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 17, 1963, at 9:30 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Hayes, Vice Chairman

Bopp

Clay

Daane

Irons

Mills

Mitchell

Robertson

Scanlon

Shepardson

Messrs. Hickman, Wayne, Shuford, and Swan, Alternate

Members of the Federal Open Market Committee

Messrs. Ellis, Bryan, and Deming, Presidents of the

Federal Reserve Banks of Boston, Atlanta, and

Minneapolis, respectively

Mr. Sherman, Assistant Secretary

Mr. Kenyon, Assistant Secretary

Mr. Hackley, General Counsel

Mr. Noyes, Economist

Messrs. Baughman, Brill, Eastburn, Furth, Garvy,

Green, Holland, Koch, and Tow, Associate

Economists

Mr. Stone, Manager, System Open Market Account

Molony, Assistant to the Board of Governors

Cardon, Legislative Counsel, Board of Governors

Broida, Assistant Secretary, Board of Governors

Williams, Adviser, Division of Research and

Statistics, Board of Governors

Mr. Yager, Chief, Government Finance Section,

Division of Research and Statistics, Board

of Governors

Miss Eaton, Secretary, Office of the Secretary,

Board of Governors

Mr.

Mr.

Mr.

Mr.

12/17/63

-2Messrs. Sanford, Mann, Ratchford, Jones, and

Grove, Vice Presidents of the Federal

Reserve Banks of New York, Cleveland,

Richmond, St. Loui, and San Francisco,

respectively

Mr. Brandt, Assistant Vice President of the

Reserve Bank of Atlanta

Mr. Willis, Economic Adviser, Federal Reserve

Bank of Boston

Mr. Kareken, Economic Consultant, Federal

Reserve Bank of Minneapolis

Mr. Meek, Manager, Securities Department,

Federal Reserve Bank of New York

Upon motion duly made and seconded,

and by unanimous vote, the m .nutes of the

meetings of the Federal Open Market Committee held on November 12 and November

26, 1963, were approved.

Mr. Mills asked whether it was the thought of the Committee

that the decision taken at the December 3 meeting on the procedures

for allocation of securities in the Open Market Account should be

treated as perfunctorily as it was in the draft minutes, which simply

cited the fact that the revised procedures had been approved.

After discussion of this point, it was noted that the draft

minutes for December 3 were still open for review and that they could

be modified to such extent as might be considered appropriate.

In

this connection, Mr. Sherman observed that a fuller record of the

discussion of the question of possible deficiencies in Reserve Bank

reserves against note and deposit liabilities would be included in the

minutes of the meeting of the Federal Reserve Bank Presidents with the

Board of Governors that took place on the afternoon of December 3.

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12/17/63

Before 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

December 3 through December 11, 1963, and a supplementary report

covering the period December 12 through December 16, 1963.

Copies of

these reports have been placed in the files of the Committee.

Supplementing the written reports, Mr.

Sanford commented that

the Treasury gold stock this week should remain unchanged for the

eighteenth consecutive week.

It was likely, however, that the following

week would show a sizable decline in order to provide for gold sales

expected later this month and in January, which should serve as a

reminder that the balance of payments problem was far from being

eliminated.

In the two weeks since the meeting of December 3 Russian

sales of gold had been reduced to comparatively small figures.

So far

in December, the London gold pool had accumulated only a small amount

of gold.

Since the December 3 meeting, Mr. Sanford continued, the System's

drawings on the swap arrangement with the Bundesbank had been increased

further by a total of $34 million, making the outstanding amount $136

million.

The Account's gross debtor position on all swaps was now $376

million and its net debtor position was $326 million.

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Year-end window dressing needs of German banks continued during

the past two weeks--although there was some evidence in the past few

days of their having passed their peak-.-but capital continued to flow

into Germany and that country continued to have a favorable trade balance.

Of the Account's drawings of $34 million in the past two weeks $28 million

had gone to absorb part of the Bundesbank's takings of dollars, and $6

million had been used for operations in the New York market.

With the aid

of an expected large German military goods payment later in the month,

sizable progress was anticipated in reducing the drawings on the German

swap arrangement.

The German mark had fluctuated only between $0.2516-3/4

and $0.2517-3/8 in the past two weeks, a bit away from its ceiling, and

today the mark had eased a bit.

The Sw.ss franc had been at or close to its effective ceiling,

Mr.

Sanford said, reflecting in part year-end liquidity requirements of

Swiss banks for Swiss francs.

To aid in handling this situation, the

Swiss National Bank since December 10 had been buying spot dollars and

selling t..em for one-month forward delivery, meanwhile laying them off

to the Bank for International Settlements on a dollar/gold swap.

He

noted parenthetically that the U. S. Treasury had been extending maturing

Swiss franc contracts with Swiss commercial banks.

Mr. Sanford said that for a short while the French franc had

been a bit off its ceiling, probably reflecting a development having to

do with Euro-dollars and other European currencies about which he would

speak later.

12/17/63

-5The Canadian dollar, which had been holding steady, had tended

to ease of late, and the Bank of Canada had sold U. S. dollars to

support the rate.

This, together with their expectation that they would

be further sellers to provide U. S. dollars for conversion of year-end

Canadian dividends and for year-end settlements, gave the Account an

opportunity to acquire sufficient Canadian dollars from the Bank of

Canada to permit complete retirement on December 16 of the swap drawings

equivalent to $20 million which were entered into in the latter part of

November because of the tragic event of that period.

Mr. Sanford reported that the Euro-dollar market had been subject

to considerable pressures in December as a result of the approach of the

year end and several extraordinary developments, and rates had moved up-in the case of the 90-day maturity by 1/2 per cent.

It now appeared

that the Stinnes and Ira Haupt situations, in which Euro-dollars had

been providing some financing, had resulted in the development of a more

questioning attitude on the part of some who heretofore had deposited

dollars in the Euro-dollar market; there had even been some indications

that U. S. corporations, to some unknown degree, had been pulling back

funds.

A further indication of the pull-back of funds, which always

occurred, however, to some degree at the year end, was that Japaneses

banks had had $100 million of Euro-dollars withdrawn from them, with

closely corresponding effects on Japanese official reserves.

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12/17/63

Mr. Sanford said the French development that he had mentioned

earlier had taken the form of a warning by the Governor of the Bank of

France to the French market calling their attention to several factors,

including (1) that operations effected on the Euro-currency markets,

entailing as they did serious risks, could not be considered as current

transactions in the foreign exchange markets but only as credit operations which must be handled with at least the same care as operations

transacted for the benefit of French residents; (2) the duration of

investments was to be adapted to that of the borrowings; (3) it was well

known that some countries, and in some countries some business enterprises, made excessive, and therefore generally dangerous, use of all

funds borrowed abroad.

The Governor of the Bank of France pointed out

in the warning that the French authorities had taken the necessary

measures to prohibit such errors by French enterprises.

French banks

also had to abstain in their own interest, as well as in the general

interest, from granting excessive facilities to banks or business

enterprises established abroad, about which they did not always have

sufficient information, especially since it also was known that the

exchange thus lent was often re-lent to third parties in that same

country or elsewhere.

Mr. Sanford added that there had been criticism

in France of the tenor of the warning, since it was held that only one

French bank had suffered losses.

12/17/63

Mr. Daane mentioned that there had been confirmation in Europe

during the past week, particularly from the Japanese, that the flow of

new funds into the Euro-dollar market was drying up, and he asked

whether this had been reflected in the U. S. balance of payments figures.

Mr. Sanford replied that it was not possible to isolate the effects of

such a development in the weekly balance of payments reports.

It was

reflected, however, in transactions in the New York money market; the

Japanese government, for instance, was selling U. S. Treasury bills to

provide funds for Japanese commercial banks to repay Euro-dollar loans

they were unable to renew.

Thereupon, upon motion duly made and

seconded, and by unanimous vote, the System

Open Market Account transactions in foreign

currencies during the period December 3

through December 16, 1963, were approved,

ratified, and confirmed.

Mr.

Sanford recommended that the swap arrangement with the Bank

of Canada in the amount of $250 million, which matured December 27, 1963,

be renewed.

Noting that this arrangement had been renewed every three

months since its inception in June 1962, he recommended placing it on a

one-year basis while maintaining at three months the drawing provision

which was, of course, subject to mutual agreement.

He indicated that

this would tend to simplify procedures and to remove some existing confusion when both the swap arrangement and the drawing provision were on a

three-month basis, and that it would be a further indication to outside

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12/17/63

observers that there was indeed a strong and continuing solidarity

between the central banks.

It was believed that the Bank of Canada

would find a one year renewal of the swap arrangement satisfactory,

Mr. Sandford said, and he noted that the arrangement with the Bank of

England was for a one year period,

Mr. Mills commented that a one year arrangement with Canada or

any other country might well extend through a period in which a change

in government occurred, and the arrangement would thus be fixed for the

advantage of a succeeding government whose thinking and policies might

be of a quite different kind from those of the government in office at

the time the arrangement was made.

Mr. Sanford agreed that such a situation could arise.

But, he

observed, each drawing was limited to a period of three months and would

be entered into only on mutual agreement of the parties.

Thus, the

System as well as the other central bank involved had to agree to a

drawing before

it could be made.

Mr. Ellis asked whether the logic supporting the extension of

the Canadian arrangement to a one year perioc' would apply to all swap

arrangements.

Mr. Sanford expressed the view that it would apply to a

number of them, but not necessarily to all.

He felt the Committee might

not want to move to a one year basis for some of the newer arrangements

under which there as yet had been little experience, but it probably

would be thought desirable to extend others to one year as the occasion

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12/17/63

arose.

A one year basis indicated considerably more solidarity between

the central banks and, incidentally, it substantially reduced the amount

of paper work required.

