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 28, 1964, at 9:30 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Martin, Chairman

Hayes, Vice Chairman

Balderston

Daane 1/

Hickman

Mills

Mitchell

Robertson

Shepardson

Shuford

Swan

Wayne

Messrs. Ellis, Bryan, and Deming, Alternate Members

of the Federal Open Market Committee

Messrs. Bopp and Irons, Presidents of the Federal

Reserve Banks of Philadelphia and Dallas,

respectively

Mr. Young, Secretary

Mr. Sherman, Assistart Secretary

Mr. Kenyon, Assistant Secretary

Mr. Broida, 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 Accourt

Mr. Coombs, Special Manager, System Open MareL

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, Governnent Finance Section,

Division of Research and Statistics, Board

of Governors

Miss Eaton, General Assistant, Office of the

Secretary

1/ Entered meeting at point indicated in minutes.

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Mr. Helmer, First Vice President of the Federal

Reserve Bank of Chicago

Messrs. Eastburn, Taylor, Baughman, Parsons,

Tow, and Green, Vice Presidents of the

Federal Reserve Eanks of Philadelphia,

Atlanta, Chicago, Minneapolis, Kansas City,

and Dallas, respectively

Messrs. Sternlight and Parthemos, Assistant Vice

Presidents of the Federal Reserve Banks of

New York and Richmond, respectively

Mr. Eisenmenger, Director of Research, Federal

Reserve Bank of Boston

Upon motion duly made and seconded, and

by unanimous vote, the minutes of the meeting

of the Federal Open Market Committee held on

July 7, 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 July 7

through July 22, 1964, and a supplementary report covering the period

July 23 through July 27, 1964.

Copies of these reports have been placed

in the files of the Committee.

Supplementing the written reports, Mr. Coombs said that the

gold stock would remain unchanged again this week.

The French had come

in with their usual monthly gold order for $34 million last Friday, and

$25 million would be sold to Germany on July 29.

These sales had been

substantially offset, however, by a purchase of $50 million from the

Bank of England.

The Stabilization Fund would wind up the month with

a gold balance of nearly $170 million, which would be further supplemented

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early in August by the United States' share, possibly as much as $25

million, of the Gold Pool receipts during July.

While the Stabilization Fund at the moment was in a fairly

comfortable position, Mr. Coombs continued, there were a number of

potentially heavy demands for gold which might materialize over coming

months.

The French demand continued to run at a rate of slightly more

than $400 million a year.

The Swiss National Bank was now carrying

somewhat more than $200 million in excess of their traditional ceiling.

The potential German demand was, of course, even greater, and Bundesbank

officials had already hinted that they would like to get a substantial

share of any gold which might be sold off by the British or the Dutch.

The Austrians had indicated that they would like to make new arrangements

for a series of monthly purchases in order to keep their gold ratio up

to the 50 per cent level, and the Spaniards, who had been building up

their dollar balances, might also be heard from.

On the exchanges, Mr. Coombs said, there had been some interest

ing developmemts in the guilder, lira, and sterling markets.

In the

case of the guilder, the Netherlands Bank had continued to pursue a

tight money policy in an effort to check inflation and correct a serious

balance of payments deficit.

During the first five months of this year,

the Netherlands ran a total balance of payments deficit of $250 million,

which was a very substantial amount indeed for a country the size of

the Netherlands.

Largely owing to the credit squeeze, however, only

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$60 million of this deficit had to be financed by drawing down the

reserves of the Netherlands Bank.

The remaining $190 million was

financed by repatriation of short-term dollar investments by the Dutch

commercial banks as their liquidity positions came under pressure.

In

recent weeks, repatriation of dollar investments by the Dutch commercial

banks was apparently running well ahead of the balance of payments deficit,

with the result that the dollar reserves of the Netherlands Bank had

risen by more than $50 million and now stood close to the $200 million

ceiling.

To guard against still further inflows originating in borrowing

abroad, the Netherlands Bank had recently prohibited the Dutch commercial

banks from ircurring a net debtor position in foreign exchange.

If the

Dutch credit squeeze continued, however, loopholes in this regulation

might well appear just as had occurred in the case of France.

Meanwhile,

the pulling back of dollar investments by Dutch commercial banks had

probably contributed to the strength of the Euro-dollar rate which

remained more than one-half per cent above the 90-day certificate of

deposit rate in the New York market.

Mr. Coombs reported that there had been a number of encouraging

developments in the case of the lira, both political and economic.

new government seemed to be much more solidly established.

The

The Italian

credit restraint program, initiated by the Bank of Italy nearly a year

ago, had brought about a decided slackening in the rate of monetary

expansion.

Imports were down, while exports had continued to rise.

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A lot of money had come in through direct foreign investment in Italian

industry, and the Italian reserves actually increased during the second

quarter despite the fact that the Italian commercial banks continued to

liquidate their foreign indebtedness.

The New York Bank's operations in

forward lira as agent of the Bank of Italy might also have contribuced

to an improvement in the market psyc ology.

Rumors of a lira devaluation

had subsided and the market rate on tne forward lira had now declined

below the 4 per cent ceiling that had been maintained.

Meanwhile Italy's

partners in the Common Market, some of whom had previously taken a

pessimistic view of the Italian government's economic program, now seemed

prepared to provide not only short-term but also medium-term financial

assistance in order to cushion the transition to a solid equilibrium

in the Italiar payments accounts.

In retrospect, the $150 million of

short-term credit provided by the Federal Reserve to the Bank of Italy

last winter seemed to have been a useful operation.

In

the case of sterling, Mr.

Coombs said,

the Account Management',

weekly reports to the Committee had outlined the rationale and results

of the recent operations in sterling in order to forestall private

arbitrage outflows to London.

In general, the operations achieved their

limited objectives and had provided some useful experience in , new area

of operations.

Both the Account and the Bank of England had been concerned

over the possibility of leakages and Mr.

Coombs

sound it

gratifying that

the commercial banks acting as agents succeeded in maintaining secrecy.

7/28/64

Finally, Mr. Coombs said, as had been anticipated the Bank of

Japan had requested a renewal for a further three months of their $50

million swap drawing maturing July 30.

Furthermore, the Bank of Japan

expected a reserve decline of roughly $65 million in the course of this

month, partly owing to measures recently taken to restrain borrowing on

the Euro-dollar market, and might wish to make a further drawing in the

amount of $30 million before the month's end.

Mr. Mitchell asked whether the Italian authorities had any

policy with respect to foreign investments in Italian industry, and

whether they felt such investments might serve to thwart their monetary

policy.

Mr. Coombs replied that by and large the Italian authorities

had encouraged such investments.

Their volume had not been great

enough to thwart Italian credit policy, and some recent investments by

large American corporations had helped strengthen the capital structure

of certain major Italian industries.

This probably had reduced the

concern by the Bank of Italy that credit tightening would damage the

capital structure of some Italian firm.

In response to questions by Mr. Ells concerning the possible

further swap drawing of $30 million by the Bank of Japan, Mr. Coombs

said the Japanese felt that a useful purpose would be served by reducing

their reserve loss in July from an expected $65 million to about $35

million.

He was hopeful that the reserve loss would be temporary and

soon reversed.

The outlook for Japan's balance of payments had improved

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since earlier this year, and the Japanese seemed determined to carry

out policies to strengthen their payments situation.

There was, of

course, no assurance that these policies would be effective in time

to permit repayment of the drawing.

If the Japanese were unable to

liquidate the drawing by use of current receipts, Mr. Coombs thought

they probably would apply to the International Monetary Fund for a

medium-term credit and repay the drawing by that means.

Mr. Mills commented that Mr. Coombs, had touched on several

sensitive points which seemed to him to deserve the scrutiny and

analysis of academicians.

The question he had in mind was how far

monetary policy should be pressed to maintain the international reserve

positicn of any individual country at the expense of undermining the

economy of that country.

One saw the problem in Japan where there

had been a rash of bankruptcies quite recently;

moved frequently between tightness and ease.

Japanese policy

One could see a definite

slackening ir the economy of Italy, and in some Latin American countries

such as Argentina.

In all of these countries it seemed to be reassuring

that monetary measures had resulted in improving the international ex

change positions.

But if this was done at the expense of reducing the

viability of their domestic economies, there was a question of whether

the gain was worth the loss.

Mr. Coombs said he thought that a certain amount of experience

bearing on this question had been built up since the war.

European

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countries and Japan had movedfrom a system of direct, selective

controls more or less across the board toward greater reliance on

general monetary and fiscal policies.

They had not completely

abandoned direct controls, but were seeking a proper blend of the two.

He thought that the combination of tighter credit, fiscal measures,

and certain direct controls in Europe was halting inflationary trends,

so far without adverse effects on production and employment.

In his

judgment, these policies were working.

Thereupon, upon motion duly made

and seconded, and by unanimous vote,

the System Open Market transactions in

foreign currencies during the period

July 7 through July 27, 1964, were

approved, ratified, and confirmed.

Mr. Coombs recommended that the $250 million standby swap

arrangemet with the German Federal Bank, which would reach the end

of its three-month term on August 6, be renewed for a new and longer

period of six months.

He noted that te German Federal Bank would be

agreeable to this arrangement.

Renewal of the swap arrangement with

the German Federal Bank, with extension

of term from three to six months, as

recommended by Mr. Coombs, was approved.

Mr. Coombs then recommended that the $100 million standby swap

arrangement with the Bank of France, which also matured on August 6,

be renewed for another three-month period.

It was possible that the

Bank of France itself might suggest an extension of the term to six

months.

If so, he assumed this would be acceptable to the Committee.

7/28/64

Renewal of the swap arrangement

with the Bank of France for a further

period of three months, or for six

months if the Bank of France should

so request, was approved.

The possible further drawing of

$30 million by the Bank of Japan on its

swap arrangement with the System was

noted without objection.

Before this meeting there had been distributed to the members

of the Committee a report from the Manager cf the System Open Market

Account covering open market operations in U. S. Government securities

and bankers' acceptances for the period July 7 through July 22, 1964,

and a supplemertary report covering the period July 23 through 27, 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 financial markets have turned in a good performance

during the past three weeks, highlighted by the Treasury's

very successful advance refunding. In that operation, as you

know, some $9-1/4 billion of issues maturing within three

years have been exchanged for issues maturing in five, nine,

and twenty-eight years. Although the turn-in considerably

exceeded market estimates, the atmosphere in the market has

remained quite firm and confident. Even the rumors of a

possible british Bank rate increase shook loose only a few

bond holdings from weaker hands and these have been readily

absorbed. The dealers' stake in the refunding issues remains

rather large, of course, and the market accordingly is

vulnerable to news that would suggest any change in the

outlook--which at present is regarded as pointing to stable

rates.

A counterpart of the heavy response to the Treasury

refunding has been the increased downward pressure on

Treasury bill rates--which the current offering of a $1

billion strip of bills has served to ameliorate, but not

7/28/64

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entirely to offset. Early in the past three-week period

there was a substantial demand for bills on the part of

sellers of eligible rights in the refunding, and by holders

of the $2 billion of maturing July 15 oills. These sources

of demand served to deplete dealer inventories very sub

stantially, and since the middle of the period the more

moderate continuing demand frombanks, corporations, and

public funds has served to maintain downward pressure on

bill rates. At their low point on July 16 and 17, the

3-month bill was bid at 3.42 per cent, compared with 3.50

per cent at the start of the recent period. Rates moved up

only briefly and moderately after the Treasury's bill strip

was announced, and yesterday the 3-month bills were sold at

an average rate of about 3.48 per cent. It may be that payment

for the strip of $1 billion Treasury bills tomorrow, followed

by the sale of $1 billion of 1-year bills on Thursday, and by

the sale of another short-term security to refund the remaining

August 15 maturities, will serve to put some supply back into

the short-term area and tend to bolster short rates, but on

the other side it is to be expected that investor demands will

continue and the System will also have to be a sizable buyer

of short issues in meeting forthcoming reserve needs. Once

the books on the Treasury's August 15 refunding are closed we

may be able to effect some part of that provision of reserves

through purchases of coupon issues, without buying in an area

too close to the Treasury's offering, out in any event the

prospective reserve need seems too large to be met without

further sizable purchases in the short-term area.

System operations were substantial during the past three

weeks, as the Desk sought to preserve a steady market back

ground during the Treasury's refunding operation. Reserves

were injected over the first several days, then withdrawn in

large volume against the background of an easier money market,

and then in the past three days re-injected in antici ation of

reserve drains through the impact of market factors. Federal

funds traded mainly at 3-1/2 per cent, but in larger volume

than had prevailed in recent months, aid there was trading below

3-1/2 per cent on several days, especially toward the end of

the July 22 week.

The Treasury will be announcing tomorrow its plans for

refunding the remaining $4.1 billion of August 15 maturities,

of which some $2.2 billion are held by the public. Given the

modest size of the maturities and the solid condition of the

market, this job should be quite routine. Indeed, the major

question for the Treasury would seem to be how this operation

might be adapted to deal most effectively with the problem of

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the short rate. The current expectation is that the Treasury

will offer a short note, but some further offering of bills

is also a possibility.

