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Series V, Subseries D
Liam McChesney Martin, Jr., Papers
26/Folder 1
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Federal Reserve Bank of St. Louis
Hearings, July 1960-June 1961
HEAR INGS
(51)
(52)
Joint Economic Committee,
Wright Patman, Chairman
(1961, Folder 1
Page l )
President's Economic
Report - 2:30 p . m
Joint Economic Committee,
Wright Patman, Chairman
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Federal Reserve Bank of St. Louis
3/7/61
Board's Annual Report
(to review operations of
the FRBoard and Federal
Open Market Committee)
Robert Rouse, a.m. of
June 1; President Hayes,
am of June 2
6/2/61
No prepared statement
Hearings
Continued in Folder 2, 1961
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JOINT ECONOMIC COMMITTEE
Wright Patman (Texas), Chairman
Paul H. Douglas (Illinois), Vice Chairman
John Sparkman (Ala. )
J. W. Fulbright ( A r k . )
William Proxmire (Wis.)
Claiborne Pell ( R . I . )
Prescott Bush (Conn.)
John Marshall Butler (Md.)
Jacob K. Javits (N. Y . )
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Federal Reserve Bank of St. Louis
Richard Boiling (Mo.)
Hale Boggs (La.)
Henry S. Reuss (Wis.)
Martha W. Griffiths (Mich.)
Thomas B. Curtis (Mo.)
Clarence E. Kilburn ( N . Y . )
William B. Widnall (N. J . )
The Honorable William Froxaire,
United States Senate,
Washington 25, ». C.
Bear Senator Proooairei
this is in reply to your letter of March 30, 1961, referring
to R^y testimony before the Joint Economic Cosssdtte®, on March 7, 1961,
and ay further statement on unemployment supplementing s& testimony.
It was ay intention in both instances to call attention to
the dual nature of our current unemployment problem, arising as it does
both from contraction of over-all demand and from changes in structural
factors in the economy. I also suggested what 1 thought were the
appropriate policies applicable to the differing causes of unemployment.
With respect to your observation of a "sharp and decisive
contradiction* between Dr. Heller and ne, it is wy understanding that
the Council of Economic Advisers, in emphasizing the importance of
moving to combat cyclical unemployment, was not seeking to Minimise
the need for appropriate action to help relieve conditions arising
from structural changes of the type to which I have referred, as I
indicated in the statement supplementing my testinony. Indeed, the
Council stated explicitly 11that such measures *should be high on the
agenda of national policy.
A large bocjy of information hag been gathered in recent
years by Congress, various Government officers, and private research
organisations dealing with the amount, characteristics and persistence
of structural unejaployiaent. While there are differences in emphasis,
the general consensus of these studies is that in recent years unemployisent has been high and persistent even in periods of expanding activity*
An important factor causing such chronic una&ployaent has been dynamic
structural changes in the econowy.
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Federal Reserve Bank of St. Louis
The Honorable William Proxmire
-2-
Within the past week, the National Planning Association has
released an informative document entitled "The Rise of Chronic Unemployment11. This report presents a very interesting statistical and interpretive analysis of the increase in structural unemployment in recent
years. The National Planning Association also concludes, "However,
even if in a cyclical upswing chronic unemployment becomes somewhat
alleviated, this does not mean that ita causes are being removed. It
is a sobering fact that the recovery periods over the last ten years,
far from solving the problems of chronic or structural unemployment,
have mainly succeeded in masking its extent and seriousness. Therefore, it is necessary to face up to the fact that the persistence of
chronic unemployment presents us with a specific problem and separate
measures to combat it will have to be devised in addition to the pursuit
of anti-cyclical policies and those designed to support economic growth."
Ity response to your question as to an acceptable level of
unemployment and goals must be the saias as I have made many times to
the Joint Economic Comittee. the System has long recognized that no
single index or siiaple combination of indicators can serve as a con*
tinuing infallible guide to its policy. The goals and the guides of
credit and inonetary policy must be broad and adaptable to changing
times and conditions. However formulated, their pursuit inevitably
requires discretion, patience, and skillful judgment in the light of
the fullest and widest information available respecting the credit
situation and indeed all phase® of the national economy. Moreover,
their success will be conditioned by various other policies, programs,
and activities of Government,fcgra wide range of private activities,
andfcrythe changing moods and impulses of businesses and the public
generally with respect to spending, borrowing, and saving.
In answer to your last question I would say that the implicit predominant purpose of the Federal Reserve Board is to contribute, insofar as the limitations of monetary and credit policy permit,
to an economic environment favorable to sustained economic growth and
the optimum utilisation of our expanding industrial and manpower resources. Traditionally this overall policy has been followed by easing
credit conditions when deflationary factors prevailed and, conversely,
by restrictive measures only when inflationary forces threatened.
Signed) Wtt. McC Martial Jr3
Wm. Ho€. Martin, Jr.
MW:mas
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Federal Reserve Bank of St. Louis
Ma T
Honorable William M c C h e s n e y M a ;
Chairman, Board of Goverm
Federal R e s e r v e System
Wa
D. C.
Dear Chairman Martin:
Your f u r t h e r stateme
unemploymrplementmg
your testimony to the" Joint Economic Committee, on M a r c '
reached me this morning. While J a p p r e c i a i >
comments on the nature ot" unemployment in the Am e r i c
nomy
today, it does seem to me that you ha\ e f a i l e d to con
.th
the salient points raised by the d i f f e r 1
testimony and that of Dr. H e l l e r .
As you w i J ] r e c a l l , J in
differences during the hear;Subsequr
1 discussed them on the floor ot
I observed
ence between your t e s t i m o n y
Dr. Heller amount
and decisive contradicticonomic policy. I i n s e r t >
of the specific d i f f e r e n c *
f my r e m a r k
the Record for March 9 is attached for your c
-•.
9,
rp
-ilysis
rpt from
Your f u r t h e r st^temeni now comments g e n e r a l
the
problem of unemployment without o f f e r i n g any f u r t h e r , deeper analysis
of the questions raised by the conflicts between your earlier remarks
and those of Dr. Heller. As you know, Dr. Heller attached an appendix
to his main statement which 'Specifically challenged the view that unemployment at present is so Substantially structural in n a t u r e that a n t i cyclical programs would soon be seriously inflationary. He provided
statistical tables showing for example, a remarkably
rm increase
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Federal Reserve Bank of St. Louis
-*~.
Honorable William M c C b t
March 30, 1961
e Two
mployment betw
•
i I960 in a number of i n d u s t r i e s regardl*
of t h e i r structure or \-. Since you provi
similar statistical
support for \
-sition, 1 would v e r y much appreciate having a detailed,
statistical anal
h would support your contentions.
To the
Acceptable 1
level of urieruplo
, Dr.
• gave .1 .-.prt ific , •'iswer. He staled that
4% unemployment would be the level t
Jd a t t a i n b e f o r e poll-; of contraction, i. e. , dimi;
in money supply r e l a t i v e to GNP, or
hiking taxes, decreasing i
-lopted. I hope you will a
give us your estimate of
m "targe'
so that the Committee will have a b e n c h m a r k against which to meas
f u t u r e monetary and f i s c a l ,
••>.
a number of >.
as w e J l as uaemploymsignificani
suggest g
t poll i
. >
contract its <
ploymenl
the internal
imple
^hould be a m a t : Balancing
p r o f i t b , ret
->, gold outflow,
possible how
- ia would
essary to
^t 6%, 5%, 4%
ioyment.
^G that
/ would be ir
4%, provided the p r i c e level is st'
:on to
-n. falling and
«.ble?
ProVmire, IX S'. S.
Enclosure
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Federal Reserve Bank of St. Louis
BOARD
OF G O V E R N O R S
OF THE
_DERAL
R E S E R V E SYSTEM
.
Attached statement submitted for the transcript
of Mr. Martin's testimony before Joint
Economic Committee on the President's Economic
Report—in response to a request by Representative Curtis.
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Federal Reserve Bank of St. Louis
STATEMENT OF THE BOARD'S VIEHS ON OECD
In the modern world of interdependent nations, suitable international forums in -which economic questions of mutual interest can be
considered, and discussed have an important role to play. In the postwar
period the Organization for European Economic Cooperation has provided
one such forum for its member countries in Western Europe, and for Canada
and the United States, which have been associate members. The proposal
to reconstitute the OEEC as the Organization for European Economic
Cooperation and Development (OECD) results from the great change in
economic conditions and economic problems in the past decade, and
particularly from the re-establishment of world multilateral trade and
the convertibility of most leading currencies. In addition to its other
activities, the OECD would provide the basis for continuation and intensification of international economic consultation and cooperation among the
countries concerned. Member countries would thus be provided with an
opportunity to inform themselves more fully than might otherwise be
possible regarding the policies of their fellow members, and to express
their views regarding the consonance of such policies with their own
economic interests.
It must be remembered, of course, that there are practical
limits on the extent to which it is possible to reconcile the economic
policies of different countries* These limits result from the variation
among their economic conditions, among their techniques of economic control, and, at times, among their views as to what policies are suitable
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-2-
in particular circumstances. On various occasions, representatives of
the United States in Paris negotiations have pointed out the existence
of such limits, and the Board of Governors fully agrees with this view.
The Board of Governors understands that nothing in the Convention
embodying the proposed organisation would affect the present status of the
Federal Reserve System in the structure of the U. S. Government or its
independence of judgment and action in the field of monetary policy.
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TO:
Board of Governors
FROM: Ralph A. Young
In his testimony on Tuesday., Chairman Martin was asked by
Representative Curtis whether the Board had made anywhere a statement
of views concerning the OECD Treaty. After eliciting Mr. Martin's views,
Representative Curtis further requested that the "Federal Reserve have a
statement, a considered statement, for insertion in the record as to your
position on OECD as you have expressed it, that you do not feel that this
would in any way affect your independent judgment and powers that you
presently have *"
To respond to this request, there is attached a suggested draft
statement for the Board's consideration. Also attached is the excerpt
from the testimony covering Representative Curtis' colloquy with Chairman
Martin,
Attachments 2
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c
DRAFT STATEMENT OF THE BOARD'S VIEWS ON OECD
In the modern world of interdependent nations, suitable international forums in which economic questions of mutual interest can be
considered and discussed have an important role to play.
In the postwar
period the Organization for European Economic Cooperation has provided
one such forum for its member countries in Western Europe, and for Canada
and the United States, which have been associate members. The proposal
to reconstitute the OEEC as the Organization for European Economic
Cooperation and Development (OECD) results from the great change in
economic conditions and economic problems in the past decade, and
particularly from the re-establishment of world multilateral trade and
the convertibility of most leading currencies.
In addition to its other
activities, the OECD would provide the basis for continuation and intensification of international economic consultation and cooperation among the
countries concerned. Member countries would thus be provided with an
opportunity to inform themselves more fully than might otherwise be
possible regarding the policies of their fellow members, and to express
their views regarding the consonance of such policies with their own
economic interests.
It must be remembered, of course, that there are practical
limits on the extent to which it is possible to reconcile the economic
policies of different countries. These limits result from the variation
among their economic conditions, among their techniques of economic control, and, at times, among their views as to what policies are suitable
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Federal Reserve Bank of St. Louis
c.
-2-
in particular circumstances. On various occasions, representatives of
the United States in Paris negotiations have pointed out the existence
of such limits, and the Board of Governors fully agrees with this view.
The Board of Governors understands that nothing in the Treaty
embodying the proposed organization confers any power to bind the United
States{without compliance with applicable procedures imposed by domestic
law. \ On this basis, it is clear that neither the present status of the
Federal Reserve System in the structure of the U. S. Government nor its
^
independence of judgment and action in the field of monetary policy
would be affected by U. S. membership in the OECD.
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•c
EXCERPTS FROM CHAIRMAN MARTIN'S TESTIMONY ON MARCH 1, 1961,
BEFORE JOINT ECONOMIC COMMITTEE CONCERNING OECD
(From unedited transcript of hearing)
"Representative Curtis. * * *
"The question I would like to ask, though, is whether the Federal Reserve
has made a statement in regard to its position or where it is going to be in the
event of the OECD Treaty being adopted.
"First of all, has a statement been made, issued by the Federal Reserve
on your position?
"Mr. Martin. No, no statement has been issued by the Federal. I think
that I have discussed it with Secretary Dillon on occasion, and as I understand it,
the OECD set up is not decision-making.
"Representative Curtis.
So you do not think it will be in any way
adversely affect?
"Mr. Martin.
I am assured that it will not, and certainly we are all
in favor of the general cooperation which is involved in it. There are obviously
complications in it because different central banks have different relationships
to the Treasury, and if you are going to have a cooperative grouping of them, why
you have the same problems that we have on interest rates that we are going to
have the same interest rates we have to recognize that there are budgetary problems, fiscal and debt management problems and problems on the wage productivity
aspect that would all have to be measured together also."
•* •* * #• # *
"Representative Curtis. Mr. Martin, I wanted to get back to the OECD
a little bit.
"Mr. Martin.
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Federal Reserve Bank of St. Louis
Very well.
-2-
"Representative Curtis.
I will read a passage in an article appearing
in Commercial and Financial Chronicle of Thursday, February 23, by Herbert Bratter
'One of the principal arguments advanced by Secretary Dillon
for our ratification of the OECD convention is that OECD will bring
about coordination of the monetary and credit policies of its members
and make it possible to avoid such developments as out* capital and
gold outflow last year.
'The policies of the twenty central banks of the OECD countries
will be coordinated.
Our Federal Reserve Board, for example, will
keep in close and more or less continuous contacts in OECD with the
central banks of Britain, Canada, and Continental countries, and
vice versa, before instituting policies which, whatever their validity
for domestic purposes, may have undesirable effects on other OECD
countries1.
"The only reason I read that is the request that I was going to make
to the Chairman.
"Would the Federal Reserve have a statement, a considered statement,
for insertion in the record as to your position on OECD as you have expressed
it, that you do not feel that this would in any way affect your independent
judgment and powers that you presently have.
"I cannot believe it would, myself, in this treaty, but I think it is
a very important thing, particularly as the Federal Reserve has not commented.
"That was my first question.
"You have not made an official statement on it. Would you care to do
that and would you prepare a statement for us.
"Mr. Martin.
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I will be very glad to, Congressman Curtis."
87TH CONGRESS 1
1st Session /
f EXECUTIVE
\REPORT No. 1
SENATE
ORGANIZATION FOR ECONOMIC
COOPERATION AND DEVELOPMENT
REPORT
OF THE
COMMITTEE ON FOREIGN RELATIONS
UNITED STATES SENATE
ON
EXECUTIVE E, 87TH CONGRESS, 1ST SESSION
• i•
MARCH 8, 1961.—Ordered to be printed
U.S. GOVERNMENT PRINTING OFFICE
67119
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WASHINGTON : 1961
COMMITTEE ON FOREIGN RELATIONS
J. W. FULBRIQHT, Arkansas, Chairman
JOHN SPARKMAN, Alabama
ALEXANDER WILEY, Wisconsin
HUBERT H. HUMPHREY, Minnesota
BOURKE B. HICKENLOOPER, Iowa
MIKE MANSFIELD, Montana
GEORGE D. AIKEN, Vermont
WAYNE MORSE, Oregon
HOMER E. CAPEHART, Indiana
RUSSELL B. LONG, Louisiana
FRANK CARLSON, Kansas
ALBERT GORE, Tennessee
JOHN J. WILLIAMS, Delaware
FRANK J. LAUSCHE, Ohio
FRANK CHURCH, Idaho
STUART SYMINGTON, Missouri
THOMAS J. DODD, Connecticut
CARL MAECY, Chief of Staff
DAEHELL ST. CLAIEE, Clerk
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CONTENTS
Purpose and background of the convention
Substance of the convention
Development Assistance Committee
Trade provisions
Other provisions
Protocols
Committee action
OECD and GATT
Functions of DAC
Relationship to NATO
Legal interpretation
Other questions
Further committee action
Conclusion
Appendix 1. Memorandum of understanding
Appendix 2. Official assistance to the less-developed countries by OECD
countries and Japan
Appendix 3:
Table A. Importance of OECD countries as a market for lessdeveloped countries
Table B. Proportion of export earnings of selected less-developed
countries derived from principal primary products, 1959
Appendix 4. Letter from the Legal Adviser, Department of State, dated
February 27, 1961, and enclosed memorandum
Appendix 5. Opinion of the Legal Adviser, Department of State, dated
March 6, 1961, and attached memorandum
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in
Page
1
2
4
4
5
6
6
6
9
9
10
10
11
14
15
16
17
18
18
20
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87TH CONGRESS
1st Session
)
\
ORGANIZATION
SENATE
j EXECUTIVE REPT.
1
No. 1
FOR ECONOMIC COOPERATION
DEVELOPMENT
AND
MARCH 8, 1961.—Ordered to be printed
Mr. FULBRIGHT, from the Committee on Foreign Relations, submitted
the following
REPORT
[To accompany Ex. E, 87th Cong., 1st sess.J
The Committee on Foreign Relations, having had under consideration the Convention on the Organization for Economic Cooperation and Development, together with two protocols relating thereto,
signed at Paris on December 14, 1960 (Ex. E, 87th Cong., 1st sess.),
reports the convention and protocols to the Senate and recommends
that the Senate give its advice and consent to ratification.
PURPOSE AND BACKGROUND OP THE CONVENTION
Since the end of World War II, vast changes have swiftly transformed relations between the non-Communist industrial nations, as
well as relations between these powers and the less developed but
politically awakened areas of the world. The Organization for
Economic Cooperation and Development (OECD) reflects these
changes, and has been designed to cope with those that can determine
economic stability and growth.
Structurally, the OECD consists of the 18 European members that
comprised the OEEC (Organization for European Economic Cooperation), plus the United States and Canada. The OEEC was
established in 1948 to help Europe recover from the war. It recommended allocations of Marshall Plan aid to member countries, established the European Payments Union and liberalized intra-European
trade. The OECD amounts to a recognition that the objective
of the predecessor organization has been attained, and has given way
to another and equally urgent set of problems that can be adequately
dealt with only by a remodeled organization, in which the United
States and Canada are participants.
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2 ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT
The OECD has two broad purposes. One is to promote economic
stability and the orderly growth of the economies of member countries.
The other is to devise more effective methods of assisting the less
developed countries, and for arranging to distribute the aid burden
more equitably. Thus, on the one hand, the OECD reflects the growing interdependence of the economies of its member countries. And,
on the other, it acknowledges the urgent need to narrow the gap between the rich and the poor countries, yet in a form that will not tax
the economic vitality of any,one of its members.
The OECD concept—the need for such an institution—has been
widely discussed here and abroad in recent years. In the fall of 1959,
behind an American initiative, these discussions assumed an official
character. Next, in December 1959, the heads of Government of the
United States, France, Germany, and the United Kingdom, meeting
in Paris, publicly recommended an intensive study of methods of
promoting consultations on major economic problems. This was
followed by a ministerial meeting of January 14, 1960, in which representatives of the 18 OEEC countries and the United States and Canada
adopted a resolution 'establishing a group of 4 experts to determine
means by which the 20 nations could improve their cooperation on
economic problems and development assistance.
On April 7, 1960, the Group of-Four published its report, which
proposed that the OEEC be reconstituted as the OECD. On May
25, senior officials of the 20 nations presented their governments' views
on the Group of Four report and established a Working Party to draw
up a draft convention remodeling the OEEC and to begin reviewing
the OEEC acts.
On July 23, a Ministerial Conference reviewed the status of the
project and established a Preparatory Committee to complete the
transformation of the OEEC into the OECD. The Committee's
report was adopted at the Paris Ministerial Meeting of December 13,
1960, and the convention with related protocols was signed the next
day by the representatives of the 20 governments.
•
SUBSTANCE OF THE CONVENTION
The OECD Convention consists of 21 articles and 2 related protocols. The aims of the organization, as well as the methods and
provisions for achieving these aims, are set forth in articles 1—6.
A comparison of these six articles with the OEEC Convention reveals
the following: The objectives of the OECD are broader than those of
the OEEC. But the obligations are fewer and considerably less
demanding. The OECD Charter provides for consultation and
voluntary cooperation. The OEEC embodied rules and obligations
to which each of itJs members was bound. Although preoccupied at
the start with the distribution of Marshall Plan funds, the OEEC
became generally concerned with intra-European trade and payments problems. For example, the OEEC countries developed a
code of liberalization, which removed quantitative restrictions on
member imports within a system of reciprocal commitments. As a
concession to the United States, the OEEC's Code of Trade Liberalization has been discarded in its entirety. For some members,
this was a major—and painful—concession.
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ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT
3
Many of OEEC's other codes and obligations have also been
allowed to lapse. None of those that will be carried over will apply
to the United States. However, the United States has agreed to
certain recommendations of the OEEC. The terms of these recommendations do not obligate the United States, or other members, to
courses of action. Appendix No. 1 to this report is a memorandum
of understanding which formally commits the 18 OEEC members to
vote in the OECD Council for adoption of those OEEC acts that
have been recommended by the Preparatory Committee. However,
the United States and Canada are not similarly bound. Under paragraph 2 of this memorandum, the United States and Canada shall be
released from the commitment to vote in the OECD Council for
adoption of any acts in this category if appropriate notification is
given no later than 10 days after the deposit of either country's instrument of ratification. The act then becomes applicable to all the other
members, but not to an abstainee.
The OECD's basic purposes—to promote orderly economic growth
within its 20 member community, and to assist more effectively the
less developed countries—is embodied in article 1. Under article 2,
the members agree to pursue these aims by promoting the development and most efficient use of their economic, scientific, and technological resources.
They also agree, under article 2 (c), to—
pursue policies designed to achieve economic growth and internal and external
.stability and to avoid developments which might endanger their economies or
those of other countries.
This language clearly reflects the rapid and sweeping postwar changes
that have inspired the creation of the OECD. It acknowledges the
growing and relentless interdependence of the economies of the
member countries. These economies have together become an
elaborate skein, the threads of which are the payments balances and
economic policies of the member countries (and others, like Japan).
The process of reaction and adjustment between them is a constant
rhythm. Ideally, this process should also provide equilibrium, just
as the free gold standard was once supposed to provide automatic
equilibrium. Unfortunately, the tangled skein of international
economics lacks the element that would assure stability, or automatic
equilibrium. The OECD, through its Economic Policy Committee,
will provide advice and recommendations designed to protect each
member from economic disequilibrium.
The Secretary of the Treasury, Mr. Dillon, in testifying before the
Committee on Foreign Relations, illustrated the need for the OECD
mechanism with this reference to the U.S. balance of payments
difficulties of 1960.
During the first half of 1960 our balance of payments deficit on an annual
basis was $2.9 billion—down markedly from the level of $3.8 billion in 1959.
Last spring our Federal Reserve discount rate was at 4 percent, the German
Bundesbank rate was 4 percent, and the Bank of England rate was 5 percent.
In other words, all those rates were close together. Then, as business began to
slow in the Unitedl States, our Federal Reserve began to ease credit and reduced
its rate first to 3 /2 percent, and later to 3 percent. Meanwhile the German
Bundesbank, with its eye on the domestic boom in Germany, and with the
objective of controlling inflation at home, increased its discount rate to 5 percent
in June. The Bank of England promptly followed suit and upped its rate to 6
percent.
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Federal Reserve Bank of St. Louis
4
ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT
These actions brought about a sharp imbalance in short-term interest rates.
The results were bad for all concerned. A flood of short-term funds left New York
seeking the higher return in Frankfurt and London. This sharply increased our
balance-of-payments deficit from an annual rate of $2.9 billion in the first 6
months to a rate of $4.7 billion in the second 6 months. This sudden and sharp
increase shook confidence in the dollar and the result was a substantial increase
in the outflow of gold. This, in turn, brought on the speculative outbreak in the
private gold market in London last October when for a day or two gold sold at
$40 an ounce.
Meanwhile the large inflow of American funds frustrated the efforts of the
German authorities to tighten up on investment in Germany. When this became
clear, the German and British authorities both cut back their discount rates, the
flow of short-term capital slowed and confidence was gradually restored.
The lesson to be learned by all this is that in these days of convertible currencies
there must be close cooperation and coordination between our financial and monetary authorities and those of the major industrialized countries of Western Europe.
This is now recognized on all sides. The OECD is the forum in which this coordination can be worked out and through which we can avoid similar episodes in
the future. As such, it is a vitally important element in our drive to right our
payments deficit without infringing on the actions that must be taken to reinvigorate our economy here at home.
Development Assistance Committee.—Under article 2(e), the OECD
members have agreed to meet their development assistance responsibilities by providing capital and technical assistance to the less
developed countries, as well as helping them to secure and expand
export markets. The OECD instrument for this activity will be its
Development Assistance Committee, successor to the Development
Assistance Group, which operated throughout 1960 on an interim
basis. Appendix No. 2 to this report is a breakdown of official assistance provided by the OECD members and Japan to less developed
countries. It should be noted that the French figures include assistance to Algeria, which in the past has been regarded by French governments as part of Metropolitan France.
The Development Assistance Committee (DAC) initially will consist of nine OECD members—Belgium, Canada, France, Germany,
Italy, the Netherlands, Portugal, the United Kingdom, and the United
States—and also Japan. The DAC will not of itself be an operating,
or "burden sharing," agency. Instead it will review aid programs,
recommend levels and kinds of aid, as well as more efficient and
equitable aid programming. It will be a clearinghouse for information
concerning the needs of the less developed areas and a forum in which
the capacities of the major industrialized nations of the West, along
with Japan, can be measured against these needs. The DAC will
thus enable nations which are meeting their responsibilities in this
area to encourage laggard nations to assume their share of the burden.
Trade provisions.—Artides l(c) and 2(d) provide that the OECD
members will "pursue their efforts" to expand world trade "on a
multilateral, non-discriminatory basis in accordance with international obligations"; also to try to "reduce or abolish obstacles to the
exchange of goods and services * * *." The OECD's concern will be
the broad outlines of trade policy, not tariff negotiations, or trade
rules. These matters are the concern of the GATT (General Agreement on Tariffs and Trade) of which all OECD members, excepting
Iceland, are contracting parties. Congress has never approved the
GATT, and approval of the OECD will not constitute approval of the
GATT. Articles l(c) and 2(d) do not obligate members to take any
actions which they otherwise would not take. These articles do mean
that the OECD, as an extension of its function of providing economic
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stability, will become a consultative forum in which members can deal
with general trade problems of concern to some or all of them.
As an example, Western Europe has divided into two trade blocs.
Leaving aside the unproductive competition inherent in such a division, other problems appear. On January 1, 1961, the Common
Market "Six" scaled down its internal tariffs on industrial items and
some agricultural goods. The effect of these first adjustments has
created some discrimination against imports from countries outside
the "Six." Obviously, the United States and others must encourage
the "Six" and the "Seven" (European Free Trade Association) countries to adjust their general trade policies in a way that will avoid further discrimination against those who are members of neither bloc.
The OECD will be a forum for such discussions, as well as for the
larger question of ending the trade division in Europe in a manner
that will protect every country's interests. The problem affects the
rich and poor alike.
In Africa, those countries which formerly were French colonies
have the privilege of association with the "Six." This means that
they can—and do—sell their goods in a preferred market. It also
means that neighboring African States—-Nigeria, for example, which
in 1959 sold 35 percent of its exports to the "Six"—must compete
for this market against a rising tariff wall. Appendix No. 3 to this
report contains two tables, (a) and (6), which show respectively the
importance of OECD countries as a market for the less developed
countries; and the proportion of export earnings of selected less developed countries derived from their primary products.
In article 2(d), one of the two trade provisions, the members also
.agree to try to "maintain and extend the liberalisation of capital movements." At present, only Belgium-Luxembourg, Canada, the United
States, and Germany, among the members, permit the unrestricted
flow of capital from their countries. This is another example of a
problem that can be discussed within the broad, multilateral framework of the OECD.
Other provisions.—In article 3 the members agree (a) to "keep each
other informed"; (b) to "consult together on a continuing basis"; and
(c) to "co-operate closely and where appropriate take co-ordinated
action."
The language "where appropriate" makes article 3(c) permissive
rather than mandatory. Furthermore, article 6(3) provides that—
Xo decision shall be binding on any Member until it has complied with the
requirements of its own constitutional procedures. The other Members may
agree that such a decision shall apply provisionally to them.
Articles 7-14 are concerned with organization and procedural
matters. Subsidiary bodies, such as the Economic Policy Committee
and the DAC, would be established under the authority of article 9.
Article 15 concerns the status of OEEC acts that might be carried
over. It provides that "* * * decisions, recommendations and resolutions of the Organization for European Economic Cooperation shall
require approval of the Council to be effective after the coming into
force of this Convention." Under article 6, each member shall have
one vote on the Council, and "decisions shall be taken and recommendations shall be made by mutual agreement of all the Members."
Article 17 allows any member to terminate membership in the
convention by giving 12 months' notice of that intention to the
depositary government.
•
Ex. Kept. 1, 87-1
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Articles 18-21 cover the location of the OECD Headquarters
(Paris); budgetary procedure; and notification responsibilities of the
depositary government.
Protocols.—There are two supplementary protocols to the convention. The first gives the members of the European Economic Community the option of acting individually within the OECD, or jointly
through one of their commissions, such as the High Authority of the
Coal and Steel Community, or the European Atomic Energy Community. The second protocol covers the privileges, exemptions, and
immunities of OECD officials and representatives.
COMMITTEE ACTION
The convention, with related protocols, was transmitted to the
Senate by President Eisenhower on January 17, 1961. On February
14 and 15, the Committee on Foreign Relations examined the convention in public session. Witnesses from the executive branch,
representing President Kennedy, were heard on February 14. They
were the Secretary of the Treasury and the Under Secretary of State
for Economic Affairs. On February 15, the committee heard testimony
from all other persons who had asked to appear.
The Chairman, Mr. Fulbrighfc, asked whether article 6 (1) endowed
the individual members with a veto power over the decisions and
recommendations of the OECD Council. Under • Secretary Ball,
answering in the affirmative, said:
A nation which opposes a particular proposal has the option either of voting
against it, in which case the proposal is killed, or of abstaining, in which case
the proposal does not apply to that country.
The chairman, in referring to Secretary Dillon's comment on the
relationship between discount rates and capital outflows, asked
whether the OECD's authority would "affect the power of the Federal
Reserve Board to alter our discount rates." Secretary Dillon said no.
Senator Morse carried the question a step further and asked whether
the jurisdiction of the Federal Reserve Board might be enlarged by
the creation of the OECD. Secretary Dillon replied:
* * * this convention, will not in any way, shape or form enlarge the authorities of the Executive or of the Federal Reserve or any other organization in the
U.S. Government to take actions which are not already provided for * * * under
act of Congress.
OECD and GATT.—Senator Sparkman asked whether this organization would, or could, perform any of the functions that had been
contemplated for the ITO (International Trade Organization), or
whether the OECD bears any relationship to the GATT.
Secretary Dillon said that there is no connection whatsoever.
He added that during the OECD discussions some of the countries
objected to the elimination of the code of trade liberalization, because
they felt they drew a measure of protection from these trade rules.
However, the American position was accepted at the July OECD
ministerial meeting. It was stated then by Secretary Dillon as follows:
* * * In the [U.S.] Constitution it is * * * specified that foreign trade is
within the competence of the Congress of the United States and not within the
competence of the Executive. All the actions which the Executive takes in this
field and has taken over the past years in the form of trade agreements and so
forth have been taken on this specific authority which has been voted by the
Congress of the United States through the original Trade Agreements Act and
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its various extensions, the last of which occurred in 1958. It is impossible for
the United States to agree to anything which would infringe this competence
of the Congress.
One thing to which this happens to apply is the question of detailed and fixed
procedures and rules which have to be approved by the Congress as part of our
joining, working with, any new organization. We have suggested three times
in the last 10 years to our Congress, once under the Democratic administration,
and twice under the administration of President Eisenhower, that rules and procedures which had been worked out by experts, and which would help the
functioning of the GATT, be specifically approved by the Congress. Three times
the Congress has refused to do that, allowing us to continue to operate within
the framework of the GATT, but saying that as a Congress they would not
approve any specific rules which might have the effect of binding or making it
more difficult for them to operate with freedom in the field of trade in the future.
It is very clear that this same consideration applies to this Convention. Any
attempt to tie in rules of trade, rules of procedure that are fixed and definite,
would not be acceptable to our Congress and that is the reason why the United
States Representatives have continually objected to such rules and regulations.
It is not a question of substance, the substance of whether we wish to talk
about things or do not wish to, but it is a very important question of procedure
and the prerogative of our Congress, which we are bound to uphold. It would
be no use for us to reach an agreement around this table that we know would
not be acceptable to our Congress, and would be doing a disservice to all of us
sitting here. That is why I have dwelt on this problem.
Senator Aiken also sought a more precise understanding of the
intent of articles l(c) and 2(d), the trade provisions. And the
following exchange occurred between him and Secretaries Dillon
and Ball:
Senator AIKEN. * * *.
The Senator from Alabama asked what the relationship of OECD would be to
GATT, and you said there would be no relationship whatsoever.
But reading this pledge to pursue efforts to reduce or abolish obstacles to the
exchange of goods and services and current payments, makes one wonder whether
OECD intends to operate parallel to GATT. What is the purpose there?
Secretary DILLON. Well, in the field of capital flow and money, the GATT
does not operate, and in that field I think that OECD would operate.
We have always had a completely free regime for the flow of our capital and
investments overseas; since the war, certainly, and probably for quite some time
before that, the European countries have not.
Now that their currencies are becoming convertible, it is in our interest to
press for a greater freedom of these capital flows so that European funds will
come to the United States for investment with greater ease than is presently
the case. This would be a forum through which this objective would be sought,
and that is what I think is referred to here when they talk about current payments
and liberalization of capital movements.
Senator AIKEN. But GATT and OECD would perform parallel functions as
they .relate to removal of trade barriers.
Secretary DILLON. Well, that is the specific policy of the GATT, and in OECD
it is not its specific policy.
However, the countries agree that they will pursue their efforts individually,
that is, to reduce and abolish obstacles.
Now, by obstacles to the exchange of goods, we do not mean tariffs.
What is really meant there are discriminatory provisions such as the chairman
was talking about, which we have a few of in the agricultural field, and of which
the European countries have many more.
This is a pledge to work toward reducing or abolishing these, but how quickly
results will be achieved I do not know, and certainly this organization is not the
primary forum in which this will be discussed.
Mr. BALL. Senator, I might add that this organization will not be an organization that makes trade rules or that enforces trade rules or that modifies existing
trade rules.
There is a very clear distinction between what is contemplated here and the
operations of the GATT in Geneva.
Senator AIKEN. It would simply make findings and, on the basis of those findings, make recommendations to its members or just release its findings?
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Mr. BALL. The major interest of the United States in this, as Secretary Dillon
has said, is in relation to the resolution of the existing problems between the Six
and Seven. Our concern there is to see that in the consideration of this problem
the interests of the United States are represented.
The chairman pursued this matter further and raised with the two
executive branch witnesses some comments of the opposition to the
OECD:
The CHAIRMAN. * * *.
Since I asked you my question about the opposition, I have sent for, and have
received, this statement which is apparently the principal statement of the
opposition to this treaty. I think it would be well for the record if you would
comment on it.
First the ITO and OTC [Organization for Trade Cooperation] are described
and how they were defeated by the Congress. Then the statement says "They
both also sought to use the sanctity of an international agreement as a means of
making permanently supreme the economic outlook of people then in the executive branch of the Government and especially in the State Department."
Do you think this is a true characterization of this agreement?
Secretary DILLON. Not at all, Mr. Chairman.
The other two agreements did provide a mechanism for establishing trade
rules and, as such, they would have much more explicitly recognized the GATT.
The executive branch, at that time, felt that this was advisable because it was
thought that the GATT was a useful instrument to prevent discrimination.
But the OECD has nothing whatsoever to do with trade rules at all. We have
made that very clear. We would be glad to repeat it again. It does not reflect
the philosophy of any particular group.
It is a broad, bipartisan measure that is in the national interest, and it simply
recognizes the new facts of this era of convertibility, that we have to have a
forum for the interchange of economic information, and where we can develop
closer coordination and exchange views on methods and means by which each
of our countries is successful in pursuing the objectives, its own objectives, of
greater economic growth.
The CHAIRMAN. The statement says:
"While Congress has the constitutional authority and responsibility to regulate
our foreign commerce, it could no longer do so without encountering and, perhaps
running afoul, of provisions of the international agreement."
Do you think that is true?
Secretary DILLON. Xo, sir.
The CHAIRMAN. It says:
"Ratification of the agreement would, therefore, transfer some of the most
meaningful aspects of the enumerated congressional powers into the hands of
the Executive without bothering about a constitutional amendment. Surrender
by Congress in this matter would mean breaking faith with the electorate and,
in fact, betrayal of its trust."
Would you think it is a true statement?
Secretary DILLON. It would not transfer one single thing from the Congress to
the Executive.
The CHAIRMAN. It states:
"How would this come about? It would come about through an authorization
of membership in an international organization having aims which could not be
carried out without entrenching upon the functions of Congress."
Mr. BALL. As has been pointed out repeatedly here, Mr. Chairman, the decisions
of this organization can only be carried out through the constitutional processes
of the United States. It does not add, it does not detract one bit from the powers
of Congress. It does not expand the powers of the Executive.
Secretary DILLON. That was the very reason that that language was specifically
written into the charter in subparagraph 3 of article 6, so that there could be no
misunderstanding on this subject. We were afraid that otherwise some people
would misinterpret this thing. But with that language in there there can be no
misunderstanding.
The CHAIRMAN. So it is very clear that any specific agreement must return to
the Congress and follow the usual procedure. None is authorized in advance by
this agreement?
Secretary DILLON. That is correct.
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Senator Sparkman suggested that a memorandum outlining the
history of the GATT "from the standpoint of its consideration by
Congress/' along with some background on its activities, would be
helpful to the committee. The Legislative Reference Service of the
Library of Congress was asked to prepare such a memorandum. It
appears on page 102 of the printed hearings.
Functions of DAC.—Senator Sparkman was interested in whether
the DAC would be an operating agency, and, if so, would there be
any overlapping of its functions with those of other multilateral organizations, such as the International Bank for Reconstruction and
Development (IBRD).
His question produced the following exchange:
Mr. BALL. I would like to point out a distinction here which, I think, could
be the subject of some confusion. This is not going to be an operating agency
in the area of foreign assistance. The OECD will provide a forum in which the
problem of foreign assistance can be freely discussed among the nations which
have the resources to contribute to that effort.
Senator SPARKMAN. Is that true of the OECD and the DAC, both?
Mr. BALL. Yes. The DAC is simply a committee established under the
OECD in which the problems of assistance are going to be discussed, and in
which the effort will be made to mobilize the greatest amount of effort and resources for the purpose. But it is not contemplated that this will be an agency
which administers aid.
Secretary DILLON. Senator, I might say that in the meetings that we had last
year of this Development Assistance Group, which is the predecessor organization, the World Bank and some of the U.N. agencies participated as observers,
and they worked very closely with this group.
This group might lead to closer coordination of national efforts, but, as Secretary
Ball says, it has nothing to do with operations and therefore would not interfere
with these other agencies at all.
Secretary Dillon added to the committee's understanding of the
purpose and function of the DAC with this observation:
We found when we started to discuss this last year in the earlier meetings of
the Development Assistance Group, which will be the predecessor of this committee, that there was not even agreement on the definition of what was foreign
aid. Some countries were calling foreign aid ordinan^ exports, which they financed
on a 2- or 3-year basis, and so there was a good deal of discussion on that. We
are now discussing what is aid and what is simply ordinary exports that one is
financing. Statistics are being gathered, and it will become clear whether one
or more of the big industrialized countries is not doing what it is obviously
supposed to be doing. For any country riot carrying a fair share of the burden,
there will be moral pressure on that country to do better.
Now, certainly no one could expect the United States to do any more since we
have been carrying the bulk of the load from the beginning with help from particularly the French and the British.
So, therefore, the effect of this committee will be, from our point of view, since
we are already doing what we should, to throw the spotlight on those who have
not yet met their full responsibilities. In that way it is a very important financial
tool and very helpful to the United States in seeing that the program is better
shared.
Relationship to NATO.—The chairman asked whether the OECD
might have the effect of downgrading the importance of NATO.
The opinion of the executive branch witnesses is that the two organizations will perform complementary functions. Senator Morse
pursued the matter further, and drew this comment from Secretary
Dillon:
I would like to say one thing about this. One field in which the OECD will
be active, which is the responsibility of the Development Assistance Committee,
is the coordination and discussion of policy for development assistance to underdeveloped countries throughout the world, many of which are neutral countries.
