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, July 7, 1964, at 9:30 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Hayes, Vice Chairman

Balderston

Daane

Hickman

Mills

Robertson

Shepardson

Shuford

Swan

Wayne

Messrs. Bryan and 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. Young, Secretary

Mr. Sherman, Assistant Secretary

Mr. Broida, Assistant Secretary

Mr. Hackley, General Counsel

Mr. Noyes, Economist

Messrs. Brill, Furth, Grove, Jones, Koch, and

Mann, Associate Economists

Mr. Stone, Manager, System Open Market Account

Mr. Molony, Assistant to the 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, General Assistant, Office of the

Secretary, Board of Governors

Messrs. Latham and Helmer, First Vice Presidents of

the Federal Reserve Banks of Boston and Chicago,

respectively

Messrs. Holmes, Sanford, Baughman, Parsons, Tow, and

Green, Vice Presidents of the Federal Reserve

Banks of New York, New York, Chicago, Minneapolis,

Kansas City, and Dallas, respectively

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Messrs. Parthemos and Brandt, Assistant Vice

Presidents of the Federal Reserve Banks of

Richmond and Atlanta, respectively

Mr. Meek, Manager, Securities Department, Federal

Reserve Bank of New York

Mr. Anderson, Financial Economist, Federal Reserve

Bank of Boston

Mr. Rothwell, Economist, Federal Reserve Bank of

Philadelphia

Upon motion duly made and seconded, and

by unanimous vote, the minutes of the meeting

of the Federal Open Market Committee held on

June 17, 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 June 17

through July 1, 1964, and a supplementary report covering the period July 2

through July 6, 1964.

Copies of these reports have been placed in the

files of the Committee.

Supplementing the written reports, Mr. Sanford said that no change

was expected in the gold stock again this week for the twenty-first con

secutive week.

The Stabilization Fund now held about $176 million of gold

and there were no orders currently in hand, although, of course, it was

anticipated that the usual French order for $34 million would be received

near the end of the month.

In the London gold market, activity picked up

a bit as a result of demand from Italy and of events in Cyprus and the Far

East, and the fixing price was permitted to ride up slightly.

In the past

week, however, demand had tapered off again, and the London price had

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receded to $35.0711.

The United States' share of the pool's acquisition

in June was nearly $16 million.

So far in July, the pool had picked

up a further small amount.

The exchange markets continued to be dominated by short-term

capital flows, Mr. Sanford reported.

It was possible, to a limited extent,

to see a reversal of the midyear window-dressing on the Continent, with

some outflows from Germany and Switzerland and inflow to the United

Kingdom.

This normal seasonal pattern had been dampened, however, by the

revival of speculation against the Italian lira and by continuing doubts

about the futu.:e of sterling.

Thus, although Swiss banks had begun putting

surplus funds abroad, and in the past week the Swiss franc had come off

its ceiling, the heavy inflow of capital from Italy had raised the Swiss

National Bank's excess dollar holdings still further and had prevented a

pronounced decline in the Swiss franc rate.

At the same time, although

the German mark had eased slightly since midyear, there had not been the

normal heavy flow of funds back into sterling, and spot sterling had

continued to be quite soft at about $2.7914.

These developments, taken

together with the weakening in the U. S. balance of payments position

during the second quarter, indicated that the summer was beginning with a

rather precarious exchange market outlook.

Sterling fell rather sharply during June because of shifts of funds

to the Continent and into the Euro-dollar market, but the British let the

rate decline without intervening on a very substantial scale because there

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was little evidence of speculation and, in any event, they expected

sterling to rebound sharply after the end of June.

The close of the

period for midyear positioning did see an immediate small jump in sterling,

but there was no sustained advance.

Although they were prepared to show

the $56 million exchange market loss incurred during June, the British

did not want to show the full decline in reserves of some $71 million

which would have resulted from last minute unexpected payments, and con

sequently they drew $15 million on the swap with the System Account.

Even

the announcement of the smaller reserve loss, however, was followed by a

slight weakening in sterling.

Mr. Sanford commented that it would not be unexpected if pressures

on sterling continued and it was quite possible that the Bank of England

would make additional use of the Federal Reserve swap arrangement in

coming months.

In their efforts to bolster sterling, the British certainly

would keep interest rates firm--as they had in recent weeks.

Meanwhile,

the net narrowing of forward sterling discounts in the past month had

already made U. K. money market instruments more attractive than they had

been in some time, and in the past week there had been reports of U. S.

funds being invested in British hire-purchase deposits.

Similarly in the

case of Canada, with the forward Canadian dollar premium holding at about

1/3 per cent, there had been a sizable increase in United States investments

in Canadian finance paper.

As Mr. Coombs indicated at the last meeting, Mr. Sanford said,

the Swiss situation continued to be troublesome.

The flow of Italian

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funds into Switzerland, as speculation against the lira revived during

June, pushed the Swiss National Bank's dollar holdings up even further,

to $385 million, some $210 million over their usual limit.

Consequently,

despite the successful completion of the arrangements to liquidate the

System's Swiss franc obligations, it had not yet proved possible to effect

further reductions in Treasury forward market Swiss franc contracts, and

arrangements along the lines mentioned at the last meeting to take care

of some of the Swiss National Bank's excess dollars were still under discus

sion.

Mr. Sanford noted that the recent rise in the Swiss discount rate-

like that in the Belgian rate--was not anticipated to have any effect on

capital flows and had had very little impact on the exchanges.

In Germany, developments had been somewhat more satisfactory.

After the very large reserve gains of early June, the Bundesbank had taken

in net only a few dollars in market operations since mid-June, although

of course the mark remained quite strong.

The planned issue of U. S.

Treasury bonds denominated in DM went through on July 1 to the extent of

$150 million, S50 million having been held back by the Treasury for

possible markec intervention during the summer.

After this issue the

Germans held only about $90 million more than at the beginning of June.

Thus, at the moment the upward pressures on the German reserve position

were not too great, as German banks were continuing to put some short-term

funds abroad.

These outflows had driven the forward mark premium close

to one per cent and the Account had resumed offering forward marks

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at that level for Treasury account under the parallel arrangement with

the Bundesbank.

To date, however, the market had held just below the one

per cent: level and no sales had proved necessary.

Mr. Sanford commented that he had already noted the revival of

speculation against the Italian lira during this period.

There was a

heavy outflow of funds through the spot market, particularly following

the announcement of the resignation of the Italian Government, but since

then the pressures had been concentrated in the forward market.

The Bank

of Italy had now taken a strong stand in the forward market and was giving

the New York Bank, as their agent, unlimited orders to support the three

month rate (at 4 per cent discount).

The Bank of Italy

had also decided

to use the Bank of England for the bulk of the support operations in

Europe before :he opening of the New York market.

The practice of placing

sizable bids in the market had proved helpful in stabilizing the market

for the lira.

Mr. Coombs had reported that at the week-end Bank for

International Settlements meeting the Italians had given a fairly

optimistic account, including a betterent of the trade balance.

Mr. Sanford concluded by noting that, with the completion of the

repayment of System swap drawings in Swiss francs, the System Account

now had outstanding no drawings initiated by it under any of the swap

arrangements.

As to drawings by the other party, there was outstanding

a $50 million drawing by the Bank of Japan, in addition to the $15 million

Bank of England drawing he had mentioned earlier.

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Thereupon, upon motion duly made and

seconded, and by unanimous vote, the System

Open Market Account transactions in foreign

currencies during the period June 17 through

July 6, 1964, were approved, ratified, and

confirmed.

Mr. Sanford said he had several recommendations, all relating to

swap arrangements which would mature in the near future.

First, with respect to the renewal of the $50 million swap arrange

ment with the Bank of Sweden which matured July 17, that Bank had given

further thought to the period of renewal and had now indicated that it was

prepared to renew for twelve months, instead of the six-month period

approved at the last meeting of the Committee.

This would be in line with

the general authorization of the Committee for negotiation of extensions

for periods not exceeding twelve months.

Renewal of the swap arrangement with the

Bank of Sweden, with extension of term for a

period up to twelve months, was approved.

On July 20, Mr. Sanford said, the swap arrangements with the Swiss

National Bank and the Bank for International Settlements, each in the amount

of $150 million, would mature.

Mr. Coombs had discussed these arrangements

with the respective representatives in Basle and at present they were

favorably inclined to renewals for twelve months, although they desired to

give further thought to the subject.

Renewals of the swap arrangements with

the Swiss National Bank and the Bank for

International Settlements, with extension of

term for a period up to twelve months, were

approved.

