December 13, 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 Tuesday, December 13, 1960, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Balderston Mr. Bopp Mr. Bryan Mr. Fulton Mr. King Mr. Leedy Mr. Mills Mr. Robertson Mr. Shepardson Mr. Szymczak Messrs. Leach, Allen, Irons, and Mangels, Alternate Members of the Federal Open Market Committee Messrs. Erickson and Johns, Presidents of the Federal Reserve Banks of Boston and St. Louis, respectively Mr. Young, Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Mr. Thomas, Economist Messrs. Brandt, Hostetler, Noyes, Roosa, and Tow, Associate Economists Mr. Rouse, Manager, System Open Market Account Mr. Molony, Assistant to the Board of Governors and Koch, Advisers, Division Messrs. Garfield of Research and Statistics, Board of Governors Messrs. Brill and Williams, Associate Advisers, and Statistics, Board Division of Research of Governors to the Chairman, Board Mr. Knipe, Consultant of Governors Mr. Keir, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors
Messrs. Ratchford, Mitchell, Jones, and Coldwell, Vice Presidents of the Federal Reserve Banks of Richmond, Chicago, St. Louis, and Dallas, respectively Mr. Holmes, Manager, Securities Department, Federal Reserve Bank of New York Mr. Parsons, Director of Research, Federal Reserve Bank of Minneapolis Messrs. Young, Noyes, Garfield, Koch, Williams, and Brill participated in a visual-auditory presentation to the Committee on the subject of economic growth.1/ Copies of the text and accompanying charts have been placed in the files of the Committee and have been sent to the members and other Reserve Bank Presidents. Committee there had been distributed to the members of Before this meeting on open market operations covering the period the Committee a report report also contained a review December 7, 1960, which November 22 through 7, 1960. There had also been the 13-week period since September of covering the period December of a supplementary report distributed copies from the Securities 1960, and of a memorandum through December 12, on the views that Reserve Bank commenting of the New York Department on November 22, 1960. at the Committee meeting Robertson had expressed Mr. of the Committee. placed in the files have been of these reports Copies commented as Mr. Rouse written reports, of the In supplementation follows: following the and Brill withdrew Garfield, Williams, 1/ Messrs. presentation.
In conducting open market operations since the last meeting special attention was given to the impact of the changes in Regulation D effective November 24 and December 1. As was to be expected, the free reserve statistic increased sharply without being immediately or completely reflected in the feel of the money market. However, the fact that the money market subse quently remained generally easy, both in New York and elsewhere, suggests that country banks have been making better use of these new reserves than in previous instances when they acquired new reserves. On the other hand, it is discouraging to note that nonborrowed and required reserves have not been substantially expanded as a result of the ready availability of reserves. This is partly due to float but more significantly to the slow rate of creation of new bank credit. Actual operations during the period were quite limited and were aimed at mopping up a modest part of the surplus reserves to forestall the development of sloppy money conditions. While short-term rates have fluctuated, they have remained within a reasonably satisfactory range. In one instance, on Friday, December 2, there were clear signs that excessive ease was forcing lower short-term rates and the System sold a moderate amount of bills and other short-term issues. It is worth noting that in this instance the market was quite ready to make bids for certificates, notes, and bonds, as well as for bills. On last Friday a somewhat similar situation developed, posing the problem of having to sell short-term securities. However, as it turned out the only thing necessary was the avoidance of putting a foreign buy order in the market, and market rates subsequently moved back up. opinion for the System to sell It is quite possible in my other than bills in worthwhile well as to buy short issues as realize that we cannot always most conditions. We size under bills and there is no doubt in as large blocks as move them remain the principal security for that the Treasury bill will by a number of the we have been told System use. However, we should have no real problems in dealing both dealers that over the securities. Incidentally, ways in other short-term with the Ford a number of contacts so we have had past week or that they find their money man volunteered Motor Company, and maturity in some up to two-year in trading issues no difficulty size. bank rate on Thursday, the lowering of the British While to the U. S. regarded as helpful generally been December 8, has
balance-of-payments situation, the spread between the British and U. S. bill rates, on a covered basis, has not yet narrowed as much as might be hoped because the discount on forward sterling has narrowed. Yesterday, the yield in favor of British bills was about 1.15 per cent which, if anything, is more than it has been. Last week the International Monetary Fund sold $300 million gold to the U. S. Treasury and has given us instructions to invest the dollar proceeds in U. S. Government securities matur ing in up to one year. We expect that this can be accomplished by the end of this year with the minimum adverse reserve effects and perhaps it will afford an opportunity for the Account to dispose of some certificates. This sale of gold to the Treasury obscured for one week the continued outflow of gold to a number of foreign accounts. The outflow for the current week to date aggregates over $204 million to several accounts, including $150 million to the British representing utilization of a portion of the proceeds of the sale of sterling to the Ford Motor Company. The balance was invested in U. S. Government securities. I should also like to report that in yesterday's auction the Treasury awarded us only 57 per cent of our bid for $25 million six-month Treasury bills. As a result $10,750,000 of System holdings of December 15 bills are scheduled to mature this coming Thursday. Thereupon, upon motion duly made and seconded, the open market operations dur ing the period November 22 through December 12, 1960, were approved, ratified, and confirmed. statement of his views on the Mr. Hayes presented the following business outlook and credit policy: business news to suggest There is nothing in the recent drift, but at the of the slow downward a near-term reversal is no evidence of a developing cumulative same time there to exert a adjustments continue decline. While inventory longer run that hopeful for the it is negative influence, inventories under is being made in getting some progress relation to sales. Business spending on plant control in a little more apparently now declining and equipment is
rapidly than had been expected. Although a number of surveys show considerable hope of an upturn by next summer, the current level of profits and of excess capacity throws some doubt on these expectations. Residential construction seems to be making little progress. On the other hand, government and export demand remain favorable, and in the key area of consumer spending the October-November record has been mildly encouraging. But undoubtedly the overriding fact in the current business situation is the high and rising level of unemployment and unused plant capacity. Although the current sag in business has been milder than any other postwar contraction, there is a possibility that the economy's upward "bounce" may also be less now that so many war-created demands have been filled, and with inflationary psychology so greatly diminished. As for bank credit, it may be of interest to note that the trend of total bank loans in November and since midyear has been somewhat stronger than in 1957. Monthly changes in bank holdings of securities were distorted by the October bill financing, but since midyear both investments and total bank credit have risen much more sharply than in 1957, with an especially rapid rise at New York banks. The tendency this fall for money pressures to be concentrated at New York banks is not surprising, since loans and investments at these banks have risen by about 5 per cent from midyear through October, with deposits up only 2 per cent; whereas outside of New York each of these items has risen about 3-1/2 per cent. The same contrast is shown in the recent changes in bank liquidity measures. Loan-deposit ratios have continued their slow decline outside of New York, but in New York there has been little net change since midyear. The current performance of the money disappointing. Moreover, the outlook in this supply has been respect is only moderately hopeful in view of the likelihood that Treasury balances will stay high until next year and that there will be no Treasury cash financing until next spring. Incidentally, however, it now looks as if there would be no cash surplus in the fiscal year, so that the April cash might be substantially larger than had been expected financing a few months ago. seen a pronounced improvement in In the last week we have with the successful completion atmosphere of the bond market, the corporate offerings which had been initially "sticky." of several the long-term interest however, whether It may be questioned, have risen appreciably since the summer, are rates, which of the economy. In this with the dubious state consistent