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This is a function which simply could not be carried out successfully by NATO,
because NATO is looked upon as a military alliance, and a strong partisan of
one side—our side—in the cold war.
So these neutral countries of Asia and Africa would not feel comfortable if
their aid was being coordinated by that sort of an organization. They have
made that very clear. So that is the great advantage of having the OECD,
which does not have that connotation and which does have all the neutral
countries of Europe as members.
Senator MORSE. Mr. Secretary, I could not agree with you more. That is
why I pursue this matter a moment longer. Secretary Ball pointed out that
Sweden and Switzerland will be members of OECD. They are not members of
NATO.
Legal interpretation.—Several committee members were especially
interested in having a precise understanding of articles 5 and 6.
Specifically, they were concerned with what, if anything, distinguishes
the "decisions" of 5(a) from the "recommendations" of 5(b); also
whether article 6(3) clearly and adequately protects the balance
between the legislative and executive branches of the Government.
In response to a committee request, the Legal Adviser to the Department of State prepared a memorandum addressed to these specific
questions. It appears as Appendix 4 to this report. Under article
5(a), the Organization may "take decisions which, except as otherwise
provided, shall be binding on all the Members." The Legal Adviser
says: "Thus, by the very terms of a decision, it may be restricted in
its obligator}^ application to only certain of the members of the
Organization."
Under 5(b), the Organization may "make recommendations to
Members * * *". The Legal Adviser says:
* * * Recommendations may recommend a course of action by members, or
study of a matter, or adherence to an international agreement drafted in an OECD
committee, etc. For example, the OECD will normally deal with substantive
problems such as economic policy and assistance to the less-developed countries
by exchanging information and by informal discussions. To the extent that
additional action were necessary, this would normally be taken by the OECD
Council in the form of a recommendation to member governments. Thus, the
OECD Council might follow a discussion of assistance to the less-developed
countries by a recommendation to member governments that they increase the
length of the credits extended to the less-developed countries. In such cases, the
member governments would not be legally bound by the recommendations, but
they would endeavor to carry out the recommendations.
The Legal Adviser says that articles 1 and 2 are—
void of any grant of power to the Executive, and the power, in any particular
case, of the U.S. Executive to bind the United States must be sought and found
in an independent source outside the [OECD] Convention.
His conclusion is that—
paragraph 3 of article 6 allows for full compliance with U.S. constitutional procedure and the division of functions between the Executive and the Congress.
Other questions.—Senator Aiken asked about the anticipated size
of the OECD staff and the cost of maintaining the Organization.
The following exchange occurred between him and Secretary Dillon,:
Senator AIKEN. Mr. Secretary, how large an organization do you expect this
to be in terms of personnel?
Secretary DILLON. We have a feeling that this will be smaller than the present
OEEC organization because this organization had a very considerable number
of personnel engaged in certain functions which would probably not be continued.
I think that the total effort in Paris will be several hundred.
The figures, I think, on the OEEC now are somewhere under 1,000 people
working in that organization.
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Senator AIKEN. It may be 1,000. What was the estimated cost of maintaining
the organizaton a year?
Secretary DILLOX. Well, the OEEC's costs were approximately $4 million, so
we thought that our share would be about $1 million, if we had the same assessment
as our assessment in NATO, which is roughly 25 percent.
Senator AIKEN. 25 percent.
Secretary DILLON. We might have a smaller assessment here because this is
a larger organization somewhat. In NATO our assessment is 24.2 percent.
Here there are the few extra smaller countries, so it might be possible that we
could negotiate something between 20 and 25 percent, which, I think, would be
fair.
Senator Morse asked whether consideration was given to inviting
Japan to be a full-fledged member of the OECD. Secretary Dillon
replied that the United States "would like to see that happen."
However, the European countries, while agreeing to Japanese participation in the DAC, opposed a general membership for Japan. Secretary Dillon observed that this feeling might change and at some
later date Japan could be invited into full OECD membership.
The chairman and Senator Morse indicated that their further
questions would be submitted in written form. The contents of
their correspondence can be found in the appendix to the record of
the OECD hearings. Among other things, their questions dealt with
the balance of payments problem; discriminations against U.S.
products; restrictions against capital movements in and out of the
OECD countries; the U.S. tariff position and the benefit to the
United States of GATT participation; examples of decisions that
might be made by the OECD Council in regard to the aims set forth
in article 1.
Among those who asked to bring their views on the OECD before
the committee were three Members of Congress, Senator Jacob K.
Javits of New York; Representative W. J. Bryan Dorn of South
Carolina; and Representative James C. Davis of Georgia. Senator
Javits supports the convention. Congressmen Dorn and Davis oppose
it on the grounds that it could, in their view, expand the authority of
the executive branch to regulate foreign commerce. They were followed by seven public witnesses, six of whom oppose the convention
for reasons similar to those expressed by Congressmen Dorn and
Davis. The committee received over 600 communications concerning
the OECD. There was an approximately even division between those
who were for, and those who were against the convention.
Further committee action.—-On March 1, the committee met in
executive session to hear further testimony from Secretaries Dillon
and Bail. Senator Long questioned the language of article 2(d), and
the following explanation was offered by Secretary Dillon:
What this means—the English text was construed by the people wTho drafted
the language, and by those who signed it, to mean that they would pursue their
efforts to reduce or abolish obstacles and to maintain and extend the liberalization
of capital movements.
In other words, the "maintain and extend the liberalisation of capital movements" follows after "pursue their efforts to," and therefore the agreement is to
pursue efforts to maintain and extend the liberalization of capital movements.
No flat commitment is made to maintain and extend them; in the French text,
which is equally valid, that is made very clear, because the word "to" is in there
in the French text.
There is a word "to" before "maintain."
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The question arose again when Senator Gore asked this question
of Secretary Ball and the Legal Adviser to the Department of State,
Mr. Chayes:
If by this treaty we specifically agree to maintain and extend the liberalization
of capital movements, would a statutory enactment contrary to such liberalization of capital movement be in conflict with the treaty?
Mr. Chayes responded and the following exchange ensued:
Mr. CHAYES. Well, Senator, your hypothetical case depends upon reading
article 2(d) as an absolute engagement to maintain and extend the liberalization
of capital movements.
I think the Secretary has already said that the article is to be construed as an
engagement merely to pursue efforts to maintain and extend the liberalization of
capital movement.
Senator GORE. May I ask a question right there? Suppose that instead of the
Secretary's interpretation, the Court should hold that, in fact, this is an agreement to maintain and extend the liberalization of capital movements; what would
then be the confrontation?
Mr. CHAYES. Well, with deference, Senator, I cannot conceive a court so
holding in view of the fact that the French and English text have equal status,
and any ambiguity that appears in the English text is fully clarified by the French
text.
Senator Gore was specifically concerned with the meaning of the
term "current payments" and the phrase 'liberalisation of capital
movements" as they appear in article 2(d). The Department of
the Treasury, in order to define these terms precisely, offered a
memorandum that appears in the appendix of the printed hearings.
Several members sought further assurance that none of the provisions of the convention could endow the President with authority
that he does not already have; these members also sought further
clarification of the constitutional guarantees contained in article 6(3).
The Legal Adviser, Mr. Chayes, responded with a memorandum dated
March 6, which appears in appendix 5 to this report.
The committee met again in executive session on March 6. Under
Secretary Ball and the Legal Adviser, Mr. Chayes, were present.
Some members were interested in U.S. policies regarding mostfavored-nation treatment. Upon request, the Department of State
submitted one memorandum explaining American policy on this
subject, and another which set forth provisions of the GATT that
.allow contracting parties to adopt discriminatory policies under
certain circumstances. These memorandums may be found on page
245 of the hearings.
Senator Williams observed that the President's authority under the
Trade Agreements Act is discretionary. He asked whether a decision by the OECD Council might compel the President to act within
the scope of his authority, thus depriving him of his option not to act.
This produced the following exchange between the Senator, Under
Secretary Ball, and Mr. Chayes:
Mr. BALL. No; he could not bind himself to do anything unless he has the
power to do. I do not quite understand how this could possibly occur—do
you, Mr. Chayes?
Mr. CHAYES. Well, I do not think he could even bind himself to waive his
discretion in the case of a subsequent escape clause proceeding since he does not
have, I do not think, constitutional power to waive that subsequent discretion.
Mr. BALL. You see, he has to make a finding.
Senator WILLIAMS. That is right.
Mr. BALL. We cannot waive his power to make the finding. He has to make
the finding to comply with the statute. Otherwise he has no power.
*
*
*
*
*
*
*
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Mr. CHAYES. I do not know just what the terms of our arrangements in
GATT are. But it is perfectly clear that in the case of any agreement in GATT,
or any other agreement under the Trade Agreements Act—and notice when we
are talking about the hypothetical case of an agreement under this Convention, it
is only an agreement carried out within the terms of the authority delegated by
the Trade Agreements Act—no such agreement can be made until the President's
discretion has been exercised in accordance with all the terms and conditions of
the act.
Senator Hickenlooper asked whether any provision of the convention
could give the President tariff-making authority and prevent the
Congress from taking back that authority.
Under Secretary Ball and Mr. Chayes replied that this would not
be possible.
The committee feels that in giving its advice and consent the Senate
must emphasize, as an inherent part thereof, that it accepts and relies
upon the assurances of the executive branch of the Government that
nothing in the Convention enlarges, diminishes, or alters the powers
of the President or the Congress in respect to any substantive actions
taken or that may be taken by the Organization for Economic Cooperation and Development and that a clear expression of such interpretation and understanding should be incorporated as an integral
part of such advice and consent. The committee felt that the resolution of ratification should contain the relevant assurances that had
been offered by Secretary of State Herter, Secretary of the Treasury
Dillon, Under Secretary Ball, and the Legal Adviser of the Department
of State. Secretary Herter's statement appears in his letter of January 16 to President Eisenhower, which can be found on page 2 of
the message from the President transmitting the convention to the
Senate (Ex. E, 87th Cong., 1st Sess.). Statements of the other
deponents may be found in this report and appendixes thereto. The
full text of the resolution of ratification itself follows:
RESOLUTION OF RATIFICATION
Having regard to and in reliance on the statement in the letter of January 16,
1961, from Secretary of State Herter to President Eisenhower and transmitted
by him to the Senate on January 17, 1961, that "the U.S. representative will not
have any additional powers in substantive matters to bind the United States
after the convention enters into force than now exist in the Executive, but that
any act of the Organization outside the power of the Executive will require action
by Congress or the Senate, as the case may be, before the United States can be
bound," and having regard to and in reliance on the testimony of Secretary of the
Treasury Dillon and Under Secretary of State Ball in behalf of the administration,
and having regard to and in reliance on the Opinion of the Legal Adviser of the
Department of State dated March 6, 1961, and quoted in the committee report
on this convention:
Resolved (Two-thirds of the Senators present concurring therein), That the Senate
advise and consent to the ratification of the Convention on the Organization for
Economic Cooperation and Development, together with two protocols relating
thereto, signed at Paris on December 14, 1960, by representatives of the United
States of America, Canada, and the 18 member countries of the Organization for
European Economic Cooperation (Executive E, 87th Congress, 1st session),
with the interpretation and explanation of the intent of the Senate that nothing
in the convention, or the advice and consent of the Senate to the ratification
thereof, confers any power on the Executive to bind the United States in substantive matters beyond what the Executive now has, or to bind the United States
without compliance with applicable procedures imposed by domestic law, or
confers any power on the Congress to take action in fields previously beyond the
authority of Congress, or limits Congress in the exercise of any power it now has.
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14
ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT
CONCLUSION
The Committee on Foreign Relations believes that the OECD
member countries are undergoing the gravest test of their collective
history. To prevail will depend, as much as anything else, on their
ability to promote stability and growth within their delicately balanced, interdependent economies. Yet even this will not be enough,
if the product of this growth is not in sufficient measure devoted to
programs that will encourage the development of less favored peoples
in a way that is consonant with their best purposes. If the energies
and resources of the aspirant and newly independent peoples were
turned to uncongenial purposes, the consequences for Western
civilization would ultimately be decisive.
This thesis is understood by the leaders of both the Soviet Union
and the United States, and apparently by a majority of the people
of the United States. It is also understood by some, but by no
means all, of the leaders of West Europe. Many of them do not yet
understand either the moral imperatives or the cold logic of foreign
assistance. And what is true of these leaders can be safely said to
apply, as well, to their constituents.
In that light, the OECD will be an educational forum. Terms
can be defined. Foreign aid itself is a term that badly needs definition. To some, exports financed with short term, high interest credits,
are foreign aid, and sums for this purpose are cited, not as investment,
but as evidence of p'ood faith. To others, funds invested in a colony
fall within the definition of foreign aid. The American experience
with foreign aid must be brought to bear upon the consciousness of
other capital exporting countries. Bilateral talks, even if conducted
at the White House level, are no substitute for the education that
can be spread throughout the OECD membership by joint exposure
to the same information, to the philosophy and the logic that have
motivated American foreign aid from the beginning.
If Europeans have not developed a keen appreciation for foreign
aid, it is also true that Americans have been laggard in acknowledging
the economic interdependence
of the Atlantic Basin countries. The
truth is that the WTest can no longer tolerate economic disequilibrium.
Too much depends ou the vigor of its interdependent economy,
greater by far than the sum of the individual parts.
More important than the collective GNP ($775.5 billion) of the
OECD members are the scientific and technical resources upon which
it is built. With the OECD, these resources can be mobilized and
directed toward productive purposes. For the first time, a group of
countries with common interests, beset by common problems, will be
free to discuss their goals and problems within an organization designed for precisely that purpose.
This is a time of sweeping political, social, and technological change.
History is being shaped within a swirl of events that often develop
with bewildering speed. The committee believes that the OECD will
enable its members to see these events in a broader and, hence, more
relevant perspective. It will enable them to look above the crises of
today to problems that lie ahead; to dispose of many problems in a
systematic, orderly fashion, thus avoiding the harsh urgency that so
often distorts bilateral efforts to solve problems that become critical
overnight. The committee, therefore (by a vote of 16 to 0), recommends that the Senate give its advice and consent to the ratification
of the pending treaty.
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APPENDIXES
APPENDIX 1
MEMORANDUM OF UNDERSTANDING ON THE APPLICATION OF
ARTICLE 15 OF THE CONVENTION ON THE ORGANISATION FOR
ECONOMIC CO-OPERATION AND DEVELOPMENT
Article 15 of the Convention on the Organisation for Economic Co-operation
and Development (hereinafter called the "Convention") provides that decisions,
recommendations and resolutions (hereinafter called "acts") of the Organisation
for European Economic Co-operation shall require approval of the Council of the
Organisation for Economic Co-operation and Development (hereinafter called the
"Council") to be effective after the coming into force of the Convention.
Pursuant to a Resolution adopted at the Ministerial Meeting of 22nd-23rd July,
1960, a Preparatory Committee has been established and instructed to carry
further the review of the acts of the Organisation for European Economic Cooperation, to determine which acts should be recommended to the Council for
approval, and to recommend, where necessary, the modifications required in order
to adjust these acts to the functions of the Organisation for Economic Co-operation
and Development.
At the said Ministerial Meeting it was agreed that there should be the maximum possible degree of certainty as regards approval by the Council of acts of
the Organisation for European Economic Co-operation in accordance with the
recommendations of the Preparatory Committee; it was also agreed that Canada
and the United States, not being Members of the Organisation for European
Economic Co-operation, should have a certain latitude with respect to the said
recommendations. '
Therefore the Signatories of the Convention have agreed as follows:
1. The representatives of the Signatories on the Council shall vote for approval
of acts of the Organisation for European Economic Co-operation in accordance
with the recommendations of the Preparatory Committee, except as otherwise
provided hereinafter.
2. Any Signatory which has not been a Member of the Organisation for
European Economic Co-operation shall be released from the commitment set
out in paragraph 1 with respect to any recommendation or part thereof of the
Preparatory Committee which it specifies in a notice to the Preparatory Committee no later than ten days after the deposit of its instrument of ratification
or acceptance of the Convention.
3. If any Signatory gives notice pursuant to paragraph 2, any other Signatory,
if in its view such notice changes the situation in regard to the recommendation
or part thereof in question in an important respect, shall have the right to request,
within fourteen days of such notice, that the Preparatory Committee reconsider
such recommendation or part thereof.
4. (a) If a Signatory gives notice pursuant to paragraph 2 and no request is
made pursuant to paragraph 3, or, if such a request having been made, the
reconsideration by the Preparatory Committee does not result in any modification of the recommendation or part thereof in question, the representative on the
Council of the Signatory which has given notice shall abstain from voting on the
act or part thereof to which the recommendation or part thereof in question
pertains.
(b) If the reconsideration by the Preparatory Committee provided for in
paragraph 3 results in a modified recommendation or part thereof, the representative on the Council of the Signatory which has given notice may abstain from
voting on the act or part thereof to which the modified recommendation or part
thereof pertains.
(c) Abstention by a Signatory pursuant to sub-paragraph (a) or (b) of this
paragraph with respect to any act or part thereof shall not invalidate the approval
of that act or part which shall be applicable to the other Signatories but not to
the abstaining Signatory.
5. The provisions of this Memorandum relating to actions to be taken before
the voting in the Council shall come into force upon its signature; the provisions
relating to the voting in the Council shall come into force for each Signatory upon
the coming into force of the Convention as regards that Signatory.
IN WITNESS WHEREOF, the undersigned have appended their signatures to this
Memorandum.
DONE in Paris, this fourteenth day of December, Nineteen Hundred and Sixty,
in the English and French languages, both texts being equally authentic, in a
single copy which shall be deposited with the Government of the French Republic,
by whom certified copies will be communicated to all the Signatories.
[Signatures omitted.]
15
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16 ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT
APPENDIX 2
Official assistance to the less-developed countries by OECD countries and Japan
[Dollars in millions]
1956
Austria:
GNP ..
Aid
Aid as percent of GNP
Belgium-Luxembourg:
«NP
Aid. .
Aid as percent of GXP. . _ Denmark:
GXP
--.
Aid
Aid as pe'cent of GXP
France:
GNP
...
_ ...
Aid
Aid a« percent of GXP
Germany:
GNP
Aid
—
.-- .
Aid as percent of GNP
Ireland:
GNP
Aid
Aid as percent of GXP
Italy:
GXP
Aid
Aid as percent of GXP
Netherlands:
GXP
Aid
A.ld as percent of GXP
Norway:
GNP
Aid
4id as percent of GNP
Portugal:
GNP
Aid
Aid as percent of GNP
Sweden:
GNP
Aid
.
Aid as percent of GNP
Switzerland:
GNP
Aid
Aid as percent of GNP
United Kingdom:
GNP
Aid
Aid as percent of GNP
Total, above countries:
GNP
Aid ..
Aid as percent of GNP
United States:
GNP
Aid
Aid as percent of GNP.
Canada:
GNP
. .
Aid
Aid as percent of GXP
Japan:
GNP
Aid .
Aid as percent of GNP
-.-
-
.
1957
1958
1959
1956-59
$4, 238
$2
0.05
$4,665
$1
0.02
$4, 938
0.12
$5 264
$4
0 08
$19 105
$13
0 07
$10,860
$17
0. 16
$11,650
$24
0.21
$11,616
$23
0.20
$12 000
$52
0 43
$46 126
$116
0 25
$4, 461
$3
0.07
$4, 769
$1
0.02
$4, 918
$4
0.08
$5, 270
$5
0 09
$19 418
$13
0 07
$37,513
$487
1.30
$41, 867
$639
1.53
$47, 532
$787
1.66
$51 000
$954
1 87
$177 91°
%2 867
1 61
$46, 048
$21
0.05
$49, 905
$46
0.09
$52, 929
$78
0.15
$56 645
$107
0 19
$205 527
$253
0 12
$1, 510
$1, 588
$1
0.06
$1 710
$6 438
$1, 630
$1
0.06 .
SI
0 06
$9
0 03
$23. 414
$16
0.07
$25, 088
$16
0.06
$26. 638
$31
0.12
$27 970
$17
0 06
$103 110
$81
0 08
$8, 610
$33
0.33
$9, 315
$34
0.37
$9, 592
$41
0.43
$10 175
$43
0 42
$37 692
$151
0 40
$3, 725
$1
0.03
$3, 950
$2
0.05
$3, 894
$3
0.08
$4 100
$4
0 10
$15 669
$10
0 06
$1, 945
$7
0.36
$2, 015
$5
0.25
$2, 071
$4
0.19
$2 135
$21
0.98
$8 166
$38
0 47
$9, 470
$3
0.03
$10, 245
$12
0.12
$10, 623
$4
0.04
$10, 850
$10
0 09
$41 188
$29
0 07
$6, 846
$1
0.01
$7, 355
$1
0.01
$7, 593
$3
0.04
$8 000
$1
0 01
$29 794
$5
0 02
$57, 960
$208
0.36
$61,328
$243
0.40
$63, 484
$264
0.42
$65, 700
$356
0.54
$248, 472
$1 070
0 43
$216, 600
$799
0.37
$233, 740
$1,025
0.44
$247, 458
$1,247
0.50
$260. 819
$1,575
0.60
$958 617
$4,648
0 48
$419, 200
$2, 141
0.51
$442, 500
$2, 343
0.53
$441, 700
$2,415
0.55
$478, 000
$2, 438
0.51
$1,781,400
$9,340
0.52
$30, 182
$28
0.09
$31, 773
$46
0.14
$32, 509
$88
0.27
$34, 700
$57
0.16
$129.614
$219
0.17
$24, 650
$16
0.06
$28, 050
$15
0.05
$27, 750
$205
0. 74
$30, 000
$41
0.14
$110. 450
$277
0.25
NOTES
1. GNP figures are at current market prices. The figures for 1959 are estimated.
2. Both the GXP and aid figures have been converted to dollars at current exchange rates.
3. Aid figures are based primarily on actual expenditures. For all the countries they include: (a) net
official grants, (6) gross official bilateral loans of 5 years or over, (c) official contributions and subscriptions
to international organizations paid during the period (i.e., net I B R D subscriptions, IFO capital contributions, contributions to the EEC Development Fund, net contributions to United Nations technical
assistance and relief agencies). For the United States, the increase in U.S. holdings of local currencies
derived from Public Law 480, title I sales is included to reflect the transfer of resources. For Japan, the
yearly breakdown on gross official bilateral loans of 5 years or over is estimated. Reparations payments
have not been included.
4. This definition of assistance has not been accepted by the countries involved and has no international
standing.
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APPENDIX 3
TABLE A.—Importance of OECD countries as a market for less developed countries—Exports from less developed countries to OECD members
by principal commodities, total exports, and proportion taken by OECD countries, 1959
Rubber
Imports from LDC 's into—
Austria
Belgium/Luxembourg...
Canada
Denmark
France
Germany
Greece.
Iceland
Ireland
Italy..
Netherlands
Norway
Portugal
Spain
Sweden
..
Switzerland
Turkey
United Kingdom
United States
Total OECD imports from LDC's...
Total world imports from LDC 's
Cotton figures are for crop year 1958-59.
Negative.
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Cocoa
Coffee
Rice
Tobacco
Petroleum
Cotton '
Tin
Copper
Thousand,
Thousand Thousand
Thousand Thousand
Million
Thousand
Thousand
long tons Metric tons long tons metric tons metric tons metric tons metric tons
bales
Metric tons metric tons
11.3
534
10.0
9.8
1.6
1.9
0
48.6
0
2.6
14.3
60
10.0
54.8
22.5
11.2
6.7
269.5
2,001
180.3
45.3
16,739
12.5
56.8
8.2
.3
15.8
201.3
967
0
6.2
843
3.4
38.4
0
6.0
(*)
25.4
0
.5
120.4
1,496
55.3
197.0
82.4
12.2
28.8
686.2
339
53.8
143.9
6,965
102.3
136.7
45.4
18.3
16.5
889.9
50
219.3
1.9
109
2.4
7.2
1.3
0
1.3
1.1
88
.2
1.6
0
0
0
0
0
0
3.8
9,962
5.8
.4
0
.1
.9
13.9
0
0
56.1
1,315
26.2
83.6
.6
0
22.5
323.1
2,342
76.7
20.6
9,605
74.3
50.3
39.9
12.9
12.4
288.9
80
10.7
2.9
71
4.0
25.1
.5
.7
.1
12.0
0
0
4.8
167
1.0
10.5
.7
.8
1.2
222.4
0
2.8
21.4
57
21.4
.1
0
(>)
7.2
137.4
0
14.1
21.3
1,040
6.7
68.0
0
.6
2.4
31.5
0
30.7
6.4
(')
12.0
(»)
(8)
(3)
(3)
120.0
57
14.2
3. 8
5,912
.8
1.0
0
0
0
0
163
0
167.3
228,272
77.2
52.9
23.2
57.6
46.2
777.2
0
336.2
557.4
45,258
204.7
1,396.6
0
14. 5
58.7
136.3
24,162
206.4
1,209.0
328,402
630.0
2.240.9
22ti. 1
137.0
220.9
4,184.7
30,249
1,148.6
2,042.5
479,655
750.4
2.511.8
3,833.7
241.7
317.3
8,115.0
50,052
1.430.0
OECD imports as percentage of world
imports from LDC's
1
2
Tea
59
68
84
89
6
3
Not available.
57
70
52
60
80
All LDC
exports
Millions
$70
580
440
80
1,880
1,710
60
(2)
80
860
750
120
120
(3)
300
140
(")
3,920
6,040
17,150
26.210
65
18 ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT
TABLE B.—Proportion of export earnings of selected less developed countries derived from principal primary products, 1959
[Percentages]
Cocoa
Countries
Bolivia
._
Brazil
Chile .
Colombia
Costa Rica
Dominican Republic
Ecuador
El Salvador
Guatemala
Haiti
Honduras
Mexico
Nicaragua
Panama
Paraguay
Peru
Venezuela
Egypt
Iraq
Sudan.
Syria
Ethiopia
Ghana
Burma
Cevlon
India ._
Indonesia -5-1
Malava
Pakistan
Thailand
Vietnam
-. J
;
5
5
17
13
3
Coffee Copper Cotton Petroleum Rice Rubber Tea Tin Tobacco
77
50
13
3
64
71
• 55
24
9
21
69
2
57
69
16
21
4
8
26
45
7
22
5
87
71
1
93
60
48
•67
8
61
2
71
12
34
32
APPENDIX 4
17
48
66
26
31
63
60
20
4
10
6
.
DEPARTMENT OF STATE,
February 27, 1961
Hon. J. W. FULBRIGHT,
Chairman, Committee on Foreign Relations,
U.S. Senate.
DEAR MR. CHAIRMAN: In the course of the hearings on the Convention on the Organization for Economic Cooperation and Development on Wednesday, February 15, 1961, before the Foreign Relations
Committee a request was made for a memorandum setting forth the
legal analysis of article 5 and article 6.
I attach such a memorandum and hope it will be helpful to your
committee in the consideration of the convention. I wish to point
out that the Department of Justice has been consulted in the preparation of this memorandum.
Sincerely yours,
ABRAM CHAYES, The Legal Adviser.
Enclosure: Memorandum.
MEMORANDUM
Article 5 of the Convention on the Organization of Economic Cooperation and
Development reads as follows:
"In order to achieve its aims, the Organization may:
"(a) take decisions which, except as otherwise provided, shall be binding
on all the Members;
"(b) make recommendations to Members; and
"(c) enter into agreements with Members, non-member States and international organizations.
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Article 6 reads as follows:
"1. Unless the Organization otherwise agrees unanimously for special cases,
decisions shall be taken and recommendations shall be made by mutual agreement of all the Members.
"2. Each Member shall have one vote. If a Member abstains from voting on
a decision or recommendation, such abstention shall not invalidate the decision
or recommendation, which shall be applicable to the other Members but not to
the abstaining Member.
"3. No decision shall be binding on any Member until it has complied with the
requirements of its own constitutional procedures. The other Members may
agree that such a decision shall apply provisionally to them."
It appears that the discussion in the committee which gave rise to the request
for the present memorandum concerned in the main article 5 and article 6, paragraph 3.
Under article 5 (a) the Organization may act by taking decisions. Such decisions are binding on all the members, except as otherwise provided. Thus, by
the rvery terms of a decision, it may be restricted in its obligatory application to
onh certain of the members of the Organization.
Under article 5(b) the Organization may act by making recommendations.
As the term signifies, these are not of an obligatory nature, but a member would
be expected to endeavor to carry out such a recommendation, unless the member
abstained from voting for it. Recommendations may recommend a course of
action by members, or study of a matter, or adherence to an international agreement drafted in an OECD committee, etc. For example, the OECD will normally
deal with substantive problems such as economic policy and assistance to the
less-developed countries by exchanging information and by informal discussions.
To the extent that additional action were necessary, this would normally be taken
by the OECD Council in the form of a recommendation to member governments.
Thus, the OECD Council might follow a discussion of assistance to the lessdeveloped countries by a recommendation to member governments that they
increase the length of the credits extended to the less-developed countries. In
such cases, the member governments would not be legally bound by the recommendations, but they would endeavor to carry out the recommendations.
Under article 5(c) the Organization may enter into agreements with members,
nonmembers, or international organizations. One such type of agreement is
referred to in Supplementary Protocol No. 2, namely, an agreement by the Organization with Canada or a nonmember government regarding the legal capacity
and privileges and immunities of the Organization on the territory of Canada or
such nonmember government. Also the Organization might enter into an agreement with another international organization, such as the International Monetary
Fund, for participation of representatives of the IMF as observers in certain
committees of the OECD.
The question was raised in the hearings before the committee whether the statement of the aims of the Organization in article 1 and the agreement in elaboration
of such aims in article 2 could be construed, assuming Senate ratification, to confer
power upon the executive branch of the United States Government acting through
its representative on the Council of the Organization, to bind the United States
by participating in a decision of the Organization within the fields described in
articles 1 and 2 which define the substantive scope of the Organization. As
stated in the letter of January 16, 1961 of the Secretary of State to the President,
which the President enclosed with his message to the Senate of January 17, 1961,
and as reiterated by Government spokesmen at the hearings, it is not considered
that by the convention the Executive will have any additional powers in substantive matters that now exist in the Executive. In short, articles 1 and 2 set
forth the general agreement between the member nations and limit the proper
scope of activities of the Organization; these articles are void of any grant of
power to the Executive, and the power, in any particular case, of the United
States Executive to bind the United States must be sought and found in an
independent source outside the convention.
With this as background, consideration may now be given to article 6, paragraph
3. This important paragraph states that no decision shall be binding on a member
until it has complied with the requirements of its own constitutional procedures.
Thus, if a decision were proposed to the Council for the establishment of a
committee of representatives of member governments to study the promotion of
tourism, the executive branch would consider it had power to agree to such a
decision. Similarly, if a decision were proposed to the Council for the establishment of a fund for the period of a year, contributed to by all members, to encourage
tourism in member countries, the United States Executive would consider it had
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20
power to agree to such a decision, if the United States Congress had authorized
and appropriated funds for the promotion of tourism to the United States. If
no such congressional authorization and appropriation existed, the executive
branch through its representative would either veto the decision, or abstain (thus
permitting the decision to become binding as to other member countries) or
approve, subject to compliance with United States constitutional procedures.
In this last event, appropriate United States congressional action would have to
be taken before the decision could be binding on the United States. Similarly,
a decision might be proposed to the Council involving an international agreement
of a type which would require Senate advice and consent under United States
treaty procedure. In this case, again, the United States representative could
veto, abstain, or approve subject to compliance with United States constitutional
procedures. In this last event, Senate advice and consent would need to be given
before the decision could be binding on the United States. In conclusion, it is
our view that paragraph 3 of article 6 allows for full compliance with United
States constitutional procedures and the division of functions between the Executive and the Congress.
It may be noted that it is expected that most of the decisions taken by the
OECD Council which will be binding on member governments will not pertain to
substantive matters but will pertain to administrative matters, such as the establishment of committees and working parties. For example, the OECD Council
will have to take decisions to establish the appropriate subsidiary bodies of the
OECD. Council decisions will also be taken concerning the terms of reference of
these committees. Later Council decisions will be taken covering the activities
of these committees.
APPENDIX 5
MARCH 6, 1961.
OPINION OF THE LEGAL ADVISER
The Legal Adviser of the State Department is of the opinion that nothing in
the Convention on the Organization for Economic Cooperation and Development
confers any power on the Executive to bind the United States in substantive
matters beyond what the Executive now has, or on the Congress to take action in
fields previously beyond the authority of Congress. Conversely, nothing in the
convention diminishes the power of the Executive or Congress in these respects.
The attached memorandum sets forth the reasoning underlying this opinion,
ABRAM CHAYES, The Legal Adviser.
MEMORANDUM
1. There is nothing in the convention which expands or enlarges the power
of the Executive in substantive matters.
Article 1 states the aims of the Organization and article 2 sets forth the general
agreement of the members in elaboration of these aims. Then article 5 states
that the Organization may take decisions and article 6 describes the process by
which these decisions be taken. This process provides two safeguards for the
United States. In the first place no decision may be imposed on it without its
consent. Secondly, that consent must be given in compliance with the requirements of U.S. constitutional procedures before the decision becomes binding
upon us.
The argument has been intimated that since the Organization under article 5
is authorized to take decisions and since the executive branch will be representing
the United States in the Organization, the convention will operate to give the
Executive power to agree on decisions in the substantive fields covered by articles
1 and 2. This argument is based on the erroneous assumption that the convention in any way concerns itself with the distribution of powers within the United
States or any other member state. Properly viewed, articles 1 and 2 merely
set forth a general agreement between the member nations on broad lines of
public policy and define the area of concern of the Organization. Under article 5
the Organization may take decisions, but the convention is silent as to the process
by which a member nation, within its own internal system, arrives'at the point,
where it may cast an effective vote in favor of a particular decision. Articles
1 and 2 are void of any grant of power to the Executive. Thus, the power of the
United States to cast a favorable vote and bind the United States in any particular
case must be sought in a source outside the convention.
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Federal Reserve Bank of St. Louis
ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT 21
Paragraph 3 of article 6 was urged upon the other countries by the United
States. The United States in the negotiations emphasized that under our constitutional system certain matters were in the purview of Congress and that the
agreement of the United States to Council decisions on such matters even after
the ratification of the convention would remain subject to further action by the
Congress before being binding on the United States. Paragraph 3 of article 6
would have been unnecessary and meaningless if the mere ratification of the
convention served to clothe the Executive with powers to take action in the fields
covered by articles 1 and 2.
It may be pointed out that the view that the convention does not enlarge the
power of the Executive in substantive matters (1) was stated in the letter of
January 16, 1961, of Secretary of State Herter to President Eisenhower which
he enclosed with his message to the Senate of January 17, 1961, (2) was repeated
several times by Secretary Dillon and Under Secretary Ball at the hearingsbefore the Foreign Relations Committee, and (3) was developed in some detail
in a memorandum of the Legal Adviser of the State Department concurred in
by the Department of Justice and enclosed with a letter of February 27, 1961,
from the Legal Adviser to the chairman of the Foreign Relations Committee.
2. There is nothing in the convention which expands or enlarges the power of
the Congress to take action in fields previously beyond the authority of the
Congress.
The argument appears to have been made that the provisions of articles 1 and 2
may in some way serve as the source of authority for Congress to legislate in the
future in fields which are reserved to the States by the 10th Amendment. As was
stated at the hearings by Government spokesmen, articles 1 and 2 define the
broad aims and goals of the Organization. The language of article 2 is that of
agreeing to "promote," "pursue policies," "pursue * * * efforts" and "contribute * * * by appropriate means." The concrete steps by which the broad aims
and goals are to be effectuated remains in the complete discretion of each member
nation. We wish to emphasize the point made in Under Secretary Ball's letter to
the chairman of February 27, 1961, that such language in article 2 does not constitute a commitment to take any concrete action or refrain from any concrete
action. We are merely bound to consult and exchange views and information in
a regular and systematic manner on matters within the purview of the article.
In our view this language cannot serve as any authorization to Congress to take
any action it otherwise could not take.
In this connection it should also be pointed out that treaties, like laws, are
subordinate to the Constitution. They cannot violate the Constitution.
Finally, reference is again made to paragraph 3 of article 6. This paragraph,
on its face, defers to our constitutional system not only in its distribution of
powers between the Executive and the Congress, but also in its distribution of
powers between the Federal Government and the States.
3. Nothing in the convention diminishes the power of the Executive or
Congress.
In the course of the hearings the question was raised whether provisions of
article 2 might not override congressional actions or inhibit congressional actions
on particular subjects. As stated before, the terms used in article 2 do not constitute commitments to take any concrete action or refrain from any concrete
action. In this view, it is difficult to envisage any statute of Congress or any act
of the Executive that could be inconsistent with the terms of article 2. We therefore conclude that the terms of article 2 will not diminish the powers of Congress
or the Executive in the fields therein described.
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Federal Reserve Bank of St. Louis
o
Mr. Chairman:
Almost a year ago, in the earlier part of I960, the Federal
Reserve System began to lean against the incipient down-ivind of what has
come increasingly to be classified as the fourth cyclical decline of the
postwar era.
Already, as the winter faded, and with it the inflationary
psychology that had characterized the economic situation carrying over
from 1959, bank reserve positions—which govern the ability of the banking system to 'expand loans—had been made less dependent on borrowed funds.
Then, with the spring in progress, the Federal Reserve moved
further:
first, to promote still greater ease in bank reserve positions;
and next, beginning in May, to provide additional reserves to induce a
moderate expansion in bank
In this period in particular, new supplies of reserve funds were
injected into the economy by means of open market operations.
The first
effect was to enable member banks to reduce appreciably their reliance on
borrowed reserves. After this was accomplished the added reserves went
to support the potential for bank credit expansion.
In these open
market operations, from late March through July, the Federal Reserve paid
out about $1.3 billion, net, for the Government securities it was buying
on an increasing scale. After cushioning the reserve impact of a $500
million increase of currency in circulation and gold outflow, this sum
made possible a $300 million reduction in member bank borrowing and a
$500 million increase in member bank reserves.
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Federal Reserve Bank of St. Louis
-2-
But other means available for the execution of System policy
were used as well, particularly after mid-1960.
In early June, and again in August, discount rates were reduced,
by 1/2 percentage point each time. These reductions lowered the cost of
member bank borrowings from the Federal Reserve Banks to 3 per cent
from the 4 per cent level that had prevailed before.
In August also, and again in November, by actions taken in
implementation of a 1959 Act of Congress, nearly $2 billion previously
tied up in vault cash of member banks was released to
assure ample coverage of heavy borrowing needs for the fall and preChristmas seasons. An additional $700 million was provided by further
net purchases of U. S. Government securities,
*e£^<4i*J*'-<*TC>f
«_-*-*>****
After midyear, monetary'policy had to oejje^itli an outflow of
/7
^
gold exceeding $1.5 billion. Thus, a substantial part of the reserve
funds provided by the System in this part of the year went to offset the
effect of this outflow on member bank reserves.
Taking the year I960 as a whole, the change in bank reserve
positions was dramatic.
From net borrowings from the Federal Reserve
of $425 million in December 1959, member banks as a whole moved by
December I960 to a surplus reserve of $650 million.
The total turn-
around exceeded a billion dollars.
Nevertheless, the money supply showed a stubborn downtrend
until mid-1960.
In the spring, bank credit seemed to respond less
promptly to easier reserve conditions than in comparable periods in the
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Federal Reserve Bank of St. Louis
c
-3past. After May, however, the seasonally adjusted money supply did begin
to reflect our actions.
In the second half of the year, the money supply
rose at an annual rate of about 1,5 per cent. By year end, it had risen
to $140.5 billion, just below the end-of~1959 peak.
The money supply has
expanded further in January and February of this year.
Indeed, the annual
rate of increase calculated from the performance of these two months was
in the neighborhood of 4 per cent and the total money supply is now
above year-ago levels.
The savings and time deposits of banks continued to grow in I960
and after midyear the pace of growth was unusually rapid. This increase
in time deposits permitted an increase of total bank loans and investments
for the year as a whole by $8.4 billion. That was twice as much as the
year before,
tf^o
Total credit in the economy ^
expanded
by some $37 billion. That
A
figure was about two-fifths less than the record expansion of $61.5
billion in 1959, on which I reported to you a year ago, and more nearly
in line with total credit extensions of other recent years. The smaller
growth in I960 was attributable to reduced pressure of borrowing demand,
especially on the part of the Federal Government.