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In the case of the Austrian National Bank swap arrangement for

$50 million, maturing July 24, a renewal for twelve months would be

welcomed by that Bank, Mr. Sanford reported.

Renewal of the swap arrangement with the

Austrian National Bank, with extension of term

for a period up to twelve months, was approved.

Mr. Sanford also noted that the swap arrangement with the Bank of

Japan for $150 million would mature July 30 and their representative had

indicated that they would like to renew for twelve months.

The $50 million

outstanding swap drawing also would mature on July 30 and it was proposed

to renew it fcr three months, at the end of which period the Bank of

Japan would hope to pay it off.

Renewal of the swap arrangement with the

Bank of Japan, with extension of term for a

period up to twelve months, was approved.

Renewal of the drawing on the swap with

the Bank of Japan was noted without objection.

Concerning the $250 million swap arrangement with the Bundesbank

maturing August 6, Mr. Sanford observed that the subject of renewal for as

long as twelve months had been raised with their representative and the

Account was to hear in due course.

One other swap arrangement matured

August 6, Mr. Sanford noted; namely, the $100 million facility with the

Bank of France.

Renewal of this arrangement had not yet been discussed

with that Bank, but this would be done by telephone before the next meeting

of the Committee.

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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 June 17 through July 1, 1964, and a

supplementary report covering the period July 2 through July 6, 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:

The money market has been generally firm since the last

meeting of the Committee. The special pressures associated

with the June 15 corporate tax date were unwound without

difficulty and the reserve drains associated with the July 4

holiday produced no undue stress. Banks in the major money

centers experienced a few pressures around June 15 and the

July 4 holiday, but a good flow of Federal funds enabled

them to balance their positions with a relatively low level

of borrowing from the Reserve Banks.

Rates on short-term Treasury bills have edged somewhat

lower since the mid-June tax date, while rates on longer

bills have fallen by as much as 10 basis points. The spread

between the 3- and 6-month bills narrowed sharply to a re

cord low of 2 basis points at last night's close. The

downward movement in rates, which occurred despite the rise

in the Belgian and Swiss bank rates, reflects heavy demand

for Treasury bills by public bodies, foreign central banks,

and other investors as well as by the System over the period

since the last meeting, while the decline in the spread be

tween short and long bills reflects the particular popularity

of the December bill maturities. The question of the size of

the spread between the 3- and 6-month bills has come under

considerable discussion in recent days, since the new 6-month

bill auctioned yesterday matures in 1965, when the corporate

income tax rate declines from 50 to 48 per cent. This means,

of course, that the excess of the after-tax yield on 6-month

bills over 3-month bills has now increased. This in turn is

expected to attract buyers to the 6-month area, perhaps

putting enough downward pressure on that rate to keep it quite

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close to the 3-month rate. There was not much evidence of

this tendency at work in the auction yesterday, however,

for the new 3- and 6-month bills were auctioned at average

rates of 3.49 and 3.54 per cent, respectively--the same

spread as occurred the week before.

The market for Treasury notes and bonds is marking time

this week, expecting the Treasury to announce at any moment

a financing operation designed to achieve some debt extension.

According to present plans, the Treasury will announce a

major advance refunding operation after the close of the mar

ket tomorrow.

As you know, most participants in the Government

securities market tended to expect, at the beginning of

the year, that yields would work higher as the year unfolded.

The rise in the British Bank rate in late February and the

passage of the tax cut at about the same time sparked a

conviction among nearly all participants that yields were

going to move higher immediately. The resultant bandwagon

psychology led to considerable selling of coupon securities

and put yields on 3- to 5-year issues in the neighborhood of

4-1/4 per cent by late March. Subsequently, however, as no

indications of a surge in consumer spending or credit demands

appeared and evidence accumulated that monetary policy was

not changing, the expectation of higher rates began to relax

its hold. Indeed, since early April, the prices of Treasury

notes and bonds have moved irregularly upward until most issues

are now at or near the highest levels of the year. In its

early stages, this rise in prices was taken as a technical

reaction to the overselling of late February and March. As

prices continued to improve through much of May and early

June, many market professionals were concerned as to whether

the market was really as good or as solid as it appeared. In

the past two or three weeks, however, a further rise in prices

in the face of a general expectation that the Treasury would

soon add to the supply of intermediate- and long-term issues

has generated a new conviction that current interest rate levels

accurately reflect supply and demand forces operating in the

credit markets and can be sustained for perhaps a considerable

period. In these circumstances, the Treasury might well be

able to achieve a worthwhile measure of debt extension in its

forthcoming operation.

It now appears that the Treasury ended the fiscal year

with a cash balance of $10.2 billion, considerably above

earlier expectations. While there remain some uncertainties

with regard to the rate at which these balances will be drawn

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down, particularly in early July, it now appears that the

Treasury should be able to get by at least until August 15

without any new cash financing, except for the sale of a

one-year bill at the end of this month and the increase of

three weekly bill offerings to the $2.1 billion level of sur

rounding issues. Should the bill rate come under what the

Treasury regards as undesirable downward pressure, however,

it would be prepared to sell additional Treasury bills at any

time to deal with the situation. By the time the Committee

again meets, the outlook for Treasury financing over the bal

ance of the summer should be a good deal clearer than it is

now.

Thereupon, upon notion duly made

and seconded, and by unanimous vote, the

open market transactions in Government

securities and bankers' acceptances during

the period June 17 through July 6, 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. Brill presented a statement on economic conditions as follows:

The state of the domestic economy continues to be good,

with activity maintained at a high level, prices remaining

stable, and both business and corsumer behavior characterized

by cautious optimism. True, the most recent statistics sug

gest some hesitation in the expansion, but hopefully nothing

more than "a pause that refreshes," a temporary leveling off

of the sort we have experienced from time to time in this

retail sales in

upswing. To cite just a few developments:

June appear to have slipped a bit from May's record volume;

the unemployment rate moved back up again, as was widely ex

pected; and employment declined substantially, which is more

puzzling. There is not enough information available yet to

provide a clue to the June production index, but it is un

likely to show more than a minor advance from the May level.

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Newly available data for May suggest that a slowdown

in some economic areas may have begun two months ago. Thus,

the May rise in personal income was much less than in preceding

months; manufacturers' inventories declined in May, after a

larger than average increase in April; manufacturers' new

orders also edged off after their large April spurt; and

housing starts fell again.

It is certainly premature to voice any alarm about such

a one- or even two-month letup in the pace of expansion,

particularly when recent surveys of spending plans portend

further gains ahead. Nevertheless, it is worth noting that

a number of demand sectors which played an important role in

earlier phases of the cyclical upswing appear to have lost

some of their vigor over the past 6 to 12 months. Federal

Government expenditures for goods and services, for example,

reached a peak in the summer of 1963, after a very sharp

run-up in 1961 and a more moderate but persistent increase

over the next year and a half. Since thle third quarter of

1963, Federal spending has risen very little. Also,

residential construction has shown little further gain

since last fall, after a rapid advance earlier last year.

Housing starts have remained in the 1.5 to 1.6 million range,

high but about one-tenth below the fall peak, and dollar

outlays on residential construction have hardly budged from

the fourth-quarter rate.

More recently, business spending for inventories has

slowed. Additions to inventories seemed to be picking up

some steam toward the end of 1963, but the rate of accumulation

has dropped sharply this year. A flurry in April was reversed

in May; in fact, manufacturers' inventories declined in that

month. Unless the statistics for June change the picture

markedly, total inventory accumulation in the first two

quarters of this year might not be much more than half the

rate of the last two quarters of 1963.

There is a hint, too, that consumer spending for durable

goods may be losing rather than gaining momentum. Such

spending rose at a $3 billion rate in late 1963, a $2 billion

rate in the first quarter of this year, and is estimated to

have increased by only $1 billion in the spring quarter.

Sales of domestic autos appear to have reached either a demand

peak or a supply limit at about 7-3/4 million units, and a

slowdown also is apparent in the furniture and appliance

areas, which had risen spectacularly earlier.

There have been offsets, of course, which have kept

aggregate activity on an upward path. While consumers may

have reached a temporary saturation point at advanced levels

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of spending for housing and durable goods, there has been

no lack of vigor in their spending for nondurables,

particularly apparel, general merchand:.se, and food. After

a somewhat sluggish performance in the latter half of

1963, expenditures for nondurables have risen at a phenomenal

$4 billion, or 9 per cent, annual rate in each quarter of

this year. In the business area, spending for plant and

equipment is picking up part of the slack resulting from

cautious inventory buying. Fixed capital outlays have been

rising fairly steadily since early 1963, and the latest

surveys indicate a continuation of the advance at a steady

pace over the balance of this year. In the governmental

area, State and local spending continues to mount rapidly.