Mr. Hickman suggested that an intention to change the amount of

a particular arrangement might provide a reason for not lengthening its

period, and Mr. Sanford agreed.

However, he noted, in the past the

amounts of particular 3- and 6-month arrangements had been changed during

the period of the arrangement.

Mr. Mills commented that while it was theoretically possible to

refuse tc agree to a particular drawing under a one year swap arrangement,

to do so might lead to a charge of bad faith, since a commitment for one

year had been made.

He did not question extension of the Canadian

agreement, but he thought that publication of the terms of the arrange-

ments would invite invidious comparisors if some were on a long-term

basis and others were not.

Such a situation would be impolitic and

difficult to handle, in his judgment.

Chairman Martin commented that the Committee had already started

in this direction by placing its arrangement with the Bank of England on

a one year basis.

Mr. Hayes considered it likely that the Committee would eventually

want to go to a one year basis for many of the agreements, but he saw no

necessity for determining the matter at this time.

12/17/63

-10The Chairman then suggested that the Committee vote on the

recommendation with respect to renewing the Canadian arrangement for

a one year period, with the understanding that no precedent would be

established if the Committee approved the proposal.

Thereupon, renewal of the swap arrangement with the Bank of Canada for $250 million

for a one year period was approved.

Mr. Mitchell commented that frequently the recommendations of

the Special Manager came to the Committee without advance notice.

Sometimes this was unavoidable, but on other occasions it would be

possible for the Committee to be advised in advance that a certain

recommendation was going to be made.

It. seemed to him that with such

advance notice the Committee could dispose of the Special Manager's

recommendations more effectively and expeditiously.

Chairman Martin suggested that the Special Manager work with

the Committee Secretariat to see what could be done along such lines.

In further remarks, Mr. Sanford advised, for reasons which he

outlined, that there was no progress to report on the matter of a possible

increase in the swap arrangement with the Bank of France.

Mr. Sanford also mentioned that drawings on the Netherlands Bank

swap arrangement of $20 million and $60 million equivalent in guilders

would mature on December 27, 1963, and January 2, 1964, respectively, and

drawings on the B.I.S. of $50 million and $25 million equivalent in Swiss

francs would mature December 30, 1963, and January 7, 1964, respectively.

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12/17/63

To the extent that it was not possible to reduce these drawings by

their respective maturity dates, it would be necessary to seek

renewal for further three-month periods.

These would be the first

renewals of these particular drawings.

In reply to a question, Mr. Sanford said the drawings in

question originally had been made in late September and early October,

and earlier drawings of guilders and Swiss francs had been repaid

before these drawings were made.

The proposed renewal of the drawings,

to such extent as might be necessary, was

noted without objection.

Before this meeting there had been distributed 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 December 3 through December 16, 1963.

A copy of this

report has been placed in the files of the Committee.

In supplementation of the written report Mr. Stone commented

as follows:

There is little to add to the written reports regarding

developments in the brief period since the last meeting. In

this period the money market coped quite readily with what

has sometimes been a period of considerable seasonal strain.

In some recent years, the advent of December dividend and tax

dates has thrown a large volume of financing needs back on

the banks as dealer repurchase agreements with corporations

12/17/63

-12-

ran off, forcing the dealers to turn in size to the banks

which were at the same time experiencing direct pressure

from increased business loans around the tax date. This

time, the money market banks were well prepared for these

additional demands, and perhaps even over-prepared for the

demands that emerged in the first half of the period, with

the result that the money market was unexpectedly easy.

Also contributing to the facility with which the market

handled the seasonal demands made upon it this year is the

fact that dealer positions and use of credit had recently

been running on the order of $800-$900 million less than

a year ago.

Later in the interval a firmer tone returned to the

money market, and yesterday--the quarterly corporate tax

date--there was evidence of some sizable pressure of the

sort that had been anticipated earlier. Thus, where the

System had been absorbing reserves through the first part

of the period, in order to help restore a firmer tone, the

System supplied a sizable volume of reserves yesterday to

provide some lubrication over the tax date itself.

The temporary easing in the money market had little

impact in the securities markets beyond the Treasury bill

area. Bills edged lower in rate through the first half

of the interval and then returned to about the same level

as two weeks ago, with the three-month issue remaining in

a range of 3.50-3.55 per cent. The average issuing rates

in yestercay's auction of about 3.54 per cent and 3.68 per

cent for the 3- and 6-month bills, respectively, were within a basis point of the rates two weeks ago.

In the bond market, as the shock of the assassination

receded further in time, the market gave increasing attention

to economic factors that are expected to affect interest

rate. in the months ahead. In particular, attention has been

given to the continuing indications of good business, rising

loan demand, and the prospect that an early tax cut may both

stimulate business and temporarily enlarge the Treasury's

deficit. The market has also noted the recent rise in yields

on high-grade corporate bonds. Finally, the market remains

aware that the balance of payments problem is still far from

solved. The downward drift in prices in response to these

factors has been quite orderly, however, with no great

pressure of selling reported.

The corporate and municipal bond markets showed little

change in price during the recent period, following the

declines that had occurred earlier. Investors showed

selective interest in new issues, with some of the larger

12/17/63

-13-

offerings winning only fair response. Considerable

attention is focusing on two major negotiated offerings

that are expected to reach the market today--$150

million of Sinclair Oil bonds and $100 million of

Bankers Trust capital notes. Rate expectations for the

Bankers Trust issue are in the neighborhood of 4.45-4.50

per cent, while the Sinclair bonds are expected to come

at a slightly higher level.

Near-term prospects for Treasury financing include

the sale of another billion dollar one-year bill,

probably on December 30; replacement of the $2.5 billion

maturing January 15 bills--possibly with a like amount of

June tax bills; and the raising of anot er $750 million-$1 billion of cash in mid-January--perhaps through a note

or short bond. Toward the end of the month, the Treasury

will choose the terms of the refunding of its February 15

maturities, of which a little over $4 billion are publicly

held.

Thereupon, upon motion culy made and

seconded, and by unanimous vote, the open

market transactions in Government securities and bankers' acceptances during the

period December 3 through December 16,

1963, were approved, ratified, and

confirmed.

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. Brill commented on economic conditions as follows:

Optimism about the economic outlook continues to

abound, in fact to increase with the apparent improvement

in prospects for the tax cut. It is getting more and more

difficult these days to characterize our profession as the

"dismal science."

This nigh-universal optimism carries with it some

obvious dangers. When everyone is convinced that there

is "no way to go but up" such an orientation can easily

spill over into attitudes towards wages and prices.

Thus, even with unutilized capacity and manpower, we have

12/17/63

-14-

been getting continued testing of markets by businessmen

through scattered price increases--fortunately, not all of

which hold--and mutterings from labor leaders about the

kinds of contracts they will fight for next year.

In the context of such exuberant psychology, it may

be salutary, as an antidote, to stress some of the

deviations and lapses from progress, when and where they

occur. The wage and price stability we have enjoyed in

this expansion is explainable principally in terms of

fundamental supply and demand relationships, but I am sure

the occasional pauses in the uptrend have also been

influential in preserving economic sobriety.. Hesitations

in the pace of expansion have introduced just enough

uncertainty to help keep inflationary psychology from

reviving, at least outside of the stock market and some

parts of the real estate market.

November can fairly be described as one such pause in

the general updrift, even if its import has not yet been

fully assimilated by the optimists. There was not much

economic progress last month.

Industrial production edged

up only slightly, not enough to move the index out of the

rounded 127 level achieved in October. Retail sales also

remained at about October levels, if one makes rough

allowance for the effects of the national tragedy on

November 22. Employment remained essentially unchanged

and the unemployment rate bounced up. Construction

activity was high but no higher than in October, and

businessmen reported that their current spending for plant

and equipment was not rising as much as they had anticipated

three months ago and that they foresaw no rise from present

levels in the immediate future.

November developments, then, should be sobering, and

even more so if put in a somewhat longer perspective.

Industrial production at 127 is, after all, only barely

higher than the index for July.

Nonfarm employment has

grown quite moderately since July, and retail sales in,

November were also no higher than mid-year levels. If it

were not for the continuing $8 or $9 billion per quarter

gain in total GNP, one might venture a judgment that the

pause in economic expansion really began back at midyear.

Momentum in the broad GNP aggregate has been maintained in

large part by exceptional--perhaps unsustainable--increases

in both private and State and local government construction

activity, and by a continued rise in consumer and Government

.spending for services.

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12/17/63

I would not want to overdo the contrast between

leveling off in the industrial sector of the economy and

continued expansion in other components of total economic

activity. We could be the victims of inadequate or

inconsistent seasonal adjustments among the various measures.

One should note a similar divergence between the production

index and the broader GNP measure in the latter part of

1962, which was followed by an upsurge in production

earlier this year. One should also note that in both years

the late summer and fall credit figures--particularly

business loan demands--appeared more consistent with the

expansive pattern of GNP than with the stable pattern of

the production index.

Whether the recent course of the economy actually has

been sidewise or moderately up may be debatable, but this

is of less importance than the clear evidence that we have

not been in a strong boom. Given only modest progress at

best, in recent months, and given still substantial margins

of unutilized resources, there does not appear to be much

reason for expecting that a tax ctt will necessarily

produce a "bubble on a boom" of the sort we got in 1955,

when rising Government expenditures were overlaid on rising

private demands.

Not that this insures us against inflationary effects.

We have had earlier experience with rising price levels well

befcre full employment or full capacity utilization was

achieved.

But, as Chairman Martin recently pointed out,

there also is another risk--the risk that an economy having

already sustained a three-year expansion might not respond

vigorously to a tax cut stimulus. Current evidence suggests

that either possibility is still very much alive.

It would

be premature, therefore, to adopt policies consistent with

only one alternative.

Until the economy more clearly commits

itself to one course or another, a policy of watchful waiting

continues to be appropriate.