The most significant
thing about the Federal Reserve's operations in I960 is not that they were
extraordinary but, instead, that they were typical of Federal Reserve
operations under the flexible monetary policy that has been in effect now
for a full decade.
That policy, as I have capsuled it before in the shortest and
simplest description I have been able to devise, is one of leaning against
the winds of inflation and deflation alike—and with equal vigor.
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Federal Reserve Bank of St. Louis
-4It is, in my opinion, the policy that the Federal Reserve mist
continue to follow if it is to contribute to the provision of conditions
conducive to a productive, actively employed, growing economy with
relatively stable prices.
Yet, while the necessity for adhering to that policy remains as
great as ever, the difficulty of executing it has become vastly greater.
This is so because of economic and financial cross-winds that have been
developing for years and, since mid-1960, have been gaining in force.
The problem, it now appears, and it is by no means a problem
for monetary policy alone, is to lean against cross-winds—simultaneously.
I do not know how effectively this can be done.
I do know, however, that
it will not be easy—just as the problems of monetary policy and of other
financial policy have never been easy.
To put in perspective the problems that the Federal Reserve
faces today—and how it is adapting to this problem—let me briefly review
monetary policy over the past 20 years,
Inmediately upon the United States' entry into World War II in
December 1941, the Board of Governors announced that the Federal Reserve
was prepared—
1. "To use its powers to assure that an ample supply
of funds is available at all times for the war effort, and
2. "To exert its influence toward maintaining conditions in the United States Government security market that
are satisfactory from the standpoint of the Government's
requirements."
Making good on its words, the Federal Reserve saw to it that the
banking system was supplied with ample lendable reserves to provide the
Government with all the war -financing funds that it could not raise through
taxation and through borrowing people's savings.
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Federal Reserve Bank of St. Louis
—5—
It did so by buying outstanding Government securities on a huge
scale. The Federal Reserve1s payments for these securities wound up in
bank reserves. In turn, the banking system used these additional reserves
to purchase new securities that the Treasury was issuing to obtain further
funds to finance the war effort.
To keep the process going, the Federal Reserve in effect maintained a standing offer to buy Government securities in unlimited amount
at relatively fixed prices, set high enough to assure that their interest
rates or yields would be pegged at pre-determined low levels. When no one
else would accept those yields and pay those prices, the Federal Reserve
did so. And in so doing, it helped to finance the war.
The process was successful for its emergency purpose. But the
procedure of pegging Government securities at high prices and low yields
entailed a price of its own that the economy—the people and the Government alike—would later have to pay. The results were two-fold:
1. During wartime, money was created rapidly and continually,
in effect setting a time bomb for an ultimate inflationary explosion—
even though the immediate inflationary consequences were held more or less
in check by a system of direct controls over prices, wages, materials,
manpower, and consumer goods.
2. The market for Government securities became artificial. The
price risks normally borne by participants in that market were eliminated:
bonds not payable for 20 years or more became the equivalent of interestbearing cash since they could be turned into cash immediately at par value
or better—at the option of the owners, at any time.
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Federal Reserve Bank of St. Louis
-6The pegging of yields and prices of Government securities was
continued for some time after the war to provide a gradual transition to
a market freely responsive to the changing demand for and supply of
securities, A gradual transition was especially important because capital
values generally had become moored to the artificial yields and prices
in the pegged market for Government securities.
By 1950, however, the need to end the dependence of the Treasury
and the Government securities market upon money creation by the Federal
Reserve, and to halt the inevitable inflationary consequences, had become
clear to many observers, The outbreak of hostilities in Korea and the
•;
—W^
inflationary crisis that accompanied;brought the matter to a head.
Understanding of the problem was enhanced by an exhaustive investigation conducted by a Special Subcommittee of the Joint Congressional
Committee on the Economic Report, under the chairmanship of Senator Paul
Douglas. In its report in January 1950, the Congressional Subcommittee
said means must be found for discontinuing the pegging of the Government
securities market—if financial stability and effective control over the
creation of new money were to become possible in the decade of the 1950's.
After considerable negotiation, the Treasury and the Federal
Reserve System reached an Accord, jointly announced by them on March 4,
1951, that served to recognize and reaffirm that:
1, To serve the public welfare, Federal Reserve policy must be
directed toward maintaining monetary conditions appropriate for the
economy as a whole, rather than toward special treatment for the Treasury
and the Government as if their interests could differ properly from those
of the people as a whole.
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Federal Reserve Bank of St. Louis
•"rrr
2. Likewise to serve the public welfare, the Treasury's
borrowing operations in management of the Government's debt must be
reasonably calculated to induce loans to the Government in an economic
system where no one can be compelled to lend his money at interest rates
that he would be unwilling to accept voluntarily.
Thus, the Accord re-established the complementary operation of
monetary and debt management policies: by the Federal Reserve, to regulate the availability, supply, and cost of money with a view to its
economic consequences; by the Treasury, to finance the Government's needs
in the traditional context of a competitive market.
To provide for the gradual withdrawal of the pegs that had fixed
market prices and yields, several procedures were instituted immediately
and carried out over the next weeks and months.
That's much easier to say now than it was to do then. For this
was the danger:
1. Hanging over the market like a storm cloud were two issues
of the longest term, 2-1/2 per cent bonds, outstanding in the total amount
of $19.7 billion. Their prices had been propped around 100-3/4 throughout
January and February 1951, by price-supporting purchases.
2. Although these bonds were not due for redemption until 1967-72,
they were instantly saleable in markets. In fact, many of their holders '
were exercising their right to sell—and selling in large amounts—so as
to reinvest the proceeds in private securities yielding a higher return.
3. Even a lowering of the price props, much less a complete
withdrawal, might very easily cause holders of these instantly marketable
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Federal Reserve Bank of St. Louis
-8-
securities to unload them on the market so heavily as to cause a collapse in the market that might, in turn,, provoke a sharp economic
setback.
Since the primary necessity was to safeguard the market and
the economy against that danger, these were the first steps taken under
the Accord:
Holders of the overhanging, fully marketable 2-1/2 per cent
bonds of 1967-72 were offered an opportunity to exchange them, in early
April 1951, for 2-3/4 per cent bonds of 1975-SO that could not be sold
at all although they could, at the holder's option, be converted into
1-1/2 per cent notes carrying sale privileges.
While the exchange was being effected, support buying was continued by the Federal Reserve and the Treasury, but at declining prices:
from January through April, net purchases by the Federal Reserve totaled
approximately |1.4 billion. When the exchange was completed, the offer
of nonmarketable bonds had been accepted on a scale sufficient to remove
from the market $13.6 billion of the overhanging marketable bonds,
including $5.6 billion that had been held by the Federal Reserve and the
Treasury.
This exchange paved the way for discontinuance of Federal Reserve
purchases of Government bonds in support of their prices.
In May and June, net purchases by the Federal Reserve of longterm bonds dropped off to $250 million, but that was enough to assure
against development of disorderly conditions in the market. After that,
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Federal Reserve Bank of St. Louis
-9-
the Federal Reserve ceased buying .almost altogether: purchases during the
entire last half of 1951 totaled only $20 million.
And prices, which had
been supported around 100-3/U at the start of the year, fluctuated around
97 during the last half of the year when the bond market was on its own.
As the years 1951 and 1952 progressed, however, market developments demonstrated a disturbing skepticism among investors that the Federal
Reserve was in fact abstaining (or would continue to abstain) from attempting
to maintain certain predetermined interest rates, regardless of the over-all
state of the demand for and the supply of savings.
This skeptician was fed
by market observation that the System engaged in purchases of securities
involved in Treasury financings around the periods of such financings.
After very careful study of the functioning of the Government
securities market and of the relation of Federal Reserve monetary operations
to the market, the System decided that it would limit its open market transactions to short-term securities, usually those of the very shortest term:
Treasury bills.
It also decided to refrain from operations in securities
involved in Treasury financings.
In taking these steps, the Federal Reserve
objective was to convince the market that it was not undertaking to peg
interest rates—and most certainly not those on intermediate- and longterm securities.
Accordingly, to minimize market uncertainty as to possible Federal
Reserve operations affecting market rates, and thereby to aid the effective
competitive functioning of the market, the System announced in April 1953
that until further notice, unless disorderly conditions arose in the market,
it would operate only in the short-term area, where its operations would
have the least market impact.
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Federal Reserve Bank of St. Louis
-10I think I should point out here, in fairness to my colleagues
on the Federal Open Market Committee, that in this decision to limit our
open market operations to the short end of the market, we were not unanimous—neither then, nor since then*
Indeed, the divergence of views in the System on this question
has been more marked and more continuous than on any other that I can
recall in my ten years in the Federal Reserve. That, I think, is readily
understandable because the question relates to the techniques of open market
operations—a highly technical and involved subject—rather than to general
credit policy itself.
In my opinion, it is and always will be easier to achieve full
agreement on what to do than on how to do it. To me, that explains why
the uninterrupted character of the divergence in the System over operating
techniques contrasts sharply with the rather high degree of agreement we
have had, most of the time, over questions of general credit policy-r
whether and when to ease or restrain, and how much. Also, why it contrasts
completely with the undeviating firmness of our opposition, at all times,
to returning to a pegged market.
These matters, however, are too well known to members of this
Committee for me to labor them further at this point:
the records of your
past hearings, as well as our Annual Reports, contain the views on that
score of several members of the Open Market Committee, including the
former and the present vice chairmen of our Committee, Messrs. Allan Sproul
and Alfred Hayes of the Federal Reserve Bank of New York, as well as myself
as chairman.
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Federal Reserve Bank of St. Louis
-11In any event, .following the 1953 decision I have described—the
decision to confine our open market transactions to the short-term sector
of the market—the emphasis in Federal Reserve operations continued to be
placed upon providing bank reserves to meet the economy's needs rather
than to set particular rates of interest.
Inevitably, however, interest
rate movements, since they reflected basic demand and supply conditions,
continued to be one of many factors considered by the Federal Reserve in
making judgments about the need for changes in the reserve base. Conversely,
Federal Reserve operations in the market continued, inevitably, to be an
important influence affecting the general level of market interest rates..
Despite confinement of its operations ordinarily to the short-term
area, the Federal Reserve stood prepared to buy securities other than Treasury bills should unusual developments create disorderly conditions in the
Government securities market and thus in credit markets as a whole.
When
disorderly conditions seriously threatened as in late November of 1955 or
actually developed as in the summer of 1958* the Federal Reserve bought
longer term securities to maintain or re-establish orderly trading.
Apart
from these exceptional and infrequent circumstances, however, the Federal
Reserve maintained its reliance upon operations in Treasury bills without
interruption until I960.
With the introduction of the 6-month Treasury
bill in 1958 and the 12-month Treasury bill in 1959, the System extended
the maturity range of its operations within the short-term area.—
Toward the close of 1959 there were increasing indications, signaled by rapid rises in market interest rates accompanying a mounting
intensity of borrowing demands, that conditions bordering on the disorderly
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Federal Reserve Bank of St. Louis
-12might be encountered increasingly in the future and that there might be
more occasions than in the past for corrective operations by the Federal
Reserve in maturities beyond the range of Treasury bills,
After the middle of I960, another consideration pointing to a
possible need for Federal Reserve operations in longer term securities
arose from the convergence of two important developments.
1. On the domestic front, a decline in key sectors of business
activity, accompanied by gradual rise in unemployment, suggested that the
economy might be moving downward on a broad pattern of recession.
2. In the area of international financial accounts, a big deficit
>,
in the U. S. balance of payments was made larger by a substantial outflow
of short-term funds from the United States to foreign money centers, partly
in response to higher interest rates abroad.
As I stated earlier, the Federal Reserve had been making bank reserves available to ease the credit situation since the winter of I960.
Thus, it had been a contributing influence in the decline in market interest
rates to mid-1960. In the light of the domestic business and employment
situation and the balance of international payments deficit, this decline
presented us with a dilemma in the latter part of I960.
If the Federal Reserve continued to supply reserves by buying only
Treasury bills, the direct impact of its purchases might drive the rate on
those securities so low as to encourage a further outflow of funds to foreign
markets and thus aggravate the already serious balance of payments deficit.
If, on the other hand, the Federal Reserve refrained from further
action to supply funds for bank reserves because of the balance ^of-payments
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Federal Reserve Bank of St. Louis
-13-
«
situation, it would be unable to make its maximum contribution toward
counteracting decline in domestic economic activity through the stimulative
influence of credit ease.
Thus, in an effort to expand reserves and yet to minimize the
repercussions on the balance of payments, the Federal Reserve began, in
late October I960, to provide some of the additional reserves needed by
buying certificates, notes, and bends maturing within 15> months. Since
that time, the System has bought and sold such securities, in addition to
bills, on a number of occasions duly reporting these portfolio changes in
a public statement issued every Thursday.
Now here let me note something about the decline in interest rates
that took place in I960.
During the first eight months, market rates on
Treasury bills and intermediate-term issues fell much more sharply than on
bonds; as is usual in a period of declining rates.
After late summer, however, the differential between short- and
long-term rates ceased to widen, and the average level of rates itself remained relatively unchanged. The increased net outflow of domestic and
foreign capital from the United States in the second half of the year, in
response partly to the attraction of higher interest rates and potential
capital gains abroad, was itself a factor in keeping interest rates in the
United States from declining, because it reduced the supply of funds available here.
It was in the latter part of I960, as I have noted, that Federal
Reserve operations were directed more and more toward reducing the direct
impact on Treasury bill yields of Federal Reserve purchases.
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Federal Reserve Bank of St. Louis
Thus, when
-mthe System was providing for the large seasonal expansion in credit needs
that occurs in the fall and pre-Christmas seasons, it did not rely solely
on further open market purchases but took actions that made vault cash
holdings of banks fully available for meeting reserve requirements. And
on the occasions when the System did engage in open market operations,
it
often conducted these operations in short-term Government securities other
than Treasury bills,,
Fith the domestic economy and the balance of payments continuing
to pose conflicting problems > open market transactions in securities other
than Treasury bills are continuing.
Beginning on February 20, as we stated
in an announcement issued on that date, a copy of which is attached to this
statement, the Federal Reserve has engaged in purchases of securities
having maturities beyond the short-term area, putting to practical test
some matters on which it has been possible in recent years only to theorize.
There is still a question as to the possibility of bringing about
a meaningful decline in longer term rates through purchases of longer term
securities without, at the same time, causing a shift in market demand
toward short-term securities that would also press down levels of shortterm rates.
On the other hand, it seems to me,, few could question the desirability of the result, if it can be attained, as a means of keeping financial
incentives attuned to the current needs of our domestic economy and our
international financial position.
We will want to observe closely, of course, the effect of this
change in operating techniques on the market and its capacity to fulfill
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Federal Reserve Bank of St. Louis
its role in transferring a large volume of securities among our various
financial institutions to facilitate their responses to shifts in the supply
of savings and the demands of borrowers.
In our country, the Government cannot force anyone to lend his
money at rates he is unwilling to accept—any more than it can force him
to spend his money at prices he is unwilling to pay.
In the securities
market, investors always have the alternative of investing their funds in
short-term securities if they feel that yields in the longer-term area are
unfavorable.
Therefore, in the outcome of this test much will depend on
the reactions of investors.
As I have said many times in the past, before this Committee and
others, I am in favor of interest rates being as low as possible without
stimulating inflation, because low rates can help to foster capital expenditures that, in turn, promote economic growth.
Yet, as I assume we can all agree, interest rates cannot go to and
long remain below the point at *Mch they will attract a suff icient volume
of voluntary saving to finance current investment at a relatively stable
price level.
At least we can agree, I think, that interest rates cannot
be driven and long held below that point without resort to outright creation
of money on such a scale as to invite inflation, serious social inequity,
severe economic setback, and, under present conditions, an outflow of funds
to other countries and consequent drains on this country's gold reserves.
I do not believe anyone expects the Federal Reserve to engage in
operations that will promote a resurgence of inflation in the future.
In
combating inflation in the past, undue reliance has perhaps been placed on
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Federal Reserve Bank of St. Louis
-16-
monetary policy. I can readily agree with those who would have fiscal policy,
with all of its powerful force, carry a greater responsibility for combating
inflation, and I am encouraged to think that this may be likely in the future.
If we do this, we should more nearly achieve our over-all stabilization goals,
along with some reduction in the range of interest rate fluctuation.
That, however, is a matter for another day. Today, we have in this
country a serious problem to contend with in the erratic but persistent rise
in unemployment that has taken place since mid-1960.
In January, the season-
ally adjusted rate of unemployment was 6.6 per cent of the labor force, the
highest percentage since 19£8; the actual nuirber of persons unemployed was
^
5>.U million, the highest number since the days before World War II-,
The contracyclical operations that the Federal Reserve is and has
been conducting, despite the handicaps imposed by the balance of international
payments difficulties that we hope will be overcome, should be helpful, as
they have been in the past, in combating that part of unemployment caused by
general economic decline. Certainly we mean them to be.
While the unemployment that arises from cyclical causes should prove
only temporary, there are, however, forces at work that have produced another,
structural type of unemployment that is worse, in that it already has proved
to be indefinitely persistent—even in periods of unprecedented general
prosperity.
The problem of structural unemployment is manifest in the higher
total of those left unemployed after each wave of the three most recent business cycles, and in the idleness of many West Virginia coal miners, Eastern
and Midwestern steel and auto workers, Vest Coast aircraft workers, and like
groups, in good times as well as bad.
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Federal Reserve Bank of St. Louis
c
•
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-17To have important effect, attempts to reduce structural unemployment by massive monetary and fiscal stimulation of over-all demands likely
would have to be carried to such lengths as to create serious new problems
of inflationary character—at a time when consumer prices already are at a
record high.
Actions effective against structural unemployment and free of
harmful side effects therefore need to be specific actions that take into
account the who, the where, and the why of unemployment and, accordingly,
go to the core of the particular problem.
Analysis of current unemployment shows that, in brief:
1. The lines of work in which job opportunities have been
declining most pronouncedly for some years are farming, mining, transportation, and the blue collar crafts and trades in manufacturing
industries,
2. The workers hardest hit have been the semi-skilled and
the unskilled (along with inexperienced youths newly entering the labor
market). These workers have accounted for a significant part of the
increase in the level and duration of unemployment. Among white collar
groups, employment has continued to increase and unemployment has shown
little change even in times of cyclical downturn,
3. The areas hardest hit have been, primarily, individual
areas dependent upon a single industry, and cities in which such industries as autos, steel, and electrical equipment were heavily
concentrated.
Actions best suited to helping these groups would appear to include
more training and re-training to develop skills needed in expanding industries;
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Federal Reserve Bank of St. Louis
(
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C
-18provision of more and better information about job opportunities for various
skills in various local labor markets; tax programs to stimulate investment
that will expand work opportunities; revision of pension and benefit plans
to eliminate penalties on employees moving to new jobs; reduction of impediments to entry into jobs, and so ona
Measures to alleviate distress and
hardship are, of course, imperative at all times.
In some of the instances cited, the primary obligation of the Government will be leadership, rather than action, for obviously a major responsibility and role in efforts to overcome unemployment, both cyclical and
structural, rests upon management and labor.
For our part, we in the Federal Reserve intend to do our share in
combating the cyclical causes of unemployment, as effectively as we can,
and in fostering the financial conditions favorable to growth in new job
opportunities.
Meanwhile there is, I think, need on the part of all of us to recognize that the world in which we live today is not only a world that has
changed greatly in recent years, but also a world that even now is in a
period of further transition.
In economics and finance, no less than in other relationships, the
lives of nations and peoples throughout the earth have been made more closely
inter-linkdd by developments that have progressed since the beginning of
World War II—inter-linked at such speed, in fact, as to outstrip recognition.
Today, the condition of our export trade, from which a very large
number of Americans derive their livelihood, depends not only upon keeping
competitive the costs and prices of the goods we produce for sale abroad,
but also upon the prosperity or lack of it in the countries that want to
buy our goods.
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Federal Reserve Bank of St. Louis
-19Whether our Government's budget is balanced or not, a factor
that greatly affects our economic and financial condition, depends not only
upon our own decisions respecting expenditures and taxes, but also upon
decisions by governments abroad as to how far they will share the costs
of mutual defense and of programs to aid underdeveloped nations of the
world. The decisions those governments make affect, in turn, their budget
positions and, through them, economic and financial conditions in their own
countries.
Every country, of course, will always have problems of its own
that differ from the current problems of other lands. Communist Russia,
for example, gives some signs of worry over a problem old and familiar
to us and to them: The danger of economically destructive inflation. The
New York Times of January 30 reported that Premier Khrushchev, in a
recent public speech, had pointed to precisely that danger, noting that "the
purchasing power in the hands of the Soviet people might exceed the value
of the goods available for them to buy."
In Brazil, a new administration is seeking means to cope with an
inflation that already has exacted an enormous price in suffering inflicted
upon her people by soaring increases in the cost of living.
In Belgium, a program of austerity, to bring about adjustments
made necessary by the loss of the Congo, provoked riots that recently made
headlines across the United States.
In the Free World, the United States has not been alone in finding
that its domestic situation and balance-of-payments position seemed to
call for conflicting actions, thus presenting monetary and fiscal policy
makers some complicating cross-currents.
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Federal Reserve Bank of St. Louis
.-20On January 19, for example, the German Federal Bank reduced its
equivalent of our discount rate and made known at the time that it was doing
so, despite the high level of activity in the German economy, for the purpose
of reducing a heavy and troublesome inflow of funds from other countries.
A month earlier the Bank of England had. reduced its bank rate also, to curb
a short-term capital inflow.
Over the last weekend, Germany and the Netherlands up-valued
their currencies by nearly 5 per cent; these actions should help them to
reduce the inflow of volatile capital.
The truth of it is that the major countries of the Western world,
after a long and painful struggle in the wake of World War II to restore
convertibility of their currencies, and thus to lay the necessary basis for
interchanges that can enhance the prosperity of all, have succeeded—only
to find that success, too, brings its problems.
Today, though currency convertibility does in fact make possible
an expanding volume of mutually profitable interchanges among nations, it
also makes possible dangerously large flows of volatile funds among the
nations concerned—flows on a scale that could shake confidence in even the
strongest currencies, and cause internal difficulties in even the strongest
economies.
To the causes of these flows—differences in interest rates, conditions of monetary ease or tightness, budgetary conditions, and developments
of any kind that raise questions and doubts about determination to preserve
the value of a country's currency—we must remain alert and ready, willing
and able to meet whatever challenge arises.
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Federal Reserve Bank of St. Louis
-21I, for one, am confident that we Td.ll meet such challenges as
may come. Our opportunities for the future are more important than the
problems they bring T-jith them. Let us seize these opportunities, firmly
and without fear.
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Federal Reserve Bank of St. Louis
- 0-
Board of Governors
of the
Federal Reserve System
For immediate release
February 20, 1961
Below is a copy of a statement issued in New York today, for
immediate release.
At the direction of the Chairman of the Open Market Committee of
the Federal Reserve System, the following announcement was made today by
the Manager of the System Open Market Account for the information of the
public and all participants in the market for Government securities:
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Federal Reserve Bank of St. Louis
"The System Open llarket Account is purchasing
in the open market U. S. Government notes and bonds of
varying maturities, some of which will exceed 5 years.
"Price quotations and offerings are being
requested of all primary dealers in U. S. Government
securities. Determination as to which offerings to
purchase is being governed by the prices that appear
most advantageous, i.e., the lowest prices. Net
amounts of all transactions for System account will be
shown as usual in the condition statements issued every
Thursday.
"During recent years transactions for the
System Account, except in correction of disorderly
markets, have been made in short-term U. S. Government
securities. Authority for transactions in securities
of longer maturity has been granted by the Open Market Committee of the Federal Reserve System in the
light of conditions that have developed in the domestic
economy and in the U. S. balance of payments with
other countries."
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
Feb. 3, 1961
To? Mr. Martin
Fm: Chas. Molony
-X
Here's the co^e part of the Patman remarks
I mentioned as notewor%h5ZLj»--fXfor what he has to say
about impact of FR bond purchases on short as well
as long rates, and also for a clue to questions he
may be asking you and other witnesses from his post
as Chairman of the Joint Economic Committee,
Chas Molony
Original and 2 carbons attached
•
c
February 3, 1961
Representative Wright Patman,
Congressional Record 25 January
1961, pages 1369-70, in the course of remarks on a tax measure introduced by him to "speed up substantially the rate at which business firms
and farmers may write off. . . the cost of newly acquired machinery and
equipment":
". . . Much of the obsolescence with which we are faced today is as
a direct result of the monetary policies of the Eisenhower administration
and British bankers' thinking of 1810.
The tight-money and high-interest
policies have retarded investment, as indeed they were intended to do.
"Monetary Policies Paralyzed
"But monetary policies have not been the whole cause.
Rather, the
conclusion of business people and independent experts alike is that the real
obsolescence period of most capital equipment today is a great deal shorter
than the depreciation periods generally allowed under the tax laws.
Some
experts have estimated that if U.S. industry were actually replacing equipment as fast as it is becoming obsolete, the cost would be from $5 to
$8 billion a year more than its present depreciation allowance.
"Plainly, no change in monetary policies likely to be made will be
enough to correct the deficit which has accumulated over the long years of
economic slumber.
In truth, there are some disturbing signs that the new
administration will itself be enmeshed in the Eisenhower monetary policies at least for some time to come.
All policies I have heard suggested to date
revolve around the notion that our first objective must be to preserve the
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Federal Reserve Bank of St. Louis
.,.
gold.
Thus the monetary policies which seem to be shaping up are
modified by those of the past only by the notion that while short-term
rates must continue to be held up - as a means of checking the flow of
"hot funds" and easing the drain of our gold -- long-term rates can
nevertheless be brought down and thus investment in new capital equipment can be allowed to resume.
"Over the past 6 years I have been, not the most effective critic,
but very probably the most persistent critic, of the Federal R e s e r v e ' s
bills only policy.
policy.
No one woild be happier than I to see an end to that
But even if the bills only policy were completely eliminated,
and the Federal Reserve officials became fully cooperative in the idea of
trading in the long-term market, they could not make anything like the
reduction in long-term rates that the economy calls for without also reducing short-term rates.
{' So, in context of the policies that seem to be shaping up, it is not
too much to say that our balance of payments problem must be solved
before any real solution to our domestic problems can be reached.
Such a
reduction in interest rates as the domestic economy clearly calls for does
not seem to be in prospect.
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Federal Reserve Bank of St. Louis
"
BOARD OF GOVERNORS
or THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Tn
Chairman Martin,- f\i\f^!^^^
Date
Subject;
March 6,1961
Testimony note
ecorrect^d the paragraph on page 2 of your testimony
as follows:
"In August\3££/, and again in November, by actions taken in
implementation of a 1959 Act of Congress, nearly $2 billion
aH4-2?eeeFvee
previously tied up in vault cash / of member banks were released
to assure ample coverage of heavy borrowing needs for the fall
and pre-Christmas seasons. An additional $700 million was provided
by further net purchases of U. S. Government securities."
The record of reserve requirement action shows that in August
vault cash released amounted to $^80 million and in November to $1.^00 million,
making a total of $1.880 million.
With the August action, reserve requirements of central reserve
city banks were reduced by 1/2 per cent, providing $125 million in reserve
funds.
In connection with the November action, the reserve requirements
were reduced by 1 per cent, providing $250 million.
The November action
raised the reserve requirements of country banks from 11 to 12 per cent
absorbing $380 million. Thus the net provision of reserve funds by reserve
requirement actions in August and November comes to a total of $5 million.
This explains our subsequent deletion of "and reserves."
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Federal Reserve Bank of St. Louis
March 6, 1961
To
Chairman Martin
From Jerome W. Sh
Subject: lour appearance
before Joint Economic Committee
; on Tuesday, March 7-
Some jrossible\questions that/you may be asked during the
hearing on Tuesday are listed below:
Open Market Operations in Lbiag-term^Securities
1. On what date did the CMC decide to take the action announced in the Press Release of February 20, 1961?
2. How did the various OMC members vote on the action announced on February 20?
3. How was the OMC directive modified to provide for the
action announced on February 20?
(Congressman Reuss has indicated that he might be interested
in the above questions.)
Bank Earnings
1. How does one account for the recent "unusually high"
earnings of commercial banks?
2, Why haven't commercial bank loan rates come down more
during recent months?
(Senator Fulbright has shown some interest in questions such
as these.)
Bank Mergers
Mr, Hackley is furnishing you a memo on this matter which I
mentioned to you recently.
The "Triffin Plan"
You may be asked for your views on such plans as those of
Robert Triffin and E. M. Bernstein for the internationalization of reserves, et cetera. You may recall that about a year ago, in answer to a
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Federal Reserve Bank of St. Louis
J
letter from Senator Douglas, we merely indicated that the Board's
staff was following the plans. Congressman Reuss has indicated dissatisfaction with our letter to Douglas. Senator Butler seems to
think any such plan might, in effect, devalue the dollar.
QECD
1. How do you or the Board look upon the OECD?
2. Might not the OECD, if put into operation, have some
effect on the Board's independence?
(Senator Fulbright, or possibly other Committee members,
may raise questions along these lines.)
Gold Outflow
You may recall that Senator Proxmire, now a member of the
Committee, has pressed Senator Robertson for an investigation of the
gold outflow and balance of payments problems and has said Congress
should conduct such an investigation even if the Administration may
not be sympathetic to it. Proxmire might open up a broad range of
questions on this, including, for example:
1. Is the 25> per cent gold reserve requirement necessary?
2. Would the Board's authority under section ll(c) of the
Federal Reserve Act to suspend such requirement be of any real value
if the gold outflow should get worse?
3. Do any other foreign countries of importance have a
gold reserve requirement? (Attached is a tabulation of the situation
on this matter in selected foreign countries, prepared in Arthur Marget's
division.)
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Federal Reserve Bank of St. Louis
GOLD AND FOREIGN EXCHANGE COVER REQUIREMENTS OF SELECTED FOREIGN CENTRAL BANKS
Central
bank of
Argentina
Liabilities against Required reserves
(per cent)
which gold or foreign exchange reIn gold
serves are required In gold
or foreign
exchange
Notes and demand
liabilities
Status of reserve requirements; recent changes;
qualifying provisions
Suspended since October
Only net foreign exchange holdings may be included. Gold cover
requirement of 20 per cent eliminated by 1957 legislation,
Australia
Belgium
Brazil
Notes and demand
liabilities
Notes
In effect since April 12, 1957*
Previous legislation, which had been suspended from May 1,
required a 30 per cent cover in gold and UO per cent in gold or
foreign exchange.
33-1/3
25
---No minimum requirement of gold or foreign exchange.
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Federal Reserve Bank of St. Louis
In effect (but note qualification)^
Basis of requirement significantly reduces ratio of cover of total
outstanding notes. Currency is issued exclusively by Treasury,
which can either put it into circulation directly itself, or under
"general legislation," i.e. through Rediscount Department or the
Bank Loan Fund of Bank of Brazil. Gold and foreign exchange cover
requirement applies only to currency issued under latter of tK
two methods. A large part of notes in circulation was put
circulation directly by the Treasury,
-2-
Central
bank of
Liabilities against Required reserves
(per cent)
which gold or foreign exchange reserves are required In gold In gold
or foreign
exchange
*
Canada
France
Notes and other
demand deposits
35
*
—
Germany
*No minimum requirement of gold or foreign exchange,
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Federal Reserve Bank of St. Louis
Status of reserve requirements; recent changes;
qualifying provisions
Unless the Governor in Council otherwise prescribes, Bank of
Canada is not required to maintain gold or foreign exchange reserves
in any minimum or fixed ratio to its liabilities, (Section 25 of
Currency, Mint and Exchange Fund Act of 1952.) Section 26 of Bank
of Canada Act of 193U had specified reserve of not less than 2^
per cent of note and deposit liabilities, to be held in gold cc/*n
or bullion, net amounts of specified types of foreign exchange, and
specified quantities of newly-mined Canadian silver. This requirement was suspended from 19UO until 1952, when suspense procedure
was superseded by Section 25 of Currency, Mint and Exchange Fund
Act cited above.
Suspended since September 1, 193 9 j by decree.
Statutoryrequirement of a 35 per cent reserve in gold bullion or
gold coin had been in effect only from June 1928. Previous
legislation generally stipulated that Bank of France metallic
reserve must at all times be adequate "to assure full convertibility" of note issue.
-3-
Liabilities against
which gold or foreign exchange reserves are required
Required reserves
(per cent)
India
Notes
1.15
billion
rupees
Italy
Notes and other
demand liabilities
Central
bank of
In gold
In gold
or foreign
exchange
Status of reserve requirements5 recent changes5
qualifying provisions
5*15
In effect; requirement established in 1956.
billion Foreign exchange assets must total at least 1; billion rupees and may
rupees be in the form of deposits abroad, foreign government securities
maturing within five years, and bills of exchange bearing at least
two good signatures and maturing in not more than 90 days, prov? J<3d
that these claims are payable in the currencies of countries wh_ .1
are members of the International Monetary Fund. At least 85 per
cent of the gold must be held in India. The minimum amount of
foreign exchange required may be lowered temporarily from U to 3
billion rupees by Cabinet action.
Previously, Reserve Bank was required to maintain gold and foreign
exchange reserves equal to at least i;0 per cent of note issue, and
at least UOO million rupees of such reserves had to be in gold.
UO
Suspended since July 22, 1935*
Requirement had been established by a decree-law of December 21,
1927.
Japan
Netherlands
Notes, drafts,
deposits, and other
current account
balances
minimum requirement of gold or foreign exchange.
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Federal Reserve Bank of St. Louis
In effect.
Under Royal Decree of June 2?, 1956, issued in conformity with
Article 2 of decree of January 11, 1956, requirement is 50 per cent
in gold and convertible foreign exchange; may be changed at any
time by Royal Decree. Except in period 191U-1929* when requirement was 20 per cent in gold coin and bullion, required cover from
1860's to 19U9 was 1*0 per cent in gold coin and bullion; this was
suspended in 19UO and abrogated in 19U5«
-hCentral
bank of
Sweden
Liabilities against
which gold or foreign exchange reserves are required
Notes
Required reserves
(per cent)
In gold In gold
or foreign
exchange
150
million
kroner
Switzerland
Notes
Union of
South Africa Notes and other
liabilities, including
notes of other banks
for which it has
assumed liability under
Section 15 of Currency
and Banking Act
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Federal Reserve Bank of St. Louis
Status of reserve requirements5 recent changes;
qualifying provisions
In effect,
Requirement specified in Sveriges Riksbank Act of June 30, 193U, as
amended to May 22, 1959- (See Chapter III, Article 11, which states
gold reserve may not remain below this figure,) In addition, the
Riksdag establishes a ceiling on the note-issuing authority of the
Bank. In June I960, total notes outstanding amounted to 6,800
million kroner3 minimum gold reserve of 15>0 million is less than
2.2 per cent of this amount*
In effect since 1905•
Requirement is currently in force under Article 19 of Federal Law on
the Swiss National Bank, December 23, 1953 •
In_effectL1
Requirement established by October 19U8 amendment to Reserve Bank Act
of 19hlj» In computing the reserve ratio the Reserve Bank may deduct
from its liabilities an amount equal to the book value in Union currency of its assets outside the Union. Minister of Finance may suspend reserve requirement for 30 days, subject to extension by him
for "periods" not exceeding 15 days each. (Language of Section 1?
of Reserve Bank Act of 19UU, as amended by Section 9 of Act No. ' ^
of 19U88) From May 19hh to October 19U8, required reserve was
30 per cent in gold coin and bullion against notes only. Between
1920 and 19UU, requirements were 30 per cent in gold against notes,
and 30 per cent in gold and specie against deposits and bills
payable; silver specie was limited to one-fifth of latter reserve.
-$-
.•
Central
bank of
Liabilities against
which gold or foreign exchange reserves are required
United Kingdom Notes in excess of
J> 2,3^0,000,000
In gpld In gold
or foreign
exchange
100
Prepared by the Division of International Finance,
Board of Governors of the Federal Reserve System,
March 2, 1961.
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Federal Reserve Bank of St. Louis
Status of reserve requirements; recent changes;
qualifying provisions
In effect.
From 18UU to 1928, an increase in note issue had to be matched by
a corresponding increase in Bank of England gold holdings. Since
1928, Bank has been required only to hold gold coin and bullion
to the full value of notes in excess of a specified total
fiduciary issue. Current applicable legislation: Section 2(1)
of Currency and Bank Notes Act of 195U. Current fiduciary ceiling
of fe 2,350 million established by U.K. Treasury in I960, under
legislation permitting it to establish for two years, and renew
for another two years, ceiling above that laid down by Parliament*
As of December lU, I960, notes covered by gold amounted to
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Federal Reserve Bank of St. Louis
B O A R D OF G O V E R N O R S OF THE FEDERAL
"ERVE SYSTEM
,
Dote
T«
P
Marc I"
lQ6l
Chairman Martin
Ralph A. Young
A briefing note on proposals for the
modification of the IMF. If questioned,
you could even read this into the record.
Attachment
Proposals for Modification of the
International Monetary Fund in Relation
to International Capital Movements
To the extent that it is found impossible or inconvenient
to avoid excessive international capital movements, thought must be
given to methods for preventing such capital movements from disturbing the international payments system and thus the United States
domestic economy* In particular, thought has been given to the
possible improvement of the procedures of the International Monetary
Fund in this respect. For this purpose, two types of proposals are
apparently under consideration.
The first (typified by the so-called "Bernstein proposals")
would have the Fund use its existing power to borrow currencies of
its member countries and to lend such currencies to other members
over and above their quota. For instance, if the United States
wanted to offset a movement of capital to Germany, the Fund would
borrow the corresponding amount of German currency and Itend it to
the United States; the United States could use that currency to
redeem the dollar funds that had been transferred to the German
central bank.
Such an operation might be more acceptable to Germany than
a direct loan of German marks to the United States, because under the
Articles of Agreement of the International Monetary Fund all sums
made available to the Fund, as well as all sums owed to the Fund,
are guaranteed against changes in their gold value. Sums loaned to
the Fund would therefore be as free from the risk of depreciation as
would physical holdings of gold, and they would have the advantage
of yielding a return.
"While the United States could borrow from the Fund without
the need for special legislation, it is prevented from making loans
to the Fund without Congressional action (Bretton Woods Agreement
Act, Section 5). Obviously, foreign countries would be reluctant
to make loans to the Fund for relending to the United States unless
they could be assured that if they needed dollars in the future,
the United States would be prepared to make similar loans avails, ble
to the Fund. For this reason, this proposal is likely to remain
impractical unless the Congress authorizes U. S. loans to the Fund.
The second proposal (exemplified by the Triffin plan)
envisages the deposit with the Fund of foreign currencies which a
country acquires over and above the amounts it wishes to hold itself.
For instance, if there were a flow of capital from the United States
to Germany and Germany did not want to keep the funds invested in
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Federal Reserve Bank of St. Louis
-2-
dollars, it could deposit them with the International Monetary Fund,
Again, the benefit for Germany would lie in the automatic guarantee
of these deposits against any risk of depreciation in terms of gold.
In comparison with the first proposal, the second would
have the disadvantage that the amount of funds involved would not be
under the control of the United States. Under the first proposal,
it would always be up to the United States to decide whether or not
to borrow foreign currencies from the Fund, and thus how far to
permit funds to be subjected to the automatic gold value guarantee.
Under the second proposal, the decision on the amount involved would
be entirely up to the creditor countries and to the management of
the Fund.
At present most experts within the United States Government
agencies and most executive directors of the Fund favor the first
plan—that is, borrowing from the Fund—over the plan of permitting
foreigners to deposit dollars.
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Federal Reserve Bank of St. Louis
Federal Reserve Position on Proposals with
Respect to the Modification of the International Monetary Fund
The Staff Committee of the National Advisory Council on
International Monetary and Financial Problems extensively discussed
the attitude to be taken by the U. S. Executive Director of the
International Monetary Fund in the preliminary exchanges of views
among the Executive Directors on proposals to increase the effectiveness of the Fund. Staff members of the Board of Governors took part
in these discussions. Studies are continuing and when conclusions
are reached they will be made available through appropriate channels.
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Federal Reserve Bank of St. Louis
March 3, 1961.
S E L E C T E D
F I N A N C I A L F A C T S
Latest
period
Preceding
period
Year
ago
n
$55.0
ii2.8
$56.0
1*3.3
$51.5
39.7
- 1.8
- 1.2
6.8
7.8
»
Q.3-'60
202.8
198.5
186.7
2.2
8.6
"
tt
139.1
136.1
128.0
2.2
8.7
Q.i-«6i
2/1,650
2,709
2,151
-39.1
-23.3
N
^1,975
1,322
1,9U3
Itf.U
1.6
1-25-61
195.8
112.7
83ol
197.9
115.8
82.1
- 1.1
- 2.7
1.2
5.5
U.9
6.1
n n n
Feb. «6l
31.2
1U.3
31.9
11*0,2
185.6
107. U
78.3
29.8
lUl.l
- 2.2
0.8
U.7
0*1
# n
* ?
