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. April 14, 1964, at 9:30 a.m.

PRESENT: Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Balderston

Daane

Hickman

Mr. Mills

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mitchell

Shepardson

Shuford

Swan

Wayne

Treiber, Alternate for Mr. Hayes

Messrs. Ellis, Scanlon, ard Deming, Alternate

Members of the Federal Open Market Committee

Messrs. Bopp, Clay, and Irons, Presidents of the

Federal Reserve Banks of Philadelphia, Kansas

City, and Dallas, respectively

Mr. Sherman, Assistan, Secretary

Mr. Kenyon, Assistant Secretary

Mr. Hackley, General Counsel

Mr. Noyes, Economist

Messrs. Brill, Furth, Garvy, Grove, Holland,

Jones, Koch, and Mann, Associate Economists

Mr. Stone, Manager, System Open Market Account

Mr. Coombs, Special Manager, System Open Market

Account

Mr. Molony, Assistant to the Board of Governors

Mr. Cardon, Legislative Counsel, Board of Governors

Messrs. Partee and Williams, Advisers, Division of

Research and Statistics, Board of Governors

Mr. Axilrod, Chief, Government Finance Section,

Division of Research and Statistics, Board of

Governors

Miss Eaton, Secretary, Office of the Secretary,

Board of Governors

-2

4/14/64

Messrs. Eastburn, Black, Baughman, Parsons, Tow,

and Green, Vice Presidents of the Federal

Reserve Banks of Philadelphia, Richmond,

Chicago, Minneapolis, Kansas City, and Dallas,

respectively

Mr. Eisenmenger, Director of Research, Federal

Reserve Bank of Boston

Mr. Meek, Manager, Securities Department, Federal

Reserve Bank of New York

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Com

mittee held on March 24, 1964, were

approved.

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 March 24 through April

8, 1964, and a supplementary

report covering the period April 9 through April 13, 1964.

Copies

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

Supplementing the written reports, Mr. Coombs said that he

expecte

no change in the gold stock this week.

Since March 16 the

Russians had been heavy sellers in the London gold market, with

total sales through April 13 amounting to somewhat more than $450

million.

Of this total, the Pool had taken in $443 million and had

made not only the regular month-end distribution but also two interim

distributions in which the United States' share was $251 million.

This inflow had increased the gold holdings of the Stabilization

-3

4/14/64

Fund to the abnormally high level of $300 million.

The only gold

sales in sight for April were $11 million to the Austrians and

possibly another $34 million to the French.

The exchange markets had been reasonably quiet, Mr. Coombs

continued, and the Account had been able, as a result of the Italian

drawings upon the International Monetary Fund, to pay off completely

the System's swap drawings in German marks and Dutch guilders.

The

Swiss franc debt, which amounted to $220 million on March 4, had

subsequently been paid down by $40 million through regular weekly

purchases of Swiss francs from the Swiss National Bank.

Liquidation

of the Swiss franc debt continued to be handicapped by unusually

tight money market conditions in Switzerlard.

It might, however, be

possible for the Account to clean up the renaining $180 million of

the Swiss franc debt through two operations that were now under

negotiation.

The first of these was a possible swap between the

Swiss National Bank and the Bank of Italy in the amount of $100 million

equivalent.

If this went through, the Bank of Italy would presumably

sell to the U. S. the Swiss franc proceeds against dollars, and the

francs could then be applied against the swap debts with the Swiss

National Bank and the Bank for International Settlements.

Another

by-product of such a swap between the Swiss and the Italians would be

that the Italians would pay off in full their $150 million drawing on

their swap line with the System.

4/14/64

The second operation now being negotiated was a U. S.

Treasury issue of a $75 million bond denominated in Swiss francs

to the Bank for International Settlements, which would in turn

issue short-term money market paper to the Swiss commercial banks.

Here again, the Swiss franc proceeds of the Treasury bond issue

would be sold to the Federal Reserve.

If both operations were to go

through, the Account could thus clean up $175 million of the $180

million debt still outstanding.

In both cases, there were only a

few technical details still to be overcome, and he was hopeful that

negotiations might be completed within the near future.

At the last Basle meeting, Mr. Coombs said, a representative

of the Bank of Japan indicated to him that the Bank might wish to

draw upon its swap line with the System during the course of April.

The Japanese were fully aware of the necessity of avoiding repeated

renewals of such swap drawings and would expect to draw upon the

International Monetary Fund if they cculd not liquidate the swap

through other means.

Also, at the last Basle meeting, the Bank of

England sought and received informal commitments from a number of

the Continental central banks of credit assistance in the event of

speculation against sterling arising out of the forthcoming British

election.

Mr. Coombs thought the Committee should welcome this

approach, which would contribute to a reasonably equitable sharing

of the burden of assistance to the United Kingdom in the event of

another sterling crisis.

4/14/64

Mr. Mills inquired whether the Bank of Italy swap with the

Swiss National Bank would be favorably regarded by the European

economic community.

He noted that there had been some complaint

about the U. S. dealing directly with the Bank of Italy in working

out the recent package of assistance.

Mr. Coombs said the main concern expressed at the Basle

meeting was that the Italians did not seek assistance from other

European central banks as well as from the U. S. Had they been

approached, he felt that a good deal of money would have been put

up on a standby basis.

central banks

Against this background, bringing additional

such as the Swiss National Bank, into the picture

would be helpful.

The Bank of France also might be prepared to

render assistance if asked.

It might be recalled that after the

French opposed the British entry into the Common Market, the Bank

of France extended credit to the British when sterling came under

speculative pressure.

Thereupon, upon motion duly made

and seconded, and by unanimous vote,

the System Open Market Account trans

actions in foreign currencies during

the period March 24 through April 13,

1964, were approved, ratified, and

confirmed.

Mr. Coombs recommended renewal for another three months

each of the following reciprocal currency arrangements:

(a) Bank

of France, $100 million; (b) German Federal Bank, $250 million; and

-6

4/14/64

(c) Bank of Japan, $150 million.

There we::e no drawings presently

outstanding under these swap arrangements, which were renewed most

recently on February 6, February 6, and January 29, 1964, respectively.

Thereupon, renewal of the swap

arrangements with the Bank of France,

the German Federal Bank, and the Bank

of Japan, as recommended by Mr. Coombs,

was authorized by unanimous vote.

Mr. Coombs then pointed out that on April 29, 1964, two Bank

of Italy drawings of $50 million each under its swap arrangement

with the Federal Reserve would mature.

Unless the Bank of Italy was

able to execute the swap with the Swiss National Bank that he had

mentioned earlier, it might wish to renew such drawings for another

three months.

One of the drawings had already been renewed once;

for the other, this would be the first renewal.

After discussion, renewal on a three

month basis of the two Bank of Italy

drawings of $50 million each, if requested,

was noted without objection.

Mr. Coombs also referred to certain System swap drawings that

would mature later this month; namely, a drawing of $20 million under

the swap agreement with the Bank for International Settlements and

two drawings of $25 million and $30 million, respectively, under the

swap agreement with the Swiss National Bank.

be the second renewal in each of these cases.

If renewed, this would

As he had mentioned

earlier, however, it might be possible to liquidate these drawings

in the near future.

4/14/64

Renewal of the aforementioned drawings

under the swap arrangements with the Bank

for International Settlements and the Swiss

National Bank, if necessary, was noted

without objection.

This concluded the discussion of System foreign currency

operations.

Before this meeting there had been distributed to the

members of the Committee a report from the Manager of the System

Open Market Account covering open market operations in U. S.

Government securities and bankers' acceptances for the period

March 24 through April 8, 1964, and a supplemental report covering

the period April 9 through April 13, 1964.

Copies of these reports

have been placed in the files of the Committee.

In supplementation of the written reports, Mr. Stone

commented as follows:

System open market operations supplied reserves on

balance during the past three weeks, cffsetting seasonal

reserve drains and permitting the market to accommodate

smoothly the payments flows associated with the end-of

March bank statement date, the April 1 Cook County tax

date, and other sizable financial flows. Free reserves

were somewhat higher and member bank borrowings

somewhat lower than in the preceding three weeks, but

the averages for both periods fell within the recent

range of variation. The great bulk of Federal funds

trading took place at 3-1/2 per cent although the rate

softened temporarily toward the ends of the two-week

reserve averaging periods encompassed during the recent

interval.

In the securities markets the atmosphere was

noticeably brighter during the past few weeks. Treasury

bills were in good demand from a variety of sources

including corporations, State and local funds, foreign

accounts, and some commercial banks. In particular, the

4/14/64

commitment in the short-term area by AT&T of over $1

billion, raised in its recent stock offering, had a

pervasive impact on short-term rates. At the same time,

supplies of bills fell short of dealers' expectations

as the Treasury did not tap the bill area for its April

cash borrowing.

In this setting, bill rates moved lower,

with the quotations for three- and six-month bills

declining by 7 and 5 basis points, respectively, over

the interval. In yesterday's auction the average

issuing rates for three- and six-month bills, at about

3.48 and 3.69 per cent, respectively, compared with rates

of 3.55 and 3.74 per cent three weeks earlier. These

lower levels have started producing a more cautious

atmosphere, for most market participants seem to regard

the current levels as rather temporary and as more likely

to be followed by an increase than by a further decline

in rates. However, given the Treasury's April 15 paydown

of $2.5 oillion maturing bills, it may be that bill rates

will remain for a time around their present levels.

In the Treasury bond market, prices edged irregularly

higher during the past three weeks as market participants

came to feel that the downward price movement of the

preceding several weeks had gone far enough and may have

been overdone for the time being. In this developing

environment, the Treasury's cash offer of $1.0 billion

16-month notes was very well received. Underlying the

change of trend were the favorable reports on the first

quarter balance of payments, together with a feeling that

the tax cut may not produce any early upsurge in business

activity. Commercial bank selling of intermediate

maturities slackened, and this, in combination with

modest investor buying, augmented on two days by System

purchases, tended to move prices higher over the interval.

While underlying market sentiment is less gloomy now than

at the time of the last meeting, it remains quite cautious

and dealers continue to hold a sizable net short position

in the over-5-year area.

The corporate and municipal markets have shared in

the improvement in sentiment that has developed recently.

The relatively light calendar of new corporate bond issues

has contributed to the strength in that market, while the

excellent response accorded two large municipal offerings

has restored an affirmative outlook in that area.

A more cheerful atmosphere also developed in the

bankers' acceptance market during the period. After

experiencing a sharp build-up in inventories during the

4/14/64

first half of the interval, dealers raised their rates

by 1/8 per cent effective April 2. Subsequently, net

investor demand brought these inventories sharply lower

again and effective today the dealers have returned

their rates to the levels prevailing three weeks ago.

The next major item on the Treasury's financing

calendar is the refunding of about $10.6 billion May 15

maturities--of which about $4.2 billion is publicly

held. The Treasury plans to meet with its advisory

groups on April 27 and 28 and will probably announce

the terms of the exchange on April 29 or 30. No other

major financing operation is expected until June, when

the Treasury may choose to get a start on its heavy

cash needs of the second half of the year. I should

note that the Treasury plans to continue to put out a

new issue of one-year bills each month and that it may

choose to raise perhaps $0.5 billion new money in

weekly bill auctions between now and the end of June.

Thereupon, upon motion duly made

and seconded, and by unanimous vote,

the open market transactions in Govern

ment securities and bankers' acceptances

during the period March 24 through April

13, 1964, 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. Noyes presented a statement on economic conditions as

follows:

We are all weary of the phrase "watchful waiting"

and also of the posture it describes. I shall propose

that we dispense with both despite the fact that we

still find ourselves in the position in which information

that is just beyond our reach seems highly important to

the System's basic policy responsibilities.