connection, some concern has been expressed over the sluggish behavior of mortgage rates, which have dropped a good deal less than in earlier recession periods. The international financial situation shows signs of temporary betterment, with a possibility that the short-term capital outflow may have passed its peak. However, the situation remains exceedingly delicate, with a continuing threat of loss of confidence abroad in this country's ability to handle our affairs soundly and to avoid such highly undesirable measures as controls over capital exports. Among other things, we must, I think, continue to pay very close attention to the comparative levels of short-term interest rates in this country and abroad. The latest reduction in the British bank rate from 5-1/2 per cent to 5 per cent indicates that abroad there is increasing recognition of the close interdependence of the various national money and capital markets. It seems to me clear that the condition of business war rants our maintaining our policy of ease, but perhaps with probings toward greater ease than has prevailed, on the average, in recent weeks. Our aim should be to encourage an active search by the banks for loan and investment outlets. While I would de-emphasize the reserve figures, as we have so often agreed is desirable, I would not be at all concerned if, as a result of our actions, free reserves should fluctuate around the $750 million level. As in the past, I would hope that the Manager would be guided mainly by the feel of the market and by the action of short-term rates, especially the rate on three month Treasury bills. No major open market operation seems likely to be needed in the next few weeks, and seasonal factors should tend to exert pressure on short-term interest rates. year, however, the problem may become After the turn of the the prospective absorption of reserves more difficult, despite of the tendency at that season for bill by the System, in view rates to decline. in my judgment, to consider a lower This is no time, discount rate, especially in view of the risk of nullifying the of the recent rate reductions psychological effects favorable The directive seems European central banks. by various satisfactory in its present form. especially in the fiscal area, In view of possible actions, with the domestic business situation, I am wondering to cope on the Syster to demonstrate its willing if it is not incumbent its disposal to possibilities at explore all reasonable ness to undue risks on the without taking domestic expansion encourage feeling that long-term I have an uneasy international front.
rates are somewhat higher than they should be to be as helpful as possible in present economic circumstances, although I can't prove this or set any quantitative measure on it. Also, I have some fear that with bank liquidity still rather low, the banks may not be seeking expansion of their lending and investing as actively as we would wish. Faced with this kind of problem, together with the even more serious problem of avoiding substantially lower bill rates, we may be approaching a time when a departure from our usual policy of confining open market operations to short-term securities may be justified. It might turn out to be desirable to place reserves in the market by means of any maturity which seemed to be currently in supply--and even the possibility of useful swaps of shorts against longs should not be overlooked. Probably we need not face up to these problems today; I am not sure that I would advocate operations in long-term securities even during the early months of next year. But I hope the members of the Committee will be considering these questions over the coming weeks with an open mind; for if ever there was a time when we should demonstrate our flexibility, and our willingness to explore all alternatives, that time is the present. Mr. Johns said he continued to believe that the directive to the Federal Reserve Bank of New York was correct in stating that it should be the goal of the Committee to encourage monetary expansion for the purpose activity and employment while sustainable growth in economic of fostering taking into consideration current international developments. Although forecaster, he had a particular competence as a business he claimed no that the current situation, whatever it might rather uncomfortable feeling and that inventory adjustment more than a mere called, was something be The behavior of final causes involved. might be more fundamental there of goods were if sales especially far from encouraging, demand was it might be that the inventory sales of services, and separated from was not was continuing, going on, and probably which had been adjustment
the only cause of such behavior of final demand. He could only express the hope that when the history of this period was written it would not be the conclusion of the historians that the almost unprecedented contraction of the money supply which occurred from mid-1959 to mid-1960 had put to too severe a test the question of the relationship between the money supply and economic activity. He shared with Mr. Hayes a feeling of disappointment that the System had not obtained, at least in the most recent period, the expansion of bank credit for which the directive called. It seemed to be indicated from the weekly reporting bank figures that commercial bank credit declined slightly in November, that the banks sold securities on balance, and that loans increased somewhat less than would be normal at this time of the year. It also that from the last half of October to the last half of November appeared adjusted money supply declined on a daily average basis. the seasonally appeared that the velocity of money had been declining. It further Johns said, he would recommend that it In these circumstances, Mr. to carry out the directive, to keep the aim of the Committee, in order be point, he felt that this with reserves. At some the member banks supplied of bank credit. To illustrate, begin to show up in an expansion would banker in the southernmost with a related a recent conversation Mr. Johns which he claimed expounded the view, District who part of the Eighth that the banks were uncomfortably shared by many other bankers, was than they would like, ratios were higher illiquid. Their loan-deposit
so much so that the banker expressed doubt whether his bank and others similarly situated were in a position to expand their loans if they had the applications, although they would take care of the credit needs of their communities. The banker went on to say that it would not do any good to furnish more reserves because the banks could not use them; they did not have the loan demand and their loan-deposit ratios were already too high. Effective November 24, the country banks in that area obtained quite a lot of additional reserves through the release of vault cash, and these reserves had not found their way into the money markets, at least with any degree of rapidity. The country banks requested some of the cotton paper held by the bank with whose official Mr. Johns was conversing and although this bank was reluctant to give them the cotton paper, it bank relationships. This tended to did so in view of correspondent uncomfortable feeling of illiquidity, and the relieve somewhat the bank's banker indicated that if his institution should continue to be liberally would make loans if it had acceptable supplied with reserves it would buy Government securities. If not, the bank applications. conversation tended to point up the Mr. Johns commented that this that is, to keep the to see the System follow; course that he would like their feeling of illiquidity with reserves until commercial banks supplied reserves in continued to keep the System then repaired. If had been which the directive of bank credit that the expansion he thought supply, called for would occur.