Thereupon, upon motion duly made

and seconded, and by unanimous vote, the

open market transactions in Government

securities and bankers' acceptances during

the period July 7 through July 27, 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. Koch presented a statement on economic conditions as follows:

Recently released second quarter GNP figures show that

economic expansion thus far in 1964 has been about on target

as projected early in the year by the Council of Economic

Advisers. Moreover, many of the more comprehensive indicators

of economic activity continue to rise and seem gradually to be

reflecting the effects of the tax cut. Industrial production

in June, for example, was one-half per cent above May and 4

per cent above the end-of-1963 level. Retail sales in July

are apparently advancing further from the record May- June

level.

Yet the "too-good-to-be-true" picture of the economy

seems to be losinga bit of its luster. This current impression

may reflect merely the onset of the usual summer doldrums or

even an economist's penchant for feeling better when he can

find something wrong. Nevertheless, some economic indicators

have not done so well recently. The rate of unemployment rose

again in June and no doubt continued high in July, while the

rate of expansion in employment has been tapering off. Although

housing starts were up a little in June, they have been drifting

downward on balance since last fall. New orders received by all

producers of durable goods declined slightly again in June,

although those of machine tool builders rose sharply.

Some uneasiness about the future course of the economy stems

also from the structure of the expansion during the first half

of the year. Early in the year the likelihood of as much

7/28/64

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expansion as projected was questioned if so much of it had

to depend on increased consumer spendirg on nondurable goods

and services. Yet it is just this category of spending that

has increased so sharply over the past six months. The

January projection called for an increase in consumer spending

on nondurable goods and services during the first half of about

$12-1/2 billion, or almost 4 per cent. The estimated actual

increase turned out to be only a little under this projection.

Although we can expect some drop in the personal saving rate

from its current level, temporarily at about 8-1/4 per cent

as a result of the tax cut, one wonders whether consumers can

continue over the next six months and longer to increase their

spending on nondurable goods and services as rapidly as in the

recent past.

Consumer spending on durable good.; has risen much less

sharply this year, particularly recently. Dealer deliveries

of new autos have declined moderately since mid-June, but

shipments from assembly plants in the East were limited by a

trucking .trike that ended last week. I have already noted the

slowing down in housing starts.

In the business sector, the main news is in the inventory

area where stocks continue moderate in view of the further

rise in sales. The rise in inventories in recent months has

been in goods-in-process and finished goods rather than in raw

materials and purchased stocks. In other words, businesses are

expanding their inventories where needed to meet customer demands

for quick deliveries. But with supplies of materials still

generally ample, with delivery times still showing few signs

of lengthening, and with industrial wholesale prices remaining

relatively stable, businesses are not pushing to stock up in

anticipation of future needs.

In the important wage-price-profit area, it is still too

early to predict the likely outcome of the current bargaining

activity in the auto industry. The recent labor-management

agreement's in the rubber and oil industries involved fringe

benefits, whose total costs are very difficult to estimate,

but there were no wage increases. These settlements do not

appear to have been out of line with either cost stabilization

objectives or settlements reached in other major industries

earlier in the year. In manufacturing as a whole, unit labor

costs, including fringe benefits, are down from early in the

year, with the first half rise in money earnings being the

smallest since the recession year 1954.

Recent price changes have been mainly in markets for

foodstuffs, and largely reflect seasonal influences. The

wholesale industrial price index has remained stable. Most

7/28/64

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prices are not changing. The evidence suggests mainly

selective bottleneck-type upward pressures, such as in the

case of some nonferrous metals.

With prices remaining relatively stable and unit labor

costs, at least in manufacturing, down a little, profit

margins are up further. Higher business sales and profits

have led to some upscaling of capital nvestment, but thus

far such investment can hardly be called ebullient. It is clear

that businessmen are reluctant to overbuild capacity.

Difficult as it always is to foresee sources of future

economic strength, it is in the business fixed capital spendirg

area, in State and local government spnding, and in the area

of consumer spending on nondurable goods and services that we

must probably seek the sources of further aggregate expansion.

Since State and local spending and consumer spending on

nondurables normally rise gradually and since the further rise

in business fixed capital spending is now projected by business

men at a rate that is within reasonable bounds, most projections

of over-all economic activity this year call for continued

moderate expansion.

And with the unemployment rate remaining high, this further

moderate expansion in over-all economic activity again raises

doubts as to the likelihood of bringing the rate down signif

icantly in the foreseeable future.

Indeed, with the unemployment

rate of nonwhite teenagers over 30 per cent, one basic cause

of our repent race riots becomes painfully clear. As for

capital utilization rates, that for major materials production

has been unchanged since April and that for manufacturing is

up only moderately from a year ago. Current rates are unlikely

soon either to limit the rise in physical production or to

induce widespread price boosts.

Thus, in conclusion, domestic economic developments as a

whole still seem to me to call for expansionary Government

ecoromic measures, including a stimulative monetary policy.

Mr. Brill made the following statement concerning financial

developments:

After several months of rather placid existence, financial

markets were stirred into some turbulence over the past three

weeks, principally by debt management operations and an assist

from rumors of a British Bank rate increase. The turbulence

was mild considering the magnitude of the debt management

operations. The Treasury advance refunding, involving $27

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billion of publicly-held debt, resulted in a removal of

$4-1/2 billion of short-dated instruments from the market

and almost $5 billion of shorter intermediates. To fill

the gap created at the short end, which was causing downward

pressure on short-term rates at a time when rates abroad

were rising, the System and the Treasury sold bills, the

Treasury rushed out a $1 billion bill strip, and it indicated

that forthcoming offerings would also be in the short area.

As the dust settles, we find long- and intermediate-term

rates on Government securities only a shade higher than early

in July and short-term rates a bit lower, a remarkably small

price reaction in light of all the fund flows involved. The

dust hasn't completely settled, for dealers still have sub

stantial positions in the new issues, with more Treasury

financing imminent, but they do not apoear unwilling to carry

substantial inventories of coupon issues in light of current

market attitudes and expectations.

The narket's ability to abscrb such a lengthening in

maturity in the Federal debt with minimal price adjustment

is the latest indication of the tremendous savings volume

the private economy continues to generate. Financial saving

by the private sector has continued high this year, as it has

throughout the recovery and exparsion period, and recently it

has been given an extra boost by the tax cut. What is dif

ferent this year, however, is not so much the volume of saving

as its compositon. Two differences in savings patterns have

emerged in 1964, neither, unfortunately, readily susceptible

to explanation.

First is the shift in composition as between financial

intermediaries and direct market investment. From 1961 to

1963 the bulk of private financial savings flows--well over

four-fifths of the total--went into financial intermediaries.

This contrasts with 1959, the previous high saving year, when

only one-half went to intermediaries and the other half,

responding to rising market rates, went into direct purchases

of securities. So far in 1964, savings flows have tended to

revert to the 1959 pattern, with the flow to institutions

lower and the flow into securities increasing sharply.

What is surprising about this shift is that it has taken

place without the usual change in interest rate relationships.

One of the few stable functional relationships we have been

able to discern in financial flows is that when there was a

widening of the spread between market interest rates and the

rates offered by institutions, the share of private savings

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flows directed into market instruments increased, and when

institutional rates began to catch up with the market, a

larger share of the savings flow was diverted through

financial intermediaries. It is comforting to econometricians

to have an economic relationship that makes common sense and

also yields a high "r 2 ," and it is disconcerting when such a

previously firm relationship fails to work. It isn't working

now. The pattern of flows so far this year would be more

consistent with a substantially higher level of market rates

than has actually prevailed, given the level of rates offered

by banks and savings associations.

There doesn't seem to be any easy explanation of this

deviatior.

Perhaps savers have reached some saturation point

in their ownership of savings accounts and want to diversify

their po.tfolios regardless of current rate relationships.

Perhaps confidence in the future stability of prices is

permittirg savers to waive any inflation risk premium when

acquiring long-term debt instruments. There are many possible

explanations, but none that can now be supported empirically.

Another puzzling development in savings flows is the

recent rise in the public's demand for cash balances. The

money supply rose substantially in June, even while Government

balances were increasing, and has continued to increase thus

far in July when Government deposits are being drawn down.

Based on required reserve figures through July 22, it seems

likely that the money supply will show an annual rate of

expansion of over 8 per cent in both June and July, after

rising at only a 2 per cent rate over the first five months

of the year. It is hard to find in the available evidence

any explanation of this sudden surge in cash balances,

particularly since in the current state of financial statistics

we don't even know who is holding the larger balances, let alone

for what purposes. There is nothing in surveys of consumer or

business spending intentions to suggest: that the private sectors

are girding themselves for a spending spree. One hypothesis is

that the rise reflects a sort of inadvertent accumulation of

tax saving, being held idle until consumers and businesses decide

how to commit the funds. This has some elements of plausibility,

but again is unverifiable.

Before attempting to read too much significance into a

two-month development, however, it should be recalled that

growth in the money supply is not always smooth. For example,

there was a spurt in the money supply last November of about

the same order of magnitude as that which occurred this June,

but it didn't seem to result in any significant change in the

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course of the economy, financial or otherwise. It may

be that the recent surge will soon spend itself.

This is not to belittle expansion in the money supply

at an 8 per cent annual rate, or to cast doubt on the

validity of the figures. It is just that recent increases

do not seem to have significant corollaries in any other

economic development of which we are aware. In the context

of an economy that shows no signs of overheating, that seems

to have reached a plateau in its use of plant and labor

resources, and that still generates a large volume of long

term saving, a rapid increase in the money supply for brief

periods is cause for inquiry and study, but not necessarily

for alarm.

Mr. Furth presented the following statement on the balance of

payments:

The payments deficit for the second quarter turned out

somewhat smaller than expected three weeks ago but the

tentative figures for the first three weeks of July were

disappointing.

The deficit was $140 millior in June, and $675 million

in the second quarter, after adjustment for seasonal influ

ences and "special" transactions.

For the fiscal year 1964 as a whole, the deficit amounted

to $1.8 billion--still too large a figure but by far the lowest

twelve-month total in seven years. And it is particularly

gratifying that it could be financed in such a way as to keep

the decline in U.S. reserves and the increase in liabilities

to foreign monetary authorities to a minimum. More than two

thirds of the total was covered by "special" receipts and by

the increase in dollar holdings of foreign holders other than

monetary authorities. Nearly all the rest was financed by

medium-term credits, including the issue of Roosa-bonds and

drawings on the International Monetary Fund. U.S. gold

holdings declined by only $200 million, while U.S. holdings

of foreign convertible currencies actually rose and liquid

dollar liabilities to foreign monetary authorities declined.

Moreover, the deficit was nearly equalled by a rise in

U.S. liquid claims on foreigners. Bank-reported short-term

claims alone increased by $1.3 billion, and long-term bank

loans by an additional $0.7 billion.

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Notwithstanding the comfort we may derive from the

results of the past twelve month,, the July figures are

disquiet ng. The tentative data for the first three weeks

of the month indicate a deficit of $560 million. July

always shows a sharp seasonal deterioration in the U.S.

payments balance, but this year's increase in the deficit

over and above June seems to be far larger than seasonal.

Unfortunately, we do not know the causes of that

increase. It is true that sharp increases have been

observed during the first month of every recent quarter:

January 1964 was much worse than December 1963, April

much worse than March; and the second and third months of

each quarter have always shown considerable improvement.

But the trend is disturbing: April was worse than January,

and July seems likely to be worse then April.

The prospects of improving the payments balance in the

short run by monetary policy depend, of course, on the

reasons for the deterioration. Insofar as a decline in

foreign demand for our exports, or an increase in our

Government expenditures abroad, was responsible, monetary

policy could do little about it. Insofar as an increase

in our imports or in our expenditures for foreign travel

was a factor, monetary policy--apart, of course, from its

perennial role as guardian of price stability--could correct

the situation only by action severe erough to temper the rise

in our national income.

On :he other hand, insofar as we were to find a sudden

increase in the outflow of money-market funds into foreign

currency assets, relatively small changes in covered

interest rate differentials might be helpful. But during

the second quarter these flows were, on balance, quite

insignificant, and we have no indications of any substantial

increase in recent weeks. Flows into the Euro-dollar market

were indeed large in recent months and may have risen further.

But the impact of these flows on the U.S. payments balance may

any measure

not be easily affected by U.S. monetary policy:

designed to curtail them may, after a brief lag, not only

raise interest rates in the Euro-dollar market but perhaps

also divert borrowers from that market to U.S. banks.

Finally, we might find that there was an unusually rapid

increase in direct investments abroad and in U.S. bank credit

to foreigners. We have no data on direct investments for the

second quarter, and no complete data on bank credit for any

month after May. But we know that all types of bank-reported

claims on foreigners together rose in June by the unusually

7/28/64

-18-

large amount of $340 million; and if I had to make a guess,

I should say that bank credit and direct investments could

well have contributed significantly to the recent deteriora

tion.

If the U.S. payments deficit were to continue at the

level of the past three weeks, and if a rise in U.S. invest

ments and credits were indeed found to be playing a large

role, U.S. monetary policy would be faced with the question

of how best to deal with the problem. At the moment, however,

we lack the information needed for an appropriate answer.

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 most significant aspect of the last three weeks'

developments has been the reappearance of a very serious

balance of payments deficit--at least on the basis of

partial data available so far for July, together with data

indicating that the June deficit was more serious than it

had seemed to be at first glance. At the same time, the

latest domestic statistical data point to a continuing

favorable business situation and a prospect of further

expansion. However, there are presently no signs of any

acceleration, and there were even indications of leveling

off in some sectors in May and June--although these signs

were slighter in June than in the preceding month.