While Federal purchases of goods and services have increased

by $1-1/2 billion over the past four quarters, State and

local purchases have increased $5-1/2 billion.

Thus, in the context of over-all expansion, we have been

experiencing a sort of rolling readjustment over the past

12 months, with increased private and local government

spending compensating for the leveling off in Federal spending,

and within the private total, consumption outlays--initially

for durables and more recently for nondurable goods--filling

the gap left by the decline in housing activity. Throughout

the period, business capital outlays have proceeded on a

steady and substantial upward course.

Such readjustments have much to commend them in permitting

orderly expansion. First, resources have been freed to meet

shifts in public preferences, in contrast to the 1955 situation

of rising demands. Second, the economy has been able to absorb

the consequences of excesses in some areas--multi-family

construction, for example--in an atmosphere of sustained

employment and incomes. Third, by avoiding a concentration

of expenditures, it has minimized bottleneck effects which

in the past have been the origin of more general upward price

pressures.

On the other hand, it also has resulted in a more leisurely

pace in making inroads into unutilized resources than some

would desire. The unemployment rate in June was, after all,

still above 5 per cent, only moderately below that a year earlier,

and marked by continued heavy long-term unemployment. Capacity

use among producers of major materials is still well below

the 90 per cent mark--86 is the best current guess--and capacity

is growing.

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-14Obviously, we can do better.

Nevertheless, it is hard

to fault a record that includes continued cost and price

stability, soaring profits, and a five per cent rate of

growth in real GNP. The wisest Governmental policy would

seem to Le to let well enough alone, at least until im

balances on one side or another give signs of developing.

Mr. Noyes made the following statement concerning financial

developments:

One of the things that we have noted frequently throughout

the course of this recovery and expansion has been the phenomenal

capacity of the economy for self-adjustment. As one or another

of the many financial or physical components of total economic

activity has moved out of line with the generally steady ex

pansion that has characterized the 40 months of upward thrust,

we have noted these aberrations with concern. But so far, at

least, our concern has been short-lived--we have had only to

wait for another month of data and it has been allayed.

Recently there have been misgivings about the behavior

of some key financial variables, especially the money supply

and other measures closely related to it. For the first five

months of 1964, the money supply increased at an annual rate

of only 2 per cent, total reserves at a rate of only 1.3 per

cent, and reserves required for private demand deposits showed

a small decline.

When we add our preliminary estimates for June, however,

there is quite a change, which brings the rate of monetary ex

pansion more nearly into line with the recent behavior of other

financial and nonfinancial variables. For the first half, we

are now estimating the money supply up at an annual rate of

3.1 per cent, and total reserves up 3.9 per cent; and reserves

required for private demand deposits shift from a decline to a

gain of about 1/2 of 1 per cent.

The gain in the money supply in June is all the more notable

because it occurred in the face of a further substantial increase

in U. S. Government deposits. In fact, the large run-up in the

Government's balance during the whole first half has unques

tionably tended to distort the money supply data, for the period

as a whole, on the low side.

Including estimates for June, time and savings deposits at

commercial banks are up at an annual rate of 11 per cent for the

first half, and total bank credit increased at about a 6-1/2

per cent rate--both lower rates than prevailed in 1963. However,

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bank loans were up a little more than in either 1962 or

1963, and the second quarter rate of 12.2 per cent was

slightly above the first quarter rate.

I sould emphasize that these numbers for the first

half are all subject to revision when more complete data

are available, but the bank credit figures are especially

fragile at this early date after the end of the period.

Nothing need be added to the Manager's report on develop

ments in the Government securities market except to say that,

while it was less pronounced, the firming of prices and the

downdrift in yields since the last meeting extended to almost

all segments of the capital market. S:ate and local govern

ment issues were an exception. In this market new issues

were large, and despite investor response to the upward adjust

ment of yields, dealer inventories remained high at the end

of June.

The stock market continued buoyant through yesterday's

close, with market sentiment dominated by favorable earnings

reports and estimates.

Turning to Government finance, we are now estimating the

cash deficit for fiscal 1964 at only $4.5 billion. When one

remembers that we were looking somewhat skeptically at an

estimated cash deficit of over $8 billion in January, when

half the fiscal year was already behind us, the change is

striking. The Treasury's favorable cash position of over

$10 billion, which has resulted from this extraordinary

budget performance, has made it possible for the Treasury

to plan for the major advance refunding operation, mentioned

by Mr. Stone. It has also meant, of course, that the supply

of bills in the market is already somewhat less than might

have been anticipated, and it may be that shifting out of

"rights" into bills in connection with the refunding will put

bill rates under downward pressure. We understand that the

Treasury has this very much in mind and is prepared to sell

bills, despite its high cash balance, if this is necessary

to prevent excessive downward pressure on bill rates.

Since the last meeting, current weekly estimates of free

reserves have been in a very narrow range--126, 126, and 123and the figure for the week ending tomorrow also now appears

likely to be in the vicinity of that range. As indicated

earlier, in connection with the discussion of money supply de

velopments, the various measures of aggregate reserves all

moved up in the month of June, but this has tended generally

to put them more nearly in line, rather than to push them out

of line, with the moderate expansion called for in the directive.

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Quite apart from the prospective Treasury financing, a con

tinuation of the present directive would seem to be consistent

with the broad objectives of policy.

Mr. Furth presented the following statement on the balance of

payments:

The U. S. payments deficit for June may be tentatively

estimated at $100 million. This estimate is based on the

preliminary weekly data and the final figures may turn out to

be quite different. But our tentative estimate would mean that,

on a seasonally adjusted basis, the deficit was smaller than in

May and April, although still larger than the average of the

first qua::ter.

Our tentative estimate also would imply a deficit for the

second quarter of $700 million before seasonal adjustment, and

of perhaps $800 million after seasonal adjustment. This would

compare with a seasonally adjusted deficit of less than $200

million for the first quarter.

Nearly half of the deterioration between the first and the

second quarter may be attributed to a decline in the trade

surplus, due to the absence of some temporary factors that

favored exports in the first quarter (Soviet wheat sales) and

to the anticipated rise in imports. The surplus on service

account seems to have declined, too, with investment income

probably receding from its unusually high level of the first

quarter and travel expenditures reaching record peaks, perhaps

accentuated by the reduction in Atlantic air fares.

Government expenditures and direct investments abroad

apparently rose from unusually low first-quarter levels. The

monetary policies of many European countries not only favor

new participations of U. S. firms in European concerns squeezed

by credit restrictions but also force U. S. firms to shift the

financing of their existing European subsidiaries back to the

United States.

The aggregate net outflow of funds on portfolio and short

term account may not have changed much. A rise in foreign bond

placements and probably also in the outflow of money-market

funds was apparently offset by a reduction in long- and short

term bank lending to foreigners, which reached extraordinarily

high levels in the first quarter.

It should be stressed, however, that all these interpretations

are based either on incomplete data or on guesswork.

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While the deterioration in our payments balance from

the first to the second quarter was disappointingly large,

it is encouraging that within the second quarter there seems

to have been steady improvement from month to month. Un

fortunately, we have no way of knowing whether this improvement

is going :o continue in the period ahead.

The most ominous factor may well remain the continuing

tendency of European central banks to combat real or imagined

inflationary threats by restrictive monetary policies, which

are bound directly and indirectly to hurt our efforts to

reduce the U. S. payments deficit. Last week, Belgium and

Switzerland increased their discount rates: Belgium for

the third time since last summer, Switzerland for the first

time in seven years.

The Swiss action probably is designed to foster a general

increase in long-term interest-rate levels, which the authorities

believe necessary in order to stem the construction boom. Since

Switzerland prohibits the payment of interest on foreign-owned

short-term assets, the move will not directly attract U. S.

short-term funds. But it will certainly do nothing to slow

the influx of funds, which led in June to a rise in Swiss

reserves of $150 million.

The Belgian step is more difficult to understand. Belgium

has suffered less from price increases than most other European

countries. Government budget and bank credit are well under

control, and there have been no signs of an unsustainable in

dustrial boom. It is true that the basic money-market rate,

the yield on four-month government funds, has for some time

been higher than the discount rate and has recently advanced

from 4.75 to 4.80 per cent. But it seems reasonable to assume

that this change was a result rather than a cause of central

bank policy.

