June 18, 1963 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, June 18, 1963, at 9:30 a.m. PRESENT: Mr. Martin, Chairman Mr. Hayes, Vice Chairman Mr. Balderston Mr. Bopp Mr. Clay Mr. Irons Mr. Mills Mr. Mitchell Mr. Scanlon Mr. Shepardson Messrs. Hickman, Wayne, and Shuford, Alternate Members of the Federal Open Market Committee and Deming, Presidents of the Messrs. Bryan Federal Reserve Banks of Atlanta and Minneapolis, respectively Mr. Young, Secretary Mr. Sherman, Assistant Secretary Mr. Kenyon, Assistant Secretary Mr. Hexter, Assistant General Counsel Mr. Noyes, Economist Messrs. Baughman, Furth, Garvy, Green, Koch, and Tow, Associate Economists Stone, Manager, System Open Market Account Mr. Manager, System Open Mr. Coombs, Special Market Account Assistant to the Board of Governors Mr. Molony, Adviser, Division of Research Mr. Williams, and Statistics, Board of Governors Mr. Yager, Chief, Government Finance Section, Division of Research and Statistics, Board of Governors Hilkert, and Hemmings, First Messrs. Latham, Vice Presidents of the Federal Reserve Banks of Boston, Philadelphia, and San Francisco, respectively
Messrs. Mann, Taylor, Jones, Parsons, and Grove, Vice Presidents of the Federal Reserve Banks of Cleveland, Atlanta, St. Louis, Minneapolis, and San Francisco, respectively Mr. Parthemos, Assistant Vice President, Federal Reserve Bank of Richmond Mr. Cooper, Manager, Securities Department, Federal Reserve Bank of New York Mr. Eisenmenger, Acting Director of Research, Federal Reserve Bank of Boston There had been distributed preliminary and revised drafts of minutes of the meeting of the Federal Open Market Committee held on May 28, 1963. The revised draft incorporated amendments to the Committee's Guidelines for System Foreign Currency Operations reflecting the following actions that had been taken by the Committee at the May 28 meeting: (1) adoption of a working rule that, in the absence of excep tional circumstances, drawings under a reciprocal currency arrangement should be fully liquidated within twelve months; and (2) authorization to the Federal Reserve Bank of New York to utilize its holdings of a for the purpose of settling commitments denominated in other currency total of $50 million equivalent. The currencies, up to a combined an appropriate amendment to the con revised draft also incorporated to the New York Reserve Bank on foreign tinuing authority directive operations covering the second of these two Committee actions. currency minutes further incorporated an amendment to the The revised draft of action taken by the Committee at its meeting Guidelines flowing from authorizing the New York Reserve Bank to purchase on March 5, 1963,
specified currencies through forward transactions up to a combined total of $25 million equivalent for the purpose of allowing greater flexibility in covering commitments under reciprocal currency agree ments. This action was reflected at the time in the continuing authority directive but not in the Guidelines. It was noted that approval by the Committee of the minutes of the May 28 meeting would serve to ratify the foregoing amendments to the Guidelines and to the continuing authority directive. It would follow that reference to these amendments would be included in the entry for the record of policy actions of the Open Market Committee covering the meeting of the Committee on May 28, 1963. Thereupon, upon motion duly made and seconded, and by unanimous vote, the minutes of the meeting of the Federal Open Market Committee held on May 28, 1963, were approved. meeting there had been distributed to the Committee Before this a report from the Special Manager of the System Open Market Account on foreign exchange market conditions and on Open Market Account and operations in foreign currencies for the period May 28 through Treasury together with a supplementary report covering the period June 12, 1963, June 13 through June 17, 1963. Copies of these reports have been placed in the files of the Committee. supplementing the written reports, Mr. Coombs In comments summarized current and prospective developments with respect to the
U. S. gold stock along with conditions in the London gold market. Turning to System foreign currency operations, he noted that the System had completed repayment of its Swiss franc drawing under the swap arrangement with the Swiss National Bank through transactions conforming to the procedure authorized by the Committee at its meet ing on May 28, 1963. He also noted that negotiations had been completed for liquidation on June 20, 1963, of the drawing of $16 million of Swiss francs that remained outstanding under the swap arrangement with the Bank for International Settlements. In further comments, Mr. Coombs said that announcement of the increase from $50 million to $500 million in the swap facility with the Bank of England, pursuant to the Committee's authorization at the meeting on May 28, had been generally well received by central banks. However, certain foreign Treasury officials apparently were continuing the System's swap arrangements under some form of to press to bring international surveillance. He had taken the position, Mr. Coombs said, that drawings against swap facilities were purely a matter of bilateral relationships and that the integrity of the Federal Reserve against the abuse of such swap System was an adequate safeguard the Federal Reserve System had published two facilities. Further, articles at approximately six-month intervals giving a full story of System swap arrangements and operations thereunder. He thought, however, that it might be useful on the occasion of the monthly meetings of the
Bank for International Settlements at Basle to advise the participants confidentially on Federal Reserve drawings and repayments under such arrangements, subject to prior concurrence by the other central banks that were parties to the respective swap agreements. Such a procedure would serve t.o dispel rumors that might otherwise be circulated as to the extent of Federal Reserve commitments in various currencies. It was suggested in the alternative that the purpose might be served by comments in the course of conversations with central bankers attending the meetings, as and when that seemed desirable, rather than to put the matter within the framework of a regular reporting basis. agreed that the alternative procedure would serve the purpose, Mr. Coombs that during the course of the monthly meetings he was in conver adding representatives of the central banks attending the meetings. sation with It was the consensus that the alternative procedure would not be inappropriate, assuming that information concerning drawings and repay ments under System swap arrangements would not be divulged except after banks that were parties to the particular clearance with the central reciprocal currency agreements. Proceeding with his review of System foreign currency operations, to the recent strengthening of the dollar rate Mr. Coombs referred which had resulted in a termination of against the Netherlands guilder, in that area. He also described prospective develop System operations ments that might afford an opportunity for repayment of part of the
System's drawings of guilders under its swap arrangement with the Netherlands Bank. Mr. Coombs noted that the continued strength of the German mark had resulted in drawings by the System of $100 million equivalent of marks in four instalments under the swap arrangement with the German Federal Bank, and disbursement of $90 million equivalent of the marks thus drawn. It was Mr. Coombs' view, for reasons stated, that the System should continue its operations in support of the dollar against the mark, drawing if necessary the full $150 million equivalent of marks available under the swap arrangement with the German Federal Bank. Under certain circumstances, a case might even be made for increase in the swap facility, but on balance he felt negotiating an be well advised to limit its drawings to no more that the System would and invite the Treasury to deal with any further flow than $150 million into Germany. Further, if no reversal of the present situation of funds was seen over the next three months, he was inclined to feel that the and the German Federal Bank the System should suggest to the Treasury the System's swap drawings indirectly through possibility of funding issues by the Treasury of bonds denominated in German marks. additional of gold by the German Federal Bank. An alternative would be purchases of his views in this regard, Mr. Coombs In further explanation should run through the remaining $60 million of said that if the System marks available under the swap arrangement with the German Federal Bank flow of money into Germany developed, a and a substantial speculative
case possibly could be made for increasing the swap facility. However, System operations were intended to deal with financial flows that were expected to be reversible, and as yet there was no sign of a turning of the tide of flows into Germany. Therefore, if the System exhausted the remaining $60 million equivalent of German marks available uncer the swap facility, it might still be faced with the possibility of continuing market operations in support of the dollar for an indeter minate length of time. In such a situation, it might be well to call a halt to System operations. Mr. Coombs concluded his comments with remarks on the recent weakening of the Italian lira and prospective developments in that regard. Thereupon, upon motion duly made and seconded, and by unanimous vote, the System Open Market Account transactions in foreign currencies during the period May 28 through June 17, 1963, were approved, ratified, and confirmed. Mr. Coombs pointed out that the $250 million swap arrangement with the Bank of Canada would mature June 26, the $50 million swap the Bank of Sweden would mature July 17, and the swap arrangement with arrangements with the Bank of Italy, the Swiss National Bank, and the Bank for International Settlements, in the amounts of $150 million, $100 million, and $100 million, respectively, would all mature July 18, 1963. He recommended renewal of these swap arrangements, each for a further period of three months.
