July 6, 1960

July 6, 1960 FOMC Minutes: Full Text

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 Wednesday, July 6, 1960, at 10:00 a.m. PRESENT: Mr. Martin, Chairman 1/ Mr. Hayes, Vice Chairman Mr. Balderston Mr. Bryan Mr. Fulton Mr. King Mr. Leedy Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Mr. Leach, Alternate for Mr. Bopp Allen, Irons, and Mangels, Alternate Members Messrs. of the Federal Open Market Committee Mr. Johns, President of the Federal Reserve Bank of St. Louis Mr. Young, Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Hexter, Assistant General Counsel Mr. Mr. Thomas, Economist Marget, and Tow, Messrs. Brandt, Eastburn, Associate Economists Open Market Account Rouse, Manager, System Mr. the Board of Governors Assistant to Mr. Molony, of Research and Koch, Adviser, Division Mr. Statistics, Board of Governors Finance Section, Mr. Keir, Chief, Government and Statistics, Board Division of Research of Governors Board of to the Chairman, Knipe, Consultant Mr. Governors in minutes. at point indicated 1/ Entered

Mr. Hilkert, First Vice President, Federal Reserve Bank of Philadelphia Mr. Hickman, Senior Vice President, Federal Reserve Bank of Cleveland Messrs. Mitchell, Daane, and Einzig, Vice Presidents of the Federal Reserve Banks of Chicago, Minneapolis, and San Francisco, respectively Mr. Willis, Economic Adviser, Federal Reserve Bank of Boston Messrs. Gaines and Black, Assistant Vice Presidents of the Federal Reserve Banks of New York and Richmond, respectively Mr. Holmes, Manager, Securities Department, Federal Reserve Bank of New York Mr. Meigs, Senior Economist, Federal Reserve Bank of St. Louis Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on June 14, 1960, were approved. there had been distributed to the members of Before this meeting market operations covering the period the Committee a report of open and a supplementary report covering the June 14 through June 29, 1960, of both reports have been 30 through July 5, 1960. Copies period June placed in the files of the Committee. since the Committee meeting With further reference to developments made the following comments: June 14, 1960, Mr. Rouse on Market Committee on of the Federal Open Since the meeting have been mixed, as the Manage June 14, open market operations effects of the mid-month to offset the easing ment first tried direction to provide then sharply reversed expansion and float funds to ease a tightening money market. The tightening ini pressures on concentration of reserve resulted from the tially June 15 tax date when there City banks following the the New York to and from New York, and especially were sizable flows of funds burden of financing Government security a quick shift of the

dealers to the New York banks as corporation repurchase agree ments expired on the tax date. Later in the period, funds were needed to meet the reserve drains associated with the July 4th holiday. The net effect of these reserve gyrations and off setting System actions was to maintain a generally easy tone in the money market. In the earlier phase, the Desk was able to withdraw funds readily without resort to the market through sales of Treasury bills to foreign accounts and bill redemptions; but the later efforts to supply funds through purchases of bills were more difficult and aggravated the trend toward lower bill rates. With this meeting scheduled today and the Treasury auction tomorrow, it was a most unpleasant surprise to have the weekend statistics greet us yesterday morning. Instead of free reserves of over $100 million for the week, we faced negative free reserves of $75 million and an enormous accumulated reserve deficit in New York and a moderate one in Chicago and only two days left in the statement week in which to repair the damage. Treasury balance, required reserves, and float were the principal offenders. Fortunately the securities markets were strong enough to stand it and in the end we were able to make some amends, but this morning's first estimate indicates only small free reserves, if any, for the statement week on average. The Treasury's offering of $3.5 billion of tax bills for auction today may eventually relieve some of the downward push on bill rates. The prospects are for a successful auction with substantial bidding by commercial banks interested in the Tax and Loan credit, with rates mentioned in a wide range of 2.55 per cent to 2.80 per cent. In another move which will affect the bill rate structure, bill auction changed the relation the Treasury in last week's bills, increasing the proportion of ship of three- and six-month bills in the total. As a result, the spread between six-month in Friday's auction widened and six-month bill rates the threeto about 50 basis points. event in the Government securities mar An interesting new $19.8 million of District of ket is the offering tomorrow of due in 1979, callable in 1970 and after, Columbia Stadium Bonds, which are fully guaranteed as to interest and principal by the these bonds were estimated States Government. Originally United have been fully exempt from $6 million and were to at about of municipal dealers and several syndicates Federal income tax, purposes. The underlying therefore organized for underwriting were changed to make the bonds fully taxable, statute was subsequently preparing to bid. syndicates are apparently but the same municipal

Some of these syndicates include Government securities dealers. Had it been set up originally as it turned out, some of the Government securities dealers would have submitted individual bids. Yields around 4.40 per cent to 4.45 per cent are mentioned. We believe the bonds will be traded in the secondary market as distinct from other Treasury issues, in the same way as Merchant Marine bonds which are not widely traded or quoted by Government securities dealers because of their relatively small size. Mr. Leach referred to a statement on page 2 of the report of open market operations for the period June 14 through June 29, 1960, which indicated that by the end of the period under review strong investor demand, augmented by System purchases, had brought rates on the 91-day and 182-day bills to 2.14 and 2.58 per cent, respectively. He also noted from page 6 of the report that on June 24, with foreign accounts buying heavily, it was decided that a go-around would have an undue impact on purchases were limited to bills offered by rates and hence System Account during the day. He noted further that dealers on their own initiative had stated that efforts in in his oral comments this morning, Mr. Rouse, purchases of bills to supply funds through part of this period the latter lower bill rates. the trend toward difficult and aggravated were rather of bills had an said, that the buying indicate, Mr. Leach This seemed to in the past. He so than it had had on rates, more unusually strong effect at some times to buy it would seem advisable of Mr. Rouse whether inquired other short-term securities. Account purchases question System replied that without Mr. Rouse on bill rates, although the downward push required had aggravated in the size would have as so that they conduct its operations had tried to the Desk

small an effect on such rates as possible. He vent on to point out that the commercial banks held only about $2.5 billion of such securities at the present time, approximately the same amount as held in the Account portfolio. Therefore, banks were now adjusting their reserve positions through the use of other short-term securities to a considerable extent. In such circumstances, he felt that it would be helpful to deal in short term securities other than bills on certain occasions. Vice Chairman Hayes said that Mr. Leach's question was an appro priate one and that if the members of the Committee should see fit to bring it up during the discussion of policy, it would seem quite reasonable to do so. Thereupon, upon motion duly made and seconded and by unanimous vote, the open market transactions during the period June 14 through July 5, 1960, were approved, ratified, and confirmed. with regard to economic the following statement Mr. Koch presented developments: the last meeting of this chart show presented at Since the developments over a on the course of economic Committee focused my remarks today on longer period, I shall concentrate somewhat about the current and what they suggest more recent developments facts confirm our earlier In brief, recent state of the economy. at a high, probably activity is continuing judgment that economic little upward momentum. although currently showing a record level, staff economic memoran tone in the detect a little firmer I think I dum prepared for this meeting. in June will probably production index Thus, our industrial which was 1 of 110 per cent, the May level little change from show indicators of the leading In addition, above April. per cent year, have strengthened early in the which were weak cyclical change,

somewhat since March. In this connection, however, it should be stressed that recent changes in these indicators have been small, and they have been shifting erratically from month to month. Finally, the gross national product in the second quarter apparently showed a slightly larger advance over the first quarter than had been expected. This modest raising of our sights on the second quarter gross national product is due mainly to a somewhat greater seasonally adjusted annual rate of inventory accumulation than had been anticipated. Earlier we had been thinking that the rate of accumulation might be about $3 billion in the second quarter, as contrasted with the nearly $11 billion in the first quarter. Now it looks as if the second quarter rate might have been in the neighborhood of $5 billion. Also on the favorable side, retail sales of automobiles and consumer goods in general rose in June, following declines in May. New orders received by durable goods producers increased slightly in May, owing mainly to a fairly large gain for aircraft. Average hours of work also firmed somewhat. An important recent development observable in the labor field is that the increase in industrial wages has slowed down to a pace significantly slower than in earlier periods markedly This tendency toward smaller wage in of high level activity. is illustrated by the recent settlement for operating creases This settlement involved in the railroad industry. employees over a two-year period and a wage increase of 4 per cent a discontinuance of the esclator clause. prices declined slightly in In the price field, wholesale items and some as lower prices of industrial May and early June, for processed foods. than offset higher prices farm products more slightly further in on the other hand, increased Consumer prices, rise in April. In May, they were May following a somewhat larger recent rise in consumer a year ago. The cent higher than 1.9 per trend in prices for the continuing upward prices has reflected in food prices. seasonal increase more than and a somewhat services tensions in the to note that increasing It is of interest collapse of the summit as a result of the international situation expressed in several foreign anti-U. S. feelings being talks and appreciable effect not had any thus far apparently countries have is supported This conclusion inventory developments. on price and expressed by pur but also by recent views not only by statistics chasing agents. the economic picture, side of the less favorable Turning to a leading unemployment compensation, claims for in June initial adjusted on a seasonally rose slightly market indicator, labor

