Full text of William McChesney Martin, Jr., Papers : Hearings : 1960 July - 1961 June, Box 26, Folder 2

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Series V, Subseries D
filliam McChesney Martin, Jr., Papers
Sox 26/Folder 2


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Hearings, July 1960-June 1961 (cont.)


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Miss Muehlhaus

The Honorable /right Patatan,
Chairman,
Joint Economic Comsaittee,
Congress of the United States,
Washington 25, D. C.

Dear Mr. Chairman:
The Federal Open Market Committee has carefully considered
the requests for copies of its minutes and certain other materials for
the year I960, aade of Mr. Rouse and tae during the Joint Economic Com*
mittee Hearings of June 1 and 2, 1961. Tou and I have discussed these
requests by telephone, and they were referred to in your letter of
June Ik, 1961. It is the view of the Federal Open Market Cotwittee
that it should act as follows on your Commit tee1 a request*:
1* A aeworandum outlining the considerations taken into
account on the last occasion when the Committee instituted a policy
of restraint is enclosed. In this connection, I should point out, as
do the answers I have already submitted to the list of questions you
raised at the Hearings, that the deterttlnation of monetary policy is
a continuous process, arid thus it is difficult to pinpoint the aoiaent
of a change. To repeat a consent I made on this subject more than
fire years ago,
Monetary policy...must be tailored to fit the shape
of a future visible only in dim outline. Occasions are rare
when the neaning of developing events is so clear that those
who bear the responsibility caaa say, "As of today, oar policy
should be changed from ease to restraint11—or from restraint
to ease, as the case may be* irfha-t is true of a change in
policy is also true of a shift in policy emphasisi it is
rarely decided upon in a single day. ifere typically, as is
evidenced by open market operations, the outline of a shift
in policy ©{aphasia, like the outline of the future, emerges
gradually fr<*» a succession of market developments and
administrative decisions. It is a poor subject for ttie
photo-flash casters to capture as a clearly defined still
life, or for a news story to etch in spectacular outline*
Getting a perfect garment for the future may require
several fittings.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Therefore, factors considered and analyses undertaken by the Committee
during the meeting immediately preceding and during other meetings farther
back in time night not Men strikingly different from those at the meeting
that may be selected as narking the beginning of a policy of restraint*
2* Copies of the wires referred to in your letter as being
from the Board to Mr. Hayes and Mr* Rouse are enclosed* These wires, prepared at the offices of the Board of Governors and sent to all Reserve
Bank Presidents as well as Board members, contain a detailed summary of
the HtOO a.m. daily conference call which* you will recall, was fully
described by Mr. Rouse in his statement that he read at the hearing on
June 1 and submitted for the record. Host of the information contained
in each wire is a rundown of developments in the money and securities
•arkets during the first hour of trading that morning. The last part of
the wire indicates what the Account proposes to do that day. given the
situation as seen at HiOO a.ra*
3. Regarding the notes and interpretative weaoraoia referred to
in your lettert
(a) There is very little in the way of note taking
beyond that done by the secretarial staff of the Committee
and by a staff menber of the Hew lork Bank to record what
actually transpires at the meetings. Any notes taken at
the Meetings by Committee members are usually no store than
scribbled abbreviations for the purpose of keeping for the
moment a running memory aid of the discussion as it proceeds,
and such notes are not customarily retained. The ssinutes
are prepared pros^tly by the secretarial staff and drafts
thereof are usually in the hands of the Committee raembera
and Mr. Eouse, as Manager of the System Open Market Account,
within a week to 10 days, the Secretary of the Committee
also furnishes Mr. Rouse by the morning of the day following
a meeting a brief unedited synopsis of each member's policy
recommendations and of the consensus of the Gotmittee. The
notes taken by the staff member of the New lork Reserve Sank
are recast in the form of an internal m^jorandua for working
purposes, and this memorandum and the synopsis are available
to Mr. Rouse as an aids memoir pending receipt of the preliminary draft of minutes and the final minutes. 3ince these
are merely staff working papers and their content is fully
covered in the minutes, it seems needless to furnish them
separately.
(b) As to interpretative memoranda, these may be
taken to include the economic summary prepared by the Board*s
staff, projections of reserve figures and factors, and the


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-3-

detailed record of open market operations undertaken since the
previous meeting, all of which are furnished to Committee members prior to the meeting* Copies of these are enclosed, although their substance is covered to some extent in the minutes.
Also, there is enclosed the pertinent opening paragraph of
a memorandum dated August 2, I960, and sent by Mr. Bouse to the
members of the Federal Open Market Committee and tho Federal
Reserve Bank Presidents not then serving on the Committee, expressing his understanding of the consensus of the Committee at
its July 6, I960 meeting relative to possible open market operations in short-term securities in addition to Treasury bills*
This is included because it night be considered to be interpretative of a Committee discussion.
U. Verbatim records of toe westings of the Federal Open
Market Committee are not made* the minutes, however, present a
faithful and comprehensive record of the Committee's proceedings.
The Open Market Cosanittee ifi prepared to make these minutes of
its meetings held in I960 available to the Joint -xsonomic Committee
on the understanding that they will be treated as confidential. It
should be noted, however, that some members of the Ooaaaittee feel
that normally it might be wore appropriate for a request for the
minutes to come from the Banking and Currency Committee of the Mouse
or of the Senate. With regard to the request that the minutes be
handled as confidential, the Committee believes that it would not
be in the public interest to have such minutes for I960 a*de public
in whole or in part at this time, and its reasons for this position
are as follows)


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

(a) there are references in the minutes to information obtained on a confidential basis, this information,
and its sources, should be kept confidential, certainly
for a substantial time period.
(b) From time to tiae there are references in the
minutes to long-term prospects and possible monetary
policy action should these eventuate. To guard against
a reduction in the effectiveness of Coaaaittee actions or
potential actions, there should be some considerable
elapse of time before the minutes of any given meeting
are given public access.
(c) The ednutes contain a full account of the proceedings at the meetings, including the participants'
statements. However, a person will frequently compress
his remarks by omitting natters of background perspective
that are fully understood by others present at the meeting, but which wight lead to Misinterpretation on the

The Honorable Wright Patman

-1*-

part of one merely reading the siinutes without the advantage of having been present*
(d) The minutes contain statement* by Individual
members which are often made to raise points of discussion or to probe the possibilities of different courses
of action in implementing System policies* these stateisents do not necessarily represent a firm view of the
individual tseiaber arid, in fact, the ifienber may raise a
particular matter lierely to obtain discussion and
clarification of the issue* involved* Heedless to say,
individual views expressed early in a Meeting may well
be modified by subsequent discussion during the uaeti&g*
Therefore, the participants should feel free to r&ise
questions and express their views— either tentative or
firm—with the knowledge that their cements will not
be released within a short period of tine after the
meetings* this freedom of discussion and the exchanges
of viewpoints prior to the final decision a re essential
features of the process of decision-making.
It is largely for the foregoing reasons that the Open
Committee believes that the public Interest would not be served if the
minutes for I960 were to become public documents at this tine, either
in whole or in part* The Committee is particularly of this view, in
the light of the comprehensive Record of Policy Actions made available
some months ago in the k?th Animal Report of the Board of Governors of
the Federal Reserve
the official records of the Federal Open Market Committee are
maintained in the Board's offices, where the original copy of the minutes
for I960 is available for examination by representatives of your Committee. However, with the thought that it would be wore convenient, the
duplicate original signed copy of the I960 minutes is being delivered
herewith to the custody of your Cowraittee for its perusal* It will be
appreciated if this duplicate original is returned to us for safekeeping
as soon as it has served its purpose*
Sincerely yours,

W«* HeC. Kartin, Jr.
Enclosures
Staff:rae


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

To

Members of the Federal Open Market
Committee and Federal asserve Bank
Presidents Hot Presently ,>ervlng
On the Committee

Fro»

Robert G, House

Subjectt Operations in 3iortterri Securities Other
than Treasury bills

At the July 6 aeeting of the Open Market Committee there
was considerable discussion of the possibility that open market operations
might, under certain circumstances, be conducted in other short-tent
securities in addition to treasury bills. It was the understanding of
the Account Manager that the consensus of the Committee was that it URS
the Manager's responsibility* to initiate operations in short-term securities
other than bills if the general state of the market and the reserve situation
suggest th&t such a course of action is desirable. If such an occasion should
ariset the Account Management expects to state its intention at the time of
tie 11 o'clock call* This will allow mewbera of the Committee an orportunity
to register an objection, if they have one,


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

##«•*•#« « # # # * * * * # » « • & * * < & * # » # »

COPY

July 14, 1961

To:

Bill Johnson

From: J. W. Shay

Enclosed are two copies of a letter of this
date to Mr. Patman.

The original has been

delivered to Mr. Patman today.

(on note paper)

To: Mr. Johnson, Executive Director,
Joint Economic Committee


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

COPY

July 14, 1961.

The Honorable W r i g h t Patman,
Chairman,
Joint Economic Committee,
Congress of the United States,
W a s h i n g t o n , D. C.
Dear Mr. Chairman:
In response to your letter of July 13, 1961, the requests
presented in your letter of June 14 to Chairman Martin were
considered fully by the Federal Open Market Committee at its
meeting on July 11. The materials that the Committee authorized
be furnished are now being gathered. The complete response to the
June 14 letter, as well as the replies to the two remaining questions
presented during the hearings of the Joint Economic Committee on
June 1-2, should be in your hands not later than the end of this
coming w e e k .


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Sincerely yours,

(Signed) C. C. Balderston
C. Canby Balderston,
Vice Chairman.

COPY
Congress of the United States
Joint Economic Committee
July 13, 1961.

The Honorable
William McC. Martin
Chairman, Board of Governors
The Federal Reserve System
Washington 25, D . C .
Dear M r . Martin:
Yesterday I received your letter of July 11 attaching
answers to certain of the questions which w e r e asked of you at the
conclusion of your testimony b e f o r e the Committee on June 2.
It is most disturbing to note that your letter is silent
concerning the t h r e e requests set out in my letter to you of June 14,
a l e t t e r which was written at your insistence, repeating requests
made to you orally during your testimony on June 2.
Among the three requests repeated in my letter of June 14
is that for the minutes of meetings of the Open Market Committee during
the year I960. It was my understanding of your telephone call to me
following my letter of June 14, that you would inform the Committee
what decision had been reached concerning the request for these minutes
immediately following the July 11 meeting of the Open Market Committee
It is my f u r t h e r understanding that promptly after the July 11 meeting
you would supply such other information as had been requested, in order
that the record of the June 1 and 2 hearings could be closed and printed.
It now appears that although several successive delays have
been granted, the Committee is now confronted with a new, unscheduled
delay of unknown duration. Any hint you can provide as to when our
outstanding requests will be honored, if ever, will be appreciated.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Sincerely,

W r i g h t Patman
Chairman

July 21,

The Honorable Bright Patman,
Chairman,

Joint ^concede Comiaittee,
Congress of the United otates,
Washington 25, D. C.
Dear Mr. Chairman:
ith ay letter of July H, l?6l, I transmitted the replies
to 12 of the 13 questions that you presented to me at the Hearing before the Joint Economic Committee on June 1 and 2 this year*
There is now enclosed the reply to the thirteenth question
that you asked at that time, as well as a Joint reply by Mr* Hayes,
President of the Federal He serve Bank of Mew Tork, and ay self, to the
question that you asked of each of us regarding the question of effects
of changes in reserve requirements and open market operations*

(SIGNED') Wfv". r.

Enclosure
MS: me


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

IV.-* PT'*' !r.

Joint Economic Committee
13. For each of these actions (1) what combination of
economic indicators prompted the action, (2) what
evidence is there of market response, and (3) did
the response match, fall short of, or surpass expectations or aims?
In answering these questions, it needs to be recognized
that formulation and execution of monetary policy is a continuous
process that requires constant review of economic and financial developments and adaptation to such developments. Consequently changes in the
directive do not necessarily represent a sharp change in the direction
of policy. Moreover, within a given directive there is room for variation in policy execution in response to changes in credit conditions and
market behavior.

Such variations are generally reflected in the consensus

of the Committee that is reached at each meeting as to the course of policy
execution in the period ahead.
Broad economic objectives of the Committee are by their nature
expressed in general terms. The processes and procedures through which
policy is executed in the short-run are necessarily more specific and
concrete. Monetary policy exerts its influence most immediately and directly upon the volume of commercial bank reserves, the amount of which
can be promptly and accurately measured and can be largely controlled by
Federal Reserve actions on its own initiative. This control is not complete because member banks may on their initiative borrow reserves or use
reserves to reduce borrowings at the Reserve Banks.

Through the medium of

bank reserves, policy actions influence the amount of credit that commercial
banks extend and thereby influence the money supply. These secondary effects are in turn strongly affected by the attitudes and actions of banks
in adjusting to changes in reserves and in their willingness to borrow from

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-2-

the Reserve Banks.

They are also affected by the decisions of borrowers

with respect to the use of bank credit.
Ultimate consequences of changes in the money supply upon
general economic activity, employment, and prices are determined by
eventual holders of funds, who are motivated by many factors other than
cash holdings,

lore especially, the bulk of current financial transactions

reflects the use of existing funds rather than changes in the total volume
of cash balances and these uses are likewise influenced by many factors
of a nonmonetary nature. All of this means that, although monetary policy
actions have marginal effects of significance, assessment of these consequences is generally difficult and sometimes impossible.

It must be to

some extent a matter of judgment,
Answers to the first section of this question, namely what
indicators prompted the Committee's actions, are fully, though briefly,
set forth in the record of policy actions for the meeting at which the
new directive was adopted. This record gives the essential points of
the Committee's discussions that formed the basis for the decision as
to the directive and that served as a guide for subsequent operations
by the Account Management. Material presented in this answer represents
principally a summary of the points set forth in the policy record.
Answers to the second section of the question,

relating to

market response to System actions, require an analysis of events that
followed each change in the wording of the directive, as well as an appraisal of actions by the Account Management in carrying out the directive,
in light of more specific instructions growing out of the Committee's
deliberations and also in the light of changing money market conditions.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Answers to this question can also generally be found in the records of
deliberations at subsequent meetings of the Committee.

These records

contain brief analytic descriptions of economic developments that accompanied or followed preceding System actions.

They often specifically

point out relationships between these events and System aims and actions.
The third section of the question, which would relate response to expectations, requires a hindsight analysis and is most difficult, if not impossible, to answer in any concrete terms. As noted above,
monetary policy execution is a continuous process, one which usually involves probing or testing actions.

If in the course of events these

actions do not seem to be obtaining the desired results or seem to be
unnecessary or in the wrong direction they are modified or discontinued.
A process of constant adaptation to current developments is a part of the
task of conducting current System operations to promote the desired aims,
ilore importantly, it is not to be expected that Federal Reserve
actions alone can assure the attainment of ideal economic conditions.
The effects of other factors are difficult to appraise.

It is possible

to determine quickly the amount of bank reserves that were available, and
information as to changes in the volume of bank credit and the money supply can be had fairly readily and accurately.

It is a matter of judgment,

however, rather than of precise measurement, to make an assessment of the
secondary effects of these direct and measurable consequences of monetary
policy, relative to the effects of various other factors, in determining
the course of interest rates, prices, employment, and general economic
activity.

To make such a judgment it is essential to consider and appraise

not only monetary policies but also other significant influences, including
private actions, as well as various Government policies.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Five versions of clause (b) in the Open Market Committee*s
policy directives, including the one in force at the beginning of the year,
governed Federal Reserve operations in the course of I960. The three
parts of this question are discussed separately with respect to each of
these directives,
I.—January 12, I960
Directive, clause (b): "to restraining inflationary credit expansion in
order to foster sustainable economic growth and
expanding employment opportunities."
(1) What combination of economic indicators prompted the action?
This particular directive had been first adopted on May 26,
1959, and had been continued since that time. The principal factors providing the basis for this directive, as set forth in the policy record for
May 26, 1959, included: expanding productive activity; a growing belief that
creeping inflation was inevitable and actions to hedge against its results; highest level of construction contracts on record; rising industrial prices; robust expansion in consumer instalment credit; other
unseasonably large private credit demands, accompanying heavy Treasury
borrowing; further significant expansion in the money supply and in
the ^turnover of deposits; and increased borrowing by member banks at
the Reserve Banks to sustain bank credit expansion.
As these or other similar forces continued to be evident
with some variations in degrees of intensity or in composition during the
rest of 1959, the policy directive remained unchanged.

The steel strike

in this period was an especially potent and disturbing influence both in
limiting resources and in creating uncertainties as to future commitments.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

At times there were variations in the conduct of policy with respect to
the degree of restraint or ease, but the general aim continued to be one
of restraint on inflationary bank credit expansion in the face of vigorous
current and prospective private credit demands, along with heavy borrowing by Federal, State, and local governments and an increased flow of
individual savings. Expansion in total credit in 1959 was larger than
in any previous year, with bank loans contributing to the growth.

Be-

cause of restraint on bank credit expansion, banks obtained funds to increase their loans by selling securities to nonbank investors.

The bulk

of the growth in credit was supplied directly or indirectly by nonbank
lenders making use of available funds.
At the beginning of i960, principal economic indicators were
moving up, and settlement of the prolonged steel strike was believed
to remove a major element of uncertainty.

Increases in interest rates

and severe pressures on the money market in December were attributed to
inventory restoration and to widespread market expectations of a forthcoming boom, as well as to usual seasonal factors that generally involve
very large cash needs at that time. Declines in interest rates in January
were due in part to seasonal influences but also to some slackening in
credit demands and to anticipations of a Federal budgetary surplus.
The prevailing vie\v as to economic prospects, however, was one of great
optimism, with expectations of continued expansion in activity and
pressure

on resources.

Although there was some sentiment in the Com-

mittee at the time for a slight lessening of the degree of restraint,
the consensus was that, in view of the prevailing attitude of extreme,
optimism, relaxation of restraints would be likely to stimulate excessive
reliance on credit financing, particularly from banks.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-6(2) What evidence is there of market response?
Federal Reserve policies under this directive, which was in
force from late May 1959 until March 1, I960, were directed toward
restraint on bank credit and monetary expansion in view of vigorous
credit demands and limited resources. Response is indicated by the moderate rate of total bank credit expansion in the period. The record increase in total credit—bank and nonbank—and the rise in interest rates
that occurred in 1959 are indicators of the vigor of credit demands in
that period. The total of funds advanced in all credit and equity instruments exceeded %0 billion in 1959, compared with an average for previous
years of around ^[j.0 billion.

The Federal debt increased ^11 billion and

other debt increased by a record ^50 billion. Growth in bank credit was
a moderate -15.5 billion and the money supply, which had expanded abruptly
during 1958 and the early months of 1959, declined somewhat in the latter
part of 1959 and in early I960. The turnover of money increased throughout the period and other liquid asset holdings of the nonbank public continued to increase at a rapid pace.
Vigor of over-all credit demands, together with restraint on
bank credit expansion, resulted in rising interest rates, which in turn
helped to bring forth savings to meet credit needs without undue monetary
expansion. The limited increase in total bank credit and the money supply
and the drawing in of such large amounts of savings to meet the large
credit demands that developed in 1959 reflected the influence of Federal
Reserve policy. The resulting rise in interest rates served to draw
savings into use and made unnecessary the creation of additional money
to finance the high level of economic activity that prevailed.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

(

r
-7-

In the early weeks of I960, increased supplies of steel and
other products became available, while the Federal budget developed a
surplus.

Savers continued to invest in securities; they bid securities

from banks to such an extent that interest rates declined, while the
money supply decreased* Although private credit demands were well sustained and total liquid assets of the public continued to increase, total
loans and investments of banks and the money supply shewed a greater than
seasonal decline.

It began to become evident that there could be some

relaxation from the degree of restraint on bank credit that had been necessary in 1959, At successive meetings of the Committee in January and
February, sentiment for relaxation of credit restraint increased.
(3)

Did the response match, fall short of, or surpass expectations or aims?
In 195>9> the aim of monetary policy was to limit the creation

of additional money at a time when credit demands were exceptionally
strong, while liquidity in general was large and the resources available
for further expansion in output were limited.