4/14/64

-10-

It may be helpful to remind the Committee again

that this situation is not abnormal, but is, in fact,

characteristic of a free enterprise economy operating

in response to market determined prices, which reflect

changes both in current conditions and expectations.

It is a rare thing indeed when we are able to foresee

clearly changes in, say, interest rates or prices of

commodities which have not already been fully reflected

in current market quotations. Uncertainty is a normal

and necessary condition to the effective functioning

of our type of free society. With the passage of time,

specific uncertainties are resolved, but others spring

up immediately to take their place. If this were not

the case, we would always be in the midst of either an

inflationary or deflationary spiral.

So . will not apologize for the fact that neither

the data about what happened in the first quarter of

the year, nor my analysis of it, will resolve your doubts

as to the future course of the economy.

We are now estimating that GNP in the first quarter

will be up about $7 or $8 billion--about a 1-1/4 per

cent increase, or an annual rate of 5 per cent--somewhat

less than in the fourth quarter of 1963. If we abstract

from fluctuations in the rate of inventory accumulation

and look just at final purchases of goods and services,

the rate of expansion is almost incredibly stable--up in

each recent quarter by about $9 or $10 billion, or at an

annual rate of around 7 per cent,

The production index went up another 5/lOths of a

point in March to 128.2. This makes the cumulative gain

for the quarter 1.2 percentage points on the index, or

almost exactly 1 per cent--a moderate figure.

Unemployment in March held at 5.4 per cent of the

total labor force. However, unemployment among adult

males dropped further to 3.9 per cent from 4.1 per cent

last month and 4.6 per cent a year ago.

Price movements continue to be the most difficult

area to report on satisfactorily. Most of the action in

recent weeks has been in nonferrous metals, with copper

in the spotlight. The very recent movements can be

attributed to the unsettled supply situation, but it

must also be borne in mind that the five metals in the

BLS daily industrial commodity index are now up 20 per

cent, and the entire group is up 8 per cent from a year

ago. On the other hand, the over-all wholesale price

index was stable during the first quarter, at a level

4/14/64

-11-

only 1/2 of 1 per cent above a year ago, and consumer

prices have not shown any tendency to depart from the

sluggish upward drift that has characterized the

behavior of this index in recent years.

Analysis of current performance in relation to

capacity is also a frustrating exercise. About all

that can be said with any assurance is that in the

case of almost everything but steel, we seem to be

running closer to capacity than a year ago--and that

in the case of steel we have considerably more slack

than we did when orders and deliveries were being

accelelated by strike expectations a year ago. Taken

altogether, this probably means that the price structure

is more vulnerable to demand pressures than it was

earlier in the expansion, but the fact that there is

less pressure on steel capacity today than a year ago

provides a very useful anchor to the windward.

It is always possible that either an unmistakable

cyclical upsurge or a softening may emerge in the

period ahead, but these now seem by far the least

likely possibilities. The most likely seems to be

that the economy will continue to exhibit, as it has

recently. many of the characteristics associatec in

the past with the expansionary phase of the business

cycle. If one feels these should be dampened by some

measure of monetary restraint, there is very little to

be said for delaying, in the hope of clearer evidence.

Similarly, if one feels that the present expansionary

movement should be encouraged--that it is, in fact,

what governmental policy has been seeking--then present

monetary policy should be positively accepted on its

merits--not simply carried forward by default through

As I believe

another period of "watchful waiting."

Governor Mitchell pointed out some time ago, if the

market senses that the System's posture is one of

waiting to pounce, this, in itself, creates a very

nervous and unsettled market condition.

By prearrangement with Mr. Koch, I will conclude

with a word about the Treasury financing calendar. As

it now stands, an even-keel policy would seem to be

called for from late April through most of May. There

is a good chance that the books on the May 15 refunding

will be open at the time of the next FOMC meeting.

Whether further Treasury financing in June would or

should take precedence over a change in System policy

4/14/64

-12-

at that time is a question which can only be settled

in the context of the time. All that can be said now

is that the Treasury would like to finance some of

its second-half cash needs outside the bill area,

and/or extend the maturity of the debt through an

advance refunding in June.

As a practical matter, the options that are open

can be stated fairly simply: Between now and the May

refunding the System can either maintain substantially

the present policy or move to a slightly less easy

policy--say, a somewhat lower free reserve target.

Only most urgent considerations, which do not appear

to exist, would justify a discount rate change between

now and the announcement of the refunding at the end of

the month. In either case, the System could pre-empt

time for a change in policy in late May or June, if

conditions warrant, although a change at that time would

undoubtedly reduce the chances of any Treasury financing

outside the bill area.

Mr. Koch made the following statement concerning financial

developments:

Since it is now possible to make fairly good

estimates of financial developments over the first

quarter of the year, it strikes me as an appropriate

time to step back a pace and see just how a monetary

policy designed to keep moneymarket ccnditions

relatively stable over this period, coupled with the

changing demands for funds, have been reflected in the

course of the basic indicators of policy--namely, bank

reserves, the money supply, bank credit, and interest

rates. For this purpose I have passed out to you this

morning a table we bring up to date periodically here

at the Board which summarizes recent developments in

selected indicators of monetary policy. This table,

as you will note, shows the daily average level of these

indicators in March, as well as their seasonally adjusted

annual rates of change for the following periods:

the

first quarter of 1964, the last half of 1963, the year

1963 as a whole, and the first quarter of 1963.

As for the most commonly used measures of aggregate

bank reserves, total reserves and required reserves

behind private deposits have increased at a slower rate

thus far this year than they did in 1963. Nonborrowed

reserves have risen at about the same pace.

4/14/64

-13-

Tapered growth since the turn of the year has also

characterized most measures of the economy's liquidity,

one of the two main channels through which monetary policy

affects real activity. The money supply narrowly defined,

for exanple, grew at a 3.3 per cent rate from December

through March, as compared with a 5.0 per cent rate in the

second half of 1963.

Tine and savings deposit expansion at commercial

banks was at about the same rate in the first quarter as

a whole as in the latter part of last year, but the rate

slackened markedly over the quarter. Saving and loan

association shareholding growth has also been less sharp

recently than earlier. Accumulation of savings at mutual

savings banks was at a substantially more rapid pace in

January, due mainly to higher rates paid by New York

mutuals but the pace dropped off considerably in

February and even more in March. In view of the tax cut

early in March, the reduced rate of growth in liquid

saving, coupled with the decline in retail sales, are

difficult to reconcile. The explanation may lie in

increased consumer purchases of AT&T stock and other

nonliquid investments.

The other main channel through which monetary policy

affects the economy is through the cost and availability

of credit and capital, particularly commercial bank

credit. The rate of increase in total loans and invest

ments of banks was 10.9 per cent in the first quarter of

1964 as compared with 8.0 per cent in the whole of 1963.

The recent percentage rise in this item has been larger

than that in demand and time deposits combined. The

differerce reflects in large part a substantial increase

in Government deposits from December to March. These

deposits are being drawn down abruptly in April, and for

this reason a more rapid rate of increase in private

deposits and the money supply is expected this month

than earlier in the year.

An examination of the character of recent bank

credit growth suggests that it is due more to banker

than to borrower initiative. Thus, business borrowing

from banks, the main demand-oriented category of bank

credit, has shown only a moderate growth recently,

whereas bank acquisitions of financial-type loans and

U. S. Government securities, the rates of growth of

which are more at the initiative of the banks themselves,

have been either stronger or about as strong recently as

in late 1963. Aggregate capital market financing is

4/14/64

-14-

expected to be very large in April, sparked mainly by

the huge AT&T stock issue. For the year to date,

however, the volume of publicly-offered bonds has been

quite moderate. The calendar of future issues scheduled

to date also continues moderate for this time of year,

normally a period of relatively heavy capital market

financing.

Turning to the cost of credit, most categories of

interest rates averaged only a little higher in March

than in December. From mid-February co late March,

however, rates on intermediate- and long-term securities

rose considerably. In the last week or so, rates moved

back down a little, mainly in the case of short- and

intermediate-term issues.

The relatively moderate demands for both bank credit

and bond financing suggest that the recent interest rate

rise was due mainly to expectations lather than to

stepped-up demands for borrowed funds. Two factors seem

to me to have been primarily responsible. First, dealers,

counting on rather immediate upward rate pressures, went

short in their longer term Government security positions.

Secondly, banks and possibly other investors, thinking

that rates would no doubt rise sometime this year even

if not in the immediate future, tended to shorten up

their portfolios. The most recent decrease in rates

suggests that more uncertainty about the course of

interest rates has now developed, at least as to the

near-terr future, but a substantial bond rally is unlikely.

What does all this suggest as to the most appropriate

posture for monetary policy in the immediate weeks ahead?

It is difficult to find in recent domestic financial

developments in and of themselves much cause for a change

in policy. The seasonally adjusted annual rates of

growth of most of the basic indicators of policy have

been moderate and strike me as sustainable and appropriate

in light of current economic developments. The relatively

high recent rate of over-all bank credit expansion, plus

the large volume continuing to flow abroad, might give

one cause to doubt this judgment. But it should be noted

that the sharper over-all rate is likely to prove

temporary, having been pushed up partly by bank acquisi

tions of Treasury securities in recent financings and by

an accompanying short-lived build-up in Government

deposits. Moreover, the flow of bank credit abroad

might more appropriately be curbed by an extension of

the interest equalization tax proposal than by adoption

-15-

4/14/64

of a less stimulative general monetary policy. Also,

one must constantly remind himself that bank credit

expansion over the last couple of years has reflected

a higher proportion of investment of real savings as

compared to demand deposit creation than it did earlier.

Nor should the February and March increase in

intermediate- and long-term interest rates be interpreted

as justifying, much less dictating, either a less easy

open market policy or a higher discount rate. True,

some of the expectations for better business and increased

credit demands that gave rise to the interest rate rise

may come true, but it would seem to be much more

appropriate for monetary policy to wait for market

validation of such expectations than to attempt to

validate them through either open market or discount

rate action. Such a course of policy would not only

seem to make more economic sense, but it could also be

justified more convincingly to our many watchful

observers both inside and outside of Washington.

Mr. Furth presented a statement on the balance of payments

as follows:

The "flash" report for March indicates a payments

surplus for the month of $380 million, after deducting

German and Mexican advance payments estimated at $90

million. The surplus for the first quarter (after

deducting "special" receipts) was about $225 million

before, and perhaps $50 million after, seasonal

adjustment. This would be the first quarterly surplus

since the fall of 1957, and it would make the cumulative

deficits for the past two, three, four, and five quarters

the smallest since 1958. The tentative data for the first

week of April, adjusted for seasonal movements of volatile

funds, suggest maintenance of the first-quarter position.

This favorable result was apparently due to four

factors: a high level of exports, attributed mainly to

continued full employment in most foreign industrial

countries and some improvement in the payments position

of some less developed countries; a moderate level of

imports, attributed largely to the continued sluggish

rise in U. S. industrial production; near-balance in the

flows of portfolio capital, attributed mainly to the

effects of the proposed interest equalization tax, and

probably also in flows of recorded and unrecorded

4/14/64

-16-

short-term funds; and a decline in net Government

expenditures abroad, attributed in part to some

nonrecurrent repayments. The result was achieved in

the face of one unfavorable factor, however:

a near

record volume of bank lending to foreigners, which in

January-February reached an annual rate in excess of

$2 billion.