Plant and equipment spendirg seems likely to continue

its upward course; and the absence of inventory build-up in

the first half of 1964 may point to an increase in stimulus

to production from this source in the second half. Consumer

spending is a major element of strength in the economy. The

May rise in retail sales now appears to be stronger than

reported earlier, and the advance report for June indicates

maintenance of the high May level, with further advances in

early July.

Prices continue to exhibit remarkable stability--but the

cost-price outlook is still clouded by the unsettled automobile

pay negotiations.

Recent balance of payments figures give cause for consider

able concern. Preliminary data for the first three weeks of

July show an aggregate over-all deficit of about $550 million.

We have no way of analyzing what lies behind this huge deficit.

7/28/64

-19-

It may reflect errors that will lead to drastic revision--but

it is so large that even after a sizable revision we would

still face a very disturbing problem. Paradoxically enough,

the press has recently been filled with optimistic appraisals

of the ba.ance of payments outlook, based largely on the

relatively low annual rate of deficit of about $1.6 billion

in the first half. This optimistic point of view ignores two

important facts:

(1) that even a deficit of this magnitude

presents serious financing problems in this seventh year of

major deficits; and (2) that the trend within the first half

was adverse. The latter point gains greater weight in the

light of what seems to be happening in July.

The modest June deficit should be assessed against the

background of a sizable reflux of corporate time deposits from

Canada during that month, which caused Canadian balances in

this country to fall by $200 million. In the absence of the

sharp decline in our liabilities to Canadian banks, the deficit

would have been in the $300-$400 million range. Another ominous

development is a very substantial upsurge in June in bank

reported claims on foreigners, estimated tentatively at over

$300 million and apparently reflecting very large short-term

bank loans. The fact that the trade surplus seems to be

holding up at a relatively high level, together with the

increasingly tight credit conditions abroad and the evidence

of deterioration in our short-term capital account, suggests

that monetary policy might well be looked to as at least a

partial remedy of our payments problem,.

More complete banking data now available for June confirm

the picture of moderate strength already evident three weeks

ago. Money supply, money supply plus time deposits, and bank

credit rose more rapidly than their average monthly increases

earlier in 1964. If we include preliminary figures for the

first half of July, the money supply has grown at an annual

rate of 4.3 per cent so far this year, exceeding the 3.8 per

cent of a year earlier. For money supply plus time deposits

this year's gain still lags somewhat behind last year. But it

is striking that despite the sizable business expansion and

despite a number of minor policy changes toward less ease on

the part of the Committee, there is no solid evidence of a

slow-down in credit growth, and we have continued to provide

liquidity to the economy on a very generous scale. I am

pointing to this not critically but to emphasize the point that

a switch to a slightly less generous credit policy would

probably involve only minimal risks to domestic business.

'8/64

-20-

We may all find great satisfaction in the debt extension

achieved in the Treasury's highly successful advance refunding

program. The program did, however, put heavy downward pressure

on short-term interest rates--pressure which fortunately has

been partly offset by the Treasury's offering of a strip of

bills and a one-year bill, and the prospect of a short-term

obligation to replace the remaining August 15 maturities.

Nevertheless, demand for short-term securities, including

System purchases to offset seasonal pressures on bank reserves,

will remain heavy for the next couple of weeks.

A change of policy at this time is precluded by the neces

sity of naintaining stable money market conditions to facilitate

the August 15 refunding and to permit the market to digest the

huge advance refunding just conpleted. I would hope, however,

that within the existing polic the Desk would do what it

could to maintain as firm a short-term rate structure as possible,

in view of the pull being exerted on American funds by foreign

rates. The existing directive might well be renewed with only

minnr changes to reflect the altered Treasury financing outlook

and the accelerated deterioration in the balance of payments

in July.

Looking a little

further ahead, I am impressed anew by the

lack of progress in coping with our very serious balance of

payments problem and the necessity of giving adequate emphasis

this

problem in the formulation of monetary policy.

To me

is unthinkable that anyone should contemplate abdicating

for maintaining the international strength

responsibilites

of the dollar and relyin: on the vague hope that some other

banch of Government, using more "specific" measures, will take

In other words, I think it

thisburden from our shoulders.

highly probable that within the next month or two, in the

absence of an unexpected improvement in the balance of payments,

we shall have to take some moderate but clear-cut action in the

direction of less credit ease.

Unfortunately, public opinicn is none too well prepared

for such a move, in view of the many optimistic statements on

the dollar's status in recent months. Probably a loss of gold

is the most convincing sign of international financial trouble

to the general public, and of course for a variety of reasons

the loss has been nil for many months. Moreover, it is even

possible that a sterling crisis could bring some temporary

additions to the gold stock and thus render more difficult this

psychological obstacle to acceptance of a m:re restrictive

policy. Under these conditions I feel that it is up to the

System to try to prepare the ground, both within and outside of

-21

7/28/64

the Government, for whatever action seems likely to be

called for fairly soon if the international danger signals

now clearly flying are confirmed by actual payments

developments in the coming weeks.

Mr. Ellis commented that in New England consumer spending seemed

to be strengthening, according to recent data on department store sales

and new car registrations.

Business capital spending continued to rise,

and nonresidential building contract awards were running 12 per cent

above a year ago.

In a recent survey of the one hundred largest

manufacturing corporations in the District, second-quarter sales were

resorted to have substantially exceeded expectations, and more than

two-thirds of the firms expected third-quarter sales to be at least

near the second-quarter levels.

Insured unemployment Claims in New England were 12 per cent

below last

year, and new lows were expected later this year.

Nonagricultural employment was up, although manufacturing employment

had yet to regain its earlier level.

hand, continued to rise slowly.

Manufacturing output, on the other

Shoe production in May was less than

last year, and for the first five months of 1964 was about 1 per cent

below the level last year.

Financial activity continued to outpace production, Mr. Ellis

remarked.

Business loan expansion around the tax date in June was

sharper in the District than in the nation.

However, demand deposits

continued to show almost no growth, and today were at about their

1962 level.

The scramble for deposits continued to be intense.

Since

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7/28/64

January the vclume of CDs outstanding in New England had expanded

34 per cent, in comparison with 24 per cent for the United States as

a whole.

In New England the loan-deposit ratio had reached a new

peak of 71 per cent, and at Boston banks the ratio was 75 per cent,

compared with 66 per cent for all member banks.

Turning to policy, Mr. Ellis said it seemed to him that there

were three aspects of the current economic situation to be taken into

consideration.

First and foremost, there was the continued balanced

expansion of the economy without excesses.

The expansion was so nearly

ideal that the burden of proof seemed to rest on anyone who wanted to

alter conditicns.

This led to the second major aspect, the pattern of

credit expansion.

In June total reserves had risen sharply--at a

seasonally adjusted annual rate of over 16 per cent.

As had been

pointed out, the recent record suggested that a one-month bulge in re

serves tended to be followed by slower growth rates in subsequent months.

But it appeared obvious that if such a rate of expansion continued it

would call

for attention.

The third element to be taken into consideration, Mr. Ellis said,

was the recent worsening in the U. S. balance of payments position.

The

outlook seemed to be for a resumption of outflow of short-term balances,

as a result of widening covered yield spreads.

Given che present situation, Mr. Ellis' choice of policy would

be to seek net free reserves between zero and $100 million, and to

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7/28/64

support the Treasury bill rate as necessary, gradually moving it into

the 3.50-3.60 per cent range as a small precaution against the effects

of higher short-term rates abroad.

This policy would be in the context

of letting the dust settle after the recent advance refunding.

would hold a discount rate increase in abeyance.

He

Like Mr. Hayes, he

was concerned that the public be prepared before any significant move

toward less ease was undertaken.

Mr. Irons reported that econonic conditions in the Eleventh

District had changed little during the past few weeks.

There had been

a moderate upward movement in June and in the first part of

July.

Industrial production was running about 5 per cent above a year ago

aid was inching up.

Production had been held down a bit by a decline

in crude oil cutput, and it was likely that crude oil allowables would

be reduced slightly in August.

Construction was very strong, and the

outlook, especially for residential construction, was favorable.

Employment had moved about seasonally and the unemployment rate, not

seasonally adjusted, was about 4-1/2 per cent of the labor force.

was somewhat below the year-ago figure of 5 per cent.

This

Retail trade,

including auto sales, was very strong.

It was too early to say much about agricultural prospects for

this year, Mr. Irons continued, but there had been an increase in

acreage and crops generally were satisfactory.

normal for this season.

The situation was about

Cash farm receipts for the year to date were

running between 5 and 6 per cent below a year ago.

-24

7/28/64

On the financial side, Mr. Irons said, loans at District banks

had increased, while investments and deposits were down slightly.

There were no large changes one way or the other among loan categories,

but commercial and industrial loans were down and loans in other

categories were up.

strong.

Demand for Federal funds in the District had been

Borrowings at the Reserve Bank were higher, but the change was

not great; a few more banks, both small and large, were coming in to

the discount window.

In the light of the domestic and international situation, and

of the Treasury financing situation, it seemed to Mr. Irons that there

was

no reason at the moment to make any strong policy change.

The

domestic economy was undergoing steady expansion with a good degree of

price stability, and there was a lack of evidence of any imbalances.

There had been some deterioration in the ba:ance of payments situation

in recent weeks, but in his judgment an overt policy change was not

called for as yet by either domestic condit:ons or foreign developments.

He would like to see continued moderate expansion in bank credit,

relative stability on average in the money market, and levels of interest

rates and a degree of reserve availability approaching those of the last

three weeks.

His guidelines would be free reserve averages of $100

million, plus or minus about $25 million; a

Treasury bill rate around

3.50 per cent, plus or minus about 5 basis points; and the Federal

funds rate also at ?.50 per cent.

He would not raise the discount

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7/28/64

rate at this time.

The draft directive with the minor changes proposed

by the staff was acceptable to him.

He would prefer that any errors on

the part of the Desk be on the side of a little more firmness rather

than a little more ease.

Mr. Swan reported that, as in the Eleventh District, there had

been no very .;ignificant changes in the immediate situation in the

Twelfth District.

The rate of unemployment in the Pacific Coast States

was unchanged in June, which was a little unusual in contrast with the

increase in unemployment in the nation.

However, the District unemploy

ment rate still continued well above that of

the country as a whole and

in May and June was little changed from June of last year.

The failure

of unemployment to worsen was related to the fact that the decline in

employment in defense-related industries in June was the smallest monthly

drop so far in 1964.

The rate of these decreases had been lessening,

but some further declines in defense employment were anticipated.

Lumber prices, while still below year-ago levels, were somewhat

firmer in July, Mr. Swan said.

The firming occurred against a background

of a steady flow of orders and some vacation shut-downs.

Cash farm receipts for the first five months of the year in the

District were slightly higher than a year ago, but had shown less increase

than in the nation as a whole.

Agricultural production prospects seemed

to be better; crop volume in the District was likely to be heavier in

1964 than in 1963.

Department store sales in the first part of July

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7/28/64

continued at levels well above a year ago.

On the whole, the economic

situation in the District appeared quite favorable.

Twelfth District banks reflected some pressure in their reserve

positions, Mr. Swan noted.

The larger banks were net buyers of Federal

funds in the week ending July 8.

They moved to the selling side in the

next two weeks,, but in relatively small amounts.

Mr. Swan reported that one of the smaller city banks recently

had borrowed f-om the Reserve Bank to tide over until it could sell some

mortgages.

It; borrowing need had been occasioned by the fact that a

rather substantial certificate of deposit, held by a savings and loan

association, had not been renewed as expected, and the bank felt its

only recourse was to sell mortgages.

Mr. Swan said he did not know

whether or not this would prove to be the first of a number of such

incidents, but he suspected that it might be.

It seemed to Mr. Swan that with an advance refunding just

accomplished, and with additional Treasury financing ahead, the Committee

should maintain an even keel situation in the next three weeks.

In his

judgment the domestic situation did not call for a policy change in any

case.

Recent developments in the balance of payments certainly were not

encouraging, but given the lack of knowledge thus far as to the cause

for the deterioration, and given the fact that the figures were tentative

and had been subject to substantial revisions in the past, he saw no

basis as yet in the international situation for a change in policy.

-27

7/28/64

Thus, Mr. Swan favored a continuation of the Committee's policy of

the past three weeks, without any attempt to obtain slightly more

firmness within the framework of current policy.

He was satisfied

with the draft directive that had been prepared by the staff, and

would not change the discount rate.

Mr. Deming reported that Ninth District economic activity

expanded in June, apparently more than seasonally, and the expansion

seemed to have carried over into July.

June was up 12 per cent.

Total industrial power use in

While total employment, seasonally adjusted,

had shown little change from January to July, manufacturing employment

in Minnesota moved up in July from June levels.

By the close of June,

iron ore shipments from Lake Superior ports were 23 per cent ahead of

the same period last year.

Nonresidential construction activity was moving

ahead steadily, although residential building was slowing down.

June bank debits, seasonally adjusted, for the Ninth District

showed the sharpest month-to-month rise this year and were 18 per cent

ahead of last June, Mr. Deming said.

June personal income, however.

probably would show some decline from May, in large part due to the new

wheat program which caused cash sales receipts of farmers to drop,

although much of this drop would be made up with certificate payments

later.

Agricultural output in the District in 1964 should be favorable,

as growing conditions were good.

Total wheat production should exceed

last year's level by 10 per cent due to higher yields.

Feed grain

-28

7/28/64

production was estimated on July 1 as slightly smaller than last year.

