August 1, 1961 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, August 1, 1961, at 10:00 a.m. PRESENT: Mr. Martin, Chairman Mr. Allen Mr. Balderston Mr. King Mills Mr. Mr. Shepardson Mr. Swan Wayne Mr. Mr. Johns, Alternate for Mr. Irons Mr. Treiber, Alternate for Mr. Hayes Messrs. Ellis, Fulton, and Deming, Alternate Members of the Federal Open Market Committee Messrs. Bopp, Bryan, and Clay, Presidents of the Federal Reserve Banks of Philadelphia, Atlanta, and Kansas City, respectively Mr. Young, Secretary Mr. Kenyon, Assistant Secretary Mr. Hackley, General Counsel Mr. Thomas, Economist Messrs. Coldwell, Einzig, Garvy, Mitchell, and Noyes, Associate Economists Mr. Rouse, Manager, System Open Market Account Molony, Assistant to the Board of Governors Mr. Mr. Holland, Adviser, Division of Research and Statistics, Board of Governors to the Chairman, Board of Mr. Knipe, Consultant Governors Economist, Government Finance Section, Mr. Yager, Division of Research and Statistics, Board of Governors Jones, and Tow, Vice Presidents Messrs. Hostetler, of the Federal Reserve Banks of Cleveland, St. Louis, and Kansas City, respectively
Mr. Eisenmenger, Acting Director of Research, Federal Reserve Bank of Boston Messrs. Holmes and Stone, Managers, Securities Department, Federal Reserve Bank of New York Mr. Anderson, Economic Adviser, Federal Reserve Bank of Philadelphia Mr. Black, Assistant Vice President, Federal Reserve Bank of Richmond Mr. Brandt, Assistant Cashier, Federal Reserve Bank of Atlanta Mr. Hellweg, Economist, Federal Reserve Bank of Minneapolis Upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on June 20, 1961, were approved. In view of certain questions that had been raised following distribution of the preliminary draft, it was agreed, at the sugges tion of Chairman Martin, to defer until the next meeting consideration of approval of the minutes for the Committee meeting on July 11, 1961, in order that these questions might be studied further. Upon motion duly made and seconded, the action of the Federal Open Market Committee on July 18, 1961, in approving the recommendation of the Account Manage ment that the Account exchange its entire holdings of 3-1/8 per cent certificates and 4 per cent notes due August 1, 1961, for $3,216,150,00 3-1/4 per cent notes maturing November 15, 1962, and $1,600 million 3-3/4 per cent notes maturing August 15, 1964; and that $13,800,000 2-3/4 per cent bonds due September 15, 1961, and $5 million 1-1/2 per cent notes due October 15, 1961, be exchanged for 3-1/4 per cent notes due November 15, 1962, was approved, ratified, and confirmed.
Before this meeting there had been distributed to the members of the Committee a report of open market operations covering the period July 11 through July 26, 1961, and a supplemental report covering the period July 27 through July 31, 1961. Copies of these reports have been placed in the files of the Open Market Committee. Mr. Rouse stated that he had returned to the New York Bank only yesterday from a European trip, but that he and Mr. Marsh had prepared a short statement amplifying the aforementioned written re ports on open market operations. Mr. Rouse then presented substan tially the following statement: Since the last meeting of the Federal Open Market Com mittee, the money market has remained generally easy with Federal funds trading for the most part around 1 per cent. At the start of the period prospects were that reserves to be absorbed in the week ended July 19, in part would have to offset the usual monthly bulge in float. Projections for period indicated that reserves would have to the rest of the be supplied in size. Complicating considerations were the an even keel during the Treasury financing opera need for the persistent downward pressures on Treasury bill tions and rates that assumed increasing importance following the rise in the British discount rate. first statement week, System holdings of Govern In the were reduced through sales and redemptions ment securities bills, not only to reduce the redundant bank of Treasury reserves but also in an effort to head off a decline in Treasury bill rates. Although the 91-day bill rate dropped below 2.20 per cent, sales of bills were limited to avoid with the Treasury's financing operations and interference also because of the need for a large amount of additional reserves in the following statement week. At the start of the second statement week, bill rates were again under downward pressure and it was evident that the injection of the large amount of needed reserves would have to be made to a considerable extent through issues other than bills-which would take several days to acquire. Accordingly, buying started on Thursday, July 20, and it
soon developed that the System was getting an assist from the large volume of swaps undertaken by banks against pur chases of the new issues made available by the Treasury. The System was thus able to buy substantial amounts of shorter-intermediate securities before the week end of July 22-23. Market selling of intermediate issues was augmented after the week end when uncertainties over the international situation began to appear, culminating in the increase in the British bank rate on Tuesday and the President's speech on the Berlin situation that evening. As a result, banks again shifted their thinking toward shortening up their in vestment portfolios, in contrast to the willingness to ex tend maturities which was displayed in the Treasury's refunding. These events also focused greater attention on of our short-term rates to those in other the relationship countries. Against this background, the System continued to make purchases outside the short-term area. By Wednesday, July 26, it was evident that despite these purchases more funds would have to be provided to meet the reserve require arising from bank acquisitions of new tax anticipation ments In order to acquire the volume of securities needed bills. to provide the reserves, the scope of our purchases was include shorter securities, principally notes broadened to and certificates maturing within 15 months. July 27 and 28, purchases were On Thursday and Friday, The tone of the money market was easy and the curtailed. reserves at that time would have ag provision of additional downward pressures on short rates. On the other gravated the projections indicated a need for supplying additional hand, after the week end. Thus the decision to curtail reserves on Thursday and Friday was made with the expecta operations tion that substantial action would later have to be taken to the money market firmed supply reserves. As anticipated, System responded by making repurchase yesterday, and the at 2-1/2 per cent, and by resuming the purchase agreements, of securities on an outright basis (including the purchase of bills from foreign accounts). that the System purchases of issues It should be noted short-term area have been to a large extent in beyond the maturities. Offerings of maturities be two- and three-year range have not been large; in fact, offerings beyond yond that have been quite scarce. Since most of the purchases ten years market, the impact on the market have been made in a falling has been moderate, and the market has been able to adjust readily to other influences. that the very easy money conditions over It is evident the past several weeks have encouraged banks to buy Treasury
bills, mostly short-term issues. However, the continued reserve ease, coupled with other investment factors, has ex tended the buying out to the 91-day area and has been an important factor in keeping downward pressure on the 91-day bill rate. The average rate for 91-day bills in the auction yesterday w:s 2.30 per cent. I believe the System could ease its problem with regard to short-term rates by allowing free reserves to work a little lower, and thus avoid the "sloppy" condition of this recent period. The Treasury's recent financing operations have been eminently successful as commercial banks evidenced a willing ness to extend their maturities to the three-year 3-3/4 per cent issue offered in the exchange. The attrition was moderate and the Treasury can look with satisfaction on the substan tial amount of debt moved out to the three- and seven-year area. The auction of the $3.5 billion tax anticipation bills was equally satisfactory; the average rate in that auction was 2.49 per cent. Finally, the favorable atmosphere created by the re funding has faded due to international developments and the prospect for greater Government spending and economic activ ity, which suggest higher interest rates. While the prospects for an advance refunding in the near future had been good, the Treasury must now adopt an attitude of "wait-and-see." Having cleared the decks for the next two months, it will undoubtedly still be on the alert for opportunities to move in that direction. Mr. Rouse added the comment that in talks during his recent trip to Europe, mostly with central bankers but also with commercial bankers, he found a continuing and growing distrust about the ability of the United States to keep its financial house in order. Without much doubt, developments last week must have aggravated that feeling. In making this comment, he did not mean to imply that he had found evidence of distrust in terms of immediate pressures on the dollar, but there was a background of "wanting to be shown." Among those with whom he talked on this trip, and with whom he had also talked
earlier in the year, he sensed that the feeling ne had mentioned was growing, and this of course had a relationship to the short term rate situation. Mr. Rouse noted, in this connection, that any outflow of funds from this country would be unfortunate. Thereupon, upon motion duly made and seconded, the open market trans actions during the period July 11 through July 31, 1961, were approved, ratified, and confirmed. Mr. Noyes presented the following statement with regard to economic developments: As background for a summary of the most recent economic developments, it may be useful to run through some of the revisions in the National Income and Product accounts re leased since the last meeting. The revision goes back to to follow too many numbers 1958, but as it is difficult presented orally, I shall limit these remarks to the most recent twelve-month pnriod and the broad aggregates. Economic activity, as measured by GNP, reached a cyclical high in the second quarter of 1960, estimated at the time to be $505 billion. It declined to an estimated at that level in billion in the third quarter--held $503.5 the fourth quarter, and then dropped again to the cyclical low of $499.8 billion in the first quarter of 1961. Activity increased sharply in the second quarter--and preliminary guesses as to the extent of improvement were revised upward as the quarter progressed. You will recall that at the last meeting we suggested a figure of $513 billion on the unrevised basis. It now appears that the peak in the second quarter of 1960 was $50 .4 billion, rather than $505. The decline in the third quarter was to $505.1--in the fourth to $50.5, and the first quarter low was $500.8 rather than $499.8. Thus we see that the decline in the third quarter of 1960 originally reported, due in large part to the was less than fact that personal consumption expenditures were better maintained and the cutback in inventory accumulation was less than originally estimated.
