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55th,

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM







BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Washington, May 15, 1969
THE SPEAKER OF
THE HOUSE OF REPRESENTATIVES.

Pursuant to the requirements of Section 10 of
the Federal Reserve Act, as amended, I have
the honor to submit the Fifty-Fifth Annual
Report of the Board of Governors of the
Federal Reserve System. This report covers
operations for the year 1968.
Yours respectfully,
Wm. McC. Martin, Jr., Chairman.

Part 1—Review of 1968
3
9
13
16
21

MONETARY POLICY AND THE ECONOMY
DIGEST OF PRINCIPAL POLICY ACTIONS
CREDIT MARKETS AND FINANCIAL FLOWS
First half of year
Second half of year

29
30
39
42
43

DEMANDS, RESOURCE USE, AND PRICES
Demands
Labor markets
Wages and costs
Prices

47
47
49
50
50
54

U.S. BALANCE OF PAYMENTS
Transactions in goods and services
Remittances and pensions
U.S. Government credits and economic aid grants
Private capital flows
Official reserve transactions

57
60

FOREIGN CREDIT RESTRAINT PROGRAM
OPERATIONS IN FOREIGN CURRENCIES

Part 2—Records, Operations, and Organization
69
99

RECORD OF POLICY ACTIONS—BOARD OF GOVERNORS
RECORD OF POLICY ACTIONS—FEDERAL OPEN
MARKET COMMITTEE

226
227
275

OPERATIONS OF THE SYSTEM OPEN MARKET ACCOUNT
Review of Open Market Operations in Domestic Securities
Review of Open Market Operations in Foreign Currencies

324
324
325
325
326

SPECIAL STUDIES BY THE FEDERAL RESERVE SYSTEM
Reappraisal of the Federal Reserve discount mechanism
U.S. Government securities market study
Foreign operations of member banks
Effects of monetary policy on economic activity




328

INTERNATIONAL LIQUIDITY

328
331

Special Drawing Rights
Gold: The two-tier system

333

333
333
333
333
333
334
334
334
334

336

337
337
337
338
339
339
340
341
341
342
342
343

LEGISLATION ENACTED

Elimination of gold reserve requirement against Federal
Reserve notes
Direct purchases of Government obligations by Federal
Reserve Banks
Truth in lending
Special Drawing Rights certificates
Defense production
Bank protection
Margin requirements for securities traded over the counter
"Tender offers" with respect to securities of State-chartered
member banks
Housing and urban development; real estate loans by national
banks; member bank underwriting of certain municipal
revenue bonds
Interest on deposits; reserves of member banks; open market
operations; Reserve Bank advances
LEGISLATIVE RECOMMENDATIONS
Lending authority of Federal Reserve Banks
"Par clearance"
Reserve requirements
Purchase of obligations of foreign governments by Federal
Reserve Banks
Loans to bank examiners
Bank holding companies and bank subsidiaries
LITIGATION
Collateral Lenders Committee et al. v. Board of Governors of
the Federal Reserve System
United States v. Girard Trust Bank and The Fidelity Bank,
both of Philadelphia, Pennsylvania
Suits arising out of closing of San Francisco National Bank
Baker Watts & Co. et al. v. Saxon




345

345
347
348
349
350
352
352
353
354

354
354
355
356
357
357
358

BANK SUPERVISION AND REGULATION BY THE FEDERAL
RESERVE SYSTEM

Examination of member banks
Federal Reserve membership
Bank mergers
Bank holding companies
Foreign branches of member banks
Acceptance powers of member banks
Foreign banking and financing corporations
Bank Examination Schools and other training activities
FEDERAL RESERVE BANKS

Examination
Earnings and expenses
Holdings of loans and securities
Volume of operations
Loan guarantees for defense production
Foreign and international accounts
Bank premises

359

BOARD OF GOVERNORS

359
359

Building annex
Income and expenses
TABLES:

364
366
370
371

372
373
374

1. Detailed Statement of Condition of All Federal Reserve
Banks Combined, Dec. 31, 1968
2. Statement of Condition of Each Federal Reserve Bank,
Dec. 31, 1968 and 1967
3. Federal Reserve Bank Holdings of U.S. Government
Securities, Dec. 31, 1966-68
4. Federal Reserve Bank Holdings of Special Short-Term
Treasury Certificates Purchased Directly from the
United States, 1953-68
5. Open Market Transactions of the Federal Reserve System
During 1968
6. Bank Premises of Federal Reserve Banks and Branches,
Dec. 31, 1968
7. Earnings and Expenses of Federal Reserve Banks During
1968




TABLES—Cont.

376
378
379
379

380
381
382
383
384

386

387
388
390
392

414

8. Earnings and Expenses of Federal Reserve Banks, 1914—
68
9. Volume of Operations in Principal Departments of Federal Reserve Banks, 1965-68
10. Number and Salaries of Officers and Employees of Federal
Reserve Banks, Dec. 31, 1968
11. Fees and Rates Under Regulation V on Loans Guaranteed
Pursuant to Defense Production Act of 1950, Dec. 31,
1968
12. Maximum Interest Rates Payable on Time and Savings
Deposits
13. Margin Requirements—Effective Date of Change
14. Member Bank Reserve Requirements
15. Federal Reserve Bank Discount Rates, Dec. 31, 1968
16. Member Bank Reserves, Federal Reserve Bank Credit, and
Related Items, End of Year 1918-68 and End of
Month 1968
17. Principal Assets and Liabilities, and Number of Commercial and Mutual Savings Banks, by Class of Bank, Dec.
30, 1968, and Dec. 31, 1967
18. Member Bank Income, Expenses, and Dividends, by Class
of Bank, 1968 and 1967
19. Changes in Number of Banking Offices in the United
States During 1968
20. Number of Par and Nonpar Banking Offices, Dec. 31,
1968
21. Description of Each Merger, Consolidation, Acquisition of
Assets or Assumption of Liabilities Approved by the
Board of Governors During 1968
MAP OF FEDERAL RESERVE SYSTEM—DISTRICTS
FEDERAL RESERVE DIRECTORIES AND MEETINGS:

416
418
419
420
444

Board of Governors of the Federal Reserve System
Federal Open Market Committee
Federal Advisory Council
Federal Reserve Banks and Branches
INDEX







In 1968 restraint of inflationary pressures was the principal
economic problem facing monetary policy. Federal Reserve
efforts to curb such pressures, to foster a sustainable rate of
economic expansion, and to help attain reasonable equilibrium
in the balance of payments were aided by enactment in June of
a package of fiscal restraint, including a 10 per cent surtax on
personal and corporate income and certain constraints on Federal spending. As fiscal restraint was added to the monetaryfiscal policy mix, the rate of expansion in economic activity
began to moderate in the second half of the year. But the rate
of economic expansion remained higher than had generally been
expected, and higher than appeared desirable in view of the need
to restrain price advances and reduce inflationary expectations.
As a result, monetary policy, which had become somewhat
easier in the summer, moved toward greater restraint in the autumn. And as the year drew to a close, the banking system was
again under reserve pressure, and most interest rates had reached
new highs.
During the first half of 1968, expansion in real gross national
product accelerated to an annual rate in excess of 6 per cent
from just under 4 per cent in the second half of 1967. This surge
in economic activity was spurred in the early months of the year
by expanded consumer expenditures, continued increases in
Federal defense outlays, and growth in residential construction.
During the spring, growth in such final demands slowed, but a
fast pace of expansion in over-all economic activity was sustained by a marked increase in inventory investment, partly in
preparation for a possible steel strike in the summer. With demands generally strong and unit labor costs rising, price increases continued to be large and widespread over the first half.
The strengthening of domestic demand for goods and services,




together with rising prices of domestically produced goods, led
to a sharp increase in imports in the first half of the year. Although exports also were rising more rapidly than they had
during most of 1967, the surplus in U.S. international transactions in goods and services dropped markedly.
The surge in economic activity, the deterioration in the U.S.
foreign trade position, and the continuing very large deficit in
the Federal budget highlighted the need for measures of fiscal
restraint. While such measures were being considered, monetary
policy actions were taken to restrain credit expansion and to
make credit more costly. Effective in mid-January, reserve requirements against demand deposits in excess of $5 million at
all member banks were increased by Vi of a percentage point;
this action had been announced in late December 1967. Monetary restraint was intensified in subsequent months by restrictive
open market operations and two increases in the discount rate,
and during the March-June period there was little growth in
bank reserves.
In mid-March the Federal Reserve discount rate was raised
from AVi to 5 per cent to strengthen the international position
of the dollar and to combat domestic inflationary pressures. Evidences of domestic overheating were widespread. At the same
time there was a large-scale movement out of many national
currencies into gold, based partly on fears of a change in U.S.
gold policy. The Governors of central banks actively participating in the gold pool met in Washington on March 16 and 17
and reached agreement on a number of issues connected with
the role of gold and with currency speculation. Pressures in the
gold market subsequently abated.
The Federal Reserve discount rate was raised again, to 5Vi
per cent, in mid-April. This increase, together with more restrictive open market operations, led to a further rise in market
interest rates. At the same time, Regulation Q ceiling rates on
large-denomination time certificates of deposit were raised—
from 5¥L per cent to a scale ranging from 5V£ to 6V4 per cent




depending on maturity—so as to avert a sharp contraction in
outstanding bank deposits and bank credit. With market interest
rates near the new Regulation 0 ceilings, time deposit growth
slowed and bank credit expansion moderated in the second
quarter. Outstanding large-denomination CD's declined somewhat during the quarter, and banks with foreign branches greatly
increased their borrowings of Euro-dollars.
Meanwhile, net inflows of deposits to savings and loan associations and mutual savings banks continued at around the reduced pace that had come to prevail since the last quarter of
1967. These institutions became somewhat more cautious, however, in making commitments for mortgages because they did
not know how large a volume of savings would be withdrawn at
the midyear interest-crediting period.
Passage of fiscal restraint legislation led to market expectations of declining interest rates, predicated for the most part on
anticipations of a slower economic growth and an easier monetary policy. Longer-term interest rates and Treasury bill rates
declined during the first part of the summer. A large volume of
reserves was provided during the summer through System open
market operations, which were conducted with a view to accommodating tendencies for short-term interest rates to decline and
for somewhat less firm money market conditions to develop in
the wake of the fiscal restraint legislation. Federal Reserve discount rates were reduced from 5Vi to 5VA per cent in midAugust, primarily to move the rate into closer alignment with
the reduced level of short-term rates.
The reduced level of market interest rates enabled banks to
acquire more funds through an accelerated expansion of time
and savings deposits, particularly large-denomination CD's. As
a result, banks greatly expanded their investments in U.S. Government and State and local government securities, and the
prime loan rate charged businesses was reduced in late September. Net inflows of funds to thrift institutions did not show a
resurgence, but they were sustained at around their previous




reduced rates; and with uncertainties removed, these institutions
increased their mortgage commitment activity.
As the summer progressed, demands for goods and services
in the economy turned out to be stronger than most observers
had anticipated. Private credit demands were exceptionally large
during the third quarter—reflecting in part a sharp rise in consumer spending on durable goods as well as increased outlays
by State and local governments. Business credit demands were
sustained by a renewed expansion in fixed investment and by
inventory accumulation at a rate that was only somewhat lower
than in the second quarter. However, fiscal restraint was beginning to take hold. The rate of increase in Federal spending
dropped sharply in the third quarter and declined further in the
fourth. And as the higher tax rates reduced the growth of disposable personal income, consumer spending showed only a
minor further rise after the burst of buying of durable goods in
the summer.
Nevertheless, there was no diminution of price pressures. And
an inflationary psychology was becoming embedded in decisionmaking for key sectors of the economy. Most notably, businesses
enlarged their plans to buy plant and equipment. In financial
markets, long-term interest rates rose sharply in the last few
months of the year to new highs, while stock prices also advanced markedly from around midsummer until the last few
weeks of the year.
In an effort to resist inflationary pressures and psychology,
monetary policy actions became more restraining. Reserves were
provided less readily through open market operations in the
autumn, a period when a continued tendency for bank credit
to expand rapidly suggested that both credit demands and demands for goods and services were remaining relatively strong.
In these circumstances member banks were forced to increase
their borrowings from the Federal Reserve to obtain reserve
funds, and the rates on Federal funds and 3-month Treasury
bills rose from their lows of the late summer and early autumn.




In mid-December the Federal Reserve discount rate was raised
to 5Y2 per cent, and this action, in combination with firming
through open market operations, led to further upward movements in interest rates.
As the year drew to a close, short-term market interest rates
were above Regulation Q ceilings. Hence, banks were unable to
roll over all of their maturing large-denomination CD's, and a
sizable attrition of such outstanding deposits began to develop.
The reduced supply and higher cost of funds to banks, including
the high cost of Euro-dollar funds, led the banks to undertake
adjustments that affected the terms and availability of credit to
borrowers. In particular, banks raised the prime loan rate
charged businesses by two stages in December to a level of 6%
per cent; and they sharply reduced their acquisitions of U.S.
Government and—late in the year—State and local government
securities. Net inflows of funds to nonbank savings institutions
increased at a slower rate toward the year-end—contributing,
along with generally higher market interest rates, to a stiffening
of borrowing costs and other terms in the mortgage market.
While monetary restraint was developing in the fourth
quarter, the money stock rose at a somewhat faster rate than in
the third. The difference in the rate of increase between the two
quarters was influenced to a large extent by short-run net transfers of funds between private demand deposits and U.S. Government deposits. Over the second half as a whole, the money stock
rose at an annual rate of just over 6 per cent, a somewhat slower
rate of increase than in the first half of the year.
For the year as a whole the U.S. balance of payments showed
an over-all surplus on either of the two usual methods of calculation, despite the virtual disappearance of the merchandise
trade surplus. A massive net inflow of private capital took place
through a number of channels. Foreigners supplied ample funds
to the Euro-dollar deposit market, thus facilitating the borrowing there by U.S. banks. Foreign investors purchased an unprecedented volume of U.S. equity securities as well as of issues




sold abroad by U.S. companies to comply with the requirements
of the mandatory controls imposed at the beginning of the year.
The Federal Reserve's foreign credit restraint program (discussed on pages 57-59), together with market conditions, produced a reversal of the previous year's net outflow of bank
credit. And foreign monetary authorities made large purchases
of U.S. Treasury nonmarketable securities.
The Federal Reserve, together with the U.S. Treasury, continued to participate actively during the year in the cooperative
actions taken by monetary authorities of various countries to
deal with speculation in the gold and foreign exchange markets.
The Federal Reserve's reciprocal currency arrangements with
central banks of other countries were expanded further. The
total swap network was enlarged from $7,080 million to $10,505
million. Substantial use was made of these swap facilities by
central banks of other countries during the year. On December
31 outstanding swap drawings by the Bank of England and the
Bank of France totaled about $1.6 billion. Federal Reserve
commitments under outstanding swap drawings from continental
European central banks, which had been about $1.8 billion at the
end of 1967, were liquidated before the end of July; subsequently, the System drew again on its swap facilities with the
Swiss and German central banks, and at the end of the year it
had outstanding commitments of about $400 million.
•




Period or
announcement
date

Action

Purpose

January 1

Issued revised and substantially more restrictive
guidelines for banks and other financial institutions for
restraint of foreign credits as a part of the President's
balance of payments program.

To strengthen the U.S. balance of payments by
achieving a net inflow of at least $500 million during
1968.

January through
late June

Directed that System open market operations be
conducted with a view to maintaining firm conditions
in the money market and, from time to time, attaining firmer conditions or facilitating adjustments to increases in Federal Reserve Bank discount rates, with
provisions for modification of operations depending on
the course of bank credit developments.

To foster financial conditions conducive to resistance of inflationary pressures and to attainment of
reasonable equilibrium in the country's balance of
payments.

March 11

Imposed a new margin requirement of 70 per cent
on loans made by "other lenders" (i.e., other than
banks, brokers, and dealers) for the purpose of purchasing or carrying registered equity securities.
Imposed a new margin requirement of 50 per cent
on such loans made by banks or "other lenders"
against securities convertible into registered equity securities. Lowered the margin requirement on such
loans by brokers and dealers to 50 per cent.

To broaden the coverage of, and in most respects to
tighten, the Board's regulations governing the use of
credit in stock market transactions.

March 13

Announced revisions in the guidelines for banks and
nonbank financial institutions issued under the President's balance of payments program.

To implement an agreement reached between the
Governments of Canada and the United States.




DIGEST—Continued
°

Period or
announcement
date

Action

Purpose

March 14

Discount rates increased from AV2 to 5 per cent at
9 Reserve Banks, effective March 15. (By March 22,
the 5 per cent rate was in effect at all Reserve Banks.)

To strengthen the international position of the dollar
and to curb inflationary pressures in the domestic
economy.

April 18

Discount rates increased from 5 to SV2 per cent
at 3 Reserve Banks, effective April 19. (By April 26,
the SVi per cent rate was in effect at all Reserve Banks.)

To restrain intensifying inflationary pressures and
to strengthen the position of the dollar at home and
abroad.

Maximum interest rates payable by member banks
on single-maturity time deposits of $100,000 or more
revised, effective April 19, 1968, from 5Vi per cent
on all maturities to:
Per cent
Maturity group
5lA
30-59 days
534
60-89 days
6
90-179 days
6V4
180 days and over

To avoid a sharp contraction in outstanding bank
deposits and bank credit.

June 7

Increased the margin requirement on loans by banks,
brokers and dealers, and other lenders for the purpose
of purchasing or carrying registered equity securities
from 70 to 80 per cent.
Increased the margin requirement on such loans by
these lenders against securities convertible into registered equity securities from 50 to 60 per cent.

To prevent excessive use of credit to finance transactions in securities.

Late June
through early
September

Directed that System open market operations be
conducted with a view to accommodating tendencies
for short-term interest rates to decline and for somewhat less firm money market conditions to develop in

To foster financial conditions conducive to sustainable economic growth, continued resistance to inflationary pressures, and attainment of reasonable equilibrium in the country's balance of payments.




connection with enactment of fiscal restraint legislation and to facilitating orderly adjustments to the reduction (in mid-August) in Federal Reserve Bank
discount rates, with provisions for modification of
operations depending on the course of bank credit
developments.
August 15

Discount rate reduced from 5Vi to 5lA per cent at
one Reserve Bank, effective August 16. (By August 30,
the SVA per cent rate was in effect at all Reserve
Banks.)

To align the discount rate with the change in money
market conditions that had occurred chiefly as a result
of the enactment of the tax increase and the related
expenditure constraints and the associated expectations
of reduced Treasury demand for financing.

Early September
to mid-December

Directed that System open market operations be conducted with a view to maintaining about the prevailing
conditions in money and short-term credit markets,
with provisions for modification of operations depending on the course of bank credit developments.

To foster financial conditions conducive to sustainable economic growth, continued resistance to inflationary pressures, and attainment of reasonable equilibrium in the country's balance of payments.

After midDecember

Directed that System open market operations be
conducted with a view to attaining firmer conditions
in money and short-term credit markets while taking
account of the effects of other possible monetary
policy action, with provision for modification of operations depending on the course of bank credit developments.

To foster financial conditions conducive to the reduction of inflationary pressures, with a view to encouraging a more sustainable rate of economic growth
and attaining reasonable equilibrium in the country's
balance of payments.

December 17

Discount rates increased from SVA to 5Vi per cent
at 9 Reserve Banks, effective December 18. (By December 20, the 5Vi per cent rate was in effect at all
Reserve Banks.)

To foster financial conditions conducive to the reduction of inflationary pressures, with a view to encouraging a more sustainable rate of economic expansion and attaining reasonable equilibrium in the country's balance of payments.

December 23

Announced revised guidelines for restraint of foreign
credits by banks and other financial institutions.

To continue the President's program, announced on
January 1, 1968, to strengthen the U.S. balance of
payments.




During 1968 the changing mix of fiscal and monetary policies—
both as it developed and as it was expected to develop—gave
rise to sharp variations in attitudes of credit market participants
and to large swings in both the cost and the availability of lendable funds. Demands for credit remained generally strong,
buoyed by a continued expansion of economic activity, which
slowed only moderately after enactment of fiscal restraint measures at midyear. Demands for credit were larger, in fact, in the
second half of the year than in the first—reflecting a thirdquarter surge in consumer spending, increased activity in real
estate markets, large offerings of State and local government
securities, and sizable borrowing by the Federal Government to
finance a larger-than-seasonal deficit.
Early in the year, with the Federal budget continuing to be
expansive, with prospects for fiscal restraint in doubt, and with
a progressive firming in monetary policy under way, market
rates of interest rose. By spring, these higher rates had resulted
in a moderation of inflows of funds to depositary institutions,
particularly banks. Market rates began to decline, however, in
response to the midyear shift in the fiscal-monetary policy mix.
These declines made it possible for banks to more than recoup
their earlier losses of CD funds and to increase sharply the share
they advanced of total funds raised in credit markets.
As the second half of the year progressed, it became apparent
that demand forces in the economy were stronger than most
analysts had anticipated and that the restrictive impact of the
fiscal legislation was going to be felt much more slowly than had
been expected earlier. Monetary policy became more restrictive
in the last few months of the year. Although the resulting constraint on reserve growth and the rise in market rates of interest
began to slow deposit inflows to banks—and hence the increase
in bank credit—it was not until the last few weeks of the year
that the availability of funds to banks was sharply curtailed.




13

1. Volume raised by nonfinancial
sectors

2. Shares in funds supplied by selected
institutions

BILLIONS OF DOLLARS, SEASONALLY ADJUSTED, ANNUAL RATES

PER CENT

10
2

50

90

30

60
1966

1967

1968

1966

1967

1968

TABLE 1: BORROWING BY TYPE OF INSTRUMENT
In billions of dollars
Calendar year 1967

Type of instrument

II
U.S. Govt. securities 1,2..
State and local govt.
issues i
Corporate securities 1....3
Consumer instalment debt
Mortgage debt 3

III

.5 - 8 . 8
4.1
5.4
.6
3.9

IV

Calendar year 1968
III

Year

IV

Year

9.4

11.6

12.7

6.5

-2.7

8.4

4.7

16.9

3 .1
6 .6
1 .0
6 .6

3. 8
6. 1
6
5*. 1

3.6
6.1
1.1
7.1

14 .6
24 .1
3 .3
22 .7

3 .7
5 .0
1 .8
6 .8

3.8
5.5
2.1
6.5

4.6
5.0
2.5
6.4

4.3
5.4
2.6
7.3

16. 5
21. 0
9. 0
27. 1

1
Quarterly and yearly totals, not seasonally adjusted.
2 Total net issues, flow of funds data.
3
Quarterly and yearly changes, seasonally adjusted.

TABLE 2: BANK CREDIT
Seasonally adjusted changes, in billions of dollars
Calendar year 1967 i

Component
I

III

II

IV

Calendar year 1968 i

Year

I

Total loans and investments

11 0

4. 7

12.9

7.4

36.0

6.0

Investments:
U.S. Govt. securities. ..
Other securities

3.7
3.7

-1. 4
3. 8

5.5
1.5

-1.7
3.7,

6.1
12.7

.2
2.2

5
3

3 7

2.

5.8

5.5

17.2

3 6

1.5
.7
1.4
2.2

2.0
.7
1.7

4.
1. 8
8
1
-0. 5

Loans:
Total
Business
Consumer
Real estate
Securities
1

9
9

7
.4

8
-0. 9

Quarterly data are seasonally adjusted.
NOTE.—Figures for all commercial banks.

14



-0.4

7.7
1.8
4.6
1.3

1.5

1 0
1.7

-0.5

IV

III

II

Year

17 0

9.7

38.0

3.6
3.1

-2.3
3.5

2.0
9.1

8.5

26.9

10
7
1
1

3
3
S
3

3.8

2.8
1.6
2.2

-1.1

8.4
4.9
6.5
1.7

3. Bank reserves and borrowings

5. Interest rates

BILLIONS OF DOLLARS, SEASONALLY ADJUSTED
SHORT-TERM

],/**

3-MONTH MATURITIES

26.0

AX/
TOTAL RESERVES

TREASURY BILL RATE

1967

1966

N T SAO AL A J SE
O E S N LY DU T D

1966

,

1966

:

1967

j

1968

1.0

BORROWINGS FROM
FEDERAL RESERVE

LONG-TERM

1967

4. Cost of reserves

STATE AND LOCAL GOVT. Aaa

40
.
1967

1966

1967

1966

1968

1968

TABLE 3: DEPOSIT FLOWS

Annual rate of change, in per cent
Item

Calendar year 1967 1
III

Total member bank de15.4
posits
6.6
Money stock
Time and savings deposits
at banks
19.7
Savings accounts in nonbank thrift institutions..
9.5
1

IV

Calendar year 1968 i
III

Year

IV

Year

13.7
7.0

7.2 11.7
4.9 6.4

7.0
4.6

1.2
8.7

13.1 12.4
4.5 7.4

16.2 15.8

9.1 16.]

11.0

6.4

7.0
6.1

3.2
5.9

17.9 15.7 11.3
6.1
6.3 6.3

8.7
6.5

9.4

9.4

8.6
6.5

Quarterly data are seasonally adjusted.




15

FIRST HALF OF YEAR
Demands for credit were relatively large in the first half of 1968,
but as Federal Reserve monetary policy moved further toward
restraint, interest rates rose fairly steadily and bank credit expansion was curtailed by spring. The rise in interest rates was
accentuated at times by doubts as to whether the Congress would
enact restrictive fiscal legislation, by uncertainties concerning
prospects for peace in Vietnam, and by developments in international gold and foreign exchange markets. As enactment of
fiscal restraint began to seem more likely in late spring, interest
rates tended to stabilize, and some even began to decline. This
trend was also encouraged by developments with respect to the
Vietnam conflict and by progress in resolving difficulties related
to international liquidity and the difficulties in the gold and
foreign exchange markets.

With the rapid expansion in economic activity, private demands
for credit were well sustained during the first half of 1968. A
further increase in plant and equipment outlays early in the year
—together with continued efforts to build liquidity: and restructure outstanding debt—led to relatively heavy public offerings of
corporate securities, although these offerings were somewhat
below the exceptional 1967 pace. Business borrowing of a
shorter-term nature, through bank loans and dealer-placed
commercial paper, began to accelerate in the spring, probably
in response to financing of increased tax payments as well as
more rapid accumulation of inventories.
A sharp rise in disposable personal income in the early months
of 1968—when there was a large upward adjustment in social
security benefits and a substantial advance in the minimum wage
—led to greatly expanded consumer expenditures. This increase
in outlays was concentrated in durable goods and was financed
in part by a sharp rise in consumer instalment debt. The expansion in mortgage debt outstanding continued at a pace approxi16



mately as rapid as that reached in the latter half of 1967, when
the impact of the late 1966 and early 1967 easing of monetary
policy was reflected in a marked recovery in housing starts and
construction outlays.
Borrowing in the capital markets by State and local governments also was large over the first half of the year—nearly
equaling the record volume in the first half of 1967. Most of
this borrowing was to cover continued heavy expenditures, although there was also a pronounced rise in issues of industrial
revenue bonds—generated by fears that Federal tax exemption
on these bonds would be removed.
Cash borrowing by the Federal Government continued to be
sizable in the first quarter of 1968, when a further sharp rise in
expenditures contributed to a sustained large budgetary deficit.
Market doubts about the willingness of the Congress to enact
fiscal restraint legislation that would reduce the huge deficit
($25 billion in the fiscal year 1968) contributed to upward pressures on interest rates. Federal demands in credit markets
dropped sharply in the second quarter of 1968 when the Government drew down its cash balances contraseasonally as an
alternative to borrowing to finance current outlays.

With increasing domestic and international pressures on the
dollar and in the absence of fiscal action, the Federal Reserve
had begun in late 1967 to implement a variety of measures designed to limit the availability and to increase the cost of credit.
The discount rate was raised three times—from 4 per cent to
5Vi per cent in steps of Vi percentage point—between November 1967 and April 1968. An increase of V2 percentage point in
reserve requirements against demand deposits in excess of $5
million at member banks became effective around mid-January.
Moreover, increasing pressure was placed upon member bank
reserve positions through System open market operations.
As a result of these various policy actions, nonborrowed re-




17

serves of member banks declined slightly over the second quarter
of 1968, after having risen at an annual rate of 4.5 per cent in
the first quarter. Although member bank borrowings at the Reserve Banks increased, total reserves showed virtually no change
in the spring quarter, following a relatively rapid rise in the
winter. On a monthly-average basis, member bank borrowings
reached a peak of nearly $750 million in May, roughly three
times the January average.
The progressive tightening in money market conditions early
in the year was reflected in a rise in the Federal funds rate—the
rate at which banks lend excess reserves on an overnight basis—
to 6 per cent and above in late spring as the availability of reserves to banks was restrained relative to demand. Commercial
paper rates also rose rapidly: two increases in prime lending
rates at banks—in November 1967 and in April 1968—induced
some borrowers to shift to open market paper for funds. By
mid-May most short-term rates had surpassed the peak levels
preached in 1966, and the market rate on 3-month Treasury bills
reached a high of 5.92 per cent. In late May, however, prospects
for fiscal restraint improved and most short-term market rates
of interest declined, with market yields on Treasury bills dropping 40 to 60 basis points by midyear.
Long-term interest rates—while fluctuating widely in response
to developments in the Vietnam conflict, the proposed fiscal
package, and the gold crisis—also tended to move higher during
the first half of the year. By mid-May most long-term rates had
also surpassed their previous highs. However, these rates began
to decline somewhat after enactment of the fiscal restraint program in late June.

Increased pressure on bank reserve positions, together with
rising interest rates, led to reduced inflows of funds to the major
types of financial institutions in the first half of 1968. As market
yields became more attractive relative to those on time and sav18



ings deposits of banks and nonbank savings institutions, flows of
funds began to bypass these intermediaries; as a result these
institutions accounted for a much smaller share of the tptal
credit supplied than during most of 1967. In the first half of
1968 depositary institutions supplied about 40 per cent of net
funds raised in credit markets; this was about half of their share
in 1967, but still a somewhat larger share than in the second
half of 1966.
Net inflows of time and savings deposits at commercial banks
slowed considerably in late 1967 and early 1968 and had
dropped further by the spring of 1968. The bulk of the reduction
in time and savings deposit growth in the second quarter
stemmed from attrition of large-denomination CD's as shortterm market rates surpassed the Regulation Q ceiling rates on
such deposits.
In the early part of the year banks had been able to maintain
their outstanding CD's, on balance, at the peak levels prevailing
in late 1967 by keeping offering rates on these instruments at
or near the Regulation Q ceiling. By late March, however, shortterm interest rates on other money market instruments had risen
enough that even the maximum CD offering rate of 5Vi per
cent then in effect for all maturities was relatively unattractive
to large, interest-sensitive investors. In the first 3 weeks of April
outstanding CD's at large commercial banks declined by more
than $1.0 billion.
The Federal Reserve revised Regulation Q ceilings on CD's
in mid-April. The ceiling rate on 30- to 59-day maturities was
left at 5Vi per cent, but rates for other maturities were raised as
follows: to 53A per cent on 60 to 89 days, to 6 per cent on 90
to 179 days, and to 6lA per cent on 180 days or more. Nevertheless, outstanding CD's continued to decline through midJune, although much less rapidly than earlier. In an effort to
offset this run-off of CD funds, major banks borrowed heavily
in the Euro-dollar market, and liabilities of head offices to
foreign branches increased about $1.5 billion between April




19

and June. By the latter part of June short-term market rates of
interest had declined enough to enable banks to attract CD funds
again.
While consumer-type time and savings deposit inflows at commercial banks also were sustained comparatively well in the early
months of the year, there was a marked slowing in growth
following a large outflow of passbook savings deposits after the
interest-crediting period at the end of March. Net savings inflows
at nonbank thrift institutions—after slowing in late 1967—moderated only slightly further through mid-1968.
The increase in interest rates during the first half of 1968
also made it much more expensive to hold demand deposits, and
in spite of an increased need for transactions balances associated
with the accelerated rate of economic activity, growth in the
money stock—private demand deposits plus currency outside
banks—over the first quarter slowed to an annual rate of about
4.5 per cent from the 6.0 per cent pace in the last half of 1967.
Although interest rates rose further in the second quarter, growth
in the money stock accelerated to an annual rate of about 8.5
per cent. However, much of this increase reflected net transfers
out of U.S. Government deposits. Moreover, the sharply increased pace of financial activity during the second quarter probably also contributed to the increase in holdings of money.
In view of reduced deposit inflows and heavy demands for credit,
banks backed away from security investments and began to
draw down liquidity positions, which they had rebuilt in 1967.
After having acquired large amounts of U.S. Government securities during most of 1967, major reporting banks liquidated holdings of Treasury bills almost continuously from late in that
year to mid-1968, although they did add to holdings of coupon
issues during Treasury financings. Banks also found it necessary
to cut back on their acquisitions of other securities, principally
State and local government issues.
Pressures on security markets from bank portfolio adjust20




ments were strongest after about mid-March when tight monetary policy and sustained attrition of CD's coincided with an
accelerated demand for business loans. Consumer loan demands
at banks were relatively strong throughout the first half of 1968,
reflecting the broad expansion in consumer expenditures. The
net increase in real estate loans at banks continued near the
relatively advanced pace of the second half of 1967.

Despite reduced net inflows of funds, savings and loan associations were able to extend mortgage credit in the first half of
1968 at a rate only slightly less than that in the second half of
1967. In 1967 these institutions had used a substantial portion
of new savings flows to rebuild liquid assets and to repay borrowing from the Federal Home Loan Bank Board. As in 1967,
mutual savings banks devoted a somewhat larger share of their
funds to the acquisition of corporate securities in the first half
of 1968 than they had in other recent years, apparently to take
advantage of the relatively attractive yields available on these
securities.
SECOND H A L F OF YEAR
In the second half of 1968 financial markets were influenced by
several factors: a sharp shift in market attitudes early in the
summer, brought on by enactment of the fiscal restraint program; continued and unexpectedly strong credit demands; a
reversal of market expectations later in the year, when inflationary psychology became predominant as business activity remained relatively strong; and variation in Federal Reserve policy
from accommodation of market ease to increased monetary restraint.

The Revenue and Expenditure Control Act of 1968, enacted in
late June, provided for a 10 per cent surtax on personal and
corporate incomes and for certain restraints on Federal spend-




21

ing. In the early summer participants in the securities markets
generally anticipated that interest rates would decline as a result
of the fiscal package, which was expected to moderate economic
activity and to reduce reliance on monetary policy, as well as
shift the Federal budget position from a large deficit to a modest
surplus.
Reflecting these expectations, interest rates did decline as
dealers in U.S. Government securities and other debt instruments
bid aggressively for securities and increased sharply their inventories of Treasury bills and coupon issues. Positions of U.S.
Government securities dealers alone nearly doubled from late
June to early August—reaching a level of $6.1 billion during the
first week in August. Moreover, commercial banks became large
net buyers of both U.S. Government and State and local government securities at the attractive yields still available. Banks financed their purchases in large part through issuance of largedenomination CD's, which became competitive again as shortterm market rates of interest declined.
The market yield on 3-month Treasury bills reached a low of
4.89 per cent in early August, about 100 basis points below the
mid-May high. Over the same period long-term interest rates declined by 30 to 50 basis points from their earlier highs. In line
with the declines in market rates resulting from the change in
fiscal stance, Federal Reserve discount rates were reduced from
5XA to 5V\ per cent in mid-August.
By the fourth quarter of 1968, however, market attitudes had
changed noticeably, and interest rates rose steadily during the
quarter—reaching new highs in most cases. The continuing
relatively strong business news and upward price pressures
created doubts about the extent to which fiscal restraint was taking hold and led many to expect that monetary authorities would
adopt a policy of greater restraint. As price pressures persisted,
inflationary expectations became more widespread and were
affecting business decisions. For example, plant and equipment
surveys revealed that businesses had increased the volume of fixed
22




investment outlays planned for the future. In financial markets
prices of common stocks rose sharply, partly in response to a
shift in investor interest from bonds to stocks. And Government
securities dealers acted to reduce their holdings of both shortand long-term Treasury issues, thereby contributing to upward
pressure on interest rates.
The initial decline and the subsequent sharp rise in interest
rates during the second half of 1968, of course, were not wholly
the product of changing expectations. The System increased the
rate at which it supplied bank reserves through open market operations in the third quarter but in the autumn it sharply curtailed
the supply of these reserves.

In the months immediately following passage of the fiscal restraint measures, required reserves of member banks rose sharply
in response to increased deposit inflows. The Federal Reserve
supplied these reserves through open market operations. During
the third quarter nonborrowed reserves of member banks rose
at an annual rate of about 13 per cent. Total reserves, however,
rose by less, as banks reduced their borrowings at the Federal
Reserve Banks.
This expansion in reserves was accompanied by only a slight
reduction in the Federal funds rate, since demands for very
short-term funds were large. These demands stemmed in part
from the build-up in dealer inventories of U.S. Government
securities that resulted both from anticipation of interest-rate
declines and from dealer underwriting of the large Treasury bill
and coupon financings in July and August, which raised $5.7
billion of new cash. Banks too bought large amounts of the new
Treasury issues, and major money market banks financed their
acquisitions not only through issuance of CD's but also through
short-term funds raised in the Federal funds and Euro-dollar
markets.
After the initial favorable impact of the fiscal restraint pack-




23

age on market expectations waned, demands for very short-term
credit and for bank reserves were reduced as dealers pared their
inventories of securities and as banks became less willing buyers
of U.S. Government issues. At the same time, however, the
Federal Reserve made reserve funds less readily available to the
banking system, thereby exerting additional upward pressure on
the Federal funds rate and on Treasury bill rates.
Nonborrowed reserves of banks increased at an annual rate
of only 3 per cent in the fourth quarter as a whole and actually
declined during the last 2 months of the year. With open market
operations providing fewer reserves, banks increased their
borrowing at the Federal Reserve Banks. They were willing to
pay higher interest rates for Euro-dollar funds abroad, although
outstanding Euro-dollar borrowings showed little net change
over the fourth quarter.
In furtherance of its policy of monetary restraint, the Federal
Reserve raised the discount rate from 5VA to 5Vi per cent in
mid-December. Later in the month the market rate on 3-month
Treasury bills reached a peak of 6.29 per cent, an increase of
about 130 basis points in a little more than 4 months. Yields on
new high-grade corporate issues (with 5-year call protection) had
risen to 6.92 per cent, and those on long-term U.S. Government
securities to 5.90 per cent, representing increases of 80 and 100
basis points, respectively, from their August lows.

During the third quarter of 1968 both the amount of fuaids
raised by all borrowers and the amount raised by the private
sector rose sharply to levels well in excess of previous records.
All sectors combined raised about one-third more funds than
they had on the average during the first two quarters of the year.
While cash borrowing by the Federal Government increased
substantially, State and local governments, businesses, and consumers together accounted for more than half the rise. Private
borrowing was relatively well maintained into the fourth quar24




ter, but the net amount of Treasury cash borrowing declined.
After having built up its balance in the third quarter through
large new security issues, the Federal Government reduced its
cash balance to help finance its relatively large fourth-quarter
budgetary deficit.
Consumers increased their borrowing during the summer as
they expanded their outlays further, particularly for durable
goods. They financed their increased expenditures not only by
borrowing more but also by reducing their saving rate sharply.
The volume of corporate borrowing in the bond market after
midyear remained at about the first-half rate as plant and equipment expenditures—after declining in the second quarter—rose
at a pace nearly as fast as in the first quarter. Short-term borrowing by businesses actually accelerated in the second half, particularly in the last few months of the year when inventory
accumulation increased. Demand for mortgage credit also remained large, on balance, as the backlog of housing demand
led to a sharp advance in construction activity toward the end of
the year. And credit demands by State and local governments
reached new highs, reflecting in part the rush to issue industrial
revenue bonds before the year-end, when under the terms of
legislation enacted at midyear the Federal tax exemption on
such bonds of over $5 million would terminate.
BANK DEPOSITS AND CREDIT

Although short-term market rates of interest had begun to fall
after mid-May, it was not until the end of June that they had
declined enough relative to the maximum rate of interest that
banks could pay on time and savings deposits to permit
a significant net expansion of such deposits. In the third quarter
banks added nearly $3.0 billion to their outstanding CD's, or
about $1.0 billion more than they had lost earlier. Inflows of
consumer-type time and savings deposits also began to show a
rather steady increase from the somewhat reduced pace of the
second quarter.




25

With market rates of interest rising during the autumn, growth
in total time and savings deposits at banks moderated, and toward
the year-end expansion became quite limited. From the end of
September through the first week of December banks were able
to add $2 billion to their outstanding CD's—bringing the total
increase since midyear to more than $5.0 billion. But by the
latter part of December most short-term market rates were again
above the Regulation Q ceilings applicable to large-denomination CD's. Outstanding CD's declined considerably more than
seasonally during the last 3 weeks of the year.
Meanwhile, inflows of consumer-type time and savings deposits in the fourth quarter were well sustained, in part because
some depositors were reluctant to withdraw funds before the
year-end interest-crediting period. Stepped-up promotional campaigns and the expansion of the types of time deposit accounts
offered by banks also helped to maintain these inflows.
Growth in private demand deposits at banks in the third
quarter was reduced sharply from the second-quarter rate, but
then spurted in the last 2 months of the year. The third-quarter
growth in these deposits was restrained in part by net transfers
of funds to U.S. Government deposits. In addition, an abatement in financial activity probably reduced needs for transactions balances. Toward the year-end, reductions in U.S. Government deposits to finance the budgetary deficit, resurgent stock
market activity, and possibly expectations of rising interest
rates contributed to the expansion in private cash balances. Over
the second half as a whole the money stock rose at an annual
rate of about 6 per cent, somewhat slower than in the first half.
With their total deposits—time and demand together—rising
sharply after midyear, commercial banks were able to accommodate a much greater share of the growing demands for credit.
They advanced about half of the total funds raised in markets
during that period, compared with slightly more than 20 per
cent in the first half.
Banks used a substantial portion of their deposit inflows to
26



acquire securities, in part to rebuild their holdings of liquid
assets—which had been depleted earlier in the year—and also
to take advantage of the relatively high yields on intermediateand long-term State and local government and Federal Government issues in a period when interest rates were expected to
decline further. In July and August alone banks added $3.5
billion to their holdings of U.S. Government securities, mainly
during the Treasury financings. Moreover, banks accelerated
their net acquisitions of other securities markedly after midyear. Increases in holdings of securities accounted for about 40
per cent of total bank credit expansion during the third quarter.
In the fourth quarter, with deposit inflows slowing, banks were
less active in the securities markets. They reduced their holdings
of U.S. Government securities, on balance, in part to help finance
continued large loan demands. And by December banks had
sharply reduced the rate at which they took State and local government securities into portfolio.
Growth in bank loans accelerated sharply after midyear.
But more than a third of the increase in the third quarter was
in security loans, reflecting the build-up in dealer inventories.
The reversal of market expectations in the autumn led to a reduction in dealer inventories and in outstanding security loans
in the last few months of the year.
Business, consumer, and real estate loans at banks all rose
more in the second half of the year than in the first half. Business borrowing increased as a result of both accelerated tax
payments and a continued high level of economic activity—including the resumption of large expenditures on plant and equipment after midyear and a substantial pick-up in the rate of
inventory accumulation in the fourth quarter. By industry category, the rise in business loans was much the largest in retail
trade; nevertheless, public utilities, construction, and service
industries also increased their borrowing substantially at banks.
With sizable demands for loans and with available funds becoming more limited and more costly, banks raised the prime




27

loan rate in three stages from 6lA per cent (to which it has
been reduced by most banks in September) to 7 per cent by
shortly after the year-end.
FLOWS TO OTHER DEPOSITARY INSTITUTIONS

The sharp increase in flows of deposits to banks during the
second half of 1968 was not matched at savings and loan associations and mutual savings banks. Because the savings that
currently flow into these institutions are less interest-sensitive
than those that flow into large-denomination CD's, which are
an important element in banks' time deposits, the nonbank
thrift institutions had not been so adversely affected as banks
by the rise in market interest rates in the second quarter. Similarly, they were not so favorably affected by the decline in interest rates during the summer. Over the second half of 1968
as a whole, deposits at nonbank thrift institutions increased at
an annual rate of a little more than 6 per cent, only a little faster
than in the second quarter.
Savings and loan associations extended mortgage credit in
the latter half of 1968 at a somewhat faster pace than they had
earlier in the year. They also increased the rate at which they
made new mortgage commitments, which had been held back
in the spring in anticipation, prior to the tax increase, of a
substantial withdrawal of deposits around the midyear interestcrediting period. Mutual savings banks also increased their mortgage lending in the second half; some of this lending was
financed by cutbacks in acquisitions of corporate securities.
•

28




Demandsy Resource Use, and Prices
1968 marked the eighth consecutive year of expansion in output, employment, and incomes from the cyclical low in early
1961. Real GNP increased by 5 per cent, double the rise of
1967. The 1968 rate had been exceeded in four of the seven
preceding years, but this had occurred in periods when the
margin of unutilized manpower resources had been larger. By
late 1968 the unemployment rate had declined to 3.3 per cent,
its lowest level in 15 years. Although the capacity utilization
rate in manufacturing did not quite match the reduced level of
1967, prices throughout the year were under severe upward
pressure. According to the GNP deflator, prices advanced almost
4 per cent, the largest increase in more than a decade.
Unit labor costs again rose considerably—by about 4 per cent.
Even though the rise in output per man-hour was larger than in
1967, it did not equal the exceptionally rapid increases in
average wage rates, which reflected—among other influences—
strong demands for labor, a large statutory increase in minimum
wages, and marked advances in consumer prices.
The surplus on U.S. net exports of goods and services in
1968 was less than half that of 1967. The sharp decline was attributable to the virtual disappearance of the surplus on merchandise trade, which amounted to only $100 million as compared with $3.5 billion in 1967. Imports continued the rise that
had begun in the final quarter of 1967, and for the year as a
whole they increased by 23 per cent. Exports too made gains
during the year, but the gains were not nearly enough to offset
the surge in imports.
In view of the continued rapid growth in economic activity
and employment and the persistent rise in prices during the first
half of the year, fiscal measures to dampen the inflationary expansion were enacted in late June to give support and aid to
monetary and credit policies. As a result, during the second half
the Federal Government's fiscal position moved from large deficit




29

to balance, and the rate of growth in both current-dollar and real
GNP moderated.
Nevertheless, there was an unexpectedly long lag between enactment of the fiscal restraint program and dampening of
inflationary expansion. The underlying strength of demand was
even stronger than had been anticipated. Futhermore, inflationary expectations became still more widespread and were an
influential element in decisions with respect to capital spending
programs, wage negotiations, and pricing policies. At the yearend businesses were expanding their expenditures for fixed capital
and inventories at rapid rates and were planning to expand fixed
investment outlays considerably further in 1969.
DEMANDS
An unusual feature of the pattern of demands during 1968 was
that final sales and inventory investment alternated as major
sources of short-run expansion in GNP. As Table 4 shows,
final sales surged in the first and third quarters; in the second
and fourth quarters these sales slowed, but the rate of inventory
accumulation increased and tended to take up the slack. But
over-all growth in GNP in both current and constant prices was
significantly faster in the first half than in the second.
The rapid rise in activity in 1968 had its roots in events during the preceding year. Thus, in the second half of 1967, after
virtually no growth in the first half, real GNP was increasing
again, at an annual rate of 3.8 per cent, and price increases were
widespread and substantial. Expansion accelerated in the first
quarter of 1968 as consumer spending climbed at a record
rate. For the most part this upsurge was in response to an exceptionally large gain in consumer income as increases in the
statutory minimum wage and in social security benefits augmented a substantial rise in income from much higher employment and higher wage rates. Furthermore, the rate of personal
saving—which had been very high in 1967, especially near the
year-end—declined somewhat.
30




TABLE 4: GROSS NATIONAL PRODUCT
19681
Item

1967

1968

I

II

III

IV

887.4

In billions of dollars
Total

.

Inventory change
Final sales
Private *
Federal

789.7

860.6

831.2

852.9

871.0

6.1

7.7

2.1

10.8

7.5

10.6

783.6
693.0
90.6

852.9
752.9
100.0

829.1
732.0
97.1

842.1
742.0
100.0

863.5
762.3
101.2

876.8
775.0
101.7

16.4

Change from preceding period:
In billions of dollars
Total
Inventory change
Final sales
Private2
Federal

42.1

70.9

20.2

21.7

18.1

-8.6

1.6

-6.2

8.7

-3.3

3.1

50.8
37.6
13.2

69.3
59.9
9.4

26.4
22.8
3.6

13.0
10.1
2.9

21.4
20.2
1.2

13.3
12.7
.5

In per cent
GNP in current dollars

5.6

9.0

10.0

10.4

8.5

7.5

GNP in 1958 dollars

2.4

5.0

6.4

6.2

5.1

3.4

GNP implicit deflator
(1958 = 100)

3.1

3.8

3.7

4.0

3.6

3.9

1

Quarterly figures are at seasonally adjusted annual rates.
Adjusted to include State and local governments.
Note.—Basic data from Dept. of Commerce.
2

In the first quarter of 1968 demand for automobiles benefited
from a spillover from the fourth quarter of 1967, when a prolonged strike at a major producer had greatly limited the
availability of new cars. In addition, outlays for residential construction showed a sizable expansion, stemming from an earlier
upward trend in housing starts, and business expenditures for
fixed capital continued to grow. Finally, there was a further large
rise in Federal purchases, particularly for defense. Even though
inventory investment was much less than in the preceding quarter, real GNP and the industrial production index rose at annual
rates of about 6.5 and 6.0 per cent, respectively. The labor
market tightened further, and increases in wage rates averaged




31

6 to 7 per cent annually; this was somewhat more than in 1967
and appreciably faster than growth in productivity. As a result,
unit labor costs rose considerably further, and with demands
brisk, strong upward pressures on prices continued.
In the second quarter consumer spending rose only half as
much as it had in the first, and business outlays for fixed capital
declined. While defense spending continued to rise strongly, the
increase in total final sales was only about half that for the first
quarter; indeed, after adjustment for price increases private
final sales were unchanged. However, inventory accumulation
expanded considerably, and the rise in real GNP almost matched
the first-quarter growth. The index of industrial production
also continued to climb, and the rise in the GNP price deflator
accelerated.
The Revenue and Expenditure Control Act of 1968 imposed
a 10 per cent surcharge on corporate income taxes and on most
individual income taxes. For corporations the surcharge was
made retroactive to January 1; and for individuals, to April 1.
For persons or families with small taxable incomes, however,
the surcharge was less than 10 per cent, and for those in the
lowest brackets there was no surcharge. Withholdings on personal income were raised enough in July to cover most of the
increase in current liabilities, but the increase in withholdings
did not cover the increased liability for the April-June period.
The Act also imposed limitations on expansion of Federal
spending in the fiscal year 1969.
Partly in view of the sharp slowing of expansion in final sales
in the second quarter, expectations were widespread that fiscal
restraint would cause an almost immediate and substantial dampening of the expansion in real growth and that as a result the
rapid advance in prices would taper off. As it turned out, the
third-quarter rise in Federal purchases was the smallest in 3
years, despite a general pay raise in July for Federal civilian employees and members of the Armed Forces. Defense outlays
changed little, as expenditures connected with the war in
32



Vietnam began to level off. And with the tax surcharge going
into effect on withholdings about July 15, the third-quarter rise
in personal disposable income was less than half the average
for the first half of the year.
But the widespread expectations that the rise in output would
slow markedly failed to materialize in the short run, mainly because consumers increased their spending by reducing sharply
their rate of current saving. Moreover, record sales of new automobiles—stimulated in part by forthcoming price advances on
the 1969 models to be introduced in late September—were facilitated by a rapid expansion of instalment credit.
In addition to the unexpected surge in consumer spending,
housing starts in the third quarter increased to the highest rate
since early 1964. This rise reflected in part the release of mortgage funds that had been held back pending the successful outcome of efforts to raise permissible ceilings on mortgage interest
rates in several States. But it also indicated the strength of the
backlog of demand for new homes and the belief in many
quarters that effective fiscal restraint would permit substantial
easing in credit availability. Business spending for plant and
equipment rebounded from its dip in the second quarter, but as
indicated above, inventory accumulation was less than in the
second quarter.
Thus, although the Federal deficit declined from an annual rate of more than $10 billion in the second quarter to $3
billion in the third (as measured in the national income accounts), expansion in real GNP was at an annual rate of 5 per
cent, only moderately below that of the first half. While the
quarterly GNP price deflator slowed from its rate of advance
in the first half, the monthly consumer price index increased a
little faster than it had earlier because of a sharp jump in mortgage interest rates, and inflationary expectations became widespread.
In the fourth quarter growth of real GNP slowed to an annual
rate of 3.4 per cent, with total final sales much less expansive




33

than in the third quarter. Consumer expenditures showed one of
the smallest increases in recent years in dollar terms, and in
real terms they were unchanged. Auto sales declined somewhat
from the very high third-quarter rate, and sales of nondurable
goods rose little. Federal spending for goods and services increased by only a small amount. Nevertheless, there were still
many indications of exuberance: businesses, in particular, appeared to be preparing for a prolonged period of expansion and
were raising sharply their current and prospective outlays for
fixed capital. Housing starts edged up further, and expenditures
for residential construction—which had changed relatively little
in the first three quarters—rose considerably. Inventory accumulation increased, and industrial production advanced at an annual
rate of 5 per cent. And prices, as measured by the GNP deflator,
rose as fast as they had in the first half of the year.
CONSUMER EXPENDITURES AND INCOME

Strong surges in consumer spending in the first and third quarters
alternated with much smaller increases in the second and fourth
quarters—particularly the fourth. To some extent this pattern
reflected variations in the growth of personal disposable income,
but it also stemmed from large swings in the saving rate. For
the four quarters, the personal saving rate was successively 7.1,
7.5, 6.3, and 6.8 per cent. The big decline in the third quarter
made possible roughly $7 billion of additional consumer spending. The high rate of saving for the year as a whole—6.9 per
cent—had been exceeded to a significant degree only once in
the preceding 15 years—in 1967, when the annual average had
been 7.4 per cent.
The recent high rates of saving may reflect to some extent the
higher levels of real as well as money income in the past few
years. Per capita disposable income measured in constant dollars
increased 3.0 per cent in 1968 and was 29 per cent above its
level in 1961—the year when the last recession reached its
trough. High rates of saving in recent years have been accom34




panied by a bulge in additions to consumer holdings of financial
assets; this was particularly true in 1967 and 1968. However,
after 2 years of diminished growth, consumer instalment and
mortgage debt rose sharply in 1968 as automobile purchases
(including imports) expanded to a record 9.6 million units and
home purchases increased considerably.
In 1968 wage and salary income, transfer payments, and interest income all expanded strongly, whereas rents, proprietors'
income, and dividends—continuing the pattern of changes in
other recent years—showed less rapid increases. Wages and
salaries accounted for 67.6 per cent of total personal income in
1968, compared with an average of 67.0 per cent in the period
1960 through 1966, a large shift for this component. Disposable
personal income was 69.0 per cent of GNP in the first half of
1968, about the same as the 1960-66 average proportion, but
then it declined to 68.0 per cent in the second half, when the
surtax became effective.
High levels of real income, large reserves of assets, and relatively favorable consumer debt positions have been suggested as
reasons for the limited impact of the increase in the surtax on
consumer spending in the third quarter. An additional factor may
have been the greater impact of the tax on high-income groups
than on lower-middle-income and low-income groups. While it is
usual for changes in income to be followed by gradual adjustments in expenditures, the big bulge in consumer spending in
the third quarter in the face of a "halving" of the growth in
disposable income was unusual.
More than two-fifths of the increase of 8.5 per cent in total
consumer expenditures from the year 1967 to the year 1968
represented increases in prices, but the growth of almost 5 per
cent in the physical volume of takings was substantial. Prices
of services rose considerably more than did those of goods—reflecting in part the relatively larger wage component of services.
Prices of nondurable goods went up more than prices of durable
goods.




35

Private housing starts exceeded 1.5 million units in 1968, onesixth more than in 1967 and the largest number since 1964.
Starts of both single-family and multifamily units increased, but
the latter rose more in both absolute and percentage terms and
for the year accounted for 40 per cent of all starts, a new high.
The increase of over one-fifth in expenditures for residential construction reflected higher costs per unit as well as, with some lag,
the higher level of starts. The market for new homes and apartments remained strong throughout the year, despite higher costs
and the highest mortgage interest rates since the 1920's. Vacancy
rates continued to decline, reaching the lowest levels in more
than 10 years.
In the first quarter of 1968 housing starts were at an annual
rate of 1.5 million, but they declined somewhat in the second
quarter—reflecting tight money conditions and the fact that a
number of States still had relatively low usury ceilings, which
tended to curtail the flow of mortgage funds. By the middle of
the year ceilings had been lifted in some heavily populated States
in the Northeast, and a surge in housing starts followed. In the
third quarter, even though mortgage market conditions improved
only moderately, starts recovered to a 1.5-million annual rate,
and in the fourth quarter they rose to an even higher rate—1.6
million. In December the volume of outstanding mortgage commitments was still very large, but conditions in the mortgage
market were tending to moderate the expansion in new commitment activity.
INVESTMENT IN FIXED CAPITAL

Business investment in fixed capital increased by about 8 per
cent in 1968. This increase compares with only 3 per cent in
1967 but was far short of the average annual rise of one-sixth
in the 1964-66 period. About half of the 1968 increase represented higher prices of structures and of producers' durable

36



equipment. Indeed, increased costs apparently accounted for all
of the current-dollar increase in outlays for structures.
The sharp fourth-quarter rise in spending for fixed capital
reflected to some extent a make-up for the failure of businesses
to realize plans in the first three quarters as indicated by successive shortfalls in actual from planned spending shown in Commerce-Securities and Exchange Commission surveys. Nonetheless, the strength of plant and equipment outlays in the fourth
quarter may have also reflected an increase in expansion plans,
in part in response to widespread inflationary expectations.
The intentions expressed by businesses in late 1968 to increase
spending for plant and equipment were somewhat surprising in
view of the substantial volume of unused capacity in manufacturing but not so surprising in view of the further rise of 6 per
cent in 1968 in corporate profits after tax, including the surcharge. This rise, inflationary expectations, the rapid pace of
technological changes, frequent shifts in styles and models, and
the continuing strong pressures to reduce costs—all served
to stimulate plans for new plant and equipment spending. Although industrial output rose more than 4 per cent in 1968 and
has risen 15 per cent since 1965, additions to capacity have
more than kept pace with the increase in output. The capacity
utilization rate in manufacturing had fallen from more than
90 per cent in 1966 to 85 per cent in 1967, and it remained
close to that level in 1968.

Following the pronounced inventory adjustment during the first
half of 1967, which brought the annual rate of accumulation
down from $20 billion in the fourth quarter of 1966 to $2 billion in the second quarter of 1967, inventory investment picked
up after mid-1967. When consumer expenditures showed an
unexpectedly strong spurt in early 1968, there was a sharp drop
in the rate of accumulation. Subsequently, the rate moved up and




37

for the remainder of the year averaged well above the 1967 rate.
In view of the large increase in final sales, however, inventory
accumulation in 1968 was relatively moderate—about $7.5 billion (GNP basis), compared with $6.1 billion in 1967 and the
exceptionally high rate of nearly $15 billion in 1966.
In late 1967 and the first half of 1968 business inventory
accumulation was augmented by substantial additions to steel
stocks in anticipation of a possible strike on July 31. In the
second quarter of 1968 there was also a large build-up in auto
stocks. The reduction in steel output after the wage settlement
proved to be less than expected as demands from both consumergoods and producer-durable-goods industries became more vigorous. Even with auto sales at new record levels during most of
the second half, there was a sizable further increase in auto
stocks, and at the year-end such stocks were relatively high.
Stock/sales ratios for durable goods remained high in 1968.
At manufacturers, inventories did not appear to be excessive in
view of the level of unfilled orders. The stock/sales ratio at
durable goods retailers, which in 1967 had not fully readjusted
to levels existing before the Vietnam war, was rising again in late
1968. The ratio for nondurable goods, which had been reduced
to record low levels in the third quarter of 1968, also moved
up somewhat late in the year.
FEDERAL SECTOR, NATIONAL INCOME ACCOUNTS

The Federal deficit fell to an annual rate of about $9.5 billion in
the first half of the calendar year 1968 from about $12.5 billion
in the second half of 1967. Receipts rose briskly early in the
year, in part because of rising profits and incomes but also
because of the retroactive liabilities under the 10 per cent corporate surcharge. Moreover, an increase in the taxable wage ceiling effective January 1 led to higher contributions for social
insurance. On the other hand social security benefits were increased in the first quarter, and Federal expenditures, particularly for defense, rose rapidly in the first half of the year.

38



In the third quarter the deficit fell sharply as withholdings of
individual income taxes were increased to reflect the 10 per
cent surtax. Another factor tending to reduce the deficit was the
cutback in Federal expenditures in the fiscal year 1969 from
the rate of outlays proposed in the January 1968 budget as required by the Revenue and Expenditure Control Act of 1968.
Since expenditures for the war in Vietnam were exempted from
the cutback—as were some other relatively uncontrollable categories such as interest on the debt and social security benefits—
the realized net decline from the aggregate expenditure figures
as proposed in January is likely to be considerably smaller.
As a result of the tax surcharge and the constraints on Federal
spending, the deficit of the Federal Government as estimated in
the NIA fell from about $12.5 billion in the calendar year 1967
to an annual rate of $9.5 billion in the first half of 1968 and of
less than $3 billion in the third quarter. And in the fourth
quarter the NIA budget was in balance. For the calendar year
as a whole, the deficit was a little over $5 billion.
LABOR MARKETS
Reflecting strong demands in most sectors of the economy, the
labor market continued to tighten in 1968. Expansion in employment was most pronounced early in the year and again in the
fourth quarter. Employment rose more rapidly than the labor
force, and the unemployment rate dipped to 15-year lows—3.3
per cent at the year-end, and 3.6 per cent for the year as a whole.
Nonfarm payroll employment rose by 2.1 million persons—
slightly more than in 1967—with more than four-fifths of the
expansion occurring in nonmanufacturing activities. Employment increases in trade, in services and finance, and in State
and local government each exceeded 500,000 in 1968. Manufacturing employment increased by 300,000. Farm employment,
including both farm operators and family and hired labor, declined further.
The civilian labor force increased by 1.4 million in 1968—




39

about the expected "normal" rise as estimated from population
growth in working-age brackets and trends in participation
rates. The increase included 800,000 adult women, 500,000
adult men, and 100,000 teenagers.
In manufacturing, employment was essentially unchanged
between June and October. During the latter part of this period,
employment gains in several industry groups were offset by declines in steel—where inventories had been built up to record
levels in anticipation of a late-summer strike, which did not
materialize. With the inventory adjustment in steel well along
in late 1968, manufacturing employment was again on an upswing, having spurted by more than 160,000 between October
and December. Indications of renewed strength were widespread
among both durable and nondurable goods industries, but they
tended to be more definite in industries manufacturing producers'
durable goods, in line with the step-up in business fixed investment programs.
The average work-week in manufacturing in 1968 was little
changed from the preceding year, but it edged lower from September to December as employers in most industries reduced
hours of work and increased the number of their employees.
Responding to a turnaround in building activity, employment
in construction rose more than 50,000 in 1968, and the unemployment rate fell to 6.9 per cent, the lowest rate since the
Korean war. A strong thrust in the final quarter raised construction employment to about the 1966 peak.
Developments in the manufacturing and construction industries were especially influential on the demand for men employees; the jobless rate for married men fell to an average of 1.6
per cent for the year, and at the year-end it was at a post-WorldWar-II low of 1.4 per cent. The rate for all adult men averaged
2.2 per cent for the year as a whole and was down to virtually a
frictional rate of 1.8 per cent at the year-end. In 1968 the adult
male labor force registered its second successive large increase,
after a decade of much slower growth. These additional men
40




contributed substantially to the fulfillment of increased manpower needs and helped to limit labor shortages during the year.
Relatively large increases in the adult male civilian labor force
will be common in coming years because of high post-WorldWar-II birth rates.
The bulk of the gain in nonfarm employment was concentrated in the service sector. Close to four-fifths of the total employment increase was accounted for by trade, finance, services,
and State and local government. Since women account for a
large part of employment in these activities, demands for their
services continued firm, and their unemployment rate edged
down to 3.8 per cent.
The Federal Government contributed little to the rise in employment in 1968, and after midyear Federal employment began
to decline because of limitations on hiring and spending incorporated in the revenue and expenditures legislation. At the end
of the year Federal employment was nearly 80,000 below its
June peak.
In general, the pattern of demand in 1968 favored adult, fulltime workers; teenage unemployment was virtually unchanged at
nearly 13 per cent. As in other recent years, large numbers of
unemployed teenagers were competing for a limited supply of
part-time jobs during the school year, and during the summer
the labor market was flooded with youngsters seeking full-time
summer jobs or career opportunities. High levels of demand and
a tight market for adults apparently are not sufficient to reduce
unemployment of youngsters to acceptable levels, even though
the number of teenagers in the labor force is no longer expanding at the rapid rates of the 1963-66 period. Jobless rates for
Negro and other nonwhite youngsters—typically at very high
levels—averaged 25 per cent in 1968. How to motivate, train,
and provide job opportunities for young people, especially nonwhite youth, continues to be a key national problem.
Among nonwhite adults, however, high unemployment yielded
in 1968 to the pressures of strong demand. Employment gains




41

for this group exceeded the increase in the labor force, and their
unemployment rates declined to the lowest levels since the
Korean war. Nevertheless, unemployment rates for nonwhite men
and women (3.9 and 6.3 per cent, respectively) were still nearly
double the comparable rates for white adults.
WAGES AND COSTS
Average hourly earnings of workers in private nonfarm industries rose 7.3 per cent over the year ending in December 1968,
significantly more than the 5.0 per cent increase in the previous
12-month period. The largest percentage increases were recorded
in retail trade and in some service industries, where the increase
in the minimum wage and the tight labor market had the greatest
relative impact. For production workers in manufacturing,
hourly earnings rose by 6.5 per cent.
A key factor making for large increases in wages was the accelerated rise in consumer prices, which generated demands for
wage increases to offset increased living costs in addition to the
usual demands that aim to provide a higher standard of living
and additional fringe benefits. In 1968 more than 4.5 million
workers covered by renegotiated major collective bargaining
agreements received median first-year wage increases of 7.5 per
cent, compared with a median first-year wage increase of 5.6 per
cent in 1967 covering about the same number of workers.
The pattern of a substantially higher first-year increase had
been a feature of the contract settlement with the major automobile companies in the final months of 1967. During 1968 this
pattern spread to contracts negotiated in the glass, can, aluminum,
aerospace, and steel industries in manufacturing and to the telephone, railroad, bituminous coal, and copper industries in nonmanufacturing activities. All of these contracts call for subsequent-year wage increases that are considerably smaller than the
first-year boosts.
At the end of 1968 major collective bargaining agreements
covering nearly 2.6 million workers contained provisions for
42



cost-of-living adjustments; this number was only slightly more
than a year earlier. The trends in recent years toward (1) establishing a maximum limit on the amount of the adjustment as
well as a guaranteed minimum and (2) the substitution of annual for quarterly escalator adjustments were continued. In the
automobile and farm equipment industries the provision for a
maximum adjustment limited the size of the annual adjustment
to amounts that were smaller than the increase in consumer prices
in 1968.
Responding in part to the upswing in production, the increase
in manufacturing productivity was stepped up in 1968, with
output per man-hour rising nearly 2.5 per cent; although this
increase was considerably larger than the 1.0 per cent rise in
1967, it was considerably below the average of 3.9 per cent for
the years 1960 through 1965. Despite the productivity gain in
1968, unit labor costs rose 4.2 per cent—nearly as much as in
1967—because increases in hourly compensation accelerated to
nearly 7 per cent; this was the largest rise in hourly compensation
since 1951 and compared with about 5.5 per cent in 1967.
PRICES
Inflationary pressures, which had begun to accumulate in late
1965 with the intensification of the war in Vietnam, became
even stronger in 1968. As was noted above, pressures of demands on labor resources were acute, the rise in wage rates
accelerated sharply, and unit labor costs continued to show a
pronounced upward thrust.
In such a setting, and with some industrial materials and
foodstuffs in limited supply, wholesale prices of industrial commodities increased more than in any other year since 1957;
prices of farm products and processed foods and feeds recovered
much of their 1967 decline; and both the consumer price index
and the broader GNP implicit price deflator showed the largest
increases in 17 years.
In the course of 1968, as in each of the two preceding years,




43

the pattern of wholesale prices of industrial commodities was
influenced by fluctuations in the intensity of demand pressures
as well as by special supply situations. Thus, the year began and
ended with industrial prices rising at a fast rate, whereas for a
brief period in the late spring and early summer these prices
showed little change. The temporary ebb in the upward movement of industrial prices accompanied the abrupt slowing in the
second quarter of the expansion in private final sales—which
had been very strong in the first quarter—and widespread expectations that fiscal legislation would appreciably reduce the rate
of expansion in total demands. Average price increases for a
variety of industrial materials and products slowed during that
period.
Also contributing to the virtual halt in the industrial price
rise in the spring were the repercussions of the settlement in
early April of the 8 ^ month strike in the copper industry. High
V>
and rising demands for copper products during that strike had
been met by bidding up prices of copper scrap and foreign copper, which in turn were translated into sharp increases in prices
of copper and brass mill products. Altogether, average prices of
copper items increased nearly 30 per cent from early July 1967,
just before the strike, to March 1968—and this price increase
made a significant contribution to the sharp rise in average
prices of all industrial commodities over that period. With restoration of domestic primary output following settlement of the
strike, copper ingots advanced to 42 cents per pound from the
pre-strike level of 38 cents. Nevertheless, average prices in the
basic industry declined 18 per cent from March to July, with
scrap, imported copper, and brass and copper products down
sharply.
During the late summer consumer and business demands—
for housing and autos in particular—held at much higher levels
than had been anticipated; consumer prices except for foods
continued to rise at a fast pace; and the rapid pace of wage
increases showed no abatement. Under such conditions, whole44




sale prices of industrial commodities resumed their upward
course. Major factors in the sharp increase in the industrial
average from July to December included: a 2.3 per cent increase in prices of steel mill products following the July 31 wage
settlement—an increase half as large as the rise for the preceding
3 years combined; a sizable increase in prices of new autos; a
renewed, fast rate of increase in prices of producers' equipment;
and an extraordinarily large further rise in prices of lumber and
plywood, supplies of which were limited relative to unexpectedly
large demands.
Altogether, wholesale prices of industrial commodities increased at an annual rate of about 3.5 per cent in the first 4
months of 1968—continuing the sharp upswing of the last half
of 1967. In the second half of 1968 they were rising at a rate
close to 3 per cent. The rise for the year averaged 2.5 per cent;
this compared with about 1.5 per cent in 1967 and 2 per cent
in 1966.
The recovery in 1968 in average wholesale prices of foods
and foodstuffs reflected a substantial rise in prices of livestock
and products; supplies of these items leveled off following the
large increase in 1967, while consumer demands expanded substantially further. For the year average prices of livestock and
products were up 4 per cent and were almost back to the 15-year
high reached in 1966. Prices of crops and products on the average were unchanged from 1967 and were less than 1.5 per cent
below the post-World-War-II record of 1966.
Consumer prices rose at a rapid pace throughout 1968. In
December the index was 4.7 per cent above a year earlier, and
the average for the year was 4.2 per cent above 1967. The advance in 1968 was nearly half again as large as the increase in
each of the two preceding years and was more than three times
the average annual increase in the first 5 years of this long period
of economic expansion.
Consumer price increases were widespread for both commodities and services. For commodities the rise at retail gen-




45

erally exceeded by an appreciable margin the rise at wholesale,
because upward labor and other cost pressures were generally
stronger at the distributive level. Moreover, consumer demands
—though varying from quarter to quarter—were generally
strong; total personal consumption expenditures in 1968 were
nearly $42 billion—or 8.5 per cent—higher than in 1967. In
1967 these expenditures had increased 5.7 per cent.
Retail prices of food, which had been about unchanged in
1967, showed a sizable increase in 1968. However, toward the
end of the year they tended to stabilize as supplies of meats and
of fruits and vegetables were expanding again. Among other
commodities there were especially large increases in prices of
apparel and furniture, and prices of new cars, appliances, and
housefurnishings rose substantially. For the year, retail prices
of nonfood commodities averaged 3.7 per cent higher than in
1967; this rise contrasts with increases of 2.5 per cent and 1.3
per cent in 1967 and 1966, respectively.
As usual, the rise in prices of services exceeded that for commodities. For the year service costs included in the consumer
price index were 5.2 per cent above 1967—compared with increases of 4.4 per cent and 3.8 per cent in the two preceding
years—-and at the year-end they were running 6 per cent above
late 1967. Much of the acceleration in the rise in 1968 stemmed
from a spurt in mortgage interest charges and other costs of
owning and maintaining a home and from a larger rise in rent.
In December, rent was up nearly 3 per cent from a year earlier,
as compared with a 2 per cent rise during the year 1967, and
household services less rent were up nearly 8 per cent, more than
double the rise during the preceding year. Costs of medical care
services continued sharply upward—rising more than 7 per cent
from December 1967 to December 1968—almost as much as
during 1967.
•

46



U.S. Balance of Payments
During 1968 transactions in goods and services between the
United States and the rest of the world showed the smallest net
export balance this country has had in many years. Nevertheless, owing to massive inflows of private capital, the net reserve
position of the United States—gold stock, position in the International Monetary Fund, and net asset-liability position against
foreign official reserve holders—improved somewhat in the
course of the year.
The shift in private capital flows toward the United States
involved investors, lenders, and business creditors both here and
abroad and reflected diverse influences. Among these influences
were the greatly tightened controls on outflows from the United
States of corporate investment funds and of U.S. bank credit to
borrowers abroad; the unusually high interest rates in this country and the interest equalization tax (IET), both of which
served to reinforce the effectiveness of the capital controls; a
sharp growth in European investors' holdings of U.S. equity
securities; and movements of liquid funds out of other currencies
into the Euro-dollar market, facilitating a great increase in the
use of Euro-dollar resources by U.S. banks.
In addition to the inflows of private capital, investments by
foreign monetary authorities in over-1-year time deposits at
U.S. banks and in certain types of U.S. Government securities
helped to reduce the balance of payments deficit as measured on
the liquidity basis. Indeed, the liquidity balance moved into
surplus in the second half of the year, partly as a result of repatriations of funds late in the year by U.S. companies influenced
by changing conditions in financial markets as well as by the
direct investment control regulations.
TRANSACTIONS IN GOODS AND SERVICES
The surplus on goods and services fell sharply early in 1968 and
remained low. For the year it amounted to about $2 billion, far




47

below the balance of $4.8 billion achieved in 1967 or the average surplus of $7.0 billion in 1963-65.
Merchandise exports responded well to the general upswing
in world demand, and their value in the second half of the year
was 13 per cent greater than in the second half of 1967. Gains
in exports to Western Europe, Canada, and Latin America were
especially noteworthy. Increases were concentrated in nonagricultural products, particularly in machinery and equipment.
The shrinkage in the trade surplus was the result of an unprecedently large rise in merchandise imports. A new upswing in
imports had started in the last few months of 1967—after a
13-month pause—and the rise continued through the first three
quarters of 1968. For the year as a whole imports were 23 per
cent greater in value than in 1967; and in the second half of
the year, at an annual rate of $34.1 billion, they were 25 per
cent larger than in the second half of 1967. The trade surplus,
which in 1967 had amounted to $3.5 billion, nearly vanished in
the first half of 1968 and remained virtually zero in the second
6. As IMPORTS grow much faster than EXPORTS, trade surplus shrinks
BILLIONS OF DOLLARS, SEASONALLY ADJUSTED, ANNUAL RATES

EXPORTS

20
IMPORTS

TRADE SURPLUS

48



half, when merchandise exports were at an annual rate of $34.2
billion.
The 25 per cent increase in value of imports from the second
half of 1967 to the second half of 1968 accompanied a 10 per
cent increase in the current value of GNP. While exceptionally rapid growth of automobile imports from Canada under
the 1965 agreement accounted for several percentage points of
the 25 per cent increase, there were also large advances in almost
all other categories of imports. Under the conditions of recent
years, with general prosperity in the United States and with U.S.
consumer prices rising since late 1965 by more than 3 per cent
a year, rapidly growing imports of finished manufactures have
assumed increasing importance within the total. Partly for this
reason, the trend of growth in total imports has accelerated.
From 1963 to 1968 imports rose at an average rate of 14 per
cent a year, compared with an average rate of 5 per cent over
the preceding 10 years. The exceptionally rapid rise in imports
after September 1967 reflected not only the accelerated trend
but also the cyclical acceleration usually seen during a period of
exceptionally rapid growth of national income in money terms.
Net receipts from current transactions other than merchandise
trade increased a little in 1968. Income and fees received from
direct foreign investments were substantially higher than in 1967,
but much of this gain was offset by larger payments of interest
to foreigners. Net tourist expenditures were reduced slightly from
the 1967 peak related to the Canadian EXPO 67. Military expenditures abroad, which had risen rapidly in the two preceding
years, increased more slowly and amounted to $4.6 billion
in 1968.

REMITTANCES AND PENSIONS
Private unilateral transfers, at $0.75 billion, were a little smaller
than in 1967, when contributions to Israel had been unusually
large. Pensions and other miscellaneous transfers by the U.S.
Government were about unchanged, at $0.4 billion.




49

U.S. GOVERNMENT CREDITS
AND ECONOMIC AID GRANTS
Economic aid grants by the U.S. Government declined a little
further in 1968, to $1.7 billion. U.S. Government credits to
foreign countries, net of repayments, were also slightly reduced,
at $2.3 billion. Disbursements were somewhat higher, but so
were repayments on outstanding credits despite the postponement of the instalment of the 1946 loan due from the United
Kingdom at the end of the year. Repayments by foreign governments ahead of schedule amounted to about $250 million.
PRIVATE CAPITAL FLOWS
For the first time in many years, the net flow of private capital
in 1968 was inward—to the United States from the rest of the
world—instead of outward. Total inflows, including $3.4 billion of foreign liquid funds moving to the United States through
commercial banks abroad, exceeded total outflows by nearly $5
billion. In 1967 there had been a net outflow approaching $2
billion. (These figures exclude all changes in the liquid and nearliquid claims of foreign monetary authorities on the United States
and-—in 1967—the U.K. liquidation of its special portfolio of
U.S. securities, and they also exclude some relatively small
changes in certain nonliquid liabilities of the U.S. Government
to other foreign official and private creditors.)
Capital and credit transactions by U.S. businesses other than
banks, apart from transactions in securities of unaffiliated companies, gave rise to a net capital outflow of only $0.3 billion
in 1968, far below the $2.9 billion outflow of the preceding year.
The announced goal for the year 1968 of the mandatory regulations imposed on direct investors was to reduce by $1 billion (as
compared with 1967) the amount of direct investment outflow
to countries other than Canada—defined, for this purpose, as
including subsidiaries' undistributed foreign profits but as excluding use of funds borrowed abroad by U.S. companies. This
goal was surpassed, primarily by increased borrowing abroad
rather than by cutting back on investment outlays. Besides bor50



rowings of the foreign operating subsidiaries themselves, new
issues of convertible debentures and other bonds in Europe by
affiliated financing subsidiaries incorporated in the United States
were very large. These issues exceeded $2 billion, compared with
$450 million in 1967. However, some of the proceeds of these
issues were temporarily invested at short term abroad instead of
being transferred to operating subsidiaries immediately; such
funds remained available for financing of direct investment in
the future without use of new funds from the United States.
7. U.S. CORPORATIONS reduce their net capital outflow through
a massive increase in BORROWINGS ABROAD

-mum

•

ASSETS

mm**,****,.

I

J»llli
1966

m
mm •

iiliiSI

SAtE 0F||SJ|11

OTHER itiiiii

r~-^—pISiti

In addition to bond financing, U.S. businesses increased other
liabilities to foreigners by about $1 billion in 1968. Part of this
increase reflected loans obtained from banks abroad for financing direct investment; and part represented receipt of advance
payments on aircraft export contracts and other commercial
credits, which are not related to the direct investment control
program. Also—as required by the regulations, though not
counting against the ceiling—there was a net return flow of liquid
assets held abroad by U.S. businesses apart from the proceeds
of past or current bond issues in Europe; this reversed the outflow of such funds that had occurred in 1967.
Under the Federal Reserve's foreign credit restraint program,




51

discussed on pages 57-59, U.S. banks' claims on foreigners
covered by the program were reduced by about $600 million in
1968. The net reflow for all U.S. bank-reported claims, including those handled by banks for their domestic customers,
amounted to $250 million, in sharp contrast to a net outflow the
year before of about $450 million.
The $2.6 billion shift in flows of corporations' investments and
borrowings and the $0.7 billion shift in flows of U.S. bankreported credits were both facilitated by the relatively easy credit
conditions during 1968 in some European countries, especially
Germany. A third important shift in flows was little affected by
credit market conditions: net foreign purchases of U.S. corporate
stocks attained in 1968 an extraordinary total of $2.0 billion,
Such purchases had begun to increase about the middle of 1967,
and the net inflow that year reached $0.8 billion (apart from
net British sales, mainly from the United Kingdom's official portfolio). Continuation of an inflow of such massive proportions
is not explainable merely as a reaction to political and economic
uncertainties abroad, but reflects also a change in investor preferences through increased familiarity with the investment advantages of the U.S. equities market. There was also some
increase in the inflow of foreign capital for direct investment in
the United States—to more than $350 million in 1968 from
$250 million in 1967.
Transactions in foreign securities resulted in a net capital outflow from the United States close to that of the preceding year—
about $1.3 billion, net of redemptions. Sales of newly issued
foreign bonds in the United States remained relatively high at
$1.6 billion, though still concentrated in Canadian issues and
those of the World Bank and other international institutions in
consequence of the diversion of other issuers to the growing
European market. The IET continued to play a role in preventing other foreign issues here and also served to hold down net
U.S. purchases of outstanding foreign stocks and bonds to as
little as $0.2 billion.
52



Bond issues of international and regional institutions sold in
this country—included in the figure cited above—reached a
record of nearly $0.5 billion. As a partial offset to this outflow of
capital, however, the international institutions in 1968 added
$0.2 billion to their holdings of liquid and near-liquid assets
in the United States. Foreign private holders other than banks
also increased their liquid assets in this country. The 1968
growth in these assets, $0.4 billion, was slightly larger than the
annual average of such inflows since 1963.
A fourth major change in capital flows in 1968 was a new
mushrooming of the inflow of liquid funds to the United States

through banks abroad. The liabilities of U.S. banks to their foreign
branches operating in the Euro-dollar market together with other
U.S. liquid liabilities to banks abroad rose by $3.4 billion, compared with $1.3 billion in 1967 and $2.7 billion in 1966. The
inflow thus generated may be viewed as a response to the efforts
of U.S. banks to enlarge their lendable resources, but its very
large size in 1968 was clearly a result of heavy speculative flows
of foreigners' funds out of sterling and the French franc, which
contributed to the ready availability of funds in the Euro-dollar
market. Nearly $2 billion of the inflow occurred during May
and June, at the time of the civil disturbances in France, when
severe drains on French official reserves of gold and foreign exchange were occasioned not only by losses of exports but also
by capital flight from the franc.
Later in the year the acute speculative crisis of November,
this time centered on the German and French currencies, was
not accompanied by any rise in U.S. liabilities to commercial
banks abroad. Speculation on an upward revaluation of the
German mark was a powerful magnet pulling funds into marks
rather than dollars. In December, despite the beginning of a
reflow out of marks, year-end influences—including repatriations of U.S. direct investors' funds—caused extremely tight
conditions in the Euro-dollar market and produced a more-thanseasonal decline in U.S. banks' use of Euro-dollar resources.




53

8. LIABILITIES TO FOREIGN COMMERCIAL BANKS increase
by record amount in 1968 and ...

OFFICIAL RESERVE TRANSACTIONS reflect over-all surplus
DEFICIT
U.S. RESERVE ASSETS;

OFFICIAL RESERVE TRANSACTIONS
With the massive shift in private capital flows from 1967 to
1968, which more than offset the deterioration in net exports of
goods and services, the over-all balance of payments changed
from very large deficit in 1967 to considerable surplus in 1968
as measured on the official settlements basis. In fact, the change
from a deficit of $3.4 billion to a surplus of $1.6 billion was
even greater than can be explained by the recorded and estimated data available at present. It is possible that additional
capital inflows that have not been measured served to offset the
unmeasured and unidentified outpayments that predominated
all through the earlier years of the decade.
Despite the substantial balance of payments surplus to be
covered by official settlements, the gold stock of the United
54



States declined in 1968 by $1.2 billion. Sales of $1.4 billion
were made in the first quarter, largely in support of the gold pool
operations to keep the price of gold in private markets from
rising much above the official price of $35 an ounce. Following
the devaluation of sterling in November 1967, widespread speculation had developed on the possibility of a rise in the official
price of gold against all currencies. To counter this, massive
sales were made by the gold pool. Speculation on a rise in the
private price of gold—if and when the gold pool operations were
terminated—mounted to a peak of intensity in March.
On March 17 the Governors of the central banks of the active
members of the gold pool issued a communique in Washington,
announcing that they would no longer sell gold except to monetary authorities and expressing the opinion that it was no longer
necessary, in view of the prospective creation of Special Drawing
Rights (SDR's) in the International Monetary Fund, for central
banks to buy gold from the market. During the rest of 1968 the
price of gold fluctuated without rising above $43 an ounce on
the London market. (Developments during 1968 related to
SDR's and the March 17 communique are discussed on pages
328-32.)
The massive speculative purchases of gold in late 1967 and
early 1968 created a floating supply of gold that played an important role in stabilizing gold prices subsequently. Another
effect of the purchases, immediately felt, was to put a strain on
the balances of payments and the reserve positions of the countries out of whose currencies speculators on gold were moving.
During the period of speculation there was no significant net
decline in private foreign liquid dollar claims on the United
States. It appears therefore that on balance the rush to gold was
financed by drains on the net reserves of other countries. Foreign
purchases of gold from the United States, whether through the
gold pool or through purchases by monetary authorities directly
from the U.S. Treasury, had their counterpart in reducing the
outstanding claims on the United States of foreign monetary




55

authorities (rather than of private holders) or in increasing U.S.
holdings of international reserve assets other than gold.
During the year 1968 as a whole U.S. holdings of convertible
foreign currencies (mainly sterling and French francs) increased
on balance by $1.2 billion, and the U.S. net position in the International Monetary Fund was enlarged by $0.9 billion. Total
reserve assets, including gold, thus showed a net increase of $0.9
billion. The effect of the official settlements surplus of $1.6 billion, given these changes in reserve assets, was to reduce outstanding U.S. liabilities to foreign monetary authorities by $0.7
billion. Such liabilities fell very sharply during the first half of
1968, the period of the rush to gold and of the civil disturbances
in France. During that half year U.S. liquid and near-liquid
liabilities to foreign monetary authorities shrank by $2.4 billion.
In the second half year, when U.S. reserve assets rose by $1.6 billion, U.S. liabilities to foreign reserve holders rose by $1.7 billion; particularly large increases in both accounts occurred in
November in connection with the crisis in speculation on the
German mark.
•

56



Foreign

Credit

kcsir.jh:

!}r •:,::;-

During 1968 the Board of Governors continued to administer
that portion of the President's balance of payments program that
applied to banks and other financial institutions, in accordance
with guidelines issued on January 1, 1968, and described in the
ANNUAL REPORT for

1967.

The President, by Executive Order 11387 dated January 1,
1968, made mandatory the program administered by the Department of Commerce for nonfinancial corporations and gave the
Board of Governors the authority to impose regulations relating
to the foreign transactions of banks and other financial institutions. However, in view of the degree of cooperation exhibited
by financial institutions since the program was begun in early
1965, the Board elected to continue it as voluntary in nature.
On March 1, 1968, because of a difficult financial situation
that developed for Canada early in the year, all transactions with
that country were exempted from restriction under U.S. balance
of payments programs. Changes in foreign claims by U.S. financial institutions on residents of Canada were excluded from the
ceiling after February 29,1968. Bank claims on Canada increased by $46 million between that date and December 31,
1968. Claims of nonbank financial institutions on Canada of
all maturities increased $405 million in 1968.
The objective of the 1968 program was to reduce covered
assets outstanding by at least $500 million—$400 million by
the banks and $100 million by the nonbank financial institutions. Actual reductions during the year totaled $852 million.
As of December 31, 1968, banks had reduced their covered
assets outstanding by $612 million (Table 5), and nonbank
financial institutions had reduced such assets by $240 million
(Table 6).
Financial institutions continued to follow the priorities set
forth in the guidelines. Bank ceilings were reduced by a total
of $226 million related to repayment of term loans to developed




57

TABLE 5: FOREIGN CREDITS OF U.S. BANKS
End of year

1968

1965
Number of reporting banks .

1966

1967

161

148

151

Mar. 31 June 30 Sept. 20 Dec. 31
153

153

154

161

Millions of dollars
Total foreign credits subject
to ceiling
Ceiling to end of 1968
Net expansion of credit since
December 1964
Net leeway for further expansion of credit with ceiling
for 1968

9,652

9 ,496
10 ,360

9,865
10,409

9 ,396
9 ,984

9,203
9,886

9,156
9,784

9,253
9,729

+ 156

-3

+ 370

-99

-292

-339

-242

864

544

588

683

628

476

countries of continental Western Europe. There was a further
reduction in the ceiling by $222 million representing 40 per
cent of the amount of short-term credits to those countries outstanding on December 31, 1967. Short-term credits outstanding
to those countries declined by $ 118 million during the year.
Long-term investments by nonbank financial institutions in
developed countries other than Canada and Japan declined by
$145 million in 1968.
On December 23, 1968, the President accepted a recommendation from the Cabinet Committee on the Balance of Payments that the balance of payments programs be continued in
1969 in substantially the same form as in 1968. On the same
day the Board of Governors issued revised guidelines for banks
and nonbank financial institutions.
The 1969 guidelines for banks maintain the ceiling at the
1968 level—that is, 103 per cent of the end-1964 base figure,
or the 1967 ceiling plus one-third of the difference between that
amount and 2 per cent of total assets as of December 31, 1966,
whichever is greater. Banks were requested to continue to reduce
their ceilings each month by the amount of repayment of longterm loans to developed countries of continental Western Europe
outstanding on December 31, 1967. Banks also were asked to
58



TABLE 6: FOREIGN ASSETS OF REPORTING NONBANK FINANCIAL INSTITUTIONS
Amounts shown in millions of dollars

Type of asset

Amount
Dec. 31,
1968

Change from
Dec. 31, 1967
Amount

Per cent

SUBJECT TO GUIDELINE
Deposits and money market instruments, foreign countries
except Canada
Short- and intermediate-term credits, foreign countries
except Canada 1
Long-term investments, "other" developed countries: 2
Investment in financial businesses 3 3
Investment in nonfinancial businesses
Long-term bonds and credits
Stocks (except those acquired after Sept. 30, 1965,
in U.S. markets, from U.S. investors)

16

-35

-69.1

234

-60

-20.4

112
8

8
(4)
-42

7.6
-1.8
-6.4

-110

-19.5

-240

-14.2

130
149
586
44
7,906
1,344

10
15
18
1
404
-43

8.4
11.2
3.1
2.8
5.4
-3.1

Bonds of international institutions, all maturities

984

81

8.9

Long-term investments in Japan and3 the developing countries:
Investment in financial businesses
Investment in nonfinancial businesses3
Long-term bonds and credits
Stocks

25
10
768
201

13
3
78
-22

101.9
38.8
11.3
-9.9

TOTAL holdings subject to guideline .
Adjusted base-date holdings 5 .
Target ceiling?

616
456
1,443
1,597
1,517

NOT SUBJECT TO GUIDELINE
Investments in Canada:
Deposits and money market instruments.
Short- and intermediate-term credits *. . .
Investment in financial businesses3 3
Investment in nonfinancial businesses . . .
Long-term bonds and credits
Stocks

Stocks, "other" developed countries (if acquired after
Sept. 30, 1965, in U.S. markets, from U.S. investors)
TOTAL holdings not subject to guideline. . .