Renewal of the aforementioned swap arrangements, as recommended by Mr. Coombs, was approved unanimously. Mr. Coombs noted that a System drawing of $25 million equivalent of guilders under the swap arrangement with the Netherlands Bank would mature July 11, 1963, and he recommended renewal of the drawing for a further three months if that should prove necessary. of the drawing if necessary, as Renewal recommended by Mr. Coombs, was noted without objection. Mr. Coombs pointed out that the Bank of England's drawing of $25 million under its swap arrangement with the Federal Reserve System would mature July 16, 1963. If the Bank of England should so request, that a three-month renewal of the drawing be granted. he recommended The granting of a renewal of the drawing, by the Bank of England, was noted if requested without objection. This concluded the consideration of System foreign currency operations and related matters. meeting there had been distributed to the members Before this of the Committee a report covering open market operations in U. S. and bankers' acceptances for the period May 27 Government securities 1963, and a supplementary report covering the period through June 12, June 17, 1963. Copies of these reports have been June 13 through placed in the files of the Committee. of the written reports, Mr. Stone commented In supplementation as follows:
The money market continued steadily firm in the period since the last meeting of the Committee. There were only slight further price and yield adjustments to the recent shift in System policy while, during the course of the period, there was an astonishingly enthusiastic reception for the Treasury's sale of 4 per cent bonds of 1970. Turning first to the sale of the 4 per cent bonds, it may be premature to attempt to draw any firm conclusions about this operation, but one or two points do seem to emerge. Clearly, the $100,000 figure for subscriptions to be allotted in full was set at too high a level; moreover, by indicating this full allotment figure in advance of accepting subscriptions, some sizable speculative interest was encouraged. More fundamentally, the episode illustrates the great difficulty in setting price and other terms on Treasury offerings when the market is in a period of transition. In this case, the market's shift toward of somewhat higher rates had for the time being expectations about run its course--although it seemed at the time when the had to set its terms that the underlying atmosphere Treasury was still very cautious and called for terms that would be regarded as attractive by investors. System operations and the money market, the As regards has afforded an excellent example of the uncer recent period tainties that lurk behind bank reserve statistics and the such data. Once again, market tone proved to projections of be the most reliable part of our "guidance system." In terms rather, in terrs of current estimates of actual reserves--or reserves were somewhat lower in the of actual reserves--free in the preceding three-week interval, but past few weeks than had, if anything, a slightly easier consistency. the money market a little lower, and while Federal Member bank borrowings averaged cent most of the time, there were fewer funds traded at 3 per really substantial reserve needs remained occasions on which satisfied at the discount window. to be in good part, a reflection of a These developments were, availability toward the money center shift in basic reserve in particular, had a much banks. The New York City banks, smaller basic reserve deficiency than in the previous period, to reduce both their net purchases and accordingly were able from the Reserve Bank. of Federal funds and their borrowings supply of Federal funds may have Thus, while the countrywide lower than in the previous three weeks, the been somewhat less, and resulted on balance in demand was also appreciably tone in the money market. a slightly more comfortable Apart from these geographic shifts in basic reserve rather complicated the interpretation of availability, which
the significance of given reserve levels, System operations were further complicated during the recent period by an extraordinarily persistent series of "misses" in the day-to day reserve projections. Sizable misses are of course not unusual, but one can often depend on a rough balancing out from day to d y between over-estimates and under-estimates of the various reserve factors. In the recent period, however, there was a strong tendency for actual reserve levels to fall short of the projections, particularly the projections of float and the Treasury balance at the Reserve Banks. As regards the Treasury balance, there has been some tendency for daily expenditures to fall short of estimates and for revenues to run higher. As for the misbehavior of float, we have no ready explanation but some work is being done to re-examine past patterns to see if more reliable projections can be eveloped. Treaury bill rates, after moving upward following the policy shift in the latter half of May, have hovered around 3 per cent in the case of the 3-month issue, while the 6-month bill has moved around 3.08 per cent. In the Treasury bond market, there have been few develop ments of any significance, apart from the activity surrounding the new 4's. Over the past three weeks prices of most issues have been down somewhat, with declines mainly in the maturities close to the new 1970 issue. The limited extent of the decline reflected in part the favorable technical position of the market following the heavy purchases of bonds by the Treasury in the latter part of May as it grappled with the problem of the debt ceiling. At the moment at least, the bond market atmosphere seems fairly steady and more confident than it was three weeks ago, when the market was still adjusting to the lower level of reserve availability. The situation in the corporate and municipal markets has In the corporate area there has been a continuing been mixed. tug of war, with underwriters bidding strongly for a limited supply of new issues and then being content to distribute the bonds slowly to rather reluctant investors. Rates on new and outstanding issues have remained about unchanged. In the on the other hand, the rate trend has been tax-exempt market, upward. The calendar of new issues has remained large, and dealer inventories have been kept from rising only by virtue of continuing price concessions. projections for the three weeks ahead indicate The reserve that unusually large amounts of reserves will be needed. The New York projections suggest a need of over $700 million, while
the Board staff estimates indicate a need of about $1.2 billion. And both sets of estimates have recently been on the low side of actual results. Under the circumstances, I should like to recommend that the limit on changes in the Account over the next three weeks be raised from $1 billion to $1.5 billion. I hope it will not be necessary to operate on that scale. But it would be well to be prepared if we should have to do so. During discussion based on Mr. Stone's report, it was noted that projected reserve drains exceeded $1 billion in the three weeks ending July 10, with an indication that part of the drain would reflect an in U. S. Government deposits at the Federal Reserve Banks. increase Question was raised whether it would not be reasonable for the Treasury the Government deposits at a somewhat lower level, thus reliev to leave on the System to provide reserves. Mr. Stone commented ing the pressure that System-Treasury discussions had resulted in general agreement on the desirability of keeping Treasury balances at the Reserve Banks at a level of about $900 million. In the preceding rather constant the balances had fallen relatively below, but they had statement week, restored to around the $900 million level, thus resulting already been in a reserve drain. to Mr. Stone's comment that in the past Mr. Mitchell referred market had once again proved to be the most period the tone of the system." He inquired whether the reliable part of the Desk's "guidance operating in conformity with the Committee's Manager felt that he was of the market as a primary guide. directive in following the tone the Committee's instructions called for Mr. Stone pointed out that
maintaining about the same degree of money market firmness. He regarded the reserve projections as one part of the apparatus employed in measuring the tone and feel of the market, not only in terms of what was happening at the moment but in days ahead. In that sense, the reserve projections entered into the operations of the Desk. There had been a number of occasions on which the estimates pointed to free reserve levels over $200 million. If the Desk had been guided by those estimates alone, presumably it would not have undertaken any open market operations, but the market itself suggested that those figures were not accurate. The market acted as if there were fewer reserves around. Therefore, despite the estimates the Desk went in and bought bills rather heavily. Asked whether it was fair to infer that the Desk had operated according to the tone and feel of the market and not according to the reserve projections, Mr. Stone replied that these factors could not be separated so sharply. The Desk operated primarily on the basis of tone and feel of the market, but the reserve estimates were used as an indication of the market tone that the Desk was likely to be con four days hence. If the reserve projections had fronted with three or given the appearance of being more accurate, there might have been marginal changes in the Desk's operations. On some days the Desk might have bought a little less or sold a little more, but the general thrust of the Desk's operations would have been about the same.
Thereupon, upon motion duly made and seconded, and by unanimous vote, the open market transactions in Government secur ities and bankers' acceptances during the period May 28 through June 17, 1963, were approved, ratified, and confirmed. The Chairman then called for the staff economic and financial reports beginning with Mr. Noyes, who presented the following statement on economic developments: Most of the recent information on the performance of the economy suggests that the broad observation we have used so often in the last two years may again be appro priate. The economy is generally expanding, with resources available for further expansion. Unemployment, especially among teen-agers, has con tinued to creep upward. Despite the high level of auto sales, the performance of retail trade as a whole has been a little disappointing--in that there has been practically no further advance since last November. Concern is expressed that in the absence of a tax cut the current upward thrust may falter when the stimulus recently provided by steel in ventory accumulation is reversed. On the other hand, some sectors are more active than was generally anticipated. Construction activity, especially the construction of multi-family private residences, has held up better than many expected, and most recently has been rising. If the prospects for capital investment were any stronger, they might well be a cause for concern rather than comfort. Plant and equipment spending in the second half implied by the latest Commerce-SEC survey would be up 7 per cent from the 1962 level for the same period. A higher rate would raise a question as to whether capital spending plans were realistic in relation to recent developments in final demand and, there fore, likely to be sustained. Furthermore, it is increasingly difficult to summarize the total pattern of price developments as one of price stability. Wholesale prices were up in May, and the prospects that these prices will increase further--perhaps by seem to be a larger amount--in June. It seems to me that it would be wrong to describe recent price developments in the aggregate as alarming or even inflationary, but at the same time one