A strike at the Duluth-Superior docks by grain handlers had embargoed

grain shipments to those ports since July 6 and had caused grain to

back up to local farm storage.

District retail sales in July seemed to have improved over June,

Mr. Deming cortinued.

Department store sales were quite strong in the

first half of the month in the city areas and even in the smaller urban

centers where they had been weak so far this year.

The Minneapolis Bank's regular opinion survey on short-term

prospects, taken as of July 22, indicated general optimism.

Only

two respondents foresaw some weakness in the next several weeks; about

two-thirds foresaw improvement, and about one-third stability at present

high levels.

Bank credit expansion had moderated somewhat so far in July,

Mr. Deming said, as investments declined slightly more than loans grew.

At city banks, however, loan demand in July was stronger than usual with

the increase in business loans rather marked.

So far this year, business

loan demand at city banks had been weak, in large part apparently reflec

ting lessened demand for credit by grain processors who were reducing

inventory as a result of the new wheat program.

Some rebuilding of

inventory was now taking place, but the amount of credit required by

the milling trade probably would remain smaller than usual since the

new program resulted in lower cash prices, and certificates did not have

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7/28/64

to be purchased until or after actual grain processing.

The net

result was that the Government would, in effect, carry about one

third of the inventory cost.

With respect to policy, Mr. Deming said, it seemed to him

that for the next three weeks the Committee had to stay about where it

was at present; the Treasury financing situation was the dominant

consideration.

There also was no particular reason to change policy

on grounds of the domestic economic situation.

However, he had begun

to share the concern expressed by Mr. Hayes and others about the

deterioration in the balance of paymerts.

In his judgment the Committee

would be well advised not only to keep this problem in mind but also

to look toward monetary policy action that hopefully would moderate

such outflows of short-term funds that might

be taking place.

The

Minneapolis Reserve Bank recently had learned of some cases in the

District in which corporations with very strong cash positions were

moving funds to Canada.

Other corporations were inquiring into the

possibilities of doing the same.

Mr. Deming commented that it would

be hard to say how much of a change in rate differentials would be

required to stop such flows.

Mr. Deming concluded by saying the staff draft of the directive

was acceptable to him.

He would not change the discount rate.

Mr. Helmer reported that business trends in the Seventh District

continued to develop favorably and, allowing for seasonal trends,

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7/28/64

employment appeared to be increasing and unemployment to be decreasing

slightly.

A local steel producer reported that

auto firms were ordering

steel as though they expected to continue output without a work

stoppage.

Current estimates for the Auto industry placed output at

1-1/2 million units in the third quarter--12 per cent above last

year--with about 900,000 of these being 1965 models.

had been rising for some types of steel

Order backlogs

(mainly plates and structurals)

and for some types of capital equipment (especially machine tools and

heavy presses), but there was little evidence that District business

firms were paying or obtaining higher prices for goods.

Business loans declined at District banks during the past few

weeks, although by an amount less than usual

for July, Mr. Helmer noted.

Trade and metals manufacturing firms had reduced borrowings rather

sharply but these reductions had been offset

in part by net increases

in most other industry groups, especially public utilities.

The

continued rise in "other" loans suggested that consumers might have

stepped up the pace of their borrowing.

Although most District banks

had maintained fairly comfortable reserve positions, borrowing at the

discount window rose temporarily in the week of the Treasury's refunding.

Banks in Chicago apparently had no difficulty acquiring desired amounts

of CDs, and the amount outstanding had been restored to the pre-tax

date level.

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7/28/64

Mr. Tow said there was little evidence of accelerating economic

activity in the Tenth District.

Nonfarm employment had declined slightly this year.

In a

majority of States, employment had been essentially unchanged, but a

decline in three States had produced an over-all District decrease.

Most important had been a halt in Colorado's long postwar expansion,

along with employment declines in Kansas and Oklahoma as contributing

factors.

Farm income prospects in the Tenth District for the last half

of this year were distinctly better than the first half, when cash

receipts from farm marketings decreased 6 per cent.

With wheat pro

duction a fifth higher than last year's relatively small crop, cash

receipts from that source should materially improve.

prices were lower than last year, this

While wheat

effect should be more than

offset by an increased volume of marketings and certificate payments

under the new Federal wheat program.

Receipts from cattle sales also

should improve, as a larger volume of marketings should at least offset

the effect of lower cattle prices.

Cattle prices strengthened somewhat

in June and since then had remained above their May lows.

Asset growth of Tenth District weekly reporting banks this

year had about paralleled that of a year ago, Mr. Tow noted.

A more

rapid rate of loan growth had been accompanied by a marked increase

in liquidation of investments.

Business loans, however, had decreased,

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7/28/64

in marked contrast to a large expansion las: year.

In fact, loans to

durable goods manufacturers constituted the only broad category of

business loan expansion.

The faster growth in total loan volume this

year stemmed largely from expansion in loan,; to nonbank financial

institutions; banks, brokers, and dealers; and real estate loans.

The composition of the more rapid total loan volume expansion in

Tenth District weekly reporting banks over a year ago raised real

doubt as to whether it was related to growth in economic activity

within the District.

Mr. Wayne commented that business activity in the Fifth District

continued to rise at a slow, steady pace, following a trend that had

been in progress for many months.

The Bank's latest survey showed

businessmen viewing the near future with about the same degree of

optimism as was indicated three weeks earlier.

Manufacturers on

balance again reported small gains in new o-ders and shipments and a

slight upward tendency in employment, wages, and the outlook for profits.

The textile business seemed stronger and more stable than at any time

in the past several years.

New orders continued at a good pace, keeping

backlogs large and prices firm, and profits were expected to be the best

in more than a decade.

Building activity remained at record levels,

but stability in seasonally adjusted construction employment since early

in the year and spring declines in both contract awards and building

permits might foretell a leveling off sometime in the near future.

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7/28/64

Retail sales apparently continued at generally high levels,

In

agriculture, July rains had brightened crop prospects quite generally.

The rather fragmentary information that had become available

since the Committee's last meeting suggested that the U. S. economy

was continuing to move ahead at a moderate pace,

Mr. Wayne continued.

It was true, as Mr. Hayes had suggested, that there were a number of

question marks; the leading indicators had been showing some weakness

for two months, contract awards and housing starts had been trending

downward, and durable goods sales did not look particularly strong.

But it seemed significant to Mr. Wayne that the advance was proceeding

at a good pace in the face of such factors without any signs of in

ventory excesses.

Mr. Wayne believed that recent rate.; of expansion in reserves

and bank credit had been generally appropriate to domestic business

Disparities between domestic and foreign money rates

conditions.

continued to occasion concern and should significant short-term

outflows be stimulated, reconsideration of the posture of policy might

be in order.

For the present, however, Mr. Wayne saw no reason either

in the domestic or the international situation for altering the Committee's

position.

Accordingly, and also in view of the Treasury financing, he

favored no change in policy and would leave the discount rate at the

present level.

Mr. Wayne indicated that he was satisfied with the draft

directive prepared by the staff.

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7/28/64

Mr. Mills said that, assuming that .he reported financial

statistics faithfully reflected the performance of the national

economy and international movements of funds, in his judgment no

change in policy was called for at this time.

However, he continued

to be disturbed by the Committee's concentration in policy actions on

maintaining a predetermined level of interest rates.

In his belief,

the result was to draw a curtain over what otherwise would be a visible

and desirable interplay of financial market factors that would offer

the Committee advance notice of impending developments on which policy

actions could be formulated.

The Committee was now precluded from

formulating policy in this way by the lack of availability of signs.

Mr. Robertson said that he shared some of Mr. Mills' concern.

He then made the following statement:

Given the reported steady e.pansion in business activity,

the stability in the price picture, and the persisting high

level of unemployment, it seems to me that a "steady in the

boat" posture for monetary policy continues to be very much

in order.

I am not indifferent to the unfavorable recent balance

of payments developments, but I continue to feel that the

credit flows contributing most to the recent changes are

better dealt with by a selective approach to the few lenders

involved rather than by general monetary measures. On the

domestic side, money supply increases have been substantial

in June and July, but as yet I see no cause for concern in

that development. A significant part of the July increase

reflected transfers of deposits from Government to private

hands, rather than a continuation of the strong net bank

credit and deposit creation recorded in June. Two such

months do not make a trend. Moreover, with n the money

supply total the recent cessation of growth in currency in

circulation should lead us to accommodate a little stronger

rate of growth in the demand deposit component of money.

-35-

7/28/64

Finally, these money supply increases ought to be

viewed against the perspective of the very appreciable

shrinkage in the public's holdings of other liquid assets

that resulted from the Treasury's advance refunding. With

all these counteracting influences operating on over-all

public liquidity, I am glad that monetary policy has been

as expansive as it has.

Even apart from all these other considerations, however,

I think the Committee ought to feel impelled to follow an

"even keel" policy over the next three weeks because of the

status of the past and prospective Treasury financings.

Dealers still hold a very large amount of the longer-term

advance refunding issues, and now the Treasury will be

announcing a separate refunding offering for the August 15

maturities (presumably a reasonably short-term offering for

which the books would be open some time next week). The

latter should be a routine operation, on which the Treasury,

from its point of view, would not need any help. Nonetheless,

we must remember that we have ordinarily maintained an "even

keel" policy during and at least for a few days after the

subscription periods for coupon issue refundings, and that

the market has come to expect this from us as a regular

practice

I favor a clear-cut understanding of the "rules of the

game" between us and the market, and therefore I would not

want to see us break this one by a departure from "even

keel" unless the need therefor is substantial. I see no

substantial need to break this rule, and therefore I advocate

a policy of "no change" between now and the next meeting of

the Committee.

Mr. Robertson added that in his opinion the directive with che

amendments proposed by the staff was clearly appropriate.

He would

hope that no attempt would be made to slip sideways into a tighter

position, as some had suggested.

Mr. Shepardson said that while the general outlook was encouraging

it seemed to him that many of the public statements being made about

prospects for the domestic economy were perhaps too optimistic and that

the uncertain foreign situation provided some cause for concern.

-36

7/28/64

However, with the present Treasury financing activities calling for

maintaining a stable situation, it seemed inappropriate to make any

change in policy.

Accordingly, he favored a continuation of the

policy of the last three weeks.

Unlike Mr. Robertson, Mr. Shepardson

was inclined to feel that within the constraints imposed by the Treasury

financing the Committee should not avoid moves in the direction of a

little lower free reserves, and a little higher levels of short-term

rates, somewhat along the lines Mr. Ellis had suggested.

Mr. Shepardson

approved of the directive as drafted by the staff.

Mr. Mitchell commented that he thought monetary policy should

be accommodative of the needs of the economy, which he would define

under present circumstances as continuing

that it had been doing.

He

was puzzled by the behavior of the money supply during recent weeks,

as was Mr. Brill, and he was uncertain of the significance of recent

balance of payments figures, as was Mr. Furth.

But until some further

knowledge was available on the implications of these developments he

would be inclined to continue policy as at present.

also precluded a policy change.

Treasury financing

The draft directive submitted by the

staff was agreeable to him.

Mr. Mitchell said he would like to comment on Mr. Hayes'

suggestion that the Committee should be preparing the public for

something.

lie was not sure what it was

the public should be prepared

for, but he had a feeling that it was a recession.

His reason for

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7/28/64

saying this was that it seemed pretty clear by now that the tax cut

had not had the stimulative effect that had been sought.

It was

possible that there would be a delayed reaction, but in his judgment

the goals sought had not been realized.

He was not sure of the

reason; perhaps the effects of the tax cut had been counteracted by

the trend of Government expenditures.

In any case, Mr. Mitchell

thought that the Committee might well face a situation this fall in

which some expansive contribution would be expected from monetary

policy on domestic economic grounds.

He fully shared Mr. Hayes'

concern about the balance of payments, but he did not think that the

sort of remedy Mr. Hayes proposed was one that the Committee was free

to use.

Not only was the domestic economy the Committee's greatest

concern, but the strength of the U.S. econony was of the greatest

importance throughout the world.

It seemed to Mr. Mitchell that monetary policy in recent years

had been outstandingly successful in accommodating the economy.

He

thought the Committee should be very careful in making any departures

in its policy on the grounds that the balance of payments situation

required them, particularly since it appeared that the end of the

current cycle might well be near.

In his judgment it was most important

that the System avoid the collison course on which it would embark if

it raised the discount rate or if the Committee made any deliberate

change in its policy posture without overwhelming evidence of need.

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7/28/64

Mr. Hayes said he wanted to make clear that he did not foresee

a recession and was not suggesting that the public be warned about the

prospect of one.

In his opinion the domestic economy was doing very

well but there was a lack of progress in the balance of payments

problem.

In fact, the situation appeared frightening when one looked

back over the past five or six years.

He thought monetary policy did

have a role to play in connection with the payments problem, and that

it was not possible to separate the question of domestic prospects

from that of the international strength of the dollar.

Mr. Hickman said that figures now available for the second

quarter reaffirmed the impression that the economy was growing at a

balanced and sustainable rate.

The preliminary figures on GNP showed

gains of 1.6 per cent in both the first and second quarters.

Industrial

production, on a revised basis, showed a ga.n in the second quarter of

2.2 per cent, slightly larger than the 1.6 per cent gain in the first

quarter.

Retail sales,

with sales up less in

on the other hand,

showed an opposite pattern,

the second quarter than in

the first

(1.8 per

cent as compared with 2.3 per cent).