370

75

12,517

632

25.3

5.3

1
2
3

Bonds and credits with final maturities of 10 years or less at date of acquisition.
Developed countries other than Canada and Japan.
Net investment in foreign branches, subsidiaries, or affiilates in which the U.S. institution has
an ownership interest of 10 per cent or more.
4 Less than $500,000.
5
Dec. 31, 1967, holdings of assets subject to guideline, less carrying value of equities included
therein but since sold, plus proceeds of such sales to foreigners.
6
Not applicable.
7
Adjusted base-date holdings multiplied by 95 per cent.

hold short-term credits to those countries to the level requested
by the 1968 guidelines, that is, 60 per cent of the amount of
such credits outstanding on December 31, 1967.
The revised guidelines for nonbank financial institutions were
not changed substantively from the 1968 guidelines.
•




59

Operations in Foreign Currencies
1
o
The Federal Reserve System's foreign currency operations in
1968, as in earlier years, were designed to moderate and cushion
destabilizing fluctuations in the flows of international payments
and in monetary reserves, in cooperation with the central banks
of other countries and with the U.S. Treasury. The Federal Reserve participated in actions to counteract speculation, including
the provision of credit packages to supplement the official reserves
of countries whose currencies were under speculative attack.
Potentially disruptive flows of funds were generated in Europe
by speculation on changes in gold prices, until the gold pool was
terminated in March; by speculation against the French franc
after the civil disturbances in that country during May and June;
and later in the year by speculation on the possibility that the
German mark might be revalued upward. Despite improvement
in British exports as a result of the November 1967 devaluation
of sterling, confidence in the new sterling parity was not fully
established in 1968. And the Canadian dollar was under heavy
speculative attack for a short time early in the year, occasioned
largely by fears that the U.S. balance of payments program announced on January 1 would adversely affect the Canadian
balance of payments.
Despite the strains on the international monetary system, and
despite a further deterioration in the U.S. balance on international transactions in goods and services, confidence in the dollar
was not seriously affected. Large flows of private capital to the
United States had the result of giving this country a balance of
payments surplus as measured by official reserve transactions.
The claims of foreign monetary authorities on the United States
declined on balance; they were reduced by $2.4 billion in the
first half of the year and increased by $1.6 billion in the second.
(A discussion of the U.S. balance of payments appears on pages
47-56. An account of developments in 1968 related to gold
and to SDR's will be found on pages 328-32.)
60



At the beginning of 1968 the Federal Reserve had outstanding about $1.8 billion of foreign currency commitments arising
from drawings it had initiated under reciprocal currency (swap)
arrangements with the central banks of Switzerland, Italy, Germany, the Netherlands, and Belgium, and with the Bank for International Settlements. These swap drawings had been made
during 1967 to provide cover for large amounts of dollars that
accrued to continental European central banks' reserves as the
result of speculative flows out of sterling and other balance of
payments developments. By mid-July all of the Federal Reserve's
outstanding swap drawings had been liquidated. The central
banks concerned were adding to their reserve positions in the
IMF (to finance drawings by Britain, France, Canada, and
others), but they were experiencing substantial declines in their
total claims on the United States, and in order to replenish working balances they reduced their holdings of dollars under the
reciprocal currency arrangements. Liquidation of the swap drawings was also facilitated by sales of foreign-currency-denominated securities by the U.S. Treasury.
During the summer and autumn, and particularly in November, there were large speculative flows of funds into German
marks and to a lesser extent into Swiss francs, chiefly out of
French francs and sterling and also out of Euro-dollars. To cover
the Swiss central bank's increased holdings of dollars in its reserves, the Federal Reserve drew on the reciprocal currency arrangement with that central bank. The System also made relatively small swap drawings of German marks in November, in
connection with forward market operations. To offset speculative
inflows, the German central bank had in various ways been encouraging outflows of short-term investment funds from Germany. For several days following the reopening of exchange
markets after the Bonn meeting of finance ministers and centra]
bankers of the Group of Ten, the German central bank made
outright forward sales of marks in the market at a rate designed
to make covered outflows of funds from Germany attractive; the




61

Federal Reserve participated in this operation. At the end of
1968 the Federal Reserve's outstanding commitments on its swap
drawings in Swiss francs and marks were somewhat over $400
million.
In April the Federal Reserve terminated its $500 million
participation with the U.S. Treasury in giving technical commitments in forward lire, related to the dollar/lira swaps transacted
by the Italian authorities with the Italian commercial banks. In
October the Federal Reserve reciprocal currency arrangement
with the Bank of Italy was increased from $750 million to $1
billion.
During 1968 several foreign central banks made use of Federal Reserve swap facilities. These included the Bank of Canada,
the Bank of England, and the Bank of France, and also the
central banks of the Netherlands, Belgium, and Denmark.
To help cope with the speculative attack on the Canadian dollar, early in March the United States granted Canada complete
exemption from the restraints on U.S. capital outflows as outlined in the President's January 1 balance of payments program.
To support the Canadian dollar, a $900 million international
credit package was arranged, including a commitment by the
U.S. Export-Import Bank. Earlier the Canadian authorities had
made a drawing from the IMF and also a $250 million drawing
under the reciprocal currency arrangement with the Federal
Reserve; $500 million was still available under the latter facility.
Following the meeting on March 16 and 17 of the Governors
of central banks then active in the gold pool, increases were
announced in several Federal Reserve swap arrangements, and
these included a $250 million increase in the arrangement with
Canada. All of these actions contributed to a turnabout in speculative flows of funds, and in June and July the Bank of Canada
repaid its drawing from the Federal Reserve.
From time to time during 1968 the pound sterling was subject
to severe selling pressure in the exchange markets. The rush to
gold in the early months of the year involved sales of sterling
62



assets by some speculators. The maturing of forward sales of
dollars made by the Bank of England before the November
1967 devaluation of sterling, the shifting out of sterling of some
parts of the official reserves of several sterling-area countries,
and other withdrawals of funds from London—stimulated by
disappointment at the slowness of improvement in the British
trade position, and accentuated later in the year by nervousness
generated by speculation on French franc devaluation and German mark revaluation—all put pressure on the United Kingdom's reserve position.
At the March 17 meeting in Washington, the central bank
Governors announced that the total of credits immediately available to the United Kingdom (including the IMF standby) would
be raised to $4 billion. As part of this package the Federal Reserve swap arrangement with the Bank of England—previously
for $1.5 billion, much of which had already been drawn—was
increased by $500 million. In September the BIS announced that
a group of 12 central banks (acting where appropriate on behalf
of their governments) would participate with it in a $2 billion
medium-term credit facility to the Bank of England, to offset
conversions of sterling balances by sterling-area countries. Such
conversions, it was expected, would be limited as a result of
agreements that had been reached between the British authorities
and the sterling-area countries. To facilitate participation by the
U.S. Treasury in this arrangement—by permitting, from time to
time as might be necessary, warehousing by the Federal Reserve
of sterling acquired by the Treasury—the Federal Open Market
Committee authorized an increase of $650 million in the amount
of foreign currencies the Federal Reserve might hold under commitments to deliver to the Treasury's Stabilization Fund.
Under the Federal Reserve reciprocal currency arrangement
with the Bank of England, the latter drew substantial sums in
the spring and summer. A considerable part of the United Kingdom's IMF drawing in June was used to reduce outstanding
drawings under the Federal Reserve arrangement. At the end of




63

the year, after large additional drawings during the November
crisis, the Bank of England's commitments amounted to $1,150
million. In addition, Federal Reserve holdings of sterling included nearly $300 million under arrangements separate from the
reciprocal currency arrangement. The Bank of England also had
substantial commitments outstanding to the U.S. Treasury under
special credit arrangements.
To help relieve pressures on the pound sterling stemming from
strains in the Euro-dollar market, the Federal Reserve, through
its arrangement with the BIS, supplied some dollars to the Eurodollar market in June and again in December, for short periods.
The BIS drew dollars from the Federal Reserve under the reciprocal currency arrangement and made the placements.
Faced with massive speculative outflows from the franc from
May until near the end of November, the Bank of France made
substantial use of its swap line with the Federal Reserve, in
addition to selling gold, drawing on the IMF, and using other
international credits—while taking actions to resist inflationary
pressures and to improve the underlying French balance of payments position. The Federal Reserve reciprocal currency arrangement with the Bank of France was increased early in July
from $100 million to $700 million. It was again increased, to $1
billion, at the time of the Bonn meeting in November. Of the $2
billion package of new international credits for France announced in November, the United States made available a total
of $500 million—$300 million through the increase in the Federal Reserve swap line and $200 million in a facility extended
to the Bank of France by the U.S. Treasury. Drawings by the
Bank of France under the Federal Reserve arrangement reached
a peak of over $600 million in November, but by the end of the
year had been reduced to $430 million.
Drawings on their Federal Reserve swap lines by the central
banks of the Netherlands and Denmark in June were liquidated
within a few months, and drawings by the Belgian central bank

64



in July and October were almost entirely liquidated by the end
of the year.
At the end of 1968 the Federal Reserve's reciprocal currency
arrangements with 14 central banks and the BIS totaled $10,505
million—having been increased at four times during the year, in
March, July, October, and November.
A detailed review of Federal Reserve operations in foreign
currencies during 1968 is given on pages 275-323.
•




65

Tart2
c

Recordsy Operations, and
tiion




Record of Policy Actions of the
Board of Governors
JANUARY 18, 1968
AMENDMENT TO REGULATION 0, PAYMENT OF INTEREST ON
DEPOSITS.

Effective January 18, 1968, Regulation Q was amended to alleviate a
problem bearing on the exemption of time deposits of certain foreign
official depositors from the maximum rate limitations contained in that
regulation.
Votes for this action: Messrs. Robertson, Mitchell, Maisel, Brimmer, and Sherrill. Votes against
this action: None. Absent and not voting: Messrs.
Martin and Daane.

Under legislation enacted in 1962 and subsequently renewed,
but due to expire on October 15, 1968, in the absence of further congressional action, the time deposits of foreign governments, of the monetary and financial authorities of foreign governments when acting as such, and of international financial
institutions of which the United States is a member had been
exempted from interest rate ceilings established under Regulation Q. It was not known whether this legislation would again
be extended, but the efforts of commercial banks to attract or
to renew official time deposits had been increasingly impeded
by the banks' inability to guarantee payment of interest in excess
of the regulatory ceilings beyond the October expiration date of
the statute.
In order to alleviate this problem, the Board amended Regulation Q so as to exempt such foreign official time deposits with
specified maturities up to 2 years from the interest rate ceilings
of the regulation. The Board derived its authority for this action
from legislation enacted in 1966 and renewed in 1967. That
legislation placed the regulation of interest rates on a discretionary rather than a mandatory basis and authorized the Board




69

to set different limits according to the nature or location of the
depositor or according to such other reasonable bases deemed
by the Board to be in the public interest. The legislation was
itself scheduled to expire on September 21, 1968. But even if
the legislation were not renewed, the present amendment to
Regulation Q would allow banks to issue certificates of deposit
until September 21, 1968, with maturities of up to 2 years to
qualifying foreign official depositors at interest rates in excess
of the Regulation Q ceilings.
(Note: The legislation was subsequently extended for a period of 1 year
from September 21, 1968, and in light of that extension the exemption under
this regulation was also continued. See the Board policy record entry for October 7, 1968, on page 92 of this ANNUAL REPORT.)

FEBRUARY 1, 1968
ADOPTION OF N E W REGULATION G, CREDIT BY PERSONS OTHER
THAN BANKS, BROKERS, OR DEALERS FOR THE PURPOSE OF PURCHASING OR CARRYING REGISTERED EQUITY SECURITIES.
AMENDMENTS TO REGULATION T, CREDIT BY BROKERS, DEALERS,
AND MEMBERS OF NATIONAL SECURITIES EXCHANGES, AND
REGULATION U, CREDIT BY BANKS FOR THE PURPOSE OF PURCHASING OR CARRYING REGISTERED STOCKS.
Effective March 11, 1968, the Board adopted a number of changes
to broaden the coverage of, and in most respects to tighten, its regulations governing the use of credit in stock market transactions.
Votes for this action: Messrs. Martin, Robertson,
Mitchell, Daane, Maisel, Brimmer, and Sherrill.
Votes against this action: None.

The effect of adoption of the new regulation (designated Regulation G) was to extend to other lenders margin requirements
corresponding to those that had long been applicable to brokers,
dealers, and banks on credit extended for the purpose of purchasing or carrying registered equity securities. As a result of
the adoption of Regulation G and of the continuation of applicable provisions of Regulations T and U (relating to loans by
brokers and dealers and by banks, respectively), the margin

70



required on virtually all registered stock transactions was 70
per cent, effective March 11, 1968.
Also under the provisions of Regulation G—and in this case
with concurrent changes in Regulations T and U—the margin
required on all loans for the purpose of purchasing or carrying securities convertible into registered stock was established at
50 per cent, effective March 11. This requirement, set independently of the margin requirement on stock transactions, was fixed
initially at 50 per cent in recognition of the fact that convertible
securities combine characteristics of both stocks and bonds.
The revised regulatory requirements were applicable to all
new loans made on or after March 11, 1968, for the purpose of
purchasing or carrying registered equity securities. The treatment
of such loans made prior to that date varied, depending upon the
category of lender. The adoption of margin requirements on loans
made on convertible securities by brokers or dealers had no
effect on loans made before March 11. For loans on convertible
securities made by banks between October 20, 1967—the date
the original proposals had been published for comment—and
March 11, 1968, a fully margined status had to be achieved
by April 10; bank loans made before October 20, 1967, were
not affected unless there had been subsequent substitutions of
collateral or conversion into stock. On all loans for purchasing
or carrying registered equity securities made by Regulation G
lenders between February 1 and March 11, 1968, a fully margined status had to be achieved by April 10. Loans by such
lenders made prior to February 1 were not affected.
Also included in the Board's action was a requirement, applicable to all lenders, that loans on convertible securities having
a margin status below the prescribed 50 per cent be subject to
a 70 per cent "retention requirement": That is, 70 per cent of
the proceeds from a sale of these securities would have to be
retained to improve the status of the loan until it was margined
at the full 50 per cent.
The regulations, as adopted by the Board, required that all




71

lenders performing certain services "as agent" for foreign and
other stock market lenders obtain a statement from their principals to the effect that the activities of the principals conformed
to the applicable margin regulations. However, this provision
never became effective. (See the entry for May 7 on page 83
of this ANNUAL REPORT.) Also, banks and Regulation G lenders were forbidden—as brokers and dealers long had been—to
arrange for credit on lower margin than they could extend
themselves.
Among the other provisions of the regulations was a requirement that banks and Regulation G lenders obtain from the borrower a signed statement providing for, among other things, an
indication of the purpose of any stock-secured loan; determine
in good faith that the statement was correct; and sign it as so
accepted. (Since loans by brokers or dealers are generally for
the purpose of purchasing or carrying securities, no statement of
purpose would ordinarily be required in connection with such
loans.)
FEBRUARY 1, 1968
AMENDMENT TO REGULATION T, CREDIT BY BROKERS, DEALERS,
AND MEMBERS OF NATIONAL SECURITIES EXCHANGES.
Effective February 5, 1968, Regulation T was amended to extend by one
day, to five full business days after the transaction, the period in which a
broker or dealer must obtain the customer's margin deposit on a margin
transaction.
Votes for this action: Messrs. Martin, Robertson,
Mitchell, Daane, Maisel, Brimmer, and Sherrill.
Votes against this action: None.

The purpose of this liberalizing change in Regulation T, which
applied to all loans by brokers or dealers subject to margin requirements, was to reduce current pressures on the bookkeeping
departments of brokerage firms by insuring that a weekend would
always be included in the period of time within which the deposit
must be obtained.
72



FEBRUARY 5, 1968
AMENDMENT TO REGULATION O, LOANS TO EXECUTIVE OFFICERS OF MEMBER BANKS.

Effective March 15, 1968, Regulation O was amended chiefly to bring
the regulation into conformity with recent legislation.
Votes for this action: Messrs. Martin, Robertson, Mitchell, Daane, Maisel, and Brimmer. Votes
against this action: None. Absent and not voting:
Mr. Sherrill.

Public Law 90-44, enacted on July 3, 1967, liberalized the
rules governing loans by member banks to their own executive
officers. Under the new provisions of Regulation O, amended to
conform with this law and effective March 15, 1968, executive
officers could borrow from their own banks up to $30,000 for
a home mortgage, $10,000 for the education of children, and
$5,000 for any unspecified purpose. Previously, an executive
officer could not borrow more than $2,500 from his bank.
The amendment to Regulation O also redefined the term "executive officer," limiting its applicability to persons participating
in the determination of major policies of a member bank. As
a result, many bank officers with lesser responsibilities were
granted a freer access to the credit facilities of their own institutions.
FEBRUARY 7, 1968
AMENDMENT TO REGULATION K, CORPORATIONS ENGAGED IN
FOREIGN BANKING AND FINANCING UNDER THE FEDERAL RESERVE ACT.

Effective February 8, 1968, Regulation K was amended to require the
Board's specific approval before corporations that were engaged in foreign
banking and financing under the Federal Reserve Act could make any
equity investment in a foreign business.
Votes for this action: Messrs. Martin, Robertson, Mitchell, Maisel, and Brimmer. Votes against
this action: None. Absent and not voting: Messrs.
Daane and Sherrill.




73

This amendment to Regulation K, intended to be of temporary duration, was adopted in furtherance of the purposes of the
Government's balance of payments program announced by the
President on January 1, 1968. The amendment revoked the
"general consent" provision of Regulation K, which had permitted so-called "Edge Act" and "Agreement" corporations to
make certain investments without application to the Board for
its specific approval. As a result, all equity investments abroad
by member banks or such corporations, as well as the holding
by them of shares of a subsidiary that made any equity investment abroad, were subject to the specific approval of the Board.
The Board indicated that, in line with the objectives of the
balance of payments program, equity investments in developed
countries of continental Western Europe would not be approved
unless circumstances clearly demonstrated that the transaction
would not be detrimental to the U.S. balance of payments. Applications to make investments elsewhere would be considered
on their merits, provided the investments could be made within
the ceiling established for the applicant under the voluntary
foreign credit restraint program and provided the priorities established in that program were being followed.
The Board stressed that all equity investments abroad by
member banks and by Edge Act and Agreement corporations
would continue to be regarded as extensions of credit to foreigners for purposes of the foreign credit restraint program.
FEBRUARY 8, 1968
AMENDMENTS TO REGULATION Y, BANK HOLDING COMPANIES.

Effective March 15, 1968, Regulation Y was revised primarily to make
the regulation conform to the provisions of governing legislation.
Votes for this action: Messrs. Martin, Robertson, Mitchell, Brimmer, and Sherrill. Votes against
this action: None. Absent and not voting: Messrs.
Daane and Maisel.

The principal purpose of this action was to incorporate into
74



Regulation Y certain technical changes and other revisions conforming to the new provisions that became effective under the
Bank Holding Company Act amendments of 1966.
MARCH 8, 1968
AMENDMENTS TO REGULATION G, CREDIT BY PERSONS OTHER
THAN BANKS, BROKERS, OR DEALERS FOR THE PURPOSE OF PURCHASING OR CARRYING REGISTERED EQUITY SECURITIES;
REGULATION T, CREDIT BY BROKERS, DEALERS, AND MEMBERS
OF NATIONAL SECURITIES EXCHANGES; AND REGULATION U,
CREDIT BY BANKS FOR THE PURPOSE OF PURCHASING OR CARRYING REGISTERED STOCKS.

Effective March 11, 1968, the Board adopted technical amendments
to Regulations G, T, and U designed to clarify certain provisions of the
margin regulations announced on February 1, 1968.
Votes for this action: Messrs. Robertson, Mitchell, Maisel, and Brimmer. Votes against this action:
None. Absent and not voting: Messrs. Martin,
Daane, and Sherrill.

On February 1, 1968, the Board had adopted, effective March
11, 1968, a number of changes to broaden the coverage of, and
in most respects to tighten, its regulations governing the use of
credit in stock market transactions. Since that time a need for
several technical improvements in the regulations had come to
light, and the amendments now adopted were designed for that
purpose.
The amendments clarified that the 50 per cent margin requirement applicable to convertible debt securities was not applicable
to preferred stocks, the latter being subject to the same margin
requirements as other registered equity securities. The amendments also sharpened the definition of the term "indirectly secured" as used in Regulations G and U. The amendments eliminated the requirement that banks obtain "purpose statements"
in connection with certain routine transactions. And, finally, they
clarified the method by which short sales of convertible bonds
were to be carried out under Regulation T.




75

MARCH 12, 1968
REVISION OF FOREIGN CREDIT RESTRAINT PROGRAM GUIDELINES.
The Board adopted revisions in the guidelines for restraint of foreign
credits by banks and other financial institutions.
Votes for this action: Messrs. Martin, Robertson, Mitchell, Daane, Brimmer, and Sherrill. Votes
against this action: None. Absent and not voting:
Mr. Maisel.
Since the announcement on January 1, 1968, of revised guidelines for the use of banks and other financial institutions in
limiting foreign credits, an agreement had been reached between
the Governments of Canada and the United States under which
such institutions would be permitted to increase claims on residents of Canada without reference to the guideline ceilings. The
current revisions were in conformity with that agreement.
MARCH 14, 1968
INCREASE IN RATES ON DISCOUNTS AND ADVANCES BY FEDERAL
RESERVE BANKS.
Effective March 15, 1968, the Board approved actions taken by the
boards of directors of the Federal Reserve Banks of Boston, Cleveland,
Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, and
Dallas establishing a rate of 5 per cent (an increase from 4Vi per cent)
on discounts and advances to member banks under Sections 13 and 13a
of the Federal Reserve Act.
Votes for this action: Messrs. Martin, Robertson, Mitchell, Daane, Maisel, Brimmer, and Sherrill. Votes against this action: None.
Pursuant to the policy established by this action, the Board subsequently
approved the same rate for the remaining Federal Reserve Banks effective on the following dates:
San Francisco
March 15, 1968
Philadelphia
March 18, 1968
New York
March 22, 1968
Effective the same dates the Board approved for the respective Fed-

76




eral Reserve Banks a rate of 5Vi per cent (an increase from 5 per cent)
on advances to member banks under Section 10(b) of the Federal Reserve
Act. In addition, the Board approved increases at most of the Banks in
rates on advances to individuals, partnerships, and corporations other than
member banks under the last paragraph of Section 13 of the Act.
(In accordance with the provisions of the Federal Reserve Act, the
Federal Reserve Banks are required to establish rates on discounts for
and advances to member banks at least every 14 days and to submit
such rates to the Board for review and determination. Prior to this date
the most recent rate changes were made in November 1967, as described on pages 79 and 80 of the Board's ANNUAL REPORT for 1967.)
Note: The directors of five Federal Reserve Banks had voted initially
to establish rates other than 5 per cent under Sections 13 and 13a of the
Federal Reserve Act, subject to the approval of the Board of Governors.
These rates were 43A per cent voted by the directors of the Federal
Reserve Bank of Chicago, 5Vi per cent by the directors of the Federal
Reserve Banks of Philadelphia, St. Louis, and Dallas, and 6 per cent
by the directors of the Federal Reserve Bank of New York. Upon being
advised that the Board was prepared to approve a rate increase of Vi
percentage point, the Federal Reserve Banks in question voted to establish a rate of 5 per cent. In taking action to establish a rate of 6 per cent,
the directors of the Federal Reserve Bank of New York had also voted
to establish an alternative rate of SVi per cent, if the former rate was not
acceptable to the Board of Governors. The Board did not approve either
alternative, and consequently the Reserve Bank's existing rate of AVi
per cent continued in force until the directors voted to establish, with
the Board's approval, a rate of 5 per cent.
The action to increase the discount rate was taken at a time
of strong inflationary pressures in the domestic economy and of
massive speculation in world gold markets based on expectations
of an increase in the price of gold. Such speculation had resulted
in substantial sales of gold from the official stocks of the United
States and other countries actively participating in the London
gold pool in order to maintain the market price of gold at a
level close to the official price of $35 per ounce. Expectations of
continuing inflation in the United States and speculative attitudes
in world markets had been influenced by the recent rapid expansion in U.S. economic activity, strong upward pressures on




77

U.S. prices and costs, and consequent deterioration in the U.S.
balance of trade, and also by the uncertain prospects for enactment of proposed fiscal restraint legislation.
Growth in bank reserves, bank credit, and the money supply
had slowed on the average since late November 1967, when
the discount rate had been raised from 4 to AV2 per cent. In the
intervening period the System had implemented a policy of increased monetary restraint by raising reserve requirements against
most demand deposits and by pursuing more restrictive open
market operations. (The policy record entries of the Board and
the Federal Open Market Committee that describe the firming
actions noted above and furnish details on attendant economic
and financial circumstances may be found in the ANNUAL R E PORT for 1967 and in this ANNUAL REPORT beginning on page
122.)
The rates of expansion in bank reserves and in bank credit
were believed to be moderating further in March, but growth in
the money stock was expected to accelerate somewhat from its
minimal February pace. In an atmosphere of unsettled foreign
exchange markets and strong inflationary pressures in the domestic economy, market interest rates had risen considerably
during the first half of March. The 3-month Treasury bill rate
had advanced from around 5 per cent early in the month to
nearly 5Yi per cent on the day this action was taken; most
yields in capital markets had moved to new highs, exceeding
their peaks of late 1967.
In this situation the increase of Vi percentage point in the
discount rate was designed to supplement actions already undertaken through other policy instruments. The increase was in
accord with a policy of curbing inflationary pressures in the domestic economy and fostering progress toward attainment of
reasonable equilibrium in the country's balance of payments,
thereby strengthening confidence in the international position
of the dollar.
In its review of actions by some Reserve Banks initially calling
78




for larger increases in the discount rate, the Board concluded
that such increases were not warranted in the present situation
and ran the risk of engendering unduly large market reactions.
The Board recognized, however, that domestic or international
developments might make a further increase in the discount rate
desirable at a later date.
APRIL 18, 1968
1. INCREASE IN RATES ON DISCOUNTS AND ADVANCES BY FEDERAL
RESERVE BANKS.

Effective April 19, 1968, the Board approved actions taken by the
boards of directors of the Federal Reserve Banks of New York, Philadelphia, and Minneapolis establishing a rate of 5Vi per cent (an increase
from 5 per cent) on discounts and advances to member banks under
Sections 13 and 13a of the Federal Reserve Act.
Votes for this action: Messrs. Martin, Robertson, Mitchell, Daane, and Brimmer. Votes against
this action: None. Absent and not voting: Messrs.
Maisel and Sherrill.
Pursuant to the policy established by this action, the Board subsequently
approved the same rate for the remaining Federal Reserve Banks effective on the following dates:
San Francisco
April 19, 1968
Atlanta
April 22, 1968
Boston
April 23, 1968
St. Louis
April 23, 1968
Cleveland
April 26, 1968
Richmond
April 26, 1968
Chicago
April 26, 1968
Kansas City
April 26, 1968
Dallas
April 26, 1968
Effective the same dates the Board approved for the respective Federal
Reserve Banks a rate of 6 per cent (an increase from 5Vi per cent) on
advances to member banks under Section 10(b) of the Federal Reserve
Act. In addition, the Board approved increases at most of the Banks in
rates on advances to individuals, partnerships, and corporations other
than member banks under the last paragraph of Section 13 of the Act.




79

2. AMENDMENT TO REGULATION Q, PAYMENT OF INTEREST ON
DEPOSITS.
Effective April 19, 1968, the Board approved an amendment of the
Supplement to Regulation Q to increase the maximum rates of interest permitted to be paid by member banks on certain single-maturity time deposits, including certificates of deposit (CD's), of $100,000 or more.
The following schedule of maximum rates was adopted:
Maturity
Maximum rate
(days)
(per cent)
30- 59
SVL
60- 89
5%
90-179
6
180 and over
6V4
Votes for this action: Messrs. Martin, Robertson, Mitchell, Daane, and Brimmer. Votes against
this action: None. Absent and not voting: Messrs.
Maisel and Sherrill.
Since December 6, 1965, the maximum rate payable on such largedenomination time deposits, apart from those of certain foreign official
depositors, had been 5Vi per cent for all maturities. No changes were
made in the maximum rates of interest payable on other classifications
of time and savings deposits, and time deposits of qualifying foreign
official institutions remained exempt from the limitations of this regulation (see Regulation Q entries for January 18 and October 7 on pages
69 and 92 of this ANNUAL REPORT) .
These actions were taken to supplement policy measures of
monetary restraint adopted earlier, including successive firming
actions through open market operations and an increase in the
discount rate to 5 per cent in mid-March. (Policy record entries describing these actions may be found in this ANNUAL
REPORT, beginning on pages 122, 136, and 76, respectively.)
The more restrictive stance of monetary policy had been reflected
in firmer money market conditions and higher short-term interest rates, with the 3-month Treasury bill rate rising recently to a
range around 5.35 per cent. Growth in total member bank reserves had slowed sharply since February, and bank credit, as
measured by the bank credit proxy—daily-average member bank

80




deposits—had expanded at an appreciably reduced pace in
March and was expected to show no further growth in April.
Banks had met increasing loan demands in recent weeks through
sizable reductions in their holdings of U.S. Government securities. Growth in the money stock had accelerated in recent weeks,
however, reflecting in part sizable declines in U.S. Government
deposits.
Despite the increased monetary restraint, expansion in domestic economic activity was continuing at an excessive pace and
was being accompanied by substantial upward pressures on
prices and costs. Against this background an overt move toward
increased monetary restraint was deemed desirable to reaffirm
the System's determination to help resist inflationary pressures
at a time when enactment of proposed fiscal restraint legislation remained uncertain.
Rising interest rates in short-term debt markets had significantly reduced the ability of banks to compete for time and savings deposits under existing Regulation Q ceilings, with the result that the outstanding volume of large-denomination CD's had
contracted substantially in recent weeks and growth in consumer-type time and savings deposits at banks and in savings
accounts at nonbank thrift institutions had remained at a reduced pace. The further increase of Vi percentage point in the
discount rate was expected to exert additional upward pressure
on short-term market interest rates and to make it even more
difficult for banks to replace maturing CD's. In these circumstances the Board concluded that ceiling rates under Regulation
Q should be raised on large-denomination CD's in order to give
banks some leeway to compete for interest-sensitive funds. It
was believed desirable to set the new graduated scale of ceiling
rates at levels that would enable banks to resist further large reductions in such deposits, but not so high as to permit a significant expansion in the outstanding volume of CD's and thus in
bank credit.




81

APRIL 23, 1968
AMENDMENTS TO REGULATION D, RESERVES OF MEMBER BANKS.

Effective September 12, 1968, Regulation D was amended to effect several changes in the method of computation of reserve requirements
by member banks.
Votes for this action: Messrs. Martin, Robertson, Mitchell, Maisel, Brimmer, and Sherrill. Votes
against this action: None. Absent and not voting:
Mr. Daane.

The amendments were designed to facilitate more efficient
functioning of the reserve mechanism. They did not represent any
change in Federal Reserve monetary policy, but were expected
to reduce uncertainties, for both member banks and the Federal Reserve, as to the amount of reserves required to be maintained during the course of any reserve-computation period.
Adoption of the amendments was therefore expected to moderate
some of the pressures for reserve adjustments within the banking
system that occasionally develop near the close of a reserve
period and produce sharp fluctuations in the availability of
day-to-day funds.
The major changes in the rules by which member banks
would compute and comply with System reserve requirements,
which were substantively the same as those published for comment on January 29, 1968, were as follows:
(1) establishment of a 1-week reserve period for the socalled "country banks" instead of the former 2-week period,
thus putting such banks on the same basis as reserve city banks;
(2) use of average deposits 2 weeks earlier in calculating
the weekly average required reserves for the present period;
(3) use of vault cash held 2 weeks earlier, together with
average balances at the Federal Reserve Bank for the current week, in the computation of weekly average reserves held
in satisfaction of the requirements; and
(4) provision that either excesses or deficiencies averag82




ing up to 2 per cent of required reserves might be carried
forward to the next reserve week.
MAY 7, 1968
AMENDMENTS TO REGULATION G, CREDIT BY PERSONS OTHER
THAN BANKS, BROKERS, OR DEALERS FOR THE PURPOSE OF PURCHASING OR CARRYING REGISTERED EQUITY SECURITIES;
REGULATION T, CREDIT BY BROKERS, DEALERS, AND MEMBERS
OF NATIONAL SECURITIES EXCHANGES; AND REGULATION U,
CREDIT BY BANKS FOR THE PURPOSE OF PURCHASING OR CARRYING REGISTERED STOCKS.

The Board amended Regulations G, T, and U to revoke certain provisions that would have applied to banks, brokers, and other lenders when
they acted as agents for others who were in the business of lending
against registered equity securities.
Votes for this action: Messrs. Martin, Daane,
Maisel, Brimmer, and Sherrill. Votes against this
action: None. Absent and not voting: Messrs. Robertson and Mitchell.

On February 1, 1968, the Board, in adopting Regulation G
and amending Regulations T and U, included a requirement that
all lenders performing certain services "as agent" for foreign
and other stock market lenders obtain a signed statement from
their principals to the effect that the activities of the principals
conformed to the applicable margin regulations. This requirement was originally scheduled to take effect on March 11, 1968.
However, on February 29 the Board deferred the effective date
until April 10, 1968. The purpose of the delay was to mitigate
the administrative burden connected with handling a substantial volume of ministerial agency transactions involved in effectuating the requirement.
Subsequently, on March 27, 1968, the Board amended the
pertinent provisions of the regulations to provide that the requirement apply only where the bank, broker, or other lender
knew or should know that the services it performed as agent
were connected with a loan secured in such a way that the agent




83

would have had to observe the requirement of the regulations
if it had itself made the loan. This change was scheduled to go
into effect on April 17, 1968.
On April 12, 1968, the Board deferred the effective date
to May 17 and on May 7 it revoked these provisions, which
were thus never actually in effect. The Board deleted the requirement because of the possibility that it might give rise to disproportionate operational problems, particularly with regard to
transactions involving foreign principals. The Board noted, however, that a potential for evasion of the regulations through
agency activities did exist and that it planned to keep this
area under surveillance.
MAY 9, 1968
PROPOSED AMENDMENT TO REGULATION U, CREDIT BY BANKS
FOR THE PURPOSE OF PURCHASING OR CARRYING REGISTERED
STOCKS.
On May 9, 1968, the Board voted not to adopt a proposed amendment
to Regulation U that would have exempted from margin requirements
loans made by banks to dealers to finance their market-making activities
in convertible bonds.
Votes for this action: Messrs. Martin, Robertson, Maisel, and Sherrill. Votes against this action:
None. Absent and not voting: Messrs. Mitchell,
Daane, and Brimmer.

In conjunction with the changes announced February 1, 1968,
in its regulations governing the use of credit in stock market
transactions, the Board had published for comment a proposal
to exempt from margin requirements loans made by banks to
dealers to finance their market-making activities in convertible
securities. It was originally proposed that this exemption, if
adopted, would become effective not later than March 11, 1968.
To aid it in reaching a decision, the Board requested that dealers
who wished to be eligible for the exemption begin to file certain
reports.
84



The Board, after twice deferring action because of difficulties
encountered in collecting and analyzing sufficient data, decided
not to grant the exemption. Analysis of the reports filed by
dealer firms engaged in market-making activities had not revealed a clear need for extending credit on a more favorable
basis to such firms, and it appeared that the exemption would
lead to severe administrative difficulties. It was therefore required that bank loans on convertible securities made .between
October 20, 1967, and March 11, 1968, to those dealer firms
that had filed reports to establish eligibility for possible exemption be brought up to 50 per cent margin status by May 10.
Such loans had been granted temporary exemption pending
final Board action.

JUNE 7, 1968
AMENDMENTS TO REGULATION G, CREDIT BY PERSONS OTHER
THAN BANKS, BROKERS, OR DEALERS FOR THE PURPOSE OF PURCHASING OR CARRYING REGISTERED EQUITY SECURITIES;
REGULATION T, CREDIT BY BROKERS, DEALERS, AND MEMBERS
OF NATIONAL SECURITIES EXCHANGES; AND REGULATION U,
CREDIT BY BANKS FOR THE PURPOSE OF PURCHASING OR CARRYING REGISTERED STOCKS.

Effective June 8, 1968, the Supplements to Regulations G, T, and U
were amended to increase margin requirements from 70 to 80 per cent
on loans made on stocks and from 50 to 60 per cent on loans made on
convertible bonds.
Votes for this action: Messrs. Martin, Robertson, Daane, Brimmer, and Sherrill. Votes against
this action: None. Absent and not voting: Messrs.
Mitchell and Maisel.

During the month of April margin credit of brokerage customers had increased by $200 million, bringing the total of margin credit outstanding at brokerage houses to $6.4 billion, and
preliminary indications were that a further rise had occurred
in May. The recent increases in stock market credit marked




85

a resumption of the upward trend observed during 1967, when
such credit rose 29 per cent at brokerage houses and 19 per cent
at commercial banks.
In view of these developments, the Board acted to increase
margin requirements under the authority granted in the Securities Exchange Act of 1934 to prevent excessive use of credit
to finance transactions in securities. The margin requirement on
loans for the purpose of purchasing or carrying registered stocks
was increased from 70 to 80 per cent; that on loans for the purpose of purchasing or carrying securities convertible into registered stock was raised from 50 to 60 per cent. These higher
requirements were applicable to all new extensions of credit on
or after June 8, 1968, for these purposes by brokers, banks,
and other lenders. No change was made in the 70 per cent retention requirement applicable to undermargined accounts.
AUGUST 5, 1968
AMENDMENTS TO REGULATION F, SECURITIES OF MEMBER STATE
BANKS.

Effective August 5, 1968, Regulation F was amended to implement
recent statutory amendments to the Securities Exchange Act of 1934.
Votes for this action: Messrs. Robertson, Daane,
Maisel, Brimmer, and Sherrill. Votes against this
action: None. Absent and not voting: Messrs. Martin and Mitchell.

The amendments to Regulation F implemented provisions of
Public Law 90-439, effective July 29, 1968, insofar as they
applied to State member banks. Those provisions required disclosure of certain information with respect to: (1) acquisition
of more than 10 per cent of a class of equity securities registered pursuant to the Securities Exchange Act; (2) making of
so-called "tender offers" (or solicitations favoring or opposing
such offers); and (3) replacement of a majority of the directors
of an issuer in connection with an acquisition, or tender offer,

86



subject to the Act. State member banks engaging in any of the
above actions were required to file prescribed information with
the Board and, in the case of a tender offer, to include such information in the advertisement thereof.
AUGUST 6, 1968
AMENDMENTS TO REGULATION G, CREDIT BY PERSONS OTHER
THAN BANKS, BROKERS, OR DEALERS FOR THE PURPOSE OF PURCHASING OR CARRYING REGISTERED EQUITY SECURITIES.

Effective August 8, 1968, Regulation G was amended to relax some
provisions thereof, particularly as they applied to credit unions.
Votes for this action: Messrs. Robertson, Daane,
Maisel, Brimmer, and Sherrill. Votes against this
action: None. Absent and not voting: Messrs. Martin and Mitchell.

Regulation G applied only to lenders with $50,000 in new
loans or $100,000 in loans outstanding against registered equity
securities in a given quarter. Therefore it affected only a very
small minority of the credit unions in the United States. However, several of the provisions of Regulation G were felt to be
unduly restrictive on even this small number of credit unions.
The first of the two major amendments included in this action permitted a lender subject to the regulation to extend up
to $5,000 in general credit along with credit for purchasing or
carrying registered securities. As originally adopted, the regulation forbade a lender subject to its provisions to extend both
types of credit to the same borrower at the same time.
The second major amendment permitted credit unions whose
membership was limited to employees and former employees
of a corporation to make loans for the purchase of stock in the
corporation under an employee stock-purchase plan without
regard to initial margin requirements. It was required that the
loans be made under a plan that embodied safeguards to discourage repayment with proceeds from the sale of the purchased




87

stock. Such loans were already exempt if made by the corporation itself under similar safeguards.
AUGUST 13, 1968
OPERATIONS SUBSIDIARIES AND LOAN PRODUCTION OFFICES.

The Board reinterpreted provisions of the Federal banking laws relating
to operations subsidiaries and loan production offices.
Votes for this action: Messrs. Martin, Mitchell,
Daane, Maisel, and Sherrill. Votes against this action: Messrs. Robertson and Brimmer.

These interpretations, which reversed positions taken in 1966
and 1967, were as follows:
1, As tar as Federal banking law is concerned, a member
bank of the Federal Reserve System may purchase for its own
account shares of corporations to perform, at domestic locations
where the bank is authorized to engage in business, functions
that the bank is empowered to perform directly.
2. As far as Federal banking law is concerned, a member
bank of the Federal Reserve System may establish and operate,
at any location in the United States, "loan production offices"
that perform only servicing activities. Such offices may be established and operated by a bank either directly or indirectly
through wholly owned subsidiaries.
In adopting these interpretations, the Board reexamined its
position concerning the so-called "stock purchase prohibition"
of Section 5136 of the Revised Statutes (12 U.S. Code Section 24), which forbids the purchase by a member bank for
its own account of any shares of stock of any corporation,
except as permitted by provisions of Federal law or as comprised
within the concept of "such incidental powers as shall be necessary to carry on the business of banking." The Board concluded that the incidental powers clause permits a bank to organize its operations in the manner that it believes will best fa-

88



cilitate the performance thereof, and that a wholly-owned subsidiary corporation engaged in activities that the bank itself may
perform is simply a convenient alternative organizational arrangement and is permissible unless use of such a subsidiary is
inconsistent with other Federal law, either statutory or judicial.
In view of the relationship between the operation of certain
subsidiaries and the branch banking laws, the Board also reexamined its rulings on what constitutes "money lent" for the
purpose of Section 5155 of the Revised Statutes (12 U.S. Code
Section 36), which provides that "The term 'branch' . . . shall
be held to include any branch bank, branch office, branch
agency, additional office, or any branch place of business . . .
at which deposits are received, or checks paid, or money lent."
The Board concluded that a test similar to that adopted with
respect to the servicing exemption under the Bank Holding
Company Act is appropriate for use in determining whether
or not "money [is] lent" at a particular office, for the purpose of the Federal branch banking laws.
Accordingly, the Board listed activities that it considered did
not, individually or collectively, constitute the lending of money
within the meaning of Section 5155 and concluded that when
loans are approved and funds disbursed solely at the main office
or branch of the bank, an office at which only preliminary and
servicing steps are taken is not a place where "money [is] lent"
and therefore is not a branch.
In stating the reasons for their dissent Messrs. Robertson
and Brimmer said that, while they believed it would be in the
public interest to amend the governing statutes to give national
banks and State member banks greater latitude to conduct some
of their business through subsidiary corporations, they also believed the problem should have been resolved through legislation rather than by changing the Board's interpretation of the
law. They also stated that to go even further and adopt the position that State member banks may (through these subsidi-




89

aries) establish loan production offices anywhere in the United
States was to take such a long step toward a fundamental change
in our banking structure as to call for legislative consideration
even if the legality of that position were unquestionable, which
in their view was not the case.
AUGUST 15, 1968
DECREASE IN RATES ON DISCOUNTS AND ADVANCES BY FEDERAL
RESERVE BANKS.
Effective August 16, 1968, the Board approved the action taken by the
board of directors of the Federal Reserve Bank of Minneapolis establishing a rate of 5V* per cent (a decrease from 5V2 per cent) on discounts
and advances to member banks under Sections 13 and 13a of the Federal
Reserve Act.
Votes for this action: Messrs. Martin, Robertson, Maisel, Brimmer, and Sherrill. Votes against
this action: None. Absent and not voting: Messrs.
Mitchell and Daane.
Pursuant to the policy established by this action, the Board subsequently approved the same rate for the remaining Federal Reserve Banks
effective on the following dates:
Richmond
August 19, 1968
Philadelphia
August 23, 1968
Cleveland
August 23, 1968
Chicago
August 23, 1968
Kansas City
August 23, 1968
Boston
August 27, 1968
Dallas
August 28, 1968
New York
August 30, 1968
Atlanta
August 30, 1968
St. Louis
August 30, 1968
San Francisco
August 30, 1968
Effective the same dates the Board approved for the respective Federal
Reserve Banks a rate of 53A per cent (a decrease from 6 per cent) on
advances to member banks under Section 10(b) of the Federal Reserve
Act. In addition, the Board approved decreases at all of the Banks in

90



rates on advances to individuals, partnerships, and corporations other
than member banks under the last paragraph of Section 13 of the Act.

Market interest rates had fallen considerably on balance in
connection with enactment of fiscal restraint measures in late
June, as a result of widespread expectations that these measures
would be followed by moderation in the pace of economic expansion and reduction of inflationary pressures, some easing
of monetary policy, and smaller Treasury financing requirements. In short-term debt markets rates on 3-month Treasury
bills had declined by more than Vi percentage point to about
4.90 per cent by early August but since that time had climbed
back up to about 5.15 per cent. Member bank borrowings had
been reduced over this interval, but day-to-day rates in the money
market, including rates on Federal funds, had remained at high
levels and appeared increasingly to be exerting some upward
pressure on the short-term yield structure.
The decline that had taken place in short-term market interest
rates to levels well below Regulation Q ceilings on large-denomination CD's had enabled banks since early summer to replace
the CD's they had lost earlier in the year. Growth in private
demand deposits and in the money supply had leveled off since
early July, but U.S. Government deposits had risen fairly
rapidly. Bank earning assets had grown sharply in recent weeks,
as banks had invested heavily in the U.S. Government securities offered in recent Treasury cash financings and had increased their acquisitions of State and local government obligations and their loans on securities.
The action to decrease the discount rate by VA percentage
point moved the rate into closer alignment with the reduced
level of short-term market interest rates. The Board believed
that such a reduction would tend to moderate the tendency
for short-term rates to move up from their summer lows and
thereby help to forestall developments that might otherwise call
for an enlarged provision of reserves.




91

OCTOBER 7, 1968
AMENDMENT TO REGULATION 0, PAYMENT OF INTEREST ON
DEPOSITS.
Effective October 15, 1968, Regulation Q was amended with respect
to the payment of interest by member banks on certain time deposits
of qualifying foreign official depositors.
Votes for this action: Messrs. Robertson, Mitchell, Daane, Maisel, and Brimmer. Votes against this
action: None. Absent and not voting: Messrs. Martin and Sherrill.

Pursuant to the enactment of Public Law 90-505, which became effective September 21, 1968, this amendment to Regulation Q clarified the authority of member banks to pay interest
without regard to Regulation Q ceilings on time deposits of
foreign governments, of the monetary and financial authorities
of foreign governments when acting as such, and of international
financial institutions of which the United States is a member.
In this respect the amendment, which applied to time deposits
with maturities of not more than 2 years, was essentially a
restatement and extension of an earlier amendment, effective
January 18, 1968 (see page 69 of this ANNUAL R E P O R T ) ,
which had been issued in light of the possible expiration of the
Board's authority to regulate interest rates on a discretionary
basis, an authority extended by Public Law 90-505.
The current amendment also modified an earlier position of
the Board with respect to the payment of interest on deposits
in the form of negotiable certificates of deposit (CD's) transferred by a so-called "exempt" organization, as defined above.
Formerly, a member bank had been prohibited from paying interest at a rate exceeding the generally applicable maximum
rate permitted by Regulation 0 at the date of issue if a CD
issued to an exempt organization had been transferred to a
nonexempt holder at any time before maturity. Under the
amendment a member bank could pay the contract rate on a
CD issued to an exempt organization throughout the time it
92



was held by such an organization even though the holder at
maturity was not an exempt organization, provided that (1)
in the event of a transfer, the date of transfer, attested to in
writing by the transferor, appeared on the CD, and (2) the
maximum rate limitations of Regulation Q in effect at the date
of issuance of the certificate applied during such time as the
CD was held by any person other than an exempt organization.
The Board indicated that, in keeping with the intent of the
authorizing legislation, the current amendment was designed
to encourage, to a greater extent than before, foreign monetary
authorities to deposit funds in U.S. commercial banks and thus
be of assistance in solving the nation's balance of payments
problem.
NOVEMBER 13, 1968
AMENDMENT TO REGULATION A, ADVANCES AND DISCOUNTS BY
FEDERAL RESERVE BANKS.
Effective November 13, 1968, Regulation A was amended with regard
to the kinds of assets eligible as collateral for advances, thus bringing
the regulation into conformity with recent legislation.
Votes for this action: Messrs. Robertson, Mitchell, Daane, and Maisel. Votes against this action:
None. Absent and not voting: Messrs. Martin,
Brimmer, and Sherrill.

Public Law 90-505, which became effective September 21,
1968, and the conforming changes in Regulation A now adopted
by the Board broadened the definition of obligations eligible as
collateral for advances to member banks to include all "such
obligations as are eligible for purchase under Section 14(b) of
the (Federal Reserve) Act." Previously, the reference had been
to "notes . . . eligible for . . . purchase," which the Board
had construed as not including obligations generally regarded as
securities.
Obligations thus made eligible as collateral for advances included "direct obligations of, and obligations fully guaranteed




93

as to principal and interest by, the United States or any agency
thereof, and municipal obligations, issued in anticipation of the
collection of taxes or in anticipation of the receipt of assured
revenues, with a maturity from the date of the advance not
exceeding six months."
In adopting the amendment, the Board revoked all previous
interpretations with respect to the eligibility of specific obligations included in the above categories.
DECEMBER 16, 1968
REVISION OF FOREIGN CREDIT RESTRAINT PROGRAM GUIDELINES.
The Board adopted slightly revised guidelines for restraint of foreign
credits by banks and other financial institutions. It was understood that
these guidelines would be issued if the administration determined that the
over-all U.S. balance of payments program should be continued in 1969
in substantially the same form as in 1968.
Votes for this action: Messrs. Robertson, Mitchell, Daane, Maisel, Brimmer, and Sherrill. Votes
against this action: None. Absent and not voting:
Mr. Martin.

Adoption of the revised guidelines continued an integral
part of the President's program, announced on January 1, 1968,
to strengthen the U.S. balance of payments. In considering the
foreign credit restraint program applicable to banks and other
financial institutions, the Board concluded that balance of payments prospects for 1969 did not permit any basic change in
the program and that restraint of capital outflows, both public
and private, would continue to be required. Thus, the guidelines for 1969—announced on December 23, 1968, following
acceptance by the President of a recommendation from the
Cabinet Committee on the Balance of Payments regarding the
over-all balance of payments program—were substantially the
same as those for 1968. However, in view of the importance
of increasing U.S. exports, the Board indicated its intention

94



to review the program early in 1969 to determine whether additional flexibility for financing U.S. exports might be provided
in the guidelines.
DECEMBER 17, 1968
INCREASE IN RATES ON DISCOUNTS AND ADVANCES BY FEDERAL
RESERVE BANKS.
Effective December 18, 1968, the Board approved actions taken by
the boards of directors of the Federal Reserve Banks of Boston, New York,
Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, and
Dallas establishing a rate of 5Vi per cent (an increase from SlA per cent)
on discounts and advances to member banks under Sections 13 and 13a of
the Federal Reserve Act.
Votes for this action: Messrs. Robertson, Mitchell, Daane, Maisel, Brimmer, and Sherrill. Votes
against this action: None. Absent and not voting:
Mr. Martin.
Pursuant to the policy established by this action, the Board subsequently approved the same rate for the Federal Reserve Banks of St.
Louis, Kansas City, and San Francisco, effective December 20, 1968.
Effective the same dates the Board approved for the respective Federal
Reserve Banks a rate of 6 per cent (an increase from 534 per cent) on
advances to member banks under Section 10(b) of the Federal Reserve
Act. In addition, the Board approved increases at all of the Banks in
rates on advances to individuals, partnerships, and corporations other
than member banks under the last paragraph of Section 13 of the Act.
Note: The directors of the Federal Reserve Banks of Philadelphia and
St. Louis had initially voted to establish, subject to the approval of the
Board of Governors, a rate of 53A per cent on discounts and advances
to member banks under Sections 13 and 13a of the Federal Reserve Act,
with corresponding secondary rates. Upon being advised that the Board
was not prepared to approve a rate increase of Vi percentage point, the
Federal Reserve Banks in question voted to establish a rate of 5Vi per
cent.
The discount rate increase was approved partly in light of
the advances in other market interest rates that had occurred over
recent months but also in recognition of the continued excessive
strength of the economic expansion, the accompanying resur-




95

gence of inflationary expectations, and the adverse impact of
rapidly rising domestic prices on the country's balance of payments. In this situation a policy of increased monetary restraint
was deemed appropriate and the discount rate action was
taken, in conjunction with firming actions through open market
operations, in furtherance of such a policy. Details of the attendant economic circumstances and the views of the Federal
Open Market Committee, which voted to foster firmer conditions in money and short-term credit markets at its meeting
on December 17, 1968, may be found in the entry for that
date in the Record of Policy Actions of the Federal Open
Market Committee, beginning on page 219 of this ANNUAL R E PORT.

Before approving the increase of VA percentage point in the
discount rate, the Board reviewed the arguments for a Vi point
increase which had been voted initially by the directors of the
Federal Reserve Banks of Philadelphia and St. Louis. The
Board decided that, together with the firmer stance in open
market policy, a XA point advance in the discount rate would be
a sufficient change under current economic circumstances. The
Board also recognized that conditions in domestic financial
markets and in foreign exchange markets were highly sensitive and might tend to become unsettled if a larger increase were
announced at this time.
During the course of the meeting the Board also considered
arguments for a Vi point increase in member bank reserve requirements, the action to have an effective date in mid-January
1969 rather than immediately for technical reasons. Board members present were evenly divided in their assessment of the
desirability of such an increase. Those in favor (Messrs. Robertson, Mitchell, and Brimmer) believed that this additional
action would help reduce the availability of bank reserves without: adding as directly to upward pressures on market interest
rates as would open market sales of securities designed to absorb
the same amount of reserves, and also that the action, in con96



junction with the other measures of restraint being adopted,
would provide an unmistakable signal of the System's determination to resist inflationary pressures in the economy. Those
opposed (Messrs. Daane, Maisel, and Sherrill) thought that
considerations similar to those underlying the decision against
a Vi point increase in the discount rate militated also against an
increase in reserve requirements—namely, that the other actions agreed upon were adequate in the current economic situation and that such further action would risk undesirably large
reactions in financial markets. In their judgment consideration
of an increase in reserve requirements should await an assessment of the impact of the firming actions being undertaken
through open market operations and the VA point advance in the
discount rate.
The Board agreed that the effectiveness of the more restrictive policy undertaken through open market operations
and the increase in the discount rate would be enhanced if the
maximum interest rates payable on various categories of member
bank time and savings deposits under the Board's Regulation Q
were maintained at prevailing levels.




97

Record of Policy Actions of the
Federal Open Market Committee
The record of policy actions of the Federal Open Market Committee is presented in the ANNUAL REPORT of the Board of Governors pursuant to the requirements of Section 10 of the Federal
Reserve Act. That section provides that the Board shall keep a
complete record of the actions taken by the Board and by the
Federal Open Market Committee on all questions of policy relating to open market operations, that it shall record therein the
votes taken in connection with the determination of open market
policies and the reasons underlying each such action, and that it
shall include in its ANNUAL REPORT to the Congress a full account of such actions.
In the pages that follow, there are entries with respect to the
policy actions taken at the meetings of the Federal Open Market
Committee held during the calendar year 1968, including the
votes on the policy decisions made at those meetings as well as
a resume of the basis for the decisions. The summary descriptions
of economic and financial conditions are based on the information that was available to the Committee at the time of the meetings, rather than on data as they may have been revised later.
It will be noted from the record of policy actions that in some
cases the decisions were by unanimous vote and that in other
cases dissents were recorded. The fact that a decision in favor
of a general policy was by a large majority, or even that it was by
unanimous vote, does not necessarily mean that all members of
the Committee were equally agreed as to the reasons for the
particular decision or as to the precise operations in the open
market that were called for to implement the general policy.
Under the Committee's rules relating to the availability of
information to the public, the policy record for each meeting is




99

released approximately 90 days following the date of the meeting and is subsequently published in the Federal Reserve Bulletin
as well as in the Board's ANNUAL REPORT.
Policy directives of the Federal Open Market Committee are
issued to the Federal Reserve Bank of New York as the Bank
selected by the Committee to execute transactions for the System
Open Market Account. In the area of domestic open market activities the Federal Reserve Bank of New York operates under two
separate directives from the Open Market Committee—a continuing authority directive and a current economic policy directive.
In the foreign currency area it operates under an authorization
for System foreign currency operations and a foreign currency
directive. These four instruments are shown below in the form
in which they were in effect at the beginning of 1968. No revisions
were made in the continuing authority directive during the year;
changes in the other instruments are shown in the records for the
individual meetings.
CONTINUING AUTHORITY DIRECTIVE WITH RESPECT TO
DOMESTIC OPEN MARKET OPERATIONS
(in effect January 1, 1968)

1. The Federal Open Market Committee authorizes and directs the
Federal Reserve Bank of New York, to the extent necessary to carry out
the most recent current economic policy directive adopted at a meeting of
the Committee:
(a) To buy or sell U.S. Government securities in the open market,
from or to Government securities dealers and foreign and international
accounts maintained at the Federal Reserve Bank of New York, on a
cash, regular, or deferred delivery basis, for the System Open Market
Account at market prices and, for such Account, to exchange maturing
U.S. Government securities with the Treasury or allow them to mature
without replacement; provided that the aggregate amount of such
securities held in such Account at the close of business on the day of a
meeting of the Committee at which action is taken with respect to a
current economic policy directive shall not be increased or decreased by
more than $2.0 billion during the period commencing with the opening of

100



business on the day following such meeting and ending with the close of
business on the day of the next such meeting;
(b) To buy or sell prime bankers' acceptances of the kinds designated
in the Regulation of the Federal Open Market Committee in the open
market, from or to acceptance dealers and foreign accounts maintained
at the Federal Reserve Bank of New York, on a cash, regular, or deferred
delivery basis, for the account of the Federal Reserve Bank of New York
at market discount rates; provided that the aggregate amount of bankers'
acceptances held at any one time shall not exceed (1) $125 million or
(2) 10 per cent of the total of bankers' acceptances outstanding as shown
in the most recent acceptance survey conducted by the Federal Reserve
Bank of New York, whichever is the lower;
(c) To buy U.S. Government securities, obligations that are direct
obligations of, or fully guaranteed as to principal and interest by, any
agency of the United States, and prime bankers' acceptances with maturities of 6 months or less at the time of purchase, from nonbank dealers for
the account of the Federal Reserve Bank of New York under agreements
for repurchase of such securities, obligations, or acceptances in 15 calendar days or less, at rates not less than (1) the discount rate of the Federal
Reserve Bank of New York at the time such agreement is entered into,
or (2) the average issuing rate on the most recent issue of 3-month
Treasury bills, whichever is the lower; provided that in the event Government securities or agency issues covered by any such agreement are not
repurchased by the dealer pursuant to the agreement or a renewal thereof,
they shall be sold in the market or transferred to the System Open Market
Account; and provided further that in the event bankers' acceptances
covered by any such agreement are not repurchased by the seller, they
shall continue to be held by the Federal Reserve Bank or shall be sold in
the open market.
2. The Federal Open Market Committee authorizes and directs the
Federal Reserve Bank of New York to purchase directly from the Treasury
for the account of the Federal Reserve Bank of New York (with discretion,
in cases where it seems desirable, to issue participations to one or more Federal Reserve Banks) such amounts of special short-term certificates of indebtedness as may be necessary from time to time for the temporary accommodation of the Treasury; provided that the rate charged on such certificates
shall be a rate VA- of 1 per cent below the discount rate of the Federal
Reserve Bank of New York at the time of such purchases, and provided
further that the total amount of such certificates held at any one time by
the Federal Reserve Banks shall not exceed $ 1 billion.




101

CURRENT ECONOMIC POLICY DIRECTIVE
(in effect January 1, 1968)
The information reviewed at this meeting indicates that industrial output
and employment have rebounded following strike settlements in the automobile and other industries, and that prospects have heightened for more
rapid expansion of over-all economic activity in the months ahead. Both
industrial and consumer prices have continued to rise at a substantial rate.
The imbalance in U.S. international transactions has worsened, partly because of weakening in the export surplus since midyear. Foreign purchases
of gold have been large following the devaluation of the pound sterling.
Bank credit expansion has lessened, with diminished bank buying of Government securities and continued moderate loan growth. Most interest rates
have risen further in reaction to the British devaluation and Bank rate increase, the rise in Federal Reserve discount rates, and waning expectations
of enactment of the President's fiscal program. In this situation, it is the
policy of the Federal Open Market Committee to foster financial conditions
conducive to resistance of inflationary pressures and progress toward reasonable equilibrium in the country's balance of payments.
To implement this policy, System open market operations until the next
meeting of the Committee shall be conducted with a view to moving slightly
beyond the firmer conditions that have developed in money markets partly
as a result of the increase in Federal Reserve discount rates; provided, however, that operations shall be modified as needed to moderate any apparently
significant deviations of bank credit from current expectations or any unusual liquidity pressures.
AUTHORIZATION FOR SYSTEM FOREIGN CURRENCY
OPERATIONS
(in effect January 1, 1968)
1. The Federal Open Market Committee authorizes and directs the
Federal Reserve Bank of New York, for System Open Market Account, to
the extent necessary to carry out the Committee's foreign currency directive:
A. To purchase and sell the following foreign currencies in the form
of cable transfers through spot or forward transactions on the open market
at home and abroad, including transactions with the U.S. Stabilization Fund
established by Section 10 of the Gold Reserve Act of 1934, with foreign
monetary authorities, and with the Bank for International Settlements:

102



Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks
Italian lire
Japanese yen
Mexican pesos
Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs
B. To hold foreign currencies listed in paragraph A above, up to the
following limits:
(1) Currencies held spot or purchased forward, up to the amounts
necessary to fulfill outstanding forward commitments;
(2) Additional currencies held spot or purchased forward, up to
the amount necessary for System operations to exert a market influence
but not exceeding $150 million equivalent; and
(3) Sterling purchased on a covered or guaranteed basis in terms
of the dollar, under agreement with the Bank of England, up to $200 million equivalent.
C. To have outstanding forward commitments undertaken under paragraph A above to deliver foreign currencies, up to the following limits:
(1) Commitments to deliver foreign currencies to the Stabilization
Fund, up to $350 million equivalent;
(2) Commitments to deliver Italian lire, under special arrangements
with the Bank of Italy, up to $500 million equivalent; and
(3) Other forward commitments to deliver foreign currencies, up
to $550 million equivalent.
D. To draw foreign currencies and to permit foreign banks to draw
dollars under the reciprocal currency arrangements listed in paragraph 2
below, provided that drawings by either party to any such arrangement
shall be fully liquidated within 12 months after any amount outstanding
at that time was first drawn, unless the Committee, because of exceptional
circumstances, specifically authorizes a delay.
2. The Federal Open Market Committee directs the Federal Reserve
Bank of New York to maintain reciprocal currency arrangements ("swap"




103

arrangements) for System Open Market Account for periods up to a maximum of 12 months with the following foreign banks, which are among
those designated by the Board of Governors of the Federal Reserve System
under Section 214.5 of Regulation N, Relations with Foreign Banks and
Bankers, and with the approval of the Committee to renew such arrangements on maturity:
Foreign bank

Amount of
arr = ent
dollars equivalent)

Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements:
System drawings in Swiss francs
System drawings in authorized European
currencies other than Swiss francs

100
225
750
100
1,500
100
750
750
750
130
225
100
200
400
400
600

3. All transactions in foreign currencies undertaken under paragraph
1(A) above shall be at prevailing market rates and no attempt shall be
made to establish rates that appear to be out of line with underlying market
forces. Insofar as is practicable, foreign currencies shall be purchased
through spot transactions when rates for those currencies are at or below
par and sold through spot transactions when such rates are at or above par,
except when transactions at other rates (i) are specifically authorized by
the Committee, (ii) are necessary to acquire currencies to meet System
commitments, or (iii)are necessary to acquire currencies for the Stabilization
Fund, provided that these currencies are resold forward to the Stabilization
Fund at the same rate.
4. It shall be the practice to arrange with foreign central banks for the
coordination of foreign currency transactions. In making operating arrange-

104



ments with foreign central banks on System holdings of foreign currencies,
the Federal Reserve Bank of New York shall not commit itself to maintain
any specific balance, unless authorized by the Federal Open Market Committee. Any agreements or understandings concerning the administration
of the accounts maintained by the Federal Reserve Bank of New York
with the foreign banks designated by the Board of Governors under Section
214.5 of Regulation N shall be referred for review and approval to the
Committee.
5. Foreign currency holdings shall be invested insofar as practicable,
considering needs for minimum working balances. Such investments shall
be in accordance with Section 14(e) of the Federal Reserve Act.
6. A Subcommittee consisting of the Chairman and the Vice Chairman
of the Committee and the Vice Chairman of the Board of Governors (or
in the absence of the Chairman or of the Vice Chairman of the Board of
Governors the members of the Board designated by the Chairman as alternates, and in the absence of the Vice Chairman of the Committee his alternate) is authorized to act on behalf of the Committee when it is necessary
to enable the Federal Reserve Bank of New York to engage in foreign
currency operations before the Committee can be consulted. All actions
taken by the Subcommittee under this paragraph shall be reported promptly
to the Committee.
7. The Chairman (and in his absence the Vice Chairman of the Committee, and in the absence of both, the Vice Chairman of the Board of
Governors) is authorized:
A. With the approval of the Committee, to enter into any needed
agreement or understanding with the Secretary of the Treasury about the
division of responsibility for foreign currency operations between the System
and the Secretary;
B. To keep the Secretary of the Treasury fully advised concerning
System foreign currency operations, and to consult with the Secretary on
such policy matters as may relate to the Secretary's responsibilities; and
C. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and
Financial Policies.
8. Staff officers of the Committee are authorized to transmit pertinent
information on System foreign currency operations to appropriate officials
of the Treasury Department.
9. All Federal Reserve Banks shall participate in the foreign currency
operations for System Account in accordance with paragraph 3 G (1) of
the Board of Governors' Statement of Procedure with Respect to Foreign
Relationships of Federal Reserve Banks dated January 1, 1944.




105

10. The Special Manager of the System Open Market Account for foreign currency operations shall keep the Committee informed on conditions
in foreign exchange markets and on transactions he has made and shall
render such reports as the Committee may specify.
FOREIGN CURRENCY DIRECTIVE
(in effect January 1, 1968)
1, The basic purposes of System operations in foreign currencies are:
A. To help safeguard the value of the dollar in international exchange
markets;
B. To aid in making the system of international payments more efficient;
C. To further monetary cooperation with central banks of other countries having convertible currencies, with the International Monetary Fund,
and with other international payments institutions;
D. To help insure that market movements in exchange rates, within
the limits stated in the International Monetary Fund Agreement or established by central bank practices, reflect the interaction of underlying economic forces and thus serve as efficient guides to current financial decisions,
private and public; and
E. To facilitate growth in international liquidity in accordance with
the needs of an expanding world economy.
2. Unless otherwise expressly authorized by the Federal Open Market
Committee, System operations in foreign currencies shall be undertaken
only when necessary:
A. To cushion or moderate fluctuations in the flows of international
payments, if such fluctuations (1) are deemed to reflect transitional market
unsettlement or other temporary forces and therefore are expected to be
reversed in the foreseeable future; and (2) are deemed to be disequilibrating
or otherwise to have potentially destabilizing effects on U.S. or foreign official reserves or on exchange markets, for example, by occasioning market
anxieties, undesirable speculative activity, or excessive leads and lags in
international payments;
B. To temper and smooth out abrupt changes in spot exchange rates,
and to moderate forward premiums and discounts judged to be disequilibrating. Whenever supply or demand persists in influencing exchange rates in
one direction, System transactions should be modified or curtailed unless
upon review and reassessment of the situation the Committee directs otherwise;
C. To aid in avoiding disorderly conditions in exchange markets. Spe-

106



cial factors that might make for exchange market instabilities include (1)
responses to short-run increases in international political tension, (2) differences in phasing of international economic activity that give rise to
unusually large interest rate differentials between major markets, and (3)
market rumors of a character likely to stimulate speculative transactions.
Whenever exchange market instability threatens to produce disorderly conditions, System transactions may be undertaken if the Special Manager
reaches a judgment that they may help to reestablish supply and demand
balance at a level more consistent with the prevailing flow of underlying
payments. In such cases, the Special Manager shall consult as soon as practicable with the Committee or, in an emergency, with the members of the
Subcommittee designated for that purpose in paragraph 6 of the Authorization for System foreign currency operations; and
D. To adjust System balances within the limits established in the
Authorization for System foreign currency operations in light of probable
future needs for currencies.
3. System drawings under the swap arrangements are appropriate when
necessary to obtain foreign currencies for the purposes stated in paragraph 2
above.
4. Unless otherwise expressly authorized by the Committee, transactions
in forward exchange, either outright or in conjunction with spot transactions,
may be undertaken only (i) to prevent forward premiums or discounts from
giving rise to disequilibrating movements of short-term funds; (ii) to minimize speculative disturbances; (iii) to supplement existing market supplies
of forward cover, directly or indirectly, as a means of encouraging the
retention or accumulation of dollar holdings by private foreign holders; (iv)
to allow greater flexibility in covering System or Treasury commitments,
including commitments under swap arrangements; (v) to facilitate the use
of one currency for the settlement of System or Treasury commitments denominated in other currencies; and (vi) to provide cover for System holdings of foreign currencies.




107

MEETING HELD ON JANUARY 9 f
1.

1968

Authority to effect transactions in System Account.

Economic activity was expanding vigorously as 1967 drew to
a close, and prospects were for further rapid growth in early
1968. Prices were rising at a substantial rate; and with demands
strong and costs increasing, inflationary pressures were expected
to persist in the period ahead.
Industrial production was tentatively estimated to have increased sharply further in December to a level above the peak of
a year earlier. Nonfarm employment also continued to expand
rapidly; in December nearly 1 million more persons were employed than in August, before the strike in the automobile industry. The unemployment rate, which in November had declined
to 3.9 per cent, fell in December to 3.7 per cent, the same as a
year earlier. Housing starts rose further in November, but part
of the increase may have reflected an acceleration of schedules
by some builders, in reaction to increasing uncertainties about
future mortgage market conditions.
Average prices of industrial commodities continued to rise in
December, according to preliminary estimates. Since midyear,
such prices had advanced at an annual rate of about 3 per cent.
Moreover, wholesale prices of farm products, which had been
declining earlier, turned up in December—raising the possibility
that advances in retail prices of food might resume. The consumer price index increased considerably further in November
despite a slight decline in food prices.
Real gross national product in 1967 as a whole was estimated
to have been about 2.5 per cent greater than in 1966. Growth
was at a considerably higher rate in the second half of the year,
however, and further acceleration appeared likely in early 1968.
Recent surveys indicating that consumers were cautious in their
attitudes and buying intentions suggested that personal saving

108



would continue in the first quarter at the unusually high rate prevailing throughout 1967. Nevertheless, in view of the prospect
for a large rise in incomes, a substantial increase in consumer
expenditures was anticipated. Business spending on plant and
equipment was expected to expand sharply, and the rate of inventory accumulation—which now appeared to have advanced
more in the fourth quarter than had been estimated earlier—was
expected to continue rising. Some further increase in outlays for
residential construction appeared probable, in light of the upward
course of housing starts through November and advances in construction costs. On the other hand, defense outlays—growth in
which had slackened in the second half of 1967—were expected
to level off.
The U.S. balance of payments worsened sharply in the fourth
quarter of 1967. On the "liquidity" basis of calculation the deficit
increased markedly from the third quarter, and on the "official
reserve transactions" basis the balance shifted to a large deficit
from a surplus in the preceding quarter.1 For the year as a whole,
the deficit on the liquidity basis was estimated at about $3.7
billion, compared with $1.4 billion in 1966; and the official
settlements balance was in deficit by an estimated $3.4 billion,
compared with a small surplus in 1966. Although detailed information on fourth-quarter payments was not yet available, it
appeared that much of the deterioration was attributable to a
reduction in the surplus on merchandise trade; in the OctoberNovember period exports declined and imports rose from their
third-quarter rates. Special transactions—including the liquida1

The balance on the "liquidity" basis is measured by changes in U.S. reserves
and in liquid U.S. liabilities to all foreigners. The balance on the "official reserve
transactions" basis (sometimes referred to as the "official settlements" basis) is
measured by changes in U.S. reserves and in liquid and certain nonliquid
liabilities to foreign official agencies, mainly monetary authorities. The latter
balance differs from the former by (1) treating changes in liquid U.S. liabilities
to foreigners other than official agencies as ordinary capital flows, and (2)
treating changes in certain nonliquid liabilities to foreign monetary authorities
as financing items rather than ordinary capital flows.




109

tion of official British holdings of U.S. securities—also contributed to the deficit on both bases in the fourth quarter. For
1967 as a whole, the liquidity deficit was substantially reduced
by the net effect of special transactions.
On January 1, 1968, the President announced a new program
which was, in his words, "designed to bring our balance of payments to—or close to—equilibrium in the year ahead." After
stressing the need for a tax increase and other actions to "help
stem the inflationary pressures which now threaten our economic
prosperity and our trade surplus," the President outlined elements
of a program through which an improvement of about $3 billion
in the U.S. payments balance would be sought in 1968. The most
important of these were a mandatory reduction in the flow of
U.S. funds into direct investments abroad, particularly to continental Western Europe, and increased restrictions, under the
Federal Reserve's foreign credit restraint program, on lending
abroad by U.S. financial institutions. The program also included
reduction of expenditures by American citizens for travel outside
the Western Hemisphere, curtailment of Government expenditures overseas, and a variety of measures to increase U.S. exports
and the trade surplus.
Gold holdings of the U.S. Treasury were reduced in December
by the record monthly amount of about $900 million, mainly as
a result of settlement of the U.S. share of sales made by the gold
pool in London in November and December. Following the
President's announcement of the new balance of payments program, foreign purchases of gold slackened abruptly. In foreign
exchange markets the dollar strengthened against all continental
European currencies, and the position of sterling improved
somewhat.
System open market operations since the preceding meeting
of the Committee had been directed at fostering slightly firmer
conditions in the money market. An announcement by the Board
of Governors on December 27 of an increase in reserve require-

110



ments against demand deposits, effective in mid-January, reinforced the belief of market participants that the System was
moving toward greater monetary restraint.2 The Federal funds
rate, which earlier had fluctuated around the AV2 per cent discount rate established on November 20, increased somewhat to
a range around 45/s per cent. Average free reserves of member
banks were estimated to have declined to about $80 million in
the three statement weeks ending January 3, from slightly over
$200 million in the first 2 weeks of December.
Most short-term interest rates rose somewhat further in the
latter half of December as money market conditions firmed, but
longer-term yields remained stable or edged down. Various factors contributed to an improvement in the atmosphere in capital
markets in this period; these included a seasonal lull in new private security issues, the absence of Treasury financing activity,
and an apparent shift in investor expectations toward the view
that longer-term rates were not likely to rise much further.
Both short- and long-term market interest rates declined following the announcement on January 1 of the new balance of
payments program—which many investors interpreted as reducing the likelihood of greater monetary restraint in the near term
—and the downtrend was reinforced by press reports suggesting
that prospects for peace negotiations in Vietnam had improved.
As a result, yields on new corporate bonds and on Treasury notes,
bonds, and longer-term bills were now considerably below their
levels at the time of the Committee's preceding meeting, and
yields on municipal bonds were slightly lower. Most short-term
yields, however, were higher on balance; the market rate on 3month Treasury bills, at 5.02 per cent on the day before this
meeting, was 12 basis points above its level 4 weeks earlier.
Interest rates on new-home mortgages rose further in Novem2

Reserve requirements against demand deposits in excess of $5 million at
each member bank were increased from 16Vi to 17 per cent for reserve city
banks, effective with the reserve computation period beginning Jan. 11, 1968;
and from 12 to HV2 per cent for other member banks, effective with the
computation period beginning Jan. 18, 1968.




Ill

ber and apparently remained under upward pressure in December. Net inflows of funds to nonbank depositary institutions
continued to moderate in late 1967, although the available information did not suggest that depositary institutions in general
were facing substantial drains around the year-end interest- and
dividend-crediting period. With inflows slackening, and with high
yields on marketable bonds offering an attractive alternative
form of investment, lenders in the aggregate were expanding their
new mortgage commitments at a slower pace than they had
earlier.
Growth in time and savings deposits at commercial banks also
had continued to moderate recently. Such deposits expanded at
an annual rate of 8.5 per cent in December—compared with
rates of about 12 per cent in November and about 16 per cent
over the year 1967. The moderation of growth was a result of
substantial run-offs of large-denomination CD's and further slowing of the rise in other time and savings deposits. Private demand
deposits declined slightly on average in December, and the money
supply increased relatively little. With Government deposits contracting, the "bank credit proxy"—total member bank deposits 3
—was about unchanged. Banks reduced their borrowings of
Euro-dollars through foreign branches in December, with much
of the decline apparently seasonal in nature.
Over the year 1967 the money supply and the bank credit
3
In recent years the Committee had been making use of daily-average
statistics on total member bank deposits as a "bank credit proxy"—that is, as
the best available measure, although indirect, of developing movements in bank
credit. Because they can be compiled on a daily basis with a very short lag, the
deposit figures are more nearly current than available bank loan and investment
data. Moreover, average deposit figures for a calendar month are much less
subject to the influence of single-date fluctuations than are the available monthend data on total bank credit, which represent estimates of loans and investments at all commercial banks on one day—the last Wednesday—of each
month. For statistics on daily-average member bank deposits, see the Federal
Reserve BULLETIN for October 1966, p. 1478, and subsequent months. Some
brief comments on the relation between the member bank deposit series and the
bank credit statistics are given in the note on p. 1460 of the October 1966

BULLETIN.

112



proxy increased by about 6.5 and 11.5 per cent, respectively. As
measured by end-of-month data on loans and investments, bank
credit was estimated to have increased by about 11 per cent in
1967.
Business loans at commercial banks, which had been rising at
a relatively slow pace in recent months, expanded sharply in
December. Part of the acceleration reflected special factors, but
part appeared to be related to the increasing pace of economic
activity and to the smaller volume of capital market financing.
With growth in their deposits limited, banks accommodated the
larger demand for loans by selling a substantial volume of Government securities. Banks also reduced the rate at which they
acquired State and local government issues.
On the day of this meeting the Treasury was offering $2.5
billion of tax-anticipation bills, for payment on January 15.
Banks were expected to be the initial purchasers of practically
all of the offering, for which they were permitted to make full
payment by crediting Treasury tax and loan accounts. Largely
as a consequence of such purchases, bank credit expansion was
expected to resume in January; the proxy series was projected to
rise at an annual rate in the range of 6 to 10 per cent if prevailing
money market conditions were maintained. It appeared likely
that growth in business loans would be slower than in December
but still fairly rapid, and there was some prospect that in meeting
loan demands banks would continue to limit their takings of
municipal securities. Growth in time and savings deposits was
expected to continue moderating in light of the high yields available to investors on competing market instruments. Little or no
increase was anticipated in private demand deposits and the
money supply, but Government deposits were projected to rise
substantially.
Concern was expressed in the Committee's discussion about
the inflationary environment and outlook, on both domestic
grounds and in light of the recent contraction in the surplus on




113

U.S. merchandise trade. The new balance of payments program
was expected to result in a substantial reduction in the over-all
deficit in 1968. It was observed, however, that the various elements of the program directed at improving the balance on
specific types of international flows did not obviate the fundamental need for slowing the rise in domestic prices.
It was noted in the discussion that since mid-November the
System had employed all three of the major instruments of monetary policy—discount rates, open market operations, and reserve
requirements—in shifting toward a posture of somewhat greater
restraint, that the effects of these policy actions were still unfolding, and that growth in bank credit and the money supply had
slowed appreciably in recent months. It also was noted that forthcoming Presidential messages and further congressional hearings
on an income tax surcharge would soon be providing new information on planned Federal expenditures and the prospects for a
tax increase. Accordingly, the Committee decided to make no
further change in policy at present. Reinforcing this decision was
the possibility that higher interest rates resulting from a further
firming of monetary policy at this time might have undesired
effects on flows of funds to financial intermediaries.
The Committee agreed that it would be appropriate to maintain the somewhat firmer conditions in the money market that
had developed as a result of recent System open market operations and the announced action with respect to reserve requirements. Some members noted in this connection that a slightly
lower average level of marginal reserves might be required after
the effective dates of the increase in reserve requirements in order
to maintain prevailing money market conditions in other respects.
The Committee also agreed that operations should be modified
as needed to moderate any apparently significant deviations of
bank credit from current expectations. The following current
economic policy directive was issued to the Federal Reserve Bank
of New York:

114



The information reviewed at this meeting indicates that over-all
economic activity has been expanding vigorously, with both industrial
and consumer prices continuing to rise at a substantial rate, and that
prospects are for further rapid growth and persisting inflationary pressures in the period ahead. The imbalance in U.S. international transactions worsened further in late 1967, but the new program announced
by the President should result in a considerable reduction in the deficit
this year. Following announcement of the program, foreign purchases of
gold slackened abruptly and the dollar strengthened in foreign exchange
markets. Long-term bond yields have declined in recent weeks but some
short-term interest rates have risen further. Bank credit has changed little
on balance recently as banks have disposed of Government securities to
accommodate strengthened loan demands. Growth in the money supply
has slackened and flows into time and savings accounts at bank and nonbank financial intermediaries have continued to moderate. In this situation, it is the policy of the Federal Open Market Committee to foster
financial conditions conducive to resistance of inflationary pressures and
progress toward reasonable equilibrium in the country's balance of
payments.
To implement this policy, System open market operations until the
next meeting of the Committee shall be conducted with a view to maintaining the somewhat firmer conditions that have developed in the money
market in recent weeks, partly as a result of the increase in reserve
requirements announced to become effective in mid-January; provided,
however, that operations shall be modified as needed to moderate any
apparently significant deviations of bank credit from current expectations.
Votes for this action: Messrs. Martin, Hayes,
Brimmer, Daane, Francis, Maisel, Mitchell, Robertson, Scanlon, Sherrill, Swan, and Wayne. Votes
against this action: None.
2.

Ratification of amendment to authorization for System foreign
currency operations.

At this meeting the Committee ratified the action taken by
members on December 14, 1967, amending paragraph 2 of the
authorization for System foreign currency operations to change
(1) the size of the swap arrangement with the Bank for International Settlements providing for System drawings in Swiss




115

francs, and (2) the size of the arrangement with the Swiss
National Bank, each from $250 million to $400 million equivalent, effective immediately. As indicated in the policy record for
the meeting held on December 12, 1967, these increases supplemented the enlargements of the System's swap network that had
been approved on November 27 and November 30.
Votes for ratification of this action: Messrs.
Hayes, Brimmer, Francis, Maisel, Mitchell, Scanlon,
Sherrill, Swan, and Wayne. Votes against ratification
of this action: None.
Absent at this point in meeting and not voting:
Messrs. Martin, Robertson, and Daane.

116



MEETING HELD ON FEBRUARY 6, 1968
Authority to effect transactions in System Account.

According to reports at this meeting, prospects were for continued rapid growth in over-all economic activity and for persistent inflationary pressures in the period ahead. Preliminary estimates of the Department of Commerce indicated that real GNP
had increased at an annual rate of 4.4 per cent in the fourth
quarter of 1967, the same as in the preceding quarter, and that
average prices, as measured by the GNP "deflator," had advanced
considerably. In his January budget message the President had
again proposed a 10 per cent surcharge on corporate and personal
income taxes, now to be effective on January 1 and April 1,
1968, respectively. The budget estimates indicated that even if
the tax surcharge were enacted as proposed the Government
would incur a sizable deficit in the calendar year 1968.
Average prices of industrial commodities continued to increase
at a substantial rate in January, according to preliminary estimates. Prices of farm products, which had turned up sharply in
December, rose somewhat further. The consumer price index
again advanced considerably in December, partly because retail
prices of food rose after having declined moderately for 3 months.
Growth in real GNP was expected to accelerate in the first
quarter of 1968. Prospects favored substantial increases in consumer incomes and spending, a sharp rise in business outlays on
plant and equipment, a small increase in residential construction
outlays, and—contrary to earlier expectations—some further
growth in defense expenditures. The rate of business inventory accumulation, which now appeared to have increased considerably
in the fourth quarter of 1967, was expected to rise only moderately further in the first quarter of 1968.
The worsening of the U.S. payments balance in the fourth
quarter, according to newly available information, was due in




117

large part to a marked decline in the surplus on merchandise
trade. With imports rising sharply and exports edging down, the
trade surplus in the fourth quarter was at a rate only about onethird that in the two preceding quarters and the lowest since the
fourth quarter of 1959.
The gold stock of the U.S. Treasury was reduced by $100 million in early February, mainly to cover the U.S. share of sales
made by the London gold pool in January. Although the overall atmosphere in foreign exchange markets had tended to improve in recent weeks, the Canadian dollar had come under
heavy pressure. On January 22 the Bank of Canada raised its
discount rate for the third time in 5 months, bringing the rate
to 7 per cent. Interest rates in the Euro-dollar market had declined further from the unusually high levels they had reached
in late November and December, following the devaluation of
sterling.
System open market operations since the preceding meeting
of the Committee had been directed at maintaining the somewhat
firmer conditions in the money market that had developed earlier,
although operations were complicated by large changes in the
excess reserves of country banks as reserves first flowed out of
money centers and then back again. In adapting operations to
these changes in reserve distribution, the net reserve position of
member banks was permitted to fluctuate over an unusually wide
range—from free reserves of $405 million in the statement week
ending January 10 to net borrowed reserves of $70 million in the
following week.
The Federal funds rate continued to fluctuate around 4% per
cent, and late in the period interest rates on loans by money
center banks to Government securities dealers edged up to a range
of 5 to 5lA per cent. On the other hand, interest rates on shortterm market securities—including Treasury bills, large-denomination CD's, bankers' acceptances, and commercial and finance
company paper—declined on balance during the period, in part

118



perhaps because pressures in credit markets proved to be less
intense than many participants had expected. Offering rates on
large-denomination CD's maturing in less than 6 months moved
down from the 5Vi per cent ceiling established under Regulation Q; around the turn of the year banks had been offering the
ceiling rate on CD's of all maturities. Although the market rate
on 3-month Treasury bills had been rising recently, its level on
the day before this meeting—4.91 per cent—was about 10 basis
points below that of 4 weeks earlier.
Conditions in markets for longer-term securities had been generally buoyant in recent weeks, despite deferral of congressional
action on the President's proposed income tax surcharge and new
tensions in the Far East. Yields on long-term Treasury and corporate bonds fluctuated irregularly below the peaks they had reached
in late 1967, and yields on State and local government issues declined. On January 31 the Treasury announced that it would
offer a new 7-year, 5% per cent note in exchange for Treasury
notes and bonds maturing in February, August, and November
1968, with settlement on February 15. Initial market reactions
to the offering were favorable. The Treasury also announced
that $4 billion of a 15-month note would be offered for cash subscription later in the month.
In mortgage markets yields rose further in December—reattaining the highs they had reached in November 1966—and
growth in mortgage commitments outstanding continued to moderate. Preliminary data suggested that net inflows of funds to
nonbank depositary institutions slackened further in December
and January, but that withdrawals of savings around the yearend interest- and dividend-crediting period were not as large as
many in the industry had feared.
Commercial bank credit expanded at a relatively fast pace in
January after slowing markedly in late 1967. Contributing to the
expansion were rapid growth in business loans early in the month
and bank acquisitions of tax-anticipation bills sold by the Treasury at midmonth. The bank credit proxy—daily-average mem-




119

ber bank deposits—rose from December to January at an annual
rate of about 9 per cent, near the upper end of the range that had
been projected earlier. Private demand deposits and the money
supply increased sharply before turning down after mid-January;
on the average the money supply rose at an annual rate of 8 per
cent, in contrast to the expectation of little or no change. However, Government deposits rose less than had been anticipated,
and total time and savings deposits—instead of growing relatively
slowly on the average—declined slightly. Despite the reductions
in offering rates on large-denomination CD's of shorter maturity,
the volume of CD's outstanding increased over the course of
January by nearly as much as it had declined in December.
Business loans at banks were expected to grow moderately in
February—at a rate that was below the rapid pace of December
and early January but that, as a result of enlarged business needs
for inventory financing, was above the slow rate of the preceding
autumn. Mainly because of Treasury financing operations, however, it appeared likely that total bank credit would continue to
expand at roughly the January pace; growth in the bank credit
proxy was projected at an annual rate in the 7 to 10 per cent
range if prevailing money market conditions were maintained. It
was expected that the money supply would change little, and
might possibly decline somewhat, but that growth in time and
savings deposits would resume. A rather sharp expansion was anticipated in Government deposits as a result of the Treasury's
forthcoming cash financing.
Considerable concern was expressed in the course of the Committee's discussion about recent and prospective inflationary pressures in the domestic economy and about the sharp decline in
the nation's foreign trade surplus. Against this background, a
number of members indicated that they had been disturbed by
various financial developments in January—including the unexpectedly sharp growth in the money supply and the general decline in short-term interest rates other than day-to-day money
market rates—which suggested that monetary conditions had become less restrictive. There also was widespread sentiment to the
120



effect that the growth in bank credit projected for February on
the assumption of unchanged money market conditions was larger
than desirable in the current environment. At the same time, it
was recognized that the forthcoming Treasury financing operations imposed an important constraint on monetary policy at
present.
The Committee concluded that it would be desirable to maintain firm money market conditions at this time and to seek firmer
conditions, to the extent permitted by Treasury financing, if bank
credit appeared to be expanding as rapidly as projected. The following current economic policy directive was issued to the Federal Reserve Bank of New York:
The information reviewed at this meeting indicates that over-all economic
activity has been expanding rapidly, with both industrial and consumer
prices rising at a substantial rate, and that prospects are for continuing
rapid growth and persisting inflationary pressures in the period ahead.
The imbalance in U.S. international transactions worsened further in late
1967, primarily because of a sharp reduction in the surplus on merchandise
trade. Although day-to-day money market rates have remained firm, rates
on other short-term instruments have declined recently; meanwhile, longterm bond yields have fluctuated irregularly below the peaks reached late
last year. Growth in bank credit resumed in January, reflecting both loan
expansion around the year-end and Treasury financing. The money supply
expanded sharply following earlier slackening, but flows into time and
savings accounts at bank and nonbank financial intermediaries have continued to moderate. In this situation, it is the policy of the Federal Open
Market Committee to foster financial conditions conducive to resistance
of inflationary pressures and progress toward reasonable equilibrium in the
country's balance of payments.
To implement this policy, while taking account of Treasury financing
activity, System open market operations until the next meeting of the
Committee shall be conducted with a view to maintaining firm conditions
in the money market, and operations shall be modified to the extent
permitted by Treasury financing if bank credit appears to be expanding
as rapidly as is currently projected.
Votes for this action: Messrs. Martin, Hayes, Brimmer, Daane, Francis, Maisel, Mitchell, Robertson,
Scanlon, Sherrill, Swan, and Wayne. Votes against this
action: None.




121

MEETING HELD ON MARCH 5, 1968
1. Authority to effect transactions in System Account.