In view of the steel

stoppage, which placed a limit on available productive resources, a higher
level of economic activity could hardly have been attained in 1959. Under
the

circumstances, unrestrained expansion in credit-financed demands

would no doubt have exerted strong inflationary price pressures with
little or no sustainable contribution to increased employment. Had bank
reserves been more readily available, it is reasonable to conclude that
credit and monetary expansion would have been much greater with more unstabilizing consequences.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

It cannot be inferred that credit restraints in 1959 were
the sole or even the principal factor moderating inflationary developments or that the downturn that developed later was due to shortage of
credit. It might be concluded, rather, that monetary policy by helping
to prevent excesses made a positive contribution to avoiadance of a
more severe and prolonged recession. A key influence in stopping further
expansion in economic activity was the failure of consumer buying to keep
pace with potential or even actual output of consumer goods or with consumer income.

This was in large part due to factors other than credit

availability, such as resistance to prices, uneven distribution of increase in income, and shifts in consumer tastes. It is possible that by
early I960 the higher interest rates and resulting stimulus to saving
may have been a factor in limiting consumer buying.
The lag in consumer buying, relative to output, was reflected
in business inventory accumulation, which was the most outstanding element
of instability in 1959 and I960. Disturbances in the pattern of normal
business expansion that were forced by the prolonged steel stoppage,
with a tentative resumption of operations while negotiations were in process,
also exerted an unstabilizing influence with respect to inventories and to
business plans and commitments. For example, early in I960 it began to
be apparent, to the surprise of many, that inventories of steel and steel
products had been built up to a much higher level than would be needed
with resumption of productive operations.

The continued large Federal

budget deficit during the period of expanding private activity in 1959
and the quick shift to a moderate surplus was also an element of instability.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-9-

Early in I960 the slackening of credit demands and a general
market re-evaluation of the business outlook, with continued strong nonbank demand for securities, obtained an immediate market response in a
decline of interest rates.

The money supply also declined somewhat more

than seasonally, reflecting in large part continued purchases of Government securities from banks by nonbank investors.

Thus total nonbank hold-

ings of liquid assets continued to increase, even though the money supply
declined.

This was reflected in a greater than seasonal decline in re-

quired reserves. The reserves released were not fully offset by Federal
Reserve actions, and there was a moderate decline in net borrowed reserves.
This brought about an easing of the credit situation before there was any
indication of an economic downturn.
In summary, it may be said that Federal Reserve policy under
this directive served in 1959 to prevent excessive bank credit expansion
at a time of relatively full utilization of resources that were limited
by the steel strike and when there were strong credit demands with widespread expectations of inflationary tendencies. Early in I960, for a
variety of reasons, the underlying forces changed—contrary to prevailing
expectations at the time—and it gradually became increasingly evident
that credit restraints could be relaxed.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

(

r
-10-

II.—March 1, I960
Directive, clause (b): "to fostering sustainable growth in economic
activity while guarding against excessive
credit expansion."
(1) What combination of economic indicators prompted the action?
Although reports of economic developments at this time indicated continuance of underlying economic strength, it appeared that
some earlier exuberant expectations were not being fully realized and
that there was less need for restraint to guard against credit excesses.
Resumption of inventory expansion seemed to be an indication of a slackening of demand relative to output rather than a factor of strength. Although the increase in bank loans was substantial, particularly to
finance the increase in business inventories and also to finance consumer purchases on credit, the increase was exceeded by bank sales of
Government securities to nonbank investors, and total bank credit and the
money supply were decreasing.

Accordingly the Committee concluded it

would be appropriate to supply reserves more readily and to follow a
policy of moderately less restraint.
In view of these developments, the Committee decided to
eliminate from the directive the reference to inflationary credit expansion.

Retention of safeguards against permitting excessive credit

expansion were deemed essential, however, as the basic situation seemed
to be strong, particularly in other countries, and there was some uncertainty as to how much the slowdown in trade might be due to the temporary influence of severe weather conditions.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-nWhat evidence is there of market response?
During the two months or more following adoption of this
directive, economic activity was generally maintained at a high level
with little or no further growth. With more favorable weather conditions
in April, there were some evidences of a resumption of upward tendencies,
but with no pronounced upturn or shift in tone. In the financial area,
although private credit demands were moderately strong, bank holdings
of Government securities and the seasonally adjusted money supply continued to decline. Growth in nonbank holdings of liquid assets other
than money tended to level off, reflecting in part a reduction in the
volume of short-term Government securities outstanding.

Turnover of

demand deposits continued at a higher level than during the preceding
year.
Federal Reserve operations added to the availability of
reserves, supplementing amounts released through the more than seasonal
decline in required reserves.

Member bank borrowings were reduced

from over $800 million in February to about &5>00 million in May, and
net borrowed reserves declined to a small amount.

Interest rates

showed marked declines, in reflection of both reduced credit demands
and increased availability of bank reserves.
(3) Did the response match, fall short of, or surpass expectations or aims?
Federal Reserve operations under this directive increasingly
moved in the direction of supplying more reserves to banks but the
response was not altogether satisfactory.

One of the most striking

developments of this period (March to May I960) was the sharp decline
in interest rates, along with the maintenance of a fairly high level


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

c
-12-

of economic activity and moderately strong private credit demands.

This

course of events may be attributed in part to a shift in the Federal Government *s fiscal position from large net borrowings to net retirement of
debt. It may also have reflected the effect of the previously higher interest rates in drawing savings from cash-type assets into income-yielding
liquidity instruments and other investments and perhaps stimulating additional saving. This decline in interest rates was enhanced by the Federal
Reserve policies and actions during this period.
Neither borrowers nor lenders, however, responded with alacrity
to increased availability of credit. The Federal Government was reducing
debt and private credit demands did not increase sufficiently to offset
the decline. Interest rates declined, but showed tendencies to fluctuate
widely in reflection of actual or anticipated variations in supply or
demand conditions in credit markets. Although availability of bank reserves increased, many banks still found it necessary to borrow reserves
either from the Reserve Banks or from each other.
In this period, although consumer incomes continued to increase and consumer credit extensions ?;ere at a high level, consumer
spending failed to keep pace with actual or potential output. It was
becoming apparent that the net accumulation of business inventories had
been excessive.

This period was characterized by a lag in spending rela-

tive to current income as well as to resource availability. It was apparent that there were important factors other than the availability of
bank credit that shared responsibility for this lag and for the shifts
in attitude, which together provided the basis for subsequent downward
adjustments in output and employment.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-13-

.—May 2U, I960
Directive, clause (b): "to fostering sustainable growth in economic
activity and employment by providing reserves
needed for moderate bank credit expansion."
(1) What combination of economic indicators prompted the action?
Information available at the time of this meeting, partly
preliminary, suggested that gains in economic activity that seemed to
be developing in April may not have been realized and in any case were
not general. Although System operations under the former directive
had increasingly moved in the direction of supplying more reserves to
banks, total credit demands were moderate and the seasonally adjusted
money supply was tending to decline.

In addition, there had been a

pronounced relaxation of the inflationary psychology prevalent earlier.
Under the circumstances, it was evident that the directive
needed to be revised to call for a further supplying of reserves with
a view to fostering moderate expansion in the bank credit and encouraging
an increase in the money supply that might be needed for sustainable
growth.
(2) What evidence is there of market response?
Under this directive, operations were more vigorously
conducted toward increasing the availability of bank reserves, enabling
banks to reduce their borrowing, and bringing about declines in interest
rates.

Federal Reserve holdings of securities increased by over $1

billion from May to August; Federal Reserve Bank discount rates were
lowered from h per cent to 3-1/2 per cent in June and to 3 per cent in
August, and action was announced in early August to release reserves


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

by authorizing member banks to count additional amounts of vault cash
as reserves and reducing reserve requirements at central reserve city
banks to become effective late in August and on September 1, Also in
late July margin requirements on stock market credit were reduced
moderately from 90 per cent to 70 per cent, following a decline in
stock prices, relatively low trading activity, and a reduction in
stock market credit.
Member bank borrowings at the Reserve Banks
decreased from an average of ^5>00 million in May to less than $300
million in August, with net free reserves averaging about $25>0 million in
the latter month.

Interest rates declined sharply in all sectors of

the market. Both loans and investments at banks increased, and the
seasonally adjusted money supply turned up in June and continued to
increase in July. Long-term borrowing by corporations and by State
and local governments increased.
Outside the financial area, economic activity, although
continuing into the summer at a high level, was evidencing no upward
momentum.

Uncertainty regarding future trends was becoming more

widespread and there was a gradual increase in unutilized plant
capacity and manpower.

Reports from business corporations indicated

a decline in profits. While consumer demand was a sustaining influence,
it was not providing a stimulus for economic expansion.

Final sales

of goods were running short of output and inventories continued to expand.
(3) Did the response match, fall short of, cr surpass expectations or aims?
In reviewing developments from May to August, it would
appear that in the financial area the response to shifts in Federal


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Reserve policies and operations was in the desired direction. Credit
and monetary contraction ceased and there was in fact some monetary
expansion.

Interest rates declined. Although economic activity in

general seemed to be continuing at a relatively high level with no
evidence of a downturn, the lack of growth and the underutilization
of resources were matters for concern. Failure of the economy to
expand could appropriately be attributed to factors which caused
spending and investment not to increase, while production was maintained
and incomes continued to expand.

As a result, inventories were

accumulating, although they did not appear to be excessive relative
to sales, and unemployment of labor and idle resources were tending
to increase.

Under the circumstances, although the lag in spending

could not be attributed to shortage of credit, it appeared that
availability of credit could be made easier with little risk of
excess and with possibly some stimulating effect.
IV.—August 16, I960
Directive, clause (b): "to encouraging monetary expansion for the
purpose of fostering sustainable growth in
economic activity and employment."
(1) What combination of economic indicators prompted the action?
This new directive was designed to give greater emphasis to
the need for operations that would help stimulate expansion, by removing
the limiting words "moderate" and "needed" from the directive previously
in force. The reason for its adoption was principally the failure of
the economy to expand in preceding months, with a resulting widening
of the gap of unutilized resources and unemployment. Action had justbeen taken to release additional reserves and to lower discount rates.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

It was the Committee's intention that these measures be strengthened
by operations that would further expand the availability of reserves
and give greater encouragement to bank credit and monetary expansion.
It was also thought possible that reserves supplied through the
release of vault cash might not be fully utilized promptly and that,
therefore, somewhat larger amounts of excess reserves would be needed
to obtain the desired stimulus.
(2) What evidence is there of market response?
Following adoption of this directive, rather large amounts
of reserves were made available through increases in Federal Reserve
holdings of Government securities, as well as through the previously
announced action with resnect to vault cash and reserve requirements.
The reserves thus made available were adequate to cover heavy seasonal
needs and to offset an accelerated gold outflow as well as to make
possible greater than seasonal additions to the volume of reserves.
Member bank borrowings declined, with some weekly fluctuations, to a
negligible figure by the end of the year, and net free reserves rose
to an average of nearly $5>00 million in October and to over $600
million in November.
Although banks responded rather slowly to the increased
availability of bank reserves and there was no credit growth in August,
bank loans subsequently increased more than seasonally, especially
business loans, and banks also added to their investments. The money
supply, though leveling off in August, increased moderately in
September and October, but declined in November. The principal
counterpart to the expansion in total loans and investments of banks


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-17was an exceptionally rapid growth in time deposits.
Government securities declined somewhat.

Nonbank holdings of

Long-term financing by corpora-

tions and by State and local governments continued moderately heavy.
Notwithstanding the easing in the banks' reserve positions
interest rates showed little or no further decline after mid-August.
This leveling out of interst rates may be attributed in part to the continuation of private demands for credit at fairly good levels and the
reduced liquidity position of corporations. Interest rates were also
maintained to some extent by large-scale advance refunding operations by
the U. S. Treasury, when institutional investors made significant readjustments in their holdings of Government securities,

A technical market

factor was a reduction in the inventories of securities dealers, following
a buid-up during the summer.
One new factor of particular importance in maintaining interest
rates, in the face of declining economic activity and an easy money policy,
was the flow of funds abroad that accelerated in September and resulted
in exceptionally heavy drains on the country *s gold stock during the remainder of the year. Although the drain on bank reserves exerted by these
gold movements was offset by Federal Reserve actions, the shifting of funds
incidental to the movement had a disturbing effect on credit markets. This
flovir of funds abroad was also an influence toward holding down the expansion
in the domestic money supply. Since this outward flow of funds was due in
part to the lower level of interest rates in this country than in foreign
money markets, as virell as to confidence factors, more vigorous action on
the part of the Federal Reserve to supply additional reserves would have
incurred the risk of accelerating the gold outflow and thus would not
have served the intended purpose.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-18In September and October, moderate recession in economic
activity became increasingly evident.

Although aggregate final

takings of goods and services were maintained or increased somewhat,
inventory contraction and some curtailment in purchases of durable
poods resulted in a moderate decline in total production. The
accompanying increase in unemployment was more marked. There were
also decreases in residential construction and curtailment in business
plans for plant and equipment expenditures.
(3) Did the response match, fall short of, or surpass expectations or aims?
In this period, as in the preceding one, monetary policy
was directed toward encouraging credit expansion in order to foster
growth in the economy. The adoption of more vigorous measures was
inhibited and the effectiveness of the action taken was diminished by
the outflow of funds to foreign markets. This movement, which caused
a drain on United States gold reserves, was induced by interest rate
differentials and uncertainties as to future developments.

Interest

rates stopped declining, though they remained much lower than in
previous months; further measures to lower rates, it was believed,
would accelerate the gold outflow. Moderate expansion of bank credit
and the money supply did occur, although the rate of expansion was
sometimes disappointing.

Nevertheless, largely for reasons other

than credit availability, recession in economic activity developed.
V.— October 2£, I960
Directive, clause (b) : "to encouraging monetary e:xpansion for the
purpose of fostering sustainable growth in
economic activity and employment, while taking
into consideration international developments."


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

(
-19(l) What- combination of economic indicators prompted the action?
The only change in the directive from that previously in
force was the addition of the clause with respect to international
developments.

Deepening of economic recession in the United States

called for continuation of action to maintain ready availability of
bank reserves.

let the persistent outflow of capital abroad, induced

in part by interest rate differentials and confidence factors,
precluded policies that would vigorously push down interest rates,
particularly short-term rates, or that would raise fears abroad that
inflationary policies were being adopted during a period of serious
balance of payments stress.

It was to indicate recognition of this

situation that the new clause was added to the directive.
Specific action to implement this directive taken by the
Account Management was to extend open market operations to the
purchase of short-term securities other than Treasury bills.

There

seemed to be a particularly strong demand for Treasury bills in the
market but a more abundant supply of other short-term issues available
for purchase.

In view of the imminent very large seasonal needs for

bank reserves to cover currency demands and credit expansion, as well
as the gold outflow, the System Account faced the need for making very
heavy purchases of securities in the weeks ahead.

It was desirable

that these be acquired with a minimum of downward pressure on the
short-term Treasury bill rate, which occupies a key position with
reference to international money flows.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-20-

Sugsequently, action was taken to release a large amount of
reserves by authorizing banks to count all of their vault cash holdings
in meeting reserve requirements and at the same time making some partly
offsetting adjustments in reserve requirements. This action, which was
taken to put into effect legislation adopted in 1959, provided another
means of supplying reserves while minimizing Federal Reserve purchases of
Government securities and consequent effects on interest rates.
(2) 17hat evidence is there of market response?
In order to carry out this directive, while meeting seasonal
currency demands and increases in required reserves as well as a continued
heavy outflow of gold, heavy purchases of securities were made by the
Federal Reserve in late October and during November, including Treasury
bills and other short-term issues, as well as some repurchase contracts.
In December, reserves were plentifully supplied by the release of vault
cash, and System sales of securities exceeded purchases.

In this period

member bank borrowings declined to a relatively negligible amount and free
reserves exceeded (^600 million.
Interest rates did not show the increase usual in the
December period of heavy liquidity demands, and in fact some rates
declined—in the medium- and long-term sectors, as well as in the
short-terra area. Bank credit increased more than usual, chiefly
through acquisition of Government securities, and the seasonally
adjusted money supply, after declining in November, turned up again
in December.

Total liquid asset holdings of the nonbank public, after

showing little change during the first half of I960, increased somewhat


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-21in subsequent months. Bank liquidity had also improved, with
increases in holdings of short-term Government securities and in
time deposits, while bank borrowings were reduced, but the banks1
loan-deposit ratios were higher than in earlier years.
The moderate downdrift in economic activity continued during
the last quarter of I960, with unemployment rising to a seasonally
adjusted rate of 6.8 per cent of the labor force. Prices of sensitive
materials showed further declines.

Consumer buying decreased somewhat,

after seasonal adjustment, but most of the curtailment in output
continued to be accounted for by inventory curtailment, particularly
in the manufacturing sector. Trade inventories rose throughout the
year. Personal incomes were well maintained, in part through transfer
payments, but corporate profits were estimated to be relatively low.
Government expenditures were tending to increase, while revenues
remained at a high level, continuing to provide a seasonally adjusted
cash surplus in the Federal budget.
(3) Did the response match, fall short of) or surpass expectations or aims?
Again it might be said that, under the circumstances prevailing
with respect to nonmonetary forces and the international situation, the
response in the financial area to Federal Reserve policies and
operations in the late months of I960 was about as much as could have
been expected. Borrowing demands were light because of inventory
curtailment and uncertainty as to future prospects. Yet total bank
credit increased more than seasonally, as banks added to their holdings
of Government securities and their loans to dealers in such securities.
Demand deposits increased no more than seasonally, but time deposits
showed a rapid rate of expansion.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-22While a greater increase in the money supply would have
been desirable, any more vigorous measures to supply banks with
reserves so as to encourage them to expand investments and thereby
increase the money supply might have resulted in a further gold
outflow, either because of low interest rates or for confidence
reasons.

In that event, such measures would not have served the

intended purpose of promoting monetary expansion and stimulating
domestic activity.

Interest rates remained steady, and there was

some expansion in over-all liquidity.

These achievemaits

no doubt

had some effect in moderating the intensity of the recession, which
soon after came to an end.

July 18, 1961.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Joint Economic Committee

Reserve Requirement Changes and Open Market Operations:
Quickness of Effects
When the Federal Reserve System is considering the choice
of one instrument or another as the means for increasing the availability of bank reserves and fostering monetary expansion, one of
the considerations is the speed and thoroughness with which the influence will be transmitted throughout the banking system, although
this consideration may or may not be of prime importance in any
given situation. It has been pointed out that a reduction in reserve
requirements can have a widespread effect very quickly and that this
may at times be a reason why such a reduction, rather than open
market purchases, would be the preferable form of action.
The purpose of the present note is to discuss the quickness
of effects of these kinds of Federal Reserve actions. The discussion
is restricted to a comparison of alternative means of increasing
the availability of reserves, especially since Federal Reserve
actions to reduce reserves are practically always directed toward
absorbing redundant reserves being made available by market developments and never toward forcing a net contraction in credit.
It is impossible to trace exactly the effects of any
particular System action affecting the supply of reserves, because
the secondary and subsequent consequences of the flow of reserves
and money throughout the financial structure are very much greater
than the immediate effect of the initial action upon the banks


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

first affected. Most Federal Reserve open market operations,
furthermore, are in response to short-run market developments or
pressures and are thus directed toward offsetting fluctuations in
reserve availability that would otherwise have occurred due to
market forces.
A change in their reserve requirements affects with
unquestioned speed the reserve position of all member "banks to
which it is applicable. An open market operation also tends to
affect the reserve positions of a great many banks rather quickly.
It reaches most country banks indirectly, however, and there is
room for difference of opinion as to the speed and pervasiveness
with which the effects are transmitted to then.
Open market operations ordinarily affect, in the first
instance, the reserve balances of so-called "money market banks"
in Mew York and other financial centers. Through them the effects
are quickly transmitted to the money market in general. This is
true because these larger banks, which deal actively in money market
instruments such as Federal funds, Treasury bills and other highly
liquid paper, undertake to keep their available funds fully invested
by buying such instruments whenever other credit demands do not completely use up their available funds. Many banks, especially country
banks, do not attempt to keep all their funds continuously invested
in this manner. Hence, changes in their reserve position may have
less immediate impact on the market, although such banks, in adjusting their reserve positions, may affect the money market, particularly


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

through shifts in their balances with city correspondents. The
flow of reserves to or away from country banks is determined
largely by the activities of their customers — depositors and
borrowers — rather than by money market developments.
When a reduction occurs in reserve requirements for all
classes of member banks, every member bank immediately has more
funds available for lending or investing (or for reducing its indebtedness to the Federal Reserve System). In the case of money
market banks, this tends to produce an extremely rapid response in
terms of expansion of their loans and investments --as would also
be the case if the Federal Reserve action took, instead, the form
of open market purchases.
On occasions when it is especially important that the
effects of a Federal Reserve action influence the reserve positions
of country banks as rapidly and as pervasively as possible, this
would be a factor that would favor a change in the reserve requirements. On the other hand, country banks do not put newly released
reserves to use as rapidly as money market banks, so that if a
quick money market response is needed, open market operations
would be preferred. Of course, the matter of relative promptness
is only one consideration, and not necessarily the decisive one,
dictating the choice of instrument.
There are three main ways in which a country bank may
respond to a reduction in reserve requirements. The bank may, of
course, immediately make new loans (if there is a demand for loans)


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

or acquire additional investments. Second, it may increase its
balances with its city correspondent banks. The city bank receiving such deposits would typically be one that is active in the
money market; it could therefore more readily put the additional
funds to work until such time as the country bank might withdraw
tham in order to increase its own loans or investments. In either
of the foregoing case? the total loans and investments of the
banking system, and hence normally the money supply, are increased.
Tur'rd; t>e country bank may simply leave its funds temporarily in
t*3 form of excess reserves at its Federal Reserve Bank or it may
use the funds to repay indebtedness at the Reserve Bank.