basis. The level of unemployment, around 5 per cent, continues high for the current phase of the business cycle. Steel mill operations have declined further, falling from 71 per cent of capacity in May to an average of 60 per cent in June and to 53 per cent last week. The seasonally adjusted rate of total construction outlays declined in June and was 7 per cent below the all-time high reached in May last year. Although private housing starts held steady in May, additional reports have appeared of surplus housing in scattered areas. Defaults on home loans and foreclosures on nonfarm real estate have also been rising but, it should be noted, both still represent a small proportion of new mortgage lending or debt outstanding. Finally, the latest National Industrial Conference BoardNewsweek quarterly survey of appropriations for plant and equipment spending by major manufacturing companies has been interpreted as indicating that although outlays will continue strong throughout this year, some softening may develop early next year. Thus, although economic activity continues fairly high, un certainty about its future course is widespread. Some observers talk of the imminence of cyclical contraction; others of what Mr. Fulton so graphically characterized as "deteriorating stagnation" a meeting or so ago. On the other hand, still other observers take heart in at least certain aspects of the reduced current rate of increase in economic activity. They feel that the generally orderly adjustment from the unsustainably high rate of inventory accumulation early in the year and the avoidance of speculative imbalances and excesses generally associated with the culmination of a boom have strengthened the chances for a more sustained period of prosperity. remarks Chairman Martin entered the During the course of Mr. Koch's meeting and assumed the Chair. Mr. Koch said that the to a question by Mr. Balderston, In response relatively moderate in comparison accumulation was still volume of inventory with sales, and that the increase had been somewhat less than during the Recent increases had been of the previous business cycle. comparable period inventory situation was inventories, but the in finished goods concentrated other postwar cycles. similar phase of shape than in the in better

Mr. Thomas then made the following statement with respect to financial developments: The past four weeks have been a period of large and varied seasonal pressures on money and credit markets. These were due at first to usual June tax, dividend, and other settlements and then to holiday currency demands. Treasury financing operations and rather large shifts of foreign funds added to the complications. Viewing the period as a whole in perspective, bank reserve positions were kept relatively easy by large-scale Federal Reserve operations and money rates remained low. Yet pressures were felt in the market. Around the middle of the month when temporary liquidity demands were at their maximum, Treasury bill rates increased somewhat. Dealers took on a very large volume of Government securities, mostly bills, and increased their borrowings. Banks had to supply much of these credit needs and at the same time meet loan demands of businesses and finance companies customarily heavy at that time. Required reserves increased substantially. Reserves were supplied temporarily by a sharp increase in float. System operations--mostly runoff of maturing billsactually absorbed reserves in that week. Member bank borrowings on balance the banks continued to show net increased, although free reserves. Most of the excess, however, was at country banks, while city banks, where the credit demands centered, their borrowings at the Reserve Banks. Federal had to increase available than they had been. funds were less readily In the last two weeks of June, loans and investments at were reduced. In the latest week banks sharply re city banks the Federal Reserve and from duced their borrowings--both from was aided by a resumption of Federal others. This easing have continued on a large scale this Reserve purchases, which Treasury bill rates again turned down, week. characterized by a sharp drop in The month of June was interest rates to the lowest levels since early 1959. Except are lower than at Treasury bill rates for the summer of 1958, on medium- and long-term time since early 1956. Yields any in June but not as much as short-term issues also declined above any levels reached and they generally continue rates, before 1959. the easing reserve interest rates reflects This decline in Federal Reserve discount the reduction in of banks and position as the more fundamental in June, as well rates that occurred

forces that had been in process earlier. These include principally the changed position of the Federal budget from large deficit to small surplus, moderation of private credit demands, the lessened fear of inflation, and the shift of the public's liquid asset holdings from cash to securities. Credit demands in June were moderately large. New capital issues both by corporations and by State and local governments--totaling $1 billion or more each--were larger than in any other month of 1959 and 1960. The aggregate for the first half of the year, however, was less than in the two previous years. Offerings by finance companies, however, have been much larger this year than in those years. Borrowings at banks by finance companies, though somewhat less than last year, appear to have exceeded those of most other recent years, both in June and for the year to date. Loans to other businesses by city banks, although moderately large in June, were not as great as in most other recent years. The same may be said of total loans at city banks. These banks showed a further small decrease in their holdings of U. S. Government securities during June. Total loans and investments increased more than in June of 1959, much less than in 1957 and 1958. 1956, and 1955, though It appears that both demand and time deposits increased somewhat more than seasonally during June. It is unlikely, however, that the rise was sufficient to offset the sharp drop in the money supply during May. Treasury balances at banks continued at a high level and are expected to be main the weeks ahead generally above the levels of last tained in year. The Treasury's borrowing needs in the next half year will be much smaller, with less frequent financing operations, the same period of 1959 and 1958. than in in the past few days should be more System operations to cover any normal seasonal reserve needs than sufficient except for temporary variations. for the next three months, how much additional stimulus to be considered is The question banks will be called It is doubtful whether should be provided. to expand loans or should be encouraged upon, will be willing, amounts in the months than customary seasonal by much more of business inventories of the current level ahead. In view loan demands may not position of businesses, and the liquidity at a have already increased heavy. Loans be particularly are such as to loan-deposit ratios good rate and bank fairly in seeking new loans. Encourage as some restraint on banks serve speculative or might lead to greater loan expansion ment for

unsustainable commitments, although in the present economic climate this does not seem likely to be a serious threat. Supplying banks with additional reserves in excess of usual seasonal needs or likely loan demands would enable them to reduce borrowings or increase their holdings of Government securities--or at least cease their liquidation of such holdings. Since the Treasury will be a seasonal net borrower in the months ahead and bank deposits should expand seasonally, some increase in total bank credit is to be expected. One question is whether the public generally will want to discontinue or reduce its recent proclivities for economizing on cash and increasing holdings of securities. Unless this trend changes, additions to bank reserves and attempts by banks to expand their holdings of securities may result in further declines in short-term interest rates. Unless credit demands strengthen, it may be difficult to effect a greater than seasonal expansion in the money supply without some further reduction in interest rates. Mr. Marget made the following statement with regard to the United States balance of payments: In the six weeks that have elapsed since I last reported to this Committee on developments in our trade position, we have received the full trade figures for April and the pre liminary figures for May. These figures--to borrow the adjective used in one of the newspaper comments on them--are "heartening." First, there is our export performance: the critical area, certainly, for all of us who wish to see a solution of our bal ance-of-payments on expansionist, rather than contractionist, lines. On a seasonally adjusted basis, exports in April and May averaged an annual rate of more than $19 billion. This rate was about 4 per cent above the average for the first quarter of this year and 23 per cent above the low of a year earlier; indeed, it rate since the middle of 1957, a year in which we was the highest ran an over-all surplus in our balance of payments. Moreover, al lack details on exports for May, the breakdown for though we still April showed that the rise in exports was spread widely over major Thus, although the largest increase over the commodity groups. past year has been in agricultural products, mainly reflecting the falling off in cotton exports since higher cotton shipments, more than made up by the increased early this year has been foreign demand for U. S. nonagricultural products. In April,