However, the over-all magnitude of the recession was about the same. Taking it from the second quarter high of $506.4 to the first quarter low of $500.8, the revised fig ures show a decline of $5.6 billion, while the original de cline from $505 to $499.8 amounted to $5.2 billion--declines of 1.11 per cent and 1.03 per cent, respectively. The official estimate, on the new basis, for the second quarter of 1960 is $515 billion--well above the $506.4 of a year ago. Some perspective on this rather striking improve ment is added if we look at the figures in terms of per capita real income and product, as was suggested by Governor Mills at the Board meeting yesterday. In these terms the GNP is still a little below the 1960 peak, and disposable personal income was at exactly the same level in the second quarter of this year as it was a year ago. Up to last week it was easy to summarize the situation as one of rapid, but apparently healthy recovery, especially as the stock market appeared to settle down after its spurt in the spring months. Commodity markets--and in fact whole sale prices generally--showed no evidence of inflationary conditions or expectations. Production was rising rapidly, but the most rapid advances were in industries that had been operating far below capacity, and there was no evidence that any important bottlenecks were developing. Industrial production was back to 110 per cent of the of one or two points and a further advance 1957 level in June is indicated for July. Department store sales appear to be recovering from the to the weather--and may be at slight dip in June--attributed levels for the month. Consumer credit probably near record increased moderately again, following several months of sub stantial decline. in both manufacturing and other nonagricul Employment tural lines improved very rapidly from April onward. For both categories together, almost one million workers, over the normal seasonal change, were added to payrolls and above in the three months ending in June. Despite this very rapid advance in employment, unemployment remained high, however, at a seasonally adjusted rate of 6.8 per cent in June, but the July figure, to be released shortly, will it may be that show some improvement. that about the expected improve Early reports suggest in the second quarter. profits took place ment in corporate
Financial markets were extraordinarily stable despite a very large volume of financing, both public and private. A week ago it was hard to escape the feeling that the situation was a little too good to be true--and it was. On top of substantial increases in expenditures to fi nance space exploration and longer-run defense measures, and general acceptance of the fact that the recommended postal rate increase is not likely to be enacted, the President has found it necessary to recommend an increase of $3-1/2 billion in current defense expenditures, thus substantially increasing the prospective deficit for the current fiscal year, and re ducing the possibility of a budget surplus in fiscal 1963. It is too early to tell whether this will be the straw that will convert a rapid, but orderly, recovery into a boom which will threaten both internal stability and our still fragile balance-of-payments position. At least, it seems to have dispelled very rapidly the doubts that were growing in some quarters about the continuing strength of the recoverymay have incidentally served a very useful pur doubts which in tempering some of the excessive speculative activity pose associated with the early stages of the in security markets recovery. Fortunately, perhaps, no one has a clear idea as yet of just what the budget deficit for fiscal 1962 will be. More important, the President accompanied his recommendations with statement regarding his intentions with respect a very firm factors have certainly tended to to the 1963 budget. These minimize the immediate inflationary expectations and the ur gency of the need for counter-measures. As of this moment in time, actual developments do not for any change in monetary policy. It would be seem to call however, to ignore the fact that recent events, foolhardy, and overseas, have increased the chances both in this country that monetary policy may be required to play a less expan if we are to protect the integrity of the dollar. sive role Mr. Thomas presented the following statement with regard to credit developments; of economic recovery brought no striking Progression in July prior to the President's state credit developments ment. Subsequently evidences of a changed situation have in money and securities markets, which are influenced appeared
by expectations in advance of actual events. Banks had adequate reserves for credit expansion throughout the month, and a sizable expansion ensued. Large increases occurred in bank holdings of Government securities and in loans on securities, reflecting active bank participation in Treasury financing operations during the month. Busi ness loans, including those to finance companies, showed rather large declines, as is common in July. New capital issues continued in large volume, although below the high level of the second quarter. Private demand deposits appear to have increased by close to the usual seasonal amount in July, while time deposits continued to show a large increase. U. S. Govern ment deposits, which began the month at a high level, moved steadily down until July 26 and then increased sharply, showing little net change for the four weeks as a whole. It appears that the daily average money supply, seasonally adjusted, was about the same in July as the average that has prevailed since April. Money markets remained generally easy during the month, and short-term money rates tended down, but did not fall below the lowest levels of the past year. Yields on medium and long-term Government securities, which had risen fairly sharply in June, leveled off or declined slightly. Yields on State and local Government bonds also tended to decline, while those on high-grade corporate bonds rose at a slower pace than in May and June. In the past week, following the President's statement, interest rates have turned up moder ately. Some of the increase in the last two business days reflects a tightening of bank reserve positions from the rather easy situation that has prevailed recently. of member banks were relatively large Free reserves during most of July, averaging nearly $580 million. Required declined slightly, reflecting a substantial decrease reserves in the reserves needed to be held against U. S. deposits and a slightly more than seasonal increase in those against other fluctuations in market factors affecting the deposits. Wide broadly counterbalanced by corre supply of reserves were spondingly wide changes in Federal Reserve holdings of the current week, reserve availability is securities. In reduced by a combination of market factors being sharply reserves because of the additions and by increased required to tax and loan accounts in connection with Treasury financing. reserves are being supplied by heavy System purchases Additional but free reserves are likely to decline to an aver of securities, than $400 million, in the absence of further System pur age of less Additional purchases will be needed to supply reserves next chases. After that, except for rather wide temporary variations, week.
partly related to Treasury accounts, no sustained increase in System holdings will be needed until November. As for future System policies and operations, three broad sets of questions need to be considered: (1) What would be required for continued recovery at a reasonable pace? (2) What will be the effect of the stepped-up defense program? the effect of the new restraints adopted in (3) What may be the United Kingdom? As to the first question, it appears that continued bank credit expansion at somewhat more than an average secular rate of growth will be appropriate until the economy is close to reasonably full utilization of resources. By one rather rough basis of comparison, bank credit expansion during the 1960 recession and early period of recovery compares favorably with that in 1958. Although credit expansion has not been as large in the first half of 1961 as in the first half of more promptly after the down 1958, expansion began somewhat turn in 1960 than it did in 1957. Taking 12-month periods from close to the peak of activity in 1960 (June) and in 1957 loans and investments of all commercial banks (July), total increased by $13 billion in the 12 months ending June 1961, compared with $12 billion in the 1957-58 period--a little in each case. The increase in holdings of over 7 per cent was a little less than $8 billion in Government securities each period. demand deposits have increased more in Privately-owned in the 12 months ending July 1958--using the past year than daily averages, $2.5 billion against $1.5 billion. semi-monthly been no increase, however, in the last few months There has with a steady growth throughout 1958. Time deposits compared increased sharply in both periods, but more so in the past year--$11 billion against $8 billion in 1957-58. Thus in each case bank credit was abundantly available, and the funds thereby provided found their way into time deposits at banks to a larger extent than into demand deposits. of a longer standard of comparison, it can On the basis be shown that expansion in the money supply has slackened in recent years to a pace that may be considered inadequate for a satisfactory rate of growth in theeconomy.* Since 1955, the computed annual rate of growth in the money supply has are analyzed in a memorandum * This view and related developments prepared in the Board's Research Division which has been dis tributed to the members of the Committee under date of July 31,
been only 1 per cent. When time deposits are added, the rate of growth has been larger, but not as great as same analysts consider appropriate. Consideration might also be given to changes in the public's holdings of liquid assets other than bank deposits, which have grown somewhat more rapidly than total bank deposits in the past decade and also increased sharply in 1959 and again in 1961. When these are added to deposits, the rate of growth in the total during the past year has corresponded closely to the average for the decade and to the 1958 increase. Since 1955 the increase in the these assets has been only slightly less aggregate of all than GNP in current dollars. In the meantime, the turnover of demand deposits has increased, as the balances held in checking accounts are called upon to finance a more rapid rate of increase in trans actions. This rate of turnover is now comparable to the level that prevailed in the 1 20's. An important and strategic question is whether this ratio can be expected to rise further or whether it will be necessary in the future for holdings of cash balances to increase more nearly in pace witn expansion In recent years the rate of growth in GNP has been in GNP. viewed as inadequate. Reasons for this retarded rate of growth are largely nonmonetary, but any accelerated increase in GNP would probably need to be accompanied by a greater in money than has occurred in recent years. This increase must be taken into consideration in the determina question tion of monetary policy. event, it may be concluded that for the immediate In any credit expansion at approximately the pace future, continued appropriate in order to permit fur of recent months would be ther economic recovery. An approximation of the amount of that need to be made available to permit such expan reserves tables that have been presented to sion is indicated on the the Committee. Turning to the possible effect of the projected expan upon credit and monetary needs, sion in the defense program it should first be kept in mind that this program and any it may entail do not call for a threat of inflation that expansion below the rate that would slowing down of credit of reserves to be supplied be needed. The amount otherwise be fully as large as the totals pro in future months should presented, which indicate the probable jected in the tables This does not mean, of course, needs for a normal recovery. free reserves should necessarily be kept at $550 million. that increase and expansion in credit and in If credit demands
required reserves exceeds the amounts projected, then banks should have to borrow to obtain the additional reserves, and free reserves should decline. But, if monetary expansion and required reserves fail to come up to the projected amounts, then free reserves should be maintained at $550 million or more. Whether more credit and monetary expansion than has been projected would be desirable may be a question for future consideration. The second point to keep in mind regarding the enlarged defense program is that, taken by itself, the resulting in crease in Government spending will not place any great burden on our economic resources. It is well within the capacity of the economy to provide and still allow for considerable increase in private consumption, as well as in investment needed for expanding resources. Any measures needed to restrict consump tion or allocate resources will depend upon the response of the private economy. Evidence of that is still remote. What is the possible magnitude of the impact on the economy? The indicated increase in defense expenditures of less than $3 billion in the next fiscal year is much.less than the addition made in 1956-57 following the Suez crisis. When allowance is made, however, for the increase that has already occurred in defense spending this year, the comparison will be closer. At this time, moreover, there is more slack in the economy than there was in 1956. Federal budget deficit for this and Yet the prospective other reasons is large and, along with recovery in the private economy, will probably be a stimulant to private spending. the pressure on resources may eventually become Altogether excessive. Published official estimates indicate that, after allowing for increased tax receipts expected from expanding incomes, the deficit in the administrative budget will be about $6 billion if the pro $5.3 billion in fiscal 1962--or posed increase in postal rates is not adopted. Analysis of the estimates of receipts underlying this inadequate allowance for tax refunds and figure indicates that could together amount to various miscellaneous receipts $1 billion and $1.5 billion. These and other possible between could easily produce an administrative budget def variations billion. Various items of expenditure outside the icit of $8 budget could produce a cash budget deficit of administrative which is a more accurate measure of bor close to $11 billion, rowing needs. These revised budget estimates probably will not signif icantly change the previous estimates of Treasury borrowing
needs for the remainder of this calendar year, which will amount to over $7 billion, in addition to $4 billion already borrowed in July. The principal difference will be elimina tion of any debt retirement in the first six months of 1962. The net increase in the public debt in the entire fiscal year 1962 may be less than the cash deficit, because of the large Treasury cash balance at the beginning of the year, but never theless may be as much as $9 or $10 billion. This could have a materially stimulating effect on the economy. Some reconsideration may be needed, moreover, of views as to private borrowing demands during the next few months. It had been believed that these would be moderate in view of prospects for corporate sources and uses of funds. The basic factors are not likely to be greatly changed, but if the new defense program should alter business views as to inventories and plant and equipment expenditures, credit demands could increase. This is a situation that will need careful watching and more information as to changes in business attitudes and plans. The trends of home buying and of expenditures for con sumer durable goods and the credit involved, which had been thought to be factors that would moderate, rather than stim ulate, economic expansion, may also accelerate their pace. Stock market speculation offers another potential element of instability, although the volume of credit involved is not likely to be substantial under existing margin requirements. Until such pressures become evident, however, and ac tually affect credit demands, there seems to be no occasion for the adoption of measures of credit restraint. Some fur ther expansion is still needed. Restrictive measures at an early stage could unduly inhibit essential financing of the Treasury and of private needs. If, subsequently, demands are sufficient to threaten credit expansion at a rate that undue pressures on resources, then the restraint would exert on expansion can be permitted to operate or be applied by limiting the availability of reserves. I have not discussed the other new influence that has been brought into the situation during the past week in a manner, namely, the British measures of restraint. dramatic These will be discussed by Mr. Young. To the extent that to cause a flow of funds abroad because of interest they tend care may be needed to avoid keeping our rate differentials, rates too low. Increases in domestic credit demands accom panying recovery or induced by the new defense program may be sufficient to prevent this problem from arising.