Mr. Holland made the following statement with regard to the

financial situation:

The financial system is deep in the throes of its usual

December churning, and the final outcome is still uncertain.

The tax date is past, but the remaining two weeks of the

month can still generate some substantial pressures, as the

sharp but temporary upsurges of demand for bank credit and

12/17/63

-16-

reserves in the last two weeks of 1961 and 1962 can testify.

To date, however, one must say that the December tax and

dividend pressures had been surmounted fairly easily.

First reports from leading New York City banks suggest that

customer borrowing on the tax date yesterday was somewhat

heavier than usual, but not extraordinarily so. Bank

borrowing at the discount window moved up somewhat this

week, but up to the tax date, it was still below the

average November level. The money market generally also

has been in a comfortable position during most of December.

Mr. Stone has already commented on a number of the factors

contributing to this result, and I would add mention of the

sharp reserve redistribution from country to city banks.

Underlying the immediate market factors, there seems

to me to have been some recent softening, at least for a

time, of the strong pressure of credit demands upon the

banking system that was occurring earlier this fall. Bank

earning assets have continued to expand in late November

and December, but important portions of the week-to-week

increases at city banks have represented special financing

arrangements, or additions to bank portfolios of bankers'

acceptances, Treasury bills, or securities loans made when

a bank found itself with temporarily surplus reserves.

The more liquid of these acquisitions ought to be fairly

quickly disgorged as member bank borrowing climbs back up

into the $300-$400 million range.

A counterpart to these changes in bank earning assets

has been a slowdown in bank deposit growth and reserve

utilization. Seasonally adjusted required reserves against

private deposits have been drifting irregularly lower ever

since their early November jump. Money supply appears to

have leveled off in the second half of November and first

half of December, following its early November bulge. Time

deposit expansion also seems to have slowed in December

after the big November expansion when city banks bid so

aggressively for C.D. money. Part--but only part--of this

moderation of private deposit growth can be traced to

transfers to Government deposits, which have been climbing

somewhat more than usual since the end of October. But the

rest of the explanation must lie elsewhere. Partly it may

lie in imperfections in the seasonal adjustments being used.

Partly also, it may reflect a pause for some digestion of

the sharp deposit and credit increases that have occurred

since August. Such a pause is not unreasonable to expect.

We have had them before; they often have been brief, and

sometimes have been succeeded by a vigorous new upward push.

12/17/63

-17-

If in fact that vigorous upthrust is able to reassert

itself against the ebbing seasonal tides of the new year,

I think an important threshold for policy will have been

reached.

While the configuration of expansion in the banking

system was shifting, adjustments of other kinds were

proceeding elsewhere in the credit markets. In most

markets in which credit instruments are traded (the chief

exception being the mortgage market) interest rates have

had a tendency to show more movement in November and

December, both upward and downward. The timing has

varied from market to market, and the causes.of rate

fluctuations have not always been the same. In the

short-term markets, the chief factors have been shifting

reserve availability and changing expectations as to

official intentions. In longer term markets, rate

movements have been conditioned more by changing supplies

of new offerings, and, increasingly, by expectations as

to the likely trend of rates in 1954.

Whatever else their effects, the recent rate

fluctuations in the short-term area have had the therapeutic value of shaking up complacent market assumptions

of an official "rut" for bill rates and Federal funds

rates, and this has correspondingly broadened market

ideas of the range within which rates may be expected to

fluctuate under any given monetary policy in the future.

This may be of explicit help next month, for it gives

the Account Manager slightly greater leeway for permitting

market-induced fluctuations in short-term interest rates

during the lengthy succession of forthcoming Treasury

financings. As Mr. Stone has suggested, the Treasury

plans to be involved in the market in some respect or

another on every day from December 30 through February 15,

excepting for the reserve week from January 23 through 29.

To be sure, the Treasury and market participants will need

the protection of a System "even keel" policy more during

some of these intervals than others. But, by any stretch,

the openings for any intervening change in monetary policy

are uncomfortably slim.

There are, it should be noted, two ways in which

monetary policy will benefit from this concentrated Treasury

schedule. It will sweep the calendar clean of any further

necessary Treasury offerings until the May 15 refunding. An

advance refunding in March is a possibility, but that offering

is discretionary with the debt managers. Second, the Treasury

will be supplying a net $2 billion of longer bills to satisfy

12/17/63

-18-

seasonally strong investor demands, thereby moderating

the possible downward tendencies in bill rates. This

addition to bill supplies is about the same amount as

was added by the Treasury during the first two months

of 1963, but it will be concentrated much earlier in the

coming season, and should correspondingly postpone any

tendency for bill rates to drop to levels that might be

regarded as undesirable for policy purposes.

I recognize that several of my foregoing comments

suggest the possibility that both the need and the

opportunity for a further shift of monetary policy could

emerge by mid-February or thereafter. It would be

presumptuous--even foolhardy--of me to forecast such a

juncture. But this is one eventuality that the Committee

will want to watch for.

Mr. Furth gave the following report on the balance of payments:

The payments deficit for the current quarter will be

larger than that for the third quarter but probably still

much smaller than for the first two quarters of the year.

The October figure was revised upward by $100 million

to $300 million, owing to a reporing error of a large

bank; there is nothing the Federal Reserve can do to avert

such errors, and the resulting misinterpretations of the

payments trend--except to urge the reporting banks again,

and again to be more careful.

The preliminary November figure also indicates a

deficit of about $300 million; this result is rather

encouraging not only because November--like October-apparently saw a net flow of window-dressing funds to

Canada but also because the murder of President Kennedy

probably led to some outflow of U.S. funds.

The first December week produced a very large surplus,

suggesting a reflux of such volatile funds. The second

week showed a moderate deficit but the tentative nature of

the weekly data precludes the projection of the figures for

the second half of the month. Moreover, the next weeks will

see two types of transactions with opposite effects on the

outflows of window-dressing funds

U.S. payments balance:

to Europe--which have already begun--and receipts of year-end

payments on the debts owed by the United Kingdom and some

other countries to the U.S. Government. Incidentially,

insofar as European banks used Euro-dollars borrowed from

foreign residents rather than dollars borrowed from U.S.

12/17/63

-19-

residents for window-dressing, their transactions would

not affect the U.S. payments balance; but the dollar

would still be under pressure in European exchange

markets as commercial banks sold the dollars to their

central banks.

The Euro-dollar market seems to have contracted in

recent months, owing both to a more critical attitude of

European central banks and to the failures of financial

enterprises here and abroad that had large Euro-dollar

commitments. It remains to be seen what influence, if

any, a sizable contraction would have on U.S. international

liquidity. Withdrawal of U.S. corporate funds would reduce

the U.S. deficit, as presently calculated, except insofar

as the resulting rise in interest rates abroad led to

increased foreign borrowing from U.S. banks. But the

withdrawal of dollars now put into that market by foreign

bankers or traders would swell the dollar holdings of

foreign central banks and could thereby cause larger

foreign gold purchases from the U.S. Treasury.

The economic position of most foreign countries

remains encouraging. The same thing cannot be said,

however, for the policies of some of the most prosperous

countries. In spite of its large payments surplus and the

absence of domestic inflation, the most liberal and

internationally-minded European nation, Germany, maintains

a level of interest rates that attracts capital from all.

over the world; last summer it raised its import barriers

by increasing compensating taxes levied on imports; and

now it is planning to subsidize its exports by means of

changes in its system of tax rebates.

The European Economic Community as a whole seriously

contemplates an increase in its steel tariff, and it still

has to decide whether its agricultural policy will or will

not be consistent with expanding world trade in agricultural

commodities.

If protectionism is going to emerge victorious from

these decisions, the result may well be a trade war between

the Community and the rest of the world, with serious

consequences for the very existence of the Community and

for the economic cohesion of the free world.

A revival of beggar-my-neighbor policies in international

trade might well nullify the gains in cooperation achieved in

international finance, and thereby add to the difficulties of

defending the dollar.

12/17/63

-20Chairman Martin then called for the usual go-around of

comments and views on economic conditions and monetary policy

beginning with Mr. Hayes, who commented as follows:

Nothing has occurred in the last two weeks to change

our assessment of the current business situation and outlook. Both continue to be quite favorable, even though

there are some uncertainties, especially with respect to

next year's business outlays on plant and equipment, and

even though the unemployment problem seems as intractable

as ever. The growing indications that the tax bill will

be passed early in the year constitute an important

element of strength. Mild upward price pressures are in

evidence, particularly in industrial raw materials--but

these faint signs are still far from conclusive evidence

that a major price break-out is under way.

Our balance of payments statistics continue to make

disappointing reading.

The final October report now shows

a deficit of $315 million, with the November figure

estimated to be almost as large. Now that some details

for October are available, it appears that both short-term

capital outflows and a shrinking trade surplus contributed

significantly to the deficit for that month. It is

disturbing to see the over-all deficit remain at such a

high level despite the virtual cessation of purchases of

newly-issued and outstanding foreign securities. While

the situation in the foreign exchange markets is fairly

satisfactory--except for the strength of the German mark

and the German balance of payments--the possibility of

renewed pressure on the dollar is clearly present.

The over-all statistics on bank credit point to

continued rapid expansion in this series, with the $3

billion gain in November the third largest this year. The

7.6 per cent annual rate of gain in bank credit in the

first eleven months of 1963 was only slightly less than

the 8.5 per cent rate of gain for the corresponding period

of 1962. Bank loans, including business loans, again

showed substantial increases; and while part of the rise

in loans appears to have been attributable to special

factors, it is hard to avoid the conclusion, especially in

the light of comments around this table at the last few

meetings, that underlying loan demand has strengthened

considerably in recent months. Nonbank liquidity

registered a further sharp advance in November, with sizable

12/17/63

-21-

gains in both money supply and time deposits. On the

other hand, it may be worth noting that in the past

two years the banks have materially lengthened the

average maturity of their portfolio of Governments--so

that further loan expansion could put greater upward

pressure on long-term interest rates than has been

true in earlier periods of loan expansion.