It is perhaps only a coincidence that the Belgian step was

taken at the same time at which the Belgian Executive Director

in the International Monetary Fund led an unprecedented protest

of the directors of the Common-Market members against what he

considered the "soft" position taken by the Fund management in

its Annual Report draft, which took the U. S. side in the

controversy on international liquidity. Or did the Europeans

want to demonstrate by both word and action that they favor

everywhere a tightening rather than an easing of liquidity?

If their aim is merely the restoration of internal and

external financial stability, they seem to have succeeded

pretty well in France and Italy. In fact, France again has

achieved a payments surplus close to an annual rate of

7/7/64

$2 billion.

Italy's payments deficit has nearly disappeared,

and its international position has so improved, despite

recurrent rumors of an impending lira devaluation, that the

fall of its government has caused hardly more than a ripple

in excharge markets.

Gerany still has taken no action on the modest government

proposals to stem the inflow of foreign capital; its recent

tariff reductions will benefit its Common-Market partners

rather than the rest of the world, including the United States.

The latest wage agreement, in the all-important metal industry,

was quite moderate, contrary to the perennial fears of wage

push earlier expressed by the German authorities.

How seriously we should take the threat of inflation in

Germany may be illustrated by a few figures, taken from the May

report of the German Federal Bank. Between the first quarters

of 1963 and 1964, industrial wages rose 7 per cent. But

industrial production rose nearly 10 per cent. Wholesale as

well as retail prices rose less than 1 per cent. But German

net reserves rose from March to March by nearly $700 million,

in spite of substantial prepayments on military purchases.

In spite of these accomplishments, the authorities in all

three countries still talk and act as if their only problem was

inflation. In France and Italy, industrial production seems

to have stopped rising, if it has not actually declined. Under

conditions of full employment, such a pause is harmless and

perhaps even welcome. But the question remains whether these

countries will modify their restrictionist attitudes in time to

avoid damaging not only their economies but--more important

from our own point of view--also the U. S. payments balance.

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

and views on economic conditions and monetary policy, beginning with

Mr. Hayes, who presented the following statement:

The business picture has remained essentially unchanged

since our last meeting. Prospects continue excellent for

further upward movements, but there are no signs at this point

of any acceleration in the pace of the advance. Indeed, some

of the statistics suggest just a little less vigor than those

becoming available a few weeks ago. In particular, leading

indicators of construction activity suggest the possibility of

some easing off in this sector of the economy. Continued price

stability is evidenced both by the performance of the major

indices and by the latest purchasing agents' report.

7/7/64

-19In ccntrast with this generally satisfactory domestic

situation, the balance of payments again shows signs of

becoming a serious problem. This problem has a number of

rather di.tinct aspects. In the first place, there is the

real possibility of a sharply adverse public and market

reaction, here and abroad, to the eventual publication of

the poor second quarter statistics. Second, there is a

possibility that there will be a further deterioration in

our paymerts position in the months ahead. Third, it is a

sobering thought that we may be nearing the limit of our

capacity to finance our deficits through further accumulation

of official dollar holdings or the extension of longer term

bilateral credit facilities--granted that our swap lines remain

fully available to deal with temporary reversible flows and

that the drawing rights on the Fund remain virtually intact.

And this third factor can, of course, be influenced importantly

by the first two.

While June data are, of course, preliminary, the second

quarter is likely to show an annual rate of deficit in excess

of $3 billion--close to the large average deficit of the past

six years.

The public has, of course, been prepared for some

worsening in our payments position, but it is questionable

whether so sharp a deterioration has been discounted in advance.

Some of the deterioration between the first and second quarters

reflect the reflow of funds from Canada in March, and their

return in April; even after a rough adjustment for this factor,

the annual rate of deficit in the second quarter would be well

above $2 billion, which I find disturbing. For the past two

months, however, the deficit has been running at a more moderate

rate, though it is still too high.

In aralyzing our current position we have to remain aware

that while the midyear window dressing period has just come to

a close, we are getting into a period of heavy seasonal pressures,

mainly reflecting tourist spending abroad. There is uncertainty

as to how well our trade surplus will hold up, with the continuing

rise in our GNP--although preliminary data for May are encouraging.

New foreign issues may well grow in the third quarter, and interest

rates are rising in several major foreign countries, with some

acceleration of short-term flows to Canada apparent in recent weeks.

At the same time the Euro-dollar market may feel the impact of some

of the credit tightening moves in Europe and may in turn exert an

attraction for American funds. Moreover, in an election year and

with a variety of political uncertainties abroad, together with

inflationary pressures in much of Europe, there is always a

possibility of market disturbances that could have adverse repercus

sions on the dollar.

7/7/64

-20-

In the credit area, the Wednesday-to-Wednesday figures

available for weekly reporting banks for four weeks through

June 24 do not reveal any unusual strength in bank loan demanddespite a rather sharp temporary bulge over the tax date.

Apparently corporate liquidity is still high. The new proxy

series for bank credit does, however, point to a good gain in

June on a daily average basis; and if we inspect the rates of

growth in credit and deposits for the past six months we find

less evidence than we did a month or so ago for a substantial

slowing of such growth as compared with last year. The money

supply proper, for example, rose in the first six months at a

3.1 per cent annual rate, not far out of line with the 3.6 per

cent gain in the first half of 1963. For money supply plus

time deposits the comparable figures are 6.5 per cent this year

and 7.6 per cent last year. We can hardly be accused of having

prevented continuing ample growth of credit and liquidity.

With respect to policy for the next three weeks our path

seems clearly marked, in view of the likelihood that the Treasury

will undertake important financing operations in this period.

I would therefore favor no change in policy at this time. The

directive might appropriately be left as it is, except for some

recognition of the further confirmation of a weakened balance of

payments position in the second quarter and recognition of the

sizable increase in bank credit as well as money supply in the

past month.

Whether we will still be inhibited by "even keel" considera

tions by the time of the next meeting is now uncertain but should

be amply clear by that time.

As I pointed out at the last meeting, it is none too soon to

give serious thought to our longer-range policy problems and thus

to be prepared to move promptly toward an appropriate stance when

we are free to implement our judgment, provided, of course, that

conditions then warrant a change of policy. While it is by no

means certain, we may be entering a period when the dollar's

international position may be seriously threatened by disillusion

ment and weakened confidence abroad. In any event, we cannot avoid

giving the balance of payments heavy weight in our policy decisions

from now on. There may be a few members of the Committee who

would like to reserve monetary policy to deal with purely domestic

considerations, and to use so-called "specific measures" (including

capital controls) to deal with the balance of payments. Hopes of

disposing so neatly of our problems are, I believe, built on

illusion. Our domestic and international economic well-being are

inextricably interwoven, and at a time of unprecedented domestic

prosperity we should be especially alert to the obligations of

-21-

7/7/64

monetary policy for the preservation of a strong international

financial system based on the dollar. To put it another way, a

world of convertible currencies and freely-moving trade and

investment is the kind of world we believe in, and it is the

kind of world where each country's monetary policy must take

careful account of what is occurring beyond the national borders.

For many nonths now the trend in Europe has been toward greater

credit restraint, almost exclusively because of domestic irfla

tionary pressures. Most European countries have tried hard and

are still trying to blunt the international effects of their

actions. We can hardly expect to remain immune to all these

developments. It would be one thing if we were faced with

depressed domestic conditions--then the argument for looking

mainly inward would be strong indeed. But instead we are con

fronted with record domestic highs in sector after sector, and

with an economy which shows no sign of being seriously vulnerable

to moderate policy moves in the direction of greater restraint.

Apart from the question of our own deliberations, we face

a real problem in helping the public to see more clearly both the

risks and the necessities of our balance of payments position.

In this process of education the System should be playing a

leading role, matched perhaps only by that of the Treasury.

Now, to touch on a more specific matter, I would hope that

serious consideration would be given to the use of a cut in

reserve requirements to provide some of the reserves needed to

take care of seasonal credit expansion this fall. Just as an

example, a 1 per cent reduction in reserve city bank requirements,

a 1/2 per cent reduction for country banks, and a 1/4 per cent

cut for time deposits might together provide a major part of th

season's needs. In the absence of such a move the gold reserve

ratio problem could become acute around the end of the year; and

the move would obviate substantial bill purchases that could

put undesirable downward pressure on short-term interest rates.

Mr. Shuford said that national economic activity had continued to

rise at a rapid but orderly rate in recent months.

Production had shown

substantial gains since March and retail sales remained favorable.

Em

ployment increases since March indicated greater use of productive

capacity.