would be reluctant to see any more upward price pressure than has prevailed. all wish devoutly for a higher rate of While we may economic activity--and a lower level of unemployment--it is hard to see how developments of recent weeks could realistically have been more favorable to the achievement of these goals. The activity mix certainly has not been ideal--it never is. In this case we might have liked a little larger volume of final purchases by consumers and a little less buying of steel for inventory. But the over all rate of progress seems to have been about as large as economy could handle without raising more questions the than it answered for the ultimate objective of sustained expansion. appears that real GNP increased at an annual It now about 4-1/2 to 5 per cent during the first half rate of of 1963. Without suggesting that we can be at all com respect to the future, it does appear that placent with this rate is as sustainable, and perhaps more sustainable, a higher or lower rate would have been. At than either can say that any sizeable additions over and least one above the increase in total demand that actually occurred would have had to be fortunately selective not to have and that any considerable shortfall would created problems have had to be similarly well placed if it were not to raise questions as to the future. is that a continuation of about the My own judgment rather than either an acceleration recent rate of expansion, or deceleration, is the optimum to which policy should be As I said before, one would hope that the composi directed. shift in several ways--and certainly that we might tion might lower rates of unemployment--but neither a faster nor achieve of expansion would seem likely to con a slower over-all pace of our objective in the longer run. trioute to the achievement this broad objective, what sort of a If one accepts monetary policy would contribute to its achievement? My guess is that it might be necessary to let credit markets ease a in response to the usual summer doldrums, accentuated little inventory adjustment, which now looks as this year by steel might lie immediately ahead of us. Then, if Government if it and business spending plans materialize in the early fall, in now foreseen, some lessening of ease at that the magnitudes time would be both a natural and desirable result of rising credit demand. For the time being, since the economy shows no evident signs of a significant change of pace, neither a substantially
tighter or easier policy would be called for to maintain the present rate of progress. The case for a change, if any, would seem to rest primarily on other than domestic considerations. Mr. Koch presented the following statement on financial developments: It is still too early to trace satisfactorily the effects of the recent slight further lessening in monetary ease on the course of bank credit and the money supply. Thus far, the effects have been concentrated mainly in the money market, although free reserves have been somewhat lower and borrowings larger at country as well as city banks, suggesting a spreading of less easy reserve positions through out the banking system. In the money market, short-term interest rates have risen about 10 basis points or so, mainly in response to reduced bank reserve availability. Free reserves since mid May have averaged $100 to $150 million less than earlier. The Federal funds rate has continued to bump against the 3 per cent discount rate, and New York commercial bank lending rates to Government security dealers have ranged between 3-1/4 and 3-1/2 per cent. At the same time, actual required reserves behind private deposits have inched up relative to the guideline 22, after having declined in the preceding month. since May In the next couple of weeks they may drop sharply again, for the Treasury is expected to accumulate a very large year balance, thus temporarily tending to end-of-fiscal drain off private deposits and reduce required reserves behind such deposits. During this period, the Account Management might well try to provide as many reserves as possible, within its bill rate and money market constraints, the sharp rise in Treasury deposits, so that private to cover deposits do not fall so far below the guideline that it would be difficult to recoup later. and money, both continue to show As for bank credit moderate movements. Although total loans and investments rose again in May and early June, after their sharp April contraction, the rise has been less pronounced than it was quarter of this year or in the autumn of in either the first last year. supply showed no change in May but probably The money rose a little in early June. Since January, the money supply
has grown at a seasonally adjusted annual rate of about 2 per cent. Moreover, the demand deposit component of the money supply has shown no change over this period, all of the growth in the total being due to a rise in currency in circulation. Interestingly enough, in our guideline projections we allow for growth in time and savings deposits but not for growth in currency in circulation. Time and savings deposit growth at commercial banks in May and early June was probably at a seasonally adjusted annual rate of about 13 to 14 per cent, as compared with 17 to 18 per cent earlier. The inflow of savings at saving and loan associations also slackened in April and May, but that at mutual savings banks continued large. markets reacted to the modest recent change The capital in monetary policy with relative indifference. Municipal yields--a special case--rose sharply, but yields on new high grade corporate issues actually declined a few basis points. longer term U. S. Government notes and bonds had Yields on before the Treasury's announcement on June 6 of its steadied new intermediate-term cash financing, the public response to which can only be termed spectacular. the future, the third quarter is likely to provide As for light corporate and municipal calendars of new pub seasonally lic issues, although private placements may continue large. borrowing in the last half of the year may Federal Government be considerably less than anticipated earlier. Cash receipts have been larger than expectations and expenditures are lower. in the months ahead may well be only a little New financing the second half of 1962. This may have a higher than during bullish effect on bond prices when it is fully realized by the market Finally, I should like to make two comments on the reg reserve memorandum that is distributed before each ular staff First, we have made another change in the base period meeting. the shift in policy adopted at the May 7 in recognition of the change in policy was not effective meeting. Both because refinancing was completed about a week until after the Treasury for technical reasons explained in the memorandum, we later and week ending May 22 as the zero base from are now considering the which to compute cumulative changes of actual required reserves from the guideline. to include a 3 per cent annual growth We are continuing guideline computation. The staff has considered trend in the occasionally made that this growth allowance the suggestion perhaps to 2 per cent, but has decided be reduced somewhat, a change essentially for the following reason. With against
actual required reserves behind time and savings deposits currently increasing at a seasonally adjusted annual rate of 13 to 14 per cent, a 3 per cent increase in required reserves behind total private deposits provides reserves to support less than a 1 per cent annual rate of increase in demand deposits. A 2 per cent increase in required reserves behind total deposits, assuming continuance of the current rate of growth of time deposits, would necessitate demand deposit contraction at an annual rate of about 1/2 of 1 per cent. Although it is no doubt true that some of growth in time and savings deposits has provided the recent essentially the same stimulus to spending as the growth in demand deposits, the staff did not consider it appropriate to use a guideline figure that implied demand deposit contraction. Moreover, the new time and savings deposits of commer as well as those at mutual savings banks and cial banks, at saving and loan associations, appear to have shareholdings of real savings rather than money. more the characteristics lack of increase in the turnover of This is suggested by the these deposits and shareholdings since their increased rate a year and a half ago. Personal time and of growth began at commercial banks still apparently turn savings deposits once every two years, and deposits at savings over about banks and shareholdings at saving and loan associations every four years. These turnover rates have been about once these low levels for many years. very stable at turnover rates do not, of Low and stable time deposit much of the recent growth in these course, tell us how of demand deposits. Nor do deposits has come from shifts out of the recent growth represents, in they tell us how much They do suggest, however, money rather than savings. essence, deposits are not being used as transactions that the new time balances any more than the old ones were. The new time deposits have arisen as a result of shifts out of could, of course, still demand deposits turning over demand deposits, with the remaining more rapidly. According to our demand deposit turnover figures, taken place, to some extent at least. this is apparently what has monetary policy is that a somewhat The relevance of all this for the narrowly defined money supply greater degree of restraint on than earlier in order to achieve the same is probably needed now broad economic objectives.
Mr. Furth presented the following statement with respect to the U. S. balance of payments and related matters: The U. S. payments position remains unfavorable. In May, the deficit, tentatively estimated at $330 million, was somewhat higher than in April or in the average of the first quarter. The preliminary and fragmentary weekly figures for the first two weeks of June indicate a similar deficit this month. Detailed data are available only through April, and some of those are preliminary or fragmentary. But they permit some idea of what has been happening. The cumulative deficit in those four months was about $1,050 million A surplus on trade and nonmilitary services of about $2,250 million was offset by net Government expendi tures for foreign aid and defense of perhaps $1,850 million and direct investments of perhaps $500 million, leaving a combined deficit on these accounts perhaps as small as $100 million. But in addition we know of recorded movements of financial capital, including $550 million of net acquisition of portfolio securities, primarily foreign bond issues, and $150 million net extension of bank-reported credits. This leaves perhaps $250 million unaccounted for, including pre expenditures abroad of some U. S. Govern sumably classified ment agencies and under-reporting of imports of goods and services as well as unreported movements of private capital. This year, as in most previous years, the U. S. deficit thus reflected, as the IMF paper on the U. S. payments bal ance puts it, an exchange of liquidity for foreign assets. But this year some of these exchanges involved assets of rather similar character. On two recent occasions, for in sums flowing into European countries as proceeds stance, from foreign government bonds acquired by U. S. residents have, for all practical purposes, been reinvested in U. S. by the Treasury in the currency of the country bonds issued involved--with only two differences. From the U. S. payments point of view, it is probably unfavorable that the foreign bonds were acquired by U. S. private investors but the Treasury bonds by foreign monetary authorities; it is favor able, on the other hand, that the U. S. bonds bear lower interest rates than the foreign bonds. Abroad, the recovery in Europe from the winter set-back seems to continue. Less welcome from the point of view of the U. S. payments balance is the resumption of heavy flows
of private capital, particularly into Germany. In the field of foreign policy, two developments may have an impact on flows of funds from the United States. The first is the tendency of foreign countries to take restrictive, or cease expansionary, policies; the latest example is the increase in the discount rate of the Bank of Sweden. The second is their effort to find ways to restrict the inflow of U. S. investment capital, insofar as it involves control over domestic industries. The Canadian budget promises a tax reform pointing in that direction, and France has finally induced the European Community to look into the alleged danger of Economic "alienation" of European enterprises to U. S. capital. Last time, the understanding way was mentioned in which the IMF delegation treated the U. S. payments problem. This time, the BIS may be added to the list. the BIS has been widely quoted and The annual report of As I read it, the essence of its views misunderstood. the subject is contained in the following sentences: on "Contributions to equilibrium are needed from a reduction in net capital exports and in government dollar expenditures abroad. The have indicated that a tighter mon authorities etary policy will be feasible as the economy expands with the aim of reducing capital ex ports and attracting capital imports. Such a policy would have to be directed mainly to longer term investment funds, as short-term have largely been interest differentials eliminated and as substantial attraction of funds from London would not be desirable." liquid Chairman called for the usual go-around of At this point the developments and monetary policy begin comments and views on economic Mr. Hayes, who presented the following statement: ning with to have expanded further The domestic economy appears production and residential construction in May. Industrial and retail sales recovered from continued to show strength, out to be a very small April dip. Manufacturers' what turned sales expectations have taken a sharp turn for the better, while business plans for spending in the second half of 1963 These various factors provide a seem to be a bit stronger.
