserve System was a Governmental institution and a servant
of the public.
inspection.
As such, its records should be made available for public
He would prefer not to publish the minutes in book form,
but to make them available on a limited basis in Federal Reserve libraries and at National Archives and in microfilm form at some universities.
He also would make available the minutes of Board actions but
12/3/63
-67-
only with a substantial time lag, because Board minutes often dealt
with specific institutions.
For minutes of the Open Market Committee,
a 5-10 year lag would be appropriate,
and a 5 year lag probably was
adequate.
Mr. Robertson said he had no objection to an extension of the
"article" approach, but he considered it unwise for the Federal Reserve
to attempt to select a historian to write a history from the System's
point of view.
It was difficult to learn enough about any individual
to know whether his ideas coincided with the System's viewpoints, and
in any event historians should be objective and write history as they
see it--rather than as we would direct or desire.
As to the span of
the history, it would be desirable to start from the beginning of the
System and come up to whatever lag period the Committee decided was
appropriate.
Mr. Shepardson said that as a public body the Committee's
actions were appropriate for the public record after such time lapse
as might be considered necessary.
But there was a question in his
mind as to whether the "records" necessarily included all the internal
documents used in arriving at a conclusion.
The idea of a quarterly
report had some merit, but he was doubtful whether public records
should necessarily include all of the internal discussion reflected
in the minutes.
For that reason, Mr. Shepardson said, he had not been
particularly enthusiastic about publication of the minutes.
On the
12/3/63
-68-
other hand, the point had been made that the Committee had been called
upon to submit the minutes to Congress.
Whether or not Congress could
appropriately demand the minutes might be a consideration.
He doubted
that it lacked the authority to do so, and if this view was correct it
provided an argument for making the minutes available to other people
by placing them in a repository open to anyone interested.
Mr. Shepardson said that he was cynical enough to expect that
the greatest use of the minutes would be made by those who were trying
to pick out something for their own particular purposes.
both sides--defenders and attackers--might do that.
People on
At least there
would be an opportunity for those interested in defending the System
to do so, although he doubted that it.would work out that way.
He
agreed with the suggestion that the System should try to get, through
arms-length selection, someone who would write an objective history-hopefully one that would be more readable and more useful than the
minutes themselves.
Altogether, Mr. Shepardson said, while he did not generally
like the idea of putting out the Committee minutes as a public document-and he thought the minutes of the Board had to be considered along with
those of the Committee--perhaps it could not be avoided.
It might be
best done by making the minutes available at appropriate reference
centers.
As to the time lag, 5 years might be a good principle.
A
3-year lag was implied in the suggestion that the minutes be published
-69-
12/3/63
for the 1951-60 period.
However, if the Committee should now decide
to publish the minutes for this period, another year probably would
pass before they were ready for release.
In a final comment, Mr.
Shepardson said he agreed with Mr. Clay that if the Committee was
going to publish its minutes it would be better to do so when it was
not under pressure rather than act in response to pressure.
Mr. Mitchell said that if the matter came to a vote he would
not vote against making the minutes available.
Nevertheless, he
questioned whether this was the best course of action.
He thought
it a mistake to believe that the minutes could be confined to the
hands of objective, competent scholars, and he did not shrink particularly from putting -the minutes in the hands of hostile critics.
While he was prepared to release the minutes on any basis
agreeable to others, Mr. Mitchell continued,
he thought publication
of past minutes would not meet the real issue.
He had thought quite
a bit about the matter and had come to the conclusion that it would
be desi able to make available a digest of the minutes every 3 months.
Such a digest was the real solution to the problem of telling people
what the Committee was doing.
If it were well and responsibly pre-
pared it would conceal nothing of relevance; it would reflect the
different points of view expressed and the personalities of the various
participants.
It also would be a much more polished document than
were the minutes.
-70-
12/3/63
Mr. Hickman said he would go along with those who favored
publishing the minutes as a whole rather than attempting to have
them digested by an unbiased scholar.
Such a person would be dif-
ficult to find; everyone had certain predilections and feelings in
these matters.
He recently had reviewed the record and thought it
a good document which spoke for itself.
