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BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM




J^etter of Transmittal




BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Washington, May 6, 1970
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-Sixth Annual
Report of the Board of Governors of the
Federal Reserve System.
This report covers operations of the Board
during the calendar year 1969.

Yours respectfully,
Arthur F. Burns, Chairman.

Contents
Part 1—Review of 1969
3 MONETARY POLICY AND THE ECONOMY
10 DIGEST OF PRINCIPAL POLICY ACTIONS
13 CREDIT MARKETS AND FINANCIAL FLOWS

16
22

First half of year
Second half of year

29 DEMANDS, RESOURCE USE, AND PRICES
31
Demands
39
Labor market
41
Wages and costs
42
Prices
46 INTERNATIONAL PAYMENTS AND RESERVES
46
U.S. balance of payments
53
Federal Reserve operations in foreign currencies
55
Foreign credit restraint program
59
International monetary arrangements and the IMF

Part 2—Records, Operations, and
ranization
Orgc
69 RECORD OF POLICY ACTIONS—BOARD OF GOVERNORS
95 RECORD OF POLICY ACTIONS—FEDERAL OPEN MARKET
COMMITTEE
208 OPERATIONS OF THE SYSTEM OPEN MARKET ACCOUNT

209
256

Review of open market operations in domestic securities
Review of open market operations in foreign currencies

298 LEGISLATION ENACTED
298
Interest on deposits; deposit insurance coverage; commercial paper
as deposits; reserves against Euro-dollar borrowings; selective
credit controls
298
State taxation of national banks
299
Salaries of members of the Board




300 LEGISLATIVE RECOMMENDATIONS
300
Lending authority of Reserve Banks; "par clearance"; reserve requirements; purchase by Reserve Banks of obligations of foreign
governments; loans to bank examiners
300
Bank holding companies
305
Credit cards
307 LITIGATION
307
Investment Company Institute, et al. v. Camp
307
United States v. First at Orlando Corporation, et al.
308 BANK SUPERVISION AND REGULATION BY THE FEDERAL
RESERVE SYSTEM
308
Examination of member banks
310
Federal Reserve membership
310
Bank mergers
311
Bank holding companies
312
Foreign branches of member banks
312
Acceptance powers of member banks
312
Foreign banking and financing corporations
314
Actions under delegation of authority
315
Bank Examination Schools
315
Truth in Lending
316 FEDERAL RESERVE BANKS
316
Examination
316
Earnings and expenses
317
Holdings of loans and securities
318
Volume of operations
318
Loan guarantees for defense production
319
Foreign and international accounts
320
Bank premises
321 BOARD OF GOVERNORS
321
Building annex
3 21
Income and expenses
STATISTICAL TABLES:
1. Detailed statement of condition of all Federal Reserve Banks
combined, Dec. 31, 1969
328
2. Statement of condition of each Federal Reserve Bank, Dec. 31,
1969 and 1968

326




STATISTICAL TABLES—Cont.

332
333

334
335
336
338
340
341
341
342
343
344
345
346
350

351

353
353
355

3. Federal Reserve Bank holdings of U.S. Government securities,
Dec. 31, 1967-69
4. Federal Reserve Bank holdings of special short-term Treasury
certificates purchased directly from the United States,
1954-69
5. Open market transactions of the Federal Reserve System during
1969
6. Bank premises of Federal Reserve Banks and branches,
Dec. 31,1969
7. Earnings and expenses of Federal Reserve Banks during 1969
8. Earnings and expenses of Federal Reserve Banks, 1914-69
9. Volume of operations in principal departments of Federal Reserve Banks, 1966-69
10. Number and salaries of officers and employees of Federal Reserve Banks, Dec. 31, 1969
11. Fees and rates under Regulation V on loans guaranteed pursuant to Defense Production Act of 1950, Dec. 31, 1969
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, 1969
16. Member bank reserves, Federal Reserve Bank credit, and related items, end of year 1918-69 and end of month 1969
17. Principal assets and liabilities, and number of commercial and
mutual savings banks, by class of bank, Dec. 31, 1969, and
Dec. 31, 1968
18. Changes in number of banking offices in the United States during 1969
Number of par and nonpar banking offices, Dec. 31,1969:
19.
By Federal Reserve district
20.
By State and other area
21. Description of each merger, consolidation, acquisition of assets or assumption of liabilities approved by the Board of
Governors during 1969