for example, the largest increases were in the very area in which most concern had been expressed about our ability to maintain a competitive position--in machinery and equip ment (particularly transport equipment) and in metals (par ticularly steel). Indeed, the exports of machinery and equipment were well above even the peak rates recorded in the peak-export year 1957. Secondly, our import performance has been such as to contradict the expectations of those who have suggested that any gain in our exports was likely to be offset, or more than offset, by a corresponding increase in our imports, so that we were not in fact likely to achieve the sizable surplus in our current accounts which we need in order to keep our over all balance of payments in equilibrium if we are to continue to maintain a large program of foreign aid and foreign invest ment. Actually, our imports, while they have been fluctuating erratically from month to month since last December, have, if anything, fallen somewhat since that time. In April and May, for example, they averaged $15 billion at an annual rate: about the same as in the first quarter of this year, but 3 per cent below the average for the fourth quarter of last year. And again the distribution of imports has been such as to en courage the hope that some success is attending our efforts to competitive situation in the world which some face up to the new of us feel is the basic reason for the existence of our balance of-payments problem altogether. Certainly cyclical factors, and special factors such as last year's steel strike, as well as longer-term "competitive" factors lie behind the heavy concentration of the decline, in our imports, of steel and other metals, with below last year's fourth-quarter steel imports down about one-third evidence of an improvement in our com average. But it is surely the imports of new automobiles should also petitive position that down from the fourth quarter, and that in May be significantly one-fourth below the level of a should have been as much as they year earlier. and with im slowly, but steadily, increasing, With exports the result can only if anything, a slight decline, ports showing, balance; and in fact the figures been an increase in our trade have and May do show an improvement in that trade balance by for April But there has not been billion at an annual rate. more than $1/2 we take as a measure in the figure which a comparable improvement in our over-all balance of payments: namely, the of movements and dollars. On movement of gold figure for the international for May are still the data it would appear--though the contrary,

incomplete--that, despite the increase in our export surplus of $1/2 billion, annual rate, in our trade account, we were still running an over-all balance of-payments deficit close to the first-quarter seasonally adjusted annual rate of $2.8 billion. The explanation, quite obviously, lies in capital movements--including, of course, such movements as have been induced by the widening of the spread between the interest rates prevailing in the respective monetary centers. But the rest of the evidence, surely, is such as to indicate that, if matters continue to go as they have been going, this is something that we can take easily in stride. Gold movements, for example, while they amounted in the second quarter of this year, at $85 million, to somewhat more than they were in the first quarter, were $300 million less than the purchases of foreign countries in the second quarter of 1959; and these, in turn, were con siderably lover than they had been in 1958, the year of massive gold-outflow ($2.3 billion) which first awakened the country to the existence of its balance-of-payments problem. What will be decisive, in fact, for the future will be the extent to which we can continue to provide evidence of adjustment in the most intractable part of our balance-of-payments problem: namely, the trade part. It was in the trade sector that our balance of payments showed its greatest deterioration; it is in the trade sector that we find the most encouraging evidence of movement in the of adjustment. It has been the improvement in the direction trade sector that has offset the otherwise "unfavorable" sector; it will be to further improve movements in the capital ment in the trade sector that observers, including the foreign dollar balances, will look for evidence that the holders of policies being followed in the United States, including its are consistent with that attainment of balance monetary policy, to which we stand committed. in our international accounts of his view, on the the following statement Mr. Hayes presented business outlook and credit policy: It seems to me that we are on the right track with respect being patience and and that for the time to monetary policy are called for above all else. steady nerves situation to suggest that is nothing in the business There or that it is action was premature discount rate the recent

likely to need to be reversed in the near future. On the other hand, while recent business statistics are only mildly encouraging, they do point to the likelihood of some modest expansion in the second half of the year. Consumer spending is the most hopeful source of this second-half improvement, and in this connection it is encourag ing that the disappointing May performance of retail sales now seems attributable mainly to the late date of Easter rether than to a weakening of demand. In the construction area, easier availability of mortgage funds suggests that an upturn in residential construction may be in the making--although this stimulus may be less effective than it has been in similar situations since World War II be cause the demand for and supply of housing are now clearly in closer balance than in many years. With the prospect of con tinued strength in private nonresidential construction and an improved outlook for the highway building program, total construction should be an element of strength in the second half. Nonfarm wholesale prices experienced an unusually sharp drop in May, and the wholesale price index as a whole may show a decline for June. The recent small rise in consumer prices appears of relatively minor significance, attributable as it is very largely to seasonal food price changes. As for bank credit developments, the growth of business loans slackened somewhat in June after a performance in the earlier months of the year roughly comparable with the experience of earlier expansion years. However, while the tax period failed to bring forth any particularly sharp rise in business loans, there was a very marked gain in both security loans and loans to finance companies. The inference is that corporations have been turning less to their banks for tax funds than to the dis position of short-term government securities, including those held under repurchase agreements, and finance company paper. Total loans at weekly reporting banks showed a strong increase in the first three weeks of June, and with security holdings changing very little, total bank credit scored a sizable gain. During the same period required reserves have risen by about any recent year of more than in million, or substantially $350 business expansion, financing has been exceptionally heavy in the New municipal While this has caused some indigestion in past three weeks. circles, there has been no basic weakening of bond underwriting market has been relatively quiet. prices. The corporate new issue are somewhat higher than three weeks ago. Stock prices

The outstanding economic characteristics of the period ahead are likely to be ample productive capacity, an unemploy ment ratio of around 5 per cent, and better balance between the supply of and the demand for investment funds. Resumption of inflationary pressures in the current period of expansion has become a steadily less likely prospect. On the other hand, we cannot overlook the sharp divergence of business conditions here and in Europe, and the difficult question as to what extent European monetary policy measures and financial developments may require review and adjustment of our own domestic credit policy. All in all, it would seem appropriate to continue the relatively easy policy we have been following for the past month t or so. As brought out in Mr. Gaines memorandum already distrib uted to the members of the Committee, recent data suggest that we are now getting the growth in the reserve base that we have wanted, and it appears likely that the money supply also turned upward in June. This is all to the good. However, I feel strongly that at a time like the present, when the evidence does not clearly support the need for easier money and lower interest rates, the possibility that there may be adverse effects on the balance of payments from lower domestic short-term interest rates should be given some weight. In addition to movements of funds to Germany for other reasons, some short-term funds are moving out of the United States in response to present rate differentials--and while these move ments have not resulted thus far in an appreciable outflow of gold, we must keep in mind possible effects both here and abroad if such a flow were to develop on a substantial scale. I am concerned over the prospect that the sizable open mar ket operations needed to supply reserves through the remainder of the year are likely to drive bill rates even lower than they now are if operations continue to be restricted to bills. months represent a period when the Perhaps the next few be given greater leeway in the selection Manager might appropriately has usually accorded him. It of securities than the Committee seems to me that if he were permitted to operate freely throughout his attention to bills, short-term area, instead of confining the which happened to be available could acquire those maturities he rates of any actions the impact on short-term and might minimize that since commercial banks base. I might add aimed at the reserve on short-term securities a considerable extent have been relying to there is a money market adjustments, than bills for their other the scope of our operations basis for our broadening very logical our operations in help us to adjust direction. It would in this tight commercial the paradox of a relatively order to deal with the nonbank sector. ease in by side with relative system side banking

I think the discount rate and the directive should be left unchanged. Mr. Irons said that conditions in the Eleventh District were not too much different from three weeks ago, although perhaps the shading was toward a little more strength. The situation was relatively favorable, taking into consideration the drag of the petroleum situation and some cutting back in defense expenditures at aircraft plants. Department store sales improved in June and retail sales generally were a little better, although cumulatively they were running somewhat below the figures of 1959. New car registrations were 3 or 4 per cent above a year ago. Production of crude oil was still running about 8 per cent below a year ago, and this was having an effect on drilling, which was off 15 or 20 per cent, but refining was up. Employ above last year, and unemployment was around 4.5 per cent in Texas. ment was ago. Upon adding up all of these was a little above a year Construction within 2 to 3 per cent of the record high factors, one came out somewhere had improved lately. While the rainfall levels. The agricultural outlook some parts of the District, on the whole the was excessively heavy in situation was quite favorable. District banks had a in the past three weeks Mr. Irons said that increase in and a fairly sizable increase in deposits fairly substantial bankers to feel on the part of was some tendency He thought there loans. were not being pur a bit. Federal funds positions were easing that their from the Reserve the case. Borrowing as had been as large amounts chased in

