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, November 10, 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
Hickman
Mills
Mitchell
Robertson
Shepardson
Shuford
Swan
Wayne
Messrs. Ellis, Bryan, Scanlon, and Deming,
Alternate Members of the Federal Open Market
Committee
Messrs. Bopp, Clay, and Irons, Presidents of the
Federal Reserve Banks of Philadelphia, Kansas
City, and Dallas, respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Broida, Assistant Secretary
Mr. Hackley, General Cunsel
Messrs. Brill, Grove, Holland, Koch, Mann,
and Ratchford, Associate Economists
Mr. Stone, Manager, System Open Market Account
Mr. Molony, Assistant to the Board of Governors
Mr. Cardon, Legislative Counsel, Board of
Governors
Messrs. Williams and Partee, Advisers, Division
of Research and Statistics, Board of
Governors
Mr. Reynolds, Associate Adviser, Division of
International Finance, Board of Governors
Miss Eaton, General Assistant, Office of the
Secretary, Board of Governors
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11/10/64
Messrs. Holmes, Sanford, Eastburn, Baughman,
Tow, and Green, Vice Presidents of the
Federal Reserve Banks of New York, New
York, Philadelphia, Chicago, Kansas City,
and Dallas, respectively
Messrs. Sternlight, Brandt, and Bowsher,
Assistant Vice Presidents of the Federal
Reserve Banks of New York, Atlanta, and
St. Louis, respectively
Mr. Arena, Financial Economist, Federal Reserve
Bank of Boston
Mr. Kareken, Consultant, Federal Reserve Bank
of Minneapolis
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Commit
tee held on October 20, 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 operations and on Open Market
Account and Treasury operations in
October 20 through November 4,
foreign currencies for the percd
1964,
the period November 5 through 9,
and a supplemental report for
1964.
Copies of these reports have
been placed in the files of the Committee.
Supplementing the written reports, Mr.
Sanford said that the
weekly published gold stock figure had remained unchanged again during
the past three weeks.
The Stabilization Fund's holdings, however,
were down considerably since the last meeting, by $60.6 million, to
$132.9 million.
Prospective sales later this month would reduce the
Fund's holdings to some $50 million by month end, and the Spaniards
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were looking for a considerable amount of gold over a period of
several months.
The London gold pool had lost another $6 million
as demand cont:.nued to outstrip sales of newly-produced gold.
The
Russians had remained out of the market.
In the exchange markets, Mr. Sanford reported, heavy selling
waves had buffeted sterling on two separate occasions, and had put
heavy pressure on British reserves, which for October as a whole
declined $86.8 million in
spite of net drawings of $215 million by
the Bank of England under facilities with the System and other central
banks.
At the end of October, the Bank of England's indebtedness to
the Federal Reserve was only $5 million and to other central banks
$410 million; for value today the Bank of England was drawing $75
million on the Federal Reserve swap, raising the total outstanding
to $80 million.
The first heavy selling wave occurred on Friday, October 23,
when the market, learned that the British Government would,
week end,
after that
disclose measures to deal with Britain's payment difficulties,
and consequently sought to protect itself against all possible contin
gencies.
The Bank of England was forced to intervene on a scale
unprecedented since January 1963 when Britain's bid for Common Market
membership was vetoed--a total of $82 million was expended to hold the
rate at $2.7825.
Sterling moved above $2.7850 for a few days following
announcement of the government's measures, essentially because of
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11/10/64
covering operations.
Thereafter,
it
traded at rates somewhat below
this level without any sizable interventior until last Friday,
November 6, when rumors of a possible devaluation of sterling hit
an already apprehensive market and the Bank of England again had to
step into the market heavily, selling $73 million.
Thus, a deep
seated uneasiness continued to surround the pound which Mr.
Sanford
suspected would persist for some time, until there was convincing
evidence of & turn-around in Britain's payments position.
important element in
One
this regard was the attitude and reactions of
the Continental countries concerning Britain's 15 per cent surcharge
on imports of semi-
and finished-manufactured
goods.
In
the meantime,
continued resort could be expected by Britain to short-term credit
facilities with the central banks.
still
The latter would,
he understood,
make funds available to the Bank of England despite a consid
erable amount of complaining on the Continent concerning the U. K.
import surcharge.
With respect to other markets, Mr.
continued to be considerable
Belgium.
The U.S.
Sanford noted that there
flows of funds to the Netherlands and
Treasury had had to absorb part of the reserve
gains of those two countries by way of gold sales--$10 million to
Belgium on October 19, $20 million to the Netherlends recently, and
$30 million to Belgium for value on November 12--since the swap
facility with the Dutch was fully used and the Belgian one largely
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so.
-5
Also, flows of funds into Swiss francs on Friday, November 6,
possibly in connection with that day's rumors of sterling devaluation,
prompted the New York Bank for the first time since June to sell $1.9
million equivalent of Swiss francs at its ceiling in the New York
market within the Swiss National Bank's daily limit of 10 million
Swiss francs.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the System open market transactions in
foreign currencies during the period
October 20 through November 9, 1964,
were approved, ratified, and confirmed.
At Chairman Martin's request, Mr. Young commented on the
discussions concerning the British situation which had taken place
at meetings in Paris from which he had recently returned of the
Economic Policy Committee and of Working Party 3 of the Organization
for Economic Cooperation and Development.
Mr. Daane added a few
comments on the discussions at the subsequent meeting of the Group
of 10, which he had attended.
Chairman Martin then asked whether Mr. Sanford had any
recommendations to present to the Committee.
Mr. Sanford replied that he had two matters to discuss.
First, on December 9, a $30 million equivalent drawing of Dutch
guilders from the Netherlands Bank would mature.
Inasmuch as it
was expected that tight money market conditions would generally
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prevail in the Netherlands at least until the year end and that the
Dutch guilder would continue to be firm, Mr. Sanford proposed to
renew the drawing for another three months.
This would be the first
renewal of this drawing, he observed.
Renewal of the drawing on the
swap arrangement with the Netherlands
Bank was noted without objection.
Mr. Sanford then noted that a memorandum had been sent to
members of the Federal Open Market Committee on November 5, 1964,
concerning the proposed agreement between Federal Reserve Bank of
New York and :he Swiss National Bank which would implement, in so
far as the United States was concerned, Switzerland's association
with the International Monetary Fund's General Arrangements to Borrow.
(A copy of this memorandum, entitled "Proposed agreement between the
Federal Reserve and the Swiss National Bank to implement Switzerland's
association with the International Monetary Fund's General Arrange
ments to Borrow," together with attachments, has been placed in the
files of the Committee.)
There was little he could add to the explanations given in
the memorandum, Mr. Sanford remarked, except to say that entering
into the agreement would not adversely affect the availability of
reciprocal short-term swap arrangements between the Federal Reserve
on the one hand, and the Swiss National Bank and the Bank for Inter
national Settlements on the other, amounting to $300 million; that
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11/10/64
if medium-term accommodation was extended to the United States it
was not expected that it would be through the Federal Reserve Bank
of New York except as fiscal agent of the U.S.; and that if the Swiss
should need medium-term assistance from the United States, this, too,
would be taken care of by the U.S. Government and not by the Federal
Reserve.
Finally, in any event, no action affecting the Federal
Reserve could be taken without specific authorization of the Federal
Open Market Committee.
He requested the Committee's authorization
for the Federal Reserve Bank of New York to sign the agreement, noting
that this matter had been under discussion for more than two years.
Mr. Young reported that he had received two suggestions for
changes in the draft of agreement.
The first was to add the phrase
"acting pursuant to authorization and regula.ion of the Federal Open
Market Committee" after "Federal Reserve Bank of New York" in the
first sentence of the draft.
The second suggestion related to the
last sentence of Section 4, and involved substituting the word "con
sider" for the word "take"
in
this sentence,
which read,
"The Federal
Reserve Bank of New York is prepared to take, in agreement with
the Swiss National Bank, any other measures for assistance that may
be thought appropriate."
In the discussion of these proposals some members indicated
that they did not feel the suggested changes had any important sub
stantive implications.
They noted that, as Mr. Sanford's memorandum
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pointed out, any arrangements entered into under the agreement by the
Federal Reserve Bank of New York in its own name would be subject to
specific prior authorization by the Committee, and that the agreement
did not impose a commitment on the United States to provide assistance
to Switzerland but was intended only to express the readiness of the
U.S. to consider such assistance.
In view of these considerations,
and of the possibility that any proposal to amend the agreement might
further extend negotiations which had already been in process for
over two years, they favored approving the draft in its present form.
Other members expressed a preference for making the suggested revi
sions, particularly the first of the two, if it did not involve undue
delay.
After the discussion, the Chairman proposed that the Committee
vote on the agreement with the understanding that the Committee's
General Counsel would be authorized to decide whether either of the
suggested changes should be proposed to the Swiss National Bank.
Thereupon, upon motion July made
and seconded, and by unanimous vote,
the agreement with the Swiss National
Bank was approved, subject to the
understanding described by the Chairman.
Note:
Subsequent to this meeting the
Committee's General Counsel decided that
the suggested changes were not essential
and therefore need not be proposed to
the Swiss National Bank.
Mr. Sanford observed that he understood the Committee's
Secretariat proposed, after the agreement had been signed by both
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parties,
that copies of the press release dealing with the subject
be sent to the relevant Congressional Committees, for their informa
tion.
No objection was made to this proposal.
Before this meeting there had been distributed to the members
of the Committee a report from the Manager of the System Open Market
Account covering open market operations in U.S. Government securities
and bankers' acceptances for the per:od October 20 through November 4,
1964, and a supplemental report for the period November 5 through 9,
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:
In the past three weeks the mone, market largely
regained the firmer tone that had developed in August and
September and that had temporarily given way to some occa
sional ease in late September and early October. Federal
funds traded mainly at 3-1/2 per cent on all but one day
of the last three weeks, and on most days there was some
trading at 3-5/8 per cent. On occasion, the money market
seemed on the verge of easing, and buyers of Federal funds
tended to hold back, apparently in anticipation of lower
rates, but the expected flows did not develop and the
market tightened again.
System operations were substantial during the period.
Reserve needs were generated not only by the usual month
end drains from market factors--compounded in this case
because float had scaled unusual heights in mid-October
and then fell back abruptly--but also by the absorption
of reserves through transactions relating to the British
repayment of $255 million of its swap drawing with the
System on October 30. On a net basis, the System added
$1,250 million to its holdings of U.S. Government securities
and acceptances over the period--and this in addition to
the release of around $300 million of reserves through a
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reduction in the Treasury's balance with the Reserve Banks,
as we discussed at the last meeting.
Notwithstanding the generally firm money market condi
tions, the securities markets strengthened during the period,
as a number of market participants veered away from the view
that a near-term rise in interest rates will occur. In
terms of day-to-day market developments, the factor most
responsible for turning the tide seemed to be the absence
of an immediate British Bank rate increase with the advent
of a new government in that country. At the same time,
market observers noted that the automobile strike was
slowing the economy's momentum, while the President's
comments on the undesirability of a steel price rise were
regarded as reducing the imminence of an inflationary out
break. Equally important, these market viewpoints emerged
against a background of substantially reduced dealer posi
tions in Government securities, relatively light calendars
of corporate and tax-exempt issues, and some accumulated
demand from potential investors who had been waiting on the
sidelines for a rise in yields that did not materialize.
Prices of most longer-term Treasury issues rose half a
point or more over the period, and three bonds were up by
a full point.
In this setting the market gave a very good reception
to the Treasury's cash offering of about $9-1/4 billion new
18-month notes which will be used to repay the November 15
maturities and raise some new cash. The new 4 per cent
notes were oversubscribed to an even greater extent than
expected in the market, and the percentage allotment was
accordingly a little smaller than anticipated. The new
notes began trading at a small premium, and demand has
continued good. The largest single g::oup of subscriptions
is from commercial banks, and the behavior of banks in
either holding the notes, selling them out, or liquidating
some other assets to pay for them next Monday, may provide
some measure of the degree of pressure under which the
banks are currently operating.
The Treasury bill market also was the beneficiary of
increased investor and dealer confidence, and the rate
impact of these psychological effects was reinforced by
the heavy System purchases of bills in recent weeks. The
result was that rates moved slightly lower during much of
the period. In the bill auction on November 2, average
issuing rates of 3.56 and 3.72 per cent were set for the
three- and six-month issues, respectively, compared with
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3.59 and 3.74 per cent just before the last Committee meeting.
Bill rates have edged slightly higher again in the last few
days, however, and auction rates yesterday were about 3.57
and 3.74 per cent for the three- and six-month maturities.
The prospect of additional supplies from the Treasury
remains a background factor in the bill
market.
Current
plans call for the Treasury to announce, probably today,
the sale of about $1.5 billion June tax bills,
on which
the Treasury is likely to allow 50 per cent tax and loan
credit. After this the decks would be clear through the
end of the year except for routine bill roll-overs. Shortly
after that, the Treasury will presumably have to raise some
additional cash, and if market conditions are favorable an
advance refunding early in the new year is a distinct
possibility.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the open market transactions in Govern
ment securities and bankers' acceptances
during the period Oc:ober 20 through
November 9, 1964, were approved, ratified,
and confirmed.
Mr.
Stone then noted that in
dated November 4,
1964,
his nemorandum to the Committee
entitled "Bankers'
Acceptances,"
he had
recommended that the limit on the Account's outright holdings of
these acceptances be raised to $125 million
or 10 per cent of
outstandings from the figures of $75 million or 10 per cent of
outstandings now specified in the Committee's continuing authority
directive.
As the memorandum indicated, when the present limit of
$75 million was established in 1958 the bankers' acceptances market
was substantially smaller than at present.
Total outstandings had
more than doubled since then, and the average size of dealer portfo
lios had increased to over $200 million.
Because the market had
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developed substantially, the Account Management believed that the
proposed increase in the limit would hel. the Committee to continue
to make as effective a contribution to the market as it had in the
past.
As the memorandum also indicated, the Desk had attempted to
operate in this market in only a marginal way with respect to the
volume of outstandings and of transactions.
The Account Management
would not regard the proposed new limit as target to be reached;
the purpose was simply to provide additional leeway for operations
if market conditions indicated their desirability.
Mr. Mills commented that he agreed the market for bankers'
acceptances had grown substantially, but he wondered whether the
Committee's operations had encouraged greater dependence on the
facilities of the Desk than was justified, with the result that the
market itself was not putting out enough effort to place acceptances.
Mr. Stone said he thought the market had developed a high
degree of self-reliance.
A few years ago the market was so small and
insubstantial that dealers were not willing to hold more than $15 or
$20 million in acceptances.
Now, however, their holdings were in the
neighborhood of $200 million.
A wide range of customers, both bank
and nonbank, had been developed, and dealers maintained large port
folios in order to service these customers.
Mr. Mills then asked whether the acceptance dealers were now
building up their portfolios possibly with the knowledge that they
had recourse to the Federal Reserve if necessary.
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Mr. Stone replied in the negative.
He thought the dealers
were now enlarging their portfolios because the aggregate volume
of acceptances was increasing.
Whenever the supply of acceptances
was greater than the demand and dealers expected the situation to
reverse, they tended to increase their inventories in the expecta
tion of makirg a profit on resale in
the market;
they did not act
in anticipation of purchases by the Desk.
Mr. Mills commented that the present size of dealer port
folios suggested that there was not an avid interest in acquiring
acceptances in the market.
Historically, acceptances had been a
highly desirable and liquid market instrument.
Mr. Stone had
explained in his memorandum that the dealers were now adjusting
their own positions.
He would not deny this, but he wondered if
the Committee was watching the situation closely enough to be sure
that it was not simply providing a cushion for the benefit of
dealers rather than helping the market.
Mr. Stone observed that
he was quite sure this was not the case.
Mr. Robertson said he felt somewhat as Mr. Mills did.
He
would not oppose the recommendation to increase the limit because
it amounted simply to an updating of a decision the Committee had
made 6 years ago after extended debate.
He would say, however, that
he saw nothing in Mr. Stone's memorandum to indicate whether the
market was now standing on its own feet, or ever would.
Nor was
11/10/64
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there anything in the memorandum to indicate whether the Committee
had been weakening or strengthening the market, or how long the
Committee would have to continue to support it.
He hoped the
objective was not to keep the Committee in a position to control
the market.
Mr. Stone said that the Committee's purpose in re-entering
the acceptance market in 1955, as he understood it, had been to
encourage its growth and development without dominating it.