The high level of long-term bank loans to foreigners

may be related in part to the cessation of foreign bond

issues. But contrary to an opinion reportedly

prevalent in the market, the short-term loans are

overwhelmingly being made to the usual customers of U. S.

banks, mainly Japan, and their size seems to be

connected with the large volume of wocld exports.

Most observers believe that the rest of the year

will see a higher deficit rate. In fact, statisticians

of the Commerce Department believe that the second half

of the year will again produce a deficit at an annual

rate of nearly $2-1/2 billion. They assume that exports

will not rise further but that imports will increase by

more than $2 billion annual rate, or about one-eighth,

reflecting both rising demand connected with the

expected domestic expansion following the tax cut and

the recent increase in nonferrous metal and coffee

prices. They also assume that Government expenditures

for economic aid will increase again to last year's

high level; and that both portfolio investment funds

and unrecorded funds will again flow out. But they also

believe that this deterioration on Government, portfolio,

and short-term funds accounts would be approximately

offset by a reduction in the increase in bank lending to

foreigners. On balance, therefore, they foresee an

over-all deterioration in the U. S. payments position

about equal to the rise in U. S. imports.

Some of these assumptions appear doubtful. For

instance, I should believe that the Administration would

be able to keep the net outflow of aid funds from

rising--even if it does not succeed in achieving a

further reduction. And I should also believe that the

expected rise in U. S. economic activity would not only

raise imports but also reduce the net outflow of direct

investments; and that the favorable payments results of

the first quarter would have a significant confidence

effect, leading to a further reflux rather than to a

renewed outflow of unrecorded U. S. funds.

4/14/64

-17-

Under these assumptions, we might expect that the

over-all U. S. payments balance would indeed deteriorate

somewhat, but hardly by more than $1 billion annual

rate; and we might be so bold as to forecast a total

payments deficit for 1964 of less than $1 billion, as

compared with the Commerce figure of more than $2 billion.

If foreign private dollar holdings were to rise in

1964 as much as in 1963, a deficit of not more than $1

billion could be entirely financed by that rise, and

the "official settlements" balance would then be in

equilibrium. While such an expectation would be too

optimistic, it might be reasonable to assume some rise

in official dollar holdings of less developed countries,

which are likely to gain reserves, at least temporarily,

because of the expected improvement in their terms of

trade. If this were to happen, U. S. gold holdings could

remain intact, and industrial countries with a large

dollar component in their reserves would not be forced

to acquire unwanted further official dollar assets. In

other words, even with a conventionally calculated

deficit in the neighborhooc of $1 billion, the inter

national payments mechanism could remain undisturbed,

and confidence in the stability of the system, and in

that of its basic currency, the dollar, could continue

to increase.

This appraisal seems consistent with the recent

behavior of international reserves. U. S. gold reserves

have shown a recovery even more remarkable than the

improvement in the U. S. payments balance, thanks in

part to the large volume of Soviet sales; U. S. gold

holdings are again about as large as they were last

July. And more important from an economic though not

from a psychological point of view, the "chronic"

surplus countries, France, Germany, and Switzerland,

aparently have, at least temporarily, experienced a

significant decline in the rate of their reserve

accumulation since the Italian stabilization in mid

March. In contrast, the countries that had currency

troubles earlier this year, Britain and Italy, seem to

have been adding modest amounts to their reserves.

it would be unwarranted to believe

To sum up:

that our payments troubles are over--the situation

still is far too unsettled. But it would be equally

unwarrarted at this time to consider all of the recent

progress as temporary, analogous to the seeming

improvements in early 1961 (when U. S. imports were

4/14/64

-18-

at unsustainably low levels on account of the recession)

or in early 1962 (when the inflow of funds from Canada

disguised a continued large basic deficit).

We can't

predict that the rest of the year will remain good, but

neither can we predict that it wll turn bad.

Following discussion based on the staff presentations,

principally for the purpose of obtaining clarification and

amplification of some of the material contained therein, Chairman

Martin called for the usual go-around of comments and views on

economic conditions and monetary policy beginning with Mr. Treiber.

who presented the following statement:

As the reports so far this morning have

indicated, the business situation is essentially the

same as it was at the time of the last meeting of the

Committee.

The advance in business activity continues

at a moderate pace. Business sentiment continues

optimistic. Conceivably the present boyancy could

become tempered by the current and prospective cuts in

defense spending after several years of increases; but

the cutbacks in procurement are likely to have more

effect, a: least initially, on specific communities and

regions than on the nation as a whole.

The over-all unemployment rate in March remained

unchanged at 5.4 per cent. The unemployment rate for

married men edged downward for the fourth month in a

row and returned to its recent low of 2.9 per cent. On

the other hand, there was a rise in unemployment among

teen-agers.

Desp.te the flurry of announced price increases

for individual commodities, the broad price indices have

continued to show stability. Purchasing agents apparently

expect that the recent firming of prices will continue

but that the increases will be held within bounds. The

fairly widespread increases in raw industrial commodity

prices can be traced, in part, to strong demand in

foreign industrialized countries; as yet such increases

have not significantly affected our general price

indices. The major tests lie ahead. These include (a)

labor negotiations in key sectors and their effects on

4/14/64

-19-

costs; (b) price policies of business concerns as various

industries approach capacity production; and (c) the

cumulative impact of the tax cut on consumer demand.

Ma:ch witnessed an unusually strong expansion of

bank credit, even if the adjustment for seasonal

influences may be too high. Bank loans rose sharply.

There were large demands for funds by securities brokers

and dealers and by finance companies. The demands of

both were related, in part, to the withdrawal of

corporate funds (associated with the March 15 tax date)

from repurchase agreements, on the one hand, and finance

company paper, on the other. Business loan demand was

on the weak side. The fact that corporations in the

aggregate did not have to turn, to any considerable

extent, to banks to cover their cash needs for the tax

dates is indicative of their large liquidity reserves.

The seasonally adjusted money supply showed only a

modest increase in March. The slow rise, despite the

sharp advances in bank credit, is largely attributable

to the large increase in U. S. Government deposits. Time

deposits also continued their rise, although at a slower

rate than in the preceding 12 months.

The preliminary balance of payments figures for the

first quarter of 1964 are very encouraging. We should

not, however, let this favorable development make us

over-confident, since the improvement may well turn out

to be only temporary. Future quarters might well see a

decline in the trade surplus and prospective new foreign

security issues are already larger than the actual

figure for the first quarter.

Sparked by a heavy but probably temporary demand in

recent weeks, Treasury bill rates have moved somewhat

lower and into a wider range. The market rate on three

month Treasury bills has been below the discount rate

for the first time since early December. The Treasury

has indicated that it will probably add moderately to

the supply of bills by increasing the weekly Treasury

bill offerings during the remainder of the year. As the

current special demand factors recede and the supply of

bills rises, there is reason to believe that Treasury

bill rates will rise again. While it is good to see

greater flexibility in Treasury bill rates, a continu

ation of such rates below the discount rate could lead

to misinterpretation, especially abroad, of monetary

policy. International capital movements are influenced

greatly by the confidence and attitudes of foreigners.

-20-

4/14/64

It would be unfortunate if foreigners were to come to

feel that we are not fully committed to the defense of

the dollar in the light of the continuing balance of

payments problem and the rising trend of interest rates

in leading foreign countries.

Our recent balance of payments experience does not

call for movement at this time toward less ease. Yet

we must bear in mind that restrictive credit action

abroad, including interest rate increases, could make

necessary defensive action here at some future time.

On the domestic front, the business advance is

continuing at a moderate pace, with few concrete signs

of immediate inflationary dangers. The domestic

situation calls for continuing alertness to developments,

but not for immediate action toward less ease. Clearly,

neither the international nor the domestic situation

calls for more ease.

Thus, it seems to me, it is desirable to continue

our current monetary policy and to aim at a firm money

market, with the Federal funds rate fairly consistently

at 3-1/2 per cent, and with free reserves generally in

the $50 million to $150 million (or a slightly wider)

range. While flexibility in Treasury bill rates is

desirable and there should be no harm in having, from

time to time, rates on three-month Treasury bills below

the discount rate, I would trust that the rates would

also be above the discount rate in the 3.50-3.60 range

a good part of the time.

Mr. Treiber felt that the Secretariat's memorandum of April

8, 1964. rega-ding the form and content of the current economic

policy directive had done a good job of setting out the major

issues and difficulties involved in formulating such a directive.

In particular, there was clear recognition of the difficulty of

simultaneously specifying long-term goals and workable short-term

targets in a way that was informative to the public after the event

without being too inflexible for the Accourt Management in

day-to-day operations.

its

He concurred in the conclusion that, at

-21

4/14/64

least for the time being, the Account Manager should be instructed

in terms of "money market variables" rather than in terms of inter

mediate or longer range objectives relating to bank reserves, bank

credit, and the money supply.

Important as these latter quantities

were, they were not really workable as short-term targets.

Rather,

they must be observed and studied as guides or reference points for

modification of the objectives set forth in terms of money market

conditions.

In issuing an instruction in terms of money market conditions,

Mr. Treiber said, it would seem to him unwise to use quantitative

targets, whether expressed as levels or ranges.

The basic difficulty

was that policy must be executed in a dynamic market environment,

the elements of which were unpredictable and in the short run often

uncontrollable.

There was thus no assurance that the Manager could

always hit the targets specified by the Committee.

Furthermore,

given the unpredictable combinations in which money market variables

may occur, there was no assurance that it would always be desirable

for the Manager to attempt to hit the targets specified by the

Committee.

It would seem preferable to defer to the unpredictable,

uncontrollable nature of many of the short-term variables with

which the Desk dealt, Mr. Treiber continued, and to cast the

second paragraph of the current policy directive in language

-22

4/14/64

sufficiently broad to give the Manager flexibility to adapt

operations to changing circumstances in accordance with his

judgment of the Committee's intent.

As a practical matter, Mr. Treiber could foresee great

difficulty for

the Committee in getting together on a particular

range of free reserves or Treasury bill rates or both.

It was

hard enough to agree on such words as "slight" or "moderate".

Mr. Treiber then turned to the alternative drafts of

possible current economic policy directives that had been distri

buted by the Secretary for the Committee's consideration under date

of April 13, 1964.1 /

For the first paragraph of the directive, he preferred

alternative A

which seemed to him to be a more straightforward

statement of .he Committee's policy position than alternative B,

but he presented

certain specific language suggestions.

Also, he

questioned the reference to the "slower growth of aggregate bank

reserves and the money supply."

As for the second paragraph, Mr.

Treiber preferred alternative B for the reasons he had mentioned

previously.

He questioned, however, the inclusion of the second

1/ These alternative drafts of paragraphs cne and two of the

directive had been developed by the Secretariat in the light of the

staff memorandum with regard to the problems presented by the form

of the directive, distributed under date of April 8, 1964. Copies

of the alternative drafts of suggested directives are appended to

these minutes as Attachment A.

-23

4/14/64

sentence.

If the first paragraph stated that it was the

Committee's current policy to accommodate moderate growth in the

reserve base, bank credit, and the money supply, the second sentence

of alternative B for the second paragraph would seem redundant; at

the same time it would seem incomplete because of failure to refer

to the other factors mentioned in the first paragraph.

Mr. Shuford said that in recent months economic activity

in the Eighth District had continued to expand.

Employment in the

District's major labor markets had risen significantly, with the

largest gains in the construction field.

Total bank deposits rose

at about an 8 per cent annual rate from December to March.