If it

does either of these, there is no immediate increase in bank credit
or money.
Analysis of member bank data indicates that on each
occasion when the reserve requirements of country banks have been
reduced, there has been a substantial temporary increase in their
excess reserves. In the case of some banks, there were periods
ranging up to several months during which the reduction in requirements was reflected mainly in excess reserves rather than in actual
expansion of "'.oans or investments.
Neve the]'rs, in this case as in the cases where the funds
were immediately iir ssted (either directly or through correspondent
banks), the banker had a feeling of greater "ease" because he was
in a position where he could more readily expand his loans or investments whenever any attractive opportunity might present itself.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Furthermore, despite the temporary increases in the total excess
reserves of country banks at times when reserve requirements have
been decreased, more than half of the reserves released to these
banks have usually gone into loans or investments or correspondent
balances within a month from the date of each release.
If the additional lending power is made available instead
by means of Federal Reserve open market purchases, rather than by
reducing reserve requirements, the additional reserves tend to flow
initially into money market banks, because these banks buy and sell
money market instruments themselves, carry the accounts of other
large investors whose transactions are important in this market,
and also handle the financing of the securities dealers (to whom
the Federal Reserve makes payment in the first instance). The money
market banks tend to put their added reserves to use quite promptly,
either by reducing their borrowings or by expanding their loans and
investments from the level that would have prevailed in the absence
of such Federal Reserve operations.
Such speedy response is facilitated by the normal channels
of operations of the financial system, which tend to funnel net excesses of supplies or demands for funds from all parts of the country
into the money centers. Added reserves that are received by money
market banks are thus redistributed to other banks. This may occur
directly, if the money market banks repay borrowings or buy securities from other banks or increase loans to them. Otherwise, the
reserve redistribution will be indirect, as the money market banks


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

increase loans to, or purchase securities from, nonbank customers,
with a resultant prompt increase in the deposit liabilities of
those banks and hence in the total money supply.
Such an increase in the money supply is normally accompanied or followed by an outflow of funds from money market banks
to the rest of the banking system. These payment flows increase
bank balances of many persons and firms engaged in economic activities everywhere, and hence affect all the banks in which they keep
their accounts. The effect on individual banks, especially country
banks, is indirect and not susceptible to accurate measurement, nor
does it necessarily affect every bank. When a country bank's
position becomes "easier" due to its having an inflow of deposits,
the banker himself is normally unaware that this condition may be
related to the Federal Reserve operation.
Because of this, the banker would not know whether or not
he could expect the added funds to stay in his bank, and hence he
might be hesitant about investing them in anything that could not
be liquidated quickly if necessary.

If his condition of relative

ease had arisen instead from an announced reduction in reserve requirements, he might expect that this would not be reversed soon by
an increase in the requirements and might therefore expand his loans
with more confidence.
The foregoing discussion relates mainly to System moves
to supply reserves for the purpose of exerting direct influence on
bank credit in the direction sought by System policy.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

In other

words, if the System's over -all policy should call for monetary
expansion this would presumably be accomplished under varying
circumstances by open market purchases or, alternatively, by
lowering reserve requirements with the results described, or by
coordinated use of both. Consideration must be given, however, to
the System's objective of smoothing out the peaks and valleys in
reserve availability so as to keep bank reserve positions and the
tone of the money market consistent with the System's broader objectives of ease or restraint. This may at times require short-run
moves in a direction contrary to longer run System objectives. For
example, when market factors temporarily supply excessive amounts
of reserves, the System may sell securities to mop up some of the
excess, even though basic policy calls for monetary ease.
This continuing objective is carried out through day-to-day
open market operations. Such operations provide the requisite flexibility in direction and timing, in addition to which it is possible,
through judicious use of repurchase agreements, as well as outright
purchases and sales, to direct operations toward particular areas
of the money market as conditions may require.

July 18, 1961


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

11

The Honorable Wright Patman,
Chairman,
Joint Economic Coaaittee,
Congress of the United States,
Washington, D. 0.

v hen I appeared before the Joint economic Committee on
June 2, 1961 in connection with the hearings on the Board's
Annual Report, you presented a list of 13 questions to which you
asked that answers be submitted later on.
the answers to 12 of these questions have been completed
and are enclosed herewith. A response to the 13th question is
in the course of preparation and it is expected that it will be
sent to you in the near future*
At those hearings, there Has also presented, to Mr. Hayes
as well as to lae, a request for a statement on the quickness of
effects of reserve requirement changes and open aarket operations.
That statement also is in preparation and should be ready for
transmission to you within the next several days*
Sincerely yours,
(Signed)ffin,McC, Martin, Jr.
Urn* MeO. Hartin, Jr.
Snelosures
MS: me


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

1. In framing its directive to the Manager of the
Account and reporting to the Congress, what, if any,
difference is there in the terms "credit expansion"
as in the revision of May 2U, and "monetary expansion" as in the revision of August 16? Are we to
understand these terms to apply to an expansion of
total loans and investments, of demand deposits, of
demand deposits plus time deposits, or currency in
circulation plus demand deposits?
No difference was meant by the two terms "bank credit expansion"
as used in the Ma;/ 2h revision of the Federal Open Market Committee's
policy directive, and "monetary expansion" as used in the August 16
revision.
The term "bank credit expansion" refers more precisely to an
increase in the total loans and investments of commercial banks, that
is, in their principal assets. "Monetary expansion" relates to an
increase in the nation's money supply, usually defined to include
demand deposits of banks and currency in circulation. Technically
speaking, the terms differ in that "bank credit expansion" approaches
the problem from the bank asset side, while "monetary expansion"
approaches it from the bank liability side. Since demand deposits are
at the same time the major component of the money supply and the main,
although not the sole, offsetting liability to bank assets, bank credit
expansion and monetary expansion are essentially two sides of the same
coin.

July 7, 1961


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Joint Economic Committee
What is the reason for including the limitation in
various directives restricting changes in security
holdings of the System to $1 billion or later to
&1.5> billion: Have these limitations at any time
during the past year restricted or controlled the
actions taken?
The dollar limitation contained in the directive issued to
the Federal Reserve Bank of New York by the Federal Open Market Committee
is intended simply to set a ceiling on the total change that may be
made between meetings in System Account holdings of Government securities
without further consideration by the Committee. The limitation did not
preclude operations in pursuit of the Committee's policy objectives
at any time during the Dast year.
The usual limitation of $1 billion is high enough to cover
any normal variations in the System portfolio required over the usual
three-week period between meetings. On occasion estimates may indicate
that an exceptionally large absorption, or release, of reserves from
the operation of other factors may require a larger change in the
System portfolio in order to meet Committee objectives. On such
occasions, the Manager of the System Open Market Account or any member
of the Committee may request that the limit be changed. This was the
case at the meeting of October 2£, I960. At that time estimates of
factors affecting member bank reserves over the succeeding weeks
indicated that changes in float and currency circulation alone would
absorb about ^3/h billion bank reserves before November 10 and
suggested that implementation of the Committee's directive to conduct
open market operations with a view "to encouraging monetary expansion"


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-2might require a change in the System's security holdings of more than
&1 billion. Accordingly, the Manager of the System Open Market
Account requested that the limit be raised to £l«5> billion and the
Committee granted this request. As it turned out, the change in
System out-right holdings of securities over the period amounted to
^991 million. During the period, reserves supplied temporarily by
the acquisition of Government securities under repurchase agreement
amounted, however, to as much as $6U0.5> million, although the net
change in securities held under repurchase agreement for the whole
period was only f>80 mil] ion.

It might be noted that the limitation

does not apply to such repurchase agreements, which are made for the
account of the Federal Reserve Bank of New York and -which provide
reserves on a temporary basis, nor does it apply to purchases and
sales of bankers' acceptances.
The limitation stipulated in the directive did not inhibit
the Manager in the conduct of operations during I960, and it remains a
useful device, since it ensures that a decision of the full Committee,
which can be obtained on short notice through a telephone meeting if
necessary, must be made if unexpected developments in the money or
securities market suddenly require open market operations in excess
of the limitation.

July 7, 1961


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Joint Economic Committee
3. What significance did you expect the Manager or the
Congress, in later reading of directives, to attach
to the phrase in the August 16 meeting "to take
into account even more than usual the tone of the
market rather than statistical measures"? What
statistical measures were referred to and why were
they to be downgraded in importance?
In providing that operations for the System Account during
the period immediately following the August 16 meeting should "take
into account, even more than usual, the tone of the market rather
than statistical measures," the Committee expected the Manager to
rely to greater degree than customarily would be the case on his
intimate knowledge of current money market conditions, as a basis
for Ms judpjnent of the decree of ease actually prevailing from day
to day and of the transactions to be effected in pursuit of the
Committee1s objective of encouraging monetary expansion. In line
with regular Committee procedure, this particular authorization applied
only to the period until the next meeting of the Committee, when the
directive would again be reviewed and reconsidered.
In the ordinary course and as part of his job, the Manager
of the Account is expected to use his special and expert knowledge of
market conditions, along with statistical estimates or projections of
available reserves and information regarding the distribution of such
reserves, in measuring the prevailing tone of the market. His judgment
on this point is, of course, of key importance in combination with
statistics in arriving at a determination of the particular transactions
needed on ai-y given day in order to attain the Committee's objective.
Among the most pertinent statistics he examines are daily projections

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-2-

of total reserves, excess reserves, and borrowings, in the aggregate
and by class of bank.

He also has available figures on current

positions and financing needs of Government securities dealers and
the flow of securities through the market, as well as market prices
and yields on U. S* Government securities, the prevailing rate on
Federal funds, and a variety of other money market data.
By his examination of such statistics and by observing
current market developments, the Manager of the Account is aided in
determining the actions needed to maintain or bring about the objectives
indicated by the Committee's directive and policy consensus.

However,

there is no single statistical measure that states or reflects precisely
the degree of ease or tightness prevailing in the market at any given
time, or the change in the degree of ease or tightness that would be
produced by the injection or withdrawal of a given amount of additional
reserves.

One of the functions of the Account Manager is to interpret

the available statistical data in the light of his expert judgment,
and thus to initiate operations that will attain the Committee's
objective.
At the August 16 meeting, the Committee felt it desirable
to place relatively greater emphasis than usual on the Manager's
evaluation of the tone and feel of the market. This was because the
customary statistical indicators were likely to provide less precise
guidance as to the degree of ease or tightness prevailing in the
market during the next few weeks as a result of uncertainty regarding
member bank response to the actions taken by the Board of Governors


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

—3—

of the Federal Reserve System on August 85 I960. Those actions made
additional reserves available through (1) authorizing the counting of
vault cash by banks in meeting their reserve requirements effective
August 25 and September 1, and (2) reducing reserve requirements
for central reserve city banks effective September 1.

July 7, 1961


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Joint Economic Committee
k. Assuming that the System Manager is, as is
apparently the case, expected and allowed to
translate "shades of opinion1' into operational
dollar terms, do you feel that this is an adequate
explanation to the Congress of the "determination
of open market policies and the reasons underlying the action," as required by statute?
The policy actions of the Federal Open Market Committee and
the reasons underlying such actions are, it is believed, adequately
explained in the Annual Report of the Board of Governors. The
directive and the accompanying entry that appears in the Annual Report
covsring each policy action provide Congress with an explanation of
the "determination of open market policies and the reasons underlying
the action," as required by statute. This material is supplemented
by the general analytical text covering the events of the year as
presented on pages 1-33 of the Annual Report for I960.
Significant shades of opinion regarding policy that emerge
in the course of Committee discussions are reflected in the Committee
consensus and are recorded in the entries for the policy record, later
published in the Annual Report. The bearing that such observations
have upon the policy actions taken by the Committee thereby becomes
part of the public record.
Additional comment on the use of shades of opinion by the
management of the System Open Market Account appears in the answer
to Question 5>.

July 7, 1961

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Joint Economic Committee
In translating these "shades of opinion," is the
Manager expected to consider the number of members
voting for or against the directive and assign
different weights to the opinions of different
members, depending upon what seems to him to have
been the most persuasive and best articulated
reasons?
The Manager of the $ystem Open Market Account is expected and
instructed by the Federal Open Market Committee to pursue operations
that will attain the objectives specified by the directive issued by
the Committee at any given meeting. He is not expected or authorized
to "assign different weights to the opinions of different members,
depending upon what seems to him to have been the most persuasive
and best articulated reasons."
To assist him in carrying out the recessary operations, the
Manager has the benefit of the full discussion at the meeting at which
a policy decision is reached. The "shades of opinion" expressed by
members at a meeting are not necessarily related to the number voting
for or against a directive:

such shades of opinion exist when a vote

is unanimous, as is often the case, and they may relate to a variety
of factors such as timing of operations or emphasis upon one or more
of a series of statistical indicators.
In fact, the term "shades of opinion," as used in the
introduction to the Record of Policy Actions of the Federal Open
Market Committee appearing on page 3h of the Board's Annual Report
for I960, applies to all the Committee discussion, particularly those
significant portions that are set- forth in the subsequent entries
appearing on pages 35-lh covering individual policy decisions. The

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-2-

purpose of the introductory'' general comment on this point was to
indicate to the Congress and others that the Manager, by attendance
at the meetings, is in a position to know immediately the full background of discussion leading to the wording of the directive and to
the additional substantive instructions given by the Committee at
the meeting, as set forth in the Record of Policy Actions.
Many examples of these shades of opinion are contained in
the entries covering individual policy decisions.

For example, several

shades of opinion are reported at the January 12, I960, meeting in the
paragraph at the top of page 37> and in the second paragraph on that
page a minority vote and the reasons given in support thereof are
presented. The Management of the Account had the benefit of this
full discussion in pursuing the directive calling for "operations
with a view to restraining inflationary credit expansion in order to
foster sustainable economic growth and expanding opportunities." He
was bound by the directive and consensus, however, which was for no
charge in the degree of restraint that prevailed at the time the
meeting convened; and the Manager would not consciously have taken a
move to change the situation without further instruction from the
Committee.
At the January 26 meeting, the Committee decided to continue
substantially the same degree of restraint on credit expansion but,
to illustrate again the shades of opinion that existed, several
members would have preferred to move slightly in the direction of
reducing the degree of pressure on bank reserve positions if a large


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-3Treasury financing had not been imminent. It was clear that no
member then favored increasing the degree of restraint, and one
again voted against the directive because he continued to feel that
less restraint should be applied.
At the February 9 meeting, the shades of opinion expressed
included (a) the unanimous view that any tightening in the degree of
restraint should be avoided, (b) the views of several who leaned
toward less restraint, and (c) a rather general view that a moderate
increase in the money supply would be desirable. However, the
majority action, and the wording of the directive issued, was for no
change in the existing policy on the grounds that a basic shift in
open market policy was not called for at the time.
At the next meeting, March 1, the directive and the
accompanying consensus set forth in the policy record were changed
by unanimous vote to wording that called clearly for moderately less
restraint. Taking the period January 12 to March 1 as a whole, although
the wording of the directive did not change, the shades of opinion
recorded in the policy record entries for several meetings made clear
that any doubts as to the effect of transactions in the System Account
should be resolved on the side of no more restraint, rather than on
the side of an increase in pressures on reserve positions of banks.
In sum, whether arrived at by a small or large majority or
by unanimous vote, the Committee instruction as to policy and operation
of the Account is the basic guide that the management of the Account
is obligated to follow. The directive represents a general statement


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

of Committee policy objectives, which is supplemented by the consensus
that emerges from each meeting and forms the basis for the record of
the policy decision. Thus, the policy record entry that appears in
the Annual Report is a more complete spelling out of the Committee1s
instructions and reasoning than is the directive taken alone. Within
the framework of the directive, however, the Manager of the System
Account may be expected to derive assistance in understanding-' the
intent of the Committee in issuing its instruction because of his
knowledge of the views expressed in the process of arriving at the
Committee's decision.

July 7, 1961


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Joint Economic Committee

6. In purchasing or selling securities, do you ever
expect or direct the Account to take an active forceful
role by purchasing securities above or below the current
price for the purpose of changing the level of interest
rates? If this is never done, is not the role of the
System reduced to that of a follower rather than a leader?
The Federal Open Market Committee does not direct the Account
Management to make purchases above current prices, or to make sales below
current prices, in carrying out transactions for the System Account.
Transactions for the Account, rather, are made on a "best price" basis,
that is, purchases are made at the lowest prices offered, and sales at
the highest prices bid at the time the transactions are effected. This
procedure is utilized in order to avoid arbitrary discrimination among
dealers and disruptive market effects. Nevertheless, it permits the
Federal Reserve to assume an active, forceful, role in influencing
conditions in the money and credit markets when this is deemed desirable.
Such influence is exercised primarily through changes in the supply of
bank reserves, although interest rate considerations may at tines be of
importance.
The System is a large participant in the Government securities
market and its operations affect the expectations of other participants
in that market as well as general expectations regarding money
conditions.

System transactions in Government securities consequently

have an immediate effect on prices and yields, as do the large transactions of any other market participant.

The magnitude of this effect,

in the case of purchases, depends primarily on the size of the operation
relative to the volume of securities available in the market, including

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-2-

those in dealers' positions as well as those flooring into the market
from customers, at prices that are at, or close to, those currently
being quoted.

Similarly, the immediate impact of System sales will

depend on the strength of bids for securities in the market, including
those by dealers for positioning and for filling orders for customers.
By operating on a "best price" basis, the System permits the market to
adjust continuously to the volume of transactions actually effected.
To operate otherwise would tend to weaken the value of the knowledge
that a free market, where the individual decisions of buyers and sellers
are worked outj can provide.
The immediate focus of System open market operations is to
regulate the reserve positions of banks and in this way to make
possible a flow of bank credit and money adjusted to the needs of the
economy.

The bulk of operations are designed to offset undesired

short-term variations in other factors affecting bank reserves and to
provide for seasonal and other temporary needs for reserves. Open
market policy thus helps to dampen the very wide short-term variations
in securities prices and yields which would tend to occur in the
absence of System actions.

From the standpoint of such day-to-day

operations, therefore, the question of "leading" or "following" the
market does not arise.
Contracyclical monetary policy is carried out simultaneously
with operations conducted to provide for seasonal and other short-term
reserve needs and in practice the two sets of operations cannot be
separated.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

The extent to which factors raaking for temporary changes

-3in reserves are in fact offset—or, occasionally, reinforced—by
System operations depends on the direction in which monetary policy
is moving in its economic stabilization function.

It is in carrying

out its continuing contracyclical. function that the Federal Reserve
may be said to have an active, leadership influence on money and
credit flows and thereby on market interest rates.
Through influence on market expectations, bank credit and
monetary policy also have effects on interest rates in addition to, or
even prior to, those resulting from changes in bank reserve positions
and in market supplies of securities.

Sxpectational responses to

System actions, by accelerating market adjustments in prices and
yields of securities to cyclical movements in the economy, give
monetary policy an additional leverage in its efforts to counter
economic instability. At the same time, the risk that the response
of market psychology may be excessive requires that the authorities
be careful in undertaking- actions or operations that might appear to
signal an abrupt change in prevailing credit conditions.

July 7, 1961


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Joint Economic Committee

7» Reference is made on several occasions to "relating
the supply of money in the market to the needs of
commerce and business." vhat significance has this
statement in a policy directive unless related to
some equilibrium level of interest rates?