In his
judgment, operations had been successful in contributing to this
end; the market obviously had grown quantitatively and qualitatively.
Originally it was mainly a bank market, ard it had been helpful to
dealers in encouraging participation by nonbanks to be able to point
to System interest in the market and System participation in a
marginal way.
Moreover, Mr. Stone said, System operations in
acceptances had provided an opportunity to follow closely developments
that were of interest from a regulatory point of view.
Mr. Mitchell said that he felt much as Mr. Robertson did.
It was his understanding that the Committee originally undertook to
aid this market with the presumption that aid would be given only
until it was well established.
Mr. Stone had reported that the market
now was well developed, and the question arose as to why the Committee
should operate in it any longer.
There were many markets to which the
Committee could lend support if it were so minded, and the arguments
11/10/64
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that Mr. Stone had advanced with respect to acceptances could, in his
opinion, be made for other types of instruments as well.
impression from Mr.
He had the
Stone's memorandum that the acceptance market no
longer needed assistance,
although it
was still
leaning on the Committee.
He had no objection to raising the limit to $125 million, but he thought
the Committee should take a fresh look to see whether there was reason
to continue to operate in acceptances.
Mr. Hayes said he felt that bankers' acceptances were a :ype
of paper that traditionally, and properly, had been regarded as an
important element in a widely-developed and active money market.
The
encouragement that the Committee gave to the acceptance market was
mainly through the psychological effect of its participation, rather
than as a result of any substantial cushioning operations.
It seemed
appropriate to Mr. Hayes for the Committee to encourage use of this
instrument in view of its interest in seeing the money market developed
as fully as possible.
Mr. Daane said he agreed System participation in this market
was appropriate because acceptances were an important money market
instrument.
It was not proposed to increase System holdings of accept
ances immediately to $125 million; the objective simply was to allow
a little more latitude in operations that would remain marginal.
could not see anything objectionable in the recommendation.
He
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11/10/64
Mr. Mitchell remarked that he was not opposing the rec
ommendation but thought the Committee should re-examine its reasons
for participation in this market.
He did not find Mr. Stone's
memorandum convincing on this point.
Mr. Shepardson commented that while he agreed with Mr.
Hayes on the desirability of maintaining contact with this market,
he did not see why it was necessary to increase the dollar limit on
operations.
The Committee's participation in the market indicated
its interest and demonstrated its confidence in this instrument,
and it apparently had been helpful to the development of the market
in the past.
But it did not necessarily follow that the dollar
limit should be raised.
Mr. Stone said he thought that the Account's participation
had to have sone meaningful relation to the size of the market itself;
operations had to be on a visible scale to be helpful in encouraging
further sound growth and development.
Mr. Mitchell asked what criteria the Desk applied in
deciding on operations in acceptances.
Mr. Stone replied that all
operations were undertaken at the initiative of the Account Manage
ment.
In general, holdings were modified seasonally, concurrently
with the seasonal fluctuations in the volume of acceptances outstanding.
When the seasonal tides were running strongly and adding to outstand
ings, the Account's holdings were increased; when they were not,
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holdings were left largely unchanged or perhaps reduced a little.
He agreed that such operations might have some small tendency in
the direction of moderating interest rate fluctuations but added
that operations of a size that would have any substantial rate
effects were specifically avoided.
The scale of operations
generally was evaluated in terms of the statement week, and
generally involved upward or downward changes of no more than $2
million or $3 million over a week.
Mr. Hickman commented that the Desk was acting in a fairly
neutral fashion with respect to interest rates if it maintained a
roughly constant share of total outstandings in its portfolio.
Mr. Ellis said the Committee seemed to be moving toward
a permanent policy of maintaining a given share of outstanding
bankers' acceptances in its portfolio.
He had not realized that the
Committee was committed to this sort of policy, and he was not sure
that he would endorse it.
Perhaps the market had grown sufficiently
for the Committee to be able to operate in it when it wanted to take
some pressure off of the bill market.
At the same time, there had
been some qualitative changes that were not mentioned in Mr. Stone's
memorandum, and it probably could not be argued that the quality of
acceptance paper had improved uniformly.
In any case, he agreed that
at some point the Committee should re-assess its role with respect
to this market.
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Chairman Martin noted that the Committee reviewed all of its
continuing authorizations and directives on an annual basis at the
time of its organization meetings.
He proposed that the Committee
vote on amending the continuing authority directive to increase the
limit for holdings of bankers' acceptances as recommended by Mr. Stone,
and plan on considering its appropriate role in this market at its
next organization meeting, in March 1965.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
section l(b) of the continuing authority
directive relating to transactions in
U.S. Government securities and bankers'
acceptances was amended to read as
follows:
To buy or sell prime bankers' acceptances of the kinds
designated in the Regulation of the Federal Open Market
Committee in the open market, from or to acceptance dealers
and foreign accounts maintained at the Federal Reserve Bank
of New York, on a cash, regular, or deferred delivery basis,
for the account of the Federal Reserve Bank of New York at
market discount rates; provided that the aggregate amount
of bankers' acceptances held at any one time shall not
exceed $125 million or 10 per cent of the total of bankers'
acceptances outstanding as shown in the most recent accept
ance survey conducted by the Federal Reserve Bank of
New York.
Mr. Stone then called to the Committee's attention the fact
that the Desk heretofore had not entered into repurchase agreements
with one of the dealers in bankers' acceptances (M. & T. Discount
Corporation), and he reviewed the factors that had underlain the
Desk's position in that regard.
He also noted, however, that the
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situation had recently changed, and that the reasons for not making
repurchase agreements with the firm in question no longer existed.
He indicated that in his view it would be helpful to the market and
to the System to make repurchase agreements with the firm and that,
if the Committee interposed no objections, he proposed to do so.
In the course of discussion no objections were raised to
Mr. Stone's proposal.
Chairman Martin commented that it would be
desirable in the future for the Manager to submit any proposals of
this type to the Committee by memorandum in advance of the meeting
at which they were to be discussed.
Chairman Martin then called for the staff economic and
financial reports, supplementing the written reports that had been
distributed prior to the meeting, copies of which have been placed
in the files of the Committee.
Mr. Brill presented the following statement on economic
conditions:
Economists would be hard put without strikes, strike
threats, elections, and international tensions to becloud
the situation, but I suppose our professional ingenuity
would be capable of finding other reasons for hedging.
Fortunately, I don't have to be particularly ingenious
today, for there is more than enough of strikes, elections
and tensions to muddy up the statistics.
As best as I can penetrate the murky figures, there
doesn't seem to hlave been any significant change in the pace
or charac:er of the economy over the past month, except in
the auto industry. Industrial production appears to have
increased moderately in areas not directly affected by the
strike. Manhour figures used in calculating the bulk of the
11/10/64
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current index have just come in, and a cursory examination
suggests that the total index will be down by less--perhaps
a half a point less--than the 3 points attributable to the
General Motors strike alone. Similarly, retail sales appear
to have done well in October, outside of automobile dealers.
The unemployment figure was not affected by the strike, for
strikers are counted as both employed and in the labor force,
and the unemployment survey took place at mid-month before
there were any repercussions of the strike on other companies
or industries. The unemployment rate, at 5.2 per cent, showed
little change from the preceding month--or for that matter,
from the level that has prevailed for the past five months.
The most recent inventory data are for September, too
early to show much effect from the auto strike. The figures
do indicate, however, some early response to the threat of a
steel strike, a response which may have carried over into
October. In addition, the October figures will reflect the
reported piling up of steel ordered but not used by GM, but
there will be the offset of a sharp reduction in auto dealer
stocks.
Abstracting from these cross currents, the October
figures would probably suggest a continued desire by producers
and distributors to rebuild inventories from recent low levels,
but no great or widespread surge of inventory accumulation.
One might also take the recent McGraw-Hill survey as a
current datum on the business situation. In fact, it is
probably more useful in this capacity than as a precise
forecasting tool. As a forecast, it would be somewhat dis
couraging, since the projected year-over-year increase implies
very little further advance from current levels for this
critical spending area. Even if adjus:ed generously for the
usual understatement of spending plans during upswings, it
would not suggest a prospective investment boom of, say,
1956-57 proportions, with the usual accompanying bottleneck
price pressures, and the usual deflationary consequences as
capacity pulls too far ahead of final demands.
As a measure of current business sentiment, the survey
has its encouraging aspects, for it indicates the same caution
that has characterized business attitudes throughout this
expansion. It is evident that businessmen are not building
their longer-run spending plans around prospects of inflation,
and it appears that whatever steel sto:k-piling is going on
is probably more in fear of production interruptions than as
a price hedge. In fact, direct questions on the price sit
uation elicited answers suggesting that businessmen expect
continued general price stability.
11/10/64
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Recent developments have been conducive to this sort
of price outlook. Significant price pressures have been
largely confined to the nonferrous metals area, and have
been offset by decreases elsewhere. As our "green book"
analysis indicates, there has beer no follow-through from
spot markets for raw materials to the broader price
measures, in sharp contrast with earlier cyclical experi
ence. By the time the spot index had risen 20 per cent
in the 1954-56 upswing, the over-all industrial commodity
index had risen 3 per cent. The spot index has risen 20
per cent again since the summer of 1963, but the over-all
index has increased only three-terths of one per cent in
this period. This is partly because outside the nonferrous
metals area many items have shown little or no change,
partly because many of the larger increases have been for
items with little weight in the over-all production picture,
and partly because there have beer offsetting declines.
To date, it's been a wonderful demonstration of the social
effectiveness of the market process, when it can operate
in the context of a fairly balanced and gradual expansion.
Steel is a critical determinant of whether this over
all stability will be maintained, because of steel's direct
importance in the production process and also because of its
psychological impact. To cite history again, steel mill
product prices were raised as early as mid-1954, only shortly
after the spot index had begun to rise, and when steel
operating rates were less than 70 per cent of capacity.
The steel increase was reflected in higher auto prices by
that fall and in higher machinery prices by winter. The
second and larger steel price increase occurred in mid-1955,
when operating rates were well over 90 per cent, and
triggered a widespread advance that raised the index for
all industrial commodities by close to LO per cent in the
next year and a half.
The demand and supply situation of the 1960's, for
steel and generally, is quite different, both here and
abroad, from that of the mid-1950's, and one can hope that
steel producers and labor leaders are not too obtuse to
recognize this. The internal power struggle in the steel
workers' union, and the industry's insistence on financing
expansion through higher prices and earnings rather than
by resort to the capital market, may blind bo:h participants
to current economic realities. Under these circumstances,
even though one may deplore Government intervention in the
market determination of wages and prices, on both domestic
-22
11/10/64
and balance of payments grounds one can justify at least a
vigorous presentation of the public's interest in a prompt
and reasonable settlement. This is apparently being done
by the Executive Branch, and there doesn't seem to be any
point to "jumping the gun" with monetary policy, especially
since there is little if anything else on the domestic scene
to warrant any shift in policy.
Mr. Deming commented that he was a little mystified by the
performance of the wholesale price index.
previous
neetirgs,
As he had mentioned at
the Minneapolis Bank regularly surveyed large
firms with headquarters in
the Ninth District, and recent returns
indicated without question that the average prices of goods these
firms manufactured and sold had been going up.
or about a quarter of those contacted,
In October six firms,
reported that they recently
had raised prices, and nine others expected to make increases before
the end of the year.
No firms reported price declines.
While the
increases on the whole were not large, and while some may have been
partly of a seasonal nature,
sort found in
he would expect that tendencies of the
the District would be reflected
in
the national indexes.
Mr. Brill observed that the indexes did reflect many price
increases,
but taken together such increases were neither large enough
nor numerous enough to offset the decreases
simultaneously.
:hat were occurring
For example, lumber prices had been declining--which
was not surprising in view of developments in
were petroleum prices until recently.
construction--and
so
And domestic tin prices had
fallen in a delayed reaction to releases of tin from the stockpile.
-23-
11/10/64
He was not my.tified by the stability in the over-all wholesale price
index, particularly since steel prices had not been rising.
Mr. Hayes remarked that he was impressed by the results of
the purchasing agents' survey for October, in which 41 per cent of
the agents reported increases in prices of items they were buying.
Except for October 1963, this was the highest figure in six years.
It was his feeling that upward price movements were distinctly dominant.
Mr. Holland made the following statement concerning financial
developments:
For the financial system as well as for the real
economy, October proved to be a month of tempering
developments.
Most financial aggregates showed more moderate
changes. The September surge of credit demand, that
had tightened money markets and bulged bank credit
and money supply totals, seemed to be dampened in first
one area and then another as October progressed. Before
the end cf the month, the moderating influence had
spread quite generally through the system.
A number of elements seemed to contribute to this
pattern, including the large size of some temporary
financing needs in September, and perhaps some over
borrowing and overaccumulation of cash in that month
in anticipation of later fall needs. In addition,
there was some corporate cash accumulation in October
because of the auto strike that permitted temporary
reductions in borrowing needs and unseasonal investment
in money market assets.
Given this intermingling of influences in September
and October, the most expedient way to appraise recent
financial changes is to average the statistics for the
two months together. When one does this, the growth in
total bank credit, on a daily average basis, appears as
just under an 8 per cent annual rate, within the 7-8
per cent range of growth that has prevailed on average
in each of the intervals between the changes in monetary
11/10/64
-24-
policy during the past two years. The September-October
average money supply growth was at a 5.3 per cent annual
rate, slightly above the year-to-date average of 4.2
per cent, and similarly higher than the 4 per cent rate
of rise in real GNP through the third quarter. But as
the projection show at the last meeting of the Committee
pointed out, such a pace of money growth can be conceived
as within the capacity of the economy to use and absorb
without necessarily having inflationary consequences.
The only immoderate-appearing figure in the October
financial reports was the stepped-up rate of increase in
time deposits, at a 14 per cent annual rate. Partly,
this reflected an aggressive and successful effort by
some of the larger banks to build up their CD totals
(the first real push in this direction since last July).
This occurred on top of a resurgent rate of growth in
savings-type deposits, a phenomenon that had been
developing for three months now and that seems fairly
broadly spread through the banking system. Deposit-type
savings institutions other than banks have also been
reporting strong net inflows, suggesting a continued
moderation in the consumer's approach to spending his
funds and a turn in favor of intermediaries over market
instruments as a channel for savings, after a contrary
movement had emerged temporarily last spring.
Insofar as corporations are concerned, their more
willing purchases of CD's in October were also accompanied
by some selective acquisitions of other money market assets
again, after heavy September liquidations. Over the same
period, :usiness borrowings at banks assumed a more moderate
cast; we are estimating seasonally adjusted business loan
increases at commercial banks in October of only $200
million, the smallest since March. Some of these money
market and bank loan movements are known to be associated
with the auto strikes, and may not be washed out until
sometime in December. Making such allowance for the
strike effect as one can, however, the judgment seems
warranted that underlying corporate needs for external
funds have dropped back from their September spurt, even
if they were continuing to run above the more flaccid
rates evident earlier in the expansion.
The combination of somewhat reduced demands for outside
financing and the continued large flow of savings helped in
infusing a better tone into the securities markets in recent
weeks. In the money market proper, however, indicators have
11/10/64
-25-
fluctuated a good deal, for reasons that Mr. Stone has
already described. And the continuing changeability of
the money market and bank credit picture was demonstrated
again in the past two weeks, by the brisk run-up of pri
vate deposit expansion and money market pressures in the
past week of November 4, only to be followed by some
apparent fall-back in deposits in the current week.
It is fair to ask what analytical significance, if
any, should be attached to the kind of bulges in money
and credit demands that have been experienced recently.
Let me suggest a few tentative conclusions, I hope ex
pressed with enough diffidence to suggest the fragmentary
nature of some of the evidence and the still unproven
linkages in several steps of the argument.
The attractive levels of short-term interest ratesat least by domestic standards--and the numerous innova
tions in the types and terms of near-money instruments,
have cut down the cushion of idle balances on the nation's
money stock. One consequence is that cyclical, seasonal,
or even temporary swings in the needs for money for
transactions purposes are likely to be mirrored to a
greater extent than before in bulges in the outstanding
money supply, and also in pressures or money markets as
businesses and individuals try to dispose of liquid
assets or borrow in order to obtain cash balances from
time to time. These changes in money and credit demand
can be quite choppy, not just because of inertia and
slippages in the financial mechanism, but because the
whole complex of decision-making in a free economy permits
a good deal of short-run variability in the choice and
timing of actions.