On the

other hand, industrial use of electric power and business loans of

reporting banks were about unchanged.

As indicated by the reports this morning, Mr. Shuford con

tinued, national economic conditions continued to be quite favorable.

Activity had been at a high level without creating thus far any

obvious imbalances in production, employment, and incomes.

The

economy was operating in a framework of relative price stability,

and the U. S. payments balance had continued to improve.

As to policy, Mr. Shuford said his position was quite

similar to that outlined by Mr. Treiber as far as the immediate

posture was concerned.

Certainly he would not want to see any more

ease, and he had an underlying inclination toward less ease.

At

-24

4/14/64

the same time he would not favor any overt tightening as of today.

The recent decline in interest rates appeared to have resulted from

a temporary falling off in the demand for funds relative to the

supply.

Thus, it seemed to him that the rate fluctuation had been

appropriate.

However, he would not want to see rates decline

further and, as Mr. Treiber had indicated, it appeared that they

probably would not remain at the lower levels for any appreciable

time.

His preference would be for a bill rate between 3.50 and

3.60 per cent.

With respect to the money supply, he would favor a

continuation of the rate of increase that had prevailed during the

past quarter, or possibly a little less; he was inclined to believe,

on the basis of the seasonal pattern that had prevailed since 1960,

that the money supply perhaps had increased at somewhat more than

the indicated 2.7 or 3.0 per cent rate, but a continued rate of

increase of

about this order would, it seemed to him, be appropriate

for the time being.

With respect to the form of the directive, Mr. Shuford said

he was glad to receive the document sent out by the Secretariat bu:

had not had time to study it adequately.

Neither had he had time

to relate fully the points discussed in the document to the

alternative draft directives.

The present directive would seem

quite satisfactory for the moment, and he would be willing to renew

it for the time being, eliminating the reference to Treasury

-25

4/14/64

financing.

However, he would be willing to accept alternative

draft A for the first paragraph.

While he would have selected

alternative A for the second paragraph, he would not object to

the broader alternative B for that paragrap, if the majority

sentiment was in that direction.

Mr. Bopp reported that although the pace of economic

activity in the Third District had not accelerated greatly, there

had been discernible improvement.

awards had spurted ahead.

Nonresidential construction

Unemployment was declining slowly but

rather steadily; in each recent month a majority of the District's

labor markets had reported decreases.

showed no exceptional advances.

Store sales, however,

The Reserve Bank's capital spend

ing survey showed substantial upward revisions of the estimates

for 1964 that were reported last fall,

Basic reserve positions of reserve city banks registered a

deficit averaging around $40 million for the three weeks ended

April 1.

this year.

This represented the tightest three-week period so far

The deficit was financed almost entirely through the

Federal funds market.

Borrowing at the discount window by both

reserve city and country banks continued to be relatively light.

As for policy, Mr. Bopp felt that this was a strategic

period in which it would be important not to give misleading

signals.

Economic analysts were groping for clues as to the

-26

4/14/64

effects of the tax cut, and they would continue to do so in the

period ahead.

Despite some improvement recently, the Government

securities market seemed poised for a general increase in interest

rates.

Perhaps the tax cut would prove to be the very strong

stimulus that many expected, Mr. Bopp said, and perhaps a vigorous

upswing in activity would bring on higher interest rates.

It was

by no means certain right now that this would happen, however.

In

the present situation, the System should do nothing either to

confirm or deny the validity of current expectations.

Until there

was more conclusive evidence of their validity, policy should aim

for about the same conditions of reserve availability and about the

same levels of interest rates as had prevailed recently.

He would

make no change in the discount rate.

The directive should be written in terms of money market

conditions, Mr. Bopp believed.

Of the draft alternatives that had

been distributed for consideration at this meeting, he would prefer

alternative B for both paragraphs.

Mr. Hickman observed that business continued to move ahead.

The Cleveland Bank's directors and other businessmen with whom he

and his associates were in contact were increasingly optimistic

about the outlook.

Further evidence to this effect was provided by

reports from 21 Fourth District business economists who met at the

Reserve Bank early this month.

Almost without exception, they

-27

4/14/64

emphasized current high rates of activity, the forward movement of

the individual industries they represented, and the generally

favorable outlook.

On the industrial production index, the median

forecast of the group was for a two-point increase for the second

quarter and a one-point increase for each of the third and fourth

quarters.

Only two of the entire group predicted any decline this

year.

Representatives of the automobile ..

ndustry and its suppliers

expected domestic production and sales of cars in the neighborhood

of 7.6 to 7.8 million in 1964, barring a strike.

If a strike should

occur, there would be a serious shortage o. cars, which probably

could not be made up this year.

There was general agreement in the

group that labor demands would be heavy and negotiations tough.

Representatives of the steel industry felt that inventories

were in reasonable balance with orders and shipments, and that the

outlook for steel was good.

Their forecasts of ingot tons were

similar to the one he had reported at the preceding meeting of this

Committee, namely, 60 million ingot tons fcr the first half and

about 55 million tons for the second half, for a total of 115 million

tons for the year.

The decline in steel output during the second

half would probably be seasonal; it was not expected to have any

material effect on the Board's index of industrial production.

-28

4/14/64

Among representatives of the machinery industries, there

was general agreement that the impact of the projected rise in

capital expenditures was already being felt in new orders for

machinery.

At the Cleveland Bank's Board meeting on Thursday, one

of the directors, who heads a major machine tool firm, indicated

that new orders were beginning to reflect increased emphasis on

plant expansion.

He also pointed out that although shipments had

expanded considerably, the pace of new orders had caused the back

log to build up and delivery dates to be stretched out.

Also present at the economists' meeting were representatives

of the rubber, nonferrous metals, glass, paper, utilities, railroad,

and petroleum industries.

satisfaction

outlook.

Almost without .xception, they expressed

with the present state of demand and the business

While there was evidence of price firming in a number of

lines, particularly in nonferrous metals and chemicals, the group

seemed to feel that most increases represented partial recovery

from previous softness, and were not as yet inflationary.

So far as open market operations were concerned, Mr. Hickman

thought that the tone of the market had been too easy in the past

three weeks, and that the level of free reserves had been consist

ently above what he considered to be the System's objectives.

Although part of this was due to misses in reserve projections, he

could not escape the feeling that errors were permitted to fall

-29

4/14/64

predominantly on the side of ease.

Earlier this year the

Committee appeared to be operating with a free reserve target of

$100 million, plus or minus $50 million (or at least the statistics

were consistent with that assumption).

Now the Desk appeared to

have shifted into a position where small d:..fferences below $100

million were resisted vigorously, while on the other side free

reserves had been allowed to drift as high as $240 million.

This

implied to Mr. Hickman a shift in the target from about $100 million

to somewhere around $150 million.

In view of current business

optimism, the burgeoning reserves of the banking system, and the

ever present threat of adverse capital flows to other countries,

he thought that this easing was inconsistent with the best interests

of the U. S. economy.

So far as techniques of open market operations were

concerned, Mr. Hickman continued to feel that the Account should

operate mainly in short-term securities, with occasional ventures

into the long-term area when it could be done without altering the

yield curve or generating suspicions that the System was influencing

the market for the purpose of aiding Treasury financing.

The

purchase of coupon issues for System account last week reinforced

an upward drift in bond prices that had begun earlier.

This was

done at a time when dealers had a substantial short position in

long bonds.

Observers were led to believe that the System was

4/14/64

-30

preparing the market for the next Treasury refunding operation.

Evidence of this, Mr. Hickman said, was provided by the following

comment that appeared in a leading New York newspaper:

"Because

the advance was caused primarily by Federal Reserve buying, several

dealers described the Treasury market as 'artificially strong.'

One noted that, if prices remained at improved levels, the Govern

ment would have a more attractive market in which to offer new

securities. . .in two or three weeks."

In summary, Mr. Hickman thought that the Committee should

shoot for a free reserve target of $100 million, with minor, but

equally likely, variations on either side of the target.

In

addition, he thought the Desk should restrict its operations to

the short-term end of the market whenever the time was sufficiently

close to a major Treasury financing to raise doubts as to System

intentions.

In his opinion, monetary policy in the past three

weeks had accommodated more than a "moderate growth" in the

reserve base and had failed to maintain "conditions in the money

market that would contribute to continued improvement in the

capital account of the U. S. balance of payments."

It also, in

his opinion, did not give adequate weight to the possible effects

of the tax cut and to the effects of recent increases in money rates

abroad on international capital flows.

In short, he considered

that monetary policy since the last Committee meeting had been

4/14/64

-31

inconsistent with the directive; that either the directive should

be changed or open market operations should be revised to provide

for less ease.

Mr. Hickman said he thought the staff memorandum on the

directive was excellent.

He also liked the efforts that had been

made on the drafting of a current economic policy directive for

this meeting.

He would choose alternative A for the first paragraph

and B for the second, but with certain revisions.

In the first

paragraph, he would delete the word "progressive" before "stimulus,"

since he was not sure that the tax cut would have a progressively

stimulative effect.

He also felt that the Committee should look

at more current data than changes over the first quarter of the

year in formulating monetary policy for the next three weeks; in

particular, he was concerned about the gearing of near-term policy

to a slower growth of aggregate bank reserves in the first quarter

when, in fact, bank reserves had increased sharply during the past

few weeks.

deleted.

He also thought the money supply reference should be

In alternative B for the second paragraph he would delete

the sentence having to do with aggregate measures because he did

not believe they were within the control of the Desk over periods

as short as three weeks.

Also, as he had indicated previously, he

felt that conditions in the money market since the last meeting

reflected excessive ease.

-32-

4/14/64

Mr. Daane said he would recommend "no change' in policy

at this time, for the reasons given by Mr. Treiber and others.

With reference to the posture of the System as reflected in the

operations of the Desk, he felt that the Account Management had

succeeded in being helpful in a difficult period, and that the

Desk's operations clearly reflected the consensus of the Committee

at the March 24 meeting.

continued.

He would hope that this consensus

He shared the opinion that the balance of payments

situation should still be viewed with some degree of caution; the

first-quarter figures seemed almost too gocd to be true.

They

gave the Commiittee some opportunity, perhaps, to reassure the

market again that the System was not sitting right on the verge of

a pouncing operation and did not call for any change in policy on

either side of the fence.

As to the directive, Mr. Daane said that he, too, was

impressed with

the staff memorandum, but he had not had an

opportunity to study it fully.

meeting

On the specific directive for this

he doubted, like Mr. Shuford, that a great deal would be

gained by changing the directive.

If it were to be changed, he

would go along with alternative A for the first paragraph, with

the changes suggested, and with alternative B for the second

paragraph, subscribing fully to Mr. Treibel's comment that it was

unwise to try to pinpoint targets in view of the difficulties that

enter into the Manager's operations.

-33-

4/14/64

Mr. Mitchell said that he agreed substantially with what

Mr. Bopp had said about appropriate Committee policy.

On the

question whether the Desk's operations in the past three weeks had

departed from the Committee's objectives, he thought they had not.

He agreed with Mr. Daane that the developments that had occurred

were needed to correct erroneous impressions that had been growing

earlier. A situation had been achieved that gave the Committee a

much better posture from which to move.

On the directive, Mr. Mitchell liked alternative B for the

first paragraph, except for the sentence having to do with interest

rate advances abroad and their possibly adverse effects on the

capital account of the payments balance.

This sentence seemed to

him to be included in the draft directive without sufficient back

ground of fact.