As we consider the possible need for policy

modifications in the months immediately ahead, we

cannot overlook the fact that the next couple of weeks

provide perhaps greater freedom of action to the System

than any other prospective period until some time in

March. The financing calendar for January is fairly

full, and in the latter part of that month the February

refinancing will be announced. This in turn may well be

followed closely by an advance refunding that will

extend well into March.

On most of the occasions during the past two years

when we have seen fit to move modestly toward lesser ease,

the Committee has rightly felt some reluctance to do so in

view of the then position of the domestic economy. Today,

however, I think we are in a different situation. Not only

is a further modest move in this direction clearly

indicated as desirable by the continuing balance of

payments problem, but there also is real justification

for asking ourselves whether the recent growth rates for.

bank credit and nonbank liquidity have rot exceeded

optimum levels even from a purely domestic standpoint.

We have had several warnings in the market that further

credit expansion at the present high rate may have decidedly

undesirable consequences for credit stardards.

I doubt

whether any of us, when we modified policy a year ago and

five months ago, had any idea that bank credit would keep

on growing as fast as it has.

It seems to me highly appropriate that in the next

three weeks we should seek to encourage a somewhat reduced

rate of bank credit growth by allowing credit demands to

put somewhat greater pressure on bank reserve positions.

Thus, free reserves might be allowed to fall moderately--

possibly to about the zero level. I can see no harm at all

if the result is to push bill rates somewhat above the

discount rate--perhaps to the 3.60 per cent level--although,

as seasonal pressures wane, we may have difficulty keeping

the rate much above 3-1/2 per cent. The serious balance of

payments outlook warrants our continuing to give careful

attention to the bill rate, over and above the proposed

-22-

12/17/63

objective of slowing the rate of credit growth.

If the Committee should agree on the soundness of

these objectives, the second paragraph of the directive

might well be amended slightly, first to eliminate the

reference to possible market unsettlement, which no

longer seems needed, and second to suggest a slightly

greater degree of firmness in the money market and a

slightly slower rate of reserve expansion.

Mr. Shuford said there had been no significant changes in

economic activity in the Eighth District since the Committee

meeting of two weeks ago.

For the year as a whole the District had

had marked improvement, but there had been little change since

August.

Total employment in the District's major labor markets had

increased only slightly from the high level reached in July.

Since

August industrial use of electric power had been about unchanged

and similarly with bank debits.

Total loans of weekly reporting banks showed a considerable

increase from August to November with most of the increase in

business loans to commodity dealers and food, liquor, and tobacco

processors.

Funds to accommodate this loan expansion had come from

a net sale of securities and a growth in deposits, mainly time deposits.

Noting that the national economy had been discussed fully

this morning, Mr. Shuford said he would simply mention that after

reaching a high level in mid-summer activity

somewhat more moderate rate.

had increased at a

Industrial production recently had

been only slightly above its July level in contrast to a 12 per

cent annual rate of expansion from January to July.

New construction

12/17/63

-23-

expenditures, after increasing rapidly from the first of the year

to August, were down somewhat in September and October and appeared

to be little changed in November.

Economic strength did appear in

some areas such as personal income, which in November continued the

steady rise of the past twelve months.

The latest data for corporate

profits and for plant and equipment expenditures were strong.

Mr. Shuford commented that monetary policy over the past year

seemed to him to have been reasonably appropriate.

Committee actions

had permitted a higher level of short-term interest rates, which had

contributed to a somewhat improved balance of payments situation.

At

the same time, policy had facilitated the improvement that had occurred

in economic activity by providing reserves for a relatively rapid

growth in bank credit and the money supply.

Mr. Shuford said he agreed with Mr. Hayes that the balance of

payments problems had not been resolved and could become more severe.

It was also true that the rate of increase in the money supply during

the past

year had been high compared with other recent years and had

continued high this fall.

However, in view of the moderate improvement

in the economy, the relative stability of prices, and the moderate

growth in real product, he did not feel that monetary policy had been

unduly expansive, considering a period longer than just the past few

months.

He thought the Committee needed to be very much on the lookout

for evidence that monetary expansion might be leading to excessive

12/17/63

-24-

total demand, but in his opinion there was no clear evidence of this

Accordingly, Mr. Shuford said, he would favor no basic change

as yet.

He favored a bill rate fluctuating around the 3-1/2 per

in policy now.

cent level in response to seasonal influences both now and after the

year end, and a Federal funds rate continuing in the neighborhood of

3-1/2 per cent.

He thought reserves should continue to be provided at

a moderate rate so as not to unduly hamper economic development.

did not favor a change in discount rate.

He

With respect to the directive,

he suggested omitting the phrase referring to the death of President

Kennedy.

Mr. Bryan said that Sixth District figures had been behaving

about the same as the national figures; they indicated some continuation of the upthrust but perhaps at a slightly decelerated rate.

As

he looked at the national problem he noted the change from a year ago

in the money supply, narrowly defined.

The increase seemed to him to

have been ample, and in the last three months the rate of increase had

been up, not down.

The banks recently seemed to have been able to

supply a rather sharply increased loan demand while expanding their

investments.

Also, liquidity in the nonbank sector had risen sharply.

The net of it, Mr. Bryan said, was that he could not see on the basis

of any reserve figures that the economy had been starved for reserves.

On the contrary, if anything monetary policy had been slightly too easy.

With respect to policy for the present, Mr. Bryan said that

December was not a time when the Committee could make a change

12/17/63

-25-

with any confidence, and he would be inclined to favor no change.

He

would interpret. no change in terms of a target figure for free reserves

of slightly over zero, but he would not object if they fluctuated back

and forth around the zero point.

He had noted comments at this meeting on the price level, Mr.

Bryan continued; he did not view price developments with as much

equanimity as others, he said, because of the consistency of the upward

drift that had been fairly evident in services and now had become

evident in commodities.

It seemed that some factors had been operating

to raise the price level in spite of the unemployment rate and the

existence of excess capacity.

While the rate of increase in itself

did not seem large, when it was compounded over a ten-year interval it

produced a surprising figure.

Mr. Bryan concluded by saying the direc-

tive should be altered by taking out the reference to Mr.

Mr.

Kennedy.

Bopp said that during the past two weeks there had been

small changes in

the Third District which po:nted,

slight imrovement in the business situation.

if

anywhere,

to a

Some areas had posted

gains in manufacturing employment in November, and store sales, after

closing out November with another relatively poor week, had picked up

during the first week of December.

Two developments characterized Third District banking since the

last Committee meeting:

the recent strength in

continuing reserve pressure and a slackening of

business loans.

Though down from recent highs,

-26-

12/17/63

the basic reserve deficit of reserve city banks was still fluctuating

around the $100 million mark, reaching $120 million on a daily average

basis in the week ending December 11.

During the same week, country

bank borrowing was $13 million, a relat.ively high level for recent

years.

Though total loans and investments were up, business loans at

weekly reporting member banks had declined by $22 million.

This

compared to a $2 million fall in the same period last year.

As to policy, Mr. Bopp felt it important not to be swept away

by the extremely optimistic sentiment that seemed to prevail now.

Business was better than many people had expected but optimism seemed

to have out-run the facts.

The pace of expansion remained moderate and

was remarkably free of the excesses which characterize booms.

The

consensus on the outlook was favorable, but the predictions continued

to indicate only moderate advances.

And it was still far from a sure

thing that bus.ness would escape a downturn next year.

For these reasons, Mr. Bopp said, the Committee should not

move any further away from ease.

In any case, the present period,

with seasonal pressures in force, seemed an inappropriate time for

such a move.

It was important to see how vigorous business remained

during the winter months and as action on a tax cut moved nearer.

Moreover, time would reveal whether the recent improvement in the

balance of payments was temporary or not.

In sum, Mr. Bopp said, he would make no change in over-all

policy; he would not change the discount rate; and except for deleting

-27-

12/17/63

the reference to President Kennedy's assassination he would make no

change in the directive.

Mr. Hickman said that, as was to be expected, not much had

been added to the understanding of the business situation since the

last meeting of the Committee.

Output continued to expand moderately.

The latest projections on plant and equipment spending, as announced

by Commerce-SEC, were reassuring as to trend, although somewhat

disappointing as to level.

The news of a slippage of retail sales in

November had been anticipated, and fragnentary evidence for December

suggested a strong rebound.

Contrary to some expectations, the pre-

liminary report on seasonally adjusted corporate profits for the third

quarter showed a rise from the second quarter.

This might be a good occasion, Mr. Hickman commented, to catch

up on the most recent wrinkles in the auto and steel industries.

Twc

schools of thought seemed to be emerging in the automobile trade--one

bullish, one bearish.

strong to

The bears felt that sales were not sufficiently

sustain current output rates over the near future.

They

foresaw a cut on the order of 10 per cent in the production rate in

early 1964.

The bulls pointed to a shift of consumer preference

towards cars in the middle-range price bracket, coupled with the fact

that inventories had been particularly tight among dealers in such cars.

As more cars become available, it was argued, they would be sold, and

the current high level of output maintained.

12/17/63

-28In the steel industry, inventory liquidation appeared to have

proceeded more rapidly than expected, Mr. Hickman reported.

Ingot

output and shipments were rising contra-seasonally and were lending

support to the adjusted index of industrial production.

Only a month

or two ago observers had been prepared for a decline in the steel

industry, at least of seasonal proportions.

Mr. Hickman said that money and credit developments of the

last two weeks had continued essentially along the lines of the recent

past except for an occasional inadvertent easing of the money market,

associated, as Mr. Holland had indicated, with a maldistribution of

reserves.