These short-run financial changes are not meaningless,
I would argue, given present interest rate levels, but
rather are often indicative of changes that are also
underway or in prospect in demands for other assets. If
this is true, then the question of how long and to what
extent monetary policy should accommodate these financial
changes has to depend primarily upon how well the economy
can accommodate attendant or consequent changes in real
demands, and secondarily on how long it might take monetary
policy to exercise a countervailing influence if desired.
Right now, with rates of resource utilization higher than
last year, the margin for accommodation of upswings in
demand appears narrower than a year ago when we were
likewise facing a bank credit and money supply bulge.
-26
11/10/64
In prospect after the turn of the year, however, is a
sharp and more-than-seasonal swing in the Federal Govern
ment's position, from that of a net borrower toward that
of a net saver. In the process, an additional margin of
both real and financial resources should be released to
meet private demands. That development, if it materializes,
should permit monetary policy to accommodate somewhat
greater private bank credit and money increases than
would otherwise be the case. Irdeed, given the undoubted
lags with which monetary policy affects real demands, this
may be none too soon to take some account of such fiscal
prospects in current monetary policy deliberations.
Mr. Hickman referred to Mr. Holland's comment about the
expected change in the Federal Government's budget position in early
1965, and asked whether Mr. Holland meant that this was something the
Committee should take account of now by providing sufficient credit
for the private economy to expand and take up the slack.
He noted
that there usually were seasonal swings in the Federal budget.
Mr. Holland replied that the significance of the swing in the
Federal budget in this fiscal year was that it was expected to be
larger than seasonal, and to result in a greater than usual degree
of fiscal restraint on the economy in the first half of calendar 1965.
Given the lags in monetary policy, it might well be appropriate for
the Committee to take some account of this expectation now.
Mr. Hayes asked whether the Committee should not also take
account of the possibility that developments elsewhere in the economy,
for example, in inventory accumulation and consumer spending, would
offset this fiscal restraint.
considerable momentum.
In his judgment, the economy had
-27
11/10/64
Mr. Hickman commented that economists associated with large
firms in the Fourth District at a recent meeting were almost unan
imously of the view that production and aggregate demand would be
rising in the first half of next year.
He felt that monetary policy
should be geared to developments in the aggregate.
Mr. Holland agreed that the Federal budget was only one
element in the whole picture, but added that it also was the one that
seemed to be changing most rapidly.
Inventory accumulation currently
was at a moderate level, and he knew of no important changes in other
areas that were coming into view at present.
General economic
activity might or might not rise to inflationary levels next year,
but fiscal policy would be moving in a dirction to help monetary
policy dampen any such movement.
Mr. Balderston asked Mr. Holland to interpret for the Commit
tee the annual rate of change in seasonally adjusted nonborrowed
reserves during the months of August, September, and October.
noted that thi:
He
rate was 5.4 per cent, as compared with 3.3 per cent
for the preceding period of a little more than a year.
Was this
increase a matter about which the Committee should be concerned?
Mr. Holland replied the higher rate of expansion reflected
the pull on reserves supplied by the System of the expansion in
demands for credit that developed through September and, on the
whole, continued in October.
Since the Committee used marginal
11/10/64
-28
reserve positions as a major guide to policy, when credit demands
led to rises in bank indebtedness the System provided additional
reserves.
The change to which Mr. Balderston referred thus was a
consequence of the System's response to credit demands under its
current policy posture.
Mr.
Shepardson asked whether the expected increase in Federal
Government receipts in early 1965 was mainly a result of rising
levels of economic activity,
ative.
and Mr. Holland replied in
the affirm
Mr. Mitchell commented that some part of the expected
lumpiness in
Federal receipts was due to under withholding of
personal income taxes.
Mr. Brill added that much of the increase
would reflect corporate tax payments in 1965 on profits made in
1964, which were sharply higher than in the preceding year.
Mr. Reynolds presented the following statement on the balance
of payments:
In a few days, the Commerce Department will announce
that the U.S. payments deficit on "regular transactions"
in the third quarter was at an annual rate of $2.3 billion.
This rate is down a bit from the second quarter rate of
$2.7 billion, but the decline is not significant, and is
not as large as press reports may have led people to expect.
For the period since the third quarter ended, weekly
indicators show no significant change in the deficit. While
the unadjusted deficit may have risen to something like $600
or $700 million in October, the increase appears to have
been little more than seasonal. There was the usual large
outflow of funds into U.S. dollar deposits with Canadian
banks, which seek such funds to build up the balance sheet
totals that they publish for October 31.
11/10/64
One factor that tended to increase the deficit in October
was an increase of more than $100 million in U.S. purchases
of new foreign bond issues, as a backlog of Canadian issues
came to market following enactment of the interest equalization
tax. Heavy Canadian borrowing will continue this month, to
the tune of about another $100 millior. Also, the Inter
American Development Bank is borrowing $100 million here
this month, although that issue will not have any immediate
effect on the payments deficit, since the proceeds are to
be placed in long-term time deposits here, thus producing
an offsetting capital inflow. The total of new foreign
issues this quarter may be $400 to $500 million, close to
the record amounts of early 1963.
The main constituents of the over-all payments position
continue to be a large surplus on current account and an ever
larger deficit on U.S. private and Government capital account.
The surplus on goods and services actually increased in the
third quarter, mainly because export shipments were speeded
up in September in anticipation of a port strike, which did
not materialize, thanks to a Taft-Hartley postponement. The
fact that imports have not risen faster than exports, as was
earlier feared, is encouraging.
Data on capital flows in the third quarter are still
incomplete. Extensions of bank credit to foreigners through
loans and acceptances, on which we do have firm data, increased
a little, contraseasonally, as a sharp increase in long-term
lending outweighed a decline in short-term lending. On the
other hand, there is no evidence of any net outflow of liquid
U.S. funds in the third quarter, whereas there had been such
outflows in the second quarter. Also, U.S. purchases of new
foreign security issues fell off sharply in the third quarter
and net transactions in outstanding securities continued small.
These pieces add up to some moderation in reported
capital outflows during the third quarter from the very high
rate of the first half year. However, this decline, taken
together with continued strength in the current account,
cannot easily be squared with the continued high rate of
over-all deficit. Even after allowing for the possibility
that direct investment outflows and Government grants and
credits may have increased a little, we are left with a
substantial increase in net unidentified payments--the "errors
and omissions" item--which presumably is to be ascribed in
part to an increase in unrecorded capital outflows.
The facts so far surveyed may be summarized by saying
that the over-all deficit has remained large, and total
-30-
11/10/64
outflows of U.S. capital have remained very large, although
neither has increased significantly since last spring. Thus,
if recent balance of payments developments are cited in
support of the need for firmer monetary policies, the
argument must be that the deficit and the capital outflows
have remained too high for too long, rather than that
there has been any clear deterioration recently. The
argument is strengthened by near-term prospects. There
seems little reason to expect any diminution in capital
outflows or in the over-all deficit during the current
quarter. And in the absence of Russian gold sales, we
are beginning to see some declines in our gold stock, as
Mr. Sanford noted.
Firmer credit conditions in this country might serve
particularly to restrain bank landing to foreigners, which
amounted to about $1-1/2 billion in the year through September,
and which was at about that rate in the third quarter.
Any
beneficial effects on other flows would probably also come
more from changed availability cf credit than from changing
interest-rate differentials, since Britain and Canada would
probably have to move their rates in step with ours, and
since monetary policies in several Continental European
countries still
lean towards tightening.
Mr. Mitchell asked if
there was any way of estimating the
impact of the new British trade restraints on U.S. exports, and
Mr.
Reyrolds replied that the staff had made some crude estimates.
United States exports to Britain currently were at an annual rate of
about $1-1/2 billion, and roughly half of the goods involved were
subject to the surcharge.
The staff estimate was that the tax would
reduce exports by an amount in
at an annual rate.
the neighborhood of $100-$200 million,
Much would depend upon how temporary the tax
seemed likely to be; if it was expected to end soon, the reduction
might well be larger than this because some traders might decide to
wait it out.
However, it was Mr. Reynolds' impression that few
expected the tax to be taken off at any time soon.
11/10/64
-31Chairman 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:
Basically the domestic economy appears to be strong,
although we are currently passing through a phase of some
uncertainty, as observers move into the annual period for
worrying about what may happen next year. Unfortunately,
the General Motors strike has added to the uncertainty by
producing important declines in many statistical series,
probably to be followed by sharp rebounds in later months.
I would expect continued business expansion well into
1965, taking into account the favorable outlook for consumer
spending, plant and equipment outlays, inventory accumulation
and State and local spending. I have been impressed by the
strength of consumer outlays in the third quarter and the
likelihood that the influence of the cut in income taxes is
not yet exhausted. The key area of business plant and
equipment expenditures is also encouraging in the light
of various recent surveys, as well as the relatively high
rate of capacity utilization and the h gh level of profits.
I would not expect Federal spending and residential
construction over the coming months to provide much impetus
to further expansion.
As for prices, it is true that the over-all indices at
both the consumer and wholesale level continue to show
marked stability; and the possibility of a big outburst of
inflationary psychology has doubtless been dampened by the
President's attitude towards a general steel price increase.
On the other hand, the sensitive index for all industrial
commodity prices has continued to move up, and specific
price announcements continue to be overwhelmingly on the
upside. There is ample reason for concern over the possibility
of increased price pressures in the coming months, probably
stemming more from wage pressures than from demand pull.
October is shaping up as a month of heavy deficit in the
balance of payments. To a considerable extent this is a
seasonal development; corporate flows to Canada and tax pay
ments by petroleum companies to Venezuela always boost the
deficit in the first month of each quarter. Nevertheless,
there may have been some basic deterioration from September,
if for no other reason than the increase in Canadian securities
issues placed in New York. Bank lending abroad in one form
11/10/64
-32-
or another remains high, as does the aggregate of private
capital outflows--although there have been marked changes
from time to time in the composition of this aggregate.
There seems to be no reason to expect the fourth quarter
to show any improvement over the third quarter deficit of
about a $2.4 billion annual rate.
Hence, the deficit for
the year could easily reach $2.1 billion. We seem to be
faced with a persistent deficit at this unsustainably high
rate, despite the marked progress shown by the trade balance
over the last year or two.
As a result, there has recently
been a noticeable hardening of the attitude of the surplus
countries toward the United States.
In analyzing bank credit developments, I would be
inclined to minimize the importance of month-to-month swings
and to .tress rather the rates of growth for the first ten
months of this year as a whole. It is noteworthy that total
bank credit has grown at a rate somewhat higher than in the
same period last year, and the growth of the money supply is
also running slightly ahead of last year. Business loan
demand, while not spectacular, has been considerably ahead
of 1963, and fairly good strength in credit demands seems
likely for the remainder of this year.
Since capital outflows play so large a part in our
persistent balance of payments problem, monetary policy
can and should be employed in alleviating that problem.
I do not have in mind here a "crash program" to deal with
a sudden new crisis but rather a moderate sustained effort
to help cope with a drain that is cumulatively eroding our
international economic position. And while the present
statistical position of the domestic economy might not, in
isolation, justify a change in policy, it seems to me that
the ecoromy is fully strong enough to withstand a moderate
change without damage. In fact, given the rapid growth of
bank credit so far this year and the existing threat of
inflationary developments, I feel there may well be a good
deal of merit from a domestic standpoint in some slight
change in the System's posture at this time, especially
when we consider how damaging any inflationary tendencies
would be to our international position.
We should probably maintain current policy until the
Treasury's refunding program is out of the way. Thereafter
the coast seems clear for policy modification without the
It would seem to
need to consider the even-keel factor.
me wise to conduct open market operations, starting about
a week from now, with a view to encouraging somewhat firmer
11/10/64
-33-
money market conditions than have prevailed in the last
month or two. The objective of this policy change would
be to achieve a moderately slower expansion in bank credit
and a firmer short-term interest rate structure, both of
which could be decidedly helpful in connection with our
international accounts.
Specifically, I would think in
terms of a range of free reserves around the zero level,
but more often below zero than above it; I would envision
the numbers falling frequently in the range of zero to
$50 million net borrowed reserves, recognizing, of course,
that there would be swings outside of this range on both
sides. Hopefully the 90-day bill rate might, under these
conditions, be expected to move up to about 3-3/4 per cent,
and borrowings would be expected to exceed recent levels.
I don't think it is necessary ac this time to prejudge
the possible consequences of this moderate change in open
market policy in terms of future discount rate action.
I
am aware that the increase in short-term market rates would
set in motion considerable expectations along these lines,
but I think there would be no particular difficulty in
discount administration, at least for a period of several
weeks--,nd we shall, of course, have an opportunity to
review this situation on December 1. It will, of course,
be necessary to consider the effects of any discount rate
move in this country on rate policies abroad, especially
in the U.K. It seems not unlikely, however, that the U.K.
may be moving in the direction of a higher Bank rate for
reasons related entirely to the British situation itself.
It is clear that the tighter credit conditions that have
developed on the Continent in the past year have had an
adverse effect on both the British situation and our own.
With respect to the directive, I would suggest a
material change in wording if the Committee agrees on the
I
wisdom of the moderate policy change I have proposed.
staff's
of
the
am satisfied with the second paragraph
alternative B (omitting the last clause on bank reserves,
as so many of the Committee members proposed at the last
meeting); but it seems to me that the first paragraph
could be improved, to give a clearer picture of the reasons
for our policy change. 1/ I have some language to suggest
at the appropriate time.
1/ Alternatives A and B of the draft directive referred to
by Mr. Hayes, and subsequently by others, are appended to these
minutes in Attachment A.
-34-
11/10/64
I think it might be well for us to have in mind that,
in the event of any rise in short-term market interest
rates reflecting an intentional modest shift of policy,
there would be a risk of a severe squeeze on the banks as
long as the present ceiling is maintained on time deposit
interest rates under Regulation Q. Indeed, we may be close
to running into a squeeze of this sort even without a
further firming of policy. Major banks are now ready to
pay 4 per cent for four-month or, on occasion, even three
month maturities; and under these conditions it may be
difficult for banks outside of the
money centers to retain
their interest-sensitive time deposits--which, incidentally,
have shown little or no growth since mid-summer. Of course,
this difficulty might become applicable even to the major
banks if interest rates were to experience some further
rise. It would seem highly appropriate, therefore, that the
Board of Governors give this matter careful consideration,
ir order to prevent a more intensive tightening of bank
credit than any of us would like to contemplate.
Mr.
Shuford observed that as had been pointed out this morning
economic activity during the fall had continued to rise markedly
despite interruptions
in
the automobile industry that were adversely
affecting the October data.
favorable.
From the second quarter of this year to September,
industrial production in
rate,
The prospects for further growth remained
the nation rose at a 6.5 per cent annual
and manufacturing output in
at an estimated 8 per cent rate.
the St. Louis District increased
In
both the nation and the District
payroll employment had continued to rise faster than the working-age
population.
Business loans as well as other major groups of bank
loans had been rising rapidly both in
the District and in
the nation.
For several years, Mr. Shuford said, it had been a chief
objective of monetary policy to take actions that would foster
11/10/64
-35
expansion in the total demand for goods and services.
An appropriate
volume of reserves had been supplied for a moderate growth in money
supply, and the demand for goods and services had been rising at a
strong rate.
The result had been a rise in real output with few
price increases.
The balance of payments, although still trouble
some, had not deteriorated.
It seemed to Mr. Shuford that the
record evidenced an appropriate monetary policy during this period
of economic expansion.
In the last two or three months, Mr. Shuford continued,
monetary expansion had been at an annual rate of about 5 per cent
rather than 8 per cent as in June and July.
But even 5 per cent
was a relatively rapid rate, and he thought that a slightly lower
rate would be more appropriate to the present state of the economy.
Economic activity appeared to be rising somewhat faster than could
be sustained over the long run, and the economy appeared to be
approaching the optimum use of capacity consistent with reasonably
stable prices.
While the Committee should hesitate to make definite
forecasts, it had to bear in mind that monetary expansion customarily
took effect with a lag.
Mr. Shuford believed, therefore, that monetary actions should
be somewhat less expansionary than they had beer. in recent months.
He would not want to clamp down forcefully, and he did not even
advocate a change in the Committee's proximate goal of providing for
11/10/64
-36
moderate growth in bank reserves and the money supply.
however, like to see the growth rates in
He would,
bank reserves and the money
supply return to the 3 or 4 per cent range that had prevailed over
the past two years.
More moderate growth in
reserves and the money supply seemed
likely to necessitate somewhat less easy money market conditions,
including higher interest rates and some net borrowed reserve figures.