Mr. Bryan stated that the Atlanta Reserve Bank had been reviewing rather carefully the performance of Sixth District statistics, which in previous postwar recessions had generally shown less decline than the national figures and in periods of expansion had moved upward more. In this recession, however, most of the figures showed a performance less favorable than the national figures. Generally speaking, the District figures had gone down more than the national average. The State of Florida, which made the District figures look so good in most of the postwar periods, was not doing so this time, and some industries such as lumber and textiles that are important in the District were showing poor figures. Moreover, it appeared that the District was being hurt rather badly, and might be hurt more on a long-term basis, by disturbances. Turning to the national situation, Mr. Bryan said that there appeared to be a slow, mild deterioration. Because of the slowness of the deterioration, it might be hoped that the recession would be shallow and short-lived. However, that remained a hope and not something that could be proved. Accordingly, as far as monetary policy was concerned, he felt that the System had little choice except to continue the policy, directive, of supplying reserves for the purpose of expressed in the of the money supply. For a to bring about an expansion attempting a policy that had year the System had pursued considerable part of the in the reserve figures. Thus far this month, achieved a slow expansion
however, those figures were slightly less, on a daily average basis, than in December 1959. In the current month the System was confronted with important seasonal factors of about $350 million from November. Therefore, to state a target in terms of total reserves, he hoped that the System would fully take care of the seasonal factor of $350 million and in addition supply some amount of reserves as a contracyclical influence. Whether that should be $100 or $200 million, he did not know, but he would think of something in that magnitude during the month of December. Accordingly, he believed that the System ought to add to total reserves in December, on a daily average basis, by something like $450 to $550 million. With reference to the comment of Mr. Hayes concerning the seasonal factor in short-term rates after the turn of the year, Mr. Bryan said he was rather fearful that if the Committee were to hold a preconceived notion of what the short-term rate ought to be, it could easily get into He shared with a number of other members of the Committee the trouble. desirable to drive short-term rates to a feeling that it would not be rates abroad. At the same with competitive short-term greater disparity a choice, he believed the System must time, if it became necessary to make situation and not the with the domestic economic concern itself primarily had noted many times at Committee position. As he country's international monetary policy cannot do, and he thought meetings, there are some things
it must be recognized, with regard to the international situation, that this is not a matter that fundamentally and basically responds to monetary policy. Instead, it arises from causes separate and distinct from monetary policy and can only be cured by actions outside the jurisdiction of the Federal Reserve. If what was involved was merely a short-term flow of capital in response to interest-rate differentials, the United States would be in no difficulty. However, more was involved in the problem and the Federal Reserve should not be expected to cure a problem that it did not create. Mr. Bopp reported that business in the Third District continued to deteriorate, as reflected in a number of statistics. New and continued unemployment claims were rising and were now as high as at the equivalent point in 1958. The proportion of the labor force unemployed increased in October and remained higher than the national figure. Electric power consumption declined from September to October, and construction awards while rising nationally. For the declined in both September and October in the District were down of 1960, construction awards first ten months while nationally the decrease was 3 per cent. In the 11 per cent, latest four weeks, department store sales were 7 per cent below a year about the only bright spot, ago. Automobile registrations provided year. The banking situation to 4 per cent over last rising in October were still some from time to time there relatively unchanged; remained of the larger banks. pressure on reserves evidences of
Mr. Bopp said that he would not recommend a change in the discount rate or the directive at this time. However, like others who had spoken, he believed that somewhat greater ease would be appropriate in view of the domestic situation, which he felt was becoming increasingly important relative to the international situation. Mr. Fulton said that except for good automobile sales, indicators in the Fourth District were all down. The situation was not only sluggish but deteriorating. The steel mills were moving along at an even slow pace, with no significant improvement anticipated until the latter part of next year. The mills were well supplied with iron ore, and one company recently announced the complete closing of a high-cost mine in upper Michigan. On the other hand, low-cost properties were being developed in Canada and locations abroad. In the aluminum industry there was a gradual downward trend. The export market had been disappointing, was faced with a price problem in world markets. The and the industry paper industry was running only 1.5 per cent volume of operations in the compared with an annual increase of 4 to 5 per cent over a above 1959, part of the industry's operations number of recent years. The packaging down due to the inventories of customers already in was off, with orders foreseen. A Reserve Bank director and no immediate uptrend was packages, distribution throughout the a company with considerable representing States indicated recently that orders from the south, southwest, United that eastern and midwestern orders coast were picking up, but and west
were on a low level. While auto production was now high, expectations for the first quarter of next year were that production would fall off, with a consequent effect on the already low rate of steel production. Department store sales had not held up well recently, although for the year to date sales were running one per cent above a year ago. Unemployment was now higher as a percentage of the labor force and in actual numbers. Several cities had been added to the list of those having a substantial labor surplus, principally in the steel and metal working areas. Mr. Fulton said there seemed to be a widespread belief among businessmen and bankers that there would be little change in the business situation until after the middle of next year. Bankers reported that there was beginning to be quite a bit of competition for mortgages now that repayments were running in excess of new mortgages, particularly at savings and loan associations. Due to substantial repayments, the had been forced to search for new mortgages to keep up their associations portfolios. This development suggested the likelihood of less stability in the mortgage rate and the possibility that long-term rates generally would begin to be less settled. the view that the degree of As to policy, Mr. Fulton expressed appropriate and said he being maintained was quite ease currently been made relative to the short-term in the statements that had concurred should charge itself with did not feel that the System rate. He
maintaining a level of short-term rates; instead, he would prefer to seek a level that would encourage investment in longer-term securities. If the funds now going abroad were actually short-term funds, they would come back, and whatever temporary outflow occurred was not going to embarrass this country over the longer run. For these reasons, he would not concentrate on maintaining a level of short-term rates after the turn of the year. Mr. Fulton concluded by saying that he thought the discount rate was appropriate and that no change in the directive was needed at this time. Mr. King recalled that several meetings ago a member of the staff said, in discussing the economic situation and the business outlook, that perhaps as never before the consumer held the key to the future trend of the economy. The events of the past several weeks had borne out the wisdom of that observation, Mr. King suggested. Continuing, Mr. King said that he was almost persuaded by the statements that had been made to the effect that the domestic, as contrasted with the international, the present time. He was aware was the most alarming factor at situation the consumer also had of insecurity, but that bankers had a feeling to moderate purchases. Mr. King manifested this feeling in his decisions present time would cause monetary ease at the believe that undue did not Instead, that decision out and buy goods. suddenly to rush the consumer had reached the population as a whole occur only when the was likely to
point where people believed they had improved themselves to some extent in their personal finances. This might develop within a month or two or it might take a somewhat longer time, but in any event he was inclined to feel that this was the turning point that would occur some day. As he had said, he was almost persuaded by the appeal with respect to the domestic economic situation, but at the present time he hoped that the bill rate could stay in the vicinity of 2 to 2.20 per cent. It must be recognized that shortly after the turn of the year seasonal factors would exert a downward effect on the bill rate, and too precipitate a move at this time might drive the bill rate to an unduly low level. He agreed with the view that it would be desirable if long-term rates could level that undue ease would cause the off or drop, but he did not believe the decisions that must be made before the economy again consumer to make would move ahead. not favor a change in the discount King said that he would Mr. operations would be that open market at this time. He anticipated rate fluctuate rather widely, possibly that free reserves would so conducted he hoped that it $1 billion. However, $600 million to in the range from from 2 to 2.20 rate in the area maintain the bill be possible to would per cent. down of been some slowing that there had Shepardson commented Mr. and that in unemployment, with some increase activity, along business hand, it seemed On the other matters of concern. were both developments