382 MAP OF FEDERAL RESERVE SYSTEM—DISTRICTS




384
386
387
388

FEDERAL RESERVE DIRECTORIES AND MEETINGS:
Board of Governors of the Federal Reserve System
Federal Open Market Committee
Federal Advisory Council
Federal Reserve Banks and branches

412 INDEX




"Parti




ofig6g

Monetary Policy and the Economy
During 1969 the Federal Reserve moved to a very restrictive monetary
policy in an effort to slow the expansion of aggregate money demands in
the economy and to dissipate deeply rooted expectations of continuing
inflation. Progress in controlling inflation was sought as a step toward
both attaining sustainable noninflationary growth in the domestic
economy and improving the relative competitiveness of the United
States with other trading nations.
The intensity of monetary restraint is suggested by the marked slowdown that developed in the rates of growth of the money stock and bank
credit. During the second half of 1968 these two variables had increased
at seasonally adjusted annual rates of 7 and 15 per cent, respectively.
But over the corresponding period of 1969 the growth rate for each
dropped to less than 1 per cent.
The policy of monetary restraint was conducted against a background
of generally taut fiscal policy, although the over-all degree of fiscal restraint slackened somewhat during the year. Moreover, at certain times
when the Congress was deliberating over various items of tax legislation
—notably in the spring and again near the year-end—prospects for
continued fiscal restraint became quite uncertain. Nevertheless, Federal
purchases of goods and services were considerably less expansive than
in 1968, and a significant slowing in total economic activity developed
as the year progressed, even though price and wage increases remained
sizable and inflationary psychology persisted.
Constraints on the supply of lendable funds, continued strong demands for funds, and widespread anticipation of further inflation
led to very large increases in interest rates. Near the year-end market
interest rates generally reached their highs for the year, in most cases
from 2 to 3 percentage points above the levels prevailing just before
monetary policy began to tighten in late 1968.
DOMESTIC DEVELOPMENTS
During the first half of 1969 the rate of growth in real gross national
product slowed somewhat further, extending the adjustment that had
become evident during the second half of 1968. Although the rate of
inventory accumulation was reduced in the early months of 1969, however, final demands for goods and services remained strong. There were




sizable increases in consumer spending, in business outlays for fixed investment, in State and local government purchases, and in residential
construction—even though housing starts were beginning to decline.
With increases in aggregate spending well maintained, unemployment
remained at a low level and upward pressures on costs and prices
intensified.
As inflationary pressures and expectations became more pervasive,
monetary policy moved toward a more restrictive stance. The initial
shift toward restraint had occurred near the end of 1968 with an increase of XA of a percentage point in the Federal Reserve discount rate
to 5V2 per cent. This change was accompanied by a tightening of open
market policy, which was gradually carried further during 1969. In
early April the Federal Reserve raised the discount rate again—this
time by Vi percentage point, to 6 per cent—and increased reserve requirements against demand deposits by V2 percentage point for both
reserve city and country banks.
Following the initial tightening in December 1968, yields on market
instruments that compete with large negotiable time certificates of deposit (CD's) moved well above the ceiling rates on CD's at major money
market banks. Since the Federal Reserve did not raise the rate ceilings,
holders of maturing CD's were encouraged to transfer such funds to
higher-yielding market securities. This curtailment of their resources induced banks to stiffen credit terms and to engage in portfolio adjustments that tightened financial markets more broadly. At the same time,
to cover the heavy attrition in CD's and still remain in a position to accommodate customer takedowns of the large backlog of outstanding
loan commitments, major banks moved aggressively to tap alternative
sources of funds. These included expanded day-to-day borrowing of
Federal funds, somewhat longer-term borrowing of Euro-dollars from
foreign branches, sales of assets under repurchase agreements, and the
issuance of commercial paper through affiliates.
Net redemptions of CD's in early 1969 had occurred primarily at a
small number of large city banks that possessed the capacity to turn
readily to nondeposit sources of funds. Since the volume of funds so
obtained expanded very rapidly, questions were raised at the time
whether the policy of monetary restraint was really being effective. However, the effects of CD attrition were soon reinforced by the tightening
of more general monetary controls over the supply of bank reserves. As
a result, growth in the money stock moderated; net outflows of time and