reasonable basis for expecting continued expansion during the rest of the year. On the other hand, the surge of teen-agers into the labor force kept unemployment high in May and may cause further deterioration this month. Commercial bank credit expanded strongly in May, but weekly data suggest some lessening of the pace of advance in late May and early June. So far, bank credit components have not reflected an adjustment to the firmer money market conditions or the past month, nor do they point to any noticeable revision in anticipations regarding the future course of rates. Thus, the banks have been investing even more heavily than in the previous month ir real estate loans, consumer loans, and other securities, while business loans have been unu..ually weak. Also, time deposits have con to increase rapidly while the money supply has risen tinued very little of payments developments have been quite Recent balance with the May deficit of around $300 million disappointing, heavy April deficit. To a considerable extent exceeding the this high May figure (as well as the large 5-month aggregate) reflects an upsurge of foreign security placements, primarily borrowers. There may be some diminution of long by Canadian and direct investment in the months ahead; term borrowings must face the fact that the continuance of an but I think we deficit at anything like its present level constitutes over-all to the dollar despite the recent a threat of the first magnitude in the exchange and gold markets. calm atmosphere only $202 million of the 5-month deficit of about While gold, we can hardly expect such $1-1/4 billion was settled in persist in the future. For one thing, a low proportion to rise in foreign private dollar there has been a substantial this year, but this appears to be mainly the holdings so far of American banks to of an increase in the liabilities result reflecting Euro-dollar market the branches abroad, probably of the deficit has been financed activity. Also a sizable part and there is a limit to the Treasury borrowings abroad, through to undertake such financ willingness of the European countries in the absence of convincing evidence that the ing, especially I hope that the members of is being gradually reduced. deficit to read Mr. Coombs' force Committee have had an opportunity the of the Dollar," expres memorandum on the "Present Position ful reached a critical phase and that sing the judgment that we have to a break in confidence which the dollar has become vulnerable warning. The thinking of the European might occur almost without is pretty accurately reflected in the Annual monetary authorities Report just released by the Bank for International Settlements,
which strongly urges higher interest rates in this country and incidentally holds out no hope that our problem will be eased by further interest rate declines in Europe. In considering appropriate future policy actions, we must of course give careful attention to the timing of the Treasury's program of financing over the next few months. It is quite clear that the Treasury's calendar is crowded and that there will be only a few brief periods when we will have reasonable freedom to act. The first and most satisfactory of these periods is from about Thursday of this week, June 20, when payment for the surprisingly successful new 4 per cent bonds will be made, until the week of July 8, when the July one-year bill will probably be auctioned. With new cash financing and announcement of the August refunding later in July, it would appear that unless we move expected in the near future we shall be "locked in" until September, and even that month may be pre-empted, since another advance refunding may be carried out at that time. last meeting, I believe that we As I indicated at the made the right move in open market policy on May 7 and that firmer tone in the money market has been widely the resulting to the country's international and accepted as appropriate domestic outlook. In my judgment it has had a wholesome effect expectation of a subsequent discount rate in causing growing increase while at the same time demonstrating our cautious for the state of the domestic economy. After six solicitude greater degree of firmness, I think we weeks of this somewhat can well afford to move a little further on this road in rate action. I would hope that we preparation for discount bill rate above 3 per cent and keep it could get the 90-day and in view of the continuing heavy corporate demand there; bills and the relatively low level of dealer positions, for may well call for somewhat larger borrowings this objective the average of the past somewhat lower free reserves than and might well have to drop below three weeks. Free reserves $100 million. appropriately be changed slightly to The directive might toward greater firmness in this modest additional move reflect the money market following completion of the Treasury financing, emphasis on reserve expansion. and to place less it seems to me clear that the As for the discount rate, is at hand. While it would be reassuring, time for decision to have a more emphatic demonstration before making our move, and a clearer picture in of strength in the domestic economy of the tax bill now in the regard to the stimulative effects
Ways and Means Committee, the continued gravity of the international payments position leaves us little choice, especially in the light of the Treasury's calendar, as I have already suggested. An increase of 1/2 per cent in the discount rate in the near future could be expected to serve two very important purposes: (1) to signal to foreign monetary authorities and to the world in general that the System is ready to use traditional tools of monetary policy to defend the international position of the dollar, and (2) to achieve a level of short-term market rates that s ould cause a substantial repatriation of short term funds. At this juncture we would probably do well to try to hold down the impact of our action on long-term rates, because of the uncertainties in the domestic economy--even though at a later date we may conclude that our international problems call for an all-out defense affecting interest rates and credit availability throughout the maturity range. We might consider softening the impact of the discount rate move on long-term rate expectations by using longer maturities to the extent practicable when reserves must be provided, as they must in very considerable volume over the next few weeks, and perhaps by some use of swaps between long and short maturities. Apart from even-keel considerations there is another reason why late June would seem to be a highly appropriate time for discount rate action. It is my understanding that the President will probably make a forceful speech on the entire balance of payments program early in July, with emphasis on the need for stronger Government action in several directions. This would help to make our own move both more acceptable and more effective. It seems to me that prior rather than subsequent action by the System is somewhat preferable from the standpoint of the System's posture of independence within the Government. As for foreign reactions, I am confident that the British and Canadian authorities would be sympathetic, even though it is conceivable they might find themselves under considerable pressure to make some rate adjust ments of their own. In any case, it is the international financial position of all three countries, vis-a-vis the Continent, that is of crucial significance, and we should welcome any strengthening have strong reason to believe that the of this position. We Continental European central banks, which have long urged a tightening of credit policy by the Federal Reserve, would not frustrate such action by competitive tightening of their own credit policies. Incidentally, we also have some hope that
the European central banks might be willing, at least temporarily, to restrain borrowing activities by their commercial banks in the Euro-dollar market to help minimize any upward effect on Euro-dollar rates of our own action. It would seem to me highly desirable that an increase in the discount rate be accompanied by a further relaxation of the interest rate ceilings imposed by Regulation Q. In particular, the 90-day ceiling, which is already decidedly restrictive, might well be increased to 3-1/2 per cent and the 6-month ceiling to 3-3/4 per cent. Action along these lines would give strong support toward our objectives in the area of short-term capital flows. Mr. Irons reported that in the Eleventh District the component parts of the economy had shown mixed movements recently, with probably a little net improvement. There had been no significant change in the financial picture. Loans were up a bit, time and savings deposits advance, demand deposits were down somewhat, and in showed a further vestments were off a little. Total bank credit showed a slight decline. Demands of banks for funds, either through the Federal funds market or the discount window, were relatively unchanged. As for some time, District banks were net purchasers of Federal funds in the most recent period. Borrowings from the Reserve Bank ranged generally in the $5-$10 million area. In summary, Mr. Irons said, the District showed little change and financial factors, and there had been no noticeable in economic attitudes. Neither businessmen nor bankers were change in general expecting a strong economic upsurge, but they were confident of the continuation of a good level of business activity.
Turning to monetary policy, Mr. Irons said he was inclined to feel that it would be desirable, with one possible exception, to maintain the same degree of money market firmness that had been main tained during the past three weeks. He was quite satisfied with market conditions and with the operations of the Desk during a period that had been rather difficult due to factors mentioned by the Account Manager. He was rather glad to see the three-month bill rate drop back to a level slightly below the discount rate. To repeat, he would con sider it in order to maintain for the next three weeks the degree of firmness that had been achieved. Mr. Irons went on to say that he had read the Coombs memorandum to by Mr. Hayes. His problem was a lack of personal knowledge referred of the exact situation in Europe with regard to the degree of confidence in the dollar. If a substantial loss of confidence in the dollar was imminent, or if there were other elements in the picture that would call discount rate, he would favor such action. This kind for action on the some shock element; perhaps, in fact, an increase to of move would have 4 per cent ought to be considered from that standpoint. as high a rate as reason that he saw for raising the discount rate at this time, The only a serious and almost imminent loss of however, would be the existence of dollar about which something must be done. If this was confidence in the think the System should feel restricted actually the situation, he did not action even at a time when the Treasury was in the market, from taking
because the threat externally would be more serious than the problem of the Treasury. To summarize, if the conditions that he had mentioned were imminent, firm action on the part of the System would be in order. If they were not imminent, he would favor continuing the monetary policy that had been in effect during the past three weeks. Mr. Deming noted that employment in the Ninth District, which was weak early in the year due to weather conditions, rose more than seasonally in April and May, and apparently this stronger trend was continuing in June. The District had been running slightly below year ago employment levels but probably would go ahead of them in June. Production had grown appreciably faster than employment, and the improvement was broadly based. In April the industrial power use index was 10 per cent ahead of the previous year, and almost 6 per cent ahead of January. Ore shipments had been relatively slow, partly because the Great Lakes opened up late and partly because stocks at mills were high. Agricultural prospects were excellent, with the moisture situation very good. Respondents to the Reserve Bank's most recent survey of attitudes gave the most optimistic appraisal of the business outlook since April and May of last year. Seventy-four per cent saw improvement as probable or certain, and only 2 per cent saw a decline as likely. The balance, of course, foresaw continued stability. As to District banking developments, loans were up more than
seasonally in May, with particular strength at country banks. Country bank loan-deposit ratios hit a postwar high in May, a point above the previous peak of May 1960. City bank loan-deposit ratios were still 5 points below the May 1960 peak, but. they were 5 points above the December 1961 level. As to monetary policy, Mr. Deming said he had gone through about processes as Mr. Irons and had come to about the same the same thought conclusions. It seemed to him that the Desk had done quite a good job during a rather difficult period, and he would like to maintain as nearly as possible the current degree of money market firmness. If the degree of international confidence in the dollar had reached as low a point as suggested by Mr. Coombs' memorandum and the comments of should take some action of a dramatic Mr. Hayes, the System probably Personally, however, he was not completely convinced and drastic nature. this particular time, and he would that such action was necessary at rate now. If firm action was deemed prefer not to change the discount by the international situation, the usual considerations to be required the System from taking such action even of even keel should not preclude financing. In other words, he would regard during a period of Treasury actions as broader and more extended the open priods for monetary policy normally be the case. Absent a real under such conditions than would monetary policy about as at dollar crisis, though, he would maintain with no change in the discount rate. present,