While the expansion was rather rapid, it seemed well-balanced

and there was little evidence of price inflation.

7/7/64

-22

Activity in the Eighth District had been on a plateau during

the first four months of the year but might have shown some improvement

since April.

Business loans at weekly reporting banks rose markedly

from April to June, after remaining unchanged for about half a year.

Bank

deposits had continued to rise at about a 9 per cent annual rate, with

most of the gain in time deposits.

continued to rise.

Value added in manufacturing also had

On the other hand, total payroll employment in the

major labor markets of the District had shown little change since January

and the volume of debits at District reporting banks had been unchanged

for nine months.

Mr. Shuford reported that the outlook for construction activity

in the St. Lou;s Metropolitan Area was favorable.

The projects included

in the Downtown Riverfront Redevelopment Program were beginning to take

shape.

Chrysler Corporation recently had announced a major expansion in

its St. Louis assembly plant which was expected to be completed by January.

Turning to policy, Mr. Shuford said he favored maintaining cur

rent market conditions because it was likely that the Treasury would be

conducting a major financing.

The economy seemed to be at a high level

and moving forward satisfactorily, with no large imbalances.

Mr. Shuford said he found some of the financial indicators a bit

puzzling in view of the strong economic situation.

Market interest rates

had shown some weakness since March; yields on three-month Treasury bills

were lower in June and in early July than in March and rates on Government

-23

7/7/64

securities in the six-month to five-year range had shown a pronounced

decline.

In previous business expansions, the demand for funds usually

had outpaced the supply, with upward pressure on interest rates.

The

opposite seemed to be occurring this time, and this development deserved

study.

Mr. Shuford noted that from September 1962 to November 1963 the

money supply rose at a relatively rapid 4.5 per cent rate, and this ex

pansion probably had contributed to the current strength of the economy.

From November to May, however, growth was it the much lower rate of 2

per cent.

Such a decline in the rate of monetary expansion would appear

to be somewhat restrictive unless there was reason to believe that the

demand for money had declined.

He was pleased to see that the preliminary

figure for the money supply in June was up considerably, and, as had been

reported this morning, the growth rate so far this year was a little

above 3 per cent.

In view of the interest rate situation, which might indicate some

weakening of demand for loan funds, and of the moderate rates of increase

in the money supply, bank reserves, and bank credit of recent months,

Mr. Shuford preferred to see no tightening in monetary policy.

On the

other hand, in light of the strong rise in business activity and the

weakening of the balance of payments position, he did not advocate easing.

Specifically, Mr. Shuford said, he would prefer to see the three-month

Treasury bill rate remain near the 3.50 per cent discount rate.

This

7/7/64

-24

might be consistent with free reserves fluctuating around the $100 million

level.

He was inclined to think that these market conditions during July

would lead to moderate rates of expansion in bank reserves, bank credit,

and money.

Mr. Shuford did not favor changing the discount rate.

He agreed

with Mr. Hayes' observations concerning the kinds of changes that should

be made in the present directive, and he thought that the draft which the

staff had prepared would accomplish this purpose.

Mr. Bryan reported that a number of new figures for the Sixth

District economy had become available since the last meeting.

There had

been sharp increases in nonfarm employment, retail trade, and construction

contract awards.

Personal income also had risen and insured unemployment

was at the record low level of 3 per cent.

In the financial area the

money supply, however defined, and both loans and investments at banks had

risen sharply.

Nationally, Mr. Bryan said, the economy seemed to be moving along

at a satisfactory pace, and there did not appear at this time to be any

significant elements of inflation or instability.

He took note of the

point already made that in June most of the reserve series had moved up

and now showed a more satisfactory rate of growth.

Total reserves had

come up sharply, with part of the gain absorbed by an increase in excess

reserves from their previously extraordinarily low level and part offstt

by a reduction in borrowings at the Federal Reserve Banks in recent weeks.

7/7/64

-25

Mr. Bryan believed that no change in policy was called for under

the circumstarces.

Specifically, for the longer term he favored a rate

of increase in total reserves of approximately 3 per cent or a little

h.gher.

For the shorter term he would set a central target for free

reserves at the $100 million level.

Mr. Bopp said the major indicators of business conditions in the

Third District depicted a rather good year for a region that contained

many areas of labor redundancy.

Unemployment claims were low; unemployment

rates were declining; employment was up in the growing regions of the

District and steady in the declining ones.

ahead and so were construction awards.

Manufacturing output was moving

Electric power consumption in

manufacturing industries and construction contract awards in the Third

District stood at favorable levels, compared with recent years.

Since the last meeting of the Committee, Mr. Bopp observed, re

serve pressures

on District member banks had continued to diminish and

loans had continued to better their year-ago performance.

In two out of

the last three weeks, reserve city banks experienced a slight basic reserve

surplus, averaging around $9 million.

be largely seasonal in nature.

The surplus, however, appeared to

The latest statement week (ending July 1)

showed a slight swing back to the deficit side.

There was no reserve

city bank borrowing at the discount window in June, and country bank

borrowing continued at a low level.

Business loans at weekly reporting

member banks rose $12 million in the three weeks ending July 1, compared

to an $8 million increase last year.

7/7/64

-26

In Mr. Bopp's opinion, business and financial developments, as

well as the probable forthcoming Treasury financing, called for no change

in policy during the next three weeks.

Recent data indicated that the

rise in consumer demand, especially for durables, was tapering off rather

than accelerating.

Also, the economy was entering the season when there

was usually a lull in demand and business activity.

generally stable.

Prices continued

The margin of unused resources seemed sufficient to

meet any likely increase in demand in the next few weeks without upward

pressure on prices.

In his view, the domestic situation clearly did not

call for any firming or tightening of policy.

The balance of payments deficit, Mr

the second than in the first quarter.

Bopp noted, was larger in

However, the deterioration was not

in the short-term capital sector which was more sensitive to interest

rate differentials.

Moreover, it did not appear likely that the recent

rate increases by the central banks of Switzerland and Belgium would exert

any strong pull on United States funds.

Although he would not like to

see short-term rates decline, he did not favor action at this time to

bring abcut an increase.

Mr. Bopp recommended no change in

policy.

He believed,

however,

that the proposed changes in the description of the economic background in

the directive drafted by the staff were appropriate.

Mr. Hickman said that, on the basis of preliminary data, domestic

business activity in June continued along the path of moderate and

7/7/64

-27

apparently sustainable rise.

Retail trade leveled, or may have

declined a shade, from the advanced May rate.

At this early stage,

it appeared that production advanced fractionally in June, with in

dustrial groups other than autos and steel providing most or all of

the push.

The production index in most of the remaining months of

1964 was not expected to receive much help from further advances in

steel and autos.

One element of relative weakness in the economy might be

construction, judging by housing starts and construction contracts.

The recent softness in these figures suggested a possible decline in

future construction put in place.

It was arguable, however, that the

recent behavior of the foreshadowing construction series was only a

return to a sustainable position and an indication that construction

activity was leveling off.

Mr. Hickman continued to see evidences of potential "sectoral

inflation" in a number of the specialized capital goods industries in

the Cleveland District.

At the last meeting of the Committee, he had

mentioned that one of the Cleveland Bank's directors indicated that he

was having difficulty in obtaining skilled people for work in the machine

tool industry.

It now appeared, from a survey of 50 Fourth District

industrialists, that about half were experiencing similar difficulties,

insofar as both skilled labor and professional personnel were concerned.

As he saw it, the problem seemed to be concentrated in the metal-working

industries where new orders had been exceptionally strong.

7/7/64

-28Insofar as policy was concerned, Mr

Hickman thought that with

a large-scale Treasury financing ahead, an even-keel policy was clearly

irdicated over the next few weeks.

This would presumably call for re

solving doubts on the side of ease, which was probably nc more than the

market would expect under the circumstances.

In his opinion, the Desk

had followed very closely the intent of the Committee within the last

few weeks, maintaining a generally comfortable tone in the market.

The

bill rate had held steady within a narrow range, but yields on interme

diate- and long-term Government securities had continued to edge downward

Mr. Hickman's personal view was tha, the tone of the market was

too easy, and that a continuation of this tone would be undesirable if

it were not for the impending Treasury financing.

With spreads widening

between interest rates here and abroad, and with bank credit readily

available, he suspected that the Committee was creating difficulties for

itself later on.

Some banks in the Fourth District reported confidentially

that they were studying opportunities to earn higher rates abroad, and

were seriously considering getting their feet wet in this area.