The economic analyst could, therefore, take his pick as to

whether the expansion was accelerating, decelerating, or steady.

However, it was important to note that when the above increases for

both quarters were summed and multiplied by two to obtain annual growth

rates, the improvements thus far this year had been substantial:

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7/28/64

industrial prcduction was increasing at an annual rate of 7.6 per

cent; retail sales at a rate of 8.2 per cent; and GNP at a rate of

6.4 per cent.

Expectations for continued gains in the economy were

widespread, Mr. Hickman said, judging from views expressed at the

latest meeting of 25 Fourth District business economists held

recently at the Cleveland Bank.

These economists felt that business would

continue to expand, although not rapidly, during the next three or

four calerdar quarters.

Doubts about the outlook were expressed only

for the second quarter of 1965 and later, but primarily because of

the low visibility of economic forecasts beyond the six-month horizon.

There was widespread concern in the group about labor negotiations in

the auto industry this year and possibly in steel next year.

Incidentally,

steel analysts in the Fourth District were now looking for a 1964 ingot

output of 117-119 million tons, and automobile analysts were lookirg

for an 8-million-plus car year.

Representatives of both industries

were now inclined to see total output for their respective industries

next year as being below this year's record performance.

Scattered and incomplete reports for the Fourth District in

July showed a rather mixed picture, with some signs of hesitation,

Mr. Hickman continued.

Part of the hesitation reflected the usual

summer vacations and shutdowns, and part reflected a leveling that had

occurred in iron and steel and the transportation industries in recent

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7/28/64

weeks.

The latest employment statistics for major labor market areas

of the Distric,

seasonally adjusted, showed three improvements, six

declines, and five with no change.

This contrasted to the situation

earlier this year when changes were almost uniformly on the side of

improvement.

With respect to monetary policy, Mr. Hickman thought that

because of the imminent Treasury refunding the Committee was faced

again with the need to maintain an even keel.

He hoped personally

that in following this course the Committee would not again experience

the violent expansion in the money supply that had occurred recently.

Between the first half of May and the first half of July, as the staff

report pointed out, the money supply expanded at an annual rate of 9.3

per cent.

In his opinion such an expansion hardly seemed consistent

with an even-keel policy.

Mr. Hickman continued to feel that nonetary policy had been

too easy too long and that the Committee was building up serious

problems for itself in the future.

History seemed to show that if

rates of monetary expansion similar to those that had prevailed in the

recent past were continued for too long, they were likely to result in

price inflation, boom, and bust.

From the balance of payments standpoint

also, excessive credit expansion and credit availability appeared to

have encouraged capital outflows from both the banking and nonbanking

sectors.

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7/28/64

Mr. Hickman thought that as soon as the Treasury's calendar

permitted, the Committee should push the bill rate to the general area

of 3.60 per cent; and, in the meantime, it should continue to swap key

foreign currencies, buying British pounds and Canadian dollars spot and

selling them forward, to reduce or eliminate the covered yield dif

ferentials.

He would also let the Canadians and the British know

what was being done and why, and solicit their cooperation.

The revised draft directive was satisfactory to Mr. Hickman.

Mr. Bopp said that business continued to be good in the Third

District.

Labor force developments since the last meeting had been

mainly favorable.

Output, which wavered a bit in May, appeared to

have picked up again in June.

Sales at retail had been satisfactory,

although not matching national increases.

Unemployment claims in Pennsylvania and Delaware continued to

be low, compared with the totals of recent years.

Help-wanted indexes

increased in June in Philadelphia and the Middle Atlantic States, as

well as in the nation.

Unemployment rates typically decreased in June,

although in a few places insured rates went up somewhat.

The Third

District now had no labor markets classified "F" and only oneScranton-- in the "E" category.

Electric power consumption and employment in the manufacturing

industries of the Third District decreased more than seasonally in May,

but both measures appeared to have recovered in June, Mr. Bopp noted.

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This assessment was based on not quite complete data, however.

Construction contract awards in the Third District this year were

holding at last year's levels, as were national constructionawards.

Department store sales in the District were up 8 per cent over 1963

for the year to date, 9 per cent in the latest four weeks, and 6

per cent in the latest week.

Since the Committee's last meeting, Mr. Bopp said, reserve

pressures on Third District member banks once more had increased and

loans continued to better the year-ago performance.

The basic reserve

position of reserve city banks had shifted to the deficit side again

after having been positive during the last Lwo weeks in June.

For

the three weeks ending July 22, the deficit averaged almost $50 million.

Borrowing at the discount window, both by reserve city and country

banks, continued to be quite light.

Net loans adjusted at weekly reporting member banks rose by

$17 million, compared to a year-ago decline of $1 million.

Business

loans dropped slightly but by an amount less than last year.

Total

deposits adjusted in the first half of July rose by $41.0 million,

compared to a $70.1 million decline last year.

The increase was

predominantly in the category "other demand deposits adjusted," with

time and savings deposits and interbank deposits also rising.

Mr. Bopp commented that as the economy passed the mid-year mark,

it continued along a path characterized by steady expansion without

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7/28/64

inflationary or specutive excesses.

Perhaps most indicative of this

course was the 5 per cent increase in gross national product over the

second quarter of a year ago, coupled with a continued rise in output

per man-hour in manufacturing and steady wholesale and industrial

prices.

In short, economic policy in the first half achieved the goal

of steady growth without inflation, although there was still some way

to go in attaining the objective of reasonably full employment of

manpower and other resources.

Because of this general under-utilization of resources,

Mr. Bopp regarded as a favorable development the steady growth in

bank credit, in the money supply, and in other liquid financial assets.

The question remained, however, as to whether this build-up represented

inflaticnary tinder for the second half of the year.

In a complex

industrial economy, of course, anything was possible.

Yet, in his

judgment, ample unused resources rendered such a development unlikely.

As for the balance of payments, it was heartening to see the

second quarter deficit revised a bit in favor of the U. S.

It also

was suitable that short-term rates had risen above their monthly laws.

In short, for domestic reasons, Mr. Bopp felt that the present

posture of ease continued to be appropriate to the near-term future

even in the absence of need for an even-keel policy to facilitate

present Treasury financing.

The present posture also was appropriate

to the current balance of payments condition, although that condition

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7/28/64

had to be watched closely during the remainder of the year.

In his

opinion the draft directive submitted by the staff was appropriate.

Mr. Bcpp said that he might mention that there seemed to be

a significant and rapidly increasing restiveness with respect to

Federal Reserve membership in the Third District, particularly on

the part of small and medium-sized banks.

considering withdrawing from the System.

Some were actively

To some extent this situation

was peculiar to Pennsylvania, where State banking laws gave significant

competitive advantages to nonmember banks.

Mr. Daane entered the meeting at this point.

Mr. Bryan commented that he had no new and immediately current

Sixth District figures that had not heretcfore been presented.

The

economy of the District appeared to be robust as judged by directors'

reports, and if judged by new plant and expansion announcements, would

continue in good health for some time.

Borrowings from the discount window for some weeks had been

generally heavier than seemed appropriate :n view of the District's

total banking resources as a proportion of national banking resources.

But charts on member bank borrowings, over a longer term, exhibited an

alternating pattern, first going above the 6 per cent line representing

the District's relation to the national total of reserves, and then

going below.

He was thus unable to attach any particular significance

to the present situation.

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7/28/64

The national economy, speaking wholly to the domestic side,

seemed to be going ahead nicely, Mr. Bryan said.

The development did

not at the moment appear to give clear indications of inflation; on

the contrary.

The development also seemed to be sufficiently balanced

and symmetrical so that he did not see any present and compelling

reason for believing that the national economy would shortly change

its direction.

The money supply and reserve supplies seemed to Mr. Bryan to be

in order.

Accordingly, speaking to the longer run of three or four

months, he believed that the Account Manager should aim for approximately

a 3 per cent growth in total reserves after allowing for seasonals.

In the shorter run, taking account of the fact that the Treasury

operations would largely inhibit any change in policy, which in any

event did not seem to be indicated, Mr. Bryan believed that the

Account Manager should aim on a daily average basis for $100 million

free reserves, plus or minus $50 million or so.

Mr. Bryan noted that he had not spoken of the balance of payments

situation, but in his recommendation for short-run policy and longer

run policy had abstracted from the balance of payments for reasons that

he had mentioned at other meetings.

He would say, however, that in his

judgment the balance of payments problem was extraordinarily serious,

to the point that it might eventually force national policies resulting

in a shock to the domestic economy.

Without in eny degree making a

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7/28/64

forecast, Mr. Bryan said he could imagine a hypothetical, but quite

possible, chain of events that might at some point lead to devaluation

of the dollar.

The problem here, Mr. Bryan said, was one of remedies.

If it could be shown that monetary expansion in this country was

primarily responsible for the balance of payments difficulties he

would, of course, agree that the Comittee must take primary responsi

bility in effecting a remedy.

But he did not believe that this could

be demonstrated.

Mr. Bryan said that he would not change the discount rate at

this time.

He was agreeable to the directive proposed by the staff.

Mr. Bryan then said that he would like to make a comment with

regard to the staff's regular report to the Committee, "Current Economic

and Financial Conditions," which was familiarly referred to at his Bank

as the "green book."

He thought the staff should be complimented for

this book; its format and content were excellent, and he found it most

useful.

He wanted to raise a question concerning this report without

having any firm convictions about the answer.

On three or four occasions

the Committee had discussed the possibility of publishing from time to

time, in the Federal Reserve Bulletin or elsewhere, a review of economic

developments and a statement about monetary policy.

He had not reviewed

the green book to determine whether there would be a problem in connec

tion with confidential information, but the question that occurred to

him was whether this book could be publicly released after each meeting.

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7/28/64

At a minimum, this would make the most recent figures available

promptly, and it would also indicate the variety of considerations

the Committee had in mind at each meeting.

Publication of this material

might serve as a substitute for the types of articles the Committee had

discussed on earlier occasions.

Mr. Shuford commented that economic activity in the Eighth

District had continued on a high plateau since January.

Perhaps it

could be said to have inched up slightly, but generally speaking

there had not been much change since the first of the year.

Employment,

bank debits, and department store sales renained at about their January

levels.

Bank deposits had continued to increase at a rapid pace, however,

and business loans had risen markedly since April.

District construction activity had been at an advanced level in

recent months, with contract awards so far this year 30 per cent above

the same period a year ago.

The sharpest increase had been in non

residential construction, but there also had been a substantial rise in

residential building permits.

Farm crop prospects were good, Mr. Shuford said.

planted to major crops was about the same as last year.

The acreage

Crops generally

were in good condition for this time of the year, but, as had already

been mentioned, it was a little early to be making predictions.

Most

of the small grains had been harvested and corn, cotton, soybeans, and

tobacco were progressing satisfactorily.

Dry weather in the southern

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7/28/64

part of the District had been a problem, but recent rainfall had

improved conditions.

Livestock prices were below year-ago levels,

but they had recovered somewhat from the depressed levels of April

and May.

Nationally, Mr. Shuford continued, economic activity had

continued strong in the second quarter.

Output, employment, incomes,

and retail sales all had increased significantly from the first quarter

to second.

The economy not only appeared to be healthy, but it also

was strong in all major sectors.

Inventories were not excessive,

and at this time there appeared to be no major imbalances.

There had been considerable churning in the money and capital

markets during the past two or three weeks, Mr. Shuford noted.

As

Mr. Noyes had anticipated at the last meetirg, shifting from "rights"

into Treasury bills in connection with the advance refunding had put

Treasury bill rates under downward pressure, but after the refunding

rates returned to the levels that had prevailed since last November.

Pressure

in the money market, as reflected by data on Federal funds

rates, dealer positions, free reserves, and the like, changed little

on balance.

The most recent data on bank reserves, bank credit, and

the money supply showed marked expansion.

However, since late last

year monetary growth had been in the 3 to 4 per cent range.

Mr. Shuford

noted that in the latter part of 1963 the Committee had been concerned

about the high rate of growth in the money supply, and a few meetings

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7/28/64

ago it had been bothered by the fact that the growth rate then was

quite low.

Now the growth rate was back up again.

It behooved the

Committee, Mr. Shuford said, to consider the behavior of the money

supply from a longer run point of view.

Mr. Shuford commented that the balance of payments problem

continued to be troublesome, and increasingly so at present.

For the

time being, however, he favored no change in policy for the various

reasons that had been discussed, including Treasury financing activity.

The staff's draft directive appeared satisfactory to him.

Chairman Martin noted that Mr. Daane, returning from a trip

abroad, had joined the meeting a short time earlier, and he asked

whether the latter had any comments.

Mr. Daane said he thought, no change in policy was called for,

particularly in light of the recent surprisingly successful advance

refunding, and of the imminence of further Treasury financing activity.

He had been somewhat confused by the available data on balance of

payments developments, and he felt this was an area that the Committee

should watch carefully.

At this juncture, however, he thought no

change in policy was the best course.

Mr. Balderston commented that at the moment the market might

need to be let alone to digest the large volume of Government securities

issued in the recent advance refunding.

Since the redistribution of

the dealer and other temporary holdings should not take long, it was

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7/28/64

his hope that the Committee would use the interim to take a fresh look

at the current posture of monetary policy with a view to minimizing

the outflow of dollars at present and a possible resumption of gold

outflows in the future.

Fortunately, Mr. Balderston said, the Committee was now

approaching a period in which some adjustment of that posture would

be possible.