Reports at this meeting indicated that over-all economic activity
was expanding rapidly and that prices were rising at a substantial
rate. The outlook was for faster expansion in real GNP in the
first two quarters of 1968 than in the latter half of 1967, and for
persisting inflationary pressures.
Consumers were expected to provide the major stimulus to
economic activity in the current half-year. It appeared likely
that disposable incomes would advance rapidly—particularly if
a tax increase were not enacted—as a result of continuing rises
in employment and wage rates and of higher social security benefits. Thus, even if personal saving remained at the unusually high
rate of 1967, marked increases in consumer spending were in
prospect.
In addition, it was anticipated that business fixed investment
would rise sharply in the first quarter and moderately in the
second and that defense spending would increase at a faster rate
than previously estimated. On the other hand, in light of conditions in mortgage markets little or no further increase was foreseen in residential construction outlays. Growth in the rate of
business inventory accumulation, which had contributed importantly to the expansion in the latter half of 1967, was expected to
slow in the first quarter and taper off in the second.
Retail sales rose substantially in the first 2 months of 1968,
according to incomplete information. Industrial production,
however, declined somewhat in January and was expected to
change little in February. The unemployment rate moved down
in January for the third successive month—to 3.5 per cent, from
3.7 per cent in December—although growth in nonfarm employment slowed from its earlier rapid pace, apparently in large part

122



because of the effect of bad weather on employment in the construction industry.
Average wholesale prices of both industrial commodities and
farm products rose considerably further in February, according
to preliminary estimates. Consumer prices continued to advance
at a substantial rate in January and were 3.4 per cent higher
than a year earlier. The recent pattern of settlements in wage
negotiations and the increase on February 1 in Federal minimum
wage rates suggested that unit labor costs would remain under
upward pressure.
Both exports and imports of the United States rose sharply in
January, but the surplus on merchandise trade fell somewhat
below the markedly reduced fourth-quarter 1967 rate. With respect to the capital account, outstanding U.S. bank credit to
foreigners declined more than seasonally and direct investment
outflows apparently were reduced by the mandatory restrictions
under the President's new balance of payments program. On balance, the deficit in U.S. international payments on the liquidity
basis of calculation remained sizable in January, and also in the
first 3 weeks of February according to tentative figures. The
deficit on the official reserve transactions basis was considerably
smaller, primarily as a result of large Euro-dollar borrowings by
U.S. banks through foreign branches.
Heavy speculative demands for gold reemerged in the London
market at the end of February and in early March, when fears
of a change in U.S. gold policy became widespread. In foreign
exchange markets, the generally improved atmosphere that had
developed in January persisted for most of February. Late in the
month, however, sterling and the Canadian dollar again came
under pressure.
The Treasury completed two major financing operations in
February. In a financing conducted during the first half of the
month, $3.8 billion of publicly held securities maturing in February, August, and November 1968 were exchanged for new 7-




123

year, 53A per cent notes. Also, the Treasury sold about $4.1
billion of new 15-month, 55/s per cent notes to the public for
cash payment on February 21; commercial banks, which were
permitted to make payment in full for these notes through credits
to Treasury tax-and-loan accounts, initially subscribed for the
bulk of the issue. Government securities dealers made good
progress in distributing the 7-year notes they had acquired, while
bank selling of the new 15-month issue appeared to be relatively
light and was readily absorbed by the market. In February the
Treasury also announced that it was resuming the $100 million
addition to each weekly offering of 3-month bills.
Growth in bank credit and the money supply had moderated
on balance since November 1967, when the System had begun
to shift monetary policy toward a posture of somewhat greater
restraint. In the 3 months through February the bank credit
proxy—daily-average member bank deposits—had expanded at
an annual rate of 6 per cent, compared with a rate of nearly 11.5
per cent over the preceding 7 months; and the money supply had
grown at an annual rate of 4 per cent, about half that of the
earlier period. For February, however, the bank credit proxy
was estimated to have increased at an annual rate of 10 per cent.
Both loans and investments of banks declined in the first part of
February, but bank credit expanded sharply later in the month
as a result of bank acquisitions of the new 15-month notes offered
by the Treasury. The February advance in bank credit was at the
upper end of the range projected at the time of the Committee's
previous meeting and slightly faster than the pace in January,
when growth was also stimulated by a large Treasury cash financing. Private demand deposits and the money supply, which had
not been expected to grow in February, increased somewhat but
substantially less than in January.
Time and savings deposits of commercial banks, after declining slightly in January, expanded in February at a rate below
that of the summer and early fall of 1967. Most of the rise was

124



in consumer-type deposits; with business loan demands not particularly strong, banks were not aggressive in seeking to expand
their outstanding large-denomination CD's. Some banks were
now offering the SVi per cent ceiling rate on certificates with
maturities as short as 4 months—in contrast to a 6-month minimum 4 weeks earlier—but rates on shorter-maturity CD's remained below the ceiling.
With no major Treasury financings in prospect for March,
growth in the bank credit proxy was projected to moderate in
that month to an annual rate in the range of 5 to 7 per cent,
assuming no change in prevailing money market conditions. It
was thought likely that somewhat firmer money market conditions would have relatively little effect on bank credit expansion
in March. Projections for April suggested some further moderation in bank credit growth if money market conditions were unchanged and a quite low growth rate if such conditions were
somewhat firmer, unless demands for business loans strengthened
considerably or the Treasury decided to undertake a major financing. Time and savings deposits were projected to expand in
March at about the February pace, and private demand deposits
and the money supply were expected to grow somewhat more
rapidly than in the preceding month.
System open market operations had been directed at maintaining stable conditions in the money market during the first
part of February. The Treasury's financing operations were under
way in that period and staff estimates of bank credit growth for
the month were near the lower end of the range that had been projected at the previous meeting. Subsequently, after estimates of
bank credit growth had been revised upward, operations were
modified to achieve somewhat firmer conditions in the money
market. The net reserve position of member banks shifted to
average net borrowed reserves of about $95 million in the last
two statement weeks of February from average free reserves of
$120 million in the first 2 weeks, and average member bank bor-




125

rowings rose by about $110 million, to about $425 million. The
Federal funds rate, which initially had fluctuated for the most
part in a range of 4% to 4% per cent, later was predominantly
in a range of 43A to 4% per cent and at times was as high as 5
per cent.
Market rates on Treasury bills had risen since the preceding
meeting of the Committee, but the advance was moderated by
sustained nonbank demand for bills and, late in the period, by
sizable purchases by foreign central banks. The 3-month bill rate,
at 4.99 per cent on the day before this meeting, was up 8 basis
points over the interval. Rates on most other short-term market
instruments also had edged higher.
In longer-term debt markets the generally buoyant conditions
of January had been succeeded by a more cautious atmosphere.
Conditions in these markets were affected by a variety of conflicting factors—including expectations of further tightening of
monetary policy, the belief that prospects for fiscal restraint had
been somewhat enhanced recently, and continuing uncertainties
relating to developments in Vietnam. Yields on Treasury notes
and bonds had changed little on balance in the last 4 weeks, but
advances in yields on corporate and State and local government
bonds, particularly the latter, had resumed. While the calendar
of new publicly offered corporate bonds remained relatively light,
continuing additions were being made to an already large volume
of prospective offerings of municipal securities.
Conditions in markets for residential mortgages appeared to
have changed little in January, after tightening for some time.
Primary market yields on conventional new-home mortgages rose
slightly, but secondary market yields on FHA-insured home
mortgages remained unchanged at the record level reattained a
month earlier. The deposit experience of savings and loan associations and of mutual savings banks was mixed in January, but in
general it apparently was better than many observers had anticipated.

126



The Committee decided that greater monetary restraint was
desirable at this time in light of the current and prospective pace
of economic expansion, persisting inflationary pressures, and the
sharply reduced surplus on U.S. merchandise trade. Specifically,
the members agreed that it would be appropriate to seek somewhat firmer conditions in the money market than had been attained in recent weeks, and to seek still firmer conditions if bank
credit appeared to be expanding more rapidly than projected.
In the course of the discussion a number of members expressed the view that a discount rate increase should be considered by the System soon. At the same time, it was noted that
action under the Board's Regulation Q to increase the ceiling
rate on large-denomination CD's might be needed at some point
to avoid an undesirably large reduction in the outstanding volume of such CD's.
The following current economic policy directive was issued
to the Federal Reserve Bank of New York:
The information reviewed at this meeting indicates that over-all economic activity has been expanding rapidly, with both industrial and consumer prices rising at a substantial rate, and that prospects are for continuing rapid growth and persisting inflationary pressures in the period
ahead. The foreign trade surplus has been at a sharply reduced level in
recent months and the imbalance in U.S. international payments remains
serious. Interest rates on most types of market instruments have edged up
recently, following earlier declines. While growth in bank credit has moderated on balance during the past 3 months, bank credit expansion has
been substantial in February, mainly reflecting Treasury financings. Growth
in the money supply slowed in February, while flows into bank time and
savings accounts expanded moderately. In this situation, it is the policy of
the Federal Open Market Committee to foster financial conditions conducive to resistance of inflationary pressures and progress toward reasonable equilibrium in the country's balance of payments.
To implement this policy, System open market operations until the next
meeting of the Committee shall be conducted with a view to attaining
somewhat firmer conditions in the money market; provided, however, that




127

operations shall be further modified if bank credit appears to be expanding
more rapidly than is currently projected.
Votes for this action: Messrs. Martin, Hayes,
Brimmer, Ellis, Galusha, Hickman, Kimbrel, Maisel,
Mitchell, Robertson, and Sherrill. Votes against this
action: None.
Absent and not voting: Mr. Daane.
2. Amendment of authorization for System foreign currency
operations.

The Committee amended paragraph 3 of the authorization for
System foreign currency operations in two respects. The phrase
"Unless otherwise expressly authorized by the Committee" was
added at the beginning of the first sentence of the paragraph, before language specifying that all foreign currency transactions
should be at prevailing market rates. Such a qualification had
been included at the corresponding point in the Committee's
original authorization regarding foreign currency transactions
adopted in February 1962, and had been inadvertently omitted
when the previous instruments governing foreign currency operations were reformulated in June 1966. The effect of restoring the
qualification was to simplify procedures in the event the Committee concluded that because of special circumstances a particular transaction should be undertaken at a rate different from that
prevailing in the market.
At the same time, the second sentence of the paragraph, which
had read as follows, was deleted:
Insofar as is practicable, foreign currencies shall be purchased through
spot transactions when rates for those currencies are at or below par and
sold through spot transactions when such rates are at or above par, except
when transactions at other rates (i) are specifically authorized by the Committee, (ii) are necessary to acquire currencies to meet System commitments, or (iii) are necessary to acquire currencies for the Stabilization
Fund, provided that these currencies are resold forward to the Stabilization
Fund at the same rate.

128



Restrictions on spot sales of foreign currencies at prices below
par and on spot purchases at prices above par had been included
in the Committee's foreign currency instruments since their
original adoption in February 1962. The Committee now concluded that such restrictions were unnecessary, in light of the
limitations on the purposes for which foreign currency operations could be undertaken given in paragraph 2 of the Committee's foreign currency directive. The restrictions also were considered undesirable on the grounds that spot sales of foreign
currencies at prices below par and spot purchases at prices above
par might be useful, on occasion, in furthering the purposes
specified in the directive.
As amended, paragraph 3 of the authorization for System
foreign currency operations read as follows:
Unless otherwise expressly authorized by the Committee, all transactions
in foreign currencies undertaken under paragraph 1 (A) above shall be at
prevailing market rates and no attempt shall be made to establish rates that
appear to be out of line with underlying market forces.

Except for the changes resulting from these amendments, the
Committee renewed the authorization in its existing form.
Votes for this action: Messrs. Martin, Hayes,
Brimmer, Ellis, Galusha, Hickman, Kimbrel, Maisel,
Mitchell, Robertson, and Sherrill. Votes against this
action: None.
Absent and not voting: Mr. Daane.
3. Review of continuing authorizations.

This being the first meeting of the Federal Open Market Committee following the election of new members from the Federal
Reserve Banks to serve for the year beginning March 1, 1968,
and their assumption of duties, the Committee followed its customary practice of reviewing all of its continuing authorizations




129

and directives. The action taken with respect to the authorization
for System foreign currency operations has been described in
the preceding portion of the record for this date.
The Committee reaffirmed its continuing authority directive
for domestic open market operations and its foreign currency
directive in the forms in which both were outstanding at the beginning of the year 1968.
Votes for these actions: Messrs. Martin, Hayes,
Brimmer, Ellis, Galusha, Hickman, Kimbrel, Maisel,
Mitchell, Robertson, and Sherrill. Votes against these
actions: None.
Absent and not voting: Mr. Daane.

130



MEETING HELD ON MARCH 14, 1968
1. Authority to effect transactions in System Account.

In the period since the preceding meeting of the Committee
speculative demands for gold in London and other foreign
markets had swelled to massive proportions. On the day of this
meeting, the British authorities had temporarily closed the
London gold market and had declared a Bank Holiday for the
following day; the Board of Governors had approved an increase
in Federal Reserve Bank discount rates from 4Vi to 5 per cent,
effective March 15; and arrangements were made for central
bank governors of countries that had been actively participating
in the London gold pool to meet in Washington on Saturday
and Sunday, March 16 and 17, to consider their future policy
with respect to gold. The purpose of this meeting of the Committee, which was held by telephone, was to review recent
developments and make such changes in the Committee's policy
instruments as appeared to be needed in light of those developments.
The Committee agreed that its current policy directive should
be modified to permit adaptation of open market operations to
the changed circumstances brought about by recent events,
including the discount rate action. After discussion, the following
current economic policy directive was issued to the Federal
Reserve Bank of New York:
In light of recent international financial developments, System open
market operations until the next meeting of the Committee shall be conducted with a view to maintaining firm but orderly conditions in the
money market, taking into account the effects of increases in Federal
Reserve discount rates.
Votes for this action: Messrs. Martin, Brimmer,
Daane, Ellis, Hickman, Maisel, Mitchell, Robertson, Sherrill, Clay, Coldwell, and Treiber. Votes
against this action: None.




131

Absent and not voting: Messrs. Hayes, Galusha,
and Kimbrel. (Messrs. Treiber, Clay, and Coldwell,
respectively, voted as their alternates.)
2. Amendment to authorization for System foreign currency
operations.

At this meeting the Committee authorized the Special Manager
to undertake negotiations looking toward increases, up to specified limits, in a number of the System's reciprocal currency
arrangements, on the understanding that any such enlargements
—and the corresponding amendments to paragraph 2 of the
authorization for System foreign currency operations—would
become effective upon a determination by Chairman Martin that
they were in the national interest. Specifically, negotiations
were authorized for increases up to varying maximum amounts,
ranging from $100 million to $400 million equivalent, in the
System's two swap arrangements with the Bank for International
Settlements and in the arrangements with the central banks of
Belgium, Canada, Italy, Japan, the Netherlands, Sweden, and
Switzerland.
Votes for this action: Messrs. Martin, Brimmer,
Daane, Ellis, Hickman, Sherrill, Clay, Coldwell,
and Treiber. Votes against this action: Messrs.
Maisel, Mitchell, and Robertson.
Absent and not voting: Messrs. Hayes, Galusha,
and Kimbrel. (Messrs. Treiber, Clay, and Coldwell,
respectively, voted as their alternates.)

This action was taken on the ground that enlargements of
the swap arrangements should prove helpful in coping with flows
of short-term funds in foreign exchange markets if such flows
became heavy in the current highly uncertain environment. The
Committee concurred in the view of the Special Manager that
under existing conditions it would be desirable if negotiated
enlargements were to become effective immediately upon a

132



determination by the Chairman that they were in the national
interest, thus obviating the need for further Committee action.
Messrs. Maisel, Mitchell, and Robertson dissented from this
action because of reservations about the desirability, under
current circumstances, of authorizing a substantial enlargement
of the swap network before discussions were held with monetary
authorities of other countries on means for coordinating international financial policies. They favored postponing consideration
of increases in the swap arrangements until after the forthcoming
week-end meeting of central bank governors.
Subsequent to this meeting, on March 16, available members
of the Committee (Messrs. Martin, Brimmer, Daane, Maisel,
Mitchell, Robertson, and Treiber, the last voting as alternate
for Mr. Hayes) voted unanimously to authorize the Special
Manager to undertake negotiations looking toward an increase
of $250 million equivalent in the System's swap arrangement
with the German Federal Bank, on the understanding that any
such increase, and the corresponding amendment to the authorization for System foreign currency operations, would become
effective upon a determination by Chairman Martin that it was
in the national interest. Messrs. Maisel and Robertson indicated
that they continued to hold the general reservations concerning
swap line increases that they had expressed on March 14,
but that they had voted favorably on this action because—
inasmuch as the Committee had taken the action it did on that
date—they thought it appropriate to include the swap line with
the German Federal Bank in an enlargement of the swap network.
On March 17, available members of the Committee (Messrs.
Martin, Brimmer, Daane, Ellis, Galusha, Maisel, Mitchell, Robertson, Sherrill, and Treiber, the last voting as alternate for Mr.
Hayes) voted unanimously to authorize the Special Manager
to undertake negotiations looking toward an increase of $500




133

million equivalent in the System's swap arrangement with the
Bank of England, subject to the same understanding as in the
actions taken on March 14 and 16.
On March 17 Chairman Martin determined that increases in
the System's swap arrangements with the foreign banks listed
below, in the indicated amounts (millions of dollars equivalent),
were in the national interest:
Bank of Canada
Bank of England
German Federal Bank
Bank of Japan
Netherlands Bank
Bank of Sweden
Swiss National Bank
Bank for International Settlements:
System drawings in Swiss francs
System drawings in other authorized
European currencies

250
500
250
250
175
50
200
200
400

Accordingly, effective March 17, 1968, paragraph 2 of the
authorization for System foreign currency operations was amended
to read as follows:
2. The Federal Open Market Committee directs the Federal Reserve
Bank of New York to maintain reciprocal currency arrangements ("swap"
arrangements) for System Open Market Account for periods up to a
maximum of 12 months with the following foreign banks, which are
among those designated by the Board of Governors of the Federal Reserve System under Section 214.5 of Regulation N, Relations with Foreign
Banks and Bankers, and with the approval of the Committee to renew
such arrangements on maturity:

134



Foreign bank
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements:
System drawings in Swiss francs
System drawings in authorized European
currencies other than Swiss francs




Amount of
arrangement
(millions of
dollars equivalent)
100
225

1,000
100

2,000
100

1,000
750

1,000
130
400
100
250
600
600

1,000

135

MEETING HELD ON APRIL
1.

2, 1968

Authority to effect transactions in System Account.

The domestic economic situation continued to be characterized
by substantial increases in over-all activity and prices. Real GNP
was estimated to have grown rapidly in the first quarter and another large rise appeared in prospect for the second quarter.
From the preceding autumn, average prices of industrial commodities had advanced through March at an annual rate of
about 4.5 per cent, and average consumer prices had risen
through February at a rate of nearly 4 per cent. The outlook
was for persisting inflationary pressures in the period ahead.
Industrial production was little changed in February; but according to tentative estimates, it had increased moderately in
March. Nonfarm employment rose sharply in February, but the
labor force also expanded markedly and the unemployment rate
increased to 3.7 per cent from 3.5 per cent in January. Weekly
retail sales figures for early March suggested that the sharp
resurgence of consumer expenditures, under way since the beginning of the year, was continuing.
Consumer spending was expected to increase considerably
further in the second quarter, even if a tax increase were enacted,
because of the prospective rapid gains in income. In addition,
defense outlays were running substantially above the levels that
had been anticipated earlier, as had been noted by the President
in the March 31 address in which he announced the de-escalation
of bombing in North Vietnam. The President also indicated that
estimates of defense expenditures in the fiscal year 1969 had been
revised upward.
Apart from the consumer and defense categories, changes in
activity in broad economic sectors were expected to be relatively
moderate in the second quarter. It appeared likely that residential
construction activity, which had risen slightly in the first quarter,

136



would change little further. Some increase in the rate of business
inventory investment was anticipated, following an apparent slowing in accumulation in the first quarter. On the other hand,
growth in fixed investment was expected to level off after a substantial rise in the early months of the year. For 1968 as a whole
businesses planned to increase their spending on new plant and
equipment by 6 per cent, according to a recent Commerce-SEC
survey, compared with a rise in actual outlays of 2 per cent in
1967. The survey indicated that capital spending would increase
moderately from the first to the second half of 1968.
Uncertainties continued in the markets for gold and foreign
exchange, but the heavy speculative activity of early March
abated following the agreement on gold policy reached at the
midmonth meeting of gold pool members in Washington. Speculation slackened further after the March 19 announcement by the
British Government of a broad program designed to restrict
growth of consumer incomes and spending, and after agreement
was reached regarding special drawing rights (SDR's) in the
International Monetary Fund at the month-end meeting in
Stockholm of major industrial countries comprising the "Group
of Ten." On March 21 the Bank of England lowered its discount
rate from 8 to IVi per cent. Gold holdings of the U.S. Treasury
were reduced in March by $1.4 billion, largely as a result of
settlement of the U.S. share of sales by the gold pool before
operations of the pool were discontinued at midmonth and of
sales to foreign central banks.
Incomplete data on the U.S. balance of payments in the first
quarter suggested that the deficit was large on both the liquidity
and official settlements bases of calculation, although not so
large on either basis as in the fourth quarter of 1967. There had
been improvement in flows in some important elements of the
capital account, but the surplus on merchandise trade apparently
had remained near the low level to which it had fallen in the
preceding quarter.




137

System open market operations in early March—between the
meetings of the Committee held on March 5 and March 14—had
been directed at achieving somewhat firmer conditions in the
money market. Subsequently, operations were directed at confirming the still more restrictive monetary policy signaled by
the midmonth increase in the discount rate from AVi to 5 per
cent, while maintaining orderly market conditions. In the last
two statement weeks of March net borrowed reserves averaged
about $370 million, compared with averages of about $240
million in the first half of the month and of about $90 million
in the last half of February. The Federal funds rate moved up
to a range around 5 per cent before mid-March and then advanced to a range around 5VA per cent.
Interest rates on most types of market securities fluctuated
widely during March but rose on balance. These rate developments reflected events relating to gold, shifts in sentiment regarding prospects for Vietnam peace negotiations and for domestic
fiscal action, and the firming of monetary policy. Yields on Treasury securities of all maturities rose sharply until midmonth, when
uncertainties in international financial markets were most intense, and subsequently declined somewhat. The swing in the
market rate on 3-month Treasury bills was particularly marked;
from an early-March level of close to 5 per cent, the rate rose
to a peak of 5.45 per cent on March 14 and then fell irregularly
to 5.13 per cent on April 1, the day before this meeting. Most
other short-term market interest rates were considerably higher
on April 1 than they had been 4 weeks earlier, and there had
been sizable net increases in yields on long-term corporate and
municipal securities.
Growth in bank credit slowed considerably in March, a month
in which the Treasury undertook no major financing operations.
The bank credit proxy—daily-average member bank deposits—
was estimated to have expanded at an annual rate of about 4 per
cent, compared with 10 per cent in February. Outstanding busi-

138



ness loans at banks increased somewhat, but security loans and
holdings of Government securities declined substantially.
With short-term interest rates rising on balance, by mid-March
banks were generally offering the ceiling rate of 5Vi per cent
on large-denomination CD's of all maturities; earlier, the offering
rate for shorter-term certificates had been below the ceiling.
Nevertheless, banks experienced a substantial decline in outstanding CD's during March. The pace of growth in consumertype time and savings deposits increased somewhat, however, and
total time and savings deposits rose slightly more in March than
in the preceding month. Government deposits declined, and
private demand deposits increased by a relatively small amount.
The money supply grew at a faster rate than in February, with
more than half of the expansion reflecting an increase in currency
holdings of the public.
In the 4 months through March, time and savings deposits and
the money supply had grown at annual rates of about 6.5 and
3.5 per cent, respectively, and the bank credit proxy at a rate
of about 5.5 per cent—in each case less than half the rate of
the preceding 7 months. Inflows of funds to savings and loan
associations and mutual savings banks also had been substantially
curtailed in recent months.
Bank credit was projected to change little in April and to
expand moderately in May—on the assumptions that the Treasury would raise a substantial volume of new cash in connection
with its May refunding but would not undertake a major financing earlier, and that money market conditions would remain unchanged. In an alternative projection, in which a slight finning
of money market conditions was assumed, the annual rate of
change in the bank credit proxy in April was estimated in a
range of + 1 to —3 per cent.
It was expected that at the currently higher levels of market
interest rates banks would find it more difficult in April to attract
consumer-type time and savings deposits and that the banks




139

would experience a further run-off of CD's of greater than seasonal dimensions. As a result, total time and savings deposits
were projected to expand at a relatively low rate in April. On the
other hand, growth in the money supply was expected to be more
rapid than in March, largely as a consequence of a sizable decline anticipated in Government deposits.
The Committee agreed that continued firming of monetary
policy was desirable in light of present and prospective inflationary pressures, the highly unfavorable developments of recent
months in U.S. foreign trade, the persisting uncertainties in international financial markets, and the still uncertain outlook for
fiscal action. Some members expressed the view that circumstances might soon require consideration by the System of a
further increase in the discount rate.
At the same time, various reasons were advanced for moving
cautiously in firming further through open market operations at
present. These included some improvement in prospects for
restrictive fiscal action by Congress; it appeared likely that the
Senate would take affirmative action shortly on a measure providing for an increase in taxes and a reduction in budgeted Federal
expenditures. In addition, it was noted that a considerable degree
of monetary restraint had already been achieved, the effects of
which were still unfolding, and that there had been insufficient
time as yet to determine the economic implications of various
recent events, including the de-escalation of bombing in North
Vietnam. It also was noted that a marked further firming of
monetary policy at this time might have undesirably large
adverse effects on flows of funds to financial intermediaries. In
this connection, some members foresaw a possible need at a
later point for the Board to raise ceiling rates on large-denomination CD's, although none indicated that he thought such action
was desirable immediately.
At the conclusion of the discussion the Committee agreed
that slightly firmer money market conditions should be sought,
140



but that operations should be modified if unusual liquidity pressures developed or if the change in bank credit appeared to be
deviating significantly in either direction from the projection. The
following current economic policy directive was issued to the
Federal Reserve Bank of New York:
The information reviewed at this meeting indicates that over-all economic activity has expanded at a very rapid pace in early 1968, with
prices rising substantially, and that prospects are for a continuing rapid
advance in activity and persisting inflationary pressures in the period
ahead. Since late fall, growth rates of bank credit, the money supply, and
time and savings accounts at financial institutions have moderated considerably. Speculative activity in gold and foreign exchange markets,
which was intense in early March, abated after the midmonth agreement
on gold policy by gold pool members and appears to have slackened further following the Stockholm agreement regarding Special Drawing
Rights. The foreign trade surplus, however, has remained at a sharply reduced level in recent months and the imbalance in U.S. international payments continues to be a matter of serious concern. Most market interest
rates have fluctuated widely, although rising on balance, in reaction to
international financial developments, the firming of monetary policy, and
uncertainties regarding military and fiscal prospects. In this situation, it is
the policy of the Federal Open Market Committee to foster financial conditions conducive to resistance of inflationary pressures and attainment of
reasonable equilibrium in the country's balance of payments.
To implement this policy, System open market operations until the next
meeting of the Committee shall be conducted with a view to attaining
slightly firmer conditions in the money market; provided, however, that
operations shall be modified if bank credit appears to be deviating significantly from current projections or if unusual liquidity pressures should
develop.
Votes for this action: Messrs. Martin, Hayes,
Brimmer, Daane, Ellis, Galusha, Hickman, Kimbrel, Maisel, Mitchell, Robertson, and Sherrill.
Votes against this action: None.




141

2.

Ratification of amendments to authorization for System
foreign currency operations.

At: this meeting the Committee ratified the actions taken by
members on March 16 and 17, relating to the System's swap
arrangements with the German Federal Bank and the Bank of
England. As indicated in the policy record for March 14, 1968,
the members authorized the Special Manager to undertake negotiations looking toward increases of $250 million equivalent and
$500 million equivalent, respectively, in the two arrangements,
on the understanding that any such increases and the corresponding amendments to paragraph 2 of the authorization for System
foreign currency operations would become effective upon a
determination by Chairman Martin that they were in the national
interest. The Chairman made such a determination on March
17, 1968.
Votes for ratification of these actions: Messrs.
Martin, Hayes, Brimmer, Daane, Ellis, Galusha,
Hickman, Kimbrel, Maisel, Mitchell, Robertson,
and Sherrill. Votes against ratification of these actions: None.

142



MEETING HELD ON APRIL 19, 1968
Authority to effect transactions in System Account.

On the day before this meeting, the Board of Governors of the
Federal Reserve System had approved an increase in Federal
Reserve Bank discount rates from 5 to 5Vi per cent and had
raised the maximum rates payable by member banks on new
large-denomination CD's having maturities of 60 days or more.1
Both actions were effective on the day of this meeting. Following
the announcement of these actions, interest rates advanced in
domestic financial markets—with the market rate on 3-month
Treasury bills rising about 20 basis points to around 5.55 per
cent—and in foreign exchange markets the dollar strengthened
against most currencies. The purpose of today's meeting, which
was held by telephone, was to consider the need for revision of
the Committee's current economic policy directive in light of
yesterday's actions.
The Committee agreed that open market operations in the
interval until its next scheduled meeting should be directed at
achieving firmer money market conditions in keeping with the
higher discount rate, while facilitating orderly market adjustments to the increase in that rate. The following current economic policy directive was issued to the Federal Reserve Bank
of New York:
1
By amendment to Regulation Q the following schedule of maximum rates
payable by member banks on CD's of $100,000 or more was adopted:

Maturity
Maximum rate
(days)
(per cent)
30- 59
SVi
60- 89
53A
90-179
6
180 and over
6V4
The maximum rate payable previously had been 5Vi per cent for all maturities.




143

System open market operations until the next meeting of the Committee
shall be conducted with a view to achieving firmer but maintaining orderly
conditions in the money market, while facilitating market adjustments to
the increase in Federal Reserve discount rates.
Votes for this action: Messrs. Martin, Hayes,
Brimmer, Daane, Ellis, Galusha, Hickman,
Kimbrel, Maisel, Mitchell, and Robertson.
Votes against this action: None.
Absent and not voting: Mr. Sherrill.

144



MEETING HELD ON APRIL 3 0 , 1968
1. Authority to effect transactions in System Account.

Over-all economic activity had expanded at a very rapid pace
thus far in 1968 and prices had risen substantially. The outlook
was for continued rapid expansion in activity and persisting
inflationary pressures.
In the first quarter, according to preliminary Department of
Commerce estimates, real GNP advanced at a 6 per cent annual
rate and average prices—as measured by the GNP deflator—at
a 4 per cent annual rate. Defense spending and business capital
outlays expanded considerably, and outlays on residential construction increased moderately. Most of the advance in GNP,
however, reflected a sharp rise in consumer expenditures; personal income increased at an unusually rapid rate in the quarter,
and the percentage of income saved fell below the unusually high
figure of the preceding quarter. Partly because of the large increase in consumer expenditures, the rate of business inventory
accumulation declined markedly.
In March nonfarm employment rose substantially further, and
the unemployment rate edged down to 3.6 per cent from 3.7 per
cent in February. Industrial production increased moderately,
and retail sales continued to advance rapidly. In early April, however, retail sales apparently were adversely affected by civil disorders in many cities.
The consumer price index rose considerably further in March
to a level about 4 per cent above a year earlier. With the cost of
living advancing at a rapid pace, settlements in recent wage negotiations had provided for increases in wages and fringe benefits
of 6 per cent or more per year. The rise in average prices of
industrial commodities moderated in both March and April,
mainly because of large declines for a few major industrial
materials. Average prices of farm products changed relatively
little in the 2 months.




145

It appeared likely that in the second quarter real GNP would
advance as fast as or faster than in the first quarter and that
average prices would continue upward at about the first-quarter
pace. In prospect were further large rises in consumer income
and spending and another substantial increase in defense outlays.
It was expected that business capital spending and outlays on
residential construction would level off, but that business inventory accumulation would rebound from its low first-quarter
rate,,
Since the establishment of the two-market system for gold on
March 17, the price of gold in the private market had for the
most part ranged between $37 and $40 per ounce. The volume
of foreign official gold purchases from the U.S. Treasury had
increased considerably in recent weeks.
The deficit in the U.S. balance of payments in the first quarter
now appeared to have been smaller than estimated earlier and
considerably smaller than in the fourth quarter of 1967. The
surplus on merchandise trade was reduced further in the first
quarter from the low level to which it had fallen in late 1967; in
March, when exports declined largely because of a longshoremen's strike in New York, U.S. foreign trade was in deficit. The
deterioration in the trade account, however, was more than offset
by a marked improvement in capital transactions, reflecting in
part; a net reflow of U.S. bank credits during the quarter that was
about as large as the foreign credit restraint program was intended to achieve over the full year. The outlook was for some
recovery in the trade account but for substantial deterioration in
the capital account—especially in view of the likelihood that the
reflow of bank credit and certain other favorable first-quarter
capital movements would not be sustained.
System open market operations had been directed toward
achieving slightly firmer conditions in the money market following the meeting of the Committee on April 2. After the increase
in Federal Reserve Bank discount rates from 5 to 5V4 per cent
effective April 19 and the meeting of the Committee on that day,

146



operations had been directed at achieving still firmer money
market conditions while facilitating orderly market adjustments
to the higher discount rate. In the first part of April the effective
rate on Federal funds moved up to a range of 5V£ to 5% per
cent, and subsequently it rose to a range around 6 per cent. Net
borrowed reserves of member banks averaged $335 million in
the 4 weeks ending April 24, compared with an average of about
$310 million in March; and average borrowings of member
banks increased to about $690 million in the latest 4 weeks from
about $650 million in the earlier period.
Interest rates on most types of short- and intermediate-term
market securities rose substantially over the course of April, in
part as a result of the increase in discount rates and the firming
of money market conditions. The market rate on 3-month
Treasury bills, at 5.48 per cent on the day before this meeting,
was 14 basis points above its level on April 18 and 35 basis
points higher than on April 1. Yield changes were more irregular
in capital markets, where investor sentiment was influenced by
fluctuating prospects for fiscal action and for Vietnam peace
negotiations, but since mid-April long-term yields in general had
also been rising. Several large additions to the April and May
calendar of public offerings of corporate bonds and the continuation of a relatively large volume of new issues of municipal
bonds contributed to upward pressures on yields of such securities.
The Treasury was expected, on the day following this meeting,
to announce the terms on which it would refund securities maturing in mid-May, of which about $4 billion were held by the
public. Estimates suggested that the Treasury would have to
raise a substantial amount of new cash before the end of the
fiscal year. It was thought likely that some of this would be
raised in connection with the May refunding, although the
amount was uncertain, and that further cash financing would be
undertaken in June.




147

Interest rates on new-home mortgages, which had changed
little in February, edged up in March to postwar highs. Net inflows of funds to nonbank depositary institutions had improved
somewhat in February and March, but in the 4 months through
March they were at an annual rate about one-third less than in
the preceding 7 months. Although withdrawals during the
interest- and dividend-crediting period in late March and early
April were smaller than many observers had anticipated, net
inflows in the period shortly thereafter apparently were not as
large as usual.
Commercial bank credit, as measured by the bank credit proxy
—daily-average member bank deposits—was estimated to have
declined at an annual rate of 3.5 per cent in April. Business loans
outstanding, which had begun to expand more rapidly after midMarch, increased substantially in April. However, banks continued to liquidate their holdings of U.S. Government securities.
They also reduced the pace at which they acquired other securities, notably municipal obligations. Following the April 19 increase in the discount rate, commercial banks raised their prime
lending rate from 6 to 6Vi per cent.
The money supply increased in April at a pace considerably
above that of earlier months of the year. Private demand deposits rose sharply as U.S. Government deposits declined, and
currency holdings of the public continued to expand at a higherthan-normal rate. Total time and savings deposits of banks were
estimated to have increased relatively little in April; with shortterm interest rates rising, inflows of consumer-type time and savings deposits slackened and the volume of large-denomination
CD's outstanding contracted substantially. The CD run-off was
concentrated in the first half of the month, before offering rates
were increased under the higher ceilings that became effective on
April 19. By the month-end offering rates were at the new maximum levels for shorter-term CD's but were somewhat below the
ceilings for longer-term certificates.

148



In the 5 months through April the bank credit proxy had
grown at an annual rate of 3.7 per cent, about one-third of the
rate for the preceding 7 months. In the same period commercial
bank time and savings deposits had expanded at a rate of 5.5
per cent, less than two-fifths of the earlier pace; and the money
supply had grown at a 5.6 per cent rate, about two-thirds of that
prevailing earlier.
Changes in bank credit in May and June were expected to
depend in part on the pattern of Treasury financing operations.
On the assumptions that prevailing money market conditions
would be maintained and that the Treasury would raise only a
moderate amount of new cash in connection with the May refunding—meeting the bulk of its residual needs for the fiscal
year 1968 in June—the annual rate of change in the bank credit
proxy was projected in a range of —2 to + 2 per cent in May
and in a range of + 4 to + 6 per cent in June. On the same
assumptions, U.S. Government deposits were projected to decline
substantially further in May and private demand deposits and
the money supply to increase rapidly, although not so rapidly
as in April. It was expected that banks would expand their outstanding CD's somewhat, but that consumer-type time and savings deposits would continue to grow at a relatively slow pace.
The Committee agreed that the Treasury's forthcoming refunding operation precluded a change in monetary policy at this time.
Although members expressed concern about persisting inflationary pressures and the recent worsening in the U.S. foreign trade
balance, a number indicated that they would have favored no
change in policy at present even if Treasury financing were not
in prospect. Among the reasons they advanced were the considerable degree of restraint already achieved by recent monetary
policy actions, the effects of which were still in train; and the
view that prospects for restrictive fiscal action had improved. At
the same time, the desirability was noted of avoiding any tendency toward relaxation in the degree of money market firmness.




149

The Committee concluded that the firmer conditions now prevailing in the money market should be maintained, with the
proviso that operations should be modified, insofar as permitted
by the Treasury financing, if bank credit appeared to be deviating
significantly from the projection. It was understood that allowance would be made in interpreting this proviso for any substantial difference between the amount of new cash the Treasury
actually raised in connection with the May refunding and the
amount assumed in the projection.
The following current economic policy directive was issued to
the Federal Reserve Bank of New York:
The information reviewed at this meeting indicates that over-all economic activity has expanded at a very rapid pace thus far in 1968, with
prices rising substantially, and that prospects are for a continuing rapid
advance in activity and persisting inflationary pressures in the period
ahead. Since late fall, growth rates of bank credit, the money supply, and
time and savings accounts at financial institutions have on balance moderated considerably. Market interest rates have risen in recent weeks,
partly in reaction to the firming of monetary policy including the further
increase in Federal Reserve discount rates. The U.S. foreign trade balance
has worsened further, and the international payments position of the
United States continues to be a matter of serious concern. In this situation,
it is the policy of the Federal Open Market Committee to foster financial
conditions conducive to resistance of inflationary pressures and attainment
of reasonable equilibrium in the country's balance of payments.
To implement this policy, while taking account of Treasury financing
activity, System open market operations until the next meeting of the
Committee shall be conducted with a view to maintaining the firmer conditions prevailing in the money market; provided, however, that operations shall be modified, to the extent permitted by Treasury financing, if
bank credit appears to be deviating significantly from current projections.
Votes for this action: Messrs. Martin, Hayes,
Brimmer, Daane, Ellis, Galusha, Kimbrel, Maisel,
Robertson, and Sherrill. Vote against this action:
Mr. Hickman.
Absent and not voting: Mr. Mitchell.

150



In dissenting from this action, Mr. Hickman expressed the
view that the recent upward adjustment of interest rates had
been less than contemplated under the policy directive the Committee had issued at its April 19 meeting, and less than was desirable in view of the inflationary pressures in the economy. He
agreed that the prospective Treasury financing precluded substantial firming of money market conditions before the Committee's next meeting. Nevertheless, he thought that firmer conditions should be sought, if and when feasible after the Treasury
financing had been completed, on the understanding that the
stance of monetary policy would be reexamined should fiscal
action be taken.
2. Amendment to authorization for System foreign currency
operations.

The Committee amended paragraph 1B(3) of the authorization
for System foreign currency operations to increase, from $200
million to $250 million, the limit on authorized System Account
holdings of sterling purchased on a covered or guaranteed basis.
With this amendment, the first paragraph of the authorization
read as follows:
1. The Federal Open Market Committee authorizes and directs the
Federal Reserve Bank of New York, for System Open Market Account,
to the extent necessary to carry out the Committee's foreign currency
directive:
A. To purchase and sell the following foreign currencies in the form
of cable transfers through spot or forward transactions on the open market
at home and abroad, including transactions with the U.S. Stabilization
Fund established by Section 10 of the Gold Reserve Act of 1934, with
foreign monetary authorities, and with the Bank for International Settlements :




Austrian schillings
Belgian francs
Canadian dollars
Danish kroner

151

Pounds sterling
French francs
German marks
Italian lire
Japanese yen
Mexican pesos
Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs
B. To hold foreign currencies listed in paragraph A above, up to the
following limits:
(1) Currencies held spot or purchased forward, up to the amounts
necessary to fulfill outstanding forward commitments;
(2) Additional currencies held spot or purchased forward, up to the
amount necessary for System operations to exert a market influence but
not. exceeding $150 million equivalent; and
(3) Sterling purchased on a covered or guaranteed basis in terms of the
dollar, under agreement with the Bank of England, up to $250 million
equivalent.
C. To have outstanding forward commitments undertaken under paragraph A above to deliver foreign currencies, up to the following limits:
(1) Commitments to deliver foreign currencies to the Stabilization
Fund, up to $350 million equivalent;
(2) Commitments to deliver Italian lire, under special arrangements
with the Bank of Italy, up to $500 million equivalent; and
(3) Other forward commitments to deliver foreign currencies, up to
$550 million equivalent.
D. To draw foreign currencies and to permit foreign banks to draw
dollars under the reciprocal currency arrangements listed in paragraph 2
below, provided that drawings by either party to any such arrangement
shall be fully liquidated within 12 months after any amount outstanding
at that time was first drawn, unless the Committee, because of exceptional
circumstances, specifically authorizes a delay.
Votes for this action: Messrs. Martin, Hayes,
Brimmer, Daane, Ellis, Galusha, Hickman, Kimbrel,
Maisel, Robertson, and Sherrill. Votes against this
action: None.
Absent and not voting: Mr. Mitchell.

152



This action was taken on grounds that it would be helpful in
connection with discussions of specific arrangements, including
a drawing by Britain on its $1.4 billion standby facility with the
International Monetary Fund, for repayment by the Bank of
England of outstanding drawings under its swap line with the
Federal Reserve. It was understood that initial use of the enlarged authority would be subject to the approval of Chairman
Martin in light of developments in those discussions.




153

MEETING HELD ON MAY 28, 1968
1.

Authority to effect transactions in System Account.

Reports at this meeting indicated that over-all economic activity
was continuing to advance rapidly and that inflationary pressures were persisting. It appeared likely that growth in real GNP
in the second quarter would again be large. Beyond midyear,
economic prospects depended in large part on the outcome of
pending fiscal legislation, which provided for a 10 per cent
surtax on individual and corporate incomes and for a $6 billion
reduction from the Budget estimate in Federal expenditures for
the fiscal year 1969. Such legislation, if enacted, was expected
to contribute to a marked slowing of the pace of expansion in
aggregate output and to a gradual lessening of inflationary
pressures.
Estimates for the second quarter included a further sizable
rise in consumer spending, although not so large as the extraordinary advance of the first quarter. Defense expenditures were
expected to continue to increase at a substantial rate. A sharp
rise in housing starts in April, although it reflected temporary
influences in large part, now suggested a moderate increase in
outlays for residential construction in the second quarter. It
appeared that business outlays for fixed capital would change
relatively little; but inventory accumulation, which had been at
a very low rate in the first quarter, was expected to increase
considerably.
In April nonfarm employment rose moderately further, and
the unemployment rate again edged down, to 3.5 per cent from
3.6 per cent in March. The industrial production index was unchanged from a March level that had been revised upward.
Retail sales were advancing in early May, following a decline in
April that was attributable largely to widespread civil disorders.
Gold and foreign exchange markets had been unsettled in
recent weeks; important contributing influences included shifts

154



in prospects for fiscal action in the United States and political
uncertainties in France. The price of gold in the private London
market had risen sharply after mid-May from around $39.50
per ounce to a new high of $42.60 on May 21, but subsequently
declined somewhat. The Treasury gold stock recently had been
reduced further, as a number of small central banks had purchased gold from the United States. Sterling was under renewed
pressure in foreign exchange markets, and quotations for the
French franc were nominal in most markets as a result of the
general strike and the closing of French banks.
With respect to the U.S. balance of payments, the deficit on
the official settlements basis was reduced in April and May by
an accelerated rise in liabilities of domestic banks to their
branches abroad. Movements out of sterling and French francs
had contributed significantly to the availability of funds in the
Euro-dollar market. U.S. exports of goods expanded sharply in
April from the substantially reduced March level while imports
increased slightly. For March and April together, however, the
merchandise trade surplus was quite small.
In early May the Treasury marketed two new 6 per cent notes
having maturities of 15 months and of 7 years for payment on
May 15. The shorter-term note was offered for cash and attracted subscriptions mainly from commercial banks, which
were allowed to make payment by credit to Treasury tax and
loan accounts. The 7-year note was offered in exchange for
securities maturing in mid-May, of which $3.9 billion were held
by the public. After allowing for attrition of $1.3 billion in the
exchange offering, the Treasury raised about $2.1 billion of new
cash in these financings.
Interest rates had risen substantially on balance in all maturity
areas since the preceding meeting of the Committee. Yield increases were especially pronounced after the mid-May announcement that there would be a further delay in congressional consideration of the pending fiscal legislation. Other influences




155

included the tightening of monetary policy associated with the
mid-April increase in the discount rate and the continuing large
volume of new offerings in the corporate and municipal bond
markets. During the week immediately preceding this meeting,
some short-term market rates, particularly on Treasury bills, had
declined from their peaks as renewed optimism concerning prospects for enactment of fiscal legislation emerged. The market
rate on 3-month Treasury bills, at 5.67 per cent on the day
before this meeting, was down 25 basis points from its May 21
high but was still 19 basis points above its level of 4 weeks
earlier.
During April interest rates on residential mortgages had risen
substantially and yields on both conventional new-home mortgages and on FHA-insured mortgages trading in the secondary
market were at postwar highs. Early in May, as permitted by
new legislation, maximum contract interest rates on Federally
underwritten home mortgages were increased to 6% per cent.
Net inflows of funds to nonbank depositary institutions had
weakened considerably further in April from the reduced inflow
of the first quarter.
System open market operations since the preceding meeting
of the Committee had been directed at maintaining firm conditions in the money market while countering persistent tendencies
toward excessive tightness. In view of the advanced level of
market rates, System repurchase agreements were made at an
interest rate of 53A per cent, one-quarter of a percentage point
above the discount rate. The effective rate on Federal funds
moved up further to a range around 6Vs to 6% per cent, compared with a range around 6 per cent in the latter part of April.
Bank rates on new loans to Government securities dealers also
advanced sharply. Member bank borrowings averaged $720
million and net borrowed reserves $380 million in the 4 weeks
ending May 22, compared with averages of $690 million and
$340 million, respectively, in April.

156



Commercial bank credit, as measured by the bank credit
proxy—daily-average member bank deposits—was estimated to
have increased only a little in May following a small decline in
April. Business loans, after a sharp rise in early April, had
changed relatively little through early May while banks had
continued to reduce their holdings of U.S. Government securities. The further advance in market interest rates acted to limit
growth in commercial bank time and savings deposits, and in
May, as in April, such deposits increased very little. Rates on
large-denomination CD's generally moved up to the new Regulation Q ceilings, but the volume of outstanding CD's was little
changed over the month. Rates on Euro-dollar deposits rose
sharply as U.S. banks built up their Euro-dollar liabilities. The
money supply continued to grow rapidly in May; private demand deposits expanded substantially as U.S. Government deposits declined.
The bank credit proxy was now projected to decline in June
at an annual rate in the range of 1 to 4 per cent if prevailing
money market conditions were maintained. Business demand for
bank loans was expected to be strong in June, partly to finance
tax payments. The money supply and private demand deposits
were projected to increase at about the rapid April—May rate,
and U.S. Government deposits were projected to decline sharply,
assuming no large cash financing. Total time and savings deposits were anticipated to show virtually no growth and possibly
to decline, as relatively high market interest rates were expected
to continue to curtail growth in consumer-type time and savings
deposits and to result in a sizable decline in outstanding CD's
for which scheduled maturities were large in June.
The Committee agreed that a restrictive monetary policy was
appropriate in view of the strength of domestic demands and
persisting inflationary pressures, as well as of the deterioration
in the U.S. foreign trade balance that was contributing to continuation of an unsatisfactory over-all payments position. At the




157

same time, however, there was general agreement that a number
of considerations militated against any additional tightening at
present. An important consideration was the possibility that in
the near future Congress would enact the pending fiscal-restraint
legislation. Furthermore, a considerable degree of monetary restraint had already been achieved; the banking system was being
subjected to increasing liquidity pressures; over-all expansion of
bank credit appeared to have halted in April and May; and
market rates of interest had advanced sharply to levels that
could give rise to a substantial amount of disintermediation.
The Committee concluded that open market operations
should be directed at maintaining about the prevailing firm conditions in the money market, but that operations should be
modified if bank credit appeared to be deviating significantly
from current projections or if unusual pressures should develop
in financial markets. The following current economic policy
directive was issued to the Federal Reserve Bank of New York:
The information reviewed at this meeting indicates that the very rapid
increase in over-all economic activity is being accompanied by persisting
inflationary pressures. There has been little or no growth on average in
bank credit and time and savings deposits over the past 2 months, although
the money supply has expanded considerably as U.S. Government deposits
have declined. In recent weeks both short- and long-term interest rates
have risen sharply on balance from their earlier advanced levels, partly in
reaction to shifting expectations with regard to the likelihood of fiscal
restraint. There has been some revival of speculative activity in the private
gold market and in foreign exchange markets. The U.S. foreign trade
balance and over-all payments position continue to be a matter of serious
concern. In this situation, it is the policy of the Federal Open Market
Committee to foster financial conditions conducive to resistance of inflationary pressures and attainment of reasonable equilibrium in the country's
balance of payments, while taking account of the potential for severe
pressures in financial markets if fiscal restraint is not forthcoming.
To implement this policy, System open market operations until the next
meeting of the Committee shall be conducted with a view to maintaining
firm conditions in the money market; provided, however, that operations

158



shall be modified if bank credit appears to be deviating significantly from
current projections or if unusual pressures should develop in financial
markets.
Votes for this action: Messrs. Martin, Hayes,
Brimmer, Daane, Ellis, Galusha, Hickman, Kimbrel,
Maisel, Mitchell, Robertson, and Sherrill. Votes
against this action: None.

2.

Authority to purchase and sell foreign currencies.

The Committee amended paragraph IB(3) of the authorization
for System foreign currency operations to increase, from $250
million to $300 million, the limit on authorized System Account
holdings of sterling purchased on a covered or guaranteed basis.
Votes for this action: Messrs. Martin, Hayes,
Brimmer, Daane, Ellis, Galusha, Hickman, Kimbrel,
Maisel, Mitchell, Robertson, and Sherrill. Votes
against this action: None.

At its previous meeting the Committee had increased the
limit in question from $200 million to $250 million. That action
had been taken on grounds that it would be helpful in connection with discussions of specific arrangements, including a drawing by Britain on its $1.4 billion standby facility with the International Monetary Fund, for repayment by the Bank of England
of outstanding drawings under its swap line with the Federal
Reserve; and it had been understood that initial use of the enlarged authority would be subject to the approval of Chairman
Martin in light of developments in those discussions. Today's
action was taken on similar grounds and subject to the same
understanding.
The Committee also amended paragraph 4 of the foreign
currency directive, by adding the words "and to facilitate opera-




159

tions of the Stabilization Fund" to clause (iv). With this amendment, paragraph 4 of the directive read as follows:
Unless otherwise expressly authorized by the Committee, transactions
in forward exchange, either outright or in conjunction with spot transactions, may be undertaken only (i) to prevent forward premiums or
discounts from giving rise to disequilibrating movements of short-term
funds; (ii) to minimize speculative disturbances; (iii) to supplement
existing market supplies of forward cover, directly or indirectly, as a
means of encouraging the retention or accumulation of dollar holdings by
private foreign holders; (iv) to allow greater flexibility in covering System
or Treasury commitments, including commitments under swap arrangements, and to facilitate operations of the Stabilization Fund; (v) to facilitate the use of one currency for the settlement of System or Treasury
commitments denominated in other currencies; and (vi) to provide cover
for System holdings of foreign currencies.
Votes for this action: Messrs. Martin, Hayes,
Brimmer, Daane, Ellis, Galusha, Hickman, Kimbrel,
Maisel, Mitchell, Robertson, and Sherrill. Votes
against this action: None.

On November 14, 1967, at a time when an increase in System
Account and Stabilization Fund holdings of sterling was under
consideration, the Committee had amended paragraph 1C(1) of
the authorization for System foreign currency operations to enable the System Account to "warehouse" part of the Stabilization Fund's holdings of sterling if the Fund's resources should
prove inadequate to meet all demands upon them from time to
time in the future. Since such "warehousing" operations—none
of which had been undertaken to date—would involve forward
transactions, the Committee concluded that it was desirable to
make a conforming change in the list of purposes, given in
psiragraph 4 of the foreign currency directive, for which forward
transactions were authorized.

160



MEETING HELD ON JUNE 18, 1968
Authority to effect transactions in System Account.

Reports at this meeting indicated that the continued rapid advance in over-all economic activity was being accompanied by
persisting inflationary pressures. It appeared likely that Congress
would act favorably within a few days on legislation providing
for a 10 per cent income tax surcharge and a $6 billion reduction in expenditures from Budget estimates for the coming fiscal
year. Such legislation was expected to contribute to a considerable moderation of the rate of advance in aggregate demands.
Staff estimates suggested that both real GNP and average
prices—as measured by the "GNP deflator"—were continuing
to increase at rapid rates in the second quarter. According to the
estimates, however, business inventory accumulation would be
considerably larger than in the first quarter and growth in final
sales would be smaller. In particular, consumer expenditures
were expected to rise substantially but at a pace well below the
extraordinary advance of the first quarter; and according to a
recent Commerce-SEC survey of business spending plans, outlays on new plant and equipment would change little in the
second quarter after increasing sharply in the first. It also appeared that outlays for residential construction would rise
moderately further and that defense spending would advance
at about the rapid first-quarter rate.
Staff estimates for the third quarter suggested that growth in
real GNP would slow sharply if the pending fiscal legislation
were enacted. The rate of increase in disposable income was
expected to slacken considerably—as a result of both the income
tax surcharge and slow growth in employment—and a further
slowing of growth in consumer expenditures appeared likely,
despite an anticipated decline in the rate of personal saving.
Prospects for the third quarter also included a moderate decline
in residential construction outlays, a leveling off of the advance
in defense expenditures, and little further change in the rate of




161

inventory accumulation after a large second-quarter rise. However, the Commerce-SEC survey suggested that outlays on plant
and equipment would increase somewhat in the third quarter.
The lower over-all rate of economic growth in prospect seemed
unlikely to have an appreciable effect immediately on advances
in wage and other costs, and average prices in the private economy were expected to rise almost as rapidly in the third quarter
as in the first half of the year.
In May the unemployment rate remained at 3.5 per cent.
Nonfarm employment was unchanged from April, as an increase
in the number of workers on strike offset employment gains elsewhere. Average hourly earnings continued to rise rapidly. Industrial production was estimated to have increased to a new
high, and according to the advance report, retail sales rose
moderately from an April level that had been held down by civil
disorders in many cities.
Preliminary estimates indicated that average wholesale prices
of industrial goods declined somewhat in May, primarily because of further sharp reductions for copper and related products following settlement of the copper strike; average prices of
other industrial commodities continued to rise. Prices of foods
and foodstuffs increased considerably, and the total wholesale
price index edged up further. In April the consumer price index
continued upward at about the average rate of other recent
months and was 4 per cent above a year ealier.
With respect to the U.S. balance of payments, preliminary
data for May suggested that the deficit on the liquidity basis
diminished sharply from its high April level, in part because of
the favorable effects of various special official transactions. The
merchandise trade surplus was expected to increase in coming
months from its recent low level, but net outflows of U.S. capital
also were expected to rise. Such outflows had been unusually
small in the early months of the year, following the introduction
of the new restaint program on January 1.
On the official settlements basis, a payments surplus was now

162



indicated for May and possibly for the second quarter as a
whole, primarily as a result of an exceptionally large rise in the
liabilities of U.S. banks to their branches abroad. The recent
massive inflow of foreign liquid funds apparently reflected both
increased demands for funds by domestic banks and large additions to the supply of Euro-dollars as a result of movements out
of sterling and French francs. It was thought likely that the
inflow would subside soon.
In foreign exchange markets, the position of sterling had
improved somewhat in recent weeks, but the French franc had
remained under severe pressure. The price of gold in the private
London market had continued to fluctuate in a range of about
$41 to $42 per ounce.
System open market operations since the preceding meeting
of the Committee had been directed at maintaining firm conditions in the money market. Early in the period reserves were
absorbed temporarily, by means of matched sale-purchase agreements, in order to counter easing tendencies. Late in the period,
however, when tendencies toward undue tightness emerged,
reserves were supplied by purchases of Treasury bills from
foreign accounts and through repurchase agreements with nonbank dealers at a 5% per cent interest rate. For the period as
a whole, effective rates on Federal funds were usually in a range
of 6 to 6V4 per cent but occasionally were below 6 per cent.
Member bank borrowings averaged about $730 million in the
3 weeks ending June 12, little changed from the preceding 4
weeks, but average net borrowed reserves increased to about
$445 million from $375 million in the earlier period.
Interest rates on most types of market securities had declined
substantially on balance since the preceding meeting of the Committee, primarily because of growing expectations that fiscal
restraint legislation would be enacted soon. Yield reductions
were more marked on Treasury bonds than on corporate and
municipal bonds, for which the calendar of new offerings continued heavy. The market rate on 3-month Treasury bills, at
5.58 per cent on the day before this meeting, was 9 basis points




163

below its level 3 weeks earlier, and rates on longer-term bills
were down by 20 to 30 basis points.
Preliminary data for May suggested an increase in net inflows
of savings funds to mutual savings banks and savings and loan
associations. But with demands for mortgage funds continuing
strong, and with uncertainties increasing about prospects for
savings flows at thrift institutions around the midyear interestand-dividend-crediting period, conditions in mortgage markets
remained fairly tight. Contract interest rates on conventional
new-home mortgages, which had been at a postwar high in
April, rose sharply further in May.
At commercial banks, demands for business loans strengthened after a mid-April to mid-May lull. There was some improvement in net flows of time and savings deposits in the
latter part of May, but for the month as a whole such deposits
grew at an annual rate of only about 3 per cent, roughly the
same as in April and less than half the first-quarter pace. With
U.S. Government deposits declining further, private demand
deposits and the money supply expanded considerably; growth
in the money supply was now estimated at an annual rate of
11 per cent in May, compared with 6.5 per cent in April. Bank
credit, as measured by the bank credit proxy—daily-average
member bank deposits—expanded at an annual rate of 1.5 per
cent in May, after declining at a 4.5 per cent rate in April.
Allowance for changes in the daily average of U.S. bank liabilities to foreign branches, which are among the nondeposit liabilities of banks omitted in calculating the credit proxy, would have
served to reduce the decline in April by about 1 percentage
point and to have increased the rise in May by about 3.5 percentage points.
New projections suggested that if prevailing money market
conditions were maintained the bank credit proxy would rise
at an annual rate of 3 to 6 per cent in June and somewhat more
slowly in July; and that if money market conditions were less
firm, growth in July would continue at about the rate projected
for June. Allowance for a further increase in average liabilities
164



to foreign branches, expected to occur in June, would have
added about 3 percentage points to the limits of the range of
growth projected for that month. The projections for July assumed that the Treasury would raise a substantial amount of
new cash—about $4 billion—early in the month through a sale
of tax-anticipation bills. Further declines in the average level
of Government deposits were anticipated in both June and July,
and were expected to contribute to continued vigorous expansion of the money supply.
The Committee's policy discussion at this meeting was conducted against the background of the widespread expectation
that Congress probably would act affirmatively within a few days
on the pending fiscal legislation. It was thought likely that such
action would be followed by further declines in Treasury bill
rates and other short-term market interest rates. The possibility
was recognized, however, that short-term rates might subsequently come under renewed upward pressure, partly as a
consequence of the sizable cash financing the Treasury was expected to undertake in early July.
The Committee agreed that open market operations should
be directed at maintaining firm conditions in the money market
in the period before Congress acted on the pending legislation,
and at countering any tendencies toward disorder that might
result if such action were negative or delayed. As to the appropriate course if fiscal legislation were enacted soon, there was
some sentiment for seeking less firm money market conditions
on the grounds that over-all economic restraint otherwise was
likely to prove excessive. At the same time, however, concern
was expressed in the course of the discussion about the risk that
premature monetary easing would offset the effects of fiscal
restraint.
The Committee concluded that if Congress acted affirmatively
on the pending fiscal legislation open market operations should
seek to accommodate any resulting declines in short-term interest rates and to cushion any upward pressures on such rates




165

that might emerge subsequently. The proviso was added that
this course should be followed only so long as bank credit
growth in June, and also in July, did not appear to be developing at a rate above the range projected for June.
The following current economic policy directive was issued
to the Federal Reserve Bank of New York:
The information reviewed at this meeting indicates that the very rapid
increase in over-all economic activity is being accompanied by persisting
inflationary pressures. Enactment of fiscal restraint measures now under
consideration in Congress, however, would be expected to contribute to
a considerable moderation of the rate of advance in aggregate demands.
Growth in bank credit and time and savings deposits has been relatively
small on average in recent months, although the money supply has expanded considerably as U.S. Government deposits have declined. Both
short- and long-term interest rates have receded from the advanced levels
reached in May, mainly in reaction to enhanced expectations of fiscal
restraint. The U.S. foreign trade balance and over-all payments position
continue to be a matter of serious concern. In this situation, it is the
policy of the Federal Open Market Committee to foster financial conditions conducive to resistance of inflationary pressures and attainment of
reasonable equilibrium in the country's balance of payments, while taking
account of the potential impact of developments with respect to fiscal
legislation.
To implement this policy, System open market operations until the
next meeting of the Committee shall be conducted with a view to maintaining generally firm but orderly conditions in the money market; provided, however, that if the proposed fiscal legislation is enacted operations shall accommodate tendencies for short-term interest rates to
decline in connection with such affirmative congressional action on the
pending fiscal legislation so long as bank credit expansion does not
exceed current projections.
Votes for this action: Messrs. Martin, Brimmer,
Daane, Galusha, Hickman, Kimbrel, Maisel, Mitchell, Robertson, Sherrill, Bopp, and Treiber. Votes
against this action: None.
Absent and not voting: Messrs. Hayes and Ellis.
(Messrs. Treiber and Bopp voted as their alternates.)

166



MEETING HELD ON JULY 16 f 1968
1. Authority to effect transactions in System Account.

Staff estimates for the second quarter continued to indicate sharp
further advances in real GNP and in average prices as measured
by the "GNP deflator." It now appeared, however, that growth in
consumer expenditures had been smaller than expected earlier
and that business fixed investment had declined somewhat. Much
of the increase in real GNP was a consequence of a marked rise
in the rate of inventory accumulation, reflecting in part a build-up
of stocks of steel as a precaution against a possible strike when
current wage contracts expired on July 31.
Industrial production was estimated to have increased somewhat further in June and retail sales, according to the advance
estimate, were unchanged. Although the labor market remained
generally firm, growth of nonfarm employment had slowed in
recent months. The unemployment rate rose from 3.5 per cent in
May to 3.8 per cent in June, when young workers entered the
labor force in larger numbers than usual.
The consumer price index advanced again in May and was
about 4 per cent above a year earlier. Average hourly earnings
had continued to rise at a substantial rate in recent months, but
increases in consumer prices had held down gains in real earnings
and had contributed to demands for higher wages. At the wholesale level, average prices of industrial goods rose again in June
after declining in May. Although increases had become less widespread recently, it appeared likely that industrial prices would remain under upward pressure in coming months.
In late June legislation was enacted that provided for a 10 per
cent surcharge on income taxes, retroactive to April 1, 1968, for
individuals and to January 1, 1968, for corporations. The legislation also provided for a $6 billion reduction from the January
Budget estimate for Federal expenditures in the fiscal year 1969.
However, the exemption from cuts of certain categories of expenditures together with upward revisions in estimates of defense




167

spending suggested that the net reduction was likely to be less
than $6 billion.
Staff projections suggested that the pace of advance in aggregate demands would moderate considerably in the third quarter,
partly as a result of this legislation. It was expected that consumer
expenditures would advance at only about the moderate pace of
the second quarter—with a decline in the rate of personal saving
roughly offsetting the combined effects on disposable income of
the income tax surcharge and smaller employment gains; that the
rise in Federal spending would slow; and that residential construction outlays would turn down. On the other hand, some increase
in business fixed investment outlays appeared likely. A significant reduction was now anticipated in the rate of inventory accumulation; businesses were expected to shift from accumulation
to decumulation of steel stocks after the strike deadline and to
adjust stocks of consumer goods in line with the recently smaller
gains in sales.
In foreign exchange markets, the French franc continued under
heavy pressure in late June and early July. The Bank of France
increased its discount rate from 3Vi to 5 per cent effective July 3,
and on July 10 announced that it had arranged for $1.3 billion in
newr international credit facilities. The exchange rate for sterling
reached a new low in late June, but subsequently strengthened
markedly as a result of two developments: (1) an announcement
on July 8 that 12 central banks and the Bank for International
Settlements had given firm assurances of their willingness to participate in new arrangements to offset fluctuations in the sterling
balances of countries in the sterling area; and (2) the publication
on July 11 of figures indicating that British imports had declined
significantly in June for the first time since devaluation of the
pound. The price of gold in the private London market recently
had fallen from around $41 to around $39 per ounce on rumors
of an arrangement designed to encourage sales of gold in the
market by South Africa.
Tentative estimates suggested that the deficit in the U.S. bal168



ance of payments on the liquidity basis had declined markedly in
the second quarter. All of the improvement, however, appeared to
reflect special official transactions; except for these transactions,
the deficit would have been large. The merchandise trade account
was in deficit in May for the second time in 3 months. On the
official settlements basis the payments balance was estimated to
have been in substantial surplus in the second quarter, as a result
of a record increase in liabilities of U.S. banks to foreign branches.
On July 2 the Treasury auctioned $4 billion of tax-anticipation
bills maturing in March and April 1969, for which commercial
banks were permitted to make payment in full by credits to tax
and loan accounts. The Treasury was expected to announce at
the end of July the terms on which it would refund the $8.6 billion
of securities maturing in mid-August, of which $3.6 billion were
held by the public. Current estimates suggested that the Treasury
also would have to raise a substantial amount of new cash in
August.
Conditions in securities markets had eased somewhat in reaction to the enactment of fiscal-restraint legislation, and yields on
Government securities of all maturities had declined moderately
on balance in the period since the preceding meeting of the Committee. The market rate on 3-month Treasury bills initially fell
sharply—from 5.60 per cent on June 18 to 5.20 per cent on June
21. The abruptness of this decline was related to heavy reinvestment demands by holders of maturing tax-anticipation bills and
to substantial purchase of bills by the System on June 19 to offset
the effects on bank reserves of large-scale international transactions. Subsequently the 3-month bill rate came under upward
pressure partly as a result of the Treasury's offering of tax bills in
early July, and on the day before this meeting it was 5.42 per
cent, 18 basis points below its level 4 weeks earlier. Rates on other
short-term instruments showed smaller net declines over the
interval, and some—such as those on commercial paper—remained at their mid-June levels.
Yields on long-term corporate and municipal bonds, for which




169

the volume of new issues continued sizable in June and July, were
little changed over most of the period since the preceding meeting
of the Committee. Conditions in private bond markets had become more buoyant in recent days, however, following the good
reception accorded a large corporate issue. Expectations of a
near-term relaxation in monetary conditions contributed to the
improvement in bond markets, as did the announcements of new
international support for sterling and the French franc.
System open market operations since the preceding meeting of
the Committee had been directed at maintaining firm conditions
in the money market, while accommodating tendencies for shortterm interest rates to decline following congressional action on
fiscal legislation. The interest rate on System repurchase agreements with nonbank dealers was reduced to 5% per cent on July
5 from the level of 53A per cent that had been employed since late
April. The effective rate on Federal funds, which was mainly in
a 6V4 to 6Y2 per cent range early in the interval, subsequently
fluctuated primarly in a 6 to 6Vs per cent range. Member bank
borrowings averaged $595 million and net borrowed reserves
$260 million in the 4 weeks ending July 10, compared with averages of $720 million and $410 million, respectively, in the preceding 4 weeks.
Conditions in markets for residential mortgages continued to
tighten through mid-June but appeared to have stabilized thereafter. Preliminary indications suggested that the savings flow experience of nonbank depositary institutions during the interestand-dividend-crediting period around the end of June was better
than many industry observers had expected.
Growth in time and saving deposits at commercial banks in
June remained at the low annual rate of about 3 per cent that had
prevailed in the two preceding months. However, the net reduction during the course of the month in the volume of largedenomination CD's outstanding was considerably less than
normal for the season, and in late June and early July the outstanding volume was increasing. By the time of this meeting most
170



banks issuing such CD's had reduced their offering rates for certificates of longer maturity to levels below the Regulation Q ceilings. Private demand deposits and the money supply continued to
expand rapidly in June, although not so rapidly as in May, and
U.S. Government deposits increased slightly after declining steadily since February. In the second quarter as a whole, during which
Government deposits fell substantially on balance, the money
supply grew at an annual rate of about 8.5 per cent, compared
with about 4.5 per cent in the first quarter.
Commercial bank credit, as measured by the bank credit proxy
—daily-average member bank deposits—increased at an annual
rate of 6 per cent in June after rising relatively little in May and
declining in April. For the 3 months together, the proxy series
increased at an annual rate of 1 per cent, compared with a rate of
about 7 per cent in the first quarter. Allowance for changes in the
daily average of U.S. bank liabilities to foreign branches, which
are among the nondeposit liabilities omitted in calculating the
credit proxy, would have served to increase the growth rates by
about 2.5 percentage points in the second quarter and 0.5 of a
percentage point in the first.
It was expected that the pattern of bank credit growth in July
and August would be strongly influenced by Treasury financing
operations and by business borrowing to finance additional tax
payments required under the terms of the new legislation. Staff
projections suggested that if prevailing money market conditions
were maintained the bank credit proxy would grow at annual
rates in the ranges of 1 to 4 per cent in July, 10 to 12 per cent in
August, and 6 to 8 per cent in the 2 months taken together. In an
alternative projection, in which somewhat easier money market
conditions were assumed, the annual rate of increase in the bank
credit proxy in July and August together was estimated in a range
of 7 to 9 per cent. These projections assumed that the Treasury
would raise a total of about $7.5 billion of new cash in the 2
months, including the $4 billion already raised in July through
the sale of tax-anticipation bills. Allowance for a further increase




171

in average liabilities to foreign branches, expected to occur in
July, would have added about 1 percentage point to the limits of
the ranges of growth projected for July and August together.
It appeared likely that private demand deposits and the money
supply would continue to expand at a substantial rate on average
in July, but to slow sharply in the latter part of the month and to
change little on average in August, a period in which Government
deposits were expected to rise substantially on balance. The outlook also favored further rapid growth in large-denomination
CD's outstanding, at least in July.
In the course of the Committee's discussion a number of members indicated that they were inclined to maintain prevailing
money market conditions for the time being, while awaiting evidence of the probable effectiveness of the recently enacted fiscal
restraint measures in containing inflationary pressures and improving the underlying position of the balance of payments. Other
members, while not advocating a substantially easier monetary
policy at present, thought that the prospective effects of the new
fiscal legislation warranted seeking somewhat less firm money
market conditions to the extent such a course was consistent with
the forthcoming Treasury financing.
After considering these alternatives, the Committee agreed
upon an intermediate course. Specifically, it was decided that
open market operations should be directed at accommodating
easing tendencies in money market conditions in the period ahead
if such tendencies arose from market forces; and at cushioning
upward pressures on interest rates if they should develop. It also
was agreed that operations should be modified, to the extent permitted by the Treasury financing, if bank credit appeared to be
deviating significantly from current projections.
The Committee also discussed the appropriate interest rate for
System repurchase agreements (RP's) with nonbank dealers.
The members noted that market participants had attached some
degree of policy significance to recent changes in the RP rate and
to the fact that the rate employed most lately was still Vs of a
172



percentage point above the discount rate. While the views of
members differed regarding the desirability of regular use of a
flexible RP rate as an instrument for influencing money market
conditions, the Committee thought that under existing circumstances it would be appropriate to employ a 5Vi per cent rate
beginning with the next occasion on which the Account Management made repurchase agreements.
The following current economic policy directive was issued to
the Federal Reserve Bank of New York:
The information reviewed at this meeting indicates that over-all economic
activity continued to expand rapidly in the second quarter, with inventory
accumulation accelerating while the rise in capital outlays and in consumer
spending slowed. The newfiscalrestraint measures are expected to contribute
to a considerable moderation of the rate of advance in aggregate demands.
Industrial prices have been increasing less rapidly than earlier but consumer
prices have continued to rise substantially and wage pressures remain strong.
Growth in bank credit and time and savings deposits has been moderate on
average in recent months; growth in the money supply has been larger as U.S.
Government deposits have been reduced. Conditions in money and capital
markets have eased somewhat, mainly in response to the increase in fiscal
restraint. Although there recently have been large inflows of foreign capital,
the U.S. foreign trade balance and underlying payments position continue to
be matters of serious concern. In this situation, it is the policy of the Federal
Open Market Committee to foster financial conditions conducive to sustainable economic growth, continued resistance to inflationary pressures, and
attainment of reasonable equilibrium in the country's balance of payments.
To implement this policy, while taking account of forthcoming Treasury
financing activity, System open market operations until the next meeting of
the Committee shall be conducted with a view to accommodating the tendency
toward somewhat lessfirmconditions in the money market that has developed
since the preceding meeting of the Committee; provided, however, that operations shall be modified, to the extent permitted by Treasury financing, if
bank credit appears to be deviating significantly from current projections.
Votes for this action: Messrs. Martin, Hayes,
Brimmer, Daane, Galusha, Hickman, Kimbrel,
Maisel, Mitchell, Robertson, Sherrill, and Bopp.
Votes against this action: None.




173

(Mr. Bopp voted as an alternate member in place
of Mr. Ellis, whose membership on the Committee
had terminated on June 30, 1968, the effective date
of his resignation as President of the Federal Reserve
Bank of Boston.)
2. Amendments to authorization for System foreign currency
operations.

The Committee ratified an action taken by members on July 2,
1968, effective on that date, to increase the System's swap arrangement with the Bank of France from $100 million to $700
million equivalent, and to make the corresponding amendment to
paragraph 2 of the authorization for System foreign currency
operations. As a result of this action, paragraph 2 read as follows:
The Federal Open Market Committee directs the Federal Reserve Bank
of New York to maintain reciprocal currency arrangements ("swap" arrangements) for System Open Market Account for periods up to a maximum of 12 months with the following foreign banks, which are among
those designated by the Board of Governors of the Federal Reserve System
under Section 214.5 of Regulation N, relations with foreign banks and
bankers, and with the approval of the Committee to renew such arrangements on maturity:

Foreign bank
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway

174



Amount of
arrangement
(millions of
dollars equivalent)
100
225

1,000
100

2,000
700

1,000
750

1,000
130
400
100

Foreign bank

Amount of
arrangement
(millions of
dollars equivalent)

Bank of Sweden
Swiss National Bank
Bank for International Settlements:
System drawings in Swiss francs
System drawings in authorized European
currencies other than Swiss francs

250
600
600
1,000

Votes for ratification of this action: Messrs.
Martin, Hayes, Brimmer, Daane, Galusha, Hickman,
Kimbrel, Maisel, Mitchell, Robertson, Sherrill, and
Bopp. Votes against ratification of this action: None.
(Mr. Bopp voted as an alternate member in place
of Mr. Ellis, whose membership on the Committee
had terminated on June 30, 1968.)

Although the arrangement between the Bank of France and
the Federal Reserve had been the first negotiated when the System's swap network was established in 1962, it had remained at
$100 million since early 1963 while various other lines in the network had been enlarged from time to time. The increase in this
arrangement served to bring the relative sizes of the arrangements
in the System's swap network into better balance. It formed part
of a package of credit facilities provided to the Bank of France at
this time by a number of central banks to help deal with destabilizing exchange market pressures.
The Committee also amended the foreign currency authorization in another respect at this meeting. Under paragraph 1C(1)
of the authorization, as it had been amended on November 14,
1967, the Federal Reserve Bank of New York was authorized to
have outstanding forward commitments to deliver foreign currencies to the Stabilization Fund of up to $350 million equivalent.
The limit had been increased to that level (from a previous figure




175

of $200 million) in November to facilitate the "warehousing" by
the System Account of Stabilization Fund holdings of sterling if
the resources of the Stabilization Fund proved inadequate to meet
all the demands upon them from time to time in the future.
At this meeting the Committee approved an increase in the
limit in question up to an amount not exceeding $1,050 million
equivalent, on the understandings that (1) the specific amount
would be determined by Chairman Martin (or in his absence, Mr.
Robertson, Vice Chairman of the Board of Governors) and (2)
that the action would become effective upon a determination by
Chairman Martin (or in his absence, Mr. Robertson) that it was
in the national interest.
Votes for this action: Messrs. Martin, Hayes,
Brimmer, Daane, Galusha, Hickman, Kimbrel,
Maisel, Mitchell, Robertson, Sherrill, and Bopp.
Votes against this action: None.
(Mr. Bopp voted as an alternate member in place
of Mr. Ellis, whose membership on the Committee
had terminated on June 30, 1968.)

This action was taken against the background of discussions at
meetings in Basle, Switzerland, on July 6-8, 1968, and prior discussions between representatives of the U.S. Treasury and the
Federal Reserve. At the Basle meetings agreement in principle had
been reached among representatives of the Bank for International
Settlements, the Bank of England, and 12 other central banks
including the Federal Reserve regarding new arrangements for
offsetting fluctuations in sterling balances held by countries in the
overseas sterling area (OSA). In general, the agreement provided for the extension of a medium-term facility of $2 billion
equivalent to the Bank of England by the BIS, with backing provided by the participating central banks, acting where appropriate
on behalf of their Governments. It was understood that the agreement was contingent on the satisfactory completion of negotia-

176



tions by the British authorities with the OSA countries concerning
the management by the latter of their sterling reserves.
In the System's preliminary discussions with the U.S. Treasury
it had been agreed that the Treasury should participate as principal in the arrangement, with the dollars to be made available on
a swap basis against sterling by the Stabilization Fund. It was also
agreed that if the resources of the Stabilization Fund should prove
insufficient from time to time to meet these and other commitments, the Federal Reserve would undertake to warehouse temporarily for the Stabilization Fund necessary portions of the
sterling acquired by the latter.
It was reported at this meeting of the Committee that the U.S.
share in the arrangement would be in the neighborhood of $600
million to $700 million. After approving System participation in
the arrangement in the manner described, the Committee noted
that the agreement was contingent on certain negotiations by the
British authorities and that the specific size of the U.S. share had
not yet been determined. Accordingly, it was decided that both
the effective date of the amendment to paragraph 1C(1) of the
authorization and the new figure for maximum forward commitments to the Stabilization Fund to be established by that amendment (within the limit set by today's action) should be subject to
determination by Chairman Martin, or in his absence, Mr.
Robertson.
Subsequently, agreement was reached on the new arrangement
at a meeting in Basle on September 9, 1968, with the U.S. share
established at $650 million, and the arrangement went into force
on September 23, 1968. On September 24, Chairman Martin
determined that an increase in the limit on forward commitments
to deliver foreign currencies to the Stabilization Fund of $650
million equivalent, to $1 billion, was in the national interest.
Accordingly, effective September 24, 1968, paragraph 1C(1) of
the authorization for System foreign currency operations was
amended to read as follows:




177

1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, for System Open Market Account, to the
extent necessary to carry out the Committee's foreign currency directive:

C. To have outstanding forward commitments undertaken under paragraph A above to deliver foreign currencies, up to the following limits:
(1) Commitments to deliver foreign currencies to the Stabilization
Fund, up to $1 billion equivalent;

178



MEETING HELD ON AUGUST 13, 1968
Authority to effect transactions in System Account.

Reports at this meeting indicated that some elements of economic
activity had expanded vigorously in early summer. Staff projections suggested, however, that expansion in over-all activity
would slow considerably in the months ahead as a result of the
new fiscal restraint measures and a marked reduction in inventory accumulation.
Retail sales rose sharply in July, according to the advance
report. Industrial production increased moderately, and nonfarm employment continued upward at the reduced pace of recent months. The unemployment rate edged down to 3.7 per
cent from 3.8 per cent in June, but remained above the low of
3.5 per cent recorded in the two preceding months.
Average prices of industrial commodities advanced only
slightly further in July, but increases in steel prices were announced following the wage settlement in the steel industry at
the end of the month. Because of a marked, although largely
seasonal, increase in prices of farm products and foods, the
wholesale price index rose considerably in July. In June the
consumer price index rose more than it had in other recent
months. About one-half of the advance reflected higher costs
of consumer services, including mortgage interest charges.
The staff projections suggested that inventory accumulation,
which had contributed significantly to the rapid growth of real
GNP in the second quarter, would slow in the third and fourth
quarters. A sharp curtailment of steel production had already
begun, and it was expected that liquidation of the stocks of
steel that had been built up as a precaution against a strike
would continue throughout the rest of the year and perhaps into
early 1969. Growth in final sales was projected to remain at
about the reduced second-quarter rate, in the expectation that
the rise in Federal spending would taper off and that the income
tax surcharge would damp increases in consumer expenditures.




179

In foreign exchange markets the French franc had remained
under pressure in recent weeks. The position of sterling had
improved earlier, following the announcement that 12 central
banks had expressed willingness to participate in new arrangements to offset fluctuations in overseas sterling balances and a
report indicating that the British foreign trade deficit had narrowed in June. The sterling exchange rate moved lower on the
day of this meeting, however, after publication of figures indicating that the British trade deficit had widened again in July.
The price of gold in the private London market recently had
continued to fluctuate in a narrow range around $39 per ounce.
In the second quarter the U.S. foreign trade balance had
deteriorated further. Nevertheless, the over-all payments balance
on the liquidity basis, although still in deficit, had improved
substantially, partly as a result of various special official transactions. Even apart from such transactions, however, the balance
had improved markedly in May and June, when there were
sizable net inflows of private capital; and it appeared that the
improvement had been maintained in July. A substantial surplus
was recorded in the payments balance on the official settlements
basis in the second quarter, mainly because of a massive increase
in liabilities of U.S. banks to their branches abroad. Such liabilities increased further in early July, but declined in subsequent
weeks.
On July 31 the Treasury offered a new 6-year, 55/s per cent
note priced to yield about 5.70 per cent, for payment on August
15. Commercial banks were permitted to pay for 50 per cent of
their allotments by credits to Treasury tax and loan accounts.
The issue was very well received, and the Treasury raised about
$1.9 billion of new cash in addition to refunding $3.6 billion
of publicly held securities maturing in mid-August. This was
the largest sale to the public of an intermediate-term issue in
more than 20 years.
Most interest rates had declined substantially on balance since
the previous meeting of the Committee. The declines were largely
180



attributable to market expectations that credit conditions would
ease as a result of slower economic growth, smaller prospective
Treasury financing needs, and relaxation of monetary restraint
following the recent enactment of fiscal legislation. Expectations
of a near-term shift in monetary policy, perhaps including a cut
in the discount rate, appeared to have been encouraged by a
reduction in the interest rate on System repurchase agreements
from 55/s to 5Vi per cent on the day after the Committee's
preceding meeting.
Contributing to the rate declines were increases in bank purchases of Treasury and municipal securities and a large build-up
of dealer inventories of Treasury securities, as well as prospects
for a substantial reduction in the volume of new corporate bond
issues. The fact that only an intermediate-term obligation was
offered in the Treasury's August financing—in contrast to the
customary practice of including a short-term "anchor" issue—
added to downward pressures on rates in short-term markets,
where the declines were most pronounced.
Most recently, however, continued firmness in day-to-day
money market rates had raised doubts about prospects for an
immediate substantial easing of monetary policy. Both short- and
long-term interest rates had turned up and had erased part of
their earlier declines. On the day before this meeting the market
rate on 3-month Treasury bills was 5.05 per cent, 16 basis points
above the low reached in the preceding week but still 37 basis
points below its mid-July level.
Net inflows of funds to mutual savings banks and savings and
loan associations slowed in July. There were signs, however, that
conditions in primary and secondary mortgage markets were
beginning to ease, after tightening gradually but steadily for
more than a year.
With interest rates on competing market instruments declining
on balance in July, the volume of large-denomination CD's outstanding at commercial banks increased by an unusually large
amount. Banks recently had reduced their offering rates on all




181

CD's except those with short maturities, and by the time of this
meeting such rates were still at the Regulation Q ceilings only
for CD's maturing within 2 months. Growth in consumer-type
time and savings deposits continued in July at about the moderate pace of previous months. Government deposits declined on
average, and growth in private demand deposits and the money
supply accelerated—the latter to an annual rate of about 13 per
cent, from 8.5 per cent in the second quarter and 4.5 per cent
in the first.
Business loans outstanding at banks increased more than seasonally in July, although the rise was somewhat less than might
have been expected in view of the additional corporate tax payments required under the new fiscal legislation. Bank investments
expanded sharply, however, as did loans to finance securities
holdings. Total bank credit, as measured by the bank credit
proxy—daily-average member bank deposits—grew at an annual
rate of 9 per cent, compared with rates of 1 per cent in the
second quarter and 7 per cent in the first. Allowance for changes
in the daily average of U.S. bank liabilities to foreign branches
would have served to increase the growth rate by 2 percentage
points in July and slightly more in the second quarter.
System open market operations in the early part of the interval
following the preceding meeting of the Committee had been
directed at accommodating the tendencies for short-term interest
rates to decline. Later in the period, however, when it became
apparent that bank credit was increasing at a rate significantly
above that projected at the time of the previous meeting, operations were modified to the extent permitted by the Treasury
financing. Member bank borrowings, which had averaged $555
million in the 2 weeks ending July 24, rose to an average of $670
million in the following 2 weeks; and average net borrowed reserves increased from $215 million to $320 million. Since the
preceding meeting of the Committee, the effective rate on Federal
funds had fluctuated mostly in a 6 to 6 V\ per cent range and
bank rates on loans to dealers in U.S. Government securities,

182



whose financing needs were heavy, also had remained high.
New staff projections suggested that the bank credit proxy
would increase from July to August at an annual rate of 16 to
18 per cent if the prevailing stance of monetary policy were
maintained. About three-fourths of the estimated growth reflected an expected increase in average Government deposits
from July to August as a result of Treasury cash borrowing.
Much slower growth—at an annual rate of 5 to 7 per cent—
was anticipated for September, when the Treasury was not expected to engage in new borrowing except in connection with
its regular bill offerings. The money supply was projected to
remain about unchanged in August and to grow moderately in
September when a decline in Government deposits was anticipated. Expansion in time and savings deposits was expected to
moderate somewhat in August and September.
The Committee agreed that the rate of economic growth was
likely to slow during the second half of the year. Several members noted, however, that some moderation in the recent rapid
pace of expansion would be desirable in light of prevailing inflationary pressures, and that the evidence available to date was
not sufficient to indicate the amount of slowing in prospect.
Considerable concern was expressed about the rapid rates of
increase in bank credit experienced in July and projected for
August, even though it was noted that the spurt was projected
to be temporary. At the same time, it was thought generally that
it would be undesirable for short-term interest rates, which had
been advancing in recent days, to rise substantially further.
The Committee concluded that it would be appropriate at this
time to maintain, on balance, about the prevailing conditions
in money and short-term credit markets, with some easing in
day-to-day money market rates to be permitted if Treasury bill
and other short-term rates remained under marked upward pressure. It was also agreed, however, that operations should be
modified if bank credit growth in August and September
appeared to be significantly exceeding current projections.




183

Several members expressed the view that in light of the
marked net decline in short-term interest rates since the enactment of fiscal legislation, a near-term reduction in the discount
rate would be appropriate to bring it into better alignment with
current market rates. These members noted that a cut in the
discount rate might have the effect of moderating further upward pressures on short-term rates without requiring reserve
injections of the size that might otherwise be needed for that
purpose.
At the conclusion of the discussion the following current
economic policy directive was issued to the Federal Reserve
Bank of New York:
The information reviewed at this meeting indicates that some elements
of economic activity continued to expand vigorously in early summer." Expansion in over-all activity, however, is projected to slow considerably in
coming months as a result of the new fiscal restraint measures and a
marked reduction in inventory accumulation. Industrial prices have been
increasing less rapidly in recent months, but consumer prices have continued to rise substantially. Wage pressures remain strong, and the recent
wage settlement in the steel industry was followed by announcements of
steel price increases. Both short- and long-term interest rates have declined
considerably, in large part as a result of expectations of easier credit conditions. Bank time and savings deposits, particularly large-denomination
CD's, have expanded sharply in early summer; growth in the money supply
has continued large as U.S. Government deposits have been drawn down
further on average; and growth in total bank credit has been unusually
rapid. Although the U.S. balance of payments has recently shown a marked
improvement, the foreign trade balance and underlying payments position
continue to be matters of serious concern. In this situation, it is the policy
of the Federal Open Market Committee to foster financial conditions conducive to sustainable economic growth, continued resistance to inflationary
pressures, and attainment of reasonable equilibrium in the country's
balance of payments.
'To implement this policy, System open market operations until the next
meeting of the Committee shall be conducted with a view to maintaining,
on balance, about the prevailing conditions in money and short-term credit
markets; provided, however, that operations shall be modified if bank credit
appears to be significantly exceeding current projections.

184




Votes for this action: Messrs. Martin, Brimmer,
Daane, Galusha, Hickman, Kimbrel, Maisel, Mitchell, Robertson, Sherrill, Bopp, and Treiber. Votes
against this action: None.
Absent and not voting: Mr. Hayes. (Mr. Treiber
voted as his alternate. Also, Mr. Bopp voted as an
alternate member in place of Mr. Ellis, whose membership on the Committee had terminated on June
30, 1968, the effective date of his resignation as
President of the Federal Reserve Bank of Boston.)




185

MEETING HELD ON AUGUST 19, 1968
Authority to effect transactions in System Account.

On Thursday, August 15, the Board of Governors of the Federal
Reserve System approved a reduction from 5Yi to 5VA per cent
in the discount rate of the Federal Reserve Bank of Minneapolis.1
In its announcement the Board stated that the change was primarily technical, to align the discount rate with the change in
money market conditions that had occurred chiefly as a result of
the enactment of the Federal tax increase and its related expenditure cuts. The purpose of today's meeting, which was held by
telephone, was to consider the need for a revision of the Committee's current economic policy directive in light of the discount
rate action.
Reports at this meeting indicated that the reaction in financial
markets to the Board's discount rate announcement had been
quite mild. Prices of Treasury notes and bonds had edged up
slightly on Friday, August 16. The market rate on 3-month
Treasury bills—which had advanced from 5.05 per cent on August 12, the day before the Committee's previous meeting, to
5.17 per cent on August 15—declined the next day to 5.11 per
cent. There had been no significant change in the effective rate
on Federal funds, which had been fluctuating in a 6 to 6VA per
cent range in recent weeks. Staff projections still suggested that
the bank credit proxy—daily-average member bank deposits—
would increase at annual rates of 16 to 18 per cent in August and
5 to 7 per cent in September, even if there were some easing of
day-to-day money market rates in the wake of discount rate reductions.
The Committee agreed that open market operations should be
directed at facilitating orderly money market adjustments to re1J
The reduction was effective August 16. Discount rates of the other Federal
Reserve Banks were subsequently reduced to 5lA per cent, with effective dates as
follows: Richmond, August 19; Chicago, Cleveland, Kansas City, and Philadelphia, August 23; Boston, August 27; Dallas, August 28; and Atlanta, New York,
St. Louis, and San Francisco, August 30.

186



ductions in Federal Reserve Bank discount rates. As at the preceding meeting, the desirability was noted of cushioning upward
pressures on short-term interest rates if they should develop.
The Committee also agreed that operations should be modified
if bank credit appeared to be deviating significantly from current
projections, on the understanding that this proviso was to be implemented as a result of any downward deviations only if such
deviations were of considerable magnitude.
The following current economic policy directive was issued to
the Federal Reserve Bank of New York:
System open market operations until the next meeting of the Committee
shall be conducted with a view to facilitating orderly adjustments in money
market conditions to reductions in Federal Reserve Bank discount rates;
provided, however, that operations shall be modified if bank credit appears
to be deviating significantly from current projections.
Votes for this action: Messrs. Hayes, Brimmer,
Daane, Galusha, Hickman, Kimbrel, Maisel, Robertson, Sherrill, and Bopp. Votes against this action:
None.
Absent and not voting: Messrs. Martin, Mitchell,
and Morris. (Mr. Bopp voted as alternate for Mr.
Morris.)




187

MEETING HELD ON SEPTEMBER 1O? 1968
Authority to effect transactions in System Account.