Bank, relatively high on some days, on average was fluctuating around $25 to $28 million. A number of smaller banks in the agricultural sections were borrowing for seasonal purposes and probably would be borrowing for another couple of months. Mr. Irons went on to say that, on the basis of his contacts, the attitude of businessmen seemed neither highly optimistic nor highly pessimistic. They were looking for a little more improvement in the last half of the year, but not much difference. On the other hand, they were not anticipating any sharp decline, even in the oil industry. On the whole, the District showed relatively favorable conditions at this time. There would be the summer doldrums, as always, but that could not be avoided and should not be a cause for panic. Mr. Irons said that in view of current uncertainties and the state he would maintain about the same degree of ease that of business activity, would favor a moderate amount of been the Committee's objective. He had While he would lean toward somewhere around $50 million. free reserves, he would not force ease to meet seasonal requirements, providing reserves operations. He would avoid aggressively through open market on the market provide for seasonal requirements, but tightening and, as he had said, amount of free reserves. pushing up the avoid of free reserves, Mr. a given amount In the process of maintaining ease con providing additional possibility of there was the Irons noted, provision of were used, the made available the free reserves tinually; if

more to maintain a given amount of free reserves might mean a continuous easing. This he would avoid. He would take no overt action, no definite action that would point one way or the other, and instead would try to continue to fluctuate around a neutral position. He would not favor changing the discount rate or the directive. Mr. Mangels said that latest available figures showed Twelfth District employment down .2 per cent, while unemployment, which had been running a little less than 5 per cent, increased to 5.5 per cent. Employ ment had declined in the lumber and aircraft industries as well as in food processing plants in California and the Northwest. Also, there had been a cutback in Government employment of about 10,000 persons upon the com pletion of the census-taking. Construction in May was up 5 per cent from was down 17 per cent from a year ago; total construction contracts April, but 6 per cent below the 1959 period. Steel production for the year to date were for the month of June but was down to 63 per was at 66 per cent of capacity to think that in the next week. The industry seemed cent in the latest some upswing in production, because two there might perhaps be month or from the mills. The lumber industry use was in excess of shipments final new orders and shipments with production below was still in the doldrums, but at a low level, Prices had stabilized, being made from inventories. agriculture, there point. In at the break-even in some cases virtually Washington, Oregon, Idaho, and much rain and cold weather in had been too water and some a shortage of irrigation Nevada there was Utah, while in

reservoirs were already depleted. Dry weather in California was holding down yields of wheat and barley, although in the irrigated areas there was still a sufficient water supply. In California the farm labor situation was still uncertain, with the unions continuing their efforts to organize the farm workers. This might have a detrimental effect on the peach and tomato canning crops. Department store sales for the four weeks ended June 27 were about 5 per cent below a year ago, while auto sales in California for the first two weeks in June were below May, which in turn was 15 per cent below April. said that loans of District banks increased somewhat Mr. Mangels in the four weeks ended June 22, although real estate loans were down $41 deposits increased slightly, and time deposits were up million. Demand increase in savings deposits, but nominally. There was an $85 million about what might happen in the in California were much concerned bankers crediting of interest at days of July following the first ten or fifteen advertising 4-1/2 per With savings and loan associations the end of June. the banks were antici dividends on share accounts, cent and 4-3/4 per cent Borrowing from the drop in savings deposits. quite a substantial pating banks. City banks borrowing by country was nominal, mostly Reserve Bank transactions in rather funds market, with in the Federal were quite active large amounts. District was in the Twelfth that the observation Mangels said Mr. although there economic activity, weakness in of increasing one of a pattern

were no clear signs of a general turndown. At the recent business out look conference, it was the consensus of the 18 participants that there probably would be little change from the present level of business activity in the near future. They did not expect that present areas of weakness would be expanded, but they saw nothing in the picture that would increase the over-all pace of business activity in the Twelfth District area. Banks were still being selective in reviewing applications for credit and felt that their positions were tight. They were concerned about loan-deposit ratios. Mr. Mangels felt it would be helpful if the System were to supply needs. In doing so, he would go along with reserves in excess of seasonal Desk try to stay away somewhat from the suggestion of Mr. Hayes that the low bill rates. Mr. Mangels also Treasury bills because of the present further consideration to the release that the Board might give suggested free reserves some would like to see net vault cash. He of additional million. He saw no perhaps as high as $200 where above $100 million, rate or the directive. to change the discount occasion three weeks had not of the past Allen said that developments Mr. business trend. to make out the underlying to him in trying been helpful of activity in steel, the low rate considered, particularly All things but with summer on the whole, pretty well to be doing economy seemed the weeks to wait for several necessary to it might be appeared that here it or the other. one way moving decidedly business was determine whether

Retail trade in the Seventh District area was on the whole satisfactory but spotty, Mr. Allen said. Cash receipts from farm marketings in the first five months were about 2 per cent below the same period of 1959. However, hog prices had increased recently to the highest level in a year and a half, and a further rise was expected by the end of the summer because the spring pig crop was 16 per cent below that of last year. Mortgage lending terms in the Chicago area had shown no signs of easing, and that appeared to have been the case nationally. However, an analysis of the supply and demand for long-term funds suggested that rate cuts might be in prospect. Savings had been running about as large as last year, but the demand for long-term money was substantially lower. Nevertheless, spokesmen for the savings and loan associations were insisting that mortgage rates would hold firm, just as commercial there was any likelihood of an early reduction bankers were denying that in the prime rate. Mr. Allen went on to say that automobile sales for the last ten estimated at around 26,000 per day, which would be very days of June were period of 1959, and would mark the first good, but a little below the same below year-ago levels. Pro year that daily sales had fallen time this 3,800,000 and sales six months was approximately duction for the first the high inventory of more than 1,000,000 about 3,200,000, accounting for reduced, and August was was currently being cars on June 30. Production 1,140,000 cars would Estimates were that to be the low month. expected

be made in the third quarter and 1,600,000 in the fourth. Adding those figures to the first half, the year's production would be 6,540,000, or 17 per cent more than the 5,594,000 total for 1959. It seemed important to note, however, that the forecasts called for less auto production in each of the remaining quarters than was achieved in either the first or the second quarter of the year. In the field of monetary policy, Mr. Allen said he concluded that it would be advisable to mark time for the present. For one thing, the trend of business activity was not clear. Furthermore, Treasury financing was in process. He would not favor changing the discount rate or the directive. Mr. Leedy said that conditions in the Tenth District on balance tended to be favorable. The winter wheat harvest was nearing completion that production this year would be even higher than and it now appeared was estimated by the Department of Agriculture as of the first of June. cash receipts of farmers were first four months of this year During the with the improvement in the wheat situation, lower than last year. However, and a volume of cattle marketings better pasture and range conditions, it appeared that lower level of prices, large to offset the sufficiently be larger than cash receipts would half of this year during the second during the last half of 1959. employment situation say that the District went on to Mr. Leedy a strike against last year, notwithstanding than at this time was better

construction contractors in the Kansas City area that had resulted in about 17,000 unemployed. Except for Kansas, each State in the District showed a higher level of employment than last year. Department store sales during the latest reporting period were about 5 per cent above the corresponding period of last year, although the cumulative figure for the year to date was about 2 per cent under last year. District banks had experienced an increase in demand and time deposits, Mr. Leedy said. There had also been an increase in business loans recently, although the rate of growth in those loans this year was somewhat lower than last year. Mr. Leedy said that in view of the Treasury financing he assumed that an even-keel policy would be followed in the period immediately ahead. He assumed there would be some need for supplying additional reserves incident to the financing, but beyond that, and beyond supplying what might be needed in the way of seasonal requirements, it seemed to him that the System should not be pushing funds into the market. The bill rate, and the way it had been trending, was something that should be watched carefully, and the fact that the Federal funds rate during the to such a low level was another factor that should be recent period got In brief, it seemed to him that the Committee had taken into account. desired to bring about at this time. In the about accomplished what it that the Committee need not ahead, it was his view period immediately required to see that funds other than those attempt to supply additional accomplished and seasonal needs were met. the Treasury financing was