Mr.
Shuford thought the Committee should be prepared to accept such
necessary developments.
Moreover,
higher interest rates might also
be appropriate for the balance of payments problem.
He recommended,
as soon as appropriate after the current Treasury financing,
that a
step be taken toward less easy money market conditions with a view to
moderating the rate of monetary growth and other stimulative aspect.s
of the System's actions.
As for the directive,
Mr.
Shuford said he found alternative B
The
drafts acceptable with one or two minor changes.
of the staff's
second paragraph was satisfactory to him wi:h the bracketed phrase
retained.
In
the first
paragraph,
he favored omitting two phrases
relating to the balance of payments.
He recognized
that the payments
balance was a continuing problem, but it had not shown any further
deterioration recently, and his position on policy was not motivated
by it.
Accordingly,
he would leave out the phrase in
the first
sen
tence of alternative B which read "while placing somewhat greater
11/10/64
-37
emphasis on fostering improvement in the capital account of U.S.
international payments."
Similarly, in the last sentence of this
paragraph he would omit "and the possibility of some adverse effects
on the deficit of the recent slowing down of economic activity in
Europe."
Mr. Shuford did not favor a change in the discount rate.
Mr. Bryan remarked that in reviewing recent statistics for
the Sixth District he did not see any significant differences from
the trends in the nation as a whole.
Perhaps the District was in a
slightly better situation than the nation with respect to construc
tion contract awards, but even in this area it showed much the same
tendencies as the nation.
Over the longer term of a year or so,
most of the figures showed that the District had been moving ahead
of the nation, although that statement was subject to one or two
exceptions.
His view of the national economy was that it was per
forming adecuately, although he would wish that the unemployment
statistics
had a better face.
Mr. Bryan advocated no change in policy for the immediate
future--specifically, for the next few days.
As he conceived it,
that would mean free reserves somewhere in the neighborhood of $50
million.
At the same time, he thought the Committee was getting
itself into a box by never showing a negative free reserve figure,
and that the sooner it got out of that posture the better off it
would be.
If free reserves remained positive for a long period and
11/10/64
-38
it then became necessary to show a negative
figure, this could
easily give the market a substantial jar with consequences that
would go far beyond what the Committee intended.
Accordingly,
when
the Treasury financing was over, he would like to see free reserves
fluctuate around zero, occasionally on the negative side and occa
sionally on the positive.
Having said that, Mr. Bryan continued,
he would add that he again was gettirg concerned about the use of
free reserve figures as a guide to monetary policy.
Once more he
was leaning towards use of total reserves as a guide.
Mr. Bopp reported that ecoromic activity in the Third
District now compared well with national levels.
Unemployment in
most major labor markets was lower than at any time since the mid
fifties.
Manufacturing output and employment were climbing steadily,
with manufacturers of durable goods turning in
especially good records.
Sales at department stores were strong, although the rise in the
Third District had not been quite so vigorous as in the nation.
On the financial front, the basic reserve position of
reserve city banks had eased somewhat.
Reflecting this easier tone,
reserve city banks had not borrowed during the last two weeks of the
most recent reporting period and Federal funds and other borrowing
had dropped substantially.
For the three weeks ending November 4,
total loans and investments
(adjusted)
increased,
increase arising from increased loan activity.
with most of the
11/10/64
-39
Economic activity appeared to be continuing along a course
of moderation, Mr. Bopp said.
Inventories, wholesale prices, and
the rate of output relative to capacity all reflected the moderate
pace of business, a pace with which one might well be pleased if it
were not for the stubborn cling of unemployment above 5 per cent of
the labor force.
Moderation also was reflected on the financial front.
The
somewhat slower rate of increase in the money supply in October was
a desirable development, in Mr. Bopp's opinion, even though one
month's data could hardly be more than suggestive of future trends.
Although not necessarily surprising, the October deficit
in the balance of payments was discouraging.
The behavior of the
deficit would bear close scrutiny in coming months, especially the
capital sector where the U.S. might experience further outflows of
funds in
the form of long-term bank Ioans and purchases of foreign
securities.
As for the future, Mr. Bopp continued, some had expressed
concern over the possibility of overheating of the economy in the
months ahead, as automobile manufacturers rushed to catch up in
output and as manufacturers and others stockpiled steel in
to beat the May strike deadline.
materialize,
an attempt
Even if this development were to
there were a number of factors which suggested a slow
down in the longer run.
Included here were the likelihood of a
11/10/64
-40-
reduced rate of increase in capital spending and a leveling in both
Federal Governnent and housing expenditures.
possibility that seemed to Mr.
It was the longer-run
Bopp the more important,
and he saw
some danger of being unduly influenced by the possibility of a rapid
surge in business activity in
the short run.
Mr. Bopp felt, therefore, that about the same degree of ease
prevailing in recent weeks continued to be appropriate.
He would not
feel uncomfortable with a three-month bill rate closer to the 3.60 per
cent level.
Within a policy of essentially no change,
quarrel with a slight firming in
the money market.
he would not
The discount rate
should be held at the present level, and he favored alternative A for
the directive.
Mr.
Hi.kman said that the auto strike had been the major
influence on the economy in October, with adverse effects showing up
in industrial production, personal income, and retail sales.
production had continued unchanged at high levels.
Steel
Some rebound might
be expected in the economy in November, although the extent would be
restrained by continuing disputes over local
issues in the auto
industry.
Some light on future prospects for automobiles and steel was
provided at the Bank's quarterly meeting last week of 25 industrial
economists, representing large corporations headquartered mainly in
the Fourth District.
The consensus was that the auto strike had
11/10/64
-41
knocked about a half million cars from this year's production, most
of which would be carried over to next year.
This meant that auto
production was now estimated at 7.8 million cars for 1964 instead of
the 8.3 million previously anticipated.
Likewise, total car sales,
including imports, were now expected to amount to 8.1 million cars
instead of 8.2 million.
Whereas formerly it was considered a close
question whether 1965 would match 1964, it now appeared that produc
tion next year
might go as high as 8.1 million cars and total sales
as high as 8.3 million, with both production and sales exceeding this
year's levels.
District. economists representing the steel industry expected
this year's ingot output to total 126 million tons.
It
was estimated
that steel consumption in 1964 would amount to the equivalent of 116
million ingot tons,
tories.
Next year steel consumption was expected to increase slightly
to 118 million tons,
in
and that 10 million tons would be added to inven
ingot equivalent.
With no further net increase
inventories anticipated for the year as a whole,
this would mean
production of 118 million ingot tons as against 126 million this year,
for a decline of about 6 per cent.
Forecasts of the index of industrial
production made by this
group of economists showed modest gains during the current quarter
in
the first half of 1965,
or a slight decline
in
with a large majority
the third quarter.
expecting a
Of the latter
and
levelup
group,
about
-42
11/10/64
half looked for an inventory spurt and then a slump, and the remainder
for a gradual and pervasive weakening of denand throughout the economy.
Mr. Hickman said he continued to be concerned about current
monetary policy.
He had been on the conference call during the past
three weeks and had followed developments closely.
Early in the
period it looked as though a free reserve figure of $50 million was
equivalent to a marginal credit supply sufficient to bring the rate
of expansion in bank credit and the money supply down to sustainable
levels.
At least, the figures seemed to reflect this for most of
October up to the reserve period ended October 28.
however,
a sharp spurt in
In the next week,
required reserves coupled with other factors
almost caused free reserves to fall below zero.
This might mean that
credit demand was too strong under present conditions to be held within
sustainable bounds by a free reserve level a; high as $50 million.
With the comfortable cash position of the Treasury resulting
from the recent, financing, Mr. Hickman continued, the calendar should
be clear after the next few days throughout the remainder of the year.
The System, in his opinion, should use this opportunity to probe very
slightly and very gently toward less ease.
Quantitatively, he sug
gested a free reserve target of about $25 million plus or minus $50
million.
Thus, he came about out where Mr. Shuford and Mr. Bopp had,
but a little above Mr. Hayes.
If this almost imperceptible shift in
policy failed to bring rates of growth of bank credit and the money
-43
11/10/64
supply down to sustainable levels, which he would take to be about
4 per cent under current conditions,
to zero free reserves.
the Committee might have to move
This recommendation, in his opinion, would
not require any change in the substantive portion of the directive,
and, hopefully, would not result in a change in the discount rate.
Before closing, Mr. Hickman said, he would like to comment
briefly on some recent changes in his District that might conceivably
In Columbus, commercial banks
have a major impact on savings flows.
had raised rat s to 4 per cent early in
the differential
tions.
August,
in
effect eliminating
that had previously favored savings and loan associa
Immediately, there had been a sharp increase in savings deposits
at Columous banks and a marked slowdown in the rate of increase of
savings shares.
In Cleveland, the savings and loan associations had
just informed him that they would like to reduce dividend rates at the
beginning of next year from 4-1/4 per cent :o 4.1 per cent for those
compounding interest quarterly and from 4.3 per cent to 4.15 per cent
for those compounding semiannually.
The savings and loans felt that
they were unable to compete with commercial banks at the current rate
of 5-1/2 per cent on mortgage loans with 80 per cent loan-to-value
ratios, and must discourage further large inflows of funds by reducin
dividend rates.
These changes, if they spread throughout the economy,
could clearly have important consequences for monetary policy and for
evaluating present rate ceilings under Regulation Q.
11/10/64
-44
Mr. Hickman concluded by noting that he had a redraft of the
staff drafts for the directive, combining elements of alternatives
A and B, that he might offer for Committee consideration at a later
point in the meeting.
Mr. Daane observed that the problem confronting the Committee
at this meeting seemed unusually complex.
He started from the premise
that the Committee's policy had been too accommodative for too long.
He had not been completely convinced by Mr. Mitchell's arguments in
favor of such a policy in his Arden House speech this past week end
and he found it significant that Mr. Mitchell had made no reference
to the balance of payments in this speech.
At this moment, Mr. Daane said, he would have felt more
comfortable if policy were somewhat less accommodative with respect
to both bank reserves and the price of money.
Despite his discomfort
with the present posture of policy, however, he could not see any
clear advantage from a timing standpoint in making a move at this
juncture.
On the domestic economy, it seemed from the staff review
that the case for making even a slight move toward less ease was
somewhat weaker now than it had been at the previous meeting.
This
was indicated by developments in capital spending plans, construction,
and inventories, for example, and in the financial area by the most
recent changes in bank credit and the money supply.
The balance of
payments remained a serious problem, but as Mr. Hayes had said it had
11/10/64
-45
not been worsening recently.
On the whole there was little that was
really new in the balance of payments situation; for much of the year
the Committee had been discussing a 1964 payments deficit of about
$2 billion,
and there were no additional grounds now for undertaking
a program to combat the balance of payments deficit.
The Committee did have an operational problem, Mr. Daane
continued.
The situation at present was analogous in some respects
to that at the meeting in August.
As was the case then, a firmer
condition already was established in the money market prior to this
meeting--free reserves for the most recent statement week were only
$5 million.
His view in August had been that the Committee should
try to maintain the firmer conditio.s that had come about,
similarly he now felt that it
and
would be desirable to keep free reserves
as close to their current levels as was feasible.
He did not think
it wa. possible to move to mainly negative figures in the course of a
gentle, probing shift, because continuing negative reserves would be
read by the market as a clear signal that the Committee was changing
the posture of policy.
A premise underlying the current rally in the
bond markets was that monetary policy changes were not imminent in
either the United States or Britain, and an indication that this
premise was wrong would be followed by considerable changes, wiping
out the rally and going well beyond what the Committee intended.
would not seem to be meaningful to make such a policy shift unless
It
11/10/64
-46
the System was willing to couple it with a discount rate change.
This, in turn, would have many international consequences, and it
was a step the System could not take lightly.
Mr. Daane's conclusion was that, while it was rather dis
tasteful to seem always to be in a position of advocating no change
in policy and passive accommodation, he would still favor maintaining
current market conditions until the next meeting of the Committee.
He would not favor allowing the market to get a signal in the form
of net borrowed reserve figures until the Committee wanted to take a
positive step in the direction of less ease, although he recognized
the difficulties the Desk faced in avoiding negative figures.
He
preferred alternative A of the draft directives and he would make no
change in the discount rate.
Mr. Mitchell said that he had found a good deal of reassurance
in some of the events of recent weeks, including the McGraw-Hill
survey of capical spending and the consequences of the strike in the
auto industry.
At several recent meetings there had been extended
debate about the desirability of referring to the auto strike in
the
directive, and about the likelihood that it would lead to a rash of
wage increases.
But the General Motors settlement,
it seemed to him,
had produced the impression that this was an industry that was not
giving in easily to inflationary wage demands.
He found this highly
reassuring as an indication of psychology in current wage negotiations.
11/10/64
-47The effects of the strike in. dampening down the economy had
already been noted, Mr. Mitchell said.
So had the possibility there
might be a letup next year in the pace of the expansion, or even a
downturn.
Mr. Mitchell thought the latter were not necessary develop
ments, and could be avoided.
On the other hand, monetary policy
could be the straw that brought them to pass.
In his judgment policy
should be kept about as it was in the absence of any specific contrary
indications.
Mr. Mi:chell said he was much in sympathy with Mr. Daane's
closing remarks.
He thought the Committee should not undertake
probing actions that might upset the bond market and the British
situation without having any great benefit
for the economy.
While
he could not feel very concerned about a reduction in
the free reserve
target from $50 million to $25 million, he thought it
would be better
not to risk giving the impression that policy had changed and thus
possibly setting off reactions here and abroad,
felt there was a very strong need to do so.
unless the Committee
Any small move that the
Committee made might force a change in the ciscount rate, which would
have highly significant implications.
keeping policy unchanged.
Mr.
This was another reason for
Mitchell favored alternative A of the
draft directives.
Mr. Shepardson said he did not think he could add to the
analysis of the economy that already had been given.
While there
-48
11/10/64
were some conflicts among the indications of the various indexes, it
seemed to him that the Committee had been in a position for too long
a time of having, inadvertently or otherwise, a greater rate of
expansion in bank credit and the money supply than was desirable.
No time ever seemed to be the right time to make a change, yet at
some point the Committee had to get on a little firmer basis than it
was at present.
In his judgment, the Committee had hesitated for too
long; a further shift to slightly less ease might have been made three
or six weeks ago.
In any case, he thought the Committee should move
to a little less ease now.
He did not favor going as far as
Mr. Hayes had suggested, but the general level of free reserves
should be reduced somewhat, and the Committee should be prepared to
accept negative free reserves from time to time.
Mr. Shepardson was not sure how the Committee should view
the rate of money supply expansion.
This rate had varied in periods
when there had been no change in the objectives of policy.
He was
not disturbed by short-run fluctuations, but the longer-term expansion
this year seemed to him to have been at a higher race than should be
expected to continue.
In sum, Mr. Shepardson said, he favored a little less ease
than at present.
He did not think this would presage a change in
the discount rate; he did not anticipate that much of a change in
-49-
11/10/64
policy at this time.
He preferred alternat.ve B for the directive,
but, as did Mr. Hayes, he would like to see some rewording of the
first paragraph.
Mr. Robertson made the following statement:
The evidence the staff has laid before us today
clearly indicates that now is not the time to undertake
any venturesome change in monetary policy.
Business activity has been given pause by the work
stoppages in the automobile industry. Partly because of
that fact, business inventory accumulation has been more
moderate than earlier forecast, and we are not--in my
judgment--seeing any important spread of wage and price
increases of inflationary proportions. Signals from the
financial side are confirming the moderate pace of
business activity, with money supply and bank loan and
investment statistics now presenting a distinctly calmer
picture after the flurry of a month or so ago.
I was one of those around this table who voiced some
concern last summer about the possibility of a build-up
of inflat.onary momentum this fall. But I must say that
the facts in hand give no hard evidence of such a devel
opment. Hence, concern about inflation still has to be
in terms of future possibilities rather than today's
actualities.
When one tries to look toward future possibilities,
he must at once be impressed with the absence of ebullient
prospects. The new survey of capital spending plans calls
for holding the present level, or not much more. Even
before that information was available, the staff projection
show at the last meeting envisioned a very moderate amount
of economic growth, with a steadily more restraining influ
ence being exercised by the Federal budget. Comments in
the credit and capital markets, I understand, are beginning
to emphasize more the large amount of savings that will
need to be employed in 1965, and less the possibility that
credit demands might exceed supplies of funds and continue
upward pressures on both interest rates and productive
capacity. Our ability to produce has in fact been growing
almost as fast as our increase in actual output, and as a
result both capacity utilization rates and unemployment
11/10/64
-50-
have changed relatively little recently. Our margin for
further expansion of production and incomes is still
substantial.