Consumer expenditures had been expanding vigorously this summer, according to reports at this meeting. Staff projections suggested, however, that the rate of business inventory accumulation
was declining markedly in the third quarter—largely because of
a shift from accumulation to liquidation of steel stocks—and that
growth in over-all activity was slowing as a consequence.
Steel production had been cut back sharply following the wage
settlement in the steel industry at the end of July, and as a result
the industrial production index was tentatively estimated to have
declined in August. Although nonfarm payroll employment increased fairly sharply in August, manufacturing employment was
unchanged for the second consecutive month. Total civilian employment declined in August, but the labor force declined somewhat more and the unemployment rate fell to 3.5 per cent from
3.7 per cent in July.
Growth in Federal outlays appeared to be slowing in the third
quarter, but total final sales were now estimated to be rising at a
rapid rate. Retail sales, which had increased sharply in July, remained at a high level in August according to available weekly
figures. The sizable advance in consumer spending apparently
was associated with a decline in the saving rate; the new income
tax surcharge affected paychecks beginning in mid-July, and disposable income was estimated to be advancing less rapidly in the
third quarter than earlier in the year. Housing starts also rose
considerably in July, and it appeared that residential construction outlays would be somewhat higher in the third quarter than
in the second. A new Commerce—SEC survey, taken in August,
indicated that business outlays on plant and equipment would be
somewhat lower in 1968 as a whole than estimated earlier, but
that businesses planned to increase their outlays moderately from
the second quarter to the third.
Staff projections for the fourth quarter suggested that the rate
188



of inventory accumulation would be reduced somewhat further
as liquidation of steel stocks continued and that the expansion in
final sales would slow. It was expected that the increase in Federal expenditures would be quite small and that the rise in consumer spending would slacken as a result of continuing slow
growth of disposable income. Little change was anticipated in
residential construction expenditures, and the recent Commerce
—SEC survey suggested that business outlays for plant and
equipment would be maintained at about the third-quarter rate.
Average prices of industrial commodities, according to preliminary estimates, were unchanged in August after rising only
slightly in July. It was expected, however, that the industrial
average for September would be affected by advances already
announced in prices of steel mill products. Prices of farm products and foods, which had increased considerably in July, declined in August, and the over-all wholesale price index moved
down to its June level. The consumer price index rose substantially in July for the second month in a row; as in June, a large
part of the advance reflected higher costs of consumer services,
including mortgage interest charges.
In foreign exchange markets, rumors in late August that a revaluation of the German mark was imminent led to large-scale
inflows of funds into Germany and to sharply increased pressures
on the French franc and sterling. On September 4 the French
Government unexpectedly removed the foreign exchange controls it had imposed on May 31. Following the announcement of
this action and the simultaneous publication of preliminary estimates of the French budget for 1969, the position of the franc
improved; but pressures subsequently resumed. The sterling exchange rate strengthened appreciably after the announcement on
September 9 that final agreement had been reached by the Bank
of England and 12 other central banks on new arrangements to
offset fluctuations in overseas sterling balances. The price of gold
in the private London market had risen by about $1 per ounce




189

since mid-August and currently was fluctuating narrowly around
$40.
U.S. exports increased slightly and imports fell sharply in July
—resulting in a small surplus in the foreign trade balance after 2
months of deficit. Despite a foreign trade deficit in the May-July
period as a whole, the payments balance on the liquidity basis,
apart from special official transactions, had improved considerably. However, tentative estimates for August suggested that a
large deficit had re-emerged. The balance on the official settlements basis apparently was in surplus in August, as liabilities of
U.S. banks to their foreign branches rose to a new high after declining during the last 3 weeks of July.
In domestic financial markets, prior to the reductions in Federal Reserve Bank discount rates from 5Vi to 5V4 per cent—the
first of which was announced on August 15—interest rates on
various types of market securities had been rising from the lows
they had reached early in the month. Market reactions to the discount rate cuts were varied; some observers interpreted the action
as a confirmation of earlier expectations of some relaxation in
monetary restraint, while others—who had expected more vigorous action—thought it indicated that a marked easing of policy
was not likely in the near future.
On balance, interest rates on new corporate bonds and on
Treasury securities changed little during the latter half of August.
However, yields on municipal bonds remained under upward
pressure in the face of continuing heavy flotations of new issues
by State and local governments. In early September yields on new
corporate bonds and on Treasury securities also advanced, as
corporate underwriters released unsold new offerings from syndicate and some Government securities dealers acted to lighten
their heavy inventories. The market rate on 3-month Treasury
bills was 5.24 per cent on the day before this meeting, 13 basis
points above its level following the mid-August announcement
of discount rate action. Rates on longer-term Treasury bills had
190



risen only slightly during the interval and currently were close to
or below the rate on 3-month bills.
Growth in commercial bank time and savings deposits, which
had stepped up sharply in July, accelerated further in August.
Expansion in large-denomination CD's outstanding was substantial but less than the very large rise of July, when interest
rates on competing market instruments had been declining. The
average level of U.S. Government deposits increased considerably in August as a result of Treasury cash financings, and expansion in private demand deposits and the money supply slowed
appreciably—the money supply to an annual rate of about 5 per
cent from nearly 15 per cent in July.
In August, as in July, banks were heavy buyers in the large
offerings of securities undertaken by Federal, State, and local
governments. Growth in bank loans to businesses was maintained
at about the recent average pace, and loans to brokers and dealers to finance holdings of securities increased moderately further.
Total bank credit, as measured by the bank credit proxy—dailyaverage member bank deposits—expanded at the unusually high
annual rate of 21 per cent, after rising at a 9 per cent rate in July.
Allowance for changes in the daily average of U.S. bank liabilities to foreign branches would have served to increase the growth
rate by about Vi of a percentage point in August and 1 Vi percentage points in July.
System open market operations in the period since the Committee's August 19 meeting had been directed mainly at facilitating orderly adjustments in money market conditions to the
reduction in Federal Reserve Bank discount rates. As the period
progressed less emphasis was placed on the supplementary objective of moderating upward pressures on Treasury bill rates, in
light of accumulating evidence that bank credit was growing at
a higher rate than that projected at the time of the Committee's
previous meeting. The effective rate on Federal funds, which had
been mostly in a 6 to 6VA per cent range prior to the discount
rate cuts, subsequently fluctuated in a 5% to 6 per cent range




191

and was at the upper end of that range at the close of the period.
Net borrowed reserves and member bank borrowings averaged
about $185 million and $480 million, respectively, in the 3
weeks ending September 4, down from averages of about $290
million and $640 million in the previous 3 weeks.
Growth in bank credit was expected to moderate from the high
August rate in September and October. The Treasury was not
expected to engage in an another major cash financing until the
latter part of October; and prospects favored some reduction
from the current high level of outstanding loans to finance holdings of securities and also a slower growth in business loans, particularly after the mid-September tax date. New staff projections
suggested that the bank credit proxy would expand at an annual
rate of 7 to 10 per cent in September if prevailing conditions in
money and short-term credit markets were maintained. Growth
in about the same range was foreseen for October, on the assumption that the Treasury would raise about $3 billion of new
cash in the latter part of the month. The projections suggested
that expansion in time and savings deposits would moderate in
September, and that on the average Government deposits would
change little over September and October and the money supply
would rise only slightly.
The Committee decided that no change in monetary policy
was warranted at this time. On the one hand, a relaxation of
monetary restraint was not deemed appropriate in light of the
current strength of final demands and the persistence of inflationary pressures; on the other hand, greater restraint was not
considered desirable in view of the outlook for slowing in overall economic activity, although it was noted that firm evidence
was lacking thus far on the amount of slowing in prospect. However, a number of members—while not advocating a firming of
policy—expressed concern about the rapid rates of bank credit
expansion in recent months, and some thought that expansion in
September and October at a rate near the upper end of the pro192



jected range would be higher than desirable in the current economic environment.
At the same time, it was noted that Treasury bill rates might
well come under temporary upward pressure as a result of
credit demands associated with the September tax date and the
larger-scale sales of bills by the System that were expected to be
required in the next week or so to absorb reserves supplied by
market factors. A number of members expressed the view that
such pressures should be moderated if they proved to be unduly
marked or prolonged, in light of the risk that persistent large increases in bill rates might precipitate a change in market expectations that would result in a new general uptrend in market interest rates.
The Committee concluded that it would be desirable at present
for open market operations to be directed at maintaining about
the prevailing conditions in the money and short-term credit
markets, on the understanding that increases in Treasury bill
rates in the near term, if moderate, would not be considered inconsistent with this objective. The proviso was added that operations should be modified if bank credit appeared to be deviating
significantly from current projections.
The following current economic policy directive was issued to
the Federal Reserve Bank of New York:
The information reviewed at this meeting suggests that, although consumer demands have been strong this summer, reduced rates of inventory
accumulation and tapering growth of Government expenditures are being
reflected in a slowing of expansion in over-all activity. Industrial prices
have been increasing less rapidly in recent months, but consumer prices
have continued to rise substantially and wage pressures remain strong. Most
market interest rates have changed little on balance following reductions in
Federal Reserve Bank discount rates. Growth in bank credit and time and
savings deposits has been rapid this summer; growth in the money supply
slowed in August as U.S. Government deposits were built up following an
extended decline. The earlier improvement in the U.S. balance of payments
was not maintained in August, according to preliminary indications, and




193

the foreign trade balance and underlying payments position continue to be
matters of serious concern. In this situation, it is the policy of the Federal
Open Market Committee to foster financial conditions conducive to sustainable economic growth, continued resistance to inflationary pressures,
and attainment of reasonable equilibrium in the country's balance of payments.
System open market operations until the next meeting of the Committee
shall be conducted with a view to maintaining about the prevailing conditions in money and short-term credit markets; provided, however, that
operations shall be modified if bank credit appears to be deviating significantly from current projections.
Votes for this action: Messrs. Martin, Hayes,
Brimmer, Daane, Galusha, Hickman, Kimbrel, Maisel, Mitchell, Morris, Robertson, and Sherrill. Votes
against this action: None.

194



MEETING HELD ON OCTOBER 8, 1968
1. Authority to effect transactions in System Account.

Staff estimates of GNP in the third quarter had been revised
upward since the preceding meeting of the Committee, mainly
because consumer expenditures had proved stronger than expected. The estimates still suggested that expansion in real GNP
had moderated from its very rapid pace in the first half of the
year, but they indicated that economic growth had slowed by
less than earlier projections had implied. Projections for the
fourth quarter, which also had been raised, suggested that expansion would continue at about the rate now estimated for the
third quarter.
According to retail sales figures for August and the first 3
weeks of September, consumer spending on both durable and
nondurable goods was being maintained at the high level to
which it had risen in July. Since growth of disposable income
in the third quarter had been curtailed by the tax surcharge, it
appeared that the rate of personal saving had declined sharply.
Little further change in the saving rate seemed likely in the
fourth quarter, and with disposable income expected to continue
rising slowly, growth in consumer spending was projected to
slacken. The staff projections also suggested that other categories of final demand—including Federal outlays, residential
construction expenditures, and business spending on plant and
equipment—would provide relatively little stimulus to economic
expansion in the fourth quarter. On the other hand, the rate of
inventory accumulation, which had declined in the third quarter,
was now expected to rise in the fourth quarter.
In September output of steel was curtailed further as users
of the metal continued to reduce inventories that had been accumulated prior to the wage settlement in the steel industry. As a
consequence, the industrial production index was estimated to
have declined again. Employment in manufacturing—even apart
from the steel industry—had not increased since June, but labor




195

markets remained generally firm and in recent months average
hourly earnings had continued to increase at a rapid pace.
Average prices of industrial commodities rose appreciably in
September after having changed little for several months. The
rise, which was the largest for any month since late winter, reflected not only the advance in steel prices following the wage
settlement but also increases for a broad list of other commodities. With average prices of farm products and foods turning up,
the over-all wholesale price index rose in September by about as
much as it had declined in August. The consumer price index
increased considerably less in August than it had in June and
July, partly because of a slowing of the advance in mortgage
interest charges.
In foreign exchange markets, pressures on the French franc
abated for a time in late September but then increased again.
However, speculation on an imminent revaluation of the German
mark had subsided in recent weeks, and market conditions in
general had improved considerably. The exchange rate for sterling, which had strengthened after the September 9 announcement that final agreement had been reached on the new sterling
balances arrangement, advanced further following the publication on September 17 of figures indicating that the British foreign
trade deficit had narrowed sharply in August. On September 19
the Bank of England reduced its discount rate to 7 per cent from
the IVi per cent rate that had been in effect since March 21.
In August a large rise in U.S. merchandise exports was exceeded by an even larger rise in imports, and the U.S. trade surplus declined from the low level of July. Part of the increase in
both exports and imports was attributable to expectations of a
possible strike of longshoremen on October 1. With respect to the
over-all payments balance, tentative estimates for the third quarter indicated that the deficit on the liquidity basis was smaller
than in the second quarter. All of the improvement, however,
apparently had occurred in July; preliminary data suggested that
sizable deficits had been incurred in August and September. It
196



appeared that there was a moderate surplus in the third quarter
on the official settlements basis, mainly as a result of a further
increase in liabilities of U.S. banks to their branches abroad.
Such liabilities rose sharply from mid-August to mid-September,
but declined subsequently.
The Treasury was expected shortly to announce a cash offering of tax-anticipation bills, perhaps in the amount of $3 billion
or $3.5 billion, for which commercial banks would be permitted
to make payment by credits to tax and loan accounts. Also, an
announcement was expected on October 23 of the terms on
which the Treasury would refund notes and bonds maturing in
mid-November, of which about $4 billion were held by the
public. The possibility was noted that a pre-refunding of bonds
maturing in mid-December, of which $1.6 billion were publicly
held, might be undertaken along with the refunding of November
maturities.
System open market operations since the preceding meeting
of the Committee had been directed at maintaining about the
prevailing conditions in the money and short-term credit markets. Although the System undertook an unusually large volume
of operations for this purpose—absorbing reserves on a massive
scale in the first part of the period and supplying substantial
amounts of reserves later—money market conditions initially
eased somewhat and subsequently firmed again. Thus, the effective rate in Federal funds transactions, which had averaged
about 5% per cent in the period before the previous meeting,
fluctuated below that level for a time and then moved up to the
6 per cent area. Rates posted by major banks on loans to Government securities dealers followed a similar pattern.
A number of factors combined to complicate operations and
to require a large volume of transactions by the System in this
period. In addition to normal seasonal fluctuations, these factors
included large international transactions affecting reserves; a
sharp, although temporary, decline in Treasury balances at Reserve Banks before the September 18 payment date for corporate




197

taxes; and the adoption of new methods for calculating required
reserves of member banks under the revision of Regulation D
that became effective on September 12.1
With respect to the last of these factors, the introduction of a
2-week lag in the deposit balances used for calculating required
reserves, at a time when deposits were rising seasonally, had the
effect of temporarily reducing required reserves and increasing
excess reserves considerably relative to the levels that would have
obtained under the prior procedures, thus necessitating offsetting
open market operations. In addition, operations were complicated by uncertainties as to how member banks would react—
particularly during a transition period—to this and the other
changes in procedures, including the new carryover provisions
for reserve excesses and deficiencies. The effects of the carryover
provisions on reserve-management practices of banks were expected to have the incidental consequence of weakening the
short-run relationship between marginal reserves—that is, free
or net borrowed reserves—and the other measures used to assess
money market conditions. As it turned out, net borrowed reserves increased on the average in the 3 weeks beginning September 12; average borrowings by member banks declined to
about $475 million from $520 million in the preceding 4 weeks,
but excess reserves declined more.
Yields on both short- and long-term Treasury securities, like
day-to-day money market rates, moved down after mid-September and then rose again—changing little on balance during the
1

Under Regulation D, as amended effective Sept. 12, 1968, all member banks
are required to meet their daily-average reserve requirements on a weekly basis;
previously, a biweekly settlement period had been employed for country banks.
In addition., required reserves are calculated on the basis of average deposits
2 weeks earlier rather than on the basis of average deposits in the current settlement period. Similarly, the vault cash component of the total reserves maintained
by banks is recorded with a 2-week lag. Also, member banks are permitted to
carry forward into the next reserve week excesses, as well as deficiencies, in
reserve requirements averaging up to 2 per cent of required reserves, except
that any portion of such excesses or deficiencies not offset in the next week may
not be carried forward into later weeks.

198



period since the preceding meeting of the Committee. The market rate on 3-month Treasury bills, for example, fell from a high
of 5.30 per cent reached before mid-September to 5.09 per cent
late in the month and then advanced; on the day before this meeting it was 5.26 per cent, 2 basis points above its level 4 weeks
earlier.
The initial downward pressures on Treasury security yields
were reinforced by expectations of a reduction in the 6Vi per
cent prime lending rate of banks that had prevailed since midApril. The prime rate was reduced in late September, to 6x/4 per
cent by most banks and to 6 per cent by a few. Among the factors contributing to the subsequent upward pressures on Treasury security yields were the failure of the 6 per cent prime rate
to become general, indications that economic conditions were
stronger than had been expected, and increasing attention among
market participants to forthcoming Treasury financing operations.
In private capital markets yields on new corporate bonds had
been relatively stable in recent weeks, but yields on State and
local government issues had declined considerably, mainly because of continued heavy acquisitions by commercial banks. At
the close of the period, however, both corporate and municipal
yields were rising again.
Conditions in markets for residential mortgages appeared to
have eased slightly further in September. Net inflows of deposits
to nonbank financial intermediaries increased only moderately in
August, the latest month for which data were available. However, liquidity ratios at Federal savings and loan associations
declined markedly in both July and August after the Federal
Home Loan Bank Board reduced minimum liquidity requirements, and this development helped to sustain mortgage lending
activity by such associations.
Time and savings deposits at commercial banks, which had
grown rapidly in July and August, expanded substantially again
in September. Inflows of consumer-type deposits increased fur-




199

ther, and the outstanding volume of large-denomination CD's
declined less than seasonally despite moderate reductions in offering rates on all CD's except those of short maturity. Private
demand deposits and the money supply declined; on balance the
money supply had not increased since the first week of July, after
rising substantially in preceding months.
Growth of business loans at banks slowed in September. Although banks' holdings of municipal securities expanded considerably further, their holdings of Treasury securities were
about unchanged—in contrast to the two preceding months
when banks had been heavy buyers of securities offered in
Treasury financings. Total bank credit, as measured by the bank
credit proxy—daily-average member bank deposits—rose at an
annual rate of about 9 per cent in September, compared with a
rate of more than 21 per cent in August. Allowance for changes
in the daily average of U.S. bank liabilities to foreign branches
would have served to increase the growth rate by about 1.5 percentage points in September and 0.5 of a percentage point in
August.
Bank credit growth was expected to accelerate somewhat in
October as a result of the anticipated cash financing by the
Treasury. The latest staff projections suggested that the bank
credit proxy would expand at an annual rate of 10 to 13 per
cent if the conditions in money and short-term credit markets
that had prevailed on the average since the Committee's preceding meeting were maintained. This projection assumed that the
Treasury would offer $3.5 billion of tax-anticipation bills for
payment in the latter part of the month and that commercial
banks initially would acquire the bulk of the offering. Slower
growth of bank credit was projected for November, when the
Treasury was not expected to raise new cash. The October projection allowed for some moderation in the rate of expansion in
time and savings deposits and for little growth in private demand deposits. A small increase in the money supply, reflecting
mainly an expansion in currency, was anticipated.
200



The Committee was divided in its views on the appropriate
course for monetary policy under current circumstances, with a
majority favoring no change and a minority advocating at least
a slight increase in monetary restraint. The majority was opposed to greater restraint at present primarily because it continued to expect the rate of expansion of consumer spending and
of economic activity in general to slow down as the effects of the
recent fiscal restraint measures were increasingly felt. The fact
that the Treasury would be undertaking a major refunding operation before the Committee's next meeting also was cited as a
consideration militating against a change in policy at this time.
The Committee concluded that open market operations should
be directed at maintaining the conditions in money and shortterm credit markets that had prevailed on the average in the
period since the preceding meeting, on the understanding that
operations would not be undertaken to offset any moderate upward pressures on Treasury bill rates that might develop. The
proviso was added that operations should be modified, insofar as
the forthcoming Treasury refunding permitted, if the rate of
bank credit expansion appeared to be significantly in excess of
current projections.
The following current economic policy directive was issued to
the Federal Reserve Bank of New York:
The information reviewed at this meeting suggests that over-all economic
expansion has moderated, although less than projected, from its very rapid
pace earlier in the year, but upward pressures on prices and costs are persisting. Most market interest rates have changed little on balance in recent
weeks. Bank credit and time and savings deposits expanded rapidly this
summer, but the money supply has shown no net growth since July after
rising substantially for several months. The earlier improvement in the
U.S. balance of payments was not maintained in August and September,
according to preliminary indications, and the foreign trade balance and
underlying payments position continue to be matters of serious concern. In
this situation, it is the policy of the Federal Open Market Committee to
foster financial conditions conducive to sustainable economic growth, con-




201

tinued resistance to inflationary pressures, and attainment of reasonable
equilibrium in the country's balance of payments.
To implement this policy, System open market operations until the next
meeting of the Committee shall be conducted with a view to maintaining
about the prevailing conditions in money and short-term credit markets;
provided, however, that operations shall be modified, to the extent permitted
by the forthcoming Treasury refunding operation, if bank credit expansion
appears to be significantly exceeding current projections.
Votes for this action: Messrs. Martin, Brimmer,
Daane, Galusha, Maisel, Mitchell, Morris, Robertson, and Sherrill. Votes against this action: Messrs.
Hayes, Hickman, and Kimbrel.

Messrs. Hayes, Hickman, and Kimbrel dissented from this
action because they thought that the rates of bank credit growth
recorded in recent months and the rate projected for October
were excessive, particularly in light of the persisting inflationary
pressures and the unexpected strength in the economy. Accordingly, they favored seeking money market conditions somewhat
firmer than those advocated by the majority, to the extent the
Treasury refunding operation permitted.
2. Amendment to authorization for System foreign currency
operations.

At its meeting on March 14, 1968, the Committee had authorized the Special Manager to undertake negotiations looking
toward increases, up to specified limits, in a number of the
System's reciprocal currency arrangements, on the understanding that any such enlargements—and the corresponding amendments to paragraph 2 of the authorization for System foreign
currency operations—would become effective upon a determination by Chairman Martin that they were in the national interest.
As indicated in the policy record for March 14, the Chairman
had made the indicated determination for certain of these arrangements on March 17.
Among the arrangements covered by the Committee's action
202



of March 14 was that with the Bank of Italy, for which negotiations looking toward an increase of up to $250 million equivalent
had been authorized. Recently these negotiations had been successfully completed, and on the day of this meeting Chairman
Martin determined that an increase in the swap arrangement with
the Bank of Italy from $750 million to $1 billion equivalent was
in the national interest. Accordingly, the corresponding amendment to paragraph 2 of the authorization for System foreign currency operations became effective on October 8, 1968.




203

MEETING HELD ON OCTOBER 29, 1968
Authority to effect transactions in System Account.

The expansion in real GNP moderated somewhat in the third
quarter, according to preliminary Commerce Department estimates. The amount of slowing—to an annual rate of about 5
per cent, from more than 6 per cent in the first half of the year
—was less than had been implied by recent staff projections.
New projections presented at this meeting suggested that the expansion would moderate somewhat further in the fourth quarter
and would continue to slow in the first half of 1969.
The strong performance of the economy in the third quarter
was attributable largely to a substantial increase in consumer
spending. Growth in disposable income was sharply curtailed by
the tax surcharge, so the rise in consumer spending was associated with a large decline in the rate of personal saving; indeed,
the decline in the saving rate was one of the largest in nearly a
decade. In addition, business outlays on plant and equipment
increased substantially after moving down in the second quarter,
and Federal outlays expanded further, although at a considerably
slower rate than earlier in the year.
Retail sales in October were remaining close to the advanced
level of the summer months, according to available weekly figures. Output of steel, which had been cut back sharply following
the late-July wage settlement in that industry, turned up in early
October, and the industrial production index for October was
tentatively estimated to have risen slightly after declining for 2
months. In September nonfarm employment expanded only moderately, and the unemployment rate edged up to 3.6 per cent from
3.5 per cent in August. Labor markets remained firm, however,
and wage rates continued under strong upward pressure.
Average prices of industrial commodities, which had increased
appreciably in September following several months of little

204



change, rose substantially further in October. In both months
the advance encompassed a broad range of commodities. The
over-all wholesale price index was unchanged in October, however, as prices of farm products and foods fell by about as much
as they had risen in the preceding month. The consumer price
index increased moderately in September.
Conditions in foreign exchange markets had improved in the
latter part of September when speculation on an imminent revaluation of the German mark abated, and the markets remained
quiet in October. The exchange rate for sterling had been firm
in recent weeks. Although the exchange rate for the French franc
remained at or close to its lower support limit, selling pressures
against the franc appeared to have moderated considerably.
The surplus on U.S. merchandise trade in the third quarter
was somewhat above the very low levels of the first two quarters
of the year, with part of the improvement reflecting an acceleration of exports in anticipation of a possible strike of longshoremen on October 1. New estimates of over-all payments flows
suggested that the balance on the liquidity basis was less unfavorable in September than had been thought earlier and that
the deficit was smaller in the third quarter as a whole than previous estimates had indicated. However, fragmentary data for
early October suggested renewed deterioration. The latest estimates of the balance on the official settlements basis still indicated a moderate surplus in the third quarter, mainly as a result
of a further rise in borrowings of U.S. banks through their foreign branches.
On October 17 the Treasury auctioned $3 billion of taxanticipation bills due in June 1969. Bidding in the auction was
aggressive, in part because the offering coincided with widespread reports that a halt in the bombing of North Vietnam was
imminent. On October 23 the Treasury announced that in exchange for securities maturing in mid-November and mid-December, of which about $5.6 billion were held by the public, it




205

would offer 2 notes—a new 18-month, 55/s per cent note priced
to yield 5.73 per cent, and a reopened 6-year, 5% per cent note
priced at par. It was expected that the Treasury would auction
additional tax-anticipation bills for payment in late November
or early December mainly to compensate for cash redemptions
in connection with the current refunding.
Interest rates on most types of market securities had risen on
balance in recent weeks, although yields had fluctuated in response to shifting prospects for the de-escalation of hostilities in
Vietnam. Both short- and long-term markets were influenced by
continuing reports indicating that economic expansion was vigorous despite the recent fiscal legislation, and by the associated
expectations that a firmer monetary policy might be required to
resist inflationary pressures. In short-term markets yields increased on finance company and commercial paper, bankers'
acceptances, and Treasury bills; the market rate on 3-month
Treasury bills, at 5.46 per cent on the day before this meeting,
was 20 basis points above its level of 3 weeks earlier. Contributing to the upward pressures on long-term rates were the large
volume of new corporate security offerings and the record
amount of State and local government issues in October, as well
as the Treasury refunding.
In markets for home mortgages, the gradual easing of conditions that had been under way since mid-June continued in September, although the increase in net deposit inflows to nonbank
financial intermediaries was again moderate. After the first
week of October, however, there were indications that conditions
in the secondary market for mortgages were beginning to tighten
again.
Time and savings deposits at commercial banks continued to
expand rapidly in October, according to preliminary estimates.
It appeared that inflows of consumer-type time and savings deposits had accelerated further. In addition, banks increased their
offering rates on large-denomination CD's slightly—by about the

206



amount they had reduced them in September—and the volume
of CD's outstanding rose considerably. Private demand deposits
and the money supply were estimated to have increased fairly
rapidly from September to October—the money supply at an
annual rate of about 7 per cent—after changing little on balance
since the first week of July.
Business loan demands at commercial banks were relatively
strong in October, and banks continued to add to their holdings
of municipal securities at a substantial pace. Total bank credit,
as measured by the bank credit proxy—daily-average member
bank deposits—was estimated to have increased at an annual
rate of about 12 per cent in October, compared with 9 per cent
in September. Allowance for changes in the daily average of
U.S. bank liabilities to their foreign branches would have reduced the October growth rate by about one-half of a percentage
point and increased the rate for September by about 1.5 percentage points.
System open market operations in the period since the preceding meeting of the Committee had initially been directed at maintaining about the prevailing conditions in the money and shortterm credit markets. Later, however, some slight firming of conditions had been permitted, within the limitations imposed by
the current Treasury refunding, because estimates from time to
time indicated that bank credit was expanding at a rate at or
above the upper end of the projected range (after some downward revision of the projection to allow for a smaller Treasury
offering of tax-anticipation bills than had been assumed). The
System had carried out relatively large operations, alternately
absorbing and supplying reserves, to cope with sizable fluctuations in market factors affecting reserves and with pressures
generated by continuing member bank adjustments to the new
reserve computation procedures that had become effective on
September 12. In recent weeks the effective rate on Federal funds
had fluctuated mostly in a range of 534 to 6V6 per cent. Member




207

bank borrowings averaged about $425 million in the 2 weeks
ending October 23, down slightly from the average of $455
million in the preceding 4 weeks. Excess reserves declined more
on the average, however, and net borrowed reserves increased.
New staff projections suggested that, if prevailing conditions
in money and short-term credit markets were maintained, the
bank credit proxy would expand at an annual rate of 9 to 12
per cent in November and more slowly in December. The projections, which assumed that the Treasury would offer $2.5 billion
of tax-anticipation bills for payment in the last week of November, were subject to revision if the size or timing of the offering
were different. It was expected that business loan demand would
remain fairly strong in November and that banks would continue to acquire municipal securities at a rapid pace. Prospects
favored slower growth in the volume of large-denomination CD's
outstanding and in total time and savings deposits at commercial
banks, but it appeared likely that the money supply would increase at a rate equal to or slightly above that estimated for
October.
The Committee agreed that the current Treasury refunding
precluded a change in monetary policy at this time. Some members indicated that in the absence of the Treasury financing they
would have favored seeking somewhat firmer money market
conditions, on the grounds that recent and prospective rates of
bank credit growth were excessive in light of prevailing inflationary pressures. Some other members expressed the view that
an increase in monetary restraint was not warranted at present
even apart from the financing. While recognizing the uncertainties in the outlook, they believed the most likely prospect at
the moment was that the economic advance would slow sufficiently under the current stance of stabilization policies.
The Committee concluded that open market operations should
be directed at maintaining about the prevailing conditions in
money and short-term credit markets, with the proviso that op-

208



erations should be modified, insofar as the Treasury financing
permitted, if bank credit growth appeared to be in excess of
current projections. The following current economic policy directive was issued to the Federal Reserve Bank of New York:
The information reviewed at this meeting suggests that over-all economic
expansion has moderated somewhat from its very rapid pace earlier in the
year, although less than projected, and that upward pressures on prices and
costs are persisting. Market interest rates have risen in recent weeks. Bank
credit and time and savings deposits have continued to expand rapidly, but
savings inflows to thrift institutions have remained moderate. The money
supply, after growing little on balance during the summer, has increased in
recent weeks. The U.S. foreign trade balance and underlying payments position continue to be matters of serious concern. In this situation, it is the policy
of the Federal Open Market Committee to foster financial conditions conducive to sustainable economic growth, continued resistance to inflationary
pressures, and attainment of reasonable equilibrium in the country's balance
of payments.
To implement this policy, while taking account of the current Treasury
financing, System open market operations until the next meeting of the Committee shall be conducted with a view to maintaining about the prevailing
conditions in money and short-term credit markets; provided, however, that
operations shall be modified, to the extent permitted by the Treasury financing, if bank credit expansion appears to be exceeding current projections.
Votes for this action: Messrs. Martin, Brimmer,
Daane, Galusha, Hickman, Kimbrel, Maisel, Mitchell, Morris, Robertson, and Sherrill. Vote against this
action: Mr. Hayes.
In dissenting from this action, Mr. Hayes said he agreed that
the current Treasury refunding precluded any substantial change
in monetary policy. He thought, however, that the implications
of the prevailing inflationary pressures for the domestic economy
and the balance of payments were sufficiently serious to warrant
seeking whatever degree of firming in money market conditions
would be consistent with the Treasury financing—however slight
that might be—in an effort to slow bank credit growth from a
rate he considered excessive.




209

MEETING HELD ON NOVEMBER 26, 1968
1. Authority to effect transactions in System Account.

The information reviewed at this meeting suggested that the expansion in over-all economic activity, while still strong, was
moderating somewhat further in the fourth quarter from its very
rapid pace earlier in the year. In particular, retail sales in October
were no higher than they had been in August—suggesting that
the surge in consumer spending was subsiding—and the rise in
Federal expenditures was estimated to be slackening further. Staff
projections implied that the rate of economic expansion would
continue to moderate in the first half of 1969.
Recent data of various kinds indicated that the expansion was
still strong. Industrial production, which was now reported to
have turned up in September, advanced again in October, and
new orders for durable goods increased sharply. Nonfarm payroll
employment rose more in October than in other recent months,
and the unemployment rate continued at the September level of
3.6 per cent. According to a private survey taken in October,
businesses planned to increase their outlays on new plant and
equipment in 1969 by about 8 per cent, or more than the rise
currently estimated for 1968.
Average prices of industrial commodities increased slightly
in November after advancing at a substantial rate in the two
preceding months. In contrast, the consumer price index—which
had increased only moderately in September—rose sharply in
October. With labor markets remaining firm, sizable further
advances in average hourly earnings were widespread among
industries.
Foreign exchange markets were in turmoil during most of
November. Speculative buying of German marks revived on a
large scale in early November in response to renewed rumors of
an imminent revaluation. Selling pressure on the French franc

210



intensified, and sterling was also subject to pressure, particularly
after the publication of figures indicating that the British foreign
trade deficit had increased somewhat in October.
On November 19 the German Government announced that the
mark would not be revalued, but that in order to reduce the
German trade surplus the value-added tax rebate would be decreased by 4 percentage points for merchandise exports and the
border tax would be reduced by 4 percentage points for most
imports. The Finance Ministers and central bank Governors of
the Group of Ten met at Bonn November 20 through 22. New
credit facilities totaling $2 billion were made available to France,
and the German authorities increased to 100 per cent the reserve
requirements on additions to German commercial bank liabilities
to foreigners.
On November 23, contrary to the expectations of many observers, the French Government announced that the franc would
not be devalued, and on the following day President de Gaulle
outlined the policy measures that would be adopted. In addition
to the reimposition of exchange controls, these measures included
a sizable reduction in French budget expenditures, a more restrictive policy toward wage and price increases, and changes in the
tax system to favor exports and deter imports. Earlier, on November 13, the Bank of France had increased its discount rate
from 5 to 6 per cent and had announced measures to limit the
expansion of bank credit.
The British Government on November 22 announced new
actions to restrain domestic demand and to improve the balance
of payments. These included a 10 per cent surcharge on existing
purchase and excise taxes; requirement of 6-month non-interestbearing deposits equal to 50 per cent of the value of imports of
most manufactured goods; and tighter ceilings on bank loans to
the private sector.
Official estimates of the U.S. balance of payments indicated
that there had been a small surplus in the third quarter on the




211

liquidity basis of calculation, following a moderate deficit in the
second quarter. Special official transactions operating to reduce
the deficit remained large, but were not so large as in the second
quarter. The trade surplus, although still quite small, was larger
than in the first two quarters of the year; this resulted partly from
acceleration of shipments in September in anticipation of a
possible strike of longshoremen on October 1. Available data for
October and the first 2 weeks of November suggested that a sizable deficit on the liquidity basis had again emerged.
Official data confirmed the earlier expectation that a moderate
payments surplus had been recorded in the third quarter on the
official settlements basis, largely because of a further increase in
borrowings of U.S. banks through their branches abroad. The
outstanding volume of such borrowings changed little after midSeptember, however, and in October the balance on the official
settlements basis probably was in deficit.
In its November refunding the Treasury offered 2 notes in exchange for securities maturing in mid-November and mid-December. Of the $5.6 billion of these issues held by the public, $2.5
billion were exchanged for a new 18-month, 55/s per cent note
(priced to yield 5.73 per cent), and $1.3 billion were exchanged
for a reopened 6-year, 5% per cent note (priced at par). On November 19 the Treasury announced that it would auction $2 billion of tax-anticipation bills due in June, for payment on December 2, mainly to raise cash to redeem the $1.8 billion of maturing
securities not exchanged in the November refunding. This offering was expected to be the Treasury's last financing in the calendar year, and its size was near the lower end of the range that
had been anticipated by market participants.
With the Treasury refunding under way, recent System open
market operations had been directed at maintaining generally
steady conditions in money and short-term credit markets.
Operations were complicated, however, by shifts in the distribution of reserves—first away from banks in the money centers and

212



then back again—and by the effects on total reserves of a sharp
decline in Treasury balances at the Federal Reserve Banks and
of large-scale international transactions. The effective rate on
Federal funds was 6 per cent or higher on most days in the
first half of November, but it subsequently fluctuated around
53A per cent. Member bank borrowings averaged about $520
million in the 4 weeks ending November 20, above the average
of about $450 million in the preceding 4 weeks, Excess reserves
also increased on the average but less than borrowings, and net
borrowed reserves were slightly larger.
Yields on Treasury, corporate, and State and local government bonds had risen further in recent weeks, partly because of
continuing heavy demands on the capital markets. The volume
of corporate and municipal bond offerings in November, while
less than in October, was relatively large. The upward rate
pressures also reflected cautious attitudes on the part of investors,
against the background of indications of strength in the economy,
widespread expectations of inflation, and growing anticipations of
a firmer monetary policy. On the other hand, there was relatively
little reaction in capital markets to either the late-October announcement of a halt in the bombing of North Vietnam or the
recent turbulence in foreign exchange markets.
Interest rates on various types of short-term instruments also
had risen recently, in response to some of the same factors affecting longer-term rates as well as to seasonal pressures. However,
there was little net change in yields on shorter-term Treasury
bills, the market supplies of which had become limited at a time
of strong domestic and foreign demands. The market rate on
3-month Treasury bills, at 5.42 per cent on the day before this
meeting, was 4 basis points below its level of 4 weeks earlier.
Net inflows of deposits to nonbank financial intermediaries
again increased only moderately in October. Yields on home
mortgages in the secondary market, which had been declining for
several months, edged up in October and apparently also in the
first half of November.




213

Rates paid by banks on large-denomination CD's also had advanced further in recent weeks. Most banks were now paying
the Regulation Q ceiling rate of 6 per cent on certificates with
maturities of 90 to 179 days, and some reportedly were paying
the 6V4 per cent ceiling rate on longer-term certificates. According to tentative estimates, growth from October to November in
the volume of outstanding CD's, and of other time and savings
deposits as well, was slower than it had been in other recent
months. On the other hand, the expansion in private demand
deposits and the money supply accelerated—the latter to an estimated annual rate of more than 10 per cent, the highest since
July. Bank credit, as measured by the proxy series—daily-average member bank deposits—was tentatively estimated to have
increased from October to November at an annual rate of 10.5
per cent, compared with 12.5 per cent from September to October. In mid-November prime lending rates were raised to the
generally prevailing level of 6lA per cent by the few large banks
that had reduced such rates from 6V2 to 6 per cent in late September.
Staff projections suggested that the bank credit proxy would
increase from November to December at an annual rate of 5 to
8 per cent if prevailing conditions were maintained in money and
short-term credit markets. The projections assumed that the
volume of large-denomination CD's outstanding would decline
seasonally and that growth in other time and savings deposits
would slow somewhat further. An anticipated reduction in the
average level of U.S. Government deposits was expected to contribute to expansion in private demand deposits and the money
supply at a rapid rate, although not so rapid as in November.
Committee members differed in their views on the appropriate
course for monetary policy under current circumstances, with a
minority favoring operations directed at attaining somewhat
firmer money market conditions. The majority thought that,
although it would be advisable to resist any easing of money
market conditions that might be produced by market forces, a
214



shift to a firmer policy stance was not warranted at this time.
Members of the majority shared the concern expressed about
the persistence of inflationary pressures, and some indicated that
they had found the question of appropriate policy to be close. On
balance, however, they believed that domestic economic considerations did not suggest a clear and unequivocal need for a
firmer policy at present. In their judgment, despite the unexpected
strength of the economy since enactment of fiscal restraint legislation at midyear, evidences of slowing in the rate of expansion
were likely to become more pronounced in coming months. Other
considerations cited as militating against a policy change at
present were the recent turbulence and the continuing uncertainties in foreign exchange markets, and the fact that in financial
markets the peak seasonal pressures of the year were to be expected in the period just ahead. Several members expressed the
view that a slight firming of policy at this time would not be
effectual in combatting the prevailing inflationary psychology,
and that a more marked firming would be undesirable on the
other grounds cited.
The Committee concluded that open market operations should
be directed at maintaining about the prevailing conditions in
money and short-term credit markets, with the proviso that
operations should be modified if bank credit expansion appeared
to be exceeding current projections. The following current economic policy directive was issued to the Federal Reserve Bank
of New York:
The information reviewed at this meeting suggests that the expansion in
over-all economic activity, while still strong, is moderating somewhat further from its very rapid pace earlier in the year. Upward pressures on prices
and costs are persisting. Most market interest rates have risen further in
recent weeks. Bank credit has continued to expand rapidly. Growth in the
money supply has accelerated from the low average rate of recent months,
while expansion in commercial bank time and savings deposits has slowed.




215

Savings inflows to thrift institutions increased somewhat further in October
but remained moderate. Following discussions among leading industrial
countries, France, Germany, and Britain have acted to combat the recent
speculation in their currencies by taking steps designed to reduce imbalances
in their external payments. The U.S. foreign trade balance and over-all
balance of payments improved in the third quarter but partial data for
recent weeks suggest that the improvement is not being sustained, and the
underlying U.S. payments position remains a serious problem. In this situation, it is the policy of the Federal Open Market Committee to foster financial conditions conducive to sustainable economic growth, continued resistance to inflationary pressures, and attainment of reasonable equilibrium
in the country's balance of payments.
To implement this policy, System open market operations until the next
meeting of the Committee shall be conducted with a view to maintaining
about the prevailing conditions in money and short-term credit markets;
provided, however, that operations shall be modified if bank credit expansion appears to be exceeding current projections.
Votes for this action: Messrs. Martin, Brimmer,
Daane, Galusha, Maisel, Mitchell, Robertson, and
Sherrill. Votes against this action: Messrs. Hayes,
Hickman, Kimbrel, and Morris.
In dissenting from this action, Messrs. Hayes, Hickman, Kimbrel, and Morris indicated that they favored seeking somewhat
firmer money market conditions in an effort to slow the rate of
bank credit growth, which in their view had been excessive for
several months. They thought such action was required in light
of prevailing inflationary pressures and expectations. In their
judgment, the latest information on the domestic economy lent
support to the view that the rate of expansion, while perhaps
moderating somewhat in coming months, was likely to remain
excessive under the current stance of fiscal and monetary
policies. The view also was expressed that a firmer monetary
policy was desirable to help maintain the strength of the dollar
in foreign exchange markets.

216



2. Ratification of amendment to authorization for System foreign
currency operations.

The Committee ratified an action taken by members on November 22, 1968, effective on that date, to increase the System's
swap arrangement with the Bank of France from $700 million
to $1 billion, equivalent, and to make the corresponding amendment to paragraph 2 of the authorization for System foreign
currency operations. As a result of this action, paragraph 2 read
as follows:
The Federal Open Market Committee directs the Federal Reserve Bank
of New York to maintain reciprocal currency arrangements ("swap" arrangements) for System Open Market Account for periods up to a maximum of 12 months with the following foreign banks, which are among
those designated by the Board of Governors of the Federal Reserve System
under Section 214.5 of Regulation N, relations with foreign banks and
bankers, and with the approval of the Committee to renew such arrangements on maturity:

Foreign bank
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank




Amount of
arrangement
(millions of
dollars equivalent)
100
225

1,000
100

2,000
1,000
1,000
1,000
1,000
130
400
100
250
600

217

Foreign bank

Amount of
arrangement
(millions of
dollars equivalent)

Bank for International Settlements:
System drawings in Swiss francs
System drawings in authorized European
currencies other than Swiss francs

600
1,000

Votes for ratification of this action: Messrs. Martin, Hayes, Brimmer, Daane, Galusha, Hickman,
Kimbrel, Maisel, Mitchell, Morris, Robertson, and
Sherrill. Votes against ratification of this action:
None.

This increase in the Federal Reserve swap line with the Bank
of France represented part of the U.S. share of the $2 billion in
new credit facilities to France that had been announced in Bonn
on November 22, following the meeting of the Finance Ministers
and central bank Governors. In addition, the U.S. Treasury
made a $200 million credit facility available to France, so total
U.S. participation in the new facilities was $500 million.

218



MEETING HELD ON DECEMBER 17, 1968
Authority to effect transactions in System Account.

The current rate of expansion in over-all economic activity was
significantly higher than had been projected earlier, according to
a broad variety of economic information that had become available since the preceding meeting of the Committee. New staff
projections suggested that GNP in current-dollar terms would
increase about as rapidly in the fourth quarter as it had in the
third. Average prices, as measured by the "GNP deflator," were
estimated to be rising at a faster pace again in the fourth quarter,
and growth in real GNP was expected to moderate somewhat
further from the very high rates recorded in the first two quarters
of the year. Expectations of continued inflationary pressures
appeared to be widespread.
The staff projections of GNP in both the fourth and first
quarters had been revised upward from those of 3 weeks earlier
largely because of the indication, from the Commerce-SEC
survey of business plans taken in November, that outlays on
new plant and equipment were rising sharply. Other evidences
of strength in the current business situation were reflected in
November data on production, employment, and retail sales. A
sizable further advance in industrial production in November
brought the index above the previous high recorded in July, when
output of steel had been substantially larger. Nonfarm payroll
employment again rose sharply, and the unemployment rate
declined to 3.3 per cent—its lowest level in 15 years—from 3.6
per cent in October. Average hourly earnings continued to advance at the rapid pace of recent months. Retail sales, according to the advance estimate, rose in November after edging down
in September and October. It appeared, however, that consumer
expenditures would expand considerably less in the fourth quarter as a whole than they had in the third quarter.




219

The staff projections still implied that the rate of increase in
real GNP would moderate considerably in the first half of 1969,
partly because of a marked swing from deficit to surplus that was
already under way in the Federal fiscal position. In addition, it
was expected that expansion in consumer expenditures would
slow further as a result of slackened growth in disposable income
and that the increase in residential construction outlays would be
limited by tight conditions in mortgage markets. Against the
background of prospects in these sectors, the resurgence of business capital outlays and the report that inventories had risen
markedly in October suggested that imbalances could be developing in the economy as a result of inflationary expectations.
In foreign exchange markets, earlier speculative movements
of funds were partly reversed following the actions taken in
late November by Germany, France, and Britain to reduce imbalances in their external payments. The pound was again subject
to selling pressure in early December, however, and the market
for sterling remained uneasy even after publication of figures
indicating that Britain's foreign trade balance had improved
sharply in November.
Available information on the U.S. balance of payments in
October and November suggested that sizable deficits had again
emerged on both the liquidity and official settlements bases of
calculation, following the surpluses—small in the case of the
liquidity balance—that had been recorded in the third quarter.
Since mid-September there had been relatively little net change
in borrowings by U.S. banks through their foreign branches; in
the spring and summer, increases in such borrowings had resulted in the payments surpluses recorded then on the official
settlements basis. U.S. merchandise exports declined sharply
in October after rising considerably in September in anticipation
of a longshoremen's strike on October 1. Imports also declined
in October, but more moderately than exports; for September
and October together there was a small surplus in U.S. foreign

220



trade. With the current Taft-Hartley Act injunction against the
strike scheduled to expire on December 20, continued marked
fluctuations in monthly foreign trade figures appeared likely.
In late November the Treasury auctioned $2 billion of taxanticipation bills due in June 1969, for payment on December 2.
Banks, which were allowed to pay for the bills through credits
to Treasury tax and loan accounts, successfully bid for the bulk
of the issue. Despite this cash financing, however, Treasury cash
balances at banks were drawn down to very low levels prior to
the quarterly corporate tax date in mid-December, and the
Treasury temporarily replenished its balances in the period December 10-17 by selling special certificates of indebtedness to
the Federal Reserve. The volume of such certificates outstanding
was $92 million on December 10, none on December 11, $45
million on December 12, $430 million from December 13
through 15, $447 million on December 16, and $596 million on
December 17. (Certificates outstanding on December 17 were
redeemed the following day.)
Interest rates on market securities of all maturities had risen
sharply further in recent weeks as the steady stream of statistics
reflecting strength in the economy heightened concern about inflationary pressures and enhanced expectations of a firmer monetary policy. Increases in yields were particularly rapid in early
December after commercial banks increased their prime lending
rates from 6lA per cent to the 6V^ per cent level that had prevailed before the reductions of late September. Yields on most
long-term securities rose to levels above the peaks that had been
reached in the spring, and unsettled conditions in the capital
markets led to the postponement or cancellation of a number of
scheduled corporate and municipal bond offerings. Conditions in
the secondary market for home mortgages continued to tighten
in early December.
In markets for short-term securities, yield advances were particularly pronounced for Treasury bills; on the day before this




221

meeting the market rate on 3-month bills was 5.94 per cent, 52
basis points above its level of 3 weeks earlier. Upward pressures
on bill yields were augmented by seasonal forces, sales of bills
by foreign monetary authorities, and sales by domestic commercial banks of tax-anticipation bills they had acquired in the
Treasury's recent auction.
Rates paid by commercial banks on large-denomination CD's
of longer maturity had increased further in recent weeks, and
most large banks were now paying the Regulation Q ceiling
rates for all maturities. The volume of CD's outstanding rose
substantially in November, particularly after midmonth. Largely
as a consequence, the expansion in total time and savings deposits from October to November was more rapid than earlier
tentative estimates had indicated, although somewhat less rapid
than in other recent months.
Estimates of November growth rates also had been revised
upward somewhat for bank credit, as measured by the proxy
series—daily-average member bank deposits—and for the money
supply; both were now estimated to have increased from October
to November at an 11.5 per cent annual rate. Since midyear,
bank credit and the money supply had expanded at annual rates
of about 13 and 6 per cent, respectively, compared with rates
of about 4 and 6.5 per cent in the first half of the year. In November banks increased the volume of business loans outstanding
considerably further and continued to acquire municipal securities at a rapid pace, while reducing their holdings of U.S. Government securities. To a large extent, the accelerated growth
in the money supply in November reflected a rise in private demand deposits in the last half of the month, when U.S. Government deposits declined markedly.
System open market operations in the first part of the period
since the Committee's preceding meeting were directed at maintaining about the prevailing conditions in money and short-term
credit markets, and reserves were supplied partly in an effort to

222



cushion the sharp reaction of short-term market interest rates to
the rise in the prime rate. Operations subsequently were shifted
in the direction of reserve absorption when market factors began
to supply a large volume of reserves and when estimates indicated that bank credit was expanding at a rate in excess of the
range projected at the time of the previous meeting. These operations were tempered, however, in view of the continuing increases
in short-term rates. During the period as a whole, the effective
rate on Federal funds fluctuated mostly in a range of 5% to 6 per
cent. Member bank borrowings averaged $515 million in the 3
weeks ending December 11, little changed from the previous 4
weeks. With excess reserves lower on the average, net borrowed
reserves rose in the period.
New staff projections suggested that if prevailing conditions in
money and short-term credit markets were maintained, on balance, the bank credit proxy would expand at an annual rate of
8 to 11 per cent from November to December and at a rate of
4 to 7 per cent from December to January. Given the current
relationships between short-term interest rates and Regulation Q
ceiling rates, it was expected that banks would experience a
larger-than-seasonal run-off of CD's in December and a contraseasonal run-off in January, and that inflows of consumer-type
time and savings deposits would begin to moderate. Growth in
the money supply was expected to slow considerably in December—and perhaps to taper off further in January, particularly if
demands for business loans were reduced.
An alternative projection suggested that a firming of money
market conditions would have relatively little effect on bank
credit growth in December but would result in a slower rate of
growth in January—an annual rate of perhaps 2 to 5 per cent
—mainly as a result of a larger run-off of CD's. For purposes of
the projections it was assumed that the Treasury would not
engage in any new cash borrowing through the end of January.
Prior to this meeting the boards of directors of nine Federal




223

Reserve Banks had acted, subject to the approval of the Board
of Governors, to increase discount rates from the present level of
5lA per cent. It was reported to the Committee that the Board
of Governors planned shortly after this meeting to take action
with respect to discount rates and also to consider the desirability
of a moderate increase in member bank reserve requirements.
The Committee was unanimously of the view that greater
monetary restraint was required at this time in light of the unexpected strength of current economic activity, the persistence
of inflationary pressures and expectations, and the recent rapid
rate of growth in bank credit. The members agreed that one
element of the shift to greater monetary restraint should be a
firmer open market policy. There also was general sentiment at
the meeting that discount rates should be increased, although
there were some differences of view with respect to the amount;
and divergent opinions were expressed about the desirability of
action now to raise reserve requirements.
A number of members expressed the view that the combination of a firmer open market policy and an increase of onequarter of a percentage point in discount rates would be appropriate to the current economic situation. Some of these members
added that, while additional measures could be taken later if
deemed necessary, various considerations—including the continuing uncertainties with respect to foreign exchange markets,
as well as the sensitive state of conditions in domestic financial
markets with the attendant risks of unduly large market reactions—militated against also increasing reserve requirements
at this time or raising discount rates by as much as one-half
point. The basic argument advanced by those who favored a
broader combination of policy actions now was that more limited
actions were likely to be inadequate to dampen the prevailing
inflationary psychology, particularly since it appeared that an
increase of at least one-quarter point in the discount rate was
already widely anticipated in financial markets.

224




At the conclusion of the discussion the Committee agreed that
open market operations should be directed at attaining firmer
conditions in money and short-term credit markets, while taking
account of the effects of any other monetary policy actions that
might be taken. The proviso was added that operations should
be modified if bank credit expansion appeared to be deviating
significantly from current projections. The following current economic policy directive was issued to the Federal Reserve Bank
of New York:
The information reviewed at this meeting suggests that over-all economic
activity is expanding rapidly and that upward pressures on prices and costs
are persisting. Market interest rates have risen considerably further in
recent weeks. Bank credit growth has been sustained by continuing strong
expansion of time and savings deposits, while growth in the money supply
has accelerated and U.S. Government deposits have declined. The U.S.
foreign trade surplus remains very small and the over-all balance of payments apparently worsened in October and November. In this situation, it
is the policy of the Federal Open Market Committee to foster financial
conditions conducive to the reduction of inflationary pressures, with a view
to encouraging a more sustainable rate of economic growth and attaining
reasonable equilibrium in the country's balance of payments.
To implement this policy, System open market operations until the next
meeting of the Committee shall be conducted with a view to attaining
firmer conditions in money and short-term credit markets, taking account
of the effects of other possible monetary policy action; provided, however,
that operations shall be modified if bank credit expansion appears to be
deviating significantly from current projections.
Votes for this action: Messrs. Hayes, Brimmer,
Daane, Galusha, Hickman, Kimbrel, Maisel, Mitchell, Morris, Robertson, and Sherrill. Votes against
this action: None.
Absent and not voting: Mr. Martin.




225

'operations of the System- Open
s

t^rkpt Account

The following two reports describe the actions taken during 1968
to carry out the policy directives of the Federal Open Market
Committee.
The report on operations in domestic securities was prepared
by Alan R. Holmes, Manager of the System Open Market Account, who supervises these operations. It is written from the
vantage point of the Trading Desk at the Federal Reserve Bank
of New York, where operations in these securities are effected to
carry out the policy directives of the Federal Open Market Committee. The report outlines the factors that the Manager takes
into account in the day-to-day provision of bank reserves.
The report on foreign currency operations was prepared by
Charles A. Coombs, Special Manager of the System Open Market
Account, who supervises the Federal Reserve's operations in such
currencies. The Federal Reserve has been buying and selling
foreign currencies since early 1962 as part of the efforts to defend
the dollar and strengthen the world payments system. All of these
operations for the System Account are carried out, under the
authorization of the Federal Open Market Committee, by the
Federal Reserve Bank of New York, which also handles foreign
currency transactions for the U.S. Treasury.
The report on operations in foreign currencies begins on
page 275.

226



REVIEW OF OPEN MARKET OPERATIONS IN
DOMESTIC SECURITIES
Open market operations during 1968 were conducted against
a backdrop of manifold uncertainties. One of the most vexing
was concerned with fiscal restraint—first, as to the likelihood
of enactment of fiscal restraint measures, and later, as to the
timing and extent of the impact of such measures on the economy. Such uncertainties, together with recurring international
financial crises, not only complicated policy decisions but also
gave rise to widespread expectational shifts that in turn exerted
a strong influence on economic and financial developments.
Monetary policy, as it was carried out through open market
operations, passed through four phases during the year. During
the first 4 months it became increasingly restrictive as a Federal
budget deficit continued to stimulate an already booming economy and as the dollar was under attack from abroad. Then in
May and June open market operations maintained strong pressure on the banking system. This policy over the first half of
this year served to slow the rate of growth in bank credit after
February and contributed to a rise in interest rates to the highest
levels reached in many years up to that time. With the passage of
revenue and expenditure control legislation in late June, open
market operations shifted to accommodating the tendency for
short-term interest rates to decline as the prevailing expectation
was that the pace of economic advance would slow. Beginning
in late summer, however, it appeared that inflationary pressures
were not subsiding as had been projected, and with bank credit
growing rapidly, the System began to move back toward restraint in its open market operations—thus marking the fourth
phase of monetary policy. In December it undertook to increase
such restraint significantly in order to deal with the excessive
demands and inflationary psychology that still marked the
economy. Interest rates, which had already regained their May
peaks, rose to new highs during the month.




227

Open market operations undertook to promote policy objectives by varying the degree of pressure on the banking system.
The extent of this pressure was reflected in the rise of dailyaverage borrowing by member banks at their Reserve Banks
from around $250 million in January to about $700 million in
May-June, followed by an easing to about $550 million in JulySeptember and then by a gradual rise to $750 million in December. The Federal funds rate traced a similar path, rising from
around 45/s per cent in January to 6 to 6 ^ per cent in MayJune; it then fell back to 53A to 6 per cent in late summer before
rising above 6Vi per cent in late December. Bank credit growth
as measured by daily-average member bank deposits subject to
reserve requirements—the bank credit proxy—slowed to a 4
per cent annual rate in the first half of the year but bounced back
to a 13 per cent rate in the second half.
Open market operations involved outright purchases, sales,
and redemptions of $19 billion of Treasury securities in 1968,
not including the purchase and redemption of $775 million of
special securities issued directly by the Treasury for brief periods.
This represented a gain in dollar volume of 9 per cent over the
1967 total. But a much larger rise took place in the temporary
provision and absorption of bank reserves through repurchase
agreements and matched sale-purchase transactions. Almost
$67.5 billion of such short-dated contracts were written and
matured in 1968—a 77 per cent increase from the preceding
year. This rise reflected the very extensive use of matched salepurchase transactions to absorb reserves temporarily in large
volume with a minimum impact on the Treasury bill market.
The restrictive tenor of monetary policy during 1968 contributed to the more frequent use of this technique, especially
in the last 4 months of the year when a move toward policy restraint was carried out alongside the introduction of new reserve-computation procedures, which altered established patterns
of bank behavior and often tended to produce a temporary
easing of money market conditions.
228



On balance, the System's holdings of Government securities
rose by $3.8 billion in 1968, considerably less than the $4.8
billion increase of 1967. At the end of the year such holdings
totaled $52.9 billion.
JANUARY 1-APRIL 30:

IN THE ABSENCE OF FISCAL RESTRAINT, MONETARY POLICY
BECOMES INCREASINGLY RESTRICTIVE TO RESIST INFLATION
The economic and financial environment. As 1968 opened, over-

all economic activity was expanding at a rapid rate, and inflationary pressures were strong and were expected to persist. The
President reiterated his call for a 10 per cent income tax surcharge both on January 1—in a message devoted largely to
outlining restraints on the flow of U.S. capital abroad—and in
the budget message. The proposal for an income tax surcharge
ran into considerable opposition in the Congress, and its outcome remained in doubt throughout the period under review.
The U.S. balance of payments continued in serious disequilibrium, with the trade balance becoming especially weak, and extraordinary speculation in the gold and foreign exchange markets
precipitated an international financial crisis in March. Concerted
actions by international monetary authorities—discontinuing operations of the London gold pool and establishing a two-tier gold
market—again repelled the threat to the international monetary
system. But the episode underscored the need for halting inflation in the United States.
Against this background the Federal Reserve System moved
forcefully to resist inflationary pressures and to foster improvement in the Nation's balance of payments position. An increase
in reserve requirements announced on December 27, 1967, made
very clear to member banks the more restrictive thrust of monetary policy. Open market operations persistently increased the
pressure on bank reserve positions over the first 4 months of
1968. Total member bank borrowings from the Federal Reserve
rose from a daily average of $237 million in January to $683




229

million in April, while net reserve availability fell from net
free reserves of $144 million to net borrowed reserves
of $413 million. On March 15 and again on April 19 Federal
Reserve discount rates were increased by Vi of a percentage
point—bringing them to SVi per cent, the highest level since
1929. Also on April 19, the Board of Governors raised ceiling
rates under Regulation Q on large-denomination certificates of
deposit to 5% per cent on those maturing in 60 to 89 days, 6 per
cent on those maturing in 90 to 179 days, and 6V4 per cent on
longer maturities. The ceiling on certificates maturing in 30 to
59 days remained at 5Vi per cent, the rate previously applicable
to all maturities. Open market operations both facilitated market
adjustments to the higher rate levels and pressed for even firmer
money market conditions.
The restraint exerted by monetary policy—interacting with
the economy's credit demands—was accompanied by a steep
rise in money market rates of interest and a pronounced slowing
in the pace of bank credit expansion. The Federal funds rate
rose from a range of AVi to 4% per cent in January to 6 per
cent, and briefly to 6lA per cent, by the end of April (Chart 1).
Rates posted by the major New York City banks on loans to
Government securities dealers ("call loans" in charts) rose from
around 434 percent in January to 6V2 per cent in late April.
Given the upward pull of financing costs, the rate on 3-month
Treasury bills rose from about 5 per cent to 5Vi per cent over
this period in spite of the seasonal redemption by the Treasury
of $5.5 billion of tax-anticipation bills maturing in March and
April. Bank credit growth—as measured by the bank credit
proxy—was at a seasonally adjusted annual rate of 4 per cent
over the January-April period, compared with an increase of
11.7 per cent during all of 1967.
The slowdown of growth in bank credit over the interval reflected both a more-than-seasonal reduction in average Government deposits in March and April and a marked slowing in time
deposit growth. Time deposits rose at an annual rate of only 6
230



per cent in the first 4 months of 1968, compared with 16 per cent
over the year 1967. Higher short-term market interest rates at
first reduced the growth in negotiable CD's and by March and
April led to a contraction in the volume outstanding; other time
and savings deposits also rose at a somewhat slower pace than in
1967. (Savings at other thrift institutions also grew at a more
moderate pace.) The money supply—demand deposits adjusted
and currency outside banks—increased at an annual rate of
5 per cent, seasonally adjusted, during the first 4 months of
1968, compared with 6.4 per cent for the year 1967.
On the whole, bank loans grew at about the same rate during
the first 4 months of 1968 as in 1967. Business loan demand was
slightly below the 1967 pace, but consumer loans increased
sharply. On the other hand, bank investments, in both Government and other securities, increased at a much slower rate than
the rapid pace of 1967.
Short-term interest rates rose irregularly over the first 4 months
and in fact worked temporarily lower in January. Banks, finding
loan demand relatively moderate early in the year, were not aggressive in bidding for funds. However, they were able to extend
the maturities on many CD's and to replace borrowings of Eurodollars at declining rates. As money market rates rose under
Federal Reserve pressure in February and March, rates on Treasury bills and CD's began to edge higher. During the mid-March
gold crisis most Treasury bill rates advanced by 20 to 50 basis
points while the rate on 3-month Euro-dollars rose by more than
1 percentage point to IVs per cent for a few days. The acute
tensions in short-term debt markets were relieved by various
measures taken to alleviate the gold crisis. In late March the
President's announcement of a partial halt of the bombing of
North Vietnam also relieved market pressures.
Nevertheless, the strong pressure exerted by increases in dayto-day money market rates and by expectations of a further
tightening of monetary policy in the absence of fiscal restraint
led to a renewed rise in short-term rates. The banks experienced




231

1 DECEMBER 27, 1967 - MAY 1, 1968
Reserves and borrowings
MILLIONS OF DOLLARS

750

I I
Basic reserve deficit
46 MAJOR MONEY MARKET BANKS

1
1 i i i^-r
i
Morey market rates

i

BILLIONS OF DOLLARS

i

I

II I

II o
PER CENT

7
CALL LOANS

Money market rates: Federal funds, daily effective rate; call loans, daily range on new
loans to U.S. Govt. securities dealers posted by New York City banks. Bank credit proxy:
projection was made 4 weeks earlier. Short-term rates: bid rate on 3-month Euro-dollars;
secondary market rate and Regulation Q ceiling on 3-month CD's; daily bid rate on 3-

232




Bank credit proxy
BILLIONS OF DOLLARS

285
PROJECTED

SEASONAL

I 1

I

I

i

I

I I

1

i

l

ill

Other short-term rates
EURO-DOLLAR

CD's

TREASURY BILLS

CEILING
SICOMDARV MARKET

i l i l i i i i l m i l m i h i i i (in ilni h u t I m l l t i i h m

JimliMililiiliiiliiiliiiilnili

Long-term rates
BONDS

PER CENT

7
NEW CORPORATE

6
U.S. GGVERMNfENT

5
4

i him
27
OEC.

3

10

17

24

JANUARY

31

7

14
FEBRUARY

21

28

6

13
MARCH

APRIL

month Treasury bills; and offering rate on 4- to 6-month commercial paper. Long-term
rates: corporate bonds, weighted averages of new publicly offered bonds rated Aaa, Aa,
and A by Moody's Investors Service and adjusted to an Aaa basis; U.S. Govt. bonds
average yield on all bonds due or callable in 10 years or more; tax-exempt bonds, State and
local govt. bonds (20 issues, mixed quality), Bond Buyer.




233

a run-off of $1 billion in CD's over the 3 weeks ended April 17,
nearly double the decline in the comparable 3 weeks around the
mid-March tax date. The further increase in the Federal Reserve
discount rate to SVi per cent on April 19 confirmed the expectations regarding the intentions of the monetary authorities. After
this action commercial banks raised the prime loan rate from 6
to 6V6 per cent.
In the capital markets, yields fluctuated widely over the 4month period in response to the changing supplies of new issues
and shifting sentiment concerning the prospects for fiscal and/or
monetary restraint, for an end of hostilities in Vietnam, and for
the restoration of international monetary stability. On balance,
yields changed little over the interval. Average yields on longterm Treasury bonds were 5.33 per cent at the end of April,
compared with 5.36 per cent at the close of 1967. The Bond
Buyer's index of yields on 20 municipal bonds was 4.44 per
cent on May 2, the same as on December 28, 1967. New Aarated utility bonds with 5-year call protection were offered at
yields of around 6.75 per cent in early May, about the same level
as had prevailed in December 1967.
Treasury and Federal agency financing operations were large
during the 4 months. In January the Federal National Mortgage
Association (FNMA) took advantage of a buoyant market
atmosphere to sell $1.25 billion of two issues of participation
certificates (including $450 million to Government trust accounts) ; the 20-year maturity was offered at a yield of 6.084 per
cent. Later, the Treasury conducted a successful two-phased
offering—the first of its kind—to refund maturing securities and
to raise new cash. In the first week of February a new 7-year,
5% per cent note was offered to holders of issues maturing in
February, August, and November; of the $12.1 billion in public
hands, $3.9 billion was turned in on February 15. Then on
February 13 the Treasury sold for cash $4.3 billion of 15-month,
5% per cent notes for payment on February 21.
The gold crisis in March triggered both a 40-basis-point rise

234



in the average yield on long-term Government bonds and a similar sharp deterioration in the markets for corporate and municipal bonds. In the wake of the crisis FNMA's sale of $1 billion of
three issues of participation certificates on March 26 (including
$270 million placed with Government trust accounts) required
a 6.45 per cent yield on the 20-year maturity, the highest on a
Government obligation since the Civil War. The President's
peace initiative and his renewed call on March 31 for a tax increase led to a spirited rally in the capital markets, but the price
gains faded in April when the Congress adjourned for the Easter
recess without clarifying the outlook for fiscal restraint legislation—suggesting to many the inescapability of further monetary
restraint.
SYSTEM OPERATIONS IN GOVERNMENT SECURITIES DURING
In millions of dollars

1968

Jan. 1Apr. 30

May 1June 20

June 2 1 Sept. 25

Sept. 26Dec. 31

Total

Outright purchases:
Treasury bills:
From market
From foreicn accounts
Coupon issues
Special certificates of indebtedness • • •

1,595
1,196
574

1,356
675
70

1,380
671
285
87

1,543
1,888
247
688

5,874
4,430
1,176
775

Outright sales:
Treasury bills:
To market
To foreign accounts
Coupon issues

1,091
421

286
98

1,194
246

891
1,819

3,462
2,584

2,400
2,400

400
400

4,715
4,715

8,885
8,885

16,400
16,400

415
415

415
415

Type of operation

.

Matched sale—purchase transactions:
With dealers:
Sales
Purchases
With foreign accounts:
Sales
Purchases
•
Redemptions:
Treasury bills .
....
Special certificates of indebtedness . •.
Repurchase agreements:
Government securities:
Purchases
•
Sales
Federal agency obligations:
Purchases
Sales
Net change

••

592

171

278
87

436
688

1,477
775

4,592
4,459

3,821
3,958

3,869
3,997

3,580
3,580

15,862
15,994

292
318

260
223

219
268

204
204

975
1,013

+ 1,368

+ 1,446

+441

+532

+3,787

NOTE—All figures are as of date of delivery.




235

Open market operations. System open market operations unfolded against the backdrop of the foregoing economic and
financial developments. (For a statistical summary of System
operations in Government securities, see the accompanying
table.) In January the money market had to cope with the huge
flows of funds that are characteristic of the beginning of the year.
Total member bank deposits (not seasonally adjusted) declined
by $5 billion over the month, while large amounts of reserves
shifted away from the money centers and then back again. The
basic reserve deficit of the 46 major money center banks declined
from an average of $1.7 billion in the week ending January 10 to
$148 million in the week ending January 31 (middle left panel of
Chart I ) . 1 Country bank excess reserves also fluctuated widely,
averaging as high as $520 million in the week ending January 10
and as low as $114 million in the following week.
The wSystem alternately absorbed and supplied reserves—allowing net reserve availability to fluctuate widely in accordance
with expected week-to-week changes in the demand for excess
reserves. Initially, it supplied reserves in volume to avoid pressures arising from the expected early-January accumulation of
excess reserves by country banks. When float rose beyond expectations and the weekly sample of country bank reserve positions pointed to higher-than-expected reserve availability, the
System first sold bills outright and then on Wednesday, January
10, sold $460 million of bills under 1-day matched sale-purchase transactions to counter the influx of Federal funds at declining rates.
The matched sale-purchase technique, introduced in July
1966, enables the System to effect much greater short-term reserve absorption than would be feasible through outright sales
since dealers do not need to assume the market risks involved
in outright purchases from the System. During 1968 the Account
:L
The basic reserve position of this group of banks is defined as the group's
excess reserves less its net purchases of Federal funds and its borrowings from
the Reserve Banks.

236



Manager made much more frequent use of this technique than
earlier as he sought to maintain the desired pressure on bank
reserve positions. Several matched sale-purchase operations
during 1968 absorbed well over $1 billion of reserves for short
periods.
Over the remainder of January, System operations were influenced by the reserve-management patterns of both the country
and reserve city banks. In the weeks ending January 17 and 31,
money market conditions tended to ease early in the week as the
reserve city banks anticipated that substantial amounts of the
excess reserves that country banks carried over into the final
week of their biweekly reserve-settlement periods would flood
the Federal funds market later in the week. In an attempt to
keep money market conditions firm, the System absorbed reserves
early in those weeks. However, the money market banks were
content to accumulate sizable reserve deficiencies, which they
still hoped to cover at lower rates at the end of the week. As a
consequence, demands for funds far exceeded supplies on the
Wednesday settlement dates, when these banks scrambled to
cover their deficiencies. Rates for Federal funds rose from
around 43A to as high as 5Vs per cent on January 17 and on
January 31 were as high as 5V\ per cent. On both settlement
days the System made overnight repurchase agreements to
moderate the tautness in the market, but even so, member bank
borrowing from the Reserve Banks surged to more than $1
billion on January 17 and to $800 million on January 31.
The Treasury's February financing operations conditioned
open market operations during the month, but they did not forestall an appreciable increase in monetary pressures on the banks
after midmonth. During early February the System supplied
reserves just a little after the needs became apparent, in order to
keep the money market steadily firm; under these conditions
Federal funds generally traded at rates ranging from 4% to 4%
per cent. Since indicated reserve needs were relatively short-lived,
the System provided reserves entirely through repurchase agree-




237

merits, including some against "rights" to the Treasury refunding—that is, issues eligible to be exchanged for the new 7-year
notes.
Such agreements—written to mature on February 15, the exchange date—served a dual purpose: (1) to meet a part of the
banking system's reserve needs, and (2) to facilitate the Treasury refunding by assisting dealers who purchased rights issues.
However, when net reserve availability considerably exceeded
expectations over the period February 9 to February 12—the
holiday weekend when Lincoln's Birthday fell on a Monday—the
System quickly switched to selling Treasury bills—at first outright, and then under 1-day matched sale-purchase transactions.
By about mid-February it became clear that bank credit
growth was outrunning expectations (Chart 1, top right panel)
and that a move toward greater restraint—to the extent permitted by Treasury financing—was called for under the proviso
clause of the directive of the Federal Open Market Committee
adopted at the February 6 meeting. Inasmuch as the distribution
of the new 7-year notes was proceeding smoothly and the sale of
$4.3 billion of 15-month notes on February 13 had been successful, the Account Manager began to allow the seasonal action of
float and other factors affecting reserves to exert increasing pressure on the banks without taking fully offsetting action. Member
bank borrowing from the Reserve Banks rose to an average of
$424 million in the last 2 weeks of February from $313 million
in the prior 2 weeks, and net borrowed reserves emerged for the
first time in a year (except for 1 week in January). In late February the System tempered the tautness in the money market by
making outright purchases of Treasury securities, including
coupon issues.
Over the next 2 months the System carried out one of the
swiftest increases in monetary restraint in history. An inflationary
rate of expansion in the domestic economy and the threat that
persistently rising domestic prices posed to international confidence in the dollar, and hence to the international monetary

238



system, provided the backdrop for this action. In the first 2 weeks
of March the Account Manager, acting under the Committee's
March 5 directive, allowed conditions in the money market to
tighten by not offsetting the reserve drains generated by gold
losses and other reserve factors. The Federal funds rate reached
5 per cent on several days. Member bank borrowing from the
Reserve Banks rose to an average of $640 million for the 2-week
period, and net borrowed reserves to an average of $253 million.
Reflecting in part the uncertainties of the international monetary situation and expectations of a possible increase in the discount rate, banks managed their reserve positions cautiously,
bidding strongly for Federal funds and borrowing heavily from
the Reserve Banks—in excess of $1.2 billion over the March
8-10 weekend. As a result, a redundancy of reserves appeared
in the money market on Tuesday, March 12. However, in view
of the deterioration that developed in the securities markets as
foreign demand for gold mounted, the System purchased Treasury bills offered for sale by foreign official accounts, instead of
selling the bills for those accounts in an unreceptive market.
When the money market displayed signs of marked easing on
Wednesday, March 13, the end of settlement periods for both
reserve city and country banks, the System roughly offset the
immediate reserve effect of its purchases from foreign accounts
by negotiating overnight matched sale-purchase transactions.
The securities markets opened on Thursday, March 14, amid
reports that turnover on the London gold market had exceeded
the previous daily peak recorded in the aftermath of the devaluation of sterling in November 1967. Sentiment in the securities
markets deteriorated rapidly amid rising expectations of an increase of a full percentage point in the discount rate. To facilitate
an orderly adjustment as market rates moved higher, the System
conducted a go-around of the market at an unusually early hour
and purchased $313 million of Treasury bills. It also purchased
Treasury securities, including coupon issues, from foreign accounts. (The Treasury helped to offset the reserve impact of




239

these operations by advancing a scheduled transfer of gold from
the monetary stock to the Stabilization Fund by 3 days.) An
increase of Vi of a percentage point in the discount rate to 5 per
cent was announced on the afternoon of March 14, and prices
of securities rebounded the next day. The announcement on
March 17 of the termination of gold pool operations served to
calm the debt markets further, and the System conducted no additional operations in the week ending March 20.
Following the increase in the discount rate, the Federal funds
rate adjusted upward to the area of 5lA to 5% per cent in late
March and early April, and New York City banks raised their
rates on new loans to Government securities dealers to a range
of SVi to 6VAT per cent. On Wednesday, March 27, an unusual
kind of strain developed in the market—one that could mislead
banks and others as to the degree of pressure the monetary authorities intended to bring to bear on the monetary system. In
view of the large reserve deficiencies accumulated by large banks
outside New York City, the Account Manager had expected
tightness to occur in the market that day. However, the Federal
funds rate did not begin to rise sharply until about 1:00 p.m., by
which time neither repurchase agreements nor cash trades with
dealers were feasible. When the rate for Federal funds rose to a
new record high (since surpassed) of 6% per cent later that
afternoon, the System moved to show its concern over the aberrant tightness (and to meet a part of the following week's reserve
needs) by buying Treasury bills for delivery the next day.
As April unfolded, the slightly greater restraint being exerted
by open market operations—in accordance with the Committee's
April 2 directive—contributed to, and was reinforced by, a
marked increase in pressure on the major money market banks.
These banks were confronted by the prospect of heavy demands
for credit on the April 15 corporate tax date at a time when interest-rate relationships suggested the likelihood of considerable
attrition in banks' outstanding CD's. The major New York City
banks, which experienced a $700 million deepening in their basic

240



reserve deficit in the week ending April 10, raised their rates on
new loans to Government securities dealers to around 6 ^ per
cent. The Federal funds rate rose and fluctuated around 53A per
cent as the 46 major money market banks bid heavily for funds
to cover a basic deficit, which had deepened by almost $1.8 billion to $2.5 billion.
At the onset of these reserve pressures on April 4, the System
stepped in to supply reserves—in part through outright purchases
of Treasury bills and in part through repurchase agreements
against Treasury securities and bankers' acceptances. The repurchase contracts were written at 5Vs per cent—V% of a percentage
point above the prevailing discount rate. The use of such a differential, it was explained to the dealers, was a new and flexible
operating technique designed to make it possible to write such
contracts at rates closer to prevailing market rates for short-term
securities. In the past the Account Manager had on occasion
made repurchase agreements at rates below the discount rate
when relatively low market interest rates had made it necessary
to depart from the usual practice of setting the rate on System
repurchase agreements at the discount rate. However, it had not
been the System's practice to set the rate on its repurchase agreements above the discount rate when market interest rates were
well above the discount rate, and as a consequence the Account
Manager had sometimes felt constrained from providing reserves
through repurchase agreements at such times.
On Friday, April 5, the Manager negotiated additional contracts at the 5Vs per cent rate. However, a number of market
participants interpreted the premium repurchase rate as suggesting that further monetary restraint lay ahead, and this contributed
to the upward pressure on Treasury bill rates.
The System reversed direction after the weekend and sold some
Treasury bills to mop up a glut of reserves, which stemmed in
part from a bulge in float that resulted from an unexpected bank
holiday in New York State on April 9 in honor of Dr. Martin Luther King, Jr. During the following statement week, the System




241

again injected reserves through outright purchases and repurchase agreements at 5Vs per cent in order to accommodate the
churning of funds over the April 15 tax-payment date and to
moderate strong upward pressures on Treasury bill rates. These
latter pressures threatened the viability of the existing 5Vi per
cent ceiling on interest payments on negotiable CD's under Regulation Q.
On Thursday, April 18, the Board of Governors announced
the increase in Federal Reserve discount rates to 5Yi per cent
and an upward revision in Regulation Q ceilings on largedenomination CD's.2 Earlier that day the System had bought some
Treasury bills and short-term coupon issues to meet a part of the
sizable reserve need foreseen for the week. Markets adjusted
readily to the new rate levels, and the System stayed on the sidelines the next day.
Reserves bulged unexpectedly after the weekend, however, and
the System sold Treasury bills outright and under matched salepurchase transactions. Federal funds traded predominantly in a
5Vi to 5% per cent range during most of the week but dropped
as low as 4 per cent on April 24, the reserve-settlement day.
However, after the execution of matched sale-purchase transactions that day, the rate rose to 6V4 per cent. On Thursday, April
25, trading in Federal funds opened at 5% per cent and in order
to nudge the rate higher, the System sold Treasury bills under
1-day matched sale-purchase transactions. (It also purchased
bills directly from foreign accounts to meet part of the week's
reserve needs.) During that day some Federal funds were traded
at rates as high as 6lA per cent. Moreover, trading opened at that
rate on the next 2 days, but most transactions were at 6V& per
cent. Then on April 30, with the Federal funds rate tending even
higher, the System injected reserves through repurchase agreements executed at a new high rate of 5% per cent, lA of a percentage point above the discount rate.
2

See p. 80 for revised rates.

242



MAY 1-JUNE 20:
CONTINUED MONETARY REST K *L\r'f IT.NMi'^; t <• x, < .\\ v i
OF FISCAL RESTRAINT

The economic and financial environment. After several months of

intensifying monetary restraint, System policy shifted to maintaining the degree of pressure on the banks already achieved, in
part because prospects for enactment of fiscal restraint legislation
appeared to have improved. As events unfolded, most of the System's open market operations during the 7 weeks prior to passage
of the bill by the House of Representatives on June 20 were
aimed at tempering a tendency toward undue tautness in the
money market. For the 2 months May and June, member bank
borrowings from the Federal Reserve averaged $719 million,
compared with $683 million in April. For the same period net
borrowed reserves averaged $334 million, compared with $413
million in April.
Rates on Federal funds fluctuated during May and June
around or slightly above the high level attained at the very end
of April. Most trading was in a 6 to (ML per cent range, although
rates occasionally dropped toward the end of statement weeks
(Chart 2). At the beginning of May the major New York City
banks posted rates on new loans to Government securities dealers
as high as IVs per cent, and the higher financing costs to the
dealers contributed to the upward push of Treasury bill rates
early in the period. These loan rates were gradually reduced,
however, and they closed the interval at around (ML per cent,
about the same as at the end of April.
In early May the major New York City banks raised their
offering rates on all maturities of negotiable CD's to the Regulation Q ceilings that had been put into effect on April 19. With
secondary market rates at or above these levels throughout the
period, however, the weekly reporting banks sustained net losses
of nearly $700 million of CD's over the 7-week interval May 2 June 19. Large banks with access to the Euro-dollar market bid
strongly for such funds, and they succeeded in attracting Euro-




243

2 MAY 1, 1968 - J U N E 26, 1968
Reserves and borrowings
Bank credit proxy
MILLIONS OF DOLLARS

BILLIONS OF DOLLARS

285
NET BORROWED RESERVES

-T--X.

/ 5QQ

.280
ACTUAL
*—
-

'm

275
PROJECTED

EXCESS RESERVES

i

I

1

il

i

i

I

I

I

Basic reserve deficit
46 MAJOR MONEY
MARKET BANKS

•

I

I

SEASONAL

ll

I

I

Other short-term rates
BILLIONS OF DOLLARS

EURO-DOLLAR

COMMERCIAL PAPER

TREASURY BILLS
CD's
CEILING
SECONDARY

I

I

1

I

ll

I

I

I

I

i
MARKET

IMMIIMIIMMIMMII

M( ney market rates

Long-term rates
PER CENT

PER CENT

BONDS

CALL LOANS

NEW CORPORATE

7

!),$. GOVERNMENT
V
FEDERAL F U N D S !

F.R. DISCOUNT RATE

6

»
-"'-—

5

^
TAX-EXEMPT

4

4

3

3

1 \ I I I I tI I 1 I I I I I I I I 11 i 1 IE 1 I I t » H 1 t I J I 1
1
1

8

15

22

29

MAY

For notes see pp. 232-33.

244




5

12
JUNE

19

26

1

8

i M M1 I I H i I I I f 1 It I ! I 1 1 ! I 11 I f I I I I 1 I I
15
MAY

22

29

5

12
JUNE

19

dollars in an amount that was more than twice as large as their
loss of CD's. In the process the rate on 3-month Euro-dollar deposits was driven as high as IVs per cent by the end of May; this
compared with 6Vi per cent early in the month and was equal
to the crisis level of March.
Reflecting the substantial reduction in CD's outstanding, as
well as a slowdown in the growth of other time deposits, the increase in total commercial bank time deposits slowed to an annual rate of 3.5 per cent in May and June, compared with 6 per
cent over the previous 4 months and 16 per cent for the year
1967. The money supply, on the other hand, grew at an annual
rate of 10 per cent during May and June, double the rate of the
prior 4 months. In part, the more rapid growth of money reflected
a sharp decline in U.S. Government demand deposits, which are
not counted as part of the money supply. In part, it may also
have reflected the expanded volume of trading in corporate
stocks. The bank credit proxy grew at the same average rate
(4 per cent) during May and June as in the first 4 months of the
year. Bank loans generally grew somewhat more slowly than they
had in the earlier period, with the exception of loans to nonbank
financial institutions. Meanwhile, banks continued to reduce their
rate of net new investment in securities.
The atmosphere in the securities markets altered dramatically
as the outlook for fiscal restraint changed during May and June.
Prices generally declined until May 23, then began to move up.
After fluctuating irregularly during the first half of May, prices
of debt issues plummeted in reaction to a delay in the vote on
the tax measure announced by House leaders on May 15. Prices
continued to drop sharply over the following week as dealers
attempted to lighten inventories swollen by their underwriting of
the Treasury's successful May financing (see below). Sizable
purchases of Treasury coupon issues executed for Treasury accounts helped to relieve dealers' inventories without impeding
substantial downward price adjustments. From April 30 to May
22, yields on intermediate- and long-term Treasury securities




245

rose by about 30 and 20 basis points, respectively. Corporate
bond yields rose some 25 basis points as dealers attempted to
reduce their inventories in anticipation of the heavy June calendar. The municipal bond market was particularly depressed in
late May, with yields up 30 to 40 basis points from their endof-April levels (bottom right panel of Chart 2).
In early May the Treasury conducted a financing that was
quite successful in view of the uncertain atmosphere prevailing
in the market. In an operation that involved both an exchange
issue and a cash offering, it raised $2.1 billion of new money
and refunded notes and bonds maturing May 15. Private holders
of $3.9 billion of maturing issues exchanged $2.7 billion of their
holdings into new 7-year, 6 per cent notes, while $10.3 billion
of subscriptions were tendered for $3.4 billion of new 15-month,
6 per cent notes offered for cash. (Large subscriptions to the
shorter-term notes were allotted at a rate of 28 per cent.) In the
initial favorable reaction to the offering, the new 7-year notes
were bid as high as 100%2, but by May 22, when the market
was generally unsettled by the uncertain outlook for fiscal action,
the bid price was 99%2, equivalent to a yield of 6.13 per cent.
Prices of securities rebounded beginning on May 23 in a
dramatic reversal of market sentiment. Sparked by the statement
of the chairman of the House Ways and Means Committee that he
foresaw congressional passage of the proposed tax bill, the rally
gained renewed vigor following the President's statement on
May 30 that he would accept the $6 billion reduction in expenditures demanded by congressional leaders. With the removal of the
last potential obstacle to fiscal restraint, dealers sought aggressively to rebuild their inventories. While prices sustained relatively mild and brief setbacks in reaction to two further postponements of the vote on the tax and spending bill by the full House,
they did rise from May 23 to June 20—when the House finally
approved the bill; yields on intermediate-term Treasury securities showed declines of about 60 basis points, and those on
long-term Treasury bonds about 40 basis points on the average.
246



The price improvement was more restrained in the corporate
and tax-exempt bond sectors, although prices rose sharply during
the few days just before the House vote. Offerings of new corporate issues were heavy, and they encountered mixed receptions.
In fact, some issues ran into investor resistance even at the record
yields available. As the final vote on the fiscal restraint bill approached, however, investor interest in new issues picked up. The
Blue List of dealers' advertised inventories of tax-exempt issues,
for example, declined from its mid-May high of $649 million to
$427 million as of June 20. On balance, yields on corporate and
tax-exempt bonds were virtually unchanged over the May 1June 20 period.
Treasury bill rates rose generally by 25 to 50 basis points over
the first 3 weeks of May; the steepest increases occurred in the
wake of the May 14 decision of congressional leaders to postpone
House action on the tax bill. Market rates on 3- and 6-month
bills reached record levels (since surpassed) of 5.92 and 6.08
per cent, respectively, just before Chairman Mills predicted on
May 23 that the tax bill would eventually pass. Rates dropped
sharply in response to that statement but moved somewhat higher
in early June in reaction both to a subsequent delay in the House
vote and to seasonal pressures. Rates again declined sharply on
the eve of the House vote—reflecting renewed optimism over
the outlook for fiscal restraint, very large purchases of bills by
the System, and expectations of heavy seasonal demand for bills.
By June 20, the market rate for 3-month bills was 5.40 per cent
—down 11 basis points from the end of April and 52 basis points
below the interim high.
Open market operations. The System's operations in the open
market during the May 1-June 20 interval sought to maintain
the firm conditions in the money market achieved by late April.
A recurring problem was the need to head off or moderate undue
tautness in the money market. During the interval—a period of
seasonal reserve needs—the System injected a net of $1.4 billion
of reserves. The Trading Desk arranged $4.1 billion of repur-




247

chase agreements against Treasury and Federal agency securities,
while maturities and withdrawals of such agreements totaled $4.2
billion. But on an outright basis the System purchased $2.0 billion of Treasury bills—$922 million on June 19 alone. Reserve
absorptions were quite limited during the period; the total reflected outright sales of $384 million of Treasury bills, sales of
$400 million of bills under 1-day matched sale-purchase transactions, and redemptions of $171 million of maturing bills.
During the first half of May—while the Treasury's May financing was proceeding smoothly—the System sought to maintain in
the money market the firmer conditions that had been achieved
earlier. Its operations were directed largely toward attempting to
overcome the excessive tautness that developed in the money
market as major banks sought to cover sizable reserve deficits by
bidding aggressively for Federal funds. In part these conditions
reflected a growing desire by these banks to conserve their use of
the Federal Reserve discount window until the June corporate
tax-payment date when the pressures of loan demands and runoffs of CD's might pose a major problem.
In resisting the resultant strong upward pressure on the Federal
funds rate, the System repeatedly injected reserves through repurchase agreements with nonbank dealers in Government securities, and on several days when its first round failed to produce
the intended relief to the market, it made a second round of such
agreements. During the May 1-15 interval the Account Manager
arranged a total of $2.3 billion of repurchase agreements against
Treasury and Federal agency securities; these were supplemented
by $84 million of such agreements against bankers' acceptances.
All of these agreements were written at 5% per cent, XA of a
percentage point above the Federal Reserve discount rate. In
spite of these persistent reserve injections, Federal funds traded
predominantly in a 61/s to 6% per cent range in the first half of
May, and a new record "effective" rate of 6Vi per cent was set
on May 14.
Around the middle of May, System operations were condi248



tioned somewhat by developments in the securities markets, but
there was no significant departure from money market objectives.
At the opening on Thursday, May 16, the markets were very unsettled as a result of news of the postponement of congressional
action on the tax bill until early June, and Federal funds were
quoted at 6V4 per cent bid and 6V2 per cent asked. In order to
facilitate orderly adjustments in the market to the changed
outlook for fiscal restraint and to provide for a part of
the estimated sizable reserve needs for the week, the System
conducted an early go-around of the market and purchased outright $301 million of Treasury bills; it also bought $33 million
directly from foreign accounts. (Earlier still, the Trading Desk
had purchased on behalf of a Treasury trust account a substantial
amount of the new 7-year notes for which settlement had been
made just the day before.) Later in the day the System injected
an additional $301 million of reserves through 4-day repurchase
agreements written against Treasury and Federal agency securities and bankers' acceptances; the rate on these agreements was
53A per cent.
As it turned out, the System's actions on May 16 more than
filled the reserve needs for the week, and toward the end of the
statement period conditions in the Federal funds market eased.
No attempt was made to counter this temporary ease because of
the unsettled state of the securities markets and because of the
reserve needs projected for the next several weeks. Indeed, in
view of these circumstances, the System purchased $265 million
of Treasury bills and $70 million of Treasury coupon securities
on Wednesday, May 22, for delivery the following day, which
was the beginning of the next settlement period.
On several other occasions during May and June conditions
in the money market eased near the end of a statement week.
In view of the very tight conditions generally prevailing—and,
at times, the unsettled state of the securities markets—the System usually made no effort to counter such temporary ease. But
there was an exception in the week ending May 29, when easing




249

tendencies manifested themselves relatively early in the statement
period—on Monday, May 27—as the distribution of reserves
shifted in favor of the major money centers. On that day the
System sold $212 million of Treasury bills outright, and the next
day it sold $400 million of bills under 1-day matched salepurchase transactions. The only other outright sales during May
and June took place on Tuesday, May 7, when the System sold
$172 million of Treasury bills to combat easing tendencies that
emerged temporarily.
The System was ready to absorb reserves again early in June
but was inhibited by an unusually marked divergence between
the reserve statistics and the tone of the money market. Firm
money market conditions at the beginning of the statement
week ending June 5 led to heavy member bank borrowing from
the Reserve Banks—more than $1 billion—over the weekend.
These borrowed reserves combined with a sharp decline in excess reserves at country banks in the final week of those banks'
biweekly reserve-settlement period to produce a high level of
net borrowed reserves as well as an easing of money market
pressures after the weekend. The Account Manager stood ready
to inject reserves if the money market should tighten—as the reserve figures indicated was likely. But the expected firming did
not occur during the week, and the System took no action in
the market. Net borrowed reserves for the week averaged $551
million (top left panel, Chart 2).
At the end of the period under review the System injected a
huge volume of reserves to moderate unusually heavy pressures
on the money market stemming from international transactions.
On June 18 and 19 the System provided a total of $1.3 billion of
reserves, largely to offset the reserve effect of an $800 million
net repayment to the System on June 19 of a British swap
drawing. On the day before the repayment the money market
had been relatively comfortable—with Federal funds trading
at: 6V& per cent—and the System had confined its operations to
the purchase of $134 million of Treasury bills available from
250



foreign accounts for delivery on Wednesday, June 19. On the
latter day, however, the money market became exceptionally
tight, as the swap repayment absorbed reserves and as banks in
the money centers scrambled to cover deficits in their reserve
positions that had been accumulated earlier in the statement
period. In these circumstances the System purchased $622 million of Treasury bills for immediate delivery and arranged
$252 million of repurchase agreements at 5% per cent. In addition, as a start in meeting part of the sizable reserve needs projected for the next several weeks, the System purchased $300
million of Treasury bills in the market for delivery on Thursday,
June 20. In spite of this record injection of reserves, Federal
funds were bid as high as 63A per cent on June 19—although
trading was predominantly at 6 ^ per cent—and total borrowings by member banks from the Federal Reserve Banks surged
to $1.9 billion.
JUNE 21-SEPTEMBER 25:
MONETARY POLICY ACCOMMODATES TENDENCIES FOR
SHORT-TERM RATES TO DECLINE FOLLOWING PASSAGE OF
REVENUE AND EXPENDITURE CONTROL ACT

The economic and financial environment. With passage of the

revenue and expenditure control bill by the House of Representatives on June 20 and by the Senate the next day, the thrust
of national fiscal policy changed significantly. This in turn set
the stage for a shift in monetary policy from the maintenance of
firm conditions in the money market to the accommodation of
tendencies for short-term interest rates to decline. In implementing that policy, somewhat less firm conditions were permitted
to develop in the money market. Rates on both long- and shortterm securities declined substantially over the next several weeks,
and many market rates reached their lows for the year in early
August. On August 15 the Board of Governors announced a
reduction in one Reserve Bank's discount rate from 5Vi to 5V4
per cent in a technical realignment with the changed market con-




251

ditions; similar reductions at the other Banks followed within
a 2-week period.
In accordance with the Committee's policy directives, open
market operations accommodated the tendency toward lower
short-term interest rates and somewhat less firm money market
conditions by supplying reserves somewhat more generously than
in the previous period. Meanwhile, time and savings deposits
at banks were growing rapidly, and bank credit showed a sharp
expansion in a period when Treasury financing operations were
very large. As the period progressed, however, open market operations were directed at maintaining prevailing conditions in
money and short-term credit markets and, at times, at resisting in
a marginal way the tendency for growth in bank credit to outstrip
expectations. In the generally less tight money market environment, average member bank borrowings from the Reserve Banks
declined to $535 million in the third quarter from $707 million
in the second, and net borrowed reserves dropped to $183 million on the average from $360 million.
The declines in interest rates reflected widely held expectations that the new fiscal restraint measures would produce
quickly a slowdown in the rate of economic expansion and that
monetary policy would need to be relaxed progressively. For
a time there was even some talk of economic "overkill" if monetary restraint were not decisively lessened. But as the period
progressed, the strength of various economic indicators kept
pushing the expected slowdown further into the future. The
most surprising element was a surge in personal consumption
expenditures, which reflected in part a sharp cut in the rate of
personal saving. Business fixed investment also showed renewed
growth in the third quarter, and inventory accumulation slowed
less than expected. Price inflation continued, and the nation's
underlying balance of payments situation remained a matter
of serious concern.
Anticipation of a relaxation of monetary restraint, reinforced
by some evidence of such relaxation, contributed to a decline
252



in money market rates and an acceleration in bank credit expansion. Federal funds traded generally around the 6Vs per cent
level through mid-August and in a 53A to 6 per cent range after
the reduction in the discount rate (bottom left panel of Chart
3). Rates on loans to Government securities dealers posted by
the major New York City banks were reduced somewhat in
July, but such rates crept upward in the first half of August as
dealers added to inventories in expectation of a further rise in
prices. Although the cut in the discount rate led to some decline
in dealer loan rates, these rates drifted upward again in late
September. Bank credit, as approximated by the bank credit
proxy, grew at a seasonally adjusted annual rate of 13 per cent
from June to September, more than three times the rate in the
first half of the year.
Most of the growth of the bank credit proxy in the third
quarter was accounted for by time deposits. Such deposits expanded at an annual rate of 19 per cent as declining market interest rates made the rates offered by banks on time deposits
more competitive. The secondary market rate on 3-month CD's
fell from more than 6 per cent in June and July to a range of
5.60 to 5.70 per cent by late September—well below the maximum rate payable on new deposits. In the easier money market
environment weekly reporting banks succeeded in adding some
$3 billion to their outstanding CD's between June 19 and August
28 before experiencing a seasonal dip in September (figures not
seasonally adjusted). In contrast to the rapid growth in time deposits, private demand deposits displayed little growth after early
July. U.S. Government deposits, on the other hand, increased
sharply—in large part as a result of Treasury financings and
FNMA sales of participation certificates, which raised $7.0 billion of new money during the period.
On the asset side of the banks' balance sheets, holdings of
securities and of loans collateralized by securities rose sharply
during the third quarter. Increases in these accounts reflected not
only bank participation in the underwriting of new Government




253

3. JUNE 19, 1968 - SEPTEMBER 25, 1968
Reserves and borrowings
MILLIONS Of DOLLARS
750

i l l !
! I
Basic reserve deficit

1

1

1

!

