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MEMORANDUM FOB. THE PRESIDENT Subjccti Background for the Meeting vri.th Chairman Marti* Aa background for yetor Monday mMtia| v iib th« monetary policy "Quadriad," this memorandum (a) summarise* recent developments in the monetary sphere and (b) reports soma mis* jiving* about possible future developments. L R ec en t V e r e lo p m e n t* Within the framework of already existing policies and the constraint Imposed by die balance ef payment* position, the fed ha* continued to operate effectively to maintain relatively free credit availability at stable to declining long-term interest rates* Yield* ca long-terra government and private securities have re* .t | cently been la the neighborhood of their prevlon* lows lor the year (reached last May)} hi some case* new lo w for the year hare been set in the last week or two. In part, this Is doe te tit* slowing down e f the pec* of economic^ expansion and the attendant weakening of the demand bn credit* How* -— erer, the fact that total bank deposit* and currency Increased by %Z ; : billion in October - - the largest month-to-month Increase this year suggests that the f> d has recently been permitting some expension mi total bank credit. ^ fre e reserves have been maintained at about $400 million. The Treasury bill rate ba* recency been nudged «p to abeet 1, 6 percent to check outflow* e f capital to foreign center** 1* an ^ apparent effort to prevent the transmission of these upward pres•ares to long*term interest rntee, the Fed purchased nearly $1C3 million of longer-torm (over one y«nr) *ecurltlet early (Ms month* o££ifcttinj a portion of t&eta p ^ch isc* by eajci of chart* tarra *ecurltlc». Nothing further wa* don* thl# pa*t week, but th« early-Norember "nudge" or Mtwi»tH operation Kgeln d&niocstretec vtL&t can be done. It. Apprehenelon* tor the Futjre The three Council M«mbtri had lunch on Saturday with 0«orga ' Mitchell, your on* * m u minority on th« E ou d of Oortr«ort, Gcorge'a serlou* re»erratloii* with reaped to current domestic mooetary policy, and hi* proposal* for change ere io a m «r li»d In the attached copy otf hi* remark* at U it veek’* me*ting of fo d Op*tt~Mark«t Conaniittae« Hit even more b&*ic concern (not included in hit written rernarke) i* with pc»*ibl* development* on the International front, and with the *e*pon*e that ha fear* would amerg* if wa eaperlascad the auddea trial* of a run on the dollar* Unlea* wa prepare carefully la advance for fuek a c rU ii, ha feel* that tha inevitable raaponaa vould be ft efcarp and drastic tightening of credit and related mea* urea which would not&niy ' hav* bad domtitle conae^oaucea, bat **t back t o t y*ar* tha pro*pt«t* for eon* tractive darelopmeat* U iatamatf»aal monetary (otptretlM . ■ Although you hara In ap«ration a AoMjatftfcafeoa long-range bal ance of payment* and International monetary problem*, it may ba adviaahl* to turn aur attention back to *hort~|na preparedne** on tMi froot* WaUar V. HeUar Enclo»ure* CONFIDENTIAL Comment* oi Oovanior Ga&ygf Mitchell ljt 19^1 Tcrci^lsH^g policy la l?ia cm rent economic airaosp&#ra It exceptloyally dlXflctilt. l'Sfct pervastly* Fearc of aaetfctr e»rU «r, l«st thrutt tlio »«em to b ) po»t*ar-typa raeaealoa team fo r a tas&tlaabla tlgsdilca&t wjh> rabidly /a<fla$ lido th« obllrioa d "eo ckaaga#**; Tha eetmomy con*lac a* to akaoifc |olt* *• boGvecor^omlc and political* ' tsU rcal aad irdarzatlooal *• feet It d^ea It *t par capita *«ro , 1 .*,, wtfl* deflated GHP p*!1capita &owt&g ad cfgrj ftcyrt chaaga, a# U dld Vcftr*ea ,:t- tht teccrcd and third ^a&rtara tad probably will fcetwwa tka third aad fourtlu Aa acsndmy la vttlck OK? 1« not rlalag faatav fhaa tba grovc-fk in population t« oo* fh# Ima^t wa k a rt at o w m Iw i aa* oaa (bat «4 vaat ’3?S- o&ara ta kar* m aa* It ceoforma aaltkar t« oar &etda w r o u aapicadoaa aad U la a ^ _ a » '• : '':,L:'^.':!'?t SometMag v ill feappe* wklcfc W ill s tir (ba acaaoray trots par capita ' •era, Emay ta ila g fr* raogwttfcaT^ y oot, fartadfagft+ fayalgfca^' vaicMaf KalpUtaly, gt aaa/ gat «p aad fa. ftllawtag a pwWtanftal redaction la taxat at aq^danHal liuraaaa U dafanaa tpaadBagf ft w*ald mara auraly ^a la a ga paetttaa tf irapaaftry policy gara d * lacyaattagly aari* a» l ow i iHl a«ada a Idghat p rtartty tkaa tt glvaf Am fadtractahla yraMam atf tryteg ta r i h h l i aa arftifl<iat »ate «eractara 0aa w W t ^ k ^ fir ^ ^ ^ Tr.a problem Is a^proi.chtr.3 a crlrii ftsvj® bscseta tko #art cf ecs-^ca/ wo fears it geacrfctlaj a largo tnd tacr«4 §loj amcnmt c f seringa# •which la tw3 fy?a plAy of market* would bo pul to *rork ky <!U?pro3tiag (!b« c>v Ir r J a f c c t T B t a c i m e t ’u r e . h Uso c o jp o r e .t * a r e a , * k l ^ k t * v o l o l p r o f i t * * grcwlnj >o!nm« of iepr«c!it!on ciar^e* It bcirj maintained whllo > -^ Isrt-l^ry epea€lng it rcducct! as4 capital t?*o£lag It irvollng oil* Tlx# ■ rceuli pcJc.t# tc**‘sur4 A flat ol bucket fl fuad* *vmil*bl* fa* inroctmeat *3 4 a doclls® la capital flaancl&f fko*4j» la tbo co&rumtr ajr&a* Cows . of Barl&£t ccciliai# to gww, >i UaM tVoit ( b i « w bo e&UforUod m ~ ** ^ "jy »d l*«re ti«m rf. * Dob* repayzooai* aro b^fiaalog to catck «p vttk n«w debt ext*a*locta» 4*4 Ci# velara* of tftvjaf• flowing fo poaalca fuad# aai InaararKf companion ffMr* wttk tffuUxUf. At tho Dm * tixrwe* wo-" teem to bo getting a aMft la ft* ttrmcturo cicotnaey *atta& wtlfc ffca dodlBo la *t<xk market a*4 Iko AmtalAol aralUMIIty o f eojyorato *Ad caunMpti getatice# forcing a dlroxiioa ol **▼!*§• lato tkrift IwwwrtieM# i--! .‘^.'v*'V'» rw " : •-•'• ' V : .' . -;.’<■ V' rs ' ■:\; jLgaiatt CM# backgrooaJ of rUtag prtrato aartagt a»4 4^cMaiag '.; V f:- * -; •■'■ . -; ' ^ 4 v ' ^ - . r .:' : e,-v pHrato ow<fit m »<U, 6 t y * 4onl Cora<Mo>t 4 w «i*tapyoar to W m 4|, wia ctmtraefdlcal f t m >'3 , at lout ?o*«g!k fiscal acttau f W o A W t g i ^'^-*-'*r:,4 z & i5 Y'T'“/:>o' ,^4:•... -“s. ->•^ j r =■;^I4c waa la balaaco la tka aoeoai ^oartor, <a* » aoam allf W jv iU i k i U ,
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