Mr. Hickman observed that the opinion expressed by some members

of the Committee at the last meeting in favor of outright control of

bank lending abroad did not appear to be acceptable to some members of the

academic community and to the U. S. Treasury.

predicted, continued to inch upward.

Also, foreign rates, as

Thus, it seemed to him that an

-29

7/7/64

environment was gradually developing that would call for a more restrictive

U. S. monetary policy.

For the near term, however, Mr. Hickman recom

mended no change in policy and no substantive change in the directive.

He approved of the language revisions in the staff draft.

Mr. Daane said that with the Treasury on the eve of a major

effort to achieve some debt extension--an effort that was as much in

the System's interest as in the Treasury's--the situation clearly called

for no change in policy, either overtly or otherwise.

It was his under

standing that the Treasury announcement to be made tomorrow would indicate

that there still was a need to raise some cash, although the amount needed

had lessened, and that the Treasury was poised to borrow in the bill area

whenever it seemed desirable for balarce of payments reasons.

If the

Treasury did accomplish a significant amount of debt extension, Mr. Daane

thought their borrowing over the rest of the year would be largely in

the short-term area.

In the light of this, he felt Mr. Hayes' suggestion

that some of the seasonal need for reserves be met by reducing requiremen.s

should be examined pretty carefully.

He agreed fully with the objective

of avoiding downward pressure on bill rates.

It was his impression from

past experience, however, that while the open market instrument was not

perfect, it was more difficult to maintain the same monetary posture with

a change in reserve requirements than through utilizing open market

operations.

7/7/64

-30

Mr. Daane said he approved of the staff draft of the directive

except for the modification that had been made in the description of the

international payments position from "less

favorable" to "adverse.'

He did not think that what had been learned since the last meeting clearly

indicated a change in the situation, and he preferred language reading

"the country's less favorable international payments position in the

second quarter."

Mr. Hayes said that he did not fully understand the reason for

Mr. Daane's concern over his suggestion regarding reserve requirements.

By way of clarification, Mr. Daane said that in his opinion the use of

the reserve requirement instrument did not afford the same degree of

control as did the open market instrument.

To attempt to meet seasonal

needs by reducing reserve requirements would mean providing reserves in

relatively large blocks, and this might create undesired market conditions,

particularly because of possible uneven distribution of reserves.

Thus,

there were greater risks involved than when seasonal needs were met by

open market operations, and it seemed unnecessary to incur them as long

as the Treasury was prepared to combat any downward pressures on bill rates.

Mr. Hayes commented that he did not go along with this reasoning;

he thought the System's experience with reserve requirement changes had

been satisfactory.

Mr. Daane agreed that there had not been difficulties

at the time of the most recent reduction in requirements, but problems

had been encountered on earlier occasions.

the matter deserved careful study.

Chairman Martin remarked that

-31

7/7/64

Mr. Shepardson commented that as the staff report hac indicated,

the domestic expansion had been moving in a satisfactory fashion, and

hopefully at a sustainable rate in most areas.

tuations and deviations from this pattern.

There had been some fluc

In that connection, he found

the recent behavior of the money supply to be interesting.

There had

not been any s:gnificant change in policy fcr some time; yet for a few

months the money supply had grown less rapidly than in the latter part

of 1963, and in the past month there had been an upturn.

This seemed

to indicate to Mr. Shepardson that the Committee could create a climate

favorable to monetary growth but it could not necessarily produce any

given growth rate automatically.

In his judgment, Mr. Shepardson continued, there had been an

adequate expansion of the money supply over the longer run, and the fear

of the last few months that the growth rate was inadequate was without

foundation.

The Committee was providing the climate for growth that the

economy needed, and it should not be too concerned about short-run

deviations from the trend lines when it was following a general policy

of expanding reserves.

With reference to the balance of paynents situation, Mr. Shepardson

said, it seemed that there was basis for more concern--not particularly

on account of recent European rate changes, although they perhaps pointed

to a problem at some point--but in what he read concerning international

trade negotiations.

Developments in these negotiations were not encourag

ing for the U. S. trade outlook.

7/7/64

-32

Having said that, Mr. Shepardson remarked, he thought the

situation at this time justified continuation of the Committee's present

policy.

He approved of the revised directive that had been proposed by

the staff.

Mr. Robertson said that in his judgment there was nothing in the

domestic

picture or in the international situation that would justify

a change in policy.

The forthcoming Treasury financing also argued for

reaffirming present policy and for maintaining about the same money market

conditions as had prevailed in the past few weeks.

He agreed with

Mr. Daane's suggestion as to the directive proposed by the staff; "less

favorable" was preferable to "adverse" in describing the balance of pay

ments situation.

Otherwise, he found the draft acceptable.

Mr. Mills made the following statement:

Generally stable and prosperous conditions mark the

midyear of 1964, with the usual simmer business letdown to

be expected. These summer doldrums of.er a breathing space

during which policy preparation can be made to conform with

whatever new turn in direction the economy may take. There

is no reason to use this interval for posting economic guards

against imagined inflationary pressures deemed to call for antic

ipatory restrictive monetary and credit policy actions. A

move at this time toward credit restraint, either by way of

positive actions or the utterance of unofficial warning state

ments, could damage the business community's belief in

unimpeded economic progress at a time when the economy still

requires nurturing by a moderately relaxed Federal Reserve

System monetary and credit policy.

As to the domestic scene, the spreading contraction in

the construction industry must be scrutinized closely as to

its economic ramifications if momentum gathers in reduction

in the construction of multiple housing units and commercial

7/7/64

-33

buildings and in a slowing-down of housing starts, As the

construction industry holds a key position in the national

economy, any slowing-down in the pace of its activity could

produce such far-flung results as a shrinkage of employment

which, by having an unfavorable effect on the sale of new

model 1965 automobiles, could thereby transmit a depressive

influence to that likewise critical industry and in the debt

service of the consumer credit obligations identified with

it. If any serious weakness should develop in the con

struction and automobile manufacturing industries, business

activity could decline if there should not be a new surge of

activity in some other areas of the national economy.

In the light of the above, there are better reasons for

following a Federal Reserve System monetary and credit policy

aimed at encouraging reasonable credit expansion than to adopt

a policy intended to head off anticipated inflationary pressures,

of which there are presently no serious indications. The advent

of the usual summer business letdown is a good time for survey

ing unemotionally the probable trend of future business activity

and for designing a credit policy that will help to maintain

and advance the general prosperity now being enjoyed.

I must reiterate my conviction that domestic considerations

must have a first claim in making cred:t policy decisions,

with balance of payments problems set to one side for treatment,

if needed, by appropriate fiscal measures.

In that connection, Mr. Mills added, he wanted to call attertion

to an editorial in the New York Times for June 25 which repeated its

opinion that cceation of a capital issues committee provided an appro

priate approach to the correction of balance of payments problems.

Also,

an editorial in the Washington Post this morning took a similar position.

Mr. Mills said he was satisfied with the administration of the

Account since the last meeting.

It had produced a constructive margin of

free reserves, which he thought was appropriate and desirable.

However,

he had an unconfirmed feeling that the Account had been handled more in

the light of the Treasury financing than to reflect the attitude of some

Committee members and that conditions otherwise would have been more

restrictive.

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7/7/64

Mr. Mills concluded by observing that in light of expectations for

the next three weeks he would not suggest any change in policy and he did

not believe that any change was in the minds of other Committee members.

Mr. Wayne said that Fifth District business continued to advance,

although some uncertainties persisted.

Among the broad statistical

indicators, seasonally adjusted nonfarm employment and man-hours rose in

May but failed to regain March levels.

Seasonally adjusted department

store sales declined a little in June from a.1-time highs reached in May.

On the other band, insured unemployment dropped sharply from late May

through the middle of June, when Virginia had the lowest rate in the nation.

Construction activity continued at high levels, with building permits

rising sharply in May to a new 1964 high.

Respondents in the Richmond

Bank's latest survey generally regarded the business outlook with somewhat

more optimism than they had three weeks earlier.

Manufacturers reporting

on their own industries, however, showed a little less optimism than last

time.

On balance they reported increases in shipments and employment but

little if any change in weekly hours, prices, or the outlook for profits.

Business, real estate, and consumer loans at District weekly

reporting banks rose considerably more than seasonally during the first

three weeks of June and appeared to be substantially stronger locally than

in the nation as a whole.

Nevertheless, the money market banks switched

during the period from heavy net buyers to moderate net sellers of

Federal funds.