BILLIONS OF DOLLARS

46 MAJOR MONEY MARKET BANKS

4

3

2

1

I I i I i i !
Money market rates

i

I

!

t i l t

PER CENT
C A U LOAMS

7
6
F.R. DISCOUNT RATE

11 I i 1 1 1 1 1 1 1 I f I i 11
19

26
JUNE

3

10

17

24

JULY

For notes see pp. 232-33.

254



AUGUST

SEPTEMBER

Bank credit proxy

BILLIONS OF DOLLARS

i I I I I I I
Other short-term rates

f

I

i

iII

1

I I
PER CENT

7
. EURODOLLAR

£

COMMERCIAL PAPER
CD's

6

5

TREASURY BILLS

CEILING
SECONDARY MARKET

4
I

Long-term rates
BONDS

PER CENT

7

NEW CORPORATE
"""""

US.

^

6

GOVERNMENT

5

""'

-*

1 1

4

TAX-EXEMPT

!\ !

19

1
1
i i n 1 i !i 1 1 I i ! 1! ! i 1 1 11
hill i l l
26
3
10
17
24
31
7
JULY

JUNE




14

AUGUST

21

28

4

11

1B

25

SEPTEMBER

255

securities issues and record offerings of tax-exempt securities
but; also bank purchases of such securities for portfolio. Other
loans also increased, with special strength in consumer loans.
In the Treasury bill market, rates declined irregularly from
June 20 until early August, with the market rate on 3-month
bills falling from 5.40 per cent to a low of 4.89 per cent. The decline began with the System's massive purchases of bills on June
19 (described in the previous section). The reduction in the
rate of interest on System repurchase agreements by Vs of a
percentage point to 5% per cent in early July and by another
Vs percentage point to 5Vi per cent on July 17, the day after a
meeting of the Committee, was taken by many observers as
signaling a more accommodative monetary posture—contributing
to sizable demands for bills despite rising prices. Finally, the
Treasury's announcement on July 31 that its August refunding
would not include the usual short-term "anchor" issue spurred
hopes for strong reinvestment demand for bills.
As bill yields dropped, however, the widening spread between
these yields and dealers' financing costs left the bill market vulnerable to a reaction. When optimism over the prospects for
declining interest rates diminished and when the New York
City banks started to post higher dealer loan rates early in
August, Treasury bill rates reversed direction quickly. The reduction of VA of a percentage point in the discount rate, announced on August 15, served to steady bill rates, and these
rates fluctuated narrowly for the remainder of the period. On
September 25 the market rate on 3-month bills wag 5.11 per
cent, down 29 basis points from June 20 and 81 basis points
below the mid-May high. Other short-term rates posted similar
net; declines; rates offered by dealers on prime 4- to 6-month
commercial paper, for example, declined from 6V4 to 5% per
cent.
In the capital markets a brief period of profit-taking in the
wake of the enactment of the fiscal restraint legislation, which
had been heavily discounted in the markets for several days prior
256



to final passage, soon gave way to ebullience amid expectations
of lower interest rates in the months to come. Underwriters bid
aggressively for new corporate and municipal issues, and institutional interest in such securities revived markedly. Government securities dealers added heavily to their inventories, encouraged by the reductions of Ys percentage point in the rates
on System repurchase agreements on July 5 and July 17.
The buoyant atmosphere facilitated Federal Government financing operations, in which substantial amounts of new money
were raised. First, in early July the Treasury sold $4 billion
of tax-anticipation bills due in March and April 1969. In late
July the FNMA offered to the public two issues of participation
certificates totaling $800 million (in addition to $530 million
placed directly with Treasury trust accounts). Both the 10-year,
6Ys per cent certificates and the 20-year, 6.20 per cent certificates sold out quickly and moved to substantial premiums in
secondary market trading. In connection with the refinancing of
coupon issues maturing in August, the Treasury raised $1.7
billion of additional cash. It sold to the public $5.5 billion of 6year, 55/s per cent notes, priced to yield 5.70 per cent, in the
largest cash sale of an over-5-year issue in more than 20 years.
The notes were heavily oversubscribed—with large subscriptions
allotted at 18 per cent—and they went to a premium in early
trading.
Dealers in particular subscribed heavily for the new notes—
augmenting the large positions they had already built up in outstanding issues in anticipation of capital gains. Faced with the
task of distributing such a large volume of the new notes, dealers
occasionally grew restive with their exposure to changes in
market conditions, and yields edged irregularly upward from
early August until early September. On the whole, however, the
yield rise was contained by dealers' continuing expectations of
lower rates in the months ahead, by sporadic bank demand for
the new 55/& per cent notes, and by a gradual reduction in the
penalty cost of carrying inventories of securities after the re-




257

duction in the discount rate on August 16. Dealers placed considerable amounts of securities with investors in August and
September; this relieved the congestion and improved the atmosphere in the market. Yields declined a bit in the last 2 weeks of
the period amid easier conditions in the money market and talk
of an impending reduction in the prime lending rate of commercial banks, which finally occurred at the end of the period. Over
the period as a whole, yields on long-term Treasury bonds declined an average of 7 basis points to 5.08 per cent (bottom
right panel of Chart 3).
In other areas of the capital markets the greatest declines
in yields were in the corporate sector, in which new public offerings in the third quarter totaled only slightly more than half the
volume for the similar period in 1967. Yields on high-grade corporate bonds declined about 35 basis points over the period;
new Aa-rated utility issues with 5 years of call protection were
yielding about 6.40 per cent in late September, compared with
6.75 per cent just before passage of the fiscal restraint bill in
June. In the market for tax-exempt bonds, on the other hand,
flotations in the third quarter reached a record level, 50 per
cent more than in the comparable period of 1967. The Bond
Buyer's weekly index of yields on 20 municipal bonds declined
13 basis points on balance over the period to 4.30 per cent on
September 26.
Open market operations. System open market operations initially moved to accommodate tendencies for short-term interest
rates to decline in the wake of passage of the Revenue and Expenditure Control Act by the Congress. In conjunction with the
resulting easing of money market conditions, the Account Manager in July twice reduced the rate charged on System repurchase agreements with dealers in Government securities and
bankers' acceptances—bringing the rate back to the level of the
discount rate. Moreover, the System's accommodative posture,
with its focus on interest rates, entailed the provision of a large
volume of reserves as the banking system helped to underwrite

258



large additions to U.S. Government debt and record flotations
of bonds by States and municipalities, as well as rapid increases
in consumer debt. In the face of the resultant surge in the bank
credit proxy, the Account Manager responded to the proviso
clause of the Committee's current economic policy directive on
two occasions during the period—aiming for somewhat firmer
conditions in order to resist excessive expansion of bank credit.
On balance, the System provided $441 million of reserves
over the June 21-September 25 interval (table, page 235). Most
of the net addition of reserves was through outright purchases of
Treasury securities—including $2.1 billion of bills, against sales
of $1.4 billion and redemptions of $278 million of maturing
bills. The System also purchased outright $285 million of Treasury coupon securities. In providing additional reserves on a temporary basis, the Account Manager arranged $4.1 billion of repurchase agreements against Treasury and Federal agency
securities during the interval. In the latter part of the period the
System relied heavily on matched sale-purchase transactions to
offset extraordinary supplies of reserves brought about by a combination of outside factors. The System sold and bought back a
total of $4.7 billion of Treasury bills under such short-term arrangements during the period.
During the first 2 weeks after congressional passage of the
revenue and expenditure control bill, conditions in the money
market varied widely, with the Federal funds rate fluctuating
around 6% per cent early in each statement week and around
5V2 per cent toward the end of each. In both of those weeks
the System injected reserves to combat the early tautness and
then refrained from absorbing reserves as more comfortable
conditions emerged in the money market near the end of the
statement week. On July 5, when a nationwide reserve need was
again indicated, the Account Manager supplied reserves by
repurchase agreements written at 5% per cent, Vs percentage
point below the rate that had been employed since April 30.
At its meeting on July 16, the Committee issued a directive




259

calling for accommodation of the tendency toward somewhat
less firm money market conditions that had developed since the
preceding meeting. The next day, in accordance with discussion
at the meeting, the Manager again cut the rate on repurchase
agreements by Vs percentage point to 5Vi per cent, thus realigning the rate with the discount rate. Market participants interpreted the move, coming on the heels of the Committee meeting,
as evidence of a modification of monetary policy that, coupled
with the economic slowdown anticipated, was expected to lead
to a marked decline in interest rates in the months ahead.
In accordance with this judgment, dealers and underwriters
aggressively built up their inventories of Government securities,
CD's, and corporate and municipal bonds—financing the bulk
of their acquisitions by borrowing at banks. It soon became apparent that the growth of bank credit was significantly exceeding
the projections presented at the July 16 meeting of the Committee, and estimates of the increase in bank credit in July and
August were revised upward over the next several weeks. Accordingly, the Account Manager began to permit some firming
of money market conditions—having been freed to a degree
from the normal constraints that a Treasury financing imposes
on such action by the enthusiastic reception accorded the Treasury's offering of new 6-year notes. During the 3 weeks following
the mid-July cut in the rate on repurchase agreements, the
System made occasional outright purchases of Treasury bills
and repurchase agreements at 5Vi per cent, but it usually did so
only after pressures on bank reserves had pushed the Federal
funds rate up to 6lA per cent. With undue tautness thus relieved,
Federal funds traded primarily in a 6 to 6 Vs per cent range over
the remainder of the 3-week period.
The combination of declining Treasury bill rates and firm
money market conditions, as already indicated, widened the
spread between bill yields and dealers' costs of financing inventories and left the market vulnerable to any change in expectations regarding the outlook for interest rates. And a correction

260



did begin about August 8 as dealer loan rates mounted further
and as doubts spread concerning the likelihood of any near-term
easing of monetary policy. At its meeting on August 13 the
Committee indicated its concern about the upward pressures on
bill rates, which had been moderated but not contained by System injections of a sizable amount of reserves through repurchase
agreements. The reductions in Federal Reserve discount rates
to 5V<\ per cent initiated on August 15 afforded additional relief
without presaging immediate further easing moves. On the next
2 days the Account Manager arranged repurchase agreements at
the new discount rate and also made some outright purchases
of bills.
Together, the discount rate cut and open market operations
produced a climate of reserve cost and availability in which the
disparity between dealer financing costs and other short-term
rates was significantly reduced, although not eliminated. While
the remaining penalty cost of carrying positions encouraged distribution, dealers remained willing to hold heavy positions in
hopes of lower interest rates in the future. Reflecting in part bank
financing of these holdings and in part banks' additions to their
own investment portfolios, the growth of bank credit continued
to outstrip projections throughout August and September.
In view of the rapid growth of bank credit, open market operations by late August shifted their focus away from special concern with Treasury bill rates and again sought at the margin to
resist excessive expansion of bank credit. During the last 2 weeks
of the period under review, moreover, the Account Manager had
to contend with a confluence of extraordinary factors providing
reserves. Among these was the inauguration on September 12 of
new procedures for calculating member bank reserves.3 One consequence of the new procedures was that required reserves—
based on average deposits for 2 weeks previously—averaged
3

For details, see the Board's Policy Record for Apr. 23, 1968, p. 82, and the
Federal Open Market Committee's Policy Record for Oct. 8, 1968, pp. 195-203.




261

some $500 million less in the 2 weeks ended September 25 than
they would have under former procedures. In these circumstances
and to absorb a seasonal rise in reserves that was augmented by
a sharp temporary drop in Treasury balances and foreign drawings on the System swap network, the System undertook very
large-scale open market operations.
In view of the short-lived nature of the bulge in reserves and
the considerable uncertainty over how banks would modify their
behavior under the new accounting rules, the Account Manager
proceeded cautiously, accomplishing most of the reserve absorption on a day-to-day basis. For this purpose matched salepurchase transactions proved particularly useful, and the Trading Desk arranged a total of $4,715 million of such agreements
in a 2-week interval. On Wednesday, September 11, the System
absorbed $1,530 million through open market operations, a
record amount for a single day.
The amounts of matched sale-purchase transactions outstanding ranged as high as $1,750 million, the level reached on September 18. These massive reserve absorptions provided clear
evidence to the market of the System's desire to avoid an easing
of money market conditions as a result of redundant reserves.
The Federal funds rate rose from 5% per cent on Wednesday,
September 18, to 5% per cent a week later. When pressures
intensified on the latter date, the System injected $362 million
of reserves through outright purchases of Treasury bills.
SEPTEMBER 26-DECEMBER 31:

MONETARY RESTRAINT INTENSIFIES AS INFLATIONARY
PRESSURES PERSIST

The economic and financial environment. In the fourth quarter,
with the economy continuing to advance more robustly and with
prices rising faster than previously expected, a growing inflationary psychology was reflected in stepped-up business spending. In general, open market operations from September to midDecember sought to maintain firm conditions in the money and

262



short-term credit markets, while not attempting to resist moderate upward pressures on other market rates. At times when
growth in the bank credit proxy was persistently outpacing
expectations, the Account Manager sought, under the authority
of the proviso clause of the directive, to move toward still firmer
conditions.
On December 17 System policy shifted toward considerably
greater restraint. The move was signaled by an increase of lA
of a percentage point in the discount rates of nine Reserve Banks
—the other three quickly followed—and was confirmed by
outright sales of bills by the Trading Desk in a firm money market pursuant to the directive issued at the Committee's December
17 meeting. Interest rates, which had edged upward from early
August through November and had been climbing rapidly earlier
in December, spurted in the wake of the System's firming actions.
By the end of the year yields on most long-term debt securities
were well above their previous historic highs.
Inflationary pressures persisted in the fourth quarter, and the
rate of unemployment sank to the lowest level since 1953. Consumer spending grew much more slowly than in the third quarter, and retail sales, while fluctuating appreciably over the period,
tended to level off on a seasonally adjusted basis. But business
spending for both inventories and fixed investment expanded
sharply, and capital spending plans pointed to a further rise in
1969. During most of the fourth quarter, indicators suggested a
worsening of the balance of payments situation. However, a sharp
—and partly temporary—influx of funds in the last few weeks of
the year produced a substantial payments surplus on the liquidity basis for the fourth quarter and a small surplus for the year
as a whole.
The combination of monetary restraint and of heavy demands
for credit produced a gradual, though irregular, firming of money
and short-term credit market conditions over the last 3 months
of the year. Member bank borrowing from the Reserve Banks
rose from an average of $515 million in September to $765 mil-




263

4. SEPTEMBER 25, 1968 - JANUARY 1, 1969
Reserves and borrowings
MILLIONS OF DOLLARS

Basic reserve deficit
BILLIONS OF DOLLARS

46 MAJOR MONEY MARKET BANKS

4

I I

I

I

I

ll

I

I

13

20

Money market rates

30
SEPT.

OCTOBER

For notes see pp. 232-33.

264




6

NOVEMBER

27

4

11

18

DECEMBER

25

1
JAN.

Bank credit proxy
BILLIONS OF DOLLARS
290

PROJECTED

ACTUAL

If

I

!

I

ll I

I

Other short-term rates

COMMERCIAL PAPER

11 n 111111! 11111

I I I I I II i l l M i I II I I III I I I

Long-term rates
PER CIHT

BONDS

NEW CORPORATE

7
6
US. GOVERNMENT
* —

5

"

TAX-EXEMPT

4

ll

I ! I I i I 11 1 1 ! I
13

25
SEPT.

OCTOBER




20

NOVEMBER

27

4

11

18

DECEMBER

25

1

JAN.

265

lion in December, while net borrowed reserves increased from
$132 million to $352 million (top left panel of Chart 4 ) . The
Federal funds rate generally fluctuated around 6 per cent until the
increase in the discount rate announced on December 17. After
that it rose rapidly, with trading frequently at rates above 6V2
per cent and sometimes—near the end of the year—as high as
IVs per cent. Rates on loans to Government securities dealers
posted by major New York City banks followed a similar pattern,
with the new loan rates generally averaging from VA to % of a
percentage point higher than the effective rate on Federal funds.
Within the context of a gradual increase in pressure, there
was considerable variability in money market conditions during
the period. Although the institution of new reserve computation
procedures for all member banks on September 12 (referred to
in preceding section) eventually helped to reduce excess reserves,
the characteristic biweekly pattern of reserve management by
country banks was succeeded by a somewhat similar cycle on the
part of reserve city banks, which at times aggravated tendencies
toward short-term variability in the money market. Given the
privilege of carrying over reserve excesses, as well as deficits,
into the next statement week, reserve city banks fell into a pattern
of alternating surpluses and deficits. These swings had sizable effects on money market conditions during the first few months of
the new reserve-computation procedures because most large
banks tended to act in phase with one another, instead of some
having excesses while others had deficiencies. Money market
conditions often tended to be taut early in those statement weeks
in which the large banks started with sizable reserve deficiencies
and to be relatively comfortable early in alternate weeks when
these banks began with large surpluses. In addition, as a consequence of the lagging of required reserves 2 weeks behind deposits, the amplitude of swings in the basic reserve positions of
the major money center banks increased, necessitating larger adjustments in the reserve positions of these banks and consequently
placing greater demands on the Federal funds market.
266



Bank credit continued to expand rapidly, with the proxy
series growing at an annual rate of 12 per cent during the last
3 months of the year; this was just a little below the average rate
for the third quarter. Large-denomination CD's outstanding continued to grow rapidly until early December, when they began to
run off sharply as an expected seasonal decline was reinforced by
rising market rates that rendered CD offering rates noncompetitive at the Regulation Q maximums. Other time and savings
deposits continued to grow throughout the period. The money
supply grew faster than in the third quarter, and U.S. Government deposits declined substantially.
On the asset side of banks' balance sheets, there was increased
growth in business loans, loans to nonbank financial institutions,
and real estate loans. Consumer loans also remained strong.
Securities loans declined, along with dealers' positions, as did
the banks' own holdings of U.S. Government securities. Banks
continued to invest heavily in non-Government securities until
December, when they sharply reduced their rate of investment
in such issues.
Short-term interest rates moved progressively higher from late
September until late December. The Treasury bill market was
kept under pressure by a variety of forces—firm money market
conditions and the resultant high costs of financing heavy dealer
inventories, a belief that the Federal Reserve was shading toward
a firmer monetary policy in view of continuing inflationary developments in the economy, and the addition of $5 billion to
the supply of bills outstanding through Treasury sales of taxanticipation issues during the period. To be sure, there were intervals of temporary declines in bill rates as a result of investment demand and of outside influences, such as the rumors in
mid-October of an impending break in the stalemated Vietnam
peace talks in Paris and the Treasury's announcement on October 23 of a "rights" refunding, which encouraged some professional buying in expectation of demand from sellers of maturing
rights. Rates on short-term bills edged down during most of No-




267

vember as a result of heavy buying by foreign official accounts
and by investors seeking a safe haven amidst the uncertain nearterm outlook for interest rates. At the same time, professional
selling continued to push up rates on longer-term bills.
AH types of interest rates advanced sharply in December. The
generally unexpected increase in the prime lending rate of major banks to 6V2 per cent on December 2 strongly affected market psychology. The System's moves toward greater monetary
restraint in mid-December and the further increase in the prime
rate to 6% per cent immediately thereafter were followed by
further sharp increases in bill rates brought on by price reductions as dealers attempted to reduce their inventories. At the
higher rate levels, strong and broadly based demand for bills
appeared after Christmas, and bill rates dipped; dealers were able
to reduce their bill holdings by $1.4 billion over the final week
of the year.
On balance, the bid rate on 3-month Treasury bills rose 116
basis points from September 26 to the end of the year—closing
at 6.25 per cent. Yields on virtually all Treasury bills were well
above the Regulation Q ceilings on comparable maturities of
CD's at the year-end. Secondary market rates on CD's also rose
steadily during the period, closing at 6.50 to 6.65 per cent on
3-month certificates, compared with the Regulation Q ceiling
of 6 per cent applicable to new CD's. Aggressive bidding for
Euro-dollars by banks that were losing CD funds—in the face
of a reduction in the supply of Euro-dollars as American firms
repatriated funds and European banks engaged in the usual
year-end window dressing—contributed to a rise in the 3-month
Euro-dollar rate from 5 1 % 6 per cent on September 25 to nearly
IV2 per cent in late December. Rates on commercial paper rose
more moderately during the period; the offering rate on 4- to
6-month paper placed through dealers increased from 5% per
cent in late September to 6Y4 per cent at the end of the year.
During most of the final quarter yields in the capital markets
trended higher, reaching new historic highs by the year-end.
268



Large volumes of municipal issues, especially, and of corporate
issues were floated against a background of uncertainties surrounding the strength of the economy and its implications for
monetary policy, the national elections, the Vietnam peace talks,
and another international monetary crisis. Except for a sharp but
short-lived rally sparked in mid-October by renewed hopes for
the end of hostilities in Vietnam, yields remained under nearly
steady upward pressure for 3 months beginning September 25.
The Treasury offered holders of issues maturing in November
and December the right to exchange into the reopened 5% per
cent note of November 1974 at par or into a new 18-month,
55/s per cent note priced to yield 5.73 per cent. The inclusion
of the 6-year note came as a surprise to market participants in
view of the uncertainties abounding, and underwriters showed
little interest in the issue; nevertheless, public subscriptions
totaled $1.3 billion, which was higher than generally anticipated.
With an additional $2.5 billion of the public's holdings of the
eligible issues exchanged into the shorter note, $1.8 billion of
the maturing issues were redeemed. This attrition made it necessary for the Treasury to sell $2 billion of tax-anticipation bills
in late November to rebuild the Treasury's cash balance.
Market yields rose sharply in the wake of the boost in the
bank prime rate on December 2. And they rose even more
sharply in the week following the increase in the discount rate
announced on December 17 and the further rise in the prime
rate the next day. After Christmas, however, a surge in year-end
tax swapping and net demand at the record yields led to a partial
recovery in prices of Government notes and bonds. On balance,
from September 25 to December 31 yields on long-term Treasury issues rose some 67 basis points to an average of 5.75 per
cent. Dealers reduced their holdings of Treasury coupon issues
maturing in more than 1 year to $360 million at the end of
December from the year's high of $1.5 billion in early August.
In the corporate and tax-exempt bond markets, a number of
issues were postponed after the first increase in the prime rate




269

in December. But the tax-exempt market was kept under pressure by sizable flotations of industrial revenue bonds before the
January 1 effective date of legislation removing the tax-exemption privilege on issues of more than $5 million and by a large
volume of undigested earlier offerings. Dealers succeeded in
reducing their advertised inventories of tax-exempt issues by
$300 million in December to $550 million at the end of the year.
By then the Bond Buyer's index of yields on 20 tax-exempt
bonds had risen 55 basis points from late September to 4.85
per cent. Yields of corporate bonds rose even more than that
during the fourth quarter. The year's last new Aa-rated utility
issue with 5 years of call protection was floated on December 5 at
7.10 per cent, about 70 basis points above the yield on similar
issues late in September.
Open market operations. System open market operations from
late September to mid-December were generally directed toward
maintaining firm conditions in the money and short-term credit
markets. As the period progressed and the economy continued
to be stronger than had been expected, both short- and longterm interest rates moved up. Reflecting the tenor of the Committee's concern with the rate of bank credit growth, open market operations offered little resistance to the rate rise. Indeed,
under the proviso clause, the Account Manager moved toward
firmer money market conditions in October and again in late November and early December. After the increase in the discount
rate announced on December 17, open market operations were
aimed at attaining firmer money market conditions in such a
manner as to make clear the System's determination to resist
inflationary pressures.
On balance, the System provided $532 million, net, of reserves through open market operations over the September 2 6 December 31 interval (table). It purchased outright $3.4 billion
of Treasury bills and $247 million of coupon issues. Repurchase
agreements of $3.8 billion against Treasury and Federal agency
securities were also arranged and terminated during the period.
270



The System absorbed reserves through outright sales of $2.7
billion of bills and redemptions of $436 million of maturing
bills. In addition, the Trading Desk arranged $3.9 billion of
matched sale-purchase transactions, by far the heaviest use of
this instrument in any quarter since its inception. Finally, for
several days prior to the influx of corporate tax payments, the
System purchased varying amounts of special certificates of indebtedness to tide the Treasury over seasonal low points in its
cash balances. The total amounts of these special certificates held
over the period December 10-17 ranged up to a high of $596
million.
Conditions in the money market firmed toward the end of
September as a result of the reversal of the seasonal influences
that had provided reserves in volume earlier in the month. Required reserves, under the new computation procedures, began
to catch up with the mid-September rise in demand deposits at
the same time that the Treasury was rebuilding its balances at
the Reserve Banks and float was declining seasonally. Although
some firming of money market conditions from the comfortable
tone earlier in the month was appropriate, the System injected
a substantial amount of reserves early in the period to combat
tendencies toward undue tautness. Indeed, the System purchased
outright $854 million of Treasury securities during the statement week ended October 2 and made overnight repurchase
agreements on the September 30 statement date, when the availability of bank credit to dealers was somewhat curtailed. Nevertheless, Federal funds traded primarily at 6 per cent during the
week, compared with 5% to 5% per cent over the two previous
weeks.
During October the Account Manager sought to resist excessive growth of bank credit by allowing money market conditions
to firm slightly on the average, within the limitations imposed by
the Treasury refunding then under way, as called for by the
proviso clause. In addition, frequent open market operations
were undertaken to offset short-run variations in money market




271

conditions that resulted from the new reserve-carryover provisions introduced September 12.
Operations in the weeks ending October 16 and 23 are illustrative of the pattern of monetary actions sometimes needed to
deal with such fluctuations. Thus, in the week ending October 16
the System injected reserves in large volume to counter undue
firmness in the money market created when banks attempted to
cover deficiencies carried over from the preceding week as
quickly as possible through various forms of borrowing. Because
the banks were overly cautious and took this action early in the
week, a condition of ease developed near the end of the statement week, and the System absorbed reserves in volume, by
means of both outright sales and matched sale-purchase transactions. Nevertheless, these actions did not match the volume of
excess reserves accumulated so the large banks carried over sizable amounts of excess reserves into the next statement week.
As a result, bidding for Federal funds was relatively limited
early in the October 23 statement period, so the System absorbed
a substantial volume of reserves in an effort to promote money
market firmness and encourage a larger volume of member bank
borrowing over the weekend.
However, the banks were content to accumulate deficits, and
borrowing remained quite light through Tuesday, October 22.
Partly because of the low volume of borrowing early in the week,
reserves available in the Federal funds market that day were not
sufficient to meet the insistent deferred demands of deficit banks;
hence, Federal funds were bid up to rates as high as 6Y2 per
cent in the scramble for funds. The System then reversed direction and injected reserves to moderate the tightness. Similar patterns of alternating ease and tightness in the money market,
which the System had difficulty in smoothing out completely, recurred in succeeding weeks.
Late in November open market operations were complicated
by an unexpected bulge in float, a sharp decline in the Treasury's
balance at the Reserve Banks, and heavy foreign drawings on
272



the System's swap line stemming from massive speculation on an
upward revaluation of the German mark and a devaluation of
the French franc. In combination, these factors supplied reserves
in very large volume, thereby tending to produce ease in the
money market and to relax the pressures on the banks. In this
situation the System was able to absorb reserves—without disrupting the securities market—by outright sales of Treasury bills
to foreign accounts and by matched sale-purchase transactions
with those accounts; additional reserves were absorbed by means
of matched sale-purchase transactions with Government securities dealers.
Around the beginning of December the Account Manager
satisfied seasonal needs for reserves by buying Treasury bills
directly from foreign accounts, thus avoiding sales of bills for
such accounts into the market at a time when short-term rates
were already adjusting sharply higher. The System also arranged
overnight repurchase agreements on December 2, the day the
bank prime rate was boosted to 6V2 per cent, with a view to facilitating the market adjustment to this unexpected event and to
provide for an indicated reserve need.
After that brief injection of reserves, the System absorbed
reserves steadily during the weeks ending December 11 and 18, a
time of year when it usually had provided reserves to meet seasonal needs. The factors that had been instrumental in easing
money market conditions late in November were still at work in
the first half of December; increases in float (partly related to the
influenza epidemic) were especially substantial, and the Treasury's balance at the Federal Reserve Banks declined sharply.
There were indications, moreover, that bank credit was again
outstripping expectations, thereby calling for implementation of
the proviso clause. Accordingly, the System absorbed reserves
each day during the 2-week period—employing matched salepurchase transactions in the market as well as outright sales of
bills in the market and to foreign accounts. Despite these largescale absorptions of reserves the money market remained rela-




273

tively comfortable, with Federal funds trading at rates around
5% per cent.
Open market operations promptly confirmed the firmer stance
of monetary policy that was signaled by the announcement on
December 17 of an increase in the discount rate to 5Vi per cent
—along with the stand-fast on Regulation Q ceilings. With projections indicating the need to absorb some reserves, but with
current money market conditions relatively firm, the System sold
outright $187 million of Treasury bills into the market on December 19. This move was promptly interpreted in the market
as confirming a policy of greater restraint. Having provided this
signal, the System remained on the sidelines for the next 2 days
while money market conditions tightened further and securities
yields rose steeply as market participants reacted to the prospect
of significantly greater monetary restraint.
During the remainder of the year open market operations
sought to maintain the degree of restraint achieved after the
increase in the discount rate, while cushioning somewhat the
market's sharp reaction to the firmer policy stance. From December 24 to December 31 the System injected a large volume
of reserves to combat the undue tautness in the money market
that had resulted from the combined effects of the delayed rise
in required reserves under the new computation procedures, of
the Treasury's repayment of borrowing from the Reserve Banks,
and of the rebuilding of the Treasury's balance. Extensive use was
made of repurchase agreements as well as of outright purchases
of Treasury bills, both in the market and from foreign accounts.
Nevertheless, Federal funds traded at rates as high as IVs per
cent during the final week of the year, and a record high effective
rate of 6% per cent was reached.
•

274



REVIEW OF OPEN MARKET OPERATIONS IN
FOREIGN CURRENCIES
The central bank defenses developed in recent years to protect the
world payments system from disruptive speculative movements of
funds were subjected to some of their severest tests in 1968—the
March gold crisis, heavy pressures on sterling, a political and
economic crisis in France, and massive speculation on a revaluation of the German mark. To deal with these and other possible
strains the defenses were strengthened during the year. Thus bolstered, the international financial system weathered the successive
storms and continued to facilitate a growing volume of world
trade, even against the background of persisting payments imbalances among major trading countries.
During the year the Federal Reserve and the U.S. Treasury
participated in concerted action to restrain speculation in the gold
and exchange markets and in major packages to bolster the official reserves of countries whose currencies were under speculative
attack. In early March the United States joined in the $900 million package mobilized in support of the Canadian dollar—at the
same time granting Canada complete exemption from all the restraints on U.S. capital outflows under the President's January 1
program. In response to the March gold rush and sharp intensification of currency fears, the United States and the other members actively participating in the gold pool convened an emergency meeting in Washington on March 16 and 17 to consider
steps for curbing the speculative excesses. Agreement was
reached at that meeting to end official intervention in the London
gold market and to separate private and official transactions in
gold into two distinct circuits. These new arrangements not only
insulated official gold stocks from further inroads by private
speculators but also, in conjunction with the Stockholm Agreement on Special Drawing Rights, reaffirmed worldwide support
for maintaining the present official price of gold and the existing
currency parities.




275

Among the decisions taken at the Washington meeting was
an agreement to increase international credit facilities for the
United Kingdom, with the Federal Reserve participating through
an increase in the reciprocal currency arrangement with the
Bank of England. At the same time the entire Federal Reserve
swap network was enlarged, and on March 18 it was more than
double the size of a year earlier. In the calmer atmosphere following the Washington meeting private demand for gold subsided, and both sterling and the Canadian dollar rebounded
sharply as speculative pressures receded. When heavy speculative
selling engulfed the French franc in the summer and fall, the
Federal Reserve approved increases totaling $900 million in the
swap line with the Bank of France, which raised that facility to
$1 billion. The U.S. Treasury also extended a credit line to the
Bank of France. By the end of 1968 the Federal Reserve swap
network stood at $10.5 billion, an increase of nearly $3.5 billion
for the year.
Apart from the very substantial increases in short-run defenses
against currency speculation, a major step was taken to shield
sterling over the longer term from pressures arising out of conversion of sterling balances by sterling-area countries. On September 9, after the monthly meeting of central bankers at Basle,
the Bank for International Settlements and a group of 12 central
banks announced that a $2 billion medium-term credit facility
was being made available immediately to the Bank of England
for that purpose.
At the opening of 1968 U.S. authorities had just over $2 billion of outstanding foreign currency commitments under central
bank swaps and forward sales to the market. These heavy commitments had arisen in connection with the speculative flows of
funds during the 1967 sterling crisis that culminated in the
devaluation of the pound in November and during the subsequent period of uncertainty. Some $1.8 billion of these obligations took the form of drawings by the System on its reciprocal

276



TABLE 1: FEDERAL RESERVE RECIPROCAL CURRENCY ARRANGEMENTS

Amount of facility
(in millions of dollars
equivalent)
Other party to arrangement
Dec. 31,
1967
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank

,

,

Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements:
Dollars/Swiss francs
Dollars/authorized European currencies other than
Swiss francs
Total

Dec. 31,
1968

100
225
750
100
1,500

100
225
1,000
100
2,000

100
750
750
750
130
225

1,000
1,000
1,000
1,000
130
400

100
200
400

100
250
600

400

600

600

1,000

7,080

10,505

currency facilities to cover reserve gains of continental European
central banks. Although a substantial reflow of funds from continental European currencies in early 1968 enabled the U.S. authorities to make some reduction in these obligations, it nevertheless was necessary to employ sizable nonmarket transactions in
order to avoid their undue prolongation. Through the use of foreign exchange obtained in connection with the Canadian and
U.S. drawings on the International Monetary Fund, from issuance of U.S. Treasury securities, and in special transactions,
Federal Reserve obligations under the swap arrangements were
reduced to less than $600 million by early March.




277

During the March gold crisis the United States incurred new
swap debts and undertook new forward commitments to the
market. However, in the quieter atmosphere following the Washington meeting it proved possible to liquidate these obligations
as well as some further System swap drawings that had been
undertaken in the spring. In liquidating some $1.3 billion of
swap obligations the Federal Reserve and the Treasury purchased a substantial amount of foreign exchange from the central banks concerned as they replenished dollars sold in the exchange market. The System also obtained a substantial amount
of exchange in connection with the French and British drawings
on the IMF in June and from the U.S. Treasury, which issued
new foreign-currency-denominated securities. Thus, by July 16
all Federal Reserve and Treasury obligations undertaken in swap
transactions had been repaid. Moreover, during the spring and
summer months the $155 million of outstanding U.S. forward
commitments to the market were liquidated, and the U.S. Treasury redeemed in advance of maturity a $50 million equivalent
mark-denominated security.
The events of the latter part of 1968 were dominated by deepseated fears arising from the May crisis in France, by persistent
apprehension over the lack of sustained improvement in the British trade position, and by a growing belief in the inevitability
of a revaluation of the mark. Heavy speculation in marks erupted
in late August and gave rise to unprecedentedly large shifts of
funds into Germany before the assault receded. The respite proved
temporary, however, and the inflows resumed on an even more
massive scale in November, when the German Federal Bank
purchased some $2.8 billion in the market as speculative funds
moved into Germany, at heavy cost to French and British official
reserves. The German Federal Bank's vigorous efforts to channel
the speculative inflows to the market helped to moderate pressures on the Euro-dollar market. In the speculative rush of late
August the System and the Treasury, participating jointly, sup278



ported the German Federal Bank's efforts by selling marks forward in the market, and these obligations were liquidated in due
course. During the November rush for marks, the System reactivated its swap line—drawing marks to finance spot sales of that
currency in New York. At the same time the System drew on its
line with the Swiss National Bank to absorb most of that bank's
dollar accumulation.
After mid-November the German authorities took measures
to reduce the payments surplus and to restrain speculation while
making clear their determination not to revalue the mark. These
decisions were supported by the Group of Ten nations in a communique following a special meeting in Bonn on November
20-22. After the meeting President de Gaulle rejected any devaluation of the French franc and announced new austerity measures in support of the existing franc parity. When trading resumed on November 25, considerable apprehension remained
in the market as traders assessed steps taken by the respective
authorities in defense of their existing currency parities. Nevertheless, the speculative fever abated considerably.
In order to encourage a reflow of funds from Germany, the
German Federal Bank provided outright forward marks to the
market and offered attractive swap rates to German commercial
banks. In support of these operations the System also sold marks
forward—covering market commitments with swap drawings on
the German Federal Bank. These measures helped to generate a
substantial reflux of funds from Germany, and by the year-end
almost the entire speculative inflow had been reversed. Late in
December the System was able to begin acquiring cover for its
market commitments in forward marks. At the end of 1968 Federal Reserve commitments under all swap lines stood at $432.1
million; drawings outstanding were in Swiss francs and German
marks.
During the year other countries made substantial use of the
Federal Reserve swap facilities. The Bank of England had emerged
from the November 1967 devaluation with sizable commitments




279

under the Federal Reserve swap arrangement. After further drawings and some repayments, the commitment stood at $1.2 billion
by June 19, at which time it was liquidated, largely through a
drawing on the IMF. Subsequently—in July and during the
November exchange market upheaval—the Bank of England
made further drawings on the swap line, and by the year-end it
had total swap commitments of $1,150 million with the Federal
Reserve. The Bank of England also had substantial commitments
outstanding to the U.S. Treasury under special credit arrangements.
The Bank of France also made substantial use of its swap line
with the Federal Reserve System—drawing on the facility for the
first time in June. Drawings reached a peak of $611 million in
November, but after the French decision to hold firm on the existing franc parity, reflows of funds developed and by the year-end
the Bank of France had reduced its swap obligation to the System
to $430 million. The Netherlands Bank and the National Bank of
Denmark also drew on their lines for the first time; each employed moderate amounts, which were repaid before the yearend. The Belgian National Bank also drew dollars from the System, but it was able to pay off nearly all of its obligations before
the year-end.
With the massive movements of funds into and out of European currencies, the Euro-dollar market was subjected to considerable churning during the year. On the occasions when mark
revaluation rumors led to large inflows into Germany and to substantial dollar accumulations on the part of the German Federal
Bank, that bank effectively channeled its dollar intake out into
the Euro-dollar market. The Swiss National Bank also rechanneled large amounts of dollars taken in at midyear and at the
year-end. Several other central banks operated in their respective
forward markets so as to moderate flows into and out of their
money markets and thereby ease the effects of these flows on the
Euro-dollar market.
For its part, the System, through its arrangement with the BIS,
280



TABLE 2: FOREIGN CURRENCY TRANSACTIONS OF THE FEDERAL RESERVE,

1968

In millions of dollars equivalent

Operations initiated by the System
Other transactions

Transactions under swap lines
Acquisitions
of funds for
repaying swaps

Currency
Drawings

Belgian franc
Pound sterling
Canadian dollar
Danish krone
French franc
German mark
Italian lira
Dutch guilder
Swiss franc
Total
to
00

Repayments

Disbursements
of swap- From
Puracquired U.S. From
balances Treas- others chases
ury

Sales

107.1

212.9

107.1

10.0

202.5

5.1
200.0

0.5
243.2
5.7

412.1
175.0
15.0
498.0

650.0
675.0
185.0
828.0

340.0
175 0
15.0
498.0

122.5
50.0
100.4
288.3

457.1
625 1
83.9
535.9

37.6

52.3

1,207.2

2,550.9

1,135.1

571.2 1,904.5

252.7

Purchases

6.9
203.0

1.0

1
Includes forward as well as spot transactions; excludes Italian lira forward operations.
2 By BIS.




With others 1

With U.S.
Treasury

io.6

164.3
41.9
60.8

302.7

476.9

Sales

Swap
operations
initiated
by others

Draw- Repayings
ments

8.7 210.5 203.0
5.4 2,045.0 1,945.0
250.0 250.0
25.0
25.0
3.6 765.0 335.0
111.8 2643.0 2909.0
30.9
28.0

54.7

54.7

188.4 3,993.2 3,721.7

made dollars available to the Euro-dollar market on two occasions. In late June, when Euro-dollar rates were rising and sterling was under speculative pressure, the BIS placed $ 111 million
of funds drawn from the System to minimize those pressures.
Again, in early December, the BIS placed $80 million in the
Euro-dollar market, drawing the funds from the Federal Reserve,
at a time when Euro-dollar rates were rising and pressures were
converging briefly on the pound. In both instances, the BIS drawings were quickly repaid.
STERLING

Late in 1967 the pound strengthened following reports that
the British Government was planning sizable cuts in welfare and
defense-spending programs to backstop its devaluation package.
These cuts were announced on January 16, and although their
major impact was not to take effect until 1969-70, as Britain
would phase out its military operations east of Suez, a significant
reduction in programmed spending—by some £ 3 0 0 million—
was scheduled for 1968. The trade figures for both December
1967 and January 1968 showed major improvements over the
predevaluation deficits, and export orders were reported to be on
an encouraging uptrend.
Toward the end of January the sterling rate moved firmly
above $2.4100, and during both January and February there was
a steady demand for sterling that enabled the Bank of England
to liquidate a large volume of maturing forward commitments
that had been made prior to devaluation. In those months, however, the Bank of England was not able to make any reductions
in its outstanding Federal Reserve swap debt, which at the end
of 1967 stood at $1,050 million compared with $1,350 million by
the time of devaluation. In addition, the Bank of England continued to make use of credits from the U.S. Treasury.
But U.K. official reserves were soon subjected to new erosion
as a result of a combination of adverse developments. After 3
years of disappointed hopes, the market maintained a wait-and-see
282



attitude concerning sterling's prospects. Hectic speculation in the
gold market from November until mid-March kept the exchanges
on edge, and sterling reacted sensitively to each new threat to the
international financial system. Against this psychological background, and the nagging fear that the government's program to
control expenditures and limit private demand would be thrown
off course by labor or political unrest, sterling remained generally
on the defensive. The forward sterling discount widened sharply
at times, not only discouraging any inflow of interest-sensitive
funds, but also contributing to withdrawals from London of
maturing short-term placements of foreign funds. In addition,
several sterling-area countries, having suffered an exchange loss
on their reserves as a result of the devaluation, reconsidered the
question of diversifying their reserves and began shifting a portion of their holdings out of sterling and into other reserve assets.
In the backwash of the gathering storm in the gold market, the
pound dipped below its $2.40 parity for the first time on March
4. The following week, amid the climactic scramble for gold in
London, the February trade figures for the United Kingdom were
announced; these showed a heavy deficit, with imports at record
levels. The next day—the last day of the gold pool operations—
sterling tumbled to $2.39. The closing of the London gold market on Friday, March 15, in advance of a meeting in Washington
of representatives of the central banks active in the gold pool,
was accompanied by a declaration of a bank holiday the same
day. With London financial markets closed, there was very little
dealing in sterling either on the continent or in New York. However, when isolated trades began to appear at rates below the
$2.38 floor, the Federal Reserve—under arrangements worked
out with the Bank of England—made small purchases in New
York that quickly restored the rate to $2.3825.
On March 17, the Washington communique of the Governors
of central banks participating in the gold pool announced several
important decisions in support of sterling and the exchange markets in general. Specifically, the Governors "agreed to cooperate




283

fully to maintain the existing parities as well as orderly conditions in their exchange markets . . . [and] to cooperate even
more closely than in the past to minimize flows of funds contributing to instability in the exchange markets." Taking note of the
importance of the pound sterling in the international monetary
system, they also announced that the total of credits immediately
available to the U.K. authorities (including the IMF standby)
would be raised to $4 billion. As part of this increase, the Federal Reserve swap arrangement with the Bank of England was
increased by $500 million to $2 billion. At the same time the
British authorities announced that the London gold market
would remain closed for the remainder of March.
On Monday, March 18, the decisions set forth in the communique brought about a clear change of atmosphere in the exchanges. The demand for sterling, in particular, was strong and
the rate rebounded to above par. The next day the British Government announced the long-awaited 1968-69 budget, calling for
very substantial increases in indirect taxes on consumer purchases, a sharp rise in the selective employment tax (on employment in service industries), and a 1-year tax on investment incomes, among other provisions. At the same time the government
announced that it would seek legislation to limit annual wage
increases to 3Vi per cent and to defer or suspend price or wage
increases for up to a year. In the wake of a favorable market
response to the budget and the Washington communique, on
Match 21 the Bank of England reduced its discount rate by V2
percentage point to IV2 per cent, the first reduction since the
move to 8 per cent at the time of devaluation. Along with the
strengthening of spot sterling, discounts on the forward pound
narrowed from the 10 to 12 per cent per annum range for 3month contracts, where they had been on March 13 to 15, to 4
per cent per annum by early April.
Despite the improved atmosphere in the latter half of March—
featured by the successful conclusion of the Group of Ten talks
in Stockholm, which ironed out the last major differences on the
284



SDR facility—the month as a whole had been costly to U.K.
reserves. The Bank of England drew $50 million on its swap
with the Federal Reserve (bringing the amount outstanding to
$1,100 million) while making use of other sources of credit, including the U.S. Treasury.
April was a much quieter month for sterling and for international financial markets in general. Nevertheless, another monthly report of a large British trade deficit at a time when observers
were looking for clear signs that devaluation was beginning to
work created an uneasy undertone in the market, and this grew
more pronounced in May. The spot rate gradually drifted below
par, and the forward discount began to widen again, reaching
nearly 7 per cent by the end of May. At the same time Eurodollar rates, which had dropped back from the peaks reached at
the time of the mid-March gold crisis, began to rise once again,
with the rate on 3-month deposits moving from just under 6 per
cent in early April to more than 7 per cent by the end of May.
As a result, the covered incentive to move foreign funds out of
local authority deposits into Euro-dollars shot up to nearly 6 per
cent, adding to the strains on sterling that reemerged in May.
During the April-May period, U.S. banks—spurred by tightening credit conditions in this country—turned heavily to the
Euro-dollar market in search of funds. Although the sharp runup in Euro-dollar rates increased the incentive to switch out of
pounds, developments in the United Kingdom were also causing
concern. Setbacks for the Labor Party in by-elections, reports of
dissension in labor ranks over the continuation of the austerity
program, and fears—subsequently borne out—that the next
monthly trade figures would again look bleak, all added to market pessimism. In mid-May the crisis in France added a new
dimension of uncertainty to the international monetary situation
and helped to demoralize the market even further. As a result of
these various disturbing factors, the pattern of heavy pre-weekend selling of sterling reemerged in May for the first time since
devaluation, and at heavy cost to U.K. reserves.




285

In order to bolster the official reserves in May, the Bank of
England drew $345 million on the Federal Reserve swap line and
made use of further credits from the U.S. Treasury as well as
other international assistance. The bank repaid $245 million of
the swap drawings in early June. Subsequently, after a further
small drawing on the Federal Reserve that was soon reversed as
pressures eased, the Bank of England's swap debt stood at $1.2
billion in mid-June.
At that point it was announced that the United Kingdom
would draw the full $1.4 billion available under the standby
credit with the IMF to repay outstanding short-term credits to
central banks. A substantial part of this IMF drawing was used
on June 19 to reduce the $1.2 billion of drawings then outstanding under the Federal Reserve arrangement. The remainder of
these drawings was paid down on the same date by means of
Federal Reserve and U.S. Treasury purchases of sterling on a
covered or guaranteed basis from the Bank of England. To permit such purchases by the Federal Reserve, the Authorization for
System Foreign Currency Operations was amended to increase
from $200 million to $300 million equivalent the amount of
sterling that could be held on a covered or guaranteed basis for
System working balances. Thus, as of the end of June the $2 billion swap arrangement between the Federal Reserve and the
Bank of England had reverted to a fully available standby basis
(although certain other credit facilities, including those from
the U.S. Treasury, were still in use).
Official confirmation on July 8 that 12 central banks and the
BIS were prepared to participate in a new multilateral credit
facility—amounting to $2 billion—to offset reductions in the
sterling balances of sterling-area countries helped to turn market
sentiment, which until that period had been increasingly discouraged. More important, June trade figures, showing reduced
imports, seemed to offer the first tangible evidence that devaluation was working. Combined with a number of other encouraging developments at home and abroad, these announcements
286



stimulated widespread buying of sterling, which lifted the spot
rate above $2.3950 by the end of July. However, heavy reserve
losses at the end of June and in the first week of July had required
the Bank of England to reinstitute drawings on the Federal Reserve swap arrangement, and despite sizable reserve gains in the
last 3 weeks of July, outstanding drawings amounted to $350
million at the month-end.
Hopes for further improvement in the trade account helped
to sustain demand for pounds through early August, and the
Bank of England was able to reduce its swap drawings by $50
million to $300 million. But these hopes were dashed with the
publication of July trade results showing that the previous
month's gains had been reversed. Shortly afterward, Soviet intervention in Czechoslovakia brought new uncertainties, which were
soon compounded by mark revaluation rumors, which in turn
cast new doubts on sterling. The pressures thus generated carried
through early September, by which time the spot rate was back
close to the floor and the Bank of England had increased its
drawings on the Federal Reserve to $400 million.
As in earlier months, the market's appraisal of sterling turned
heavily on the latest trade figures. Relatively favorable results
for August and September were thus important factors in sterling's improved showing through the end of October. The temporary subsiding of mark revaluation rumors and the announcement in early September that final agreement had been reached
on the new sterling balances arrangement were further elements
in sterling's stronger market performance during this period.
A sharp run-up in sterling rates, following President Johnson's
announcement of a bombing halt in North Vietnam, was abruptly
halted by the new outbreak of mark revaluation rumors in early
November. The sterling market remained roughly balanced at
about $2.39 during the first 2 weeks of November despite uneasiness over the implications for the domestic economy of the
government's announcement of new instalment credit restric-




287

tions. But news on November 13 of a doubling of the U.K. trade
deficit for October left sterling fully exposed to the mounting
pull of funds into Germany in anticipation of an imminent mark
revaluation. Before the end of November the Bank of England
had been forced to extend heavy support to hold sterling at
$2.3827 and had increased its outstanding drawings on the Federal Reserve by $750 million, raising the total to $1,150 million.
During the Bonn meeting of November 20-22, foreign exchange dealings were suspended in London, as in several other
major European centers. Meanwhile, the U.K. authorities acted
to bolster their austerity program through indirect tax increases,
tightened credit curbs, and a 50 per cent deposit requirement
against imports of manufactured and semimanufactured goods.
Although speculation abated and markets were steadier once
the Bonn meeting was over, considerable uneasiness remained.
When trading resumed on November 25, demand for pounds was
limited to modest covering of short positions. Moreover, in the
early part of December, sterling was subjected to renewed selling
pressure by the market's apprehensions over heightened tensions
in the Middle East and by reports suggesting disagreement within
the British Government regarding the austerity program. Higher
interest rates in the United States added to the market pressures.
In this atmosphere, the Bank of England sustained substantial
losses in support of spot sterling, and forward discounts again
widened sharply. By midmonth, however, the market had become
heavily oversold, and traders—spurred by expectations that the
next set of trade figures would show substantial improvement, as
in fact was the case—moved to cover short positions. The rebound enabled the Bank of England to recover most of its
losses earlier in the month, but the market then turned cautious
once again. On balance, very little of the substantial reflux of
funds from Germany found its way back into sterling, with the
result that the Bank of England's commitments to the Federal
Reserve remained at $1,150 million at the year-end.

288



GERMAN MARK

During the early part of 1968 funds flowed heavily from Germany, as German banks responded to the pull of relatively attractive interest rates in the Euro-dollar market and foreign borrowers turned to German financial markets for long-term funds.
The substantial outflow depressed the mark rate and enabled the
System to repurchase the small amount of marks used in market
intervention late in 1967 and to obtain further amounts sufficient
to complete the liquidation of the System's outstanding $350 million swap debt to the German Federal Bank by early March. The
$750 millon reciprocal swap facility thus reverted to a fully standby basis.
But Germany's trade account remained very strong during
the early months of 1968, as it had throughout 1967. It was
evident, moreover, that Germany's resurgent growth, as well as
its accompanying stimulus to activity in other Common Market
countries, was being accomplished with few strains on Germany's
productive potential. Although persistent capital outflows depressed the spot mark early in the year, the market remained
aware of the underlying strength in the current account and of the
potential for a rapid reversal of direction with a new outbreak
of speculative demand. During the gold crisis that began to erupt
in early March, speculation on a revaluation of the mark touched
off such a burst of speculative demand and consequent heavy
flows of funds to Germany. On Friday, March 15, with unprecedented uncertainties in the exchanges arising out of the closing
of the London gold market and the emergency central bank
meeting convening in Washington over the coming weekend,
speculation seemed to focus on the mark, and funds flowed into
Germany from all over Europe and from the United States. The
Federal Bank's intake of $400 million that day raised its gross
spot intake in March to some $800 million, including a moderate
amount through the Federal Reserve Bank of New York.
These large shifts of funds into marks would have severely




289

aggravated the strains then being felt in the Euro-dollar market
and the pressures on sterling had the Federal Bank not immediately reoffered the dollars to German commercial banks on a
swatp basis for repurchase later at attractive rates. Initially in
the first week of March, the Federal Bank offered swap rates
equivalent to a premium on the forward mark of 2 per cent per
annum, more than Vi percentage point below the market. Subsequently the bank varied its rates to moderate the reflow, and
by the month-end it had raised the total of its swap sales to an
amount that about offset the gross spot inflow earlier in March.
The System participated in the market swap operation, as it had
done in November 1967, by reactivating its swap line with the
German Federal Bank to absorb $300 million from that bank.
The firm support for existing currency parities that emerged
from the Washington meeting helped to reassure the highly nervous markets. News of the large general expansion in the Federal
Reserve swap network, including an increase in the line with the
German Federal Bank to $1,000 million, contributed importantly to that reassurance. Under these circumstances the underlying liquidity of the Frankfurt market was quickly manifest, and
the spot mark moved lower through the end of March. In order
to maintain an orderly market as the earlier heavy speculation
unwound, the Federal Bank sold a sizable amount of spot dollars.
During the spring, confidence in currency parities was strengthened by President Johnson's new peace initiative in Vietnam and
the Stockholm Agreement on a plan for SDR's. Moreover, rising
interest rates in the United States and in the Euro-dollar market
after the V2 point increase in Federal Reserve discount rates to
5Vi per cent exerted a strong pull on German short-term funds.
At the same time the German Federal Bank continued its easy
monetary policy to encourage the investment of excess funds
abroad, and as capital outflows developed, it sold substantial
amounts of spot dollars, permitting the spot mark to slide gradually lower. The authorities also concluded new market swaps
with the German commercial banks to facilitate investment of
short-term funds abroad by these banks. Thus a very substantial
290



part of the dollars that had flowed in as a result of the maturing
of the March swap contracts were channeled out.
In April the System began to reduce its swap debt to the Federal Bank; using marks acquired from a correspondent and some
marks from balances, it reduced the $300 million swap obligation by $25 million. International currency uncertainties flared
up again in May, however, triggering a new round of mark revaluation rumors as apprehensions over the failure of the U.K. trade
position to show improvement were compounded by uneasiness
over further delay in enactment of the proposed U.S. tax surcharge. Speculative demand for marks boosted the spot rate
sharply, and the German authorities again purchased dollars. But
the buying was not sustained; in fact, it quickly dissipated after
a flat denial of any revaluation plans was issued by Dr. Karl
Blessing, President of the German Federal Bank. At the end of
May the market responded favorably to another official statement, which explicitly encouraged German commercial banks to
export capital and stressed that the authorities would provide
sufficient domestic liquidity for further business expansion despite the flow of funds abroad. Thus, with official approval and
ample resources available, foreign borrowers placed additional
issues in the German capital market.
One notable example of the broadly equilibrating influence
of the outflow from Germany was the Canadian Government's
5-year borrowing of 250 million marks in late May. The borrowing not only served to bolster Canadian official reserves and to
offset Germany's current-account surplus but also afforded the
Federal Reserve the opportunity to purchase a sizable amount of
German marks. The Federal Reserve purchased from Canada
$25.2 million equivalent of the proceeds of the borrowing and
used them, together with $25 million more acquired from the
market, to reduce its swap debt to the German Federal Bank to
$225 million equivalent.
The flow of German capital seeking employment abroad
stepped up in June when the Federal Bank sold sizable amounts
of dollars in the market, partly in response to conversion of the




291

mark proceeds of Canadian and Mexican long-term borrowings.
In the latter part of that month the persistent demand for dollars
depressed the spot mark to parity, and since marks were
readily available, the Federal Reserve and the Treasury purchased marks in the New York market against outstanding commitments. In addition, the System obtained $50 million of marks
from the German Federal Bank when that Bank replenished dollars sold to France in connection with the French drawing on
the IMF. These marks, together with market purchases, were
used to reduce System swap obligations in marks by $100 million to $125 million as of June 21. Finally, near the end of June
the U.S. Treasury issued to German banks special mark-denominated securities equivalent to $125.1 million. These securities
were issued in conjunction with agreements reached with the
German Government to neutralize part of U.S. troop-stationing
costs in Germany. The System purchased these marks and used
them to liquidate the last $125 million outstanding under the
swap line with the Federal Bank.
Selling of marks continued unabated through early August,
partly reflecting reflows abroad from German banks after midyear. By early August the spot mark had declined to $ 0 . 2 4 8 6 ^ ,
the lowest level since the 1961 revaluation, and the German Federal Bank had continued to supply spot dollars to the market. In
the New York market both the Federal Reserve and the Treasury made sizable purchases of marks. On August 9, the Treasury
used its recent purchases to redeem in advance of maturity a
$50.3 million equivalent, 22-month note held by the German
Federal Bank.
Toward the end of August new rumors of an imminent revaluation of the mark again touched off heavy speculative demand.
Within days the spot mark had risen virtually to its ceiling, and
the German Federal Bank had begun to take in huge amounts
of dollars. The bank's market purchases amounted to $1.7 billion in the period August 27-September 6. Some of the inflow
represented conversions of sterling and French francs, but a large
292



part came from the Euro-dollar market. From the outset, the
Federal Bank moved to neutralize the potentially disruptive effect
of these inflows, as it had in the past, by making dollar/mark
swaps available at rates that provided a sizable incentive to German banks to channel the funds to the Euro-dollar market. U.S.
authorities assisted in these efforts by selling some $33.8 million
equivalent of marks in the forward market in New York. After
the monthly central bank meeting in Basle on the weekend of
September 7-8, the demand for marks declined as speculative
influences receded. The German Federal Bank continued with
its swap sales, and by the end of September it had returned to
the market virtually all of the funds it had taken in from the earlier speculative inflow.
The market atmosphere remained quiet through most of October—encouraging renewed capital outflows and consequent substantial sales of dollars by the German Federal Bank. As the
spot rate declined, the Federal Reserve Bank of New York made
modest purchases of marks for Treasury account, and the System
and the Treasury paid off maturing August-September forward
sale commitments.
Market expectations of an eventual revaluation of the mark
persisted, however, and by the end of October this undercurrent
was reflected in a strengthening of the spot rate. In early November rumors of an imminent revaluation of the mark and devaluation of the French franc again swept the exchanges. These
rumors triggered a huge demand for marks, and by November 15
the German Federal Bank had purchased nearly $2 billion. Although the momentum behind the speculation was being generated mainly in Europe, the heavy demand reflected purchases
by U.S. firms as well. To meet some of the demand in New York,
the Federal Reserve Bank of New York sold $47 million of
marks on behalf of the Federal Reserve. These sales were covered
by a $40 million drawing on the swap line with the German Federal Bank and from balances.
Once again the German Federal Bank acted to recycle the
funds by concluding market swap sales of dollars at attractive




293

rates. After swapping out some $1 billion of its spot gains, however, the Federal Bank took action to curb the tendency of German banks to resell the spot dollar proceeds of the swaps rather
than hold the funds in dollar investments—thereby in effect obtaining outright forward cover as a result of the swaps. The German authorities indicated that they would conclude further swap
sales of dollars only if the banks invested the spot dollar proceeds
in U.S. Treasury bills. But the German banks and their customers
had become interested mainly in acquiring outright forward
cover in marks, and they chose not to engage in swap transactions with the Federal Bank on these terms; instead, they bid for
spot marks and sought forward cover through swaps in the
market.
Speculative buying of marks continued with full fury on Monday, November 18, when the regular monthly meeting of central
bankers at Basle ended without the official statement that the
mairket had expected, and speculators remained convinced that
the next move would be an upward revaluation of the mark. On
November 18 and 19 the Federal Bank purchased $850 million,
bringing gross purchases in November to more than $2.8 billion.
On November 19, in an effort to calm the market, the German
authorities issued a formal communique stating that the mark
would not be revalued and, to reduce the German trade surplus, announced new tax measures that would raise export prices
while lowering import costs.
After a holiday on Wednesday, November 20, trading in Germany was effectively suspended for the 2 days before the weekend as the Finance Ministers and central bank Governors of the
Group of Ten nations met in emergency session in Bonn. On
November 22, the Group of Ten nations issued a communique
fully supporting the German Government's decision to stand firm
at the existing mark parity, its new tax measures, and the Federal Bank's decision to impose 100 per cent reserve requirements
on new foreign-owned mark deposits held in German banks. The
monetary move, which was designed to discourage further spec294



ulative inflows, reinforced the ban already in effect on interest
payments on foreign-owned sight or time deposits denominated
in marks. The German authorities also initiated legislation authorizing the licensing of mark deposits by foreigners with
German banks.
When trading resumed in Frankfurt on November 25, substantial amounts of funds began to flow from Germany as market expectations of a revaluation receded and long positions were liquidated. To encourage these and subsequent reflows, the Federal
Bank offered outright forward cover back into marks at a 3 per
cent per annum premium for 3-month maturities. The Federal
Reserve backed up the German Federal Bank's operations, offering outright cover to the market at the same rates for the same
maturities. By the end of November the Federal Bank had resold
$880 million spot and sold $246 million of outright forward
marks. The System's outright forward sales reached $72.5 million
equivalent; all were covered by swap drawings, which raised Federal Reserve swap debt in marks to $112.1 million equivalent.
On December 2 the Federal Bank and the Federal Reserve
discontinued outright sales of forward marks, concluding that
such sales had served their purpose of encouraging capital outflows and assuring the market that there would be no parity
change. The Federal Bank offered instead to undertake swaps with
its banks at improved rates and for a wider range of maturities.
Earlier the authorities had dropped their requirement that the
proceeds of the swaps be invested in U.S. Treasury bills and now
requested only that investments match the maturities of the official swap contracts. German banks responded to the improved
incentives—enabling the authorities to roll over into 1969 the
very large December maturities of earlier swaps. Moreover,
German banks also purchased very substantial amounts of spot
dollars, as foreigners withdrew funds from Germany and commercial leads and lags began to unwind. These heavy outflows
from Germany enabled the Federal Reserve to begin accumulating German marks to cover outstanding System commitments.




295

FRENCH FRANC

Late in 1967 the French current account began to recover from
the modest deficit that had emerged during the preceding year.
With this favorable development in the background, the franc
remained above par ($0.2025 V^) during the early months of
1968. Nevertheless, there were occasional periods of pressure
on the franc, arising from reactions to the new U.S. balance of
payments program announced on January 1, shifts of funds into
the Euro-dollar market by French banks, and the March speculative stampede into gold. By the end of April the franc had
drifted to a level just above par, from which there was little
change well into May.
On May 17, however, student rioting broke out, followed
shortly by labor strikes in Paris and similar disorders elsewhere
in France. Within days the strikes had virtually paralyzed the
French economy, and on May 20 the absence of personnel forced
nearly all French banks to close. For all practical purposes, this
also closed the Paris exchange market and complicated the delivery of francs bought and sold in exchange dealings in other
countries. Trading in spot francs continued in those markets, but
at a sharply lower volume.
With the French markets closed, the Bank of France called
upon the Federal Reserve Bank of New York to help maintain
franc quotations within declared limits by purchasing spot francs
for the Bank of France account. Subsequently, the Bank of
France made parallel arrangements to cover European markets
through the BIS. For a few days the franc fluctuated just above
its floor ($0.2010Vi), but as the political crisis deepened, the rate
fell to the floor level and had to be heavily supported. Even
though banks were closed in France, speculative flows from
France to Switzerland and into the Euro-dollar market grew to
substantial volume, and at the end of May the French Government imposed exchange controls over resident capital transfers
abroad; nonresident transactions remained free of controls,
however.
296



In early June the selling abated somewhat after President de
Gaulle's call for national elections raised hopes that a beginning
had been made toward restoring order in France. Evidence of a
scattered return to work by French workers also helped to improve the atmosphere. Moreover, the Bank of France was able
to resume its regular activities and make its presence felt in support of the franc on the continent. French commercial banks
began operating again, and on June 7 the Paris bourse opened
its doors for the first time since May 20.
But the reopening of normal channels of foreign exchange
dealings brought with it further selling of francs. Despite the
gradual return to work by French workers during the month of
June, it was feared that the large wage increases necessary to
bring an end to the work stoppage might initiate a wage-price
spiral that could seriously weaken French international competitiveness. As a result, selling of francs stepped up, based in large
part on a precipitate reversal of commercial leads and lags
despite the exchange controls imposed at the end of May. The
French Government's announcement of a program of temporary
import quotas and export subsidies to bolster the franc did little
to stem the speculative tide. But the sweeping victory of the
Gaullist forces in the elections at the month-end cleared away
one area of uncertainty besetting the market, and although the
selling of francs persisted thereafter, the market fever abated.
For May the Bank of France announced a reserve loss of $307
million, and in June a further loss of $203 million was recorded.
But sizable credit operations had also been initiated. In June
the Bank of France bolstered its reserves by drawing the full
$100 million then available under its swap line with the Federal
Reserve, the first drawing by that bank since the inception of the
arrangement in March 1962. In addition, France drew $885 million from the IMF—representing its gold tranche and other
drawing rights resulting from previous Fund use of French francs
supplied by France under the General Arrangements to Borrow.
(As described in other sections of this report, the Federal Re-




297

serve was able to acquire certain currencies drawn by France,
and it used them to reduce System drawings on swap lines with
other central banks.) Thus the cost of official support for the
franc in May and June came to $1.5 billion. Part of this reserve
loss took the form of gold sales by the French authorities to replenish dollar balances, including $220 million of gold sold to
the U.S. Treasury.
With the announcement of the June reserve figures in early
July, Finance Minister Couve de Murville (later named Premier)
strongly reaffirmed the government's intention to defend the franc
parity. As evidence of that resolve, the French authorities broadened their defense of the franc to include an increase in the Bank
of France discount rate from 3Vi to 5 per cent, a tightening of
exchange controls, and new taxes. Shortly thereafter, on July 10,
the Bank of France announced a $1.3 billion package of new
credits from the Federal Reserve, the central banks of Belgium,
Germany, Italy, and the Netherlands, and the BIS. The Federal
Reserve participation took the form of a $600 million increase
in the swap line with the Bank of France, which raised that facility to $700 million.
Despite these stabilizing measures, the market remained
skeptical about the future of the franc, particularly in view of
the inflationary potential of the wage increases in June. Pressure
on the franc continued throughout the summer, and it was aggravated by recurring rumors of a revaluation of the German mark.
Selling pressures eased only temporarily after publication, in
mid-September, of the French Government's 1969 budgetary
plans. At the same time removal of the exchange controls imposed in May had only a short-lived favorable impact.
During the summer the Bank of France drew a further $390
million on the expanded swap facility. Net drawings at September 30 amounted to only $450 million, however, since the Bank
of France had repaid $40 million of its drawings in the summer
following a sale of gold to the U.S. Treasury; during the third
quarter France sold a total of $240 million of gold to the United
298



States. The French authorities also made use of other international credit facilities.
October was a generally quieter month, and the Bank of
France was able to repay $75 million of its swap debt to the System and to reduce obligations under other international credits.
The respite was short-lived, however. The outbreak of renewed
speculation in marks in early November gave rise to a massive
outpouring of funds from France, with heavy losses to French
official reserves. The French authorities responded by tightening monetary policy—including an increase in the discount rate
to 6 per cent and placement of a ceiling on short-term bank credit
growth. On November 18, after the November 16-17 monthly
meeting of the central bankers at Basle, Premier Couve de
Murville went on nationwide television to declare that France
was assured of "all the help she might need or will need in the
future" and promised large cuts in planned government spending to bolster the franc.
But the markets remained convinced that the franc faced
imminent devaluation, and heavy selling continued. To meet
the pressures, the Bank of France drew further on the Federal
Reserve swap facility, raising its debt under that line to $611
million, and also drew funds from other participants in the
July credit package. In view of the continuing feverish speculation, the French authorities decided to close the Paris financial
markets during the period of the Bonn meeting (November
20-22). Although the New York market remained open, there
were only scattered quotations for spot francs at deep discounts
below parity, and forward quotations were essentially unobtainable as the market believed that a devaluation of the franc was
certain to follow the meeting.
At the conclusion of the Bonn meeting a new central bank
credit facility for France in the amount of $2 billion was announced. U.S. participation in the new credits took the form
of a $300 million increase in the Federal Reserve swap line—
raising the total to $1 billion—and a $200 million facility ex-




299

tended to the Bank of France by the U.S. Treasury. The next
day President de Gaulle confounded market expectations by
rejecting devaluation of the franc, and on November 24 he set
forth a new program to defend the existing franc parity. The
new plan included a sharp cut in the government budget deficit,
further monetary curbs, price restraints, and tax adjustments to
improve the French competitive position—all backed up by
stringent exchange controls.
When trading resumed on Monday, November 25, there was
some immediate covering of short positions and the Bank of
France began to take in dollars. In subsequent days the Bank
of France continued to gain reserves, as the newly imposed exchange controls stopped capital outflows and French exporters
complied with regulations requiring them to repatriate export
proceeds within a short period of time. In early December
further restrictions required French importers to abrogate a
substantial portion of their contracts to purchase forward cover
in foreign exchange, and French banks were obliged to sell to
the Bank of France the currencies held as cover against those
contracts.
As a result of these moves the Bank of France continued to
gain reserves, which it used in part to repay official borrowings.
By the year-end the bank had liquidated a total of $181 million
of its swap debt to the Federal Reserve—lowering those commitments to $430 million. The bank had also repaid substantial
credits drawn from other countries of the European Economic
Community and from the BIS. At the same time the French
authorities made further gold sales, bringing those to the United
States to $600 million for the year.
SWISS FRANC

The Federal Reserve had drawn heavily on its Swiss franc
swap lines in 1967 to absorb inflows of funds seeking refuge in
Switzerland from currency uncertainties in the wake of the
Middle East conflict, the crisis in sterling, and massive specu300



lation in gold. By the end of that year Federal Reserve swap
drawings amounted to $250 million on the Swiss National Bank
and $400 million on the BIS. Moreover, as part of the concerted
central bank effort to restrain speculation, the Federal Reserve
and the U.S. Treasury jointly had underwritten $65.5 million
of forward franc sales in the market by the Swiss National Bank
in December 1967. Thus, at the beginning of 1968, total U.S.
swap and forward market commitments in francs stood at $715.5
million equivalent.
Early in 1968 a substantial but largely seasonal reflux of funds
from Switzerland developed as Swiss commercial banks moved
to rebuild their dollar investments. The spot franc rate dropped
sharply, and the Swiss National Bank extended sizable support
by selling dollars in the spot market. The National Bank covered
these sales by purchasing dollars from the Federal Reserve in
exchange for francs. The System used these francs, along with
modest franc balances obtained in the market and from special
transactions, to reduce its swap obligations in Swiss francs by
$343 million through early March.
At the same time the Federal Reserve was able to pay off
an additional $175 million of its drawings on the BIS and the
Swiss National Bank through issuance by the U.S. Treasury of
a $100 million equivalent Swiss franc security to the Swiss National Bank and by purchasing $75 million equivalent of Swiss
francs from that bank. (The Swiss National Bank simultaneously
purchased $25 million of gold from the U.S. Treasury.) Thus, by
March 8 the Federal Reserve swap debt in Swiss francs was reduced to $132 million equivalent, with $77 million outstanding
to the Swiss National Bank and $55 million to the BIS. Earlier,
in February, the U.S. authorities also paid off the first $10 million of maturing forward sales contracts falling due to the market; this left $55.5 million still outstanding, divided evenly
between the System and the Treasury.
The speculative upsurge in the gold market in March was
accompanied by a strengthening in the spot franc, although the




301

advance was dampened by the demand for dollars by holders
of Swiss francs who wished to buy gold in London. On March
15, with the London gold market closed and traders unsure of
the outcome of the weekend meeting in Washington, the demand
for Swiss francs intensified. The Swiss National Bank indicated
to the market that it would henceforth sell francs at the official
upper intervention point of $0.232814, rather than the unofficial
limit of $0.2317Vi in effect in recent years. The National
Bank did take in some dollars at the new intervention point that
day, but the amounts were not large. Demand for francs was
heavier in the forward market, however, and the Swiss National
Bank, acting jointly for the Federal Reserve and the Treasury,
sold a total of $56 million equivalent of forward francs, raising
U.S. forward commitments to the market to $111.5 million.
The news of the decisions taken at the Washington meeting
calmed the market considerably. One result of that meeting was
a further increase in the Swiss franc swap facilities with the
Swiss National Bank and with the BIS of $200 million each.
As a result, the resources available under each arrangement
were raised to $600 million. In succeeding weeks, the liquidity
positions of Swiss banks remained relatively easy, and with the
exchange markets generally calmer during April, it proved
possible for the Federal Reserve and the U.S. Treasury to
liquidate $43 million equivalent of maturing Swiss franc forward contracts, thereby reducing these commitments to $68.5
million.
The month of May brought a strengthening of the spot franc.
Early in the month, market uncertainties arising from a spate of
rumors of a revaluation of the mark and growing apprehensions
over sterling generated speculative demand for francs. In addition, there were indications that Italian interests were buying
francs to liquidate credits that were becoming expensive relative to
loan rates elsewhere. Later in the month the political and economic
upheaval in France pushed the Swiss franc still higher. By the
end of May, the flight of French capital to Switzerland had lifted
302



the Swiss franc to its ceiling and the Swiss National Bank had
taken in a sizable amount of dollars. The System subsequently
absorbed most of that intake by drawing $73 million under
the swap facility with the Swiss National Bank—raising Federal Reserve commitments to the Swiss National Bank to $150
million. On the other hand, the remaining $55 million equivalent
of Federal Reserve swap debt in Swiss francs to the BIS was
fully repaid in May through a U.S. Treasury swap of sterling
against Swiss francs with the BIS.
In June quotations for the Swiss franc moved irregularly
lower after the middle of the month, as the Swiss National Bank
provided swap facilities to help Swiss banks meet their midyear
liquidity needs. Such short-term swaps by the Swiss National
Bank reached a total of $430 million, and the bank rechanneled
the entire amount of the dollar proceeds to the Euro-dollar
market, both directly and through the BIS. Toward mid-June,
the System acquired $15 million of francs from a correspondent
and with these francs reduced its commitments to the Swiss National Bank to $135 million by June 18. In addition, the U.S.
authorities liquidated $3.0 million of maturing forward commitments to the market—using francs purchased from the Swiss
National Bank.
In July money and credit conditions in Switzerland tightened,
as heavy seasonal withdrawals of currency drained liquidity
from Swiss banks and as midyear swaps between the central
bank and the commercial banks ran off. Swiss banks bid strongly
for francs to meet month-end needs, and interest rates on 1-week
money climbed to 8 to 10 per cent per annum. With no immediate
prospect of liquidating Swiss franc swap commitments through
market transactions, the U.S. authorities moved to wind up these
commitments by other means. In early July the U.S. Treasury
issued to the BIS a 3-month certificate of indebtedness denominated in Swiss francs equivalent to $54.7 million. The Treasury
used these francs to reverse its third-currency swap of sterling for
francs with the BIS. Subsequently, on July 16, the Treasury




303

issued to the Swiss National Bank a 3-month franc-denominated
certificate for $133.7 million equivalent; the System used nearly
all of these francs, together with balances on hand, to repay
fully the $135 million commitment still outstanding under the
swap line with the Swiss National Bank. The $600 million facility with the bank thus reverted to a fully available standby basis.
Also during the month the System and the Treasury were able
to liquidate at maturity $29.5 million of forward contracts with
the market.
At the end of July credit conditions in Switzerland tightened
still further, triggering heavy repatriations of funds into Switzerland, and the Swiss National Bank took in a large amount of
dollars. The System subsequently absorbed nearly all those gains
by reactivating its swap line with the Swiss National Bank—drawing a total of $145 million by August 1. The substantial injection
of francs resulting from these inflows into the Swiss money market
brought an end to the squeeze and an easing in the spot rate,
which lasted well into August. Accordingly, in August, the
System and the Treasury paid off the last $36 million of forward
franc commitments to the market that dated back to late 1967
and early 1968.
After mid-August the Soviet invasion of Czechoslovakia and
the uncertainties generated by a renewed flare-up of speculation
in German marks brought a sharp jump in demand for Swiss
francs. However, the franc rate did not reach the Swiss National
Bank's upper intervention point, and in early September the
spot rate eased somewhat as funds began to move out of Switzerland into Germany. Later in that month, end-of-quarter liquidity
demands resulted in* a firming of the franc, but Swiss banks
sold only a small amount of dollars to the National Bank. In
view of the relatively higher rates available on Euro-dollars the
banks met their liquidity needs primarily by rediscounting money
market paper with the Swiss National Bank rather than by
liquidating dollar assets. In these circumstances, the Swiss National Bank covered the dollar needs of the Swiss Confederation
304



and the dollar requirements for exchange transactions with other
countries through purchases of dollars from the Federal Reserve,
thereby providing the System with francs needed to meet shortterm obligations. Thus, by early October the Federal Reserve
had reduced its outstanding swap debt to the Swiss National
Bank by $105 million to $40 million equivalent.
The Swiss money market remained tight in October, and
late in the month the Swiss National Bank had to take in dollars.
The Federal Reserve absorbed these gains by drawing $80 million equivalent on the swap line with the National Bank—raising
its swap debt to $120 million equivalent by early November.
Subsequently the spot franc dipped lower and traded quietly
through mid-November, despite the heavy speculation in the
exchanges focused on the German mark, French franc, and
sterling. When international currency uncertainties intensified
severely during the 3-day meeting of the Group of Ten in Bonn,
the Swiss franc rose to the ceiling and the Swiss National Bank
took in some $215 million. The Federal Reserve absorbed most
of the Swiss National Bank's intake of dollars by drawing an
additional $200 million equivalent on its swap line with that
bank. These drawings raised the System's indebtedness under
the swap facility with the Swiss National Bank to $320 million
equivalent.
In December, as in past years, the Swiss authorities offered
short-term swaps to Swiss commercial banks repatriating funds
for year-end needs. The banks made very heavy use of this
facility, with total swaps rising to $746 million. Following
past procedure the Swiss authorities rechanneled these dollars
back to the Euro-dollar market in order to prevent the disturbance of that market that would otherwise have occurred.
CANADIAN DOLLAR

The Canadian dollar came under heavy speculative attack
during the early months of 1968. Although Canada's trading
position remained strong, market sentiment had been shaken




305

by the devaluation of sterling and the subsequent gold rush.
The market was particularly disturbed by apprehensions that
the new U.S. balance of payments program announced on January 1 would adversely affect U.S. direct investment in Canada
and the balance of short-term capital flows between the two
countries, despite Canada's continued free access to the U.S.
bond market under the new program. In February political
uncertainties added to market tensions as the Canadian Government encountered temporary difficulties in obtaining legislative
approval for its anti-inflationary fiscal program. Official reserve
losses were heavy in January and February, and the Canadian
authorities accordingly reinforced their reserve position by
drawing $250 million under the $750 million swap facility with
the Federal Reserve and $426 million from the IMF. At the
same time the Bank of Canada's discount rate was raised to 7 per
cent effective January 22.
In early March, as the gold rush resumed, there was continuing heavy pressure on the Canadian dollar. Against the
background of speculative pressures, fiscal measures designed
to limit domestic demand were reintroduced into—and subsequently passed by—Parliament. Domestic measures were immediately supported by a bolstering of Canada's international
credit lines. New international credits of $900 million—over
and above the $500 million still available under the Federal
Reserve swap line—were made available by the U.S. ExportImport Bank, the German Federal Bank, the Bank of Italy, and
the BIS. At the same time the U.S. Government made clear its
wholehearted support for Canada's program to defend the
$0.9250 parity by granting Canada a complete exemption from
the restraints on capital flows announced in the President's
January 1 program.
The Canadian Minister of Finance assured the U.S. Government that this exemption would in no way impair the effectiveness of the President's balance of payments program. In addition, the Finance Minister announced Canada's intention to
306



invest holdings of U.S. dollars—apart from working balances—
in U.S. Government securities that do not constitute a liquid
claim on the United States. Effective March 15, the Bank of
Canada raised its discount rate by Vi percentage point to IVi
per cent. On the previous day most Federal Reserve Banks had
announced a V2 -point rise in discount rates.
These strong measures to protect the Canadian dollar began
to exert their full effect as soon as the March 16-17 Washington
meeting cleared away doubts about central banks' resolve to
defend the existing international payments system. The Bank
of Canada immediately announced that it would cooperate in
the policies set forth in the Washington communique. It was also
announced that the Bank of Canada's swap facility with the
Federal Reserve had been increased to $1,000 million, providing
further assurance of the capacity of the Canadian authorities
to maintain the existing parity. The market response was favorable and the Canadian dollar began to strengthen.
The market was also helped by news of a large calendar
of Canadian borrowings in New York, which suggested sizable
forthcoming demand for Canadian dollars. Moreover, a Province
of Quebec loan placed in Europe also suggested that Canadian
borrowers could tap new capital resources in Europe, where
monetary conditions had eased as a result of official policy actions designed to foster renewed business expansion on the continent.
With a sharp turnabout in market sentiment toward the
Canadian dollar, the Canadian authorities began recouping
reserves in the second half of March and thus offset some of
the losses sustained early in that month. Buying pressure gathered
momentum in April, as demand for Canadian dollars was
strengthened by the conversion of export earnings, which had
been at a very high level since the beginning of the year. Thus,
the Canadian dollar strengthened gradually, and official reserves
increased substantially in April and May. In May and June the
Government of Canada sold new issues of bonds in the United




307

States, Italy, and Germany in a total amount of $262 million
equivalent. As the exchange market situation continued to improve in late June, the Bank of Canada repaid $125 million of
its $250 million of obligations under the Federal Reserve swap
line and on July 1 reduced its discount rate by Vi percentage
point to 7 per cent.
After a brief lull early in July, there was renewed buying of
Canadian dollars as banks began to undo forward positions
against the Canadian dollar, which had been undertaken during the peak of the speculative attack in January. The Bank of
Canada took in dollars while gradually permitting the spot
Canadian dollar to advance to its effective ceiling ($0.9324).
Against this favorable background, the Bank of Canada announced on July 26 that it was lowering its discount rate by a
further Vi percentage point to 6V2 per cent. With this announcement the Canadian authorities also revealed that the Bank of
Canada had repaid the final $125 million outstanding on its
swap line with the System, thereby placing the entire $1,000
million facility on a standby basis. At the same time it was reported that the $100 million short-term facility with the BIS
and the facilities of $150 million each with the Bank of Italy
and the German Federal Bank had been terminated without
having been utilized.
The Canadian dollar was at or near its effective ceiling
throughout August. It then dipped for a time in September after
the Bank of Canada reduced its discount rate to 6 per cent
early in that month. But demand soon resumed in connection
with conversion of borrowings abroad and the spot rate moved
back to its ceiling before the month-end. By the end of September Canada's gold tranche with the IMF was reconstituted to the
full $185 million.
The Canadian dollar continued to benefit from optimistic
market appraisals through the closing months of 1968. In midDecember, an exchange of letters took place between U.S. and

308



Canadian Treasury officials, restating the exemption of Canada
from all U.S. balance of payments programs and the basic
principle that it would not be Canada's intention to achieve increases in its exchange reserves through borrowing in the United
States. Implementation of this principle does not require that
Canada's reserves be limited to any particular figure.
On December 18 the Bank of Canada raised its discount rate
by V2 percentage point to 6V6 per cent following announced increases in Federal Reserve discount rates. For the month of
December the Bank of Canada gained some further reserves.
Thus, despite a major crisis early in 1968, Canada's gold and
foreign exchange reserves—including the net creditor position
with the IMF—rose by $332 million for the year as a whole.
DUTCH GUILDER

Late in 1967 there were heavy flows of funds to the Netherlands, generated mainly by the sterling crisis but also by a brief
liquidity squeeze in the Amsterdam market at the year-end.
The Federal Reserve drew several times on its swap line with
the Netherlands Bank, and by early January 1968 System commitments had reached $185 million. Moreover, the Treasury
executed special temporary swaps with the Netherlands Bank
for $126 million equivalent, to provide cover for that bank's
spot dollar accumulations. As part of the concerted central
bank effort in November 1967 to restrain speculation, the
Netherlands Bank initiated forward sales of guilders totaling
$37.5 million on behalf of the Federal Reserve and U.S. Treasury. Thus, U.S. authorities' short-term commitments in guilders
reached a peak of $348.5 million on January 4, 1968.
Liquidity conditions in Amsterdam improved significantly
with the new year, and Dutch banks responded by moving excess funds back into the Euro-dollar market. In mid-January,
outflows from Amsterdam were sufficiently large for the Netherlands Bank to provide support for the guilder. The Netherlands




309

Bank then restored its dollar position through purchases from
the Federal Reserve Bank of New York acting for account of
the U.S. Treasury. Through these transactions the Treasury
obtained $23 million equivalent of guilders, which were used
to reduce Treasury commitments under its swap with the Netherlands Bank to $103 million equivalent.
These outflows from the Netherlands were short-lived, however, and the Federal Reserve was able to make only a modest
start in repaying its commitments outstanding under the swap
with the Netherlands Bank. Moreover, the Dutch balance of payments, which had been in modest surplus in 1967, showed no
signs of shifting into deficit. To avoid an undue prolongation
of the short-term guilder commitments incurred by the System
and the Treasury, a variety of special transactions were undertaken. On January 29 the U.S. Treasury issued to the Netherlands Bank a 12-month certificate of indebtedness denominated
in guilders equivalent to $65.7 million. The Treasury used $55.7
million equivalent plus a small amount in balances to reduce its
swap commitments to $47 million. The Federal Reserve purchased the balance of the guilders and used them to reduce its
swap indebtedness to the Netherlands Bank to $165 million.
On February 21 the Treasury repaid its remaining $47 million equivalent of swap commitments to the Netherlands Bank
with guilders purchased from that bank. In turn the Netherlands
Bank purchased $23.5 million in gold from the Treasury.
Shortly afterward, Canada made its drawing from the IMF; this
drawing included $30 million equivalent of guilders, which the
Bank of Canada converted to U.S. dollars through the Netherlands Bank. This reduced the Dutch dollar position enough for
the U.S. authorities to purchase sufficient guilders to liquidate the
$37.5 million in forward contracts maturing in late February
and early March. Finally, the U.S. Treasury drawing from the
IMF included $100 million equivalent of guilders, which were
used by the Federal Reserve to make a further reduction in its
swap obligation with the Netherlands Bank. As of March 8
310



Federal Reserve swap debt to the Netherlands Bank was thus
reduced to $65 million.
Demand for both spot and forward guilders swelled once
again in the wake of the March gold rush. The Netherlands
Bank purchased about $100 million through March 15 but
swapped out a sizable amount of this intake—selling the dollars
spot and repurchasing them forward—in order to mop up excess
domestic liquidity. To absorb the bulk of the Dutch reserve
gains, the Federal Reserve Bank of New York, acting for the
account of the U.S. Treasury, concluded a special 45-day swap
for $65 million with the Netherlands Bank. In addition to
market swaps, the Netherlands Bank offered guilders forward
on an outright basis, to limit the tendency for costly forward
premiums to result in sales of spot dollars to the central bank.
The Federal Reserve and the Treasury underwrote this operation, by each taking over $20.9 million equivalent of guilder
forward commitments to the market—in the 1-, 2-, and 3-month
maturity ranges. These combined operations by the Dutch and
U.S. authorities helped to reassure the market and restrained
further heavy inflows of funds.
The March 16-17 Washington meeting of the gold pool
central banks marked a major turning point. (One of the agreements reached that weekend was a further increase in the swap
facility between the Federal Reserve and the Netherlands Bank
to $400 million.) Speculative influences abated, and the guilder
market resumed a more normal trading pattern. The forward
premium on guilders narrowed, restoring attractive yield incentives in favor of Euro-dollar investments, and a sizable reflux
from the Netherlands soon developed. Moreover, commercial
firms became buyers of foreign exchange to rebuild balances
and to meet current requirements. With this reversal of pressures in the guilder market, the Netherlands Bank sold a substantial amount of spot dollars during the remainder of March
and into April—replenishing those losses through purchases
from the U.S. Treasury and the Federal Reserve.