Also, he did not think the draft directive reflected

the full extent of the balance of payments improvement that was

taking place.

But he would like alternative B with that deletion,

and he liked alternative A for the second paragraph.

He thought

the Comnittee must take a more responsible position in the

directions that it gave to the Manager.

The Manager did hear the

discussions, and he knew what the Committee was thinking about,

but if the impression should grow, because of the wording of the

directive, that the Manager dictated policy, a real public relations

problem would be irvolved.

Actually, in many cases the Manager was,

-34

4/14/64

in effect, told by the Committee to start conditioning the market

for a policy change, but this did not show in the directive.

He

did not believe it was the best course for the Committee to seem

to be giving the Manager too much leeway.

Moreover, it was the

Committee's responsibility to give the Manager an unequivocal

directive that was internally consistent.

This particular draft

at least recognized the possibility of giving the Manager definite,

consistent instructions.

Mr. Shepardson commented that. the apparent improvement in

the balance of payments naturally was encouraging.

Of course, as

He

others had indicated, the improvement might not be too solid.

felt quite sure that the recent gain in exports of agricultural

commodities would not be repeated continually.

Further, there was

quite an outflow of funds through bank loans, which was indicative

of excessive funds seeking a profitable outlet.

In short, he was

not quite as optimistic about the balance of payments as some others

appeared to be.

Domestically, Mr. Shepardson said, everyone recognized that

there had not been much indication thus far as to the effects of

the tax cut.

On the other hand, there were indications of some

price movements in commodities.

As far as consumer prices were

concerned, there had been a continuing upward crawl.

Some segments

of production were approaching capacity; generally speaking, the

-35

4/14/64

margin of excess capacity had been reduced significantly.

Thus,

it seemed to him the economy was close to a point where there could

be significant price pressures.

The difficulty the Committee faced

was the timing and the extent of price movements.

There had been

admonitions on the side of waiting until everything was on the board

for one to see.

In his opinion, however, that would be too late;

the damage would have been done.

Drastic efforts would then have

to be made to curb the excesses or they would get out of hand.

He

knew there was Governmental talk of keeping wage and price advances

within bounds, but he questioned just howmuch pressure actually

would be exerted if increases began to manifest themselves.

It seemed to Mr. Shepardson there already were enough

upward pressures on prices or threat of such pressures that it

would be appropriate for the Committee to make some move toward

less ease at this time; certainly not a drastic move, but one that

would put it in a better position--a more flexible position--to

meet such developments as might occur in the next few months and

to control the situation that he felt lay ahead.

If such develop

ments did not occur, the Committee would not be in a position from

which it could not back off.

In summary, he would favor moving

toward somewhat less ease than had prevailed with a view to

restraining some of the excesses that he thought were developing

already.

-36

4/14/64

As to the directive alternatives, Mr. Shepardson said he

had no comment pending further study.

Mr. Mills said that although he was encouraged by the

Committee's efforts to develop an improved form of directive, he

deplored the fact that it engaged so much in a battle of words

about form rather than substance.

The difficulty would be sur

mounted, in his opinion, if the Committee would fasten its

directive to the statutory instructions under which open market

operations must be administered.

The problems of the directive

were susceptible of solution through adherence to such instructions,

by virtue of which appropriate monetary and credit policies would

be adopted.

In amplification of this view, Mr. Mills presented

the following statement:

Subsection 3 of section 12(a) of the Federal Reserve

Act prescribes that the time, character, and volume of

all purchases and sales of U. S. Government and other

securities eligible for engagement by the Federal Open

Market Committee shall be governed with a view to

accommodating commerce and business and with regard to

their bearing upon the general credit situation of the

country. Although some latitude in interpreting the

statute is permissible, the conduct of open market

operations for many months past has tended to overstep

the statutory directive under which it functions. That

fact is revealed in the second paragraph of the current

economic policy directive issued to the Federal Reserve

Bank of New York in which it is set out that,

". . .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."

4/14/64

-37-

In effect, the directive is primarily an in:erest

rate directive, with the accommodation of commerce and

business relegated to a secondary position. That is

clearly so inasmuch as the maintenance of about the

same conditions in the money market implies that

policy actions should be designed to preserve the

existing interest rate structure, with the accommoda

tion of expansion in aggregate bank reserves to be

permitted only if accomplished without: unsettling the

level of interest rates. In effect, a literal

interpretation of the present directive sacrifices the

propriety of fostering a reasonable expansion in bank

credit to an interest rate objective. But conceding

that the level of interest rates has a bearing upon

the general credit situation of the country, open

market policies directed at encouraging or discouraging

the expansion of commercial bank credit can naturally

produce an interest rate structure capable of

influencing national credit conditions in the

constructive direction intended by open market policy

actions without having given precedence to a strictly

interest rate policy objective. Viewed in this way,

the Committee should revamp its reasoning and henceforth

give first place to credit rather than interest rate

considerations when issuing instructions to the Manager

of the System Open Market Account. A change such as

this in the Committee's policy instructions would comply

with the statutory directive governing its activities

and would also have the ultimately beneficial result of

freeing the U. S. Government securities market from

artificial manipulations and the domination of official

control, all to the end that the financial markets

world again respond freely to natural factors.

The tangible difficulty of attempting to artificially

control the U. S. Government securities market clearly is

revealed in the Tax and Loan Account privileges accorded

by the Treasury in its recent offerings of 3-7/8 per cent

notes and one-year Treasury bills, and which involved the

necessity of supplying additional reserves in support of

commercial bank acquisitions of these securities. This

provision of reserves is somewhat in contradiction to the

theory of maintaining existing conditions in the money

market, at least if the reserves so injected are permitted

to remain at the disposal of the commercial banks follow

ing securities divestments subsequent to their original

underwriting transactions. The reserves supplied to assist

-38

4/14/64

the Treasury's financing operation can, of course, be

withdrawn at a later date in order to maintain condi

tions in the money market in their original posture.

However, the over-all effect of first supplying and

then withdrawing reserves for purposes unrelated to

general credit conditions in the economy would further

confirm the investor community in its belief that the

Federal authorities were unalterably won over to a

policy of artificially controlling the U. S. Government

securities market through an interest rate pegging

program.

As to the Committee's current position, Mr. Mills said the

statistical record of the past three weeks on the supply of reserves

and interest rate movements, and the market reactions thereto,

reflected what he regarded as evidence of a monetary and credit

policy consistent with current economic conditions.

He would hope

for a relative continuance of similar financial factors during the

time until the next meeting of the Committee.

He had no comment

on the draft directives; as he had indicated, he thought they were

off on the wrong foot.

Mr. Wayne reported that further gains continued to

characterize Fifth District business activity.

indicators were all at or near record levels.

showed quite a sharp rise.

The broad statistical

Bank debits for March

Insured unemployment had continued to

decline more than seasonally, optimism remained high among the

Reserve Bank's business contacts, and durable goods manufacturers

responding to the Bank's recent survey reported increases in new

orders, shipments, employment, and average weekly hours.

-39

4/14/64

Uncertainties, however, continued to mark some sectors of

nondurables that were especially important to the Fifth District.

Federal cigarette tax collections in March were 9 per cent lower

than a year ago despite a 10 per cent rise from February, but

most cigarette plants were again operating full time, with a few

on overtime.

The one-price cotton bill, now enacted into law, came up

for discussion at the joint directors' meeting held last week at

Several directors speaking from first-hand

the Charlotte Branch.

knowledge said that the uncertainties of recent weeks had com

pletely disrupted some sectors of the market for cotton goods,

even to the point of causing temporary shutdowns of finishing

operations, and that these uncertainties, now stemming from the

discretionary powers of the Department of Agriculture as well as

from the unpredictable behavior of buyers and sellers, were still

a long way from being resolved.

The District's already disappointirg agricultural prospects

suffered another blow when freezing weather extensively damaged

fruit and vegetable crops, particularly in the Carolinas.

As Mr. Wayne interpreted the national situation, it was

fully as good and perhaps even stronger than the Fifth District

picture.

Evidence of increasing strength in capital outlays

continued to mount.

The profit picture remained good, cash flow

-40

4/14/64

was running at record levels, the various capital spending surveys

were quite encouraging, machine tool orders were setting a furious

pace, and manufacturers' inventories remained at a low level in

relation to sales.

Construction activity

with a large backlog of contract awards.

was at a record level,

Both the level of con

struction activity and the big upsurge in capital outlays were

almost, if net entirely, unprecedented at this stage of the cycle.

Employment continued to rise, and the country might now be making

some dent in the ranks of the unemployed.

were also on the plus side.

Most other indicators

The disappointing pace of retail sales

following the tax cut did pose some questions, but even that might

be a statist:cal quirk.

Mr. Wayne concluded that these signs added up simply to

strength and not to inflaticn.

upward pressure at all.

Wholesale prices still showed no

There had been scattered price rises but

also some reductions, as in the case of au:omobile tires and

stainless steel.

Even the prices of sensitive industrial material,

frequently a good leading indicator, had shown a scant 0.5 per cent

rise since December--quite a small movement

for this index.

Further evidence of a stable price situation was provided by the

recent conclusion of the National Association of Purchasing Agents

that "Business is good and volume is high, but capacity is ample

and a buyers' market prevails."

Upward price pressures might

-41

4/14/64

develop at any time, especially if there were significant wage

increases following the bargaining rounds this summer, but this

possibility should not be a factor in Committee policy at the mo

ment.

In view of the present price situation and the improving

balance of payments situation, he saw no reason for changing the

posture of Committee policy from what had prevailed for the past

several weeks.

With regard to the directive, Mr. Wayne concurred with the

views of Mr. Treiber as to the measures it would be appropriate to

employ in giving instructions to the Account Manager.

He considered

the memorandum prepared by the staff timely and well done.

As to

the draft directives suggested for consideration at this meeting,

he would prefer alternative A for the first paragraph and alternative

B for the second paragraph.

He would not change the discount rate

at this time.

Mr. Clay observed that economic activity appeared to

continue in the same general pattern that had prevailed throughout

much of this business upswing.

The trend was moderately upward,

most resources, were in ample supply, and the over-all price

situation was essentially stable.

The appropriate monetary policy, Mr. Clay suggested, had to

be found in the record of economic developments and not in the

knowledge that income taxes had been cut.

Considering what was

4/14/64

-42-

known about the economy, monetary policy should continue in a

manner that ccnformed to the Committee's objectives in recent

months.

This was basically a policy of credit expansion with a

view to facilitating employment and economic growth.

More

specifically, it should be the Committee's aim to provide reserve

availability so that commercial bank credit could show a moderate

rate of growth on a seasonally adjusted basis.

Money market

conditions of recent weeks presumably would be consistent with

such a goal, and the international payments situation should

permit a continuation of the greater degree of flexibility in

short-term interest rates that had prevailed recently.

Some change would need to be made in the first paragraph

of the current economic policy directive, Mr. Clay said, at least

to delete the reference to Treasury financing.

If a new wording

was adopted, alternative B of the staff drafts for both the first

and second paragraphs appeared satisfactory.

There was some

attraction to the idea of more definite guidelines, as provided in

alternative A of the second paragraph, and it was probable that

this alternative would be usable for the three-week period ahead.

However, when he considered the concern in past years over the

market's strong reliance on free reserve figures as an indicator

of the Committee's monetary policy, he would be reluctant to see

any steps taken to establish a public record of a free reserve

-43

4/14/64

guideline for instructions to the Manager, quite apart from the

more basic question of the use of free reserves as a yardstick.

The discount rate should remain unchanged.