If the Committee was trying to maintain an invariant free

reserve target of about $100 million--and he took it that such was

Committee policy--this sort of thing was to be expected.

In view of

the touch-and-fo situation in the foreign e,.changes and uncertainties

regarding future developments in foreign money market centers,

Mr.

Hickman said, any tendency towards ease, even occasionally, ran the

risk of encouraging outflows of short-term funds from New York.

From time to time, Mr. Hickman continued, he had been disturbed

over the extent to which spokesmen outside the Federal Reserve System

appeared to be speaking for or committing the System in its future

policy.

For that reason, he was particularly pleased by the recent

statements of Chairman Martin and Mr. Hayes before the International

Chamber of Commerce.

It seemed to him that their words described

12/17/63

-29-

accurately and forcefully the appropriate monetary policy for present

circumstances.

Furthermore, to him their statements served to reaffirm

the central responsibility of the Federal Reserve System in the

determination of monetary policy.

Mr. Daane said that before participating actively in the

Committee's policy deliberations he would like to have a chance to

reorient himself on System thinking and to study the considerations

that had gone :.nto the formulation of monetary and credit policy in

recent months.

Accordingly, he would make no policy recommendations

at this meeting,.

The Chairman noted that Mr. Daane had just returned from a

meeting of the "Group of 10" in Paris and invited him to comment.

Mr.

Daane replied that he would be happy to say a word about how that Group

was progressing and where it was heading.

By way of background, he

noted that at this year's meeting of the International Monetary Fund

in Washington the 10 nations participating in the "General Arrangements

to Borrow" had reached an agreement described in the following quotation

from a press release issued on October 2, 1963, by Secretary Dillon on

behalf of the "Group of 10":

"In reviewing the longer-run prospects, the Ministers

and Governors agreed that the underlying structure of the

present monetary system--based on fixed exchange rates and

the established price of gold--has proven its value as the

foundation for present and future arrangements. It appeared

to them, however, to be useful to undertake a thorough

examination of the outlook for the functioning of the

12/17/63

-30-

international monetary system and of its probable future

needs for liquidity.

This examination should be made

with particular emphasis on the possible magnitude and

nature of the future needs for reserves and for

supplementary credit facilities which may arise within

the framework of national economic policies effectively

aiming at the objectives mentioned in paragraph 2.

The studies should also appraise and evaluate various

possibilities for covering such needs."

The representatives of the Group to whom this study had been

entrusted had held two meetings in October during the week of the

Bank and Fund meetings and another meeting in Paris on November 5 and

8; and had just completed still another meeting in Paris on December

13 and 16.

Further meetings at the ends of January and February were

scheduled.

The purpose of these meetings, Mr. Daane said, was for the

participants to have full and frank discussions of their individual

views while remaining noncommittal with respect to the positions of

their governments.

It was tentatively planned to hold a week-long

meeting in Washington during the second week of April in the course of

which these preliminary expressions of individual views would be translated into negotiations, with deputies of the Group of 10 then

expressing the views of their governments.

Under this schedule the

period from the end of February to the second week of April would be

available for the governments to resolve their own positions.

Subsequent meetings were planned for mid-May and mid-June for the

purpose of preparing a preliminary report to be submitted to a meeting

of Ministers in June, for possible review at a Ministerial meeting in

Tokyo in September.

-31-

12/17/63

The representatives decided that their preliminary report

could begin usefully with a review of the reasons for the exclusion

from their discussions of two subjects--name:.y, changes in the price

of gold and fluctuating exchange rates.

The Group's secretariat had

been asked to assemble materials for this purpose, and the U.S.

representatives had contributed papers setting forth the assumptions

underlying the exclusion of these subjects.

The study itself involved three main topics:

the functioning

of the international monetary system, future needs for liquidity, and

the means of covering these needs.

Much of the discussion so far had

been concerned with the functioning of the monetary system, although

the group had begun to get into the question of liquidity needs.

The

sources of liquidity had been broken down into three components:

gold,

reserve currencies, and credit.

As to gold, the Bank for International

Settlements had submitted two background papers--one on the prospective

growth of gold reserves and the other on cooperation among central banks

in the gold market.

There had been some preliminary discussion of

these two papers at the most recent meeting, and it was expected that

there would be wider discussion as the work of the Group progressed.

As to the reserve currency component of liquidity, Mr. Daane

continued, the deputies had been invited to submit notes on their views

of the role of reserve currencies in the present international monetary

system, with particular attention to how the reserve currency system

-32-

12/17/63

was working and whether its replacement might be desirable eventually.

The U.S. representatives had submitted a paper on this subject which

had been considered at the recent meeting along with the submissions of

other countries.

Several broad currents of European thought seemed to be coming

through, Mr. Daane said.

There was considerable feeling that agreements

should not simply be bilateral, but should come under multilateral

review.

There also was considerable feeling in favor of reducing present

holdings of reserve currencies and increasing holdings of gold, and

some feeling in favor of either supplementing, or substituting for,

reserve currercies by a composite reserve unit including a gold component.

Mr. Daane concluded by saying that the participants in these

meetings felt free to express their own views and tended to be

provocative in their remarks.

Their statements, of course, did not

commit their governments to any particular courses of action.

He

thought that the direction the study ultimately would take would be

much clearer after the April meeting, when it would be learned how

serious some of the individual country submissions were in terms of

government positions.

Mr. Mitchell said that it seemed to him the performance of the

real economy in the past 6 months had not been very strong, certainly

not if judged by the course of industrial production.

On the other

hand, the economy had been relatively free of disequilibrating tendencies

-33-

12/17/63

so that, for a lackluster performance, it had behaved desirably.

The credit economy was something to which the Committee was

more sensitive, Mr. Mitchell observed. He

noted that there had been

much concern expressed about the quality of credit, but he had not

seen any evidence that the quality of credit extended by banks had

deteriorated to the point where it jeopardized bank reserves in

sense.

any

In any event, he doubted that it was possible in a free

enterprise eccnomy for monetary policy to do much about the quality

of credit, which depended on the nature of the many individual

decisions made by loan officers on the ground.

In his judgment a

policy of restricting available funds and pushing interest rates up

would result in a detetioration of the quality of credit rather than

an improvement.

On the balance of payments, Mr. Mitchell said, it was true that

there recently had been disappointing news.

However, he thought the

Committee should recognize that monetary policy would not solve the

problem except insofar as it helped to stabilize the price level.

Any

effects through short-term interest rates simply postponed the day of

judgment, and it was a mistake to think that such rate effects

accomplished more than this.

Mr. Mitchell commented that in his opinion some of the people

at the table were taking a rather unsophisticated view of the price

level and price indexes.

It should not be surprising, he said, that

the wholesale price index remained stable despite reports that many

-34-

12/17/63

businesses were testing markets and trying to raise prices.

As the

Stigler Committee had indicated, the wholesale price index utilized

price quotations rather than prices actually charged, with the result

that much actual cyclical movement was not reflected in the index.

In

his judgment, however, the price movement that was occurring was not of

a type to call for monetary policy action.

had a different defect:

The consumer price index

it failed to take account of quality changes.

He thought one could say with confidence that if such changes were

accurately measured the index would not suggest that there had been an

upcreep in consumer prices recently.

Mr. Mitchell concluded by saying that on the basis of these

thoughts and on the basis of the analyses presented by the staff, he

would favor no change in the Committee's present posture.

He would

amend the directive to take out the phrase referring to President

Kennedy's death.

Mr. Shepardson said that he recognized the divergent trends

that were mentioned in Mr. Brill's review.

On the other hand, while

it seemed to him that some factors were not as exuberant as many of

the Committee members might like, he would be inclined to give more

weight to the affirmative factors than Mr. Brill had.

He would admit

to taking an unsophisticated view of price developments; he shared

Mr. Bryan's concern that the Committee was not giving enough attention

to the upward crawl of prices.

The decline in beef prices had masked

-35-

12/17/63

the rises occurring in prices of other commodities.

Pressure on

prices was continuing, and while some increases were not sticking

others were.

There had been a constant upward movement in the consumer

price level, Mr. Shepardson continued, and this would be reflected

in wage negotiations in 1964.

He agreed with Mr. Mitchell that price

level changes would have a significant effect on the balance of

payments problem.

With respect to the outlook, Mr. Shepardson commented that

this season, near the year end, was not the best time to gauge the

situation.

Normally there was some slackening after Christmas and

it was hard to say what the next few months might show.

It seemed to

him the Committee had met seasonal reserve needs fully, if not more

than fully.

Required reserves continued to be above the staff guide-

lines and there had been a significant run-up in the money supply.

There had not been the upward pressures on interest rates often

associated with the Christmas season, which indicated that the

Committee had more than adequately met all needs.

At thi

point, Mr. Shepardson said, with the run-off that

usually started at Christmas and continued for some time afterwards,

it was particularly important that the Committee not lose ground.

Mr. Hayes had mentioned, it might be difficult to work against the

seasonal slack after Christmas, but every effort should be made to

As

-36-

12/17/63

avoid any sloppiness in money markets.

It was likely that the

Committee might want to take significant action in the near future,

and would need solid ground for such action.

He did not recommend a

significant change in policy at this time but did urge that the

Committee hold firmly to the money market conditions that it had had

recently.

It would not be undesirable for free reserves to fall to

zero, and the bill rate might be held at or somewhat above its present

level.

Mr. Robertson made the following statement:

Both business and financial activity seem to have

settled back to a more moderate rate of expansion,

following their more vigorous advances earlier this

fall. If this change of pace represents simply a pause

to consolidate gains preparatory to further advances, I

suppose we all would be satisfieo. If it should prove

to be a lnger lasting loss of momentum, however, there

is reason for concern. We still have plenty of resources

that need to be put to work, and the November figure on

unemployment is a harsh if somewhat unreliable reminder

to that effect.