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7/7/64

At the national level, Mr. Wayne said, the latest information

appeared to support earlier impressions that the current expansion in

activity posed little immediate threat to price stability.

The latest

monthly gains in some of the important coincident indicators were more

moderate than earlier in the spring, and the leading indicators were some

what less favorable than they had been for some months.

Inventories and

capital outlays were being kept in bounds and recent Department of Commerce

surveys suggested little in the way of excess from either of these quarters.

At the moment, the advance seemed altogether moderate and orderly.

As to policy, Mr. Wayne believed that current rates of expansion

in reserves, bank credit, and the money supply were generally appropriate

to the present domestic environment.

While the external situation might

provide some cause for concern, especially in view of recent rate develop

ments abroad, he did not feel that it justified any change at the present

time.

For these reasons, plus the probability of significant Treasury

financing operations over the coming period, he favored maintaining the

present policy.

level.

Mr. Wayne would keep the discount rate at its present

The draft directive appeared appropriate to him, with the change

suggested by Mr. Daane.

Mr. Clay said the domestic situation continued, in his opinion,

to call for the stimulative effect of an expansive monetary policy.

In

the aggregate, the economy was moving ahead, but there was no evidence

of over-exuberance.

orderly development.

On the contrary, the pace was one of moderation and

7/7/64

-36

The overheating of the economy about which concern often had been

expressed just was not showing up, Mr. Clay commented.

With the lessened

impact of Federal Government outlays and residential construction, the

economy was dependent upon consumer and business spending as the principal

sectors of expansion.

These sectors were advancing, but within bounds

that did not show pressure on resources and prices.

There was a strong

likelihood that expansion of the economy could continue in the months

ahead without a price inflation problem.

The economy continued to have a problem of sticky unemployment of

manpower.

At the same time, it had the other necessary productive re

sources for expanding economic activity.

While the unemployment problem

was of a fairly concentrated variety that existed side by side with

essentially full employment of many types of workers, the necessary shift

ing and upgrading of employees, as well as the required increase in total

jobs, required an expanding economy for developing and putting that manpower

and other resources to use.

In view of these domestic cond.tions and developments, Mr. Clay

said, monetary policy should remain on the expansive side, in line with

the Committee's recent policy objectives.

While the international payments

deficit was larger in the second quarter than in the first quarter of

the year, continuation of the current monetary policy also appeared

appropriate when account was taken of the international payments situation.

In addition, the probability of Treasury financing led to a presumption

of no basic change in monetary policy for the period immediately ahead.

7/7/64

-37

Mr. Clay thought that the staff draft for the economic policy

directive, with the change suggested by Mr. Daane, would be suitable for

the period immediately ahead.

In his judgment, no change should be made

in the Reserve Bank discount rate.

Mr. Helmer reported that economic accivity in the Seventh District

in recent weeks was showing greater similarity to that for the nation

than in many months.

While there were some indications of slower rise, it

was still widely expected that activity would continue upward and :hat

further progress would be made in utilizing unused resources.

Information

recently available on retail sales, debits tc demand deposits, and housing

starts indicated these were all down somewhat in the District, but analysts

associated with the major Midwest industries continued to be optimistic.

The June 30-July 2 period saw the opening of new labor contract

negotiations at the big three auto firms, Mr. Helmer noted.

A settlement

was not expected before the August 31 deadline, and, when achieved, seemed

certain to exceed the Council of Economic Advisers' 3.2 per cent guideline.

The recent partial recovery of prices for the top grade of slaughter

cattle had been beneficial to some areas of the District.

Crop prospects

were generally good and the current indication was that farmers would

realize favorable prices for hogs this fall.

However, farm machinery

manufacturers were now reporting some indications of weakening demand in

livestock areas and distributors of various kinds of farm supplies indicated

that payment terms were being eased further in order to make sales.

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-38

The net inflow of personal savings and time deposits at banks in

District urban areas increased sharply in May, largely because of a decline

in the rate of withdrawals.

At these banks, excluding Indiana where

interest rates were raised early this year, the net inflow in April and

May had been nearly one-fourth larger than in the same months last year.

At savings and loan associations

in the same four States the net inflow

rose well above the year-ago level in May after being below year-ago in

earlier months.

Hr. Helmer noted that loan expansion at District weekly reporting

banks in June was strong but less than the rise in the same month of 1963.

The June banking figures suggested that consumers were increasing their

use of credit somewhat.

business loan rates in

The quarterly interest rate survey showed that

the District were higher in June than in March and

also higher than in June 1963.

Governments in

securities.

Major District banks had liquidated

the last month but had increased their holdings of other

Chicago banks were covering their reserve needs in the Federal

funds market.

Mr. Deming said that Ninth District personal income in May moved

to a new high in terms of annual rate, completely offsetting the weakness

shown for the previous two or three months and bringing the figure back

on the trend line running since January 1962.

The average District income

gain in this period had been slightly higher than that for the nation.

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7/7/64

The agricultural picture was quite good for this time of year,

Mr. Deming continued.

There had been unusually heavy rains and current

soil moisture and early crop prospects were better than usual.

Despite

a 2 per cent acreage cutback, winter wheat output as of June 1 was expected

to be 2 per cent larger than last year.

Mr. Deming observed that two recent opinion surveys taken by the

Minneapolis Reserve Bank showed some interesting results.

The regu ar

six-week survey of major industrial concerns showed that activity, as

reflected by orders, production, shipments, employment, and hours worked,

generally expanded or remained about the same in May and June.

Such

declines as were noted were mainly seasonal although some reflected phasing

out of Gcvernment orders.

Only one company reported a slight increase in

prices of its finished products; all others reported prices generally

unchanged.

The concerns were quite optimistic about the third quarter

outlook, with three-fourths expecting output gains and half expecting

higher employment and improved profits.

Those companies who foresaw de

clines in the third quarter regarded them as mainly seasonal.

Two concerns

expected some price increases in their products, one expected a decline,

and the others expected stable prices.

The second survey was a quarterly survey of agricultural banks,

both member and nonmember.

They reported a drift to slightly lower net

farm income; and that farmers currently were spending no more, and perhaps

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7/7/64

a bit less, on all items and definitely less on major items such as

machinery. They also noted fairly strong farn loan demand and some firming

in farm loan notes as their loan-deposit ratios grew.

Some stated they

were becoming less aggressive in seeking loans and were more selective

in granting them.

Mr. Deming said member bank loans continued to expand rapidly

during June following a strong advance in May, bringing the gain for the

first six months of the year to a point comparable with the pronounced

increases of 1963 and 1962 and well above the average for recent years.

In the last two months, city banks had shown gains comparable to country

banks but the six-month record showed a much stronger expansion at country

banks since loan demand at city banks lagged during early 1964.

The in

creases shown by the city banks were concentrated in loans to nonbank

financial institutions and "all other" loans.

Business loans at the close

of June actually were lower than six months earlier, a very unusual

development, although there was some pickup

in this category in June

Bank investments showed virtually no change in June, following

a slight decline in May, Mr. Deming observed.

For the first half as a

whole, however, District member bank investments had shown a smaller

decline than was typical.

Thus, total bank credit expansion had been

larger than usual and was exceeded in recent years only in the comparable

period of 1962.

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7/7/64

Deposit changes in June were about in line with seasonal expec

tations and for the first six months of 1964 had been stronger than usual.

Time deposit growth in June was weaker than usual, with city banks showing

a rather pronounced drop in negotiable time deposits.

In part this might

reflect tax and dividend requirements of corporations, but in part it

seemed to reflect some flows into Canadian time deposits by some big

District corporations.

Banks in the District had been on the buying side of Federal funds

transactions for the past four months.

City bank borrowing at the dis

count window remained rare and minimal but country bank borrowing, while

still relatively light, had stepped up in recent weeks.

Mr. Deming said he thought that it was obviously undersirable for

the Committee to change policy in view of the Treasury financing, and

that policy over the next three weeks could stand unchanged even apart

from the financing.

He agreed with Mr. Brill's comment that it might be

best to let well enough alone.

He was concerned, however, with the second

quarter balance of payments developments, and he thought it was necessary

to keep in mind the points Mr. Hayes had mentioned.

As to the directive,

Mr. Deming said he favored the change suggested by Mr. Daane but he

thought the staff draft was fine otherwise.

Mr. Swan said that more complete figures for all States in the

Twelfth District confirmed the increase in unemployment in May that he had

mentioned at the last meeting and reflected declines in both construction

7/7/64

-42

contract awards and housing starts that were substantially greater in the

District than in the country as a whole.