311

The Treasury used the guilders so obtained to liquidate its
$65 million special swap with the Netherlands Bank in advance
of maturity, and by the end of April the System had also purchased sufficient guilders to repay the last of its swap drawing
with the Netherlands Bank. The U.S. authorities were also able
to liquidate the forward guilder contracts falling due to the
market in April and May. The last $10.7 million of these obligations were covered in early June, when the United States purchased from France part of the guilder proceeds of the French
drawing from the IMF.
Moreover, additional conversions of guilders drawn from the
IMF by France and the United Kingdom reduced the dollar balances of the Netherlands Bank to the extent that the bank in turn
drew a total of $54.7 million under the swap line with the Federal Reserve to replenish its holdings. This was the first time
the Netherlands Bank had drawn on its swap line with the Federal Reserve since the inception of the swap arrangement in
1962. In addition, the Netherlands Bank bolstered its dollar balances by selling $30 million of gold to the U.S. Treasury.
Although the guilder drifted lower in July and August, the
Netherlands Bank took in sufficient dollars to make a $24.9 million swap repayment in early September. The downward drift of
the spot rate continued into late summer, as the Dutch current
account weakened and as Dutch funds moved into U.S. corporate
securities. A slight rise in Euro-dollar rates in early October contributed to a further decline in the guilder rate so that by midOctober it had reached $0.2744^—its lowest level since the
1961 revaluation. During the course of the decline, however, the
Netherlands Bank provided only occasional and modest market
support. In fact, in mid-October the bank was able to restore
the full swap facility with the Federal Reserve to a standby
basis by repaying the $29.8 million outstanding balance of the
June drawing.
The downtrend ended when the money market in Amsterdam
tightened in the latter half of October. However, the spot guilder
312



rate held steady as an increasing demand for marks more or less
outweighed the influence of the tight money market. At that time
the Netherlands Bank increased its dollar balances by selling $25
million of guilders to the U.S. Treasury, which used them to
make an advance repurchase of its obligation to the IMF. After
the Bonn meeting on November 20-22, the demand for marks
eased abruptly and the spot guilder strengthened.
Year-end liquidity requirements in the Netherlands resulted
in a further firming of the guilder throughout December. Pressures were modest, however, and were relieved through market
purchases of dollars by the Netherlands Bank, largely on a swap
basis; the bank's swap purchases for December totaled $84 million. Just before Christmas the Netherlands Bank raised its discount rate Vi percentage point to 5 per cent, explaining that the
move was made in response to the rise in rates abroad, a weaker
trend in the Dutch current account, and the danger of renewed
inflationary tensions in the Dutch economy.

Italian official reserves increased substantially in 1967, as Italy's
balance of payments showed unexpected strength during the year
and the sterling crisis induced large repatriations of funds in the
fall. The Federal Reserve absorbed the bulk of these inflows
through swap drawings on the Bank of Italy totaling $500 million, which were still outstanding at the end of 1967. Early in
1968 the spot lira eased seasonally but not enough to provide the
Federal Reserve with the opportunity to acquire lire in volume
through market transactions. In late February and early March,
however, the Federal Reserve acquired $75 million equivalent
of Italian lire and $100 million equivalent of German marks
from the proceeds of Canadian and U.S. drawings on the IMF;
the marks were converted into lire with the Bank of Italy, and
the combined proceeds were used to reduce the swap debt to the
Bank of Italy to $325 million in early March.
As a new wave of speculation on the London gold market




313

spread to the exchange markets in March, inflows of funds to
Italy developed, but these quickly tapered off when the Bank of
Italy permitted a rapid rise in the spot rate. The spot lira moved
sharply lower after the Washington meeting, but there was no
significant reflux of funds from Italy as that country's external
position remained strong. With little change in the market pattern through April and with the usual spring and summer buildup of Italian official reserves in prospect, the Italian authorities
asked the System to absorb $175 million of their dollar holdings
by a swap drawing toward the end of April, again raising Federal Reserve swap debt in lire to $500 million.
During the spring, however, the increase in Italian official reserves did not develop as expected. A brief period of labor and
student unrest, together with political uncertainties arising out
of the resignation of Premier Moro, may have induced some outflows of funds. More important, however, were relatively easy
credit and liquidity conditions, which encouraged large capital
outflows, particularly to the Euro-bond market. Such outflows of
long-term funds from Italy continued into the summer, largely
offsetting the normal rise of reserves during the tourist season.
These developments, along with the French and U.K. drawings on the IMF in June, provided the opportunity for the Federal Reserve to liquidate the full amount of its outstanding swap
obligations to the Bank of Italy by early July. The currency
packages put together by the IMF for France and the United
Kingdom provided for $369 million of lire. Of this amount, the
System purchased $141.5 million equivalent directly from the
drawing central banks, and the bulk of the remainder was converted into dollars by the Bank of Italy—depleting its dollar
holdings. Moreover, in the absence of a large seasonal increase
in reserves, it became clear that the swap drawing effected in anticipation of such reserve increases no longer seemed necessary.
Therefore, the System purchased an additional $351.1 million
equivalent of lire from the Bank of Italy and used these lire, together with some $7.6 million equivalent acquired from a cor314



respondent and in the market, to liquidate completely its remaining swap debt to the Bank of Italy. The $750 million reciprocal
currency facility was thereby placed on a fully standby basis.
Subsequently in October, the Federal Reserve and the Bank of
Italy agreed to increase their reciprocal currency facility by $250
million to $1 billion, bringing it fully into line with the System's
reciprocal currency arrangements with other major countries.
As the Italian balance of payments moved into its period of
seasonal weakness, the lira tended to ease through late October.
In November the speculative upheaval in Europe brought the
lira under selling pressure as Italians covered commitments in
marks. But normal trading patterns resumed after the Bonn
meeting, and the spot rate held narrowly above par in routine
markets through the close of the year.
Since early 1965, the U.S. Treasury has assumed technical commitments in forward lire, related to the dollar/lira swaps transacted by the Italian authorities with the Italian commercial banks.
Earlier operations of this type had been conducted in 1962-64.
The Federal Reserve joined in these commitments in November
1965, under an authorization to participate to the extent of
$500 million. No opportunity subsequently appeared to terminate these Federal Reserve commitments through a reversal in the
Italian banks' forward positions. Consequently, in line with System policy of limiting exchange operations to relatively shortterm needs, in April 1968 the Federal Reserve transferred to the
Treasury the total of its technical forward commitments in lire,
which amounted to $500 million. During the year the Treasury
took on a small amount of new technical forward commitments
through the Italian authorities. Such commitments, as they have
fallen due, have been rolled over by the Italian authorities.
BELGIAN FRANC

The Belgian National Bank gained substantial amounts of dollars
in 1967 during the Middle East conflict and the subsequent




315

sterling crisis. The Federal Reserve drew on the swap line to
absorb some of these gains, and at the opening of 1968, System
drawings of $105.8 million equivalent were still outstanding.
Moreover, the Federal Reserve and the U.S. Treasury jointly had
$11.8 million of outstanding commitments from forward sales
of francs to the market through the Belgian National Bank in
late 1967, as part of the concerted central bank effort to maintain orderly markets after the devaluation of sterling. In addition
to these short-term obligations the U.S. Treasury had issued a
$60.4 million medium-term franc-denominated note to the
Belgian authorities.
In late January 1968 the Belgian National Bank purchased
$25 million from the System to cover moderate losses in market
support and to meet anticipated dollar requirements of the Belgian Government. The Federal Reserve used the franc proceeds
to reduce its swap indebtedness to $80.8 million. In February,
however, market conditions were briefly reversed, and the Belgian central bank once again purchased dollars, which the System covered by drawing $7.5 million equivalent of francs on the
swap. Subsequently, the System was able to make further reductions in its Belgian franc commitments. Late in February it acquired $13.5 million of francs from the Belgian National Bank,
when that bank needed dollars, and $30.2 million equivalent
following Canada's IMF drawing. Moreover, the System acquired $10 million of Belgian francs in connection with the U.S.
Treasury's drawing on the IMF. These francs were used to make
swap repayments, and by March 8 such commitments had been
reduced to $34.5 million equivalent. The remainder of the
Treasury's $15 million Belgian franc drawing was used in the
liquidation of System and Treasury forward contracts, and on
March 8, $5 million equivalent remained outstanding.
On March 7 the National Bank cut its discount rate by VA
percentage point to 3 % per cent to promote a lower level of interest rates in Belgium and to stimulate domestic economic activity. But in the following week a violent burst of speculation
316



in the gold and foreign exchange markets pushed the franc to
the National Bank's upper intervention point. By March 15 the
bank had taken in nearly $60 million. The Federal Reserve absorbed most of this inflow by additional drawings on the swap
line; by March 19, System drawings outstanding reached $80.1
million.
In the calmer atmosphere immediately following the Washington meeting, however, Belgian banks soon began to channel
funds back into dollar investments. As the National Bank provided occasional support in the spot market and replenished its
dollar holdings through purchases from the System, gradual progress was made in reducing Federal Reserve swap debt in francs.
At one stage, however, the System covered $33 million of Belgian official dollar holdings through a swap drawing that was
soon reversed, and by early June swap obligations were lowered
to $43.1 million. Moreover, the System and the Treasury purchased sufficient francs from the Belgian National Bank to
liquidate the remainder of their forward franc commitments with
the market.
In June, the French and British drawings on the IMF contained Belgian francs that the drawing countries converted into
dollars with the Belgian National Bank. After these conversions
the Belgian central bank replenished its dollar balances by purchasing dollars from the Federal Reserve. The System thus obtained sufficient francs to liquidate completely its outstanding
swap debt in francs, including a $21 million further drawing on
the Belgian National Bank that had become necessary.
During the summer months, the spot Belgian franc continued
to edge downward as a result of the economic recovery and the
maintenance of relatively low levels of short-term interest rates
in Belgium, compared with the attractive yields in the Euro-dollar market. In July the spot franc dipped below par ($0.02000),
and the Belgian National Bank intervened to slow the decline.
As part of this operation, that bank utilized $20 million under
its Federal Reserve swap line, the first such utilization since




317

1963. Selling of francs continued intermittently through late
summer, especially during the period of heavy pressure on the
French franc. The selling was not severe, however, and in the
latter part of September the Belgian National Bank repaid the
$20 million of credits drawn earlier under the swap line with the
Federal Reserve—thus restoring the entire $225 million facility
to a standby basis.
Selling pressures resumed near the end of September and
carried into October. Part of the outflows from Belgium reflected spot sales of francs by some U.S. corporations, which
refinanced in Belgium dollar credits employed earlier in direct
investments in that country. During most of October the authorities held the spot franc moderately above its official floor
($0.019851) and covered market losses with drawings on the
Federal Reserve swap line. By the end of October, drawings by
the Belgian National Bank totaled $120.5 million.
November's speculative upheaval in Europe gave rise to heavy
selling of francs. These pressures cost the Belgian authorities
substantial support losses, although they lightened considerably
in the quieter atmosphere after the Group of Ten meeting at
Bonn. The Belgian central bank drew $65 million under its
swap line with the Federal Reserve in November and another
$5 million in December to cover the cost of official exchange
market support. In early November and late December the U.S.
Treasury purchased a total of $216 million of Belgian francs
from the Belgian authorities; $60.4 million equivalent of these
francs were used to redeem in advance of maturity a 2-year note
issued to the National Bank in 1967 (leaving no further U.S.
obligations in Belgian francs), and the balance was paid to the
IMF to help reconstitute the U.S. gold tranche position with the
Fund. For its part, the Belgian central bank used the dollar
proceeds of the Treasury's franc purchases to replenish its reserves and repay a total of $183 million of its swap debt to the
Federal Reserve—leaving $7.5 million still outstanding at the
end of 1968.
318



In the meantime, effective December 19, the Belgian National
Bank had raised its discount rate to AVi per cent from 33A per
cent, to help stem short-term capital outflows and in response to
evidence of money market strains associated with larger domestic
borrowing requirements. Subsequently the spot franc strengthened, reaching par just before the year-end.
OPERATIONS IN OTHER CURRENCIES

In 1968 the National Bank of Denmark drew for the first time
on its $100 million reciprocal currency arrangement with the
Federal Reserve. In June the bank drew $25 million to meet
cash requirements largely associated with conversion of the
Danish krone portion of drawings on the IMF by France and
the United Kingdom, and with some shifts of funds into dollars
by Danish commercial banks. The drawing was repaid at maturity in September.
EURO-DOLLAR MARKET

Euro-dollar rates eased sharply in early 1968 despite the announcement on January 1 of the more stringent U.S. balance of
payments program. Sizable reflows of funds from France, Germany, and Switzerland added to market supplies, and the heavy
pressure on the Canadian dollar produced substantial shifts of
funds to the Euro-dollar market. At the same time, continuing
wide discounts on forward sterling made short-term investments
in sterling unattractive, diverting more funds into Euro-dollars.
In early March the speculative upheaval in the gold market
inflamed market apprehensions over currency parities and the
general stability of the international financial structure. In this
atmosphere the 3-month Euro-dollar rate jumped to 7 per cent,
as funds were withdrawn to continental centers. Once again,
however, the central banks of Germany, the Netherlands, and
Switzerland, acting in concert with U.S. authorities, took measures to rechannel funds to the Euro-dollar market, and by mak-




319

ing forward exchange available curbed the tendency for mounting forward premiums on major continental currencies to pull
additional funds from the Euro-dollar market. The German
Federal Bank, for example, resold nearly $800 million in swap
operations through March 31. In addition, by March 15 the
Netherlands Bank had made available $41.8 million of forward
guilders—partly in swap transactions but also on an outright
basis—and the Swiss National Bank had made available $56
million equivalent of forward francs. The Federal Reserve underwrote the forward commitments in guilders and Swiss francs and
participated in the German operations by drawing $300 million
on its swap line to absorb dollars from the Federal Bank, thereby
providing cover for part of that bank's forward purchases of
dollars.
News of the decisions taken at the Washington meeting in
March strongly bolstered market confidence in currency parities.
(At that time the Federal Reserve swap facility with the BIS
under which dollars can be made available for placement in the
Euro-dollar market was increased to $1 billion.) Prospects for
stability were further improved late in the month by President
Johnson's peace initiative and the agreement at Stockholm on a
plan for SDR's. With these favorable developments in the background, Euro-dollar rates dropped back from their mid-March
peaks.
Nevertheless, in April interest rates in the United States moved
up, and those on Euro-dollars also rose, exerting a strong pull
on short-term funds from Europe. Substantial amounts of funds
flowed into the Euro-dollar market from the continent, notably
from Germany where the 3-month interbank loan rate of about
3Vi2 to 3 % per cent per annum was indicative of the relatively
low money market rates in that country. Moreover, in May large
amounts of funds were drained from London as growing apprehensions over the pound led to sharply widened discounts on
forward sterling, creating an unusually large interest incentive
for shifting funds into dollars on a covered basis. At the same
320



time the prevailing uncertainties discouraged uncovered investments in sterling. The outflows from France that began after
mid-May seem also to have gone largely into dollars. On the
demand side, branches of U.S. commercial banks took on an
increased volume of Euro-dollar liabilities and passed the funds
on to their head offices.
With the approach of midyear there were indications of a
possible developing squeeze of exceptional stringency in Switzerland, and the Swiss National Bank acted to relieve potential
strains through market swap operations with commercial banks.
The Swiss central bank bought $430 million on a short-term
basis from Swiss commercial banks and rechanneled the dollar
proceeds to the Euro-dollar market, both directly and through
the BIS—thereby averting stress in that market. The System
backed up that operation by placing $ 111 million in the Eurodollar market through the BIS. Expectations of easier monetary
conditions in the United States appeared soon after the passage
of the income tax surcharge, and once midyear pressures were
out of the way, Euro-dollar rates eased considerably.
Early in July, with funds readily available after the midyear
adjustments by continental banks, U.S. banks increased their
borrowings of Euro-dollars sharply, with total takings reaching
$7.0 billion. During the rest of the month these borrowings were
allowed to run off somewhat, to a level of approximately $6.2
billion at the month-end, only to be followed by a further sharp
rise in August. Late in August the outburst of speculation over
a revaluation of the German mark resulted in a heavy flow of
funds—some of which came out of Euro-dollars—into German
official reserves. The German authorities moved quickly to push
these funds out again through dollar/mark swap operations with
German commercial banks. Moreover, heavy drains on French
reserves also tended to supply funds to the market in early
September. Consequently, funds remained readily available in
the market, and interest rates declined somewhat.
During October the Euro-dollar market was generally much




321

quieter, as were the exchange markets. On the other hand, interest rates began to move up in sympathy with somewhat firmer
monetary conditions in the United States.
The speculative upheaval in the exchange markets in November caused only moderate strains in the Euro-dollar market, as
the German Federal Bank once again moved immediately to
rechannel a major portion of its dollar intake out into the market
through swaps. Moreover, the Federal Bank's outright sales of
forward marks in the first few days after the Bonn meeting encouraged additional reflows from Germany; this operation was
backed up in New York, where the Federal Reserve sold forward
marks.
Nevertheless, in early December Euro-dollar rates again began to move up sharply as U.S. domestic interest rates advanced.
Pressures were apparent particularly in the shorter maturities—reflecting not only the generally tighter monetary conditions in the United States but also the usual seasonal pressures
associated with year-end positioning by European banks. At the
same time, exchange market sentiment regarding sterling was
softening once again, and as discounts on forward sterling
widened, a substantial incentive developed in favor of Eurodollars over U.K. investments. To avoid any undue additional
strain on the pound in view of approaching year-end repatriations of funds to the continent, the BIS, using dollars drawn on
its swap line with the Federal Reserve, placed $80 million in the
Euro-dollar market.
Although Euro-dollar rates rose further in the latter part of
December, the increase reflected by and large the higher levels
of U.S. rates (following the lA percentage point increase in Federal Reserve discount rates on December 18 and the further rise
in prime loan rates of U.S. banks to 63A per cent), and conditions in the Euro-dollar market remained orderly. Reflows from
Germany continued. At the same time, repatriations of funds by
Swiss commercial banks for domestic year-end needs were again

322



accommodated without undue strain on the market, thanks to
the swap operations of the Swiss National Bank. The Swiss commercial banks undertook $746 million of swaps with the National Bank, and the Swiss central bank in turn rechanneled the
dollars so obtained back into the Euro-dollar market, both directly and through the BIS. In the latter part of December, takings by branches of U.S. banks dropped sharply—to a total of
about $6.0 billion—but U.S. corporations took a substantial
amount of dollars out of Europe, partly in response to interestrate considerations and partly to comply with provisions of the
Commerce Department's program.
•




323

Special Studies by the Federal
Reserve System
Reappraisal of the Federal Reserve discount mechanism. Work on

the fundamental reappraisal of the Federal Reserve discount
mechanism, originally announced in the 1965 ANNUAL REPORT,
was highlighted in 1968 by the publication in July of the report
of the System's Steering Committee. This report set forth the conclusions and recommendations of that committee, which had
been appointed to reappraise and, where necessary, recommend
redesign of Federal Reserve lending facilities. The report was
adopted unanimously by the three members of the Board of
Governors and the four Federal Reserve Bank Presidents who
made up the Steering Committee. As of the end of 1968, however, the Board had not acted on the Committee's recommendations.
The Committee's report was made available in July so that
comments and suggestions of the banking community and the
public at large could be considered before the Board published
any revision of Regulation A, its rule governing lending to member banks. Study of the comments and suggestions received and
of the revisions deemed desirable in the published proposals is
now under way. It is expected that a proposed revision of Regulation A will be published in the Federal Register in the spring
of 1969, after which another period will be provided for general
comment before a redesigned discount mechanism is implemented.
In addition to the final report of the Steering Committee itself,
a summary report on the research undertaken in connection with
the study and various of the individual research papers have been
made available to the public upon request. A number of other
research papers are in the process of publication; the availability
of these papers will be announced in the Federal Reserve Bulletin. Papers currently available include the following:

324



"Report on Research Undertaken in Connection with a System
Study," by Bernard Shull
"The Discount Mechanism in Leading Industrial Countries Since
World War II," by George Garvy
"Evolution of the Role and Functioning of the Discount Mechanism,"
by Clay J. Anderson
"A Review of Recent Academic Literature on the Discount Mechanism," by David Jones
"A Study of the Market for Federal Funds," by Parker Willis
"The Secondary Market for Negotiable Certificates of Deposit," by
Parker Willis
"Reserve Adjustments by the Eight Major New York Banks During
1966," by Dolores Lynn
"Discount Policy and Open Market Operations," by Paul Meek
"The Redesigned Discount Mechanism and the Money Market," by
Robert C. Holland and George Garvy
"Summary of the Issues Raised at the Academic Seminar on Discounting," by Priscilla Ormsby
"Discount Policy and Bank Supervision," by Benjamin Stackhouse
U.S. Government securities market study. The final report of the

Steering Committee of the joint Treasury-Federal Reserve study
of the U.S. Government securities market has been completed
and forwarded to the U.S. Treasury and the Federal Open Market
Committee.
Foreign operations of member banks. The principal part of the

study of the foreign operations of member banks was completed
in 1968. This part of the study provides a description and analysis of the broad range of international activities that have developed in U.S. commercial banks in recent years; the examination
encompasses the operations and activities of head offices of U.S.
banks and of their branches abroad, and the uses and roles of
so-called Edge and Agreement corporations and their subsidiaries
and affiliates. A second part of the study, which focuses principally on the supervisory responsibilities of the Federal Reserve
in this area of banking activity, was still in preparation at the end
of the year.




325

Econometric model construction. Work continued during 1968
on the development of econometric models designed to trace the
effects of monetary policy on economic activity. Further progress
was made on the quarterly econometric model of the economy
being developed by economists on the Board's staff and a group
of university economists led jointly by Professor Modigliani of
the Massachusetts Institute of Technology and Professor Ando
of the University of Pennsylvania. Price and wage equations were
added to the model, and there were some important revisions in
the consumption and housing equations in the light of recent
data. A start was made at using sectors of the model to help in
analyzing the current economic situation. A paper explaining the
response to fiscal policy in the model and one discussing "The
Channels of Monetary Policy" as depicted in the model were
presented at the December 1968 meetings of the American Economic Association and the American Finance Association.
The current version of the model, like the preliminary version
completed last year, suggests that both monetary and fiscal policies have powerful effects on the economy, though the time lag
between a change in policies and the economic effect of the
change is longer for monetary policy than for fiscal policy. The
response of money income to changes in monetary policies is
stronger in this model than in a number of other models, while
the response to changes in fiscal policies is about the same in the
current version of this model as it is in other models.
Progress was also made during 1968 on the construction of
models to explain in greater detail the behavior of institutions and
individuals in financial markets. A preliminary version of a
monthly model of the money market was developed, and a progress report on this research was presented at the December 1968
meetings of the Econometric Society. Work on the aggregate behavior of nonbank financial intermediaries also was carried
forward.
In the development of econometric models to explain the portfolio adjustments of individual commercial banks, particular
326



emphasis was placed this year on the estimation of time lags
between changes in monetary policy and the effect of such
changes on the size and composition of bank portfolios. Work in
this area progressed to the point where it became possible to
begin examining the implications of models developed for individual banks for the behavior of the banking system.
•




327

International Liquidity
In 1968 the Federal Reserve continued its active participation in
discussions and negotiations concerning international liquidity.
The main developments in this field related to Special Drawing
Rights and gold.
Special Drawing Rights. In August 1964 the Ministers and the
central bank Governors of the Group of Ten countries participating in the General Arrangements to Borrow, following completion of a study of international liquidity by their deputies,
said in a published statement, "The continuing growth of
world trade and payments is likely to entail a need for larger
international liquidity. This need may be met by an expansion of
credit facilities and, in the longer run, may possibly call for some
new form of reserve asset." (The 1964 ministerial statement
and the report prepared by the deputies were published in full
in the Federal Reserve Bulletin for August 1964, pages 9 7 5 91.) In the following years further studies, followed by actual
negotiations, focused on whether provision should in fact be
made for the establishment of a new reserve asset, and if so, what
form such a new asset should take. The further work done on
these questions through 1967 was summarized in the ANNUAL
REPORTS of the Board of Governors for 1965, 1966, and 1967.
Both questions were answered at the annual meeting of the
Board of Governors of the International Monetary Fund held at
Rio de Janeiro in September 1967 when approval was given to
the Outline Plan for a system of Special Drawing Rights (SDR's).
The Outline Plan stated the principles that would govern the
creation, distribution, and use of SDR's. The text of the Outline
Plan was published in the Federal Reserve Bulletin for November 1967 (pages 1877-82), and a summary of its main features
and underlying principles appeared in the ANNUAL REPORT of
the Board of Governors for 1967 (pages 311-17).
By early 1968 the Executive Directors of the IMF had advanced far toward completion of the task of putting the Outline
Plan into legal language. The Ministers and the Governors of
328



the central banks of the Group of Ten, meeting in Stockholm
at the end of March 1968, reached a consensus on the most
controversial issues posed by an amendment to the IMF Articles
of Agreement, under which the SDR system would be established.
The detailed text of the amendment was recommended by the
Executive Directors of the Fund on April 16, 1968, and approved by the Fund's Board of Governors on May 31, 1968.
In the form in which the SDR plan was approved by the Fund,
its fundamental principles were unchanged from those embodied
in the Outline Plan of September 1967. When SDR's are created,
they will be allocated among participants in proportion to each
participant's quota in the Fund. A participating country may use
SDR's to meet a balance of payments deficit or a decline in its
reserves resulting from shifts by other countries in the composition of their reserves. The countries that are to receive the SDR's
and therefore to provide convertible currency in return will be
designated by the Fund, unless the country using SDR's has made
arrangements under provisions that enable one or more participants to agree voluntarily to accept SDR's. Under the provisions
governing voluntary agreements, a country may use any amount
of SDR's (provided it has a need to do so, for either of the purposes just mentioned, and subject to later application of the reconstitution provision, which is explained below) to obtain its
own currency held by other participants; a participant may also
obtain currencies other than its own, provided that such exchanges of SDR's against currency would contribute to the accomplishment of one or more objectives prescribed by the Fund
from a list of possible objectives specified in the amendment. The
provisions governing voluntary agreements will be helpful to any
country, but particularly to the United States, whose currency is
held in significant amounts by other countries. Under the other
procedure for using SDR's—that is, designation by the Fund of
countries to receive SDR's from, and to provide currency to, a
country using SDR's—the countries designated will normally be
those having relatively strong balance of payments and reserve




329

positions, although under certain circumstances the Fund may,
in its designations, include countries outside this category.
Under the rules, each participating country is obligated to accept SDR's from other participants and to provide currency, only
up to the point at which its holdings are equal to three times its
cumulative allocations. This is what might be called each country's total "holding" obligation. (Any member may accept a
larger amount, either ad hoc or by agreement with the Fund.)
If a participating country went into deficit, and used all its
cumulative allocations, then swung into strong and continuing
surplus, it would have to accept SDR's—so long as it remained
in the same payments position, and some other countries continued to use SDR's—until its total accumulation equaled three
times its cumulative allocations.
The use of SDR's is subject to the reconstitution provision.
This provision requires that during the initial basic period
(which, like subsequent basic periods, is likely to be 5 years in
length, although the Fund may decide otherwise) each participant's average holdings of SDR's must be at least 30 per cent of
its average net cumulative allocations.
Under Article XVII of the existing Articles of Agreement,
the amendment providing for the SDR facility, as well as for
certain changes in existing Fund rules and practices, will enter
into force when three-fifths of the members, having four-fifths of
the total voting power in the Fund, have accepted it. Given the
existing Fund membership of 111 countries, the three-fifths rule
means that 67 member countries must accept the amendment
before it can enter into force. As of April 11, 1969, 45 member
countries, representing 62.4 per cent of the total voting power,
had accepted the amendment. Of these 45 countries, 25, with
53.6 per cent of total quotas, had deposited the instruments of
participation required by Section 1 of the proposed new Article
XXIII. The United States was one of these 25, having been the
first member country both to approve the amendment and to
deposit its instrument of participation. With strong bipartisan
support the bill authorizing U.S. acceptance of the SDR amend330



ment and U.S. participation in the SDR system was approved by
Congress late in the spring of 1968 and was signed into law by
the President on June 19, 1968.
Gold: The two-tier system. From the early part of 1961 until
March 1968 the dollar price of gold in the London gold market
fluctuated within a relatively narrow range a little over $35 per
ounce. This comparative price stability in the leading private
market for gold, in a range just slightly above the official U.S.
price of $35 per ounce, reflected a policy of official intervention
to hold the price within that range. During most of this period
such intervention was conducted on behalf of a consortium of
countries known as the "gold pool." The gold pool and its market-intervention policy were established following a wave of
speculative gold buying in October 1960 that pushed the price in
the London market to more than $40 per ounce.
The devaluation of the pound sterling in November 1967
touched off a series of waves of speculative buying of gold,
perhaps based initially on the belief that sterling devaluation
might force devaluation of the U.S. dollar, that is, a rise in the
official U.S. gold price, which would mean a rise in the price of
gold in free markets. Speculative buying continued as expectations of a change in gold-pool intervention policies became widespread; rising losses from official gold stocks made the support
policy seem less and less credible.
On Friday, March 16, 1968, the London gold market was
closed by order of the Bank of England. On that weekend the
Governors of the central banks of the seven active members of
the gold pool—Belgium, Germany, Italy, the Netherlands, Switzerland, the United Kingdom, and the United States—met in
Washington. On March 17, they issued a communique. In this
document the Governors announced termination of their sales of
gold to private gold markets, reaffirmed adherence to the $35
per ounce price of gold for official transactions, and stated that
" . . . as the existing stock of monetary gold is sufficient in view of
the prospective establishment of the facility for Special Drawing
Rights, they no longer feel it necessary to buy gold from the




331

market." (For the full text of the communique, see the Federal
Reserve Bulletin for March 1968, page 254.)
Central banks of other IMF countries were informed of the
action and were invited to support the principles of the March
communique. Assurance of support was subsequently received
from the overwhelming majority of these monetary authorities.
The gold pool policy of stabilizing the market price of gold
had been based on the belief that if the market price diverged
too widely from the official price, doubts about the viability of
the official price might arise abroad even in official circles. The
fact that by mid-March 1968 the SDR plan was close to adoption
meant that the monetary authorities of the world, taken as a
group, would soon have available a means for increasing reserves that did not depend upon either additional stocks of gold or
an increase in the value of existing stocks of gold. With the
establishment of the SDR system there would therefore be less
and less reason to question the possibility of maintaining the
official price of gold at $35 per ounce. As a result there would
also be much less reason than before for concern about the price
of gold in free markets.
Establishment of the two-market system for gold in March
1968, although done under the pressure of a speculative crisis,
was a logical step in the evolution of the international monetary
system away from dependence on gold. As the Governor of the
Bank of Italy pointed out in his annual report for 1967, "The
Washington decisions, while meeting current needs, form part
of the continuous process which has been reducing the monetary
function of gold, first within individual economies and then on
the international plane." To say that the monetary functions of
gold will be further reduced under the SDR system is not to
argue that gold should be, or will be, demonetized. It simply
means that if, as may reasonably be expected, the bulk of future
additions to international reserves consist of SDR's, the size of
the gold component, relative to total reserves, will gradually
decline over time.
•

332



/ .cgisldtion Enacted
Elimination of gold reserve requirement against Federal Reserve

notes. An Act of Congress approved March 18, 1968 (Public
Law 90-269), eliminated the provision of Section 16 of the
Federal Reserve Act under which the Federal Reserve Banks
were required to maintain reserves in gold certificates of not less
than 25 per cent against Federal Reserve notes.
Direct purchases by Federal Reserve Banks of Government obli-

gations. An Act of Congress approved May 4, 1968 (Public
Law 90-300), extended through June 30, 1970, the authority
of Reserve Banks, under Section 14(b) of the Federal Reserve
Act, to purchase direct or fully guaranteed obligations of the
United States directly from the United States.
Truth in lending. The Truth in Lending Act (a portion of the
Consumer Credit Protection Act), approved May 29, 1968
(Public Law 90-321), requires the Board of Governors to prescribe regulations to assure a meaningful disclosure of credit
terms so that consumers will be able to compare more readily
the various credit terms available and avoid the uninformed use
of credit.
Special Drawing Rights certificates. The Special Drawing Rights
Act, approved June 19, 1968 (Public Law 90-349), mainly for
the purpose of authorizing U.S. participation in the Special
Drawing Rights facility to be established within the International
Monetary Fund, contains incidental provisions authorizing (1)
the Secretary of the Treasury to sell to the Reserve Banks certificates against the Special Drawing Rights of the United States
and (2) the Reserve Banks to use such certificates for specified
purposes.
Defense production. An Act of Congress approved July 1, 1968
(Public Law 90-370), extended through June 30, 1970,
the termination date of certain provisions of the Defense Pro-




333

duction Act of 1950, including Section 301, which is the basis
for guarantees of loans for defense production.
Bank protection. The Bank Protection Act of 1968, approved
July 7, 1968 (Public Law 90-389), requires the-Board of Governors and the other Federal supervisors of financial institutions
whose deposits are federally insured to establish minimum standards with respect to installation, maintenance, and operation of
security devices and procedures for use by such institutions in
guarding against loss of funds by theft.
Margin requirements for securities traded over the counter. An

Act of Congress approved July 29, 1968 (Public Law 90-437),
amended the Securities Exchange Act of 1934 to authorize the
Board of Governors (1) to extend the coverage of margin requirements to credit that banks and other lenders may extend
for the purpose of purchasing and carrying securities traded
over the counter (as distinguished from those traded on the national securities exchanges) and (b) to permit brokers and
dealers to extend credit on such securities, subject to margin
requirements.
"Tender offers" with respect to securities of State-chartered mem-

ber banks. An Act of Congress approved July 29, 1968 (Public
Law 90-439), amended the Securities Exchange Act of 1934
to require disclosure of certain information with respect to (1)
acquisitions of more than 10 per cent of a class of equity securities registered pursuant to the 1934 Act, (2) the making of socalled "tender offers" (or solicitations favoring or opposing such
offers), and (3) the replacement of a majority of the directors
of an issuer in connection with such acquisitions or tender offers.
Under the 1934 Act, the Board of Governors is responsible for
implementing these requirements with respect to registered securities issued by State-chartered member banks.
Housing and urban development; real estate loans by national
banks; member bank underwriting of certain municipal revenue

bonds. The Housing and Urban Development Act of 1968, ap-

334



proved August 1, 1968 (Public Law 90-448), amended various
laws relating to housing and urban development and enacted
several new laws designed to assist in providing housing for low
and moderate income families. Numerous provisions of the Act
relate directly to the activities of the Reserve Banks and their
member banks. In summary, such provisions:
(1) make the Reserve Banks depositaries for the Government
National Mortgage Association, a new Federal instrumentality;
(2) expand the powers of national banks in the area of real
estate loans by amending Section 24 of the Federal Reserve Act
(a) to authorize such banks, without limitation, to make loans
or purchase obligations guaranteed by the Secretary of Housing
and Urban Development under the portion of the Act described
as the "New Communities Act of 1968," (b) to authorize such
banks to purchase a participation (as distinguished from the
entire interest) in a loan secured by a first lien on improved
real estate or on forest tracts, (c) to extend from 24 to 36
months the permissible maturity of loans by such banks to finance
commercial building construction, and (d) to authorize such
banks to accept a second lien on real estate as security for a loan
if the bank relies primarily on the creditworthiness of the borrower or other security as collateral for repayment of the loan;
(3) expand the powers of national banks under paragraph
Seventh of Section 5136 of the Revised Statutes (and to that
extent remove Federal limitations on the power of State-chartered member banks) to authorize such a bank (a) to underwrite and deal in (i) obligations, participations, or instruments
of or issued by the Government National Mortgage Association,
without limitation on amount, and (ii) so-called "revenue obligations" of investment grade that are issued by a State or a political subdivision thereof, or an agency of either, for housing, university, or dormitory purposes, in an amount not to exceed, as
to each such issuer, 10 per cent of the bank's capital and surplus,
and (b) to purchase for its own account stock issued by corpora-




335

tions created pursuant to Title IX of the Act for the purpose of
providing housing for low or moderate income families and to
invest in partnerships or joint ventures formed by such corporations pursuant to that Title; and
(4) expand the powers of national banks by adding a paragraph Ninth to Section 5136 of the Revised Statutes to authorize
such banks to issue securities guaranteed by the Government
National Mortgage Association backed by a pool of mortgages
insured under the National Housing Act or Title V of the Housing Act of 1949, or insured or guaranteed under the Servicemen's
Readjustment Act of 1944 or chapter 37 of title 39 of the United
States Code. (In connection with the latter, Section 21 of the
Banking Act of 1933 was amended to remove a criminal prohibition against banks issuing such securities.)
Interest on deposits; reserves of member banks; open market oper-

ations; Reserve Bank advances. An Act of Congress approved September 21, 1968 (Public Law 90-505), extended through September 21, 1969, the flexible authority of the Board of Governors,
the Federal Deposit Insurance Corporation, and the Federal
Home Loan Bank Board in regulating the maximum rates of
interest or dividends payable by insured banks and savings and
loan associations on deposit or share accounts. The Act makes
permanent the authority of the Reserve Banks to purchase in the
open market direct or fully guaranteed obligations of Federal
agencies and the authority of the Board to require member banks
to maintain a reserve ratio for time deposits of not less than 3
and not more than 10 per cent. The Act also grants (1) the
supervisory agencies referred to above the authority to prescribe
regulations governing all aspects of payment of interest on deposits, including advertising, and (2) the Reserve Banks the
authority to make advances (a) to member banks on the security
of any obligations eligible for Reserve Bank purchase (including
Federal agency issues), and (b) to any person on the security
of obligations of Federal agencies (previously, the security was
limited to direct obligations of the United States).
336



Legislative Recommends'
Lending authority of Federal Reserve Banks. Under present law,
when a member bank borrows from its Reserve Bank on collateral other than obligations that are eligible for purchase by Reserve Banks (mainly U.S. Government obligations) or short-term
promissory notes of the member bank's customers that meets
certain "eligibility" requirements, it must pay interest at a rate
not less than V2 of 1 percentage point higher than the Reserve
Bank's basic discount rate. For several years the Board of Governors has urged legislation that would permit a member bank,
subject only to regulations by the Board, to borrow on any
security satisfactory to its Reserve Bank without the necessity
of paying a higher rate of interest simply because the security is
"ineligible" for the basic rate.
The need for enactment of such legislation has increased as
member banks have reduced their holdings of U.S. Government
securities and broadened the scope of their lending in order to
meet the expanding credit demands of their customers. Many of
these loans cannot qualify as security for Federal Reserve advances except at the "penalty" rate of interest, although their
quality may be equal to that of presently "eligible" paper.
To enable the Federal Reserve System always to be in a position to carry out promptly and efficiently one 6f its principal
responsibilities—the extension of credit assistance to enable the
banking system to meet the legitimate needs of the economy—
and to avoid penalizing those uses of credit that generate sound
paper that is not "eligible" under existing law, the Board again
urges legislation that would authorize the Reserve Banks to extend credit on sound collateral without regard to the present
"eligibility" provisions.
"Par clearance." Most banks pay the face amount of all checks
presented to them for payment; this practice is frequently described as "par clearance." In a few areas of the country, how-




337

ever, many small banks deduct a so-called "exchange charge"
from the face amount of checks presented by mail and remit only
the balance. In such circumstances the drawee bank shifts all or
a portion of the expense incurred by it in connection with the
collection process to the payee of the check or to an indorsee.
In the Board's view there is no justification for the increased
costs, delays, and inefficiencies that result when banks do not pay
all checks at their face amount.
The trend of legislation in this area at the State level has been
toward requiring banks to pay the face amount of checks drawn
on them. In recent years, Florida, Minnesota, Mississippi, North
Dakota, and South Dakota have enacted legislation along these
lines. Despite the progress in this direction that has been made at
the State level, the Board favors enactment by the Congress of a
requirement that all federally insured banks pay at par all checks
drawn on them.
Reserve requirements. For several years the Board has favored
legislation that would (1) authorize it to fix required reserve
percentages on a graduated basis according to the amount of a
bank's deposits and (2) make such requirements applicable to
all federally insured banks (rather than to member banks only).
The reasons for such changes in the structure of bank reserve
requirements have become stronger with the passage of time.
Thus, in the Board's judgment, the differences between reserve
city and "country" banks, in both size and functions, have decreased substantially, and the division of member banks into
such categories has become arbitrary to the point where such
division is a major obstacle to the development of a more equitable system of reserve requirements. Since deposits in nonmember banks are part of the country's money supply just as are
those in member banks, nonmember banks should be subject to
the federally imposed reserve requirements applicable to member
banks.

338



Under present law, the Board has authority to establish a system of graduated reserves. However, implementation of such
authority on the most rational and equitable basis is impaired by
the outmoded differentiation between reserve city and "country"
banks and by the lack of authority in the Board to make reserve
requirements applicable to nonmember banks.
In the event that the Congress should consider that extending
the coverage of federally imposed reserve requirements to nonmember banks is impractical at this time—even if accompanied by
granting such banks access to Federal Reserve discount facilities
—the Board recommends that the Congress remove the impediment to adoption by the Board of the most rational and equitable reserve requirements for member banks. This would be
accomplished by legislation establishing a system of graduated
reserve requirements on the basis of the amount of a bank's
demand deposits.
Purchase of obligations of foreign governments by Federal Reserve

Banks. Under present law, balances that the Reserve Banks
acquire in foreign central banks in connection with the System's
foreign currency operations may be invested in prescribed kinds
of bills of exchange and acceptances. On occasion these investment media have not been conveniently available. To facilitate
economic use of such balances, for several years the Board has
favored enactment of legislation that would permit Reserve
Banks to invest in obligations of foreign governments or monetary authorities that will mature within 12 months and are payable in a convertible currency.
Loans to bank examiners. Title 18 of the U.S. Code, "Crimes
and Criminal Procedure," prohibits loans to a bank examiner
by any bank that the examiner is authorized to examine. For
several years the Board has favored modification of this prohibition to permit, under appropriate safeguards, a federally insured
bank to make a home mortgage loan to a bank examiner in an
amount not exceeding $30,000.




339

Bank holding companies and bank subsidiaries. In 1968 the

Board engaged in an intensive study of the problems presented
by the recent trend toward the formation of one-bank holding
companies. The Board has favored inclusion of one-bank holding companies within the coverage of the Bank Holding Company Act since before its original enactment in 1956, and the
Board continues to believe that such companies should be
brought within the purview of the Act.
However, its recent study has led the Board to conclude that
expansion of the coverage of the Act should be accompanied
by legislation under which banks would have greater freedom
to offer new services either directly, or through wholly owned
subsidiaries, or through affiliates in a holding company system,
subject to administrative approval of entry and of acquisitions
to prevent involvement in operations that would be inconsistent
with the purposes of the Act.

340



Litigation
Collateral Lenders Committee et ah v. Board of Governors of
the Federal Reserve System. On February 1, 1968> the Board
announced its adoption of Regulation G, "Credit by Persons
Other Than Banks, Brokers, or Dealers for the Purpose of Purchasing or Carrying Registered Equity Securities," effective March
11, 1968. On March 1, 1968, plaintiffs, a group of lenders whose
loans for the purpose of purchasing registered equity securities
would thereby become subject to the margin requirements applicable to banks, brokers, and dealers, sought a declaratory
judgment that Regulation G was invalid and unconstitutional,
and a permanent injunction against the Board's enforcement of
Regulation G as to plaintiffs.
A 5-day temporary restraining order against the Board was
granted on March 1. Extension of this order beyond March 5 was
refused by the Court, and on March 11, 1968, the effective date
for the Board's Regulation G, the Court denied plaintiffs' motion
for preliminary injunction and ruled that Section 7(d) of the
Securities and Exchange Act of 1934, 15 U.S.C.A. § 78g(d),
pursuant to which the Board promulgated Regulation G, as well
as Regulation G itself, was constitutional and valid. The Court
concluded that in promulgating Regulation G the Board had fully
complied with applicable administrative law requirements and
that there had been no violation of plaintiffs' procedural or substantive due process of law rights; it also concluded that plaintiffs
had failed to establish any irreparable injury by application to
them of Regulation G and that any injury to plaintiffs was overweighed by the immediate and irreparable injury that would occur
to the national economy and the investing public if the effectiveness of Regulation G were delayed. Certain of the plaintiffs appealed to the U.S. Court of Appeals for the Second Circuit the
lower court's order in favor of the Board. These appellants voluntarily dismissed their appeal on September 25, 1968, and an order
of dismissal was entered by the Court of Appeals.




341

United States v. Girard Trust Bank and The Fidelity Bank,
both of Philadelphia, Pennsylvania. On August 12, 1968, the
Board approved a merger of Girard Trust Bank, Philadelphia,
Pennsylvania, and The Doylestown National Bank & Trust Company, Doylestown, Pennsylvania, and the merger of The Fidelity
Bank, Philadelphia, Pennsylvania, and Doylestown Trust Company, Doylestown, Pennsylvania. On September 10, 1968, suits
were filed on behalf of the United States to enjoin consummation
of the proposed mergers, the complaint in each case alleging that
consummation of the merger would violate Section 7 of the
Clayton Act in that such consummation "may be substantially to
lessen competition or tend to create a monopoly." However, the
issues raised by the suits were rendered moot by action of the
Girard Trust Bank and The Fidelity Bank, in November 1968, in
terminating the merger agreements.
Suits arising out of closing of San Francisco National Bank.
On January 22, 1965, the San Francisco National Bank, San
Francisco, California (SFNB), was declared insolvent by the
Comptroller of the Currency, and the Federal Deposit Insurance
Corporation was appointed receiver of the bank. The Federal
Reserve Bank of San Francisco, pursuant to the provisions of
Section 10(b) of the Federal Reserve Act and of the Board's
Regulation A, had provided credit assistance to SFNB, through
advances and discounts. During the latter part of 1964 and the
first: few weeks of 1965, the Federal Reserve Bank, pursuant to
the statute and regulation cited, received collateral for these advances from SFNB in the form of certain Government bonds and
promissory notes.
In November 1965 certain depositors of SFNB filed suit
against the Federal Reserve Bank in the U.S. District Court,
San Francisco, alleging superior rights to the collateral held by
the Federal Reserve Bank and seeking a declaration of unlawful
preference, subordination, and constructive trust. On motion filed
by the Federal Reserve Bank, the District Court dismissed the

342



complaints—holding, in part, that in making advances to SFNB
the Federal Reserve Bank was acting primarily as an instrumentality of the United States and thus was protected from suit by the
Federal Tort Claims Act and that the exercise of the discount
function by the Federal Reserve Bank was the performance of a
discretionary governmental function that was not subject to
judicial review. Four of the cases decided in favor of the Federal
Reserve Bank were appealed to the U.S. Court of Appeals for the
Ninth Circuit and argued before that Court in March 1968.
While these and numerous other cases involving parties other
than the Federal Reserve Bank, but also arising out of the closing
of SFNB, were pending before the Court of Appeals, negotiations
were undertaken looking to a settlement of the several cases. In
December 1968 the Federal Reserve Bank, together with the
Federal Deposit Insurance Corporation, numerous creditors of
SFNB, and other parties involved, signed an agreement of
settlement that assured creditors of the SFNB approximately
52 cents on the dollar and provided for dismissal of the appeals
involving the Federal Reserve Bank and other litigants. The
agreement was approved by the U.S. District Court on December
26, 1968, and on January 13, 1969, an order dismissing the
pending appeals was entered by the U.S. Court of Appeals.
Baker Watts & Co. et al. v. Saxon. Following rejection by the
U.S. District Court of the District of Columbia of an interpretation by the Comptroller of the Currency purporting to authorize
national banks to underwrite and deal in governmental securities
known as "revenue bonds" (see ANNUAL REPORTS for 1966,
page 314, and 1967, page 335), an appeal from that decision
was taken to the U.S. Court of Appeals for the District of Columbia by the Port of New York Authority, one of the plaintiffs
in the lower court. In March 1968 the Court of Appeals affirmed
the District Court's decision.




343

Bunk Supet vision
and Regulation hy
the Federal Reserve System
Examination of member banks. National banks, all of which are
members of the Federal Reserve System, are subject to examination by direction of the Board of Governors or the Federal Reserve Banks. However, as a matter of practice they are not examined by either, because the law charges the Comptroller of
the Currency directly with that responsibility. The Comptroller
provides reports of examination of national banks to the Board
of Governors upon request, and each Federal Reserve Bank
purchases from the Comptroller copies of reports of examination
of national banks in its district.
State member banks are subject to examinations made by
direction of the Federal Reserve Bank of the district in which
they are located by examiners selected or approved by the Board.
The established policy is to conduct at least one regular examination of each State member bank, including its trust department, during each calendar year, with additional examinations if considered desirable. In most States joint examinations
are made in cooperation with the State banking authorities,
while in others alternate independent examinations are made.
All but 37 of the 1,262 State member banks were examined
during 1968.
The Board of Governors makes its reports of examination of
State member banks available to the Federal Deposit Insurance
Corporation, and the Corporation in turn makes its reports of
insured nonmember State banks available to the Board upon
request. Also, upon request, reports of examination of State
member banks are made available to the Comptroller of the
Currency.




345

In its supervision of State member banks, the Board receives,
reviews, and analyzes reports of examination of State member
banks and coordinates and evaluates the examination and supervisory functions of the System. It passes on applications for admission of State banks to membership in the System; administers
the disclosure requirements of the Securities Exchange Act of
1934 with respect to equity securities of banks within its jurisdiction that are registered under the provisions of the 1934 Act;
and under provisions of the Federal Reserve Act and other statutes, passes on applications for permission, among other things,
to (1) merge banks, (2) form or expand bank holding companies, (3) establish domestic and foreign branches, (4) exercise expanded powers to create bank acceptances, (5) establish foreign banking and financing corporations, and (6) invest
in bank premises an amount in excess of 100 per cent of a bank's
capital stock.
By Act of Congress approved September 12, 1964 (Public
Law 88-593), insured banks are required to inform the appropriate Federal banking agency of any changes in control of management of such banks and of any loans by them secured by 25
per cent or more of the voting stock of any insured bank. In
1968, 48 such changes in ownership of the outstanding voting
stock of State member banks were reported to the Reserve Banks
as changes in control of these member banks. In addition, reports of 24 loans secured by 25 per cent or more of the stock
of a State member bank were forwarded to the System. Arrangements continue among the three Federal supervisory agencies for
appropriate exchanges of reports received by them pursuant to the
Act. The Reserve Banks send copies of all the reports they receive
to the appropriate district office of the Federal Deposit Insurance
Corporation, the Regional Administrator of National Banks
(Comptroller of the Currency), and the State bank supervisor.
Upon receipt of reports involving changes in control of State
member banks, the Reserve Banks are under instructions to for-

346



ward such reports promptly to the Board, together with a statement (1) that the new owner and management are known and
acceptable to the Reserve Bank or (2) that they are not known
and that an investigation is being made. The findings of any investigation and the Reserve Bank's conclusions based on such
findings are forwarded to the Board.
By Act of Congress approved July 3, 1967 (Public Law 9 0 44), each member bank of the Federal Reserve System is required to include with (but not as part of) each report of condition and copy thereof a report of all loans to its executive officers
since the date of submission of its previous report of condition.
Since the Board's 1967 ANNUAL REPORT was released, member
banks have submitted the following data as required by law:
Tota1 loans to
executive officers

Period covered
(condition report
dates)

Range of
interest rate
charged (per cent) i

Number
Oct. 4, 1967—
Dec. 30, 1967...
Dec. 31, 1967—
Apr. 18, 1968...
Apr. 19, 1968—
June 29, 1968...
June 30, 1968—
Oct. 20, 1968 . . .
Oct. 21, 1968—
Dec. 31, 1968...

Amount (dollars)

8,211

14,364 ,199.32

1-12

8,804

16,039 ,841.36

2-18

7,264

14,861 ,950.15

2-18

9,886

19,861 ,431.82

3-18

( 2)

(2)

(2)

1
The rate of 18 per cent reflects the inclusion of rates of 1 Vi per cent per month charged on creditcard and check-credit plans.
2
Compilation of data for condition report of Dec. 31, 1968, has not been completed.

Federal Reserve membership. As of December 31, 1968, member banks accounted for 44 per cent of the number of all commercial banks in the United States and for 63 per cent of all
commercial banking offices, and they held approximately 82 per
cent of the total deposits in such banks. State member banks accounted for 14 per cent of the number of all State commercial




347

banks and 40 per cent of the banking offices, and they held 60
per cent of total deposits in State commercial banks.
Of the 5,978 banks that were members of the Federal Reserve
System at the end of 1968, there were 4,716 national banks and
1..262 State banks. During the year there were net declines of
42 national and 51 State member banks. The decline in the number of national banks reflected 54 conversions to branches incident to mergers and absorptions and 12 conversions to nonmember banks. The decline was offset in part by the organization of 14
new national banks and the conversion of 6 nonmember banks
to national banks. The decrease in State member banks reflected
mainly seven conversions to branches incident to mergers and absorptions and 40 withdrawals from membership.
At the end of 1968 member banks were operating 14,352
branches, 703 more than at the close of 1967; this included 684
de novo establishments.
Detailed figures on changes in the banking structure during
1968 are shown in Table 19, pages 388 and 389.
Bank mergers. Under Section 18(c) of the Federal Deposit
Insurance Act (12 U.S.C. 1828(c)), the prior written consent
of the Board of Governors of the Federal Reserve System must
be obtained before a bank may merge, consolidate, or acquire
the assets and assume the liabilities of another bank if the acquiring, assuming, or resulting bank is to be a State member
bank.
In deciding whether to approve an application, the Board is
required by Section 18(c) to consider the impact of the proposed
transaction on competition, the financial and managerial resources and prospects of the existing and proposed institution,
and the convenience and needs of the community to be served.
The Board is precluded from approving "any proposed merger
transaction which would result in a monopoly, or which would
be in furtherance of any combination or conspiracy to monopolize or to attempt to monopolize the business of banking in any

348



part of the United States." A proposed transaction "whose effect
in any section of the country may be substantially to lessen competition, or to tend to create a monopoly, or which in any other
manner would be in restraint of trade," may be approved only if
the Board is able to find that the anticompetitive effects of the
transaction would be clearly outweighed in the public interest
by the probable effect of the transaction in meeting the convenience and needs of the community to be served.
Before acting on each application the Board must request reports from the Attorney General, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation on the
competitive factors involved in each transaction. The Board in
turn responds to requests by the Comptroller or the Corporation
for reports on competitive factors involved when the acquiring,
assuming, or resulting bank is to be a national bank or an insured nonmember State bank.
During 1968 the Board disapproved one and approved 14 applications, and it submitted 99 reports on competitive factors to
the Comptroller of the Currency and 73 to the Federal Deposit
Insurance Corporation. As required by Section 18(c) of the
Federal Deposit Insurance Act, a description of each of the 14
applications approved by the Board, together with other pertinent information, is shown in Table 21 on pages 392 through
413.
Statements and orders of the Board with respect to all bank
merger applications, whether approved or disapproved, are released immediately to the press and the public and are published
in the Federal Reserve Bulletin. These statements and orders set
forth the factors considered, the conclusions reached, and the
vote of each Board member present.
Bank holding companies. During 1968, pursuant to Section
3(a)(l) of the Bank Holding Company Act of 1956, the Board
approved nine applications for prior approval to become a bank
holding company. Pursuant to the provisions of Section 3(a)(3)




349

of the Act, the Board approved applications by 19 bank holding
companies, involving acquisition of shares in 33 banks, and denied
two applications. To provide necessary current information, annual reports for 1967 were obtained from all registered bank
holding companies pursuant to the provisions of Section 5(c) of
the Act.
Statements and orders of the Board with respect to applications to form or to expand bank holding companies, whether
approved or disapproved, are released immediately to the press
and the public and are published in the Federal Reserve Bulletin.
These statements and orders set forth the factors considered, the
conclusions reached, and the vote of each Board member
present.
Foreign branches of member banks. At the end of 1968, 26
member banks had in active operation a total of 373 branches
in 57 foreign countries and overseas areas of the United States;
14 national banks were operating 353 of these branches, and 12
State member banks were operating 20 such branches. The number and location of these foreign branches were as shown in the
tabulation on the opposite page.
Under the provisions of the Federal Reserve Act (Section 25
as to national banks and Sections 9 and 25 as to State member
banks), the Board of Governors during the year 1968 approved
96 applications made by member banks for permission to establish branches in foreign countries and overseas areas of the
United States.
During the year, member banks opened branches overseas as
follows: The Valley, Anguilla; Buenos Aires, Cordoba, and
Rosario, Argentina; Marsh Harbour and Nassau, Bahamas;
Bridgetown, Barbados; Liege, Belgium; Road Town, Tortola,
British Virgin Islands; Conception, Chile; Barranquilla,
Bogota, Cali, and Medellin, Colombia; Salcedo and Santiago,
Dominican Republic; London, England; Guayaquil and Quito,
Ecuador; Paris, France; Duesseldorf, Frankfurt am Main, and
Munich, Germany; Athens and Piraeus, Greece; Guatemala City,

350



[Table referred to on opposite page.]

Latin America
177
Argentina
33
Bahamas
8
Barbados
1
Bolivia
2
Brazil
15
Chile . .
18
Colombia
17
Dominican Republic
7
Ecuador
7
El Salvador
1
Guatemala
3
Guyana
1
Honduras
3
Jamaica
2
Leeward Islands
..
3
Mexico
5
Nicaragua
2
Panama
21
Paraguay
6
Peru
8
Trinidad and Tobago
5
Uruguay
2
Venezuela
4
Virgin Islands (British)
3
Europe
Austria
Belgium
Germany
France
Greece
Ireland
Italy




80
1
9
14
7
5
2
2

Europe—Cont.
Netherlands
Switzerland
United Kingdom

. .

5
3
32

Africa
Liberia
Nigeria

3
1
2

Near East
Dubai
Lebanon
Saudi Arabia

6
1
3
2

Far East
Hong Kong
India
Indonesia
Japan
Korea
Malaysia
Okinawa
Pakistan
Philippines
Singapore
Taiwan
Thailand
Vietnam
U.S. overseas areas and
trust territories
Canal Zone
Guam
Puerto Rico
Truk Islands
Virgin Islands
Total

72
12
11
4
12
3
5
2
4
5
8
2
2
2
35
2
2
17
1
13
373
351

Guatemala; Comayaguela, Honduras; Hong Kong; Bombay and
Madras, India; Djakarta, Indonesia; Dublin, Ireland; Kingston,
Jamaica; Amsterdam and Rotterdam, Netherlands; Belfast,
Northern Ireland; Changuinola and Panama City, Panama; Asuncion, Paraguay; Lima, Peru; San Juan, Puerto Rico; Basseterre
and Sandy Point, St. Kitts; San Fernando, Trinidad and Tobago;
Charlotte Amalie, Christiansted, and Frederiksted, Virgin Islands.
Acceptance powers of member banks. During the year the Board

approved the applications of five member banks, pursuant to the
provisions of Section 13 of the Federal Reserve Act, for increased acceptance powers. Four banks were granted permission
to accept drafts or bills of exchange drawn for the purpose of
furnishing dollar exchange as required by the usages of trade in
such countries, dependencies, or insular possessions of the United
States as may have been designated by the Board of Governors.
One bank was granted permission to accept commercial drafts
or bills up to 100 per cent of paid-up and unimpaired capital
stock and surplus.
Foreign banking and financing corporations. At the end of 1968

there were five corporations operating under agreements with
the Board pursuant to Section 25 of the Federal Reserve Act
relating to investment by member banks in the stock: of corporations engaged principally in international or foreign banking.
Three of these "agreement" corporations have head offices in
New York, and one has its head office in Miami, Florida. The
four corporations were examined during the year by examiners
for the Board of Governors. The fifth "agreement" corporation
is a national bank in the Virgin Islands and is owned by a State
member bank in Philadelphia.
During 1968, under the provisions of Section 25 (a) of the
Federal Reserve Act, the Board issued final permits to 10 corporations to engage in international or foreign banking or other
international or foreign financial operations, and 10 corporations

352



commenced operations. At the end of the year there were 56 corporations in active operation under Section 25(a): 30 have home
offices in New York City; five in Philadelphia; three each in
Boston, Chicago, and San Francisco; two each in Detroit and
Seattle; and one each in Cleveland, Pittsburgh, Norfolk, WinstonSalem, Atlanta, Dallas, Los Angeles, and Portland. One of the
corporations in Seattle has five active branches in Hong Kong, and
one of the corporations in Philadelphia operates a branch in
London. Examiners for the Board of Governors examined 49 of
these corporations during 1968.
Bank Examination Schools and other training activities. In 1968
the Bank Examination School conducted four sessions of the
School for Examiners, five sessions of the School for Assistant
Examiners, and one session of the School for Trust Examiners.
The Bank Examination School was established in 1952 by the
three Federal bank supervisory agencies, and since 1962 has
been conducted jointly by the Federal Reserve System and the
Federal Deposit Insurance Corporation.
Since the establishment of this program, 3,769 persons have
attended the various sessions. This number includes representatives of the Federal bank supervisory agencies; the State Banking
Departments of California, Connecticut, Idaho, Indiana, Kentucky, Louisiana, Maine, Michigan, Mississippi, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, New York,
North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia, Washington, and Wyoming; the Treasury Department of the Commonwealth of Puerto Rico; and 17 foreign countries.




353

• / ru! Reserve Ranks
Examination of Federal Reserve Banks. The Board's Division of
Federal Reserve Bank Operations examined the 12 Federal Reserve Banks and their 24 branches during the year, as required
by Section 21 of the Federal Reserve Act. In conjunction with
the examination of the Federal Reserve Bank of New York, the
Board's examiners also audited the accounts and holdings related
to the System Open Market Account and foreign currency operations conducted by that Bank in accordance with policies formulated by the Federal Open Market Committee, and rendered reports thereon to the Committee. The procedures followed by the
Board's examiners were surveyed and appraised by a private
firm of certified public accountants, pursuant to the policy of
having such reviews made on an annual basis.
Earnings and expenses. The accompanying table summarizes the
earnings, expenses, and distribution of net earnings of the Federal
Reserve Banks for 1968 and 1967.
EARNINGS, EXPENSES, AND DISTRIBUTION OF N E T EARNINGS
OF FEDERAL RESERVE BANKS, 1968 AND 1967
In thousands of dollars
Item
Current earnings
Current expenses
Current net earnings
Net addition to current net earnings
Net earnings before payments to U.S. Treasury
Dividends paid
Payments to U.S. Treasury (interest on F.R. notes)..
Transferred to surplus

354



1968

1967

2,764,446
242,350

2,190,404
220,121

2,522,096

1,970,283

8,520

2,094

2,530,616

1,972,377

36,960
2,463,629

35,028
1,907,498

30,027

29,851

Current earnings of $2,764 million in 1968 were 26 per cent
higher than in 1967, reflecting increases of $501 million on U.S.
Government securities, $51 million on foreign currencies, and
$22 million on discounts and advances.
Current expenses were $22 million more than in 1967, or 10
per cent. Statutory dividends to member banks amounted to $37
million, an increase of $2 million from 1967. This rise in dividends reflected an increase in the capital and surplus of member
banks and a consequent increase in the paid-in capital stock of
the Federal Reserve Banks.
Payments to the Treasury as interest on Federal Reserve notes
totaled $2,464 million for the year, compared with $1,907 million in 1967. This amount consists of all net earnings after dividends and the amount necessary to bring surplus to the level of
paid-in capital.
At the request of the Treasury Department, Bureau of the
Mint, the System began separating the silver coin from clad coin
(the three-layered coin that contains no silver, which was authorized by the Coinage Act of 1965) of the 10<£ and 25^ denominations. The separation process at the Reserve Banks yielded approximately 501 million silver coins at a face value of about $65
million. The cost to the System for performing the operation, including the acquisition and maintenance of equipment, was
$320,000, of which $120,000 was expended for the purchase
of coin separating machines in addition to those furnished by the
Mint.
Expenses of the Federal Reserve Banks also include costs of
$717.98 for six regional meetings incident to the Treasury Department savings bond program.
A detailed statement of earnings and expenses of each Federal
Reserve Bank during 1968 is shown in Table 7 on pages 374
and 375 and a condensed historical statement in Table 8 on
pages 376 and 377.
Holdings of loans and securities. The accompanying table shows
holdings, earnings, and average interest rates on loans and securities of the Federal Reserve Banks during the past 3 years.




355

Average daily holdings of loans and securities during 1968
amounted to $51,935 million—an increase of $5,518 million
over 1967. Holdings of acceptances decreased $31 million,
whereas there were increases of $5,158 million in U.S. Government securities and $391 million in discounts and advances.
The average rates of interest on holdings were up from 4.33
per cent to 5.22 per cent on discounts and advances, from 4.62
per cent to 5.75 per cent on acceptances, and from 4.66 per cent
to 5.17 per cent on U.S. Government securities.
RESERVE BANK EARNINGS ON LOANS AND SECURITIES,

Item and year

Total

Discounts
and
advances

1966-68

Acceptances

U.S.
Govt.
securities 2

In millions of dollar:?
Average daily holdings:
1966
1967
1968

1

Earnings:
1966
1967
1968

42,612
46,417
51,935

649
178
569

117
104
73

41,846
46,135
51,293

1,885.8
2,164.6
2,687.4

29.2
7.7
29.7

5.8
4.8
4.2

1,850.8
2,152.1
2,653.5

In per cent
Average rate of interest:
1966
1967
1968

4.43
4.66
5.17

4.50
4.33
5.22

4.96
4.62
5.75

4.42
4.66
5.17

1

Based on holdings at opening of business.
2 Includes Federal agency obligations.

Volume of operations. Table 9 on page 378 shows the volume
of operations in the principal departments of the Federal Reserve
Banks for 1965-68.
Discounts and advances increased sharply over the previous
year in both number and dollar amount, and the number of
banks borrowing rose to 1,310 from 1,104 in 1967.

356



Volume continued to rise in most of the other operations,
particularly in food stamps redeemed and in transactions in U.S.
Government securities.
Loan guarantees for defense production. Under the Defense Pro-

duction Act of 1950, the Departments of the Army, Navy, and
Air Force, the Defense Supply Agency of the Department of Defense, the Departments of Commerce, Interior, and Agriculture,
the General Services Administration, the National Aeronautics
and Space Administration, and the Atomic Energy Commission
are authorized to guarantee loans for defense production made by
commercial banks and other private financing institutions. The
Federal Reserve Banks act as fiscal agents of the guaranteeing
agencies under the Board's Regulation V.
During 1968 the guaranteeing agencies authorized the issuance of three guarantee agreements covering loans totaling $51
million. Loan authorizations outstanding on December 31, 1968,
totaled $72 million, of which $21 million represented outstanding loans and $51 million additional credit available to borrowers.
Of total loans outstanding, 71 per cent on the average was guaranteed. During the year approximately $77 million was disbursed
on guaranteed loans, most of which are revolving credits.
Authority for the V-loan program, unless extended, will terminate on June 30, 1970.
Table 11 (page 379) shows guarantee fees and maximum
interest rates applicable to Regulation V loans.
Foreign and international accounts. Assets held for foreign ac-

count at the Federal Reserve Banks increased $615 million in
1968. At the end of the year they amounted to $21,826 million:
$11,183 million of earmarked gold; $9,120 million of U.S. Government securities (including securities payable in foreign currencies); $216 million in dollar deposits; $109 million of
bankers' acceptances purchased through Federal Reserve Banks;
and $1,198 million of miscellaneous assets. The latter item consists mainly of dollar bonds issued by foreign countries and inter-




357

national organizations. Assets held for international organizations, including IMF gold deposits, declined $1,317 million to
$8,121 million.
In 1968 new accounts were opened in the names of the Central
Bank of Brazil; Central Bank of Cyprus; Bank of Lebanon; Central Bank of Malta; Bank of Mauritius; Sultan of Muscat and
Oman; Board of Commissioners of Currency, Singapore; Central
Bank of Trinidad and Tobago; and Central Bank of Uruguay.
New gold collateral loan arrangements amounted to $15 million in 1968. All drawings during the year under these loan
arrangements were repaid by the end of the year. Loans on gold
are made to foreign monetary authorities to help them meet dollar
requirements of a temporary nature.
The Federal Reserve Bank of New York continued to act as
depositary and fiscal agent for international organizations. As
fiscal agent of the United States, the Bank continued to operate
the Exchange Stabilization Fund pursuant to authorization and
instructions of the Secretary of the Treasury. Also on behalf of
the Treasury Department, it administered foreign assets control
regulations pertaining to assets in the United States of North Vietnam, Cuba, Communist China, and North Korea, and their nationals, and to transactions with those countries and their nationals.
Bank premises. During 1968, with the approval of the Board,
properties adjacent to the Boston, Richmond, and San Francisco
Reserve Banks and to the Denver, Omaha, and Los Angeles
Branches were acquired for future expansion, and a site was
obtained for a new building for the Baltimore Branch.
Table 6 on page 373 shows the cost and book value of bank
premises owned and occupied by the Federal Reserve Banks and
of real estate acquired for banking-house purposes.

358



Board of Governors
Building annex. In accordance with the Board's authorization
as reported last year, plans for an annex to its present building
were developed and subsequently approved by the Fine Arts
Commission and the National Capital Planning Commission.
In addition, an agreement was entered into between the Board
of Governors and the Department of the Interior whereby the
Board will build a self-liquidating, underground garage for the
use of Federal Reserve and Department of the Interior employees
under the present Department parking lot adjoining the Board
site on the north, and the National Park Service of the Department of the Interior, with the Board cooperating, will develop
the surface as a park in accordance with its present designation
as National Park Service land.
Income and expenses. The accounts of the Board for the year
1968 were audited by the public accounting firm of Lybrand,
Ross Bros. & Montgomery.
ACCOUNTANTS' OPINION

Board of Governors of the
Federal Reserve System:
We have examined the balance sheet of the Board of Governors of the
Federal Reserve System as of December 31, 1968, and the related statement of assessments and expenses for the year then ended. Our examination was made in accordance with generally accepted auditing standards,
and accordingly included such tests of the accounting records and such
other auditing procedures as we considered necessary in the circumstances.
In our opinion, the balance sheet and related statement of assessments
and expenses present fairly the financial position of the Board of Governors of the Federal Reserve System at December 31, 1968 and the results
of its operations for the year then ended, in conformity with generally
accepted accounting principles applied on a basis consistent with that of
the preceding year.
^
Lybrand, Ross Bros. & Montgomery
y
5
y
Washington, D.C.
January 30, 1969




359

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BALANCE SHEET
DECEMBER 31,

1968

ASSETS
OPERATING FUND:

Cash.
Miscellaneous receivables and advances
Stockroom and cafeteria inventories at first-in, first-out cost
Total operating fund

$ 2,046,449
19,925
34,929
,.

2,101,303

PROPERTY FUND:

Land and improvements
Bluilding and building construction
Furniture and equipment

792,852
4,894,481
1,153,966

Total property fund

6,841,299
$ 8,942,602

LIABILITIES AND FUND BALANCES
OPERATING FUND:

Current liabilities:
Accounts payable and accrued expenses
Income taxes withheld
Accrued payroll
Fund balance:
Balance, January 1, 1968
Excess of assessments over expenses for the year
ended December 31, 1968

$ 642,395
483,158
73,031
$ 1,198,584
(155,866)
1,058,585
902,719

Total operating fund

2,101,303

PROPERTY FUND:

Fund balance:
Balance, January 1, 1968
Additions
Property adjustments and disposals
Total property fund

6,285,038
568,583
(12,322)
6,841,299
$ 8,942,602

The accompanying notes are an integral part of the financial statements.
[See page 362 for notes.]

360



BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

STATEMENT OF ASSESSMENTS AND EXPENSES
FOR THE YEAR ENDED DECEMBER 31,

1968

ASSESSMENTS LEVIED ON FEDERAL RESERVE BANKS:

For Board expenses and additions to property
For expenditures made on behalf of the Federal Reserve Banks...
Total assessments

$14,198,200
18,811,038
33,009,238

EXPENSES :

Expenditures for printing, issue and redemption of Federal Reserve
Notes, paid on behalf of the Federal Reserve Banks
For the Board:
Salaries
$7,952,415
Retirement and insurance contributions
1,650,120
Travel expenses
369,055
Legal, consultant and audit fees
187,637
Contractual services
440,245
Printing and binding—net
437,649
Equipment and other rentals
752,144
Telephone and telegraph
181,284
Postage and expressage
153,780
Stationery, office and other supplies
103,486
Heat, light and power
62,878
Operation of cafeteria—net
75,688
Repairs, maintenance and alterations
83,741
Books and subscriptions
29,980
System membership, Center for Latin American
Monetary Studies
28,100
Miscellaneous—net
62,830

18,811,038

12,571,032
568,583

For property additions
Total expenses
EXCESS OF ASSESSMENTS OVER EXPENSES

31,950,653
$ 1,058,585

The accompanying notes are an integral part of the financial statements.




[See page 362 for notes.]

361

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
NOTES TO FINANCIAL STATEMENTS
ACCOUNTING METHODS

The Board has consistently followed the practice of not providing for
depreciation on fixed assets. Acquisitions are charged to expense and proceeds
from sales of fixed assets are recorded as income. The property accounts are
increased or reduced at full cost, with corresponding increases or decreases in
the property fund balance when property is acquired or sold.
Assessments and expenditures made on behalf of the Federal Reserve
Banks for the printing, issuance and redemption of Federal Reserve notes are
recorded on the cash basis and produce results which are not materially different from those which would have been produced on the accrual basis of
accounting.
LONG-TERM LEASES

The Board leases outside office space at an annual rental of $298,415
under a lease expiring in 1972. This lease may be terminated with six months
notice after 1969.
CONSTRUCTION

The cost of the new Federal Reserve North Building and North Garage,
as estimated by the architect, will be approximately $20,000,000. According to
present plans this amount will be expended over the next three years.

362



Tables




1. DETAILED STATEMENT OF CONDITION OF ALL FEDERAL RESERVE BANKS
COMBINED, DECEMBER 31, 1968
(In thousands of dollars)
ASSETS
Gold certificates on hand
Gold certificates due from U.S. Treasury:
Interdistrict settlement fund
F.R. Agents' fund

1,278
5,967,237
4,057,000

Total gold certificate account
F.R. notes of other F.R. Banks
Other cash:
United States notes
Silver certificates
National bank notes and F.R. Bank notes
Coin

10,025,515
784,712
3,846
65
73
201,619

Total other cash
Discounts and advances secured by U.S. Govt. obligations:
Discounted for member banks
Discounted for others
Other discou nts and advances:
Discounted for member banks
Foreign loans on gold

205,603
163,580

25,000

Total discounts and advances
Acceptances:
Bought outright
Held under repurchase agreement
Federal agency obligations:
Held under repurchase agreement
U.S. Govt. securities:
Bought outright:
Bills
Certificates
Noies
Bonds

57,715

18,756,205
28,706,122
5,474,502
52,936,829
52,936,829

Total loans and securities
Cash items in process of collection:
Transit items
Exchanges for clearing house
Other cash items
Total cash items in process of collection
Bank premises:
Land
Buildings (including vaults)
Fixed machinery and equipment

53,183,124
10,946,517
199,019
670,719
11,816,255
123,682
67,729

Total buildings
191,411
Less depreciation allowances
109,904
Total bank premises
Other assets:
Claims account closed banks
Denominated in foreign currencies
Gold due from U.S. Treasury for account International Monetary Fund
Reimbursable expenses and other items receivable
Interesu accrued
Premium on securities
Deferred charges
Real estate acquired for banking-house purposes
Suspense account
Allother
Total other assets

364



25,000
188,580

Total bought outright
Held under repurchase agreement
Total U.S. Govt. securities

Total assets

163,580

31,769

81,507
113,276
2,060,664
230,118
4,206
455,801
1,294
3,174
4,299
9,589
3,035
2,772,180
78,900,665

1. DETAILED STATEMENT OF CONDITION OF ALL FEDERAL RESERVE BANKS
COMBINED, DECEMBER 31, 1968—Continued
(In thousands of dollars)
F.R. notes:
Outstanding (issued to F.R. Banks)
Less: Held by issuing F.R. Banks
Forwarded for redemption

LAAlUiJTlES
47,560,111
2,037,493
11,854

2,049,347

F.R. notes, net (includes notes held by U.S. Treasury
and by F.R. Banks other than issuing Bank)
Deposits:
Member bank reserves
U.S. Treasurer—General account
Foreign
Other deposits:
Nonmember bank—Clearing accounts
Officers' and certified checks
Reserves of corporations doing foreign banking or
financing
International organizations
Allother

45,510,764
21,737,916
702,795
215,966
66,681
20,969
75,840
321,458
262,212

Total other deposits

747,160

Total deposits
Deferred availability cash items

23,403,837
8,334,396

Other liabilities:
Accrued dividends unpaid
Unearned discount
Discount on securities
Sundry items payable
Suspense account
All other

491
380,744
9,126
1,768
1

Total other liabilities

392,130

Total liabilities

77,641,127

CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts1
Total liabilities and capital accounts
Contingent liability on acceptances purchased for foreign correspondents

629,769
629,769
78,900,665
109,198

i During the year this item includes the net of earnings, expenses, profit and loss items, and accrued
dividends which are closed out on Dec. 31; see Table 7, pp. 374 and 375.
NOTE.—Amounts in boldface type indicate items shown in the Board's weekly statement of condition
of the F.R. Banks.




365

OS
Os

2. STATEMENT OF CONDITION OF EACH FEDERAL RESERVE BANK, DECEMBER 31,1968 AND 1967
(In millions of dollars unless otherwise indicated)

Boston

Total

New York

Richmond

Cleveland

Philadelphia

Item
1968

1967

10,026
784
207

11,481
727
360

163
25

129
12

58

75
89

1968

1967

1968

1967

698
71
23

2,813
162
21

2,792
173
43

2

74

41
7

58

1968

1968

1967

1967

1967

1968

75
89

ASSETS
Gold certificate account
.
F R notes of other Banks
Other cash

.

Discounts and advances:
Secured by U.S. Govt. securities
Other
Acceptances:
Bought outright
Held under repurchase agreements
Federal agency obligations held under repurchase
agreements
U.S. Govt. securities:
Bought outright . . .
Held under repurchase agreements
Total loans and securities.
Cash items in p™™«« "** m i w t i o n
Bank premises
Other assets:
Denominated in foreign currencies
IMF gold deposited^
All other
Total assets




554
63
11

38

662
49
9

739
67
24

921
65
48

861
83
13

1,008
53
21

1

494
35
5

11

*

3

2

38

52,937
•.

48,980
132

2,762

2,512

12,687

12,318
132

2,810

2,526

4,175

3,743

3,978

3,607

53,183

49,455

2,762

2,514

12,819

12,700

2,810

2,527

4,186

3,743

3,981

3,609

It 817
113

112

605
3

695
3

2,663
10

2,143
10

635
2

2

807
5

740
5

886
10

887
7

2,061
230
481

1,604
233
316

101

77

418
233
80

83

185

144

107

83

18

529
230
118

109

24

27

16

39

26

39

25

78,902

75,423

4,123

4,099

19,365

18,592

4,117

3,998

6,052

5,692

5,980

5,693

LIABILITIES
F.R. notes
Deposits:
Member bank reserves
U S Treasurer General account
Foreign
Other:
IMF sold deoosits 1
All other

45,510

42,369

2,637

2,496

10,511

9,854

2,616

2,444

3,700

3,404

4,142

3,882

21,737
703
216

21,092
1,123
135

731
*
11

870
83
7

5,897
681
52

6,054
233
31

870
*
12

872
77
7

1,538
*
20

1,449
66
13

1,021
1
11

941
78
7

230
517

233
430

13

9

230
287

233
232

13

26

18

13

21

19

Total deposits
Deferred availability cash items
Other liabilities and accrued dividends

• • 23,403
8 334
395

23,013
8,549
296

755
649
20

969
561
15

7,147
1 292
95

6,783
1,570
77

895
520
20

982
493
15

1,576
632
32

1,541
617
22

1,054
688
30

1,045
682
22

77,642

74,227

4,061

4,041

19,045

18,284

4,051

3,934

5,940

5,584

5,914

5,631

630
630

598
598

31
31

29
29

160
160

154
154

33
33

32
32

56
56

54
54

33
33

31
31

78,902

75,423

4,123

4,099

19,365

18,592

4,117

3,998

6,052

5,692

5,980

5,693

109

156

5

8

28

40

6

8

10

14

6

8

47,560

44,311

2,714

2,601

11,038

10,321

2,684

2,507

3,933

3,644

4,272

4,005

2,050

1,942

77

105

527

467

68

63

233

240

130

123

45,510

42,369

2,637

2,496

10,511

9,854

2,616

2,444

3,700

3,404

4,142

3,882

Total liabilities

....

CAPITAL ACCOUNTS
Capital paid in.
Surplus
Other capital accounts
Total liabilities and capital accounts
Contingent liability on acceptances purchased for
foreign correspondents
F.R. NOTE STATEMENT
F.R. notes:
Issued to F.R. Bank by F.R. Agent and outstanding
Less held by issuing Bank, and forwarded for
redemption
F.R. notes, net 2
Collateral held by F.R. Agent for notes issued to
Bank:
Gold certificate account
U.S. Govt. securities
Total collateral
ON

For notes see end of table.




4,057

6,663

280

450

500

1,000

300

525

600

600

665

640

44,691

38,606

2,451

2,176

10,600

9,400

2,500

2,100

3,400

3,100

3,690

3,395

48,748

45,269

2,731

2,626

11,100

10,400

2,800

2,625

4,000

3,700

4,355

4,035

OS

oo

2. STATEMENT OF CONDITION OF EACH FEDERAL RESERVE BANK, DECEMBER 31, 1968 AND 1967—Continued
(In millions of dollars unless otherwise indicated)
Chicago

Atlanta
Item

1968

1967

Minneapolis

St. Louis

1968

1967

1,491
58
27

2,007
54
67

1968

1967

1968

1967

Kansas City
1968

1967

San Francisco

Dallas
1968

1967

1968

1967

ASSETS
Gold certificate account. . .
F.R. notes of other Banks.
Other cash
Discounts and advances:
Secured by U.S. Govt. securities.
Other

524
80
27

659
64
42

353
33
25

437
34
34

229
18
3

195
17
4

338
35
16

395
35
18

344
43
12

388
31
14

,286
107
23

1,319
81
37

63
10

Acceptances:
Bought outright
Held under repurchase agreements.
Federal agency obligations held under repurchase agreements
U.S. Govt. securities:
Bought outright
Held under repurchase agreements
Total loans and securities
Cash items in process of collection
Bank premises
Other assets:
Denominated in foreign currencies.
IMF gold deposited1
All other
Total assets




2,937

2,725

8,698

7,817

1,869

1,768

1,023

952

2,050

1,972

2,253

2,047

7,695

6,993

2,947

2,725

8,763

7,826

1,870

1,769

1,027

954

2,058

1,979

2,258

2,053

7,702

7,056

907
18

913
20

2,028
17

1,881
18

574
8

501
9

403
3

336
3

824
19

733
17

577
9

626
9

908
9

1,030
9

48

38

91

209

301

233

70

56

'26'

18

76

48

17

4,659

4,540

12,761

12,134

2,950

2,851

1,740

1,553

118

93

272

18

11

130

12

20

13

68

43

3,399

3,260

3,381

3,227

10,375

9,784

LIABILITIES
F.R. notes
Deposits:
Member bank reserves. .
.
U.S. Treasurer—General account
Foreign
Other:
IMF cold deoosit 1
All other

476
....

Total deposits
Deferred availability cash items
Other liabilities and accrued dividends
Total liabilities

,432

8 076

306
1
14

1 ,165
83
9

,988
1
32

7 ,408

1 ,677

1 ,569

764

717

1 ,679

1 ,575

1 ,575

1,433

5,657

5,155

,900
107
21

784
1
7

754
71
5

678
15
5

507
48
3

1 ,039
*
10

957
97
6

1 ,229
1
13

1,150
61
8

3,656
2
29

3,473
119
18

?

12

11

39

31

8

7

6

5

10

9

11

io

79

58

333
749
21

268
749
15

060
1,373
66

059
1 ,446
47

800
415
14

837
394
11

704
234
10

563
238
7

1 ,059
591
16

1 ,069
551
13

1 ,254
464
16

1,229
485
12

3,766
727
55

3,668
763
40

4 579

4 464

V 575

960

,906

,811

1,712

1,525

,345

,208

,309

3,159

10,205

9,626

40
40

38
38

93
93

87
87

22
22

20
20

14
14

14
14

27
27

26
26

36
36

34
34

85
85

79
79

4 ,659

4 ,540

12 ,761

12 ,134

2 ,950

2 ,851

1,740

1,553

3 ,399

3 ,260

3 ,381

3,227

10,375

9,784

7

10

16

23

4

5

2

4

5

7

6

9

14

20

597

,549

8 390

7 ,692

1 ,738

,636

790

747

1 ,754

1 ,647

1 ,715

1,539

5,935

5,423

121

117

314

284

61

67

26

30

75

72

140

106

278

268

2 ,476

2 ,432

8 ,076

7 ,408

1 ,677

1 ,569

764

717

1 ,679

1 ,575

1 ,575

1,433

5,657

5,155

350

450

,000

1 ,400

180

331

27

127

225

155

180

2 ,300

2 ,150

7 ,650

6 ,450

1 ,670

1 ,370

775

635

1 ,775

1 ,450

1 ,630

1,380

6,250

5,000

2 ,650

2 ,600

8 ,650

7 ,850

1 ,850

1 ,701

802

762

1 ,775

1 ,675

1 ,785

1,560

6,250

5,735

?

CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts
Total liabilities and capital accounts.
Contingent liability on acceptances purchased
for foreign correspondents
F.R. NOTE STATEMENT
F.R. notes:
Issued to F.R. Bank by F.R. Agent and
outstanding
..
Less held by issuing Bank, and forwarded
for redemption
F.R. notes, net 2
Collateral held by F.R. Agent for notes issued
to Bank:
Gold certificate account
U.S. Govt. securities
Total collateral
^
O\
VO

j

*Less than $500,000.
i Gold deposited by the IMF to mitigate the impact on the U.S. gold stock of purchases by foreign countries for gold subscriptions on increased IMF quotas. The United
States has a corresponding gold liability to the IMF.