to him that the country was going through some wholesome and salutary adjustments, painful to be sure, but adjustments that were needed at some time. The country appeared to be getting in a little better position competitively, and that was needed. Some of the price movements and some of the indications of a little more restraint in wage negotiations were sound and constructive developments. Mr. Shepardson went on to say that he did not think the Federal Reserve could take care of the international situation entirely; other factors were of more significance. However, he did not believe that the Federal Reserve would aid the situation by flooding the carburetor. The System should maintain a position of ease, as it had, but he did not feel that providing any large amount of additional reserves at this time would have a wholesome effect. Mr. Johns had related a conversation with said that his bank did not have any large demand for loans, a banker who it would not be constructive to provide a and to him (Mr. Shepardson) was not the demand for credit. Accordingly, flood of money when there had attempted to position that the Committee favor holding to the he would keep an eye on the three periods. He would for the past two or maintain sense that that would be the controlling rate, but not in the short-term to flood the but not attempt provide needed reserves factor. He would at this time. not change the directive and he would market, made at the November remarks he had referred to the Mr. Robertson the Account was manner in which concerning the 22 Committee meeting
handled during the preceding three-week period and noted that, in accordance with the procedure agreed upon, there had been distributed prior to this meeting a memorandum from the Securities Department of the New York Reserve Bank commenting on the views that he (Mr. Robertson) had expressed. As he read the memorandum, he felt the faulty logic and strained interpretations were apparent to anyone who wished to see them, but he did not wish to labor the point, other than to assert that he thought the comments he had made at the preceding meeting may have been a contributing factor in leading to the better administration of the Account since that meeting. With respect to policy for the forthcoming period, Mr. Robertson expressed himself as very much in agreement with the comments that had been made today to the effect that the Committee ought to aim at an easier position. In short, he would attempt to do more to get the economy switched around toward an upward movement, for over the long pull this was the Federal Reserve's real function and he had some doubt as to whether the System had functioned in that respect as well as it could a move toward greater ease such as he recommended, he have. To pinpoint should be somewhere in the say that in his opinion free reserves would that this might permit the $750 million. He would expect neighborhood of 2 per cent and that it would keep the bill rate to move downward toward funds rate low. He would like to have the actions of the System Federal that the System really wanted ease. construed as meaning
If he were a member of the board of directors of a Federal Reserve Bank, Mr. Robertson said, he would push right now for a reduction of the discount rate by one-quarter of a percentage point. In his opinion, this would not indicate panic but rather a move designed to encourage the commercial banks to perform their function of searching for loans in order to expand the money supply to the extent possible and try to get the economy moving upward. As he saw it, such a move would not disturb confidence in the dollar; instead, it probably would have the reverse effect. The directive seemed to him proper, and he thought the Committee ought to move further in the direction indicated by it. Mr. Mills stated that in his comments he proposed to discuss problems having to do with the money supply and satellite considerations regarding developments in the area of bank credit that were disturbing to him and caused him to doubt whether heavy injections of additional commercial banking system would, as they had in the reserves into the the effect of jolting the economy and the bank credit past, have center. Mr. Mills then read the following statement: statistics off dead money supply in the face of energetic Federal A stagnant to supply reserves and promote the Reserve System actions a new look into the bank credit demands expansion of commercial Presently the System has of monetary policy formulation. roots have one foot on an stunt of trying to essayed the trick riding low interest rates expansion through effort to foster business the other foot on an availability of credit and and ready rate structure high enough to effort to maintain an interest of funds abroad for investment at higher prevent the transfer last time a somewhat similar Roman riding interest yields. The
trick was tried in the 1920's the horses pulled apart and an effort to maintain an interest rate high enough to prevent inflation, but not so high as to induce an inflow of gold from Great Britain, failed and the forces of inflation took over. Current financial conditions are not comparable to the 1920's, but the lesson of the earlier experience suggests that the Federal Reserve System should no longer attempt an ambivalent monetary and credit policy. The policy called for is one that will assure ready availability of bank credit at interest rate levels high enough to retain volatile investment funds in the United States and possibly attract a return flow from abroad. The adoption of this policy requires subordina tion of the attempt to promote the expansion of bank credit by the forced feeding of new reserves into the commercial banking system, which policy, in any event, is proving and has been proven ineffective in achieving its intended purposes. The reason that an aggressive Federal Reserve System policy of active ease is not causing the desired expansion of bank credit and the money supply can be laid to the fact of a sluggish and waning demand for bank credit accountable to the dominance of recessionary business influences. The money supply not only represents the pool of previous extensions of bank credit, but is also a measure of the magnitude of total spend ing. Inasmuch as the demand for bank credit has fallen, the spending that originates from bank lending and investing has also fallen, and may fall further if total bank loans should Under these circumstances, and considering the contract. effect of recessionary influences on consumer and dampening to spend and invest, a Federal entrepreneur propensities new reserves in abundance Reserve System policy of supplying expansion, but merely forces the does not promote bank credit down to an undesirably and level of short-term interest rates unrealistically low level. injection of reserves into the Whereas the forced an expansion of bank system is not inducing commercial banking investments in to promote increased it might be expected loans, an increase in and thus to support U. S. Government securities bank holdings of It is true that commercial the money supply. S. Government securities have risen substantially, short-term U. acquisitions of because of massive this has been largely but the medium of anticipation bills through U. S. Treasury tax have served to These purchases and Loan Accounts. their Tax to sustain the money bank credit and increase outstanding demand for credit need of a forceful illustrate the supply, and supply. Other in the money spark an expansion in order to securities have of U. S. Government bank purchases commercial
not done so, inasmuch as they were financed through funds avail able from rising totals of time and savings deposits which, in turn, are a reflection of lesser spending attitudes and a drab business situation. Moreover, it does not follow that commercial bank purchases of U. S. Government securities otherwise financed will induce an expansion of bank credit because, where such purchases are made by commercial banks located outside of the money markets, they are transacted by transferring available cash to the U. S. Government securities dealers in the money markets and not by creating a new deposit on their own books which would tend to bolster the money supply. This sequence of events occurs regardless of the volume of reserves held by the "up-country" commercial banks, and its effect is only to heighten the demand for short-term U. S. Government securities and to drive their yields down without promoting an increase in bank deposits and the money supply. The opposite is, of course, true of central reserve city bank purchases of U. S. Government securities which do result in the creation of new deposits for the accounts of their U. S. Government securities dealer customers. However, the investment activities of the central reserve city banks are not alone enough to bolster the money supply at a time of a low demand for commercial bank credit. What is evident seems to be that an easy monetary and credit policy is ineffective in inducing an expansion of bank credit at a time when the demand for credit and the propensity to spend is slack, and that an active demand for private and public credit is the economic ingredient essential to a successful pump-priming monetary and credit policy. present conditions, an aggressive Federal Reserve Under System policy of supplying reserves merely fritters itself away of short-term interest rates that increases the in an attrition to prevent a further outflow of funds from difficulty of trying monetary and credit policy at this the United States. A suitable available, but at an aim at making credit readily time would objective of making the short interest cost compatible with the attractive for the invest Government securities market term U. S. A level of positive free domestic and foreign funds. ment of both million should promote the pro on the low side of $500 reserves kind of violence to without doing the policy objective and posed such as has occurred in interest rate structure the short-term into the of new reserves injection to an over-generous response the future, there will At some time in commercial banking system. which will call into demand for bank credit be a resurgence of the Federal Reserve forces that latent credit promotive play the policy may well be a neutral controls. Until then, monetary System and monetary policy considerations in the complex of fiscal factor national economy in tandem. in ordinary times serve the that