Mr. Scanlon said that although business indicators showed mixed signs, it was believed that business activity in the Seventh District would improve gradually through the second half of 1963 despite a probable sharp decline in steel output and a possible slowing in the auto industry. This view was shared generally by business economists in the District. Local steel economists were now estimating that about 5 million tons of "excess" inventories would have been accumulated by the end of the second quarter. About 70 per cent of this accumulation was expected to be liquidated in the second half of 1963, assuming the absence of a steel strike. The auto industry continued at a good rate, although the inventory of used cars was relatively high. Loans at District weekly reporting banks rose in May, while investments declined. Total bank credit showed only a slight increase, increases, concentrated in investments, in the in contrast to large same month in 1961 and 1962. Business loans declined slightly, in contrast to both the normal seasonal trend and the national experience. Mr. Scanlon said that perhaps, if given more time to study and Coombs' memorandum, he might feel differently, but at the analyze Mr. found himself in agreement with the views expressed by moment he Messrs. Irons and Deming. In a crisis he would favor a strong move, regardless of the Treasury financing calendar, but in the absence of more convincing evidence of such a crisis he came out at about the
same place policywise as three weeks ago. This meant that he would favor no change in monetary policy right now, with no change in the directive or the discount rate. Mr. Clay noted that the continued expansion of domestic economic activity was encouraging. The performance of the business upswing had to be viewed, however, in essentially the same way as for some time past. Despite the considerable advance in activity, the domestic economy still had a lot of room for further expansion in terms of the availability of manpower and other resources. In substantial part because of the relationship between resources and aggregate demand, price developments had been favorable. These relationships of demand, resources, activity, and prices were basic considerations to the formula tion of public policy so far as domestic economic activity was concerned. While the domestic economy continued to expand, Mr. Clay added, there were important questions concerning the thrust of the upswing ahead. One was the uncertainty as to the extent of steel strike hedg to be expected in steel and related ing and the resulting readjustment industries from a reversal of this factor. Another question concerned consumer spending performance as a source of expansion in view of the modest increase in that sector in recent months. A third question arose from developments in business capital outlays; the June Commerce SEC survey indicated that the most recent quarter once again had fallen below the previous survey results. While total expenditures for the
year were essentially unchanged from the March survey, it might be significant that anticipated outlays by manufacturing firms were down somewhat from the earlier projection. The record of the third quarter should afford a better insight into the strength and pace of the business upswing that was under way. The Committee, Mr. Clay continued, had reduced the degree of reserve availability and encouraged an upward movement of interest rates in recent weeks in an endeavor to reduce the outflow of funds. It also had been suggested that this change in policy should be carried further. domestic economic conditions, however, it would appear well In view of further credit restraint at this time. This would call to him to avoid for no change in the Reserve Bank discount rate. The directive, as at the May 28 meeting, would be appropriate for a continuation adopted words "putting increased emphasis on" of present policy, except for the first paragraph. Perhaps the words "putting in the second line of the on" or some similar wording could be substituted. continued emphasis seem to have a cumulative impact that prob Otherwise the wording would with continuation of the specific instructions ably would be inconsistent in the last paragraph. say that a reading of Mr. Coombs' memorandum Mr. Clay went on to of the information available to him had caused him to re-examine all of the dollar. After such re relating to the international position not find a basis for what seemed to him examination, however, he could
a sudden shift of emphasis on the state of the dollar. If there was additional information that could be brought to bear on the question, he would like to have it. As he read it, the memorandum did not set forth any such specific reasons to suggest immediate vulnerability of the dollar. The Open Market Committee had already assumed a posture that would afford the System a basis for moving toward tighter credit conditions. If the situation was reaching crisis proportions, there be no hesitancy to make a dramatic move. However, the informa should tion available to him did not reflect factors that would seem to require at this time. On the basis of the information at his such a move disposal, therefore, he would favor continuing the present monetary policy. that Fifth District business continued to Mr. Wayne reported gained additional strength in slowly. The statistical picture advance contract awards, and in May from better April from a substantial rise in a slight rise in department store than-seasonal declines in unemployment, and continuing good levels of bituminous coal output and shipments. sales, reflected moderate gains. The Bank's latest survey also The Reserve divided between those who expected respondents were now about evenly and those who expected no significant some improvement in the near future a substantial increase in the past change, with the latter group showing On balance their collective appraisal of the recent past few weeks. gains in employment, in construction activity, and in suggested small
retail trade, including automobile sales. Manufacturers in the survey indicated a rise in new orders and shipments, accompanied by small in creases in backlogs, employment, and hours. Reports from the textile industry also showed some gains in new orders and a slightly firmer price situation. Recent rains had greatly improved the agricultural outlook. In the past three weeks reserve city banks in the District felt increased pressures, which they met with increased borrowings at the discount window and moderately heavier purchases of Federal funds. In the country as a whole, Mr. Wayne noted, business activity in May continued to show moderate improvement, thanks largely to a sharp increase in outlays for construction and continued high production of automobiles and steel. Steel orders had already dropped rather sharply, and steel production had begun to ease off. Barring some unforeseen development, steel production for the remainder of the year would quite likely be at levels significantly below those of the past three months. In view of the behavior of steel, it seemed unlikely that manufacturers' new and unfilled orders were currently continuing to increase as rapidly as they did from January through April. The May figures on employment and unemployment indicated that after seasonal adjustments there was a slight decline in total employment and a small rise in unemployment. All of these major indicators seemed to be saying that the improvement thus far had remained quite moderate and that there was no basis for expecting any quickening in the tempo in the near future if, indeed, the present pace could be maintained.
Turning to monetary policy, Mr. Wayne observed that conditions in the money market had returned approximately to those prevailing three weeks ago after some significant tightening for a few days, perhaps due in part to market reactions, to Treasury problems with the debt ceiling, and to difficulties encountered by the Desk in making accurate projections. The market seemed to be fully aware that there had been a small move toward less ease, but there was little evidence that it expected any further move of consequence in that direction in the immediate future. In the next few months the economy must adjust to a lower level of steel production, to the seasonal decline in automobile production, and to some rather heavy borrowing by the Treasury. It did not seem to him that the momentum that had been attained by the current improvement in business activity was sufficient the risk that would be involved in imposing the additional to justify burden of adjusting to any substantial reduction in credit availability, of a situation of actual crisis in this country's international short the Coombs memorandum and had listened to Mr. accounts. He had read Hayes' statement this morning, but he saw nothing in the picture to change in policy at this time, and a change in the justify a dramatic be regarded as a dramatic move. He continued to discount rate would a change in the discount rate should be reserved for a believe that if it occurred, with the change so dramatic as to be crisis situation, clearly indicative of what the System intended. There might be a
question whether a change of 1/2 per cent would constitute such a move. In the present circumstances, however, he would favor renewing the current policy dire-tive in essence, and he would not change the dis count rate. Mr. Mills presented the following statement: The excellent paper that Mr. Coombs has prepared on the subject of the festering balance of payments problem afflicting the international financial position of the United States cor rectly diagnoses capital movements as being its root cause. Such being the case, higher interest rates are not the right cure to prescribe, both because of their inefficacy and because their adoption by policy measures would inevitably unduly restrict the availability of domestic credit, exert downward pressure on the money supply, and work consequential damage on the economy. As I endeavored to emphasize at the Committee's last meeting, a higher interest rate structure in the United States mig..t offer some temporary relief to the balance of payments problem, but only up to the point when our foreign allies should raise their interest rates as counteroffensive to defend their reserves against the losses of gold measures and dollars induced by our actions. In that event, the entire rainbow-chasing policy would have ended in failure. As pos for reducing official disbursements of United States sibilities dollars abroad and obtaining further repayments on foreign advances appear to be limited, official United States control over capital outflows under Treasury administration is the action necessary to curb our losses of logical and correct reserves. The heavy movements of borrowed funds to Canada and Japan, loans by Belgian and Italian authorities on the London dollar market, and announcements of future foreign loans to be made in the New York market evidence the crying need for sterner measures than a defensive interest rate structure to correct the situation. In fact, foreign observers cannot be blamed if cynical and skeptical attitude to the approach thus they take a to its balance of payments dif far taken by the United States ficulties. Until stern measures are adopted, it is reasonable foreign loans to be negotiated in the United to expect further States as the cheapest market available and one in which it would be nigh to impossible to officially produce a high enough domestic long-term interest rate structure as to make borrowings
abroad more attractive. Moreover, it is probable that some foreign analysts are influenced by statements of authorities of the stature of Paul Samuelson, who has publicly called for devaluation of the United States dollar, and reason that loans made in the United States are not only cheap interest-wise but conceivably can be repaid at below their original debt burden if devaluation should be compelled by financial difficulties whose correction had been delayed too long. Repeated pro nouncements from official quarters that our capital markets will be kept open, and in the face of intolerable balance of payments deficits, can only lead to further doubts abroad about the financial policies being followed in this country and their sustainability. The balance of payments situation is indeed critically serious and must be confronted aggressively. If there is no hope of meeting the problem by adoption of appropriate controls over capital outflows, and even limitations on tourist expendi tures, then the final defense must resort to higher interest of the opinion that development of a rates. I am personally higher interest rate structure, and an increase in the discount rate at this time, will in the long run have harmful economic consequences, but if the Committee decides on that course, I shall reluctantly bow to the inevitable. seemed to him that the general movement Mr. Shepardson said it domestic economy was encouraging. A period of normal summer of the of course, and this would not argue for any slowdown was approaching, further monetary policy action toward less ease at this time as far as economy was concerned. Like others who had spoken, however, the domestic and he was not sure about the international situation, he was concerned afford to sit tight until a crisis had actually whether the System could know just how imminent or serious the threat of a occurred. He did not enlightenment was available, he would crisis might be; if any further it. On balance, though, he would be inclined to try to like to have crisis by taking less severe action than would be called anticipate a for after the crisis actually had occurred.