Given these possibilities and allowance for lags in
the effectiveness of monetary policy, a System tightening
action now might result in some very untimely downward
pressure on the economy next year.
There are several other factors--of a lower order
of importance--that also weigh on the side of no change
in current monetary policy. One is the desirability of
avoiding any unnecessary pull of capital away from Great
Britain, at a time when she is struggling to deal with a
far worse balance of payments position than ours without
resort to any escalation of interest rates. Another is
the futility of trying to deal with the complex of
Canadian-United States capital flows with interest rate
changes here, given the inter-governmental agreements
already in operation to influence reserve movements
between the two countries. As a matter of fact, the
third-quarter data cast doubt on the wisdom of relying
on interest rate changes to deal with balance of payment
problems. Those data show a cessation of outflow and
probably an inflow of short-term funds to the United
States during a period when a number of international
interest rates widened their spread over their U.S.
counterparts. Another factor which should be noted is
that the Treasury is still in the process of winding up
its November financing. While those operations have been
routine, still they would suggest--other things being
equal--no change in policy.
All things considered, therefore, I would vote for
no change in policy today and for adoption of the
alternative A current directive distributed by the staff.
In complying with this directive, I would hope the Manager
could operate in such a way as to not encourage, and if
possible dampen, the seasonal tendencies for rising
short-term rates and tightening money market conditions
during the remainder of the year.
Mr. Mills made the following statement:
In my opinion, there has been no material change in
economic conditions since the last meeting of the Federal
Open Market Committee. The degree of credit availability
11/10/64
-51
now to be aimed at is the subject up for decision. For
convenience, credit availability can best be defined in
terms of the supply of reserves. It continues to be
essential to supply reserves sufficient to foster further
expansion of the economy and to meet seasonal reserve
needs.
Considering the existence of latent inflationary
pressures and the difficult balance of payments problem,
reserves should be provided in the minimum amount neces
sary to accomplish the desired objective, which would
envisage a level of free reserves ranging from $50 million
down to zero. This reserve target would require a steady
injection of reserves into the commercial banking system
until year end but, although an expansion of bank credit
would have been supported, the general availability of
credit would have been kept relatively taut so as to
discourage commercial bank lending ventures overseas and
to compel their modest rationing of credit to the end of
directing their lending attention into more worthwhile
and constructive economic channels.
In view of the flow of repayments reaching the
commercial banks on outstanding loans and investments
and a capacity to rearrange their credits into a changed
pattern, there is every reason to believe that the
proposed policy would place no obstacle in the way of
reasonable economic expansion, but in exercising a
modest degree of credit restraint would be conducive to
improvement in the field of commercial bank credit
practices.
Mr. Mills added that his statement touched upon a predicament
that he believed was increasingly faced by :he Committee in developing
monetary policy, and that was how to reconcile the objectives of
monetary policy with the obligations that the System had to foster
and maintain a sound and solvent commercial banking system.
There
was no desire to interfere in the bankers' individual independence
in selecting loans and investments.
On the other hand, monetary and
credit policy involved a general credit control, and the time might
11/10/64
-52
come when monetary policy should be directed equally to its broader
economic objectives and to the supervisory obligations that the
Committee had to the banking system.
For many years,
Mr.
Mills said,
the goal of monetary policy had been to stimulate stable economic
growth.
Economic growth was identified,
of course, with the expansion
of the money supply and of bank credit.
Mr.
Mills was of the opinion
that in the longer run there could be a conflict of interest between
the economic objectives of monetary policy and its
to encourage better banking practices.
should now move in
In
use as an agent
his opinion,
the direction he had ind.cated,
the Committee
which would be
desirable both on economic and commercial banking grounds.
Mr. Mills said that for the directive he preferred alternative
B,
which called for only a slight tightening of r.oney market conditions.
For the most part free reserves recently had been ranging moderately
above $50 mill.on.
In his thinking,
on the lower s de of $50 million,
Mr.
the free reserve level should be
and down to zero.
Wayne said the trend of Fifth D strict
had changed little
remained good.
in
recent weeks and prospects for the near future
Insured unemployment throughout the District had con
tinued to decline about seasonally.
indicated some improvement in
contract awards.
business activity
The latest data on construction
employment,
building permits,
and
Furniture manufacturers at the recent Southern
Markets received a record volume of new orders and were now operating
11/10/64
-53
at 100 per cent of practical capacity to meet delivery schedules
that were almost solid through March and extended as far ahead as
May and June on some lines.
A leading furniture producer reported
small-scale introduction of a second shift to cope with a backlog
that was twice as large as ever before, even though $5 to $6 million
of new orders had recently been turned down.
booked up far into the future,
Textile output remained
and recently reported third-quarter
earnings for some of the nation's principal textile firms showed gains
averaging nearly 50 per cent over last year's figures as a result of
strong demand and the reduced cost of cotton.
In the latest survey,
business sentiment remained generally optimistic.
reported significant gains in orders,
continued to report wage increases;
shipments,
Manufacturers again
and backlogs;
a few
and there were scattered references
to higher prices.
Mr. Wayne said there was not nuch he could add to what already
had been said regarding national economic conditions.
He was disposed
to align himself with the analyses that Messrs. Robertson and Mitchell
had presented.
In the policy area, some recent developments suggesed
that it might be desirable to reduce reserve availability for domestic
reasons.
Despite these considerations,
however,
it
seemed to him
that any move toward less ease would create problems.
He could see
no way to make any significant move toward less ease which would nct
create conditions requiring an increase in the discount rate which
11/10/64
-54
could lead to developments the Committee was not seeking at this
time.
If higher rates should spread through the market they would
cause large shifts in assets, possibly including a substantial run
off of CD's unless the Board decided to revise Regulation Q and such
shifts might have undesirable international repercussions.
He was
content to wait at least until the next meeting before deciding
whether a policy change was necessary.
Mr. Wayne commented that there had been a good deal of
discussion about the uncomfortableness of staying in one policy
posture for a long time.
from that view.
He would like to disassociate himself
He thought the policy the Committee had been following
had been correct, and he was not uncomfortale about it.
Mr. Wayne concluded by saying he would prefer no change in
policy and certainly no change in the discount rate.
Alternative A
of the draft directives was acceptable to him.
Mr. Clay said it would appear appropriate to continue the
monetary policy adopted at the last meeting of the Committee.
There
were some special developments that underscored this policy position.
One was the impact of the automobile strikes with their various
repercussions upon the domestic economy.
On the international scene
was the British decision to maintain the current discount rate rather
than increase it.
This would presumably make the tightening of credit
policy in this country inappropriate, quite apart from other
11/10/64
-55
considerations.
The fact was,
however,
that the basic economic
situation did not call for a reduction of monetary ease at this
time,
even aside from these special factors.
Mr. Clay remarked the domestic economy continued to be
dependent for expansion primarily upon consumer and business spending.
Present indications of consumer spending performance did not suggest
any need to deter it.
Even after allowance was made for the prelim
inary nature of the McGraw-Hill survey of business capital outlays,
that sector did not suggest any basis for credit restraint.
When
account was taken of the contractive trend in residential construc
tion in recent months,
higher interest rates would not appear to be
a salutary development for that sector of the economy--quite
the
contrary.
When one turned to manpower ard the U.S.
again found a stimulative policy in
order.
ment problem wis of a somewhat special
resource base,
one
Granted that the unemploy
type and that it
onight requ:re
other measures to facilitate the upgrading of the labor force,
the
solution to the problem was dependent upon an expanding economy that
would provide added jobs and enable the upgrading to take place.
Monetary policy should continue to pursue tne expansionary
role that the growin,
resource base and increasing productive
efficiency permitted it
to follow without overheating of the economy
11/10/64
-56
Mr. Clay felt.
Price developments thus far were not such as to
justify any contraction in the general credit situation on that
ground.
Credit developments also appeared to be generally in line
with the monetary policy to be pursued.
Despite the fluctuations in
credit growth over shorter periods that might raise questions as to
the pace of expansion, perspective over a longer span of months and
for the year to date did not suggest
that the policy followed had
been too expansionary.
Mr. Clay said alternative A of the staff drafts appeared to
be appropriate for the economic policy directive for the period
immediately ahead.
In his opinion, no change should be made in the
discount rate.
Mr. Scanlon reported that the level of economic activity in
the Seventh District continued to rise, allowing for the effects of
the General Motors strike.
Retail sales in October, excluding autos,
appeared to have held close to the September level in the District
and were far above the relatively low year-ago level.
Output of the major industries important in the District,
again excluding autos, appeared to be rising more rapidly than over
all production in the nation.
Delays were being reported by District
producers of steel in meeting promised delivery schedules for some
products.
New orders for steel continued in
large volume and backlogs
were rising further as many manufacturers attempted to build up their
inventories.
11/10/64
-57
Mr. Scanlon observed that producers of industrial machinery
continued to report a strong flow of new orders and further rise of
backlogs.
Orders were especially strong from the metalworking
iidustries.
Rising backlogs were reported also by purchasing agents
in Chicago.
In September, 54 per cent of those surveyed reported
increased backlogs of orders, compared with 49 per cent in August.
Residential construction activity in the major District
metropolitan areas had drifted downward in recent months along with
the downward drift in the nation, Mr. Scanlon said.
However, vacancy
rates in apartments and houses available for rent or sale in the
North Central region in the third quarter were below the year-ago
rates and were somewhat below the comparable rates for the U.S.,
according to a recent survey by the Mortgage Bankers Association.
Also, mortgage delinquencies in the Midwest were generally below the
year-ago levels.
Unless vacancy and delinquency rates were to rise
appreciably from current levels, downward pressure on residential
construction in the District would not be expected to be severe or
of long duration.
The flow of savings to banks and savings and loan associations
in the District had been relatively stronger than in the nation.
While individual bankers were complaining about a decline in loan
demand, October figures for weekly reporting banks in the District
did not reflect the slackening that was apparent in the national data.
11/10/64
-58
Business, consumer, and real estate loans all rose more than a year
ago although there were substantial reductions in loans to finance
companies and loans on securities.
Business loan strength was
evident for most industries, including the metals manufacturing
firms for which the seasonal repayment was smaller than usual in
October.
Mr. Scanlon observed that the basic net deficit positions of
the large District banks, with one exception. which dominated the
total, appeared to be somewhat tighter than they were a month ago.
The two major Chicago banks had added more than $150 million to their
outstanding negotiable CD's in the past month and one had increased
the amount of its unsecured notes outstanding.
Mr. Scanlon said his views on policy were very much like
those expressed by Mr. Daane.
He had
he feeling that in some
respects the evidence to support a firmer monetary policy was
stronger at recent meetings than it was today.
While he was not
opposed to a slightly less easy policy, unlike Mr. Hayes he believec:
it was unrealistic to contemplate a short-term bill rate of 3.75 per
cent without Committee members having resolved in their minds that a
change should be made in the discount rate.
Additionally, he disliked
projecting a change in policy into the middle of a three-week period
unless the Treasury calendar was restricting the Committee.
Since
there was no such a restriction currently, Mr. Scanlon would prefer
11/10/64
-59
to examine the facts at the next meeting, and, if a change was
warranted,
make it
immediately.
On this basis, he favored alternative
A for a directive and he would not change the discount rate.
Mr. Deming said that an opinion survey early this month of
25 of the Ninth District's larger industrial concerns indicated
continued expansion of output through October.
The various
statistical irdicators available through September showed that in
dustrial output in the region had expanded quite substantially since
last spring.
The preliminary manufacturing employment data for
October tended to substantiate the opinions of industrial leaders
that output continued high during the recent month.
Furthermore,
the survey indicated that the current favorable trend would continue
through the fourth quarter.
So far this year, Mr. Deming continued, negotiated and
deferred money wage increases in labor contract settlements in the
Minneapolis area had averaged 9.3 cents per hour as compared with
9.1 cents last year.
And information from the Associated Industries
of Minneapolis, an employer association, seemed to indicate that
most industries did not feel that the auto wage pattern would be
carried through to them.
District bank credit expansion in October, Mr. Deming said,
was much stronger than a year ago and much stronger than the average
for earlier Octobers.
This reflected behavior at city banks almost
11/10/64
-60
entirely; country bank performance was about the same as last year
and about seasonal.
Both loan and investment expansion at city banks
contributed to bank credit strength in the month.
October performance
pushed bank credit growth so far this year to above last year's
expansion and well above average growth.
In contrast, bank deposit
growth in October was weaker than a year ago and than the average
growth for the month.
Still, deposit growth so far this year had
been quite strong, well above average and second only to the same
period in 1962.
Mr. Deming said his position on policy was quite close to
Mr. Daane's.
He favored no change, and consequently he preferred
alternative A for the directive.
However, he agreed with those who
would remove the constraint under which the Manager had been operating,
of attempting to avoid negative free reserve figures.
In his opinion
it was unrealistic to expect the Manager to operate with a target of
$50 million free reserves or less, and still never have a negative
figure.
While he would not go as far as Mr. Hayes had in calling
for negative reserves more often than positive, he thought there was
no reason to try to avoid negative figures altogether.
He was not
recommending deviations on the side of tightness, but rather a will
ingness to accept negative figures if they happened to occur.
In
his judgment it was sheer luck that free reserves had come out above
zero last week.
Mr. Deming favored no change in the discount rate.
11/10/64
-61
Mr. Swan reported that there appeared to have been no major
changes in the business picture in the Twelfth District since the
last meeting of the Committee.
not yet available.
Employment figures for October were
However, he had been reviewing the data for the
first nine months of the year which showed that total employment had
risen a little over 1 per cent from December 1963 to September 1964,
as compaced with a rise of something over 2 per cent for the country
as a whole.
Over-all, the District had fared rather well in view of
the fact that nanufacturing employment was down almost 2 per cent
compared with in equivalent rise for the country as a whole.
The
decline in District manufacturing employmert was, of course, related
to the situation in the defense and space industries.
The September
decline in tha: area was the smallest month-to-month decrease so far
this year.
In the lumber industry there had been some pickup in new
orders in recent weeks, but the period was too recent and too short
to say whether this development was of any particular significance.
Not surprisingly, western steel production rose substantially in the
month of October.
Some of the larger District banks were in a rather tight
position, Mr. Swan observed.
Borrowings from the San Francisco Bank
continued to be rather substantial, although this varied considerably
from bank to bank.
Still, loan demanc did not appear to be excessive
11/10/64
-62
at this point.
By and large, the October figures for weekly reporting
banks showed smaller increases than a year ago.
Mr. Swan saw no basis at this point on which to make any
change at all in policy.
In fact, he said, as Mr. Daane and others
had noted the case for a change perhaps was stronger at recent meet
ings than it was today.
Without reviewing the figures in detail, the
statistics fcr October on industrial production, inventory accumulation
consumer spending, and business spending all seemed to him to reflect
some moderation in the rate of expansion, although this might be
related in considerable measure to the auto strike.
Moderation also
was reflected in the financial area, in terms of the general rates of
bank credit and monetary expansion that had been experienced.
In the international area, Mr. Swan continued, the balance
of payments situation was at least no worse than it had been earlier.
At the moment, even a slight firming of short-term rates would appear
inappropriate, in light of the problems the British were experiencing
and of the steps they were taking to meet th em.
Moreover, he con
tinued to have considerable doubts that the effect of a slight firming
of short-term rates on capital outflows would contribute much to
solution of the U.S. balance of payments problem.
It seemed to him
that the Committee had to face up to the question of whether much more
overt action was called for now, and he did not think that such action
was justified.
11/10/64
-63
Mr. Swan noted that because of the current Treasury financing
the Committee would have to wait a week or so in any case before
implementing a policy shift.
He agreed with the view that it was
not desirable to make a change in policy at a point between meetings.
This question had come up on another occasion recently, and the
decision then had been to wait until the following meeting.
He
thought that was a desirable position to take again, particularly
with the lack of compelling reasons to change policy at present.
Mr. Swan favored no change in policy on these several grounds.
The targets he had in mind were free reserves around $50 million and
a bill rate in the range 3.55 to 3.60 per cent, or perhaps up to
3.65 per cent.
He agreed that if the bill
rate got much above 3.65
per cent and began to approach 3.75 per cent it would cause a serious
problem with respect to the discount rate, which he thought should
not be changed now.