Clause (l)(a) of the directive of the Committee has
specifically provided for operations of the System Open Market Account
to be undertaken with a view, among other objectives, to -relating the
supply of funds in the market to the needs of commerce and business.
This is one method by which the Committee keeps clearly before its
operating officials the responsibilities for accommodating commerce and
business as established under Section 12A of the Federal Reserve Act,
This statement in the policy directive relates mainly to the
function of the Federal Reserve System in offsetting seasonal, regional
and random flows of funds that might suddenly cause undue stringency in
bank reserve positions and in the money market.

Prior to the establish-

ment of the Federal Reserve System, such flows of funds at times
aggravated, or even caused, serious financial and economic disturbances.
The statement therefore refers to the more routine functions of the
Federal Reserve System involved in preventing temporary distortions in
money flows from having a disturbing effect on the economy. The policy
instructions of the Committee are contained elsewhere (Clause (l)(b) )
in the directive to the New York Bank.
The needs of commerce and business are of course accommodated
by a relatively stable reserve base, aid the System's marginal operations
referred to above must be related to these needs. Widely varying needs


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

for funds are generated in the r egular course of business activity.
Holidays such as the Fourth of July and the Christinas season, for exanple,
produce sharp increases in currency used by the public which, unless
offset by Federal Reserve action, would produce strong temporary pressures
upon bank reserve positions. Needs for credit accommodation are also
associated with such seasonal developments as quarterly tax payments and
the harvesting and processing of agricultural commodities. Variations in
credit needs of a longer run nature accompany cyclical business expansions
and the underlying trend of economic growth.
Some of these -types of shifting credit needs are sufficiently
repetitive to be projected in advance on the basis of historical patterns.
Other needs, less amenable to regular projection, may sometime be forecast
or perceived soon after their inception. The Manager of the System Open
Market Account has prepared daily estimates of aggregate reserve sources
and uses for a number of days ahead which embody adjustments for many of
these developments. In his operations, the Manager makes such allowance
for these market developments as appears practicable within the degree of
general monetary ease or restraint which the Federal Open Market Committee
has directed to be maintained.

In terras of volume, the open market opera-

tions undertaken by the Account to offset or compensate for market factors
affecting reserves far overshadow the volume of operations necessary in
order to achieve such changes in general reserve availability as are
called for by the Committee.
The kinds of demands for funds outlined above interact in
varying degrees with the prevailing state of credit ava lability and
interest rates. Some repetitive needs for funds are sufficiently

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-3-

insensitive to interest rate changes to produce substantial upward
fluctuations in market interest rates in the absence of offsetting
reserve provisions.

Such a pattern often materialized near the end of

each year prior to the establishment of the Federal Reserve System, as
the market worked to equilibrate insistent seasonal, demands for funds
with an inelastic supply. Federal Reserve operations, by providing
appropriate adjustments in the credit base, aim to minimize the degree
to which the onset of seasonal and other pressures can produce departures
from the conditions of general credit availability being sought by
over-all monetary policy.

July 1, 1961


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

.

Joint Economic Committee

8.

In connection with the indications that the Board considers the growth of time deposits in commercial banks
as having expansionary effects, precisely wliat is the
Federal Reserve policy with respect to time deposits
during periods of inflationary pressures or during
periods when stimulation of general economic activity
is desired?

Because of the diverse effects of the savings and liquidity
aspects of time deposits in commercial banks on spending and economic
activity, an appraisal of the significance of their growth must be based
on constant study of the various forces underlying such growth.

Over the

long run, increases in time deposits in commercial banks as well as in
other forms of savings facilitate investirent and contribute to economic
development. Over the economic cycle Federal Reserve policies tend to
encourage bank credit and deposit expansion at times when stimulation of
general economic activity is desired, and to restrain them during periods
of inflationary pressures.

Growth in time rather than demand deposits is

preferable during periods of inflationary pressures since they are less
liquid, but the form of deposits in which holders wish to keep their
funds is mainly a function of the needs and desires of holders rather
than the actions of the Federal Reserve.

Thus, the amount of demand

deposit expansion appropriate for any particular economic situation is
affected to some extent by the concurrent rise in time deposits as well
as in other forms of liquidity.
Time deposits in commercial banks are at the same time a form
of savings and a reservoir of liquidity.

They are a highly liquid form

of asset and are readily convertible into cash, with no fluctuation in
capital value, although some sacrifice of interest is usually involved.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

c
-2-

As a form of both savings and liquidity, time deposits in commercial banks have some influence on the volume and timing of consumption
and investment, and hence the course of activity over the economic cycle
as well as in the longer run. Current additions to time deposits, in
turn, also reflect the economy's decisions to spend or save,

For example,

when spending tends to diminish, consumers or businesses may add part of
the additional unspent income to time deposits« Thus, movements of these
deposits are, like many other facets of economic activity, both cause and
effect of such activity.
Time deposits differ from many other forms of savings in that
they are subject to more public regulation. Since most time deposits in
commercial banks are liabilities of member banks of the Federal Reserve
System, they are subject to legal reserve requirements and maximum
interest rate regulation* Reserve requirements against time deposits
limit the degree of multiple bank credit expansion that can be built up
on the basis of a given amount of reserves in case some of the bank funds
made available are held in the forra of time deposits* Federal Reserve
policy takes account of both the savings and liquidity aspects of time
deposit growth at commercial banks.

July 1, 1961

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Joint Economic Coandttee
9. Does the size of the Open Ilarket Committee have
anything to do rith the vague and very general
wording of the policy directives?
The size of the Federal Open Market Committee has little,
if anything, to do with the wording of the policy directive, once the
Committee has decided by unanimous vote or otherwise what its policy
goal is to be.
Clause (b) of the first paragraph of the directive specifies
the economic goal, or objective of current policy. This is a statement
that must guide operations over a period of several weeks and, appropriately, is in rather broad terms, irrespective of the size of the
Committee. A distinction should be made between this policy goal
statement and the detailed operating procedures or techniques to be
followed in attaining such goal. This distinction—not the size of
the Committee—is the determining factor in the type of wording used
in the Committee's directive, when the policy decision has been
arrived at.
As an example, the wording of the directive adopted at the
last meeting in I960 provided that open market operations be with a
view "to encouraging monetary expansion for the purpose of fostering
siistainable growth in economic activity and employment, while taking
into consideration current international developments." This language
set out in concise and definite terms the policy objectives of the
Committee at that particular phase of the business cycle. It was not
designed to provide detailed instructions for day-to-day operations of
the System Account in pursuit of the goal, but it was designed to make

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-2clear the Committee's purpose that should guide the Manager of the
System Account in executing transactions. Such a guide would be
necessary, regardless of the size of the Committee. Also, regardless
of the size of the Committee, more detailed guidance may be given
irithin the framework of the directive. In practice, such guidance
to the Manager is contained in the consensus that is reached at each
meeting of the Committee, as set forth in the Record of Policy Actions.

July ?, 1961


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

10 a Among several references noting that the money supply
had failed to respond as anticipated, the Septenber 13
summary refers to the change as "disappointing." Is
it your contention that the Federal Reserve is sometimes frustrated in its attempt to increase the money
supply and, if so_, how and why?

The particular variable over which the System exercises major
influence is the total of commercial bank reserves. Through its influence
over reserves the System is able to have a significant effect on total
loans and investments and total deposits of banks, and through these
variables some effect on the volume of spending, investment and saving
by the public in general.
It is never possible to predict exactly the expansion of bank
credit and money which will result from a given addition to total reserves.
Depending on the strength of public and private credit demands, the
liquidity of banks and their willingness to borrow, and many other factors,
the supply of reserves made available by open market operations or
reserve requirement adjustments may be used in many ways. Banks may
accumulate excess reserves, repay indebtedness, or utilize the reserves
as a basis for deposit expansion. Typically, some part is likely to be
employed in each of these ways. At times the bulk, if not all, of the
reserves provided may flow into one use rather than another.
The quoted observation in the policy record for September 13
related to the fact that, despite the substantially larger than seasonal
increase in total reserves since Hay, the increase in the seasonally
adjusted money supply through August had been very moderate. In this


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-2-

sense the Federal Reserve may be "frustrated" at times in endeavoring
to foster an increase in the money supply, because the monetary expansion
resulting from its actions to srpDly reserves is less than was anticipated
on the basis of previous exoerience. Responses of less than anticipated
dimensions can be, and are, taken into account in subsequent policy
formulation, as is demonstrated by the policy record cited in this
Question,

July 7, 1961


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Joint Economic Committee

11. Does the Board take into account or attempt to
estimate the member banks demand for free reserves
or liquidity as well as the supply of these
reserves? Is the rate of interest on Federal
funds an important indicator influencing the
direction and extent of open market operations?
The Federal Reserve does take into account the member banks
demand for reserves in its actions to affect the supply of reserves
through monetary policy.

It does this both in the short run to allow

banks to meet the seasonal and other temporary demands for financing
on the part of the Government and private borrowers, and in the longer
run to contribute most effectively to sustainable economic growth.
The significance of the level of free reserves or net borrowed
reserves in the banking system as a factor tending to encourage or
restrain bank credit and. monetary expansion depends, among other
factors, on the demand for reserves. The demand for reserves, in turn,
depends on the vigor of actual current demands for bank credit, the
existing level of over-all bank liquidity, shifts between types of
deposits, and the variation among the different classes and groups of
banks with respect to these factors.
If the Federal Reserve responds fully to demands for reserves
by supplying them through open market operations, member bank borrowings
are unlikely to rise and excess reserves unlikely to fall. If, however,
the Federal Reserve judges that some restraint on bank credit and
monetary expansion is appropriate, it will supply through open market
operations a smaller volume of reserves than is being demanded. As a
result, there is likely to be an increase in the level of member bank

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

1
-2-

borrowings or a reduction in excess reserves. In these circumstances,
banks tend to moderate their credit expansion.
At other times, when economic activity is slack and when
credit demands are light or banks prefer to increase their liquidity
rather than to expand their loans, it is appropriate for the Federal
Reserve to supply banks with more excess reserves in order to encourage
bark credit and monetary expansion. Thus, in providing an appropriate
supply of reserves, the Federal Reserve takes into account (1) the
demand for them, (2) the desirability of encouraging or restraining
bark credit and monetary expansion, (3) the desire of banks for liquidity,
and (U) the \-rlllingness of banks to borrow in order to obtain reserves.
The rate of interest on Federal funds is an important indicator,
but only one of several important indicators, that is used to evaluate
current conditions in the money markets and thus to determine whether
action by the Manager of the Federal Open llarket Account is necessary
or desirable in order to carry out the current directive of the Federal
Open Market Committee. The Federal funds rate indicates mainly supply
and demand relationships in one segment of the money market, namely,
tho market for one-day bank funds. It reflects particularly short-term
variations in the reserve needs of individual banks and their efforts
to balance their reserve positions or to put excess reserves to use
within the period they are permitted to use for reserve computation
purposes.
The spread between the Federal funds rate and the discount rate
reflects rather accurately day-to-day changes in the distribution of


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-3-

reserves among larger banks, and hence their short-run lending and
investing ability.

This is especially true in periods of credit ease.

The general state of credit markets even in the short run, however,
is more accvrately reflected in money market rates other than the
Federal funds rate, particularly those for Treasury bills.

July ?, 1961


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Joint Economic Committee
12.

For each of the five or six changes in key words
of the policy directives do you feel that a
reporting of this change in language meets the
requirements of a full disclosure to the Congress
of the actions taken and the reasons underlying
the action?

Changes in the la&gie of the general policy directive of
the Committee were made at th*£ Committee's meetings of March 1, May 2U,
August 16, and October 25* I960. The underlying reasons for these
changes are set forth at pages h39 55> 63, and 70, respectively, of
the Board's I960 Annual Report. In addition, the policy record entry
for each of the Committee's meetings contains a summary of the consensus
of the Committee reached at that meeting, spelling out Committee
objectives in more detail than in the broad policy directive. The
Record of Policy Actions is supplemented by an integrated analysis
appearing on pages 1-33 of the Report with respect to general economic
and financial developments during the year.
It is believed, therefore, that the Board's I960 Annual
Report clearly meets the requirements of the law for full disclosure
to the Congress of the policy actions of the Committee and of the
reasons underlying such actions.

July 7, 1961


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

W*t«MT P ATM AN

TEX

RICHARD SOI I !»*»

MO

CHAIRMAN

PAUt-H

CXX

><~E CHAIRMAN

JOHN STARKMAN. ALA.

HAUE BOM*. LA

-' W

PYA-BWOM!

A*K

HBMMT S. HBMH. WIS.

WILLIAM PHOXMIRF. WIS

MAMTMA W. •IMFnTHS. MICH

CLAIBOf*Nf f t : .

N

THOMAS •. CUlmS, MO.

^-^•/-^rr.

tontrre^s;
of the
*tatt^
Congress of
rtje fflnitrt
(Hnittb &tate£

WM. SUMMERS X3HNSON.

JOINT ECONOMIC
ONOMIC COMMITTEE
COMMITT

EXECUTWE D.RECTO*

• -

^7"^; r - MC
JOHN *• LEHMAN, DEPUTY EXECUTIVE

(CREATED PURSUANT TO SEC.
CON«RES,)
EC. 5(.)
5(»> OP
OP PUBLIC
PUBLIC LAW
LAW K4.
304. 7,TH
7»

DIRECTOR AND CLERK

June 14, 19ol

The Honorable
William Me C. Martin
Chairman, Board of Governors
The Federal Reserve System
Washington, D. C.
Dear Mr. Martin:
The purpose of this letter is to make clear the requests
made of you and Mr. House, concerning records of considerations
and decisions of the Federal Open Market Committee, during the
hearings of this Committee on June 1 and 2. The records requested
are of three types, as follows:
First, the verbatim record of the Open Market Committee
meetings, or the full minutes of the Committee meetings, or both,
if both verbatim records and minutes were made during the year
I960. (This request was made at page 2^2 of the transcript of
June 2.)
Second, all interpretative memoranda and all notes taken
or prepared by Mr. Rouse or any other members of the staff of the
Board or the New York Reserve Bank concerning the deliberations and
policy decisions of the Open Market Committee, plus copies of the
wires from the Board to Mr. Hays and Mr. Rouse (referred to by
Mr. Rouse at page 57 of the transcript for June l). This request
is also made for records pertaining to the calendar year I960.
(This request was made of Mr. Rouse at various pages of the transcript for June 1, especially at page 77-)
Third, a descriptall the factors */hich the Open
Market Committee took into account on the last occasion when it instituted a policy of restraint, and a description of the factors
which it took into account on the occasion of the immediately preceding meeting, prior to institution of a policy of restraint,


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

itman
Chairman

This article is protected by copyright and has been removed.
Article Title:

"On open market operations "Don't Nudge too far, Fed warns
Kennedy" William McC. Martin and other Fed officials tell
Congress they must reserve independence of action despite
Administration ideas about level of interest rates

Journal Title:

Business Week pgs 28-29

Date:

June 10, 1961

Pages:

28-29


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

This article is protected by copyright and has been removed.
Author:

Nossiter, Bernard D.

Article Title:

Reserve Head Balks at Low Rates: Kennedy-Martin Feud Over
Interest Breaks Into Open

Journal Title:

Washington Post

Date:

June 3, 1961


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

(

r_

Johnson - 5171

FOR IMMEDIATE RELEASE
WEDNESDAY, MAY 24, 1961
CONGRESS OF THE UNITED STATES
JOINT ECONOMIC COMMITTEE

JOINT ECONOMIC COMMITTEE TO REVIEW
OPERATIONS OF FEDERAL RESERVE BOARD AND
FEDERAL OPEN MARKET COMMITTEE

Rep. Wright Patman (D-Tex. ), Chairman of the Joint Economic
Committee today announced hearings to be held June 1 and 2.
First witness will be Mr. Robert G. Rouse, Manager of the
Federal Reserve System's Open Market Account. He will be followed
by Mr. Alfred Hayes, President, Federal Reserve Bank of New York and
Vice Chairman of the Open Market Committee, and, finally, by
Mr. William McChesney Martin, Jr., Chairman of the Board of Governors
and also Chairman of the Open Market Committee.
Mr. Patman said that the hearings will focus mainly on the
Board's Annual Report. He said the Committee will consider such
questions as:


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

"How adequate is the information made public by
the Board's Annual Report to Congress? Does it give
the public a clear understanding of the actions and
policies of the Beard and the Open Market Committee,
and the reason for these actions and changes in policy?
How well and how timely have the policies described in
the Board's report been implemented?
"Whether or not monetary policy can be determined
for longer periods in advance, and made public, in the
same way that the annual Economic Report of the
President makes public the Federal Government's fiscal
-more1961-13

2.

policies for the coming year. When the Open Market
Committee meets each three weeks and adopts a credit
policy for the three weeks ahead, would it not be
better to make a prompt announcement of the policy,
rather than have the financial community and the
general public learn only gradually what the policy is."
In explaining the role of the witnesses in the Federal Reserve
System, Mr. Patman said:
"The Open Market Committee, made up of the 7 Board
members, plus 5 Federal Reserve Bank presidents, determines over-all money and credit policy for the country.
The Federal Reserve Bank of New York is agent for the
Open Market Committee, and the System Open Market
Account, located in the New York bank, makes money and
credit 'tight' or 'easy,' according to policy instructions from the Open Market Committee."

Members of the Joint Economic Committee are:
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


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Senate
John Sparkman, Alabama
J. W. Fulbright, Arkansas
William Proxmire, Wisconsin
Claiborne Pell, Rhode Island
Prescott Bush, Connecticut
John Marshall Butler, Maryland
Jacob K. Javits, New York

HEARINGS WILL BE IN ROOM 130*1, NEW HOUSE OFFICE BUILDING,
10 a.m., THURSDAY, JUNE 1, and 10 a.m. and 2 p.m., FRIDAY,
JUNE 2.

The following has "been excerpted from the unedited copy of the
Report of Proceedings of Hearing held before the Joint
Economic Committee, on Friday, June 2, 1961, concerning
"Recent Policies and Actions of the Federal Reserve System'5

* * *#
(The questions referred to follows)
1. In framing its directive to the Manager of the Account and reporting
\

to the Congress, what, if any, difference is there in the terms "credit expansion"
as in the revision of May 24, and "monetary expansion" as in the revision of
August 16? Are we to understand these terms to apply to an expansion of total
loans and investments, of demand deposits, of demand deposits plus time deposits,
or currency in circulation plus demand deposits?
2. What is the reason for including the limitation in various directives
restricting changes in security holdings of the System to $1 billion or later
to $1.5 billion: Have these limitations at any time during the past year
restricted or controlled the actions taken?
3. What significance did you expect the Manager or the Congress, in later
reading of directives, to attach to the phrase in the August 16 meeting "to take
into account even more than usual the tone of the market rather than statistical
measures?" What statistical measures were referred to and why were they to be
downgraded in importance?
4. Assuming that the System Manager is, as is apparently the case, expected
and allowed to translate "shades of opinion" into operational dollar terms, do you
feel that this is an adequate explanation to the Congress of the "determination of
open market policies and the reasons underlying the action," as required by
statute?


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

5-

In translating these "shades of opinion," is the Manager expected to

consider the number of members voting for or against the directive and assign
different weights to the opinions of different members, depending upon what
seems to him to have been the most persuasive and best articulated reasons?
6. In purchasing or selling securities* do you ever expect or direct the
Account to take an active forceful role by purchasing securities above or below
the current price for the purpose of changing the level of interest rates? If
this is never done, is not the role of the System reduced to that of a follower
rather than a leader?
7«

Reference is made on several occasions to "relating the supply of moaey

in the market to the needs of commerce and business.08 What significance has this
statement in a policy directive unless related to some equilibrium level of
interest rates?
80

In connection with the indications that the Board considers the growth

of time deposits in commercial basiks as haviiag expansionary effects* precisely
what is the Federal Reserve policy with respect to time deposits during periods
of inflationary pressures or during periods when stimulation of general economic
activity is desired?
9»

Does the size of the Open Market Committee have anything to do with the

vague and very general wording of the policy directives!
10. Among several references noting that the money supply had failed to
respond as anticipated, the September 13 summary refers to the change as "disappointing". Is it your contention that the Federal Reserve is sometimes frustrated
in its attempt to increase the money supply amc!, if so* how and why?
11o

Does the Board take into account or attempt to estimate the member banks

demand for free reserves or liquidity as well as the supply of these reserves? Is


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

the rate of interest on Federal funds an important indicator influencing the
direction and extent of open market operations?
12. For each of the five or six changes in key words of the policy directives
do you feel that a reporting of this change in language meets the requirements of
a full disclosure to the Congress of the actions taken and the reasons underlying
the action?
13• For each of these actions (l) what combination of economic indicators
prompted the action, (2) what evidence is there of market response, and (3) did
the response match, fall short of, or surpass expectations or aims?
(The answers referred to follows)


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

(
Excerpts from Chairman Martin's testimony
before Joint Economic Committee, June 2, 1961
(From unedited transcript of testimony)
-X- -X- -X- -X- -X- * *- •*

Senator Bush. Governor Martin, I think you know, and the Committee
knows, that I am one who believes very much in the independence of the
Federal Reserve System and its responsibility to the Congress, and it is
a creature of the Congress, so to speak, and I approach this question in
that point of view, as one who respects the independence of the Federal
Reserve Board very much, and believes it is very important.
But in President Kennedy's recent message in connection with our
urgent national needs, and those three words are from his address, he
made this statement, and I will read it:
"The full financial influence of Government must continue to be
exerted in the direction of general credit ease and further monetary
growth while the economy is recovering.