1-25-61
Jan. «61
72.3
397.6
71.6
395.1*
65.7
389.2
1.0
0.6
10.0
2.2
* Annual
rate
Jan. »6l
25.8
25.1
25.1
2.8
2.8
Unit
Series
Date
Per cent change from*
Year
Preceding
ago
period
MONEY AND CREDIT
Consumer, 16'ial
Consumer, instalment
Billions
n
Mortgage debt outstanding,
total
Mortgage debt, 1-U family
houses
Corporate securities issues,
new capital
Millions
State and local govft.
n
issues, new capital
Total bank credit 2/
Total loans 2/
Investment's
Business loans at city
banks
Money supply 3/
Time deposits"~at commercial
banks
Liquid assets h/
Turnover ratesj
337 reporting centers
Billions
"
»
*
For footnotes, please see page 2.
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Federal Reserve Bank of St. Louis
n
w
Jan. «6l
n
n
»
it
it
n
- •
•
March 3, 1961
-
S ELECTED FINANCIAL FACTS
Series
Date
Unit
STOCK PRICES
Common" stack prices,
Standard & Poor»s
19U1-3 " 10 Feb. «6l
INTEREST RATES
91-day Treasury bills
6-raonth "
"
Per cent
« «
Feb. «61
w
Latest
period
62.17
Pre
~
ceding
period
59.73
YP
a 0
£
55.78
Per cent change from:
Preceding
lear
period
ago
U.I
11.5
Monthly average of daily figures Change in basis points^
2.1i2
15
2.2k
3.96
-355
2.60
-170
13
2.U7
U.30
Intermediate term
(3- to 5-ysar) issues
n
*
»
3.5U
3.53
U.66
1
Long-term U. S. Gov»t
bonds
w
*
»
3.81
3.89
U.22
- 8
-la
Feb. »6l
iu27
U.32
U.56
- 5
-29
3.Ui
3.15
3.UO
- 1
- 26
3.13
3.28
3.UO
- 15
- 27
Corporate AAA bonds
( seasoned)
State and local AAA
bonds
tt
Common stock yields,
Standard and Poor's
"
M
n
w
"
w
Feb. «6l
-112
* Seasonally adjusted.
I/ Estimated.
Excluding interbank loans.
Average of daily figures, semi-monthly, first half data.
1J/ Includes money supply, time deposits at commercial and mutual savings banks, savings and loan shares, U. S.
Government savings bonds and u. S. Government securities maturing within one year.
5/ One basis point equals 1/100 of one per cent.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
March 3, 1961.
SELECTED ECONOMIC FACTS
Series
GROSS NATIONAL PRODUCT
Total
Final purchases
Inventory change
Unit
Date
* Annual rate, billions
n
tt
n
n
Q.4-'60
n
n
Latest
period
Preceding
period
Year
ago
$503.5
506.5
- 3.0
$503.5
503.0
.6
$486.4
481.7
4.7
0.0
0.7
3.5
5.1
330.8
66.0
4.6
328.3
70.8
0.8
-6.8
3-5
-6.8
3-7
319.6
70.8
- .4
53-3
46.8
52.7
48.0
52.5
43.9
1.1
1.7
1.5
11.2
491.9
492.7
483.3
-0.2
1.8
406.3
271.0
395-7
268.2
11.3
27.7
-0.1
-0.1
0.0
0.3
1.0
14.2
11.9
Per cent change from:
PrecedinjI Year
ago
period
n
n
ft
n
Consumer expenditures
Business fixed investment
Net exports
n
n
n
n
n
n
n
it
n
it
Federal government
State and local government
n
n
it
it
n
n
tt
n
it
N
II
Total personal income
Wages and salaries
Farm income
Transfer payments
n
n
n
n
n
n
n
n
It
tt
n
n
n
n
n
N
it
12.9
31.0
406.9
271.4
12.9
30.9
Total disposable income
Total personal income, in
constant (1959) dollars:
N
N
it
n
n
356.2
356.7
346.5
-0.1
2.8
n
n
n
n
R
397.6
397.8
393-3
-0.1
1.1
Gross national product in
constant (1959) dollars:
N
ft
It
n
INCOME
9
Jan. '61
n
.
* Seasonally adjusted.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
2.7
March 3, 1961.
SELECTED ECONOMIC
FACTS
period
Preceding
period
Q.2-'6l ^$33-8
1%M
$35*9
-1-7
-5.9
41.5
44.8
0.0
-7.4
T
Series
Unit
Date
BUSINESS OUTLAYS. PROFITS. ETC.
Plant and equipment outlays
* /Annual rate, billions
0
n
Corporate profits before tax
"
Manufacturers' inventories
* 1Sillions
New orders for durable goods
"
DISTRIBUTION
Retail sales, total
"
Department store sales
Department store stocks
Auto sales, domestic
Auto dealer stocks
PRODUCTION
Industrial production, total
tt
Consumer goods
Equipment, including defense
Materials
Steel production
n
ii
Auto production
* Seasonally adjusted.
\f Anticipated.
£/ Estimated.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
»
Q.4-'60
2/41.5
Jan. !6l
53.5
53.6
y
^go
Per cent change from:
Preceding
Year
period
ago
53.3
-0.2
0.4
n
13.0
13.2
14.2
-1.5
-8.5
"
17.7
18.0
18.1
-1.7
-2.2
2/1*7
^165
2/14?
167
]4?
161
3.5
-1.2
3-5
2.5
4.8
1.0
5-9
1.1
6.0
0.9
-18.6
- 0.1
-20.0
11.1
.
* 1<)57 = 100
Jan. '6l
102
a
'
"
ill
n
M
*
100
B
" 1
"
98
195'7-59 = 100
0/7?'9
per cent of capacity
^50.0
* Anni;ial rate, millions of cars w
4.5
103
112
101
99
7°-8
46.3
5.6
111
116
103
110
1 6 1
i**
95 • 5
7.7
- 1.0
- 0.9
-1.0
- 1.0
10
'°
- 8.1
- ^.3
- 2.9
-10.9
•46'7
-19.9
-42.0
"
I947_49 = 100
* '.
"
Feb. '61
Jan. '61
* Annilal rate, millions of cars "
Mil:Lions of cars
£-10-61
March 3,
S E L E C T E D
E C O N O M I C
1961.
F A C T S
Dsricd.
,,
j-ear
°
10.7
17.1
$54.8
37.9
20.24,
10.7
17.0
$54.9
39.7
22.5
10.2
15.2
- 0.7
- 1-6
- 2.9
0.0
0.6
- 0.9
- 6.0
-12.0
4..
12.5
Jan. '61
1.098
98^
1,366
11.6
-19.6
Jan.'6l
66.6
66.4
66.1
0.3
0.8
"
"
52.3
15.7
36.7
52.2
15.8
36.4
52.9
16.6
36.3
0.2
- 0.6
0.8
- 1.1
- 5A
1.1
"
"
"
38.7
$ 2.32
i?89.64
38.3
$ 2.31
$88.23
40.4
$ 2.29
$92.38
1.0
0.4
1.6
- 4.2
1.3
-3
"
Civilian labor force=J
* Millions of persons
w
"
«
»
"
Unemployment I/
Unemployment rate
* Per ceiat of civilian labor force "
71.5
4.7
6.6
?1.1
4.8
6.8
69.8
3.7
5.3
0.6
- 2,1
- 2«9
2.4
27.0
24.5
Unit
Series
Date
Pre-
T
JJJgt
ceding
Per cent change from:
preceding
Year
period
ago
CONSTRUCTION
Total
Private , total
Residential, nonfarm
Nonresident ial
Public
Housing starts,
total private
LABOR MARKET
Total employment I/
* Annual rate, billions
"
"
"
«
»
" n
w
" "
"
" •
"
* Annu<il rate, thousands
OJF units
* Millions of persons
Nonagricultural payroll
employment
"
Manufacturing employment "
"
Nonmanuf acturing employment * »
"
"
»
Average weekly hours at factoi•ies
* Hours
Average hourly earnings at fa<jtories M
Average weekly earnings at fatstories n "
* Seasonally adjusted.
I/ Data include Alaska and Hawaii.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
"
"
"
Feb. !6l
M
n
"
"
w
$54.4
37.3
19>8
March 3,
S E L E C T E D
Series
PRICES
Wholesale, total
Farm and food
Industrial
Sensitive materials
Consumer, total
Goods
Services
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
1961.
E C O N O M I C F A C T S
Unit
Date
]19^7.49 = 100
n
Jan. r60
«
n
n
n
«
it
n
n
it
it
n
PreLatest ceding
period
period
Year
ago
Per cent change from:
Preceding
Year
aeo
period
119.8
100.0
128.1
102.6
119-5
99.2
127.9
103.1
119.3
96.3
128.8
110.4
- 0.5
0.4
3-8
- 0.5
- 7.1
127.4
118.0
151-7
127-5
118.4
151.4
125.4
116.7
148.2
- 0.1
- 0.3
0.2
1.6
1.1
2.4
0.3
0.8
0.2
BOARD OF G O V E R N O R S
r*
or THE
FEDERAL RESERVE SYSTEM
Date March 6, 1961
Subj ect:
From
Arthur ¥. Marget
The attached memorandum, by Mr. Furth, was prepared
somewhat hurriedly in order to enable you to use it as a
briefing paper, if you choose to do so, for your appearance
before the Joint Committee* The discussion of "special
facilities" for foreigners is to be found on page 5«
Attachment
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Federal Reserve Bank of St. Louis
B O A R D OF G O V E R N O R S
OF THE
FEDERAL R E S E R V E SYSTEM
Office Correspondence
To
Mr. Marget
From
J
* Herbert Furth
Date
March 6,1961.
Subject! Speculative capital movements,
balance of payments, gold transfers, and
interest-rate differentials.
Short-term capital movements were important in the U.S. balance
of payments deficit and in the decline in the U.S. gold stock during the
second half of I960 (see the attached table).
These movements can be explained in part by interest-rate
differences between the United States and other financial centers, but
in large part also by other factors, including (but not limited to)
uncertainties as to the future gold value of the dollar.
Two types of policies have been proposed to prevent such movements
from harming the international payments system and the U.S. economy: first,
policies aimed at reducing the movements to tolerable proportions; second,
policies aimed at neutralizing unfavorable effects of such movements as may
nevertheless occur.
Importance of short-term capital movements
in the second half of I960
In the second half of I960, U.S. exports of merchandise and services
failed to cover what may be called "basic" U.So payments (imports of merchandise
and services, military expenditures, pensions and remittances, recorded outflow
of long-term capital and U.S. economic aid)by a seasonally adjusted amount of
$1-1/2 billion at an annual rate. This compares with a similarly computed
deficit of $2 billion for the first half of I960, and $4-1/2 billion for 1959.
The second half of 1960 also saw an outflow of recorded U.S.
short-term capital and of unrecorded capital of $3-1/2 billion at an annual
rate, in contrast to an outflow at an annual rate of less than $1 billion in
the first half of 1960 and an inflow in 1959. These capital movements raised
the deficit in the U.S. balance of payments (as conventionally computed) to
an annual rate of $5 billion in the second half of I960, while such flows
contributed very little to the deficit in the first half of I960, and actually
reduced the deficit in 1959.
The influence of such capital movements on the deficit in the second
half of I960 was probably even larger than indicated by these figures because
there is reason to assume that some of the flows included in long-term capital
outflows actually represented speculative short-term transactions and because
there usually is an inflow rather than outflow due to unrecorded transactions.
At the very least, however, the short-term capital movements accounted for 70
per cent of the total deficit in that period.
Such movements played an even larger role in the drain on the U.S.
gold stock during the second half of I960. Withdrawals of foreign private
holdings of liquid dollar assets may add to that drain although they do not
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Federal Reserve Bank of St. Louis
-2-
affect the U.S. balance-of-payments deficit (as conventionally computed)
since these holdings are already considered a liability in computing the
U.S. international liquidity position. However, such withdrawals, by
increasing foreign official at the expense of foreign private dollar holdings,
result in gold transfers to foreigners whenever a foreign monetary authority
decides to convert its dollar acquisitions into gold.
In the second half of I960* foreign private short-term dollar
holdings declined at an annual rate of $1 billion, while they had increased
in the first half of I960 and in 1959. The movement of private dollar
holdings therefore reduced the impact of the U.S. deficit on gold movements
in the previous periods, but increased that impact in the second half of
I960. In fact, if Germany had not taken most of its reserve gains in dollars,
the decline in the U.S. gold stock in the second half of I960 would have
exceeded the balance-of-payments deficit, in spite of the U.S. purchase of
gold from the International Monetary Fund.
As it was, the U.S. gold stock declined in that period at an
unprecedented annual rate of $3 billion,as compared to a negligible decline
in the first half of I960, and a decline of $1 billion in 1959Causes of the short-term capital movements
The outflow of U.S. short-term and
withdrawal of foreign dollar holdings was in
of considerable differences between interest
in other financial centers, particularly the
of unrecorded capital and the
part certainly due to the emergence
rates in the United States and
United Kingdom and Germany.
It is equally certain, however, that differences in interest rates
did not account for all of the movements. First, there were large outflows
to countries where interest rates were not higher than in the United States,
such as the Netherlands and Switzerland. Second, part of the outflow to the
United Kingdom resulted in private purchases of gold in the London free market;
these purchases reached a record level in the second half of 1960.
Third, a large part of the funds moving to Germany were attracted
by the expectation of an appreciation of the German mark instead of mere
interest rate differentials; Germany prohibited interest payments to
foreigners on short-term assets.
Fourth, movements of capital out of the United States in response to
short-term interest-rate differentials were encouraged by developments in
forward rates. The large outflow of capital from the United States forced
the exchange rate of the dollar against the leading European currencies
virtually to the floor represented by the "gold points", approximately
3A of 1 per cent below par. Under these conditions, the premium on
forward dollars would have been expected to rise sharply, and largely to
offset the attraction of higher interest rates abroad. It failed to do so
as, for the first time since the war, some capital moved uncovered into
foreign currencies.
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Federal Reserve Bank of St. Louis
-3Fifth, some capital apparently moved not into short-term but
into long-term assets, obviously in the expectation of capital gains,
which would result in the case of bonds from an expected decline in
foreign interest rates and in the case of equities from the expectation
of a continuing boom abroad, as contrasted with the expected recession
in the United States. The importance of this factor is indicated by at
reflux of capital to the United States in early 1961 to take advantage
of expected advances in quotations at the New York Stock Exchange.
Sixth, some expansion of U.S. bank credit to foreigners and
some repatriation of dollar holdings of foreign commercial banks were
probably influenced by changes in relative credit demands and availabilities, and especially by a tightening of commercial bank reserve
requirements in some foreign countries, independently of relative levels
of money-market rates.
While there can be no doubt that all these factors played an
appreciable role, it is virtually impossible at this time to make a
reasonable quantitative estimate of their relative importance.
Avoidance of excessive capital movements
Large movements from dollars into gold or other currencies can
basically be attributed to an excessive supply of dollars abroad. In the
2-1/2 years preceding the start of that movement in mid-1960, official and
private liquid dollar holdings (short-term claims and holdings of U.S.
Government bonds and notes) of foreign countries rose $4 billion. If it
had not been for this increase, foreigners presumably would have been glad,
in the aggregate, to keep not only existing assets but also moderate further
receipts in the form of dollars: before 195^, foreigners used to complain
about an international scarcity rather than an international glut of dollars,
As long as the "basic" balance of payments of the United States
remains in long-term equilibrium, and the supply of dollars to foreigners
therefore remains limited, even relatively large capital movements would
be unlikely to result in a general "flight from the dollar«n In principle,
therefore, the best way to avoid excessive volatile capital movements will
be to restore and preserve equilibrium in the "basic" balance of international payments of the United States.
Apart from this general consideration, excessive capital movements may be avoided by eliminating their specific causes.
(a) Those capital movements that are caused by uncertainty as
to the future value of the dollar (reflected in movements into gold and
in the failure of forward exchange rates to rise) can best (or only) be
avoided by restoring confidence in the stability of the U.S. economy in
general and of the U.S. dollar in particular.
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Federal Reserve Bank of St. Louis
•4Insofar as capital movements are due to attractive yields and
expected capital gains connected with rapid rates of growth abroad, the
best remedy is to make sure that economic growth in the U.S. provides
similar attractions for capital investment at home.
(b) Capital movements exclusively caused by differences in
short-term interest rates not offset by forward-exchange costs may be
divided into two groups.
Some capital movements may result from "structural11 differences
in short-term interest rates, due to differences in the pattern of supply of
and demand for funds in various money markets. It would be unrealistic to
expect market interest rates to be as low in Japan as in the United States,
and there is no economic need to prevent funds from moving out of countries
in which the supply of short-term capital is ample to countries in which
it is scarce.
The second (and more important) type of differences resuits from
variations in the pattern of cyclical fluctuations. A country suffering
from a recession does not (all other things being equal) have the same
market rate of interest as a country experiencing a rapid upswing. Such
movements, however, will not affect the long-term equilibrium in the
balance of payments of the countries involved as long as it can be expected
that the flows will be reversed when the relative cyclical positions of the
countries are reversed.
Problems arise only when these structural and cyclical flows
become so large as to impair confidence in the smooth working of the international payments system. In this case, several different methods of
approach may be used.
The country suffering from a speculative outflow may try to
keep its interest rates higher than the current structural or cyclical
situation would warrant. It may do so by trying to keep «.n rates high,
reducing the supply of funds throughout the economy. Such an attempt
would obviously be economically and politically dangerous since it would
almost certainly reduce economic activity, employment, and "real" national
income.
The country may, instead, try to raise only those rates which
appear to be particularly attractive to international capital. Assuming
that such capital is primarily interested in short-term rates, this
would mean an attempt to raise short-term rates while not raising, or
actually lowering, medium or long-term rates. The success of such an
operation depends not only on the power of the monetary and fiscal
authorities to influence the supply of and demand for both long and short-term
funds, but also on the flexibility of the money market, and especially
the size and speed of arbitrage operations among different maturities.
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Federal Reserve Bank of St. Louis
-5Whenever arbitrage is effective, the success of the authorities in
decisively changing interest-rate patterns is likely to be short-lived.
These difficulties may invite attempts at insulating interest
rates for international transactions from the domestic level, either for
all foreigners or only for foreign official accounts. It would be possible
to issue special Treasury secTajpities and to induce banks to offer special
deposit rates, available only to foreigners, but to all foreigners. The
main shortcoming of such a policy would be the difficulty of preventing
domestic investors from transferring their funds to foreign institutions
and thereby increasing almost infinitely the amount of "foreign" funds at
the expense of "domestic" funds. If this happened, the attempt at
insulation would break down, and domestic rates would tend to rise to
the level offered to "foreign" holders.
This danger could be avoided if the special rates were restricted
to foreign monetary authorities, especially if these authorities undertook
not to make the advantage indirectly available to private holders. On the
other hand, such a restricted measure would probably not have an appreciable
effect on international capital movements, since major central banks do not
decide on the division of their reserves among gold, sterling, and dollars
on the basis of interest yields. Some of them, including those of the
United Kingdom, Belgium, the Netherlands, and Switzerland, keep all their
reserves, except for working balances, in the form of gold; in the second
half of 1960 these four banks were responsible for two-thirds of all the
gold purchases from the U.S. Treasury. Even small central banks do not
seem usually to determine their gold policy on the basis of interest rates.
At most, some of those banks might move funds from London to New York in
response to higher interest rates. Competition between London and New York
for central bank funds, through special rates offered regardless of market
levels, might, however, threaten friendly cooperation between the two major
central banking institutions of the free world. Moreover, the structural
level of interest rates is usually higher in London than in New York and
it would, therefore, be easier for London than for New York to offer particularly attractive discriminatory rates to foreign central banks.
The bulk of the funds invested by foreign central banks in the
special securities or deposits, would presumably not be shifted out of gold
or sterling, but out of other dollar assets. In this case the final effect
of the special rates would again be felt in the domestic money market;
moreover, the main result of the attempt at insulating the market for foreign
monetary authorities would merely be to burden the balance of payments with
higher interest payments to foreigners.
In any case, facilities for foreigners should be terminable
whenever a change in the international or domestic financial position of
the United States would make a continuing inflow of foreign funds no longer
desirable or positively undesirable.
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Federal Reserve Bank of St. Louis
-6Avoidance of harmful effects of capital movements
If it were impossible or inconvenient to avoid large speculative
capital movements, it still would be possible to prevent such movements
from disturbing the international payments system and thus the U.S. domestic
economy.
If the main capital movements are restricted to some major countries
(as in the second half of I960), it may be possible to conclude bilateral
agreements under which these countries keep the inflowing private funds
invested in dollars; in this case, the only effect of the capital movements would be to increase foreign official holdings at the expense of
foreign or domestic private holdings of dollars, leaving the U.S. gold
stock unchanged.
If such bilateral agreements are considered impractical, or if the
foreign countries involved insist on conditions that would seem unacceptable,
the same result may be achieved by means of existing international institutions, and in particular by utilizing present and perhaps also increased
future resources of the International Monetary Fund.
Two types of proposals to increase the effectiveness of the Fund
in this matter are currently under consideration. The first would use the
Fund's existing power to borrow currencies of its member countries and to
lend them to other members, regardless of quota limitations. For instance,
if the United States wanted to offset a movement of capital to Germany, the
Fund would borrow the corresponding amount of German currency and lend it to
the United States; the United States eould use that currency to repurchase
the dollar funds that had been transferred to the German central bank.
Germany would thus end up with increased claims against the Fund rather than
increased holdings of either dollars or gold.
Such an operation might be more acceptable to Germany than a
direct loan of German marks or dollars to the United States, because under
the Articles of Agreement of the International Monetary Fund all sums made
available to the Fund, as well as all sums owed to the Fund, are guaranteed
against changes in their gold value. Sums loaned to the Fund would therefore be as free from the risk of depreciation as would physical holdings
of gold, and they would have the advantage of yielding a return.
While the United States could borrow from the Fund without the need
for special legislation, it is prevented from making loans to the Fund without
Congressional action (Bretton Woods Agreement Act, Section 5). Obviously,
foreign countries would be reluctant to make loans to the Fund for relending
to the United States unless they could be assured that if they needed dollars
in the future in excess of their Fund quota, the United States would be
prepared to make similar loans to the Fund. For this reason, this proposal
is likely to remain impractical unless the Congress authorizes U.S. loans to
the Fund.
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Federal Reserve Bank of St. Louis
-7The second proposal envisages the deposit with the Fund of
currencies other than its own which a country acquires over and above
the amounts it wishes to hold. For instance, if there were a flow of
capital from the United States to Germany and the German central bank
did not want to keep the resulting reserves invested in dollars, it
could deposit them (against interest) with the Fund. Again, the benefit
for Germany would lie in the automatic guarantee of these deposits
against any risk of depreciation in terms of gold.
In comparison with the first proposal, the second would seem
to have the disadvantage that the amounts involved would not be under
the control of the United States. Under the first proposal, it would
always be up to the United States to decide whether or not to borrow
foreign currencies from the Fund, and thus how far to permit funds to
be subjected to the automatic gold value guarantee. Under the second
proposal, the decision on the amount involved would initially be up to
the creditor countries and to the management of the Fund.
Actually, however, the United States would be able, under the
Articles of Agreement of the International Monetary Fund, to limit the
amount of dollars deposited with the Fund by redeeming any excess in
gold — just as the United States would be able to avoid borrowing
foreign currencies from the Fund under the first proposal by making
gold payments to the foreign countries holding dollars.
Another disadvantage of the second proposal might be that
deposits with the Fund, with their combination of gold value guarantee
and yield, could prove so attractive to foreign central banks presently
holding dollar reserves that larger amounts would be deposited with the
Fund than otherwise would be presented to the United States for conversion
into gold. This danger might be avoided by keeping interest rates on those
deposits low in relation to the yields of investments in U.S. money markets.
At present, most experts within United States Government agencies
and most Executive Directors of the Fund favor the plan of borrowing through
the Fund over the plan of permitting foreign countries to deposit dollars
with the Fund. Their preference is presumably based less on the economic
differences between these proposals (which are small) than on the fear that
the second proposal might lead to the fundamental change in the free
world's system of international payments proposed by Professor Triffin.
Professor Triffin, who at present is Consultant to the Council
of Economic Advisers, has urged the replacement of sterling and dollars as
international reserve currencies by a newly created monetary unit to be
administered by the International Monetary Fund, and has advocated the
voluntary deposits of dollars (and sterling) by foreign countries with the
Fund as a first step toward a realization of his plan. To those who
believe that the Triffin plan is either premature or unworkable, or outright
harmful to the interests of the United States, the deposit proposal would
be acceptable only on the understanding that it was not to be interpreted
as an endorsement of further moves in the direction of that plan.
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Federal Reserve Bank of St. Louis
CAPITAL MOVEMENTS AMD GOLD TRANSFERS, 1959-60
I960
_
2nd half p/ 1st half
1959
(Billions of dollars)
1. "Basic" U.S. balance of
payments deficit 3/
1.3
2.2
2. Plus; Outflow of recorded
U.S. private short-term
capital and unrecorded
transactions (inflow: -)
3.4_
0.7_
-0.8
3. Equals "conventional"
deficit
If. 7
2.9
3-7
4. Plus; Outflow of foreign
private short-term capital
(inflow: -)
1.0_
-0.9_
-1.1
5. Equals: Change in gold and
in dollar liabilities to
foreign authorities k/
5-7
2.0
2.6
6. Minus; Increase in foreign
official dollar holdings V 2.6_
1.7_
7. Equals: net gold sales
0.3
3»1
If.
2.0
0.7
I/ At annual rates (without seasonal adjustment)
2/ Excluding U.S. subscription to International Monetary Fund.
3/ Imports of goods and services, military expenditures, pensions and
remittances, outflow of private long-term capital, and U.S. economic aid,
minus exports of goods and services.
k/ Includes international institutions.
/ preliminary.
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Federal Reserve Bank of St. Louis
B O A R D OF G O V E R N O R S
DF THE
F E D E R A L R E S E R V E SYSTEM
Office Correspondence
<po
Chairman Martin
Date
March 6,1961,
Subject L
From.
Shay h4s suggested that, at the hearing tomorrow before
the Joint Ecbnomic JSommittee, it is conceivable that some question
might be aske4j?p« regarding recent antitrust actions by Justice
Department in the banking field. I thought you might like to have
some briefing material on this subject.1
Accordingly, there is attached for your information a
brief statement regarding the two bank merger cases and the one
holding company case in which Justice has recently instituted
antitrust proceedings.
Attachment
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Federal Reserve Bank of St. Louis
Recent Justice Department Actions with
Respect to Bank Mergers and Holding Company Acquisitions
Bank mergers. - Recently, the Justice Department
instituted Sherman Act proceedings with respect to the consolidation
of The Philadelphia National Bank and the Girard Trust Corn Exchange
Bank. Justice has instituted similar proceedings with respect to the
consolidation of First National Bank and Trust Company and the Security
Trust Company of Lexington, Kentucky.
Both of these mergers had previously been approved by the
Comptroller of the Currency under the so-called Bank Merger Act of
I960. As required by that Act, the Board of Governors (as well as
the Federal Deposit Insurance Corporation and the Justice Department)
had made a report to the Comptroller on the competitive effects of the
mergers.
As to the Philadelphia merger, the Board reported:
"The proposed consolidation of two of the three
largest banks in the area would substantially lessen
both existing and potential competition. The resulting
bank would obtain a dominant position, with attending
competitive advantages, strongly adverse to the preservation of effective competition.ff
As to the Kentucky merger, the Board reported:
"The proposed consolidation would result in
the elimination of the fourth largest of the six banks
in Lexington and in a substantial lessening of competition. It would result in a substantial concentration
in one institution of banking resources and fiduciary
business in Lexington and Fayette County."
In both cases, the Board expresaad its views only as to the
competitive effects; it did not make any recommendation as to whether
the mergers should be approved. That decision rested solely with the
Comptroller. Under the merger legislation, the Comptroller was required
to consider not only the competitive effects but certain other factors,
such as financial condition, management, prospects, and the needs of
the communities involved. Even though the mergers may have had adverse
compatitive effects, it was within the Comptroller's discretion to
approve the mergers if he found that such adverse effects were outweighed by other considerations so that, on balance, the mergers would
be in the public interest.
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Federal Reserve Bank of St. Louis
-2-
Bank holding company case. - On March 2, 1961, the Justice
Department instituted proceedings against Bank Stock Corporation of
Milwaukee, charging that its acquisitions of stock of certain banks
violated the Clayton Act. On January 25, 1961, the Board of Governors,
acting pursuant to the Bank Holding Company Act of 1956, had approved
the acquisition by Bank Stock Corporation of stock of Bank of Commerce,
Milwaukee. The Board1s action was based upon consideration not only
of the competitive effects of the acquisition but also the other factors
required to be considered under the Holding Company Act.
In this case, as in the merger cases, the Justice Department^
action was based solely upon its consideration of the competitive
effect of the transaction, the only consideration involved in the antitrust laws. The bank merger legislation of I960 does not exempt bank
mergers from the Sherman Act; and the Bank Holding Company Act of 1956
expressly preserves the application of the antitrust laws (both the
Sherman and the Clayton Acts) to acquisitions of bank stock by bank
holding companies even though approved by the Board of Governors.
3-6-61
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Federal Reserve Bank of St. Louis
Budget Estimates for Fiscal Years 1961 and 1962
*
The Budget presented by President Eisenhower on January 16 estimated
that the administrative budget would be virtually in balance in the current
fiscal year and would show a surplus of $1*5 billion in fiscal 1962. The cash
budget was estimated to show surpluses of more than $1 billion in both years*
The receipts and expenditures totals giving these results are shown in the table
below. The breakdown of the administrative budget totals are shown in the table
attached to this note.
Fiscal Year Totals, in billions of dollars
1961
Mid-year
Budget
Review
Document
(1-16-61)
1962
Budget
Document
1959
Actual
I960
Actual
Administrative budget
Receipts
Expenditures
Surplus (+) or deficit (-)
67.9
80.3
-12>
77.8
76.5
+ 1.2
80.8
79.7
+ 1.1
79.0
78.9
+ .1
82.3
80.9
+ 1.5
Cash budget
Receipts
Payments
Surplus (+) or deficit (-)
81.7
9^.8
-13.1
95.1
94.3
+ .8
10006
98.1
99.0
97.9
103.1
101.8
-i- 2.5
+ 1.1
+ 1.3
Estimates for Fiscal 1961
The budget surplus of less than $100 million estimated for the current
fiscal year compares with a surplus of $1.2 billion realized in fiscal I960 and
a deficit of $12.4 in fiscal 1959. The estimated decline of $1.1 billion in
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Federal Reserve Bank of St. Louis
- 2the surplus from the preceding year reflects a $2.4 billion increase in expenditures and a $1.2 billion increase in receipts.
Most of the rise in revenues is due to an increase, estimated at $2.6
billion, in receipts from individual income taxes. This rise reflects mainly
the higher level of personal income reached in the second half of calendar
year I960 and the assumption that incomes will advance further in the current
half yeare
Specifically, it is assumed that personal income in calendar year
1961 will average about $415 billion, compared with $404 billion in calendar
year I960.
Corporate income taxes, which have been the principal source of
downward revision in receipts estimates in the past year, are estimated at
$20.4 billion (net of refunds), coaqpared with actual collections of $21.5
billion in fiscal I960. This estimate is based on estimated before-tax profits of $45 billion in calendar I960.
Estate and gift taxes are estimated to show a marked rise of $300
million to $1.9 billion, and excise taxes are expected to increase $200 million.
Although gross employment taxes are expected to increase substantially this year, reflecting the full-year effect of rate increases effective in January I960, net budget receipts are not affected.
Starting with
this year, moreover, all receipts from the Unemployment Tax Act are being
transferred to the unemployment trust fund. As a result, budget receipts
are reduced by over $300 million relative to fiscal I960. ]./
I/ Since a similar deduction is made from budget expenditures, the budget
surplus is not affected.
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Federal Reserve Bank of St. Louis
- 3An estimated decrease of $36? million in miscellaneous receipts is
due mainly to lower deposits with the Treasury of Federal Reserve System earnings, chiefly because of a nonrecurring deposit from surplus made in I960*
In general, receipts estimates for the current fiscal year are basad
on firmer estimates of the tax base and, therefore, are probably subject to
considerably less revision than was the case with earlier estimates* However,
two categories of receipts—the nonwithheld component of individual income taxes
and estate and gift taxes—may be on the high side. Both of these revenue
sources are strongly influenced by capital gains, which are very difficult
to estimate. It appears that Estimates of such receipts in 1961 reflect in
part estimates of relatively large realized capital gains0
For the fiscal year 1961, budget expenditures are estimated
$2.^ billion higher than in the preceding fiscal year.
as
Outlays for all
major functions except interest payments on the public debt are expected to
rise. The increases are attributable in varying degree to new legislation,
primarily the pay raise to Federal civilian employees; to increases in
relatively uncontrollable expenditures, such as grants to States for public
assistance and payments for veterans1 compensation, pensions, and medical
care; to past commitments for such purposes as water resources projects,
space exploration, and civilian aviation; and to higher Congressional
appropriations for defense and other programs.
Given the typically long lag between the incurring of obligations
and actual expenditures, it does not appear likely that adoption of any new
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Federal Reserve Bank of St. Louis
programs will alter greatly the budget estimates presented in the Document0
However, failure to put into effect the Budget recommendation that postal
rates be increased, effective April 1, would increase the Post Office deficit
by $160 million relative to Document estimates.
In the cash budget, considerable uncertainty in the Budget estimates
of expenditures in the current year attaches to unemployment benefit payments.
Although the Document estimate of $3«9 billion is about $1 billion higher than
that presented in the Mid-year Review, it appears in light of recent trends in
claims filed for compensation and of current levels of insured unemployment,
that even this higher level may understate actual payments in the fiscal year
by $500 million or so. Enactment of a supplemental unemployment compensation
bill would also add to cash outlays in the current fiscal year. In addition,
failure to put into effect the Budget recommendations that postal rates be
increased, effective April 1, would increase the Post Office deficit by $160
million relative to Document estimates, A partial offset, however, may be
provided by lower payments by the highway trust fund, which, on the basis
of experience in the first half of the fiscal year, may aggregate slightly
below Budget estimates for the year as a whole,
Estimates for Fiscal Year 1962
Document estimates of a cash surplus of $1,3 billion and in administrative budget surplus of $1,5 billion appear, at this point, unlikely
to be realized. The assumptions upon which the estimates were based include
a number of legislative recommendations regarding both taxes and spending
which appear unlikely to be put into effect.
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Federal Reserve Bank of St. Louis
In addition, the estimates
- 5assume a stronger recovery in economic activity than most observers consider
likely at the present time.
Legislative recommendations in the Budget include proposals to increase
fees and charges for Government services. Thus a recommended increase in the
gasoline tax by one-half cent to ^1/2 cents would add $810 million to budget
receipts fcy making possible the repeal of a scheduled transfer to the highway
trust fund of this amount of excise taxes as automobile parts. The recommended
postal rate increase would reduce the deficit of the Post Office Department—
and hence net budget expenditures—by $840 million. Altogether increases in
fees and charges for Government services requested in the Budget total $1.8
billion.
Corporate profits taxes are estimated by the Budget to increase
$500 million in fiscal 1962 to $20.9 billion (net of refunds)„
This esti-
mate is based on the assumption that profits before tax in calendar 1961 will
amount to $46 billion, compared with the estimated level of nearly $45 biLlion in calendar I960. Because of the high yield per dollar from this source
of revenue, it is evident that profits assumptions are critical in any receipts estimates.
Thus, if profits were to average only $43 billion this
year, collections in fiscal 1962 would be about $1.4 billion smaller than
the Budget estimate.
In receipts estimates for both fiscal years, the Budget apparently assumes continuation of the estimated high 1959 capital gains in I960
and 1961; this assumption is reflected in the estimated yield from estate
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Federal Reserve Bank of St. Louis
(
C
- 6-
and gift taxes as well as in nonwithheld individual income taxew. Estimates
of both withheld income taxes and social security taxes are based on rising
levels of wages and salaries.
Budget expenditures in fiscal 1962 are estimated at nearly $81 billion, up $2 billion from the revised estimate for fiscal 1961 and $600 million
from fiscal 1959* The extent to which the new administration will recommend,
and Congress pass, legislative programs which differ from those recommended
in the Document cannot now be reliably estimated.
Nor can it be known with
reasonable certainty how much actual spending in the next fiscal year might
be affected by enactment by such programs.
On the assumption, however, that
new programs and extensions of existing programs are limited to those which
have received widest public discussion, it appears likely that administrative budget expenditures next year may exceed Document estimates tjy $1.5 to
$2.5 billion. This estimate reflects increases for such new or expanded
programs as school aid, urban renewal, aid to depressed areas, defense and
foreign economic aid.
Increases in cash payments could exceed this range,
reflecting possible enactment of a medical care program financed by higher
social Security taxese
As a possible maximum, it is estimated that adoption of new programs, including anti-recession measures, could raise the above range of
by
increases relative to the Document/about S3 billion. Increases of this amount
might result from stepped-up spending for highway construction, housing
(including urban renewal, college housing and community facilities), public
works, agricultural subsidies and various social welfare programs«
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Federal Reserve Bank of St. Louis
FEDERAL BUDGET RECEIPTS AND EXPENDITURES. 1959-62
(Fiscal years, in billions of dollars)
Source or function
Total budeet receipts
Individual income taxes
Corporation income taxes
Excise taxes
Employment taxes
Estate and gift taxes
Customs
Miscellaneous receipts
Deduct: Interfund transactions
Total budget expenditures
Major national security
International affairs and finance
Commerce, housing, and suace technology
Agriculture and agricultural resources
Natural resources
Labor and welfare
Veterans services and benefits
Interest
General government
Allowance for contingencies
Deduct: Interfund transactions
Surplus (+) or deficit (-)
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Federal Reserve Bank of St. Louis
1961
(Estimated)
1962
(Estimated)
1959
I960
67.9
77.8
79.0
82.3
36.7
17.3
3.5
.3
1.3
.9
3.2
.4
40.7
21.5
9.1
.3
1.6
1.1
4.1
.7
43.3
20.4
9.3
45.5
20.9
9.7
1.9
1.1
3.7
.7
2*0
1.1
3.8
.7
80.3
76.5
78.9
80.9
46.4
3.8
3.*
6.5
1.7
M
5.2
7.7
1.6
45.6
1.8
2.8
4.8
1.7
4.4
5.1
9.3
1.7
45.9
2.3
3.8
4.9
2.0
47.4
2.7
3.4
5.1
2.1
4.8
~4
.7
.7
5.3
8.6
2.1
.1
.7
-12.4 + 1.2
+ .1
+ 1.5
4.5
5.2
9.0
2.0
. uary 18, 1961
Closer Coordination of Monetary and Fiscal Policies
The role of monetary policy in combating recession is important but has its limitations. The supplying of bank reserves
abundantly during recession contributes to declining interest rates,
particularly short-term rates. But some interest rates, for
example, those on home mortgages, are sluggish.
Moreover, some
types of borrowing do not increase much solely because of lower
interest rates.
Public utility borrowing is perhaps an exception
to this general rule.
Fiscal policy can compensate to some extent at least for
the limited effectiveness of monetary policy during a recession by
doing more to restore expenditures and income. The Federal budget
should be balanced, and, if possible, in surplus, over a complete
business cycle, but it need not be balanced every year.
In re-
cession, planned deficits can contribute actively to recovery, in
prosperity planned surpluses can counter-balance the deficits of
the recession and also contribute to some reduction of the public
debt.
A planned recession deficit can result from higher expenditures for unemployment compensation, for relief of depressed
areas, for necessary public works and for other purposes, as well
as from lower tax revenues. A planned surplus involves reduced
outlays and/or higher tax revenues. The Federal tax system, being
based as it is largely on income and excise taxes, does show an
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Federal Reserve Bank of St. Louis
c
-2-
ebb and flow of receipts as economic conditions change. In might
well, however, have even more built-in flexibility than it does
over the cycle, if it is to support monetary policy more effectively. Tax revenue goes up and down a good deal but could do so
even more if our tax structure were modified in a conscious effort
to get greater revenue flexibility over the cycle. This would
necessarily, however, be a long-range rather than an immediate
objective.