He therefore would address himself to what might be

called "a stitch in time."

In favor of some gradual lessening of the

pace of bank credit expansion were several considerations:

First, the rate incentive for American corporations and banks

to place funds abroad needed to be diminished in view of the balance

of payments outlook.

He was impressed with Mr. Deming's comments on

movements of corporate funds to Canada.

Actual rate advances in

Europe, coupled with the expectation of others, had induced nervous

ness that could increase.

While the long-term claims on foreigners

reported by banks increased in the second quarter by only $70 million,

Mr. Balderstone suspected that this reduced figure was not representative

of the outlook for the year as a whole.

Secondly, Mr. Balderston continued, although traditional

relationships did not indicate a significant increase in corporate

liquidity ratios, it was clear that big corporations had large and

growing quantities of liquid funds.

Consequently, they would continue

to cast around for opportunities to employ this liquidity, including

placement of funds overseas.

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7/28/64

In most European countries except Germany, both short- and

long-term rates since a year ago had advanced by about enough to

offset the rate increases in the U. S. during the same period.

Currently, the 4-1/2 per cent prime rate in the U. S. was lower than

that in any o.. these countries except Switzerland, and in that country

banks had had to become more selective in lending at that rate.

The final consideration, Mr. Balderston said, had to do with

liquidity of individuals, which continued to mount as a result of the

high rate of saving and the fact that bank Loans and investments had

grown at a fast pace, averaging about 8 per.cent annually since early

1961.

The money supply had increased markedly since mid-May, at an

annual rate of 9 per cent--a rate that should not be sustained.

And

so at a time when European countries, excluding Sweden and Britain,

had cut their rates of money supply expansion, the United States had

continued to provide comfortable bank credit availability.

The

important factor was that stiff restraint in Europe and no restraint

here would tend, over a period, to bring to a halt the recent improve

ment in the relative competitiveness of U. S. business and in the

payments deficit.

Mr. Balderston commented the U. S. balance of payments problem

could not be solved by any one action, as others had remarked earlier

in the meeting.

But since other developed countries were taking steps

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7/28/64

to counter present and developing inflationary pressures, and the

business situation here remained steadily strong, he thought it would

be appropriate to consider shifting System policy shortly to induce

more discounting by member banks, especially the large city banks.

The need for some action was reinforced by the growth of nonborrowed

reserves in the first half of this year at an annual rate of 5.9

per cent.

If this were done, one could not foretell whether or not

the big banks would give preference to domestic rather than foreign

lending, but it was worth a trial.

It was more certain that some

increase in bill rates would reduce the incentive for bankers and

nonbankers to place funds abroad.

To focus this argument upon a concrete proposal, Mr. Balderston

said, he favored rates of upward of 3.60 per

cent for the three-month

bill, but not above 3.75 per cent for the six-month bill.

Further, he

would probe to discover the effect of forcing a somewhat higher volume

of bank advances at the discount windows.

To achieve both of these

ends would require letting free reserves move close to zero, and even

below zero.

Since his concern, Mr. Balderston said, centered upon some

redressing of bill rates without setting off too large a shrinkage of

negotiable CDs, and upon staunching any future gold outflows, he was

inclined to the view that a change in reserve requirements might be

used again this fall, as Mr. Hayes had suggested at a previous meeting.

7/28/64

-53

Used instead of the open market instrument, it would meet seasonal

credit needs without depressing bill rates and, equally important,

it would reduce the gold requirement.

It seemed to Mr. Balderston

that unless action was taken early enough, the action that would be

required later might have to be more drastic than he would consider

desirable.

Chairman Martin commented that he thought the consensus was

clear today:

an even keel policy should be followed during the next

three weeks.

Some members would prefer that any minor deviations be

on the side of firmness; others would evidently prefer that they be on

the side of ease.

He added, with a smile, that his own suggestion

would be not to have any errors at all.

The Chairman also commented

that the suggestion for consideration of a change in reserve require

ments deserved careful study.

Thereupon, 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 Commmittee'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

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7/28/64

expansion in money supply and little over-all change in

interest rates. It also gives consideration to the

relative stability in average commodity prices; the

underutil:zation of manpower and other resources; the

apparent deterioration in the international payments

balance in the first weeks of July; and the interest rate

advances in recent months in important markets abroad.

To implement this policy, and taking into account

Treasury financing activity, 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.

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

held on Tuesday, August 18, 1964, at 9:30 a.m.

Chairman Martin then suggested that the Committee give consid

eration to the memorandum dated June 16, 1964, from Messrs. Ellis,

Mitchell, and Swan regarding the Committee's current economic policy

directive.

He asked whether the authors of the memorandum would care

to comment.

Mr. Mitchell observed that the memorandum in question had been

in the hands of the Committee for about six weeks, and that it had been

discussed at a staff conference in San Francisco during the preceding

week.

He would make only two points.

the report was first presented:

One was a point he had made when

that while the proposal in the mem

orandum was quite specific, the authors had not intended to be dogmatic.

The proposal reflected the authors' best judgment as to how it might be

most useful to start what could bp termed an experiment.

But the

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7/28/64

specifics could be modified readily, and it was contemplated that they

would be changed informally and gradually.

If the Committee did decide

on changes, they could be accomplished without inconvenience.

For himself, Mr. Mitchell said, he felt a certain sense of

humility in setting this proposal before the Committee, but he was not

diffident about it; he thought it important to try to improve the

techniques used in wording the directive.

Secondly, Mr. Mitchell said, he wanted to comment on one type

of criticism of the proposal that he had heard, namely, that the pro

cedures suggested would increase staff responsibilities considerably.

It shoula be noted, he said, that under the proposal Committee members'

work also would be more difficult.

specific that increased the burden.

It was the effort to be more

Moreover, Mr. Mitchell said, the

purpose of the elaborate and expensive apparatus for economic reporting

and analysis which the Federal Reserve System maintained was to provide

the basis for a flexible countercyclical monetary policy.

Such an

apparatus would not be needed if the System were to follow an automatic

policy such as some recommended, under which reserves would be injected

at a constant rate.

Mr. Mitchell thought the directive should show not only what

actions the Committee was taking but also how it analyzed the economic

situation and what its prognoses were.

There were many uncertainties

and gaps in the Committee's knowledge, and because of them the proposals

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7/28/64

in the memorandum might seem to be lame and halting, he said, but he

commended them to the Committee as a step in the right direction.

Mr. Swan commented that he had little to add to what Mr. Mitchell

had said, and would simply point out to the Committee what he personally

considered to be the two most important sentences in the report.

which occurred near the bottom of page 12, read:

One,

"However deficient

the state of the art, the Committee must, and now does, make judgments

of the sort that would be required under the proposal."

was worth bearing in mind.

text, on page 13:

This thought

The other was the last sentence of the

"In the effort to face the issues directly the

Committee and its staff undoubtedly will come to have a sharper uncer

standing of the problems, and this alone would be a long stride toward

solutions."

Mr. Swan expressed the hope that if the Committee moved in

the proposed direction it would not only improve its own processes and

directives but in the longer run it would also improve some of its

basic research programs and facilitate improvement of its analysis of

many of the issues involved.

Mr. Ellis said the three authors of the report had found they

had a high degree of uniformity in their approach to the problem of the

directive.

They had not had the advantage of Committee discussion of

the Secretariat's memorandum of April 8, 1964, which appraised existing

directive procedures.

Their own memorandum, in effect, started with a

judgment of the three authors with respect to the present practice, and

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7/28/64

they were not sure how widely that judgment was accepted among the

Committee members.

However, the authors made an assumption that the

Committee did share their judgment, and they then attempted to set

out a modest but significant step toward improvement of the directive.

The central point of their report was the suggestion that the Committee

should establish priorities among its objectives in terms of economic

series that were measurable and that could be used to set targets and

goals in numerical form.

The Committee might well disagree with the specific choices

made in the report, Mr. Ellis said, but the overriding questions were

whether the Committee itself should decide on priorities and whether

it should exp:ess them in measurable magnitudes.

If the Committee

agreed that it should do both, the question was where to start.

The

authors were quite tentative in their suggestions for a starting pcint.

Chairman Martin commented that despite his skepticism, which

had not been completely removed, as to whether too much could be done

in this area, the Committee had an obligation to make its directive as

realistic and intelligent as possible.

While the suggested procedure

would make more work for both the Committee and the staff, as Mr. Mitchell

had indicated, this was no reason of itself to shirk the effort.

The Chairman then called for comments around the table, and

Mr. Hayes made the following statement:

7/28/64

-58-

The memorandum before us, as well as the earlier

memorandum prepared by the Secretariat, has made a

signal cotribution to the discussion of the Committee's

economic policy directive as a means for instructing

the Manager and communicating with the public. I think

all of us have felt that our responsibilities for the

conduct of monetary policy demand nothing less than our

utmost efforts to instruct the Manager as clearly as

possible in achieving the Committee's objectives, and in

informing the public as clearly as we can as to those

objectives and instructions.

At the same time, I do not believe it would be wise

for the Committee to adopt the present proposal for

quantitative monetary objectives and detailed quantitative

instructions. Given the current inadequate state of our

knowledge about financial processes, and their linkages

with real economic activity, I am especially dubious about

the suggestion to single out a particular monetary variable

and specify a particular growth rate for that variable as

the System's primary policy objective. It would be

presumptuous to expect that our directives could resolve

the issues that have confronted monetary theoreticians

and policy makers for so many years, and I do not believe

that a good directive need attempt this. An effort to

impose this task on the directive will neither contribute

to public understanding nor to the quality of policy

formulation. I would be the last to say that our

directives are incapable of improvement, and I would like

to make a few comments on this later. However, I do not

share the feeling of serious dissatisfaction with the

existing directives that underlies these new proposals.

It seems to me that for the most part the existing procedure

works well, and I see no merit in substantial change unless

the change brings very real advantages. It is also my

impression that most members of the Committee have been

generally satisfied with our existing procedure.

Turning to the specific proposals, it seems to me that

there are real dangers to the quality of the Committee's

decisions if it tries to reach agreement every three weeks

on so comprehensive and complex a document as the proposed

directive. Given the difficulty we frequently have in

agreeing on wording in the present much simpler directive,

I do not see how the proposed procedures for developing the

new directive would prove workable unless we limited our

selves merely to choosing among alternative drafts prepared

by the staff. Inevitably, this would mean delegating

7/28/64

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important judgments which are the appropriate province

of the Committee itself.

I have some difficulty on this score even with

regard to the least controversial of the proposed

directive's components--the analysis of recent business

and financial developments in Elements 1 and 2. At

present, the "policy record" has the benefit of being

drafted after an interchange of views among Committee

members at our regular meetings. Moreover, members have

an opportunity to suggest changes before the record is

put in final form, and I believe that useful improvements

often emerge from this process. In contrast, the new

proposal would in all practicality require that a distilled

analysis of recent developments be prepared in advance of

each meeting and before each member's views and the Committee

staff's comments had been heard and weighed. Since this

analysis would provide the foundation for the statement of

the Committee's policy intent and specific operating

instructions, Committee members could hardly pass over

lightly the selection of data made by the staff or the

interpretations placed upon the data. Yet I doubt whether

we are often in such close accord on the factors to be

emphasized that we could agree quickly on an official

analysis rationalizing the group's policy prescription.

Too many substantive issues are involved.

Moving on to Element 3 in the proposed directive, the

statement of the Committee's policy intent, I am extremely

dubious of the proposal to make a specific percentage rate

of growth in reserves behind private demand deposits the

Committee's primary policy objective. I do not believe that

our knowledge of the dynamics of the interaction between

reserve expansion and economic growth is so well developed

that we can fix on a single measure as the target for

monetary policy--whether it is private demand deposits,

money supply, bank credit, or one of the aggregate reserve

measures. And to select not only a particular measure but

also a specific desired growth rate seems daring indeed.

All of us sitting around this table are well aware that the

linkages among monetary variables may change as our economy

develops. To endorse a single policy variable may satisfy

an urge for theoretical neatness, but it represents in my

view a potentially dangerous retreat from the real world.

Pursuit of the particular measure mentioned in the present

proposal--private demand deposits--would seem to slide over

all the questions we have had about how to interpret the

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very rapid growth of time deposits and all the uncertainties

associated with sharp changes in the level of Treasury deposits.

It would also gloss over the very substantial month-to-month

variability in these measures--variability in which a month

or two of substantial gains might be followed by sharp swings

to contraction or vice versa.

I am concerned also with the attempt under Element 3 to

specify particular expectations about interest rates or credit

conditions that we would associate with the reserve growth

goals. This would seem quite premature, given the current

state of knowledge. Certainly before we can contemplate an

approach of the kind proposed in the memorandum, there must

be a great deal more study of our financial processes, and

the linkages between those processes and the performance of

our economy, domestically and internationally. And even then,

without venturing to prejudge the results of this needed

research, I wonder if we could hope to rely on simple fixed

targets of the kind mentioned in the memorandum before us.

One obvious qualification that comes to mind is that if, at

times, the Committee should address its policy particularly

to our international position, this may not lend itself at

all to expression in terms of a desired growth rate in one

of our reserve measures. Rather, the principal emphasis then

might appropriately be placed on general market conditions.