Mr. Swan said he also had been thinking about the question
of negative free reserves, and was becoming increasingly doubtful
that it was desirable from the point of view of either the Committee
or the Manager to argue that negative figures should be avoided at
all costs.
He thought the objective of avoiding negative figures
may have taken precedence recently over the $50 million target, and
he doubted that this was desirable.
While he did not think the
Committee should call for negative free reserves just to indicate
11/10/64
that it
-64
could do so,
he would not be particularly concerned if
a
negative figure resulted by chance at a time when the target was,
say,
$50 million.
When free reserves had risen almost to $200 million
in the week including Columbus Day, it was generally understood that
this was an inadvertence.
A similar understanding might develop with
a miss in the opposite direction.
Mr.
Swan preferred alternative A for the directive.
He
thought the qualifying phrases attached to several statements :.n
alternative B implied doubts and made for extremely weak language
for a directive.
Mr. Irons remarked that conditions in the Eleventh District
were relatively unchanged from those he had reported at the last few
meetings.
Minor changes had occurred, with increases and decreases
about offsetting each other,
and the District's economy continued to
move along at a relatively high level.
The General Motors strike had
not affected the Eleventh District as much as some others,
have some effects,
in
but it
did
including cancelling out part of a slight increase
manufacturing production.
Still,
October probably would show a
fractional production increase on a seasonally adjusted basis, and
November might continue at about the same level.
strong, although down a bit in
in
the nonbuilding area.
October,
Construction was
with the greatest strength
On a cumulative year-to-year basis,
construction activity was up about 3.2 per cent.
District
Employment also had
11/10/64
-65
improved.
Nonagricultural employment totals had moved up to a record
level, and unemployment was running at an unadjusted rate of about 3.6
per cent.
The employment situation probably was a bit stronger than in
the nation as a whole.
One indication was that the Reserve Bank's
Personnel Department was beginning to find it difficult to fill
clerical and other vacancies; the employment agencies simply had no
applicants to send over.
Retail trade had been quite strong.
It
was up about 11 per cent from a year ago, reflecting rises not only
in the large cities but also in the smaller cities.
There had been
no particularly significant developments in agriculture, and the
situation there appeared satisfactory.
In the financial area, Mr. Irons said, District banks perhaps
had become a little more liquid in
the last three weeks.
There was
some sluggishness in loans, particularly in the commercial and indus
trial category, substantial purchases of Government securities, and
some increase in deposits.
The amount of discounting at the Reserve
Bank was less, but there had been an increase in Federal funds
purchases.
All in all, Mr. Irons said, from the standpoint of the District
there appeared to be nothing to indicate the need for a change in
the
present posture of the Committee with respect to credit availability.
Looking ahead to the next three weeks, it
seemed to him that the choice
11/10/64
-66
between no change and a slight increase in firmness was becoming
more difficult to make; the decision probably would have been easier
three or six weeks ago than it was now.
In general, he thought the
alternatives the Committee was debating, between a free reserve target
of $50 million or $25 million, or perhaps zero, involved differences
that were so minor they might be dropped in the process of rounding.
He did not think that the range of views on policy today was as wide
as it might appear to be.
There were arguments based on both domestic
and international considerations that could be advanced on both sides
of the question when considering policy alternatives that involved so
small a difference.
Personally, he did rot think the Committee would
gain much by an almost imperceptible firning, and it was possible
that something might be lost.
He was not ready to advocate a change
in policy toward greater firmness at this meeting, although he might
be at the next.
Accordingly, he concluded that the Committee should
continue policy about where it was.
As be had said at the previous meeting, Mr. Irons continued,
he would not be particularly bothered by occasional negative free
reserve figures, lasting for a few days, although he might be concerned
if negative figures appeared for three successive weeks.
for free reserves would be somewhere in
and usually above zero.
His target
the area of zero to $50 million,
He would be satisfied if the bill rate
11/10/64
-67
continued in the 3.55-3.60-3.65 per cent area, with the Federal funds
rate at 3-1/2 per cent.
Mr. Irons said he favored not only no basic change in policy,
bit also no attempt even to shade policy slightly toward firmness.
When the time came to make a change, he would be willing to advertise
it to the market.
He thought the Committee should have strong and
convincing arguments before it changed policy, and he did not thin
they existed now, although they might in three or six weeks.
He
would not change the discount rate and would accept alternative A
for the directive.
Mr.
Ellis commented that New England was so dependent upon
manufacturing for a livelihood that he naturally looked first to see
how the factories were doing.
was mixed.
As he had noted before,
In five of the major industries
the evidence
for which the Boston Bank
prepared output indexes--shoes, apparel, textiles, nonelectrical
machinery, and transportation equipment--the September figures
registered an encouraging seasonally adjusted gain.
electrical machinery,
however,
For paper and
the trends were down enough to pull
the total index down fractionally.
At the same time, manufacturing
employment rose minutely and insured unemployment continued its
seasonal decline.
By October 17, insured unemployment on a three
week average basis was running 13 per cent below year-ago levels.
11/10/64
-68
Mr.
Ellis said that New England manufacturers,
well accomplished a 16 per cent increase ir
having pretty
capital spending this
year, now reported expectations for next year that indicated a gain
of 5 per cent on the basis of previous experience with such surveys.
Reinforcing this evidence of business spencing were the trends in
construction contract awards, which revealed a September total 24 per
cent above a
year ago.
Perhaps New England was affected more than
other areas by urban renewal programs because residential contracts
in
September exceeded year-ago levels by 33 per cent, bringing the total
for the year to a plus 21 per cent,
of a plus 3 per cent.
in
contrast with the U.S.
figure
In the financial sector, District banks were
reporting continued strong loan demand.
Turning to monetary policy, Mr. Ellis said that everyone at
the table had the same underlying elements
on policy were matters of judgment,
to the different factors.
In
in
his analysis.
Views
involving the weight to be given
his judgment,
the economy was likely to
move ahead strongly in the first half of the next year, and it would
not require the additional stimulation of credit expansion at the
rate that had resulted from the Committee's policy over the last
three months, since the slight change made in August.
Pressures
for price advances were building up, and they should not be further
stimulated by credit expansion at the recent rapid rate.
The balance
11/10/64
-69
of payments deficit remained large, and outflows of funds in the
form of bank loans continued excessive.
The deficit had been too
high for too long.
From this point of view, Mr. Ellis said, he admitted to some
disappointment on noting in the "green book"-
that events of the
past three weeks had "resulted in somewhat easier money market con
ditions and stronger bond markets."
modest policy shift in August,
it
Looking, at events since the
seemed that the lessened ease the
Committee had intended had not occurred, or at least had not retarded
the subsequent rate of credit expansion.
In fact, the growth rate
since then had exceeded that of preceding months.
This sequence of events led Mr. Ellis to conclude that a
threshold had been reached; it appeared that the rate of credit expan
sion could be slowed only by crossing the level of zero net free
reserves.
The Committee had been discussing free reserve targets
close to zero, and the possibility that the zero line would be
crossed inadvertently.
In his opinion, the impact of crossing the
zero line would be the same whether that event was inadvertent or
deliberate.
If the threshold was to be crossed, it could be dune
either in a step sufficient to clearly signal a policy move or by
1/ The "green book" to which Mr. Ellis, and subsequently others,
referred is the report, "Current Economic and Financial Conditions,"
prepared for the Committee by the Board's staff.
11/10/64
-70
a more gradual shift.
His choice would be to attempt to move over
the threshold gradually, seeking occasional net borrowed reserves
as a deliberate policy.
Mr. Ellis agreed that no time ever seemed to be the right
time to change policy.
In his judgment the right time had been
several weeks ago, or perhaps several months ago.
He would suggest
that after the Treasury financing was completed the target for free
reserves be set at zero with the expectation that operations would
result in figures on both sides of the line.
He would expect bill
rates to rise to about 3.60 per cent or a little higher;
the Federal
funds rate to hold firmly at 3.50 per cent or above; and member bank
borrowing to hold above $350 million on the average.
Mr. Ellis commented that the second paragraph of the
directive had
been substantially unchanged since August and the
directive as a whole contained two apparent inconsistencies.
first paragraph called for accommodating moderate
The
growth in reserves,
credit, and money, while the second paragraph called for continuing
money market conditions that had proved clearly inconsistent with
moderate growth.
The second paragraph then repeated the instruction
to accommodate moderate reserve growth.
If the Committee adopted
alternative A, he would hope the last clause of one second paragraph
would be deleted.
His own preference was for alternative B.
11/10/64
-71
Mr. Balderston called the Committee's attention to the fact
that for the most recent three-month period nonborrowed reserves had
grown at an annual rate of 5.4 per cent and required reserves behind
private demand deposits at an annual rate of 6.4 per cent.
During
the past two months, bank credit had increased at an annual rate of
8 per cent.
It seemed to Mr. Balderston that the Committee somehow
had gotten off the track of appropriate policy and was fearful of
getting back on it.
He submitted that it was time to adopt alternative
B for the directive, and to inform the Desk clearly that free reserve
figures below :he zero line were permissible and were within the
intent of the Committee.
Chairman Martin said he had come to this meeting convinced
in his own mind, after considerable thought:
that the Committee would
be wise to move to a slightly less easy position.
Each member had a
particular set of reasons for his views on policy; he too had a
variety of reasons for his conclusion, including the fact that he
happened to belong to the gradualist school.
The Chairman thought the recent Administration statement
regarding monetary policy and the independence of the Federal Reserve
was splendid.
In his opinion, recent monetary policy had, on the
whole, been correct.
Some would have preferred to see it firmer and
some easier, but that was a matter of judgment.
Now he thought the
Committee had to be careful to avoid taking the position that any
11/10/64
-72
change in monetary policy should be delayed until there was a
hemorrhage in the balance of payments, or a clear case of over-full
employment, rising prices, or wage settlements getting out of hand.
If the Committee waited for such developments before moving, monetary
policy would bear the entire blame for events.
There would be no
problem if general price stability was maintained and if wage settle
ments were kept in line with productivity increases.
But if the
Committee ignored inflationary tendencies at a time when something
could be done about them, it would be compounding the difficulties.
The Chairman said he was so optimistic about the domestic
economic outlook that he thought a few mistakes could be made without
endangering the economy.
But he was deeply concerned about the inter
national situation; Britain, in particular, was facing major problems.
There had been suggestions here and abroad that selective rather
than general controls should be employed in meeting balance of payments
difficulties, but this sort of shift wculd take time and he doubted
whether the western world was ready for it.
He was deeply worried
about the U.S. balance of payments deficit, and he became increasingly
concerned when he heard statements to the effect that the deficit was
"only" $2.3 billion, or efforts to explain away the last quarter's
deficit, or arguments that the Committee should avoid firming actions
because they might attract funds from Britain, or statements that
monetary policy was not the appropriate cool for dealing with the
problem and the Committee should let it be handled by other means.
11/10/64
-73
Chairman Martin thought the Committee might be nearing the
point where monetary policy would bow out as a flexible instrument,
and criticisms to the effect that policy was continuously stimulative
would become correct.
One might argue that there was nothing wrong
with keeping policy unchanged for long periods,
some degree of flexibility was desirable.
If
but at the same time
the Committee had moved
more aggressively on August 18 and then dec .ded that had been a mis
take,
it
could have reversed the action.
most other tools.
If
This was not possible with
the Committee never did any shifting it
would
gradually get boxed into a position of doing nothing but contribute
to the flow of funds, perhaps thinking that the flow of funds had
more to do with the business situation. than in his judgment it
actually did.
He thought the notion was preposterous that a change
of $25 or $50 million in
free reserves coulc make or break the
economy.
Chairman Martin reiterated that he came into the meeting
prepared to say that the Committee should move toward firmer con
ditions,
and he would still
on his own.
be prepared to do this if
he were acting
It was clear from the go-around, however, that the
Committee was narrowly divided on what amounted to a relatively small
shift in policy.
Sometimes it
was necessary to make decisions on the
basis of a narrow majority, but all things considered he did not think
it would be desirable for the Committee to act at this time unless it
was more united in
its
thinking.
In
his judgment a vote of 8-4 or
9-3 would have provided a better basis for action today than a 7-5
division.
His thinking also was influenced by the fact that the
Committee would have freedom to maneuver in
the period ahead,
by the point that had been made regarding the disadvantages
and
of prc
jecting a policy change into the middle of a three-week period.
Accordingly, the Chairman said, he would cast his vote for
no change in
If
policy today and for alternative A of the directive.
a majority of the Committee voted in this way,
he would suggest
that the members study the matter thoroughly between now and the next
meeting.
In
the meantime,
he would have an opportunity to discuss
the situation with the Secretary of the Treasury.
Mr.
Shepardson said that reference had been made in
the
reports to the fact that the market generally had firmed up some
what recently because of a general belief that the System was not
going to move in
the direction of further tightening.
It
seemed to
him as long as there had been uncertainty on this score the uncer
tainty itself
it
might have had some restraining influence.
was unfortunate if
be no change in
He thought
the prevailing opinion was that there would
policy.
It
had been suggested that within a general
posture of no change in policy the Committee should accept a broader
range of variation in
to time; i.e.,
free reserves, with negative figures from time
to broaden the range within which the Desk would
11/10/64
-75
operate.
This would have the advantage of reinstating at least some
of the uncertainty.
Chairman Martin commented that there was another question
that he thought the Committee should face up to.
and some other members,
including Mr.
Mitchell,
much commenting on monetary policy in public.
had been doing too
He thought that was
He did not think it was necessary to censor
bad for the System.
speeches,
In his opinion he
and he was called upon from time :o time to comment on
policy, as were other members.
But he disliked the thought that the
market might know pretty well what was going on at the meeting today.
In his opinion Committee members ought to hold their discussions in
the meeting room and not make specific statements about monetary policy
outside, certainly not immediately before a meeting.
Mr. Mitchell said that he did not take umbrage at the
Chairman's remarks; he felt much the same way.
However,
he felt the
position he happened to hold was one that did not have much chance of
being enunciated.
He had thought it
particularly important to express
that position because the New York Bank, whose President held a con
trary position: was so powerful in molding public opinion through its
daily access to the press.
As a consequence he did not think the
public got a well-rounded view of the thinking of Committee members.
Mr.
Mitchell added that he would like to comment on the subject
of free reserves.
At the time last summer when he had been concerned
11/10/64
-76
with the need for avoiding negative figures the situation in the
bond market had been extremely delicate, and he had been apprehensive
that the market would react strongly to any signal of a possible
change in policy.
Those conditions did not exist today, and he
thought that free reserves could occasionally be negative without
ar.y serious consequences.
Mr. Daane said he shared the views on free reserves that
Mr. Swan and Mr. Deming had expressed.
In the last statement week,
when free reserves came out to $5 million, the Marager had been
extremely concerned that they might turn out to be negative, even
though the difference between plus or minus $5 million free reserves
was absolutely nil in terms of real effects.
with occasional
He would have no quarrel
negative figures if they arcse in the context of no
change in policy and a target of $50 million.
Mr. Swan commented that it was one thing to specify a target
and recognize that it might be missed by a considerable margin.
was acceptable to him.
This
It was quite another matter, however, to say
that one had a wider range in mind and didn't care if the outcome was
plus or minus $50 million.
He would not approve of such a position.
Mr. Hayes said that he would plead guilty along with others
of having permitted his feelings on policy objectives
his speeches to some extent from time to time.
to have colored
But he wanted to dis
associate himself strongly from the notion that he had daily contact
11/10/64
-77
with the press.
He hardly ever saw the press,
and, of course,
working at the Desk never saw the press at all.
those
Furthermore,
Mr. Waage, the press officer at the Bank, never gave any indications
on policy to the press.
In his opinion, most clues to the Committee's
current policy posture originated in Washington.
Chairman Martin commented that he thought all members of the
Committee could plead guilty; he realized that they all were invited
to make speeches.
He had had no particular objections to Mr. Mitchell's
speech, but he had thought the timing, on the Sunday before a meeting,
had been unfortunate.
He had received a number of calls from people
asking whether he knew that Mr. Mitchell had already taken a position
on policy before the meeting.
It was important for the members to bear
in mind that there was a timing problem.
He personally had refused a
great many invitations to speak during the election campaign and
immediately after it,
accepting only those in which he could discuss
the Federal Reserve as an institution with ro implications for current
policy.
Members of Congressional committees, noting that Committee
members were talking about policy in
public,
could justly ask why
they should not have the minutes currently and serially if members of
the Committee were publicly discussing impending policy determination.