Some further downward adjustments

in interest rates, particularly those which have been slow to adjust in
the recent recession, are clearly desirable, and certainly to increase
them would choke off recovery."
The President has also indicated that he thinks that we are definitely
moving out of the recession, and other statements which he has made
indicate that the Administration believes that the gross national product
will be attaining new high levels toward the end of this year, and maybe
substantially higher than were attained last year.
And so confident are they in that belief that this is at least a
partial justification in their minds for some largely increased spending


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-2-

programs which, it is said, would result in increasing tax income to the
government and, therefore, we can go ahead with these larger spending
programs because of not being fearful of the deficit, because the increase
in gross national product will produce greater earnings and we will not
have a deficit.

That is the general idea.

Now, he says, "The full financial influence of government must continue to be exerted in the direction of general credit ease and further
monetary growth while the economy is recovering."
I do not know how long he means, whether to the very end of the
recovery, but it is a statement that disturbs me somewhat, feeling as
I do that monetary policy should be used with great restraint, if any, in
respect of stimulating a recovery that already appears to be well under
way, and gives promise of going quite far in a favorable direction.
I wonder whether you would care to comment on that from the point of
view of the Federal Reserve Board, and especially whether you feel that
some further downward adjustment in interest rates, particularly those
which have been slow to adjust in the recent recession "are clearly
desirable and certainly to increase them would choke off recovery," would
you care to comment on this, sir?
Mr. Martin. Yes, 1 will be glad to comment on it.
In the first place, the Open Market Committee and the Federal Reserve will carefully consider anything that the President of the United States
says at any time, and we welcome his views.
Now, when it comes to this matter of forecasting the future —
Senator Bush. The what?


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

—3—
Mr. Martin.

When it comes to the matter of forecasting the future,

you have got a great many imponderables that nobody can state precisely,
Now, our interest rates, as I have stated a great number of times,
our role in the Federal Reserve — and he is talking there about the full
financial resources of the government, which there are many resources outside the Federal Reserve — take the home credit field, for example, on
various things — but the Federal Reserve has the obligation to supply
reserves to the economy, not to fix any levels of interest rates but to
supply reserves to the economy, in such a way as to help the economy have
stability and growth.
Whatever level of reserves in the judgment of the Federal Reserve
Board is appropriate to that, that is what we should seek,
Now, you cannot have high or low interest rates per se without
relating them to the flow of funds, and when you talk about interest rates
in this sense, levels of interest rates, you have got to relate them to
the flow of funds,
I have used the word picture of a stream.

If you pump money into

the money stream faster than it can dig a river bed to contain it, then
that money stream overflows its banks and floods the river on either side,
and I think that creates inflationary pressures.
Likewise, if you want to create artificially high interest rates you
just starve the economy for money, and you will get artificially higher
rates.
But what we have been trying to do here is to adapt this flow of
money to produce the dual operation of encouraging the flow of capital for
private domestic expansion where it is called for in this country and, at


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-4the same time, to minimize the outflow of capital abroad, and I want to
reiterate here what has been the Federal Reserve Board's position and
what I understand to be the position of those in the Administration that
I have consulted with on this also, that we do not intend to peg interest
rates.

At no time have we intended to peg interest rates,

Now, I cannot forecast what the future is going to be. But, generally speaking, against this background, if business continues to rise,
and it may not continue to rise, I am not forecasting it will here,
interest rates will tend to rise.
We can, perhaps, moderate them, but we cannot control them. If business stays about where it is under present conditions, interest rates will
stay about where they are»
If business declines, interest rates will decline.

That is the best

I can do with the —
Senator Bush. And, conversely, if business improves interest rates
should improve; is that right?
Mr. Martin. Yes, somewhat.
Senator Bush.

Yes.

I do not want to be too persistent on this, but the President speaks
of in spite of the recovery that he mentions, of the desirability, clearly
desirable, it is clearly desirable that some further downward adjustment
in interest rates take place — this would not seem to me to fit in with
the statement you have just made.
Mr, Martin. I think it depends entirely on what happens in the business picture, and I think that — I want to make my position on interest
rates clear again, as I have many times, I have repeatedly stated, that


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

(
-5I would like to see as low interest rates as you can have without producing inflationary pressures*
But I do not think the Federal Reserve Board ought to be asked to
force interest rates or to peg interest rates. It is self-defeating and
does not help in putting unemployed back to work.
Senator Bush. That is a very satisfactory answer to this question.
I am very glad to hear you say that, and I certainly agree you have been
consistent in this position over the years that you have been coming before
these committees,
I have no other questions, Mr. Chairman,
Chairman Patman* I would like to pursue that for just a little,
Mr. Martin.
I read this statement this morning to Mr. Hayes, and Mr. Hayes' answer
was that although the members of the Federal Open Market Committee are all
aware of this statement, it has not been taken up, although he said he
was not speaking for the Open Market Committee, had not been taken up
with the committee, and I did not press him for what the Open Market Committee would probably do, because you were coming on this afternoon, and
since you are the chairman, I would like to ask you what you propose to do
about this.
Will you ask the Open Market Committee to take into consideration this
statement of the President's?
Mr. Martin,

I will be very glad to see that every member of the Open

Market Committee has a copy of the statement.
Chairman Patman. I know; it was delivered to the Congress. It was
important enough to where the President of the United States came before


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

r
-6a Joint Session of Congress and delivered a message, the title of which
was "Urgent National Needs," and among the urgent national needs he said:
"The full financial influence of government must continue to be
exerted in the direction of general credit ease and further monetary
growth while the economy is recovering. Some further downward adjustment
in interest rates, particularly those which have been slow to adjust in
the recent recession, are clearly desirable, and certainly to increase
them would choke off recovery,"
That is the President of the United States,
In other words, if I understand that correctly, he is saying to you
and everyone else connected with monetary policy or monetary affairs to
adjust your business so there will be some easing of interest rates,
Now, will the Federal Reserve respect that in any way, I mean the
Open Market Committee of the Federal Reserve Board, in an attempt to
carry out his objective here?
Mr. Martin.

The Federal Reserve will consider that, Mr. Patman, as

I have answered Senator Bush here in the light of all of the circumstances,
The President followed that with an announcement of a reduction in
FHA rates to 5-1/4 per cent. That is well within his prerogative and his
program and, of course, there is a difference between clearly desirable
at a given time and whether it actually will come about or is needed.
Now, I would like to see, as I reiterate, as low interest rates as
we can have, without producing inflationary pressures.
But I do not want to see pegging develop, and I do not want to see
artificially low interest rates.
I want interest rates to be related to the flow of money into the
economy; that is what it is. It is an equilibrating factor.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

I
7—

Chairman Patman. Let me ask you this then: I understood from
Mr, Rouse's testimony yesterday that your February 20th announcement was
misunderstood, and that, in truth, the Open Market Committee has not
made any decision to try to reduce long-term interest rates; is that
correct?
Mr, Martin, Mr, Patman, I made a very full statement on that when
I was up here on March 7 — I recall that to you — I think, in answer to
a question that you put to me,
We have made a bona fide effort to endeavor to bring about a meaningful decline, although I pointed out how difficult it is to bring about a
meaningful decline in long-term interest rates and, at the same time, to
maintain the short rate in view of the balance of payments difficulty that
we had, and I pointed out at some length in the statement that I made on
March 7 what the difficulties and problems were.

And we have made a

conscientious, sincere, earnest and continuing effort to carry out both the
spirit and intention of that February 20 statement.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-8-

Chairman Patman. Mr, Martin, we were asking Mr. Hayes some questions
this morning about how these policy statements of the Federal Open Market
Committee were interpreted, and I will ask you, you. take, for instance >
the statement by the Open Market Committee on March 1, I960, where it said:
"The directive that had been in effect since May 26, 1959 , calling
for operations with a view !to restraining inflationary credit expansion
in order to foster sustainable economic growth and expanding employment
opportunities was changed to read to fostering sustainable growth in
economic activity and employment while guarding against excessive credit
expansion ."
How do you expect the manager of the account in New York to take this
statement here alone and interpret it just from this statement? Would you
expect him to do?
Mr. Martin.

Yes, I would, if he is the competent man I think he is;

I think that that gives him adequate information,
Chairman Patman, Well, of course, he testified that he had written
notes himself at the meeting of the Federal Open Market Committee when this
was agreed upon, and he used those notes.
Mr. Martin. Well, we have had him participate in the meetings of the
Committee because I think that is helpful to him,
Chairman Patman. Yes, sir $ I am sure it is.
Mr. Martin.

But I am sure, as a specialist in this field, that this

language means something to him.
Chairman Patman. But an outsider could not take this language and
interpret it without that, could he?


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-9Mr. Martin. Well, it is not that — outsiders are not the ones who
are concerned with that particular point, and I think you are dealing
here with the specialist, and it is very difficult to write —
Chairman Patman. Maybe I should not have used the word "outsider,"
but if he had not had other information than just the directive itself,
it would be difficult of interpretation, would it not?
Mr, Martin.

If he took over in a vacuum, yes.

Chairman Patman, That is right. In other words, as a stranger, he
came in and took charge of the desk, he would have difficulty interpreting
this, if that was all the information he had, the language itself,
Mr. Martin, Standing on its own, yes. But I think that it is a —
Chairman Patman, Therefore, he is necessarily dependent upon his
notes that he made at the meeting partly, and also doesn't he have the
benefit and advantage of the minutes made for the Federal Open Market Committee at the meeting?
Mr, Martin, Well, we have minutes of these meetings, Mr, Patman.
Chairman Patman, That is what I mean, and you make those minutes, one
of the purposes being to give it to the manager of your accounts so as to
help him in interpreting what you mean by this language, is it not?
Mr. Martin. Not only the manager of the account but every member of
the Committee,
Chairman Patman, I know, but he is the one who carries it into execution, as I understand it, and he is the person who actually takes action,
and he is the only one who actually takes action, isn't that right?


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Mr, Martin. Well, we are working constantly, and I welcome your
raising it, to try to get a directive which is more informative to outsiders as well as insiders, but I can assure you that the language is —
Chairman Patman. That is the point I am getting, Mr. Martin0 I
have considered this language, I have read these directives you have
gotten up, and I am not expected to be able to interpret them myself,
but I do not see how the ordinary, average person could possibly interpret what the language means* It is really, and I say this respectfully,
it is gobbledygook, you just cannot tell what it is, and I do not believe
you could tell if you just had this alone unless you had the minutes of
Federal Reserve Open Market Committee,
Mr, Martin, Well, we will certainly try to improve on any gobbledygook we have*
Chairman Patman. I am sincere about that. I have read them, and the
testimony here seems to be very plain that you have a language in the
Street or in the financial community or in the Federal Reserve that means
a lot to the Federal Reserve like this language, and you understand it
after attending the meeting of the Federal Reserve Open Market Committee
and making your own notes and having the minutes of the meeting.
But people generally cannot understand it. But the traders, these
sophisticated people, the dealers, they immediately, when you go into
action on this, know exactly what you are doing, and they can profit from
it, as they should, because of their knowledge9
But people generally do not understand it, and cannot participate in
anything that is done that would be helpful by reason of this directive.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

The point is, don't you think that language should be plain enough
for anybody to understand, and not restricted to people who are specialists in the market?
Mr, Martin, Well, I would like to see the language, and we are glad
to get suggestions — that is one of the benefits of this hearing — I
would like to see the language as clear as it can be.
So far as it meaning more to sophisticates or to those who are experts than it does to a farmer, let us say, in Nebraska, I think that
applies to anybody who reads the baseball box scores or anything else.
Chairman Patman.

That is quite different, Mr. Martin.

Mr, Martin, A man absorbed in baseball can get anything out of the
box score, more so than somebody who is not.
Chairman Patman, Well, you voluntarily go into this sport. You
are in this, whether you want to be or not. This affects everybody.
Mr. Martin. All right, I asked for it.
Chairman Patman, These minutes, you could understand this a lot
better if you had those minutes, couldn't you, of the Federal Reserve Open
Market Committee?
Mr, Martin.

You mean the general public?

Chairman Patman.

This committee, for instance, we can understand it

better if we had your minutes, the Open Market Committee minutes. Where
are those minutes, Mr. Martin?
Mr, Martin, Those minutes are in the custody of the Open Market
Committee.
Chairman Patman. Are you willing to give us the minutes for last
year, I960, so that we can use them in connection with these directives
and see whether or not we can suggest improvements on the language?

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-12-

c

Mr» Martin. Well, Mr. Patman, if your committee, if you want to
write me and request those, I will put it before the Open Market Committee,
and I will certainly do it in the most sympathetic way. I want to -- and
I have no — listen, I have never withheld anything from you, as you know*
Chairman Patman«
Mr. Martin.

No, sir; you have been —

.

I have rolled up five years of audits.

Chairman Patman. You have been very good, and I am not going to write
you any letter, Mr. Martin, but I am asking you now to let us have the
minutes for I960.
Mr. Martin. I think an orderly procedure — it is not that I in any
way distrust you, Mr. Patman — but in orderly procedure, that I have to
put this to the Committee because what is involved here —
Chairman Patman. - This transcript will be available.
Mr. Martin. It is in the public interest.
Chairman Patman.

I am asking you now to furnish us the minutes for

I960. That is long behind us, it certainly cannot be current information,
and it could not be dangerous or harmful, and I am asking you now to furnish
us the minutes for I960. When can you let us know about that?
Mr. Martin. I cannot let you know about that until after the Open
Market Committee meeting next week.
Chairman Patman. When does it meet?
Mr, Martin. It meets June 6,
Chairman Patman*

June 6e All right, sir, I shall not press it until

after June 6. Will you let me know then?
Mr. Martin. I will be glad to let you know.
Chairman Patman. All right, fine.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

The Board supplies information on all its monetary
operations on a continuous basis, with maximum feasible speed.
The Annual Report, rather than standing alone, is in
effect a supplement, pulling everything together--in full perspective ~into a comprehensive and convenient single volume.
As you know, actions to change discount rates or
reserve requirements are announced virtually immediately.

Actions

taken in open market operations are reported, in terms of net changes
in the Federal Reserve portfolio, every Thursday--with figures complete through the preceding day.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

June 2, 1961
The Board's Annual Report serves several important purposes. Perhaps
most important is to inform the Congress and the public of the policy actions
taken by the Board and the Federal Open Market Committee during the year covered.
In the official policy record of the Report, we attempt to set forth as accurately
and succinctly as we can the economic and financial developments taken into
account in arriving at each policy decision, together with the reasons for the
policy action taken and the reasons for any dissents to the action which individual
members may have expressed. A policy record is prepared and reviewed promptly
after each meeting in which a policy decision is reached. Thus, these records
do not benefit or suffer from hindsight.
Under our established procedures, a first draft summary report of a
policy proceeding is prepared by a competent and experienced secretary.

It is

then carefully reviewed without delay by every member who participated in the
policy decision. Any proposed revisions or other suggestions are submitted for
comment to the other members, and finally, after this process is completed, the
revised draft is circulated for final approval.
As I am sure is the case in the deliberations of legislative committees
on which you all serve, it is not easy in every case to express concisely the
reasons why a group of highly qualified and expert men took a particular action
at a particular time. In any group some members will express their thinking in
more detail and at greater length than others.

It does not follow that the

less expressive or even silent members hold less firmly to their opinions or
have less compelling reasons for holding them.
Accordingly, the policy record is, and will remain, an imperfect
account of all the considerations weighed in reaching a particular decision.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-2-

It is doubtful, moreover, that it could be made more accurate either by lengthening
it or by trying to specify its content more rigidly. Endeavors to force the
rationale of decisions into a mold that might obscure the reasoning actually
employed in specific cases could hardly serve a public interest.
Beyond providing a vehicle for publication of the policy record, the
Annual Report performs a number of other functions,. It contains a very carefully
drawn review of the economic developments and flows of credit funds during the
year, with special reference to money and bank credit. From time to time some
supplementary discussion has focused on the use of one or another of the instruments of policy for the purpose of making clear to interested persons the System's
own interpretation of the role performed by that tool in the execution of policy.
The Report is also an avenue for reporting to the Congress on actions
taken by the Board of Governors under various authorities that Congress has
assigned to it. Examples are its actions under the Bank Holding Company Act and
its operations in the field of bank supervision.
The Report further contains information with respect to the Board's
internal administration and the operations of the Federal Reserve Banks. Finally,
it presents some 20 statistical tables which summarize in figures the System's
operations during the year.
A virtue of the Report, in my judgment, is that it has, in appropriate
circumstances, contained recommendations for new legislation, discussion of the
role of the System in current economic and financial developments, or explanations
of the mechanism of its major policy instruments. There has been no feeling of
compulsion, however, to extend the Report to these areas in every year.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

r

•c

':

-3The Board has viewed the Report as a useful means for recording its
actions and the reasons for them, for accounting to the Congress and the public
for its performance of the responsibilities assigned to it, and for calling
attention, vhen the occasion demanded or seemed appropriate, to desirable
changes in the law.
As you know, the Board's Annual Report is only one of a number of
media of communication of the System with the Congress and the public. Our
prepared testimony before your Committee and others on various matters is another
important medium. Then there are the weekly statements of condition of the Federal
Reserve Banks, the Federal Reserve Bulletin and the monthly economic letters of
the Federal Reserve Banks. From time to time, too, the staffs of the Board and
the Banks engage in special studies in response to Congressional or other requests
and the reports presenting the result of these studies are means of communicating
with you. Lastly, the Board makes available for the information of the Congress
and the public a booklet which endeavors to explain simply and yet adequately
the purposes and functions of the Federal Reserve System as well as other informational publications on various phases of Federal Reserve activities, such as the
one issued by the New York Federal Reserve Bank on "Federal Reserve Operations
in the Money and Government Securities Market."
As a concluding point, I may recall for you the view expressed by the
Board in 1952 to the Subcommittee of the Joint Economic Committee of which you
were Chairman, concerned with Monetary Policy and Management of the Public Debt.
The Board commented on a question directed to this point as follows:


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

"The guiding view of the Board of Governors and the
Federal Reserve Banks in reports and information made
available to the public is that an adequate and critical
public understanding contributes to an intelligent credit
and monetary policy designed to foster stable economic
progress. Accordingly, the System is actively interested
in disseminating factual and explanatory information on
general economic conditions and on credit and monetary
policies. Such is deemed to be the System's responsibility
since the preservation of democratic institutions depends
on an informed public opinion."