Mr. Young presented the following statement on balance-of payments and related developments, particularly in the light of meetings last week in Paris in which he participated: Significant balance-of-payments changes for major countries from the first to the second quarter were: (a) A moderate increase in the over-all U. S, deficit, excluding debt prepayments; (b) A significant reduction in the basic deficit in Britain's external balance but a worsening of its global balance because of a large short-term capital outflow; (c) A strengthening of the surplus in France's basic balance, supplemented by a sizable short-term capital inflow; (d) A continuing large surplus in Germany's basic bal ance, moderated in recent weeks by liquidation of foreign holdings of German securities and otherwise offset in part by some short-term capital outflow; (e) A further inflow of short-term money into the Swiss, Dutch and Italian money markets. These balance-of-payments developments for key currencies were reviewed at length in a three-day international discus sion in Paris last week--one day in the meeting of the OEEC Working Party 3 and two days in a meeting of the OEEC Economic Policy Committee. The Working Party 3 meeting concentrated its attention on the German surplus particularly. Many deeply probing ques tions were directed to the German delegation concerning the adequacy of the program for dealing with and correcting Germany's surplus position. Main points of criticism related to: (a) Whether Germany's internal correction in terms of rising wages, other costs and prices was proceeding fast enough? (b) Whether Germany was not offsetting apparently lib eral monetary policy by a too tight fiscal policy, with Federal Government and Laender Government fis cal surpluses piling up in idle Bundesbank balances? (c) Whether Germany's monetary policy was per se suffi ciently expansive? (d) Whether Germany was exerting enough downward pres sure on long-term interest rates and doing enough otherwise to encourage long-term capital exports? And
(e) Whether Germany was stepping up aggressively enough its participation in foreign aid and development? The answers given were, of course, defensive: (a) That Germany was in a boom, with three or four job openings for every worker seeking employment; (b) That the boom had reached a slackening-off stage, and this would shortly become reflected in the current external balance; (c) That wages, other costs and prices were rising, with the wage rise proceeding currently at a rate about three times that occurring in manhour productivity; (d) That credit and capital demands were so strong it was difficult for monetary policy to press down further short- and long-term interest rates without giving up all control of bank credit expansion and the money market; (e) That German business concerns were now shifting bor rowing from foreign to domestic sources; (f) That the Berlin crisis was now inducing liquidation of foreign holdings of German securities as well as affecting tourist trade adversely; (g) That the fiscal surpluses of German governmental units were not too large and that in any case were needed to keep inflationary pressures within bounds; (h) That Germany's revaluation required time to work out corrective effects; (i) That Germany's efforts to expand foreign lending and foreign aid and development were proceeding as rap idly as practicable; and be asked by its trading partners (j) That Germany couldn't to press inflation too fast and too far because of inflationary apprehensions of the German people and position as a buffer and as a because of Germany's economy example as regards Russia. stable free These responses of the German delegation were not altogether persuasive to many Working Party participants and the Germans were asked to convey to their Government the anxiety of other delegations about the continuing large German surpluses on ex ternal account. Specifically, the hope was expressed that the could take further steps, without undue in German Government to reduce Germany's current external sur flationary impact, pluses and even convert them for a time into deficits. Some further aggressive addition to monetary liquidity, the elimina tion of fiscal surpluses, and measures to increase foreign
lending and to expand foreign aid were highlighted as de sirable steps under the circumstances. The German delegation in its turn emphasized the responsibility falling on countries experiencing balance-of-payments deficits to intensify steps to correct their own deficit situations. Other discussions of Working Party 3 related to recent balance-of-payments developments for the U. S. and France. These tended to be subordinated to a more general issue sug gested first by the discussion of German developments, namely, the precise nature of the mechanism for correcting balance disequilibria under modern conditions of currency of-payments internationally. Since this issue carried over convertibility two-day discussion of the Economic Policy into the following Committee, it merits special comment here. The challenge facing the Economic Policy Committee, it was suggested, was to decide upon the "rules of the game" for modern-day convertibility and then to see that member countries to the rules. The problem arose because, in the post adhered war world, there are new constraints on the policies that national governments can pursue. Full employment philosophy, today, excludes acceptance of large and per widely accepted sistent deflation of demand. The strength of labor unions, furthermore, precludes any broad-scale reduction in wage too, the dangers of a wage-cost spiral make levels. Then, governments hesitant to foster wage increases in excess of gains. Finally, governments have become com productivity price stability as essential for greatest mitted to general resources and for greatest equity in efficiency in employing distributing income. to be maintained, it was argued, sur For convertibility must allow external surpluses to be registered plus countries in internal inflation, i.e., surplus countries must import countries must allow deficits to be inflation, while deficit tendencies, i.e., must import de reflected in deflationary developments need only be relative. But, flation. These that characterize modern economies, it because of rigidities the inevitabilities of important to recognize explicitly is adjustment and to reenforce necessary the needed financial corrective tendencies by deliberate policies. If relative is too slow and too inadequate, convertibility adjustment of disequilibria, it was urged, will break down. Correction needs to be accomplished in a reasonable time. to this doctrine and delegates took exception Various much that could be done by govern pointed out that there was disequilibria without ments to correct balance-of-payments
relative inflation or deflation. Much room exists, it was alleged, for governmental action to influence the composition of demand. Deficit countries could encourage export competi tiveness, curb imports, and avoid capital outflow and surplus countries could discourage exports, encourage imports, and curb capital inflow. More study of these alternatives and ways to accomplish them on a temporary basis, it was held, was needed. A summary report about such a discussion is necessarily inadequate, but it suffices to indicate that a basic problem exists, to which solution must be found if recurrent exchange rate adjustment and realignment is to be avoided. Naturally, this particular discussion was inconclusive. But it did open up the subject and there were various expressions favorable to further and more intensive attention to it at subsequent meetings. It remains to be seen how far exploration of the "rules of the game" for modern-day convertibility can be carried and developed into operational form through inter national discussions of governmental officials. In the end, there were some delegates who contended that governments must retain their ability to alter their exchange values as an alternative to other courses of action. Other delegates, however, argued that, with industrial coun tries so much richer and liquid funds so much more ample and more mobile, the entire international system had become ultra sensitive and responsive to exchange rate changes. Hence, recurrent exchange rate alteration was no longer a tolerable alternative to a system of fixed exchange rates with relative inflation and deflation the central reliance for international adjustment. Discussion of this problem in the Economic Policy Com mittee preceded discussion of the British program to correct its cumulative external disequilibrium. This latter discus sion had to await the Chancellor's announcement of its con tents on Tuesday afternoon. The first order of business at Wednesday's meeting, therefore, was a detailed review and defense of the British program by the British delegation. Since the substance of the program is now well known, it is enough here to comment on points especially stressed by the British. The program comprises six main restraints: (1) Restraint on income-generated demand through higher taxes that bear most heavily on con sumption, plus restraint on demand financed through bank and insurance company loans through higher interest rates and reduced availability of credit;
(2) Restraint on wage increases in both the public and private sectors. In the private sector, such restraint is at first to be voluntary and coopera tive, but as soon as practicable, it will be re enforced by more formal governmental steps; expenditures overseas and (3) Restraint on public on private foreign investment; public expenditures and (4) Restraint on internal increased reliance by nationalized industries on internal financing of investment expansion; (5) Restraint on dividend increases by business corporations at governmental request; and (6) Restraint, so far as possible, on restrictive and monopolistic trade practices. The program, while focused on the short term, has longer term aspects, especially as to public expenditures, wage policy, and taxation of capital gains. Regarding public expenditures, the British intend that they shall become a declining propor tion of GNP, thus in effect renouncing a role for government expenditures in promoting economic growth. Some continuing mechanism of public policy to keep wage increases in line with productivity gains is to be sought. Taxation of capital gains, to be introduced with the next Budget, will be a per its objective in part is to placate the trade manent step; unions and encourage their cooperation in a governmental wage policy. it was explained, was a neces The bank rate increase, effect action, intended to put an abrupt curb on sary shock speculative tendencies in equity and real property markets, to discourage additional inventory build-up, to restrain fur ther consumer instalment buying by supplementing restrictive credit terms with higher finance charges, and to bring to a halt the outflow to foreign markets of short-term funds. It was categorically stated that, when evidence has accumulated bank rate has done its work, it will be re that the higher duced. The British emphasized that they sought to avoid re an inflow of "hot money" to help solve their balance liance on of-payments problem, even temporarily. be expected, the British explained, that the It was to market would react further to the bank rate change. gilt-edge The market, however, was in a strong technical position. It would soon benefit from the restraints on bank advances re from the increase in the Special Deposits percentage sulting to the banks and insurance companies to and the directive
limit loans to productive uses domestically and for export and especially to avoid advances to finance equity and property speculation. In addition, the instalment credit effects of the action to limit credit availability, together with suspension of the subsidy to home purchase finance and the restraints on stock market and property speculation, will tend to divert the flow of personal savings to fixed income securities. Finally, it was emphasized that the program is geared to produce an increase in the volume of personal and corporate savings, and that the gilt-edge market would benefit directly and indirectly from this too. One gathered the impression from this overly-complete diagnosis of prospects for the gilt-edge market that some foreign buying in the gilt-edge sector, if it were not too short term-gain motivated and hot, would be entirely welcome. British comment on their IMF drawing and its role was appropriately brief. It was indicated by the discus sion that some part of a drawing would go to repay central bank credits originating in the so-called Basle agreements, but that at least the Swiss credits would be extended for the time being. Many questions were asked of the British by other delegations, reflecting to be sure some degree of skepticism as to the adequacy of the program, as to the hazards that were being run through its monetary policy features, and as to the political capability of the British Government to carry it through. These questions were all well handled by the British delegation, but whether all skepticism was dis solved remains a question. Incidentally, a confidential report just received from Frankfurt suggests that skepticism as to the potential effectiveness of the British program pervades the first reaction of informed German business and banking circles. The balance of the Economic Policy Committee's discussion consisted of various individual country reports. Of these, only two merit special comment. The head of the Swiss delegation (the Swiss Minister of Finance) restated that the Swiss Government was not giving consideration to a revaluation of the Swiss franc and did not think that the Swiss national interest could be served in any way whatsoever by revaluation. The head of the Canadian delegation, after an extended review of recent Canadian exchange rate action, intimated that the Canadians might be willing to consider moving from a floating to a fixed rate, once an ac ceptable exchange rate had been established by market forces. Other discussion of the Economic Policy Committee related to the future of the two extant Working Parties. The life of
Working Party 2 on differential rates of economic growth and on forces making for such differentials was extended to June 1962; that of Working Party 3 on monetary and fis cal policies as they impinge on balance-of-payments equi libria was extended to the end of this year. These formal extensions of life were accompanied by some general dis cussion of the further usefulness of the two working parties, especially as groups to study and foster appropriate govern mental policies, and it was the consensus that the whole matter of continuation of activity be reviewed again at the fall meeting of the Committee. In summarizing the report he would make to the OEEC Council, the Chairman of the Economic Policy Committee stated he would suggest that the two working parties be regarded as continuing adjuncts to the Economic Policy Committee's organizational arrangements. Mr. Treiber presented the following statement of his views on the business outlook and credit policy: Since the last meeting of the Committee there have been three developments of special significance for monetary pol icy: First: The progress of the economic recovery has been confirmed by numerous economic indicators. Second: The President of the United States has requested substantial additional expenditures for defense, with a resulting increase in the prospective Federal Government deficit. Third: Recent U. S. balance-of-payments developments disappointing and the British have have been taken action which may stimulate short-term capital outflows from this country. On the whole, the economy seems to be rising at about the same rate as it did following other recent recessions. As ex pected, the rate of expansion in June and July was not as great months. Employment, income, sales, indus as in the preceding trial production, and construction all continue to move up. continue to be stable and there is a At the same time, prices good deal of unused resources, both men and capital. The high level of unemployment continues to be a knotty problem. substantially as the banks Total bank credit has increased of Treasury securities as a result have acquired large amounts financing program. Business loans of the Treasury's recent bank loans strengthened somewhat in July following and other
a relatively weak showing in June. There were heavy repay ments of loans to sales finance companies in June, a typical pattern for early recovery. In addition, probably some of the proceeds of the large amount of capital issues floated in the second quarter were used to reduce bank loans. As the Treasury expands its borrowing in the coming months and spends the money, a rise in the money supply and a rise in bank reserves may be expected. The general liquidity posi tion of the economy is good. The money market has been quite easy. During the period just ended, free reserves have averaged about $560 million, compared with an average of about $525 million in the pre ceding period. Other money market indices have reflected greater ease. Federal funds have been freely available, with the rate in the 1 to 1-1/2 per cent range during most of the period, dropping below 1 per cent on several occasions. The impact of a sizable Federal budget deficit, including the additional defense expenditures now proposed, could be pronounced by the end of the year. The military program taken by itself, however, is not likely to put a serious strain on the economy's resources. The chief effect will be to call manpower into uniform and to increase the output of conventional weapons that can be produced without much expansion in present plant capacity. inflationary impact lies more in a possible change The in business and consumer outlook regarding potential short ages and future prices. The administrative deficit for the fiscal year ended June 30, 1962, has been estimated by the Administration to be about $5 billion. The cash deficit could be about $10 billion. Concern is being expressed at home and abroad as to the magnitude of the prospective defi cit. The proposed increased Federal deficit constitutes a potential danger to the stability of the economy and confi dence in the dollar. As yet, however, the extent of the danger cannot be adequately evaluated. As the Federal Gov the stimulus of greater deficit spending to the ernment adds domestic economy, there is less need for a policy of monetary ease and low short-term interest rates that might adversely affect our international financial relations. As of today, however, the recent budgetary developments call for increased alertness rather than an actual change in monetary policy. The United States continues to have a stubborn balance problem and our international financial situation of-payments The over-all U. S. balance of payments is quite sensitive. in the second quarter will apparently show a surplus of $700
million at a seasonally adjusted annual rate. Leaving out the German debt prepayment, however, there was a deficit of $1.6 billion at an annual rate. This is a $400 million in crease from the first quarter deficit rate despite the de cline in short-term capital outflows from $2.0 billion to virtually zero. The loss seems to be explained by a sharp increase in outflows of medium- and long-term capital. Exports declined in the second quarter and the outlook for the next few months is no brighter. The austerity program in Britain can be expected to cut into our exports, and shipments to Canada may be adversely affected by recent Canadian measures. Imports remain a question but with re covery at home they may tend to move up. The emergence of a sizable deficit in the United States budget may be in terpreted abroad as a weakening of sound fiscal policy and thus ultimately lead to more gold losses. The higher interest rates now in effect in Great Britain will be an added inducement for funds to leave this country. With a 7 per cent Bank rate in England and a British Treasury bill rate between 6 and 7 per cent, American investors in British Treasury bills with full foreign exchange protection can obtain a higher yield per cent better) than that on a comparable (now about 1/4 in U. S. Treasury bills. If the British pro investment gram is successful and confidence in sterling is restoredbe--the forward discount on sterling and we hope it will decline, and there will be an incentive to will probably abroad without exchange cover. More immediately, move funds interest rate on sterling loans in London may the higher with international operations to shift cause corporations their borrowing to the United States and to use the bor in their international operations. We may rowed dollars an increasingly strong outward pull on short-term expect from this country to Europe unless our own short-term funds rates move up considerably in the interim. The pull will from Britain but even more importantly from be not only If business here recovers vigorously, of the Continent. our rates will probably rise. There is no guarantee, course, of U. S. rates required to check the however, that the level will coincide with the level considered export of capital appropriate from a domestic viewpoint. and credit situation still calls The domestic business for a policy of monetary ease. On the horizon, however, are that bear careful watching. If enlarged defense factors
expenditures and related private spending result in an upsurge of activity with inflationary aspects, we may have to modify our policy of basic monetary ease sooner than we would otherwise have done. In the coming period undue ease should be avoided. The level of free reserves is important but it is only one of several factors to be considered. We think that the so-called "feel" of the market is especially important. Too low money market rates, such as the Federal funds rate and rates on dealer loans, should be avoided. For almost a year the rate on three-month Treasury bills has been within the range of 2-1/8 to 2-5/8 per cent. During most of the time the effective range has been 2-1/4 to 2-1/2 per cent. We think that the rate should continue within this range, but that in the light of both domestic and international developments it is highly desirable that the rate be in the upper rather than in the lower part of the range. This seems desirable even if at the expense of a somewhat lower level of free reserves. Observers abroad are watching us closely. They are excessive ease here, particularly as likely to interpret symbolized by a low Treasury bill rate, as indicative of an unwillingness or inability on the part of the United to take the steps necessary to assure the sound States ness of the dollar. We believe that the discount rate should not be changed, that there is no need to change the directive, authority to engage in transactions in longer and that the term securities should be continued. that in New England business activity was Mr. Ellis reported rather than expansion was still the continuing its recovery. Recovery the stage of the cycle had been reached predominant tone, although were being posted. For example, manufacturing where some new records overtake year-ago levels. It should be output seemed about ready to that the mere reaching of year-ago levels was some noted, of course, The regional shoe industry, which what less than fully satisfactory. national output, had been affected adversely accounts for one-third of
by the early date of Easter. The industry experienced a greater than seasonal drop in April. Activity continued below year-ago levels in May, but in late May retail sales began to improve and this stimu lated some pick-up in orders from the factories. Construction was being stimulated by activity in the residential category in recent months, with the result that the cumulative contract total for the first half of the year was up 2 per cent, equal to the national rate. On the other hand, nonresidential construction was running 7 per cent behind year-ago levels. Unemployment was down slightly in June. Incomplete data for the District indicated that although employment had increased for four successive months, the total remained about .6 per cent below last year's levels. At no time during this cyclical decline did total employment fall as much as one per cent behind year not much recovery was necessary to surpass those levels. ago levels, so New claims for unemployment compensation were now down to normal seasonal levels. trade statistics suggested that New England consumers Retail were buying department store products somewhat more aggresively than in the nation at large. Registrations at private summer consumers camps were running one per cent behind year-ago levels, while agency supported by public funds) showed gains in July and August camps (those With better weather, tourist trade had improved recently. enrollments.
Some resort area banks credited the delayed tourist season with delaying the normal June-July gain in deposits. Whatever the causes, however, demand deposits were weak, with July totals down from the June average and below seasonal expectations. Loan demand also had weakened, with business loans in July below a year ago for the first time this year in the District. Nevertheless, loan-deposit ratios of weekly reporting banks averaged 65.2 per cent, this figure being identical with a year ago and some 5 percentage points above the average ratio for the United States. The banks had built up secondary reserves, and borrowing from the Federal Reserve Bank had virtually dried up. Turning to policy considerations on a national basis, Mr. Ellis commented that the most significant change in the economic out look had been the rapid emergence of the stepped-up defense prepared ness program, with its ramifications in terms of consumer expectations, public psychology, and business reactions as well as its direct impact in terms of the placing of orders and subsequent increase in expendi tures. He agreed with those who felt that the most likely prospect was for a rapid and vigorous surge in business activity during the forthcoming fall and winter. However, in view of the present under utilization of resources, it would appear that an expansion of activity could carry a considerable distance and for a considerable period of
time without severe inflationary impact. If this was correct, it would appear that the proper course of policy for the present would be to continue to encourage bank credit expansion in support of greater economic activity. Mr. Ellis expressed the view that the present directive was probably still acceptable, but that the Committee would soon have to recognize that the economy was passing through a period when the forces of recovery were developing into forces of expansion. There fore, a suitable change in the directive at some forthcoming meeting would seem appropriate. Also in the light of recent developments in the United Kingdom, which might stimulate some outward flow of capital from this country, it was necessary again to consider the appropriate ness of avoiding downward pressure on short-term rates. This sug gested the desirability of continuing the present practice of operating in all maturities in supplying reserves. For the next three weeks, Mr. Ellis said, he would make no change in the directive, he would supply reserves liberally to en courage credit expansion, he would recommend no change in the discount rate, and he would continue the special authorization covering opera tions in longer-term securities, along with the present pattern of operations under that authorization. Mr. Swan reported that employment in the Pacific Coast States reached a record high in June and that the rate of unemployment fell.
On a seasonally adjusted basis, however, unemployment was somewhat over 7 per cent. Although the Twelfth District did not suffer as severely as the nation in 1960 and early 1961, as was also true in the previous postwar recessions, it had lagged behind the nation in recovery, in terms of employment at least, for the first time in any postwar recovery. This lag in a sense was not general. Rather, it seemed to arise primarily out of special circumstances, including the continuing decline in aircraft employment and the slow recovery in residential construction, which had a particular impact in the District in view of the importance of that area of activity in the past. However, there were now definite indications of improvement in the prospects for home building in the District and the outlook for heavy engineering construction, in terms of several major projects, was quite favorable. Department store sales in June rose considerably beyond both May 1961 and June 1960, and the gains continued into July. District banks were still in a relatively easy position, and there was only nominal borrowing from the Federal Reserve Bank. While the demand for bank loans continued to be quite weak, some of the large banks had indicated that they were anticipating a strong demand within the next month or so. To the extent possible, they were arranging their investment portfolios so as to be able to ac commodate the anticipated demand.
Turning to policy, Mr. Swan commented that the available statistics did not yet reflect the impact of recent international developments and the announced plans for increased defense spending on business and consumer expectations. The outlook was for a com bination of Treasury needs for funds which might be intensified in the months ahead and a possible increase in private demands for credit over and above those that might have been expected from the normal process of recovery. This raised the prospect of some con siderable tightening of credit markets in the not too distant future. In view of the uncertainties in the international picture, and also the availability of excess manpower and plant capacity, he would certainly not advocate significantly less ease for the next three weeks. It did seem to him, however, that the Committee should be considering carefully the possibility of a definitely less easy situation developing in the months ahead. For the period immediately ahead, he would only go as far as to suggest that it would be de sirable if the bill rate did not go below 2-1/4 per cent and instead remained in the 2-1/4--2-1/2 per cent range. Also, he would suggest a free reserve target from $550 million down to $500 million, rather than $550 million up to $600 million. These were hardly significant changes; possibly he was only saying in effect that the Account Management should not resolve doubts on the side of ease to quite as in recent weeks. In supplying reserves, he felt the same extent
it would be quite desirable to purchase securities in the inter mediate area, so far as possible, rather than bills. Therefore, he would favor continuing the special authorization covering operations in longer-term securities. Although he would not suggest - change in the discount rate or the directive at this time, he felt, like Mr. Ellis, that the Committee might want to consider a change in the directive before too long. Also, if the recent reaction in the stock market should continue, with a further increase in the flow of credit into that area, it seemed to him that at some point the Board of Governors might want to give consideration to a possible increase in margin requirements. Mr. Deming commented that the most significant Ninth District economic development this summer had been the persistence of drouth over much of the area. The dry weather had been centered in the spring wheat producing areas of the western part of the Dakotas and eastern Montana, but the drouth extended into adjacent grazing areas and also into northern Minnesota. As of mid-July, only southeastern South Dakota and the southern third of Minnesota were free from drouth Since mid-July, fairly widespread showers had occur damage to crops. the District, which had given temporary relief, but they came red over too late for the small grain crops. North Dakota had been hardest hit by the dry weather, with less than 50 per cent of last year's of small grains expected. In Montana, a 25 per cent production
reduction in all wheat was indicated on July 1. All things con sidered, cash income from District crops in 1961 might be reduced by one-fourth to one-third from last year. Total cash income from farm marketings during the first half of the year appeared likely to have exceeded the same period a year ago, but cash income might fall behind during the second half, perhaps by as much as 15 to 25 per cent. Farm income, he noted, comprises about 12 per cent of total District income. Some communities in the hardest hit drouth areas were al ready noting or anticipating the economic effects of smaller crop marketings. Farm machinery sales, as well as retail sales, were reported slow, and the processing and handling of the smaller crop would reduce employment and activity to a greater extent in the period ahead. However, in spite of the reduced crop production prospects and a lack of vigorous activity in the iron ore mining areas, the over-all District economy as of midyear was in reasonably good shape. Nonagricultural employment increased 1.3 per cent from May to June in Minnesota, and unemployment declined from 6.6 per cent to 5.8 per cent of the labor force. However, in two major nonagricultural activities--mining and railroading--employment in 1961 was running about 33 per cent below five years ago, meaning a reduction of 35 to
40 thousand jobs. Also, although personal income in the District was up from a year ago by almost precisely the same percentage as nationally, there had been no gain since the beginning of the year, actually some little decline, while nationally there had been a rise in the past six months. On the financial side, both deposits and loans at District member banks at midyear exceeded year-earlier figures, with substan tial gains in time deposits. Loan totals, however, had shown little change for the past seven months. Turning to policy, Mr. Deming said he could do no better than borrow the thought expressed by Mr. Treiber: that it would be well to operate with increased alertness over the forthcoming period, and perhaps the next two or three succeeding periods. He saw no reason to change the discount rate at this time. As to the directive, in the light of recent developments in Europe he would suggest the possibility of inserting the word "increased" before "consideration" in the phrase of clause (b) now reading: "while giving consideration to international factors." However, he did not regard this possible change as important. He would be inclined to aim at keeping free reserves about where they had been, he would favor renewing the special authorization covering operations in longer-term securities, and he would suggest operating substantially in the longer-term area to avoid pressure on the bill rate.
Mr. Allen reported that Seventh District businessmen and economists remained optimistic about the continuance of the economic uptrend into 1962. The nature of additional defense spending, in particular concentration on conventional arms, strengthened that optimism, for it meant that District participation in the defense program would again increase after a long decline which began in 1953. Retail sales were edging upward, in the Seventh District as in the nation, but the record was spotty. In the four weeks ended July 23, for instance, department store sales in Chicago increased a year ago, whereas Detroit showed no change and 4 per cent over Milwaukee, Indianapolis, and Grand Rapids experienced declines. Mr. Allen said, automotive management now seemed In Detroit, less optimistic about concluding negotiations without a strike, whereas he had reported a few weeks ago that they felt that a strike might well be avoided. Based on his experience in the area, he would say that the change in mood was characteristic of this stage in an important negotiation. Automobile sales spurted in mid-July, as reported in the staff review. All major manufacturers would be by tomorrow for model changeover, and not more than down completely 150,000 1962 models were expected to be built in August. That would be barely enough to supply dealer showrooms, which was regarded as a matter of union leverage in the negotiations.
The employment situation in the District continued to im prove. In July new claims for unemployment compensation were slightly below the year-ago level, continuing a trend underway since the start of the year. It was becoming obvious that, according to precedent, the Seventh District had benefited more from the recovery than the rest of the nation, just as it declined more in the recession. As to agriculture, cash receipts from farm marketings in Seventh District States in the first half of the year were 6 per cent higher than last year, compared with a 3 per cent increase for conditions were good over the entire Dis the entire country. Crop trict, and grain yields promised to be at a record level. The high yields reflected not only good weather but also retirement of the poorest land in the 1961 feed grain program. With the conclusion of the sessions of the State legislatures, it was apparent that spending by State governments would rise sub stantially in the year ahead. Approved budgets indicated increases from a high of 26 per cent in Illinois to a in outlays which varied low of 8 per cent in Iowa. banks showed a further decline in District weekly reporting of about $100 million in commer during July, with a reduction loans company, and consumer loans for the three cial-industrial, finance offset by a rise in loans on securities. weeks ended July 19, partially
Substantial additions to Government security portfolios had been mainly in the under-one-year category, with the bill inventories of reporting banks in Chicago now $700 million, far above bill holdings at any time in recent years. In the area of monetary policy, Mr. Allen said he found himself favoring, with a degree of apprehension in the light of the greatly improved state of business and the forthcoming impetus of increased governmental expenditures, continuance for the next three weeks of that degree of ease which the Committee had fostered for many months now. He was agreeable also to continuing the directive without change, although the word "recovery" in clause (1) (b) no longer seemed appropriate. On the other hand, the reference in the to "the forces of recovery," and he would not urge a directive was change at this meeting, although he could easily be persuaded other He felt that the special authorization should be withdrawn, wise. for reasons he had heretofore stated. commented that System operations in securities other Mr. Clay issues since February 20, 1961, had given rise to the than short-term of criteria by which transactions in longer-maturity issues question be guided. The question had been brought into current focus should Reserve Bank of New York, in the July 7 memorandum of the Federal by which it was suggested that a third criterion be added to the two then being employed by the Desk. The suggestion offered in the New
York memorandum was "that operations outside the short-term area should be undertaken on those occasions when congestion appears to be developing in the capital markets or when market expectations as to the future course of rates seem to be having clearly exaggerated effects," This proposal was formulated in the light of conditions now confronting the Open Market Committee. However, it seemed well to examine its implications under more general conditions. There were times when it might be desirable to reduce long term rates of interest and thus stimulate spending even though con gestion was no problem in the capital markets. There were other times when a limited degree of congestion in the capital markets was desired in the interest of restricting investment spending and should not be offset by policy actions. Similarly, expectations of market participants as to the future course of rates might result in desirable as well as undesirable effects on the cost and availability of credit, and only in the latter case would corrective action be called for. It would appear to him, then, that the criterion for System operations in intermediate and longer-term issues should be stated in terms broader than those suggested in the New York memorandum. In stating the various criteria by which open market operations were to be conducted, the Committee should give consideration to whether existing long-term rates were appropriate for attaining the Committee's
economic objectives. The Account Manager should then be given as one of his instructions that of making purchases or sales of securi ties looking toward the desired impact on longer-term rates. Manifestly, no one had a magic formula for determining the level of long-term rates that would be appropriate at any given time. The necessity of making this judgment was not avoided, however, by selecting a variable such as free reserves by which to guide open market operations. This variable has no direct relation to the ex penditure decisions of the public nor is it a reliable guide to the availability of credit to private borrowers. To be given meaning ful interpretation as a measure of monetary restraint or stimulus, it must first be translated into terms that measure or reflect its for the cost and availability of credit, including the implications level of long-term interest rates. Turning to the posture of monetary policy for the period ahead, Mr. Clay noted that the business news of recent immediately signs that recovery in economic activity weeks contained encouraging than one might earlier have anticipated. Though had been more rapid labor and capital resources remained a considerable volume of unused to be productively employed, progress in opening up employment oppor since the first quarter, and this development tunities had been made months ahead. The probable increase in defense should continue in the by recent international developments would expenditures occasioned
make an added contribution to this end, particularly since the character of the proposed outlays was likely to benefit durable goods industries in which ample resources were available for in creasing real output. Mr. Clay suggested that monetary policy for the immediate future should be directed toward maintaining the present degree of ease in the money and capital markets until the response of the private sector to the expected increase in Federal expenditures could be appraised. Such a course of action implied continuing transactions in longer-term securities geared to the objective of maintaining present levels of long-term rates. It also meant such additional transactions in short-term securities as might be neces sary to continued expansion of bank credit and bank deposits at a seasonally adjusted rate comparable to that prevailing during the first half of this year. If the injection of reserves necessary to meet this latter condition could not be accomplished by purchase of Treasury bills without reducing the bill rate below recent levels, purchases of intermediate or longer-term issues should be undertaken for this purpose also. In conclusion, Mr. Clay expressed the view that the authoriza tion covering operations in longer-term securities should be renewed, and that no change appeared to be called for either in the Committee's directive or in the discount rate.
Mr. Wayne said that Fifth District business activity appeared to have continued the improvement that occurred in the second quarter. Like the New England area, however, the District was certainly in a period of recovery rather than expansion. By mid-June seasonally ad justed nonagricultural employment had risen 1.5 per cent from the re cession low, slightly less than the rise of 1.7 per cent for the United States as a whole. Manufacturing manhours had risen 6.8 per cent com pared with a gain of 6 per cent nationally. Total manufacturing man hours had regained 71 per cent of their recession decline, but some fairly important industries, including metals, furniture, lumber, and food processing, had recovered less than 45 per cent of their losses by mid-June. A cross-section of industrial leaders contacted in a survey last week reported further increases in new orders, backlogs, ship ments, employment, and average workweek. Business loans, however, were weaker than usual at this time of year, and the banks were in an easy position. Such borrowing as there was at the Reserve Bank seemed of a purely routine seasonal nature. Farm cash receipts for the first five months of the year were above last year. In general, it might be said that grass-roots contacts indicated moderately op timistic views. As to textiles, leaders in the industry felt that the agreement reached at the Geneva International Textile Conference in July would result in some restriction of imports in the months ahead.
Mr. Wayne said that he could see no justification for any change in System policy in the next three weeks. The economic up swing was apparently continuing at about the same rate as in pre vious recovery periods, but unemployment was still high, plant capacity was still not fully utilized, and most prices were either stable or drifting downward. As others had pointed out, however, there were two significant uncertainties in the picture. The first was the impact of proposed defense spending, not only directly but on expectations. Second, there were the recent foreign developments, particularly in the United Kingdom. The stage might be set for an outflow of capital, and a British drawing on the Internatiohal Mone tary Fund might trigger such a movement. Nevertheless, until the effects of the factors he had mentioned could be better gauged, he felt that maintenance of the present degree of ease was the most appropriate posture for monetary policy. After stating that he would not recommend a change in the directive at this time, Mr. Wayne said he had been a little concerned at recent Committee meetings regarding the emphasis placed from time to time on the failure of the money supply, as narrowly defined, to grow. In his view, the Committee should concentrate on changes in total liquidity rather than the money supply. It appeared to him that total liquidity had increased fast enough in recent months recovery despite the smallness of the rise in to foster adequate
the money supply. If more demand deposits were needed, time deposits could have been converted. Therefore, he would not favor additional ease to encourage an increase in the money supply. Instead, he would favor a range of free reserves from $550 million down to $500 million, with particular emphasis on the international situation and on the bill rate at this time. Mr. Mills commented that there could, of course, be different reactions to the remarks that had been made at this meeting up to this point. Hiw own interpretation was that there seemed to be a groping to find a monetary and credit policy that would continue to encourage bank credit expansion, while at the same time skirting the danger of generating subsequent inflationary pressures. He feared it amounted to wishful thinking to believe that a policy of that sort could be realized. Instead, it should be acknowledged that monetary and credit events, in order to avoid having to take over policy must anticipate corrective actions later. For the purpose of outlining a policy that he felt would be proper at this particular juncture, Mr. Mills then read the following statement: Whether Federal Reserve System monetary and credit policy should aim at forcing an expansion in bank credit in order to stimulate growth in the money supply or sights should be guided by movements in whether policy the short-term interest rate structure are in effect the issues that are open for debate at today's meeting of the Federal Open Market Committee. In the light of neartime experience, it has been demonstrated clearly that in the
absence of an aggressive demand for commercial bank credit, the possibility of promoting an increase in the money supply from that source is limited and, consequently, judicious financing of the Treasury's deficit through the commercial banking system continues to be the most eligible medium for promoting the expansion of bank credit, with an assist from monetary and credit policy. Several occasions have already exhibited the support to commercial bank credit expansion that resides in the financing of new is sues of U. S. Treasury securities with the commercial banks. At longer range, the problem presumably will prove to be how to decelerate Federal deficit financing through the commercial banking system in the prospect of a rising de mand for private credit as economic activity increases in both its private and public sectors--all to the end that troublesome inflationary pressures will not take root. Under the circumstances recited, it is clear that any concern about the need of pumping up the money supply can be set aside by the System Open Market Committee and its attention turned to developing a monetary and credit policy geared to movements in the short-term rate of interest. Examination of the levels of free reserves pertaining over many weeks past, with their correlation to the auction rates on new 90-day issues of U. S. Treasury bills, suggests that whereas a high level of free reserves undoubtedly exerts some expanding influence on bank credit, a relatively low level of free reserves does not force the interest yield on 90-day Treasury bills unduly upward. Such being the case and considering the status of international short-term interest rates, it appears desirable to bring down the level of free reserves from the high points which they have re cently reached and so as to exert a reasonable but not ex cessive upward pressure on the short-term interest rate Actions taken to that end should be productive structure. of an interest rate structure consistent with current and prospective national and international economic developments, at the same time that measures taken to force-feed the money of setting the stage for a with the attendant danger supply, future inflation, will have been avoided. As far as the is concerned, judicious Treasury deficit fi money supply nancing through the commercial banking system will remain as for promoting such further increase in the obvious vehicle the money supply as is demanded by rising economic activity. A Federal Reserve System monetary and credit policy con forming to the reasoning outlined recommends bringing down
the level of free reserves below current highs by gradual disengagement from the System Open Market Account's port folio of longer-term U. S. Government securities, which holdings have recently been augmented substantially. It is recommended that the special authorization for operations outside of the Treasury bill sector should be renewed, but on the above basis of a reduction in the holdings of such securities. Mr. Shepardson said it seemed to him that all of the economic reports indicated a continuing expansion of activity, slower in some areas, possibly, than in some others, but generally an upward trend. announced defense program and the In the circumstances, the recently international situation gave real pause from the stand change in the where things were going to go. He agreed point of considering just with those who had indicated that the Committee should perhaps not be overly concerned about the lack of expansion of the money supply, Since there appeared to be a continuing growth in narrowly defined. which the forces of the Government spending program total liquidity, questioned whether it was necessary to seemed likely to enhance, he to happen. It was known definitely that wait and see what was going there was going to be a prompt expansion in military supplies and manpower, and this would have both a real and a psycholog military ical effect. projections, Mr. Shepardson noted, A review of the reserve that to maintain the prevailing level of free reserves would indicate it would be necessary to supply reserves shortly in considerable followed by reverse action. This was an appropriate quantity,
occasion, he felt, not to try to supply all of the indicated reserves, but rather to let the level of free reserves fall to within the $500 opinion, in fact, free reserves had been $550 million range. In his at a higher level than necessary or desirable for the past three weeks. Accordingly, he concurred in the view that free reserves might be allowed to trend downward somewhat, although without going so far as to constitute a restraining action. A failure to meet the full indicated need for reserves in the period immediately ahead would also ease the problem with respect to short-term rates, and he felt the Committee should be concerned about such rates. To the extent that it was possible, consistent with the objectives he had mentioned, to reduce System activity in longer-term securities, that would in his opinion be desirable. He did not feel that the Committee should disengage completely from such operations, but he did feel that the Committee should take advantage of opportunities to reduce its activi ties in the longer-term area. He would not favor changing the directive or the discount rate at this time. Mr. King said he would hope that the Desk might lean in the of supplying reserves through the purchase of bills, even direction though some drop in the bill rate might occur. Even though mindful of the international considerations that had been discussed, he saw no need for deliberate action designed to push the bill rate higher. idea of accepting a lower free reserve level, in He agreed with the week or so at least. Therefore, he would not make purchases the next
in the longer-term area simply in order to provide free reserves in the vicinity of $500-$600 million. Even if free reserves were in the neighborhood of $400-$450 million, he would prefer to refrain from operations in the longer-term area to any great extent over the next three weeks. He would not suggest any change in the discount rate or the directive at this time. Mr. Fulton said that Fourth District economic recovery, after coming along quite strongly through the month of June, had slowed down in July, reflecting among other things a number of sea sonal factors such as holidays, vacations, and auto changeovers. Reports from the metalworking industries indicated that it was dif ficult to project the course of activity for the rest of the year. However, expectations were generally for a good fourth quarter, with activity going into next year at an accelerated rate. Certain prod ucts of the foundries were being taken well, but the railroads were not buying and the auto manufacturers had not been placing orders in quantity. Steel manufacturers reported that their orders were lower in July than in June, that deliveries scheduled for August were lower than for July, and that the automotive people just were not ordering. However, the hope was for a good fourth quarter and for going on into 1962 at an increased rate. There seemed to be no sig accumulation on the part of any of the users of nificant inventory either basic materials or finished steel. In the staff review
distributed prior to this meeting, it was indicated that there had been a considerable turnaround in inventory accumulation. However, those with whom he talked maintained that their customers just did not seem to be accumulating inventory beyond working levels for their own operations. The profit squeeze was a real problem in the steel industry, as in some other industries, and until business got considerably better the mills were not going to get into any rea sonably profitable operation. Department store sales had improved somewhat, although on a year-to-date basis they were 2 per cent below last year. While the volume of construction was quite good, the situation was spotty throughout the District. A large part of the volume was accounted for by Government money, Federal, State, or municipal. Loans at District banks fell during July, with the only sub stantial demand coming from those preferring to take term loans rather than to go to the capital markets. These included smaller probably would not have ready access to the capital companies that markets. to policy, Mr. Fulton said that he would not recommend a As change in the discount rate and that the directive seemed reasonably future. Although he would renew the satisfactory for the immediate special authorization covering operations in longer-term securities, himself with those who had expressed the hope that ac he would align tivity in longer-term issues might be minimized. It occurred to him
that the System might be getting into a rather difficult position by virtue of trying to maintain a level of rates in the bill market which in turn encouraged banks to buy bills. It seemed almost self defeating to sell bills and purchase longer-term securities if the banks then acquired the bills because the rate was attractive, for the yield thereby was again depressed. He had a feeling that a lesser volume of free reserves might assist in maintaining the bill rate, and relieve the System of what it felt to be its duty to main tain the short-term rate structure. Therefore, he would feel that $500 million of free reserves should probably be the maximum. To easier position than one reflected by a maxi put it another way, an million of free reserves should not be encouraged. mum of $500 that business continued to improve in the Mr. Bopp said sluggish rate than in the nation gen Third District, but at a more evident whether one looked at the business or the erally. This was financial statistics. It was noted that for the past seven weeks there had been no further expansion of time deposits. to policy, Mr. Bopp said that he would favor continuing As same degree of ease that had been maintained. He would about the not favor a change in the discount rate or in the directive at this would renew the special authorization covering opera time, and he securities. The expanded defense program might tions in longer-term the Committee would have to take another look at the situa mean that this did not apply to the next three weeks. tion, but
Mr. Bryan said that he had come to this meeting as devoid of convictions, possibly, as at any time he could recall. If one were to look at the present economic situation and the extent of recovery purely upon the basis of the figures that had been presented, an excellent case could be made for continuing present System policy more or less indefinitely. However, when one had to take into ac count the prospect of an increased Federal deficit, the repercussions of that deficit in the private sector of the economy, and the inter national situation, ne became quite uncertain as to the proper pos of System policy. Mr. Bryan commented that he was sympathetic ture with those who had suggested the need for alertness to avoid getting an inflationary situation, and that he had sympathy with again into the remarks of Mr. Mills. couple of questions, Mr. Bryan said, that troubled There were a First, much emphasis seemed to have been placed him considerably. the management of monetary policy in relation to balance-of upon In this connection, he wished to revert to payments difficulties. that he had made before, namely, that those difficulties a point policy and instead derived from other were not created by monetary While monetary policy might make some elements of national policy. difficulties, he felt the System contribution to remedying those that any major contribution to their should not cherish the illusion of monetary policy was possible. Also, he was solution by means
troubled by the feeling that because of the British situation the System must take what might be called a manipulative approach to short-term rates. The British were undertaking what was largely a classical adjustment to their problem. To the extent that the System took a manipulative approach to short-term rates, it was saying to the British in effect that the System wished to make no contribution to the amelioration of their situation. He had considerable doubt whether that would be a wise or morally correct posture. Mr. Bryan concluded by saying that if he had to suggest a target for free reserves at the present time, he would suggest tending in a downward direction to something like $500 million, rather than the $575 million average of the past four weeks or the $600 million average of the past three weeks. Mr. Johns reported that business activity in the Eighth Dis trict had been showing improvement, as it had elsewhere. As in the nation, more strength had been shown in the District in the output of durable goods than in the output of nondurables. Coal production had increased moderately in recent weeks, but crude oil production only slightly. Major cities in the District had experienced had risen a decline in the percentage of the labor force unemployed during May and June, in contrast to the constant rate of unemployment in the nation as a whole, and the situation improved further in early July
according to indications from available weekly data and from out look reports. Construction activity was improving somewhat more rapidly in the District than nationally. Financial developments had been quite similar to those in the rest of the nation. Total loans and investments had grown, and loan demand was somewhat stronger than over the nation as a whole. The growth of deposits had been primarily in the time category, and borrowing from the Reserve Bank had been nominal. On the whole, agricultural developments were satisfactory. Soy bean prospects were quite good; the expected production coupled with higher support prices pointed to increased returns. As usual, there were mixed reports concerning the cotton crop. Acreage was up in all the major producing areas except southeastern Missouri, but it was possible to get almost any kind of report about the con dition of the crop. There was general agreement that the crop was a little late, but on the whole the major producers seemed to hold fairly optimistic views. Yield prospects for feed grains were gen good, but acreage was down substantially. Tobacco producers erally the outlook to be quite promising, with production estimates reported it was expected that cash farm in up about 8 per cent. In general, be up significantly from last year, al come in the District might were quick to warn that the crops were not yet har though farmers reports involved assumptions of good vested and that optimistic weather and other favorable conditions.
As to policy, Mr. Johns said he was inclined to align him self quite closely with the views of Mr. Ellis. With reference to the staff memorandum of July 28 on member bank reserves, he found it gratifying to observe that the increase in reserves held against deposits other than U. S. Government deposits increased in the four weeks ended July 26 rather closely in conformity with the pattern projected in the July 7 staff memorandum. In the projections shown in column three of table 3 of the current memorandum, there was built in a weekly increment for expansion of demand deposits adjusted and time deposits at an annual rate of about 5 per cent. Although he had suggested three weeks ago some additional increment, he would be disposed at this time to accept the $15 million weekly increment. This meant that he believed there should continue to be modest in creases in total member bank reserves. He saw no need to change the discount rate or the directive at this time. said that he would not recommend changing the Mr. Balderston directive until it was clear from the index of industrial production and other indices that the economy had moved onto higher ground. He would favor extending the special authorization covering operations in longer-term securities. As to policy for the next three weeks, associate himself closely with the views expressed by he wished to would prefer to speak in terms of total reserves rather Mr. Johns. He
than free reserves, since the time might come this fall when mem ber banks would return to the Reserve Bank discount windows and increase their borrowings. Until and unless defense and other Gov ernment spending created speculative exuberance, it was his view that the Open Market Committee should be guided by the staff pro jections of total reserves. This figure, which was about $19.4 billion for the week ended August 23, incorporated an allowance for growth at an annual rate of about 5 per cent in privately held demand and time deposits. The projections, he noted, had been fol lowed almost precisely since February. As shown by Mr. Eckert's memorandum on the money supply and its close relatives that had been distributed prior to this meeting, the money supply plus time banks had been expanding at an annual rate deposits of commercial to 6.5 per cent since December and 5 per cent since February. of close Although the lack of growth in the active money supply was of con money supply would undoubtedly respond in time if cern to him, the adhered to the target of total reserves set forth in the Committee the staff projections. When borrowers desired more bank credit, the their discounting. Thus, free reserves would banks would increase be reduced automatically if the Committee continued to adhere to the total reserve projections. Chairman Martin commented that all things considered it seemed to him the economy was in a surprisingly healthy condition.
He was impressed today by the appearance that the Committee's thinking on policy was probably gradually turning. He thought Mr. Mills' use of the word "groping" was appropriate, because that is really the way policy is developed within the System. In his view, real prog ress was being made at the present time. The Chairman then said that Secretary of the Treasury Dillon had asked him if he would make the observation to the Committee that the Secretary hoped the Federal Reserve would not be too gloomy about the budget. The Chairman felt that this statement, and the fact that Secretary had authorized his making it, had some significance. the It should be taken into consideration by the Committee that the Secretary was concerned about the budgetary problem, and likewise the President. There had been many gloomy estimates, and talk of a deficit of $8 to $10 billion, but the Secretary seemed to feel there was a good chance that the deficit could be held closer to the $5 area. This was a hopeful factor, and one that the Committee billion ought to have in mind. Chairman Martin emphasized at this point that in a turning or transition period it was necessary to be particularly careful actions did not encourage unnecessary comment and specu that System to happen. This was of course a lation about what might be going The System had been through this a number difficult thing to avoid.