Mr. Scanlon reported that economic prospects in the Seventh

District continued to be favorable except for the possibility of

a serious disruption if the railroad negotiations should not be

successful.

Representatives of large business enterprises in the

Midwest continued to report that current crders and shipments were

exceeding earlier projections that had been considered optimistic

at the time they were made.

There had beer, some further tendency

for order backlogs for manufactured goods to rise and for delivery

lead-times to lengthen.

But these developments had not been

accompanied by any substantial increase in upward price pressures.

At the beginning of April inventories of domestically

produced autos were equal to 46 days of sales at the March rate,

compared with a 40-day supply a year earlier.

Because of the

possibility of a strike on August 31, production was somewhat

higher than would be the case otherwise.

Used car prices remained

steady, and stocks were at a "comfortable" level.

Shutdowns for

model changeover would take place in July, a week or so earlier

than last year.

Changes in 1965 cars were to be much more extensive

than in the 1964 models.

4/14/64

-44

Higher borrowings by finance companies and recent strength

in "other" loans probably reflected continued expansion of consumer

credit, Mr. Scanlon said.

Increases in business and consumer loans

had been accompanied by liquidation of U. S. Government securities

and a slowdown in acquisitions of mortgages and municipals.

Effective rates on new conventional residential mortgages in the

Chicago metropolitan area had continued "soft,"

averaging 5.76 per

cent in the first quarter compared with 5.82 per cent in the fourth

quarter of 1963.

The March interest rate survey of business loans

showed no general change in the average rate charged.

In the

smallest loan category, however, there was a sharp increase in the

proportion of loans made at rates over 6 per cent.

The large Chicago banks had reduced their borrowings now that

the pressures connected with the April 1 personal property tax date

had abated.

Government securities held by these banks had declined

sharply, mainly because of a $500 million reduction in holdings of

bills.

Bill portfolios now totaled only $350 million.

Two large

banks reported sales of 6 to 9-month CDs at 4 per cent during the

past three weeks.

Mr. Scanlon said it seemed to him that the current situation

called for no change in monetary policy at this time.

On the

directive, he thought the Secretariat was moving in the right

direction in trying to formulate a directive stated in quantitative

-45

4/14/64

terms, if this could be done without endangering the effectiveness

of the Manager's operations.

He had been intending to say that

there were good ideas in Mr. Young's April 8 memorandum, but as the

discussion moved around the table he was not sure how a group the

size of the Committee could ever select from the number of alterna

tives included in the memorandum.

Whenever the Committee departed

from broad, general instructions, it had to assign priorities to

various considerations, and this was the area where it had been

difficult to come to agreement in the past.

With respect to the alternate drafts suggested for

consideration today, Mr. Scanlon noted that. alternative A for the

second paragraph made it clear that the free reserve figure would

take precedence over short-term interest rates.

He did not know

whether the Committee was ready to face up to making this decision.

The Committee seemed to be able to agree only on directives stated

in broad general terms that did not weigh cne objective against the

other and simply indicated that the Committee was taking all factors

into account.

While he thought that the Ccmmittee most likely

should continue to work on the form of the directive and try to get

something a little more specific, he would settle today for

alternative B of both paragraphs if he had to choose between the

alternatives, and he would be willing to delete the second sentence

of the second paragraph.

4/14/64

-46

Mr. Deming reported that most indicators of commerce and

production for the Ninth District were up and looked fairly strong.

There was strength in construction activity and prospects.

Income

figures for the District were not as favorable relative to a year

ago as for the country as a whole, reflecting essentially the

decline in livestock prices.

reasonably good.

Otherwise, the farm situation looked

It appeared as though the income from wheat this

year, assuming normal yields, would be abott the same as in 1963

now that the new legislation had passed.

Mr. Deming noted that the Minneapolis Reserve Bank surveyed

from time to time some of the large District manufacturing concerns,

located principally in the Twin Cities, that do a national and

international business, asking them about prospects in the quarters

ahead for prices, employment, etc.

The most recent reports

indicated a rather general further increase in activity.

Two of the

respondents were thinking of increasing prices modestly.

One firm

reported that it had in fact increased prices modestly, but had not

been able to make the higher prices stick.

Loan demand at city banks in the District showed

significantly less strength than last year.

Demand seemed to have

picked up somewhat in the past couple of weeks, but not sifnificantly.

Country banks remained about on track with typical behavior, with

loan demand little weaker than last year.

Loan-deposit ratios did

-47

4/14/64

not show anything significant; city bank ratios were well below

their peaks, while country bank ratios had crawled up a little.

With respect to policy, Mr. Deming thought the Committee

should stay about where it was for the next three weeks.

If he

were not required to choose between directive alternatives A and

B at this time, he would be happy with the present directive,

with deletion of the reference to Treasury financing.

If he had

to choose, he would take alternative A for the first paragraph and

alternative B for the second.

Speaking more generally concerning the directive, Mr.

Deming did not feel prepared at this time to go much further than

a selection between alternatives A and B.

quantify.

He would not want to

Perhaps free reserves and short-term interest rates

might be mentioned from time to time, when the Committee so

desired, as goals of short-run policy.

But he doubted the likeli

hood of success in attempting to make the instruction to the

Manager serve at the same time as a public relations document.

He would be inclined to move toward simplifying the directive

rather than toward making it more complex.

Mr. Swan said the general business situation in the Twelfth

District appeared to be about the same as reported three weeks ago.

Some caution in connection with defense contracts, which were

concentrated in the Northwest and in California, tempered the

4/14/64

-48

prevailing optimism a little.

There had been, of course, the

infortunate earthquake disaster in Alaska, and the full extent

of the damage could not yet be assessed.

While this posed serious

problems for the area concerned, he doubted, however, that there

would be major indirect effects on other areas and other parts of

the economy.

The March figures for employment and unemployment in the

Twelfth District were available only for California; they showed

a slight increase in total nonfarm employment, with the rate of

unemployment holding at the February level of 5.7 per cent.

Retail

sales continued satisfactory in one sense, but they were somewhat

disappointing in another sense because there did not seem to be

any particular reflection as yet of a substantial increase in

consumer spending.

In the three weeks ended April 1, Loans at District weekly

reporting banks increased somewhat more than last year but at less

than the national rate of increase.

The reporting banks in the

District were able to increase their security holdings somewhat,

contrary to the decline in securities holdings on a national basis

as well as to increase their loans.

There was again some slowing

down in the rate of gain of funds moving into savings and loan

associations since the first of the year.

For the second quarter,

a few of the smaller associations had announced increases of 5 to

10 basis points in dividend rates, but this was not widespread.

-49

4/14/64

In terms of policy, Mr. Swan agreed with those who saw

no reason for any change at this point.

He saw nothing in the

domestic or international picture that would call for any

tightening, and he saw no reason, obviously, for any increase in

the discount rate.

As to the directive, Mr. Swan seconded the favorable

comments about the work done by the Secretariat, even though he

felt sure the Committee was not going to resolve the whole

question immediately.

In terms of the first paragraph of the

alternate draft directives, Mr. Swan did not feel strongly one

way or the other.

He thought he preferred alternative B in terms

of logic and description of general policy leading into the

second paragraph.

He doubted that this was too important one way

or the other, however, or that the draft was too different in

effect from the first paragraph of the existing directive.

The critical question of approach is in the second

paragraph, Mr. Swan continued.

Mr. Mitchell in this regard.

He wanted to align himself with

With due respect to all of the

questions of unpredictability and flexibility mentioned not only

this morning but many times before, it did seem to him that the

Committee should move in the direction of a more specific directive.

If the Committee had problems of inconsistencies or choices, it

should face up to them and work on them.

Choices among objectives

4/14/64

-50

would be necessary, and the Committee probably would have a hard

time reaching agreement, but the Manager had to choose among

objectives in order to operate and it seemed preferable for the

Committee to make that choice.

The public relations problem is

of a secondary nature, but he would rather explain why the Desk

had not hit a target (stated in terms of a range) than to continue

to try to explain on a defensive basis, why the Committee's direc

tives remain indefinite.

Subject to one minor change, he would

therefore prefer alternative A for the second paragraph.

Mr. Irons reported that Eleventh District conditions

were generally quite favorable, with the economy moving along at

a high level.

There continued to be moderate, though not

spectacular, gains.

Industrial production was at a record level,

nonagricultural employment was up fractionally, and unemployment

was down just a shade.

In the oil industry there had been a

little easing with respect to both crude oil and refining.

Department store sales continued to set new records month by month

and new car registrations were strong.

Agricultural activity had

made quite a good record so far this year, although there was

concern about the weakness of cattle prices.

Loans, investments, and deposits were up in the District

during the past three-week period, Mr. Irons said, and loan demand

seemed strong.

Some banks regarded it as very strong.

A few of

4/14/64

-51

the District's larger banks were using up some of their liquidity,

but they were still seeking loans actively.

They were dropping

out of Governments, particularly those with maturities under one

year, and shifting to non-Governments.

Federal funds purchases

had been running about $500 million, and sales somewhere around

$300 million to $325 million.

not been very heavy.

Borrowing from the Reserve Bank had

A few large banks were coming in when Federal

funds were not readily available; they were becoming accustomed to

living on borrowed funds, obtained either through the Federal funds

market or the discount window.

Nationally, Mr. Irons said, the picture seemed to be one

of moderate expansion without excesses or significant imbalances.

In summary, the domestic situation appeared very favorable.

Looking at the domestic situation and balance of payments develop

ments, and considering that the Treasury would soon be in the

market with a refunding, he believed that the present policy with

respect to availability of reserves and money market conditions

should be continued without change.

He would not change the dis

count rate, obviously, and he felt the bill rate should be around

3.45 to 3.55 per cent, with Federal Funds most of the time at the

discount rate.

Turning to the directive, Mr. Irons said he was not

disturbed too much about the present directive.

He thought it was

4/14/64

-52

reasonably clear and gave the Manager of the Account a reasonable

statement to follow, particularly in view of the fact that the

Manager attended the Committee meetings, heard what went on,

and was in contact with Board and Bank staff people every morning.

He agreed with Mr. Deming that it might be dangerous to try to

quantify the directive.

The Committee, he thought, permitted

itself to get lost in semantics, inserting a word here and taking

out a comma there.

He also thought the Committee should be

cautious regarding the tendency to place emphasis on the directive

as a public relations document.

Personally, he was not sure the

general public could be expected to understand the directive, and

he doubted whether the Committee should put too much emphasis on

pleasing the academic economists.

No matter what the directive

said, there would be economists who would be critical and outspoken.

He did not want to leave the impression that this was not something

worth working on, but the Committee tended to go over and over the

same ground.

Mr. Deming.

In summary, he came out at about the same place as

Ior this meeting, he would be quite satisfied with

the present directive, deleting the last sentence in the first

paragraph.

It described current policy, and the Manager should be

able to carry out operations satisfactorily.

As between draft

alternatives A and B, he had no particular preference.

The

differences appeared to him to involve mainly questions of semantics.

4/14/64

-53-

Mr. Ellis summarized the picture in the First District by

saying that the regional economy was tracking the national pattern

quite closely. There had been some slowness in manufacturing

activity, but recently even manufacturing output seemed to be

following the national pattern fairly well.

The Boston Bank had held two regional meetings since the

last meeting of the Open Market Committee.

The central banking

seminar, which brought together a group of 35 economists and

bankers, proved especially interesting to him, Mr. Ellis said,

because it focused attention on a restatement of the longer range

objectives of monetary policy.