As for Element 4, I believe that the Committee should

continue to instruct the Manager in qualitative rather than

quantitative terms. I am not only dubious of the Manager's

ability consistently to hit quantitative targets such as a

range of $50 million to $150 million average free reserves,

but. I am also concerned lest an effort to hew more closely

to such targets lead to considerably wider fluctuations in

money market conditions. In particular, the choice of a

free reserve target would strongly reinforce the position

of those observers who grossly oversimplify and regard free

We

reserves as the be-all and end-all of monetary policy.

have made considerable progress in recent years in breaking

down the market's preoccupation with free reserves. It would

be unfortunate to retrogress by specifying a range or a central

value for free reserves as our target.

If the specified ranges are narrow enough to indicate a

measure of precise control by the Committee, the variables are

likely to fall outside the prescribed ranges quite often. An

occasional failure to hit the Committee's targets would be

understandable and readily explained, but I wonder if frequent

departures from the targets would not be taken as prima facie

evidence that the Committee does not effectively control the

7/28/64

execution of its policy.

-61Of course, the target ranges

specified in the directive could be widened to the point

where there were few misses, but in th:s case I wonder

how meaningful the quantitative instructions would be.

From the standpoint of public consumption, a wide range

would only point up an apparent lack of precision in the

Committee's instructions to the Manager, leaving an

implication that the Manager must have some other guides

by which to operate.

On the other hand, I would see no objection at all to

individual Committee members mentioning quantitative

objectives as they make their comments and recommendations

on policy at each meeting. As a Committee member I find

such references useful in organizing my thoughts, and I

believe the Manager finds them useful in applying the

Committee's decisions at the Desk. It would also be useful

for the public to know that the member.; of the Committee at

times use quantitative terms in expressing their views. But

rather than have this embodied in the directive, with all

the rigidities that this would tend to impose, it would be

much preferable for the interested pub ic to become aware of

this practice through the minutes for 1936-1960 that are now

being opened to public perusal.

To consider more specifically how the formal detailing

of targets or target ranges would impair the functioning of

monetary policy, one might envisage a ,;ituation late in a

statement week when the market tone seems about right but the

projected reserve average is higher than the Committee has

called for.

Close pursuit of the target would require

substantial sales of securities, perhaps to be followed

shortly by substantial purchases if the sales were depleting

reserves too sharply for the following period. The result

might well be more frequent and larger System operations,

with no apparent relation to the money market atmosphere.

Inevitably, System actions would appear arbitrary and capricious

to the market, tending to undermine the continuity of money

market atnosphere that is an important ingredient in the smooth

functioning of the financial mechanism.

The disadvantages of spelling out in the directive the

Manager's required response to changing circumstances are also

evident in the subsidiary instructions relating to the Treasury

If a 3.40 to 3.55 per cent range is specified for

bill rate.

the 3-month bill rate, does this mean the Manager is to take

no action until the rate reaches 3.40 per cent?

And is his

I wonder if

only response to be to curtail free reserves?

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better results are not likely to follow from having the Manager

not merely respond in Pavlovian fashion to a particular rate

level, but weigh the momentum of a trend in rates, and perhaps

set in train a series of responses as rates move downwardor at other times, when the rate decline seemed clearly

temporary, having the Manager refrain from special action

addressed to the bill rate and permit natural market forces

to bring about a reversal. This would seem to be more in

line with the Committee's desire to have rates as free to

move as possible rather than boxed in by rigid limits.

Indeed,

the insertion into the directive of specific rate targets, and

the market's eventual knowledge of that fact, would have a

highly rigidifying effect on rates.

In summary, while I feel a good deal of sympathy with the

objectives; of these proposals--that is, the presentation of an

integrated rationale of the System's policy intent and of

operating instructions that would be more meaningful to the

public--I feel that the proposals before us are just a starting

point toward these ends. As such, they have performed a very

useful furction in stimulating thinking on possible improvements

in our di--ectives. My own thoughts in this area are still quite

tentative but I might just mention a few of the areas that my

colleagues and I have been considering. First, it might be

desirable to make greater use of judgmental-type statements in

those parts of the directive relating to recent economic and

financial developments. The directive might, for example,

give a clearer indication than at present whether there has

been an improvement or deterioration in the situation, whether

recent developments have borne our prior expectations, and to

what extert money market conditions have developed along lines

sought by the Committee.

Second, a clearer distinction might be made between the

Committee s assessment of the economic situation and outlook

on the one hand, and its general policy posture on the other.

Thus at times, the Committee might note that while business had

strengthened and the outlook had improved, a change in policy

was not desirable because of continued unemployment.

Third, we might be more explicit about expected and desired

behavior of credit markets and key financial indicators for

several months ahead, making it clear that our time horizon

extends over that intermediate range and is not confined to

three-week intervals. I should add, however, that even rough

attempts to set down our expectations are subject to some

dangers, and certainly will remain so until we know much more

about the underlying linkages. All these lines of thought

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deserve and require further study, but in the meantime let

us not abandon a procedure that has proved workable and has

yielded what seem to me quite satisfactory economic results.

Mr. Irons said that he had found the memorandum interesting and

stimulative, and that he intended to study it further.

The more he had

considered it, the less strong were his reactions, but he did have

qualms about certain aspects of the proposal.

His thinking started

with the assumption that what the Committee needed was a directive to

the Account Manager that would be understandable, capable of being

carried out, and accurate in reflecting the policy posture of the

Committee.

He placed less emphasis than some others on the role of the

directive in informing the public, which seemed to him to be one of

the considerations underlying the proposal that the Committee had before

it.

Mr. Irons thought that the Committee had a fairly satisfactory

way of informing the Account Manager of the Committee's policy positure

in its present directive.

to the Committee.

The Account Manager was continually responsive

If, during the three-week period, he did not perform

as Committee members thought he should have, they had an opportunity

to criticize his operations at the next meeting.

Mr. Irons noted that element 4 of the illustrative directive

attached to the report began:

"To implement this policy, System open

market operations over the next three weeks shall be conducted with a

view to maintaining weekly average free reserves in the $50-$150 million

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range."

This instruction specified positive numbers, which would be

published later, and the Manager would have to try to hit the target

given.

There was no provision in this instruction for the tone and feel of

the market.

However, the next sentence of element 4 seemed to undo what

was done in the first sentence.

It read:

'Provided, however, that free

reserves should be permitted to move above or below this range in order

to moderate any movement in the Treasury bill rate outside the range of

3.40-3.55 per cent or any serious constriction or excess in the avail

ability of Federal funds or dealer financing."

Thus, although an

initial priority was set up, it was a weak priority.

Mr. Irons said that he was fearful of using in the directive

quantitative measures of which the Committee was not sure.

There was

a difference, in his judgment, between specifying a range of figures

intended to apply if other things were equal and naming a range of

figures that nust be met regardless of other circumstances.

He was not

concerned about references to quantitative targets in the Committee's

deliberations, but he would be concerned if such targets were to be

spelled out in a directive that would be published later.

While some

might have only a hazy impression of what was meant by the words "tone

and feel," he thought these words had real .eaning to the Manager, who

was in the midst of market operations and who had a sense of the

developments occurring in the market at any given time.

Mr. Irons

thought it would be a mistake to divorce the Manager from considerations

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7/28/64

of tone and feel, and to hold him to quantitative targets.

Moreover,

if the Commit:ee issued quantitative instructions, it probably would

find that more frequent operations in the market were required, as

Mr. Hayes had suggested.

With respect to elements 1 and 2 of the proposed directive,

Mr. Irons said, the Committee now was providing, in the policy reccrd,

much of what the report recommended.

The content of these elements

seemed to be simply a revised version of the forepart of the policy

record entry, where recent developments were reviewed.

Mr. Irons

questioned the desirability of expanding the directive to include

what basically was background information at the time of it:

The Committe

adoption.

was given such information prior to each meeting in

the "green book" and in other memoranda.

This kind of information

underlay the Committee's thinking and analysis, its policy conclusions,

and its instructions to the Manager, but he did not believe it would

be desirable to make it a part of the directive.

He would be interested

in giving more background material to whoever wanted to read it, and in

this connection he would be quite favorable to considering the possibili.y

of making the green book available, as Mr. Bryan had suggested.

If the

Committee moved in the direction proposed in the report, however, it

might get into the same kind of difficulty that had arisen in connection

with the preparation of detailed minutes.

He thought, also, that the

Committee would be making trouble for itself if it attempted to include

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7/28/64

in the directive an extensive statement of the facts it had considered.

The directive almost had to be written in relatively general terms if

the Committee was to get its job done effectively.

Avoiding highly

specific instructions did not mean that the Committee could not hold

the Manager accountable for his operations.

Summing up, Mr. Irons said, he strongly

questioned the

desirability of introducing quantitative targets into the directive,

and he questioned whether the Committee would achieve much from the

first two elements of the proposal that was not already accomplished

through the policy record entry and in other ways.

He had one other

point, in connection with which he was somewhat disturbed by present

practices.

That was the question of delegation of responsibility by

the Committee to its staff, particularly in connection with the

preparation of draft directives for Committee consideration.

proposal would magnify this problem considerably, he thought.

The

The

report recommended that the staff distribute, before each meeting,

drafts of the first two elements for Committee review, and background

material to facilitate preparation of the next two elements by the

Committee.

But drafting of elements 3 and 4 around the table might

well be found to be quite a chore; and it was likely that the next

step would be for the Committee to have the staff draft these elements

also.

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Mr. Irons thought the Committee should give serious consideration

to better methods of informing the public; he was sure all of the members

would favor that.

Publishing the green book was one possible approach.

Another that had been suggested on several cccasions was to publish a

quarterly review in the Federal Reserve Bulletin which would spell out

the nature of developments and of the Committee's actions in the

preceding quarter.

countries.

Such a procedure was followed in a number of other

It would accomplish the objective of informing the public

better without disturbing the Committee's basic working instrument--its

directive to the Manager of the Account.

Mr. Dening commented that his views were similar to those of

Mr. Iron.;, except that he did not share the latter's concern about the

staff's role in drafting directive material.

He thought the Ellis

Mitchell-Swan memorandum had made a notable contribution to the

continuing discussion about Committee procecure and the nature of the

directive to the Desk.

However, he took fairly sharp issue with two

of the basic conclusions of the study.

In his view, Mr. Deming said, the positive contribution came

from the sharp focus on certain points that needed thorough considera

tion, from suggested procedures which should aid Committee discussion

and minimize inconsistencies in instructions, and from the almost

explicit recommendation for extensive research on linkages between

proximate, intermediate, and ultimate objectives of policy.

His

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disagreement, like that of Messrs. Hayes and Irons, was, first, with

the length and complexity of the suggested form of directive and,

second, with the recommendation to quantify, too precisely in his

view, certain of the long-range objectives of policy and, more partic

ularly, certain of the short-term guides.

The suggestion for staff provision of background material for

all four elements of the group's suggested form of directive was

excellent, Mr. Deming thought.

This should help a great deal in

minimizing inconsistencies in instructions.

He would suggest one

additional step in this procedure, which perhaps was implicit in the

proposal.

This would be a quarterly review and "look-ahead."

The

review would compare actual performance of the intermediate and ultimate

variables with what seemed to be desirable or with what the Committee

had hoped to attain.

The look-ahead obviously would involve some

forecasting, or at least the statement of certain objectives, but

Mr. Deming thought it would be of benefit to the Committee.

In a sense

the Committee already did some of this; the suggestion really came down

to a more formal approach.

Mr. Deming thought the memorandum's reference to the urgent

need for research was something the Committee should clearly keep in

mind.

While he was not particularly sanguine about the probability of

establishing very precise linkages among proximate, intermediate, and

ultimate objectives, the Committee should explore this field far more

thoroughly than it had.

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Finally, Mr. Deming said, the report should be commended for

its sharp focus on certain issues involved in procedure and directives.

The authors had performed a signal service in getting their points

down on paper, whether or not the Committee agreed with them.

Turning to his areas of disagreement, Mr. Deming said he

thought the proposed directive was far too long and too complex.

He doubted that the directive could be made a public relations document;

arother vehicle was needed for that purpose.

Extended discussions at

meetings probably would be necessary to reach agreement on a directive

of the lergth proposed.

This would be particularly true if the drafts

included as many polar words as did the illustrative directive for May 5,

In the past he had been on both sides of the question of the desirable

degree of complexity in the directive.

At present he leaned toward

simplicity, and toward the preference that Mr. Mills had expressed on

several occasions for something along the lines of "clause b" of the

type of directive the Committee had issued before December 1961.

Mr. Deming agreed with Mr. Irons that the proposed content of

the first two elements was more properly a part of the policy record

than of the directive.

At the most he would include a simplified

version of this material in the directive, somewhat along the lines

of the present directives.

On the matter of quantifying instructions, Mr. Deming thought

the points made by Mr. Irons were valid; any member was free to mention

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quantitative goals in the course of discuss on at present, and the

Manager could be held accountable for conformance with the instruc

tions given him.

To include numerical instructions in the published

record, Mr. Deming believed, would lead to a great deal of capricious

and uninformed criticism of the Committee, particularly in view of

the magnitudes of the revisions in the figures.

Moreover, as the

memorandum pointed out, the Committee might not always want to use

free reserves for specifying its targets.

In sum, Mr. Deming said, he thought the procedural suggestions

in the memorandum were well worth consideration; they would sharpen

the Committee's focus on policy questions.

But he would favor keeping

the directive simple, and avoiding quantification both in instructions

to the Manager and in statements of longer run policy intent.