735

2 Includes F.R. notes held by U.S. Treasury and by F.R. Banks other than the
issuing bank.

3. FEDERAL RESERVE BANK HOLDINGS OF U.S. GOVERNMENT SECURITIES,
DECEMBER 31, 1966-68
(In thousands of dollars)

Type of issue
and date

Rate of
interest
(per cent)
1968

Treasury bonds:
1962-67
1963-68
1964-69 June..
1964-69 Dec...
1965-70
1966-71
1967-72 June..
1967-72 Sept...
1967 N o v . . . . .
1967-72 D e c .
1968 May
1968 Aug
1968 Nov
1969 Feb
1969 Oct
1970 Feb
1970 Aug
1971 Aug
1971 Nov
1972 Feb
1972 Aug
1973 Aug
1973 Nov
1974 Feb
1974 May
1974 Nov
1975-85
1978-83
1980 Feb
1980 Nov
1985 May
1987-92
1988-93
1989-94
1990 Feb
1995 Feb
1998 Nov
Total.
Treasury notes:
Feb. 15, 196V—B...
Feb. 15, 1967—C...
May 15, 1967—D...
Aug. 15, 196''—A...
Aug. 15, 1967—E...
Nov. 15, 1967—F.. .
Feb. 15, 19615—A...
May 15, 1968—B...
Aug. 15, 1968—C...
Nov. 15, 1968—D...
Feb. 15, 1969—A...
May 15, 1969—B...
Aug. 15, 1969—C...
May 15, 1970—B...
Nov. 15, 1970—A...
Feb. 15, 1971—C . . .
May 15, 1971—A...
Nov. 15, 1971—B...
Feb. 15, 1972—A...
Apr. 1, 1972—EA..
May 15, 1972—B...
Aug. 15, 1974—B...
Nov. 15, 1974—A...
Feb. 15, 1975—A...
May 15, 1975—B...
Total

370



1967

307,840
358,199
573,540
145,007
54,566
46,552

169,085
307,840
358,199
573,540
145,007
54,566
46,552

181,900
249,900
158,650
117,150
176,250
292,450
116,150
238,450
46,700
82,340
6,250
53,550
32,850
27,800
246,900
23,500
37,350
72,450
2,100
25,750

95,858
304,315
348,200
104,900
,135,100
217,550
86,150
142,300
170,400
213,900
151,650
114,150
168,450
268,950
94,300
213,950
46,700
73,590
6,250
42,650
30,400
24,800
217,200
23,500
36,200
72,450
2,100
25,750

5,474,502

6,086,502

95,858
3%
4
4
4
4
4
3%
4
4
41/8

3%
4
AVA-

3V4

Increase or decrease (—)
during—

December 31

1,140,500
310,750
102,850
150,400

7,441,343
148,050
40,500
5,293,450
1,128,150
64,590
1,557,350
62,650
94,850
1,800
2,331,810
4,864,882
1,053,250
934,150
3,689,297

839,300
3,313,432
4,378,582
5,975,165
7,353,993
1,065,500
33,100
1,533,300
45,800
55,500
1,800
2,282,860

1966

107,560
169,085
306,740
335,199
573,540

1S'68

-169,085

144,007

54,566
44,052
595,450
95,858
291,065
315,200
97,500
1,117,800
193,950
64,750
130,200
160,600
203,450
138,000
102,900
117,650
178,000
74,700
147,750
37,150
68,090
3,250
34,800
23,400
23,800
135,100
13,500
24,400
61,450

-304,315
-348,200
-104,900
5,400
93,200
16,700
8,100
11,500
36,000
7,000
3,000
7,800
23,500
21,850
24,500
8,750
10,900
2,450
3,000
29,700
1,150

-612,000

-839,300
-3,313,432
-4,378,582
-5,975,165
87,350
148,050
40,500
5,293,450
62,650
1,017,000
31,490
1,500,000
:>4,050
1,000
16,850
39,350

28,706,122 26,918,382 21,301,957

1,100
23,000
1,000

342,900
2,951,032
6,374,082
338,850
1,245,000
6,694,993
837,100

'46,656

-107,560

2,500
-595,450

14,250
6,198,762

1967

48,950
4,864,882
1,013,200
934,150
3,639,297
1,787,740

13,250
33,000
7,400
17,300
23,600
21,400

12,100
9,800
10,450
13,650
11,250
50,800
90,950
19,600
66,200
9,550
5,500
3,000
7,850
7,000
1,000
82,100
10,000
11,800
11,000
2,100
11,500
-112,260
-342,900
-2,951,032
-6,374,082
-338,850
-1,245,000
-6,694,993
2,200
3,313,432
4,378,582
5,975,165
7,353,993
48,500
33,100
33,300
44,800
55,500
1,800
,282,860
''46*656*

5,616,425

3. FEDERAL RESERVE HOLDINGS OF U.S. GOVERNMENT SECURITIES,
DECEMBER 31, 1966-68—Continued
(In thousands of dollars)

Type of issue
and date

Certificates:
Aug. 15, 1967

Rate of
interest
(per cent)

Increase or decrease (—)
during—

December 31
1968

1967

1966

1968

1967

4,351,015

Treasury bills:
Tax anticipation
Other due—
Within 3 mos
3 6 mos
After 6 rnos

-4,351,015

4,351 015

5%

Total

-4,351,015

453,400

541,200

175,400

-263,200

9,245,160
4,497,150
1,955,023

6,432,194
3,440,750
1,389,514

1,645,138
881,945
78,389

2,812,966
1,056,400
565,509

18,756,205 15,975,333 11,803,658

Total

278,000

10,890,298
5,379,095
2,033,412

2,780,872

4,171,675

626,800

-132,200

-494,600

Total holdings

52,936,829 49,112,417 44,282,192

3,824,412

4,830,225

Maturing—
Within 90 days
91 days to 1 year
Over 1 year to 5 years.
Over 5 years to 10 yrs..
Over 10 years

9,706,061 -671,746
19,584,141 9,878,080 10,549,826
8,919,246 21,662,432 24,881,514 -12,743,186 -3,219,082
12,879,723 16,184,615 7,458,186 -3,304,892 8,726,429
10,942,879
832,400
990,626
10,110,479 -158,226
610,840
554,890
402,040
152,850
55,950

132,200

Repurchase agreements.

4. FEDERAL RESERVE BANK HOLDINGS OF SPECIAL SHORT-TERM TREASURY
CERTIFICATES PURCHASED DIRECTLY FROM THE UNITED STATES, 1953-68
(In millions of dollars)
Date
1953
Mar. 18

19
20
21
22*
23
24
25
26

June

5

6
7*
8
9
10
11
12
13
14*
15
16
17

Amount

Date

Amount

110
104

1953
June 18
19

364
992

189
189
189
333
186
63
49
196
196
196
374
491
451
358

506
506
506
999
1,172
823

20
21*
22
23
24

992
992
908
608
296

Date

Amount

1954
Mar. 15

134
190

16

1955
1956
1957

15
16
17*
18
19
20
21
22
23
24*

25
26

11
12*

June 15
Sept. 8

143
207

1968
Sept. 9
Dec. 10

J

18

22
169
169
169
323
424
323
306
283
283
283
203
3

1967
Mar. 10

1
\ none

1958
Mar. 17
1954
Jan. 14

Date

1959
1960
1961
1962
1963
1964
1965
1966
Dec.
9
10
11*

)

none

9
10*

12
13
14
15*
16
17

Amount

149
149
149
87
153
153
153
87
92
45
430
430
430
447
596

169

169
169

•Sunday or holiday.
NOTE.—Under authority of Section 14(b) of the Federal Reserve Act. On Nov. 9, 1953, the F.R.
Banks sold directly to the Treasury $500 million of Treasury notes; this is the only use that has been
made under thel same authority to sell U.S. Govt. securities directly to the United States.
Interest rate /t per cent through Dec. 3, 1957, and lA per cent below prevailing discount rate of
F.R. Bank of New York thereafter. Rate on purchases in 1958 was 2 per cent. For data for prior years
beginning with 1942, see previous ANNUAL REPORTS. NO holdings on dates not shown.




371

5. OPEN MARKET TRANSACTIONS OF THE FEDERAL RESERVE SYSTEM DURING 1968
(In millions of dollars)
Outright transactions in U.S. Govt. securities by maturity
Total

Other within 1 year

Treasury bills

Month
Gross
chases
January.
February...
March
April
May........
June
July
August
September...
October
November...
December...
Total

Redemp- Gross
purtions
chases

Gross
sales

1,488
967
1,550
1,761
1,168
1,894
404
1,111
5,515
2,736
3,602
6,100

1,593
770
567
982
784
409
140
5,605
2,246
3,430
6,334

28,295

20
100
305
167

22,861

150
180

1,410
917
1,212
1,651
1,098
1,693
404
1,028
5,403
2,601
3,602
6,100

1,477

27,119

January
February...
March, . .
April
May
June
July
August
September...
October
November...
December...
Total

Gross
sales

52
208
41
41
38
24
31
27

512

22,861

Exch.
Gross
or
purmaturity chases
shifts

-8,497

20
100
305
167

-73
-308
142
-308
5,586
-358
-3,816

Gross
sales

Exch.
or
maturity
shifts

3,638

9,821

708

Federal
Net
agency
change obligations
in U.S.
(net reGovt.
purchase
securities
agreements)

1,230
980
1,369

15,862

15,994

3,824

-38
57
-45
-12

9
-9

-38

-4,778

-6,005

Gross
purchases

839

289

-20
-140
739
815
119
1,605
166
647
235
50
21
-414

-3,566
308

308
-6,293
358

Over 10 years

4,636

1,031
1,205
596
1,627
2,753
1,560
908
2,734

7,658

319

1,477

34
45
50

1,136
968
657
1,832
2,488
1,560
1,145
2,497
440
790
980
1,369

Exch.,
maturity
shifts,
or
redemp.

14
31
53

150
180

64
8
18
50

Gross
sales

Gross
sales

50
51
58
10
54

289
65
87
115

21

Gross
purchases

Total

1,593
770
567
982
784

5-10 years

Repurchase
agreements
(U.S. Govt. securities)

January
February...
March. \ . , .,
April.
May........
June
July
August
September..
October
November..
December..,

Redemp- Gross
purtions
chases

409
140
5,605
2,246
3,430
6,334

289
65
87
115

1-5 years
Gross
purchases

Gross
sales

Gross
sales

Exch.
or
maturity
shifts

5
15
3
1
10
12
5
7

56

Bankers' acceptances
Net
changei
Net
outright

Net repurchases

-12
-7
-1
2
-1
3
-2
-5
-4
9
2

35
-5
-30
75
-32
-43
39
-39

-17

-89

-69

-:>o

-139
-166
830
766
75
1,683
132
599
280
11
23
-414
3,680

iNet change in U.S. Govt. securities, Federal agency obligations, and bankers' acceptances.
NOTE.—Sales, redemptions, and negative figures reduce System holdings; all other figures increase
such holdings.

372



6. BANK PREMISES OF FEDERAL RESERVE BANKS AND BRANCHES,
DECEMBER 31, 1968
(In dollars)
Cost
F.R. Bank
or branch

Land

Buildings
(including
vaults) i

Fixed machinery and
equipment

Total

Net
book value

....

1,628,132

5,929,169

2,943,179

10,500,480

2,555,318

...
...

5,215,656
592,679
673,076

13,297,187
1,526,203
2,562,224

7,035,953
673,458
1,565,400

25,548,796
2,792,340
4,800,700

6,440,573
570,713
2,690,986

1,884,357

4,841,559

2,154,452

8,880,368

2,358,818

1,295,490
400,891
1,667,994

6,642,919
1,171,259
3,043,627

3,571,958
1,587,495
2,525,243

11,510,367
3,159,645
7,236,864

1,101,526
455,049
3,233,405

513 524
146 875
91 404
250,487
347,071

4 207,163
256,000
5,755,644
2,023,475
1,069,026

2,497,936
1,068,445
625,121

7,218,623
402,875
5,847,048
3,342,407
2,041,218

1,676,020
302,608
5,847,048
1,370,152
1,140,879

1,304,755
410 775
164,004
107,925
592 342
1,557,663

5,804,778
2 000,619
1 736,177
76,236
1 474,678
2,754,271

3,558,580
1,019,618
778,871
15,842
1 098,924
1,448,181

10,668,113
3,431,012
2,679,052
200,003
3,165,944
5,760,115

7,945,418
1,956,202
1,406,624
185,754
1,838,410
5,243,698

Chicago •
Detroit

6,275,490
1,147,734

17,697,176
2,869,786

9,930,595
1,466,915

33,903,261
5,484,435

14,731,043
2,576,901

St. Louis
Little Rock
Louisville
Memphis

1 675 780
'800,104
700,075
128,542

3 191,744
1,963,152
2,859,819
294,763

2 285,317
962,372
1,041,202
218,883

7,152,841
3,725,628
4,601,096
642,188

1,535,548
3,543,869
2,961,684
168,562

Minneapolis
Helena .

600 521
15,709

5 223,279
126,401

2,688,921
62,977

8,512,721
205,087

3,239,682
53,811

1,340,561
2,828,465
592,435
950,689

6,989,491
5,745,344
1,511,600
1,491,117

2,879,034
91,693
834,845
731,925

11,209,086
8,665,502
2,938,880
3,173,731

6,432,937
8,149,114
2,138,602
2,020,107

713,302
262 477
695,615
278,180

5,008,272
787 728
1,408,574
1,400,390

3,570,804
393,301
714,187
570,847

9,292,378
1,443,506
2,818,376
2,249,417

4,643,485
876,905
1,801,346
1,342,477

684 339
247,201
777,614
207,380
480,222
274,772

3 783,530
124,000
4,103,844
1,678,512
1,878,238
1,890,966

1 458,028
30,000
1,608,576
649,432
707,575
1,049,264

5,925,897
401,201
6,490,034
2,535,324
3,066,035
3,215,002

776,565
346,401
2,11'4,229
1,292,818
1,982,812
1,568,085

Boston
New York
Annex .
Buffalo
.
Philadelphia

.

Cleveland
Cincinnati .
Pittsburgh .

....

Richmond
Annex 1
Annex 2
Baltimore
Charlotte
Atlanta
Birmingham
Jacksonville
Annex
Nashville .
New Orleans

.

Kansas City
Denver
Oklahoma City
Omaha .
Dallas
El Paso
Houston. .
San Antonio

..

San Francisco . . .
Annex
Los Angeles . . .
Portland.
Salt Lake City
Seattle
Total

...

40,522,307 138,199,940

68,115,349 246,837,596 113,276,184

OTHER REAL ESTATE ACQUIRED FOR BANKING-HOUSE PURPOSES
Boston
Cleveland
Cincinnati
Richmond
Baltimore...
Memphis
Denver
San Antonio
Los Angeles
Total
1

.

500,000
395,875
341,293
326,403
548,656
602,580
551,430
170,416
115,156
3,551,809

381,000
412,500

100,000

129,067

922,567

100,000

500,000
776,875
853,793
326,403
548,656
731,647
551,430
170,416
115,156

500,000
668,925
686,234
326,403
548,656
731,647
551,430
170,416
115,156

4,574,376

4,298,867

Includes expenditures for construction at some offices pending allocation to appropriate accounts




373

7. EARNINGS AND EXPENSES OF FEDERAL RESERVE BANKS DURING 1968
(In dollars)

Item

Total

Boston

New
York

Philadelphia

Cleveland

Richmond

Atlanta

CURRENT
I

Chicago I St. Louis

Minneapolis

Kansas
City

EARNINGS

I

Discounts and advances
Acceptances
U.S. Govt. securities
Foreign currencies
All other

!
I
29,702,022 2,232,084 8,522,694
878,276 1,128,269 1,715,593 7,089,127
536,040
886,927 1,040,781 1,059,138 1,215,553 3,397,54,153,633
4,153,633
2,653,503,692 138,894,925 663,949,404 136,299,631 203,417,300 195,815,741 142,665,634 431,041,066 94,130,996 52,687,917 105,217,837 112,264,984 377,118,2;
76,539,434 3,748,273 19,676,674 4,054,447 6,888,464 3,980,002 4,819,832 11,172,527 2,604,402 1,762,479 3,368,652 4,364,788 10,098,8'
547,163
17,829
13,788
33,486
32,809
59,195
89,408
27,115
38,837
70,765
74,883
34,702
54,3'

Total.

2,764,445,942 144,893,111 696,373,170 140,903,906 211,217,526 200,956,821 149,260,254 449,392,128 97,649,439 55,530,014 109,720,510 117,880,026 390,669,0

!

CURRENT
Salaries:
Officers
Employees
Retirement and other benefits.
Fees—Directors and others .. .
Traveling expenses
Postage and expressage
Telephone and telegraph
Printing and supplies
Insurance
Taxes on real estate
Depreciation (buildings)
Light, heat, power, and water.
Repairs and alterations
Rent
Furniture and equipment:
Purchases
Rentals
All other
Inter-Bank expenses
Subtotal
F.R. currency
Assessment for expenses of
Board of Governors
Total.




9,965,527
119,117,557
20,933,715
1,237,972
2,831,590
28,688,476
2,495,618
10,369,493
426,780
6,184,251
5,955,960
2,400,885
1,657,983
193,349

551,112 2,053,518
7,637,329 30,043,570
1,374,205 4,924,632
253,997
101,790
414,476
184,044
1,768,982 3,385,958
113,294
565,031
722,679 1,880,540
50,886
29,858
641,815 1,080,351
205,621
737,466
147,350
350,276
97,941
245,755
51,737
7,012

684,765
5,392,314
987,835
114,147
116,716
1,150,091
95,181
541,720
17,042
179,904
76,596
91,438
299,482
7,140

655,302
8,557,885
1,505,001
91,874
184,538
2,508,842
167,507
793,363
40,487
552,381
542,475
272,359
143,669
39,581

841,449
8,099,685
1,459,594
84,530
206,251
3,496,360
198,308
800,974
32,332
230,004
160,403
197,086
81,420

4,178,220
10,061,483
4,017,802

202,824 1,125,473
629,322 1,008,180
168,816
963,527
84,104 -1,174,456

185,220
384,991
149,687
87,881

267,564
726,146
441,759
148,585

249,208
989,250
171,664
2,239

10,004

EXPENSES

675,441
977,778
8,478,208 16,804,468
1,484,005 2,813,325
105,685
76,487
287,187
318,879
2,650,930 3,659,671
296,715
282,025
926,893 1,516,722
36,640
35,406
411,081 1,081,148
989,035 1,363,318
228,919
325,075
160,243
202,946
644
66,443
514,241
804,579
214,361
111,281

384,100
2,086,738
707,101
245,050

1,572

550,179
4,255,565
750,178
72,721
210,020
1,140,328
98,574
347,093
20,211
350,961
75,145
99,660
35,844
1,468

722,298
6,698,001
1,264,008
78,938
175,219
2,198,344
167,564
745,952
32,141
500,925
496,351
238,816
65,782
4,579

176,558
620,336
204,110
60,387

120,031
453,608
165,735
41,250

600,993
739,402
256,871
77,219

818,119
6,814,466
1,222,359
78,577
192,898
1,787,520
132,774
764,393
29,652
262,735
324,711
167,876
102,733

230,716,663 14,712,823 47,916,192 10,562,150 17,639,318 17,310,761 18,376,088 32,946,680 13,761,776
20,474,404 1,286,529 3,322,472 1,384,816 1,035,850 2,402,749 1,981,549 2,898,106 1,015,930
14,198,198

688,400

3,647,200

749,900

1,273,000

734,000

893,900

2,078,400

483,000

265,389,265 16,687,752 54,885,864 12,696,866 19,948,168 20,447,510 21,251,537 37,923,186 15,260,706

619,594
815,9
5,235,591 11,100,4
980,702 2,167,8
63,026
116,2
190,848
350,5
1,613,926 3,327,5
155,385
223,2
460,062
869,1
26,974
75,1
318,614
574,3
554,599
430,2
130,365
151,6
53,704
168,4
1,591
1,5
85,371
729,645
343,897
97,797

266,6
889,2
230,2
218,6

8,788,571 15,063,403 11,661,691 21,977,2
325,330
852,712
985,655 2,982,7
332,600

624,000

815,298

1,878,5

9,446,501 16,540,115 13,462,644 26,838,4

Less reimbursement for certain
fiscal agency and other expenses
Net expenses

23,038,895

1,284,592

4,672,299

978,044

2,340,334

1,207,596

1,644,877

4,163,684

1,298,691

242,350,370 15,403,160 50,213,565 11,718,822 17,607,834 19,239,914 19,606,660 33,759,502 13,962,015

694,693

1,603,791

905,717

2,244,5

8,751,808 14,936,324 12,556,927 24,593,8

PROFIT AND LOSS
Current net earnings
Additions to current net
earnings:
Profits on sales of U.S.
Govt. securities
Profits on foreign exchange
transactions
All other
Total additions.
Deductions from current net
earnings
Net addition to or deduction
from ( —) current net earnings .

2,522,095,572 129,489,950 646,159,605 129,185,084 193,609,692 181,716,906 129,653,594 415,632,626 83,687,425 46,778,205 94,784,187 105,323,099 366,075,1

792,717

41,727

191,709

40,879

61,657

58,222

43,606

132,340

28,356

15,878

33,201

33,593

111,5-

8,049,430
154,073

394,422
2,348

2,068,703
16,343

426,620
13

724,449
3,254

418,570
572

507,114
28,370

1,175,217
80,615

273,681

185,137
609

354,175
1,732

458,817
2,697

1,062,5:
16,7

8,996,220

438,497

2,276,755

467,512

789,360

477,365

579,090

1,388,171

302,845

201,624

389,108

495,107

1,190,7

476,222

5,855

9,856

8,828

17,631

9,942

322,985

6,240

11,620

3,989

6,835

13,040

59,4i

8,519,994

432,642

2,266,899

458,683

771,728

467,422

256,104

1,381,931

291,224

197,636

382,273

482,067

1,131,3:

Net earnings before payments to
U.S. Treasury

2,530,615,568 129,922,592 648,426,504 129,643,768 194,381,-420 182,184,329 129,909,698 417,014,557 83,978,649 46,975,841 95,166,460 105,805,166 367,206,5i

Dividends paid
Payments to U.S. Treasury
(interest on F.R. notes)...

2,463,628,983 126,711,431 633,194,098 126,754,047 188,962,249 178,500,503 125,027,463 405,670,595 81,055,587 45,726,018 92,888,644 102,384,586 356,753,7

36,959,336

1,784,861

9,472,606

1,933,571

3,296,071

1,909,326

2,348,186

5,462,762

1,273,412

860,423

1,609,966

2,118,480

4,889,6

Transferred to surplus.
Surplus, January 1

30,027,250 1,426,300 5,759,800
389,400
667,850 1,302,100 5,563,1
956,150 2,123,100 1,774,500 2,534,050 5,881,200 1,649,650
599,741,400 29,116,650 154,313,500 31,825,650 53,884,600 31,074,850 37,627,900 87,359,800 20,350,300 14,085,300 26,454,700 34,463,650 79,184,5!

Surplus, December 31.

629,768,650 30,542,950 160,073,300 32,781,800 56,007,700 32,849,350 40,161,950 93,241,000 21,999,950 14,474,700 27,122,550 35,765,750 84,747,6

NOTE.—Details may not add to totals because of rounding.




8. EARNINGS AND EXPENSES OF FEDERAL RESERVE BANKS, 1914-68
(In dollars)

Period or Bank

Current
earnings

Current
expenses

Net earnings
before payments to
U.S. Treasury i

Payments to U.S. Treasury
Dividends
paid
Franchise tax

Under
Sec. 13b

Interest on
F.R. notes

Transferred
to surplus
(Sec. 13b)

Transferred
to surplus
(Sec/7)

- .-J- -_.,

All F.R. Banks,
by years:
1914-15.
1916....
1917
1918
1919....

2,173,252
5,217,998
16,128,339
67,584,417
102,380,583

2,320,586
2,273,999
5,159,727
10,959,533
19,339,633

-141,459
2,750,998
9,582,067
52,716,310
78,367,504

217,463
1,742,774
6,804,186
5,540,684
5,011,832

' "2,703,894"

1,134,234
48,334,341
70,651,778

1920....
1921....
1922....
1923....
1924....

181,296,711
122,865,866
50,498,699
50,708,566
38,340,449

28,258,030
34,463,845
29,559,049
29,764,173
28,431,126

149,294,774
82,087,225
16,497,736
12,711,286
3,718,180

5,654,018
6,119,673
6,307,035
6,552,717
6,682,496

60,724,742
59,974,466
10,850,605
3,613,056
113,646

82,916,014
15,993,086
-659,904
2,545,513
-3,077,962

1925....
1926....
1927....
1928....
1929....

41,800,706
47,599,595
43,024,484
64,052,860
70,955,496

27,528,163
27,350,182
27,518,443
26,904,810
29,691,113

9,449,066
16,611,745
13,048,249
32,122,021
36,402,741

6,915,958
7,329,169
7,754,539
8,458,463
9,583,911

59,300
818,150
249,591
2,584,659
4,283,231

2,473,808
8,464,426
5,044,119
21,078,899
22,535,597

1930....
1931
1932....
1933
1934....

36,424,044
29,701,279
50,018,817
49,487,318
48,902,813

28,342,726
27,040,664
26,291,381
29,222,837
29,241,396

7,988,182
2,972,066
22,314,244
7,957,407
15,231,409

10,268,598
10,029,760
9,282,244
8,874,262
8,781,661

17,308
2,011,418
-60,323

-2,297,724
-7,057,694
11,020,582
-916,855
6,510,071

1935....
1936....
1937....
1938....
1939....

42,751,959
37,900,639
41,233,135
36,261,428
38,500,665

31,577,443
29,874,023
28,800,614
28,911,600
28,646,855

9,437,758
8,512,433
10,801,247
9,581,954
12,243,365

8,504,974
7,829,581
7,940,966
8,019,137
8,110,462

297,667
227,448
176,625
119,524
24,579

27,695
102,880
67,304
-419,140
-425,653

2,616,352
1,862,433
4,533,977

1940....
1941
1942....
1943....
1944....
1945....
1946....
1947....
1948....
1949....

43,537,805
41,380,095
52,662,704
69,305,715
104,391,829

29,165,477
32,963,150
38,624,044
43,545,564
49,175,921

25,860,025
9,137,581
12,470,451
49,528,433
58,437,788

8,214,971
8,429,936
8,669,076
8,911,342
9,500,126

82,152
141,465
197,672
244,726
326,717

-54,456
-4,333
49,602
135,003
201,150

17,617,358
570,513
3,554,101
40,237,362
48,409,795

142,209,546
150,385,033
158,655,566
304,160,818
316,536,930

48,717,271
57,235,107
65,392,975
72,710,188
77,477,676

92,662,268
92,523,935
95,235,592
197,132,683
226,936,980

10,182,851
10,962,160
11,523,047
11,919,809
12,329,373

247,659
67,054
35,605

262,133
27,708
86,772

81,969,625
81,467,013
8,366,350
18,522,518
21,461,770




1,134,234

75,223,818
166,690,356
193,145,837

607,422
352,524

275,838,994
394,656,072
456,060,260
513,037,237
438,486,040

1950.
1951.
1952.
1953.
1954.

80,571,771
95,469,086
104,694,091
113,515,020
109,732,931

231,561,340
297,059,097
352,950,157
398,463,224
328,619,468

13,082,992
13,864,750
14,681,788
15,558,377
16,442,236

196,628,858
254,873,588
291,934,634
342,567,985
276,289,457

21,849,490
28,320,759
46,333,735
40,336,862
35,887,775

1955
1956
1957
1958.
1959.

i
I

412,487,931
595,649,092
763,347,530
742,068,150
886,226,116

110,060,023
121,182,496
131,814,003
137,721,655
144,702,706

302,162,452
474,443,160
624,392,613
604,470,670
839,770,663

17,711,937
18,904,897
20,080,527
21,197,452
22,721,687

251,740,721
401,555,581
542,708,405
524,058,650
910,649,768

32,709,794
53,982,682
61,603,682
59,214,569
-93,600,791

1960
1961
1962
1963
1964

1,103,385,257
941,648,170
1 1,048,508,335
1,151,120,060
1,343,747,303

153,882,275
161,274,575
176,136,134
187,273,357
197,395,889

963,377,684
783,855,223
872,316,422
964,461,538
1,147,077,362

23,948,225
25,569,541
27,412,241
28,912,019
30,781,548

896,816,359
687,393,382
799,365,981
879,685,219
1,582,118,614

42,613,100
70,892,300
45,538,200
55,864,300
-465,822,800

1965.
1966.
1967.
1968.

1,559,484,027
1,908,499,896
2,190,403,752
2,764,445,943

204,290,186
207,401,126
220,120,846
242,350,370

1,356,215,455
1,702,095,000
1,972,376,782
2,530,615,569

32,351,602
33,696,336
35,027,312
36,959,336

1,296,810,053
1,649,455,164
1,907,498,270
2,463,628,983

27,053,800
18,943,500
29,851,200
30,027,250

4,032,067,872 18,228,468,126

727,864,057

149,138,300

Total 1914-68.

22,188,136,324

Aggregate for each
F.R. Bank, 1914-68:
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta

1,227,238,353
5,620,335,755
1,271,877,446
1,863,698,560
1,454,600,079
1,190,831,172

27-,249,09;
86^,882,814
240,9^3,978
351,074,502
282,007,066
258,577,685

958,867,472
4,778,386,784
1,039,288,374
1,517,429,383
1,177,338,086
934,584,565

41,535,562
221,466,547
51,434,063
69,472,071
33,122,195
34,022,458

7,111,395
68,006,262
5,558,901
4,842,447
6,200,189
8,950,561

Chicago
St. Louis
Minneapolis. .
Kansas City. . ,
Dallas
San Francisco.

3,631,509,124
892,716,072
512,978,787
940,524,328
901,675,531
2,680,151,117

572,240,890
221,806,880
140,590,103
221,366,323
194,450,535
409,887,997

3,065,768,539
672,138,877
375,144,209
721,634,264
710,142,348
2,277,745,225

95,129,098
25,027,418
17,017,206
28,167,199
34,175,645
77,294,595

25,313,526
2,755,629
5,202,900
6,939,100
560,049
7,697,341

Total.

22,188,136,324

4,032,067,872

18,228,468,126

727,864,057

149,138,300

1 Current earnings less current expenses, plus or minus adjustment for profit and loss
items.
2 The $758,440,849 transferred to surplus was reduced by direct charges of $500,000
for charge-off on bank premises (1927), $139,299,557 for contributions to capital of the
Federal Deposit Insurance Corporation (1934), and $3,657 net upon elimination of Sec.




2,188,893 16,590,839,682

-3,657

758,440,849

280,843
369,116
722,406
82,930
172,493
79,264

869,166,484
4,291,648,399
934,170,322
1,373,800,348
1,099,185,565
846,098,300

135,411
-433,413
290,661
-9,906
-71,517
5,491

40,637,775
197,329,871
47,112,022
69,241,493
38,729,158
45,428,490

151,045
7,464
55,615
64,213
102,083
101,421

2,836,593,435
617,255,302
334,451,705
655,209,927
635,206,004
2,098,053,891

11,682
-26,515
64,874
-8,674
55,337
-17,089

108,569,754
27,119;578
18,351,913
31,262,500
40,043,228
94,615,067

2,188,893 16,590,839,682

-3,657

2758,440,849

13b surplus (1958), and was increased by $11,131,013 transferred from reserves for contingencies (1945), leaving a balance of $629,768,650 on Dec. 31, 1968.
NOTE.—Details may not add to totals because of rounding.

9. VOLUME OF OPERATIONS IN PRINCIPAL DEPARTMENTS OF FEDERAL
RESERVE BANKS, 1965-68
(Number in thousands; amounts in thousands of dollars)

Operation

1968

1967

1966

1965

NUMBER OF PIECES
HANDLED 1
Discounts and advances
Currency received and counted....
Coin received and counted
Checks handled :
U.S. Govt. checks
Postal money orders
All other 2
Collection items handled:
U.S. Govt. coupons paid
All other.
Issues, redemptions, and exchanges
of U.S. Govt. securities
Transfers of funds
Food stamps redeemed

11
5,561,500
10,957,259

6
5,338,781
10,958,606

16
5,232,806
9,304,120

11
5,144,345
5,855,884

554,813
195,871
5,904,929

540,065
205,343
5,419,583

504,049
217,473
5,021,454

491,848
223,337
'4,606,907

13,255
26,251

14,355
25,203

14,305
26,712

14,087
26,820

284,677
6,059
384,763

246,289
5,444
273,983

235,555
4,832
166,615

222,477
4,389
81,885

84,525,110
40,585,320
1,173,761

30,968,332
38,410,969
1,184,616

90,667,647
37,001,390
957,282

75,684,394
36,075,114
496,582

190,653,523
4,640,992
2,350,761,951

175,068,179
4,860,925
2,043,772,112

160,014,331
4,626,573
1,893,974,522

134,806,438
4,507,801
'1,633,863,858

6,765,295
19,827,053

6,693,383
15,299,519

5,916,485
12,624,804

5,380,748
10,723,571

1,008,454,073
7,865,682,832
513,618

820,283,379
6,565,594,328
368,569

793,261,958
5,555,075,862
226,508

763,248,392
4,496,230,723
116,498

AMOUNTS HANDLED
Discounts and advances
Currency received and counted
Coin received and counted
Checks handled:
U.S. Govt. checks
Postal monejr orders
All other 2
Collection items handled:
U.S. Govt. coupons paid
Allother
Issues, redemptions, and exchanges
of U.S. Govt. securities
Transfers of funds
Food stamps redeemed
r
Re vised.
1
Packaged
2

items handled as a single item are counted as one piece.
Exclusive of checks drawn on the F.R. Banks.

378



10. NUMBER AND SALARIES OF OFFICERS AND EMPLOYEES OF
FEDERAL RESERVE BANKS, DECEMBER 31, 1968

Federal Reserve
Bank (including
branches)

President

Employees

Other officers

Annual
salary

Number

$ 40,000
75,000
48,500

25
86
33

$ 487,500
2,027,500
634,500

Cleveland
Richmond
Atlanta

48,500
37,500
37,500

32
42
33

Chicago
St. Louis
Minneapolis

60,000
42,500
42,500

Kansas City
Dallas
San Francisco

Number

Annual
salaries

Annual
salaries

Total
Number

Annual
salaries

1,214 $ 8,219,847
4,240
33,151,113
971
6,251,438

606,500
792,500
574,250

1,310
1,431
1,506

8,275,989
8,397,403
8,291,146

1,343
1,474
1,540

8,930,989
9,227,403
8,902,896

46
41
28

877,500
768,500
508,000

2,741
1,154
714

16,517,408
6,767,324
4,297,130

2,788
1,196
743

17,454,908
7,578,324
4,847,630

39
35
46

676,350
570,077
780,250

1,189
951
1,835

6,659,618
5,321,726
10,902,291

1,229
987
1,882

7,381,968
5,929,303
11,732,541

$565,500

Total

1,188 $ 7,692,347
31,048,613
4,153
5,568,438
937

46,000
37,500
50,000

Boston
New York
Philadelphia

1

1

486

$9,303,427

19,109 $119,739,433 19,607 $129,608,360

Includes 1,050 part-time employees.

11. FEES AND RATES UNDER REGULATION V ON LOANS
GUARANTEED PURSUANT TO DEFENSE PRODUCTION ACT OF 1950,
DECEMBER 31, 1968
Fees Payable to Guaranteeing Agency by Financing Institution on Guaranteed Portion of Loan
Guarantee fee
(percentage of
interest payable
by borrower)

Percentage of loan guaranteed

70 or less
75
80
85
90
95
Over 95 . . .

.

.

.

.

.

Percentage of
any commitment
fee charged
borrower

10
15
20
25
30
35
40-50

10
15
20
25
30
35
40-50

Maximum Rates Financing Institution May Charge Borrower
Interest rate
Commitment rate.

iy-i per cent per annum
Vi P e r cent per annum

NOTE.—In any case in which the rate of interest on the loan is in excess of 6 per cent, the guarantee
fee shall be computed as though the interest rate were 6 per cent.




379

12. MAXIMUM INTEREST RATES PAYABLE ON TIME AND SAVINGS DEPOSITS

O

(Per cent per annum)

I

Nov. 1, 1933—July 19, 1966

Rales beginning July 20, 1966

Effective date

Effective date
Type of deposit

Type of deposit
Feb. 1,
1935

Jan. 1,
1936

Jan. 1,
1957

}

3

21/2

2i/ 2

3

/

}

3

21/2

21/2

3

Savings deposits:
12 months or more
Less than 12 months
Postal savings deposits: i
12 months or more
Less than 12 months
Other time deposits: 2
12 months or more
6 months to 12 months
90 days to 6 months
Less than 90 days
(30-89 days)

1

Jan. 1,
1962

2i/ 2

21/2

3

2i/ 2
2i/ 2

2
1

2i/ 2

/ 4
\ 31/2
21/2

July 17,
1963

i 3i/ 2

Nov. 1,
1933




July 20,
1966

Dec. 6,
1965
Savings deposits

> ;

4 \
31/2/

I 3%

4

4

4 I

4

4

4

31/2/

1 ;

Closing date for the Postal Savings System was Mar. 28, 1966.
F o r exceptions with respect to foreign time deposits, see ANNUAL REPORTS for 1962,
p. 129, and 1965, p . 233.
3
Multiple-maturity time deposits include deposits that are automatically renewable
at maturity without action by the depositor and deposits that are payable after written
notice of withdrawal.
2

Nov. 24,
1964

41/2'
4

51/2

Other time deposits: 2
Mutiple maturity: 3
90 days or more
Less than 90 days
(30-89 days)
Single maturity:
Less than $100,000
$100,000 or more:
30-59 days
)
60-89 days
90-179 days
180 days and over. . .

Sept. 26,
1966

Apr. 19,
1968

4

4

4

5
4

5
4

5
4
5

51/2

5i/2

-1

51/2
5YA

6
6V4

NOTE.—Maximum rates that may be paid by member banks as established by the
Board of Governors under provisions of Regulation Q ; however, a member bank may
not pay a rate in excess of the maximum rate payable by State banks or trust companies
on like deposits under the laws of the State in which the member bank is located. Beginning Feb. 1, 1936, maximun rates that may be paid by nonmember insured commercial
banks, as established by the F D I C , have been the same as those in effect for member
banks.

13. MARGIN REQUIREMENTS
(Per cent of market value)

Regulation

Nov. 1, 1937Feb. 4, 1945

Feb. 5, 1945July 4, 1945

July 5, 1945Jan. 20, 1946

Jan. 21, 1946Jan. 31, 1947

Regulation T:
For extension of credit by brokers and dealers on listed securities
For short sales
Regulation U:
For loans by banks on stocks...

40
50

50
50

75
75

100
100

50

75

100

40
Feb. 1, 1947Mar. 29, 1949

Regulation T:
For extension of credit by brokers and dealers on listed securities
For short sales
Regulation U:
For loans by banks on stocks...

75
75
75
Jan. 4, 1955Apr. 22, 1955

Regulation T:
For extension of credit by brokers and dealers on listed securities
For short sales
Regulation U:
For loans by banks on stocks...

Mar. 30, 1949- Jan. 17, 1951- Feb. 20, 1953Feb. 19, 1953
Jan. 3, 1955
Jan. 16, 1951

50
50

75
75

50

75

Apr. 23, 1955- Jan. 16, 1958Jan. 15, 1958
Aug. 4, 1958

60
60

70
70

60

70

Oct. 16, 1958- July 28, 1960July 9, 1962
July27, 1960
Regulation T:
For extension of credit by brokers and dealers on listed securities
For short sales
Regulation U:
For loans by banks on stocks...

50
50

50
50
50
Aug. 5, 1958Oct. 15, 1958

70
70

50

70

July 10, 1962Nov. 5, 1963

Nov. 6, 1963Mar. 10, 1968

90
90

70
70

50
50

70
70

90

70

50

70

Mar. 11,1968June7, 1968

Effective
June 8, 1968

70
50
70

80
60
80

70
50

80
60

70
50

80
60

Regulation T:
For credit extended by brokers and dealers on—
Listed stocks
Listed bonds convertible into stocks
For short sales
Regulation U:
For credit extended by banks on—
Stocks
Bonds convertible into listed stocks
Regulation G:
For credit extended by others than brokers and dealers and banks
on—
Listed stocks
Bonds convertible into listed st ocks

NOTE.—Regulations G, T, and U, prescribed in accordance with Securities Exchange Act of 1934,
limit the amount of credit to purchase and carry registered equity securities that may be extended on
securities as collateral by prescribing a maximum loan value, which is a specified percentage of the
market value of the collateral at the time the credit is extended; margin requirements are the difference
between the market value (100 per cent) and the maximum loan value.
Regulation G and special margin requirements for bonds convertible into stocks were adopted by
the Board of Governors effective Mar. 11, 1968.
For earlier data, see Banking and Monetary Statistics, 1943, Table 145, p. 504.




381

14. MEMBER BANK RESERVE REQUIREMENTS
(Per cent of deposits)
Through July 13 1966
Net demand deposits 2
Effective date 1
Central reserve Reserve city
city banks 3
banks
21
16
1
1
16
1
20
14
3
27
11
24, 16
5, 1
30, July 1
1
11, 16
18
25
1
11, 16
25, Feb. 1 . .
9,1
24, 16
29, Aug. 1..
27, Mar. 1..
20, Apr. 1 . .
17
24
1
24
1
28
25, Nov. 1..

13
19%
22%
26

51/4

6
5
6

6
5
6

16
15
14
13
12

7%

7%

13
14
13

6
5

5

4

4

12
14

22
21
20

\l'

IS*

Country
banks
3
4%

k

\l*

A

23
24
22
21
20

Central reserve and
reserve city banks 3

7
10%

10
15
17%
20

8*
24
22
20
22
24
26
24

Country
banks

ON

1917—June
1936—Aug.
1937—Mar.
May
1938—Apr.
1941—Nov.
1942—Aug.
Sept.
Oct.
1948—Feb.
June
Sept.
1949—May
June
Aug
Aug.
Aug.
Aug.
Sept.
1951—Jan.
Jan.
1953—July
1954—June
July
1958—Feb.
Mar.
Apr.
Apr.
1960—Sept.
Nov
Dec.
1962—July
Oct.

Time deposits

!§*

19
20
19
18
17%
17

6

12
11%
11

6

5

5

16%
12

ft*4

Beginning July 14, 1966
Time deposits 4
(all classes of banks)

Net demand
deposits 2

Effective date

1

1966—July 14 21
Sept 8 15

Reserve
city banks

Country
banks

M6V4

5 12

Other
Savtime deposits
ings
deposits
Under Over
Under Over Under Over
$5 mil- $5 mil$5 mil- $5 mil- $5 mil- $5 million
lion
lion
lion
lion
lion
54

1967_Mar. 2
Mar 1 (
>
1968—Jan

11 18

In effect Dec. 31, 1968
Legal requirements—Dec. 31, 1968:
Minimum....
...
Ivlaximum
For notes see opposite page.

382



54

5
6

I*
16%

17

12

17

12

12%

3

3

6

3
10

3
10

3
10

121A

16%

3%

10
22

7
14

15. FEDERAL RESERVE BANK DISCOUNT RATES, DECEMBER 31, 1968
(Per cent per annum)
Discounts for and advances to member banks
Federal Reserve
Bank

Advances and
discounts under
Sees. 13 and 13a i

Advances under
Sec. 10(b) 2

Advances to all others
under last par. Sec. 13 3

Boston
New York
Philadelphia

51/2
51/2
51/2

6
6
6

61/2

Cleveland
Richmond
Atlanta

51/2
51/2
51/2

6
6
6

7

Chicago
St. Louis
Minneapolis

51/2
51/2
5i/i

6
6
6

61/2
61/2
61/2

Kansas City
Dallas
San Francisco

5i/2
51/2
51/2

6
6
6

6%

61/2
61/2
61/2

1

Discounts of eligible paper and advances secured by such paper or by U.S. Govt. obligations or
any other obligations eligible for Federal Reserve Bank purchase. Rates shown also apply to advances
secured by obligations of Federal intermediate credit banks maturing within 6 months. Maximum
maturity: 90 days except that discounts of certain bankers' acceptances and of agricultural paper may
have maturities not over 6 months and 9 months, respectively, and advances secured by Federal intermediate credit bank obligations are limited to 15 days.
2
Advances secured to the satisfaction of the F.R. Bank. Maximum maturity: 4 months.
3
Advances to individuals, partnerships, or corporations other than member banks secured by direct
obligations of, or obligations fully guaranteed as to principal and interest by, the U.S. Govt. or any
agency thereof. Maximum maturity: 90 days.

Notes to Table 14 on opposite page.
1 When two dates are shown, the first applies to the change at central reserve or reserve city banks
and the second to the change at country banks.
2
Demand deposits subject to reserve requirements, which, beginning with Aug. 23, 1935, have been
total demand deposits minus cash items in process of collection and demand balances due from domestic
banks (also minus war loan and Series E bond accounts during the period Apr. 13, 1943—June 30,
1947).
3
Authority of the Board of Governors to classify or reclassify cities as central reserve cities was
terminated effective July 28, 1962.
4 Effective Jan. 5, 1967, time deposits such as Christmas and vacation club accounts became subject
to same requirements as savings deposits.
5 See columns above for earliest effective date of this rate.
NOTE.—All required reserves were held on deposit with F.R. Banks, June 21, 1917, until late 1959.
Since then, member banks have also been allowed to count vault cash as reserves, as follows: country
banks—in excess of 4 and 2% per cent of net demand deposits effective Dec. 1, 1959, and Aug. 25,
1960, respectively; central reserve city and reserve city banks—in excess of 2 and 1 per cent effective
Dec. 3, 1959, and Sept. 1, 1960, respectively; all member banks were allowed to count all vault cash
as reserves effective Nov. 24, 1960.




383

16. MEMBER BANK RESERVES, FEDERAL RESERVE BANK CREDIT, AND RELATED ITEMS—END OF YEAR 1918-68 AND END OF MONTH 1968

00

(In millions of dollars)
Factors absorbing reserve funds

Factors supplying reserve funds
I

F.R. Bank credit outstanding
Period

U.S. Govt. securities

Total

Gold^
stock 2

Bought
outright

Discounts
Repur- and
adchase
agree- vances
ments

Float

All
other

Total

Treasury
currency
outstanding 3

Currency
circulation

Treasury
cash
holdings *

Deposits
other than member
bank reserves,
with F.R. Banks
Treas- Forury
eign

1918.
1919.

239
300

239
300

1,766
2,215

199
201

294
575

2,498
3,292

2,873
2,707

1,795
1,707

4,951
5,091

288
385

51
31

1920.
1921.
1922.
1923.
1924.

287
234
436
134
540

287
234
436
80
536

2,687
1,144
618
723
320

119
40
78
27
52

262
146
273
355
390

3,355
' ,563
,405
,238
,302

2,639
3,373
3,642
3,957
4,212

1,709
1,842
1,958
2,009
2,025

5,325
4,403
4,530
4,757
4,760

218
214
225
213
211

57
96
11
38
51

96
73
5
12
3
4
19

1925.
1926.
1927.
1928.
1929.

375
315
617
228
511

367
312
560
197
488

3
57
31
23

643
637
582
1,056
632

63
45
63
24
34

378
384
393
500
405

,459
,381
,655
,809
,583

4,112
4,205
4,092
3,854
3,997

1,977
1,991
2,006
2,012
2,022

4,817
4,808
4,716
4,686
4,578

203
201
208
202
216

16
17
18
23
29

1930.
1931.
1932.
1933.
1934.

729
817
1,855
2,437
2,430

686
775
1,851
2,435
2,430

43
42
4
2

251
638
235
98
7

21
20
14
15
5

372
378
41
137
21

,373
,853
2,145

2,688
2,463

4,306
4,173
4,226
4,036
8,238

2,027
2,035
2,204
2,303
2,511

4,603
5,360
5,388
5,519
5,536

211
222
272
284
3,029

1935.
1936.
1937.
1938.
1939.

2,431
2,430
2,564
2,564
2,484

2,430
2,430
2,564
2,564
2,484

5
3
10
4
7

12
39
19
17
91

38
28
19
16
11

2,486
2,500
2,612
2,601
2,593

10,125
11,258
12,760
14,512
17,644

2,476
2,532
2,637
2,798
2,963

5,882
6,543
6,550
6,856
7,598

1940.
1941.
1942.
1943.
1944.

2,184
2,254
6,189
11,543
18,846

2,184
2,254
6,189
11,543
18,846

3
3
6
5
80

94
471
681
815

8
10
14
10
4

2,274
2,361
6,679
12,239
19,745

21,995
22,111
22,726
21,938
20,619

3,087
3,247
3,648
4,094
4,131

1945.
1946.
1947.

24,262
23,350
22,559

24,262
23,350
22,559

249
163
85

578
580
535

2
1
1

25,091
24,093
23,181

20,065
20,529
22,754

4,339
4,562
4,562




Oth-

Member bank reserves
Other
F.R.
ac- !
counts 5
With
F.R.
Banks

Currency
and
coin 6

Required

7

1,585
1,822

25
28

118
208

,636
,890

18
15
26
19
20

298
285
276
275
258

46
5
6
6

21
19
21
21
24

272
293
301
348
393

,781
,753
,934
,898
2,220
2,212
2,194
2,487
2,389
2,355

19
54
8
3
121

6
79
19
4
20

22
31
24
128
169

375
354
355
360
241

2,471
1,961
2,509
2,729
4,096

2,375
1,994
1,933
1,870
2,282

2,566
2,376
3,619
2,706
2,409

544
244
142
923
634

29
99
172
199
397

226
160
235
242
256

253
261
263
260
251

5,587
6,606
7,027
8,724
11,653

2,743
4,622
5,815
5,519
6,444

8,732
11,160
15,410
20,449
25,307

2,213
2,215
2,193
2,303
2,375

368 ,133
774
867
799
793
579 ,360
440 1,204

599
586
485
356
394

284
291
256
339
402

14,026
12,450
13,117
12,886
14,373

7,411
9,365
11,129
11,650
12,748

28,515
28,952
28,868

2,287
2,272
1,336

977
393
870

862
508
392

446
314
569

495
607
563

15,915
16,139
17,899

14,457
15,577
16,400

1,654
1,884
2,161
2,256
2,250
2,424
2,430
2,428

1
2
3
5
4
2
1

24,097
19,499

24,244
24,427

4,589
4,598

28,224
27,600

,325 1,123
,312 821

642
767

547
750

590
706

20,479
16,568

19 ,277 1,202
15 ,550 1,018

67
19
156
28
143

541
534
1,368
1,184
967
935
808

22,216
25,009
25,825
26,880
25,885

22,706
22,695
23,187
22,030
21,713

4,636
4,709
4,812
4,894
4,985

27,741
29,206
30,433
30,781
30,509

,293
,270
,270
761
796

668
247
389
346
563

895
526
550
423
490

565
363
455
493
441

714
746
777
839
907

17,681
20,056
19,950
20,160
18,876

16,509 1,172
19,667
389
20 520 — 570
19,397
763
18,618
258

394
305
519
95
41

108
50
55
64
458

1,585
1,665
1,424
1,296
1,590

29
70
66
49
75

26,507
26,699
25,784
27,755
28,771

21,690
21,949
22,781
20,534
19,456

5,008
5,066
5,146
5,234
5,311

31,158
31,790
31,834
32,193
32,591

767
775
761
683
391

394
441
481
358
504

402
322
356
272
345

554
426
246
391
694

925
901
998
1,122
841

19,005
19,059
19,034
18,504
18,174

18 903
102
19,089 -30
19,091 -57
18,574 -70
18 619 -135

26,984
28,722
30,478
33,582
36,506

400
159
342
11
538

33
130
38
63
186

1,847
2,300
2,903
2,600
2,606

74
51
110
162
94

29,338
31,362
33,871
36,418
39,930

17,767
16,889
15,978
15,513
15,388

5,398
5,585
5,567
5,578
5,405

32,869
33,918
35,338
37,692
39,619

377
422
380
361
612

485
465
597
880
820

217
279
247
171
229

533
320
393
291
321

941
1,044
1,007
1,065
1,036

17,081
17,387
17,454
17,049
18,086

2 ,544
2,823
3,262
4,099
4,151

18
20
20
20
21

40,478
43,655
48,980

290
661
170

137
173
141

2,248
2,495
2,576

187
193
164

43,340
47,177
52,031

13,733
13,159
11,982

5,575
6,317
6,784

42,056
44,663
47,226

760
668
1,176
416
1,344 1,123

150
174
135

355
588
653

211
-147
-773

18,447
19,779
21,092

4,163
4,310
4,631

22 848 -238
24 321 -232
25 905 -182

48,855
48,952
49,631
50,242
50,625
52,230
52,160
53,044
52,839
53,329
53,350
52,937

237

843
166
672
741
1,026
305
736
529
390
179
471
188

1,416
1,882
1,617
1,265
1,714
1,941
1,648
1,851
1,004
2,373
2,381
3,361

83
56
90
87
56
134
99
51
86
56
58
58

51,434
51,056
52,127
52,612
53,421
54,610
54,880
55,475
54,768
55,737
56,260
56,544

11,984
11,883
10,484
10,484
10,384
10,367
10,367
10,367
10,367
10,367
10,367
10,367

6,789
6,798
6,791
6,790
6,790
6,708
6,710
6,724
6,743
6,766
6,786
6,814

45,819
45,846
46,297
46,621
47,202
47,640
41,919
48,353
48,340
48,719
49,989
50,922

1,338
1,265
1,084
1,070
990
838
803
776
772
754
742
752

,153
1,197
581
1,035
956
1,074
,113
916
1,036
1,086
478
703

160
192
197
140
422
153
202
127
192
99
220
216

463
456
703
489
490
507
479
463
485
434
436
747

-564
-415
-593
-689
-797
9
-320
109
-246
-356
-1,019
-1,352

21,838
21,195
21,133
21,221
21,334
21,462
21,702
21,822
21,297
22,334
22,567
21,737

5,025
4,948
3,936
4,740
4,668
4,005
5,096
4,139
4,704
4,590
4,628
4,918

25 504
25 428
25,041
25,248
24,968
25,689
25,908
25,647
26,004
26, 162
26,380
27,433

1948...
1949...

23,333
18,885

23,333
18,885

1950...
1951...
1952...
1953...
1954...

20,778
23,801
24,697
25,916
24,932

20,725
23,605
24,034
25,318
24,888

53
196
663
598
44

1955.. . 24,785
1956...
24,915
1957...
24,238
1958... I 26,347
1959.. . ' 26,648

24,391
24,610
23,719
26,252
26,607

1960...
1961.. .
1962...
1963...
1964...

27,384
28,881
30,820
33,593
37,044

1965...
1966...
1967...

40,768
44,316
49,150

1968—
Jan...
Feb...
Mar..
Apr...
May..
June..
July..
Aug..
Sept..
Oct...
Nov..
Dec...

. 49,092
*
. 48,952
1
i 49,748
.1 50,519
• I 50,625
.! 52,230
• r 52,397
. 53,044
.. 53,288
. 53,329
. 53,350
. 52,937

223
78

117
277
237
449

1
Principally acceptances and industrial loans; authority for industrial loans expired
Aug. 21,1959.




"iio*

988
114
071
677
663

637
96
645
471
574

1,359
715
28
713
1,034
-222
890
314
-3
762
815
-778

the following coin and paper currency held in the Treasury; subsidiary silver and minor
coin, United States notes, F.R. notes, F.R. Bank notes, and national bank notes.
5 The total of F.R. Bank capital paid in, surplus, other capital accounts, and other
liabilities and accrued dividends, less the sum of bank premises and other assets.
6 Part allowed as reserves Dec. 1, 1959-Nov. 23, 1960; all allowed thereafter.
7 These figures are estimated through 1958. Before 1929 available only on call dates
(in 1920 and 1922, the call dates were Dec. 29).
NOTE.—For description of figures and discussion of their significance, see "Member
Bank Reserves and Related Items," Section 10 of Supplement to Banking and Monetary
Statistics, Jan. 1962.

17. PRINCIPAL ASSETS AND LIABILITIES, AND NUMBER OF COMMERCIAL AND MUTUAL SAVINGS BANKS, BY CLASS OF BANK,
DECEMBER 31, 1968, AND DECEMBER 30, 1967
(In millions of dollars)

as

December 31, 1968
Loans and investments, total
Loans
Investments
U.S. Govt. securities...
Other securities
Cash assets

471,382
321,278
150,103
68,284
81,819
84,748

402,477
266,475
136,001
64,465
71,536
83,752

326,023
221,222
104,801
47,881
56,920
73,756

236,129
159,257
76,872
35,300
41,572
50,953

89,894
61,965
27,929
12,581
15,348
22,803

76,454
45,253
31,200
16,584
14,616
9,996

73,553
43,378
30,175
16,155
14,020
9,305

2,901
1,875

Deposits, total
Interbank
Other demand
Other time
Total capital accounts

500,160
24,696
206,502
268,962
42,275

435,238
24,694
205,991
204,553
37,006

356,351
23,540
169,125
163,686
30,060

257,884
15,303
119,904
122,677
21,524

98,467
8,237
49,221
41,009
8,536

78,887
1,154
36,866
40,867
6,946

14,179

13,679

5,978

4,716

1,262

7,701

Number of banks

429
596
691

68,905
54,803
14,102
3,819
10,283
996

60,088
48,286
11,803
2,855
8,948
883

8,817
6,518
2,299
964
1,335
113

76,368
960
35,344
40,064
6,482
7,504

2,519
194
1,522
803
464

64,922
2
511
64,409
5,269

56,859
2
490
56,367
4,481

'""ii"

197

500

333

167

1,025

8,062

8,041
788

December 30, 1967
Loans and investments, total
Loans
Investments
U.S. Govt. securities
Other securities
Cash assets

425,417
288,826
136,591
66,752
69,839
78,924

361,186
237,237
123,950
62,473
61,477
77,928

294,098
197,827
96,271
46,956
49,315
68,946

208,971
139,315
69,656
34,308
35,348
46,634

85,127
58,513
26,615
12,649
13,966
22,312

67,087
39,409
27,678
15,516
12,162
8,983

64,449
37,675
26,775
15,146
11,629
8,403

2,638
1,735
903
370
533
579

64,232
51,590
12,642
4,280
8,362
996

55,936
45,489
10,447
3,111
7,336
881

8,295
6,100
2,195
1,169
1,026
115

Deposits, total
Interbank
Other demand
Other time
Total capital accounts

456,784
21,889
190,817
244,077
39,371

396,291
21,888
190,362
184,041
34,384

327,011
20,880
157,508
148,624
28,098

231,374
13,963
109,632
107,779
19,730

95,637
6,916
47,876
40,845
8,368

69,279
1,009
32,854
35,417
6,286

67,107
831
31,630
34,645
5,830

2,172
177
1,224
772
457

60,494
1
456
60,038
4,987

52,910
1
435
52,475
4,237

7,584

14,223

13,722

6,071

4,758

1,313

7,651

7,440

211

501

331

170

Number of banks
NOTE.—All banks in the United States.




21
7,563
749

18. MEMBER BANK INCOME, EXPENSES, AND DIVIDENDS, BY CLASS
OF BANK, 1968 AND 1967

Item

In millions of dollars
Revenue
On U.S. Govt.
securities
On other securities
On loans
All other

J20,819 17,859 3,675 3,080

889

763 7,777 6,673 8,479 7,344

2,208
1,929
14,143
2,540

245
1,934
268
232
280
1,561
12,128 2,599 2,159
444
2,236
527

83
72
612
121

69
611 1,170 1,009
686
60
578
701
875
691
5,389 4,598 5,543 4,843
527
106 1,000
885
898
800

Expenses.
Salaries and wages
Interest on deposits....
All other

15,758
4,730
7,108
3 919

13,507 2,640 2,189
666
4,211
780
6,091 1,175 1,037
485
685
3,205

642
164
327
152

558
150
274
134

891

246

205 1,827 1,580 1,953 1,676

36
109

14
66

21
25

119
424

163
315

166
442

179
358

98

15

11

124

96

130

123

721
237
484
284

179
55
124
56

Net current earnings before
income taxes

5,061 4,353 1,035

1
359
Recoveries and profits 2...
Losses and charge-offs . . 1,185
Net increase (or decrease,
-+-) in valuation reserves.
377
Net income before related
taxes
3 859
1,054
Taxes on net income
2,805
Net income
3
Cash dividends declared .. 1,385

398
807
327
3,616
1,007
2,607
1,248

60
253
107
734
228
506
320

5,950
1,769
2,708
1,474

5,092
1,572
2,331
1,190

6,525
2,018
2,899
1,609

5,667
1,823
2,449
1,396

362
351
374
58
396
189 1,398 1,332 1,547 1,375
970 1,151 1,024
131 1,024
52
493
463
420
546

In per cent
Ratios:
Net current earnings
before income taxes
toAverage total capital
accounts
17.4 16.0 17.3 16.1 17.8 16.3 17.6 16.2 17.2 15.7
1.40 1.33 1.29
1.22
1.21
1.28
Average total assets. . 1.30 1.24 1.34 1.31
Net income to—
Average total capital
9.6
8.5
8.7
9.0 10.4
9.9 10.1
9.6
9.9
9.6
accounts
.72
.74
.85
.72
.75
.74
Average total assets...
.74
.65
.71
.76
Average return on—
U.S. Govt. securities.. 4.78 4.48 4.71 4.60 4.79 4.41 4.81 4.56 4.77 4.41
6.82 6.39 6.41 5.81 6.38 5.88 6.90 6.45 7.01 6.69
Loans
1
2
3

Includes recoveries credited to valuation reserves.
Includes losses charged to valuation reserves.
Includes interest on capital notes and debentures.




387

19. CHANGES IN NUMBER OF BANKING OFFICES IN THE
UNITED STATES DURING 19681
Commercial banks (incl. stock savings
banks and nondeposit trust companies)
Type of office
and change

All
banks

Member
Total

Number of banks,
Dec. 31,1967

14,222 13,721

Nonmember

National ! State2

Total
6,071

4,758

Mutual
savings
banks

NoninInsured 2 sured

Insured

1,313

7,439

Noninsured

211

331

64

8

2

-56
-4

-3
2

-1

170

Changes during 1968
Newbanks3
Consolidations and absorptions :
Banks converted into
branches
Other
Reopening of suspended bank
Interclass changes:
Nonmember to—
National
State member
State member to— l
National
Nonmember
National to—
Nonmember
*
Noninsured to in- sured
*
Insured to noninsured
Net change

89

87

-122
-11

-120
-10

15

-61
-4

14

-54
-3

1

-7
-1

j

1
6
3

6
3
7

— 40
-12

—6
-3

n

— 40

40

-12

12
19

-19

1

—1

1
-14

2

-3

-42

-93

-42

-51

—1
65

Number of banks
Dec. 31,1968

14,179 13,679

5,978

4,716

1,262

7,504

197

333

167

Number of branches and
additional offices,
Dec. 31, 19674

18,519 17,690

13,649

9,991

3,658

3,995

46

669

160

i

60
1
-2

9
1

-1

>

—43

Changes during 1968
De novo

Banks converted
Discontinued
Interclass changes:
Nonmember to—
National
State member
State member to—

1,105

1,036

122
-77

120
-75

684
77

488
66

-68

-39

40

40

14

196
11
-29

14

287

-287
-24

-14
-26

14

-24

National to—
-26

Noninsured to in- |

351
43

-7
-40
-14
24

26
1

Facilities reclassified as
branches
;

6

6

6

4

2

1,156

1,087

703

806

-103

384

Number of branches and
additional offices,
j
Dec. 31,19684
19,675 18,777 14,352 10,797

3,555

4,379

i

Net change

For notes see end of table.

388



60

46

9

729

169

19. CHANGES IN NUMBER OF BANKING OFFICES IN THE
UNITED STATES DURING 19681—Continued
Commercial banks (incl. stock savings
banks and nondeposit trust companies)
Type of office
and change

All
banks

Member
Total

National i State 2

Total

Number of banking facilities, Dec. 31,1967 5

238

238

Nonmember

207

192

Noninsured 2

Insured

Mutual
savings
banks

Insured

Noninsured

31

15

Changes during 1968
Established
Discontinued
Interclass changes:
State member to
national
...
National to non-,

10
—6

6
-5

5
-5

1

10
-6

1

1

1

4
-1

-1
1

Facilities reclassified as
branches

—6

-6

-6

-4

-2

Net change

—2

-2

-6

-4

-2

4

Number of banking facilities, Dec. 31,1968

236

236

201

188

13

35

1 Includes a national bank (6 branches) in the Virgin Islands; other banks or branches located in the
possessions are excluded.
2
State member bank figures include, while noninsured bank figures exclude, 1 noninsured trust
company without deposits.
3 Exclusive of new banks organized to succeed operating banks.
4
Excludes banking facilities.
5 Provided at military and other Government establishments through arrangements made by the
Treasury.




389

10. NUMBER OF PAR AND NONPAR BANKING OFFICES,
DECEMBER 31, 1968
Par
Total

F.R. district,
State, or
other area

Nonpar
(nonmember)
Nonmember

Member

Total

Branches
Branches
Branches
Branches
Banks & offices Banks Branches Banks & offices Banks & offices Banks & offices
& offices

DISTRICT
Boston
New York
Philadelphia. .
Cleveland
Richmond....
Atlanta
Chicago
St. Louis
Minneapolis. .
Kansas City...
Dallas
San Francisco.
Total

380
491
492
816
777
1,590
2,550
1,506
1,357
1,931
1 291
'417
:13,598

STATE

1,396
3,104
1,303
1,742
2,566
1,190
2,049
764
256
250
267
4,299

380
491
492
816
715
1,164
2,550
1,309
1,176
1,931
1,226
416

19,186 12,666

1,396
3,104
1,303
1,742
2,502
1,069
2,049
705
194
250
255
4,299

243
374
359
484
378
536
974
474
489
833
651
182

137
1,072
117
2,722
133
953
332
1,476
337
1,613
628
803
1,370 1,576
835
432
687
117
156 1,098
575
150
234
3,718

324
382
350
266
889
266
679
273
77
94
105
581

18,868 5,977

14,582 6,689

4,286

62
426

64
121

197
181

59
62
12

932

318

;

Alabama
Alaska
Arizona
Arkansas
California....
Colorado
Connecticut...
Delaware
District of
Columbia...
Florida

268
12
13
248
156
218
64
19

Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine

14
455
'
;
I

J
?
!

:
>
'

221
55
278
124
2,784
10
376
78

111
5
4
81
82
135
35
7

182
46
208
97
2,513
6
302
37

94
6
9
89
74
83
29
12

39
9
70
27
271
4
74
41

100
14
430
24
246
212
12:
7
14:
26
45 1,071
577
414
281
672
61
601
286
346
329
128
19
40

428
7
26
071
414
672
601
346
229
40

205
11
13
170
156
218
64
19

100
24
230
122
142
45
577
281
61
286
273
19

12
212

93
13

2
218

7
11

74
2
16
511
197
159
210
94
58
27

186
43
128
36
373
73
37
173
191
144

138
5
10
560
217
513
391
252
70
13

44
79
14
9
204
208
24
113
82
53

122
157
338
722
87
632
134
436
9

469
68:
1,099
10
224

55
103
208
223
46
174
88
139
6

29:
545
910
6

67
54
130
499
41
458
46
297
3

177
137
189
4
92
45

236
55
278
141
2,784
10
376
78

469
682
1,099
10
296

15
78

25
216

16

101

56

Maryland
Massachusetts.^
Michigan
:
Minnesota.... i
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire

122
157
338
722
185
664
134
436
9
76

41

76

41

53

35

23

New Jersey...
New Mexico..
New York
North
Carolina
North
Dakota
Ohio
Oklahoma....
Oregon
Pennsylvania..
Rhode Island..

226
63
316

796
114
2,208

226
63
316

796
114
2,208

183
39
254

694
66
2,097

43
24
62

102
48
Mil

117

933

79

872

26

458

53

414

61

168
525
423
50
504
13

69
1,130
56
306
1,521
158

77
525
423
50
504
13

29
1,130
56
306
1,521
158

16
156
11
58
348
70

40

974
45
248
1,173
88

31
181
180
31
146
8

3'
7

For notes see end of table.

390




37
7

46
344
243
358

13:
40
c

21
67

72

20. NUMBER OF PAR AND NONPAR BANKING OFFICES,
DECEMBER 31, 1968—Continued
Par
F.R. district,
State, or
other area

Total

Total

Member

Nonmember

Nonpar
(nonmember)

Banks Branches Banks Branches Banks Branches Banks Branches Banks Branches
& offices
& offices
& offices
& offices
& offices

STATE—
Cont.
South
Carolina....
South Dakota.
Tennessee....
Texas
Utah
Vermont
Virginia
Washington...
West Virginia.
Wisconsin....
Wyoming

94
350
75
91
249
417
63 1,127
54
115
44
71
237
711
94
487
195
4
602
223
70

347
69
401
63
115
71
711
487
4
223
1

12

174

12

174

7

19

7

19

118
165
302
1,149
54
44
237
94
195
602
70

30
58
87
596
20
27
152
35
114
166
53

223
56
278
28
85
41
545
431
2
66
1

64
17
162
531
34
17
85
59
81
436
17

124
13
123
35
30
30
166
56
2
157

17

12

157

1

19

6

24
90
53
22

3
22
16

OTHER
AREA
Puerto Rico 2..
Virgin
Islands 2 ....

1 Includes 8 N.Y.C. branches of 2 insured nonmember Puerto Rican banks.
2
Puerto Rico and the Virgin Islands assigned to the N.Y. District for check clearing and collection
purposes. All member branches in Puerto Rico and all except 6 in the Virgin Islands are branches of
N.Y.C. banks. Certain branches of Canadian banks (2 in Puerto Rico and 1 in Virgin Islands) are
included above as nonmember banks; and nonmember branches in Puerto Rico include 8 other branches
of Canadian banks.
NOTE.—Comprises all commercial banking offices on which checks are drawn, including 236 banking
facilities. Number of banks and branches differs from that in Table 19 because this table includes
banks in Puerto Rico and the Virgin Islands but excludes banks and trust companies on which no
checks are drawn.




391

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968

OTHER BANK OR BANKS

Page

Bank of Virginia, Richmond, Va.

Peoples Bank of Reedville, Reedville, Va.
Peoples Bank of White Stone,
White Stone, Va.

394

Bankers Trust Company, New
York, N.Y.
Chemical Bank New York Trust
Company, New York, N.Y.

Northern Westchester National
Bank, Chappaqua, N.Y.
Chemical Bank, New York, N.Y.
(and change its title to Chemical
Bank, New York, N.Y.)

405
412

Citizens State Bank, Sturgis, Mich.

E. Hill & Sons State Bank & Trust
Company, Colon, Mich.

402

Colonial Bank and Trust Company,
Waterbury, Conn.
Fidelity Bank, Philadelphia, Pa.

Litchfield County National Bank,
New Milford, Conn.

407

Doylestown Trust Company,

399

APPLICANT BANK

Girard Trust Company, Philadelphia, Pa.

Doylestown, Pa.
Chestnut Street Trust Company,
Philadelphia, Pa.
Doylestown National Bank and
Trust Company, Doylestown, Pa.

Kingston Trust Company, Kingston,
N.Y.
Marine Midland Trust Company of
RockXand Cowaty, Nyack, N.Y.

Kerhonkson National Bank, Kerhonkson, N.Y.
Lafayette Bank and Trust Company
of Suffern, Suffern, N.Y.

Merrill Trust Company, Bangor,
Maine

Hammond Street Trust Company,
Bangor, Maine
Hampshire Bank, Hampshire, Tenn.

410

Wachovia Bank and Trust Company, Winston-Salem, N.C.

State Bank, Laurinburg, N.C.

397

Wells Fargo Batik, San Francisco,
Calif.

Bank of Pasadena, Pasadena, Calif.

393

First Pennsylvania Banking and
Trust Company, Philadelphia, Pa.

Middle Tennessee Bank, Columbia,
Tenn.

392



413
399
403
409
396

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 1

Name of bank, and type of transaction 2
(in chronological order of determination)

BankingI offices
Resources
(in millions
of dollars)

In

operation
No. 1—Wells Fargo Bank,
San Francisco, Calif.,
to merge with
Bank of Pasadena,
Pasadena, Calif.

4,274.0

To be
operated

234
236

10.8

2

J

SUMMARY REPORT BY THE ATTORNEY GENERAL (1-10-68)

Wells Fargo—the third largest bank in California—proposes to acquire
by merger the Bank of Pasadena. The latter is a growing institution in a
predominantly suburban community in Los Angeles County.
Until December 1967, Wells Fargo's offices were confined to the northern and central parts of the State, while Bank of Pasadena's were in Los
Angeles County in the southern part of the State. However, on December
4, 1967, Wells Fargo officially opened its previously approved de novo
southern headquarters office on Pershing Square in downtown Los Angeles.
This office, manned by a substantial staff (95 employees), is only 10 miles
from Bank of Pasadena's main office and 9 miles from its existing branch
office. Substantial numbers of people in Pasadena commute to downtown
Los Angeles to work; and many of these Pasadena customers may find
Wells Fargo's new office a competitive banking alternative. In addition,
Wells Fargo already has substantial amounts of trust business and loan
participations from customers in the Los Angeles area, and at least some
of this existing business is no doubt already directly competitive with the
Bank of Pasadena. In sum, the amount of direct competition between Wells
Fargo and Bank of Pasadena—while not precisely measurable at the
moment—can be expected to increase in the foreseeable future. The increase
would be particularly great if Wells Fargo, a new banking entrant into
southern California, were to branch de novo into Pasadena itself. The Pasadena area (for which market share data is not presently available) is already
dominated by branch offices of the large bank networks. The merger would
eliminate 1 of only 4 independent banks in the area. Thus, existing and
potential competition would be eliminated by the proposed merger.
Banking concentration in the Los Angeles Standard Metropolitan Statistical Area (Los Angeles County) is high; 85.1 per cent of the deposits are
held by the 5 largest banks. The effect of this merger on concentration in
the Los Angeles SMSA is not yet measurable since the new Wells Fargo
Office there has just recently been opened. Bank of Pasadena has about 0.1
per cent of the total deposits in this entire SMSA. The merger's effect on
present concentration in the entire SMSA—clearly too broad an area to
constitute the appropriate market here—would be small.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (3-7-68)

Pasadena Bank operates its main office in Pasadena, 10 miles northeast
of Los Angeles, and its single branch in South Pasadena, 3.5 miles south.
Wells Fargo operates 1 branch (established in December 1967) in Los
Angeles, 8 miles southwest of Pasadena Bank's branch. Its remaining 233
offices are all located at a distance of 200 miles or more from Los Angeles.
For notes see p. 413.




393

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)

Banking offices
Resources
(in millions
of dollars)

In
operation

To be
operated

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS—Cont.

In the area from which Pasadena Bank derives the preponderance of its
business, there are 78 offices of 11 banks, including 58 offices operated by
5 of California's 7 largest banks. These 5 banks hold 83 per cent of the
commercial bank deposits and operate 73 per cent of the commercial banking offices, in the area. In Los Angeles County they hold 85 per cent of the
commercial bank deposits and operate 76 per cent of the commercial banking offices. The 7 largest banks in California hold nearly 85 per cent of all
commercial bank deposits in the State; Wells Fargo, with 9.7 per cent of
such deposits, ranks third. It seems unlikely that meaningful competition
exists between Pasadena Bank and the recently established Los Angeles
branch of Wells Fargo.
Pasadena Bank, which began operations on April 22, 1963, has been
without a president since April 11, 1967. The task of filling this post, as
well as that of attracting other needed management personnel, is perhaps
made difficult by other problems of the bank. In 1966 its earnings were
comparable to the average for similar sized member banks in California; in
1967, however, its earnings decreased by 8.5 per cent. Pasadena Bank holds
a large volume of poor quality loans, and the bank's capital is lower than is
desirable.
While the existence of feasible alternative solutions cannot be entirely
ruled out, the proposed merger would immediately resolve the managerial
and other problems of Pasadena Bank, which is in the interests of the community the bank serves.

No. 2—The Bank of Virginia,
Richmond, Va.
to merge with
The Peoples Bank of Reedville,
Reedville, Va., and
The Peoples Bank of White Stone,
White Stone, Va.

292.1

33

2
3.5

36

1

SUMMARY REPORT BY THE ATTORNEY GENERAL (2-8-68)

The Bank of Virginia, which has total deposits of $259 million, proposes
to merge with 2 small banks in eastern Virginia—The Peoples Bank of
Reedville (hereinafter Reedville Bank) and The Peoples Bank of White
Stone (hereinafter White Stone Bank).
Reedville Bank is located in Reedville in Northumberland County (1960
population 10,185), and has a branch office in Burgess. White Stone Bank
is located in the small town of White Stone, Lancaster County (1960 population 9,174). Lancaster and Northumberland are contiguous counties lying
on the Chesapeake Bay end of the "Northern Neck," the peninsula between
the Potomac and Rappahannock Rivers.
For notes see p. 413.

394



21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

SUMMARY REPORT BY THE ATTORNEY GENERAL—Cont.

Since the nearest office of The Bank of Virginia is about 85 miles from
Reedville Bank and 70 miles from White Stone Bank, there would seem
to be little or no direct competition between them. However, the 2 proposed
mergers taken together would appear to eliminate some competition between
White Stone Bank and Reedville Bank. The main offices of White Stone
Bank and Reedville Bank are about 25 miles apart. Two Lancaster County
banks are located in the intervening area, about 5 miles from White Stone
Bank and about 20 miles from Reedville Bank, and they compete with
both White Stone Bank and Reedville Bank.
In Lancaster County, White Stone Bank—third largest bank in the county
—presently controls 20 per cent of IPC 3 demand deposits; in Northumberland County, Reedville Bank—the largest bank in the county—now holds
about 44 per cent of IPC 3 demand deposits.
Virginia law—which permits statewide branching only by merger—would
prevent Bank of Virginia from entering either Lancaster or Northumberland
County by de novo branching. Accordingly, the only adverse effect on potential competition would be the elimination of the possibility that Bank of
Virginia would have entered either of these counties by acquisition of a
smaller bank; this consideration applies particularly to the merger with
Reedville Bank, since all the other banks in Northumberland County are
smaller than Reedville Bank.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (4-15-68)

The head office of Reedville Bank is in Reedville (population 650),
which is in the eastern portion of Northumberland County (population
10,000), at the Chesapeake Bay end of the Northern Neck Peninsula. The
Bank operates a branch at Burgess, 6 miles west of Reedville. A bank with
deposits of $3.3 million is located 5 miles west of Burgess at Heathsville,
and a bank (deposits $12.7 million) headquartered in Colonial Beach
(Westmoreland County) operates a branch at Callao, 12 miles west of
Burgess. There are no other commercial banking facilities in Northumberland County. The sole office of White Stone Bank is in White Stone (population 400), which is about 18 miles directly south of Burgess in southeastern Lancaster County (population 9,000). There are 3 other banks in
Lancaster County, including 2 (with deposits of $7 million and $3.3 million) in Kilmarnock, which is on the highway between White Stone and
Burgess. The development of meaningful competition between Reedville
Bank and White Stone Bank seems unlikely in view of the distances separating their offices and the sparsely settled nature of the intervening area,
which contains 2 offices of other banks. Furthermore, under State law,
neither bank would be permitted to establish a de novo branch outside the
county in which it is headquartered.
Virginia Bank, the fifth largest bank in Virginia and a subsidiary of a
registered bank holding company, Virginia Commonwealth Bankshares,
Inc., is headquartered in Richmond, approximately 70 miles west of White
Stone and 85 miles west of Reedville. The nearest office of Virginia Bank
For notes see p. 413.




395

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 i—Continued
Banking offices

Name of bank, and type of transaction 2
(in chronological order of determination)

Resources
(in millions
of dollars)

In
operation

To be
operated

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS—Cont.

to the banks proposed to be acquired is about 57 miles south of White
Stone and 77 miles south of Reedville. State law would preclude Virginia
Bank from entering either Northumberland or Lancaster County by de novo
branching.
The replacement of Reedville Bank and White Stone Bank by offices of
Virginia Bank, with its larger lending limit and broader range of bank
services, would afford added convenience for the Reedville-White Stone
areas without having significant adverse effects on banking competition.

No. 3—The Merrill Trust Company,
Bang or, Maine
to merge with
Hammond Street Trust
Company, Bangor, Maine

j
§
j
j
i

81.3

17

17

(Newly organized bank;
not in operation.)

SUMMARY REPORT BY THE ATTORNEY GENERAL (5-2-68)

The Merrill Trust Company, organized in 1933, proposes to merge Hammond Street Trust Company, a proposed new bank. Under the merger plan
it will be eligible to transact business for only 1 day; its separate existence
will cease upon its merger into Merrill Trust.
Merrill Trust will be the only affiliate of Merrill Bankshares Company, a
newly organized corporation under the laws of Maine, which will be a 1bank holding company.
The purpose of organizing the new Hammond Street Trust Company and
its merger with Merrill Trust is to offer an opportunity for stockholders of
Merrill Trust, who may dissent from the plan to make Merrill Trust the
subsidiary of Merrill Bankshares, to surrender their stock and receive cash.
Merrill Bankshares plans to become a registered bank holding company by
acquiring stock of other banking corporations.
The proposed acquisition will not result in the elimination of any existing competition nor an increase in the concentration of banking.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (6-5-68)

The proposed merger of Merrill Trust and Hammond Trust, the latter
being a bank with no operating history, formed solely to facilitate a corporate reorganization plan, is one step in a plan of corporate reorganization whereby Merrill Bankshares Company, Bangor, Maine, a newly organized Maine corporation, would become a 1-bank holding company,
owning all of the stock of Merrill Trust. The merger would have no effect
on competition, no effect on the banking convenience and needs of the
Bangor community, and would not alter the financial and managerial resources and prospects of Merrill Trust.
For notes see p. 413.

396



21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)

Resources
(in millions
of dollars)

Banking offices
To be
operated

In
operation

No. 4—Wachovia Bank and Trust Company,
Winston-Salem, N.C.

1,274.0
106

to merge with

The State Bank,
Laurinburg, N.C.

111

11.9
5

SUMMARY REPORT BY THE ATTORNEY GENERAL (3-4-68)

Wachovia Bank, the largest bank in the State, has acquired 10 other
banks since 1956, which, when acquired, had aggregate deposits of $147
million and 42 banking offices.
The State Bank operates 5 offices in portions of 2 adjoining counties on
the South Carolina border in the south central part of North Carolina. It
is the second largest of 3 banks, with an aggregate of 10 banking offices,
operating in Scotland County and a portion of adjoining Robeson County
known as the Maxton area; as of June 30, 1966, State Bank held 54 per
cent of total IPC 3 deposits in the Scotland County-Maxton area. The
Scotland County-Maxton area has recently experienced substantial industrial growth, and its future prospects appear to be excellent, but the number
of banks there have remained unchanged since 1959. Wachovia does not
operate a banking office in the area; its closest office is some 80 miles
distant. It does derive significant amounts of business from larger firms in
the area that State Bank, because of its size, could not handle. Hence, little
or no existing competition would be eliminated by this proposed merger.
This proposed merger would, however, eliminate Wachovia as a source
of potential competition through de novo branching in the highly concentrated Scotland County-Maxton area where State Bank is presently the
largest competitor. North Carolina law permits statewide de novo branching. Wachovia can be considered to be one of the most likely potential
entrants through de novo branching into the Scotland County-Maxton area
in the near future. It has the resources to establish such branches, and it
has demonstrated its capacity and willingness to expand through de novo
branching—over 50 per cent of its 106 existing offices were created de novo,
and it has recently secured approval to open 10 additional offices.
This proposed merger is another manifestation of a significant trend of
acquisition and mergers by North Carolina's largest commercial banks.
This acquisition trend, by reducing the establishment of de novo branches
by the State's largest banks, undoubtedly inhibits the development of a
more competitive banking structure not only by eliminating those most able
to enter new markets de novo as sources of potential competition but also
by increasing the barriers to entry de novo for smaller institutions. Moreover, acquisitions of this type tend to foreclose the creation, by means of
mergers between smaller banks in separate local markets, of banking institutions capable of competing with the largest banks in the State for the
business of large industrial customers. In this connection we note that State
Bank had an offer to merge from Waccamaw Bank and Trust Company,
Whiteville—which has $58.8 million in total deposits and 20 offices and
does not now operate in the Scotland County-Maxton area.
We conclude that the proposed merger would cause a significant lessening of potential competition.
For notes see p. 413.




397

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)

| Resources
I (in millions
of dollars)

Banking offices
In
operation

To be
operated

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (7-11-68)

State Bank operates its head office and branches in Laurinburg (population 8,200), the seat of Scotland County (population 25,200). The bank
also operates a branch at the Laurinburg-Maxton industrial park, and a
branch in Maxton (population 1,800), which is 7 miles east of Laurinburg
in Robeson County. Commercial State Bank (total deposits of $9 million),
which is headquartered in Laurinburg, operates 4 offices in this area; the
only other banking office in the area is the Laurinburg branch of Southern
National Bank of North Carolina (total deposits of $105 million), the
State's seventh largest bank. The nearest office of Wachovia to an office
of State Bank is its branch in Asheboro, 80 miles north of Laurinburg, but
Wachovia derives a sizable dollar amount of business from a few large
accounts in the Laurinburg-Maxton area.
While Wachovia, with about 22 per cent of total commercial bank deposits in the State, is the largest bank in North Carolina, its share of deposits
has decreased with the largest percentage of deposits ever held by Wachovia
being 24.1 per cent, which it held as of December 31, 1961. The acquisition
of State Bank would increase Wachovia's share of the State's total commercial bank deposits by about 0.2 per cent. Although it would be preferable for Wachovia to enter this area by establishing a de novo branch, the
North Carolina Commissioner of Banks informed the Board by letter that
he doubted that the State Banking Commission would approve the establishment by Wachovia of a de novo branch in the Laurinburg area, which
is already served by 3 banks, and that his office certainly would not recommend approval.
In recent years, the economy of the Laurinburg-Maxton area has been
undergoing a transition from agricultural to manufacturing activities. Wachovia has been a factor directly, and indirectly through participations, in
financing the larger concerns in this area whose needs are beyond the
capacity of an institution the size of State Bank with its low lending limit.
Wachovia has extended commercial credit in Laurinburg in amounts approximating $2 million on the average, almost double the amount of deposits it derives from businesses and individuals in the area. Thus, Wachovia's contribution to the area's banking needs would not only be a competently blended range of banking services and a large lending limit but
also the access to credit resources beyond those generated locally.
The proposed merger would not result in any significantly adverse consequences for banking competition, and replacement of State Bank by offices
of Wachovia would facilitate the economic growth of the LaurinburgMaxton area by affording a convenient alternative source of credit for
medium-sized business concerns, which are to a great extent dependent
upon local sources for banking services.
For notes see p. 413.

398



21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)

BankingI offices
Resources
; (in millions
of dollars)

In

operation
No. 5—Girard Trust Company,
Philadelphia, Pa.
to merge with
The Doylestown National Bank and
Trust Company, Doylestown, Pa.
No. 6—The Fidelity Bank,
Philadelphia, Pa.
to merge with
Doylestown Trust Company,
Doylestown, Pa.

1,333.6

61

34.9

5

1,121.4

62

25.8

To be
operated

1

66

t

63

•

SUMMARY REPORT BY THE ATTORNEY GENERAL

(1) Girard Trust Company and The Doylestown National Bank and
Trust Company (12-14-67):
Girard Trust Bank (hereinafter Girard) is the third largest commercial
bank in Philadelphia, Pennsylvania, and its environs, and the 32nd largest
in the United States.
Doylestown National's main office is located in Doylestown, Bucks
County, Pennsylvania, which is located approximately 25 miles northwest
of Philadelphia. It maintains 4 branches in the immediate vicinity and provides general commercial banking and trust services. During the past 10
years, Doylestown National's deposits have doubled and its gross income
has trebled.
The closest offices of the merging banks are less than 2 miles apart in
the town of Westminster, in southeastern Bucks County.
We believe that Bucks County in its entirety constitutes the best market
within which to assess the competitive effects of the proposed merger. This
county, consisting of small towns and rural communities, is a chief area
of expansion in the Philadelphia Metropolitan Area; and its commercial,
industrial, and suburban features are expected to increase rapidly during
the next decade.
Within Bucks County, Girard already holds about 5.5 per cent of total
IPC 3 deposits at its 2 established branch offices in Westminster and Riegelsville; its Davisville Shopping Center branch, just opened in November, may
be expected to increase this percentage. Doylestown National controls approximately 10.2 per cent of the Bucks County IPC 3 deposit total. As a
result of this proposed merger, accordingly, Girard would control a minimum of 16 per cent of total Bucks County IPC 3 deposits.
For notes see p. 413.




399

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 i—Continued
Name of bank, and type of transaction2
(in chronological order of determination)

Banking offices
Resources
(in millions
of dollars)

In
operation

To be
operated

SUMMARY REPORT BY THE ATTORNEY GENERAL—Cont.

This merger would eliminate considerable existing competition between
these banks in Bucks County and would increase concentration in that
market to a significant degree. The merger would also eliminate the possibility of additional direct competition between the 2 banks as a result of
the probable de novo expansion by Girard in central Bucks County. Finally,
an especially vigorous and growing independent competitor would be removed from the area. We conclude that the effect of this merger on banking
competition within the Bucks County market would, therefore, be significantly adverse.
(2) The Fidelity Bank and Doylestown Trust Company (1-2-68):
Fidelity has 3 branches within a 10-mile radius of Doylestown Trust's
only office; its closest office (in Lansdale) is about 6 to 7 miles away. It
also has 3 other branches in Bucks County. We believe that the proposed
merger would eliminate significant direct competition between Doylestown
Trust and 3 Fidelity offices within 10 miles of Doylestown.
Within Bucks County, a market for which published data is available,
Fidelity has 6 offices with IPC 3 deposits of $52 million. Doylestown Trust's
1 office hasi IPC 3 deposits of about $19 million. The 2 banks account for
about 19 per cent and 7 per cent, respectively, of total Bucks County IPC 3
deposits which, on June 30, 1966, amounted to $268 million.
The proposed merger is part of a merger trend in central Bucks County.
Three proposed mergers involving banks in Doylestown are now pending:
(1) Girard Trust Bank ($1.0 billion IPC 3 deposits) and Doylestown National Bank and Trust Company ($26.9 million IPC 3 deposits); (2) Chalfont National Bank ($6.2 million IPC 3 deposits) and The Bucks County
Bank and Trust Company ($29.8 million IPC 3 deposits); and (3) Fidelity
and Doylesrown Trust, which is under consideration here.
If all of these contemplated mergers were consummated, the 3 local
banks in central Bucks County—Doylestown National Bank and Trust
Company, Doylestown Trust Company, and Chalfont National Bank—
would disappear as independent competitors; banking alternatives in central
Bucks County would be reduced from 8 competitors to 6. The over-all
effect of these 3 mergers would be to alter significantly the Bucks County
banking structure, to the serious detriment of competition there.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (8-12-68)

Doylestown National and Doylestown Trust are headquartered in Doylestown Township (1960 population 3,800), which is located about 25 miles
north of Philadelphia in the center of Bucks County (1960 population
309,000). An estimated 28,000 people reside in the Doylestown area.
Doylestown Trust has no branch offices. Doylestown National operates 4
branch offices: 1 in Doylestown; 1 in Buckingham, 4 miles east of Doylestown; and 1 each in Warrington and Warminster, about 5 miles and 9 miles,
respectively, south of Doylestown.
For notes see p. 413.

400



21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 i—Continued
Name of bank, and type of transaction2
(in chronological order of determination)

Banking offices
!

Resources
(in millions
of dollars)

In
operation

To be
operated

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS—Cont.

Girard, the third largest bank headquartered in Philadelphia, operates
3 branch offices in Bucks County. Two are 21 and 11 miles, respectively,
from the nearest office of Doylestown National, and because of the distances
separating these offices from offices of Doylestown National, and the
presence of offices of other banks in the intervening and adjacent areas,
there is no meaningful existing or potential competition between Girard
and Doylestown National through these offices. There is potential for some
competition between Girard's other Bucks County office, which is about 3
miles from an office of Doylestown National; however, there are offices of
several other large banks nearby. Doylestown National derives about 80
per cent of its deposits and loans from the central area of Bucks County.
The deposits Girard derives from this area equal less than 6 per cent of
Doylestown National's deposits, if the account of one large corporate
customer with Girard is omitted. Similarly, the loans Girard derives from
central Bucks County equal about 6 per cent of Doylestown National's
loans, if one large-line loan that is far beyond the capacity of Doylestown
National is omitted.
Fidelity, the fourth largest bank headquartered in Philadelphia, operates
6 branch offices in Bucks County. Its nearest office to the sole office of
Doylestown Trust is more than 14 miles south of Doylestown. There are
numerous offices of other banks operating in the area between Doylestown Trust and the offices of Fidelity, and there is very little existing or
potential competition between the 2 banks through their present offices.
Doylestown Trust derives about 80 per cent of its deposits and loans from
the central Bucks County area. The deposits and loans that Fidelity derives
from central Bucks County equal about 6 per cent of Doylestown Trust's
deposits and loans.
The central Bucks County area is served by 10 offices of 6 banks that
have their headquarters in Bucks County. Doylestown National and Doylestown Trust serve as each other's major competitor. The Philadelphia National Bank, the second largest bank headquartered in Philadelphia, has
received approval to establish a de novo branch office in Doylestown and
another in nearby New Britain; in addition, The First Pennsylvania Banking & Trust Co., the largest Philadelphia-based bank, has received approval
to establish a de novo branch office in Doylestown; and Bucks County Bank
and Trust Co. (with deposits of $33.6 million) has received approval to
establish a de novo branch office about 5 miles north of Doylestown.
The addition of these competitors will, of course, significantly alter the
banking structure of central Bucks County; and, although State law, per se,
would not preclude Fidelity and Girard from establishing de novo branch
offices in the Doylestown area, there is now a serious question whether the
market would support additional de novo branch offices until the area
undergoes substantial growth.
The effect of the mergers on banking convenience and needs would be
limited to the central Bucks County area. The present banking needs of
the area are being served reasonably well; and, with the opening of the
recently approved de novo branch offices, it appears that the area's banking
For notes see p. 413.




401

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)

Banking offices
Resources
(in millions
of dollars)

In
operation

To be
operated

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS—Cont.

needs will', be met satisfactorily for some time. However, the replacement
of the two Doylestown-based banks with offices of Girard and Fidelity
would provide for central Bucks County convenient alternative sources of
full banking services. Further, Bucks County is the last undeveloped area
for outward expansion from Philadelphia; from 1950 to 1960 the county's
population increased 113 per cent, and the prospects for continued growth
are excellent. While most of the growth thus far has taken place in the
southern portion of Bucks County, the central area is obviously due for
substantial growth over the next decade or two. The presence of offices of
Girard and Fidelity, full-service banks with large lending limits, would
facilitate that growth. The net effect of the proposed mergers on competition would not be adverse, and the mergers would benefit the banking convenience and needs of the central Bucks County area and contribute to
its economic development.

No. 7—The Citizens State Bank,
Sturgis, Mich.
to acquire the assets and assume the
deposit liabilities of
E. Hill & Sons State Bank &
Trust Company, Colon, Mich.