savings deposits and liquidation of securities spread to banks outside the
money centers; bank liquidity was reduced; and the costs of obtaining
funds from nondeposit sources escalated.
In the face of this squeeze, the rate charged by banks on loans to prime
business customers was raised in three steps from 6% per cent in late
1968 to V/i per cent in mid-1969, and banks strengthened their loanrationing procedures. Over approximately the same period, growth of
total loans and investments at banks averaged only 4 per cent at a seasonally adjusted annual rate, and growth of the money stock only 4.3
per cent, down from the corresponding averages of 15 and 7 per cent
mentioned above for the second half of 1968.
The increased pressure on the banking system during the first half of
1969 was instrumental in pushing market yields sharply higher. However, upward pressure on rates was also being exerted by increased
demands for funds as borrowers sought credit outside the banking system—particularly in the rapidly expanding commercial paper market.
While total credit in the economy grew less rapidly over the first 6 months
of 1969 than it had in the latter half of 1968, the change was more than
accounted for by Federal debt repayments financed out of the large fiscal
surplus. Private nonfinancial sectors raised more funds, net, than they
had in the second half of 1968.
As monetary restraint was intensified, major banks expanded their
use of nondeposit sources of funds. This led the Board of Governors
to adopt several regulatory amendments designed to restrict access to
these sources. In particular, the Board's actions eliminated the use of
loan repurchase agreements and substantially increased the marginal
cost of Euro-dollar borrowings (by imposing a 10 per cent reserve
requirement on borrowings above a base level, as described in the footnote on page 52). The Board also proposed to narrow the exemption of
Federal funds transactions from bank reserve-requirement and rateceiling constraints, but final action was not taken on this proposal until
early 1970. A further action proposed, but not adopted in 1969, would
have applied Regulation Q ceilings to bank sales of commercial paper
through their subsidiaries and holding company affiliates, to the extent
that these funds were used to finance the banks' own activities.
In the second half of 1969 interest rates showed steep, further
advances to new highs as deposit attrition at banks remained large,
open market policy continued to maintain a tight rein on bank reserves,
and Federal Reserve regulatory proposals and actions indicated the




possibility of further restraint on bank funds. Moreover, with the
effects of persistent monetary restraint on bank lending and investment
policies tending to become cumulative, there was virtually no further
growth, on balance, in the money and bank credit aggregates. And bank
liquidity was reduced to the lowest levels of the post-World-War-II
period. At the same time, with loan funds at banks sharply curtailed,
nonfinancial businesses were forced to meet an increasing share of their
continuing needs for funds through reductions in liquid assets. In the
process, corporate liquidity ratios also dropped sharply to new lows for
the postwar period.
Liquidity pressures on nonbank thrift institutions (savings and loan
associations and mutual savings banks) also increased after mid-1969.
During the first half of the year growth in net savings at these institutions
had slowed only moderately as compared with the latter half of 1968,
despite the sizable further rise in interest rates on market instruments.
But as the year wore on and market rates rose still further, holders of
claims on nonbank thrift institutions became increasingly sensitive to
the widening spread between returns on such claims and returns on
securities. Consequently, net savings growth at these institutions deteriorated sharply after midyear.
To help offset the effects of this reduced intermediation on flows of
funds to mortgage markets, the Federal National Mortgage Association (FNMA) and the Federal Home Loan Bank Board (FHLBB)
continued to channel a large volume of funds into housing finance.
In contrast to the first half, however, when FNMA and the FHLBB
were also active suppliers of funds, even a sizable further growth in
these flows was not sufficient to prevent a net reduction in total funds
supplied to mortgage markets.
During the closing months of the year, the severity of the general
financial squeeze showed clearly in the performance of the securities
markets. At that time, despite continued constraints on the supply of
funds and marked advances in interest yields, several types of borrowers whose liquidity positions had come under particular strain
pressed actively to sell securities. Expanded market financing by the
FNMA and the FHLBB represented one such source of pressure. In
addition, nonfinancial corporations were expanding their borrowing in
both the commercial paper and the bond markets. And banks were
broadening their efforts to sell commercial paper. In the face of these