Mr. Leach reported that there had been ups and downs in recent business developments in various industries and areas of the Fifth District but no indications of any fundamental departure from the high levels that had prevailed since April. Indicative of aggregate strength in May was the slight rise in manufacturing man-hours, seasonally adjusted, to the highest total in 12 months and the maintenance of non-agricultural employment, also seasonally adjusted, at the record level reached in the preceding month. The prosperous cotton textile industry had lately gained strength in one of its weaker areas--industrial fabrics. On the other hand, the furniture industry, which did a record business during the first five months of the year, had suffered a definite slowdown marked by shrink ing retail sales and a slow pace in factory orders. The widespread lumber industry faced slow summer prospects after a spring which lacked the usual seasonal liveliness. Cigarette consumption continued its upward trend, and were holding up well. Projects in contract awards for new construction and public facilities were and modernizing business process for expanding and income in the District. significantly to employment contributing seemed to have eased some of the larger District banks Positions said. The rate of meeting, Mr. Leach since the June 14 Committee what at the discount a little, borrowings had slowed investment liquidation net sellers of Federal banks had been and money market window had dropped, from the Reserve country bank borrowings rapid decline in funds. The less city banks had easing at reserve that the slight suggested, however, Bank to country banks. not yet spread

With respect to policy, Mr. Leach said the easing actions that had been taken seemed to be having desirable effects, and he thought it would be advisable to mark time for the next three weeks. It was hardly possible that the System could add to reserve availability without affecting interest rates, and he saw nothing to be gained through forcing short-term rates even lower. Moreover, the Treasury financings that had been announced called for an "even keel" during the major part of the period. He would not recommend a change in the directive or in the discount rate. The question he asked Mr. Rouse at the conclusion of the latter's report this morning indicated that he had been thinking about of buying short-term securities other than bills. The the advisability had been given by Mr. Hayes. Mr. Leach knew reasons for such a change the Committee should not modify its practice of no convincing reason why in the light of changed conditions. the reports presented to the Mr. Mills said that in weighing a balance sheet of the he had tried to strike Committee at this meeting factors that were working through (favorable) and minus (unfavorable) plus the balance sheet to a postscript to In doing so, he added the economy. believed that the economy attitudes of those who give effect to the personal cycle and those--if intermediate business through an was moving sideways was commencing to believed the economy were those like himself--who there In striking that business cycle. the peak of a major move downward from would be that accepted position the most generally sheet, he found balance

the economy was idling in neutral, without any forward thrust, which raised a question as to what the function of monetary and credit policy should be in such a situation. Personally, he believed that the System should stay about where it was, supplying reserves to a degree that would allow a comfortable working of the commercial banking mechanism by way of a modest volume of free reserves. While it would be desirable to accomplish that purpose without unduly disturbing the interest rate structure on the downside, he could find in his thinking no reason to liberalize the authority of the Desk to operate in other than bills. In the immediate offing there would be a substantial addition to the supply of bills in the market, and the Board of Governors had available to it the means for influencing directly the supply of reserves if it saw occasion to do so. As to policy in the immediate future, Mr. Mills said that looking at the projections of the movement of reserves and being conscious that, put it, they could and had in the recent past gone awry, as Mr. Rouse had the commercial banks in reserves necessary to support he felt that the today might well be left of the tax bills being auctioned their acquisition for providing reserves for a their disposal. A mechanism was afforded at to remain in the banking structure, purpose that could be permitted definite further overt moves having to take money supply, without in support of the to change the dis He saw no occasion the supply of reserves. to sustain count rate or the directive.

Mr. Robertson said he saw nothing in the economic picture to warrant any change in present policy which, in his opinion, was as nearly on the right mark as one could get it. He agreed with the sug gestion of Mr. Irons that the Committee should not permit its policy to result in forcing reserves into the picture, but he saw nothing in the next three weeks that would bring about such a situation. Conse quently, he would adhere to present policy. He would not change the directive, nor would he take any overt actions. Mr. Shepardson said that, since he was just back from a trip to Europe, his view of the domestic situation was confined largely to the staff reports. He felt, however, that the System was in a fortunate position at the moment in the light of the general state of the economy of activity, current and prospective. System policy had and the level saw no reason to change at the moment. He agreed been effective, and he with the suggestion that the System limit its supplying of reserves to Also, particularly in the needed to meet seasonal requirements. those overseas, he would agree wholeheartedly with light of recent contacts market rates that would push short-term of avoiding action the idea purpose to be served by that further, for he saw no particular down policy or in no change in present He would recommend at this time. the directive. little or no those who foresaw he agreed with Mr. King said half of the the last activity during in general economic improvement the coming elections preoccupied with community was The business year.

and the direction in which the country might go as a result, and in his opinion the economy was likely to stay during this period in the kind of stagnation to which Mr. Fulton had referred at a recent meeting. The economy was not quite stagnant, but it had been in the doldrums pretty much throughout the year. Mr. King also said that he did not think any purpose would be served by pushing short-term rates lover. The comments about supplying additional reserves puzzled him somewhat; he did not think the question was so much one of supplying reserves as whether, if ease should develop, it ould be mopped up through open market operations. Personally, he free reserves from $100 million up to $300 million, and would favor to fluctuate to a considerable extent. allowing the free reserve figure that it should be modest. As he there was any mopping up, he felt If weeks was principally whether the question for the next three saw it, He would cast his own vote on the the System should sell securities. Account protfolio and little from the of disposing of relatively side category, for he $100 to $300 million reserves in the permitting free upsetting the precarious most to not that this would contribute felt balance of the economy. in the feeling of uneasiness reported a widespread Mr. Fulton at fairly high businesses operating even among those Fourth District, at depression was operating the steel industry The fact that rates. also an effect and on other industries had an effect levels at present

on the employment and unemployment situation. This week, in view of the holiday, the mills elected in many instances to close and give paid vacations to their workers. The order books in both the steel industry and the machine tool industry were reported to be disappointing, and shipments were larger than new orders. A principal question was how long the auto industry could manufacture cars out of inventories that were supposed to be limited a little while back. If the auto industry did not order metal this month, any improvement was going to be delayed substantially because the mills must pour steel this month to make delivery in August. Tin plate was still going well, but the canning companies were requiring the mills to carry inventories. One heartening factor was that some cold-rolled strip and some sheet steel was being exported to Europe; some English and German auto manufacturers were buying limited quantities, Appliances were in more than adequate plants had closed down to work off inventories of supply and some situation was not good, particularly consumer goods. The employment in the steel centers. The mills reported many workers on a four-day was being given to cutbacks in supervision, week, and consideration a last resort action. which was almost were being maintained in Fulton said that retail sales Mr. quite brisk in June and depart New car sales were fairly good shape. about 3 per cent. Building above last year by ment store sales were high level reached in May. declined somewhat from the activity had

Mr. Fulton went on to say that borrowings from the Reserve Bank, which had been running considerably below last year, at only about 2 or 3 per cent of the System total, had increased recently. He noted that total borrowings from the System were being maintained at around $400 million, which in his opinion was a little high for a period in which the Federal Reserve was trying to inject some ease into the reserve situation. Loan demand was reported to be strong at most District banks. The demand was heavy for capital improvement loans and there was a fair-sized volume of term loans for which the banks had committed themselves previously. There was a fair demand for mortgage loans. The statement was heard that the rate situation was not the real deterrent to the sale of houses; rather, that there was a situation of overbuilding in some areas and that people wanted less costly houses. Mr. Fulton expressed the view that the need for reserves that he felt existed should be met by the System, and he added that he would be inclined to favor releasing some additional vault cash to be counted as reserves. It seemed to him that the Desk had been striving to be quite a free reserve figure of around $50 million. He precise in maintaining greater fluctuation in that figure, feeling that would be favorable to a than a maximum and as a minimum rather million should be regarded $50 to go as high as $150 million, with that free reserves should be allowed million. A result of the precise between that point and $50 fluctuations also had been pressure a figure of $50 million ness in trying to maintain