Thereupon, the meeting recessed and reconvened at 2:00 p.m.
with the same attendance.
-78
11/10/64
Mr. Stone referred to the earlier discussion of the
possibility of net borrowed reserves and said he would like to
indicate one type of situation that could arise at the Desk.
Sup
pose the projected free reserve figure for a statement week was
$50 million as of a Tuesday night, but on Wednesday morning the
projection was revised down to, say, $10 or $15 million, perhaps
because float had collapsed overnight or required reserves had risen
sharply.
To bring the week's figure back up to $50 million would
require bill purchases of $250 or $300 million on that Wednesday.
Perhaps a bulge in free reserves was projected for the next day, and
it had been planned to make substantial bill sales.
If the purchases
were made on Wednesday, the volume of subsequent sales would be in
But if no action was taken in light of the Wednesday
creased.
estimate of $10 or $15 million, the figure published for that week
might well turn out negative.
uncommon:
Mr.
This kind of situation was not
how would the Committee propose :hat he deal with it?
Robertson asked how the Manager would proceed in
the
reverse situation, with the projected level of free reserves revised
upward on a Wednesday morning preceding a week in which substantial
purchases were expected to be necessary.
Mr. Stone replied that he
would not sell bills on that Wednesday if it would be necessary to
buy them back the next day, because he thought the Committee did not
have the same inhibitions about upward deviations from target levels
11/10/64
-79
as downward.
Mr.
Robertson rejoined that in his judgment the same
principle should be applied in
the type of case Mr.
Stone had
described.
Mr. Deane agreed, and commented that the situation Mr. Stone
had described seemed to him to be precisely the type of case Committee
members had in mind today in
suggesting removal of the constraint on
operations posed by the effort to never show negative figures.
the figure for the first
week did turr out
negative,
however,
If
he would
urge that the Desk get a running start to ensure a positive figure
for the next week to avoid two consecutive
reserves.
Also,
it
weeks of net borrowed
was of some importance how the press officer of
the New York bank treated the negative figure in the course of the
press conference;
there would be little
problem if
it
was made clear
that the negative figure had represented a miss.
Mr. Robertson said he questioned whether attempts should be
made to explain away figures even if
they had come about inadvertently;
it would be better, in his judgment, to let the results of actions
stand without comment.
Mr.
Hayes observed that he had great sympathy for this view.
He noted that on several occasions,
the public,
in presenting these figures to
the Bank's press officers had stressed the volatility of
the numbers and had sought to de-emphasize the significance of week
to-week results.
Mr. Wayne also agreed,
observing that when a
-80-
11/10/64
particular outcome was described as an error the outcome sought
was identified by implication.
Chairman Martin also concurred in this view, noting that
he frequently was asked by people who saw explanations of policy
in the press why the Committee did not announce its policy decisions
as they were taken.
In his judgment, some types of decisions on
monetary policy had to be kept confidential if operations were to
be effective.
Mr. Shepardson referred to the illustrative case Mr. Stone
had described, and said he agreed it would be a mistake to undertake
operations on a Wednesday to meet a free reserve target when they
would have to be reversed on the following day.
He thought, however,
that it would be just as much of a mistake to lean towards erring in
one direction in a statement week if there had been an error in the
other direction in the preceding week.
In his opinion, deviations
from the target should be accepted as they developed without actions
to offset them later.
In effect, the Committee should be prepared
to accept any outcomes within a certain range of deviation from the
central target as being "on track."
The problem up to now had
resulted from the effort to ensure that the figures would always
fall on one side of the zero line.
Mr. Hayes added that any realistic
range of acceptable results had to be relatively broad.
11/10/64
-81Chairman Martin then suggested that the Committee vote on
the alternatives of no change in policy or slightly less ease for
the next three weeks, and on the corresponding alternatives for the
directive, although the specific language of the directive approved
would be subject to modification.
Mr. Shepardson said his vote would
depend on whether a decision to make no change in policy would indicate
acceptance of the possibility that free reserve figures might swing
on both sides of the target even if it meant negative free reserves
at times, and he asked for clarification on this point.
Chairman
Martin said he thought it was clear from the discussion today that
almost everyone was willing to accept that possibility.
The poll of the members indicated that all except Mr. Hayes
favored no change in policy.
Thereupon, upon motion duly
made and seconded, and with Mr. Hayes
dissenting, the Federal Reserve Bank
of New York was authorized and directed,
until otherwise directed by the Committee,
to execute transactions in the System
Account in accordance with the following
current economic policy directive:
It is the Federal Open Market Committee's current policy
to accommodate moderate growth in the reserve base, bank credit,
and the money supply for the purpose of facilitating continued
expansion of the economy, while fostering improvement in the
capital account of U.S. international payments, and seeking
to avoid the emergence of inflationary pressures. This
policy takes into account the apparent underlying strength
in current economic conditions, apart from the effects of
work stoppages in the automobile industry; indications that
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the rate of increase in business capital spending may moderate
in the coming year; relative stability in broad commodity
price averages, even though additional price increases have
occurred in some materials markets; and the recent reduction
in bank credit and monetary expansion from the high rates of
summer. It also gives consideration to the persistence of
a sizable deficit in the U.S. balance of payments.
To implement this policy, and taking into account the
current Treasury financing, 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.
In explaining the reasons for his dissent, Mr. Hayes said he
was impressed by the facts that there seemed never to be a right
time to make a difficult decision, and that the need for maintaining
an even keel during Treasury financing.; inhibited action by the
Committee much of the time.
He felt that some move in the direction
of firming had been indicated for quite a while on the grounds of
the balance of payments.
Also, he thought there was a danger of
the Committee's being overly concerned about the state of the bond
market.
Tt naturally was interested it,the
state of this market,
but it should rot let that interest inhibit appropriate policy
moves.
Nor did he think it should be prevented from taking sound
policy actions by the fact that those actions might create compli
cations under Regulation Q.
Finally, Mr. Hayes said, he would
dissent from the fears that the Committee would be creating problems
abroad by a gradual move in the direction of somewhat less ease.
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11/10/64
He was sympathetic with the Chairman's comment that there was some
danger that monetary policy would be abandoned as a means of
achieving equilibrium in the world and he was alarmed at the ten
dency, visible on both sides of the Atlantic, to favor use of
selective measures.
This tendency threatened destruction of the
existing international financial system.
While he agreed that this
was not the only time at which the Committee
could act, on balance
he favored a move toward greater restraint .ow.
Chairman Martin commented that he thought it quite proper
for anyone who felt as Mr. Hayes did to dissent.
He was sympathetic
to everything Mr. Hayes had said, but in view of the considerations
he had outlined earlier he still favored no change in policy today.
Mr. Balderston said he felt that a gradual change in policy
was overdue, and his original preferences had been for alternative B
for the directive, a central target of zero for free reserves, and
no restraint on the range of free reserve fluctuations.
He also
was concerned, however, about the Committee's making a decision on
these lines by a very narrow majority at this time.
Accordingly,
in view of the fact that the Committee would have a further oppor
tunity to grapple with the problem at its next meeting, he was
willing to cast his vote for alternative A.
Mr. Hickman said that he also was willing to join the
majority despite the feeling he had indicated earlier that a little
11/10/64
-84
less ease would be appropriate now.
Mr. Shepardson commented that
he had voted for alternative A, although with some reluctance, for
the reasons Mr. Balderston had outlined.
Mr. Shuford commented that his earlier statement had
indicated that he had favored a little less ease than existed at
present.
This was the first time he had ac'vocated moving in the
direction of firmer conditions since the August action of the
Committee, although for several months he had been concerned with
the unusually high growth rates of reserves, money, and bank credit.
Although he was pleased to see the slight reduction in these growth
rates evident in the most recent figures, he continued to be con
cerned on this score.
He recognized, however, that there was a
problem of timing, and he could not be certain this was the
appropriate time to change policy,
although obviously he had thought
that it was when he had made his initial statement today.
In view
of the considerations advanced by the Chairman and by Mr. Balderston,
he was willing to wait until the next meeting of the Committee to
review the question again.
his position would be then.
He could not, of course, say now what
In a final remark, Mr. Shuford said he
agreed with Mr. Ellis that the directive contained inconsistencies.
Chairman Martin then noted that the Committee had planned
to deliberate the language of a trial directive today, and he invited
Mr. Mitchell to open the discussion.
Mr. Mitchell said he thought
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the Committee might simply proceed to consider the language of the
draft the staff had prepared on a paragraph-by-paragraph basis, to
determine how well it reflected economic and financial developments
and how adequate the accompanying analysis was.
He proposed that
the Committee start with the first paragraph of element 1.
Mr. Wayne said that while the draft might well represent a
fair analysis ne questioned whether it belonged in the directive.
Mr. Daane agreed, observing that elements 1 and 2 appeared to be
simply a condensation of the green book and its supplement.
Mr. Mitchell said that as he viewed the matter the Committee
had decided today to make no change in policy, and the draft of the
first two elements could be considered to provide the economic and
financial analysis which supported that decision.
If the Committee
felt the analysis did not support the decision, it should change one
or the other.
The green book gave the Committee the detailed facts
on the economic situation but it did not attempt to relate these
facts to the decision on policy.
Since the statement in the trial
directive was intended to explain the policy action, it was equiva
lent to the present policy record entries.
Mr. Hayes said that in his opinion element 1 of the draft
was essentially a collection of facts relating to the business
situation rather than an analysis of the reasons for the policy
action.
If the Committee wanted an analytical interpretation, the
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text would have to include much more in the way of evaluation and
forecasting, and would have to provide the Committee's reasons for
expecting certain effects or the lack of them.
He thought a purely
statistical compilation such as this offered a less lucid explana
tion than did the present policy record, which at least summarized
the views on policy expressed at the meeting.
There was very little
in the draft in the way of weighing one factor against the other.
He had never thought such evaluative material had a place in the
directive but if the Committee decided that it did it would not
accomplish its end with a text such as that before it.
Mr. Mitchell observed that the objective of today's discus
sion, as he understood it, was to see how the draft could be
improved, and he hoped Mr. Hayes would have specific suggestions
for its improvement.
Mr. Shepardson said that at one time the policy record
could have been described as a statement prepared at the Board at
the end of the year, but this was no longer true.
The staff was
now preparing the entry for each meeting on a current basis, with
the benefit of having heard the discussion around the table and of
the minute record.
What the Committee needed, in his judgment, was
a statement on the analysis underlying the policy decision taken at
each meeting.
This was accomplished in the present policy record
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-87
entries in a better manner, he thought, than it would be in
documents like the trial directive.
Chairman Martin commented that there was a great deal of
merit in Mr. Shepardson's argument, and Mr. Wayne said that it
described his position exactly.
Mr. Swan remarked that he was not sure how the argument
that the Committee did not need to adopt a text like that of
elements 1 and 2 in light of the policy record could be reconciled
with the kind of language that was incorporated in the first para
graph of the present directive.
with this paragraph?
Was it proposed also to dispense
One reason elements 1 and 2 had been suggested
was the feeling that the content of the present first paragraph
needed elaboration; that a better statement was required of the
considerations underlying policy than was possible in a short
directive.
Mr. Shepardson said he agreed a case could be made that
the present first paragraph was not satisfactory.
But he thought
the problem was that it went too far in attempting to describe the
basis for the policy action.
He would prefer a directive that
dealt with the broad, continuing objectives of policy in the first
paragraph, and that specified short-run operating instructions in
the second paragraph.
The policy record entry, which now was pre
pared at the close of the debate, should be relied on to report the
11/10/64
-88
basis for the decision taken at the meeting.
He did not favor
attempting to set out the economic background for the policy action
in the directive itself.
Mr. Ellis said that it might be useful to recall some of
the background of the proposals for elements 1 and 2.
It had seemed
to Mr. Mitchell, Mr. Swan, and himself from the beginning of their
discussions that it would be appropriate for the Committee at some
point to adopt formally an expression of the reasoning underlying
its policy decision at each meeting.
This was not done formally at
present; the staff now prepared a summary of the meeting in the form
of a draft policy record entry and submitted it to those who had been
in attendance, of whom some offered suggestions for revision but most
did not.
It had been suggested originally that such a statement be
made a part of the directive, and later an alternative proposal had
been advanced that the statement be kept separate from the directive
but still be formally adopted by the Committee.
Mr. Mitchell,
Mr. Swan, and he did not feel strongly on the question of whether
the statement should be part of the directive.
But it did seem
logically desirable that a complete statement be adopted formally,
first covering the basis for the policy action along the lines of
elements 1 and 2, and then proceeding to describe the Committee's
policy intent and operating instructions, as in elements 3 and 4.
11/10/64
-89
As far as he was personally concerned, the most important topics on
the agenda for today's discussion were elements 3 and 4.
Mr. Shepardson said he thought Mr. Ellis had raised a valid
point in noting that at present the Committee did not take formal
action on the policy record entry.
The material in the entry pro
vided the basis on which the Committee arrived at its decision and
in his opinion it was not practical to draft
meeting.
it in advance of the
However, he thought it would be appropriate for the
Committee to make it a regular order of business at each meeting to
approve the policy record entry prepared for the preceding meeting.
Mr. Daane said he subscribed entirely to this proposal.
In
connection with the draft entry that had been prepared for the
August 18 meet:.ng, for example, he felt it would have been desirable
for the Committee to have reviewed it at the very next meeting.
These entries might be brought up for consideration at the outset of
the meeting, along with the minutes.
Because the Committee was not
releasing its current minutes, the policy record entries appearing
in the Board's Annual Report provided the main medium for communi
cating the Committee's reasoning to the public.
Chairman Martin said that if the Committee waited three
weeks to review material for official approval it was possible that
reactions might be affected by any changes in thinking over that
period.
Also, if someone was absent at the following meeting the
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benefit cf his comments would be lost.
In his opinion, the people
at a meeting ought not to be revising the views they had expressed
in the past, however unsound they may have been.
Mr. Hayes suggested that anyone absent at the meeting could
convey his views to the Secretary.
Chairman Martin commented that
this still would not meet the problem that one's thinking might
change quite a bit over a three-week period.
Mr. Wayne said he agreed that views could change.
However,
he always had tried to evaluate the draft policy record entries as
objectively as possible, in terms of whether they reflected accurately
views of the majority as expressed at the meeting.
In general, he
thought the policy record entries presented the basis for the decisions
of the majority quite well.
Mr.
Mitchell said that the Committee members' review of the
draft policy record entries inevitably were affected by the lapse of
time; one had to try to recreate the environment of a meeting.
At
the moment, both he and Mr. Daane were still in process of commenting
on the August 18 entry.
He thought Mr. Shepardson's suggestion that
the Committee could adopt a policy record entry three weeks after
the meeting was unrealistic.
related to the real
But in any case this suggestion was not
issue with respect to elements 1 and 2.
These
elements had been proposed in the belief that the Committee should
decide in the course of the meeting on the basis
for whatever policy
11/10/64
-91
decision it reached.
If it found it had difficulty in reaching
agreemert it should be prepared to spend whatever time was necessary
to work the matter out.
This would result in a clear record of the
reasons for the policy actions, including statements of any dissents.
As far as incorporating these elements in the directive was concerned,
Mr. Ellis already had noted that this issue was not important, so
long as the Committee formally approved a statement of the reasons
for its decision at the meeting.
Mr. Daane thought the procedure proposed would be more cumber
some than the alternative procedure of having the policy record entry
prepared immediately after the meeting and then reviewing it at the
next meeting.
So that no one would underestimate the problem he would
note that the draft policy record entry for August 18 implied that
those who voted against the action taken felt that monetary policy
had nothing to offer with respect to the balance of payments.
He
had been in the minority then, and he certainly had never felt this.
This was the kind of thing that ought to be looked at by everyone.
Mr. Brill said he would like to clarify one point about the
staff draft of the trial directive.
The staff had interpreted its
assignment as calling for the preparation of a text for elements
1 and 2 that would explain the policy position and action described
in elements 3 and 4.
If the draft seemed more factual than analytical
this partly reflected the effort to incorporate in element 2 facts
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concerning,
for example,
recent growth rates in reserves and deposits
that were necessary to make the element 3 statement of policy intent
meaningful--facts that might or might not seem analytically important
in
themselves.
With respect to elements 1 and 2 as a whole,
there
was no intention to make them absolutely complete, but rather to
emphasize the main points of significance.
It would be preferable,
of course, to prepare alternative drafts of the trial directive, as
often was done
for the regular directive,
a formidable task,
but this might prove to be
given the timing with which important data become
available.