22.0

5.5

SUMMARY REPORT BY THE ATTORNEY GENERAL (6-21-68)

The merging banks are small, serve relatively limited banking areas in
the lower southwest part of Michigan, and are separated by a distance of
14 miles. Thus competition between them appears to be minimal. Since
under Michigan law, no bank may open a de novo branch in any town
other than the town in which it is located, if another bank is already operating there, neither of the merging banks could enter the community of the
other; accordingly, this merger would not eliminate potential competition
between the 2 banks.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (9-3-68)

The Citizens State Bank (hereinafter Sturgis Bank) operates its head
office and sole branch in Sturgis (population about 8,900); the sole office of
E. Hill & Sons State Bank & Trust Company (hereinafter Colon Bank) is
about 15 miles north of Sturgis in Colon (population about 1,100). Both
Sturgis and Colon are located in St. Joseph County (population about
42,000). Because of the size of Sturgis Bank and Colon Bank and the
distances separating their offices, there is little meaningful competition
between them. Michigan law does not permit either bank to establish a
de novo branch in the community of the other. The closest banking office
For notes see p. 413.

402



21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)

Banking offices
Resources
(in millions
of dollars)

In
operation

To be
operated

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS—Cont.

to Colon Bank is a branch of a much larger bank (headquartered in
Battle Creek) located about 6 miles north of Colon. The closest unit bank
is located about 7 miles south of Colon and is slightly smaller than Colon
Bank. However, that bank is also about 8 miles from Sturgis and currently
competes effectively with both banks located there. There are also offices
of 6 other banks within approximately 20 miles of either Sturgis or Colon,
including offices of 2 substantially larger banks headquartered in Kalamazoo.
The proposed transaction would benefit the banking convenience and
needs of the area presently served by Colon Bank and would have no material consequences for banking competition. The lending limit of the
Colon office would be increased substantially, the interest rate paid on
savings deposits would be increased, and the banking hours of the office
would be extended. In addition, the conversion of Colon Bank into an
office of Sturgis Bank would provide in the Colon area more convenient
access to broader credit accommodations and to a generally wider range
of banking services.

No. 8—Kingston Trust Company,
Kingston, N.Y.
to merge with
The Kerhonkson National Bank,
Kerhonkson, N.Y.

42.6
7.8

SUMMARY REPORT BY THE ATTORNEY GENERAL (7-3-68)

Both Kingston Trust Company (hereinafter Kingston Trust) and Kerhonkson National Bank (hereinafter National) are located in Ulster
County, New York, on the Hudson River midway between New York City
and Albany. Kingston Trust has its main office in Kingston and operates 5
branch offices throughout the county. National has its main office in
Kerhonkson and operates branch offices at Stone Ridge and Hurley.
National's branch in Hurley is located only 2 to 3 miles from Kingston
Trust's main office, and the 2 banks should be active competitors. The
proposed merger would eliminate that competition and increase Kingston
Trust's share of IPC 3 demand deposits in Ulster County from approximately 28 to 31 per cent and its share of total deposits from approximately
24 to 30 per cent.
While National has experienced some management problems in the past
year, its prospects appear to be good since it is located in a rapidly growing area and has almost tripled its net operating income over the past 5
years. National's directors have had several offers to enter into what would
appear to be less anticompetitive mergers than the one here proposed, but
apparently did not seriously consider those offers.
For notes see p. 413.




403

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 i—Continued
Name of bank, and type of transaction2
(in chronological order of determination)

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

SUMMARY REPORT BY THE ATTORNEY GENERAL—Cont.

We conclude that the competitive effects of the proposed merger will
be adverse and that National has not fully explored the possibility of becoming a partner to a less anticompetitive merger.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (10-3-68)

Kingston Bank operates its head office and 2 of its 5 branches in
Kingston (population 20,300); the bank also operates a branch 1 mile
north, and 2 others in towns 25 miles from Kingston. Kerhonkson Bank,
headquartered in Kerhonkson (population 1,200), about 18 miles southwest
of Kingston, operates 2 branches, located 10 and 2 miles, respectively,
southwest of Kingston. All offices of the 2 banks are in Ulster County,
which is served by 29 offices of 10 banks (excluding 1 office that, due to
distance, is not competitive with either bank involved in this proposal).
Kingston Bank holds 22 per cent of the deposits held by these 29 offices,
and the second and third largest banks in terms of area deposits hold 21
per cent and 19 per cent, respectively. The total deposits of the secondranking bank exceed those of Kingston Trust by 50 per cent, and the
bank is a subsidiary of a bank holding company, the sixth largest banking
organization in the State. Kerhonkson Bank is the ninth largest and holds
4 per cent of the area deposits.
Kerhonkson Bank has not been a very effective competitor. Ulster
County's population of 137,000 represents an increase of 15 per cent since
1960, and a 47 per cent increase since 1950. During the period 1960-66
population growth in the area from which Kerhonkson Bank derives the
bulk of its business represented 13 per cent of the population growth in the
whole of Ulster County, yet the bank's share of the increase in bank
deposits in the county was only 7 per cent. More particularly, the volume
of deposits and loans generated by its branch nearest Kingston (established
in 1964) is far below what could reasonably be expected for the sole banking office in a community with a population of 6,100 in 1966, a 35 per
cent increase' since 1960. Further, during 1967, Kerhonkson Bank experienced a decline in deposits of 3 per cent, and in recent months the rate of
decline has accelerated to an annual rate of about 12 per cent. In early
1967 Kerhonkson Bank's president, who had served the bank for 20 years,
became ill, and in September of that year he died. The directors have
made a reasonable effort to deal with the management problem, but have
not succeeded. The directors of Kerhonkson Bank initiated discussions regarding a possible merger with 5 banks, including Kingston Bank; 3 other
banks expressed an interest in merging with Kerhonkson Bank. In the
Board's judgment, the effect on competition of the merger of Kerhonkson
Bank with any 1 of these 7 other banks would not differ so significantlv
from that of its merger with Kingston Bank as to lend much weight to
approval or disapproval.
For notes see p. 413.

404



21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 i—Continued
Banking offices

Name of bank, and type of transaction 2
(in chronological order of determination)

Resources
(in millions
of dollars)

In
operation

To be
operated

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS—Cont.

The merger of Kerhonkson Bank and Kingston Bank would eliminate
such competition as exists between them, as well as the potential for the
development of additional competition, and enhance slightly the position
of Kingston Bank. Kerhonkson Bank, however, has not been a vigorous
competitor, and the merger would remove home office protection from
Kerhonkson, thus opening the community to de novo branching by other
banks. The replacement of Kerhonkson Bank by offices of Kingston Bank
would make a broader range of banking services more conveniently available in the communities presently served by Kerhonkson Bank. The merger
would, of course, eliminate Kerhonkson Bank as an alternative source of
banking services. However, it is in the interests of the communities served
by Kerhonkson Bank that the bank's problems be resolved fairly promptly;
the proposed merger would achieve that end.

No. 9—Bankers Trust Company,
New York, N.Y.
to merge with
Northern Westchester
National Bank, Chappaqua, N.Y.

;

5,462.0

72
80

33.9

SUMMARY REPORT BY THE ATTORNEY GENERAL (7-5-68)

Bankers Trust Company (hereinafter Bankers Trust), the sixth largest
commercial bank in New York City and the seventh largest in the Nation,
proposes to acquire Northern Westchester National Bank (hereinafter
Northern), the sixth largest of 7 commercial banks with head offices in
Westchester County and the only bank headquartered in the northern part
of Westchester County.
Bankers Trust has 72 domestic banking offices, all of which are located in
New York City and adjoining Nassau County. Through its parent holding
company, Bankers Trust New York Corporation, Bankers Trust is affiliated
with 3 other New York commercial banks, none of which have Westchester
offices.
Northern's head office is in Chappaqua (population 5,000), about 25
miles north of Bronx County and about 9 miles north of White Plains
in Westchester County; its 7 branches are located in a number of small
and widely separated towns and villages in northern Westchester. Although
it is the smallest of the 7 banks doing business in northern Westchester,
Northern has the third largest share, 12.3 per cent, of the total I P C 3
demand deposits held by commercial banks in northern Westchester.
Westchester County is a northern suburb of New York City. While
southern Westchester contains the bulk of the county's population and inFor notes see p. 413.




405

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 i— Continued
Name of bank, and type of transaction2
(in chronological order of determination)

Banking offices
Resources
(in millions
of dollars)

In
operation

To be
operated

SUMMARY REPORT BY THE ATTORNEY GENERAL—Cont.

dustry—it now has about 78 per cent of the total county population of
853,198—the rate of population increase in northern Westchester since
1950 has exceeded that of southern Westchester. As a result of the continuing migration of industry and population from New York City, an increasing number of large firms are moving into northern Westchester,
thereby indicating a future business growth commensurate with its projected population increase.
The proposed transaction would not eliminate any significant existing
competition between the participating banks or between Northern and any
of the holding company affiliates of Bankers Trust. However, it would affect
potential competition in northern Westchester since Bankers Trust is one of
the most likely potential de novo entrants into the area. Bankers Trust has
evidenced a desire to branch de novo into Westchester County and clearly
has the resources and experience to do so. It has recently applied for approval to open an office in southern Westchester, and the fact that one of
its largest customers, IBM, has established its headquarters in northern
Westchester would give it additional incentives to branch de novo in the
rapidly growing northern Westchester area.
The proposed merger would eliminate one of the most likely potential
de novo entrants into northern Westchester and substitute a large New York
City bank for the only bank headquartered in northern Westchester. We,
therefore, conclude that the proposed transaction would have an adverse
competitive effect.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (10-24-68)

In addition to Northern Bank, which operates 8 banking offices, 6 banks
operate 36 banking offices in northern Westchester County (estimated
population 190,000). Of these banks, 3 are large New York City banks,
and the other 3 are also considerably larger than Northern Bank. Northern
Bank holds about 13 per cent of the estimated $255 million deposits of the
banking offices in northern Westchester County.
Bankers Trust is the key bank of a registered bank holding company,
Bankers Trust New York Corporation (hereinafter the Corporation), which
controls a total of 4 banks having aggregate deposits of approximately $5.7
billion. Bankers Trust presently has no offices in Westchester County but
has received approval to establish a branch in the town of Greenburgh,
which is in the southwestern part of Westchester County about 15 miles
south of Chs.ppaqua. One of the Corporation's banking subsidiaries, First
State Bank of Rockland County, has a branch office located in West
Haverstraw, about 4 miles from a branch of Northern Bank, but the Hudson
River prevents easy accessibility between the 2 offices. Bankers Trust derives about $2.0 million in deposits and $4.3 million in loans from
Northern Bank's service area, a small portion of total area deposits and
loans. The 3 other subsidiaries of the Corporation derive only a nominal
For notes see p. 413.

406



21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS—Cont.

amount of deposits and loans from northern Westchester County. Northern
Bank derives only a very small amount of loans and deposits from the
areas served by the Corporation's subsidiaries.
There is no meaningful existing competition between Bankers Trust and
the other holding company subsidiaries and Northern Bank. Competition
could be increased through the establishment of de novo branches by
Bankers Trust in northern Westchester County. However, since 1960 the
New York State Banking Board has approved only 4 of 10 applications by
State banks headquartered in New York City for de novo branches in
northern Westchester County, and it is apparent, through an analysis of
growth projections for the northern part of the county and of the availability of suitable banking office locations, that the possibility of future
competition between Bankers Trust and Northern Bank is not significant.
Furthermore, the village of Chappaqua, under State law, is not open for
the establishment of branches by any banks other than Northern Bank,
which maintains its home office there. Consummation of the merger would
thus permit de novo branching in the Chappaqua community, and 2 banks
have filed applications for branches there contingent upon favorable action
on this merger.
The adequacy of the capital structure of Northern Bank has not been
regarded as completely satisfactory due to a liberal dividend policy and the
high cost of maintaining a large volume of interest-bearing deposits.
The merger would eliminate that inadequacy.
In summary, the effect of the merger on competition would be slightly
favorable, the banking factors offer some support for approval of the
merger, and the banking convenience and needs of northern Westchester
County would be benefited through a broader range of banking and trust
services.
No. 10—The Colonial Bank and Trust
Company, Waterbury, Conn.
to merge with
Litchfield County National
Bank, New Milford, Conn.

190.1

16

26.1

6

22

SUMMARY REPORT BY THE ATTORNEY GENERAL (9-24-68)

The nearest branch offices of the merging banks are 10.5 miles from each
other, and there are no banks in the intervening area. It thus appears that
there may be some competition between the banks that would be eliminated
by this merger.
Connecticut law prohibits branching into a town where there is already
the main office of another bank. Thus, Colonial cannot branch de novo into
For notes see p. 413.




407

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 i—Continued

Name of bank, and type of transaction 2
(in chronological order of determination)

Banking offices
[ Resources
: (in millions
of dollars)

In
operation

To be
operated

SUMMARY REPORT BY THE ATTORNEY GENERAL—Cont.

New Milford. The towns of Bridgewater (population 1,000), Kent (population 1,686), and Sharon (population 2,141), where Litchfield operates the
only banking offices, may be too small to support additional banking operations at this time. However, as this area expands, Colonial could become a
potential competitor in the future if this merger were not consummated.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (10-30-68)

Colonial operates 16 offices in Waterbury, which has a population of
about 108,000, and several surrounding communities located in the northern part of New Haven County, a heavily industrialized area. Litchfield
Bank maintains its head office and 2 branches in New Milford (population
11,600), which is located 28 miles west of Waterbury. It also maintains
3 branches in rural communities surrounding New Milford.
Litchfield Bank operates the only commercial banking offices in the
communities in which its offices are located. Competition for some or all
of those offices is provided by 4 banks, ranging in deposit size from $4
million to $53 million, and by 2 of the larger banks in the State with headquarters at Bridgeport. The closest offices of Colonial and Litchfield Bank
are approximately 11 miles apart over an indirect route. Travel on the
roads running east and west connecting the separate areas of Colonial and
Litchfield Bank is time-consuming and difficult. The 2 banks derive only a
small number of deposit and loan accounts from one another's service area.
With the exception of New Milford, State law permits de novo branches
in the area served by Litchfield Bank. However, the communities in that
area, aside from New Milford, have small populations with no sizable
growth anticipated in the foreseeable future. The removal of home office
protection from New Milford, therefore, appears likely to increase competition in that area; 2 large banks have applied for permission to establish branches in New Milford contingent upon approval of this merger.
Residents of 2 of the 4 communities served by Litchfield Bank do not
have convenient access to a full range of banking services. The merger
would bring to those residents expanded trust services, an increased lending limit, and a wider variety of credit and deposit instruments. In addition,
through the removal of home office protection in New Milford, residents
there will eventually have convenient access to the services of more than
1 commercial bank. Accordingly, the proposed transaction would have a
favorable over-all effect on banking competition and would benefit the
banking convenience and needs of the area presently served.
For notes see p. 413.

408



21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)

No. 11—Marine Midland Trust Company
of Rockland County, Nyack, N.Y.
to merge with
Lafayette Bank and Trust Company
of Suffern, Suffern, N.Y.

Resources
(in millions
of dollars)

Banking offices
In
operation

55.2

7

15.1

2

To be
operated

1,

SUMMARY REPORT BY THE ATTORNEY GENERAL (8-26-68)

Both banks are in Rockland County (population 193,000), immediately
west of the Hudson River and near New York City. The eastern part of
the county, where Rockland Bank has its offices, is already highly industrialized, and the central part is currently being developed. The western part
of the county, where Lafayette has its offices, is still relatively rural, but
is the next area for major industrial development.
The main offices of the 2 banks are separated by more than 11 miles.
The nearest Rockland branch to Lafayette is 5.8 miles to the east, and
there are several other intervening banks in this area. Between 80 per cent
and 90 per cent of Lafayette's business comes from the western part of
the county, with a relatively small percentage of transactions coming from
Rockland Bank's service area. Competition between the 2 banks, therefore,
does not appear to be significant.
Seven banks operate 48 offices in Rockland County. As of June 30, 1966,
Rockland Bank and Lafayette held about 17 per cent and 5 per cent, respectively, of county IPC 3 demand deposits. As noted above, however, the
banks do not appear to be operating in significant direct competition with
each other despite location in the same county.
Two company officers, each of whom was being groomed to become
president, embezzled more than $700,000 at Lafayette within the last 3
years. The result has been to demoralize the remaining personnel and so
undermine the operations of the bank (including loss of insurance and
deterioration of public confidence) that general collapse seemed imminent.
Thus, there is doubt as to the ability of Lafayette, absent merger, to remain
an effective competitor. Considering the possibilities available, Lafayette's
merger with Rockland Bank is probably the least anticompetitive merger
available to it.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (11-4-68)

Rockland Bank is a subsidiary of Marine Midland Banks, Inc., Buffalo,
New York, a registered bank holding company that has 11 subsidiary banks
in the State of New York. Rockland Bank operates 7 offices in 6 communities, all within a 7-mile radius of the town of Nyack, where its main office
For notes see p. 413.




409

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE HOARD OF GOVERNORS DURING 1968 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)

Banking offices
Resources
(in millions
of dollars)

In
operation

To be
operated

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS—Cont.

is located, in the southeastern part of Rockland County (population 193,000). Lafayette Bank's main office is located in the town of Suffern (population 5,500) in the southwestern part of Rockland County, and its only
branch is 3 miles north of Suffern. The nearest offices of the 2 banks are
located 6 miles apart on an east-west line. The flow of local traffic in Rockland County is generally in a north-south direction, and there are a number
of other banking offices in the area between the offices of Rockland Bank
and Lafayette Bank, but each bank does derive some deposits and loans from
the service area of the other. Neither bank can establish branches in the
community where the main office of the other is located, and much of the
surrounding area is presently not sufficiently developed to support additional banking offices.
Rockland Bank holds about 16 per cent of total deposits in an area
slightly larger than Rockland County, and Lafayette Bank holds about
4 per cent. Although the merger would thus result in a bank holding 20 per
cent of area deposits, there are 47 offices of 12 other banks competing in
that area. One bank holds 29 per cent of total area deposits, and 7 of
the other banks competing in the area have total deposits exceeding those
of the bank that would result from this merger.
Lafayette Bank is lacking sufficient managerial depth. In recent years the
bank has suffered two serious defalcations, which have had a detrimental
effect on the confidence of its personnel and customers. In addition, the
bank has had difficulty maintaining fidelity insurance coverage.
Consummation of the merger and the resulting affiliation with Marine
Midland Banks, Inc. would alleviate the difficulties of Lafayette Bank
without having a significant adverse effect on competition. Moreover, the
merger would have a slightly favorable effect on the banking convenience
and needs of the Suffern community.

No. 12—The Middle Tennessee Bank,
Columbia, Tenn.

20.1

to acquire ihe assets and assume the
deposit liabilities of

The Hampshire Bank,
Hampshire, Tenn.

1.1

SUMMARY REPORT BY THE ATTORNEY GENERAL (9-20-68)

Columbia (population 18,000), the Maury County seat, is a growing
industrial and trading aA~ea; 4 banks have offices in this town. Hampshire
For notes see p. 413.

410



21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

SUMMARY REPORT BY THE ATTORNEY GENERAL—Cont.

(population 2,500), with 1 bank, is located 15 miles west of Columbia in a
primarily agricultural area.
Although the merging banks are 15 miles apart in a rural area, with no
banks in the intervening area, competition between them is probably
limited because of the small size and limited range of services of Hampshire
Bank. Moreover, 2 banks have offices in Mt. Pleasant, 7 miles southeast
of Hampshire.
Furthermore, competition between the merging banks may be even more
limited than would ordinarily be the case since a director on the board
of Hampshire Bank is, also a vice president of Middle Tennessee Bank. This
individual and the president of Middle Tennessee Bank, together, own 109
of the 300 outstanding shares of the Hampshire Bank.

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (11-25-68)

Middle Bank operates 3 branches and its main office in Columbia (population 18,000), the seat of Maury County in the central part of the State.
Hampshire Bank's single office is the only bank in Hampshire (population
200), which is also located in Maury County, 15 miles west of Columbia.
The nearest competing banking offices to Hampshire Bank are offices
located in Mt. Pleasant, Tennessee, approximately 7 miles southeast of
Hampshire and 10 miles southwest of Columbia. Middle Bank competes
to some degree in all of Maury County. However, although there are no
banking offices along the direct route from Columbia to Hampshire, Middle
Bank has not been an active competitor in the Hampshire and Mt.
Pleasant communities. It is estimated that less than 2 per cent of Middle
Bank's deposits originate in the service area of Hampshire Bank and a
similarly small percentage of its loans originate in that area.
Hampshire Bank has had a serious management problem since the incapacitating illness of its chief executive officer in 1965, and as a result, the
bank's general condition is unsatisfactory. It apparently has been unable to
improve its condition, and its continued existence as an independent institution is in jeopardy. Consummation of the proposal, therefore, would
assure the continued presence of a banking office in the community of
Hampshire. Further, this office would provide the area with a substantially
larger loan limit and expansion of loan and other banking services. The
proposal would not have materially adverse competitive consequences but,
instead, would tend to enhance banking competition in the Hampshire area.
For notes see p. 413.




411

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSISTS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)

No. 13—Chemical Bank New York Trust
Company, New York, N.Y.
to merge with
Chemical Bank,
New York, N.Y.
and change its title to
Chemical Bank,
New \ ork, N.Y.

Banking offices
Resources
(in millions
of dollars)

In
operation

8,978.2

141

0.5

To be
operated

0

.

.41

J

SUMMARY REPORT BY THE ATTORNEY GENERAL (11-12-68)

Chemical Bank was recently organized for the purpose of effecting a plan
of reorganization whereby Chemical Bank New York Trust Company, a
New York banking organization, will become, through merger with Chemical Bank, a. wholly owned subsidiary of Chemical New York Corporation,
a business organization newly organized under the laws of Delaware.
The proposed transaction would appear to have no adverse effects on
competition.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (11-29-68)

The proposed merger is one step in a plan of corporate reorganization
whereby Chemical New York Corporation, New York, New York, a newly
organized Delaware corporation, would become a 1-bank holding company.
Chemical New York Corporation presently owns all of the stock of Chemical Bank; upon the merger of applicant bank with Chemical Bank, stock
of Chemical New York Corporation will be exchanged for the stock of
applicant tank. The proposed merger of applicant bank and Chemical
Bank—the latter being a bank with no operating history—would itself have
no effect on either competition or the banking convenience and needs of
any relevant area. Nor would it appear that the proposal would have any
adverse consequences relative to the financial and managerial resources and
prospects of applicant bank or Chemical Bank.
For notes see facing page.

412



21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1968 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)

No. 14—The First Pennsylvania Banking
and Trust Company,
Philadelphia, Pa.

Resources
(in millions
of dollars)

Banking offices
In
operation

2,141.7

64

0.6

0

64

to merge with

Chestnut Street Trust Company,
Philadelphia, Pa.

To be
operated

SUMMARY REPORT BY THE ATTORNEY GENERAL (12-18-68)

This merger is merely part of a corporate reorganization which will make
The First Pennsylvania Banking and Trust Company a wholly owned subsidiary of a 1-bank holding company and as such will have no effect on
competition.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (12-26-68)

The proposed merger is one step in a plan of corporate reorganization
whereby First Pennsylvania Corporation, Philadelphia, Pennsylvania, a
newly organized Pennsylvania corporation, would become a 1-bank holding
company. First Pennsylvania Corporation presently owns all of the stock
of Chestnut Street Bank; upon the merger of applicant bank with Chestnut
Street Bank, stock of First Pennsylvania Corporation will be exchanged for
stock of applicant bank. The proposed merger of applicant bank and Chestnut Street Bank—the latter being a bank with no operating history—would
itself have no effect on either competition or the banking convenience and
needs of any relevant area. Nor would it appear that the proposal would
have any adverse consequences relative to the financial and managerial
resources and prospects of applicant bank or Chestnut Street Bank.
1
During 1968 the Board disapproved 1 merger application. However, under Section 18(c) of
the Federal Deposit Insurance Act, only those transactions approved by the Board must be described in its ANNUAL REPORT to Congress.
2
Each transaction was proposed to be effected under the charter of the first-named bank,
except transactions numbered 13 and 14, which were under the charter of the second-named bank.
3
The abbreviation "IPC" designates deposits of individuals, partnerships, and corporations.




413

THE

FEDERAL RESERVE

SYSTEM

BOUNDARIES OF FEDERAL RESERVE DISTRICTS AND THEIR BRANCH TERRITORIES

r\.

Q

October I. 1968

Legend
• Boundaries of Federal Reserve Branch Territories
* Boundaries of Federal Reserve Districts
© Board of Governors of the Federal Reserve System
<> Federal Reserve Bank Cities
•
• Federal Reserve Branch Cities

NOTE.—For a complete description of each Federal Reserve district see Description of Federal Reserve
Districts—Territorial Composition of Each Head Office and Branch, Including Population and Land Area,
a pamphlet published in April 1966. This pamphlet is available upon request from the Division of Administrative Services, Board of Governors of the Federal Reserve System, Washington, D.C. 20551.




Federal Reserve
Directories and Meetings




BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
(December 31, 1968)

W M . MCC. MARTIN, JR., of New York, Chairman

J. L. ROBERTSON of Nebraska, Vice Chairman
GEORGE W. MITCHELL of Illinois
J. DEWEY DAANE of Virginia
SHERMAN J. MAISEL of California
ANDREW F. BRIMMER of Pennsylvania
WILLIAM W. SHERRILL of Texas
ROBERT C. HOLLAND, Secretary of the Board
DANIEL H. BRILL, Senior Adviser to the Board
ROBERT SOLOMON, Adviser to the Board
MERRITT SHERMAN, Assistant to the Board
CHARLES MOLONY, Assistant to the Board
HOWARD H. HACKLEY, Assistant to the Board
ROBERT L. CARDON, Assistant to the Board
JOSEPH R. COYNE, Special Assistant to the Board
ROBERT E. NICHOLS, Special Assistant to the Board
OFFICE OF THE SECRETARY
ROBERT C. HOLLAND, Secretary
KENNETH A. KENYON, Deputy Secretary
ELIZABETH L. CARMICHAEL, Assistant Secretary
ARTHUR L. BROIDA, Assistant Secretary
ROBERT P. FORRESTAL, Assistant Secretary
LEGAL DIVISION
DAVID B. HEXTER, General Counsel
THOMAS j . O'CONNELL, Deputy General Counsel
JEROME W. SHAY, Assistant General Counsel
DIVISION OF RESEARCH AND STATISTICS
DANIEL H. BRILL, Director
J. CHARLES PARTEE, Associate Director
STEPHEN H. AXILROD, Adviser
LYLE E. GRAMLEY, Adviser
KENNETH B. WILLIAMS, Adviser
STANLEY J. SIGEL, Associate Adviser
TYNAN SMITH, Associate Adviser
MURRAY S. WERNICK, Associate Adviser
JAMES B. ECKERT, Assistant Adviser
PETER M. KEIR, Assistant Adviser
BERNARD SHULL, Assistant Adviser

Louis WEINER, Assistant Adviser

416



Term expires
January 31, 1970
January 31, 1978
January 31, 1976
January 31, 1974
January 31, 1972
January 31, 1980
January 31, 1982

BOARD OF GOVERNORS—Cont.
DIVISION OF INTERNATIONAL FINANCE
ROBERT SOLOMON, Director

ROBERT L. SAMMONS, Associate Director
JOHN E. REYNOLDS, Associate Director
JOHN F. L. GHIARDI, Adviser

A. B. HERSEY, Adviser
REED J. IRVINE, Adviser
*SAMUEL I. KATZ, Adviser
BERNARD NORWOOD, Adviser
RALPH C. WOOD, Adviser
DIVISION OF FEDERAL RESERVE BANK OPERATIONS
JOHN R. FARRELL, Director

JOHN N. KILEY, JR., Associate Director
JAMES A. MCINTOSH, Assistant Director

P. D. RING, Assistant Director
CHARLES C. WALCUTT, Assistant Director

LLOYD M. SCHAEFFER, Chief Federal Reserve Examiner
DIVISION OF SUPERVISION AND REGULATION
FREDERIC SOLOMON, Director

BRENTON C. LEAVITT, Deputy Director
FREDERICK R. DAHL, Assistant Director
JACK M. EGERTSON, Assistant Director
JANET O. HART, Assistant Director
JOHN N. LYON, Assistant Director
THOMAS A. SIDMAN, Assistant Director

TYNAN SMITH, Acting Assistant Director
DIVISION OF PERSONNEL ADMINISTRATION
EDWIN J. JOHNSON, Director

JOHN J. HART, Assistant Director
DIVISION OF ADMINISTRATIVE SERVICES
JOSEPH E. KELLEHER, Director

HARRY E. KERN, Assistant Director
OFFICE OF THE CONTROLLER
JOHN KAKALEC, Controller
OFFICE OF DEFENSE PLANNING
INNIS D. HARRIS, Coordinator
DIVISION OF DATA PROCESSING
LAWRENCE H. BYRNE, JR., Director

LEE W. LANGHAM, Assistant Director
* On leave of absence.




417

FEDERAL OPEN MARKET COMMITTEE
(December 31, 1968)

MEMBERS
W M . M C C . MARTIN, JR., Chairman (Board of Governors)
ALFRED HAYES, Vice Chairman (Elected by Federal Reserve Bank of New York)
ANDREW F. BRIMMER (Board of Governors)
J. DEWEY DAANE (Board of Governors)

HUGH D. GALUSHA, JR. (Elected by Federal Reserve Banks of Minneapolis,
Kansas City, and San Francisco)
W. BRADDOCK HICKMAN (Elected by Federal Reserve Banks of Cleveland and
Chicago)
MONROE KIMBREL (Elected by Federal Reserve Banks of Atlanta, St. Louis,
and Dallas)
SHERMAN J. MAISEL (Board of Governors)
GEORGE W. MITCHELL (Board of Governors)

FRANK E. MORRIS (Elected by Federal Reserve Banks of Boston, Philadelphia,
and Richmond)
J. L. ROBERTSON (Board of Governors)
WILLIAM W. SHERRILL (Board of Governors)

OFFICERS
ROBERT C. HOLLAND, Secretary
MERRITT SHERMAN,

Assistant Secretary
KENNETH A. KENYON,

Assistant Secretary
ARTHUR L. BROIDA,
. . . c
/
A

JOHN H. KAREKEN,

Associate Economist
ROBERT G. LINK,

Associate Economist
MAURICE MANN,

Assistant Secretary
CHARLES MOLONY,
Assistant Secretary
HOWARD H. HACKLEY,
General Counsel
DAVID B. HEXTER,

Assistant General Counsel
DANIEL H . BRILL,

Assoclate

Economist

J- CHARLES PARTEE,
Associate Economist
JOHN E. REYNOLDS,
Associate Economist
RoBERT

^

^

SoLOMON

.

^

E c o n o m i s t

Economist
STEPHEN H. AXILROD,

Associate Economist
A. B. HERSEY,

Associate Economist

CHARLES T. TAYLOR,

Associate Economist
PARKER B. WILLIS,

Associate Economist

ALAN R. HOLMES, Manager, System Open Market Account
CHARLES A. COOMBS, Special Manager, System Open Market Account
During 1968 the Federal Open Market Committee met at intervals of three
or four weeks as indicated in the Record of Policy Actions taken by the Committee (see pp. 99-225 of this Report).

418



FEDERAL ADVISORY COUNCIL
(December 31, 1968)
MEMBERS
District No. 1—John Simmen, Chairman of the Board, Industrial National Bank
of Rhode Island, Providence, R. I.
District No, 2—George S. Moore, Chairman of the Board, First National City
Bank, New York, N.Y.
District No. 3^Harold F. Still, Jr., President, Central-Penn National Bank of
Philadelphia, Philadelphia, Pa.
District No. 4—John A. Mayer, Chairman of the Board and Chief Executive
Officer, Mellon National Bank and Trust Company, Pittsburgh, Pa.
District No. 5—J. Harvie Wilkinson, Jr., Chairman of the Board, State-Planters
Bank of Commerce and Trusts, Richmond, Va.
District No. 6—George S. Craft, Chairman, Trust Company of Georgia, Atlanta, Ga.
District No. 7—David M. Kennedy, Chairman of the Board, Continental Illinois
National Bank and Trust Company of Chicago, Chicago, 111.
District No. 8—John Fox, Chairman of the Board and Chief Executive Officer,
Mercantile Trust Company National Association, St. Louis, Mo.
District No. 9—Philip H. Nason, President, First National Bank, St. Paul, Minn.
District No. 10—Jack T. Conn, Chairman of the Board, The Fidelity National
Bank and Trust Company of Oklahoma City, Oklahoma City, Okla.
District No. 11—Robert H. Stewart, III, Chairman of the Board, First National
Bank in Dallas, Dallas, Tex.
District No. 12—Frederick G. Larkin, Jr., President and Chief Executive Officer,
Security Pacific National Bank, Los Angeles, Calif.

OFFICERS
JOHN A. MAYER, President

J. HARVIE WILKINSON, JR., Vice President

HERBERT V. PROCHNOW, Secretary

WILLIAM J. KORSVIK, Assistant Secretary

EXECUTIVE COMMMITTEE
JOHN A. MAYER, ex officio
JOHN SIMMEN

J. HARVIE WILKINSON, JR., ex officio
HAROLD F. STILL, JR.
ROBERT H. STEWART, III

Meetings of the Federal Advisory Council were held on February 19-20,
June 3-4, September 16-17, and November 18-19, 1968. The Board of Governors met with the Council on February 20, June 4, September 17, and November 19. The Council is required by law to meet in Washington at least four
times each year and is authorized by the Federal Reserve Act to consult with
and advise the Board on all matters within the jurisdiction of the Board.




419

FEDERAL RESERVE BANKS and BRANCHES
(December 31, 1968)
CHAIRMEN AND DEPUTY CHAIRMEN OF BOARDS OF DIRECTORS
Federal Reserve
Bank of—

Chairman and
Federal Reserve Agent

Deputy Chairman

Boston

Howard W. Johnson

Charles W. Cole

New York

Everett N. Case

Kenneth H. Hannan

Philadelphia.

Willis J. Winn

Bayard L. England

Cleveland.

Albert G. Clay

Logan T. Johnston

Richmond

Wilson H. Elkins

Robert W. Lawson, Jr.

Atlanta

.Edwin I. Hatch

John C. Wilson

Chicago

Franklin J. Lunding

Elvis J. Stahr

St. Louis

Frederic M. Peirce

Smith D. Broadbent, Jr.

Minneapolis

Joyce A. Swan

Robert F. Leach

Kansas City

Dolph Simons

Dean A. McGee

Dallas

Carl J. Thomsen

Max Levine

San Francisco

O. Meredith Wilson

S. Alfred Halgren

CONFERENCE OF CHAIRMEN
The Chairmen of the Federal Reserve Banks are organized into a Conference
of Chairmen that meets from time to time to consider matters of common interest
and to consuli: with and advise the Board of Governors. Such a meeting, attended also by Deputy Chairmen of the Reserve Banks, was held in Washington
on December 5-6, 1968.
Mr. Thomsen, Chairman of the Federal Reserve Bank of Dallas, who was
elected Chairman of the Conference and of the Executive Committee in December 1967, served in that capacity until the close of the 1968 meeting. Mr. Peirce,
Chairman of the Federal Reserve Bank of St. Louis, and Mr. Winn, Chairman
of the Federal Reserve Bank of Philadelphia, served with Mr. Thomsen as members of the Executive Committee; Mr. Peirce also served as Vice Chairman of
the Conference.
On December 6, 1968, Mr. Peirce, Chairman of the St. Louis Bank, was
elected Chairman of the Conference and of the Executive Committee to serve
for the succeeding year; Mr. Winn, Chairman of the Philadelphia Bank, was
elected Vice Chairman of the Conference and a member of the Executive Committee; and Mr. Clay, Chairman of the Federal Reserve Bank of Cleveland,
was elected as the other member of the Executive Committee.

420



FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS
Class A and Class B directors are elected by the member banks of the district.
Class C directors are appointed by the Board of Governors of the Federal Reserve System.
The Class A directors are chosen as representatives of member banks and, as
a matter of practice, are active officers of member banks. The Class B directors
may not, under the law, be officers, directors, or employees of banks. At the
time of their election they must be actively engaged in their district in commerce,
agriculture, or some other industrial pursuit.
The Class C directors may not, under the law, be officers, directors, employees,
or stockholders of banks. They are appointed by the Board of Governors as representatives not of any particular group or interest, but of the public interest as a
whole.
Federal Reserve Bank branches have either five or seven directors, of whom a
majority are appointed by the Board of Directors of the parent Federal Reserve
Bank and the others are appointed by the Board of Governors of the Federal Reserve System.

DIRECTORS

District 1 — Boston

Term
expires
Dec. 31

Class A:
Lawrence H. Martin

Chairman of the Board and Chief Executive
Officer, The National Shawmut Bank of
Boston, Mass
1968
Charles A. Beaujon, Jr.. .President, The Canaan National Bank, Canaan,
Conn
1969
William R. Kennedy
President, Merrimack Valley National Bank,
Haverhill, Mass
1970

Class B:
W. Gordon Robertson. . Chairman of the Executive Committee and
Chief Executive Officer, Bangor Punta Corporation, Bangor, Maine
1968
F. Ray Keyser, Jr
Vice President, Vermont Marble Company,
Proctor, Vt
1969
James R. Carter
President, Nashua Corporation, Nashua, N.H.. 1970
Class C.Charles W. Cole
Howard W. Johnson
John M. Fox




President Emeritus, Amherst College, Amherst,
Mass
1968
President, Massachusetts Institute of Technology, Cambridge, Mass
1969
Chairman of the Board, United Fruit Company,
Boston, Mass
1970

421

FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS—Cont.
Class A:
Robert G. Cowan
Eugene H. Morrison
R. E. McNeill, Jr

District 2 — New York

Term
expires
Dec. 31

Chairman of the Board, National Newark &
Essex Bank, Newark, N.J
1968
President, Orange County Trust Company,
Middletown, N.Y
1969
Chairman of the Board, Manufacturers Hanover Trust Company, New York, N.Y
1970

Class B:
Milton C. Mumford... .Chairman of the Board, Lever Brothers Company, Inc., New York, N.Y
Maurice R. Forman... .President, B. Forman Co., Inc., Rochester,
N.Y
Arthur K. Watson
Chairman of the Board, IBM World Trade
Corporation, and Vice Chairman of the
Board, International Business Machines Corporation, Armonk, N.Y
Class C:
Kenneth H. Hannan
Executive Vice President, Union Carbide Corporation, New York, N.Y
Everett N. Case
Former President, Alfred P. Sloan Foundation, Van Hornesville, N.Y
James M. Hester
President, New York University, New York,
N.Y

1968
1969

1970
1968
1969
1970

Buffalo Branch

Appointed by Federal Reserve Bank:
Arthur S. Hamlin
President, The Canandaigua National Bank
and Trust Company, Canandaigua, N.Y... 1968
E. Perry Spink
Chairman of the Board, Liberty National Bank
and Trust Company, Buffalo, N.Y
1969
Wilmot R. Craig
Chairman of the Board and Chief Executive
Officer, Lincoln Rochester Trust Company,
Rochester, N.Y
1970
Charles L. Hughes
President, The Silver Creek National Bank,
Silver Creek, N.Y
1970
Appointed by Board of Governors:
Norman F. Beach
Vice President and General Manager, Kodak
Park Division, Eastman Kodak Company,
Rochester, N.Y
1968
Gerald F, Britt
President, L-BrookeFarms, Inc., Byron, N.Y... 1969
Robert S. Bennett...... General Manager, Lackawanna Plant, Bethlehem Steel Corporation, Buffalo, N.Y
1970

422



FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS—Cont.

District 3 — Philadelphia

Class A:
Howard C. Petersen... .Chairman of the Board, The Fidelity Bank,
Philadelphia, Pa
Robert C. Enders
President, Bloomsburg Bank-Columbia Trust
Company, Bloomsburg, Pa
H. Lyle Duffey
Executive Vice President, The First National
Bank of McConnellsburg, Pa
Class B:
Henry A. Thouron
President, Hercules, Incorporated, Wilmington, Del
Edward J. Dwyer
President, ESB Incorporated, Philadelphia, Pa..
Philip H. Glatfelter, III. .President, P. H. Glatfelter Co., Spring Grove,
Pa..
Class C:
D. Robert Yarnall, Jr...President, Yarway Corporation, Blue Bell, Pa..
Bayard L. England
Chairman of the Board, Atlantic City Electric
Company, Atlantic City, N J
Willis J. Winn
Dean, Wharton School of Finance and Commerce, University of Pennsylvania, Philadelphia, Pa

Term
expires
Dec. 31

1968
1969
1970
1968
1969
1970
1968
1969
1970

District 4 — Cleveland
Class A:
Everett D. Reese

Director, former Chairman of the Board, The
City National Bank and Trust Company of
Columbus, Ohio
Richard R. Hollington. .President, The Ohio Bank and Savings Company, Findlay, Ohio
Seward D. Schooler
President, Coshocton National Bank, Coshocton, Ohio
Class B:
Walter K. Bailey
Director, former Chairman of the Board, The
Warner and Swasey Company, Cleveland,
Ohio
R. Stanley Laing
President, The National Cash Register Company, Dayton, Ohio
John L. Gushman
President and Chief Executive Officer, Anchor
Hocking Glass Corporation, Lancaster,
Ohio




1968
1969
1970

1968
1969
1970

423

FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS—Cont.
Class C.Logan T. Johnston
Albert G. Clay
J. Ward Keener

District 4 — Cleveland — Cont.

Term
expires
Dec. 31

Chairman of the Board, Armco Steel Corporation, Middletown, Ohio
1968
President, Clay Tobacco Company, Mt. Sterling, Ky
1969
Chairman of the Board and Chief Executive
Officer, The B. F. Goodrich Company,
Akron, Ohio
1970

Cincinnati Branch

Appointed by Federal Reserve Bank:
Jacob H. Graves
President, The Second National Bank and
Trust Company of Lexington, Ky
John W. Humphrey
Chairman of the Board, The Philip Carey
Manufacturing Company, Cincinnati, Ohio..
Robert J. Barth
President, The First National Bank, Dayton,
Ohio
P;letcher E. Nyce
President, The Central Trust Company, Cincinnati, Ohio

1968
1969
1969
1970

Appointed by Board of Governors:
Graham E. Marx
President and General Manager, The G. A.
Gray Company, Cincinnati, Ohio
1968
Phillip R. Shriver
President, Miami University, Oxford, Ohio. . . 1969
Orin E. Atkins
President, Ashland Oil & Refining Company,
Ashland, Ky
1970

Pittsburgh Branch

Appointed by Federal Reserve Bank:
Robert C. Hazlett
President, Wheeling Dollar Savings & Trust
Co., Wheeling, W. Va
Charles M. Beeghly
Chairman of the Board and Chief Executive
Officer, Jones and Laughlin Steel Corporation, Pittsburgh, Pa
Thomas L. Wentling
President, First National Bank of Westmoreland, Greensburg, Pa
George S. Cook
President, Somerset Trust Company, Somerset,
Pa

424



1968

1969
1969
1970

FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS—Cont.

District 4 — Cleveland — Cont.

Term
expires
Dec. 31

Pittsburgh Branch — Cont.

Appointed by Board of Governors:
F. L. Byrom
President and Chief Executive Officer, Koppers
Company, Inc., Pittsburgh, Pa
Lawrence E. Walkley.. .President, Westinghouse Air Brake Company,
Pittsburgh, Pa
B. R. Dorsey
President, Gulf Oil Corporation, Pittsburgh,
Pa

1968
1969
1970

District 5 — Richmond
Class A:
William A. Davis
Robert C. Baker

Giles H. Miller
Class B:
Charles D. Lyon
Thaddeus Street
H. Dail Holderness

President, The Peoples Bank of Mullens, W.
Va
President and Chairman of the Board, American Security and Trust Company, Washington, D.C
.,
President, The Culpeper National Bank, Culpeper, Va
President, The Potomac Edison Company,
Hagerstown, Md
President, Carolina Shipping Company,
Charleston, S.C
President, Carolina Telephone and Telegraph
Company, Tarboro, N.C

1968

1969
1970

1968
1969
1970

Class C.Wilson H. Elkins

President, University of Maryland, College
Park, Md
Robert W. Lawson, Jr... Managing Partner of Charleston Office, Steptoe & Johnson, Charleston, W. Va
Stuart Shumate
President, Richmond, Fredericksburg and
Potomac Railroad Company, Richmond,
Va

1968
1969

1970

Baltimore Branch

Appointed by Federal Reserve Bank:
Joseph B. Browne
President, Union Trust Company of Maryland, Baltimore, Md
John P. Sippel
President, The Citizens National Bank, Laurel,
Md
Adrian L. McCardell
Chairman of the Board, First National Bank
of Maryland, Baltimore, Md
James J. Robinson
Executive Vice President and Cashier, Bank of
Ripley, W. Va




1968
1969
1970
1970

425

FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS—Cont.

District 5 — Richmond — Cont.

Term
expires
jyec% si

Baltimore Branch — Cont.

Appointed by Board of Governors:
E. Wayne Corrin
President, Consolidated Gas Supply Corporation, Clarksburg, W. Va
1968
Arnold J. Kleff, Jr
Manager, Baltimore Plant, American Smelting
and Refining Company, Baltimore, Md
1969
John H. Fetting, Jr
President, A. H. Fetting Company, Baltimore,
Md
1970
Charlotte Branch

Appointed by Federal Reserve Bank:
G. Harold Myrick
President, First National Bank, Lincolnton,
N.C
J. Willis Cantey
President, The Citizens and Southern National
Bank of South Carolina, Columbia, S.C
C. C. Cameron
Chairman of the Board and President, First
Union National Bank of North Carolina,
Charlotte, N.C
H. Phelps Brooks, Jr
President, The Peoples National Bank, Chester, S.C

1968
1969
1970
1970

Appointed by Board of Governors:
John L. Fraley
Executive Vice President, Carolina Freight
Carriers Corporation, Cherryville, N.C
1968
James A. Morris
Commissioner of Higher Education, Columbia,
S.C
1969
William B. McGuire... .President, Duke Power Company, Charlotte,
N.C
1970

District 6 — Atlanta
Class A.John W. Cray
William B Mills
A. L. Ellis

426




President, The First National Bank, Scottsboro,
Ala
1968
President, The Florida National Bank of Jacksonville, Fla
1969
Chairman of the Board, First National Bank
in Tarpon Springs, Fla
1970

FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS—Cont.

District 6 — Atlanta — Cont.

Term
expires
£>ec. 31

Class B:

Harry T. Vaughn
Philip J. Lee
Hoskins A. Shadow

Class C.Edwin I. Hatch
John A. Hunter
John C. Wilson

President, United States Sugar Corporation,
Clewiston, Fla
1968
Vice President, Tropicana Products, Inc.,
Tampa, Fla
1969
President, Tennessee Valley Nursery, Inc.,
Winchester, Tenn
1970

President, Georgia Power Company, Atlanta,
Ga
1968
President, Louisiana State University, Baton
Rouge, La
1969
President, Home-Wilson, Inc., Atlanta, Ga... 1970

Birmingham Branch

Appointed by Federal Reserve Bank:
Major W. Espy
Chairman of the Board, The Headland National Bank, Headland, Ala
Will T. Cothran
President, Birmingham Trust National Bank,
Birmingham, Ala
Arthur L. Johnson
President, Camden National Bank, Camden,
Ala
George A. LeMaistre... President, City National Bank of Tuscaloosa,
Ala

1968
1969
1970
1970

Appointed by Board of Governors:
Eugene C. Gwaltney, Jr..President, Russell Mills, Inc., Alexander City,
Ala
1968
Mays E. Montgomery.. .General Manager, Dixie Home Feeds Company, Athens, Ala
1969
C. Caldwell Marks
Chairman of the Board, Owen-Richards Company, Inc., Birmingham, Ala
1970




427

FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS—Cont.

District 6 — Atlanta — Cont.

Term
expires
Dec. 31

Jacksonville Branch

Appointed by Federal Reserve Bank:
Andrew P. Ireland
Chairman of the Board and Senior Vice President, The Barnett First National Bank and
Trust Co., Jacksonville, Fla
L. V. Chappell
President, First National Bank of Clearwater,
Fla
Harry Hood Bassett. . . .Chairman of the Board, The First National
Bank of Miami, Fla
John Y. Humphress
Executive Vice President, Capital City First
National Bank, Tallahassee, Fla

1968
1969
1970
1970

Appointed by Board of Governors:
Castle W. Jordan
President, Associated Oil and Gas Company,
Coral Gables, Fla
1968
Henry King Stanford... President, University of Miami, Coral Gables,
Fla
1969
Henry Cragg
Chairman of the Board and Chief Executive
Officer, Minute Maid Company, Orlando,
Fla
1970
Nashville Branch

Appointed by Federal Reserve Bank:
Moses E. Dorton
President, The First National Bank of Crossville, Tenn
Andrew Benedict
President, First American National Bank, Nashville, Tenn
H. A. Crouch, Jr
President, The First National Bank, Tullahoma,
Tenn
W. H. Swain
President, First National Bank, Oneida, Tenn...

1968
1969
1970
1970

Appointed by Board of Governors:
Alexander Heard
Chancellor, Vanderbilt University, Nashville,
Tenn
1968
James E. Ward
Chairman of the Board, Baird-Ward Printing
Company, Nashville, Tenn
1969
Robert M. Williams
President, ARO, Inc., Tullahoma, Tenn
1970

428



FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS—Cont.

District 6 — Atlanta — Cont.

Term
expires
Dec. 31

New Orleans Branch
Appointed by Federal Reserve Bank:
Donald L. Delcambre.. .President, The State National Bank, New
Iberia, La
A. L. Gottsche
President, First National Bank, Biloxi, Miss...
Lucien J. Hebert, Jr
Executive Vice President, Lafourche National
Bank of Thibodaux, La
Morgan Whitney
Vice President, Whitney National Bank of
New Orleans, La
Appointed by Board of Governors:
Frank G. Smith
Vice President, Mississippi Power & Light Company, Jackson, Miss
George B. Blair
General Manager, American Rice Growers
Cooperative Association, Lake Charles, La...
Robert H. Radcliff, Jr.. .President, Southern Industries Corporation,
Mobile, Ala

1968
1969
1970
1970

1968
1969
1970

District 7—Chicago
Class A:
Harry W. Schaller

President, The Citizens First National Bank
of Storm Lake, Iowa
Kenneth V. Zwiener... .Chairman of the Board, Harris Trust and
Savings Bank, Chicago, 111
Melvin C. Lockard. . : . . President, First National Bank, Mattoon, 111...

1968
1969
1970

Class B:
Joseph O. Waymire

Vice President for Finance, Eli Lilly and Company, Indianapolis, Ind
1968
William H. Davidson. . . President, Harley-Davidson Motor Company,
Milwaukee, Wis
1969
Howard M. Packard... .Chairman of the Finance Committee, S. C.
Johnson & Son, Inc., Racine, Wis
1970
Class C:
Elvis J. Stahr
Past President, Indiana University, Bloomington, Ind
1968
Emerson G. Higdon. . . .President and Treasurer, The Maytag Company, Newton, Iowa
1969
Franklin J. Lunding.... Chairman of the Finance Committee, Jewel
Companies, Inc., Melrose Park, 111
1970




429

FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS—Cont.

District 7 — Chicago — Cont.

Term
expires
Dec. 31

Detroit Branch

Appointed by Federal Reserve Bank:
B. P. Sherwood, Jr
President, Security First Bank and Trust Company, Grand Haven, Mich
John H French, J r . . . . . . President, City National Bank of Detroit,
Mich
George L. Whyel
President, Genesee Merchants Bank and Trust
Company, Flint, Mich
Raymond T. Perring.... Chairman of the Board, The Detroit Bank and
Trust Company, Detroit, Mich
Appointed by Board of Governors:
Guy S. Peppiatt
Chairman of the Board, Federal-Mogul Corporation, Detroit, Mich
Max P. Heavenrich, Jr... President, Heavenrich Bros. & Company,
Saginaw, Mich
L. Wm. Seidman
Resident Partner, Seidman & Seidman, Grand
Rapids, Mich

1968
1969
1969
1970

1968
1969
1970

District 8 —St. Louis
Class A:
Harry F. Harrington
Cecil W. Cupp, Jr
Bradford Brett

Chairman of the Board, The Boatmen's National Bank of Saint Louis, Mo
President, Arkansas Bank and Trust Company, Hot Springs, Ark
President, The First National Bank of Mexico,
Mo

Class B:
Sherwood J. Smith
Industrialist, Evansville, Ind
Roland W. Richards.... Senior Vice President, Laclede Steel Company,
St. Louis, Mo
Mark Townsend
Chairman of the Board, Townsend Lumber
Company, Inc., Stuttgart, Ark
Class C:
Frederic M. Peirce
President, General American Life Insurance
Company, St. Louis, Mo
William King Self
President, Riverside Industries, Marks, Miss...
Smith D. Broadbent, Jr..Owner, Broadbent Hybrid Seed Co., Cadiz,
Ky

430



1968
1969
1970
1968
1969
1970

1968
1969
1970

FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS—Cont.

District 8 — St. Louis — Cont.

Term
expires
j)ec. 31

Little Rock Branch

Appointed by Federal Reserve Bank:
Louis E. Hurley
President, The Exchange Bank & Trust Company, El Dorado, Ark
Ellis E. Shelton
President, The First National Bank of Fayetteville, Ark
Wayne A. Stone
President, Simmons First National Bank of
Pine Bluff, Ark
Edward M. Penick
President, Worthen Bank & Trust Company,
Little Rock, Ark

Appointed by Board of Governors:
Carey V. Stabler
President, Little Rock University, Little Rock,
Ark
Jake Hartz, Jr
President, Jacob Hartz Seed Co., Inc., Stuttgart, Ark
Ralph M. Sloan, Jr
President, Terminal Van and Storage Company, Little Rock, Ark

1968
1969
1969
1970

1968
1969
1970

Louisville Branch

Appointed by Federal Reserve Bank:
John H. Hardwick
Chairman of the Board, The Louisville Trust
Company, Louisville, Ky
Wm. G. Deatherage. . . .President, Planters Bank & Trust Co., Hopkinsville, Ky
Paul Chase
President, The Bedford National Bank, Bedford, Ind
J. E. Miller
Executive Vice President, Sellersburg State
Bank, Sellersburg, Ind

Appointed by Board of Governors:
C. Hunter Green
Vice President, South Central Bell Telephone
Company, Louisville, Ky
Lisle Baker, Jr
Chairman of the Finance Committee, The
Courier-Journal & Louisville Times Company, Louisville, Ky
Harry M. Young, Jr
Farmer, Herndon, Ky




1968
1969
1969
1970

1968

1969
1970

431

FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS—Cont.

District 8 — St. Louis — Cont.

Term
expires
j)ec. 31

Memphis Branch

Appointed by Federal Reserve Bank:
Wade W. Hollowell
President, The First National Bank of Greenville, Miss
Allen Morgan
President, The First National Bank of Memphis, Tenn
Con T. Welch
President, Citizens Bank, Savannah, Tenn
J. J. White
President, Helena National Bank, Helena,
Ark

1968
1969
1969
1970

Appointed by Board of Governors:
Sam Cooper
President, HumKo Products Division, National Dairy Products Corporation, Memphis, Tenn
1968
William L. Giles
President, Mississippi State University, State
College, Miss
1969
Alvin Huffman, Jr
President, Huffman Brothers Lumber Company, Blytheville, Ark
1970
District 9 — Minneapolis
Class A:
Curtis B. Mateer
John Bosshard
Warren F. Vaughan
Class B:
John H. Toole
Leo C. Studness
Neil G. Simpson
Class C.Robert F. Leach
Joyce A. Swan
Byron W. Reeve

432



Executive Vice President, The Pierre National
Bank, Pierre, S. Dak
1968
Executive Vice President, First National Bank
of Bangor, Wis
1969
President, Security Trust & Savings Bank,
Billings, Mont
1970
President, Toole and Easter Company, Missoula, Mont
1968
Manager, Studness Company, Devils Lake,
N. Dak
1969
President, Black Hills Power and Light Company, Rapid City, S. Dak
1970
Attorney, Oppenheimer, Hodgson, Brown,
Wolff and Leach, St. Paul, Minn
1968
Vice Chairman of the Board, Minneapolis
Star and Tribune, Minneapolis, Minn
1969
President, Lake Shore, Inc., Iron Mountain,
Mich
1970

FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS—Cont.

District 9 — Minneapolis — Cont.

Term
expires
Dec. 31

Helena Branch

Appointed by Federal Reserve Bank:
Charles H. Brocksmith. .President, First Security Bank of Glasgow
N.A., Glasgow, Mont
1968
Glenn H. Larson
President, First State Bank of Thompson Falls,
Mont
1968
B. Meyer Harris
President, The Yellowstone Bank, Laurel,
Mont
1969
Appointed by Board of Governors:
C. G. McClave
President, Montana Flour Mills Company,
Great Falls, Mont
1968
Edwin G. Koch
President, Montana College of Mineral Science and Technology, Butte, Mont
1969

District 10 — Kansas City
Class A:
Burton L. Lohmuller... .Chairman of the Board, The First Natioanl
Bank of Centralia, Kans
Eugene H. Adams
President, The First National Bank of Denver, Colo
C. M. Miller
President, The Farmers and Merchants State
Bank, Colby, Kans
Class B:
Stanley Learned
Director and member of Finance Committee,
Phillips Petroleum Company, Bartlesville,
Okla
Cecil O. Emrich
Manager, Norfolk Livestock Market, Inc.,
Norfolk, Nebr
Alfred E. Jordan
Vice President, Trans World Airlines, Inc.,
Kansas City, Mo
Class C:
Dean A. McGee
Chairman of the Board, Kerr-McGee Corporation, Oklahoma City, Okla
William D. Hosford, Jr.. Vice President and General Manager, John
Deere Company, Omaha, Nebr
Dolph Simons
Editor and President, The Lawrence Daily
Journal-World, Lawrence, Kans




1968
1969
1970

1968
1969
1970
1968
1969
1970

433

FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS—Cont.

District 10 — Kansas City — Cont.

Term
expires
Dec. 31

Denver Branch

Appointed by Federal Reserve Bank:
J. P. Brandenburg
President, The First State Bank of Taos, N.
Mex
1968
Theodore D. Brown
President, The Security State Bank of Sterling,
Colo
1968
Armin B. Barney
Chairman of the Board, Colorado Springs National Bank, Colorado Springs, Colo
1969
Appointed by Board of Governors:
D. R. C. Brown
President, The Aspen Skiing Corporation,
Aspen, Colo
1968
Cris Dobbins
Chairman of the Board, Ideal Basic Industries,
Inc., Denver, Colo
1969
Oklahoma City Branch

Appointed by Federal Reserve Bank:
Guy L. Berry, Jr
President, The American National Bank and
Trust Company, Sapulpa, Okla
1968
C. M. Crawford
President, First National Bank, Frederick,
Okla
1968
Howard J. Bozarth
President, City National Bank and Trust Company, Oklahoma City, Okla
1969
Appointed by Board of Governors:
F. W. Zaloudek
Manager, J. I. Case Equipment Agency, Kremlin, Okla
1968
C. W. Flint, Jr
Chairman of the Board, Flint Steel Corporation, Tulsa, Okla
1969
Omaha Branch

Appointed by Federal Reserve Bank:
W. B. Millard, Jr
Chairman of the Board, Omaha National Bank,
Omaha, Nebr
1968
John W. Hay, Jr
President, Rock Springs National Bank, Rock
Springs, Wyo
1969
S. N. Wolbach
President, First National Bank of Grand Island, Nebr
1969
Appointed by Board of Governors:
Henry Y. Kleinkauf
President, Natkin & Company, Omaha, Nebr... 1968
A. James libel
Vice President and General Manager, Cornhusker Television Corporation, Lincoln,
Nebr
1969

434



FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS—Cont.
Class A:
Ralph A. Porter
Murray Kyger
J. V. Kelly
Class B:
J. B. Perry, Jr
C. A. Tatum, Jr
Carl D. Newton
Class C:
Chas. F. Jones
Max Levine
Carl J. Thomsen

District 11 — Dallas

Term
expires
Dec. 31

President, The State National Bank of Denison, Tex
1968
Chairman of the Board, The First National
Bank of Fort Worth, Tex
1969
President, Peoples National Bank, Belton,
Tex
1970
Real Estate Investments and Development,
Lufkin, Tex
1968
President and Chief Executive Officer, Texas
Utilities Company, Dallas, Tex
1969
President, Fox-Stanley Photo Products, Inc.,
San Antonio, Tex
1970
President, Humble Oil & Refining Company,
Houston, Tex
1968
Retired Chairman of the Board, Foley's,
Houston, Tex
1969
Senior Vice President, Texas Instruments Incorporated, Dallas, Tex
1970

El Paso Branch

Appointed by Federal Reserve Bank:
Joe B. Sisler
President, The Clovis National Bank, Clovis,
N. Mex
Robert W. Heyer
Director and Consultant, Southern Arizona
Bank & Trust Company, Tucson, Ariz
Archie B. Scott
President, The Security State Bank of Pecos,
Tex
Robert F. Lockhart
President, The State National Bank of El Paso,
Tex

1968
1969
1969
1970

Appointed by Board of Governors:
Joseph M. Ray
H. Y. Benedict Professor, Department of
Political Science, The University of Texas at
El Paso, Tex
1968
C. Robert McNally, Jr. . Rancher, Roswell, N. Mex
1969
Gordon W. Foster
Vice President, Farah Manufacturing Company, Inc., El Paso, Tex
1970




435

FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS—Cont.

District 11 — Dallas — Cont.

Term
expires
Dec. 31

Houston Branch

Appointed by Federal Reserve Bank:
Henry B. Clay
President, First Bank & Trust, Bryan, Tex
W. G. Thornell
President, The First National Bank of Port
Arthur, Tex
John E. Whitmore
President, Texas National Bank of Commerce
of Houston, Tex
A. G. McNeese, Jr
Chairman of the Board, Bank of the Southwest
National Association, Houston, Tex
Appointed by Board of Governors:
R. M. Buckley
President and Director, Eastex Incorporated,
Silsbee, Tex
Geo. T. Morse, Jr
President and General Manager, Peden Iron
& Steel Company, Houston, Tex
M. Steele V/right, Jr
President and General Manager, Texas Farm
Products Company, Nacogdoches, Tex

1968
1969
1969
1970

1968
1969
1970

San Antonio Branch

Appointed by Federal Reserve Bank:
James T. Denton, Jr
President, Corpus Christi Bank and Trust,
Corpus Christi, Tex
J. R. Thornton
Chairman of the Board and President, State
Bank and Trust Company, San Marcos, Tex.
T. C. Frost, Jr
President, The Frost National Bank of San
Antonio, Tex
Ray M. Keck, Jr
President, Union National Bank, Laredo, Tex.
Appointed by the Board of Governors:
Francis B. May
Professor of Business Statistics, Department of
General Business, The University of Texas at
Austin, Tex
W. A. Belcher
Veterinarian and rancher, Brackettville, Tex...
Lloyd M. Knowlton.... General Manager and Partner, Knowlton's
Creamery, San Antonio, Tex

436



1968
1969
1969
1970

1968
1969
1970

FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS—Cont.

District 12 — San Francisco

Term
expires
Dec. 31

Class A:
Ralph V. Arnold

Chairman of the Board and Chief Executive
Officer, First National Bank and Trust Company, Ontario, Calif.
Carroll F. Byrd
Chairman of the Board and President, The First
National Bank of Willows, Calif
Charles F. Frankland. . . Chairman of the Board and Chief Executive
Officer, The Pacific National Bank of Seattle,
Wash

1968
1969

1970

Class B:
Herbert D. Armstrong.. Treasurer, Standard Oil Company of California,
San Francisco, Calif.
1968
Joseph Rosenblatt
Honorary Chairman, The Eimco Corporation,
Salt Lake City, Utah
1969
Marron Kendrick
President, Schlage Lock Company, San Francisco, Calif.
1970
Class C.Bernard T. Rocca, Jr
S. Alfred Halgren
O. Meredith Wilson

Chairman of the Board, Pacific Vegetable Oil
Corporation, San Francisco, Calif.
Senior Vice President and Director, Carnation
Company, Los Angeles, Calif.
President and Director, Center for Advanced
Study in the Behavioral Sciences, Stanford,
Calif

1968
1969

1970

Los Angeles Branch
Appointed by Federal Reserve Bank:
Harry J. Volk
President, Union Bank, Los Angeles, Calif....
Carl E. Schroeder
President, The First National Bank of Orange
County, Orange, Calif.
Sherman Hazeltine
Chairman of the Board and Chief Executive
Officer, First National Bank of Arizona,
Phoenix, Ariz
T. H. Shearin
President, Community National Bank, Bakersfield, Calif.




1968
1968

1969
1970

437

FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS—Cont.

District 12 — San Francisco — Cont.

Term
expires
Dec. 31

Los Angeles Branch — Cont.

Appointed by the Board of Governors:
J, L. Atwood
President and Chief Executive Officer, North
American Rockwell Corporation, El Segundo, Calif
1968
Leland D. Pratt
Executive Vice President, Kelco Company,
San Diego, Calif.
1969
Norman B. Houston
Senior Vice President and Treasurer, Golden
State Mutual Life Insurance Company, Los
Angeles, Calif.
1970
Portland Branch

Appointed by Federal Reserve Bank:
E. W. Firsi:enburg
Chairman of the Board and President, First
Independent Bank, Vancouver, Wash
1968
Charles F. Adams
President, The Oregon Bank, Portland, Oreg... 1968
Ralph J. Voss
President, First National Bank of Oregon,
Portland, Oreg
1969
Appointed by Board of Governors:
Robert F. Dwyer
Dwyer Forest Products Company, Portland,
Oreg
1968
Frank Anderson
Rancher, Heppner, Oreg
1969
Salt Lake City Branch

Appointed by Federal Reserve Bank:
Alan B. Blood
President, Barnes Banking Company, Kaysville, Utah
1968
Newell B. Dayton
Chairman of the Board, Tracy-Collins Bank
and Trust Company, Salt Lake City, Utah.. 1968
William E. Irvin
President, The Idaho First National Bank,
Boise, Idaho
1969
Appointed by Board of Governors:
Peter E. Marble
Rancher, Deeth, Nev
1968
Roy den G. Derrick
President and General Manager, Western Steel
Company, Salt Lake City, Utah
1969

438



FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS—Cont.

District 12 — San Francisco — Cont.

Term
expires
Dec. 31

Seattle Branch

Appointed by Federal Reserve Bank:
A. E. Saunders
President, The Puget Sound National Bank,
Tacoma, Wash
1968
Philip H. Stanton
President, Washington Trust Bank, Spokane,
Wash
1968
Maxwell Carlson...
President, The National Bank of Commerce of
Seattle, Wash
1969
Appointed by Board of Governors:
Robert D. O'Brien
Chairman of the Board and Chief Executive
Officer, Pacific Car and Foundry Company,
Renton, Wash
1968
William McGregor
Vice President, McGregor Land and Livestock
Company, Hooper, Wash
1969




439

FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.
PRESIDENTS and VICE PRESIDENTS
Federal
Reserve
Bank

or branch

President
First Vice President

Vice Presidents

Boston.

. j Frank E. Morris
I E. O. Latham

D. Harry Angney
Ansgar R. Berge
L. M. Hoyle, Jr.
Laurence H. Stone
Parker B. Willis

New York...

.} Alfred Hayes
! William F. Treiber

Harold A. Bilby
William H.Braun, Jr.
John J. Clarke
Charles A. Coombs
Felix T. Davis
Peter Fousek
Edward G. Guy
Marcus A. Harris
Alan R. Holmes
Robert G. Link
Bruce K. MacLaury Fred W. Piderit, Jr.
Peter D. Sternlight T. M. Timlen, Jr.
Thomas O. Waage
Angus A. Maclnnes, Jr.

Buffalo

Daniel Aquilino
R. W. Eisenmenger
Harry R. Mitiguy
G. Gordon Watts

Philadelphia.

Karl R. Bopp
Robert N. Hilkert

Cleveland.

W. Braddock Hickman George E. Booth, Jr. Paul Breidenbach
Elmer F. Fricek
Walter H. MacDonald Roger R. Clouse
William H.Hendricks John J. Hoy
Harry W. Huning
Frederick S. Kelly
Maurice Mann
Clifford G. Miller
Fred O. Kiel
Clyde E. Harrell

Cincinnati
Pittsburgh

Richmond.

Aubrey N. Heflin
Robert P. Black

Baltimore
Charlotte

440



Edward A. Aff
Joseph R. Campbell
David P. Eastburn
David C. Melnicoff
L. C. Murdoch, Jr.
James V. Vergari

Hugh Barrie
Norman G. Dash
William A. James
G. William Metz
Harry W. Roeder

J. G. Dickerson, Jr. W. S. Farmer
Upton S. Martin
Arthur V. Myers, Jr.
John L. Nosker
James Parthemos
R. E. Sanders, Jr.
Joseph F. Viverette
D. F. Hagner
E. F. MacDonald
Stuart P. Fishburne

FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.
PRESIDENTS and VICE PRESIDENTS—Cont.
Federal
Reserve
Bank

or branch
Atlanta

President
First Vice President

Harry Brandt
Billy H. Hargett
Monroe Kimbrel
Robert E. Moody, Jr. J. E. McCorvey
Brown R. Rawlings
Richard A. Sanders R. M. Stephenson
Charles T. Taylor

* Birmingham
Jacksonville
Nashville
New Orleans

Chicago

Edward C. Rainey
Jeffrey J. Wells
Arthur H. Kantner

Charles J. Scanlon
Hugh J. Helmer

Ernest T. Baughmar1 Daniel M. Doyle
Elbert O. Fults
A. M. Gustavson
L. H. Jones
Ward J. Larson
Richard A. Moffatt James R. Morrison
Harry S. Schultz
Bruce L. Smyth
Jack P. Thompson
Swaney
Russel A. J

Darryl R. Francis
Dale M. Lewis

Leonall C. Anderserl Marvin L. Bennett
W. W. Gilmore
Gerald T. Dunne
Homer Jones
Wilbur H. Isbell
John W. Menges
Stephen Koptis
Howard H. Weigel Joseph C. Wotawa
John F. Breen
Donald L. Henry
Eugene A. Leonard

Hugh D. Galusha, Jr.
M. H. Strothman, Jr.

W. C. Bronner
Kyle K. Fossum
C. W. Groth
Howard L. Knous
Clarence W. Nelson
Clement A

Detroit

St. Louis

Little Rock
Louisville
Memphis

Minneapolis....

Vice Presidents

Helena

F. J. Cramer
L. G. Gable
Douglas R. Hellweg
John A. MacDonald
Van Nice

*Has no Vice President at this time.




441

FEDERAL ItESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.
PRESIDENTS and VICE PRESIDENTS—Cont.
Federal
Reserve
Bank

or branch
Kansas C i t y . . . .

President
First Vice President
George H. Clay
John T. Boysen

Wilbur T. Billington D. R. Cawthorne
Raymond J. Doll
J. R. Euans
Carl F. Griswold, Jr. M. L. Mothersead
Maurice J. Swords R. E. Thomas
Clarence W. Tow
John W. Snider
Howard W. Pritz
George C. Rankin

Philip E. Coldwell
T. W. Plant

R. E. Bohne
Robert H. Boykin
James L. Cauthen
Ralph T. Green
James A. Parker
W. M. Pritchett
Thomas R. Sullivan
Frederic W. Reed
J. Lee Cook
Carl H. Moore

Eliot J. Swan
A. B. Merritt

J. Howard Craven D. M. Davenport
Irwin L. Jennings
Gerald R. Kelly
E. J. Martens
R. Maurer, Jr.
W. F. Scott
J. B. Williams
P. W. Cavan
W. G. DeVries
William M. Brown
Arthur L. Price
W. R. Sandstrom

Denver
Oklahoma City
Omaha

Dallas

El Paso
Houston
San Antonio

San Francisco...

Vice Presidents

Los Angeles
Portland
Salt Lake City
Seattle

442



FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

CONFERENCE OF PRESIDENTS
The Presidents of the Federal Reserve Banks are organized into a Conference of
Presidents that meets from time to time to consider matters of common interest and to
consult with and advise the Board of Governors. Mr. Ellis, President of the Federal
Reserve Bank of Boston, and Mr. Clay, President of the Federal Reserve Bank of
Kansas City, were elected Chairman of the Conference and Vice Chairman, respectively,
in March 1968, and served in those capacities through June 1968. At the June meeting
Mr. Clay and Mr. Scanlon, President of the Federal Reserve Bank of Chicago, were
elected Chairman and Vice Chairman, respectively, and served in those capacities
during the remainder of the year.
Mr. Philip A. Shaver of the Federal Reserve Bank of Boston and Mr. J. David
Hamilton of the Federal Reserve Bank of Kansas City were appointed Secretary of the
Conference and Assistant Secretary, respectively, in March 1968. Mr. Hamilton was
appointed Secretary, and Mr. William J. Hocter of the Federal Reserve Bank of Chicago
was appointed Assistant Secretary in June 1968, in which capacities they served during
the remainder of the year.




443

Index
Page
Acceptance powers of member banks
352
Acceptances, bankers':
Authority to purchase and to enter into repurchase agreements
100-01
Federal Reserve Bank holdings
356, 364, 366, 368
Federal Reserve earnings on
356, 374
Open market transactions during 1968
372
Assets and liabilities:
Banks, by classes
386
Board of Governors
360
Federal Reserve Banks
364-69
Balance of payments {See U.S. balance of payments)
Bank Examination Schools
353
Bank examiners, home mortgage loans to, legislative recommendation. . . . 339
Bank holding companies:
Board actions with respect to
349
Revision of Regulation Y
74
Bank Holding Company Act, legislative recommendations
340
Bank mergers and consolidations
348, 392-413
Bank premises, Federal Reserve Banks and branches . .358, 364, 366, 368, 373
Bank Protection Act of 1968
334
Bank supervision and regulation by Federal Reserve System
345-53
Banking offices :
Changes in number
388
Par and nonpar offices, number
390
Board of Governors:
Audit of accounts
359
Building annex
359
Income and expenses
359-62
Legislative recommendations
337-40
Litigation
341-43
Members and officers
416
Policy actions
69-97
Regulations {See Regulations)
Salaries
361
Branch banks:
Banks, by classes, changes in number
388
Federal Reserve:
Bank premises
358, 373
Directors
421-39
Vice Presidents in charge
440-42

444



INDEX

Page
Branch banks—Continued
Foreign branches of member banks, special study and number of. 325, 350-52
Loan production offices as branches, reinterpretation
by Board of Federal banking laws
88
Capital accounts:
Banks, by classes
386
Federal Reserve Banks
365, 367, 369
Chairmen and Deputy Chairmen of Federal Reserve Banks
420
Clearing and collection:
Par clearance, legislative recommendation
337
Volume of operations
378
Commercial banks:
Assets and liabilities
386
Banking offices, changes in number
388
Foreign credit restraint program
57-59, 76, 94
Number, by class of bank
386
Par clearance, legislative recommendation
337
Condition statement of Federal Reserve Banks
364-69
Credit:
Stock market transactions, regulatory changes and
policy actions by Board affecting credit in
70, 72, 75, 83, 84, 85, 87
Truth in Lending Act
333
Credit markets and
financial
flows
13-28
Credit unions, amendment of Regulation G pertaining to
87
Defense Production Act, extension
333
Defense production loans
357, 379
Deposits:
Banks, by classes
386
Federal Reserve Banks
365, 367, 369, 384
Reserve requirements {See Reserve requirements)
Time and savings deposits:
Foreign time deposits, exemption of interest on
certain deposits
69, 92
Maximum permissible interest rates on:
Flexible authority to set, extension of law
336
Large-denomination, single-maturity time deposits,
amendment of Regulation Q
80
Table
380
Deputy Chairmen of Federal Reserve Banks
420
Directors, Federal Reserve Banks and branches
421-39
Discount rates at Federal Reserve Banks:
Decrease
90
Increases
76, 79, 95
Table
383




445

INDEX

Page
Discounts and advances by Federal Reserve Banks:
Collateral for Federal Reserve credit, amendment of Regulation
A, new provisions of law, and legislative recommendation. . . .93, 336, 337
Earnings on
356, 374
Special studies
324
Volume
356, 364, 366, 368, 378, 384
Dividends:
Federal Reserve Banks
354, 375, 376
Member banks
387
Earnings:
Federal Reserve Banks
354, 374, 376
Member banks
387
Econometric model construction, special study
326
Examinations:
Federal Reserve Banks
354
Foreign banking and financing corporations
352
Member banks
345
State member banks
345
Executive officers of member banks, loans to:
Reporting requirements
347
Revision of Regulation 0
73
Expenses:
Board of Governors
359-62
Federal Reserve Banks
354, 374, 376
Member banks
387
Federal Advisory Council
419
Federal agency obligations:
Authority of Reserve Banks to buy and sell, law
made permanent
336
Federal Reserve Bank holdings
356, 364, 366, 368
Open market transactions of Federal Reserve System
during 1968
372
Federal Open Market Committee:
Audit of System Account
354
Continuing authorizations
129
Domestic securities operations, review
226, 221-1A
Foreign currency operations, review
60-65, 226, 275-323
Meetings
99, 418
Members and officers
418
Policy actions
99-225
Federal Reserve Act:
Section 14(b), extension of authority of Reserve Banks
to purchase Govt. obligations directly from United States
333

446



INDEX

Page
Federal Reserve Act—Continued
Section 16, elimination of provision relating to gold
reserve requirement against Federal Reserve notes
333
Section 24, amendment relating to real estate loans by national banks. . 334
Federal Reserve Agents
420
Federal Reserve Banks:
Advances by, collateral for, amendment of Regulation A,
new provisions of law, and legislative recommendation
93, 336, 337
Assessment for expenses of Board of Governors
361, 374
Authority to buy and sell Federal agency obligations,
law made permanent
336
Authority to purchase Govt. obligations directly from
United States, extension
333
Bank premises
358, 364, 366, 368, 373
Branches (See Branch banks, Federal Reserve)
Capital accounts
365, 367, 369
Chairmen and Deputy Chairmen
420
Condition statement
364-69
Directors
421-39
Discount rates (See Discount rates)
Dividends
354, 375, 376
Earnings and expenses
354, 374, 376
Examination
354
Federal agency obligations (See Federal agency obligations)
Foreign and international accounts
357
Lending authority of, legislative recommendation
93, 336, 337
Officers and employees, number and salaries
379
Presidents and Vice Presidents
440-42
Profit and loss
375
Purchase of obligations of foreign govts., legislative recommendation. . 339
U.S. Govt. securities (See U.S. Govt. securities)
Volume of operations
356, 378
Federal Reserve notes:
Condition statement data
. 364-69
Cost of printing, issue, and redemption
361
Gold reserve requirement against, elimination
333
Interest paid to Treasury
354, 375, 376
Federal Reserve System:
Bank supervision and regulation by
345-53
Foreign credit restraint program
57-59, 76, 94
Foreign currency operations (See Foreign currency operations)
Map of Federal Reserve districts
414
Membership
347
Special studies
324-27




447

INDEX

Page
Federal Reserve System—Continued
Training activities
353
Financial flows and credit markets
13-28
Foreign banking and financing corporations:
Amendment of Regulation K
73
Examination and operation
352
Foreign branches of member banks, special study and number of. .325, 350-52
Foreign credit restraint program
57-59, 76, 94
Foreign currency operations:
Authorization and directive
100, 102-07, 115, 128, 129, 132, 142,
151, 159, 174, 202, 217
Federal Reserve earnings on foreign currencies
374
Legislative recommendation regarding purchase of obligations
of foreign govts. by Reserve Banks
339
Review
60-65, 226, 275-323
Foreign time deposits, exemption of interest on certain deposits
69, 92
Gold:
Reserve requirement against Federal Reserve notes, elimination,
amendment of Federal Reserve Act
333
Tables showing gold certificate accounts of Reserve
Banks and gold stock
364, 366, 367, 368, 369, 384
Two-market system for
331
Government securities (See U.S. Govt. securities)
Guidelines for banks and nonbank financial institutions
57-59, 76, 94
Home mortgage loans to bank examiners, legislative recommendation. . . . 339
Housing and Urban Development Act of 1968
334
Income, expenses, and dividends, member banks
387
Insured commercial banks:
Assets and liabilities
386
Banking offices, changes in number
388
Graduated reserve requirements on demand deposits,
legislative recommendation
338
Par clearance, legislative recommendation
337
Interest on deposits:
Exemption of interest on certain foreign
time deposits
69, 92
Maximum rates on deposits or share accounts, flexible
authority for supervisory agencies to set, extension of law
336
Maximum rates on large-denomination, single-maturity time
deposits, amendment of Regulation Q
80
Interest rates:
Discount rates at Federal Reserve Banks (See Discount rates)
Regulation V loans
357, 379
Time and savings deposits:
Exemption of interest on certain foreign time deposits
69, 92

448



INDEX

Page
Interest rates—Continued
Time and savings deposits—Continued
Maximum rates on deposits or share accounts, flexible authority
for supervisory agencies to set, extension of law
336
Maximum rates on large-denomination, single-maturity time
deposits, amendment of Regulation Q
80
Table of maximum permissible rates
380
International liquidity, discussions and negotiations
328-32
International Monetary Fund (See Special Drawing Rights)
Investments:
Banks, by classes
386
Federal Reserve Banks
364, 366, 368
Revenue bond underwriting by member banks, legislation
334
Legislation:
Bank examiners, home mortgage loans to, legislative recommendation. . 339
Bank holding companies, bank subsidiaries, legislative recommendations 340
Bank Protection Act of 1968
334
Collateral for advances by Reserve Banks, new provisions of law
and legislative recommendation
93, 336, 337
Defense Production Act, extension
333
Federal agency obligations, authority of Reserve Banks to buy and
sell, law made permanent
336
Gold reserve requirement against Federal Reserve notes, elimination. . . 333
Housing and Urban Development Act of 1968
334
Lending authority of Reserve Banks, new provisions of law
and legislative recommendation
93, 336, 337
Margin requirements, extension of law to over-the-counter securities. . 334
Par clearance, legislative recommendation
337
Purchase of obligations of foreign govts. by Reserve
Banks, legislative recommendation
339
Rate ceilings on deposits or share accounts, flexible authority for
Federal supervisory agencies to set maximum, extension
336
Real estate loans by national banks, amendment of Section 24 of
Federal Reserve Act
334
Reserve requirements:
Graduated reserve requirements on demand deposits,
legislative recommendation
338
Time deposits of member banks, law made permanent
336
Revenue bond underwriting of certain municipal bonds by member banks 334
Special Drawing Rights Act
333
"Tender offers" with respect to securities of member State banks,
amendments to Securities Exchange Act of 1934
334
Truth in Lending Act
333




449

INDEX

Page
Legislation—Continued
U.S. Govt obligations, authority of Reserve Banks to purchase direct
from U.S., extension
333
Liquidity discussions and negotiations
328-32
Litigation:
Baker Walts & Co. et al v. Saxon
343
Collateral Lenders Committee et al. v. Board of Governors
of the Federal Reserve System
341
Suits arising out of closing of San Francisco National Bank
342
United States v. Girard Trust Bank and The Fidelity Bank
342
Loan production offices as branches of State member banks,
reinterpretation by Board of Federal banking laws
88
Loans:
Banks, by classes
386
Executive officers of member banks, loans to (See Member banks)
Federal Reserve Banks (See Discounts and advances)
Home mortgage loans to bank examiners, legislative recommendation. . 339
Real estate loans by national banks, legislation
334
Regulation V loans
357, 379
Slock market transactions (See Stock market transactions)
Margin requirements:
Exemption from, proposed amendment to Regulation U regarding loans
to dealers engaged in market-making activities in convertible bonds. .
84
Extension of, to over-the-counter securities, legislation
334
Regulatory changes by Board
70, 72, 75, 83, 84, 85, 87
Table
381
Member banks:
Acceptance powers
352
Advances by Reserve Banks to (See Federal Reserve Banks)
Assets, liabilities, and capital accounts
386
Bank Protection Act of 1968
334
Banking offices, changes in number
388
Examination
345
Executive officers of, loans to:
Reporting requirements
347
Revision of Regulation O
73
Foreign branches, special study and number of
325, 350-52
Income, expenses, and dividends
387
Number
348, 386
Operations subsidiaries and loan production offices of State member
banks, reinterpretation by Board of Federal banking laws
88
Par clearance, legislative recommendation
337
Reserve requirements (See Reserve requirements)
Reserves and related items
384

450



INDEX

Page
Member banks—Continued
Revenue bond underwriting, legislation
334
"Tender offers" with respect to securities of member State banks,
legislation and amendment of Regulation F
86, 334
Membership in Federal Reserve System
347
Mergers {See Bank mergers and consolidations)
Monetary policy:
Digest of principal policy actions
9-11
Econometric model construction, special study
326
Review of 1968
3-65
Mutual savings banks
386, 388
National banks:
Assets and liabilities
386
Banking offices, changes in number
388
Foreign branches, special study and number of
325, 350-52
Number
348, 386
Real estate loans, legislation
334
Revenue bond underwriting, legislation
334
Nonbank financial institutions, foreign credit restraint
program
57-59, 76, 94
Nonmember banks:
Assets and liabilities
386
Banking offices, changes in number
388
Operations subsidiaries of State member banks, reinterpretation by
Board of Federal banking laws
88
Over-the-counter securities {See Securities)
Par and nonpar banking offices, number
390
Par clearance, legislative recommendation
337
Policy actions, Board of Governors:
Discount rates at Federal Reserve Banks:
Decrease
90
Increases
76, 79, 95
Foreign credit restraint program guidelines, revision
76, 94
Member bank reserve requirements, consideration of i n c r e a s e . . . . . .
96
Operations subsidiaries and loan production offices,
reinterpretation of Federal banking laws
88
Regulation A, Advances and Discounts by Federal Reserve Banks:
Amendment to conform to new provisions of law
93
Regulation D, Reserves of Member Banks:
Reserve requirements, changes in method of computation
82
Regulation F, Securities of Member State Banks:
Amendments to conform to Securities Exchange Act of 1934
86




451

INDEX

Page
Policy actions, Board of Governors—Continued
Regulation G, Credit by Persons Other Than Banks, Brokers, or Dealers
for Purpose of Purchasing or Carrying Registered Equity Securities:
Adoption of new regulation and amendments
70, 75, 83, 87
Margin requirements, increase
85
Regulation K, Corporations Engaged in Foreign Banking and Financing
Under the Federal Reserve Act:
Equity investment abroad, Board approval necessary
73
Regulation O, Loans to Executive Officers of Member Banks:
Revision
73
Regulation Q, Payment of Interest on Deposits:
Foreign time deposits, exemption of interest on certain deposits.... 69, 92
Maximum rates on large-denomination, single-maturity time deposits
80
Regulation T, Credit by Brokers, Dealers, and Members of
National Securities Exchanges:
Amendments
70, 72, 75, 83
Margin requirements, increase
85
Regulation U, Credit by Banks for the Purpose of Purchasing or
Carrying Registered Stocks:
Amendments
70, 75, 83
Margin requirements, increase
85
Proposed amendment to exempt from margin requirements loans
to dealers engaged in market-making activities in convertible bonds
84
Regulation Y, Bank Holding Companies:
Revision
74
Policy actions, digest
9-11
Policy actions, Federal Open Market Committee:
Authority to effect transactions in System Account, including
current economic policy directive
99-225
Continuing authority directive on domestic operations
100
Continuing authorizations
129
Foreign currency operations, authorization and directive
100, 102-07,
115, 128, 129, 132, 142, 151, 159, 174, 202, 217
Presidents of Federal Reserve Banks:
Conference
443
List
440-42
Salaries
379
Profit and loss, Federal Reserve Banks
375
Real estate loans by national banks, legislation
334
Record of policy actions {See Policy actions)
Regulations, Eioard of Governors:
A, Advances and Discounts by Federal Reserve Banks:
Amendment to conform to new provisions of law
93

452



INDEX

Page
Regulations, Board of Governors—Continued
D, Reserves of Member Banks
Reserve requirements:
Changes in method of computation
82
Consideration of increase in by Board
96
F, Securities of Member State Banks:
Amendments to conform to Securities Exchange Act of 1934
86
G, Credit by Persons Other Than Banks, Brokers, or Dealers for
Purpose of Purchasing or Carrying Registered Equity Securities:
Adoption of new regulation and amendments
70, 75, 83, 87
Margin requirements, increase
85
K, Corporations Engaged in Foreign Banking and Financing
Under the Federal Reserve Act:
Equity investment abroad, Board approval necessary
73
O, Loans to Executive Officers of Member Banks:
Revision
73
Q, Payment of Interest on Deposits:
Foreign time deposits, exemption of interest on certain deposits.... 69, 92
Maximum rates on large-denomination, single-maturity time deposits
80
T, Credit by Brokers, Dealers, and Members of National
Securities Exchanges:
Amendments
70, 72, 75, 83
Margin requirements, increase
85
U, Credit by Banks for the Purpose of Purchasing or Carrying
Registered Stocks:
Amendments
70, 75, 83
Margin requirements, increase
85
Proposed amendment to exempt from margin requirements
loans to dealers engaged in market-making activities
in convertible bonds
84
Y, Bank Holding Companies:
Revision
74
Repurchase agreements:
Bankers' acceptances
101, 364, 366, 368, 372
Federal agency obligations
364, 366, 368, 372
U.S. Govt. securities
101, 364, 366, 371, 372, 384
Reserve requirements:
Federal Reserve Banks, gold reserve requirement against
Federal Reserves notes, elimination
333
Graduated reserve requirements on demand deposits,
legislative recommendation
338
Member banks:
Changes in method of computation, amendment
of Regulation D
.-•••,
82




453

INDEX

Page
Reserve requirements—Continued
Member banks—Continued
Increase, consideration by Board of Governors
96
Table
"
382
Time deposits, authority of Board of Governors to set
reserve ratio for, law made permanent
336
Reserves:
Federal Reserve Banks:
Gold reserve requirement against Federal Reserve notes,
elimination
333
International liquidity discussions and negotiations
328-32
Member banks:
Reserve requirements (See Reserve requirements)
Reserves and related items
384
Revenue Bond underwriting by member banks, legislation
334
Salaries:
Board of Governors
361
Federal Reserve Banks
379
Savings bond meetings
355
Savings deposits (See Deposits)
Securities (See also U.S. Govt. securities):
Federal agency obligations (See Federal agency obligations)
Margin requirements for over-the-counter securities, legislation
334
Revenue fcond underwriting by member banks, legislation
334
Stock market transactions (See Stock market transactions)
"Tender offers" with respect to securities of member State
banks, legislation and amendment of Regulation F
86, 334
Special Drawing Rights
328-32, 333
Special studies by Federal Reserve System
324-27
State member banks:
Assets and liabilities
386
Bank Protection Act of 1968
334
Eianking offices, changes in number
388
Changes in control of, reports
346
Examination
345
P'oreign branches, special study and number of
325, 350-52
Mergers and consolidations
348, 392-413
Number
348, 386
Operations subsidiaries and loan production offices of,
reinterpretation by Board of Federal banking laws
88
Re venue bond underwriting, legislation
334
"Tender offers" with respect to securities of, legislation
and amendment of Regulation F
86, 334

454



INDEX

Page
Stock market transactions, regulatory changes and policy
actions by Board affecting credit in
70, 72, 75, 83, 84, 85, 87
System Open Market Account:
Audit
354
Authority to effect transactions in
99-225
Domestic securities, review of operations
226, 227-74
Foreign currencies, review of operations
60-65, 226, 275-323
Time deposits {See Deposits)
Training activities
353
Truth in Lending Act
333
U.S. balance of payments:
Foreign credit restraint program
57-59, 76, 94
International liquidity discussions and negotiations
328-32
Review
47-56
U.S. Govt. securities:
Authority of Reserve Banks to purchase directly
from U.S., extension
333
Bank holdings, by class of bank
386
Federal Reserve Bank holdings
356, 364, 366, 368, 370, 384
Federal Reserve earnings on
355, 374
Open market operations
99-225, 226, 221-1 A, 372
Repurchase agreements
101, 364, 366, 371, 372, 384
Special certificates purchased directly from United States
371
Study of market by Treasury and Federal Reserve
325
U.S. Govt. agency obligations {See Federal agency obligations)
V loans
357, 379




455


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102