on bill yields on various days when the Desk felt it necessary to supply reserves. To repeat, he believed that $400 million of borrowings, which had been quite consistent, was too high, and he would furnish reserves in somewhat greater volume, feeling that the current hesitancy needed an indication that the System would supply all the reserves that were legiti mately required. He would not favor changing the discount rate or the directive. Mr. Hilkert commented substantially as follows: Business in the Third District has shown little improvement. Employment is not encouraging; there has been a noticeable slack ening of department store sales; production of durable goods is off; and carloadings have declined. Hours worked in manufacturing plants in May showed wide spread drops in comparison to the equivalent period of 1959. The May figures are better than those for April, but this is partly because manufacturing employment decreased. Unemployment claims, both new and continued, have leveled off at rather high totals since early in 1960. Production statistics are not encouraging. The steel rate is down to 61 per cent of capacity. Electric power consumption increased slightly in May. The increase was entirely in plants producing nondurable goods. Durable goods producers in May con sumed less power than in April, and 6 per cent less than in May freight carloadings (Philadelphia 1959. Pennsylvania Railroad's been under last year's figures for many weeks. region) have contract awards, after rising sharply in April, Construction May, so that for five months in 1960 awards in dropped again in by slightly more than is true our District are under 1959 totals for the nation. sales declined more than seasonally in May, Department store June. There have been the first half of and remained low through two weeks, however. in the last increases sluggish business situation, our In contrast to the somewhat is strong and banks tight. Loan demand are still fairly banks banks have been Reserve city fairly heavily. have been borrowing banks have been more frequent Federal funds market; country in the visitors at our discount window.

Despite the somewhat pessimistic appearance of current business and some continuing tightness in the banking picture, we would be inclined not to make further moves toward ease at the present time. This is apart from the fact that a Treasury financing operation is now in process. Actions already taken seem sufficient to carry us through the current and prospective period of uncertainty. After the summer lull, we should be in better position to see the effects of recent actions and to appraise the need for further steps. We would be inclined toward no change in the directive, the present degree of ease, or the discount rate. Mr. Bryan presented a statement on Sixth District developments and on monetary policy substantially as follows: Sixth District business activity in May and early June seems to have held at a high level. Non-farm employment has increased slightly to a new record, and unemployment has declined further. Construction activity is up a bit; and department store sales, which have been at a record in early June, suggest continued strength in retail sales. Either weakness in business loan demand--which does not seem to be the case--or continuing tightness in the banking situation is indicated by the fact that the District's business loans have recently been less than usual for this time of year; and total loans and investments have resumed a declining trend. As we see the national picture, there is still no sign of exuberant boom or of general downturn. But it is necessary to note that unemployment remains uncomfortably large, with steel, furniture, and other industries under airplane, oil, appliance, going difficult adjustments. Meanwhile, business spending prospects seem a little less rosy. The problem of policy, as we see it, the business situation is not in determining what to do when lies consequences if there so robust as to give rise to inflationary monetary ease, nor so anemic as to threaten prompt were further collapse if no further ease is forthcoming. The situation is the foreign monetary moves in particular more complicated by recent payments problem in general. of our balance of and the posture As matters stand, my own inclination is to make little change is, I believe we last meeting. That views as of the in my policy in the reserves available a slow, steady increase should work for is necessary because of system. I believe this to the banking effects of mone of the lagged and because the economic situation at least for the that we should, But I also believe tary policy. reserve increases so slowly, gently, present, strive to effect the

and steadily that we give no indication of panic, produce, if possible, no speculative movement in investment asset values, and do not drive short rates to the ridiculous and obviously unsustainable low levels that have character ized other easing cycles of monetary policy. Now, in line with my previously expressed opinion that such qualitative language is of little use to the Desk, I will try to put an opinion in more interpretable, quantitative terms. The total reserve figure for June, on a daily average basis was $18,289 million. That figure represented a modest increase in total reserves and non-borrowed reserves, and permitted approximately the same modest increase in required reserves. The policy has been in the right direction, I feel sure, and in an entirely defensible amount. For July, then, I would suggest that we head for a reserve target consisting of the June daily average figure, plus a seasonal of $110 million, plus, in view of the unemploy ment and non-boom characteristics of the economy, an additional $50 million. That would bring me out with a target for July of $18,449 million on a daily average basis. Of course, it will have been noticed that I have advocated for the present a policy of modest, steady increments in total at the same time, have exhibited concern lest we reserves and, drive short bill rates down to an unsustainable low--a low that abroad and, perhaps, equally unfortunate at might be alarming we should have recourse to In this situation, I believe home. policy of bills "usually" but by no means to bills "only." a noticed that in setting my reserve For it will also have been reserves for July, I have target of 160 million additional two components: a 110 million carefully differentiated between have been calling, for want and $50 million of what I seasonal factor--perhaps better called a pro of a better name, a growth for the secular expansion of the economy. vision of reserve base for the secular expansion of the economy Such a reserve base of total reserves having a is, as I see the matter, a fraction reserves supplied for of permanence than far, far greater aspect Accordingly, I would urge or other temporary purposes. seasonal well beyond the of our purchases, we go, for such component that be necessary to avoid rate-cutting 91-day bill if that should of that instrument. with other purchasers competition believed that the in St. Louis he and his associates Mr. Johns said perhaps not showing although high and of economic activity, current rate was below an attainable or weakness, nevertheless signs of softness notable

and sustainable rate consistent with price stability. In arriving at this conclusion, due weight was given to many factors and indicators of economic activity. Some indication of a potential for a higher rate of activity was found in the relatively high rate of unemployment, the slow rate of growth in the labor force, and gains in output per worker since the last recession. Also, capacity in mining, manufacturing, and transportation appeared to be more than ample. In spite of this, however, a policy had been followed by the Federal Reserve for several months, until recently, that permitted deposits and total bank credit to contract. This was a policy that would be appropriate for checking an expansionary movement which threatened to be unsustainable. Since that did not appear to be the case, it seemed to follow that open market operations should carry out, as and when they could, directive to supply reserves needed for the mandate contained in the policy moderate bank credit expansion. that he was arguing for moderate bank credit Mr. Johns commented measures. If his remarks at previous meetings expansion, not for drastic wished to make clear actions, he as favoring drastic had been construed He had thought that he was speaking that they were not so intended. moderate bank credit directive calling for framework of the within the expansion. he would not attempt to place any Mr. Johns went on to say that of a turn gratified at the appearance objective. He was numbers on this hopefully, in the money supply. the reserve position and, perhaps around in

He merely would like to make sure that this continued, and perhaps at a slightly accelerated rate. At a meeting some time ago, and in another context, he had spoken of his desire for some exploration of the possi bility that the System might supply what in that context were referred to as growth reserves by at times going outside the bill market. Having held that view, he was now well disposed toward the suggestion that when the System wanted to supply reserves, and when aggressive attempts to buy bills would force the yields down further than might be considered desirable, the possibility be explored of buying securities other than bills. Mr. Johns added that he had been concerned about the suggestion that the Federal Reserve could not take steps to increase total bank credit because of possible depressive effects on interest rates and conse quent capital movements having adverse effects on the balance-of-payments situation, and especially our gold position. It was of concern to him to hear it implied that the gold position is so precarious that the System can not afford to pursue an appropriate internal monetary policy. There fore, he was comforted when, if he understood correctly, Mr. Marget said could be taken in stride. Mr. Johns in effect that such gold movements in stride and observed that opinion they should be taken said it was his are not relatively significant as compared to develop such gold movements trade position, to which healthy growth in the economy ments in our foreign is so important.