For the moment, Mr. Shepardson continued, he felt that it would be desirable to continue present monetary policy, which he would understand to contemplate a degree of reserve availability such as to provide a fluctuation around the three per cent guideline, with some overages as well as shortfalls. However, if it became clear that the international situation was truly alarming, he felt that the System should seriously consider the possibility of acting in such manner as might seem to be required prior to the actual eruption of a crisis. Mr. Mitchell said that on the domestic situation he found to the position expressed by Mr. Wayne. He concurred in himself close the comment of Mr. Noyes to the effect that there would be a case for credit markets ease a little in deference to the summer letting doldrums, particularly if accentuated by a steel inventory adjustment. May 7 in deciding to move toward a lesser The Committee's action of was in his judgment a mistake. While there had been a degree of ease good first half this year, the accelerating factors during that period, situation, had not succeeded in communicating particularly the steel notably to consumer spending. One themselves to the economy generally, was going to be some decelerating in the could be fairly sure that there spread more easily than the accelerating steel industry, and this could effects apparently had spread in the first half of the year. Accordingly, the domestic economy was concerned, the Open Market Committee as far as about making any policy changes, even slight, in the should be cautious
direction of tightening. It might well be that the domestic economy would not achieve a satisfactory level of operations as far as un employment was concerned until there was a tax cut and some structual changes occurred. In the interim, monetary policy ought to do whatever it could to keep the domestic economy moving at a relatively high level. One should not forget that the present level of interest rates was high, not low, by historical standards. Mr. Mitchell said his reading of the Annual Report of the Bank for International Settlements suggested to him the view conveyed Mr. Furth had read; namely, that this country was doing by the excerpt everything it could to maintain the competitiveness of short-term about and that this particular goal of monetary policy was appropriate. rates Reserve had built a link of relationships to other Further, the Federal central banks in the past year and a half that had provided a first What would be gained, then, from a tightening line of dollar defense. the international situation was concerned? of monetary policy as far as The thing that remained to be done was to deal with the basic balance arising from this country's trading and investing of payments deficit rates in this country were lower than position. Admittedly interest he did not believe the disparity could be interest rates abroad, but by raising interest rates here without forcing the domestic eliminated downturn, one that would quickly require a economy into a substantial reversal of monetary policy. As far as he could see, Mr. Mills complete
came to the only logical conclusion regarding the capital outflow problem. He would not accept that solution as yet, however, because he was not convinced that events had moved to the stage of crisis. Further, he felt that adjustments in Europe through inflation were proceeding and that they were not going to be halted. He also felt that political uncertainties in Europe might become sufficiently acute that the United States would become a haven for investors before too long. In summary, Mr. Mitchell expressed the view that monetary policy should not be used to crush the domestic economy. He was rather puzzled about any suggestion for raising the discount rate to 4 per cent. This seemed to imply that once such action was taken the job would have been done and everyone could rest easily, but in his view the consequences for the domestic economy would be so serious that the Administration and the Federal Reserve System would have to face a whole new series of problems. The ideal would be to provide some evidence that this country intended to conform to monetary discipline, while not going so far as to injure the dcmestic economy. Basically, the only solution to the inter national problem consistent with a good solution domestically lay in a rapidly expanding domestic economy, and in his view this could not be accomplished through a policy of monetary restraint. As he had said, should not have decided on the policy change made he felt that the Committee in May. He would like to move back toward a little more ease.
Mr. Hickman noted that business developments of the past few weeks generally had been reassuring. However, developments in the steel industry would pose an important test for business in the months immediately ahead. Revised April figures for retail sales, and preliminary figures for May, confirmed the generally favorable performance of the consumer sector. Total retail sales for the first five months of 1963 were 5-1/2 per cent above those of the corresponding five months a year ago, cent above the immediately preceding five months, after and 2 per the most recent Commerce-SEC survey of seasonal adjustment. Likewise, which indicated modest increases for the third and capital spending, added reassurance of support from the business fourth quarters, provided and output continued at near-record levels in May sector. Auto sales and early June. of unemployment rose slightly in The seasonally adjusted rate into the labor force. The largely to an influx of teen-agers May, due workers, however, remained at a favorable comparable rate for adult male 5.1 per cent only three months level, which compared with 4.4 per cent adult male workers was at its lowest ago. Moreover, the May figure for one month, in the three past years. level, except for Fourth District, Mr. Hickman said, confirmed Developments in the nation. The most recent data of business activity in the the strength for the District indicated substantial advances in construction contracts,
electric power output, and bank debits. The insured unemployment rate in the District had improved even further through early June, although at a slackening pace. The steel situation, as indicated earlier, was now approaching the point where it would provide an important test for the general trend of business activity in the nation. Although declining steel output would act as a drag on the economy in coming months, it appeared likely that the economy would be able to absorb the adjustment without changing direction. The Reserve Bank's staff economists and other analysts in the Fourth District were in agreement that a reduction in steel output even as large as last year's could be absorbed without a decline in the Board's production index, averaged over the third quarter; most observers expected the index to rise in the fourth quarter in any event. This year, stronger and the reduction in steel output with business confidence expected to be no larger, and possibly less than last year's, the down drag from steel should be absorbed at least equally successfully. Total the year was still projeced at approximately 106 million steel output for ingot tons. the balance of payments situation As had already been reported, in May, which portended a second quarter record no better did not improve the first quarter. The dollar still appeared to be under than that of in the foreign exchanges. Capital pressure despite a slight improvement remained large, in Mr. Hickman's opinion, because of the relatively outflows favorable terms of financing in this country and the ready availability of funds.
In regard to policy, Mr. Hickman said it seemed to him the point had now been reached where the effects of the slight shift towards less ease adopted several weeks ago had been fully absorbed by the market, the financial community, and the national economy. He believed that another step in the same direction was now needed. With the Treasury due to come back into the market for funds late in July, this action should be taken promptly. He would recommend a bill rate in the 3-1/4 -3-1/2 per cent range, with free reserves around $100 million, or lower if needed to bring about an appropriate upward adjustment in the term structure of interest rates. This would pave the way for an increase in the discount rate, possibly before the next meeting of this Committee. The directive should be reworded to call for increased firm ness in the money market, rather than a continuation of the same degree of firmness. Mr. Hickman went on to say that the foregoing remarks reflected his views before reading Mr. Coombs' memorandum. Having read that was more than ever convinced that the System should move memorandum, he promptly toward a 91-day bill rate in the range of 3-1/4 - 3-1/2 per This would not solve the country's balance of payments difficulties, cent. to overcome them, and it would put those who could help but it would help required urgent attention. In Mr. most on notice that the situation of 1/2 per cent in the bill rate would Hickman's opinion an increase have little effect on the business situation. He felt that business
would level off and then increase in any event in the months to come unless there should be a dollar crisis, which all possible steps should be taken to avoid. Mr. Bopp reported that developments in the Third District in the past three weeks had been disappointing. Because of the timing of today's meeting, many figures for May were not available. The most current data, however, all reflected deterioration or a continuation of depressed levels. Earlier hopes for improvement in unemployment claims had been partly dashed by the latest figures. Advance indications presaged some decrease in the Philadelphia help-wanted index for May. Steel produc tion, which never did match the national rise, had dropped more from its top than the national index. Perhaps symbolic of conditions in the District was the behavior of department store sales. They had fallen below the comparable totals of 1962, and indeed in this respect had turned in the nation's worst performance. The estimated May index indicated a small improvement over April, but not enough to foreshadow any change in the downward average movement that began late in 1962. Although special causes (including a transit strike and the loss of one department store) accounted for some of this poor performance, a review of Third District information indicated that in large part the disappointing store sales results had been associated with generally sluggish business in the District.
A progressive tightening appeared to be taking place at Third District banks. The basic reserve position of reserve city banks fell from plus $26.6 million in mid-May to minus $93.6 million in early June. Country bank borrowing at the discount window rose progressively from about $600,000 to $3.5 million, the highest figure reached this year on a weekly average basis. Data available for the last half of May and first week in June indicated that bank credit at reporting banks in creased while total deposits adjusted fell. The loan increase was double that occurring in the same period last year. Loans to about sales finance companies and to other financial institutions rose, as did real estate and "all other" loans. Business loans, however, had remained quite sluggish. With conditions as they were in the Third District, Mr. Bopp said, he started with a natural bent toward a policy of monetary ease. Looking at the larger picture, it appeared to him that the national economy was continuing a moderate, unsatisfactory rate of progress by unacceptable levels of unemployment and resource characterized utilization. Recent developments had, if anything, made this fact clearer and seemed likely to dispel the more extreme forms of optimism had circulated in the past few weeks. This view of the national that economy, therefore, reinforced his preference for ease. The outlook for the balance of payments, of course, was not good, Mr. Bopp added. On the other hand, prevailing levels of short-term rates
did not offer strong incentives for significant movements of funds on a covered basis. For this reason, he believed further tightening would not be appropriate at this time. The Committee had taken a position of less ease than he would prefer, but he would not now recommend a reversal of that position. Debt management policies had accomplished very recently some of the results that he would like to see achieved by monetary policy. The improved tone of the money and capital markets that had resulted from the new cash offering seemed to him desirable (although the speculative overtones of the issue were, of course, disturbing). As these effects wore off, he would hope that the Desk could prevent any sharp shift in the tone of the market. Perhaps it would be necessary to rely on the law of averages to produce "misses" on the easier side. In the meantime, however, he would like to see a reserve supply somewhat more plentiful than had been the case in recent weeks. Mr. Bopp expressed the view that a change in the discount rate would not be in order at this time. Some change in the first sentence might be appropriate to avoid a cumulative emphasis on of the directive the balance of payments. This could be accomplished by substituting for "putting increased emphasis on." "maintaining" Having read the Coombs memorandum rather hastily, Mr. Bopp said, deserve some thought. If there should a point occurred to him that might be a dollar crisis, he assumed the tendency would be to think in terms of some dramatic credit-tightening action. This would have reverberations
in the United States and the rest of the world. An alternative would be to resort to the International Monetary Fund and other drawings to work through the crisis. Two or three decades from now, others might look back and say that this would have been the preferable course. Mr. Bryan commented that Sixth District figures were sufficiently close to national trends to make a detailed recital of District statistics unnecessary. Both in the District and in the nation, the broad dif fusion of gains shown by economic indicators was impressive. Also reassuring was the moderate uptrend in plant and equipment spending, when the economy would probably be disturbed by a coming at a time let-down in steel. In the meantime, the money supply (narrowly defined) exhibited about a 2.6 per cent increase measured against year-ago figures. The time deposits) exhibited a 7.7 per cent total money supply (including figures. Total liquid assets and personal-type increase from year-ago and sharp uptrends. These factors savings continued to show persistent a long way toward explaining why the rate reaction to the probably went been modest and probably indicated System's recent policy shift had rates remarkably steady for so long that forces that had kept interest were still at work. a satisfactory economic trend In the light of what he considered even though no boom was apparent, Mr. Bryan believed that and prospect, but not "tight." He conceived that to System policy should be "firm"
have been the System's posture, on average, over the past few weeks. In that sense, he believed monetary policy should continue unchanged. Tightness should develop, if at all, from market demand against a modestly expanding reserve base. If he were to state an instruction in terms of free reserves, he would say that the Committee ought to aim at a level (daily average basis) falling within a range of $100 million to $200 million, but preferably toward the lower end of that range. However, he would like to point out that what he regarded as more basic reserve figures still exhibited an overage from December, when policy shifted--an overage as measured against even a 3 per cent growth factor. This point was discussed in the staff memorandum on reserves. He still he had recently been saying, that it would be preferable to believed, as fall back to a 2 per cent growth rate in seasonally adjusted reserves despite the case presented by Mr. Koch. Total reserves, incidentally, had been exhibiting a slightly component, Mr. Bryan noted. He regarded this develop greater borrowed in existing circumstances. Since the increas in ment as appropriate no policing problems at the moment, and a change borrowings presented would be taken as an announcement of a considerable, in the discount rate even a drastic shift to a policy of restraint, he would not presently consider an increase in the discount rate as desirable, particularly when considered in the light of the situation with respect to manpower, materiel and productive capacity.