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Federal Reserve Bank of St. Louis
r
January 18, 1961
ideral Reserve Transactions in U. S« Government Securities
Other Than Bills in Late I960
In late October, the System Open Market Committee authorized
the manager of the System Open Market Account to purchase short-term
Treasury issues other than Treasury bills in order to help supplyneeded reserves to the market -while minimizing downward pressure on
the key 3-months bill rate which threatened to fall below 2 per cent.
In pursuing this policy, the manager of the System Open Market Account
made outright purchases of eight short-term coupon issues totaling $315
million during three weeks in November. Of this amount, $9 million
were bought from foreign and international accounts and the remaining
$306 million were bought from Government Security dealers in the open
market.
The longest term issue purchased was the 3-1/U Per cen^ note
of February 15, 1962.
Ninety-seven per cent of total purchases, how-
ever, consisted of certificates, notes and bonds maturing within 13
months. ItfLth the three-months bill rate fluctuating around the 2-1/U
per cent mark in late November and December, no System purchases of
Governments other than bills have been made since the week ending
November 23.
The System has sold short-term coupon issues during only one
week—the week ending December 21, I960. These sales totaled $202 million, of wnich $169 million were to the International Monetary Fund and
foreign accounts, and $33 million to dealers in the open market. These
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Federal Reserve Bank of St. Louis
(
f
- 2-
latter sales were all made during one day on the basis of best price
bids from dealers in a market go-around. Sales to the IMF and other
foreign accounts were made in order to keep the purchases of these
customers out of the market at a time when reserve factors, notably
storm-induced float, were supplying large additional reserves to the
banking system and putting downward pressure on bill rates. Sales of
coupon issues to these accounts were accompanied by even larger sales
of Treasury bills.
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Federal Reserve Bank of St. Louis
Outright System Open Market Operations in Securities other than Treasury Bills in I960
(In $ million, par value)
With Government Security Dealers
Issues Bought
or Sold *
U-7/8 C/I
2/15/61
U-3/8 C/I
5/15/61
20.0
83.0
13.0
7.0
6.0
16.5
3-5/8 N
5A5/61
3-1/8 C/I
8/1/61
Week Ending;
Nov.
2
9
23
Dec. 2?
I
hN
8/1/61
5.0
- 2.0
Iiu3
1.0
-11.0
10.0
2-3A B BO 1-1/2 N 2-1/2 B
9/15/61 10/1/61 11/15/61
7.0
U.5
5.o
1.0
59.5
U6.3
-11.0
3-l/UM Total
2/15/62
^.5
7.0
-9.0
-^.1
38.5
- 33.0
With Foreign and International Accounts
Week Ending:
Nov. 9
Dec. 21
Gross Purchases
Gross Sales
Net Sales or Purchases
U.O
5.0
-1*0.0
116.0
-Uo.o
76.0
3lu5
3U.5
-U8.0
15.3
-59.0
15.0
-U2.0
16.5
5.0
105.8
-52.0
7.0
-9.0
315.1
-202.0
-U2.0
-U3.7
15.0
16.5
5.0
53.8
-2.0
113.1
•* Includes commitments for delivery the following statement week; a minus sign denotes a sale.
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Federal Reserve Bank of St. Louis
9.0
-169.0
-la.o
-UO.O
March 3, 19&.
Money Supply
The active money supply, as we ordinarily use the term, refers
to the supply of means of payment in the hands of the public (that is,
demand deposits other than interbank and U. S. Government less cash items
in process of collection plus currency outside banks).
In the October
1960 Federal Reserve Bulletin, the System inaugurated a new statistical
series for measuring the money supply.
In addition to incorporating
certain conceptual improvements, such as broadening the concept of money
to include demand deposits of mutual savings and foreign banks in U. S.
commercial banks and deducting Federal Reserve float, the major advantages
of the new series are that it is based on averages of daily figures rather
than on figures for a single date and appears semimonthly rather than only
monthly, as is the case with the end-of-month series.
Seasonally adjusted
estimates for each semimonthly period, together with various components on
an unadjusted basis, are released to the public generally about 10 days
after the close of each semimonthly period.
After declining $3»9 billion from the postwar peak in July 1959
to June I960, the seasonally adjusted money supply advanced $1.9 billion
through the first half of February 1961.
This increase, however, was small
compared to the record expansion in commercial bank loans and investments
that has occurred since June 1960 in response to substantial easing in
monetary policy.
The principal counterpart to that expansion was a record
$5»5 billion rise in commercial bank time deposits, seasonally adjusted,
from June 1960 through January
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Federal Reserve Bank of St. Louis
1961.
('
- 2 -
Growth in money supply from June through mid-February was at
an annual rate of about 2 per cent.
In the comparable periods of the
1957-58 and the 1953-5^ downturns, money supply showed little change.
Time deposits at commercial banks also have expanded at a more rapid
pace in the current downturn than in the two previous ones.
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Federal Reserve Bank of St. Louis
Money Supply
Seasonally Adjusted
(Billions of dollars)
Total
MONTHLY
1950 —December
1957 — December
1958— December
1959— July (postwar high)
December
I960 — January
February
March
April
May
June
July
August
September
October
November
December
1961 — January p
SEMIMONTHLY
I960— December (1)
(2)
1961 — January (l)
(2)
February (1) p
p - Preliminary.
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Federal Reserve Bank of St. Louis
Demand
deposit
component
Currency
component
11*0.1*
11*0.6
11*0.2
UiO.lt
11*0.6
90.3
107.2
112.2
llli.3
112.6
112.3
112.1
111.6
111.1*
110.9
110.5
110.7
110.8
111.5
111.6
111.2
111.1*
111.7
25.0
28.3
28.6
29.0
28.9
29.0
29.0
29.0
29.1
29.0
28.9
28.9
28.9
29.0
29.0
29.0
29.0
28.9
11*0.3
11*0.5
11*0.2
11*1.0
11*1.3
111.1*
111.5
111.3
112.0
112.1*
28.9
29.0
28.9
29.0
28.9
11£.3
135*5
11*0*8
11*3.3
11*1.5
11*1.3
11*1.0
11*1.6
11*0.5
139.9
139.1*
139.6
139.7
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Federal Reserve Bank of St. Louis
This article is protected by copyright and has been removed.
Author:
George Shea
Article Title:
The Outlook Appraisal of Current Trends In Business and
Finance
Journal Title:
Wall Street Journal
Date:
March 20, 1961
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Federal Reserve Bank of St. Louis
This article is protected by copyright and has been removed.
Author:
Felix Belair Jr.
Article Title:
Reserve Official Disputes Kennedy on Jobless Cause: Martin
Asserts 'Hard Core' Unemployment Is Heavy Even During
Prosperity: Hits Spending as Cure: Dillon Forecasts Upturn but
Sees a Budget Deficit as Unavoidable This Year
Journal Title:
New York Times
Date:
March 8, 1961
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
Mr. W . Braddock Hickman,
Senior Vice President,
Federal Reserve Bank of Cleveland,
Cleveland 1, Ohio.
Dear Mr. Hickman:
As Mr. Martin will be away from the office,
on an official trip abroad, for about a month, I wanted
to acknowledge receipt of your note to him of April 19.
1 know that he will appreciate your nice comments on
his return.
Sincerely yours,
(Miss) Margaret Muehlhaus,
Secretary to Mr. Martin.
FEDERAL RESERVE BANK
OF CLEVELAND
OFFICE OF
April 19, 1961
S E N I O R VICE PRESIDENT
Mr. William McChesney Martin, Jr.
Chairman, Board of Governors of the
Federal Reserve System
Washington 25, D. C.
Dear Bill:
This is a delayed reaction to your statement of
March 7 before the Joint Economic Committee, which
I have had occasion to refer to again and again. It is
by far the clearest and most concise statement that I
have seen of the Federal Reserve's recent operations,
problems, and attitudes. You have told me of your
concern about the problem of communicating the
System's position to outsiders, which I share. In my
opinion, this is the way to do it, and I hope we will
have more of the same.
Congratulations and best wishes.
Sincerely,
W. Braddock Hickman
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Federal Reserve Bank of St. Louis
April 10, 1961
To
Board of Governor
From Jerome W. Shay
Subject: Testimony of Council
of Economic Advisers
This morning the Council of Economic Advisers concluded their
testimony before the Joint Economic Committee. Caution and restraint
accompanied most, if not all, of their testimony.
There was a good deal of discussion concerning the need for
lower interest rates to help get the economy going again. The Council
seemed to agree that the sluggishness in the movement of interest rates
is attributable mainly to the balance-of-payments problem, which has
operated to restrain monetary policy. It was pointed out that but for
the balance-of-payments problem the discount rate could have been lowered and operations of the Federal Reserve would have been such as to
have resulted in much lower short-term interest rates with the resulting
downward pressure on long-term rates. After reference to the action
announced on February 20 by the Open Market Committee, hope was expressed that lower rates for long-term securities will occur, without which
the Council felt that recovery could not be attained.
Senator Douglas asked Mr. Tobin if he aggreed with his
(Douglas1) position, namely, that the Federal Reserve should operate
to expand the money supply by three per cent a year and do so through
open market operations in long-term securities, scrapping the "bills
only" policy and discontinuing reductions in reserve requirements. Mr.
Tobin replied that he did not wish to approve any specific rate for increasing the money supply and that it is his belief that the Federal
Reserve should have available for its use all of its instruments of
credit control, although Mr. Tobin indicated he feels that dealing in
the long-term market is desirable at this time, because of the restraints
resulting from the international balance-of-payments problem. In this
connection, Mr. Tobin observed that one of the problems with current
operations of the Federal Reserve is whether funds will merely move
from the long end to the short end of the market and an answer to this,
he felt, will depend upon further experimentation.
When Senator Douglas, in effect, gave Mr. Tobin an opportunity
to indicate that the Federal Reserve should have moved into the longer
terms before February 20, Mr. Tobin replied that the Federal Reserve had
made moves in that direction before the February 20 announcement.
One of Mr. Heller's responses seemed to indicate that the
balance-of-payments problem is such now as not to operate as a restraint
on monetary policy. On the other hand, however, most of the emphasis
was on the need for lower long-term rates, and there was no suggestion
that monetary policy should relax or revert to any former posture.
There was virtually no reference to the alleged "conflict" between Chairman Martin and Mr. Heller with respect to structural unemployment, et cetera, although Senator Proxmire did make reference to his
thought that Chairman Martin had taken a less "expansionary" view than
had the Council.
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Federal Reserve Bank of St. Louis
Mr, Heller, in effect, reaffirmed that both fiscal and monetary policy should play a part in increasing the growth rate and reducing unemployment but that a total package of remedies, some available
and some proposed, would be necessary, and, in his judgment, the unemployment problem will continue as a very "tough" one.
The Council appeared this morning without a formal statement,
although there was submitted to the Committee written replies to certain
questions that had been submitted by Congressman Curtis. Quoted below
is Congressman Curtis' question Uj., followed by the Council's reply:
"Question llr.
'The Chairman of the Federal Reserve Board
testified before the JEC and he gave a picture
of the economics behind the relatively high
incidence of unemployment that many people, including myself, thoughtwas at variance with the
one expressed in your testimony. Since then,
Mr. Martin has submitted a further statement
made after he had a chance of reviewing yours.
He states, "It seems to me that the apparent
differences with my testimony (and yours) are
mainly ones of definition and emphasis." With
this I agree and I think, far from reconciling
the differences, Mr. Martin's further statement
confirms the differences in both emphasis and
definition to be fundamental differences. Your
statement is very postive. On page 1$ you state,
"Some have attributed the growth of unemployment
in recent years to changing characteristics of
the labor force rather than to deficiencies in
total demand...Expansion of overall demand, it
is argued, will not meet this problem; it can
only be met by educating, restraining, and relocating unsuccessful job-seekers,
'"The facts clearly refute this explanation
of the rise of unemployment over the last 8 years."
'We are primarily interested in examining
into the problems of unemployment so that we can
apply the proper remedies. lour analysis suggests expanding overall demand (which I believe
you regard as being synonymous with disposable
income, which I do not). Mr. Martin clearly does
not recognize this as a method of attacking structural unemployment.
'I would be pleased to have your comments.1
"Our statement and our calculations demonstrated that recent
increases in the unemployment rate at cyclical peaks could not correctly be attributed to increases in the extent of structural unemployment. We know of no evidence that contradicts this conclusion
and the analysis that supports it.
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Federal Reserve Bank of St. Louis
"The Council's statement recognised the importance of structural
unemployment. We stated (as did Chairman Martin) that policy should
move ahead simultaneously against structural unemployment and against
unemployment stemming from weak aggregate demand. We pointed out
(as did Chairman Martin) that expansionary fiscal and monetary policy would create an environment in which the pull of jobs in the
growing sectors of the economy would attract workers from the declining sectors and areas. Thus, general prosperity contributes
to the effectiveness of policies aimed specifically at structural
unemployment. Our March 6th statement said:
11!
Measures to improve the mobility of labor to
jobs and jobs to labor, to better our educational facilities, to match future supplies of different skills and
occupations to the probable pattern of future demands,
and to improve the health of the population—these are
and should be high on the agenda of national policy. But
they are no substitute for fiscal, monetary and credit
policies for economic recovery. Adjustments that now
seem difficult, and unemployment pockets that now seem
intractable, will turn out to be manageable in an environment of full prosperity.'
"The U percent unemployment rate we mentioned as a clearly attainable target allows plenty of room for the unemployment stemming from
shifting demands and technical progress. The unemployment rate is
close to 7 percent now. As recently as February I960 it was U.8 percent. A rise in the unemployment rate by 2 percent of the labor force
in the short space of a year can scarcely be attributed to basic
changes in the structure of the economy and of the labor force. It
is the result of the recession, i.e., of weakness in overall demand.
Nor can all of the {? percent unemployment of early I960 be accepted
as hard-core structural unemployment5 there is independent evidence
that the economy was then operating short of reasonable capacity.
"We certainly do not view k percent unemployment as a rock-bottom
minimum. As policies to improve the mobility and the skill composition of the labor force take effect, it will be possible in sustained
prosperity to hold the rate of unemployment somewhere below that
figure.
"Finally, we do not regard overall demand as synonymous with
disposable income. Overall demand is the aggregate of spending by
government, business, and households. Consumer spending, which is
related to disposable income in the manner explained in #U, is only
one component, though the single largest component, of overall
demand."
cc: Each Board Member
Messrs. Thomas, Young, Molony, Fauver, Knipe, Ford, Alderfer,
Sherman, and Noyes
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Federal Reserve Bank of St. Louis
March 31, 1961,
To
From
[Board of Governors
\
Jerome ¥, Shay
Subject: Joint Economic Committee
Hearing
The Joint Economic Committee has scheduled a hearing for
Monday, April 10, to hear again from the Council of Economic Advisers o It may be recalled that when Messrs, Heller, Tobin and
Gordon appeared before the Committee on March 6 it was then arranged
that they i-rould come back at a future date for further qiestioning, .
It will be recalled also that at the President's Press Conference
at which the alleged disagreement between Mra Martin and Mr« Heller
regarding structural unemployment was referred to the President said
that he understood that the Committee was going to have both Mr»
Martin and Mr« Heller back for further testimony0
The information above concerning the scheduled hearing
for April 10 indicates that nothing more is intended than the Committee's original idea to have a return engagement with just the
Council of Economic Advisers„
cc: Each Board Member
Messrs. Thomas* Young, Molony, Fauver, Knipe, Ford, Alderfer,
Sherman, Noyes, and Marget.
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Federal Reserve Bank of St. Louis
f—?o
Board of Governors
From Jerome W. Shay
Subject: Testimony of Budget
Director Bell before Joint
Economic Committee
Thil morning, David Bell, Director, Bureau of the Budget
itilied befo: the Joint Economic Committee.
With aspect to the budget for fiscal 1961, Mr. Bell
indicated a defifcit of about sp202 billion. He said that all figures
for fiscal year ±962 are tentative, since military phases of the
budget still are sin process of preparation. Thus there has been no
change in the situation since the President's budget message of
March 2lu
Theresas no specific reference to the Federal Reserve during Mr. Bell'.sxtestimony.
With respect to the state of the economy, Mr. Bell said
that we are just about at the turning point, so that during the
summer and fall of this year we will be moving ahead at a "pretty
good rate". Nevertheless, it was his view that by the end of this
year we still would have about six or six plus per cent unemployment. He said that the unemployment problem is not just a shortrun-recession problem, since, in addition to the cyclical phase of
unemployment, there is the long-run problem—the problem of "longterm slack" in employment. The latter aspect of the problem, he
indicated would have to be met with special measures, such as programs to retrain persons displaced by automation.
Mr. Bell said he does not expect unemployment to get as
low as four per cent very soon, since to pursue policies that
would bring about a reduction to that figure would be risking
serious inflation.
According to Mr. Bell, the President's judgment so far
is that the plans thus far announced to deal with the economy are
adequate, although renewed looks at the over-all economy will be
taken from time to time. On the basis of this, Mr. Bell indicated
that there is no indication of a tax cut.
While a strong majority of the Committee members put in
an appearance at the hearing this morning, very few stayed to question Mr. Bell to any significant extent.
cc: Each Board Member
Messrs. Thomas, Young, Molony, Fauver, Knipe, Ford, Alderfer,
Sherman, and Noyes
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
Dear Dave:
Thank you Cor sending me a
copy of your testimony on the budget,
which I will study with great interest.
I know you are glad to have
this over with Cor the moment.
My best, as always.
Cordially yours,
Win. McC. Martin, Jr,
The Honorable David £. Bell,
Director,
Bureau of the Budget,
Washington 25, D.C.
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Federal Reserve Bank of St. Louis
(
EXECUTIVE OFFICE OF THE PRESIDENT
BUREAU OF THE BUDGET
WASHINGTON 25. D. C.
March 27, 1961
Dear Bill:
I thought you might like to have a copy of the
testimony on the "budget which I gave "before the Joint
Economic Committee earlier today.
With "best regards.
Sincerely yours,
Director
Honorable William McC. Martin
Chairman, Board of Governors of the
Federal Reserve System
Federal Reserve Building
Washington 25, D. C.
Enclosure
EXECUTIVE OFFICE OF THE PRESIDENT
BUREAU CF THE BUDGET
Washington 25, D. C.
FOR RELEASE ON DELIVERY
Expected at 10:00 a.m.
Monday, March 27,
STATEMENT OF DAVID E. BELL,
DIRECTOR OF THE BUREAU OF THE BUDGET,
BEFORE THE JOINT ECONOMIC COMMITTEE
Mr. Chairman and Members of the Committee:
It is a pleasure to appear before you today to discuss with you
the current budget outlook as presented in the President's message
of March 2^. The figures that I am presenting today reflect the
administrative actions and re commendations to the Congress which have
resulted from the President's review, over the past two months, of
the programs and activities of the agencies of Government. This
review is complete except for the defense program, on which the
President will transmit his recommendations shortly.
Additional budgetary details supporting the figures in this
statement are shown in a supplementary paper which is attached*
THE CURRENT BUDGET OUTLOOK
A. Fiscal Year 19^1
In the budget which was sent to the Congress on January 16, 19^1>
the previously estimated surplus had almost disappeared. In January,
19iO, the budget for fiscal 19^1 anticipated continued and vigorous
economic expansion and showed a surplus of $U,2 billion. In early
October, in the midyear budget review, with signs of a sagging economy
evident, the estimated surplus had shrunk to $1.1 billion. In
January, 19^1> expenditures in the current fiscal year were estimated
at $78*9 billion and revenues at $79.0 billion, yielding a surplus of
less than $0.1 billion. This estimated surplus depended upon a number
of assumptions with respect to both revenues and expenditures that now
ft(*t*m "tin hnv£» !•*<»*»•»•> In 6»T>Y»/v»»
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Federal Reserve Bank of St. Louis
'
- 2Expenditures of the Department of Defense were clearly underestimated* Excluding the effects of any program changes made by
the present administration, these expenditures in fiscal 1961,
including military assistance, are now estimated to exceed the
official estimate made last January by $544 million.
The January budget also assumed that the Congress would enact
postal rate increases effective April 1, 1961, in time to decrease
budget expenditures for the postal service by $160 million this year.
It is now obvious that any increases in postal rates are unlikely to
take effect before July 1. In several other instances, the January
estimates of 1961 expenditures were understated, such as $50 million
for loans of the Export-Import Bank and $74 million for veterans
direct housing loans. On the other hand, expenditures were overestimated in some cases, notably by $423 million for farm price
supports and related activities.
The net upward revision which it is necessary to make in the
1961 expenditure estimate, for the program set forth in the January
"budget, will amount to approximately $364 million.
Revenue prospects are difficult to assess at this time, since
much depends on the seasonally heavy tax collections in March and
April. However, the best judgment of the Treasury Department is
that budget receipts in fiscal 1961 may fall short of the January
budget estimate by as much as $500 million, principally because of
a shortfall in individual income tax and excise tax collections.
Thus, excluding the effects of any proposed programs or budget
amendments by this administration, we would have a 1961 deficit of
about $800 million rather than the thin surplus of $79 million that
was estimated in January«.
Certain of the recommendations that the President has made to
the Congress, and administrative actions that he has directed, will
add to expenditures in this fiscal year. These increases are estimated at about $1.4 billion. This amount includes $374 million for
temporary extended unemployment benefits (including railroad unemployment), $256 million for military functions of the Department of Defense
(including speedier contract payments, acceleration of Polaris, and
airlift modernization), $225 million for the price support and related
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Federal Reserve Bank of St. Louis
- 3activities of the Commodity Credit Corporation, $118 million for
domestic surplus food distribution, and $61* million for farm ownership, operating, and housing loans. In total, therefore, the current
prospect for fiscal 1961 is for budget expenditures of $80,7 billion,
receipts of $78.5 billion, and a deficit of about $2.2 billion.
TABLE 1. ESTIMATED BUDGET TOTALS, FISCAL 1961
(In millions)
Expend- Surplus (+)
Receipts itures or Deficit (-)
January 16, 1961 budget totals
$79,021* $78,91*5
Administrative actions and recommended
program changes .
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
.
Total
Necessary revisions in estimate for
January budget program (not related
to new proposals)
Revised estimate, budget totals
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Federal Reserve Bank of St. Louis
79,021*
-500
78,521*
$
+79
1,361*
-1,361*
80,309
-1,285
381* -881*
80,693
-2,169
-kB. Fiscal Year 1962
In the January budget, expenditures of $80.9 billion were proposed
for fiscal 1962 and revenues were estimated at $82.3 billion, yielding
a budget surplus of $1.5 billion. The estimate of revenues assumed a
prompt and brisk upturn in economic activity, as well as the enactment
of various legislative proposals to increase revenues over their yield
under existing laws.
As the President stated last week in his message on budget and
fiscal policy, his recommendations for new programs and for appropriation amendments, excluding defense, will increase expenditures in fiscal
1962 by about $2.3 billion.
The additional nondefense expenditures include:
.... $500 million for aid to elementary and secondary schools,
for the States and local school districts to use as they determine
for construction, teachers salaries, and special projects^ an
additional $30 million is estimated to be spent in 1962 for higher
education ($21 million) and for medical education ($9 million).
.... $^78 million for the Department of Agriculture, including
$16^ million for the costs of the Commodity Credit Corporation in
supporting farm prices, distributing surplus foods abroad, and
other activities, $169 million for domestic distribution of surplus
foods, the food stamp pilot program, and the school lunch and
special milk programs, $122 million for farm ownership, operating,
and housing loans, and smaller amounts for the Forest Service and
the Bural Electrification Administration.
.... $M*0 million for the fiscal 1962 portion of the temporary
extended unemployment compensation program. Under this program,
as recommended by the President and passed by the Congress, the
duration of benefits will be extended up to 13 weeks for unemployed
workers who exhaust their benefits under regular programs. These
extended payments will be financed through advances from the genera]
budget to the trust fund. They will be repaid later from the
proceeds of the temporarily increased Federal unemployment tax.
.... $215 million for aid to the dependent children of the
unemployed — to help relieve distress and prevent the enforced
breaking-up of families.
.... $21^ million for the Housing and Home Finance Agency,
covering the cost of the programs advanced by the President for lowcost housing, urban renewal, college housing loans, public facility
loans, and housing for the elderly.
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Federal Reserve Bank of St. Louis
- 5.... $95 million for veterans "benefits, consisting of $65 million
for the selective cost-of-living increases and adjustments in compensation payments to service-disabled veterans proposed "by the
President and $30 million for direct housing loans.
The proposed increases in expenditures can "be expected to generate
an increase in economic activity and in incomes over the next year,
vhich will, in turn, yield an increase in tax revenues, estimated in the
President's message at $900 million.
Thus, the $2.3 billion increase in 1962 expenditures proposed by the
President is less than the originally estimated surplus of $1.5 billion
plus revenue increases of $900 million from the accelerated economic
recovery that the President's program could be expected to generate. The
new budgetary proposals for 1962 have, of course, as stated in the
President's State of the Union message, been kept within this limit intentionally. Of themselves, except for the additional defense needs, they
would not unbalance the budget submitted to the Congress by the preceding
administration.
However, it is now apparent that both the expenditure and revenue
estimates in the January budget were in error.
The January budget estimate of expenditures for farm price supports
and other activities of the Commodity Credit Corporation was based on
assumptions as to output, domestic consumption, and exports of farm commodities which now appear to be optimistic. On this count alone, $2^9
million needs to be added to the earlier estimate. Interest on the public
debt, considering only the program set forth in the January budget but
allowing for the presently expected shortfall in revenues, is now estimated to rise by about $100 million over the January figure. laking
account of a number of other increases and decreases in expenditure estimates, the total net effect of reestimating the January program is to
increase the 1962 expenditure estimate by $372 million.
Federal revenues in fiscal 1962 will depend largely on the course of
the economy during the calendar year 196l. The Treasury and the Council
of Economic Advisers now tell us that the economic assumptions underlying
the budget sent to the Congress in January would have been unrealistically
optimistic if the Government program advanced in that budget has been
adopted. In fact, if the budget expenditure program recommended in January
had prevailed, a revenue estimate of $80.5 billion for fiscal 1962 would
have been closer to the mark than the $82.3 billion predicated
Allowing for the improvement in economic activity that the present
budget proposals would generate, budget receipts for fiscal 1962 are now
estimated at $8l.U billion. "While corporation income taxes are not expected to fall significantly below the January estimate, individual income
taxes and excise taxes are now expected to be substantially lower.
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Federal Reserve Bank of St. Louis
C
(
-6-
The present estimate of $8l.lj- billion of budget receipts for 1962
assumes the extension of corporate income and excise tax rates and the
adoption of the President's proposal to prevent the diversion of taxes
from the general fund to the highway trust fund.
All the revisions in the January budget estimates for 1962, except
for the defense program, are summarized in Table 2. As that table clearly
shows, a budget deficit is now in prospect for 1962, and that deficit
will be the consequence of the overestimation of revenues and underestimation of expenditures in the January budget.
TABLE 2. ESTIMATED BODGET TOTALS, FISCAL 1962
(in millions)
Receipts
January 16, 1961 budget totals
ExpendiSurplus (+)
tures
or deficit (-)
$82,333
$80,865
$1,^68
900
2,322
-1,^22
83,233
83,187
-A6
Necessary revisions in estimate
for January budget program (not
related to new proposals ).
-1,800
+372
-2,172
Revised estimate, budget totals....
81,^33
83,559
-2,126
Recommended program changes,
except defense, and added
revenue from increased economic
activity generated by new proposals
Total
Note; If the Congress adopts the President's proposal for a revolving fund
for foreign aid loans, total loan disbursements will not change but the
recorded totals of budget receipts and expenditures in 1962 would each be
reduced by about $300 million.
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RECOMMENDED REVISIONS IN TRUST FUND HIOGRAMS
A number of the programs recommended in the President's messages
would be financed through trust funds, outside of the regular budget.
They include mainly (l) improvements in the existing system of old-age,
survivors, and disability insurance, (2) provision of medical care for
the aged on a self-financed basis through the old-age, survivors, and
disability insurance system, (3) a speedup in the payment of veterans
life insurance dividends, and ( k ) increased funds for the Federal-aid
high-way program.
Table 3 sets forth the revisions in the estimates of trust fund
receipts and expenditures.
The effect of the temporary extended unemployment compensation program on the budget has already been mentioned. Advances from the general
budget to the trust fund and trust fund payments are shown in Table 3»
However, pending the determination of firm proposals for strengthening
the permanent Federal-State unemployment insurance system, no estimates
have been included for the revision of the permanent program.
The revisions recommended by the President for old-age, survivors,
and disability insurance benefits will add $1.1 billion to trust fund
expenditures in fiscal year 1962. To finance these increased payments,
tax increases of one-quarter of one percent each on employers and employees are to go into effect on January 1, 1963• The inclusion of
medical care for the aged in the social security system will not affect
trust fund expenditures until fiscal year 1963• The proposed increase
in the covered wage base from $U,800 to $5,000 would be effective
January 1, 1962, and would affect trust fund revenues only slightly
in fiscal 1962; a further tax rate increase of one-quarter of one percent
on employers and workers would go into effect on January 1, 1963*
As a result of the early payment of dividends under the veterans
life insurance system, trust fund expenditures of $>105> million will be
shifted from fiscal year 1962 into fiscal 1961.
The entire balance of Federal-aid highway funds scheduled for this
fiscal year has been made available to the States. Efforts are underway
to obtain the cooperation of the States in effecting a speedup to get
highway projects under construction more rapidly, but no change has been
made in the January estimate of highway trust fund payments for 1961.
A proposed expansion of the presently authorized Federal-aid highway
program, together with the necessary increase in taxes to support it,
was transmitted to the Congress earlier this month. If the increases
recommended are promptly enacted, further acceleration of highway construction will result in increased trust fund payments in 1962 of $60
million and increased receipts of $15> million.
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Federal Reserve Bank of St. Louis
- 8A much larger than expected volume of mortgage sales early this
calendar year has reduced by $731 million the net expenditures for 1961
estimated in January for the secondary market operations of the Federal
National Mortgage Association. No further substantial sales are anticipated under present policies, however, and the secondary market operations
are being used to support a reduction in the interest rate from £-3A
percent to £-1/2 percent on loans insured by the Federal Housing Administration.
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- 9-
TABLE 3*
ESTIMATED TRUST FUND EXPENDITURES AND RECEIPTS
(Fiscal years.
In millions)
Expenditures
1961
"T952
January 16, 1961 budget program
Administrative actions and recommended program changes;
Old-age, survivors, and
disability insurances
Liberalization
Medical care
Unemployment trust fund:
Temporary unemployment compensation
and employment service expansion..,,,
Extension of railroad unemployment
benefits
Veterans life insurance:
Accelerated dividend payments
Federal-aid highways
Federal National Mortgage
Association purchases (net).
Total program changes
Necessary revisions in estimate for
January 16, 1961 budget program
(not related to new proposals):
Unemployment trust fund
Federal National Mortgage
Association purchases (net)
Revised estimate, trust fund totals
a/ Reduced interest receipts.
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Federal Reserve Bank of St. Louis
Receipts
1961
1962
$2U,102
$25,155
$2h,239
$25,189
$5
—
1,105
—
—
—
.
-/ -21
kO
509
U53
56k
kk6
8
15
2k
—
105
~
-105
60
a/ -1
—
—
15
200
—
—
—
877
1,528
587
U80
300
—
—
—
—
—
—
26,683
2li,826
25,669
-731
2lj,5k8
- 10 RECEIPTS FROM AND PAYMENTS TO THE PUBLIC
Because trust fund and certain other transactions are not included
in the budget totals, and because the budget and trust fund totals
include several billions of dollars of intragovernmental transactions,
a consolidation of all accounts—excluding intragovernmental receipts
and payments—is necessary to show the flow of money between the Federal
Government and the public. A summary derivation of these consolidated
cash totals is shown in Table lu
TABLE lu ESTIMATED RECEIPTS FROM AND PAYMENTS TO THE PUBLIC
(Fiscal years.
In millions)
1961
Description
1962
January
estimate
Current
estimate
January
estimate
Current
estimate
$79.02li
4^78 £p|i
2k. 239
2ii,826
$82.333
25,189
$8l.li33
25,669
11,195
63
99,005
Iu783
63
98,50k
ii,29li
82
103,lli5
82
102,301
78.9U5
80.693
80,865
25.155
83,559
26,683
• -
Receipts from the public *
....
Deduct:
Intragovernmental transactions. . . •
Total
Payments to the public:
....
2U,102
Government-sponsored enterprise
Deduct:
Intragovernmental transactions* * . «
Excess of interest accruals
....
Total.
Excess of receipts over payments (4-) or
payments over receipts (-).
NCTEs
-196
-196
h,195
ii.783
725
725
3lh
97 , 931
99*537
101,832
105,630
4-1,0?U
-1,033
4-1,313
-3>329
Detail may not add to totals because of rounding.
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2i21
L.719
- 11 FISCAL POLICY: THE LONG RUN
In this first appearance "before the Joint Economic Committee, I
should like to say a few words about the "basic approach of the new
administration to fiscal policy.
First, let me say something about the long-run trend in Federal
receipts and expenditures* This is a growing country with an expanding labor force, continually better technology, and a steadily increasing
capacity to produce. In these circumstances, as the President said in
his budget and fiscal policy message, "Federal revenue and expenditure
levels must be adequate to meet effectively and efficiently those
essential needs of the Nation which require public support as well
as, or in place of private effort." One United States has very large
resources to meet its obligations of world leadership and, at the same
time, to achieve major advances in well-being at home. The question
at any given time, within the total of the Nation's capacity, is one
of judgment as to the relative importance of the various alternative
public and private uses of resources.
At the present time, the President has proposed that we should
move ahead along certain lines — to improve the education, health,
and welfare of our people, to conserve and develop our natural
resources, to provide needed public facilities, to increase scientific
research and promote technological progress, and to strengthen free
world defenses. It would be a serious error of public policy, as well
as false economy, to reject these public programs on an arbitrary
assumption that "we cannot afford them." Biis Nation can afford
higher expenditures, public or private, up to the limit of its capacity
to produce — a limit it has not approached for several years. The
question is one of relative importance. Bach expenditure must be
evaluated, in the President's words, "in terms of our national needs
and priorities . . . and compared with the urgency of other budgetary
requirements." Bie relevant criterion in determining the desirability
of a proposed use of resources for a public purpose is its value to
the country in comparison to the value of using the same resources
for other purposes, public or private.
Meeting our national needs responsibly in the years ahead may
well mean increased rather than reduced Federal spending, until and
unless we can arrive at a satisfactory agreement for the reduction
of world armaments. As a matter of fact, budget studies published
by the preceding administration, to which the President referred in
his budget message, indicate that under its policies, and under existing laws and programs, annual Federal budget expenditures would be
likely to increase by $L5 to $20 billion in the coming decade, and
annual trust fond outlays by another $10 to $L5 billion.
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- 12 -
By far the largest proportion of Federal Government purchases
of goods and services is for national security purposes. The future
level of expenditures for national security will depend in large part
upon world events in relation to United States interests, commitments,
and risks. If there is no worsening of international tensions, and
if changes in military technology continue along the lines that seem
quite possible, the increase in defense expenditures in the years
ahead might be moderate, and the percentage of the gross national
product needed for defense purposes migiht decline, as it has in the
past few years. It is also quite possible, of course, that world
tensions may increase, or technological changes of a different type
may come along, which would require a larger share of the national
product for defense purposes.
If it proves possible to meet national security needs with a
declining share of the national product, the needs of the Nation for
education, health, community development, scientific research,
development of natural resources, and other programs might be met
without an increase, and perhaps with a decrease in the share of the
Nation's growing output of goods and services used by the Federal
Government*
On the other hand, Federal transfer payments (such as social
security benefits and other Federal programs that do not involve a
Government claim on the Nation's current output of goods and services)
and grants to States will probably continue to grow, and perhaps also
rise as a proportion of the gross national product. These disbursements as well as direct purchases of goods and services will have to
be taken into account in determining the Government's total revenue
needs.
As stated in the President's economic message of February 2, the
Anerican economy was capable in calendar 1960 of an output of $535
billion, 6 percent above the $503.5 billion actually produced. Moreover, our economic potential now grows at a rate of at least 3»5 percent
per year. At this rate, the gross national product would increase to
more than $750 billion by 1970 in present prices. At today's tax rates,
this growth would yield an increase in budget revenues from $77'8
billion in fiscal 1960 to approximately $120 billion in fiscal 1970.
These are minimum estimates. With proper public and private policies,
we should be able to achieve a significantly higher rate of growth in
national output.
The President's economic and fiscal recommendations have been
prepared with this objective in mind. The expenditures proposed are
an important part of a national effort to close the gap between our
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- 13 actual and our potential output and to achieve adequate economic
growth* !Ebis is particularly true ot capital expenditures of Government that are needed to reinforce private capital expenditures, and
expenditures to Improve the quality and productivity of our human
resources. These expenditures are as essential to economic growth
as are private investment outlays.
FISCAL POLICY; THE SHORT RUN
Within the framework of long-run goals, fiscal policy should "be
adapted to the needs of the current economic situation. "Federal
expenditure and revenue programs," to use the President's
words,
"should contribute to economic growth and r^v*""1™ employment within
a setting of reasonable price stability." Moreover, as the President
noted, "because of the limits which the current "balance Qf payments
deficit places on the exercise of monetary policy, fiscal policy must
assume a heavier "burden of responsibility for economic stability and
growth.
Certain Federal expenditures automatically exercise a contracyclical influence. Unemployment compensation "benefits, and old-age
and survivors insurance payments (reflected mainly in trust fund
accounts rather than in the regular "budget), for example, tend
automatically to rise in times of economic decline and to fall, or
in the case of OASI "benefits to rise less rapidly, in times of boom.
Most Federal expenditures, however, exhibit no such automatic,
contracyclical pattern, and it is necessary to make Judgments as to
their magnitude and timing in relation to the current economic outlook. Federal programs differ greatly, of course, in the degree to
which they can or should be altered in response to fluctuations in
business activity. Defense expenditures, to take a major example,
should be set at the level needed, no more and no less, to provide
adequately for the defense of this Nation. Their timing can sometimes
be adjusted, within limits, for economic reasons, but their magnitude
should be determined by defense needs. Bie same is true of expenditures to enact and enforce legislation, to assure Justice, to protect
our people against crime and internal violence, to represent the
interests of citizens of this country in countries abroad, and to
provide numerous other services of Government.
At the same time, there are activities of Government which may
or may not be worth undertaking, depending on the extent to which the
Nation's resources are being utilized. If private demands are high,
and productive resources are bein& pushed to capacity operations with
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- 111. consequent upward price pressures, then Government should retrench.
Less urgent projects should be deferred* On the other hand, when
private demands are slack, and productive resources are idle, such
deferred public projects should be undertaken and can help economic
recovery while filling a specific public need. Moreover, public
works projects -- especially those with a fairly short completion
time -- can be accelerated in times of low employment and retarded
in times of high employment* The procurement of certain supplies
and equipment can be speeded up when private spending is declining
and slowed down when private spending is rising without significantly
affecting the efficiency of the Government's inventory and supply
systems. It was for this purpose that the President directed, a few
weeks ago, a speedup in construction and procurement already funded.
Federal expenditure programs can be increased or decreased for
the purpose of offsetting business cycle movements, however, only
within limits. Public expenditure programs typically cannot be
turned on and off like a faucet. The authorization and appropriation
processes are inevitably time-consuming. Engineering, planning, and
procurement arrangements also take time. This problem of an inevitable
timelag is less serious now, when there is persistent slack in our
economy, than it would be in more favorable circumstances* Programs
of intrinsic merit can be initiated now without fear that their impact
will be felt too late, when it is not needed. But steps to speed up
public expenditure programs must always be taken with due care, lest
waste and inefficiency result*
On the revenue side of the budget, tax collections, even with
no change in tax rates, respond fairly promptly and more than proportionately to fluctuations in the general level of employment and
incomes. Although this sensitivity to the business cycle is probably
a reflection of other tax objectives rather than of conscious design,
it is nevertheless desirable. We have learned from long experience
that an attempt exactly to match tax revenues to expenditures each
year, regardless of the level of business activity, would be not only
extremely difficult, but would be positively harmful*
A decline in revenues relative to expenditures in times of
falling economic activity means that the Federal Government is contributing to recovery by reducing the net amount of purchasing power
that it is siphoning out of the private income stream. Thus consumers
and businesses have more funds to spend than they would otherwise
have. Conversely, in times of boom and inflationary pressures arising
from excess private demand, a rise in Federal revenues has the opposite
effect; it siphons some of the excess purchasing power out of the
private income stream. In these ways, the automatic response of tax
revenues to economic activity contributes to economic stability.