Mr. Helmer said he had no comments on the memorandum.

Mr. Tow said that in his judgment the idea of moving toward a

more comprehensive and more explicit directive was a very good one.

Implementation of the recommendations in the memorandum under discussion

would bring a number of improvements, but it also would create problems

that would need to be worked out over time.

Mr. Tow thought the inclusion of element 1 on economic devel

opments and element 2 on credit developments would be important additions

to the directive.

This would result from both the more comprehensive

description and the added analytical emphasis.

Inclusion of these

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sections, as possibly amended by the Committee in any given meeting,

would provide a logical groundwork for the policy statements in

elements 3

and 4.

The principal question about including longer

elements 1 and 2 in the official directive was the ability of a

Committee of 12 people to agree on the wording without becoming bogged

down in too much discussion of detailed phraseology.

The biggest change from the present directive, Mr. Tow noted,

was the inclusion of element 3 as a statement of the Committee's longer

run policy intent.

A more specific statement of longer run policy

intent would be a constructive step, in his view, although the inclu

sion of this section also would create some problems to resolve.

One

problem would be that of internal consistency, arising from the different

approaches to monetary policy taken by Committee members.

Some preferred

what might be called a credit and interest rate approach, while others

preferred some variant of a money supply approach.

Accordingly, it

would be necessary to write element 3 in such a way that both approaches

would be incorporated.

To some degree, that had been done in the

illustrative directive attached to the memorandum.

This problem could

not be avoided--if its avoidance required agreement on any one approach

to monetary policy--but over time the problem should be lessened through

increased knowledge concerning the relationships between these variables.

Another problem, Mr. Tow said, arose from the effort to quantify

the targets adopted.

No matter what measure was used, whether aggregate

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reserves, money supply, credit, interest rates, or some other, there

was no way of knowing what the correct quantification should be.

Whether figures were used or not, however, the Committee had to

observe what was happening to its ultimate economic objectives, and

change these intermediate goals if and when necessary.

Added research

should enable the Committee to make better approximations in the future,

but there could never be exact projections.

Whether quantification was used or not, Mr. Tow thought the

inclusion of element 3 would be an important improvement in the

Committee's directive.

For the time being, it might be better to

experiment with a verbal approach with a view to quantification later.

In the interim, research, including work on quantitative models, could

be carried on.

In his judgment, Mr. Tow said, quantification was the main

issue in element 4, as the general framework proposed was essentially

that used by the Committee at present.

The question of what figures

to use again was an issue, but in a somewhat different way, as changes

could be made from time to time relative to the achievement of the

goals set forth in element 3.

There also was a problem of consistency

among the short-run targets, but the draft provided escape provisions

for various contingencies over the short interval between Committee

meetings that should go far toward alleviating this problem.

He did

not think this element could be written with two or more variables

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without escape clauses, since it was not possible to predict how the

relationships among the variables would work out.

A leading issue, Mr. Tow said, appeared to be the impact on

the market when the Committee and its Manager were committed to

explicit quantitative guides.

to pass judgment.

This was a difficult issue on which

Much might depend on how the matter was handled.

The proposal did not call for any particular guides to be used

indefinitely, but provided that different guides should be used,

depending on what was most appropriate at any given time.

the market

Presumably

would come to understand that it could not assume that any

particular guide would be used indefinitely, let alone any particular

guide values.

There was reason to wonder whether the problems of the

Committee and the Manager in connection with this matter would be any

greater than they were now.

It seemed to Mr. Tow, however, that the most important issue

before the Committee at this time was the adoption of the general

framework for the directive that was proposed in the memorandum.

He

personally thought that adopting this franework, even though

quantification was not accepted, would be

a highly constructive step,

and one worthy of consideration by the Committee.

Quantification,

whether or not adopted to some degree at this time, should be a

continuing goal.

7/28/64

-74

Mr. Wayne said that he agreed with most of the views that had

been expressed by Messrs. Hayes, Irons, and Deming.

He believed that

the Committee's present directive was a distinct improvement over that

used previously.

He could understand the desire to arrive at some

neat, clear model that would look well, but he was persuaded that a

move at this time in the direction proposed would prove treacherous.

His concern was focused by the thought that the Committee would have

to experiment in quantifying targets and then verify in retrospect

whether or not the quantity it had named was correct.

To experiment

within the official directive of the Committee to the Desk would invite

criticism.

Mr. Wayne thought the report had served a useful purpose in

focusing on the question of linkages in the economy, and he would

consider it highly desirable for the System to do more research in

this area.

But to attempt to draft directives of the type proposed in

advance of such research would, in his judgment, be dangerous.

Instead,

work des gned to increase knowledge of linkages should be pressed first.

He also shared the other concerns that had been expressed about quantify

ing instructions to the Manager.

Mr. Mills said he concurred in the views that had been expressed

by Messrs. Hayes and Irons, and in some of the variations on these views

expressed by other members of the Committee.

He was suspicious of the

target approach, feeling that the inevitable result would be to repeat

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the history of religion, where simple faith over the years had been

sacrificed to symbolized ritual without inspiring people in general.

He thought that would inevitably be the path followed if the Committee

adopted the proposals made.

Their adoption would amount to a surrender

to statistics in place of instinctive adaptation to circumstances as

they developed.

Mr. Mills said he would much prefer the present directive to

the kind proposed and, as the Committee knew, he was not happy with

the present directive.

He thought the first and second paragraphs were

contradictory; the emphasis in the first negated what was called for

under the second.

As Mr. Deming had noted, his own preference would be

to return to the old clause (b), a subsection of the type of directive

the Committee formerly had used.

Mr. Robertson commented that he was grateful for the memorandum,

because he would like to see a better job done with the directive, and

he assumed the other members would also.

with the particular proposals.

However, he, too, quarreled

It seemed to him that the first two

elements were not properly sections of a directive at all; they covered

ground that now was covered in the policy record, except that it was

proposed to draft them in advance of the meeting rather than afterward.

In his judgment the illustrative drafts of these elements did a better

job than did the corresponding part of the present policy record entries,

and he thought their format could be used to advantage in the record.

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Moreover, while he did not think elements 1 and 2 should be

made a part of the directive, he was not opposed to their preparation

in advance of the meeting.

In fact, he thought it would be desirable

to have such information brought to the attention of the Committee

before each meeting, so that there would be a clear understanding of

the situation that had to be dealt with at :hat meeting.

Mr. Robertson also had no fault to find with the desire to set

forth the policy intent of the Committee for a longer period than 3

weeks.

But he was concerned about the risk of being too specific in

a directive that would be published.

He doubted the advisability of

using precise numbers in either element 3 or element 4.

In his judgment

the directive should indicate the general kind of monetary climate the

Committee was seeking.

With respect to the use of a free reserve range

in element 4, he doubted the wisdom of always using a free reserve range

for instructing the Manager, although he knew of no better way of in

dicating what operations the Committee thought were necessary to achieve

the results it desired.

Moreover, he would strike the last sentence of

element 3 releting to credit conditions.

And in place of the subsidiary

instructions of the type proposed for element 4, setting specific limits

for the bill rate and describing money market conditions under which the

Manager was authorized to deviate from his first instruction, he would

substitute some such language as "in order to moderate substantial swings

in money market conditions, and to partly offset any tendency of the

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growth rate for required reserves behind private deposits (for example)

to deviate substantially from the average rate of the past year."

Such

language would give the Manager authority to deviate from any specified

free reserve cange without requiring him to maintain the bill rate or

other rate within any precise limits.

The Manager would have to use

judgment, but that was a part of his job.

Mr. Robertson expressed the hope that the Committee would agree

on some line, along which it thought progress might be possible, and

undertake to experiment with a directive on these lines for three or

four meetings on a side basis.

The experimental directives would not

be officially adopted; the Committee would continue to issue directives

of the presert type.

But by experimenting informally, the Committee

would have an opportunity to check back after the fact, and determine

whether it seemed feasible to develop more precise directives.

Mr. Shepardson said that elements 1 and 2 seemed to him to be

more appropriately a part of the policy record entry than of the

directive. On the matter of providing this type of material to the

Committee before each meeting, he felt that such information was

largely contained in the green book, which was available to the Committee

prior to the meeting.

In his judgment, the present type of policy record

statement, which was developed on the basis of both information from

the green book and the discussions at the meeting, was superior to the

type of predeveloped statement proposed for elements I and 2.

He thought

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also that the:e elements would add unduly to the length of the directive,

and he would prefer a more concise statement, such as was contained in

the first paragraph of the present directive.

With respect to the details of the proposal, Mr. Shepardson

felt that the fluctuations observed over time in the various quantitative

series raised considerable hazards in trying to set forth numerical

targets in the directive;

they could be pointed to as targets that were

more often missed than hit.

In his judgment there were too many factors

involved to permit the selection of two or three and the omission of

others from the directive.

Such a procedure, he believed, would open

the gate unnecessarily to charges of "misses" that would not necessarily

have been significant.

Mr. Shepardson said he, like others who had commented, was hopeful

that through research a better understanding of the underlying relation

ships could be developed.

At the moment, however, it was clear that the

Committee did not have a full understanding of them.

As he had mentionec

at the preceding meeting, without any change in the objectives of the

Committee or in the operations of the Desk, there recently had been

marked fluctuations in the rate of growth of the money supply.

The

Committee had yet to develop a full understanding of the causes of such

fluctuations, and until it did it was unnecessarily hazardous, in his view,

to attempt quantification in the directive.

7/28/64

-79Mr. Shepardson said he favored making the type of material

included in the green book publicly available.

He noted that the

Committee had made progress in getting its policy record entries

prepared on a more current basis.

This was an important improvement

because it avoided the possibility of any suggestion that the entries

were written with the aid of hindsight.

The Committee still had not

taken a further step, involving a more current release of the policy

record entries--perhaps a quarterly release.

He thought it would be

desirable to accelerate the release of these entries.

But he was

skeptical about the extensive type of directive suggested in the

memorandum.

Mr. Daane said he considered the proposed directive unnecessarily

complicated.

This was particularly true of elements 1 and 2, which, he

thought, did little more than add window dressing to what was now in

cluded ir the policy record.

Moreover, staff resources were likely to

be strained in the attempt to draft these elements in advance of each

meeting, and the staff could spend an undesirable amount of time in

worrying about specific language.

In his judgment elements 1 and 2

should not be made part of the directive.

Perhaps more thought should

be given to improving the corresponding part of the policy record entries.

With respect to the proposal to release the green book or some version

of it, his initial reaction was favorable.

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On element 3, Mr. Daane said he shared Mr. Hayes' question

about the desirability of specifying the Committee's longer run

policy intent in terms of the seasonally adjusted annual rate of

increase in required reserves.

He recalled a discussion by Mr. Koch

at a recent Board meeting of the operations the Committee would have

called for thus far in 1964 if it had employed such a target.

Perhaps

there were answers to the questions raised by Mr. Koch's discussion,

but he bad not seen them.

He was opposed to selecting a new target

of this sort without a demonstration that it would involve a net gain

for monetary policy.

The proposed element 4, Mr. Daane continued, would elevate

free reserves to a status as an operating target even higher than that

which the market believed, and some academicians had charged, that the

Committee gave to it.

He did not think the Committee should quantify

its instructions and require the Desk to meet numerical targets, even

if the instructions were tempered with qualifications.

Moreover, he

questioned the statement on page 7 of the memorandum that a change in

the free reserve target would have"quick and significant" consequences

for other policy variables.

Mr. Daane doubted that the relations were

such that quick and significant consequences would necessarily follow,

or that the Committee knew precisely what the relations were at any

time, even as between free reserves and bill rats.

Thus, he would

not subscribe to the use of free reserves it,this manner, with the full

weight of the Committee behind them.

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Mr. Daane concluded by saying that he approached the proposal

with two questions in mind:

Would its adoption basically improve the

Committee's performance, and would it improve the Committee's pre

sentations to the public?

Of the two questions, the former was by

far the more important, and he did not see anything in the proposal

that would improve the Committee's performance in the ultimate sense.

Perhaps further analysis along the lines of elements 1 and 2 was

desirable, but there was no need to incorporate it in the directive.

He was puzzled by the implication on page 3 of the memorandum that

variations in the rate of growth of bank reserves over a period when

the Committee was voting for "no change in policy" were in themselves

bad.

"No change in policy" seemed to him to be a meaningful and

significant conclusion that the Desk could and did interpret and

implement.

Chairman Martin, noting the lateness of the hour, suggested

that the meeting be adjourned at this point with the understanding

that the discussion would be pursued at a later meeting of the Committee.

Since there would be some absences at each of the next two meetings, he

suggested that this subject be put down for further discussion at the

meeting tentatively scheduled for September 29, 1964.

Chairman Martin said he knew that all of the Committee members

appreciated the work Messrs. Ellis, Mitchell, and Swan had done in

preparing their memorandum.

He believed that it was important for the

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Committee to continue to work on the problen of the directive.

In

this connection, the Chairman thought it would be useful if Mr. Hayes

had copies of his comments today distributed to the Committee.

He

also thcught the Committee might adopt Governor Robertson's suggestion

that it make unofficial "trial

runs" of a new type of directive, while

continuing to employ its present type of directive officially.

Accord

ingly, he suggested that for the next several meetings the staff prepare,

on the side, the kinds of materials called for in the memorandum.

No objections were made to the Chairman's suggestions.

Thereupon the meeting adjourned.

ecretary

Secretary