In conclusion Mr. Mills said that he would not recommend a reduction in the discount rate or a change in the directive at this time. Mr. Leach reported that the downward drift in the economy of the Fifth District continued. With few exceptions employment, seasonally adjusted, had been declining slowly and man-hours in manufacturing industries had continued to drop. The textile industry, one of the first to cut back early in the fall as new orders dragged, continued to adjust output, and might schedule a full week's shutdown at Christmastime to check a slow growth in inventories. Furniture makers experienced a satisfactory level of orders immediately after their fall market, but this situation proved temporary and current orders were not sufficient to main largest steel plant, the Bethlehem plant at tain backlogs. The nation's had been maintaining production and Sparrows Point, Maryland, which as a whole, recently cut its at higher levels than the industry employment number of employees. Coal production workweek and laid off a substantial new series of layoffs had to decline, and a in the District continued River valleys in West The Ohio and Kanawha recently been reported. plants, stood in and other industrial with their busy chemical Virginia, parts of the State. coal areas in other contrast to the depressed sharp but there was were quite varied, in the District trade reports Retail business would equal this year's Christmas little hope that apparently in the District's economy somewhat brighter spot year's volume. A last its peak level remained near which construction employment, afforded by was awards for non level of contract continuing high by a and was supported utility projects. works and and public residential
Total loans of Fifth District weekly reporting banks had trended contraseasonally downward since mid-September, and investments had moved up at a pace unmatched in any recent year. Borrowings at the discount window the past few weeks averaged less than during the comparable periods of any of the past five years. From the standpoint of policy, Mr. Leach said, the four weeks before the next Committee meeting seemed to fall into two distinct parts: the period between now and Christmas and that between Christmas and January 10. During the first period, he believed the Committee should see that reserves were readily available for seasonal purposes, while the present degree of ease. For the second maintaining approximately presumably was to decide how quickly and to what period, the problem the Desk to mop up surplus reserves created extent the Committee wished currency. It was his suggestion that operations by the return flow of the ease achieved in recent be so shaped as to maintain substantially avoid a sloppy market with downward with particular care taken to weeks, pressure on short-term rates. a change in the that he would not recommend Mr. Leach stated that a reduction would It seemed doubtful rate at this time. discount and it the domestic situation, improvement in in any noticeable result problem. On aggravate the balance-of-payments certainly would almost in view of the be out of the question an increase would the other hand, decline in short-term expect some downturn. He would current economic had learned from thought the System but he rates after Christmas, something was lost, by was to be gained, and experience that nothing
forcing short-term rates to extremely low levels through excessive ease, even in periods when there was no serious balance-of-payments problem. Mr. Leedy said that there had been no significant developments in the Tenth District since the Committee meeting three weeks ago. As to policy, it seemed to him from the projections for the period between now and the next Committee meeting that a minimum of open market operations might be required. While he felt that the System should continue to follow a policy of ease, he had the feeling that, at this juncture in particular, nothing was going to be accomplished in the way of stimulating loans and nothing in the way of creating a demand on the part of borrowers by contributing to a sloppy position in he saw it, the System had been doing the job that it reserves. As providing a large volume of reserves. However, use had should do in in the expansion of loans and there not been made of those reserves anything different was going to happen was no reason to expect that ahead. This was due to the general situation in the period immediately a waiting period to present time, which involved of the economy at the circumstances it did not appear might be ahead, and in such see what accomplish real results up of reserves would him that the mere piling to System should take care, was concerned. The as far as loan expansion and it wanted an easy care, of seasonal requirements, and was taking point where the that ease to the but to push position in reserves, did not seem to would be jeopardized international position country's with which was something domestic situation course. The be the proper but the present period, so in the especially greatly concerned, to be
System should be extremely watchful of the international situation. In the circumstances, he would keep a close eye on the bill rate, which had given a good account of itself in the period since the preceding Committee meeting. If the System could contribute to a continuation of that performance, he would favor doing so. It followed, of course, that he would not suggest any change in the discount rate, and he did not see any need for a change in the directive. Mr. Allen stated that at the annual Business Outlook Conference held last week at the First National Bank of Chicago the ten businessmen panelists pretty well agreed that business activity in the first half of 1961 would not differ greatly from the last half of 1960. There was a general expectation, however, that business would improve during the second half of next year. As to developments in the Seventh District, had been announced recently in additional layoffs and shorter workweeks television. The recently released machinery, appliances, and construction of labor market areas indicated deterioration between classification Wayne, Gary, South Bend, Des Moines, and September and November for Fort centers were not classified as having Muskegon, and seven major District store sales, strong in October, a substantial labor surplus. Department below a November and continued last year in 5 per cent below slipped ago in the week ended December 3. year
A bright spot was found in sales of automobiles, which were at a record high in both October and November. Many of the cars sold were 1960 models and about 30 per cent were compacts, so the trend in dollar sales was not as strong as in number of units. One result of the good sales was that production schedules were not being cut back as much as had seemed probable. The high inventories, however, indicated that if production in 1961 was to equal that of 1960, sales next year would have to be very good indeed. On the subject of inventories, Mr. Allen recalled having mentioned before that the many more models being offered today was an important factor. The Fisher Body Division of General Motors was currently producing 113 body styles. Sales of the new compacts offered by Buick, were said to be quite satisfactory, and thus Oldsmobile, and Pontiac that is, no trade-in was involved. per cent had been cash sales; far 24 being bought as second or many of the compacts were This meant that Thus, fears about high and represented new business. third cars inventories were reduced. feeding areas banks in cattle loans at member Agricultural of feeder said. Purchases Mr. Allen sharply in November, increased unfavorable results because of relatively this fall cattle were delayed of feeder cattle that prices last year, hopes cattle feeding from make most of weather would that favorable and prospects would decline, was less high Although there price support loans. corn eligible for the
moisture corn than last year, there was enough to have the effect of deferring marketing of cattle and hogs, increasing the demand and the prices for feeder cattle, and probably laying the groundwork for stability in livestock prices in late winter and spring. Borrowing at the discount window in the December 7 week averaged only $5 million. The largest Chicago banks still showed a basic deficit position, but it was not large and coverage through the Federal funds market had been advantageous. Mr. Allen said he would not favor changing the discount rate or the directive. He continued to feel that monetary policy had made its toward greater economic activity on a sustainable basis, contribution agreed with those, notably Mr. Shepardson, who would maintain and he not add to it. To maintain the about the current degree of ease but continuing to inject reserves in current degree of ease presupposed through the gold outflow, which apparently replacement of those lost he would not go beyond that. Most certainly, however, was continuing. District items were said that in the Twelfth Mr. Mangels In southern California sides of the ledger. show up on both beginning to substantial labor as an area of area had been classified another major unemployment stood at 6.6 per cent in California, surplus, and in October for The figures cent in Washington. and 8.2 per cent in Oregon, 7 per from the preceding showed a decline however, each latter two States, the