Mr. Szymczak commented on the degree of preparation and fore thought evident in the presentations at this and other recent meetings of the Open Market Committee. He went on to say that he would not recommend any change in policy at this time, but that there were two matters worthy of consideration. The first involved the possibility of Account operations in short-term securities other than bills, if and when there should be times when that might seem desirable. This was a matter that in his view might well be left to the judgment of the Manager of the Account and the Chairman of the Committee. Second, he felt that the time had come for the Board of Governors to consider further the question of releasing additional vault cash to be counted as reserves, along with other actions having to do with on reserve requirements that was enacted last year. the legislation Balderston said that he shared the views of Mr. Szymczak regarding Mr. the meetings of the Open Market Committee the fresh ideas being brought before from Mr. Gaines to Mr. had been impressed with the memorandum and that he to total reserves and nonborrowed Hayes dated June 30, 1960, relating been distributed prior to the meeting, This memorandum, which had reserves. been presenting to views that Mr. Bryan had in understanding the helped the Committee. any change in policy that he would not recommend Mr. Balderston said that the Desk to the suggestion With respect next three weeks. for the other than bills, he in short-term securities operate on some occasions should be Open Market Committee say that the last one to would be the

wedded to a doctrinaire policy of bills only. As a practical matter, how ever, the System already owned about half of the outstanding certificates, and there were relatively few bills in the portfolio. Also, he was impressed by the fact that during the past year or so the Account portfolio had grown less liquid; it seemed that when the System purchased longer securities, as the occasion required, it had difficulty in disposing of them. Mr. Balderston went on to say that the question he wished to raise concerning the suggestion made at this meeting had to do with the composition of the Federal debt, which, he thought, was a responsibility of the Treasury rather than the Federal Reserve System. He would like to see the Treasury supply of bills available in the market, feeling that this increase the to do, as bills were scarce and the Treasury was would be a timely thing made every feasible effort to lengthen raising money. If the Treasury had that it would be quite appropriate to increase the the debt, he thought be suggested to the that this might appropriately supply of bills and around with rates through However, for the System to monkey Treasury. a burden that properly belonged seemed not only to assume its own actions because the Treasury, in also a rather futile action, to the Treasury but greatly reduced the supply of since the first of the year, had its actions in comparison, and operations was small System did in its bills. What the toward that end. open market operations about the use of he had some concern of 1958 when in the spring his concern wished to recall this, he Having said at the charts he still looked the floor, and fell through the bill rates

with unhappiness. He merely wanted to be sure, in considering the suggestion made today, that the responsibilities of the Treasury and the System were not confused. Chairman Martin said he had little to add to the discussion, except to suggest that this was a bad time of the year to be taking soundings on the economy generally. One should be careful in July and August, particu larly with all of the varying views that were going to be heard around the country, not to make hasty judgments as to what was going to happen. On the whole, he saw more to be encouraged about in early July than he had expected six weeks ago. There was an underpinning to the economy that should not be overlooked. Chairman Martin said he had had no idea that the matter of bills only, bills usually, or short-term securities, preferably bills, would come up at this meeting. After relating an incident to illustrate his point, the Chairman suggested that the Committee would not want to get into a position of debating the matter of "bills only" indefinitely. It was proper to raise the question, of course, and he sympathized with Mr. Balderston's point about the problem of the Treasury in regard to the should recognize that However, he felt the Committee supply of bills. not get into the position that it in most extreme moments it should even If one were to go to securities about which we were talking. was only bills that sort, and if there were or two years or something of of 18 months other securities to be acquired except by really pushing the clearly no

bill rate down, this was something that ought to be taken into consideration. At least, that was his own feeling. The Committee would be subject to the charge of being doctrinaire if, under extreme conditions such as occurred recently, it pushed the bill rate down to, say, .5 per cent in order to acquire bills. This was just an observation. The Chairman then said that he had sympathy with the presentation of Mr. Bryan this morning. The System ought to try to build the reserve position steadily, not in the sense of creating easy money but in the sense of supplying reserves for growth of the economy. How to do this was a difficult question, the answer to which was illusive. However, he believed the System was making progress in that direction. In a period like this, errors--although this was not to suggest he suggested, it would seem that be more on the side of ease than that they be made deliberately--could under other circumstances. that, within the general framework in Chairman Martin then said three months, all that had been operating for almost which the Committee appeared to be to mark time. This for at present was seemed to be called and spirit in within the framework is, to mark time, the consensus; that might want to What the Committee operating today. the Committee was which was another question. six weeks from now do concerning implementation comments by Mr. Szymczak Referring to the these questions noted that the Chairman legislation, reserve requirement of the them actively in The Board had discussed before the Board constantly. were

recent weeks and would continue to discuss them. He went on to say that everyone ought to be trying to see how the System could handle the growth factor in the economy from the standpoint of reserves. This should be done in as orderly and intelligent a way as possible. The Chairman then suggested that, unless there was a disposition to debate the question of degree, the present directive be reaffirmed and there be agreement to maintain until the next meeting about the same general state of operations that had been maintained. In further discussion it was noted that the directive called for providing reserves needed for moderate bank credit expansion, and the Chairman commented that the question of how to achieve that objective was difficult. However, he thought that the Committee was slowly getting it. There were several indications of agreement with this comment, and added that, like Mr. Johns, he would not want to lose the the Chairman gained. However, the Treasury was in the market and ground that had been about stirring up the market in would be necessary to be rather careful it either direction. was no disposition to the then said that, if there The Chairman approved. He inquired whether present directive would be contrary, the replied in the negative. and the latter Rouse had any comment, Mr. or the directive. on the consensus said he had no question Mr. Hayes Committee felt the leeway clear to him what the it was not entirely However,

of the Account Manager was in the matter of dealing in short-term securities other than bills if a situation existed where operating solely in bills would have an undesirably strong effect. He asked whether the Committee felt that the Manager had this leeway or whether it was felt the Manager should come to the Committee for specific instructions. Chairman Martin said he had always thought this leeway existed. The Manager could, of course, confer with members of the Committee if he had doubts, but the Committee might be criticized for having a doctrinaire position if it did not mean "short-term securities, preferably bills." Mr. Allen recalled that on one occasion the portfolio of bills got so low that the Desk sold securities other than bills, and Mr. Robertson recalled that there had been some discussion of the matter at the meeting Mr. Shepardson said he would have of the Committee before this occurred. been expressed by the Chairman, and Mr. Bryan the same understanding as had understanding of the matter also. said this would be his that this indicated a Mills said it should be understood Mr. and that presumably such had been a general practice, departure from what Otherwise, the be undertaken without consultation. operations should not against what might be conflicting of the Desk would be pitted judgment time. If he at the particular of the Committee among the members views on a new venture, particularly be loath to go off the Manager, he would were and initiative. on his own authority present conditions, under

Mr. Hayes said the Manager clearly had been loath to do so in the past, and Mr. Mills replied in terms that he hoped the Manager would continue to feel that way. Mr. Robertson indicated this was also his feeling. Reference was made to the possibility of discussion of any such situation during the morning telephone call, and Mr. Mills observed that the morning call involved only a tripartite discussion, which in his opinion did not seem broad enough. Mr. Hayes commented that all Committee members and other Presidents receive a wire on the morning call within a short time thereafter, and they would therefore have an opportunity to express their views concerning any operations beyond the bill area that may be contemplated. Mr. King commented that according to the reserve projections he would not envisage the need for a lot of operations in the next few weeks, and Mr. Hayes said that his question had not been raised with particular the next three weeks but rather with reference to the antici reference to pated need for reserves during the balance of the year. Mr. Hayes then made the comment that he did not feel one could say the Treasury and not the solely the interest of the level of rates was that System does, and in affected by what the The rates are inevitably System. of the Treasury and the System. view they are a joint responsibility his objection he would have if there was no Hayes also said that Mr. copies of a and other Presidents the Committee members distributed to under date of Bank of New York the Federal Reserve prepared at memorandum

July 5, 1960, with regard to the possibility of open market operations in other short-term securities in addition to bills. The memorandum, he pointed out, would amplify the comments he had made in his statement this morning. Chairman Martin indicated there would be no objection to the distribution of the memorandum. Thereupon, upon motion duly made and seconded, the Committee voted unanimously to direct the Federal Reserve Bank of New York, until otherwise directed by the Com mittee: (1) To make such purchases, sales, or exchanges (including replacement of maturing securities, and allowing maturities to run off without replacement) for the System Open Market Account in the open market or, in the case of maturing securities, by direct exchange with the Treasury, as may be necessary in the light of current and prospective economic conditions and the general credit situation of the country, with a view (a) to relating the supply of funds in the market to the needs of commerce and business, (b) to fostering sustainable growth in economic activity and employment by providing reserves needed for moderate bank credit expansion, and (c) to the practical administration of the Account; provided that the aggregate amount of securities held in the System Account (including commitments for the purchase or sale of securities for the Account) at the close of this date, other than special short terms certificates of indebtedness purchased from time to time for the temporary accommodation of the Treasury, shall not be increased or decreased by more than $1 billion; from the Treasury for the account (2) To purchase direct of the Federal Reserve Bank of New York (with discretion, in to issue participations to one cases where it seems desirable, Reserve Banks) such amounts of special short or more Federal term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; the total amount of such certificated held at provided that Reserve Banks shall not exceed in any one time by the Federal the aggregate $500 million.