general market strains, it was much more difficult than usual for the
market to accommodate the volume of both refinancing and net cash
borrowing by the Treasury, even though such operations were not especially large.
Strains exerted by the cumulative effects of monetary restraint were
perhaps greatest in the market for State and local government securities.
In earlier years commercial banks had been by far the dominant investor
group in this market. During much of the latter half of 1969, however,
banks were net liquidators of a sizable volume of municipal debt. To distribute new municipal issues, it was therefore necessary for underwriters
to turn increasingly to individuals. But funds from individuals could be
attracted in volume only at sharply higher yields, and as yields rose to
levels above the legal rate ceilings of many State and local governments,
many such units that wanted to borrow were effectively excluded
from the bond market. To cope with this cutback in longer-term financing, units in need of funds drew heavily on their liquid asset positions,
expanded their borrowing in short-term markets, and/or sought upward
revisions in legal rate ceilings. Even so, a substantial part of the financing
that State and local governments had planned was not accommodated,
and a significant number of capital projects had to be deferred.
Other sectors of the economy also reflected the effects of restrictive policy more clearly during the latter half of 1969. In fact, in
the fourth quarter growth of aggregate output, as measured by real GNP,
came to a halt, and for the full year real GNP grew by less than 3 per
cent. Slower economic activity was also reflected in the Board's index
of industrial production, which declined moderately over the last 5
months of the year; in retail sales, which showed no year-over-year
growth after adjustment for price increases; and in housing starts, which
declined further.
On the other hand, upward pressures on prices and costs remained
generally strong throughout the year. For all of 1969, prices—as measured by the GNP deflator—rose by 4.7 per cent, an exceptionally rapid
rate. Along with demand pressures another factor contributing to the
sustained advance in prices was the strong upward course of unit labor
costs. Growth in output per manhour was small, and upward pressures
on wages were strong. With wage and other costs rising and profit margins tending to erode, businesses sought to recoup added costs through
higher prices.




INTERNATIONAL DEVELOPMENTS
Abroad, 1969 was a year of strongly rising demand in most countries.
Consequently U.S. exports increased considerably, despite the adverse
effects of a long port strike. But U.S. imports increased at about the same
rate as exports, and other current payments grew more than receipts.
Therefore, the net export balance of goods and services fell below the
already low level to which it had dropped in 1968.
Outflows of U.S. private capital in various forms continued to be
restrained by governmental programs, including the foreign credit
restraint program administered by the Federal Reserve, and were
affected also by the growing pressures on liquidity of banks and
businesses in this country. Nevertheless the identified outflows of such
capital were somewhat larger than in 1968. Inflows of foreign longterm capital into the United States were smaller than the year before,
as financial markets abroad tightened and the U.S. stock market
weakened,.
Extremely large international flows of liquid capital occurred in
1969. These reflected two very different sets of forces—the one stemming from monetary and credit conditions in the United States, the
other growing out of international market expectations of changes in
exchange rates between the German mark and other currencies. The
borrowing of Euro-dollar funds by U.S. banks, noted above, drew
a very large volume of funds out of national money and credit markets in other countries and contributed greatly to strength of the dollar
in exchange markets. High interest rates in the Euro-dollar market also
attracted some funds of short-term investors, American and foreign,
out of holdings in this country into deposits in that market. Until
September, anticipation of a revaluation of the German mark caused
funds to move into Germany from this country and others. After a new
parity for the German mark was established in October, the closing
months and weeks of the year saw a reversal of much of these movements.
As 1969 ended, the international monetary system appeared to have
entered a period of relative stability. The interplay of several factors
contributed to this: the strength of the dollar in foreign exchange
markets; the continued successful functioning of the two-tier gold
system, and a drop in the private market price of gold back to $35 an
ounce by the year-end; and the preparations for inauguration of a
new international reserve instrument, Special Drawing Rights (SDR's).




Moreover, the realignments in 1969 of the German and French currency parities, the improvement in the British balance of payments in
1969 stemming in part from the devaluation of sterling in November
1967, and expectations that the introduction of SDR's would facilitate
balance of payments adjustments in the future, all contributed to
growth of confidence in the stability of the international monetary
system.
Nevertheless, a large imbalance remained to be corrected between
too-small U.S. net exports of goods and services and too-large potential
net outflows of capital from this country. In 1969, as a result of Eurodollar borrowing, the actual U.S. balance of payments measured on
the basis of official reserve transactions was comfortably in surplus.
Without that borrowing, U.S. international settlements would have been
seriously adverse—and in fact the 1969 balance of payments deficit
measured on the liquidity basis was exceptionally large.
•




Principal Federal Reserve Policy Actions y 1969: Digest
Period, or
announcement
date

Action

Purpose

January through
March

Directed that System open market operations be conducted
with a view to maintaining the prevailing firm conditions in
money and short-term credit markets that had developed following the mid-December 1968 increase in the discount rate, with
provisions 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.