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33ae sensitivity of Federal revenues and payments to overall
economic conditions helps to give the economy a "built-in" stability,
valuable in arresting recessions and checking inflationary booms.
But "built-in" stabilizers can at best do only part of the job. Bie
automatic response of the tax system restores a fraction, but only
a fraction, of the loss of income and demand in recession. Similarly,
it can do no more than offset part of the increases in spending in an
inflationary period.
Bie automatic stabilizers leave plenty of room for discretionary
policies of economic stabilization, "both fiscal and monetary. A
major surge in private spending — such as that which occurred shortly
after the outbreak of the Korean ¥ar — calls for an increase in tax
rates; and indeed the Congress then acted promptly and -wisely to
provide such an increase. Conversely, a serious or prolonged decline
in economic activity relative to the nation's potential would call
for a redaction in tax rates.
As the Chairman of the Council of Economic Advisers emphasized
in his testimony before this Committee, we must be alert not to permit
tax and expenditure policies to stabilize employment and production
at levels far short of full capacity. As the capacity of the economy
grows, potential revenues grow even faster. A tax and expenditure
structure that yields a deficit in a given year could well yield a
surplus several years later when, even though the rate of unemployment is the same, the output of the economy is larger. 0?ax and
expenditure programs should be adjusted from time to time to assure
that automatic surpluses do not develop under circumstances when they
would be harmful. When the economy is operating at its full potential, and when investment funds are in short supply, a surplus contributes to economic growth by permitting some retirement of public
debt, thus releasing savings for needed investment in private plant
and equipment. But a surplus while unemployment is high, resulting
from deliberate action or simply from the automatic response of the
tax structure to growth in the Kation^ productive potential, can of
itself prevent the attainment of full employment. Under such circumstances, a budget deficit is clearly essential to economic recovery.
THE BUDGET ASP THE BALANCE OF PAYMENTS
Bie magnitudes of our Government expenditures abroad are substantial. OBie President has directed that a close review of all governmental activities be made in order to economize on the use of dollars
abroad. But with the best efforts to economize, we can anticipate
that our total foreign expenditures wiH remain large until major
disarmament becomes possible.
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Federal Reserve Bank of St. Louis
- 16 It would be a serious error to eliminate essential expenditures
solely for foreign exchange reasons. As stated in the President's
message on balance of payments and gold, we must not try to
strengthen our balance of payments at the cost of either military
operations abroad that are required for the safety of our people, or
of economic progress in the less developed countries. Uiere are
other and better ways of ensuring a reasonable balance in our basic
economic relationships with foreign countries.
It is not easy to assess the impact of Federal expenditures
on the U. S. balance of payments. For one thing, expenditures for
foreign goods and services have taken place within total agency
programs and, with few exceptions, have not been shown separately
in the budget. Now that the need for estimates of foreign exchange
expenditures is more apparent, the treasury and the Budget Bureau are
taking steps to identify direct outlays for foreign goods and services,
and as the President directed in his Balance of Payments message,
these will be considered in making budgetary decisions. Ihere is,
however, a deeper problem. Ihe impact of Federal outlays on the
Nation's balance of payments is not measured by the direct costs of
foreign purchases. Ihere is the additional question of what happens
to the dollars spent abroad. A direct outlay for a foreign purchase
which results in an immediate offsetting purchase of American
products has, of course, no net effect whatever on the balance of
payments. It is necessary therefore to be very careful in judging
the relationships between the budget and the balance of international
payments.
EFFICIENCY AND ECONOMY IN GOVERNMENT SPEPOOTQ
It is an essential element of fiscal policy that expenditures
be made in the most efficient way possible. As the President said
in his budget message, "We must not allow expenditures to rise of
their own momentum, without regard to value received." "It is my
determined purpose," the President said, "to be a prudent steward of
the public funds --to obtain a dollar's worth of results for every
dollar we spend."
35ie Federal budgeting process is not only one of deciding which
programs shall be supported and which denied. It is also a process
of maximizing results per dollar of funds spent. I regard this as a
major and continuing responsibility of the Budget Bureau. We must
lead a continuing, government-wide effort to increase efficiency
and reduce waste.
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(
- IT Bie existence of such waste in recent years has, I know, "been
documented in studies carried out "by congressional committees,
including a subcommittee of this Committee. I hope it will "be possible for us to continue to "benefit from the interest of these
committees, and that we can work together to bring about greater
efficiency and economy of operation in all Government activities.
O&ere are certain legislative actions which I hope will be
taken this year to assist in this effort. Appropriated funds can be
spent most efficiently if the Department head has authority to
exercise some discretion in assigning funds and personnel within
his agency. O&e President has asked the Congress, in enacting
appropriations for each Department and agency, to provide the necessary authority to transfer within his agency a modest amount of the
funds available for operating expenses, subject to control
by the Bureau of the Budget through the regular apportionment
process. Further, enactment of the bill (already passed by the
Senate) giving the President authority to transmit reorganization
plans to the Congress will strengthen the arm of the President in
seeking efficiency and economy.
At the same time, I think it is clear that the task of driving
out waste and improving efficiency is primarily a task of intelligent and continuous good management, acting day after day and month
after month to find opportunities for improvement and put those
Improvements into effect. Ihis is principally a matter of Executive
Branch leadership, and I know — and the President knows — that a
tremendous amount can be done within the authority already given by
the Congress. I can assure you that the President takes a keen
personal interest in this matter, and that we intend to keep steady
pressure on every agency, and to follow up every lead that may promise
better and cheaper results in the expenditure of public funds. Hie
President has arranged for the continuing services of a group of distinguished consultants, including Bobert Lovett and Don K. Price,
to assist in the effort to achieve steady improvement in the effectiveness of Government operations. ¥e expect to continue to give this
matter top priority.
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EXECUTIVE OFFICE OF THE PRESIDENT
BUREAU OF THE BUDGET
WASHINGTON 25, D. C.
March 21, 1961
DETAIIg IN SUPPORT OF THE STATEMENT OF
THE DIRECTOR OF THE BUREAU OF THE BUDGET
Total budget expenditures for fiscal 1961 are now estimated to be
$80.7 billion, $1.7 billion higher than the January budget estimate of
$78.9 billion. For fiscal 1962, budget expenditures are estimated to
total $83.6 billion, which is $2.7 billion more than estimated in the
January budget. Revised estimates of expenditures and needed new
obligational authority for each functional program area in 1961 and
1962 are compared with the January budget estimates in Tables 5 and 6.
(The estimates are shown for each major agency in Tables 16 and 17.)
The figures for fiscal year 1962 exclude any changes to be proposed
in the President's message on national defense, which is expected
this week.
The largest single increase in estimated 1962 expenditures is
for labor and welfare programs, which are expected to increase by
$1,261 million, mainly for aid to education and for the temporary
extended unemployment benefit program. Expenditures in 1962 for
agriculture and agricultural resources are now expected to be $61±2
million higher than the January estimate; this increase reflects an
upward revision in estimated disbursements for the program proposed
by the preceding administration as well as the new proposals advanced
in recent weeks by the President. An increase of $U;3 million is
estimated for commerce and housing programs, and space technology,
mainly for housing programs.
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- 2-
TABLE 5. BUDGET EXPENDITURES BY FUNCTION
(Fiscal years. In millions)
1961
1962
January
estimate
Current
revision
January
estimate
Current
revision
$1*5,930
$1*6,720
$1*7,392
:1/$1*7,1*72
2,310
2,1*35
2,712
2,826
3,781;
3,950
3,371
3,811*
1*,936
I** 905
5,101
5,71*3
1*951
2,01*5
2,138
2,162
Labor and welfare ..•••••••«...••••
1*,1*83
5,089
i*,759
6,020
Veterans services and benefits ....
5,227
5,239
5,296
5,301
8,993
8,993
8,593
8,693
1,982
1,968
2,071
2,095
25
25
100
100
79,621
81,369
81,532
81*, 226
676
676
667
667
78,91*5
80,693
80,865
83,559
Function
International affairs and
Commerce, housing, and space
Agriculture and agricultural
res ources ••••*•••••••••••••••••••
General government •«••••*»•••«••••
Deduct interfund transactions .....
Total
~Lj Excludes any program changes in the fmilitary functions of the Department of
Defense to be proposed in President s defense message.
Notes: If the Congress adopts the President's proposal for a revolving
fund for foreign aid loans, total loan disbursements will not change but
the recorded totals of budget receipts and expenditures in 1962 would
each be reduced by about $300 million.
Detail may not add to totals because of rounding.
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C
(
- 3-
TABLE 6.
NEW OBHGATIONAX AUTHORITY BY FUNCTION
(Fiscal years.
In millions)
1961
Function
1962
January
estimate
Current
revision
January
estimate
Current
revision
$1*5,912
$1*5,975
$1*6,278
1/$1*6,108
3,207
3,563
3,102
3,210
1*,612
5,460
3,993
1*,900
k,696
7,238
1*,605
5,285
2,Qk9
2,050
2,012
2,109
k,937
6,171
5,025
6,10*2
5,438
5,1*38
4,963
5,003
8,993
8,993
8,593
8,693
2,073
2,102
2,096
2,120
150
150
200
200
82,068
87,11*1
80,867
8U,072
International affairs and
Commerce, housing and space
Agriculture and agricultural
Natural resources ...............
Veterans services and benefits ..
Allowance for contingencies .....
Total
~Lj Excludes any program changes in the military functions or the Department
of Defense to be proposed in Presidentfs defense message.
Note: Detail may not add to totals because of rounding.
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- kMajor National Security. Developments to date indicate that the
January estimate of 1961 expenditures for the military functions of the
Department of Defense, $1*1*5 billion, was an underestimate. A more
realistic figure is $Li2.2 billion, an increase of $7liU million. Part
of this increase is offset by reductions of $200 million in the estimate of military assistance expenditures and $10 million for stockpiling expenditures, compared with the figures included in the January
budget. Apart from reestimates, an increase of $256 million is
estimated in 1961 expenditures for the military functions of the
Department of Defense, primarily as a result of accelerations directed
by the President. Of this increase, $175 million reflects speedier
contract payments due to the lifting of the 20 percent holdback
restriction that was placed on procurement contracts in 1957. The
remainder is mainly for acceleration of the Polaris missile programs
and the step-up in the rate of airlift modernization.
In total, the result of the reestimates of the January budget
figures and the actions of the President is that budget expenditures
for major national security programs in 1961 are now estimated to be
$U6.7 billion, an increase of $790 million over the January estimate.
For fiscal year 1962, the January budget program for the military
functions of the Department of Defense has been reestimated upward by
$190 million, reflecting a higher operating level consistent with the
revised estimate for 1961. Partly offsetting this increase are declines
of $100 million in military assistance expenditures and of $10 million
for atomic energy programs. The 1962 figures do not include the effects
of the President's new recommendations concerning defense, to be transmitted to the Congress shortly.
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-5TABLE 7. MAJOR NATIONAL SECURITY
(Fiscal years. In millions)
Description
January 16, 1961 budget program ....
Reestimates of budget program:
Department of Defense - military:
Military functions
New obligational
Expenditures
authority
1961
1962
1961
1962
estimate estimate estimate estimate
$1*5,930
$1*7,392
Till*
190
1*6,1*61*
1*7,1*82
$1*5,912
$1*6,278
1*5,912
1*6,278
Stockpiling and defense
Revised estimate, January budget
program 0.
Proposed program changes:
Department of Defense - military:
Military functions
Atomic Energy Commission (new
obligational authority is for
linear electron accelerator) ....
Current estimate
256
—
1*6,720
I/
-10
1*7,1*72
63
I/
—
30
1*5,975
1*6,108
I/ Excludes any program changes to be proposed in President's defense message,
International Affairs and Finance. Compared with the January budget ,
expenditures for international programs are currently estimated to be $2,1*35
million in fiscal year 1961, an increase of $125 million, and $2,826 million
in fiscal 1962, an increase of $111* million.
For 1961, $50 million of the increase represents a reestimate of the
net expenditures of the Export-Import Bank, reflecting the current expectation
that loan disbursements will be higher and loan repayments lower than estimated
in the January budget. Another $50 million, similarly, reflects a reestimate
of mutual security (economic and contingencies) expenditures, again based on
the latest information available. It is estimated that $25 million will be
spent this year under the $100 million supplemental appropriation requested
for Chilean reconstruction; no estimate for this purpose was carried in the
January budget.
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- 6The estimated increase in expenditures for fiscal year 1962 includes
(l) $50 million representing a reestimate of the expenditures for the
Inter-American Program for Social Progress, (2) $50 million for the
Chilean reconstruction program, and (3) $111. million for the State
Department (mainly for Africa) and U. S. Information Agency (expansion
of activities in Africa and Latin America),
New expenditures of $20 million for the Peace Corps can be included within the amounts previously estimated for foreign economic
assistance, because of the expectation that other aid disbursements
will decline temporarily as emphasis shifts from support aid to planned
investment programs abroad.
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-7TABLE 8. INTERNATIONAL AFFAIRS AND FINANCE
(Fiscal years.
Description
January 16, 1961 budget program
In millions)
Expenditures
1961
1962
estimate estimate
$2,310
$2,712
New obligational
authority
1961
1962
estimate estimate
$3,20?
$3>102
3,102
Reestimates of "budget program:
Export-Import Bank.
Mutual security - economic and
50
Inter -American Program for Social
Progress..
—
50
2,kLO
2,j62
3,20?
25
50
100
—
—
256
—
I/
Revised estimate, January "budget
program
Proposed program changes:
Chilean reconstruction
Emergency famine relief (Commodity
Credit Corporation). .................
Mutual security - economic and
contingencies (including Peace
Corps)
State Department (mainly for
Africa)..........
.........
United States Information Agency
Current estimate.,
-115
—
200
—
—
6
8
—
—
12
11
2,^35
2,826
3*563
3,210
I/ If the Congress adopts the President's proposal for a revolving fund for foreign
aid loans, total loan disbursements will not change but the recorded expenditures in 1962 would be reduced by about $300 mil lion.
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-8Commerce, Housing, and Space Technology. !ftte current outlook
is for an increase over the January "budget estimate of $166 minion,
to $3>950 million, in 1961 expenditures for commerce and housing
programs, and for space technology. The major change is in the
postal deficit, reflecting the now o"bvious fact that postal rate
increases will not be enacted effective April 1, 1961, as assumed
in the January budget estimate. Expenditures for Veterans
Administration direct housing loans from funds already available
win apparently run some $7^ million higher than estimated in
January as a result of continued high demand and improved loan
processing procedures. Uhese and other increases are offset in
part by a downward revision of $50 million in the January estimate
of expenditures for space programs.
Budget expenditures in 1962 are now estimated to increase
"by $Mi-3 million over the January estimate, from $3,371 million
to $3^8lif million, largely for housing programs, for redevelopment of distressed areas, and for acceleration of research and
development in selected space activities. In addition to the
legislative proposals for housing programs, made in the President's
message to the Congress of March 9> "the revised estimate reflects
accelerated activity under prior authorizations in public facility
loans, college and veterans housing loans, and urban renewal.
Bie current estimate of 1962 expenditures assumes that the
Congress will act, as the President is recommending, to increase
postal rates effective July 1, 1961, by enough to eliminate the
postal deficit now in prospect for 1962 under present rates.
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- 9COMMERCE, HOUSING, AND SPACE TECHNOLOGY
(Fiscal years.
Description
In millions)
ExpendjLtures
1951
1962
estimate estimate
&3,784
$3,371
New obligjational
authcjrlty
1962
1961
estimate estimate
$4,612
^3,993
Reestlmates of "budget program:
lli8
140
Veterans Administration direct
74
Office of Civil and Defense
11
-10
3
-50
-30
-10
«._
3,909
H
12
National Aeronautics and Space
Other
••—
__
3,374
4,760
4,005
45
65
54
30
10
10
45
100
150
350
-300
50
50
120
225
Revised estimate, January budget
Proposed program changes:
Housing and Home Finance Agency:
30
600
Veterans Administration direct
30
«••!•
National Aeronautics and Stpace
10
8
126
42
47
13
8
23
85
ho
Department of Commerce (scientific
research and other programs )
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3,950
3,814
5,460
4,901
- 10 -
Agriculture and agricultural resources. Budget expenditures
for agricultural programs are now expected to "be $^,905 million
1961 and $5,7^3 million in 1962. Bie present estimate for 1961
is $31 million less than the January estimate, primarily because
of a $k23 million reduction in the estimated expenditures of the
Commodity Credit Corporation for farm price supports and related
activities. Largely offsetting this decrease are program
changes made by this administration. 2he largest increases are
$225 million in Commodity Credit Corporation expenditures under
the new feed grain legislation and $118 million for the domestic
distribution of increased amounts of surplus foods; another
$3^ minion is for increased farm ownership and operating loans
over the level contemplated in the previous administration's
program.
For the fiscal year 19^2, total expenditures are now
estimated to be $6k2 million higher than the January estimate.
It now appears that the January budget program for the Commodity
Credit Corporation was underestimated by $2^9 million. Even
at the low support levels assumed in the 1962 budget, lower
exports, reduced domestic consumption, and higher crop yields
than were estimated when the January budget calculations were
made can now be expected to increase outlays for farm price
and income supports and other activities. A larger increase
of $393 million in 1962 expenditures will result from program
changes proposed by the President, including those described
in his agricultural message of March 16. Details are shown in
the following table.
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-11 TABLE 10. AGRICULTURE AND AGRICULTURAL RESOURCES
(Fiscal years. In millions)
Expenditures
1961
1962
estimate estimate
Description
New obligational
authority
1961
1962
estimate estimate
January 16, 1961 budget program
$4,936"
$5,101
Reestimates of "budget program:
Commodity Credit Corporation.
Soil Bank program.
-423
11
2k$
—
Revised estimate, January budget
program.
......
4,524
5>350
4,696
Proposed program changes:
Commodity Credit Corporation (price
supports: cotton, peanuts, rice,
and milk; surplus food distribution abroad and other )
Surplus food distribution (domestic)
Food stamp pilot program; ...........
Farm ownership and operating loans..
Rural Electrification Administration loans ...»
Other...
225
118
4
34
164
100
50
77
—
—
15
-13
Current estimate
*.
4,905
5,743
$4, 696
2, 542
—
$4,605
4,605
50?
84
--•
—
100
-11
7>238
5/285
Natural Resources* Expenditures in the fiscal year 1961 for natural
resources programs are now estimated to be $94 million above the January
budget estimate. The current estimate of $2,045 million includes the
expenditure of $69 million by the Forest Service to pay for those forest
lands of the KLamath Indians which are not sold to competitive bidders by
April 1, 1961. Sie January budget provided for a supplemental appropriation for 1961 to cover this payment, which is required by law, but proposed
unjustifiably to defer the payment until fiscal year 1962. Unis shift of
expenditures from 1962 back to 1961 offsets a number of expenditure
increases proposed by the President for 19^2, so that the total rise in
natural resources expenditures in the coming fiscal year as compared with
the budget estimate is $24 million.
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- 12 •Bie increases for 1962, as shown in the following table, are for
certain activities -which are being accelerated, particularly for development of our national forests, parks, and seashore and recreational areas;
for construction of Indian schools; and for starting some new water resource projects of the Corps of Engineers. In addition, the Bureau of
Reclamation will initiate construction of additional transmission lines
and will continue construction of one new project which is being started,
at the direction of the President, in fiscal 1961* Ihese and other
measures set forth in the President's message of February 23 will make
possible greater progress toward the Nationfs long-range resource conservation and development goals.
TABLE 11. NATURAL RESOURCES
(Fiscal years. In millions)
Description
January 16, 1961 budget program. ......
Expenditures
1961
1962
estimate estimate
New obligational
authority
1961
1962
estimate estimate
$1,951
$2,138
$2,0^9
$2,012
69
25
-15
-10
-69
20
2,020
2,089
2,0^9
2,012
1
lk
—
21
k
5
15
—
11
8
21
IT
2
—
1
—
—
—
20
11
21
22
2
2,0^5
2,l62
2,050
2,109
Reestimates of budget program:
KLamath Indian land purchase
Corps of Engineers, construction....
Tennessee Valley Authority.
Other...
Revised estimate, January budget
program
Proposed program changes:
Bureau of Indian Affairs (Indian
welfare and education)
National Park Service (Mission 66
and seashore areas )
Other Interior Department
Forest Service
«..
Corps of Engineers, construction....
Tennessee Valley Authority. .........
Current estimate...
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Federal Reserve Bank of St. Louis
- 13 Labor and Welfare* Budget expenditures for education, labor,
health, and welfare programs in 1961 are now estimated to be $5,06*9
million, $606 million more than the January estimate. For 19^2,
the current estimate is $6,020 million, an increase of $l,26l million
from the January budget.
Almost all the increase in 1961 is for temporary extended
unemployment benefits and aid to dependent children of the unemployed,
Budget expenditures of $5?4 million are estimated for 1961 for the
temporary unemployment compensation program, representing an advance
to the unemployment trust fund. Ihis amount includes extended
benefits for unemployed railroad workers, and for Federal employees
and ex-servicemen. Disbursements to the States under this temporary
program will be made from the trust fund in 1961 and 19&2, and
the advance will be repaid to the Treasury in later years from
increased proceeds of the Federal unemployment tax.
Hie largest single expenditure increase estimated for 19&2 is
$500 million for the elementary and secondary school program proposed in the President's education message to the Congress on
February 20. Another $440 million is for the 1962 advance to the
unemployment trust fund for the temporary unemployment compensation
program. The proposed legislation to aid dependent children of the
unemployed is estimated to entail expenditures of $215 million in
1962. Proposed legislation and budgetary increases in other
programs for health, science and scientific research, education,
and welfare would increase spending in 1962 by an additional
$106 million. Ihis estimate reflects an anticipated reduction of
$52 million in the January estimate of budget expenditures for
public assistance, which would result from enactment of the proposals for liberalizing the old-age, survivors, and disability
insurance program and for providing medical care for the aged
through the social security system*
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Federal Reserve Bank of St. Louis
- Ill TABLE 12.
LABCR AND WELFARE
(Fiscal years.
Description
January 16, 1961 budget program
In millions)
Expenditures
1961
1962
estimate
estimate
New obligational
authority
1961
1962
estimate
estimate
$k,k$3
$k,759
$U,937
$5,025
—
-1
—
-1
h,h73
k,7kQ
k,937
Reestimates of budget programs;
Other
Revised estimate, January budget
program
5,02k
Proposed program changes?
Temporary extended unemployment
Temporary extended railroad unemployment benefits
Advances for employment security
administration
Elementary and secondary education....
2k
—
2k
Ik
—
-10
500
18
—
20
66?
Aid to federally affected schools.....
—
-5
—
8
28
215
30
226
—
-52
—
-52
—
9
—
3k
Aid to dependent children of the
unemployed
OASDI liberalization and medical
care (budget effect)
Public Health Services.
Medical education and research
Water and air pollution control
Other Public Health Service
(mainly National Institutes of
Health)
Maternal and child welfare grants.....
National Science Foundation— grants
for basic research and science
education
—
12
—
52
—
—
38
10
1
—
80
10
—
29
—
65
Special milk program
Vocational rehabilitation and other...
—
—
9
9
171
—
-161
21
5,089
6,020
Current estimate
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Federal Reserve Bank of St. Louis
6,171
69kk2
- 15 Veterans Services and Benefits* Budget expenditures for veterans
programs are currently estimated to be $5,239 million in fiscal 1961,
|l2 million higher than estimated in January, and to be $5,301 million
in 1962, a rise of $5 million from the January budget estimate* The
revision for 1961 is a reestimate of the January budget program, based
on actual trends to date. The estimated 1962 expenditures reflect the
net effect of (l) a downward reestimate of the January figures, mainly
due to a lesser than anticipated impact of the Veterans Pension Act of
1959, which liberalized eligibility requirements and raised pension rates
for many pensioners on the rolls, and (2) a proposed selective increase
in compensation rates for veterans with severe service-connected disabilities to offset rises in the cost of living since rates were last
adjusted in 1957 and to adjust some rates which are out of line.
TABLE 13» VETERANS SERVICES AND BENEFITS
(Fiscal years.
In millions)
Expenditures
1961
Description
January 16, 1961 budget program
Reestiraates of budget program:
Veterans compensation and pensions*..*
Other Veterans Administration programs
Revised estimate, January budget
program..
1962
New obligational
authority
1961
1962
estimate
estimate
estimate
estimate
$5,227
$5,296
$5,U38
$1|,963
—
12
-i|0
-20
—
—
-25
—
5,239
5,236
5,1*38
U,938
5,239
5,301
5, 1*38
5,003
Proposed program changes;
Selective increase in compensaCurrent estimate
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Federal Reserve Bank of St. Louis
- 16 Interest. Expenditures for interest in 1962 are now estimated to
be $87693 million, an increase of $100 million over the January estimate.
This is due to increased interest on the public debt growing mainly out
of the heavier borrowing in 1961 and 1962 now expected.
TABLE llu
(Fiscal years.
INTEREST
In millions)
Description
January 16, 1961 budget program. .....*
New obligational authority
and expenditures
1961
1962
estimate
estimate
$8,993
$8,593
Reestimates of budget program:
Interest on the public debt
Current estimate
—
100
8,993
8,693
General Government. Expenditures in fiscal year 1961 for general
government activities are currently estimated to be $1,968 million,
which is $li|. million less than estimated last January. For fiscal year
1962, the current estimate is $2,095 million, an increase of $2U million
over the estimate in the January budget. The major changes in the 1961
estimate are for higher unemployment compensation payments to ex-servicemen
and former Federal employees, more than offset by downward revisions in
the estimates for the General Services Administration and other agencies
in this category.
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Federal Reserve Bank of St. Louis
-IT-
TABLE 15,
GENERAL GOTERNMENT
(Fiscal years.
Description
January 16, 1961 budget program,,,
In millions)
Expendiliures
1961
1962
estimate
«estimate
$1,982
$2,071
New obligaliional
author:Lty
1961
1962*
e stimate «estimate
$2,073
$2,096
Reestimates of budget program:
Unemployment compensation for
Federal employees and exservicemen.
,
General Services Administration,
Other ,
,
33
-Ii2
-25
Revised estimate, January budget
program,
,
I,9li8
2,071
20
h
17
3
1,968
2,095
33
-6
2,100
2,096
Proposed program changes:
Judgeship Bill.
Other «...
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Federal Reserve Bank of St. Louis
1
1
2,102
k
17
3
2,120
- 18 -
TABLE 16. BUDGET EXPENDITURES BY MAJOR AGENCY
(Fiscal years. In millions)
Agency
Legislative branch and the Judiciary. . .
1961
Current
January
estimate revision
1962
Current
revision
January
estimate
$208
61
$200
72
$203
92
$207
92
1,675
^3
1,725
58
1,875
75
1,875
175
2,660
-100
2,660
-50
630
2,680
-1*
730
2,670
-1*
71*3
770
720
5,^00
1,050
5,1*01*
701*
1*98
91*2
6,1*1*0
6ll*
Funds appropriated to the President:
Mitual security — economic and
Other.
Independent offices:
6i*o
National Aeronautics and Space
Other
kka
759
1*20
5,739
511
525
5,807
511
965
5,369
676
1*96
728
5,782
566
1*1,500
1,700
986
1*2,500
1,500
1,015
1*2,910
1,750
981*
1/1*3,100
1,650
1,021
3,716
785
285
295
786
260
3,7^
785
285
892
926
260
i*,005
873
29!*
223
63
3^5
1*,798
906
296
651*
63
351
8,993
965
*8
25
8,993
965
1*2
25
8,593
1,095
66
100
8,693
1,120
66
100
79,621
676
81,369
676
81,532
667
81*,226
78,9^5
80,693
80,865
83,559
5,31*
770
5M»
Department of Defense — Military:
Department of Health, Education,
lEreasury Department:
Total
667
Excludes any program changes to be proposed in President's defense message.
Note: Detail may not add to totals because of rounding.
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Federal Reserve Bank of St. Louis
- 19 TABLE 17. NEW OBLIGATIONAL AUTHORITY BY MAJOR AGENCY
(Fiscal years. In millions)
1962
1961
January
estimate
Agency
Legislative branch and the judiciary...
Current
revision
January
estimate
Current
revision
$176
72
$176
72
$180
116
$181*
116
2,131
507
2,131
607
2,200
13
2,1*00
13
2,781
690
2,781
690
2,598
2,628
686
7^5
965
965
5,577
5,577
756
520
1,119
5,361
5^9
780
521
1,819
1,110
5,101
755
556
9^8
5^9
5,509
612
1,236
5,1^1
832
558
1,368
6,169
677
in, 308
Ul,8Uo
1,800
972
1/1*1,81*0
1,800
978
M,371
1,800
978
3,909
3,9^0
if, 026
888
297
261*
5,505
Funds appropriated to the President:
Mutual security — economic and
Independent offices:
National Aeronautics and Space
Other
General Services Administration. .......
Department of Defense — Military:
Department of Defense --Civil. ..........
Department of Health, Education,
Department of the Interior. «.
Post Office Department .................
8,330
837
297
525
728
268
838
297
1,566
876
268
8,993
8,993
992
79
150
993
73
150
82,068
87,1^1
63
351
1,600
99^
91*0
299
289
63
363
Treasury Department:
Allowance for contingencies
Total
*
8,593
1,126
8,693
63
200
63
200
80,867
$*, 072
I/ Excludes program changes to be proposed in President's defense message
Note: Detail may not add to totals because of rounding.
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1,156
Airmail
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Federal Reserve Bank of St. Louis
March 27, 1961.
Dear Bob;
Thank you lor your alee note of
March 24 and I am glad you approve of my
statement before the Joint Economic Committee.
We will continue to do our best aad all of as
here are most appreciative of the service you
are rendering to the Dallas Bask.
With all good wishes,
Cordially yours,
. McC. Martin, Jr.
Mr. Robert O. Anderson,
Box 640,
Rosweli, Mew Mexico.
Hoi* K M T <>. A
Box *«o
M o « s « K I . I - . N M-W
M
Mr. William M. Martin, Jr.
Federal Reserve System
Board of Governors
Washington, D. C.
Dear Bill:
Just a note to let you know how much I enjoyed your excellent
statement made before the Joint Economic Committee on the
7th of March.
I think you are starting to get your message
across to Congress in a way that the System has never been
able to do in the past.
Public awareness is now sufficient that even our Congressmen
are realizing they will be asked questions about gold, interest,
etc. , and are expected to give reasonable answers or explanations. I think you have proved that persistance can finally win
out even in Washington!
Regai
March 24, 1961
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Miss Muehlhaus
March 24, 1961
Mr* N. S. Anon
Department of Public Affairs
International Business Machines Corp.
590 Madison Avenue
New York 22, H. W.
Dear Mr. Anon:
Thank you for your nice letter of
March 20. You will find enclosed a copy of the
statement you wanted to see.
Incidentally, that
was an interesting remark you made to the effect
that "an approach is necessary which lies between
that of the classical economists and that of Keynes. "
Sincerely yours,
qr*T WK7T. *>?;-.
-
j
r^_-
Wm. McC. Martin, Jr.
Enclosure
CM:nk
cc: Miss Muehlhaus
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Federal Reserve Bank of St. Louis
IJfTKRNATlONAI
H'SIM'.SS M A < I 1 C M S
•>
M A I M SON AY K M t
N K V v YORK ^U, N. Y.
PI
Mr. William Me. Martin
Chairman Federal Reserve Board
Washington 25, D. C.
Dear Mr. Martin:
I would appreciate your sending me a copy of your recent
testimony before the joint economic committee.
I was delighted to read in the New York Times a brief description of your approach. From what I can see it is one
that I am in strong agreement with, believing that the unemployment situation represents a structural imbalance of the
economy, and can not be ameliorated by aggregative polici*
In essence it appears to me that an approach is n e c e s s a r y which
lies between that of the classical economists and that of Keynes.
Thanks very much.
Yours truly,
/l'(- r
N. S. Anon
NSA/ic
Miss Muehlhaus
March 21, 1961
Mr. J. D. Maurice, Editor
The Charleston Daily Mail
Charleston 30, West Virginia.
Dear Mr. Maurice:
Thank you lor your nice letter of March 16 and lor the copy ol
the Charleston Daily Mail editorial ol March 13 which contains
references to my comments to the Joint Congressional Economic
Committee.
The editorial struck me as measuring up fully to your editorial
page motto; 'Without, Or With, Offence To Friends Or Foes, I
Sketch Tour World Exactly As It Goes. " It is a pleasure to have one's
views summarized in so straightforward a context.
Although I do not recall making reference to a particular study,
extensive information on the seriousness of the problem of persistent
unemployment attributable to changes in economic structure has been
furnished to and by Congressional Committees in recent times. Hearings are being held presently by the House Education and Labor Sub*
committee on Unemployment and the Impact of Automation, and by the
Senate Labor and Public Welfare Subcommittee on Education (on the
retraining of persons displaced from their Jobs because of structural
changes in the economy.) In addition, you might find material of
interest to you in such committee publications as the following*.
Senate Special Committee on Unemployment Problems *
86th Congress, 2nd Session, 1960. S. Resolution 1196
a) Studies in Unemployment
b) Report of the Committee
c) Fart 6 - Hearings
Committee on Banking and Currency, Subcommittee on
Production and Stabilization.
a) Area Development - 1961 (Hearings)
b) Report of the Committee on Banking
and Currency - on S 1
c) Also hearings and Reports on Area
Redevelopment ~ 1959-1960
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Federal Reserve Bank of St. Louis
. 2 Joint Economic Committee
a) New Views on Automation 1960
b) The S ructure of Unemployment 1960 in
Areas of Substantial Labor Surplus,
Study Paper Ho. 23
Incidentally, I'm sure it was of interest to you, as it was to
me, to note the President's remarks on unemployment at his news
conference on March IS, in which he referred specifically to
West Virginia and other areas, as shown on the attached clipping
from the transcript of that conference.
Sincerely your §,
Wm, MeC* Martin, Jr.
Enclosure
CM:nk
cc: Miss Muehihaus
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THE
CHARLESTON
MAIL.
ASSOCIATION
CHARLESTON 3O, WEST VIRGINIA
March 16, 1961
Mr. William McC. Martin, Chairman
Board of Governors of the Federal Reserve System
Federal Reserve Building
Constitution Avenue
Washington, D. C.
Dear Mr. Martin:
As a West Virginia editor I am deeply and directly interested in the
problem of H structural" unemployment which yDu discussed last week in your
appearance before the Joint Congressional Economic Committee. My own
informal and fractional studies compel me to the conclusions which you have
expressed: That long after the national economy has made a satisfactory
recovery, West Virginia's problem will remain, and that attempts to solve it
by massive and imprecise inflationary means will certainly do more harm
than good.
It is for this reason that I am taking the liberty of sending you an
editorial inspired, in part, by your testimony and referring to the efforts of
Mayor Francis of Huntington to initiate some action along the lines you suggest. Our problem, as you may gather, is to arouse some interest where so
much of the curative effort seems to be directed toward inadequate and often
demoralizing relief or a permanent inflation. So far, I am sorry to say, we
have not generated much enthusiasm for attacking this problem at its source,
which is the displaced (as distinguished from the unemployed) miner.
I thought you might be interested to know that some of us in West
Virginia have been thinking along the same lines.
Incidentally, if copies of the Federal Reserve study to which you have
referred are available, I would greatly appreciate one.
Sincerely,
JDMaurice/mjb
Enclosure
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This article is protected by copyright and has been removed.
Article Title:
Prime The Pump Or Train The Individual; Which Is The Better
Road To Recovery?
Journal Title:
Charleston Daily Mail
Date:
March 13, 1961
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Federal Reserve Bank of St. Louis
March 21, 1961
Bear Frasar:
Thank you Cor your nice letter ol
March 15 with respect to my testimony before
the Joint £conomie Committee.
I am glad you approve of it aad you
are quit* right that time limitation required
omission of the voluntary credit control and
other activities daring the period. My comments were directed entirely to open market
operations aad the evolution of "bills preferably."
Bat 1 certainly agree with you as to the importance of the other elements.
With all good wishes.
Cordially yours,
Wm. McC. Martin, Jr.
Mr. Fraaar 0. Wilde,
Chairman of the Board,
Connecticut General Lite Insurance Company,
Hartford, Connecticut.
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Federal Reserve Bank of St. Louis
Hartford, Connecticut
Frazar B. Wilde, Chairman of the Board
March 16, 1961
Dear Bill:
Your statement to the Joint Economic Committee
on March 7 not only reads well but it makes good
sense! I was particularly interested in the history you traced because I played a very minor role
in some of it.
The somewhat abortive yet interesting work of the
committees on voluntary credit control you did not
mention in your statement. I presume you were
properly concerned with the need for brevity.
To me it was valuable experience in learning about
the practical difficulties of selective credit controls
and, at the same time, I might add that standby controls are not necessarily condemned because of that
experience.
Sincerely yours,
The Honorable William McChesney Martin, Jr.
Chairman, Board of Governors
Federal Reserve System
Washington, D. C .
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CHARLES J CHANDLER
WICHITA. KANSAS
March 21, 1961
Mr. Wm. McC. Martin, Jr.
Board of Governors of the
Federal Reserve System
Washington, D. C.
Dear Bill:
I have your kind note of March 17th which I
did not expect you to bother to answer. I appreciated
greatly the opportunity to read in detail the statements
you made before the Joint Economic Committee on March
7th. Bob Bethke attended the Committee hearing and I
had a visit with him about it and I, of course, read
the condensed statements in the Goldsmith-Nagen
Letters which had more to do with the questions and
answers period than the statements themselves.
I am especially glad that you brought out the
matter of the structural type of unemployment, because
it is this which is going to be the hardest to lick,
in my opinion, and is the sort of thing that money
alone cannot buy. Your thinking, as always, is sound
and I feel as you do -- that to make water run up and
down hill at the same time requires a very unusual
situation.
I want to say in closing that I think you
handled Representative Reuss1 questioning excellently.
With my warmest regards,
Sincerely,
C. J. Chandler
CJC:L
Dear Charlie:
1 do appreciate your note very much
and It Is good to hear from one's real friends.
t am enclosing a copy of my statement before
the Joint Economic Committee which you might
enjoy glancing through.
iiy best, mm always.
Cordially yours,
Wra. McC. Martin, Jr.
Mr. Charles J. Chandler,
First National Bank in Wichita,
Wichita, Kansas,
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Federal Reserve Bank of St. Louis
2701 0 Street N. W.
Washington 7, D. C.
March 21, 1961
Hon. Wm. McC. Martin, Jr.
Chairman, Board of Governors
Federal Reserve System
Washington 25, D, C.
Dear Bill:
Thank you for sending me the manuscript of your
Statement before the Joint Economic Committee. I have used
it as the basis of a further letter to Dr. Neal, as per copy
enclosed.
It may be that I am overconcerned with our present
situation, but there are things in it which disturb me deeply.
Sincerely yours,
Lph E. Flanders
Enclosure
2701 0 Street N* W«
Washington ?, 0* C«
•ah 21,
Or* Alfred C. Neal, Preeident
CoHBdttee for Eeonosde
711 Fifth Avenue
New Yor* 22, New York
Dear A!:
This ia a continuation on the subject of :.y letter o £
February 21*
Jo you have eccees to Chainaaa Martin's st*teE/ent before
the Joint :xxTja J.c Occult tee of liareh 7, 1961? If so, I would, call
your attention to the passage beginning with the last two paragraphs
on page 16, in which he considers the problen of "structural un«7ipioynent," This particular passage ends with the taird full paragraph on page IB, in which he says, *Ksanwhile there is, I think,
need on the part of all of us to recognise that the world in which
we live today is not only a world that has changed greatly in
recent years, but also a world that even now is in a period of
further transition* **
It sssrai to c«d that Mr* Martin underscores the points of
view I have been trying to make, though I would fy no aeans assume
that he would be in full agreement with the points of view I hare
raised*
He suggests that actions beet suited to helping the
structurally unsnployed would include "nor* training and re-training
to develop skills needed in expanding industries** Gbe of the
fundamental questions I am raising, of course, is the question as to
whether industries are expanding as fast, whether in variety or
as is the total number of enployahlss* We have accepted
the axica that enployasnt, production and consumption can be expected
under nomal conditions to keep in step with each other* Kaybe that
is an axion which needs to be questioned*
Sincerely yours,
cos Donald K* David
W, HOC. Martin.