There had been distributed to the Committee copies of a memorandum from Mr. Rouse dated July 1, 1960, transmitting a memorandum of the same date from Mr. Larkin, Assistant Vice President of the Federal Reserve Bank of New York, concerning System Open Market Account transactions in one year Treasury bills maturing July 15, 1960, under the authorization given by the Committee on April 12, 1960, and renewed at subsequent meetings, to acquire up to $150 million of such bills either by outright purchase or by swapping other bills. Mr. Larkin's memorandum showed that $36.8 million of these bills had been acquired since the meeting on June 14, making a total of $134.7 million acquired under the Committee authorization and total System Account holdings of $148.1 million. In commenting on the matter, Mr. Rouse suggested that if the to give similar authority at a later date with Committee should decide bills, the authorization be clearly respect to other issues of one-year be acquired by way of "swap" transactions. confined to bills that might adopted with respect to the July 15 bills, The authorization, in the form of such bills by outright purchase, seemed to limit also the acquisition an interpretation, from on the basis of such thus deterring the Desk, offered yesterday at a one-year bills that were acquisition of certain to the market. He supply additional reserves time when it desired to in the market as have been no repercussions appeared to added that there first to the authorization conducted pursuant result of transactions the given on April 12, 1960.

In response to a question as to whether he intended to request authority for the acquisition of other issues of one-year bills, by swap similar to that given with respect to the one-year bills transactions, of July 15, 1960, Mr. Rouse replied in terms of stating reasons why he would prefer to study developments and wait until the next meeting of the Committee before determining whether to recommend that such authority be given. He indicated that at present it seemed possible that there would be no occasion to ask such authority for the acquisition of one year bills maturing October 17, 1960. There followed discussion in which reference was made to current System Account holdings of one-year bills, other than the July 15 bills, and to the possibility that the Account might be able to acquire such quantities of those bills as it desired without going into swap trans actions. In this connection, Mr. Rouse stated his understanding that no special authority from the Committee was needed for the outright purchase of one-year bills, and there was no indication of disagreement with this statement. With respect to the language of the authorization to acquire July 15 bills first given on April 12, 1960, which provided for the acquisition of up to $150 million of such bills either by outright purchase or by swapping other bills, Mr. Robertson made the comment that, as Mr. Rouse had suggested, consideration should be given to

phrasing any future authorization with respect to other issues of one-year bills in such manner that it would be clear that the Desk was not limited in acquiring such bills by outright purchase, as opposed to swap transactions. At the suggestion of the Chairman, it was then agreed unanimously to terminate, effective immediately, the authorization originally given on April 12, 1960, for the acquisition of one-year bills of July 15, Reference was made to a memorandum from Mr. Young, which had been distributed under date of July 1, 1960, suggesting that in view of the initiation of the uniform statistical reporting program in the Market Statistics Department of the Federal Reserve Bank of New York in May, it now seemed appropriate to give further thought to steps that might be taken looking toward the development of standard accounting practices for Government securities dealers. As background, the memorandum pointed out that with the memorandum of October 5, 1959, from the Secretary of the regarding the Treasury-Federal Reserve study of the Government Committee an inventory of areas for possible securities market there was distributed action which suggested certain steps for obtaining more administrative including: "Undertake preparation information about the market, adequate practices for manual of, standard accounting for, or of recommendations daily reporting, at dealers, designed to facilitate Government security current statistics and respondents, of needed minimum cost to dealer and earnings position on of dealer's financial periodic reporting

standard basis . . ." Also, the report of the Steering Group dated January 5, 1960, regarding the setting up of a reporting system for obtaining information about the Government securities market included a statement that one element of an adequate informational program included the develop ment of composite financial statements for Government securities dealers for such public information use as experience shoved to be appropriate. The report further contained a recommendation that among the reports to be submitted by dealers there be a statement of financial condition having standardized content and form, such reports to be submitted quarterly, but one each year to be certified by an independent firm of accountants in the case of nonbank dealers. Copies of such financial statement reports of nonbank dealers would be available to the Trading the purpose of appraising credit worthiness Desk of the New York Bank for and financial standing. on the memorandum, Mr. Young noted In the course of commenting Desk once or more a submit reports to the nonbank dealers currently that be interested in and anyone who might on a standard form, year, but not in composite by a lack of information market was handicapped studying the with the of lengthy discussion had been the subject form. This matter securities market, study of the Government connection with the Treasury in this was an to feel that were inclined Treasury representatives and the to in the referred the recommendations However, although important item.

memorandum were made, the principal concern at the time was with getting the statistical reporting program started and no action was taken on them. Chairman Martin noted that the matter of devising standardized accounting practices and reports involved difficult problems. He sug gested, however, that the Committee might wish to ask the Steering Group to explore the matter. This group, which would include Messrs. Young and Larkin and someone designated by the Treasury to replace Mr. Mayo, who had resigned from the Treasury staff, would be asked to bring back a recom mendation for the consideration of the Committee. The Chairman then turned to Mr. Rouse, and the latter said he would like to reiterate his comments on the subject earlier in the year. As far as data were concerned, the Desk was getting audited reports at from each nonbank dealer. From the credit least on an annual basis there was no problem. The Desk knew the condition standpoint, therefore, had been no problem with which and in all the years there of the dealers, did not know for what circumstances, he not deal. In the the Desk could be needed by the Desk. information might reason additional that would be some of the difficulties Mr. Rouse then described for the use of all Government standardized reports involved in developing System had no mandate out that the He also pointed securities dealers. a type of infor this was matter. Conceivably, Congress on this from the to have for use in responding to mation that the Treasury might like by Congressional sources, but questions that might be raised certain

there was a question in his mind regarding the propriety of undertaking a program such as had been suggested. Mr. Hayes said he had a good deal of sympathy with the view that Mr. Rouse had expressed. He could understand that the Treasury and the Federal Reserve might be in a stronger position to refute loose statements if composite figures for Government securities dealers were available, but he was impressed by the difficulties that Mr. Rouse had mentioned in developing standardized practices that would encompass the many diverse activities of the dealer group, and also he was disturbed about the interference in an area of free enterprise that would be involved in developing a system of standardized practices. If dealing in Government securities was as profitable as some were suggesting, he felt that it would be obvious that there would be more than seventeen Government securities dealers. In view of the burden of reporting that the System had placed on Government securities dealers recently, he felt that it to make additional reporting requests at this time, would be unwise particularly in an area where dealer reaction would be apt to be far of course, would not preclude the less sympathetic. These factors, from asking the Steering Group to look into the problem. Committee that the Steering Group had done a good Chairman Martin commented and that this was a loose statistical program together job in putting the that the Committee request was no objection, he proposed end. If there

the group, which would include a person designated by the Treasury to replace Mr. Mayo, to explore the matter further, with the understanding that a memo-. randum would be brought back to the Committee for consideration. There being no objection, it was agreed to proceed in the manner suggested by the Chairman. As an addendum to the foregoing discussion, Mr. Young noted that the Douglas Subcommittee last year sent rather elaborate forms to the Government securities dealers and obtained certain data covering a period of ten years. The Subcommittee now had obtained two university men for and had assigned them to analyze the data. It was understood the summer to submit a report based on their analysis later this that they were summer. meeting of the Federal Open Market It was agreed that the next on Tuesday, July 26, 1960, at 10:00 a.m. Committee would be held to the usual three-week noted that according Chairman Martin would be held on August meetings of the Committee schedule, succeeding the meeting which however, that 6, 1960. He suggested, 16 and September instead on September 13, on September 6 be held would normally be held meetings in the and August 16 at the July 26 subject to review 1960, desirability of any change. might indicate the of developments that light it was understood and with this suggestion, There was agreement Federal Reserve of the of Presidents of the Conference that a meeting 12, with a for Monday, September tentatively scheduled Banks would be

meeting of the Board and the Presidents following the Open Market Committee meeting on Tuesday, September 13. The meeting then adjourned. Secretary

Source

Also: Record of Policy Actions