I know we are all watching the price indexes closely

for any signs of emerging general inflationary pressure,

but apparently price increases in some lines continue to

be roughly counterbalanced by offsetting if less

publicized decreases elsewhere. Presumably this kind of

happy coincidence will have to stop some time, but I do

not believe we can risk trying to forecast that timing.

Three years ago, no one would have forecast that our

economy could boost its GNP by roughly $100 billion

without any major accompanying movement of wholesale

prices, and I think that development snould make us

appropriately humble about our ability to guess how much

longer it can go on.

So long as we continue to have a noninflationary

economic expansion, I favor encouraging it with a broadly

stimulative monetary policy. In particular, during these

-37-

12/17/63

days of peak seasonal pressures I would direct the Manager to

provide the reserves needed by the market without any show of

reluctance, and I would caution him not. to be premature or

overaggressive in mopping up the return flow of reserves

after the holidays.

I would not think this prescription should produce any

great and sustained interest rate decline over coming weeks,

unless business activity softens, but it probably would allow

for moderately greater interest rate fluctuations downward

from their seasonal peak. This I think would be to the good,

for it could help to dispel some of the easy assumptions about

pegged rates that have pervaded financial circles, both at

home and abroad. The market developments of the past three

weeks have, of course, been a step in this direction, and I

hope we can reinforce that lesson in the weeks ahead.

All this I think can be accomplished within the confines

of the current directive. Neither domestic nor international

considerations seem to call for any overt policy change; and

both the seasonal churning in the markets and the forthcoming

schedule of Treasury financings provide technical arguments

against any change, other than perhaps to recognize these two

technical considerations explicityly in the directive, and, of

course, to drop the reference to President Kennedy's assassination.

Mr. Mills said that the main purpose of his remarks would be to

raise some heretical doubts on the handling of the transactions in the

Open Market Account that the Committee ordinarily conceived to be

orthodox and conventional.

He then made the following statement:

Confusing developments in the mechanical conduct of Federal Reserve System monetary and credit policy now cause me to

concentrate my remarks largely on technical matters. In the

short space since the Committee's last meeting, bank credit

has recorded a vigorous seasonal expansion, money market

conditions, as reflected by Treasury bill yields and the rate

on Federal funds, have tended to be relatively easy, and the

level of free reserves has plodded along in a narrow rut. It

is important to call attention to the stagnancy in the free

reserves factor because it belies what has been the feel and

tone of a desirably easier money market, and can reasonably

give rise to charges that the System's open market operations

have practiced a deception on those market observers who lay

12/17/63

-38-

store on the free reserves level as a guide to its policy intentions.

Granted the forgivable unreliability of our projections

of movements in the supply of reserves, the actual setting of

the average level of free reserves over a reserve week involves

no more than a last-minute arithmetical calculation by the

Manager of the System Open Market Account of a desired figure

then arrived at by supplying or withdrawing whatever amount of

reserves is necessary to make it come out. However, as matters

have transpired, reserves movements prior to the arithmetical

results of these calculations are what have in reality

characterized the tone and color of the reserve week and not the

recorded free reserves figure.

Application of this theory to the last two reserve weeks

indicates that, in fact, reserves available to the commercial

banking system have been adequate to sustain an appropriate

expansion of bank credit. At the same time, however, the

arbitrary fixing of a level of free reserves can have deceived

the financial community. Investor confusion as to the appearances and realities of System policy actions may be a reason for

the somewhat slow market response to the more available supply

of reserves and the seeming buildup in the supply of Federal

funds and in the magnitude of corporate repurchase transactions

with U. S. Government securities dealers.

That investors should

be bewildered about System policy intentions is quite understandable and can be traced to this further step in the direction of artificially controlling a U. S, Government securities

market that does not develop an interest rate structure

responsive to observable changes in the quantity of reserves

and the supply and demand of investment funds. The rising trend

in long-term interest rates is presently a better indicator of

actual investment conditions than is to be found elsewhere in

the area of shorter term securitie. yields, but here, too,

rumor and "official" statements may be influencing interest

rate movements beyond the realities of supply and demand con-

siderations.

In the period until the next meeting of the Committee, the

market should be allowed a reasonably free rein, and any

fortuitous increases in the supply of reserves that exceed

seasonal proportions should not be seized upon as an excuse to

absorb reserves and to tighten the market.

Mr. Wayne reported that the limited information coming to light

in the past two weeks suggested for the most part continued improvement

-39-

12/17/63

in Fifth District business.

higher.

Insured unemployment rates were seasonally

Contract awards rose almost to record volume in October with

substantial strength in each major category.

Scattered reports dealing

with principal manufacturing industries remained quite favorable.

The

Cooley one-price cotton bill was passed by the House shortly after the

last Committee meeting and was now in the hands of the Senate

Agriculture Committee.

remained at high levels.

Bituminous coal production and shipments had

Both cotton and flue-cured tobacco estimates

had been revised upward, moderately improving farm income expectations.

Turning to national conditions, Mr. Wayne said that the present

period of business expansion had been moderate with several changes of

pace, but generally it had avoided excesses.

At least partly for that

reason it had lived to a respectable middle age.

In the short period

since the last Committee meeting there had been no major developments

to change the moderately favorable outlook.

The rise in unemployment

was somewhat puzzling and might be slightly disturbing, but a similar

rise occurred in November 1962 only to be reversed the following month.

Psychologically also, there seemed to be some similarity to the situation of a year ago immediately after the Cuban crisis.

The rebound from

the tragedy of a month ago, plus some indications that the President was

inducing a slightly increased tempo of action by Congress, seemed to

have produced, at least temporarily, a somewhat stronger feeling of

confidence and optimism in the economy generally.

This attitude,

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12/17/63

together with a record backlog of capital appropriations by corporations, provided a reasonable basis for expecting that business

activity would continue at a moderately good level in the weeks

immediately ahead.

On the policy side, Mr. Wayne said, there seemed to be no signs

of monetary strain or tightness

fied activity.

in this period of seasonally intensi-

In fact, the drop in some short-term rates early last

week to their lowest levels since midsummer suggested just the

contrary.

He realized that this probably resulted from a special

combination of circumstances, but even so he believed that Committee

policy had been sufficiently easy to take care of seasonal needs and

to allow for any sustainable growth or expansion which the economy

might generate.

The increases in the various categories of reserves

and in the money supply in the past two or three months seemed to be

ample by any valid measure.

Since there had been no significant change

in basic conditions or prospects, Mr. Wayne said, it seemed appropriate

to continue the Committee's present policy.

He would favor renewing

the current directive with the elimination of the reference to President

Kennedy's death.

He did not favor any change in the discount rate at

this time.

Mr. Clay commented that it was not likely that the domestic

economy had changed in any basic way in the short interval since the

Committee last met two weeks ago.

It had been a period, however, in

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12/17/63

which a substantial amount of economic information had become

The significance of the additional information about the

available.

economy's performance and prospects was that it appeared so similar to

what it had been for a considerable span of time.

Apart from the

immediate adjustments in economic activity following President

Kennedy's death, the shape of economic events remained largely

unchanged, the pace of moderate expansion continued, the problems of

needed expansion and underutilization of resources remained, and the

evidence of a marked forward thrust in economic activity was still

elusive.

Mr. Clay felt that the degree of expansion in the months

ahead would depend importantly upon the developments in the cyclically

sensitive areas of the economy, one of which was business capital

outlays.

He observed that much had been said in recent weeks about

anticipated business capital outlays, notably following the McGraw-Hill

report, and the likelihood of a markedly better performance.

This

might yet come to pass, Mr. Clay said, but the Commerce-SEC release had

been sobering with respect to those expectations.

Present evidence

seemed to suggest that businessmen do not foresee sufficient market

demand for their output to justify a marked rate of expansion in

business capital outlays.

Under the circumstances, Mr. Clay continued, monetary policy

for domestic purposes should aim to supply reserves in sufficient

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12/17/63

volume to permit commercial bank credit growth on a seasonally

adjusted basis.

The goal with respect to the 90-day Treasury bill

rate might well remain within the yield range of recent weeks, which

presumably would be appropriate for international flow of funds

purposes.

Over all, these objectives probably would be compatible

with the general monetary policy that the Committee had been pursuing.

Presently, credit markets would move into the period when seasonal

forces might exert downward pressure on short-term rates.

It was not

possible, Mr. Clay said, to know ahead of time just how intensive those

pressures would be in any given year.

Moreover, Treasury financing

during that period and market knowledge of Treasury and Federal Reserve

interest rate objectives might tend to alleviate downward interest rate

pressures in those weeks.

If downward rate movement beyond recent levels could not be

avoided except by restricting reserve availability on a seasonally

adjusted basis, Mr. Clay observed, consideration should be given to

accepting a slightly lower level of rates temporarily.

Bank discount rate should remain unchanged.

The Reserve

He would keep the directive

as it was except for the elimination of the reference to President

Kennedy's death.

Mr. Scanlon said that business sentiment in the Seventh District

continued strong, although with cautious undertones.

A panel of top

executives at a recent annual business outlook session in Chicago had

been uniformly optimistic.

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12/17/63

The Reserve Bank's recent poll of business and financial

economists pointed to moderate economic growth in the next six months

with Gross National Product at a rate of about $610 billion in the

second quarter of 1964.

Many of these observers believed the proposed

tax cut was necessary to sustaining expansion beyond midyear.

Local steel experts in Chicago, Mr. Scanlon reported, foresaw

a rise in consumption of finished steel from 78.5 million tons in 1963

to somewhat over 81 million tons in 1964 even without inventory building.

Imports were expected to be a record 5.5-6 million tons next year.

United States ingot production was expected to rise from 109.5 million

tons in 1963 to 111 million tons next year.