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

June 1, 1961

I
To

Chairman Martin

From Jerome W» Shay

Subject: Rouse testimony before
Joint Economic Committee

This will confirm and amplify my report to you earlier today
concerning the testimony of Mr. Rouse before the Joint Economic Committee
this morning.
Members of the Committee present were Chairman Patman, Mrs.
Griffiths, and Messrs. Sparkman, Reuss, and Pell (Democrats) and Messrs.
Bush and Widnall (Republicans). Set forth below are significant or principal lines of questioning that developed during the morning. It seemed
clear that there was no real plan or organization behind the questioning,
which seemed to be pretty much on a random basis.
One of Mr. Patman!s questions was whether there was any reason
why the Government security dealers must all be located in New York (or
Chicago). This was followed with the question as to why the Federal Reserve Banks could not act as dealers. Briefly, Mr. Rouse's reply to the
first question was that New York is where the market is made, and his
reply to the second question was that the Reserve Banks are customers and
that, in any event, for the Reserve Banks to try to replace dealers would
change the situation entirely.
Mr. Patman also asked concerning attendance at meetings of the
Open Market Committee (i.e., who attended in addition to the 12 members
of the Open Market Committee). His position, in effect, was that by having
all presidents of Federal Reserve Banks present at FOMC meetings the law
has been disregarded and the meetings have been "loaded" in favor of the
"private" interests (representatives of commercial banks) as against the
seven "public" members (members of the Board).
The next line of questioning pursued by Mr. Patman, in effect,
was why open market operations and policy decisions could not be announced
promptly, as is the case
with changes in discount rates and reserve requirements, iir. Rousefs answer to this was that to do so might create
expectations in the market that would not in fact be borne out or which
might possibly benefit speculators. Mr. Patman!s position on this, however, was that the present system benefits the "sophisticated" people,
who can rather easily determine what open market policy is even though
there has been no public announcement11of it and that this, of course, discriminates against the "little fellow ,
Some of Mr. Patman1 s other questions were such as to suggest the
possibility of "leaks" of open market information and the possibility of
Federal Reserve pe rsonnel trading in the market on the basis of "inside"
information. You will recognize this as a line of questioning which Mr.
Patman frequently engages in and, as he has done in the past, he emphasized
that there is no law or regulation against purchases of marketable securities by Federal Reserve or Open Market Committee personnel.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-2-

Pursuing a disclosure by Mr. House that either he or one of his
assistants took notes during Open Market Committee meetings, Mr. Patman,
in effect, asked Mr. Rouse to supply these notes for I960 to the Committee.
Mr. Patman also indicated in this connection that he would ask you to
supply Open Market Committee minutes for I960 to the Committee. Mr. House,
in effect, said that he could not supply anything of this nature to the
Committee without the consent of the Open Market Committee. There were
indications by both Mr. Reuss and Senator Bush that undoubtedly the Open
Market Committee would supply the Committee minutes upon a proper request.
Mr. Patman made it plain, however, that he was not pushing Mr. Rouse, and
it seemed abundantly clear that Mr. Rouse has nothing further to do in
the matter at this time.
Senator Bush wanted to know whether the "nudging operation"
undertaken in February had resulted in any easing of long-term interest
rates. Mr. Rouse replied it had had some effect. In this connection,
however, Mr. Rouse referred to your speech on April 11 at Boca Raton,
Florida, and read therefrom the passages that, in effect, stated that
the Federal Reserve was not seeking to set any particular levels of rate
for either long or short-term securities and that the best guages of its
operations were whether the outflow of funds to foreign centers was being
stemmed and whether the flow of capital into productive investment activities was being facilitated. Hr. Rouse also emphasized that the basic
purpose of the System was to affect the supply of bank reserves and that,
while its operations had some effect on interest rates, this was not a
primary objective for consideration.
Senator Bush was interested also in whether the System might
encounter difficulty in disposing of any long-term bonds it might acquire.
To this, ixr. Rouse replied that the market is a good market and that such
bonds can be sold just as the long-term bonds acquired during the war had
been sold.
Senator Sparkman's principal inquiry concerned the change in
policy announced on February 20. In this connection, he referred to the
Report of the Joint Economic Committee of May 2, 1961, on the Economic
Deport of the President, which rather clearly suggests that the System1s
transactions in the long end of the market had been inconsequential.
Senator Sparkman's comments clearly indicated his belief that what the
System had set out to do was to reduce long-term interest rates. Here,
again, Mr. Rouse emphasized that the basic reasons for the System's
operations was to affect bank reserves, and he referred again to your
Boca Raton speech.
Mr. Widnall's only question was whether money could be expected
to go into the short-term market if long-term rates were reduced. To
this, Mr. Rouse replied affirmatively.
Mr. Reuss started his questioning by asking for definitions of
short, intermediate and long-term securities. Mr. Rouse's response was
that short-term included anything up to five-year maturities, that intermediate covered from five to 10-year maturities, and that anything over

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

10 years was a long-term security. This reply created some excitement,
inasmuch as Mr. Reuss clearly expected Mr. Bouse to say that short-term
securities were those with maturities not exceeding 15 months. Thereafter, there was some tracing of the history of the directives of the
Open Market Committee from 1953 to the change in the directive on March 1,
I960, and also the change in the directive on October 25, I960, and the
purposes behind these changes. Mr. Reuss seemed to think that sometime
during I960 maturities of up to four years had been purchased, but Mr.
House said that nothing greater than 15 months had been acquired and
that this had taken place subsequent to the October 25 change in the
directive.
Mrs. Griffiths asked a series of questions with respect to
technical aspects of Open Market Committee meetings and communications.
These questions, for example, included whether the CMC minutes and the
daily 11 o1clock market 'phone calls are stenographically transcribed.
This line of questioning was such as to suggest that communications between
the Committee and the Account Manager and the trading desk were too vague
for adequate guidance and control of actual operations.
Another inquiry from Mrs. Griffiths was when during the last
five years the System applied a policy of restraint and the exact
economic factors that influenced the System in applying such policy.
Mr. Rouse's reply was that he would try to supply this for the record,
pointing out, however, that policy was a matter for the Committee, rather
than the Manager of the Account.
Senator Pell's questions were such as to indicate agreement
with Mr. House that a stenographic transcript of minutes of the Open Market
Committee would not be of real help in day-to-day operations and that the
minutes as presently prepared might be more conductive to helpful discussion
at Committee meetings and, in the end, serve as better guide lines to
the manager and the desk.

cc: Each Board Member
Messrs. Thomas, Young, Knipe, liolony, Fauver, Alderfer,
Sherman, and Noyes


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Excerpt from Board's Reply to Questions Submitted
to the Subcommittee on Economic Stabilization
(Chairman, Sen. Flanders) of the Joint Committee
on the Economic Report, Nov. 26, 195U, pp. 2lj.-2£

Conclusion
The formulation of appropriate credit and monetary policy
is, at best, difficult. It requires, first, painstaking search for
all the relevant facts that may bear on the economic and financial
outlook; second, all the wisdom and insight that experience and
operating contacts can bring to the interpretation of those facts,
and, finally, and perhaps most important, humility with respect to
any emerging situation. There are relatively few occasions when
the meaning of developing events is so clear that the monetary
authorities can say, "As of today, our policy should be changed
from restraint to ease." A shift in policy emphasis more typically
emerges from a succession of market developments and administrative
decisions in which the range for variation needed in pursuit of any
particular policy gradually shifts from the side of ease to the
side of restraint or vice versa.
The various factors that exert an impact on bank reserve
positions are at best difficult to forecast in advance. There is
a considerable margin of uncertainty in any forecast of factors absorbing or supplying reserves. let these forecasts or projections
must be made in planning open-market operations. In consequence,
there is frequently much discussion, when prospective purchases or
sales are authorized, of whether it would be wiser to deal with the
area of uncertainty in the forecast in the direction of restraint
or in the direction of ease. These changing shifts in emphasis do
not necessarily mean that a new policy direction is emerging.
Usually, however, by the time the facts of the economic situation
are sufficiently clear to lead to the adoption of a changed policy
directive, it will be found that these day-to-day allowances for
uncertainties in the forecasts of reserve availabilities have begun to be increasingly resolved on the side later indicated by the
new policy directive.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Excerpt from Riefler Answer to Questions Submitted by
the Committee on the Working of the Monetary System
(Chairman, Lord Radcliffe), June 1958, pg. 306

168.
The guiding view in making information available to the
public was stated several years ago, in a statement to a Joint Committee of the Congress, as follows:!/
From its beginning the Federal Reserve System has
departed, from the older view prevalent in other countries
that the reasons for central banking moves to tighten or
relax credit and monetary conditions should be inferred
solely from the nature of the actions taken. The course
pioneered by the Federal Reserve System is that explanations of policy actions and factual information which
guide them should be made available to the public.
A decade after the System's founding, this view was expressed in the Board's Annual Report, as follows:.?/
"The more fully the public understand what the function of the Federal reserve system is and on what grounds
and on what indications its policies and actions are based,
the simpler and easier will be the problems of credit administration in the United States. For this reason it has
been the policy of the Board to inform the public, either
through its official monthly publication or by statements
to the press, on matters in which the public has an interest and to which its attention should be drawn. By
this means the Board presents to the public a statement
of the problems confronting the system and of the attitude
of the Board toward current banking and credit developments.
The public is a partner in the Federal reserve system. The
co-operation of the public based upon an understanding of
the broad outlines of Federal reserve credit policy is of
the greatest advantage to a good functioning of the system."
1. U. S. Congress, Joint Committee on the Economic Report,
Monetary Policy and the Management of the Public Debt,
82nd Congress, 2nd Sess., Doc. No. 123, Pt. 1, p. 321.
2. Annual Report of the Federal Reserve Board for 1923, p. 38.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-2-

The dominant place which the Federal Government has
come to occupy in the functioning of the economy has made
increasingly necessary a widening public knowledge and
understanding of national purposes and policies. In a
democracy, the best and fundamentally the only way to make
wise public measures prevail, and to avoid unwise ones, is
to expose them fully and fairly to public scrutiny. This
continuing task imposes on public servants a clear responsibility for the fullest possible disclosure of accurate and
unbiased information. It calls for discriminating judgment
not only to prevent distortion or unwarranted withholding
of factual material but also to present and interpret it
intelligently. Such factual material and interpretation
need also to be readily and widely disseminated within the
bounds set by prudent expenditure of funds for this purpose

Excerpt from Riefler Testimony before the Committee
on the Working of the Monetary System (Chairman,
Lord Radcliffe), June 19, 1?£8, p. 623.

What about other publications? — Our balance sheet is
published as of every Wednesday. As I said in the memorandum, great
care is taken to make it a revealing balance sheet. In the United
States, banks are allowed to average their reserves, over a week for
city banks and over half a month if they are country banks. Figures
as of a given Wednesday, consequently, do not really tell the story
because they may be quite far from the mean, so weekly average figures have been developed to reveal what the actual balances were that
affected the money market. Then, efforts have been made to clean up
the concepts. Some of the items on the weekly statement were fuzzy,
for example, loans used to lump together both loans to member banks
and loans to foreign banks. That has been changed. The result is
that anybody who is in the market and wants to analyze what has
actually been done, gets the applicable information sometimes as
fast as we do. There are many other regular releases, of course,
than the weekly statement. In addition, all policy actions are
announced immediately. So much for information covering actual
operations; on the other side, the System tries to educate the public with respect to the philosophy that governs its actions. It
publishes Purposes and Functions, an elaborate advanced-level
textbook on money and banking. It also has many publications of a
more popular type as well as those for a pretty sophisticated audience. Each tries to convey the same story and reach the same type
of understanding in groups at the different levels. In that way,
an effort is made to reach everyone so far as it is possible. In
so far as actual future operations are concerned, we say nothing,
but we do have a detailed discussion of past operations in the
Annual Report which comes out some time after the end of the year.
The interval is long enough so that people cannot interpret from
the explanation of an action taken, say, in December, the logical
succeeding action that would have to be taken, say, in February.
If the reasons for an action were published immediately, a very
clever operator might have a basis to forecast future action. We
think we escape that hazard by publishing only once a year. Maybe
we are wrong in this attitude toward publication. In any case, it
is consistent with what the law requires.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Federal Reserve System
Monetary Policy Directives and Changes, I960
As Reported in
"Record of Policy Actions"
Annual Report, I960
A>

B

March 1, I960, Open Market Committee
Directive in effect from May 26, 1959> " • • • restraining inflationary
credit expansion in order to foster sustainable economic growth
and expanding employment opportunities" changed to read "...fostering sustainable growth in economic activity and employment while
guarding against excessive credit expansion." (page i*-l)

* May 24, I960, Open Market Committee
. . . fostering sustainable growth in economic activity and employment by providing reserves needed for moderate bank credit expansion." (page

Ct

June 2, I960, Board of Governors
Approved reduction in discount rate 1/2 percentage point from k%
to 3-1/2$. (page 80)

1)1

July 28, I960, Board of Governors
Reduced margin requirement for purchase or carrying registered
stocks from 90$ to 70% (page 8l)

E. August 11, I960, Board of Governors
Approved reduction in discount rate 1/2 percentage point from
3-1/2$ to 3$. (page 85)
F. August 16, I960, Open Market Committee
11
. . .encouraging monetary expansion for the purpose of fostering
sustainable growth in economic activity and employment." (page 6l)
G. August 25, I960, Board of Governors
Pursuant to action announced August 8, I960, permitted member banks
not classified as central reserve city or reserve city banks to
count vault cash in excess of 2-1/2$ (rather than 4$) of net demand
deposits as part of required reserves, and effective September 1,
permitted central reserve city and reserve city banks similarly to
count vault cash in excess of 1$ (rather than 2$) of net demand
deposits. Effective September 1 reduced reserve requirements of
central reserve city banks from 18$ to 17-1/2$. (page 83)
II . October 25, I960, Open Market Committee
Amended August 16 directive to add the words "while tailing into
consideration current international developments." (page 67)
I. November 24, I960, Board of Governors
Pursuant to action announced October 26, 1960, permitted banks to
count all bull: cash as part of required reserves; increased reserve
requirements at central reserve or reserve city banks from 11$ to
12$; and effective December 1, reduced reserve requirements of
central reserve city banks gainst demand deposits frcm 17-1/2$ to
16-1/2$. (page 87)
Ilote: Underlining added by JEC staff.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

BOARD

OF G O V E R N O R S

OF THt

FEDERAL

RESERVE

SYSTEM

June 1, 1961
Toi

Mr. Martin

From: Guy E. Noyes

Attached is a brief statement on
Recent Economic Developments, which should
provide the background for any questions
in this area.

G.E.N.
Attachment.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

June 1, 1961
Recent Economic Developments
Economic activity reached its low for this cycle in late
winter and has been recovering since then. The low was reached
somewhat earlier and the recovery so far has been more rapid than
had been expected by many observers.

In the three months since

February, the index of industrial production has recovered more than
half of the 7 per cent decline that occurred from July last year to
February.

By April, the index had risen from its low of 102 per cent

of the 1957 average to 105 and a further rise is indicated in Mayc
Gross national product reached its low in the first quarter
at an annual rate of $5>00 billion. In the current quarter, GNP is
expected to show a substantial rise.

Inventory liquidation, which

had been at an annual rate of $lj.-l/2 billion in the first quarter,
appears to have ended and for the second quarter as a whole there may
be some net accumulation of inventories*
This inventory shift has been stimulated to an important
extent by a pick-up in consumer buying of durable goods which had
been weak at the beginning of the year. Moreover, consumer purchases
of nondurable goods, which leveled off during the recession, appear
to be rising again. Consumer outlays on services and State and local
government and Federal Government outlays for goods and services are
continuing to expand further.
Total construction activity, including public as well as
private, increased in May to the highest level since August 195>9»
Housing starts, although still well below the highs of early 1959,
have shown considerable improvement from their reduced levels of
last winter*

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

C

(
-2-

Expansion in general activity has been supported and
reinforced by increasing personal income.

Personal income declined

little during the recession and recently has been rising again,
reaching a new high level in April«
Recovery in general activity has been accompanied by
improvement in the labor market. Recent gains in nonfarm employment,
in average weekly hours worked at factories, and in total labor
income, together with stability in the unemployment rate so far this
year compare favorably with experience in the early months of
previous postwar periods of cyclical recovery.
It is unlikely that the unemployment rate this year will
reach the high level touched in the 1958 period. At that time, the
unemployment rate rose from h per cent of the labor force to 7-1/2
per cent. In the latest period, unemployment, although starting from
a higher level, has risen much less sharply, from 5 per cent to 7 per
cent. As economic activity continues to expand, unemployment should
begin to show some decline. The reduction, however, may not come
quickly enough or go far enough to bring the number of unemployed
down to the low levels desiredo
Average prices of commodities at both wholesale and retail
have been relatively stable for some time. As is typical for periods
of cyclical recovery, however, average prices of sensitive industrial
materials have risen from their recession low last winter0


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

c
-3In the financial area, the flow of new long-term funds to
corporations and State and local governments has increased substantially.
The second quarter will show an unusually large volume of corporate
financing even aside from the large AT&T financing. State and local
government borrowing, which had declined in late I960, increased
sharply in the first quarter of the year and this increased volume
appears likely to be maintained in the second quarter.
Yields on corporate bonds have fluctuated in a narrow range
this year, declining to March, then firming a little since then.

Yields

on State and local securities have fluctuated in a range above their
lows of last September. Mortgage yields have continued to decline
steadily and the average yield on FHA. mortgages at the end of April
was about 1/2 per cent below the January I960 high. Mortgage rates
at saving and loan associations are reported to have continued to
decline in May*
Yields on U. S. Government securities have continued this
year in the broad range reached in the second half of I960 following
sharp declines from their highs earlier in that year. The short-term
bill rate has tended this year to stay within a narrow range of 2-1/U
to 2-1/2 per cent as compared with a high last year of over U-l/2 per
cent. Intermediate- and long-term securities have shown no persistent
trend this year at levels considerably below their highs last year.
Although yields on such securities recently have risen somewhat from
their lows in early May, they have continued below their levels
earlier in the year.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

r

(
-u-

The over-all monetary situation is one of continuing easee
From the last half of December through the first half of May, the
seasonally adjusted money supply rose at an annual rate of almost
3 per cent and time deposits continued to expand rapidly. Free
reserves of member banks have remained relatively high*
Credit advanced by commercial banks, which usually declines
over the first four months of the year, declined much less this year
than last. Business loan demand, however, has been generally sluggish
this spring, following the pattern of the two previous recovery periods
beginning in 195U and 1958, when business loans lagged the upturn in
economic activity by several months.
Stock market prices rose sharply since last October and
in early May reached a new peak 29 per cent above the I960 low,
More recently, prices have moved down a little. Customer credit
in the stock market rose sharply to a new record level in April*
The international balance of payments of the United States
continues to be a problem requiring long-term attention and vigilance«,
In recent months there has been some drop in the outflows of volatile
funds from the United States to other countries, but there are still
sizeable flows both of bank loans abroad and of some other types of
capital.

The reduction in the capital outflow has been an important

factor in reducing the over-all deficit—measured by increases in
foreign holdings of dollars and of gold bought from the United States—
which has been much smaller than it was last year. Among the underlying accounts of the balance of payments, exports have been holding


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

(
-5up at a. high level, and they should continue to do at least that well
with demand abroad as strong as it now is. Imports fell off in the
latter part of I960, but should tend to rise as recovery goes ahead
in this country.
In summary, the vigor of this cyclical recovery compares
favorably with the early months of previous postwar recovery periods0
Moreover, this recovery has followed the mildest recession since the
mid-19201s. It seems reasonable to expect that the forces of recovery
which are now underway will carry further and that by year-end overall activity will be at a level substantially above the I960 peak0


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

FRIDAY TESTIMONY

A.

Treasury report of its operations, due about now, won't reveal
much buying of 10 year and over Governments during February.
—next to last week 200,000 per day avg.
—next to last week 1,800,000 per day avg
Heavy buying was in March and April.
Query:

Brunt of questioning as to amount of intermediate and long-term
buying will fall on Bob Rouse as the first witness.

B.

"Where does nudging end and pegging start?
Answer will be revealing both to market and to critics:
Possible posture.
Distinction turns primarily on expectations of market as to whether
price and rate levels will be allowed to fluctuate.
Nudging must be kept within "composite" range of prices quoted if
buying is to be kept confined to loose offerings and not to have
effect of increasing the supply that would be in the market anyhow
and thus building-up expectations of price support, perhaps at
prices not sustainable by market forces.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

May 31, 1961

To

Chairman Martin

Subject:

Hearing on June 2

From Jerome W. Shaj

Attached/are some materials you may wish to review before
the hearing on Juife 2 before the Joint Economic Committee.
1. Charts covering 1959 and I960.- The first of these
materials is a group of six charts, accompanied by an explanatory
key, covering 1959 and I960. The lines A through I on each chart
represent the monetary policy directives and changes during I960,
which are described in the key.
These charts have been distributed by the staff of the
Committee to each member of the Committee in preparation for the
hearing. Unless some Committee member mentions the charts during
the hearing, I would suggest that you not refer to them.
2. Monthly Review of Atlanta Reserve Bank.- The second
item is the Monthly Review of the Atlanta Federal Reserve Bank of
May 1961, the lead article of which is "Managing the System Open
Market Account". lou may get a question concerning the chart on
page 3 of the Review. The question would be based on the chart and
would, in effect, suggest that our dealings in Treasury bills have
not been as important as our dealings in certificates and notes.
3» Open market operations during late I960.- The third
set of data includes a confidential memo of May 31, 1961, prepared
by Mr. Yager, on "Federal Reserve Transactions in U. S. Government
Securities Other Than Bills in Late I960". The memo was marked
"CONFIDENTIAL" because of the third paragraph on page 1; but by now
confidential treatment may not be necessary.
There have been indications of interest in to what extent
we may have departed from "bills only" during I960 and the facts and
figures of such operations, if any.
You will note that Mr. Yager has attached a supporting
chart to his memo, and also copies of the relevant Weekly Statements
of Condition for late I960.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

.
To Chairman Martin
U» Open market operations during 1961,- The fourth set
of materials consists of the confidential tables which I believe are
distributed to each Board Member in connection with the weekly review
of the money market. There have been indications that you might find
it useful to have in mind especially Tables VII and IX, particularly
with respect to the extent of Treasury purchases.
5. Statutory policy directions to the Federal Reserve.- The
fifth item is an excerpt of a statement supplied to the Senate Finance
Committee in 1957 concerning the mandate given to the FRSystem in the
law. As you will recall, Mr. Patman strongly suggests that we have
no directive to work for sustained economic growth and a stable dollar,
It may be useful to have the attached except for insertion in the
record if, as is not unlikely, the question is raised again on June 2.