month, Oregon being down .3 per cent and Washington down .5 per cent. The over-all employment situation in the District was somewhat better than a year ago, employment being up about 3.2 per cent from October 1959. No major change in either the employment or the unemployment situation was foreseen for the next two or three months. Continuing, Mr. Mangels commented that in November the steel rate in the District dropped to 48 per cent, against a national rate of 51 per cent. However, steel executives appeared to feel that the cutting of inventories was about over and that existing rates of consumption would support higher operating rates. In other words, if consumption should continue at about the same rate as in the recent past, there seemed to be a fairly good possibility that the rate of steel production would increase in the next few weeks or the next few months. Toward the end of November nine plywood mills in Oregon shut down for a period of a week, reducing industry output to 60 per cent against 70 per cent in October. This had the effect of capacity as so the situation was a little production and demand, of equalizing contracts in October were than it had been. Total construction better were about equal to a year earlier. 2 per cent above September and was also about 2 per cent, improvement in residential construction The somewhat from the year-ago construction was down although residential somewhat disappointing, and store sales had been figure. Department down one per cent of the year was from the first cumulative figure the
from 1959, Some stores had released part of the extra help taken on for the Christmas season. Automobile sales were holding up fairly well. In October they were 13 per cent above the September figures, but sales leveled off somewhat in November. Mr. Mangels went on to say that during the three weeks ended November 30 weekly reporting banks showed a reduction of $220 million in loans to banks. Excluding that reduction, loans increased about $55 million, of which approximately one half was in consumer loans. The banks also increased their holdings of Government securities by somewhat more than $100 million. Total deposits were little changed, but demand deposits increased while time and savings deposits dropped, part of the deposits being the result of distribution of decrease in savings member banks now showed an average Christmas club accounts. Reporting 3.5 per cent below the ratio ratio of 59.3 per cent, about loan-deposit and about 6 per cent below the June high. Savings at the end of October funds, showing a 28 per associations continued to accumulate and loan but the growth in accounts a year ago, over their share cent increase The question of the under a year ago. was 7 per cent mortgage holdings was beginning to time and savings deposits rate of interest on maximum there had the year approaching; the end of head again with raise its given to was being any consideration as to whether been some inquiries shifted to banks had rate. Several per cent maximum in the 3 a change some to a monthly basis, and on a daily of interest the crediting
computation basis. One of the banks in San Francisco that at midyear shifted to a daily basis had increased its savings accounts about 53 per cent in the intervening period. There had been practically no borrowing from the Reserve Bank during the period since the last Committee meeting, and purchases and sales of Federal funds about balanced out. Mr. Mangels expressed agreement with those who had suggested that the System should supply reserves liberally between now and the end of the year. It was difficult, however, to find measurements to evaluate the effectiveness of System actions. The release of vault cash had made the free reserve figure less valuable as an indicator and the money supply figure may have lost some of its usefulness because of the increase in savings and time deposits and the conversion of money of investment not included in the money supply. Many treasurers to forms balances and get them their pencils to reduce demand had sharpened working wherever possible. deal of change in short-term interest There had not been a great rates, and the a firming up of longer-tem but there had been rates, its value as an indicator have lost some of rate seemed to Federal funds higher than market rates. with the discount rate in the present be as a guide value it might For whatever somewhere in free reserves suggested keeping Mr. Mangels circumstances, considerable leeway $750 million, with $500 million and the range from were what operations to determine of the Account to the Manager given
necessary on a day-to-day basis according to the feel of the market. He felt that the directive was satisfactory. With reference to the discount rate, Mr. Mangels commented that under normal conditions the rate probably should be reduced in light of the other changes that had taken place in the monetary picture, including the actions of the System in freeing reserves. Because of the international situation, however, he did not feel that the discount rate should be changed. Mr. Irons reported that there had been little over-all change in District and that there had been mixed developments. In the Eleventh been some improvement in the petroleum industry. the last month there had might improve and that production It appeared that the stock situation nine-day allowable basis instead of an would move into the new year on a been some pickup in drilling activity. The eight-day basis. There had Texas had remained relatively steady over industrial production index in November were not as store sales during few months. Department the past they were about the year as a whole been hoped, and for favorable as had was not conducive week in December ago. The first under a year 2 per cent during the next what would happen and cold, and sales due to rain to good seemed to be position of consumers be seen. The remained to two weeks accounts had time and savings was concerned; far as liquidity strong as increasing substantially. been
The position of District banks appeared to be very easy, Mr. Irons said, and there had been virtually no borrowing from the Reserve Bank except on the part of two or three banks in western Texas. The demand for bank loans seemed fairly satisfactory. Loans had increased, with commercial and industrial loans up and some decline in interbank loans. Both demand and time deposits were up during the past three-week period, and District banks had been substantial sellers of Federal funds, with practically no purchases. No banks had indicated recently that their positions were tight from the standpoint of the loan-deposit ratio or the availability of funds. Mr. Irons expressed himself as quite satisfied with the operation of the Account for the past three weeks. On an occasional day or so he had thought the situation was excessively easy, but those occasions in the market and on the whole he felt that reflected day-to-day changes satisfactorily. Over the Management had operated very the Account a continuation of the same period, he would like to see forthcoming ease forced on the not like to see additional of ease. He would degree not have much faith in net free reserve figures, market. While he did million he felt that the System they got into the range of $500-$600 when When reference was provision of reserves. into an aggressive was getting to him a supersaturation that meant up to $1 billion, to free reserves made occur. He continued to see that would not like and he of the market, to and was as it related situation, that the international to feel
reflected in short-term rates, was a serious problem and one that could not be ignored. At times he found himself more concerned by the international than the domestic situation in this rather mild recession, from which he was confident that the country would emerge without devastating consequences. In his opinion, the international situation and the short-term rate situation should not be given secondary importance, although he realized that the movement of short-term funds was not the fundamental cause of the problem. A long-range problem was involved in getting the balance of payments into a satisfactory position, but developments in the area of short-term rates and the movement of short-term funds and gold simply could not be ignored. were an immediate consequence of a deep-seated These developments with over a long period, but one deterioration that must be dealt should not lose sight of the immediate consequences. to maintain the current Irons recommended trying In summary, Mr. System had made reserves in his opinion the of ease, adding that degree rate stay in a range like to see the bill liberally. He would available the discount rate he would not change 2-1/2 per cent, and from 2-1/4 to or the directive. index England manufacturing that the New Erickson reported Mr. three months which developed trend show the unfavorable to continued nationally. However, at a quicker pace than ago and had proceeded figures. In last year's to surpass output continued electric power
October, construction contracts were 11 per cent ahead of a year ago against a national increase of 6 per cent. For the first 10 months, the cumulative figure was 6 per cent behind 1959 against a drop nationally of 3 per cent, with a substantial reduction in public works and utility contracts. The employment situation was not good. Insured unemployment showed rapid increases, and another city had been added to those already classified as having a substantial labor surplus. Department store sales lagged in November, although for the year to date they were still 2 per cent ahead of last year. For the 11 days after Thanksgiving, sales ran 5 per cent behind the comparable period in In 1959, sales also ran behind the previous year and then picked up in the remaining days before Christmas, with the result that the season as a whole showed an increase. However, it remained to be seen whether that pattern would again develop this year. The discount window had been used very modestly, Mr. Erickson said. For a part of the period since the November 22 meeting District sellers of Federal funds, and on a few days they were net banks were months ago a large bank in the District shifted purchasers. A couple of of crediting interest on savings accounts on a day-to-day to a basis the disgust of its competitors. basis, much to not favor a change in the discount Mr. Erickson said that he would Desk had done a his opinion the and that in or in the directive, rate himself with wished to associate few weeks. He over the past good job