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March 20, 1961.
the Honorable Ralph £. Flanders,
2?O1 0 Street, It* «.,
7, 9* C.
Dear
Thank, you for your sice letter of March 8. A* you
know, tLe newspapers with their limited apace are not always
able to reflect adequately the content of a statement as
loag «« sine was to the Joint Kcoaoaic Coswitta®. For that
reason a copy of the fall text ia enclosed that should help
to clarify sag
will *§a$ that X was aai^fa&siaiiag that taere are
really these two types of i*ae*jjloyiaeat~-structur&l and
cyclical* In ay view we need to be doing a good deal about
both types* However, 1 mm in agreeaeiat with you that we are
facing aew conditions for which there is a© precedent a»d we
oust attack tola hard core "structural" uaeeaployaettt in a
different way than we have done before*
ilere at the Fed we taw* beea doing everything we
can to help in the revival of business condition* aad this
will assist in remedy lag cyclical un^a^-loyaeat. It is asking
too aach, I believe, to expect monetary aad credit policy to
be very holpfttl in working out the problems of structural
unemployment*
I was interested in the extract* from your
to Dr. leal* The Commit tee for Jate^aoKic ^eveio^aeat
long served a useful purpose and we all hope it will
to do so* It is good that person* like yourself are
to keep it on it* toe**
Sincerely your*,
(Signed) BUI ^
«** McC. Hartin, «lr.
CLF:rem
cc: Miss Muehlhaus
Hiss Morris
letter
has
continue
trying
2701 0 Street N. W.
Washington 7, D. C.
March 8, 1961
Honorable William McChesney Martin, Jr.
Chairman, Board of Governors
Federal Reserve System
Federal Reserve Building
Washington 25, D. C,
Dear Friend Martin:
The morning paper reports that you have characterized the present
unemployment as being of a "built in" type* Does this mean that
in your Judgment we are facing new conditions for which there is
no precedent?
I have been coming to that conclusion myself and in talking with
Don David a short time ago expressed my fear that my old organisation the CED was skating over the surface of economic problems
instead of dealing with fundamentals* He suggested that I write
to Dr. Neal and send him a copy* That I did*
Enclosed herewith for your personal consideration are some personal
extracts from my long letter* I would be glad indeed of any comment
you may wish to make on the point of view therein expressed.
A Sincerely yours,
.ph £• Flanders
Enclosure
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JSXTAAC
From a Letter Dated February 21, 1961
To Dr. Alfred Heal, President
Comrdttee for Economic Development
. . . C. E. D. is in a rut which leads to nowhere.
it and go somewhere.
It must get out of
The world itself is not in a rut. It is striking out into the
unknown, both politically and economically. It is with the economic
changes that C. E. D. has its greatest responsibilities. Let me list
some of the evidences that -we are in new economic situations.
1. There is a new fluidity of technology, managerial ability and
capital which tends toward the migration of manufacture to areas
of low labor cost, under conditions which make labor cost the
basic element in competition.
2. Productivity in our country is catching up with consumption,
putting a premium on advertising and salesmanship to expand the
consumption of sated consumers*
3. The unsatisfied needs of our nation are social, not individual—
e.g., sewage treatment so that every flowing stream is safe to drink
from.
••• .»
With regard to the selected problems listed above I offer the following
observations. These are observations, not solutions. C. E. D. must
address itself to solutions.
As suggested in item 1 above, we are living in a new age so far as
concerns foreign competition. Modern production makes minimum demands
on the skill of the individual worker, but maximum demands on technology
and management. This fact makes it possible for the technology and
management methods to be developed in high-wage America and then exported
bodily to lower wage countries. This fact is the moving element in the
immense volume of investment abroad which has taken place since the end
of World War II. We cannot long continue to manufacture here and sell
abroad. To compete in foreign markets we must manufacture abroad.
What is the answer to this problem? Is it higher duties or quotas?
Or do we replace vanishing industries with others, new or old, in which
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we continue to hare a competitive advantage? If so, what are those
industries? Can we maintain that competitive advantage, and how? These
matters were left unconsidered by the Handall Commission. In the act
extending the reciprocal trade treaties I introduced an amendment calling
for a new commission to go into the real problems of international trade.
The Senate passed the amendment but it was lost in conference. The
opportunity is still open to the C. £. D.
This whole subject is important in connection with our balance of
trade situation. The recent report on this matter seemed to me to be
broad and shallow. It rang all the changes on conventional economics
without giving more than a sidewise glance at the deeper influences at
work. I introduced into the discussion one of the fundamental elements—the division of the profits arising from improved business efficiency.
Had these increments of profit in the last fifteen years been apportioned
among higher wages, lower prices and increased profits, every element
of our society would have benefited, including the wage earners; and the
balance of trade could have been maintained. Unfortunately this is a
matter of industry and labor morals—not of legislation; and the unfortunate
effects of immoral practices are now deeply imbedded in our economy. Here
is a problem!
As to iten 2, we continue to expect that oonsumption will automatically
keep pace with increased efficiency in production. Can we be sure of tMa
much longed? Our reliance on a fantastic expansion of the advertising
business raises doubts. Advertising failed to sell new models of standard
oars in '59 and '60. The customers1 demands were more modest. The smaller,
more economical oar was preferred and imports from Europe increased. Car
owners no longer respond to the lure of prestige in design. They are
becoming mature.and discerning*
This maturity of the consumer is in evidence in other lines. A
successful maker of household equipment reports that he no longer gets a
customer response to new models with new gadget accessories. What is
going to happen to the equipment industries if the consumer grows tfp?
Employment will drop in production. Will the expansion of employment in
advertising take up the slack?
Returning once more to the small car, its very design requires fewer
labor hours to produce it. But this is only half the story. In the last
16 years the methods of production have been so mechanized and automated
that a great reduction in labor hours is sufficient to produce a oar whether
it be large or small. Can we be sure that the consumer is now being financed
by our enterprise system automatically aad eagerly, or even reluctantly, to
absorb the new production?
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-5Jfy third proposition is that the great opportunity for expand*!
consumption is not in the private but in the social sector of our economy.
Sewage disposal and its twin, water conservation, are examples. So are
school facilities at all levels. Here we are faced with a real problem.
Our means for financing such projects is by taxing the personal profits
of private business. There are limits to funds so collected and this
limits the amount of socially desirable undertakings. In a nation with
a labor surplus, a food surplus, a surplus capacity for providing clothing
and shelter, the physical requirements for meeting expanded social consumption are all present. A totalitarian solution is theoretically able
to organize society for a great social program. Can it be done b> a
private enterprise society? How?
There may be something deeper here than we have ever imagined. An
intimation was given in a recent paper by Dr. Bdwin Nourse, former chairman of the President's Economic Council, in which he speaks of our having
arrived at a "hinge."
This letter is a compilation of problems which insistently demand
solutions. I can offer no solutions but they must be sought and found.
Hill C. E. D. address itself to that task? If it is unable or unwilling,
its usefulness is waning*
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Ralph E. Flanders
Bear Ittfrid;
Thank you for sending t»e the March 1
issue of the Commercial and Financial Chronicle
which reproduced my statement before the Joint
Economic Committee. It Is nice of you to bring
It to my attention.
With all good wishes,
Cordially yours.
Waa. MeC. Martin, Jr.
Mr. A. Wilfred May,
Executive Editor,
The Commercial and Financial Chronicle*
2S Park Place,
New York 7, Mew York.
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Muehlhaus
March 17, 1961
The Hon. David L. Francis
Mayor
City of Huntington
West Virginia.
Dear Mr. Francis:
Thank you for your nice letter of March 14 and
for sending me a copy of your report, "Solving A
Critical Human Problem. M Also for the copy of the
Charleston Dally Mail editorial, which certainly put
me in good company.
I'm sure it was of interest to you, as it was
to me, to note the President's remarks on unemployment at his news conference Wednesday, in which he
referred specifically to "eastern Kentucky, West
Virginia" and other areas, as shown on the attached
clipping from the transcript of that conference.
.
Sincerely yours,
^V
Wm. McC. Martin, Jr.
Enclosure
CMrnk
cc: Miss Muehlhaus
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C I T Y 01 HI N T I N O T O X
HUXTINGTON, W K S l \ IROiMA
O F F I C E OF THE
MAYOR
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Federal Reserve Bank of St. Louis
March 14, 1961
Mr. William McC. Martin, Jr.
Chairman, Federal Reserve Board
Washington, D. C.
Dear Mr. Martin:
Attached herewith Is a copy of an editorial appearing
yesterday morning In the Charleston paper, in which both
of our names were mentioned. I am flattered!
I am also attaching a summary of Information which
I have been using in conversations in Washington and in
Charleston, our State Capitol, on this program. We need a
lot of help to convince President Kennedy and those in
command that this vocational program is one of the quickest
and most permanent answers to our distressed area problems.
I appreciate your fine support.
MdsTsipcer e ly,
David L. Francis, Mayor
City of Huntington
DLF/nn
Enc. 2
This article is protected by copyright and has been removed.
Article Title:
Prime The Pump Or Train The Individual; Which Is The Better
Road To Recovery?
Journal Title:
Charleston Daily Mail
Date:
March 13, 1961
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Dear Mr. Booth:
How nice of you to send me the editorial
from the Roanoke Times. Ton were kind enough
to suggest that 1 aot acknowledge it but it U a
pleasure to recall my vi»it ia jLynehtmrg and
I do hope you will give Jim Caskie my regards
when you see him.
Cordially yours,
Wm. McC. Martin, Jr.
Mr. JUea Booth,
201 Courdand Building,
Lynchourg, Virginia.
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LEA
B O O T H
303 COUMTLAMD
LVNCMVUMO
VINOIMIA
March 14, 1961
Dear Mr. Martin:
The enclosed editorial reminded me once again of
the delightful, informative talk you presented to our Sphex
Club in Lynchburg last year. I thought you would like to
see this editor's comments.
I should be embarrassed if you bothered to acknowledge this, so please donrt consume your valuable tjjne on amenities. I know you need all the time you can find to hold the
line against the "new frontier" socialists who disdain the
integrity of the dollar you're trying to protect.
Sincerely,
LB:ew
Enclosure.
The Honorable William McChesney !Iartin, Jr.
Chairman of the Board of Governors
Federal Reserve System
Constitution Avenue between 20th & 21st,
Washington, D. C.
This article is protected by copyright and has been removed.
Article Title:
Recession Cure: Two Views
Journal Title:
Roanoke Times (Roanoke, VA)
Date:
March 12, 1961
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•ARKV CKX.DWATER. ARIZ
rvCMCTT MCKINLO CMRKSCM. UJ
RAL«N YAMKHK3UOH. TEX,
K>Mf»M *. CLARK. PA
JOOCPM. W. VA
iN N
cuifrono f. CASC
lACOe K
iAv;r
W»M<TON L. FHOUT
VUMOK -
ON
CLAIBORNC " - ' • ' •
LABOR AND PUBLIC WELFARE
JOHN S. FORSYTHE. GENERAL COUNSEL
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shingt
Dear Mr. Mart
^ur 1
wh:
I fon
intair.
Your test:'
Warm regards.
'ore
:
ic
Miss Muehlhaus
March 14, 1961
Mr. Joseph A. Livingston
The Evening Bulletin
Philadelphia, Pa.
Your Sunday column re unemployment does a neat
job of posing the question: 'Do we treat the symptoms -unemployment -- the disease, or both?
On Mr. Martin1* testimony, however, I suspect
your column had to be written before you had a chance to
see his text, and when you had only second-hand accounts
to go on.
Hence I'm enclosing a copy of his text. As you
will see, he did not attempt to measure the quantity of
cyclical or structural employment, but simply took (and
still takes) the position that we're faced with both and
that it is necessary to combat both by actions to get at
the differing causes of both.
Best regards.
'{Signed) Chas. MolonjT
Charles Molony,
Assistant to the Board.
Enclosure
CM:nk
cc: Miss muehlhaus
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March 13,
Dear Will:
Thank yea very much lor sending me
the editorial from the Mamaroneck Daily Times.
I am glad to have this aad appreciate your taking
the trouble to forward it.
These are difficult times Indeed aad
we will have to work things out la a realistic
manner.
With all good wishes,
Cordially yours,
Was. MeC. Martin, Jr.
Mr. WiilScholU,
1210 Oreac em Point Road,
Mamaroneck, Hew Tork.
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0 GREACEN POINT ROAD
'RB.
This article is protected by copyright and has been removed.
Article Title:
A Different Look at Unemployment
Journal Title:
The Daily Times (Namaroneck, N.J.)
Date:
March 9, 1961
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Dear Ben:
Thank yen for your nice letter el
March S with respect to my testimony before the
Joint Economic Committee. 1 am glad you approve
and 1 am forwarding a copy so that you can browse
through it at leisure.
The comments you make are very
pertinent indeed and I am in full agreement with
them. These are difficult times and mm will all
have to think through our many problems carefully. In the economic field we are certainly
much closer to normal thais we have seen for a
long time.
best, as always*
W». McC. Martin, Jr.
Enclosure
Mr. Benjamin Strong,
Chairman of the Board,
United States Trust Company of Hew fork.
45 Wall Street*
Hew T©rk 5» Hew ¥<*rk.
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45 WALL STREET- NEW YORK 5, N. Y.
HANOVER
2-46OO
BENJAMIN STRONG
CHAIRMAN
OF THE B O A R D
.
Ma r Cll
8,
1961
Dear Bill:
Congratulations on your testimony yesterday ! You not only spoke
the truth, but nailed-down the fact that the Federal Reserve System is still
an independent outfit.
I heartily agree that the measures proposed by the Kennedy Administration can have only minimal effect on the economy. Even then, its limited
value may be erased entirely by the psychological effect of the bearish statements coming from all facets of the Government. There seems to be little
understanding of the fact that at this stage of our economy, the buying public
can very easily be dissuaded from purchasing or expanding their style of living.
For some time I have had the feeling that we are back to normal after
a period of approximately thirty years.
The first fifteen years covered roughly
the Depression and World War, II, when our economy slipped back badly in
keeping up with both the population and the normal expansion requirements of
our people. From 1945 to I960, the second fifteen years, we feverishly worked to
catch up with what we had lost in the previous fifteen years. This included expansion in this country, as well as bringing other industrial countries back into
production. The end of this era coincided with the end of the Eisenhower Administration, which provided such a favorable climate for the tremendous boom of
these past fifteen years.
Now the pipelines are filled -- productive capacity has gone too far in
many directions -- Europe and other producing countries are back in world
markets with brand new plants, low labor costs and high quality.
In my opinion,
the normal influences on our economy and our markets will again prevail after
being pushed aside by the tremendous force of the post-war boom. These include
international tensions, consumer psychology, over-production and other unfavorable
aspects in certain industries, etc. , etc.
This, to me, is in fact a return to
normal conditions under our type of free enterprise system.
The unemployment problem that you dealt with yesterday so wisely is our
biggest difficulty now and in the future.
I have thought for a long time that
industry must eventually adopt some form of annual wage policy, even though the
cost comes out of the stockholders.
It is completely inconsistent that we spend
vast sums on Social Security, old age pensions, medical benefits, etc. , etc. , and
then offhand lay-off 20, 000 men in one day, as the motor industry has just done.
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United States ©rust (Hompantj
Page Z .
ofNeu-Igorh
Furthermore, the people in these times will not stand for such treatment.
Full
annual employment has been successful in a great many industries, including
banking, insurance, as well as many manufacturing operations.
Its extension
broadly to industry would, I feel, have some valuable effect on the economy in
general.
It would be a pleasure to chat with you about these matters some time
when we can get together. I have no immediate plans for a visit to Washington,
but could arrange to run down if the opportunity arises.
If you are ever in New
York, I hope you will give me the pleasure of entertaining you for lunch here at
the Bank.
We would also like to show you our new quarters.
Keep up the good work and more power to you!
Sincerely,
Mr. William McC. Martin, Jr. , Chairman
Board of Governors
The Federal Reserve System
Washington, D. C.
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With best regards,
March 13, 1941
Bear Mr. Neisser:
Thank you lor your sice letter of
March o and 1 am glad yen give qualified agreement
to nay testimony before the Joint Economic Committee. I am forwmrdiag a copy of my statement
which yam may care to peruse.
1 was sorry yon overlooked enclosing
the repriat of your comments mentioned in your
letter to me and if you have another copy I would
be glad to have them.
Wm. McC. Martin, Jr.
Mr. Mass Neisser,
Graduate Faculty of Political and Social Science,
Hew School for Social Research,
44 West Twelfth Street*
Hew Tork 11. Hew York.
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NEW SCHOOL FOR SOCIAL RESEARCH
GRADUATE FACULTY OF POLITICAL AND SOCIAL SCIENCE
66 West Twelfth Street, New York 11, New York
ORegon 5-2700
11 Park Ave., Greenvale, N.Y.
3/6/61
Mr • Win .IvicC . Mart in
Chairman
Board of Governors of the Federal xte serve System
Washington B.C.
Dear Mr. Martin,
since I permitted myself some critical comments on Federal Reserve
Policy in a recent Symposion published in the He view of economic and
Statistics, I think it appropriate to express my( qualified) agreement
\:ith your statement as reproduced by the New York Times of to-day. without doubt we have a substantial" structural" or "technological" unemployment; and this cannot be cured by Budget and monetary policies alone;
re-training, increasing the mobility of labor is required, too.
A qualification seerns to me necessary for steel workers ( possibly
also auto workers)The unemployment there seems to be less caused by
labor saving devices but b^ a fall in demand; and an increase in armament
orders would cure that. More generally, it would not help re-training
workers for other industries unless there is additional demand for the
products of these industries ; and I doubt that without any fiscal and
monetary expansion enough of that would materialize. How to bring about
this expansion without at the same time discouraging private investment, is a question about which I have thought much, but with which
I do not want to bother you.
Yours very sincerely
Hans Neisser
P.S.I take leave to enclose
a reprint of my contribution
mentioned above.
1933/34 - 1958/59:
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Twenty-Fifth Anniversary of the Graduate Faculty
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Bear Mr. Therm
Thank you for your alee tetter ef
March $ and 1 am glad that yen thought my
testimony before the Joint Economic Committee
was ail right. I am enclosing a copy of the fall
text for your information and want to thank you
your letter.
Sincerely yours.
Waa. McC. Martin, Jfr,
Enclosure
Mr. Marvin D. Thorn,
14 Williams Lane,
Berwyn, Pennsylvania.
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MARVIN D. THORN
14 WILLIAMS LANE
BERWYN. PENNSYLVANIA
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Dear Pick:
Thank you for your alee note of
March 8 and I ana glad you approved of say
testimony before the Joint Economic Committee,
These are difficult times and we have
two conflicting philosophies to deal with. Perhaps neither one of them is entirely correct
and the middle ground will come closer to the
truth, la any event, we are going to have our
difficulties. 1 am confident, however, we
can solve them.
My best, as always.
Cordially yours,
Wm. McC. Martin* Jr.
Mr. C. Richard Youngdafal,
20 Broad Street*
Mew Tork §, Hew York.
C.RICHARD YOUNGDAHL
TWENTY
BROAD
STREET
NEW YORK 5, N.Y.
March 8, 1961
Dear Bill:
Your testimony before the Joint Committee yesterday was a
real breath of fresh air, after testimony and speeches by the New
Frontier's impractical and naive general theorists.
My Harvard, Yale and Minnesota academic friends are preoccupied with "lever-pulling" to cure basic structural problems,
and this has me greatly worried. I have heard them speak of a
$35 to $UO billion "income gap" with a combination of annoyance,
sorrow, and a nervous twitching in my stomach. They speak of 1959
as falling short of our "potential" by some massive amount in
income without, apparently, any ability to recall the frantic pace
of activity at the time and the degree to which people then were
becoming convinced that inflation was a present and a future
certainty. If we could not activate the "fanny-sitters" in West
Virginia with the tempo of business as it was in 1959, how can
we hope to burn the fires of the economy brightly enough in !62
or '63 to pull these people into the stream of employment? Your
testimony on retraining and resettlement got to the heart of the
problem, and it was good to read of it.
It is not necessary for me to comment to you personally
about the recent developments in Fed open market policy. I believe I know your views well enough to assume that this change
was a strategic retreat on a secondary, albeit a highly important,
point in order to be in a better position to defend the key
point — that is, flexible monetary policy itself.
Best regards.
Sincerely,
CRY: ho
Mr. William McC. Martin, Jr,
Chairman
Board of Governors
Federal Reserve System
Washington 25, D. C.
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March 13,
Dear George:
Thank yes for your letter of
March 9 aad I ana glad you approved of my
testimony. I ai*? forwarding a copy of the
full text,
It wa* good to have a visit with
you and I hope oar path* will cross again
before tee long.
Cordially yours,
Wm. McC. Martin, Jr.
Mr. George Soloveytcbik,
c/o Great Northern Hotel,
il West 5?th Street,
New T<Hrk» If, Mew Tork.
George Soloveytchik
March 9, 1961
** *
GREAT NORTHERN HOTEL
COCKTAIL LOUNGE
•
RESTAURANT
•
GRILL
118 WEST 57th STREET, NEW YORK 19, N. Y.
CABLE ADDRESS "NORTHHOTEL"
Telephone CIRCLE 7-1900
Mr. William McChesney Martin, Jr.
Chairman of the Board of Governors
of the Federal Reserve Board
Washington, D 0 C 0
Dear Bill:
Just a few lines to say how delighted I am to see that you
have spoken out once more and that you have stated in such
emphatic terms that chronic unemployment cannot be cured
by inflationary policies.
Well done! And I hope that you will stick to your guns and
repeat this obvious truth again and again, even though the
powers that be do not seem to recognize it.
It was nice to have a long visit with you, and the only thing
I regret is that we agree on everything. It would have
cheered me up no end if you had been able to prove to me that
I was wrong in my assessment of the situation, and that the
confidence crisis was not as serious as I think. At the same
time, I was glad to have this additional proof that you and
I seem to see the situation from much the same sort of angle,
even if at times it is a most worrying one. Personally, I
still think that — despite everything -= circumstances demand
dearer and jiot_ cheaper money. However, you know best. Unfortunately, I did not have an opportunity, this time, of
meeting either Dillon or Roosa, but hope to do so on some
other occasion.
With warmest personal greetings, and hoping to see you next
year, I am,
GS:ilp
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>rge Soloveytchik
BOARD
DF
GOVERNORS
OF THE
,
-JERAL R E S E R V E SYSTEM
Mr. Ma
This
Mr.
sent
note
is for your/nformation only.
Molony s-aid "of course" and I
the copy on with the attached
from me.
Mr. French said he hopes to get
to Washington sometime and would
enjoy an opportunity of visiting with
you.
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Federal Reserve Bank of St. Louis
mnm
March 3, 1961
Mr. Vincent Martire,
Tax Fcmmdation Inc. ,
10 Rockefeller Plaza,
New York, Hew York.
Dear Mr, Martire:
IB Mr, Martin's absence irora the office,
Mr.
to reproducing In whole, or in part, Mr, Martin's
Mr. Martie would, i know, he very
pleased to have you ase his statement ia your
publication and at Mr* French 1 s suggestion I am
•ending a copy directly to you.
Sincerely yours,
(Miss) Margaret Muehihau*.
Secretary to Mr. Martin*
Enclosure
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March 8
Mr. Molony-After Mr. Martin had left this morning, Mr. Robert
French of the Tax Foundation in New York City phoned him--and
talked to me.
Mr. French knows Mr. Martin (was Dean of the
Business School at Tulane at the time Mr. Martin got his
honorary decree) and therefore wanted to call him personally.
The publication of the tax foundation often uses
statements of men in public office in their monthly issues -Mr. French has seen the newspaper reports of Mr. Martin's
statement yesterday before the Joint Economic Committee and
wanted permission to use it in the next issue. They may shorten
it a bit (for they have space limitations) but the statement would
be identified.
I told Mr. French that it was a public document and
1 was sure there would be no objection to their reproducing it;
however, that 1 would check it with you.
Mr. French asked me to send a copy today to
Mr. Vincent Martire at the Tax Foundation, 30 Rockefeller Plaza,
with a note saying they could use it.
Mr. French suggested that if there were any questions
you might want to talk to their representative in the Washington
Office--Mr. Waterfield--or Mr. Martire in New York, at
Circle 7-3690.
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May 1 send it?
Thanks
mnm
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The Honorable Fatal fi. Douglas,
Vice Chairrran.
Joint Economic Committee,
Congress of the United States,
Washington 25, 0.C.
Dear Senator Douglas:
In reply to your letter of March 2» 1961,
please be assured that steps are actively in process
looking toward the publication of current statistics
on the Government securities market. As I indicated in response to your questions at yesterday's
hearing, no specific date has been fixed for the
initial publication of these data. However, it is
anticipated that the program will be put ©is a public
reporting basis some time this Spring, probably by
the first of April.
a*) Wm,
rtin; Jr?
Wat. McC. Martin, Jr.
cc: Mr. Young
Mr. Shay
Miss Muehlhaus
KAK:RAY:JWS:ranm
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Federal Reserve Bank of St. Louis
March a, 1961
The Honorable m right Patnaan,
Chairman, Joint Economic Committee,
Congress of the United States,
Washington 25, 13.C.
Dear Mr. Chairman:
1m reply to your letter of March 2,
please he assured that steps are actively in
process looking toward the publication of current
statistics on the Government securities market.
As 1 indicated in response to questions by
Senator Douglas at yesterday** hearing, no
specific date has been fixed for the initial publication of these data. However, it is
anticipated that the program will be put on a
public reporting basis some time this Spring,
probably by the first of
Wm, McCL Martia,* Jr*
Win. McC, Martin, Jr.
cc: Mr. Young
Mr. Shay
Miss Muehlhaus .
KAK:RAY:JWS:mnm
March 20, 1961
To
Chairman Martin
From Jerome W. Shay
Subject: SamuelsonTs testimony
re unemployment.
This afternoon, Dr, Paul Samuelson testified before the Holland
Subcommittee on Unemployment and Automation of the House Committee on
Education and Labor. Dr. Samuelson, who explained that he was speaking
purely as a private citizen, had no prepared statement.
Before submitting himself to questioning by members of the Subcommittee, Dr. Samuelson spoke briefly on various aspects of unemployment.
During these opening remarks, he referred to your appearance and that of
the Council of Economic Advisers recently before the Joint Economic Committee and the views there expressed
with respect to "structural" and "cyclical"
unemployment. Dr. Samuelson1s first remark with respect to this testimony
was that there was only a difference of emphasis and that it was a healthful thing to have the matter discussed as it was. He then went on to say
that "structural" or "hard-core" unemployment cannot be remotely affected
by monetary or fiscal policy, since such unemployment calls for special
measures providing for retraining of labor, mobility of labor, et cetera.
He added, however, that the rate of effectiveness of any such special
measures would be affected by fiscal and monetary policy. Byway of explanation, he added that, when we are in a period of high demand, the sustained pull of job opportunities accompanying the high demand tends to
draw off excess labor from one area into another area or activity. Thus,
he seemed to conclude that "structural" unemployment is not a malady completely separate from the question of over-all demand, which is affected,
he said, by monetary and fiscal policy,
As previously indicated, these remarks were initiated by Dr.
Samuelson and were not in reply to any questions from members of the Subcommittee, none of whom, during the course of the hearing, referred to
your testimony or thatt of the Council earlier this month.
Later, during the hearing, Dr. Samuelson made a further reference to your testimony and that of the Council by saying thdb "when all
the fireworks are over there will be a great deal of agreement between
Mr. Martin and Mr. Heller," although there will be, he added, a "residual
amount of disagreement" of the kind that one should expect between persons
of not identical interests or backgrounds, such as almost any two economists.
In answer to a question as to what the percentage of unemployment might be
at the peak of the next recovery, Dr. Samuelson said that a reduction of
unemployment to four per cent might not be too much to hope for, but that
it would depend on how successful we are with monetary and fiscal policy.
At a later point, he went on to say that unless fiscal and monetary policy
does its job very well, there will be more and more agitation for the
institution of a shorter work week, in order to cut down the continuing
high unemployment.
cc: Each Board Member
Messrs. Thomas, Young, Molony, Fauver, Knipe, Ford, Alderfer,
Sherman, Noyes, Marget, and Wernick
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
March 6, 1961
To
Chairman Martin
From Jerome W. Shay
Subject: CEA testimony before
Joint Economic Committee
This morning Walter Heller, accompanied by Kermit Gordon and
James Tobin, testified before the Joint Economic Committee. They have
agreed to appear again before the Committee at a date as yet undetermined
for further questioning by members of the Committee, inasmuch as it was
agreed that the substantial length of the prepared testimony presented
this morning gave Committee members insufficient opportunity to prepare
themselves.
While there was good attendance by Committee members, the
spirit of the questioning was very moderate and there were no questions at
all with respect to the Federal Reserve or to monetary policy. As a matter of fact, the only Committee member to mention monetary policy was
Congressman Reuss, who expressed pleasure in seeing that the Council "had
reinstituted the practice of making recommendations with respect to monetary policy,"
The main statements on monetary policy in the Council's statement are as follows:
"Monetary Policy and Debt Management
"In this recession, for the first time since 1931-32, expansionary monetary policy has been limited by the international
financial position of the United States. Over the past six
months our balance of payments deficit has been severely aggravated by the outflow of short-term capital attracted by higher
short-term interest rates abroad. To stem the outflow, Federal
Reserve authorities have had to limit expansion of money and
credit, especially in recent months, to keep short-term interest rates from falling too far. Short-term rates have remained
1.5 to 2 percentage points above past recession levels. The
Federal Reserve discount rate, which fell as low as 1.75 percent
in the 1958 recession, is 3 percent today. The Treasury bill
rate reached 0.6 percent in Hay 1958 but stands at 2.6 percent
today, up from its recent low of 2.1 percent in November I960.
"The Federal Reserve has sought since October to expand
bank reserves in ways that do not directly lower bill rates
and other rates important in holding internationally mobile
liquid funds. These efforts have met with some success. The
money supply (defined conventionally as demand deposits and
currency) has risen l.U percent since June I960, and the money
supply (defined to include also time deposits) has risen about
1; percent. However, interest rates have remained relatively
high throughout all segments of the money and capital markets.
Whether interest rates are regarded as a cause or as a symptom
of borrowing and lending activity, substantial monetary and
credit expansion can scarcely occur without significant easing
of rates.
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Federal Reserve Bank of St. Louis
•
-2-
"The 'prime rate1—the rate New York banks charge their
prime-risk customers for commercial loans—is k*5 percent
now, in comparison with 3.5> percent in 195>8 and 3 percent in
19!?lu Corporate Aaa bonds yield ii.2 percent now, in comparison with 3.6 percent and 2,8 percent in the two preceding
cyclical troughs. Table 5 compares interest rate levels
today with those in previous recessions, and shows in the
same comparative perspective how little long-term interest
rates have fallen so far in this recession.
"The Federal Deserve has recently announced that it is
purchasing long-term U. S. Government securities on the open
market. The new policy is an extension of its efforts to provide additional reserves by purchases that do not directly
depress the short-term rate. The objective is to lower longterm interest rates, in order to increase business investment
and residential construction, while maintaining the discount
rate and related short-term rates at internationally competitive levels. Treasury public debt operations are also geared
to this objective. Federal Reserve and Treasury operations may
be expected to result in reduction of the stock of long-term
bonds available to private investors, relative to the outstanding supplies of short securities. The extent to which the
maturity structure of rates can be 'twisted1 by these operations
remains to be seen. But the experiment must be tried. The
domestic economy urgently needs the stimulus of lower effective long-term and commercial rates. At the same time, as confidence in the dollar is restored and as interest rates abroad
continue to fall, the constraint on our short-term rate can
safely be relaxed."
It should be noted also that, in connection with housing credit,
the Council1s statement observed that "Further measures to stimulate housing demand will become possible as general monetary conditions are further
eased." And, in a general context, the statement observed that "the move
to reduce interest rates and increase credit availability" can have important stimulative effects on the economy.
A point emphasized in the prepared statement of the Council and
also in the course of questioning was that an economic upturn would be
"only the beginning, not the end, of the solution of our economic problems,
This was given further meaning by the emphasis placed on the fact that any
lag in the taking effect in the economy of increased Government spending
would not have detrimental effects because of the unusual amount of sluggishness in the economy quite aside from the present recession. This
would suggest that the Council feels that any measures to stimulate the
economy now probably should be continued well into the recovery stage, and
longer.
The Council, apparently, feels that the recession has reached
its low point, although as to possible signs of upturn they were rather
vague, and indicated, as President Kennedy has, that a renewed look at
the entire situation would be taken in April.
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Federal Reserve Bank of St. Louis
With respect to its own organization, the Council clearly
feels that it needs more staff to do its job properly. Mr. Heller
indicated that this would mean employing at least 20 trained economists
rather than the present 11,
Copy of Council's statement attached hereto*
Attachment
cc: Each Board Member
Messrs. Thomas, Young, Molony, Fauver, Knipe, Ford, Alderfer,
Sherman, Noyes, and Marget
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Federal Reserve Bank of St. Louis
March 3, 1961
Chairman Martin:
The attached letter has been discussed with Ralph Young. As the subject of
the letter will come up for approval at the
meeting of the Open Market Committee on Tuesday
morning, you may wish to indicate the result
of the meeting to Senator Douglas, if possible,
before you testify on Tuesday afternoon and, thus,
leave to him the decision whether or not to raise
the matter during the hearing.
It is our understanding that the letter
was written—perhaps primarily—to add weight
on the side of favoring the reporting system.
Attachment
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Federal Reserve Bank of St. Louis
WTHMMT PATMAM. TBt.. CHAMMAM
of
. MJMMMS JOHNSON.
VWCUTIVB D4MCTCM
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
JOHN MAW8HAU. •UTUEW, MO.
MV.T..H.V
JOINT ECONOMIC COMMITTEE
(CRKATB* fWWJAWT TO WC. Ite) OF nMMJC LAW »4. 7»TM CONOftCM)
JOHN *. LEHMAN. DKPUTY CXCCUTIVI
DIUBCTWI AMD CLIMC
March 2, 1961
The Honorable Wm. McChesney Martin
Chairman
Board of Governors of the
Federal Reserve System
Washington 25, D. C.
Dear Mr. Martin:
During the 1959 hearings of the Joint Economic Committee in connection vith its study of Employment, Growth, and
Price Levels, ve learned that the Federal Reserve System had
established in the Federal Reserve Bank of New York 'a statistical section devoted to developing, in cooperation with the
Treasury and the dealers, a regular reporting system on volume,
positions, financing and prices in the market"-.for Federal Government securities. We were pleased with this action in line
with our views on the importance of regular reporting of the
facts about this market. So far, a public reporting system has
not resulted from this program. We have not inquired officially
about progress though Mr. James W. Khowles of the Committee staff
has been in regular communication with the technicians working
on the problem.
The lapse of a year and a half has not diminished my
interest in this problem nor eroded my belief that the establishment of a reporting system for the market in Federal Government securities is essential to the success of both monetary
and debt management policies. I hope that it will be possible
for this program to soon be put into operation.
Faithfully yours,
Paul H. Douglas
Vice Chairman
WMIOHT PATMAM, TfX.. CHAIHMAM
U
PMA. H OOtMLAS. R L . VtCt CHAIRMAN
mCMANo am i •!•. MO.
JOHN •PAMCMAM. ALA.
HAL« •••••. LA.
HENirr •. MMUM. Wt«.
MAJTTHA W. •MM^ITH*. MIC44.
THOMAS •. OUWT1« MO.
i w. rULMtl«MT. ANK.
WILLIAM PWOKMIMC, Wl«.
CXAHHMMC P1U.. « I
rXMUJII HMM. CONN.
Congregg of tije ®niteb States
JOINT ECONOMIC COMMITTEE
«•»«•»• I.«HMAN
(CMCATCO mMCUANT TO »KC. lik) OP FUM.IC LAW 364, TtTH COMOMCSS)
March 2, 1961
The Honorable Wm. McChesney Martin
Chairman
Board of Governors of the
Federal Reserve System
Washington 25, D. C.
Dear Mr. Martin:
The Joint Economic Committee was pleased to learn in
1959 that the Federal Reserve System had established at the
Federal Reserve Bank of Nev York a statistical section devoted
to developing a reporting system for Federal Government seetiri- "
ties which would cover volume, positions, financing and prices.
It was our understanding that this system would be developed in
cooperation with the Treasury and the dealers operating in the
market for Federal Government securities.
Although we have not as yet received word of the beginning of regular public reporting as a result of this effort,
our interest in seeing that this program is put into operation
has not diminished. Mr. James W. Khowles of the committee staff
has acted for us in maintaining regular communication with the
technicians working on this program. It is important, I believe,
that this program be put on a regular public reporting basis as
soon as possible in view of the technical problems involved. I
hope that you can offer assurance that public reporting can begin
within the near future.
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Federal Reserve Bank of St. Louis
Sincerely yours,
Patman
Chairman
This article is protected by copyright and has been removed.
Article Title:
Martin Expects -Some Success- In New Reserve Board Market
Policy
Journal Title:
Dow Jones News Wire
Date:
March 1961
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Federal Reserve Bank of St. Louis
ALLAN SPROUL
KENTFIELD, C A L I F O R N I A
14,
1<
Dear Bill:
you ~°or sending ~e ° co~y of your recent statement
"ore the Joint Economic Committee. It wr
' ven Prominence in
the local press but,
' often the case with our papers :
reportin •
'
": or internf"
Affairs,
"count '
trunePted s.r
/•fcl ed.
I think you were r*
to try to rmt the present sit
tior. in perspective by -utlinin-s the relevpn^
b. If 3
"* d
9 written your c"
"itfe differently, i4
be because every mar
his o1
' int of vicT
ling t
"•t.
'
•-' .
'T- ~,r*-jr"\re of those v:ho see
of
ice", f
for or expect "• return to "
" " -~"- some
"
Hies must be
n to be
of counsel i
Ic
.ri to pvo'r
"
the
"or?ry character of the recent action of the Fe"
]
3n
bee,
'
is the t«
'
encers of the
taken.
!
apart ""re
:^its or de>-er'
ue of
s only" or "bil"
Bferably", T cor
er the "
of ^" ~ same" an unneccess^
ble hin":ce to
'
f^exibilit" ' ~"er;er'
1
in tech3. It should ---lot be nece~
In, tc
'":nioue 2^
ion.
f into thrt '•
the
ou
economy, i
'
; of ^©--.etary ^oli ;
"" ' ' '
You
of
'
(TVd^offsetti^
^licy.
:
^ects in
is is a
"
en
rcono^i
ociat
Loticed that, in the r
'
for the President, i<,re =
of over-bu
pol*
'
"
r
e roots
i n rstruc. (1 b report 1
~ j , ^re^^red
r
.
ace limit o
fivp
-, ^TT three
men rorkln^ to^
'
Lme. I
it
"~le. )
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
For myself, I have no doubt that the System will continue to -eet its problems effectively, so long as its general
constitution end organization r.re not tampered i '
"ry those
v:ho would force it into a new and different mold, end so lo'
as the Quality of its personnel is maintained. It h.9 s the virtues
Ttren^ths of a DOlltical invention which, by natural growth
development, has adapted to our political and economic environment.
'.th best regards.
icerely,
All
^roul.
P. 3. Your
3, "leaning ' * 3^ ^-e w^n<3-H» h-8-8 become a
•^t of our economic lexicon* I doubt if "leani ;
alnst
cross-winds -- simultaneously11 ^ns^the same quality!
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
March 7,
Since t took your naxne to *ai» in my
testimony before tfee Jotet Economic Committee,
1 wanted to gel the iuli text lo you
of us here have read with great
interest the Task Force report you made to the
1- resideut and appreciate all the work you have
done.
W« are continuing to struggle with
o*r maay problems awl hope we can resolve
some of them.
With all good wishes*
Cordially yours ,
. Allan Sproul,
345,
Kentfield, California.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
March 7, 1961.
Walter-l thought you and
your associates might -want to have
copies of my statement to the Joint
Economic Committee today.
WMM
Enclosures c**
Council of Economic Advisers)
To Chairman Heller of the
/
One copy each sent by messenger to
Secretary Dillon, Under Secretary Roosa, and Under Secretary Fowler of the Treasury
and David Bell, Director of the Bureau of the Budget
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Dear * alter:
Thanks for sending over the copies
of your statement yesterday before the Joint
Economic Report. It was helpful to gel them so
promptly and we appreciate it.