Mr.
Hayes said that the Committee seemed to be on the horns
of a dilemma.
On the one hand, it could ask for a factual statement,
and the draft did appear to be a good summary of the green book.
But such a sumnary did not explain how the Committee had arrived at
its decision, and he did not see what function it would serve.
Alter
natively, it could attempt to develop a more complete analytical
statement.
But he thought it was wishful thinking to imagine that
the Committee could agree on a detailed analysis,
since it
was quite
clear from the discussion at each meeting there were many variations
in the analyses of members.
It was difficult enough to reach agree
ment on a relatively brief and simple statement;
to attempt to arrive
at a consensus on the kind of statement proposed was a completely
hopeless task,
i. his judgment.
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Mr. Daane said he would illustrate the problem with a statement
from the first paragraph of the draft, which said "no improvement had
been achieved in the employment situation."
To his mind, there had
been improvement.
Mr. Mitchell agreed that this sentence was too bald as
written.
In his opinion, however, that was exactly the kind of issue
the Committee should be debating, and the process of considering su:h
draft material would provide a focus for such debates.
Mr. Deming said it was his understanding that the policy record
entries were written on the basis of the minutes.
Committee members
had an opportunity to make suggestions on the drafts, and account was
taken of these suggestions in revising the entries.
These reviews
did not occur so much after the fact as had been implied; Committee
members received the draft entries reasonably promptly after the
meetings and returned them to the Secretariat reasonably promptly.
The material in, the trial directives seemed to provide a good running
start on drafting the entries, and he had no objections to them on
that basis.
But if the Committee was going to use such material for
the entry itself or was going to incorporate it in the directive--and
he thought it was too long for the latter purpose--there were many
statements that he would want to revise.
As examples, he cited the
statements on capital spending plans and on the balance of payments.
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Mr. Mi:chell said he thought the fact that Mr. Deming also
objected to some statements in the draft pointed up the need for the
Committee to discuss such issues before reaching its decision on
policy.
If the Committee took these issues up one by one after the
go-around some light would be shed on them, and members would have a
better opportunity to affect each others' views.
This sort of thing
was now missing from the deliberations of the Committee; it was not
spending enough time on its principal business.
Mr. Hayes commented that all the members were exposed to the
facts in the course of briefing sessions at the Banks and the Board,
and in the go-around each stressed the facts he considered most
important, putting different shades of emphasis on different aspects
of current conditions.
present was inadequate.
He did not think the exchange of views at
But he did think it was fanciful to imagine
that somehow the Committee could hammer out a uniform view on all
points.
Mr. Mitchell replied that he was not arguing for development
of a uniform view; differences in views among Committee members were
important, and should appear in the record.
Mr. Daane commented that
one difficulty was that the trial directive necessarily would be
prepared in advance of the meeting, before the views of Committee
members were known.
11/10/64
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Chairman Martin remarked that the Committee's procedure at
meetings, in which each person was called on to speak in turn, might
have become stereotyped.
Perhaps it would be desirable to consider an
alternative arrangement, under which members would be asked to address
themselves to a list of topics prepared in advance.
At present, each
Reserve Bank President first discussed developments in his District.
While District developments were interesting and important, the
length of time now spent on them might be detracting somewhat from
the discussion of the basic problems of unemployment, wages, prices,
the balance of payments, and so forth.
These problems were at the
heart of the matters with which the Committee was concerned, and it
might be able to deliberate them better under the alternative procedure.
Mr. Ellis said he thought the Chairman had identified, in
another way, the problem with which he and Messrs. Mitchell and Swan
had been concerned.
What they were driving at in the proposals for
elements 1 and 2 could be thought of as an agenda of key topics.
Committee members could review the staff draft of these elements
before the meeting, determine their points of agreement and disagree
ment, and come to the meeting prepared to discuss these points.
discussion logically would lead up to a policy conclusion.
This
What was
important was that there be a discussion of the bases for decision
before the Committee turned to the kinds of issues covered in elements
3 and 4; just how this was achieved was not of real importance.
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Mr. Wayne observed that the Committee had adopted the present
pattern for its meetings nearly a decade ago, when the executive
committee was abolished and the number of full Committee meetings
each year was increased from four to about eighteen.
He thought the
Chairman's suggestion that the procedure now be changed was a good
one.
He proposed an experiment under which each President would
concentrate on policy in his remarks, and would refer to developments
in his District only to the extent that they were pertinent to his
views on policy.
Mr. Hayes said he would hope that the Committee would still
get the benefit of advice on any important developments in the various
Districts.
He would consider it quite unfortunate for the Committee
to give up reports on business and credit developments around the
country, which he thought were one of the elements of the Committee's
strength.
Chairman Martin said he thought the Committee had made some
progress today.
It was obvious that three or four hours would hardly
be enough to discuss the question, and the Committee might plan on
continuing the discussion at the next meeting.
It would be desirable,
in his opinion, to have an agenda of key issues prepared, and seek to
get a better concentration on these issues in the discussion.
This
was a prerequisite to developing an amplified statement of policy
intent and instructions.
He thought the Committee had to try to
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explain better than it had in the past what the basis of its
thinking was.
Mr. Hayes said he thought the memorandum on the directive
proposals that. Mr. Robertson had distributed after the previous
meeting was excellent.
Mr. Robertson had noted that the Committee
had "tended to confuse the kind of analysis that is appropriate to
Committee judgments about bank credit and money with what is appro
priate for inclusion in a directive that is eventually to be published
and that is to reflect the views of a large deliberative body."
his (Mr. Hayes')
In
opinion, there was a real difference between what
the Committee should publicize and what it did in clarifying its
own thinking, and the two should be carefully distinguished.
Chairman Martin said that any mater:.al published by the
System should reflect the System's thinking accurately, and should
not attempt to rationalize actions.
It was vital to preserve the
integrity of the System's public statements, and the Committee should
attempt to be completely objective.
Mr. Hayes said his point was that the Committee could well
afford to debate the issues around the table and that a give and take
analysis of developments was all to the good, but he was dubious about
the proposal to develop a consensus on analysis.
To try to draw to
gether in one statement the Committee's judgments on this score would,
in his opinion,
lead to more trouble than the Committee had now.
He
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could not conceive of a successful effort to agree on all points
when the Committee could not even agree, for example, on the extent
to which there currently was a wage-price push.
Mr. Wayne commented that he thought the policy record
entries had been improved over the last twelve months.
He still
favored releasing these entries or something similar every three
months, after allowing for an appropriate time lapse.
He was
inclined to think that the Committee, acting as a Committee, should
approve the entries.
However, he thought the proposal to hammer out
elements 1 and 2 at the meetings was impractical.
The content of
elements 3 and 4 was, of course, another matter.
Mr. Shepardson suggested that the Committee try to accelerate
drafting of the policy record entries and simultaneously urge members
to send in their comments as expeditiously as possible.
The entry
might then be put on the agenda at the following meeting for debate
and adoption along with the minutes, as Mr. Daane had suggested.
This would represent progress.
Some lag was inevitable, but the lag
would have been reduced as much as possible.
Mr. Mitchell said he would reiterate that he thought
Mr. Shepardson's proposal was somewhat unrealistic.
Secretariat in a difficult position.
It put the
They wanted to produce a policy
record entry that satisfied everyone, and the result was to dilute
its character and make it rather bland.
Many times the Committee
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had not resolved differences of opinion at meetings, and the entries
for those meetings consequently made a poor record of the discussion.
He was not being critical of the Secretariat; in his opinion they
did a good job under the circumstances.
But he thought that in the
nature of the case the record would be much sharper if the Committee
itself agreed upon it at the meeting.
Mr. Shepardson said he agreed that there was a tendency to
develop a compromise version of the record that omitted some differences
in view.
He thought that might be corrected by instructing the
Secretariat to develop more fully the statements of differences in
view.
Mr. Sherman said he did not know what to make of Mr. Mitchell's
remark that the staff wrote the policy record to satisfy everyone.
Over the years, the entries had been prepared on the basis of the
discussions at the meetings as set forth in the minutes, with a view
to identifying each policy action and giving an accurate report of
the reasoning leading to it.
The sole aim was to prepare entries
that correctly reflected what had taken place at the meeting.
Mr. Mitchell remarked that one of the difficulties with the
Committee's public relations posture was that outsiders were not
sure that account was taken of all important problems in the delibera
tions.
If it could be shown in the policy record that these problems
were considered--whatever response the Committee made to them--that
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would contribute to a better understanding of what the monetary
authorities were trying to do.
He was not apprehensive about having
a policy record that showed differences of opinion and different
shadings of view.
Chairman Martin observed that Mr. Daane had raised a good
point with regard to the statement in the trial directive on unemploy
ment; this was a matter that usefully could be discussed further.
He
also agreed that it would be desirable to report any differences of
view in the record.
He thought that some people were of the opinion
that the Committee was not well informed.
That view may have been
built up deliberately by hostile critics, but nevertheless he thought
it was necessary to improve the public record on the Committee's
thinking..
Mr. Hayes commented that no matter how much the record was
improved the Committee still would be subject to such criticism.
Mr. Mills said he believed the Committee flattered itself
by thinking that the audience deeply concerned in what it had to
say and in what
it did was more than a very narrow and academic one.
He also thought that the more the Committee put on paper in the
policy record, the more it was exposed to criticism of omission of
essential material.
He always had felt that the Committee members
adequately addressed themselves to the main economic issues that had
been abundantly
revealed through various briefing sessions, the green
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-101
book, and the oral reports of staff members at its meetings and,
therefore, there was no reason for splitting hairs on what should
be the content of an unnecessarily elaborated policy record.
Mr. Scanlon commented that originally he had approached the
directive proposals with misgivings.
But as he considered them
further he had come to feel that since the Committee made policy
changes only on the basis of what it thought were solid reasons, it
certainly should be able to agree on the nature of those reasons.
While this might be a difficult job, the Committee really would not
have any agreenent at all if it lacked agreement on the reasons for
its actions.
The discussion today seemed to indicate that Committee
members may not have been in agreement when they thought they were.
It seemed to him desirable for the Committee to do whatever was
necessary to develop agreement by a majority.
Not everyone, of
course, had to share the majority's views.
Mr. Balderston said he felt so appreciative of the labors
of Messrs. Ellis, Mitchell, and Swan on the subject of the directive
that he hoped the Committee would not throw the baby out with the
bath water.
What seemed vital to him was that the Committee retain
elements 3 and 4 in some form.
As for elements 1 and 2, the alter
native suggestion had been made that the green book could be released
immediately after the meetings.
This was a document of which, he
thought, the Committee could be proud.
Not that everyone agreed
11/10/64
-102
with everything in it; he often had quarrels with the document at a
half dozen points.
Perhaps the initial discussions at meetings might
center on the contents of the green book, with members indicating any
points at which they held differing views.
When the book was pub
lished such differences in view could be shown in footnotes.
After
considering the green book, the Committee :night discuss elements 3
and 4.
He thought these elements should be saved because it was
important that
the Committee make itself better understood on the
subjects to which they related.
Mr. Ellis referred to Mr. Hayes' statement that it was
impossible to achieve a single statement of Committee views.
But,
he said, this was what the Committee now was doing in the policy
record, except that the record was published without action on it
by the Committee as such.
The object of Mr.
Balderston's suggestion
that the green book serve as a basis for discussion seemed to him to
be essentially the same as the object of the proposal that drafts of
elements 1 and 2 be used in this way, since these elements were an
analytical summary of the contents of the green book.
He thought
these elements would provide a splendid basis on which the Committee
could organize its discussion, whether they were called an agenda or
something else.
With reference to the suggestion for publishing the
green book, he would like to hear the staff's views, but in his
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judgment to change the character of the green book to make it
suitable for publication would destroy its unique usefulness.
Mr. Robertson said that there would be no surer way of
reducing the usefulness of the green book to the Committee than by
publishing it.
With the prospect of publication, the staff would
no longer call the shots as it saw them.
Mr. Young commented that publishing the green book might
make it as hard to produce as a leading article for the Federal
Reserve Bulletin.
Mr. Brill agreed, and added that he and other
staff members had rather strong feelings on this matter.
The staff
viewed the green book as a confidential report to the Committee--as
an interpretative document in which it could assess the economic
situation candidly and could use whatever information became avail
able, including confidential data.
He thought it highly desirable
to maintain the green book's status as an intimate staff communication
to the Committee rather than to convert
could be released to the public.
it into a document that
The latter course would lead to
discussion of its contents in the press, to attempts to drive a
wedge between staff and Committee views, and to the drying up of
important sources of information.
The staff considered confidentiality
so important to the usefulness of the green book that it tried to keep
it out of circulation even within the Government.
In sum, he thought
11/10/64
-104-
that the value of the green book to the Comittee would be seriously
impaired if it were made public.
Chairman Martin remarked that Mr. Brill had made a valid
point.
Continuing, the Chairman said he thought today's discussion
had been particularly valuable because Committee members had spoken
so frankly.
He did not think the Committee should let this matter
drop, and he suggested further discussion at the next meeting after
conclusion of the regular agenda.
Mr. Swan said that today's discussion obviously had been
necessary, and he was sorry it had not taken place earlier.
Some
members thought the Committee could not agree on language in the
proposed new type of directive, and others believed that it could.
He suggested that the Committee plan at its next meeting actually to
go through the process of deliberating the trial directive to dis
cover whether agreement was possible.
Chairman Martin agreed.
He made the further suggestion that
each member review the trial directive chat had been prepared for
today's meeting and plan on indicating his points of disagreement
with it at the next meeting, along with making any comments he might
have on the new trial directive that would be prepared for that
meeting.
Mr. Mitchell suggested that the members make such comments
on today's trial directive in writing and mail them to the Secretariat
11/10/64
within the next week.
-105
The staff might be asked to distribute a
summary of these comments before the next meeting.
It also would
find them valuable in drafting the next trial directive.
He assumed
most comments would be on elements 1 and 2, but some also might be
made on elements 3 and 4.
It was agreed that the next meeting of the Committee would
be held on Tuesday, December 1, 1964, at 9:30 a.m.
Thereupon, the meeting adjourned.
11/10/64
Attachment A
CONFIDENTIAL (FR)
November 9, 1964
Draft language for current economic policy directive for
consideration by the Federal Open Market Committee at its meeting
on November 10, 1964
Alternative A
It is the Federal Open Market Committee's current policy to
accommodate moderate growth in the reserve base,, bank credit, and the
money supply for the purpose of facilitating continued expansion of the
economy, while fostering improvement in the capital account of U.S.
international payments, and seeking to avoid the emergence of infla
tionary pressures. This policy takes into account the apparent
underlying strength in current economic conditions, apart from the
effects of work stoppages in the automobile industry; indications that
the rate of increase in business capital spending may moderate in tne
coming year; relative stability in broad commodity price averages,
even though additional price increases have occurred in some materials
markets; and the recent reduction in bank credit and monetary expansion
from the high rates of summer. It also gives consideration to the
persistence of a sizable deficit in the U.S. balance of payments.
To implement this policy, and taking into account the
current Treasury financing, 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.
Alternative B
It is the Federal Open Market Comnittee'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 without inflation, while placing somewhat greater
emphasis on fostering improvement in the capital account of U.S.
international payments. This policy takes into account the under
lying strength in economic conditions, apart from the effects of work
stoppages in the automobile industry; persistent advances in some
materials prices, which have not, however, been reflected in the broad
commodity price averages; and the vigorous although recently some. hat
reduced rates of expansion in bank credit and the money supply. It
also gives consideration to the persistence of a sizable deficit in
11/10/64
-2
the U.S. balance of payments and the possibility of some adverse
effects on the deficit of the recent slowing down of economic
activity in Europe.
To implement this policy, System cpen market operations
shall be conducted with a view to achieving slightly firmer con
ditions in the money market than have prevailed in recent weeks
/, while_accommodating moderate expansion in aggregate bank
reserves/.
Cite this document
Federal Reserve (1964, November 9). FOMC Minutes. Fomc Minutes, Federal Reserve. https://whenthefedspeaks.com/doc/fomc_minutes_19641110
@misc{wtfs_fomc_minutes_19641110,
author = {Federal Reserve},
title = {FOMC Minutes},
year = {1964},
month = {Nov},
howpublished = {Fomc Minutes, Federal Reserve},
url = {https://whenthefedspeaks.com/doc/fomc_minutes_19641110},
note = {Retrieved via When the Fed Speaks corpus}
}