In his judgment putting out
the minutes for 1951-60 would not be a disservice to the System, and
would be preferable to having the so-called unbiased work done.
If
the document was deposited in public libraries in microfilm form, it
would give the unbiased student some idea of how policy was formulated
in the System.
It would give him a feeling of democracy at work with
all points of view represented; and would demonstrate that the Committee was not a group of people representing the moneyed interests.
Publication of minutes, Mr. Hickman continued, also would help
students focus on some of the real problems of monetary policy, such
as the problem of appropriate target variables.
to do
Students would tend
asearch on positive problems, and the Committee might get some
constructive help.
With respect to the time period to be covered, Mr.
Hickman favored publishing the minutes through the year 1960.
Mr. Bopp said that as one who had spent some 10 years doing
research on the System before entering its service he had great
sympathy with the proposal to publish the minutes.
At the same time,
he agreed with an observation contained in a memorandum that had been
12/3/63
-71-
prepared for Mr. Deming, to the effect that bad books can be turned
out more quickly than good ones.
This lee him to feel that it would
be desirable for the System to get foundation money to finance a
System history.
He recalled that the Rockefeller Foundation had once
provided funds for such a study, but the only product had been
Professor Chandler's book on Benjamin Strong.
Mr. Bopp thought it would be desirable to have a competent
scholar--perhaps one selected by a committee of the American Economic
Association--write a System history.
If this could be done, he said,
he would make the minutes available subsequent to publication of the
history.
As to the time lag, it seemed to him that it should be on
the order of a decade, although he realized that the whole character
of the Federal Open Market Committee was now changed and that policy
was no longer formulated as it was years ago.
In addition, it seemed
to him that the Committee had made significant progress in providing
information in such forms as the Bulletin articles by Mr. Coombs
describing the System's foreign currency operations and by Mr. Stone
reviewing open market operations in 1962.
These were excellent works
and it would be desirable in the future to have similar reports on a
semiannual basis. Possibly the Committee could have a quarterly review
of policy published in the Bulletin with a 3-month lag.
He was generally
in favor of publishing the minutes but he did have some concern about
the hazards of making them available to anyone; the initial reactions
were apt to be critical.
-72-
12/3/63
Mr. Patterson reported his belief that Mr. Bryan still subscribed to his statement of April 1962 in favor of publishing the
minutes with a time lag of 5 years.
Mr. Shuford said that he concurred in the view that records
should be made publicly available insofar as practicable, because
the Committee was a public institution.
there were limitations.
But it seemed to him that
For one, the effect of publication on the
nature of the meetings and on the nature of the record had to be taken
into consideration.
tion would be.
There also was a question of how current publica-
Thirdly, there were statutory provisions that the Com-
mittee should consider with respect to the release of its records.
Although the Committee was a public body, Mr. Shuford said, he considered the Chairman's letter to Mr. Patman a good statement on why
its minutes should not be released.
He doubted that publication of
the minutes would accomplish the intended purpose or that it would
satisfy all those interested in the Committee's work.
As far as the
general public was concerned he thought there would be little interest
in, or public relations value to, the minutes.
As far as others were
concerned, the Committee would be faced with a problem of the lag; it
would be argued that if the records should be made available because
the Committee was a public body, they should be made available as soon
as possible.
12/3/63
-73Mr. Shuford commented that he was not disturbed by the con-
tents of the minutes, which in his judgment reflected supportable
views.
But if they were published with any lag the Committee would
always be subjected to criticism by some who would want something
more--more recent minutes, more materials on matters discussed in
executive session, perhaps verbatim transcripts.
Taking this step
would not answer all questions.
Reverting to the question of statutes, Mr. Shuford noted that
the Committee had made much material available that was not required
by statute, and it could do the same with its minutes.
However, the
statute did specify the means for the Committee to supply information
on its operations to the Congress and the public:
Report of the Board of Governors.
through the Annual
It seemed preferable to him to
move through such channels rather than to take some other voluntary
He liked Mr. Deming's suggestion for having System histories
action.
prepared,
and did not think the ends that would be served by such
histories would be accomplished by making the minutes available.