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Federal Reserve Bank of St. Louis
Wiife all good wishes,
Cordially yours,
BOARD
..
GOVERNORS
OF THE
FEDERAL R E S E R V E .. aTEM
3/2
Note:
Mr. Shay advises Mr. Martin still
scheduled to appear before Joint
Economic Committee on Tuesday
afternoon at 2:30.
Secretary Dillon will appear that
morning.
David Bell has "begged off" for
Monday afternoon, the 7th; and
Hitch of Defense Dept. is off for
Wednesday morning, the 9th.
Heller will go on Monday morning,
as scheduled.
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
mnm
THE C H A I R M A N OF THE
C O U N C I L OF ECONOM 1C A D V I S E R S
WASHINGTON
February
: Walter ¥, EelUr
Subjects March 6th Hearing
After checking with the President; ve have decided to go
ahead %-lth tbe March 6th date on the JEC hearing, in spite
of soae diseosfort occeatoned ^r the delay of the
aessage. fhe Cksseiittee interprets this to m&m. that
B*ll and Charlie Hitch vill be heard lat^?5 idth the other
vitncfioee appearing next week.
es to:
Secretary Dilloo
Chalraan Martla
Director ^11
Aect. S®eretary Hitch
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Federal Reserve Bank of St. Louis
JBC
Lehman -- 5171
FOR IMMEDIATE RELEASE
February 13, 1961
CONGRESS OF THE UNITED STATES
JOINT ECONOMIC COMMITTEE
Chairman Patman Announces Re-scheduling
of Hearings on the President's Economic Report
and the Economic Situation and Outlook
Representative Wright Patman (D., Texas), Chairman of the Joint
Economic Committee, said today that the government witnesses previously
announced as appearing before the Joint Economic Committee on February 20,
21, and 22 have, by mutual agreement, been re-scheduled for March 6, 7 and
3, The new schedule will permit more time for the preparation of additional
material by the incoming administration.
The hearings which are being held on the President's Economic Report and the current economic situation began last Thursday and Friday when
a panel of technical experts and representatives of labor, management, farm
and other organizations were heard. A copy of the revised hearing schedule
is attached.
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Federal Reserve Bank of St. Louis
REVISED SCHEDULE OF HEARINGS
ON THE 1961 ECONOMIC REPORT OF THE PRESIDENT
AND THE ECONOMIC SITUATION AND OUTLOOK
(All hearings are open to the public)
Monday, March 6, 10:00 a.m. -- Room 318, Old Senate Office Bldg.
Council of Economic Advisers
WALTER W. HELLER, Chairman
JAMES TOBIN
KERMIT GORDON
Monday, March 6, 2:00 p.m. -- Room 318, Old Senate Office Bldg.
DAVID E. BELL
Director
Bureau of the Budget
Tuesday, March 7, 10:00 a.m. -- Old Supreme Court Chamber
Senate Wing, U. S. Capitol
C. DOUGLAS DILLON
Secretary of the Treasury
Tuesday, March 7, 2j3G-p.ni. -- Old Supreme Court Chamber
Senate Wing, U. S. Capitol
WILLIAM McCHESNEY MARTIN
Chairman
Board of Governors, Federal Reserve System
Wednesday, March 8, 10:00 a.m. -- Old Supreme Court Chamber
Senate Wing, U. S. Capitol
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Federal Reserve Bank of St. Louis
CHARLES J. EITCH
Assistant Secretary of Defense (Comptroller)
Department of Defense
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Federal Reserve Bank of St. Louis
Dear Walter:
Thank yoti for sending me a copy
o€ fear letter of February 10 to Mr. Patmaa
la wiiicli I am glad to »ee you »peak for me
aUo. t think tfai» will be a better arrangement.
With all geod wishes,
Cordially your*,
fQjgr
I*-1
WM. McC. Martin, Jr.
The Honorable Walter W. Heller.
Council of Economic
Washiagtoa 25. 0.C.
cc: Mr. Shay
WMMrmnm
THE C H A I R M A N OF THE
COUNCIL OF E C O N O M I C A D V I S E R S
WASHINGTON
of til* QvlttA
, D. C.
8* sreatil^ «$$r*cic,te yosr v-n
it i
tstoe ^r0v«I of
Hum
,
to iasilcot* tuelr
*fc£* ^M«t». laf oraelly^ I
INI
t«
%o en for
V,
Copies to:
Director BeU
Secretary Billon
Assistant Swy&twry Hitoh
Chairman Martia ^
Mr. Fel&san
Mr. O'Brien
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Federal Reserve Bank of St. Louis
ML
r
.
February 10, 1961
airman Martin
Shay
Subject:
Joint Economic Committee Hearings
This morning the Joint Economic Committee concluded the first
pairt of its hearings on the President's economic report. The first
part of the hearings has been devoted to non-Government witnesses.
This tri.ll confirm that the witnesses for the Government, ining yoursefIf, will be heard by the Committee sometime during the
week, of March/6, so that the present schedule for Government witnesses
for thewee^/of February 20 is no longer effective. This was announced
officially'this morning by Chairman Patman. Specific dates for appearances will be worked out later.
One of the witnesses this morning was Herbert Stein, Research
Director for the CED, whose testimony dealt largely with the relationship between tax rates3 Governmental expenditure programs and unemployment. After stating that throughout the period 19^5-59 there was a
relationship between tax rates and Government expenditures that balanced
the budget when unemployment was 5,2 per cent, Mr. Stein related that
in the first half of I960 we moved to a surplus far greater than would
have been yielded by this 193>5-f>9 relationship. In the second half of
I960, he added, we remained far above the previous relationship, getting
a surplus of $1«,2 billion with 6.1 per cent unemployed. It was his belief that the weight of the I960 relationship between surplus and unemployment contributed to stopping the recovery that was under way in 1959.
Among other things, he added:
"The attempt to achieve high employment in the face of
a budget that would yield very large surpluses at high employment requires rapid monetary expansion to offset the
depressing effect of the budget. This means low interest
rates, and unless other countries are following a similar
policy, this is likely to cause an outflow of capital and
balance of payments difficulties.
"In fact, during I960 we did get an easing of monetary
policy. This was not sufficient to maintain high employment,
but it did contribute to the decline of U. S. interest rates,
to the outflow of short term capital and to the balance of
payments deficit."
The other witnesses this morning were W. E. Hamilton, American
Farm Bureau Federation; Angus McDonald, National Farmers Union; Herschel
D, Newsom, National Grange; and Howard L. Stier, Federal Statistics
Users' Conference. Only Hamilton and McDonald made references to monetary policy. Hamilton, in effect, defended the Federal Reserve System's
position, while McDonald indicated his view that monetary policy for the
past few years "had proven to be fallacious," In discussing this matter
with these witnesses, Senator Proxmire's comment was that the relationship between money supply and GNP "had been tighter recently than since
Andrew Mellon was Secretary of the Treasury."
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Federal Reserve Bank of St. Louis
-2It might be interesting to observe that most of the time of
the testimony of the witnesses from the farm organizations was spent
on possible ways and means of getting vigorous antitrust action
against administered prices and other pricing practices alleged to be
detrimental to farmers and small businesses.
During the full day and a half of hearings just concluded
there has been very little interest demonstrated in Federal Reserve
matters by members of the Committee.
cc: Each Board Member
Messrs. Thomas, Young, liolony, Fauver, Knipe, Ford, Alderfer,
Sherman, Noyes, and Marget.
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Federal Reserve Bank of St. Louis
February 10, 1961
To
Chairman Martin
Subject: Joint Economic Commit-
From
Jerome W. Shay
tee Hearings
Yesterday afternoon the Joint Economic Committee continued
its hearings by receiving testimony from Walter P. Reuther on behalf
of the AFL-CIO; Emerson P. Schmidt, United States Chamber of Commerce;
and George G. Hagedorn, National Association of Manufacturers.
Mr, Reuther, in a prolonged statement to the Committee, which
presented virtually nothing that was new, left no time for any consequential questioning and little time for the statements by the other two
witnesses. Briefly, Mr, Reutherfs position, in effect, was that
President Kennedy's economic proposals do not go far enough, either as
anti-recession measures or as correctives for the long pull. Mr,
Reuther!s main concern was with automation and the continuing upward
trend in unemployment. Perhaps his main proposal was for immediate
enactment of discretionary authority in the President to feduce personal
income taxes temporarily when necessary to stimulate the economy.
With respect to monetary policy and the Federal Reserve, Mr.
Reuther said:
"We welcome the President1s announcement that measures
are already under way to increase the flow of funds at declining long-term interest rates. While, in view of the outflow of gold, short-term interest rates must for the time
being be maintained, we should set as our objective, to be
achieved as quickly as practicable, a monetary policy conducive to vigorous economic growth. This requires abandonment of the !bills only1 or * bills usually1 policy.
"An adequately expanding money supply at reasonable interest rates is essential to healthy growth. This has been
denied the nation in recent years in part because of the unrepresentative character of those who set Federal Reserve
policy. The Federal Reserve Act should be amended to provide
for adequate representation of consumer, small business and
labor interests on the governing and advisory bodies of the
Federal Reserve system which is now dominated by the viewpoint of bankers and big business,"
A main burden of Emerson Schmidt's testimony was the lack of
clarity, thus far, as to what the new Administration's ideas really are.
"Obviously," he said, "it is impossible to appraise in any useful way
something which is still in the process of being born.11
In discussing what he called "The Disappointments of I960,"
Mr. Schmidt said that ",.,the money supply failed to growj during half
of the time in I960 the money supply .., was below the year-end level
in 1956 ... In December I960 the money supply was $1 billion lower,,,,
than in December 19$9.n
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Federal Reserve Bank of St. Louis
Mr. Hagedorn, whose statement contained no criticism of
monetary policy, said that "the most urgent domestic problem facing
the nation is the current rate of unemployment." He said that the
two chief economic maladjustments are "the constant tendency toward
increasing unit labor costs which places restraints on employment,
production, and trade; and a tax system which impedes the accumulation of capital and reduces incentives."
The entire first day of the hearings was marked by a seeming
lack of interest on the part of the members of the Committee, even
though most of the members were in attendance.
cc: Each Board Member
Messrs. Thomas, Young, Molony, Fauver, Knipe, Ford, Alderfer,
Sherman, Noyes, and Marget.
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Federal Reserve Bank of St. Louis
February 9, 1961
To
Chairman Martin
From
Jerome W, Shay
This morning, the Joint Economic Committee commenced hearings
on the Economic Report of the President (the Eisenhower Report) and subsequent economic messages of President Kennedy.
The only points of real significance for the Federal Reserve
were raised by Senator Proxmire and Congressman Reuss in connection with
the testimony of Roy L0 Reierson, of the Bankers Trust Company, who was
one of the panel of five witnesses appearing before the Committee this
morning
Senator Proxmire asked ilr. Reierson if the Federal Reserve determined interest rates during the f30fs and during World War II. Mr,
Reierson indicated that, while those periods, of course, were far different from the present period, he felt that the Federal Reserve did have a
strong influence on interest rates during World War II but that the interest rates during the ^O's were attributable almost entirely to the depressed economy.
Mr. Reuss, in effect, asked Mr. Reierson to comment on a program,
whereby the Treasury would issue substantial quantities of long-term obligations—either for cash or in retirement of outstanding obligations—
with the Federal Reserve shifting more of its portfolio into long-terms.
Mr. Reuss made the suggestion, he explained, because he felt that this
would assist in keeping up short-term interest rates and lowering longterm rates and also enable 1the Treasury somewhat to extend the maturity
of the debt. Mr. Reierson s reply was that the main difficulty in this
entire matter is the lack of assurance as to what decisions investors
would make. His own feeling seemed to be that there is no assurance that
this would encourage long-term money to move into mortgages and other
private obligations instead of gravitating to short-term obligations,
which would only aggravate the situation by tending to depress short-term
interest rates without any appreciable effect on long-term rates.
The other members of the panel appearing before the Committee
this morning were:
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Federal Reserve Bank of St. Louis
Louis J. Paradise, Assistant Director-Chief Statistician,
Office of Business Economics, U, S.
Department of Commerce,
Washington, D. C.
George Cline Smith, Vice President-Chief Economist,
F, W. Dodge Corporation,
New York, N, I.
Ewan Clague, Commissioner,
Bureau of Labor Statistics,
U, S. Department of Labor,
Washington, D. C.
(
C
-2-
and
George Brandow, College of Agriculture,
Pennsylvania State University,
University Park, Pennsylvania.
Mr. Reierson's statement to the Committee, however, was the only one of
any direct consequence with respect to matters concerning Federal Reserve
policy. An excerpt from his statement in this connection follows:
"The increased flow of savings and the currently reduced level
of economic activity make it reasonable to expect some further
easing of bond yields in the months immediately ahead. Shortterm rates, however, are not likely to be affected significantly
by these downward pressures in view of the demonstrated pull of
foreign money markets and the importance of balance of payments
considerations for Federal Reserve policy, Moreover, with the
economy apparently approaching the bottom of the current contraction, the next few months may well bring signs of an upturn
in business and in credit demands. These, together with the
large Treasury borrowings already in sight for the second half
of this year, suggest that later in 1961 underlying economic
forces may well be pointing toward higher interest rates. In
fact, it may be pertinent to recall the experience of 195>8^9, when a large Treasury deficit compounded the rising credit
needs of a business recovery and thus greatly enhanced the upward pressures on interest rates.
"A new factor in the interest rate outlook is the endorsement by the President of a program to attract more funds into
the capital markets at lower yields and at the same time to
halt further declines in short-term rates in order to curtail
the outflow of gold. Presumably, this would involve, on the
one hand, Federal Reserve purchases of longer-term. .Government.
obligations to reduce bond yields and, on the other hand, sales
of shorter-term securities to prevent money market yields from
falling. Also, the Treasury would probably be expected to cooperate through reliance upon the issuance of short-term securities .
"Admittedly, to the extent that Federal Reserve purchases
of Government bonds induce a shift into mortgages and other
long-term investments, a major objective of the program would
be met. Essentially, however, the aims are contradictory, as
the President's message acknowledges, for as bond yields decline, the inducement to invest at long term will be weakened,
and holders of Government bonds may instead prefer to shift
into short-term securities until long-term yields become more
attractive. This would tend to divert funds from the investment markets and reduce interest rates in the short-term
market. The many hazards and complexities involved in this
program thus place heavy additional responsibilities upon both
the Federal Reserve and the Treasury if constructive results
are to be achieved.
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Federal Reserve Bank of St. Louis
.,.
"The Federal Reserve, until a business upturn becomes
evident, faces the delicate task of following policies conducive to recovery without contributing to a further outflow
of short-term funds, and hence of gold, to the higher yielding money markets abroad. However, the task is not insuperable. A moderate rise in short-term rates at home would
reduce the attractive of foreign money centers without adversely affecting the business situation at home; bank lending rates are not likely to be raised as a result, nor would
such an increase in short-term rates, under present conditions, divert funds from the long-term markets. Furthermore,
such a rise in short-term rates need not prevent the Federal
Reserve from augmenting the lending power of the commercial
banks if the Treasury, in turn, employs debt management policies that complement the aims of the Federal Reserve.
"The Treasury already faces a chronic problem in the continuing shortening of its debt with the passage of time. Added emphasis on the use of short-term securities would further
unbalance the maturity structure of the debt and create increasingly difficult refinancing problems for the not too distant future. Financing through long-term bonds, on the other
hand, would be criticized as diverting funds from other investment markets at a time when the economy is sagging. A way out
of this dilemma may be found by resort to the issuance of
Treasury securities in the maturity range suited to commercial
bank investment. Such a Treasury policy, complementing the
policy of the Federal Reserve, would lead to higher deposits,
improved loan-deposit ratios, and increased lending capacity
of the commercial banks without depressing money market rates.
"The chances for a successful reconciliation of the conflicting aims of the President1 s program would be increased if
Federal Reserve purchases of longer term Government securities
were to be undertaken at times when reserves would ordinarily
be provided for credit policy reasons and thus would be substitutes for purchases of Treasury bills. It should be understood that the program is not designed to interfere with flexible credit policy or achieve any particular level of longterm yields. Above all, it should be made unmistakably clear
to the market that this is not the first step in a return to
pegged interest rates - a prospect which would open the gates
to inflationary psychology at home and to renewed attacks on
the dollar from abroad.
"The strength of the dollar remains the most important
single problem in the monetary field, and goes beyond the
matter of interest rates alone. There is some basis for
hope that we have seen the worst of the current wave of skepticism: foreigners appear to have gained some assurance from
the developments of recent weeks. Ultimately, however, confidence in the dollar can be maintained only if the deficit
in our international accounts is eliminated or at least reduced
very substantially and if, moreover, we follow domestic policies
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-I*and practices - in such matters as wages, prices, the budget,
debt management and credit - that will stop the persistent
erosion of the purchasing power of the dollar and enhance our
position in a highly competitive world0
"If we wish to maintain the integrity of the dollar, and
if we desire to remain free to use fiscal and credit policies
as tools for economic stabilization and growth, we must take
to heart President Kennedy's recent words: -|We cannot afford
unsound wage and price movements which push up costs, weaken
our international competitive position, restrict job opportunities, and jeopardize the health of our domestic economy.111
cc:
Each Board Member
Messrs. Thomas, Young, Molony, Fauver, Knipe, Ford, Alderfer,
Sherman, Noyes, and Marget.
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Federal Reserve Bank of St. Louis
CONGRESS OF THE UNITED STATES
JOINT ECONOMIC COMMITTEE
February 8, 1961
Mr. William McChesney Martin, Jr.
Chairman
Board of Governors of the
Federal Reserve System
Washington, D. C.
Dear Mr. Martin:
This will confirm our invitation and the arrangements
which our staff has made with you to appear as a witness before
the Joint Economic Committee at hearings on the Economic Report
of the President. You are scheduled to appear Tuesday afternoon,
February 21, at 2:00 o'clock in the Auditorium, New Senate Office
Building. The discussion will deal with monetary policy for the
coming year.
We hope that it will be possible for you to confine your
introductory remarks to 30 minutes or less so that substantial time
will be available for discussion and questions.
It would aid the Committee and the press if we could have
75 "to 100 copies of your opening statement preferably by Monday,
February 20. Copies sent by mail should be addressed to John W.
Lehman, Joint Economic Committee, Senate Post Office, Washington 25,
D. C. If the copies are being delivered by special messenger they
should go to Room G-133, New Senate Office Building.
Attached is the press announcement of the list of witnesses for the current hearings.
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Sincerely yours,
it Pa
Chairman
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Federal Reserve Bank of St. Louis
2/9
i
Mr. Martin
We haven't received the
confirming letter as yet-but your appearance is listed
on the attached schedule
for 2 p.m. the afternoon of
Tuesday, February 21.
mnm
Lehman -- 517!
FOR IMMEDIATE RELEASE
February 8, 196!
CONGRESS OF THE UNITED STATES
JOINT ECONOMIC COMMITTEE
Chairman Patman Announces Hearings
on the President^ Economic Report
and the Economic Situation and Outlook
Representative Wright Patman (D., Texas), Chairman of the
Joint Economic Committee, has announced plans of the Joint Committee
to hold hearings, "beginning February 9, on the President's Economic
Report and the economic situation and outlook.
Under the Employment Act of 19^6, the PresidentTs Economic
Report is referred to the Joint Economic Committee, which is to review it and "...file a report with the Senate and the House of Representatives containing its findings and recommendations with respect
to each of the main recommendations made by the President in the Economic Report and ... to make other reports and recommendations to the
Senate and House of Representatives as it deems advisable."
The Committee has approved a plan for hearings as set forth
in the attached schedule of witnesses and subjects.
Joint Economic Committee
Wright Patman, Representative, Texas, Chairman
Paul H.Douglas, Senator, Illinois, Vice-Chairman
House of Representatives
Richard Boiling, Missouri
Hale Boggs, Louisiana
Henry S. Reuss, Wisconsin
Martha W. Griffiths, Michigan
Thomas B. Curtis, Missouri
Clarence E. Kilburn, New York
William B. Widnall, New Jersey
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Federal Reserve Bank of St. Louis
Senate
Jchn Sparkman, Alabama
J. W. Fulbright, Arkansas
William Proxinire, Wisconsin
Claiborne Pell, Rhode Island
Prescott Bush, Connecticut
John Marshall Butler, Maryland
Jacob K. Javits, New York
John W. Lehman, Clerk and
Acting Executive Director
1961-3
SCHEDULE OF HEARINGS ON THE
1961 ECONOMIC REPORT OF THE PRESIDENT
AND THE ECONOMIC SITUATION AND OUTLOOK
Thursday, February 9, 10:00 a.m. —
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Federal Reserve Bank of St. Louis
Old Supreme Court Chamber
Senate Wing, Capitol
The Economic Outlook for 1961 -- Panel Discussion
Outlook for Federal, State, and local government
expenditures, and for inventories, plant and equipment —
LOUIS J. PARADISO, Assistant Director-Chief Statistician,
Office of Business Economics, U. S.
Department of Commerce
Washington, D. C.
Outlook for housing construction and consumer expenditures —
GEORGE CLINE SMITH, Vice President-Chief Economist
F. W. Dodge Corporation
New York, N. Y.
Outlook for labor force and employment —
EWAN CLAGUE, Commissioner
Bureau of Labor Statistics
U. S. Department of Labor
Washington, D. C.
Outlook for demand and supply of funds and interest
rates—
ROY REIERSON, Vice President and Economist
Bankers Trust Company
New York, N. Y.
Outlook for agriculture -GEORGE BRANDCW, College of Agriculture
Pennsylvania State University
University Park, Pennsylvania
Thursday, February 9> 2:00 p.m. — Old Supreme Court Chamber
Senate Wing, Capitol
Labor and Management_Coffiments on the Economic Report
and the Economic Situation and Outlook
Labor Comments
2:00 p.m.
AFL-CIO
WALTER P. REUTHER
Chairman
Economic Policy Committee
Management Comments
3:00 p.m.
3:30 p.m.
Chamber of Commerce of the U.S.A.
EMERSON SCHMIDT
Director of Economic Research
National Association of Manufacturers
GEORGE G. HAGEDORN
Director, Research Department
Friday, February 10 — Auditorium, Room G-308, New Senate Office Bldg,
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Federal Reserve Bank of St. Louis
Additional Comments by Other Group Representatives
10:00 a.m.
(panel Discussion)
American Farm Bureau Federation
W. E. HAMILTON
Director of Research
National Farmers Union
ANGUS MCDONALD
Assistant Director of Legislative
Services Division
National Grange
HERSCHEL D. NEWSOM
Master
11:30 a.m.
Committee for Economic Development
HERBERT STEIN
Director of Research
12:00 Noon
Federal Statistics Users1 Conference
ROYE L. LOWRY, Executive Secretary
or
HCWARD L. STIFR, Trustee
(
C.
k.
Monday, February 20, 10:00 a.m. -- Auditorium, New Senate Office Bldg.
Council of Economic Advisers
WALTER W. HELLER, Chairman
JAiMES TOBIN
KERMIT GORDON
Monday, February 20, 2:00 p.m. -- Auditorium, New Seriate Office Bldg.
DAVID E. BELL
Director
Bureau of the Budget
Tuesday, February 21, 10:30 a.m. — Auditorium, New Senate Office Bldg,
C. DOUGLAS DILLON
Secretary of the Treasury
Tuesday, February 21, 2:00 p.m. — Auditorium, New Senate Office Bldg.
WILLIAM McCHESNEY MARTIN
Chairman
Beard of Governors, Federal Reserve System
Wednesday, February 22, 10:00 a.m. -- Old Supreme Court Chamber
Senate Wing, Capitol
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Federal Reserve Bank of St. Louis
CHARLES J. HITCH
Assistant Secretary of Defense (Comptroller)
Department of Defense
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Federal Reserve Bank of St. Louis
January 27
Note:
Mr. Shay advised that hearings were now being set for testimony
on the President's Economic Report--by the Joint Economic
Committee.
2:30 the afternoon of Tuesday, February 21 is tentatively set for
Mr. Martin's appearance (although this is FAC dayp
Hearings will start on the 9th-On the 20th will appear members of the Council of Economic Advisers
in the morning; budget bureau officials in the afternoon
On the 21st Dillon will testify in the morning; with Mr. Martin scheduled
for the afternoon
A Mr. Hitch of the Defense Department is scheduled for the morning
of WjExkoaxx Wednesday, the 22nd (G. W. 's birthday and a holiday)
THE SECRETARY OF THE TREASURY
WASHINGTON
March 6, 1961
Dear Bill,
I thought you might like to see the
attached advance copy of my statement
tomorrow morning before the Joint Economic
Committee.
Sincerely yours,
Douglas Dillon
The Honorable
William McChesney Martin
Chairman, Board of Governors
of the Federal Reserve System
Attachment
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Federal Reserve Bank of St. Louis
HOLD FOR RELEASE ON DELIVERY
TREASURY DEPARTMENT
Washington
STATEMENT OF THE HONORABLE DOUGLAS DILLON
SECRETARY OP THE TREASURY, BEFORE THE
JOINT ECONOMIC COMMITTEE,
TUESDAY, MARCH 7, 19&L, 10:00 A.M.
Mr. Chairman, I am pleased to meet with this distinguished
Committee. It is important that we discuss the broad outlines of
our economic situation and the economic programs the Government
should follow in pursuit of our central national objective.
This objective, simply stated, is to preserve and develop the
security, freedom and prosperity of the United States within a
strong free world. Our economic policies, both domestic and foreign,
can be used effectively to serve our central objective if they are
directed particularly at three specific economic objectives which
have been a subject of particular concern to this Committee during
the past year.
The first national economic objective is that stated in the
Employment Act of 19^6, namely, the maintenance of a high level of
employment or, in the words of the Act, "maximum employment."
During the intervening years, marked at various times by
unanticipated price rises, attention shifted to the problem of
inflation and reasonable price stability emerged as a second national
economic objective.
More recently, a third national objective has received increasing
emphasis — to develop economic policies directed at stimulating
maximum sustainable rates of growth within our own country and
within the economies of our friends and allies.
In pursuing these national economic objectives it is important
to keep in mind other national objectives such as national security,
a desirable degree of economic freedom, a maintenance of a market
mechanism unimpaired by the absence of workable competition, the
provision of adequate government services in areas where private
action will not suffice, and some equitable distribution of income
and opportunity.
It is only realistic to recognize that some courses of policy
and action can serve to promote the achievement of certain of our
goals at the sacrifice of others. It seems Important that we
search for and employ those economic policies which are best designed
to achieve a maximum of all of these desirable objectives, without
unduly sacrificing one at the expense of another.
D-35
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Federal Reserve Bank of St. Louis
— 2 —
In moving now, in the year 1961, towards these long-range
national economic objectives, we must recognize the urgency of the
two major problems immediately confronting us:
First, the problem of bringing about a prompt recovery from the
present recession and, even more important, a continuing, vigorous
expansion in our domestic economy.
Second, curing the long standing imbalance in our international
payments, and working in concert with other industralized nations
toward a more permanent equilibrium.
The simultaneous occurrence of recession and acute balance of
payments difficulties posed new and complex problems for the
United States last year. The sensitive inter-relationship between
our domestic economy and our balance of payments situation can be
expected to remain with us in the future. For today we face an
international economic situation quite different from anything we
have seen for over thirty years. This new situation arose two years
ago with the return of convertibility in Europe. For the first time
since the thirties all the major currencies of the free world
became freely interchangeable for current transactions.
This new situation severely aggravated our balance of payments
problem last year and, in turn, it determined the nature of some of
our responses to recession here at home.
To begin with, I should like to review briefly the significant
developments in our balance of payments in recent years.
Between 1951 and 1957 foreign countries utilized the proceeds
of their surpluses, averaging roughly one billion dollars a year, to
build up needed reserves of dollars. The situation has been quite
different since 1957. In 1958 and 1959, our exports fell off sharply
and our imports rose. Our deficit rose to $3-1/2 billion and more
a year and we had to pay out some $3 billion in gold to cover a
large part of this deficit. In I960 another over-all deficit of
$3.8 billion occurred and we paid out another $1.7 billion of gold.
The situation in I960 was dominated by a new element. Our
exports had a very good year. But a very large outflow of short
term capital took place, mainly from June to the end of the year.
Our basic deficit — that is, minus the short term capital outflow —
markedly improved, and was estimated at about $1-1/2 billion, as
against something over $4 billion in 1959. The outflow of short
term capital, amounting to more than two billion dollars, was the
major factor in the large drain of gold and dollars during the final
six months of last year.
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Federal Reserve Bank of St. Louis
- 3Now what caused this new phenomenon— the large scale exodus
of short term capital?
With convertibility, international money markets have again
become closely inter-connected and liquid funds now flow freely
in large volume between these markets in response to differentials
in interest rates, as well as to speculative considerations. When
recession here coincided with boom abroad from mid-1960 onward,
monetary policies and interest rates in the United States and
Europe diverged widely. At one time last fall a short term investor
could obtain as much as two percent more on his money in London than
in New York. Hence, a broad stream of short term capital moved from
New York to London and other European money centers in search of
these higher short term rates. The size of this flow shook confidence in our ability to maintain the value of the dollar.
Speculation began against the dollar and added to the outflow. This
speculative fever continued unabated until late January.
The first task of this Administration was to restore confidence
and put an end to these speculative movements. The President
promptly pledged that the official dollar price of gold would be
maintained at $35 per ounce. He also outlined a broad and
comprehensive approach to achieving an over-all equilibrium in our
international payments, placing heavy emphasis on expanding our
exports. He rejected protectionism as ineffective and undesirable
and stressed that help for the less developed countries from all the
economically advanced countries must be enlarged.
I am pleased to report that reaction abroad to the President's
vigorous and determined approach has been very favorable. The
dollar once again is strong. There has been a decided slackening
in the outflow of gold and dollars and there are signs that some of
the speculative funds that left our shores last fall are beginning
to return.
This is not, of course, a sign that the problem is over, but
only that the world believes that we mean what we say. It is
imperative, therefore, that we press on with more fundamental
measures for correcting our basic balance of payments deficit,
utilizing the breathing spell provided by this free world vote of
confidence. It is clear that achievement of reasonable equilibrium
in our balance of payments will not be a simple task. It will
involve vigorous and many-sided action by our government, the
cooperation of other free countries, and active and enlightened
support by our own people. I am increasingly hopeful that if we
utilize these elements, properly welded together, we can reach our
•goal within the next two years.
One inescapable conclusion which emerged from the short term
capital movements of 1960 is the need for more effective international cooperation in economic and monetary policy in order
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Federal Reserve Bank of St. Louis
to minimize the disruptive effects, and the magnitude of such
movements. To be sure there will always be differences among
countries in the timing of booms and recessions, and there will
always be some need for a short term capital flow. But if fuller
exchanges of views and experience among the financial officials of
leading countries can in any way reduce the impact of these swings,
we must seek such exchanges. We hope to pursue this cooperation
through the proposed new Organization for Economic Cooperation and
Development (OECD), through the International Monetary Fund, and in
other appropriate ways. At longer range, we are instituting a
thorough exploration of measures to improve the functioning of the
International Monetary Fund and to strengthen its capabilities, in
order to assure adequate and flexible liquidity for the growth that
lies ahead.
I have said that we must utilize the time given us by the
restoration of confidence to attack the problem of our basic deficit,
which last year amounted to about $1.5 billion. In dealing with this
basic deficit, we are actively pursuing the specific lines of policy
laid down by the President. For example, we expect to tie our
military procurement and economic aid expenditures even more closely
to United States sources of supply. We are preparing to improve
our facilities for providing credit to our exporters. We are moving
vigorously to promote an increased stream of tourists to the
United States. We are recommending a reduction in tourist allowances
We are developing procedures to encourage foreign monetary
authorities to hold dollars. And we are reexamining the tax status
of American investment abroad to determine whether it is paying its
fair share of our national tax and whether or not any deficiency of
our tax system in this regard has contributed substantially to an
imbalance of payments. We will continue to explore ways and means
of assuring that the substantial payment imbalances of recent years
are not continued so as to impair our national economic position.
But improvement in our basic deficit also means that the chronic
surplus in the balance of payments of certain other advanced
countries needs to be simultaneously reduced. This calls for
improved international cooperation across the broad spectrum of
economic policies. International cooperation is also increasingly
needed in approaching what are now mutual responsibilities for a
rising flow of capital to the less developed countries. We hope to
facilitate both of these types of cooperation through the OECD,
It Is also essential for our people to realize that we are
inevitably subject to international competition. Just as this
country has always found open competition to be a major force in
•stimulating growth, expansion, and technological change here at
home, the same is proving to be true Internationally. This
development serves to emphasize our need to remain strong and
competitive — and not restrictive or isolated. Obviously, this has
a great many implications for American industry in terms of the
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Federal Reserve Bank of St. Louis
- 5»
price-wage-cost structure. It becomes important to emphasize to
both management and labor that profits and wages need not always be
increased to provide more benefits to investors and workers. Both
of these economic groups are made up of individual consumers.
Hence, the provision of more goods and services for the same dollar
by some lowering of prices with increasing productivity may better
distribute the benefits of that increased productivity between
workers, investors, and consumers, without sacrificing our
international competitive position. The President has just provided
a channel for funnelling many of these considerations and bringing
them to bear on key problems through the President's Advisory
Committee on Labor-Management Policy.
Now to return to the problems
must try to produce an environment
of our present recession, but will
at a faster rate than has been the
of our economy here at home. We
that will not only bring us out
also permit our economy to grovr
case in recent years.
The role of the Federal Government as an energizing force in
the growth of our economy and as a stabilizing influence upon its
ups and downs is daily becoming more important. But there are
limits upon what the Government can, or should, do. It Is as
important to avoid over-commitment as under-commitment, as essential
to avoid waste as to avoid constrictive economy. We must make
certain that the powerful and productive influence of the Federal
Government is used most effectively.
Our nation's resources — the capacity of our people and the
quality of our physical plant and materials — are Impressive.
But they are not presently being fully utilized and the level of
unemployment is unacceptably high. In initiating new programs of
expansion, therefore, we can call upon unused resources, upon credit
ease and fiscal expansion — and even upon a reasonable budget
deficit for a limited period of time — without running the risk of
inflation.
There are, of course, Inescapable physical limits on the speed
with which our untapped reserves can be put to use. Nevertheless,
the current recession makes a modest and temporary deficit not only
inevitable, but actually desirable as a stimulant to recovery and the
resumption of economic growth. The fact Is that a budget deficit
may prove helpful in a period of widespread unemployment such as the
present one. During periods of prosperity, of course, we should
return to balanced budgets and surpluses.
It is now clear that revenues in fiscal 1962 cannot help but be
less than those projected in President Elsenhower's final Budget
Message of January 16. In that message, corporate profits for
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Federal Reserve Bank of St. Louis
- 6calendar 1961 (on which, of course, fiscal 1962 revenue figures are
based) were estimated at forty-six billion dollars. The facts now
available indicate that this estimate is too high, possibly by as
much as three billion dollars. In addition, personal income may fall
somewhat short of the four hundred fifteen billion dollar estimate
in that Message.
I cannot pinpoint revenues and expenditures more exactly since
final decisions have not yet been taken by the President. However,
the Director of the Budget will be able to provide you with these
estimates when he appears before you later this month.
In past recessions the Federal Reserve has been able to promote
the needed lower long term rates of interest by allowing the short
term rate to fall almost to zero. In 1958, for instance, ninety day
bills sold at six-tenths of one percent. This tended to lower long
term rates and in turn promoted economic recovery. It is important
here to recognize that extremely low short term rates are not of
themselves necessary for recovery. They reflect increased credit
availability and help stimulate the investment flow into the long
term sector at lower rates. Today, a reduction in long term interest
rates, including mortgage rates, is just as necessary as in previous
recessions, but we must find new tools to achieve it. No longer can
extremely low short term rates be permitted to result from credit
easing steps taken to achieve our recovery objective. Instead,
moves have been made to stabilize the short term rate around present
levels, an adequately low rate for business purposes. There is
always the danger that a lower rate may precipitate a renewed flow
of short term capital abroad which could once again affect confidence
in the soundness of our dollar. This we cannot allow to occur.
Therefore, other means must be found to promote lower long
term rates — means that they do not immediately Involve downward pressures on short rates. It was this dilemma that led
the Federal Reserve Board to the conclusion that the "bills only"
policy which had worked effectively in earlier recessions was
no longer appropriate to the task at hand. In addition, the
Treasury can and should support efforts to lower the long term
rate by judicious debt management policies, not forgetting, however,
the need for some lengthening of the debt so as to maintain a
reasonable refunding pattern.
Recent developments in this field can be seen from the two
charts before you which show the market yields on U. S. Treasury
securities for selected dates.
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- 7-
Chart
MARKET YIELDS ON U.S. TREASURY SECURITIES
Pattern of Rates by Length of Maturity
The first chart shows that the high point last year was reached
in January, and the low point the following July. It also clearly
shows that long-term rates actually moved up as the recession
deepened toward the end of last year — indicative of a lag in the
availability of credit to borrowers.
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- 8-
Chart 2
MARKET YIELDS ON U.S. TREASURY SECURITIES
Office of the Secretary of the
The second chart shows that a decline in rates has occurred
since Inaugural Day and that a further decline followed the
President's economic Message, in which he specifically called for
maintaining short rates at current levels and a greater availability
of long-term credit at declining rates. This decline in long term
rates, coupled with the maintenance of short term rates was helped
when the Federal Reserve last month began buying government notes
and bonds of varying maturities, some beyond five years, for
virtually the first time in a decade, and the Treasury concentrated
its sales of securities in the short-term sector. The effect of
these policies is, of course, to decrease the supply of long-term
securities and increase the supply of short term securities.
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Federal Reserve Bank of St. Louis
- 9Our attempts to try to bring about a greater availability of
credit at lower interest rates in pursuing recovery and growth are
certainly justified by recent developments. There has been a
notable lag in certain key areas such as housing and municipal
and corporate investment. Yet these are the very areas which we
wish to stimulate.
Let me briefly examine these three specific areas:
First, housing: Although in housing the availability of credit
at lower mortgage rates is only one aspect of the problem, it is
nevertheless an important one. We are hopeful that efforts of
the Administration to lower mortgage rates — by reducing the
Federal Housing Administration rate, placing more emphasis in the
Federal National Mortgage Association program on buying rather than
selling mortgages, and urging key mortgage lenders to lower their
rates — will help to speed up a decrease in long-term mortgage
rates reflecting the increase in available mortgage funds that is
already beginning to manifest itself.
Second, security offerings of municipalities, state, and local
governments: Ordinarily, as interest rates decline and funds
become increasingly available in a recession period, such offerings
increase. However, in the current recession, this pattern has not
been discernible. As late as last month, offerings continued to lag
somewhat below a year ago. But as the credit ease continues, we can
expect some growth in constructive municipal borrowing. Estimates
for March project a considerable increase over the corresponding
month last year.
Third, the corporate financing field, where the stock market
seems to be openly inviting additional equity financing — an
invitation we hope will be increasingly accepted by corporations.
For the more corporations turn to the securities markets and repay
their bank loans, the more the banks will be able to supply credit
to other borrowers, and so stimulate recovery.
There is another vital force in this whole area of interest
rates and the availability of funds generally, and that is in the
field of tax policy.
I shall defer discussion of this subject in view of the
recommendations which the President proposes to submit shortly on
tax measures that will encourage the expansion and modernization of
the Nation's productive plant so as to accelerate economic growth
and improve the international competitive position of American
industry. It will perhaps suffice to state the basic goal of our
tax policy. It is simply this: to develop and maintain a strong
tax system which will meet the revenue requirements of the Government,
contribute to economic stability, and further the objectives of a
dynamic and growing economy.
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The tax system should be flexible and respond to changing
economic conditions. In times of falling Income, the receipts under
such a tax system should decline, so that resulting Federal Budget
deficits will help to sustain the level of demand and employment.
In times of rising Income and employment, the system should furnish
increasing revenue and a surplus should result. An important
advantage of the surplus will be that through debt retirement, it
can be made available to private investors for capital formation
and economic growth. We are looking forward to a strong economy
in which such years of surplus will match or exceed those of
deficit.
The problems of bringing about a prompt recovery and, more
Importantly, vigorous expansion, call for the stimulating potential
of a larger Government budget within a financially orderly framework.
We aim to make Government's contribution to economic activity in a
way that will provide solid support — rather than more temporary
stimulus -- to the flourishing and continuing growth we can and
must achieve. We hope that by earring out these many-sided programs
with resolve and determination, we can make maximum use of our
resources, both human and material, to create a brighter future for
all Americans,
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