This projection assume

domestic production of.7.5 million autos in 1964, only a slight drop

from the 7,650,000 units now expected to be produced in the current

year.

Auto production and sales continued strong; fourth quarter

figures were close to record levels and first quarter projections were

being raised.

Consumers appeared to be spending quite freely, Mr. Scanlon

said,

Aditions to savings at commercial banks and savings associations

were sharply below the year-ago rate in October and apparently in

November as well.

Seventh District banks had not shown as great a rise in loans

over the past month as those of the nation.

Exclusive of loans to

securities dealers, the November rise at District banks was about the

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12/17/63

same as a year ago.

For the second half to date, loan expansion had

been 4 per cent, compared with 3-1/2 per cent last year.

Borrowing by

commercial and industrial firms remained strong, with a large portion

of the recent increase attributable to seasonal borrowers and oil

company property transactions.

Recently demand had been sustained by

the usual borrowings related to tax and div.dend payments.

The basic position of large Chicago banks had been greatly

improved over the past three weeks, Mr. Scenlon continued.

Since

deposits were down slightly, this development reflected mainly portfolio and dealer loan adjustments.

Turning to policy, Mr. Scanlon said he thought the Committee's

posture had been appropriate, but he expected that economic developments

in the near future would call for a somewhat firmer money market than

was provided in the Committee's current directive.

He had the feeling

that, in retrospect, it may appear that the Committee should have made

such a move now, but with the period of so-called winter lull ahead

and possible adverse psychological effects cf the current widespread

discussion of cutbacks in Government spending, he was inclined to

continue the current policy until the next meeting of the Committee.

He thought the reference to the death of President Kennedy should be

deleted from the directive since any unusual developments in the money

market now probably would not be a direct result cf that event.

would not charge the discount rate at present.

He

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12/17/63

Mr. Deming said that 1963 was closing with Ninth District

economic activity continuing to expand, after allowances for seasonal

variations.

There had been some drop in retail sales late in November

but this seemed to have been a reaction to the President's death and the

national period of mourning.

per cent ahead of a year ago.

District bank debits in November were 10

Preliminary estimates for November

factory employment seemed favorable.

Construction employment had held

up better than usual and building permit figures indicated strength in

that area.

Even the iron ore picture seemed to be better, with

shipments in November almost double those of November 1962 and total

tonnage so far this year running about 2 million tons or 3-1/2 per cent

ahead of last year.

Since pellet shipments had increased the iron

content shipped this year probably was larger relative to last year

than the tonnage figures indicated.

The reason for the strong November

showing, Mr. Deming said, apparently was a heavier-than-expected

drawdown of mill stocks earlier and a desire to rebuild them, which

might augur well for steel output this winter.

Fourth quarter cash farm income in the Ninth District apparently

would be off sharply from the same period a year earlier, Mr. Deming

reported.

This would pull cash income for 1963 below 1962 but not by

much, perhaps 1-1/2 per cent.

The fourth quarter drop seemed to reflect

some holdup on marketings of both grain and livestock, perhaps partly

reflecting tax considerations.

Thus, the prospect now was for a more

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12/17/63

favorable first quarter farm income picture than had been expected

earlier.

Mr. Deming said the Federal Reserve Bank of Minneapolis had

inaugurated a new sample of some 15 to 20 big manufacturers headquartered in the Ninth District but operating nationally and, in

most instances, internationally.

They were asked for information on

current operations both within and without the District and about

prospects for their firms for the coming quarter.

The survey was too

new to lean on heavily as yet, but four points brought out seemed

worthy of note.

First, current (November) figures on new orders,

order backlogs, inventories, and employment indicated mostly stability

to growth relative to October.

due to unusual circumstances.

Any declines seemed to be seasonal or

Second, the out-of-District figures

seemed to be more favorable than the in-District figures, which might

also reflect seasonal factors.

Third, expectations for the first

quarter of 1964 in terms of output, employment, and profits were

favorable; in fact, more favorable than current developments were

relative to these of the immediate past.

Fourth, average prices for

finished products apparently showed no change in November and most

respondents expected no change in the first quarter of 1964.

Of the

three firms which expected price changes, two expected prices to rise

slightly and one expected its prices to fall slightly.

Turning to banking, Mr. Deming said that the statistics

indicated a much stronger than normal credit expansion in November,

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12/17/63

with loans sparking the expansion, but a return to normal seasonal

changes in the first two weeks of December.

Deposit growth, which

was larger than usual in November, apparently had carried over its

strength into December.

Ninth District banks did not seem to be under

any particular pressure but, particularly at city banks, loan-deposit

ratios had moved up rather sharply recently, although they were still

3 or 4 points below their previous peaks.

With respect to policy, Mr. Deming said he agreed with those

who suggested there should be no basic change over the next three

weeks.

As

he looked at the figures in the Board staff's memorandum

on reserves, he was struck by the fact. that borrowings and free reserves

in October, November, and December were fairly stable, if one averaged

the weekly figures shown for each month.

This, he thought, was about

the policy posture the Committee should be making.

He would expect an

upsurge in borrowings in December, and consequently lower free reserve

figures.

He would not be disturbed if free reserves fell below $100

million--a level somewhere around $50 million seemed all right--although

he did not advocate operations to push free reserves down.

Mr. Deming

concluded by noting that Treasury financing operations planned for

January and February might put some pressure on the market and in a

sense serve as a substitute for any additional pressure by the System.

He would not change the directive except to delete the reference to

the President's death.

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12/17/63

Mr. Swan reported that activity in the Twelfth District seemed

to be continuing at a reasonably satisfactory level.

In California

employment increased slightly in November but, as in the country as a

whole, there were substantial additions to the labor force and consequently the unemployment rate rose rather sharply.

Mr. Swan said he was glad to see that Mr. Brill had slightly

qualified his reference to the universal degree of optimism.

He (Mr.

Swan) happened to be in Seattle when cancellation of the Dyna Soar

The reaction there had been remarkably

project was announced.

widespread and sharp.

The cancellation means that 5,000 workers

engaged on that project will be affected, and this follows a decline

of about 14,000 jobs from the peak in 1962 in the aircraft industry in

the State of Washington.

There was a general feeling that these job

reductions would have some secondary repercussions on the economy of

the area, but it was too early to determine what the effects would be.

Attitudes were quite different in the Spokane area, Mr. Swan

said.

Conditions in agriculture, in lead, zinc, and silver mining,

and even in the lumber industry provided a basis for some optimism.

Mr. Swan reported that there had been no marked change in the

Twelfth District's financial picture during the past two weeks.

Weekly

reporting banks had shown a substantial increase in loans, although not

so much as in the nation as a whole.

District banks were net sellers

of Federal Funds in the first two weeks of December but they expected

to be net purchasers in the current week.

12/17/63

-49Turning to policy, Mr. Swan said that in view of the somewhat

more moderate increase in economic activity recently, the rise in the

unemployment rate in November--which he found difficult to interpret-and the substantial cross-currents in the money market that probably

would continue for a time, he saw no basis for changing policy at

present, not even to move to a slightly lesser degree of ease.

It

seemed to him that in light of these factors and of the expected

reversal of seasonal pressures it would be better to wait and see what

happened through the year-end before making any decision on a policy

move.

He would like to see the bill rate fluctuating around the dis-

count rate, presumably with free reserves in the area of $50 to $100

million.

He would not change the discount rate, nor would he change

the directive except to delete the reference to the President's death.

Mr. Irons reported that attitudes in the Southwest were quite

optimistic.

There were a few scattered indications of further

expansion, but on the whole the available data were neither current

enough nor good enough to support these attitudes.

Scattered comments

from merchants in the District indicated that they expected Christmas

business to be up, with some expecting a moderate increase and others

a substantial one.

The various elements in the economic picture were

about as he had reported them at the last few meetings.

Activity was

at a high level and inching up, and a more substantial rate of increase

was expected.

12/17/63

-50On the banking side, Mr. Irons said, there was more evidence

of expansion.

Loans were up more than seasonally at District banks,

with substantial gains in commercial and industrial loans and consumer

loans.

The press in the District seemed to be urging people to use

consumer credit and some recent articles in the business sections of

Dallas papers amounted almost to exhortations on the subject.

Bank

holdings of Treasury bills had risen, and bank investments generally

were up substantially in this short period.

also had risen.

Demand and time deposits

A few banks had been heavy purchasers of Federal funds,

and a few banks had been relatively heavy borrowers from the Reserve

Bank.

A fairly substantial increase in borrowings between now and the

end of the year seemed likely.

Mr. Irons noted that recently there had been a flurry of

interest on the part of some District banks in the possible use of

capital debentures; also, a large bank had announced that it would issue

mortgage notes on its buildings and use the funds to better meet its

customers' credit needs.

With respect to policy, Mr. Irons said, he came out today at

the same place as many others; he would hold to present policy and not

attempt to establish a situation of either less ease or more ease.

He

thought the Committee should continue to watch price developments

closely, but he agreed with some of the comments that Mr. Mitchell had

made regarding price indexes.

He was particularly distrustful of the

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12/17/63

consumer price index as a reflector of the cost of commodities.

At

the moment, he did not feel there was a strong inflationary bias in

the economy, although one might develop, and he would not advance such

a bias as a reason for changing policy.

Mr. Irons thought the present

situation, with the bill rate around 3.50 per cent and the Federal funds

rate at 3.50 per cent, was about right.

make reserves available as needed.

He advocated continuing to

He favored maintaining the status

quo, more or less, until the year-end, meanwhile observing developments.

He would not change the directive other than to eliminate the reference

to President Kennedy's death.

Mr. Ellis said First District department store figures suggested

that Christmas season sales this year would probably exceed those last

year despite the shorter shopping period.

Regional statistics suggested

that the underlying tendency of the District economy was in the direction

of continued upward thrust, with developments in construction, production,

nonmanufacturing activity, and vacation business the most outstanding.