In
his judgment there was a considerable amount of similarity between
the Committee and other groups, such as the courts, that met in
executive session.
He noted that the courts published only their
decisions and regarded their deliberations as intramural.
Mr. Balderston said that, as he had observed in earlier discussions of this matter, te thought it was unfortunate that when the
12/3/63
-74-
Committee turned over its 1960 minutes to a Committee of Congress,
the latter Committee then hired a pair of scholars of its own choosing to prepare a digest.
He was happy that so far the Congressional
Committee had not published that digest.
He favored publishing the
minutes as suggested initially by the Chairman, for the reasons given
by Messrs. Wayne, Mills, and Robertson.
But he had been impressed
with the argument of Messrs. Deming and Bopp that if the Committee
was to publish the minutes it should give a running start to a
scholar who, if not of the Committee's selection, would at least be
selected from a list that the Committee had approved.
On this plan,
an instructive document would be available to the public at about the time
the minutes were placed on the shelves of Federal Reserve Bank and
other selected libraries.
He suggested that the Committee act today,
first to authorize the Secretary to proceed with the reproduction of
a moderate number of copies of minutes for 1951-1960, inclusive, and
secondly to implement Mr. Deming's suggestion.
He was not sure that
it was necessary for the funds to come from a foundation but he agreed
that the selection of the scholar should not be made by the Federal
Reserve alone.
Mr. Balderston continued by observing that he was sensitive
to the fact that since 1960 the Committee had moved into new areas.
Specifically, Mr. Coombs' reports often referred to other nation's
problems.
While it was proper that this information should be revealed
-75-
12/3/63
to the Committee, he would hope that if at some future time the
minutes for last year and this year were made public all references
to other nations would be excluded.
Chairman Martin said that in his opinion the Committee had
had a useful discussion on the matter of publishing the minutes.
However, he did not think that putting the question to a vote at this
time would solve the problem.
He thought everyone ought to continue
to study the question; much depended on the particular methods of
releasing information that individuals had in mind.
He proposed that
the Committee request Messrs. Sherman and Young to make a summary of
today's discussion on the basis of the minutes, and that the Committee
take up the matter again early in the new year.
Mr. Swan noted that most of the dicussion had centered around
the minutes for 1951-1960.
If the Committee released these minutes on
any basis, he said, it immediately would be faced with legitimate
requests for records going back to 1914.
Chairman Martin said that
this was true, but he doubted that anyone would feel strongly that
information for the earlier years of the System should be withheld.
Mr. Shepardson suggested that the Committee ask the Secretary
to explore the possibility of obtaining the services of a writer to
prepare a System history.
Mr. Hayes commented that this suggestion seemed to prejudge
the issue.
He did not feel there had been any agreement at this
meeting on a course of procedure.
-76-
12/3/63
Chairman Martin expressed the view that the Committee should
continue to explore the matter.
He noted that for years there had
been discussions of the possibility of having a System history prepared.
Also, the Committee previously had considered publication of
the minutes, and from time to time had been under pressure to release
materials.
He considered the position taken in his letter to Mr.
Patman to be valid, and he thought that the Committee could hold to
But in one way or another the Committee
that position if it so chose.
had to come to grips with the fact that its decision-making process-which in his opinion was a good one--was not sufficiently understood.
This was the basic problem.
He did not think this sort of problem
should be resolved unless the Committee was virtually unanimous.
Accordingly, he would propose that the matter be held over for further
consideration.
Mr. Shepardson said that he had suggested some investigation
of the possibility of having a history written not with the idea of
action but in order that a report could be presented for discussion
before a decision was taken on release of the minutes.
The Chairman concurred in the proposal that this question be
explored.
Mr. Young said that he could discuss the matter with the
Presidents of the two main foundations and with the President of the
American Economic Association.
12/3/63
-77It was agreed that the next meeting of the Federal Open
Market Committee would be held on December 17, 1963.
The meeting then adjourned.
Secretary
Cite this document
Federal Reserve (1963, December 2). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19631203
@misc{wtfs_fomc_minutes_19631203,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1963},
month = {Dec},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19631203},
note = {Retrieved via When the Fed Speaks corpus}
}