Mr. Bryan commended Mr. Coombs' memorandum for its contribution to Committee thinking. Essentially, he pointed out, the argument made in the memorandum rested for validity on points that he (Mr. Bryan) was not fully in a position to judge. It appeared, however, that an interest rate adjustment, as referred to in the memorandum, would have to exert a substantial impact on capital outflows without at the same time creating offsetting domestic repercussions, and Mr. Bryan was not certain in his own mind whether these dual objectives could be achieved. Second, it seemed that if such action were to influence capital outflows, there must be an assumption that European rates would not follow U. S. rates upward, and he was not entirely sanguine on that score. From his read ings, there appeared to be developing in Europe--as elsewhere in the world--a new wave of nationalism, though perhaps in somewhat different form from the nationalism of the past. Further, the measures mentioned in the Coombs memorandum might have a desirable technical result, but of and Mr. Bryan was skeptical of the value a relatively temporary nature, of good temporary results. He was by no means philosophically convinced Reserve System had performed a good service through its that the Federal program of foreign currency operations. These operations had been tech and capably handled, but he wondered if it might not nically successful just to lose gold. Things of a more fundamental nature have been better had to be done about the balance of payments. In a further comment, Mr. Bryan noted that the Coombs memorandum had suggested that it might be possible to raise the short-term rate
toward 3-1/2 per cent and at the same time prevent a proportionate--or perhaps even any notable--increase in long-term rates. Mr. Bryan doubted whether this could be done. The rate curve was already quite flat; a rate curve as flat as the memorandum seemed to contemplate could easily lead to the unfunding of the public debt with a large volume of long-term Government securities being offered to the Federal Reserve System. Mr. Shuford reported that business activity in the major cities of the Eignth District continued to improve moderately from April to May. However, the level of business activity was only slightly higher than a year ago. Preliminary figures suggested that employment in the major labor markets rose from April to May. Bank deposits rose rapidly in April and May and business loans had increased since March, regaining the growth lost early in 1963. Generally speaking, business conditions in the District were roughly parallel to those in the nation. Altogether, the improvement that had been seen recently was encouraging, even though there was no evidence of an economic boom. Mr. Shuford noted that the balance of payments situationregardless of whether it had approached crisis proportions--was serious. As he had observed on other occasions, the real correction lay in areas other than monetary policy. He would like to see additional and more positive actions taken in some of those areas. A meeting of the problem through increasing short-term rates would appear to afford only temporary relief and might prolong the fundamental corrections toward which the
country should be working. At the same time, monetary policy had a role to play; in his view it had already played a significant role. Also, he recognized that most of the fundamental corrections were longer range in nature. Therefore, if it appeared that a crisis situation was approaching, he would be willing to consider an increase of some magnitude in the discount rate, either 1/2 or 3/4 per cent. If the situation had developed to a point of urgency, and if a significant move seemed necessary to safeguard confidence in the dollar, he would certainly think it desirable to consider taking such a measure. However, he hesitated to conclude that a crisis situation had been reached; if additional facts were available, it would be helpful to have them. Before reaching any final conclusion on the discount rate, he would prefer to wait and hear a full discussion. Therefore, Mr. Shuford said, he would prefer to continue the degree of money market firmness that had existed over the past three weeks. He would prefer no change in the discount rate unless it should be decided that a crisis situation clearly was approaching. Mr. Latham reported that basically the New England economy continued to show improvement, although still lagging behind the national rate of growth. Bankers and businessmen generally reflected cautious optimism, expressing the opinion that the local economy was at a high level, moving slowly but steadily upward.
Purchasing agents reported higher production and increased new orders in May, with fewer decreases compared with April. Personal incomes appeared to have slowed in growth rate, although still running ahead of last year. May department store sales were good and were running generally 3 per cent above a year ago in early June. New car sales and registra tions continued at high levels, with dealers optimistic. Savings deposits resumed their upward trend after the April dividend lull, with new deposits exceeding withdrawals at mutual savings banks, where the annual growth rate was running at about 7 per cent. Loans continued at high levels at member banks, with loan-to deposit and liquidity ratios at 68.8 and 13.4 compared with 65.9 and 17.9, respectively, a year ago. Loans and investments in municipals continued to rise at the expense of both short and longer term Governments. The sentiment expressed by officials of the District's larger banks was in favor of current System policy, with the feeling generally that money had been too easy. Mr. Hemmings reported that a number of key indicators of economic activity in the Twelfth District showed gains. The employment situation slightly in May, while the unemployment rate appeared to have improved in California and Washington, which together account for 80 per cent of total Twelfth District employment, dropped slightly below the April level
of 6 per cent. Lumber prices had risen because of a widespread strike in the Pacific Northwest and an increase in new orders. Steel produc tion was up more in May and fell less in June than nationally, and there was a continuing high level of construction activity in most District States. Consumer buying was strong in May, with department store sales up 8 per cent from April. New car registrations in California were down in the first half of May compared with April, but nevertheless reached a record for this particular period. A number of savings and loan associations in Southern California and Arizona had announced cuts in dividend rates to take effect either in speaking the reduction would be from 4.8 July or September. Generally per cent to 4.5 per cent. There were some indications that reductions occur at savings and loan associations in the San Francisco also might area in the third quarter. 5, business loans at District banks declined From May 15 to June more than in the corresponding period a year ago, but security holdings decline nationally and more than offset the increased in contrast to the Time deposits were up more than in the corre decrease in total loans. The larger banks continued to be net sellers sponding period a year ago. increased somewhat during the past week. of Federal funds, and net sales Mr. Balderston observed that the international situation presented not only the question of what should be done but when. The indication of increasing unwillingness of foreign central banks to hold dollars, as
referred to in Mr. Coombs' memorandum, was not a new or surprising development. Foreign bankers who had visited here during the past year had been indicating clearly that they were holding dollars with increasing reluctance. Shepardson's admonition against waiting for an actual As to Mr. crisis to occur to trigger defensive action, Mr. Balderston indicated that he agreed in principle. It appeared that the System would be well advised to take suitable action as early as it could find ways of taking He also hoped that steps might be taken toward some reduc such action. of Government spending abroad for military purposes tion of the flow and toward confining foreign aid to essential projects that the United afford under present conditions. As to the outflow of States could private capital, he believed that direct controls would not work because of the opportunities for avoidance. He could not imagine any controls not have many leaks. Further, he believed that widespread that would discussion of direct controls would serve to precipitate developments was worried about this morning. Possibly tax such as the Committee be administered more effectively. That might be a more deterrents could feasible approach if such deterrents could be placed in effect without debate chat might precipitate a crisis. extended policy, Mr. Balderston indicated that he con As to monetary sidered the question of timing to be most difficult. For the forthcoming three weeks, however, he would favor continuing within the general scope
of the policy adopted on May 7, but with enough further lessening of ease to encourage the bill rate to move about 3 per cent. Looking at the recent behavior of the stock market, the increase in farm land values over the past year, the sporadic price advances reported during recent weeks;, the continued upward movement of time and savings deposits, and the continued upward movement of wage rates and fringe benefits, it appeared that the economy had more liquidity than it could make use of effectively. Flooding the country with liquidity would not put to work the younger folks who had recently left school and wanted jobs, which unfortunately had been priced out of their reach. Chairman Martin commented that he was more and more convinced that domestic and international considerations could not be separated at this juncture. In his opinion, the shift in policy toward slightly less ease at the May 7 meeting was appropriate; the situation would be even more difficult if monetary policy was not in its present posture. Further, he did not believe that the domestic economy would suffer from a lesser degree of monetary ease. Instead, he felt that it would benefit, strange as that might seem--and the balance of payments position would at least temporarily be improved. Whether it would be improved over the longer run was, as Mr. Bryan has suggested, a different story, but the could not be responsible for all of the factors in the current System situation. The views presented in Mr. Coombs' memorandum involved, of course, an element of judgment. One could not be sure whether Mr. Coombs
had accurately assessed the present situation, and probably this would not be known for some time. He (the Chairman) had been talking crisis himself for perhaps 15 months. It might take another 15 months before a crisis actually occurred, if it did occur. However, there were indications, including reports in the press, of an ebbing of confidence in the dollar at this juncture. In further comments, the Chairman pointed out that no one could much effect changes in monetary policy out of deference to foretell how the international position of the dollar might have on the domestic Nevertheless, there were some inconsistencies in the present economy. debate that he felt should be pointed out. For example, the argument rates would not achieve any results from was made that higher interest of payments, but on the other hand it was the standpoint of the balance higher interest rates would be disruptive to the domestc maintained that never know about this sort of thing economy. In his opinion, one could he would hate to see an the absence of experimentation. Personally, in rate in an actual crisis situation, feeling abrupt move on the discount orderly way and try to let the it would be sounder to move in an that it became clear that they would not traditional forces operate unless work. Martin continued, that timing The fact must be faced, Chairman opinion, the System should not necessarily was a key problem. In his traditional even keel policy during periods that the feel bound by the