A meeting yesterday of 20 business

economists focused on the present and prospective strength of the

economy and of credit demands.

the discussion of retail trade.

In particular, he found reassuring

The economists did not show any

dissatisfaction or unhappiness with one month's figures, in terms

of being disappointed about the results of the tax cut.

They

oointed out that the basic pattern of consumer spending changes

slowly.

Mr. Ellis said he emerged from these conferences with the

view that the price structure was vulnerable to demand pressures.

According to his analysis, capital spending, consumer spending, and

Government spending all were likely to expand throughout the year.

All these borrowing groups, plus foreign borrowers, would exert

4/14/64

-54

increasing pressure on the credit market, intensified by

seasonal expansion later in the year.

Measuring against those

expectations the 11 per cent annual rate of growth of bank credit

in the first quarter, he could not view the situation with com

placency.

Knowing that monetary policy lags in its impact, he

found himself intellectually committed to the view that the

System should be moving to a posture of less ease to reduce the

abruptness and sharpness of delayed action.

Like Mr. Shepardson,

he was concerned that the Commit:ee consider now what its posture

should be when and if a price break-out occurred.

Turning to the directive, Mr. Ellis felt that the

Secretariat, in its memorandum, had done a service in calling

again to the Committee's attention the objectives of completeness,

reasonableness, clarity, and informativeness.

The Committee went

through a review of the form of the directive every so often, and

he liked to think that the Committee took a step forward in

improvit.g the directive each time this was done.

It was his

observation that every time the Committee changed the format of

the directive it made an improvement, but that thereafter the

Committee tended to whittle the directive down by taking out

words, phrases, and adjectives.

As the Committee studied the

directive this time, he hoped it could make another step toward

improvement in the direction suggested by Mr. Mitchell.

Choices

4/14/64

-55

had to be made; if they were not made by the Committee, then they

had to be made by the Manager.

If they were not made by the

Manager, then it was a process of muddling through.

The Committee

should continually strive for more accuracy in its directives.

As to the alternative draft directives, Mr. Ellis said he

preferred alternative A for both the first and second paragraphs.

Re would accept Mr. Treiber's amendments to the first paragraph.

The second paragraph suggested that open market operations should

be conducted for the next three weeks as they had on average for

the past three weeks.

As he looked at the past three weeks,

though, free reserves had averaged $100 million higher, while

member bank borrowings averaged $100 million lower and the bill

rate dropped 7 basis points.

Federal funds traded frequently at

less than the discount rate.

He would be unhappy if the Manager

interpreted a continuation of these results as constituting his

objective for the next three weeks.

He (Mr. Ellis) would be

willing to accept the averages of the past 6 or 9 weeks, however,

and he wouldmodify the draft directive accordingly.

Mr. Balderston said he shared the concern about policy

expressed by Messrs. Ellis, Shepardson, and Hickman.

He had the

feeling that things had gotten a little out of hand during the

past two or three weeks, and he was unhappy that the free reserve

average for the past four weeks was $130 million.

The Desk had

4/14/64

-56

missed, on the high side, what he assumed to have been the

Committee's target.

In discussing that situation, Mr. Balderston continued,

he would like to point out what he thought was the key to some

of the departure from the line toward the desired policy goal,

using as his basis comments made recently by Mr. Eckert of the

Board's staff concerning excess reserves and their long-run trend

downward.

Despite the oft-repeated admonitions of Committee

members about the tendency for continuing use of a given level

of free reserves to pull policy off the line toward the goal

actually desired, it was his (Mr. Balderstcn's) belief that the

Committee had been deceiving itself recently.

His conclusion

stemmed from the steady reduction of excess reserves of member

banks.

In 1962 the decline from the previous year was 13.5 per

cent; in 1963 the decline was 14.2 pe:r cent.

In the first quarter

of the current year, excess reserves were 14.3 per cent below the

year-age figure.

Putting it another way, each recent year's level

of excess reserves had been from 88.7 to 89.9 per cent of the pre

vious year.

By the first quarter of this year the figure had

fallen one-third from the 1961 level.

With the relatively stable

free reserve objective in recent times, it was no wonder that the

steady decline of excess reserves should be associated with lower

member bank borrowings.

During the first quarter of this year

4/14/64

-57

borrowings averaged about $60 million less than the borrowing

level of the five months following the chage in policy last

July.

Free reserves averaged $119 million, as compared with

$113 million for the preceding five months.

On the one side,

the Committee had been pulled off the line of what Mr. Balderston

thought was the desired policy direction by the technical

deficiency of $60 million in excess reserves.

Then in the past

four weeks free reserves had averaged on the high side of $100

million by $30 million.

In short, he concluded that monetary

policy had been easier than intended.

He would suggest, there

fore, a target for free reserves of around $50 million.

Comi.g to the directive, Mr. Balderston said he had

little choice, for the first paragraph, as between alternatives

A and B, though perhaps a slight preference for B.

As to the

second paragraph, he had a distinct preference, for the reasons

set forth by Mr. Mitchell, for alternative A.

The proposed

alternative E said little except more of the same.

If the

Committee was going to dispense with the thought of any quanti

tative means of communicating with the Desk, then it seemed to

him the Committee was committed, in essence, to the use of three

phrases:

more ease, less ease, or about the same degree of ease.

On the other hand, if, as in alternative A, the Committee at

least mentioned some targets in tangible form, he thought it

4/14/64

-58

communicated more effectively.

Although there were problems in

using free reserves as a goal of policy for the Committee, for

the reason that the target gets cumulatively more deceptive the

longer it remains unchanged, he nevertheless thought that free

reserves remained one of the best means discovered to date for

communicating with the Desk at three-week intervals.

If the

Committee was to get away from the words "more, less, and about

the same" and put down something the Desk could see, it would

have to say something about free reserves from time to time, and

also something about rates.

Chairman Martin commented that he associated himself

intellectually with those who felt that monetary policy had been

slightly too easy and that if the Committee could move slightly

toward less ease it would be in a stronger position.

Timing was

the problem, however, and he did not know the best way out of the

dilemma.

Everyone outside the System was trying to make System

policy, and the Committee should not take action that would play

into the hands either of those who said it was a foregone con

clusion that there would be higher interest rates or those who

thought that the Committee was pursuing an easier monetary policy.

It was a period of balancing these pressures, and also the problem

of the Treasury, which would have an almost impossible job of

financing within the 4-1/4 per cent limit if the expectations

-59

4/14/64

that he was inclined to share actually developed in the market.

The Committee should not, at this juncture: make the Treasury's

problem any more difficult than it was likely to become through

the natural forces of the market.

Therefore, he leaned to the

view that it would be desirable to have slightly less ease, but

only when the Committee could make this move without undue

complications.

The Desk, Chairman Martin continued, may have erred on the

side of over-correcting the imbalance that some people thought

existed when free reserves were averaging around $50 million, but

the Desk had been dealing with a difficult problem, and in his

opinion quite well on the whole.

It was almost impossible in

this type of market to keep any sort of balance.

The Chairman thought the Treasury had a clear right to

expect that the System would not make the Treasury's task harder

than it was going to be anyhow until it became clear what the

decision

in the market were going to be.

Therefore, he came out

with the view, generally speaking, that no change in policy for

the next three weeks would be the best course.

On the form of the directive, Chairman Martin said that

the more he worked on the directives the less confidence he had

that the Committee could find words that would be completely

satisfactory to 12 voting members.

Everyone had a word or phrase

4/14/64

-60

that meant something to him different from what it meant to the

next person.

The Committee should continue to write sample

directives and to work on them.

However, the Committee ought to

make clear that when it made some change in the directive, that

change was

made for a good reason.

He did not think it made much

sense just to change a little phrase here and there.

Chairman Martin said that he hesitated to put the draft

directives to a vote today.

There did not seem to him to be

enough neeting of the minds to make it worth while.

He felt that

the Committee perhaps ought to set up a meeting that would be

devoted solely to discussing the formulation of the directive.

Mr. Mitchell commented that there was a real issue

involved:

how the Committee could be sure that the directive was

not internally inconsistent.

While this was a difficult problem,

the Committee should not shy away from the problem because of its

difficulty.

This might all be just a matter of semantics, but he

did not think so.

Chairman Martin replied that he thought the way to handle

the matter was to set up a meeting at which the Committee would

do nothing but debate the form of the directive.

It could not do

this when trying to deal with policy, as, for example, this

morning.

Instead, the Committee should sit down and try to hammer

out points of view.

-61-

4/14/64

After further discussion along these lines, Mr. Daane

suggested, in view of the indication that the Committee appar

ently intended to make no change in policy today, that it renew

the existing directive, with only minor change, and arrange

another meeting for a full-scale debate concerning the form of

the directives and the possibility of quantifying instructions,

a point on which he had reservations.

Chairman Martin recalled that Mr. Deming's suggestion

was simply to strike the last sentence of the first paragraph

of the existing directive.

However, the Commmittee had not come

as yet to the question whether it was in fact going to make no

change in policy.

That should be determined first.

The Chairman added that he was sympathetic with the view

of those who would like to see slightly less ease as a prelude to

price changes that might occur, and while he subscribed to Mr.

Ellis's intellectual commitment on the basis of the facts as he

(Mr. Martin)

sawthem, he had not yet reached a point where he

would want to see the System compound the problems of financing

that the Treasury was going to have for the next few weeks by

even a modest adjustment of policy.

Again, he thought the Desk

had a difficult problem because free reserves had swung from $20

million to $230 million; but that had been the sort of swing

that was likely to occur when someone said that the free reserve

4/14/64

-62

target should be a little above or a little below $100 million.

To sum up, however sympathetic he would be, were the Tre.sury

not in the market, to the idea of moving slightly in line with

what he conceived to be the over-all trend rather than against

it, in his view the wisest course for the next three weeks for the

Committee would be to have the Desk continue to do what it

had

been doing for the past three or six weeks and not make a con

scious change in policy no matter how the free reserve figures

turned out.

Chairman Martin then proposed a vote on no change in

policy to see how that came out.

Those opposed could vote

against it and record their reasons.

Mr. Mitchell inquired whether this neant no change from

the past three weeks or the past six weeks, and Chairman Martin

replied that this meant no change from the directive as carried

out by the Desk.

He did not think that the Desk had deliberately

tried to change policy in arriving at the recent figures.

Mr. Stone commented that the Desk most assuredly had not

undertaken to make any change in policy in one direction or the

other.

He would like to mention a circumstance that gave rise to

the free reserve figure of $230 million for the statement week

ended March 25.

When the Committee sat around the table on

March 24, there was some discussion about the free reserve figure

4/14/64

-63

then thought to be developing--about $130 million.

As it turned

out, free reserves for the preceding day were about $350 million

above the projections, so that his associates were looking at a

free reserve figure of $220 million for the current week and net

borrowed reserves of about $250 million for the week beginning

that Thursday.

The Desk had the choice of selling about $250

$300 million of Treasury bills in the market to bring the figure

down, but this would have meant repurchasing the same quantity

and more two clays thereafter.

The alternative was to ride

through for a couple of days.

The choice of the latter course

seemed to him to reflect the intent of the Committee in those

circumstances.

Mr. Wayne commented that it seemed to him the daily wire

had said precisely that.

If there were objections, he felt that

they should have been made known at the time.

Mr. Hickman, who had been on the morning telephone call,

said he had the same recollection of the incident as Mr. Stone.

There also was the thought that the high free reserve figure

would offset the low figure of the preceding statement week.

But

the Manager did ride along week after week with free reserves on

the high side of $100 million and with borrowings quite low.