those who had spoken against excessive ease, feeling that probably this would not accomplish what it was hoped to accomplish and that it might complicate the problem of withdrawing surplus reserves from the market in January. He would favor instructing the Desk to the same effect as at the November 22 meeting; that is, to attempt to maintain the current degree of ease, with the hope that the bill rate would remain around 2-1/4 per cent and that the Federal funds rate would be under the discount rate. Mr. Szymczak said that he would favor no change in existing policy. He expressed the opinion that the Management of the Account had done an excellent job, to which he added that under present to do a job in the market such as had circumstances it was difficult the Desk should continue to operate been done. It was his view that of the market, and that the question primarily according to the feel million should depend on went as high as $750 whether free reserves the tone of the market. had put his finger on commented that Mr. Leach Mr. Balderston or shortly there December 21, At least until perplexing problem. a should be present policy felt that the he (Mr. Balderston) after, funds rate that the Federal he noted In this connection, followed. cent for or 2-1/4 per and 2 per cent between 1-1/2 had been running effect of System of the was an indication 10 days, which the past
policy. However, what might happen to the bill rate after Christmas presented an entirely different problem, to which he did not know the answer, He had a feeling that domestic conditions were worsening; unemployment seemed certain to rise even more. Since the commercial banks were still in an illiquid position, he felt that the System should not cease supplying reserves. Summarizing, Mr. Balderston said it was his feeling that neither the directive nor the discount rate should be changed, and that the System ought to continue pressing reserves on the banks at about the current rate. He realized, however, that this probably would push the bill rate down through the floor after the turn of the year. Chairman Martin noted that at recent Committee meetings he had been tending to begin his comments by saying that he thought the about right. He continued to feel that way. System had been doing should be thinking about the However, he also felt that everyone between the domestic in terms of the relationship longer-range position he believed that the economy. While economy and the international a body of opinion--much more acted wisely, there was quite System had the effect that was generally realized-to than perhaps substantial credit of the United and loose with the had played fast the System as it had been pursuing. easy a monetary policy in pursuing as States and, while effect in Europe talk to such a bit of had been quite There
it perhaps was not too important, one must not disregard it entirely as a factor in the present situation. As he had indicated, he felt that the System had eased at the right time and that it had moved progressively in the right way. He also believed that one should think of the domestic economy first. However, as Mr. Mills had pointed out today, the System was dealing with an entirely new set of circumstances, not the same circumstances that prevailed in the 1953-54 and 1957-58 recession periods. No longer was the world price mechanism outside the area of immediate relevance. No longer, either, were there important shortages of anything in the United States; the country must depend on research for the development of new products. The Chairman went on to say that whether one liked it or not, that the United States was on a modified gold it must be recognized to read in the past few weeks the standard. It had been interesting increasing, to the effect that of which the number was various comments, gold was obsolete or antiquated, that the relationship of the dollar to no real effect if there would be and that it had no real importance, he noted, always are its gold. Such comments, country lost all of the a little hard to of the game are find that the rules heard when people be ideal if one would domestic convertibility He added that observe. in a world it. However, would permit that have the conditions could would be domestic convertibility as at present, torn by strife, intolerable.
Continuing, Chairman Martin expressed the view that the System should not force monetary policy at a time like the present. It had forced monetary policy in 1957-58, and he thought that was the last time, perhaps, in this particular cycle that monetary policy could be forced. The present situation seemed to him to be summed up in the comment of Mr. Johns regarding his conversation with the banker: the demand for credit was not there. To force banks to go out and seek loans at a time when the price mechanism was working against businesses would only cause people to get into hopeless positions and lose money, The System would not want to encourage people to borrow simply because banks might make money on the loans, for the borrowers probably would trouble within a short time in view of the declining price get into level and declining profit margins. to the outflow of gold Martin then referred further Chairman came to an end. Against before the outflow and possible developments not want to compromise that the System would background, he suggested that it was the competitive the market when money into itself by forcing of the world really the problem that was goods and services pricing of down of a slight slowing there was he noted, In Europe, at the moment. He be very serious. was going to believe it he did not the boom, but dollar, on fact that the not for the that if it were on to say went account, and pound, on current than the was stronger current account,
the fact that they are the two world reserve currencies, he might be in favor of tightening up a little. On balance, however, in view of the shakiness of the domestic economy, he felt that the System should give as much aid as it could through the poultice of easy money without, on the other hand, trying to force the commercial banks. In many instances, banks had gotten into high loan-deposit ratios through imprudence. Now that business was not as strong as it had been, bank directors were saying that they wished their institutions did not have such a high loan-deposit ratio and that they would like to have this corrected before the banks became aggressive. Furthermore, the banks did not have the loan demand. In summary, the present situation involved an entirely new set of circumstances. What he was trying to point out, the Chairman said, was that monetary policy has limitations both as a restraining factor and a stimulating factor. In his opinion the System had played its part well the maximum stimulation it could current recession by providing in the when it reached this particular economy that was bound to decline to an to stimulate the economy further, stage. If he were thinking of measures in fiscal policy than in think more in terms of adjustments he would pudding is in the proof of the Mills had said, policy. As Mr. monetary reserves for supplying had been energetically eating. The System the in terms of the money supply, not made much of a dent some time. It had
however, partly on account of the gold outflow. Chairman Martin said he did not think that one could separate domestic and international economic problems at the moment, or that one could ignore the problem of the prices of world products. As he saw it, what the System had to do was to keep a reasonably even keel, and the System should not expect monetary policy to do more than it could. At this juncture, particularly, the System should be careful not to appear to be embarking on a cheap money policy just for the sake of cheap money. A lower discount rate at this point would make the European central banks that were lowering their own rates look silly, for it would appear as though the Federal Reserve was trying to be competitive. Similarly, if the Federal Reserve got the reputation a cheap money policy just for the sake of doing so, people of following to think that the System was not concerned abroad would be encouraged or with the soundness of the dollar. with the balance of payments about which one should think carefully. This was something referred to the comments of Mr. Hayes Chairman Martin then operations in long-term of System Account regarding the possibility for all members of he felt it was proper and stated that securities involving possible questions to raise for consideration the Committee He hoped that everyone operating procedures. changes in the Committee's might be that mind. It with an open such suggestions would consider
there was a need to look into the question of operations in long-term as well as short-term securities. However, as he had said several times before, the Committee should be very careful in its moves or it would get back to pegged interest rates before this was realized. Before the Committee started buying long-term bonds, it should consider whether it was going to establish a long-term rate or whether it was just going to acquire long-term bonds for the Account portfolio. In other words, any experimentation ought to be entered into very carefully. Personally, he had some questions about the adequacy of performance of the Government securities market, and those questions would be magnified by the extent to which the Committee went into longer-term securities. As he had indicated, the Committee should do this only for a specific purpose and in order to obtain a specific result. He was not sure in his own mind that the Committee everyone should be very careful to would obtain such a result, and a result would be achieved. While he be sure that he felt such go along with the argument for purchasing (Chairman Martin) could of one, two, or three years in certain securities up to a maturity the Committee came to 20-year maturities when it circumstances, different market. with an entirely would be dealing down to today was that said that what it came Chairman Martin to favor a change disposition at this meeting was certainly no there