Attachments


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

'gpflgTpEMffJAJf ffp-^

May 31, 1961

0

Federal Reserve Transactions in U. S. Government Securities
Other Than Bills in Late
In late October I960, the System Open Market Committee authorized
the manager of the Siystem Open Market Account to purchase short-term Treasuryissues other than Treasury bills in order to help supply needed reserves to
the market while minimizing downward pressure on the key 3-months bill rate
which threatened to fall below 2 per cent. Details on these operations are
shown in the attached Table 1.
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 mill ion were
bought from foreign and international accounts and the remaining $306 million
were bought from Government securities dealers in the open market. The longest
term issue purchased was the 3-1/k per cent note of February 15, 1962, which
at the tjjae of the purchase had a maturity just short of 1$ months.

Ninety-

seven per cent of total purchases, however, consisted of certificates, notes
and bonds maturing within 13 months.
The System in this period sold short-term coupon issues during onlytwo weeks—those ending December 7 and December 21. These sales totaled $232
million, of which $169 million were to the International Monetary Fund and
foreign accounts, and $63 million to dealers in the open market. 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 were
supplying large additional reserves to the banking system and putting downward pressure on bill rates. Sales of coupon issues to these accounts were


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

- 2accompanied by even larger sales of Treasury bills.
l^tforfliation on transactions available^ to the public. While details
concerning the specific issues bought and sold by the System have not been
released, the amounts, types, and approximate maturities of securities
transactions are published each week in the Board's H.iul release. On page
2 of this release are tables showing net changes in System holdings by type
of issue (i.e., bills, certificates, notes, and bonds) and by maturity category (within 15 days, l£ days to 90 days, 91 days to 1 year, and over 1 year
to 5 years, etc.). In addition, the explanatory text which precedes the
statistical tables generally indicates the extent to which changes in the
System's portfolio represented exchanges of securities in connection with
Treasury financing operations. Thus in the release for the week ending
November 16, I960, it was pointed out that a decrease of $5 billion in
certificates and an increase of $5 billion in notes reflected the exchange
of securities maturing on November 15 for new 3-lA per cent notes.
In each of the weeks in which the System made market purchases or
sales of coupon issues, the public was informed of the maximum maturity range
of the operations. Thus, in the first operation—for the week ending November
2—it was pointed out that wthe longest maturities among the securities purchased were 2-1/2 per cent bonds maturing November 15, 1961.w Similarly in
the release showing figures for the November 9 week, it was announced that
the securities purchased in that week had maturities of less than 13 monthsj
and in the weeks of November 259 December 8, and December 22, the release indicated that all securities bought or sold had maturities of less than 15 months


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

CONFIDENTIAL (FR)
Outright System Operations in Short-term Securities
Other Than Treasury Bills in Late I960 I/"
(In millions of dollars)

Issues bought
or sold

Statement week ending:
Total operations over period:
Gross Nov. 2 Nov. 9 Nov. 23 Dec. 7 Dec. 21
Net purchases Gross
or sales (-) purchases sales

5.0

98.0

13.0

7.0

11.0

16 o5

4 7/8 C/I 2/15/61

76.0

116 00

h 3/8 C/I

5/15/61

3;!-.5

3^*5

3 5/8 N

5/15/61

Jte.0

3 1/8 C/I

R/ 1/61

-57.8

15.2

V

8/ 1/61

15.0

15.0

5.0

10,0

2 3/'* B

9/15/61

16.5

16.5

7.0

8.5

1 1/2 H

10/ 1/61

5.0

5.0

2 1/2 B

11/15/61

42.8

105.8

3 1/4 N

2/15/62

- 7.0

7.0

All issues
other than bills

83.0

315.0

4

if

- Jtf).l3

- &2.

- 40.0

•——

- 73. 3 —

1^.2

1.0

- 42.0

-14-. 0 - 59.0

1.0

5.0
- 63.1*> ^9.5
- HKI3

—

-232.(3 73.5

-11.0

56.3
7.0

203.0 38.5

- 52.0

- 5.0 - 9,0

-30.0

-202.0

Delivered basis.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

May 31, 1961

K2AIHQS 1&FORS SSMATfi, FIIABCg

August 1957, Fart 3, page 1516
The Federal Reserve Act doea not contain any provision
specifically stating that th« objective of the Federal Rsserve 870torn
is to promote oonditions that will foster sustained economic growth
and stability in the velue of the dollar. However, tola objective is
implicit in the title of the aet and in policy directives contained
in various provisions of the aotj and, taking soon directives together
with the declaration of policy contained in the Bsploymant Act of 19U6,
it ia clear that the promotion of credit conditions conducive to economic
growth and the maintenance of the stability of the dollar ia one of
the moat important objectives of the Federal Reserve System.
The Federal Be serve Aet ia entitled "An aet to provide for
the establishment of federal Reserve banks, to famish an elastic
currency, to afford means of redisoounting commercial paper, to
establish a more effective supervision of banking in the United States,
and for other purposes.11
the law provides that discount rates shall be eatablished
by the Federal Reserve banks, subject to review and determination by
the Board of Governors, "with a view of aooommodating commerce and
business" (12 fl.S.C. 357).
The Board ia authorised to change reserve requirements of
member banks "in order to prevent injurious credit expansion or
contraction" (12 T3.S.C. U62b).


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-2-

The operations of the Federal Open Market Gomittee are
subject to provisions of the law which require that the time,
?har*ctar, and Tolurio of all purchase a and sales* in tae open market
'she

-ovuroed with « viaw to accoiwodating ooanerce and business

and with regard to their bearing upon the general credit situation
of the country" (12 0.S.C. 263).
The board of directors of eaoh Federal Reserve bank, in
extending credit to number banks, is enjoined to consider "the maintenance of sound credit conditions, and the accommodation of coasaarce,
industry, and agriculture"; and each Reserve bank is required to keep
itself informed of the general character and amount of the loans
and investments of its member banka "with a view to ascertaining whether
undue use is being made of bank credit for the speculative carrying of
or trading in securities, real estate, or coonoditiss, or for say other
purpose inconsistent with the maintenance of sound credit conditions1'
(12 U.S.C. 301).
In prescribing margin requirements for purchasing and carrying
securities, the Board is required ay the Securities Exchange Aet of
1931* to consider whether such requirements are *n/eces*ary or appropriate
for the accommodation of comaerce and industry, having due regard tc the
ral credit situation of the country" (15 U.S.C. 78g).
The various policy directives which have been given by
Congress tc the Board, the Open Market Comittee, and the Federal


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

Reserve banks are more fully discussed in Chairman Martin's replies.
j.952 questionnaire >f th^ Subcode! t tea on General Credit Control
I

.'-. Hanageaent of the Joint Committee on the ^conoaic Report.

These directives, aa previousi., indicated, implicitly place upon
the Federal Reserve System a responsibility for promoting monetary and
credit conditions conducive tc economic growth and maintenance of
stability of the value of the dollar. That objective is supported by
the declaration of policy contained in section 1 of the 3aploy»»nt Act
of 19U6, which reads aa followst
*S£C. 2. The Congress hereby declares that it is tha
continuing policy and responsibility of the Federal Government to us
all practicable means consistent with its needs and obligations and
other essential considerations of national policy, with the assistance
and cooperation of industry, agriculture, labor, and State and looal
?ovarnm0nts, to coordinate and utilize all its plans, functions, and
resources for the purpose of creating and maintaining, in a manner
calculated to foster and promote free competitive enterprise and the
general welfare, conditions under which there will be afforded useful
employment opportunities, including self-employment, for those able,
willing, and seeking to work, and to promote maximum employment,
production, and purchasing power" (15 0.S.C, 1021).


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

DRAFT
5-31-61
GEN/RAY:ajm

Mr. Chairman:

\

I welcome today's opportunity to respond to whatever questions
you and your colleagues may wish to ask concerning the operations of the
Board of Governors of the Federal Reserve System during 1960 as recorded
in the Board's Annual Report. Before beginning the question and answer
part of the hearing, there are a few remarks that I should like to make
concerning the role and purposes of our Annual Report to the Congress.
The Board's Annual Report serves several important purposes.
Perhaps most important is to inform the Congress and the public of the
policy actions taken by the Board and the Federal Open Market Committee
during the year covered. In the official policy record of the report,
we attempt to set forth as accurately and succinctly as we can the
economic and financial developments taken into account in arriving at
each policy decision together with the reasons for the policy action
taken and the reasons for any dissents to the action which individual
members may have expressed. A policy record is prepared and reviewed
promptly after each meeting in which a policy decision is reached. Thus,
these records do not benefit or suffer from hindsight.
established
Under ow/ joracacaoxk procedures, a first draft summary report
of a policy proceeding is prepared by a competent and experienced
secretary.

It is then carefully reviewed without delay by every member

who participated in the policy decision. Any proposed revisions or
other suggestions are submitted for comment to the other members, and
finally, after this process is completed, the revised draft is presented
for approval at a regular meeting of the Board or Federal Open Market
Committee.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

f

(
-2-

As I am sure is the case in the deliberations of legislative
committees on which you alllserve, it is not easy in every case to
express concisely the reasons why a group of men took a particular
action at a particular time. In any group some members will express
their thinking in more detail and at greater length than others.

It

does not follow that the less expressive or even silent members hold
less firmly to their opinions or have less compelling reasons for
holding them.
It is also clear that the men who serve on the Board and the
FOMC are influenced in their judgments by the total experience they
have had as Federal Reserve officials and the kind of experience they
carry forward into their Federal Reserve work from the varied private
and public activities in which they previously engaged. In other words,
they are influenced by more than the developments and technical considerations brought out at a single meeting.
Accordingly, the policy record is, and will remain, an imperfect
account of all the considerations weighed in reaching a particular
decision.

It is doubtful, moreover, that it could be made more accurate

either by lengthening it or by specifying its content more rigidly.
Endeavors to force the rationale of decisions into a mold that might
obscure the reasoning actually employed in specific cases could hardly
serve a public interest.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-3Beyond providing a vehicle for publication of the policy record,
the Annual Report performs a number of other functions. It contains a
very carefully drawn review of the economic developments and flows of
credit funds during the year, with special reference to money and bank
credit.

supplementary
From time to time some/gaflygiycpyaqBrtc discussion has "fccgSKK focused

on the use of one or another of the instruments of policy for the purpose of making clear to interested persons the System's own interpretation
of the role performed by that tool in the execution of policy.
The Report is also an avenue for reporting to the Congress on
actions taken by the Board of Governors under certain special authorities
that Congress has assigned to it. Examples are its actions under the
Bank Holding Company Act and its operations in the field of bank supervision.
The Report further contains information with respect to the
Board's internal administration and the operations of the Federal Reserve
Banks. Finally, it presents some 20 statistical tables which summarize
in figures the System's operations during the year.
A virtue of the Report, in my judgment, is that it has, in
appropriate circumstances, contained recommendations for new legislation,
discussion of the role of the System in current economic and financial
developments, or explanations of the mechanism of its major policy
instruments.

There has been no feeling of compulsion, however, to

extend the Report to these areas in every year.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

-4The Board has viewed the Report as a useful means for
recording its actions and the reasons for them, for accounting to the
Congress and the public for its performance of the responsibilities
assigned to it, and for calling attention, when the occasion demanded
or seemed appropriate, to desirable changes in the law.
As you know, the Board's Annual Report is only one of a number
of media of communication of the System with the Congress and the public.
Our prepared testimony before your Committee and others on various
are
matters is another important medium. Then there /fcsc the Federal Reserve
Bulletin and the monthly economic letters of the Federal Reserve Banks.
From time to time, too, the staffs of the Board and the Banks engage in
special studies in response to Congressional or other requests and the
reports presenting the result of these studies are means of communicating
with you.

Lastly, the Board makes available for the information of the

Congress and the public a booklet which endeavors to explain simply and
yet adequately the purposes and functions of the Federal Reserve System
as well as other informational publications on various phases of Federal
Reserve activities, such as the one issue by the New York Federal Reserve
"Federal Reserve Money and
Bank on/Operations in the/Government Securities Market."
In conclusion, it is appropriate to recall the viewpoint that
the Board expressed in 1952 to the Subcommittee of the Joint Economic
Committee of which you were Chairman, concerned with Monetary Policy
and Management of the Public Debt.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

In its written reply to a question

-5put by your Subcommittee on practices in public information, the
Board stated:
"The guiding view of the Board of Governors and the
Federal Reserve Banks in reports and information made
available to the public is that an adequate and critical
public understanding contributes to an intelligent credit
and monetary policy designed to foster stable economic
progress. Accordingly, the System is actively interested
in disseminating factual and explanatory information on
general economic conditions and on credit and monetary
policies. Such is deemed to be the System's responsibility
since the preservation of democratic institutions depends
on an informed public opinion."
This continues to be the guiding view of the Board and the
Reserve Banks.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

BOARD

OF

GOVERNORS

OF THE

FEDERAL

R E S E R V E SYSTEM

May 2U, 1961

Mr. Martin:
On the basis of a telephone call
I had yesterday afternoon from John Clarke
at the New York Reserve Bank, I would judge
that Mr. Rouse and Mr. Hayes intend to
accept invitations to testify on the morning of June 1 and the morning of June 2,
respectively. I say this because the whole
purpose of Clarke1s telephone call was to
get from me background information for
Messrs. Hayes and Rouse in connection with
the hearings planned by the Committee and
there was not the slightest indication that
Messrs. Hayes and Rouse were thinking of
trying to avoid testifying on June 1 and 2.

P.S. I told Bill Johnson that you had to
catch a plane at 5>:l5 on the afternoon of
the 2nd, but he indicated no feeling that
this would interfere with your appearance
at 2:00 p.m. that afternoon.
P.S.S. (from Miss Muehlhaus)--There is a
plane at 5:50, arriving Atlanta 7:15. It's
nonstop also. The 5:15 nonstop arrives at
6:36.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

the Honorable Wright f atman,
Chairman, Joint BeoBomie Cowalttee,
Congress of the United States,
Washington 25, &* 6*
Bear Mr* Chairman*
In reply to your letter of May 22, I will
be glad to appear as the final witness at the hearings
scheduled by your Committee for *Jmne 1 and 2 on the
Board*6 Araraal Beport for I960. It is understood that
ay appearauce on ^une 2 is to be at 2tOO p*»»

*». McC. Martin, Jr.
i» IteC, Martin, Jr.

JWSiac

WKH..HI rATMAN

T*X

CHAIUMAM

*AUl.
KJHM CTAMMMAN

•tCHA,l«J KM. I INS, MO.

A.

~-Al_r •OOO*. LA.
<* l l - A M PWOXMIHC

MARTHA *. amrnrvii. MICK
THOMAS «. CUWTim

MO

ci Ai»ti«r.e I KH.XJH* N.Y
Wll LIAM •

WIlJMAi I

«UMMII»» X>MN»O.

CLAIBOWWH Mti i . » i
PWCCCOTT » ,

Congress of ttje ^ntteb

•

JOINT ECONOMIC COMMITTEE

May 22, 1961

Honorable William McC. Martin, Jr. •
Chairman, Board of iVvert:
Federal Reserve System
Federal Reserve Building
Washington, D. C.
Dear Chairman Martin:
The Committee has scheduled hearings on the Board's
Annual Report for 1960 for June 1 and
If it suits your convenience, we would like you to
be the final witness and, accordingly, are rese
the afternoon
meeting for Friday, June 2, for your appearance.
Please let m>'
convenience and, further,
have to offer.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

oggestiou meets with your
;tions you ma;
Sincerely,

tman
Chaiinnaii

•

For release on deliveit not "before 10 a.m. on
Thursday, June 1, 1961*
STATEMENT
BY
ROBERT G. ROUSE,
MANAGER, SYSTEM OPEN MARKET ACCOUNT,
BEFORE
JOINT ECONOMIC COMMITTEE
JUNE 1, 1961

Mr. Chairman and Members of the Committee:
My name is Robert G. Rouse. I am Manager of the Federal Reserve
System's Open Market Account, and I am also a Vice President of the Federal
Reserve Bank of New York. You have asked me to appear before you as a witness
in this hearing, which, I understand, is to focus mainly on questions suggested
by the record of policy actions of the Federal Open Market Committee contained
in the Annual Report of the Board of Governors of the Federal Reserve System
covering operations for the year 1960.
A
Before turning to a description of the process by which the policies
established by the Federal Open Market Committee are translated into action by
the management of the System Open Market Account at the Federal Reserve Bank of
New York, it might be of interest to the Joint Economic Committee to hear about
one or two of the special developments in the Government securities market since
my last testimony before your Committee in August 1959* First of all, I am
pleased to report that the program for regular statistical reporting by the
Government securities dealers that arose out of the Treasury-Federal Reserve
Study of the Government securities market, and which was encouraged by your
Committee, has become a reality, with publication of the first data at the end
of March. The collection and dissemination of these statistics is now working
quite smoothly. Many of the dealers, despite some initial doubts, are finding
that the statistics are useful to them. The general public interest in these
statistics is illustrated by the fact that we have had requests from about
1,400 individuals and organizations to be put on the regular mailing list to
receive them. I am also pleased to report that there has been an addition of
one firm to the number of Government securities dealers with which the Desk
does business. This brings the total number of such dealers to 18, and there
are good prospects that we may see two more organizations develop into fullfledged Government securities dealers in the near future. As I indicated to
you in 1959> we welcome additions to the list of primary dealers; we hope that
there will be more in the future.
I should also like to compliment your Committee on the excellent
study prepared under the direction of its staff and written by Professors
Meltzer and von der Linde of Carnegie Institute of Technology. This study
was a significant contribution to public knowledge of the Government securities market.
Much of what I have 'to say regarding the implementation of the
policies of the Federal Open Market Committee is probably already familiar
to you, since a great deal has already been written and said on this subject.
In his appearance before the Joint Economic Committee in December 195&,
Mr. Hayes, President of the Federal Reserve Bank of New York, described in
some detail how the Federal Open Market Committee reaches its policy decisions


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

and how these decisions are implemented by the Federal Reserve Bank of New York;
and my own statement at that time also commented on the role of the Manager of
the Account in this respect. In addition, there is the booklet prepared by
Robert Roosa, entitled "Federal Reserve Operations in the Money and Government
Securities Markets", which has been widely circulated among the public. This
booklet was prepared by Mr. Roosa while he was associated with me in the management of the Account as assistant vice president in the Securities Department of
the New York Bank. We believe it important that the interested public know as
much as may properly be disclosed of how the System operates in the money and
Government securities markets. Despite the fact that there is much that, is
already known, I thought it might be of some interest to the Committee to
review briefly my personal experience as an individual in the front line of
System operations that are designed to carry out System policies.
Open market policy is determined by the Federal Open Market Committee,
which meets regularly at approximately three week intervals in Washington. These
determinations are based on a broad and careful analysis of all aspects of the
current state of business, credit conditions, international developments, and
related matters. The Federal Reserve Bank of New York has been designated by
the Committee as the institution in the System that conducts actual operations,
on behalf of all twelve Federal Reserve Banks, to put the Federal Open Market
Committee's policy into operation.
As Manager of the System;Open: Market Account, it is my responsibility
to supervise the execution^of'all! open market transactions carried on in accordance with the Committee's policy decisions. In view of my position as Manager
of the System Account, I attend;the meetings of the Open Market Committee. At
each of these meetings, I make a.report of System operations and stand prepared
to answer any questions that any member of the Committee may care to raise on
the manner in which the Committee's directions have been carried out. My attendance at the meetings gives me an;opportunity to hear at first hand what the
Federal Open Market Committee has. in mind as to policy for the succeeding period
as developed in the meeting. As you know from the record of policy actions contained in the Annual Report of the Board of Governors, the Federal Open Market
Committee at each meeting issues a directive to the Federal Reserve Bank of
New York, setting forth the Committee's policy in broad terms. In addition,
the Committee arrives at a consensus during the course of each meeting, which
tends to specify in somewhat more concrete terms, but still in a relatively
general way, a series of guidelines for the Manager of the Account. It is my
duty as Manager of the Account to make sure that the intentions of the Federal
Open Market Committee as to the management of the Account during the period
between meetings of the Federal Open Market.Committee are clear to me. My
presence at those meetings affords me an opportunity of raising any questions
that I may have at that time. In addition to the directive and the consensus
laid down by the Committee, I have the benefit of hearing all the detailed
statements by the several members of the Committee and by the other Presidents
of the Reserve Banks who are not currently serving on the Committee. The views
expressed in these statements serve as an important supplement to the more
formal statement of the directive and the consensus, and furnish a number of
additional guideposts for day-to-day operations.
A great, deal remains; to be said about the process
day decisions to buy or sell Government securities are made
the Committee's policy intentions, and about the process by
day activity of the Account is reviewed by the Committee on


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

by which day-toon the basis of
which the day-toa current basis.