Treasury was in the market. When it came to the question of timing, he noted, it must be realized that everyone was likely to have dif ferent judgments. It might be that a payments crisis would come, although he was not convinced that it was here now. However, while he did not pretend to know the right timing for System policy action, he was convinced that the country ought not to take a step such as devaluation of the dollar or the institution of direct controls before interest rates had been given some chance to have a play on capital flows. Unfortunately, he felt that he detected around the country a growing sentiment that devaluation was the answer, or that direct controls were the answer. This was disheartening to him. He hoped that there would not be such an experiment before indirect controls and market forces were given an opportunity. If direct controls were used, the trend toward nationalism about which the Committee had been talking was worldwide overnight. The United States was the last strong apt to become citadel of multilateral nondiscriminatory trade and convertible currencies Its leadership in the world stood on that fact. as world policies. Chairman Martin added that although the time might be at hand on foreign aid and military expenditures abroad, the for cutting back System was not in a position to take such steps. In terms of capital however, he had some feeling that a modest change in interest flows, rates at some point would do more to restore confidence. Economists, he thought, had never quite come to grips with the item of confidence and with it. Things ought to be locigal, but the market the things that go
is never logical and people are never logical. It seemed important to try to find a middle ground. The Chairman said that personally he would be inclined to move modestly toward less ease. He added, parenthetically, that he questioned the use of the word "tightness" at this juncture. Never had he seen a period when there was so much loose speculation with money. The practice of American banks in using the Euro-dollar market was growing all the time, and this was due primarily to interest rate differentials. This should be a matter of concern to the Federal Reserve System. To repeat, the Chairman said, he was convinced that no considera tion should be given to moves such as devaluation of the dollar or direct capital controls until there had been a testing to see whether the domestic economy was going to be set back by moves in the area of indirect controls. As to today's meeting, Chairman Martin noted that the majority opinion within the Committee seemed to favor no change in the present monetary policy although it might be a rather close call, insofar as the current position was concerned, between no change in policy and slightly less ease. The Chairman added the comment, in this connection, that it was hardly appropriate to start talking about tight money until net free reserves gave way to net borrowed reserves. He also expressed the view that there were many tenuous elements in the current situation. No matter whether one looked at the stock market or the real estate market, small
business activities, or some of the fringe activities of defense opera tions, there was a speculative movement around the country that was in a way reminiscent of the 1929 period. He did not believe that this situation was likely to come to a head within the next six or nine months, and he hoped that he was too pessimistic with regard to the international situation, but he felt that the monetary and credit situation in this country was not healthy. Wherever one looked, there was too much credit available, whether it was in the area of consumer instalment credit or real estate credit or some other area, and this was a hazard that must be recognized. He would only propose today that the problem be kept closely in mind. The Chairman then suggested that a vote to be taken on the basis in present monetary policy during the forthcoming three of no change which would be signified by making no change in the current economic weeks, policy directive. Accordingly, upon motion duly made and seconded, the Federal Reserve Bank of was authorized and directed, until New York by the Committee, to ex otherwise directed the System Account in transactions in ecute accordance with the following current economic policy directive: current policy to accommodate moderate It is the Committee's bank credit, while putting increased emphasis on money growth in to an improvement in the conditions that would contribute market account of the U. S. balance of payments. This policy capital the continuing adverse balance of pay takes into consideration its cumulative effects and the improved ments position and as well as the increases in bank domestic business outlook,
credit, money supply, and the reserve base in recent months. At the same time, however, it recognizes the continuing underutilization of resources. To implement this policy, System open market operations shall be conducted with a view to continuing the degree of firmness in the money market that has prevailed recently, while accommodating moderate reserve expansion. Votes for this action: Messrs. Martin, Bopp, Clay, Irons, Mills, Scanlon, and Shepardson. Votes against this action: Messrs. Hayes, Balderston, and Mitchell. Messrs. Hayes and Balderston dissented because they felt that the Committee should move in the direction of slightly less ease, while Mr. Mitchell dissented because he favored a return to the greater degree of ease that had existed prior to the shift of policy decided upon by the Committee on May 7, 1963. Chairman Martin said that, as indicated by his earlier comments, his inclination was to move toward less ease. if he had thought it would serve any purpose to He would have so voted take that position at this time. Manager had recommended, in his It was noted that the Account oral report today, that the continuing authority directive to the Reserve Bank of New York be amended to raise from $1 billion Federal the limit on changes in the System Open Market Account to $1.5 billion during the next three weeks. Upon motion duly made and seconded, and by unanimous vote, section 1(a) of the authority directive was amended continuing so as to authorize and direct the Federal Reserve Bank of New York, to the extent necessary to carry out the current economic policy directive:
(a) To buy or sell United States Government securities in the open market, from or to Government securities dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a cash, regular, or de ferred delivery basis, for the System Open Market Account at market prices and, for such Account, to exchange maturing United States Government securities with the Treasury or allow them to mature without replacement; provided that the aggregate amount of such securities held in such Account (including forward commitments, but not including such special short-term certificates of indebtedness as may be purchased from the Treasury under paragraph 2 hereof) shall not be increased or decreased by more than $1.5 billion during any period between meetings of the Committee. Mr. Hayes stated that there had been several points made during today's discussion that he felt warranted some comment. First, the Annual Report of the Bank for International Settlements did contain the sentences that. were read by Mr. Furth. Reading the full report, however, or at least the sections on interest rates, he felt that clearly the atmosphere was one of favoring a less easy monetary policy in the United also the thinking of European central bankers with whom States. This was he (Mr. Hayes) had been in contact. Mr. Hayes expressed agreement with As to direct capital controls, Chairman Martin and Mr. Balderston. This would be a the observations of if the System had not done everything possible futile thing to get into use of conventional monetary instruments. avoid such controls through the to in wishful thinking, Mr. Hayes felt, It represented indulgence upsets in Europe could be relied hope that inflation and political to With reference to balance of payments problem. upon to solve the U. S. be allowed to take U. S. central banks just the suggestion that European
gold, he could think of nothing that would be much more likely to trigger a loss of confidence by U. S. citizens generally. With reference to the question of short-term rates, he warned against placing too much reliance on the fact that covered rates were now fairly well in balance. This represented overemphasis on one phase of the short-term rate picture. A great many flows were going on without reference to the covered rates. As to the suggestion that a move on the part of the System should be one intended to have some lasting effect, Mr. Hayes said that if a higher short-term rate structure could be achieved, possibly that would have lasting effects for years in the balance of payments area. As to long-term rates, he had only suggested softening the effects of policy move at this time to see whether they could be confined mostly a to the short-term area. If so, obviously this would have advantages for the domestic economy. On the question whether any change in the discount rate should be in the order of one-half per cent or one per cent, Mr. Hayes said he in his own mind that an increase of one-half per cent came out clearly would be vastly preferable. The necessity of having to make a larger adjustment might be obviated by making a smaller move sooner. An increase cent would provide a strong signal of what the System of one-half per intended, especially since the discount rate had been at 3 per cent for such a long time. It should have the effect of encouraging actions
by other parts of the Government as effectively as a larger increase, but it would be less conducive to a move on the prime rate. It would do less to complicate the Treasury's problem, to engender political difficulties, and to generate offsetting actions abroad. As to whether there was indeed a payments crisis at hand, Mr. Hayes noted that no one could tell for certain about the timing. As Mr. Balderston said, this had been developing slowly over a period of time. Mr. Hayes was rather surprised that some of the Committee members seemed to feel that something might have been happening during the past few weeks about which they had not been informed. It was a matter of judgment as to when a process that had been developing over a long period of time would get to the breaking point. He agreed with what Mr. Shepardson and Mr. Balderston had said about anticipating rather than waiting. A mild move would run much less risk of harm to the domestic economy than a severe move, and he could not see why anyone would want to wait until the last moment before doing anything. It was human nature, of course, to want to pass the buck to someone else to solve a problem, but he could see signs that the Government in general was increasingly aware of the seriousness of the problem. The System should not fail to be among the ranks of those who were ready to do their part. Mr. Mitchell did not agree that the System could make any policy move that would change the fundamental relationship of the two ends of
the interest rate structure. In order for that to occur, the marginal efficiency of capital in this country must rise, and no policy the System could adopt would make that happen. What could develop was an artificial structure in which interest rates would be fixed, as they had been at the short end. This was one reason why people had so much money; there was no reason to fund under the existing rate structure. Mr. Mitchell agreed that the question of timing was an important point. In his view there should be either a structural change at home or def inite evidence that the economy was on its way before it would be appropriate to use the kind of medicine Mr. Hayes was advocating. It would never solve the question of the marginal efficiency of capital in this country. Mr. Hickman commented that the marginal efficiency of capital involved an equating of expected future returns and present costs. The expectational element depended in part on the degree of concern about the balance of payments situation. If this was a factor deterring in vestment it would appear that a firmer monetary policy would raise the marginal efficiency of capital. In other words, decisions to invest involved judgments as to the future, which included concern about the precarious position of the dollar. It seemed to him that there was much to be said on both sides of the question. The raising of interest rates might deter some investment, but at the same time it would represent a forward step in dealing with the balance of payments problem. Failure
to take action might result in undermining the quality of credit and lay the groundwork for a recession in the future. In his opinion, an unduly easy monetary policy was not going to help unemployment or promote the longer run utilization of capital in this country. discussion concluded with further comments by the Chairman The of the Committee, reflecting their views on various and other members credit situation and the balance of payments aspects of the domestic problem. next meeting of the Open Market Committee It was agreed that the would be held on Tuesday, July 9, 1963. meeting then adjourned. The Secretary
Also: Record of Policy Actions