At banks, October and November brought demand deposit totals to a level

some 6 per cent ahead of last year.

District banks had moved sharply

from net buyers of Federal funds in September to net sellers since.

These influences had brought to an end the contraction in bank holdings

of short-term Governments and had halted the year-long rise in loandeposit ratios.

They also interrupted the decline in short-term liquid

asset ratios chat began in the first quarter of 1963.

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12/17/63

Turning to monetary policy, Mr. Ellis said that several

aspects of the current situation inclined him in the direction of

restraint.

For example, he said, the standard analysis suggested a

strongly expanding economy in its 34th month of expansion and facing

another year of substantial growth.

The economy was likely to be

impelled forward by a tax reduction effective January 1. Except for

concern with the 5-1/2 per cent rate of unemployment, people would be

describing the economic situation in glowing terms.

It seemed to him

that higher minimum wages and liberalized unemployment compensation

provisions, coupled with changed attitudes toward "acceptable work,"

inevitably meant a higher rate of unemployment in the economy, and

experience did not suggest that this problem could be solved by credit

injections.

Since the Committee's last shift in monetary policy in July,

Mr. Ellis continued, reserve expansion had materially exceeded the

staff guidelines, to the point where the rate of credit expansion

might well be considered to be unsustainable.

Since July reserve

expansion had been at an annual rate of 6 per cent, while the money

supply had increased at a seasonally adjusted annual rate of 5 per

cent.

At some point the burden of proof must shift to those who

wanted to continue inflating the money supply at the current rate.

Considering international capital flows, he thought it appropriate to

note that foreign lending at First District reporting banks stood 41

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12/17/63

per cent above the year ago level, with all of the gain occurring

since July.

Fourth quarter balance of payments figures when published

would not be well received, and questions might be raised about the

use of monetary policy in light of these figures.

Belgium, France,

and Canada had all recently increased their bank rates by 1/2 per

cent, Mr. Ellis noted, and Sweden and Switzerland had permitted a

rise in market rates.

The Committee had been told this morning about

the attractive rates prevailing in Germany.

These various developments, Mr. Ellis said, suggested to him

that the next move in monetary policy should be a gradual shift to

what he would label as a neutral position.

He had the feeling that

the Committee had already crossed the threshold for policy that Mr.

Holland had mentioned.

He was troubled by the fact that the oppor-

tunities for changing policy in the near future were slim in view of

the Treasury financing calendar; the choice seemed to be to change

policy now or wait until spring.

He thought that now was the time to

move toward neutrality, Mr. Ellis continued, and as targets he suggested

a gradual lowering of free reserves to zero by mid-January and acceptance

of short-term rates up to 3.60 per cent with occasional fluctuations

above that level.

He would amend the directive accordingly.

In

mentioning these targets, Mr. Ellis said, he was aware of the problems

that faced the Desk during the next few weeks; it was going to take a

great deal of running even to stay in one place.

12/17/63

-54In a concluding remark, Mr. Ellis said he accepted the

possibility that developments in the market might make discount rate

action desirable before the mid-February Treasury refunding.

Chairman Martin noted that barring an unforeseen event this

would be the last Committee meeting of 1963.

He thought the Committee

was closer together in its views this morning than it had been for

some time.

He recently had re-read the minutes of the meetings for the

last year, the Chairman continued, and he was inclined to think that

the Committee, on looking back over what had been a difficult year,

would feel that monetary policy had done well.

timing of policy actions had been good.

In his opinion the

The Committee had been right

when it moved to slightly less ease at this time last year.

The most

dramatic policy action had been the discount rate change in the summer

of this year.

While judgments might differ

he believed it had been

almost essential to take that action then in view of the balance of

payments situation that was developing.

No one would know how much

effect the discount rate change had had on the balance of payments

because the interest equalization tax proposal came into the picture

almost immediately, but in his judgment the effect was salutary.

Chairman Martin said he would be inclined to Mr. Scanlon's

line of reasoning if the Committee were to attempt to project into

the future, but he did not think the Committee should do so.

He

12/17/63

-55-

favored no change in policy at the present time for a variety of

reasons.

He thought that the economy was in a period of excessive

optimism, and such optimism disturbed him because he did not think it

To some extent the optimism was the result

was warranted by the facts.

of efforts to pass the tax program; there had been a psychological

buildup about what could be achieved by a tax cut that was

disproportionate to the likely consequences.

Some kind of tax program

probably would be passed in late February cr early March and made

retroactive to the first of the year, but its actual impact on the

economy remained to be seen.

If the Committee made no change in policy today, Chairman

Martin continued, it would be pretty well blocked out for a long time.

This was not a case of holding off until the next meeting; the changes

were that the next opportunity for action would not occur before March.

If the present euphoria should be translated by a tax cut into a real

surge in the economy, the System might be faced with the need for a

change in the discount rate or some other drastic action to be taken

at the first opportunity.

This was something the Committee should

not lose sight of.

The whole western world was again faced with the specter of

inflation, the Chairman observed, and he was opposed to inflation

because it led to deflation.

There were those who believed that

unemployment could be cured by easy money.

He doubted this; monetary

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12/17/63

policy had a residual influence on the unemployment problem, but

budget, fiscal, and wage-price policies had more fundamental effects.

What the Committee was faced with, the Chairman commented, was

a condition of euphoria that was pushing interest rates higher than

justified by underlying supply and demand conditions in the markets for

funds.

He believed that even with the expected return flow of funds

this situation was likely to continue into the first part of the year.

He agreed with Mr. Shepardson's comment that the Committee should nct

let the situation get away from it on either side.

Monetary policy had

been reasonably successful in assisting the domestic economy without

inflation over the past year, and should continue to try to help the

At the same time, it was necessary to

economy in every way it could.

be cognizant of the balance of payments problem.

He did not anticipate

a run on the dollar, but the Committee must keep alert.

In sum, the Chairman said, monetary policy had had a good year,

and he thought it inadvisable for the Committee now to force its hand.

A tax reduction probably was not too far off.

If for any reason,

however, the tax cut should be set back there would be deterrent effects

on the economy, but the Committee probably would have time to face up to

this eventuality if it occurred.

He thought the Committee was justified

at this juncture in accepting the good fortune it had had with monetary

policy to date.

He favored continuing the directive as it stood except

for the elimination of the reference to President Kennedy's death.

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12/17/63

In further remarks Chairman Martin said the Committee should do

everything in its power to assess the role of monetary policy in the

early part of the new year.

He thought the Committee could take a

certain amount of satisfaction from developments in 1963, but the real

test would come if a tax reduction was voted.

With respect to the price

situation, he did not believe that monetary policy could control prices,

but it was one factor affecting them.

He did believe that prices were

on the move and the Committee could not afford to be complacent.

While

the wholesale price index continued to hold to its earlier level, the

desire and the tendency to raise prices was quite evident in business

today.

The Committee had to recognize that the price problem was going

to remain with it.

The Committee could not ignore it and should try to

reassess it.

Chairman Martin said he thought the large majority of members

were for no change in policy today, and for no change in the directive

except the deletion of the reference to President Kennedy.

He would

hope that at some point early in the new year the Committee would have

enough information to make a more fundamental judgment on policy, but

in his opinion it did not have that information today.

Thereupon, upon motion duly made

and seconded, the Federal Reserve Bank

of New York was authorized and directed,

until otherwise directed by the Committee,

to execute transactions in the System

Account in accordance with the following

current economic policy directive:

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12/17/63

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-ofpayments 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 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, Bopp, Clay, Daane, Irons,

Mitchell, Robertson, Scanlon, and

Shepardson. Votes against this

action: Messrs. Hayes and Mills.

Mr. Mills said he did not object to the deletion from.the

directive of the reference to the President's death, but he dissented

from the decision to make no change in policy for reasons that he had

cited previously.

He observed that the actual experience of the last

two weeks with respect to availability of reserves fitted his own

judgment of a viable and constructive credit policy but in his opinion

it did not conform to the language of the directive.

There would be

a relatively short period from now until the next meeting during which

there might be some temporary seasonal tightness.

However, such a

development appeared unlikely since the weight of events seemed to be

toward ease; the projected movements in reserves, the customary

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12/17/63

early-year tencency towards credit liquidation, and the post-Christmas

return flow of currency all tended in this direction.

He did not

understand why the Committee should be so concerned about inflation as

to wish to accelerate a normal seasonal credit contraction and to produce

a lower level of free reserves and credit availability.

He could not

reconcile this with the kind of credit and monetary policy that in his

judgment it was the responsibility of the Committee to formulate.

Over

the years and particularly this year, Mr. Mills continued, he had

become increasingly of the opinion that monetary policy could do a

great deal more harm than good.

He thought it was the tendency of the

Committee to permit its fears and concerns to lead to the harmful side

of contraction.

Mr. Hayes said he favored deleting the reference to the death

of President Kennedy but he dissented from both the directive and the

consensus for no change in policy.

In his judgment the Chairman had

been quite realistic about the matter of timing; if no change in

policy was made at this meeting the Committee would be precluded from

making a change for about three months. and to his mind this was unwise.

Mr. Ellis had put the case for a slight move toward less ease very

ably.

Mr. Hayes said he had the feeling that many people around the

table saw inexorable forces leading the Committee to less.ease and

he was at a loss as to why the Committee should not make a modest step

now to pave the way.

He had hoped for action at this meeting similar

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12/17/63

to the action taken last December; it seemed as appropriate now as

it had then.

In response to a question from the Chairman, Mr. Stone said

he did not consider it necessary to recommend any amendment to the

cpntinuing authority directive with respect to the limit 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.

It was agreed that the next meeting of the Federal Open

Market Committee would be held on January 7, 1964.

Thereupon the meeting adjourned.

Assistant Secretary