I hope that in trying to be brief I will not leave out any essential elements
of the story, and I shall, of course, be glad to answer any questions to fill
in any gaps that you may feel exist in it.
First of all, it should be remembered that the Committee's decisions
do not take place in a vacuum, but are made against the background of recent
experience in the money and credit markets. I should like to emphasize this
ever-present element of continuity. Quite often policy can be summarized in
terms of creating somewhat more or somewhat less pressure in the money market
and on member bank reserve positions, or in terms of maintaining about the
same conditions that prevailed in an earlier period. In moving from a policy
decision to day-to-day operations, the first question for determination is the
effect of the natural influences in the market on bank reserves and on the
degree of tightness or ease in the money markets. It may be, for example,
that in the period immediately ahead, float, or a return flow of currency
from circulation, or an inflow of gold, may be reasonably counted on to
supply reserves to the -market. If the Committee has decided upon a policy
of ease, this natural flow of funds through the market may do a great part
of the Manager's job for him. If. on the other hand,the Committee is pursuing
a policy of restraint, an increase in bank reserves through such natural
factors will require offsetting operations and thus will tend to make the
Manager's problem more complicated.
In order to keep abreast of the very latest developments in all
the factors affecting member bank reserve positions and the money market,
the Federal Reserve has developed an elaborate system for collecting information, designed to feed into the Manager's hands all the latest data pertaining
to bank reserire positions and the various factors that may'be affecting these
positions. On each morning, for example, we have on hand a complete nationwide picture of the reserve positions of member banks as of the close of
business the night before, including full information on the distribution
of reserves as between the money market banks, reserve city banks, and
country banks. In addition to up-to-the-minute information on past developments, we have a number of specialists who forecast changes in factors
affecting bank reserves for the period immediately ahead. These estimates
are revised each day for the next succeeding three- or four-week period.
But it is clear that cold statistics do not provide sufficient
basis for the conduct of day-to-day operations. We also rely heavily on
the specialists who work on our Trading Desk, which serves as the listening
post of the Federal Reserve System on the nation's money and securities
markets. Located as we are in the heart of the country's financial center,
and with direct communication with the Government securities dealers and
the money market banks, we have a unique opportunity to follow developments
in the market as they are occurring.
Part of our job is to disseminate this information on current
developments throughout the System, and to the Treasury for which we
execute transactions as fiscal agent of the United States. But in addition,
hour-by-hour developments, particularly those in the Federal funds market,
in the Government securities market, in the progress of Government securities
dealers in finding the financing required to carry their portfolios of
Government securities, provide the Manager of the Account with information
which gives him an informed judgment of the degree of ease or tightness in
the market--sometimes referred to as the "feel" of the market. The Federal

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

funds rate tells us something about the availability of excess reserves in the
banking system, with a rising rate indicative of somewhat greater pressure and
a falling rate indicative of declining pressure on bank reserve positions.
Similarly, if Government securities dealers—who scour the country each day
in search of funds from banks, corporations, and State and municipal bodies—
are having an easy time finding funds to finance their portfolios at relatively
low rates, we know that there is a ready availability of short-term funds
throughout the country. Movements in Treasury bill rates, too, may at times
be indicative of nonbank liquidity as well as bank liquidity, and may be an
important part of the information we use in reaching decisions on operations.
Current trends in the capital markets are also taken into consideration in
viewing the mix of pertinent factors.
The Manager of the Account is also directly concerned with activity
by foreign central banks, monetary authorities and international institutions
in our money market. Developments in our balance of payments and in the
international position of the dollar are of course taken into consideration
by the Federal Open Market Committee in its policy deliberations. But as
Vice President in charge of the Securities Department of the New York Bank,
I have a direct and immediate technical interest in these operations, since
foreign central banks hold and invest so large a part of their dollar reserves
through the Federal Reserve Bank of New York. Transactions for foreign accounts
affect member bank reserves and thus must be taken into account when operations
for System Account are being considered. The gold outflow in 19^0, for example,
was one of the inajor factors affecting member bank reserves with which we had
to deal. The fact that the Federal Reserve Bank of New York has close institutional relationships with foreign central banks and performs so large a percentage of transactions for their account in the money market enables us to
have first-hand information concerning the timing and the potential market
impact of these transactions. At times the coordination of these foreign
operations in the Government securities market with Federal Reserve open
market operations can become a particularly important undertaking. Transactions for foreign accounts in the market on occasion may make the job of
the Manager of the System Account somewhat easier; on other occasions, they
may complicate it. At times, for example, it is possible for us to avoid an
undesirable market impact of foreign account transactions by arranging transactions among these accounts or directly with the 'System Open Market Account.
In any event, the fact that we have knowledge of such foreign transactions
permits us to integrate them with System operations.
To sum up, then, we start from a policy decision of the Committee
as to the degree of pressure or ease desired, and on the basis of our knowledge of the present and prospective influences on bank reserves as a result
of the operation of natural factors, together with the information that is
fed to us on a current basis by the money and securities markets themselves,
a decision whether to supply reserves to the market or absorb reserves through
open market operations is arrived at. This is a decision that has to be reached
each day in the light of all of the factors that I have mentioned before. Our
estimates and forecasts of bank reserve positions are subject to wide fluctuations as a result of any number of factors that can only be imperfectly predicted, and I might add that a decision not to undertake open market operations
is as difficult as a decision to buy or sell. I should emphasize here that,
while the management of the System Open Market Account is in constant touch
with the market, the Account does not necessarily operate in the market every
minute,
every hour, or even every day or week.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

I think it is obvious that a considerable amount of judgment is
required as to the nature, the timing and the exact amount of any given open
market operation. The very nature of open market operations means that they
must be approximate and directional in nature, rather than precise, and it is
only by a constant review of the impact of our operations on the money market
and on bank reserve positions that we can answer the question of how much we
should do and when we should do it.
Although the Federal Open Market Committee meets periodically,
open market operations must be conducted on a day-to-day basis. While the
Open Market Committee lays down a number of guidelines for the Manager of the
Account, the nature and complexity of our financial structure precludes the
Committee from setting forth a precise schedule of purchases and sales of
Government securities that the Manager should follow on each day. This should
not be taken to indicate, however, that the Manager operates solely on his own
initiative between meetings of the Committee, and hence has an opportunity to
determine policy on his own-account. I shall not attempt to go into the many
advantages that stem from the regional character of the Federal Reserve System.
The fact that we do have a regional system, however, and the fact that the
Board of Governors is located in Washington while operations are, of necessity,
conducted in New York, does require a highly developed system of communications
within the System to insure that each member of the Board of Governors and each
President of a Federal Reserve Bank is kept fully informed of the Manager's
operation of the System Account on a day-to-day basis.
To start with, each morning there is a conference call at 11:00 o'clock,
at which time the Account Management talks by telephone with a representative
of the Board of Governors and one of the Presidents of a Reserve Bank who is
currently serving on the Committee. Quite often, Mr. Hayes, the Vice Chairman
of the Committee, and his alternate on the Committee, Mr. Treiber, the First
Vice President of the New York Bank, sit in with my associates and myself on
this call, and one or more of the Governors of the Board may sit in at the
Washington end. After a summary of conditions in the money and capital markets
as they have developed during the first hour of trading in the morning, a summary of the reports received from dealers as to the volume of trading in
Government securities and their positions at the close of business on the
preceding day, a review of the country-wide reserve positions, with special
attention to the reserve position of the New York and Chicago money market
banks, a review of developments expected for the day in the Treasury balance
and other information that may appear pertinent, the Account Management outlines the approach it proposes to take with respect to operations during that
day. (This review of our intentions is, of course, based on our assessment
of conditions as they exist at 11:00 o'clock'or thereabouts, and is subject
to change should there be a significant change in the market atmosphere.) The
other participants in the call may choose to comment on the course of action
outlined by the Manager and may review any other developments that appear to
them to be pertinent in this respect. A rather detailed summary of this call
is prepared at the Board of Governors and placed before each member of the
Board within a short time after the completion of the call. The same information is transmitted by telegram to the Presidents of all the other Reserve Banks,
so that within a very short time the entire System has been alerted to the
morning's developments and to the course of action that the Manager deems appropriate to implement the policy laid down by the Committee. This rapid dissemination of this information permits each member of the Committee to assess the
desirability of the action contemplated by the Manager, and tq make comments
and suggestions if he believes it desirable -to do so.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

I might add that, while the final responsibility for determining
day-to-day operations rests with me, I rely heavily upon the staff work of
specialists, traders, statisticians, economists, and others who devote so much
of their time to the conduct of our System operations. I am, of course, able
to discuss at any time problems that may arise with the Vice Chairman of the
Committee or his alternate on the Committee, and if there are particularly
troublesome problems, I may consult directly with Chairman Martin or request
a telephone conference of the full Open Market Committee.
In addition to this daily call, a written report is submitted daily
to the Board of Governors and to interested officers of other Reserve Banks,
and at the end of each statement week, a full written report of Account operations as well as developments in bank reserve positions, the money, Government
securities and capital markets is submitted by me to the members of the Open
Market Committee and to the other Presidents. Similar reports are prepared to
cover developments between meetings of the Open Market Committee, including
a report which covers developments and Account operations up to the close of
business on the Monday night preceding a meeting. Thus, when the Committee
convenes on a Tuesday morning, it has a full written record of all the activity
conducted for the Account, as well as a description of the background against
which these operations were conducted.
And this is not all. During the course of the day, we submit hourly
reports to the Board of Governors on prices arid interest rates on Government
securities, and indicate on an hourly basis, the operations that have been
undertaken by the Account Management. In addition, a summary of the day's
developments is also transmitted by telephone to a member of ttie staff of the
Board of Governors by the Trading Desk after the close of the market at 3:30 p.m.,
and a summary of this information is'prepared for distribution to members of
the Board.
In addition to these informational activities, the System has devised,
as part of its Emergency Planning Procedures, a program whereby certain officers
and staff members of the other Reserve Banks and of the Board of Governors spend
two to three weeks with us at the Trading Desk in New York. While this program
was devised mainly to provide some measure of continuity in System operations
in case of a national emergency, it has served to provide key people in the
System with a broad understanding of the scope of, and the problems involved
in, day-to-day open market operations.
All in all, while this program of information and training takes
great time arid effort, we feel that it is absolutely essential and that it
has been quite effective in keeping the entire System up-to-date on operations
undertaken on behalf of the Open Market Committee. The completeness of the
information provided, and its current nature, permits each member of the
Committee to be fully informed of the operations undertaken, and provides
each member of the Committee an opportunity for continuous review of, and
comment concerning, the manner in which the Manager is carrying out the
instructions he received at the meeting of the full Committee.
I have come to the end of my prepared statement, Mr. Chairman; and
I shall now be happy to answer any questions I can that the members of this
Committee may have, relating either to matters that I have covered, or to any
other matters that are within the scope of the Committee's announced interest.

http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

For release on deliverynot before 10 a.m.,
Friday, June 2, 1961.

STATEMENT
BY
ALFRED HAYES,
PRESIDENT, FEDERAL RESERVE BANK OF NEW YORK
BEFORE
JOINT ECONOMIC COMMITTEE

Mr. Chairman and Members of the Committee:
My name is Alfred Hayes. I am the President of the Federal Reserve
Bank of New York, and a member and the vice chairman of the Federal Open Market
Committee. You have asked me to appear "before you as a witness in this hearing,
which I understand is to focus mainly on questions suggested "by the record of
policy actions of the Federal Open Market Committee contained in the Annual
Report of the Board of Governors of the Federal Reserve System covering operations
for the year 1960. I am glad to have this opportunity to appear "before the
Committee to discuss some of these points, and possibly to assist the Committee
in respect of particular matters that concern it.
As Mr. Rouse stated when he appeared before you yesterday, the Federal
Open Market Committee has selected the Federal Reserve Bank of New York to carry
out all transactions in U. S. Government securities for the account of the twelve
Federal Reserve Banks. The selection of the Federal Reserve Bank of New York is
the logical consequence of its physical location in the nation's money market
center, where the great bulk of all transactions in Government securities, and
in other money market instruments, actually takes place. The securities acquired
pursuant to such operations are held in a "System Open Market Account" in which
the twelve Reserve Banks participate.
The general position of the Federal Open Market Committee as to credit
policy is set forth in the directive it issues to the Federal Reserve Bank of
New York at each meeting. Each directive is amplified by the statement of the
consensus of the Committee and by the full discussion of the participants in the
meeting, all of which are noted in the minutes of the meeting.
The primary responsibility for the conduct of day-to-day open market
operations rests with the Federal Reserve Bank of New York, acting in accordance
with the directions of the Federal Open Market Committee, whose members are kept
currently informed of these operations. Within the Bank, this responsibility
is centered in the Manager of the System Open Market Account. The Manager has
the advantage of frequent consultation with the President of the Bank, who is a
member of the Committee, with the First Vice President of the Bank, who is an
alternate member of the Committee, and with a staff in constant touch with the
market. All of them have an incentive to keep continuously informed and to be
readily available for consultation because of the institutional responsibility
which they share. This sharing of responsibility has the additional advantage
of permitting an internal arrangement whereby, in the absence of the Manager,
the First Vice President acts as his alternate in respect of open market
operations.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

In his statement yesterday Mr. Rouse referred to the fact that the
Federal Reserve Bank of New York, as fiscal agent of the United States, executes
transactions in Government securities for the Treasury Department and that the
Bank also conducts similar transactions in "behalf of foreign central "banks and
certain international organizations. These transactions, which are conducted
under the general supervision of Mr. Rouse in his capacity as Vice President of
the Federal Reserve Bank of New York, affect member bank reserves and thus are
relevant to, and must be closely coordinated with, System policy. The conduct
of such Treasury and foreign transactions by the New York Bank enables the
Manager and his staff to be informed as to their potential market impact and
thereby to achieve, where desirable and possible, a closer integration of such
transactions with the aims of System Open Market operations. As Mr. Rouse mentioned, it is at times possible for us to avoid an undesirable market impact of
foreign account transactions by arranging transactions among those accounts or
directly with the System Open Market Account. The fact that the Federal Reserve
Bank of New York, as an institution, acts as fiscal agent of the United States,
and serves as correspondent bank for foreign central banks, monetary authorities,
and international organizations greatly facilitates the carrying out of the objectives of the Federal Open Market Committee.
I understand that you are particularly interested in the subject of
the adequacy of the information provided by the Federal Reserve System, especially
with reference to the record of policy actions taken by the Federal Open Market
Committee. I assume that you would like me to comment first on the adequacy of
the information in the Annual Report of the Board of Governors that pertains to
the record of policy actions of the Open Market Committee.
The policy record of the Federal Open Market Committee, which is published
each year as part of the Annual Report of the Board of Governors records all
formal actions taken at each meeting of the Committee. The directive to the
Federal Reserve Bank of New York is given in full, together with the names of
all members voting for or against its continuation or change, as the case may
be, at each meeting. Furthermore, the consensus arrived at is recorded, and the
considerations leading to it are summarized in some detail.
When decisions are not unanimous, the views of the minority are presented
and occasionally it is also indicated what changes in the text of the resolutions
adopted would have made it possible for the minority to vote for them. The secretary circulates the draft of the policy record to all members of the Committee
in order to assure the presentation of a comprehensive and fair picture of our
deliberations.
I believe that the Board's report, including the Federal Open Market
Committee policy record, presents in an effective manner a comprehensive record
of steps taken as well as a review of the underlying rationale. Students of
monetary affairs have found this to be a valuable report.
The policy record is published once a year in the Board's Annual Report,
as required by law. It has been suggested that the policy record be published
more frequently. It has been pointed out that under present practice the record
of the last meeting of any year becomes available with a delay of only about
three months, while about fifteen months elapse between the first meeting of any
year and the publication of the record of that meeting in the Annual Report; and
it has been suggested that the policy record could perhaps be published quarterly,


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

with an appropriate lag. This possibility has "been raised within the System.
While I can see merit in the suggestion for quarterly publication under some
circumstances, I would emphasize that the Federal Open Market Committee has not
yet considered the matter in detail. I am sure that the Federal Open Market
Committee would wish to avoid any hasty conclusions on this matter, in view of
its importance.
I should not like to leave this subject without pointing out that
students of monetary matters, and all those who must make decisions in credit
and capital markets, follow closely the wide range of weekly and other periodic
banking statistics published by the System, including the recently inaugurated
release of data on United States Government securities markets, a matter concerning which your Committee has shown great interest. A timely and comprehensive
review of business and credit conditions is available in the various monthly publications of the Federal Reserve System, including our Bank's Monthly Review,
which carries each month a very detailed analysis of the credit and securities
markets with particular attention given to United States Government securities
and to Treasury financing operations. In addition to this material, which is
written for those who closely follow current financial developments, we make an
effort to provide less technical material, dealing with System functions, operations and policies, designed to be of interest to a much wider segment of the
public.
I should like to address myself now to the first of two related questions
in which I understand the Committee is interested, that is, whether monetary policy
can be determined for longer periods in advance, and made public. It must be
understood in this connection that an effective monetary policy requires a continuous review and reassessment of the evolving business and credit situation,
both domestic and international, in which there must be a prompt and sensitive
reaction to the interplay of factors affecting the development of policy. As
you know, the Federal Open Market Committee generally meets every three weeks
for a full scale review of these matters, and special meetings can be called on
short notice. Monetary policy has the major advantage of a high degree of flexibility- -an advantage that would be lost if it became a practice to determine and
announce policy intentions for long periods in advance. Fiscal policy does not,
generally speaking, enjoy the same degree of flexibility. There would clearly be
no wisdom in reducing the flexibility of over-all economic policy by making monetary policy less sensitive and less adaptable to changes in the business and credit
situation.
The second related question in which this Committee has evidenced an
interest is whether it would be advisable to make a prompt announcement of policy
decisions. In response to this question, I could say that theoretically it would
be possible for the Federal Open Market Committee to make an immediate announcement
following each meeting as to the policy it had adopted. In practice, however, such
public announcements would seriously interfere with the effectiveness of monetary
policy. For example, business and credit conditions may at times be so clouded
that the Federal Open Market Committee may wish to undertake a modest shift in the
extent or direction of its operations and then evaluate the effect on credit conditions and on the money market. Depending upon the results, this shift might
develop into a full-fledged move, or might be quickly reversed. The usefulness
of such operations would be destroyed if the market were informed as to what was
being attempted. Moreover, an announced shift in System policy might set off a
wave of optimism (or pessimism) which, in turn, might result in substantial
changes in security prices and yields. If somewhat later the System found it


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis

appropriate to reverse policy and made a public announcement to this effect, an
opposite swing in market sentiment would "be quite likely. In other words, a
policy of prompt announcement might subject financial markets to disruptive
swings in prices and yields that would serve no useful function. Conceivably
such a policy might introduce an unnecessary and unwarranted degree of rigidity
into System actions for fear of the very swings just mentioned.
I ha Are now come to the end of my prepared statement, Mr. Chairman, and
I shall be happy to answer any questions I can that the members of this Committee
may have relating either to matters that I have covered or to any other matters
with which this Committee is now concerned.


http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis