December 19, 1961 FOMC Minutes

FOMC minutes

then said that he was in favor of moving ahead and Mr. Mitchell matter should be pushed forward as hard and as fast as that he felt the possible. Mr. Fulton stated that he would be in favor of proceeding in accordance with the suggestion in the Secretary's letter. He would see the System get into an operation of this kind before the dislike to Congress had unequivocally given the System the authority and had expressed the opinion that the Federal Reserve was the agency to do the job. Exploration with the Treasury seemed to him highly desirable, with a view to seeking legislaticn on a unified basis. Mr. Bopp expressed agreement with the comments made by Mr. Fulton. said that he would like to see two steps taken Mr. Balderston concurrently. The first would be consultation between the legal staffs of the Treasury and the Federal Reserve, as suggested in the letter from the Secretary of the Treasury. The second would be the development of guidelines in this area that would correspond to the continuing authority directive in the domes,.:c area. Then, as soon as Congress gave the green light, the System would be in a position to begin operations in foreign currencies without further discussion and delay. Mr. Balderston also referred to the point, previously mentioned, that the System might be ineffectual in meeting a crisis if it waited until the crisis actually occurred. For this reason he felt that, as a precautionary measure, action should be taken promotly to acquire currencies

of key countries. At various times of the year such currencies could be obtained advantageously despite the fact that this country was now in a deficit situation. Mr. Balderston commented that the aggregate of dollars spent in the acquisition of foreign currencies would be small relative to the amounts placed in foreign hands in the form of investing and spending abroad. Protective steps should be taken before a crisis occurred, as illustrated by this year's experience of the United Kingdom. Had sterling been bought for the Federal Reserve System's portfolio when it was low in price last spring, perhaps it would not have been necessary for the United States to sell the United Kingdom $300 million of gold in November. Chairman Martin stated that on the basis of the comments that had been made, it appeared that the sentiment favored going forward with the proposal by autnorizing consultation with the legal staff of the Treasury, as suggested in the Secretary's letter. After referring to the point that had been raised about initiating foreign currency operations in advance of a crisis, the Chairman indicated that he would like to clarify his own position. He thought that the proposed operations in foreign currencies would be a very desirable activity. He also thought, however, that the System ought to be very careful about giving the idea that these operations were going to solve fundamental problems. It should be recognized, for example, that if the Federal Reserve had held $300

million of sterling the British might have taken the gold anyhow. Further, the British might not have taken the steps toward a solution of their payments problem that they took in the interim. No one could know such things for certain. In any event, however, either in the Government securities market or in the foreign exchange market, it was still necessary to deal with fundamentals. One must not be misled into thinking that any of these ideas, good as they were, were going to solve the whole problem. The problem was not that simple. On the other hand, every practical device should be used. With reference to Mr. Balderston's comment about the need for working out a directive for foreign currency operations similar to the continuing authority directive in the domestic area, Mr. Hayes said he felt that this had largely been done. The Secretary of the Committee had been working along tnose lines for some time. The only point he would like to add to the discussion was that he thought the Treasury should review carefully the documentation concerning the details of the proposed operations to see whether it saw anything wrong. The advice of the Treasury on the technical aspects of the proposal should be obtained. Chairman Martin said he understood from today's discussion that Counsel would be authorized to refer any of the documentation to the Treasury for review. He agreed that the staff had done a good job in putting this material together. Further, there had been excellent cooperation on the part of the Treasury. It was only at the December 5

Committee meeting that he was authorized to discuss the subject with the Treasury, and the letter since received from the Secretary was in his opinion a good letter. It provided a satisfactory basis on which to proceed without impairment of the position of either the Treasury or the Federal Reserve. No disagreement with the comments of Chairman Martin was indicated. At the conclusion of the discussion, the legal staff of the Committee was authorized to confer with the legal staff of the Treasury for the purposes suggested in the letter from the Secretary of the T reasury. It was agreed that the next meeting of the Open Market Committee ,ould be held on Tuesday, January 9, 1962. The meeting then adjourned. Secretary