April

Directed that System open market operations be conducted
with a view to maintaining firm conditions in money and shortterm credit markets, 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.

April 3

Discount rates increased from 5l/i to 6 per cent at 11 Reserve
Banks, effective April 4. (By April 8, the 6 per cent rate was
in effect at all Reserve Banks.)

To contribute to a reduction of inflationary pressures in the economy.

Increased reserve requirements against net demand deposits
at all member banks—from 16*4 to 17 per cent on deposits
under $5 million and from 17 to 17*/i per cent on deposits over
$5 million at each reserve city bank and from 12 to liy2 per cent
on deposits under $5 million and from 12i/> to 13 per cent on
deposits over $5 million at each country bank—effective in
the reserve computation period beginning April 17 and applicable to average deposits in the period April 3-9 inclusive.

To contribute to a reduction of inflationary
pressures in the economy.




April 4

Issued revised 1969 guidelines, effective immediately, covering
foreign credits and investments by U.S. banks and other financial
institutions, representing a modification of guidelines announced
December 23, 1968.

To continue the program of voluntary restraints
in effect since 1965, while permitting additional
flexibility to finance U.S. exports and resolving
some serious equity problems.

Late April
through May

Directed that System open market operations be conducted
with a view to maintaining the prevailing firm conditions in
money and short-term credit markets that had developed following the early-April announcement of increases in the discount
rate and reserve requirements, 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.

June through
December

Directed that System open market operations be conducted
with a view to maintaining the prevailing firm conditions in
money and short-term credit markets, 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.

July 24

Amended rules governing member bank reserves (Regulation D), effective July 31, to assure that certain officers' checks
issued in connection with transactions with foreign branches
were included as deposits for purposes of computing reserve
requirements.

To limit certain transactions involving member
banks and foreign branches that had resulted in
what the Board considered an unwarranted reduction in required reserves.

Amended rules governing member bank reserves (Regulation D) and payment of interest on deposits (Regulation Q),
effective July 25, to bring certain member bank liabilities on
repurchase agreements within the coverage of such rules.

To forestall the recent and contemplated use by
some member banks of repurchase agreements to
avoid reserve requirements and the rules governing payment of interest on deposits.




Principal Federal Reserve Policy Actions, 1969: Digest—Continued
Period, or
announcement
date

Action

Purpose

August 13

Amended rules governing member bank reserves (Regulation D) and foreign branches of member banks (Regulation M),
effective September 4, to establish a 10 per cent marginal reserve
requirement on certain foreign borrowings, primarily Euro-dollars, by member banks and on the sales of assets by member
banks to their foreign branches.

To moderate the flow of foreign funds between
U.S. banks and their foreign branches and also
between U.S. and foreign banks by removing a
special advantage to member banks that had
used Euro-dollars not subject to reserve requirements for the purpose of adjusting to domestic
credit restraint.

December 17

Announced revised guidelines covering foreign credit and investments by U.S. banks and other financial institutions.

To continue the program of voluntary restraints
in effect since 1965, while, in keeping with the Government's efforts to stimulate U.S. exports, giving
greater and more explicit recognition to the established priority for export financing.

December 24

Authorized Federal Reserve Banks, effective immediately and
until April 1, 1970, to provide, in accordance with certain specified principles, emergency credit facilities to nonmember depositary institutions, if the need should arise.

To provide, as a matter of general policy, the
procedures for making available emergency credit
to nonmember depositary institutions in difficulty
as to the adequacy of their liquidity reserves as a
result of substantial attrition of savings.