of times in the past decade, and almost every time there had been slips. In the circumstances, he did wish to bring out that it was necessary to try to guard against such slips to the fullest extent possible. Chairman Martin said he happened to feel personally that at this juncture it would be better to resolve doubts on the side of tightness, whether speaking in terms of free reserves or total re serves, but without any significant change in policy being evidenced by the level of either free reserves or total reserves. This was as could be developed, he realized, but it about as close a concept would then be possible to see what unfolded. Chairman Martin also expressed the view that there was an inclination to place too much emphasis on the money supply problem. he thought, sufficient money was around at the Without question, supply figures would be galvanized al present time, and the money demand for money occurred. He did not most overnight when a real mean to suggest that the System should be niggardly in supplying the System ought to be putting it reserves, but he did mean that self in the best possible position. from the go-around today, the Chairman con It was obvious change the discount rate there was no inclination to tinued, that the directive. There had been some and no general desire to change covering operations in longerdiscussion of the special authorization
term securities, but it appeared that with one exception the mem bers of the Committee did not desire to withdraw the special authori zation. The Chairman went on to say in the latter connection that he was glad the Account Management had acted as it did over the past three-week period. The Management had used its judgment and had made substantial purchases beyond the one-year area. He felt that it was desirable to get some experience and to obtain all the in formation possible about what was involved in this experience before arriving at any definitive conclusions. Today, however, he would certainly side with those who felt that the System should reduce its activity in the longer-term area to the extent that that could be done. On the other hand, he would like to leave discretion with the Account Management. Chairman Martin suggested that it would be advisable to try out where the proceeds of some of the System purchases went; to find to try to analyze the market and find that out. He had talked with a number of people who said they knew positively that certain securi sold to the Account and the proceeds immediately invested ties were special operations would not seem to accomplish much in bills. The good if that was true. Therefore, he felt that in evaluating the Committee should try to get as much informa special operations the about the securities that were acquired and what tion as possible
was being done with the proceeds of those purchases. While this was a difficult question, it was something of real importance in any longer-range evaluation. Continuing, the Chairman expressed the view that it would be inadvisable at the present time to place any limitations on the Management of the Account. In his opinion the Management had done well with a difficult problem, and it ought to be free to operate to the oest of its ability, in terms of policy, in all maturities. Of course, the Desk should not go overboard--and it had not at any time to date--in the longer-term area of the market. then turned to Mr. Rouse and inquired whether Chairman Martin the latter had any comments to make, particularly in the light of his recent trip to Europe. Mr. Rouse said he had only the comments that he had made previously. The questions that had been asked of him about Govern mental expenditures, the Federal budget, and related matters were indicative of a background of concern about possible developments in this country over a period of time. They indicated a feeling that the United States ultimately would have to resolve the same questions that the British were trying to resolve at the present time. Chairman Martin then stated that the consensus favored no change in the directive at this time and no change in the discount rate. The consensus also favored continuing approximately the same
degree of ease that had been maintained to date, along with renewal of the special authorization covering operations in longer-term securities, with the Account Management taking into consideration the comments that had been made around the table. Mr. Shepardson inquired whether the Chairman had intended to include in his statement of the consensus any reference to the manner in which doubts should be resolved in the operation of the Account. It appeared to him that to this extent there had been a shift since the previous meeting, when it had been indicated that doubts should be resolved on the liberal side. Martin responded that this was always a question Chairman with which the Committee must deal. He could sympathize with the Management of the Account when it came to operating under specific It did not seem to him that there was any particular instructions. reason to take a poll on the degree of distinction made today, al would be perfectly willing to consider it. though he There being no indication that a poll was desired, it was that the Chairman's statement of the consensus would stand understood authorization would be renewed. The renewal of and that the special a new limitation of $500 million for the authorization would provide transactions in longer-term securities. of such securities in the Mr. Rouse commented that purchases period had gotten up to $473 million. However, the past three-week
bulk of those purchases were in what he thought of as actually short-term securities; that is, securities with a maturity of not more than two or three years. As to securities with maturity over 10 years, the purchases were just $36.6 million, a very small pro portion of the aggregate purchases for the Account. 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: (1) To make such purchases, sales, or exchanges (in cluding 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 encouraging expansion of bank credit and the money supply so as to contribute to strengthening of the forces of recovery, while giving consideration to international factors, 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-term certifi cates of indebtedness purchased from time to time for the temporary accomodation of the Treasury, shall not be in creased or decreased by more than $1 billion; (2) To purchase direct from the Treasury for the ac count of the Federal Reserve Bank of New York (with dis cretion, 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 aggregate $500 million.
The Committee then authorized the Federal Reserve Bank of New York, be tween this date and the next meeting of the Committee, within the terms and limitations of the directive issued at this meeting, to acquire intermediate and/or longer-term U. S. Government secu rities of any maturity, or to change the holdings of such securities, in an amount not to exceed $500 million. Votes for this action: Messrs. Martin, Balderston, King, Mills, Shepardson, Swan, Wayne, Johns, and Treiber. Vote against this action: Mr. Allen. Chairman Martin then referred to a memorandum from Mr. Young dated June 26, 1961, which had transmitted to the members of the Committee a memorandum dated June 15, 1961, from the Steering Group of the Government Securities Market Study with respect to dealer financial statements. In this memorandum the Steering Group requested authority to explore more specifically with individual nonbank dealers the possibility of setting up a more standardized system of financial reporting along the lines indicated in attachments to the memorandum, recognizing that considerable effort by way of negotiation would be required to compose variations arising from the widely different of business done by the individual dealer firms. types At the request of the Chairman, Mr. Young made a brief state ment to the effect that in pursuance of the program of providing more adequate and ample information on the Government securities market,
the Steering Group had been looking into what might be done to improve the financial statements of the nonbank dealers. After much work on the part of the staffs of the Board and the New York Bank, a plan had been worked out. However, the work had been car ried about as far as it could in this manner, so the Steering Group would now like to go out and discuss the problem with individual dealers. This was the extent of the authorization requested at this particular time. Chairman Martin inquired whether there were any questions or comments, and Mr. Allen said that although he did not feel strongly one way or the other, he had the general feeling that he would not like to bother the dealers any more than necessary. He noted that at some points the material distributed to the Committee seemed to indicate that the New York Bank had sufficient information for credit purposes. At other points, however, the material appeared to suggest credit purposes it would be desirable to get this additional that for information. As he had said, he did not feel strongly on the matter, but he would hate to bother the dealers any more than necessary, be interested in any comments Mr. Treiber or Mr. Rouse and he would might care to make. said he thought it was the feeling at the New York Mr. Treiber Bank that from the point of view of the institut:on's conducting busi dealers there was sufficient information available for credit ness with
purposes. The staff material went on, however, to suggest that more uniform statements would be helpful for the purpose of credit analysis to the whole market and might contribute in some small way to the maintenance of a sound financial structure among the profes sionals in the market. The Government securities business being an activity where risk exposure can and occasionally does change sharply from day to day, annual or even quarterly financial statements could not in and of themselves assure credit-worthiness or financial sound ness. The report also noted considerable interest on the part of some members of Congress and some sectors of the general public for periodic consolidated balance sheet and income statement information on the dealer community in the Government securities market, and the report expressed the view that satisfying such public interest could contribute to a better understanding of the functioning of the Govern ment securities market. Thus, the Steering Group was really thinking the over-all credit situation of the country. There had in terms of been various groups that felt there should be more information, and mainly toward that aspect of the matter. the memorandum was directed Mr. Rouse said that, as indicated by Mr. Allen, the New York Bank did have adequate credit information regarding the dealers in The statements of the nonbank dealers varied Government securities. in form to a considerable extent, but the Bank was able to obtain
audited statements and interim data, if desired. This applied not only to the Bank but also to other customers of the dealers; the dealers' statements were readily available. A customer doing a sub stantial business with a dealer would want to know the dealer's financial situation, and that information was available. The only reason he saw for going further was that, as indicated in the memo randum, some members of the Congress had expressed an interest. The information was wanted by the staff of the Joint Economic Committee, apparently, and possibly by some of the members of the Committee. Personally, he did not see any other reason for going ahead with this project. It would be asking a good deal of the dealers, and he did not feel that the System should put itself in the position of taking the onus upon itself. Mr. Fulton said that this was his own reaction. If the New was now getting adequate information and the Congress York Bank Congress might be expected to ask for it. He felt wanted more, the that the System would be putting itself at the end of a limb if it tried to read the mind of the Congress and badgered the dealers to it could not have amicable relations with them. A the extent that request might be looked upon by the dealers as forcing them to com ply because of their relationships with the System. this was not a joint effort of Mr. Johns inquired whether so that the System would not the Federal Reserve and the Treasury, take the onus entirely upon itself.
Chairman Martin confirmed this statement. He added that he thought a good point was being made as to whether the dealers were being harassed too much. In point of fact, however, the dealers had been relieved of a good deal of harassment by virtue of the manner in which the study of the Government securities mar ket had been handled by the Treasury and the Federal Reserve. Mr. Swan commented that in the longer run there might be some advantage in doing some further steering, both from the stand point of the Federal Reserve and from the standpoint of the dealers. Therefore, he would be inclined to favor the current proposal, but with the understanding on the part of all concerned that this was than in the immediate interest of the System. in the public interest rather on that basis, he would not want the dealers did not want to go along If that it would be possible to explore the to force them, but he felt dealers without the System taking too much onus on itself. matter with the Mr. Young expressed agreement with what Mr. Swan had said. This interest. There had been a good deal of was a matter of the public time to time, and in part this criti criticism about the market from arisen because of the inadequacy of information. The Joint cism had asked the assistance of the System in getting Economic Committee had statements of the dealers over a number of years. The financial System was unable to provide the information, and the Joint Committee information itself. Thereafter, one of the then went out and got the
points that the Committee staff was prepared to formalize through a letter from the Chairman of the Committee was specifically along these lines; that is, a request for the development of standardized financial reporting on the part of the dealers. However, the Treas ury and the Federal Reserve indicated to the Committee staff that they were willing to try to work out something in cooperation with the dealers. If the matter were to be dropped, it was likely that a letter would be received. Mr. Thomas commented that it had been said to the Joint Com mittee that the dealers' statements were satisfactory for the System's purposes. However, the statements were in such varied forms that probably nobody but the System could understand them, and this attempt to get on an organized basis could be justified from that standpoint. It was difficult for the System to justify the point of view that it had enough information, because it could not present the information to the Joint Committee when asked. Mr. Wayne inquired whether it was not true that the System and the Treasury would be approaching the dealers on a cooperative basis as an alternative to some other approach that the dealers might like less. If so, he saw no reason not to enter into exploratory discussions. Chairman Martin and Mr. Young confirmed that this was the intent.
Chairman Martin also expressed the view that it would be advisable to go ahead and explore the subject with the individual dealers. He would not want to impose an undue burden on the dealers. However, the System needed all of the information it could get as to what was going on in the Government securities market. Some day it would be necessary to have more information than was available at the present time. Chairman Martin then said if, in the light of this discus sion, there was no objection, the Steering Group would be authorized to explore the matter with the nonbank dealers, and no objections were heard. The Chairman added the comment that he would not want the dealers to obtain any impression that the Committee was not taking this matter seriously because it might involve some added work for the dealers. The matter should be explored in a serious manner to see whether the problem could not be worked out without subjecting the dealers to undue hardship. It was agreed that the next meeting of the Committee would be held on Tuesday, August 22, 1961, and it was understood that the next succeeding meeting would be scheduled for Tuesday, September 12, The meeting then adjourned.
Also: Record of Policy Actions