Hickman thought the market had been overly easy.

Mr.

He would like

to go back to the figures of the previous three-week period.

4/14/64

-64

In reply to a question, Mr. Stone said there had been no

difference between the past three and the past six weeks so far

as the objectives of Desk operations in implementing the policy

directive were concerned, and Chairman Martin commented that it

seemed clear what the Manager had no misunderstanding as to what

was involved.

The Committee was then polled on the basis of no change,

for the next three weeks, in policy as nov being carried out.

This developed to be the consensus, Messrs. Balderston, Hickman,

and Shepardson dissenting.

Mr. Daane, in voting for no change in policy as reflected

in the current directive, said that he sympathized with the

Chairman's reference to the chore of the Treasury that lay ahead.

He would not, however, subscribe to the idea that the Committee

should at any point in time simply validate market developments

or take them as its cue to action.

There was a real opportunity

for the Committee to show continuing leadership rather than pass

ive acquiescence in market developmen:s.

Mr. Hickman stated that he voted against no change in

policy because he thought that the market had been overly easy

in the past three or four weeks and that an excessive expansion

of bank reserves had been accommodated.

4/14/64

-65

Mr. Mills said that he voted for no change in policy on

the basis that the experience of the past three weeks was in

accord with his thinking about appropriate monetary policy.

Chairman Martin then said he understood it was agreeable

to the majority of the Committee to continue the present direc

tive, with the deletion of the last sentence of the first

paragraph, which contained reference to the imminence of new

cash borrowing by the Treasury.

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 directive:

It is the Federal Open Market Committee's current

policy to accommodate moderate growth in bank credit,

money supply, and the reserve base, 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 under

utilized resources, and that it is likely to receive

additional stimulus from the recently enacted reduction

in Federal income tax rates. This policy also takes

into account the facts that the balance of payments po

sition, while improved, may still be adverse, and that

the effects of increases in money rates in important

countries abroad are as yet uncertain.

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.

4/14/64

-66

Votes for this action: Messrs.

Martin, Daane, Mills, Mitchell,

Shuford, Wayne, Swan, and Treiber.

Votes against this action: Messrs.

Balderston, Hickman, and Shepardson.

Chairman Martin suggested that the afternoon of May 5

might be set aside for a session at which the Committee would

devote its entire time to the matter of the formulation of the

directive, and there was agreement with this suggestion.

Chairman Martin then referred to a draft of letter to

Chairman Patman with reference to the request of the Subcommittee

on Domestic Finance of the House Banking and Currency Committee

for copies of the minutes of the meetings of the Open Market

Committee held during the years 1960-1963, inclusive.

When

Chairman Martin appeared before the Subcommittee on January 22,

1964, he had agreed to transmit the request to the Open Market

Committee, and the request had been discussed by the Committee

at several meetings since that time.

The draft of letter to

Chairman Patman had been prepared in the light of those discussions.

Upon question by Chairman Martin, it developed that there

was general agreement on the part of the Committee with the posi

tion taken in the draft letter.

Certain changes of an editorial

character were suggested, however.

The following letter

Patman, for the signature

Martin, was then approved

and was transmitted later

to Chairman

of Chairman

unanimously

in the day:

4/14/64

-67-

During the hearings on January 22, 1964 of the

Subcommittee on Domestic Finance of the House Banking

and Currency Committee, I agreed to transmit to the

Federal Open Market Committee the Subcommittee's

request for copies of the minutes of its meetings

held during the years 1960-1963, inclusive. The

Federal Open Market Committee has considered this

request at several meetings since that time, and it

has concluded that it would be in the public interest

to make its minutes available only after the lapse of

a considerable period of time. Accordingly, the

Committee has authorized transmittal to the Subcom

mittee of its minutes for the calendar year 1960.

The official records of the Federal Open Market

Committee are maintained in the Board's offices,

where the original signed copy of the minutes for

1960 is available for examination by representatives

of the Subcommittee. If it would be more convenient,

a duplicate original signed copy of these minutes will

be delivered to the custody of the Subcommittee for

its perusal.

As you know, a complete record of all policy

actions .aken by the Federal Open Market Committee

and by the Board of Governors is maintained by the

Board and is set out in full each year in the Board's

Annual Report to the Congress, as required by the

Federal Reserve Act. Included in the report of policy

actions taken by the Federal Open Market Committee

are:

(1) a summary of the economic and financial

information which the Committee has taken into

account in arriving at its policy deci:;ions; (2) a

summary of the main lines of the Commitee's

discussions and the differing views expressed in

their course; (3) a statement of the reasons under

lying policy decisions; (4) a record, by name of

Committee member, of all votes cast in connection

with the determination of policy; and (5) statements

of the reasons underlying dissents from particular

actions, when there are such dissents. In the

Board's Annual Report for 1963 the Record of Policy

Actions of the Federal Open Market Committee covers

79 printed pages. In addition, 42 pages of the Report

are devoted to a review of the System's open market

operations in domestic securities and 20 pages to a

review of its operations in foreign exchange.

-68-

4/14/64

The minutes contain more detailed reports on

economic and financial developments ard conditions,

including references to information obtained on a

confidential basis. Apart from these more detailed

reports, the additional material included in the

minutes consists principally of the discussions and

debates prior to final determinations of policy

actions. The Committee believes that premature

disclosure of such discussions would impair the give

and take of candid debate so important to decision

making.

In some cases it could lead to market

reactiors that might seriously handicap the

execution of current decisions and that might

redound to the special advantage of individuals or

groups sophisticated in these matter..

In connection with discussions that began in

1961 of foreign currency operations, the minutes for

recent years also contain confidential reports to

the Comiittee concerning the internal affairs, plans,

and attitudes of foreign monetary authorities and

governments. Moreover, they contain frank

expressions of opinion regarding the financial

policies of foreign countries, in support of positions

taken as to the desirability, from the point of view

of the interest of the United States, of entering

into various types of transacticns with them. You

will recall that when Secretary Dillon appeared before

your Subcommittee on March 5, 1964, he expressed the

view that it would be damaging to our international

relations if these materials were given any publicity

at all.

To provide a broad historical perspective, the

Federal Open Market Committee and the Board of

Governors have instructed their staffs to explore

means for making their records relatirg to monetary

policy decisions through the year 1960 available for

the use of scholars and other interested persons. It

is expected that procedures for accomplishing this

end will be decided upon shortly.

It was agreed that the next meeting of the Open Market

Committee would be held on Tuesday, May 5, 1964, at 9:30 a.m.,

with an afternoon session contemplated to discuss the form and

4/14/64

-69-

content of the current economic policy directive.

It was also

agreed that the meeting tentatively scheduled for Tuesday,

June 16, 196L, would be held instead on Wednesday, June 17.

There would be a meeting of the Presidents' Conference on

June 15 and a meeting of the Board of Trustees of the Retirement

System of the Federal Reserve Banks on June 16.

In a discussion of the proposed publication of the

Manager's report to the Committee on Account operations in 1963,

Mr. Treiber suggested that publication of the report in full

would be advantageous for several reasons, as follows:

It would broaden public understanding of the process

by which the Committee's open market policy decisions are

implemented. Publication of the chronology is useful in

this regard, but it is also highly desirable to publish

the general review in which the Manager presents the

insights into operational techniques, into the changing

money market environment in which policy is carried out,

and into the behavior of the credit market that derive

from his particular point of contact with the financial

markets. Following publication last year of the report

for 1962, the general review was the focal point of con

siderable favorable comment from teachers, bankers, and

participants in the financial markets. Parenthetically,

it should be noted that publication in the Federal

Reserve Bulletin with a reprinting in our Monthly Review

is likely to reach a considerably larger audience than

the Board's Annual Report alone.

Broader understanding of the criteria presently

guiding day-to-day open market operations may enable

outsiders to make useful contributions to a better

understanding of the relationship between short-run

money market variables on the one hand and intermediate

and longer term variables on the other. The academic

community has given little careful attention to the

role of the money market in the financial process. Indeed,

some members of the community have little or no

-70-

4/14/64

understanding of the reasons for the Committee's

day-to-day concern with the market.

The Manager's

report, which is focused on the money market, may

stimulate some constructive academic interest in

the field.

During further consideration of the matter,

it

was noted

that there had been included in the Board's Annual Report for

1963 the section of the Manager's report coastituting a

chronological review of operations.

Question was raised whether

publication of the same material in

the Federal Reserve Bulletin

would therefore be warranted.

As to the remainder of the

Manager's report, some question as to the desirability of

publication,

as a supplement to the New York Bank's Monthly

Review or otherwise also was raised.

After further discussion, Chairman Martin suggested that

the matter be held over until the next Committee meeting for

decision.

Thereupon the meeting adjourned.

Assistant Secretary

Attachment A

CONFIDENTIAL (FR)

April 13, 1964

Draft current economic policy directives suggested for

consideration by the Federal Open Market Committee

at its meeting on April 14, 1964

Alternatives for First Paragraph

Alternative A:

It is the Federal Open Market Comm..ttee's current policy

to accommodate moderate growth in the reseve base, bank credit

and the money supply in order to facilitate the financing of

further expansion of the economy and to foster further improve

ment for the capital account of U. S. international payments,

while seeking to avoid the emergence of inflationary pressures.

this policy takes into account the expected progressive stimulus

to domestic activity from the recent Federal income tax reduction

and the increases projected for the year in business capital

expenditures.

It also gives consideration to the slower growth

of aggregate bank reserves and the money supply in the first

quarter of this year as compared with the fourth quarter of last

year; the continued relative stability in average prices; the

country's improved, though still unsettled, international

payments position; and the advances in interest rates over past

months in important markets abroad.

Alternative B:

The Federal Open Market Committee notes that domestic

economic activity continues to expand at a moderate pace with

relative stability in average prices, and that the existing

margin of unutilized resources will permit further expansion.

It also notes that progressive stimulus to activity will be

exerted over coming months by the recent reduction in Federal

income tax rates and by the increases projected for the year in

business capital expenditures.

In addition, the Committee has

taken account of the slower growth in aggregate bank reserves

and the money supply in the first quarter of this year as com

paired with the fourth quarter of last year; the further

improvement in the economy's payments balance internationally;

and the possibly adverse effects on the cap:.tal account of the

payments balance arising from interest rate advances over past

months in important markets abroad.

In the light of these

developments, it is the Committee's current policy to accommo

date moderate growth in the reserve base, bank credit and the

money supply in order to facilitate the financing of further

expansion of the economy and to help sustain the improved position

for the capital account of U. S. international payments, while

seeking to avoid the emergence of inflationary pressures.

Alternatives for Second Paragraph

Alternative A:

To implement this policy, System open market operations

for the next three weeks shall be conducted with a view to main

taining about the same conditions in the money market as have

prevailed on average since the Committee's last meeting, with

weekly average free reserves generally in the range of $50 to

$150 million, and Treasury bill rates adjusting daily to shifts in

money market forces.

However, money market conditions shall be

permitted to ease or tighten, as necessary, to cushion any

substantial and persistent change in the rate on three-month

Treasury bills.

The Committee believes tha. operations so

conducted will be consistent with moderate upward trends in

aggregate bank reserves, total bank credit, and the money supply.

Alternative B:

In the context of this general policy, System open market

operations for the next three weeks shall be conducted with a view

to maintaining about the same conditions in the money market as

have prevailed since the Committee's last meeting.

The Committee

expects that the operations so conducted will be consistent with

moderate upward trends in aggregate bank reserves, total bank

credit, and the money supply.