On the other hand, employment

had held up quite well considering the continued layoffs in defense- and

space-related industries.

Retail sales appeared to have continued favoraole

into June.

The larger banks continued to be net sellers of Federal funds in

June, although the margin was quite small.

Borrowings from the Reserve

Bank were much lower in June than in May, but during the week ending

July 1 they rose substantially--both absolutely and in relation to bor

rowings for the country as a whole.

In the three weeks ending June 24,

covering the t.x date, total bank credit, total loans, and total commercial

and industrial loans at weekly reporting banks all increased much less

than in the sane period a year ago.

For the year to date commercial and

industrial loans increased more this year than in the comparable period

of last year.

The increase this year in total loans, however, was somewhat

less than in 1963.

Mr. Swan said the Treasury financing clearly dictated no change in

policy, but, the financing apart, he agreed with those who advocated no

change at this time in light of both the domestic and international

situations.

To him "no change" implied continuation of the situation that

had existed in the last three weeks which, he thought, quite accurately

reflected the position desired by the Committee three weeks ago.

He would

accept the directive proposed by the staff with the change suggested by

Mr. Daane.

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7/7/64

Mr. Irons said there was little new with regard to conditions in

the Eleventh District.

He could typify the novements of most major indi

cators over the past three weeks by saying slight or moderate advances were

occurring generally, and the indications were that these advances would

carry into the next month.

Production had inched up; construction con

tinued strong; department store sales were good.

There was a steady,

slight upward pull on District activity, but nothing sensational or striking.

The economic picture showed no inflationary signs.

Unemployment was not

a problem in the District; the unemployment -ate was small relative to

that in the nation as a whole.

Mr. Irons noted that conditions in agriculture were reported to

be generally satisfactory.

Some sections of the District needed rain but

that was always true at this time of the year.

Prices received by farmers

were up slightly.

On the financial side, Mr. Irons saic,

in the past three weeks

loans were up fairly substantially in most categories.

were runn:ng some 22 per cent above a year ago.

Consumer loans

Demand deposits wer

up,

but time and savings deposits were down a bit.

Mr. Irons thought that District banks generally were less liquid

than a year ago.

the small ones.

Banks were seeking funds actively, including some of

Loan-deposit ratios in the District had increased to about

58 per cent from 52 per cent a year ago.

Federal funds.

City banks were active buyers of

Member bank borrowings had risen somewhat, and an increasing

number of country banks were coming into the discount window.

7/7/64

-44

One District trend that gave Mr. Irons concern related to the

volume and quality of debt that was being created.

Occasional references

were heard at the Reserve Bank to cases in which debtors were not carrying

out the terms of their loan contracts.

Some of the new country banks in

the District were taking the view that in order to make money they had to

expand loans, and in some cases their loans were in excess of their

deposits.

There might be problems ahead in settling some of the debt that

now was being created.

On the policy side, Mr. Irons said, with the Treasury about to

undertake a financing there was not much the Committee could do at this

time.

He would not advocate a policy change even if a financing was not

in prospect.

Despite a feeling that the Committee might have been main

taining too much

ease for too long a period and might later regret it,

for the present he would follow an even-keel policy, continuing the posture

of the past three weeks, with average free reserves around $100 million,

the bill rate and the Federal funds rate at

discount :ate unchanged.

about 3.50 per cent, and the

The international situation was a source of

some concern, but in his judgment it did not require action at this

ime.

He would accept the directive drafted by the staff with the modification

suggested by Mr. Daane.

Mr. Latham reported that the New England economy continued to

evidence steady but unspectacular growth.

Business sentiment was generally

optimistic but conservative, with no apparent evidence of speculation in

inventory or bank credit.

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7/7/64

District manufacturing employment rose slightly in May to reach

the best seasonally adjusted total since August 1963.

However, with

the trends varying by industry, the twelve-month net change was only

slightly improved.

Nonmanufacturing employment also bettered the sea

sonally anticipated rise.

The preliminary manufacturing production index

for May showed a slight improvement for the month.

Shoe production

continued to reflect a downward trend compared with a year ago.

Mr. Lacham said construction contracts, which had been a strong

factor in the otherwise staid upward trend in New England, slipped below

the 1963 pace with a decrease in nonresidential building.

Residential

building contirued to show on the plus side, particularly in the apartment

building category, which apparently reflected a delayed trend compared

with other sections of the country.

Department store sales were strong

in May, and during the four weeks ended June 27, they averaged 5 per cent

above a year ago with a cumulative gain of 6 per cent for the year to date.

Deposit balances at mutual savings banks continued to show an

annual growth rate of 8.6 per cent.

A strong credit demand had been in

evidence, business loan growth continued at a rapid rate, and loan-deposit

ratios were on a rising trend.

Liquidity had been maintained nevertthless

by a reduction in long-term Government holdings.

Mr. Latham commented that competition for deposits was keen.

Special savings deposits seemed to be the order of the day.

One large

commercial bank had instituted a special savings account limited to amounts

7/7/64

-46

over $10,000.

Interest was paid on a daily basis and was subject to

change upon ten days' notice.

was tied to the discount rate.

Currently, the rate was 3-1/2 per cent or

Savings banks vying for funds had re

sorted to various types of enticing accounts.

For example, a savings

bank in New Hampshire offered regular savings accounts at 4-1/2 per cent,

investment savings accounts at 4-1/2 per cent, and a bonus savings account

at 5 per cent.

Mr. Latham noted that mortgage money was in ample supply.

Mr. Balderston observed that he was impressed by two observations

that Mr. Brill had made.

flattening out.

First, the construction boom apparently was

Second, within the advance occurring in the private sector

of the economy a rolling readjustment seemed to be under way.

In

Mr. Balderston's opinion these developments should not occasion alarm;

on the contrary, they increased the assurance that the economy would

continue in a healthy state for a while.

The Treasury financing clearly indicated no change in policy today,

Mr. Balderston said.

He would accept the draft directive submitted by

the staff.

Chairman Martin commented that everyone seemed to

agree that the

Treasury financing was the primary consideraion today, and that no change

should be made in policy.

The members also seemed to agree that the

economic policy directive prepared by the staff was acceptable with the

modification suggested by Mr. Daane.

be taken on such a directive.

The Chairman proposed that a vote

7/7/64

-47Thereupon, upon motion duly made and

seconded, and by unanimous vote, 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 follow

ing current economic policy directive:

It is the Federal Open Market Committee's current policy

to accommodate moderate growth in the reserve base, bank credit,

and the money supply for the purpose of facilitating continued

expansion of the economy, while fostering improvement in the

capital account of U. S. international payments, and seeking to

avoid the emergence of inflationary pressures. This policy

takes into account the continued orderly expansion in economic

activity, accompanied recently by a more rapid expansion in

money supply and some decline in interest rates. It also gives

consideration to the relative stability in average commodity

prices; the underutilization of manpower and other resources;

the country's less favorable internatioral payments position

in the second quarter; and the further interest rate advances

in important markets abroad.

To implement this policy, and taking into account probable

Treasury financing activity, System oper market operations shall

be conducted with a view to maintaining about the same condi

tions in the money market as have prevailed in recent weeks,

while accommodating moderate expansion in aggregate bank reserves.

Chairman Martin then noted that Messrs. Daane, Balderston, and

Young recently had returned from Europe.

At the Chairman's invitation,

Mr. Daane brought the Committee up to date or procedural and substantive

aspects of the Group of Ten Deputies' discussions concerning arrangements

to meet future international liquidity needs.

Mr. Balderston commented that he had been struck by the construction

boom in many European countries, and the resulting difficulties in

Switzerland and Austria; and by the widespread scarcity of labor.

He had

7/7/64

-48

been particularly suprised by the economic progress being made in Finland,

although a considerable degree of inflation had occurred there.

Bankers

in Germany and Austria had expressed the hope that the United States would

not let its costs get out of hand.

Such a development, they thought,

would lead to difficulties both for the U. S. and for them.

In Scandinavia

he had heard a considerable amount of talk about the need to restore the

balance there between equity and debt, and about the possibility of shift

ing to a value-added basis for taxes.

Mr. Young remarked that for part of his trip he had been on

vacation in Portugal and southern Italy, and had been pleased to note the

progress those countries were making.

He also reported briefly on meetings

he had attended in Paris of Working Party 3 and of the Economic Policy

Committee of the Organization for Economic Cooperation and Development.

It was agreed that the next meeting of the Committee would be held

on Tuesday, July 28, 1964, at 9:30 a.m.

Thereupon the meeting adjourned.

Secretary