in the policy directive or in the discount rate. Everyone recognized that the System must supply reserves to meet the seasonal needs for credit and to compensate for the outflow of gold that was occurring. The only question appeared to relate to whether the majority wanted to pursue a somewhat easier policy than the Committee had been pursuing or preferred to attempt to maintain about the present degree of ease. There appeared to be a difference of opinion on that point, and it might be advisable to take a poll. Mr. Hayes inquired whether it was possible to separate the question raised by the Chairman from the question of the short-term rate, which he regarded as almost a crucial thing, to which Chairman Martin replied by suggesting that too much emphasis on the short-term amount to making a pattern. The Committee was really rate would and if the Committee was going to dealing with the supply of reserves, it could control the impact on the supply reserves he did not believe short-term rate. many people felt that the suggested that a good Mr. Hayes a danger signal that might help in short-term rate represented safely be supplied. reserves could how many determining how that could he did not know commented that Chairman Martin he would the Desk. Personally, instruction to in terms of an be put one could have it. However, rate as high as like to see the short-term
the problem that the Committee must discuss was the degree of ease in terms of the reserves supplied to the market. Mr. Johns commented at this point that when he spoke previously he did not have any intention of arguing for excessive ease or for creating a so-called "sloppy" condition in the market. His point had been simply that bank credit expansion can and does result from commercial bank investment. He certainly had no intention of arguing that the System drive banks into making imprudent loans if, indeed, that is likely. Instead, he would desire bank credit expansion to occur in moderation and prudent magitudes. He would like to see some introduction of reserves in excess of seasonal needs and offset of gold outflow. Chairman Martin replied that this was exactly how he had tried Mr. Johns said that he thought the Chairman to state the question, and wanted to disclaim what He (Mr. Johns) had simply had stated it well. of his earlier comments. have been a misinterpretation might the same kind of disclaimer. Bryan said he wanted to make Mr. the illusion that to have been under his colleagues seemed A number of easy money policy. been pursuing an aggressive the Committee had system came of the banking in total reserves the low point Actually, that time the Since of sharp decline. after many months in March, to the total supply than $800 million added a little less System had was deteriorating, economic situation when the in a period of reserves
and he did not regard that as an aggressive easy money policy in any sense of the word. His stated objective was merely to give the banking system the usual seasonal requirement in December of about $350 million of reserves, plus about $100 million. After further comments, Chairman Martin stated that the division of opinion seemed to be between continuing the present degree of ease and proceeding toward a moderately easier policy. He asked whether this was a fair way of putting the question, and there were no comments to the contrary. Mr. Johns stated that his point was that whatever ease had been achieved had not brought about what he felt was called for by the directive. In his opinion, therefore, something else should be tried. He would not change the directive because he thought it was appropriate. The Chairman then called for comments on the question he had stated, and Mr. Hayes said that he found himself in a dilemma. While greater ease, he would not be willing to he would like to see slightly attention to short that ease without paying the Desk to seek instruct a limiting factor. If slightly rates, which he felt constituted term much violence to without doing too ease could be achieved greater believe that the but he did not would be fine, rates, that short-term two matters could be separated. in mind on had a floor Mr. Hayes inquired whether Mr. Robertson not to be it was best replied that which the latter rate, to the bill
too precise since there was always the danger that a floor would become an objective. When reference was made previously to a rate of 2 per cent, he had thought of that rate as representing an outside limit. He would like to see the bill rate stay somewhere in its present general range, Mr. Erickson said he would favor continuing the degree of ease that had been maintained, and Mr. Irons commented to the same effect, adding that he would not favor a further increase. Mr. Mangels recalled that he had mentioned a range of free reserves from $500 to $750 million. He pointed out that free reserves had averaged around $500 million during November and almost $700 million in the first week of December. He hoped that the bill rate would not fall too much below 2.15 per cent. Mr. Allen stated that he would continue the present degree of it, and Mr. Leedy said that he was satisfied ease, without increasing Mr. Leach said that he would with the degree of ease that prevailed. of ease. He added that the same degree favor maintaining approximately of things, including interest the market involves a lot the feel of might be paid to little more attention that he felt a rates, but them before the was given to time than at the present interest rates was in the picture. problem balance-of-payments from the move back moderately that he would Mr. Mills stated a somewhat tighter position, the past few weeks to degree of ease of
while Mr. Robertson stated that he would favor moderately greater ease and that he would not be fearful if the bill rate went as low as 2 per cent. Mr. Shepardson said that he would recommend no greater ease and that he hoped that the bill rate would not vary significantly from its present level, following which Mr. King said that he would not favor greater ease. Mr. Fulton indicated that he would like to see the bill rate between 2 per cent and where it now stood, which would suggest a little greater ease, and Mr. Bopp indicated that he would favor slightly greater ease, Mr. Bryan commented that he did not know what slightly greater ease meant. He felt that the System ought to supply seasonal requirements for reserves plus some additional amount of reserves as a kind of Mr. Johns said that he wished to associate contracyclical measure. himself with the point of view expressed by Mr. Robertson. stated he would favor continuing the existing Mr. Szymczak that he was concerned agreed, but added of ease. Mr. Balderston degree rate might cause a situation turn of the year the bill that after the would be quite different. that most significant thing about suggested that the Mr. Shepardson demand for supply to the of that was the relationship the money supply occur without condition could a sloppy When demand slackened, money. any increase in the money supply.
Chairman Martin remarked that he had commented several times on the contrast between 1957-58 and the present situation, the international situation being the principal difference. The Chairman then stated that the results of the poll indicated that the majority was clearly in favor of continuing the present degree of ease, with the feel of the market constituting the guiding factor. A clear majority would like to have the bill rate stay as high as possible. There being no further comments, the Chairman noted that the minutes would record the varying shades of opinion that had been expressed. Thereupon, upon motion duly made and seconded, it was voted unanimously to direct the Federal Reserve Bank of New York until otherwise directed by the Committee: To make such purchases, sales, or exchanges (1) replacement of maturing securities and allow (including off without replacement) for the ing maturities to run Account in the open market or, in the System Open Market by direct exchange with the case of maturing securities, as may be necessary in the light of current Treasury, conditions and the general credit and prospective economic a view (a) to relating the situation of the country, with the needs of commerce in the market to supply of funds monetary expansion for business, (b) to encouraging and growth in economic purpose of fostering sustainable the while taking into consideration activity and employment, and (c) to the international developments, current Account; provided that administration of the practical held in the System amount of securities the aggregate purchase or sale for the (including commitments Account
of securities for the Account) at the close of this date, other than special short-term 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; (2) To purchase direct from the Treasury for the account of the Federal Reserve Bank of New York (with discretion, in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the total amount of such certificates held at any one time by the Federal Reserve Banks shall not exceed in the $500 million. aggregate of the Federal Open Market was agreed that the next meeting It 10, 1961, and that the held on Tuesday, January Committee would be would be tentatively scheduled for January 31, ensuing meetings and March 7, 1961. February 14, The meeting then adjourned. Secretary
Also: Record of Policy Actions