Credit Markets and Financial Flows
Demands for credit remained strong in most sectors of the economy in
1969 as economic activity continued to expand, prices rose rapidly, and business capital investment rose to new record levels. In
view of the inflationary character of economic developments and of
widespread expectations of further inflation, the Federal Reserve pursued a policy of monetary restraint throughout the year. The resulting
constraint on the supply of lendable funds relative to demand led to
further sharp increases in interest rates, which were at postwar highs
by the year-end. Expansion of total bank credit slowed substantially
during the year, even after allowance for expanded use by banks of
nondeposit sources of funds, and the money stock grew by only 2.5
per cent, with most of the growth occurring in the first half.
During the year rising interest rates on market securities, in conjunction with regulatory restrictions on rates payable at depositary
institutions, progressively limited the availability of institutional credit
as funds were shifted out of deposit-type instruments and into higher
yielding market securities. Commercial banks in particular were affected
by such shifts. Their share of the total flow of credit extended to nonfinancial borrowers dropped sharply in 1969. Even though their deposit
inflows also slowed during the year, other depositary institutions were
better able to maintain their share of total credit supplied, because they
placed more reliance on nondeposit sources of funds; for example, savings and loan associations borrowed heavily from the Federal home
loan banks. As the year progressed, however, the availability of credit
directly through the securities markets also became more limited.
In the first half of the year, funds raised by nonfinancial sectors from
all sources declined substantially as compared with the total for the
latter half of 1968; but this reduction represented a shift from borrowing to repayment of debt by the U.S. Government as the budget moved
into surplus. Borrowing by private sectors increased slightly. In the
second half of the year, however, demands for funds by private sectors
showed a substantial decline in response to the increased cost and reduced availability of credit and to the slower growth in economic activity.
But the U.S. Government was a net borrower of funds in this period, and
total funds raised by all sectors increased somewhat.




13

TOTAL FUNDS RAISED AND SUPPLIED
1. Volume raised by nonfinancial 2. Shares in funds supplied by
sectors
selected institutions
BILLIONS OF DOLLARS, SEASONALLY ADJUSTED, ANNUAL RATES

TOTAL j

100

30
70

1967

f

1968

t

1969

I

1967

1968 ;

TABLE 1: SELECTED BORROWING BY SECTOR AND T Y P E
Flow of funds data, in billions of dollars; half-years at seasonally adjusted annual rates.

Sector, and
type of instrument

1968
1967

1968

1969

1969
1st H

U.S. Government:
Public debt issues
Budget agency issues

8.9
4.1

2nd H

lstH

2ndH

8.5
3.5

-17.9
-.4

7.3
-4.7

10.3
3.0

-2.8
-2.6

12.1
2.7

-.6

3.2

8.9

4.5

2.0

6.3

7.7

9.9

8.8

6.7

13.1

9.3

11.6
8.3

Nonfinancial corporate business:
Bonds and stocks
Mortgages
Open market paper

17.0
4.5
1.5

12.1
5.8
1.6

15.3
4.3
2.7

12.8
4.9
.3

11.3
6.8
3.0

14.9
4.5
3.8

15.8
4.1
1.7

Consumers:
Consumer instalment debt.
Mortgages

3.4
11.7

9.0
16.0

8.1
16.9

7.7
16.0

10.1
16.0

8.9
17.5

7.4
16.5

Federally sponsored credit agencies, i
State and local govt. issues

i Not included in the budget.
TABLE 2 : BANK CREDIT
Seasonally adjusted net changes, in billions of dollars
1968
1967

Item

1968

1969

1969

lstH

2ndH

lstH

2ndH

Total loans and investments....

36.0

38.1

9.2

11.3

26.8

7.9

1.3

U S Govt securities
Other securities

6.1
12.7

1.8
10.1

-9.8
-.8

.7
2.5

1.1
7.6

-5.3
.5

-4.5
-1.3

17.2
7.7
4.6
1.8
3.1

26.2
9.6
6.6
4.9
5.1

19.7
9.0
5.1
3.3
2.3

8.1
3.3
3.0
1.8

18.1
6.3
3.6
3.1
5.1

12.7
6.4
3.4
1.8
1.1

7.0
2.6
1.7
1.5
1.2

Total loans
..
Business
Real estate
Consumer .
Other

14



. . . .

BANK RKSKRVKS. DKPOSH ; I O u x \ M ) 1\ iTRKST RAITS
3. Bank reserves and borrowings 4. Interest rates
BILLIONS OF DOLLARS, SEASONALLY ADJUSTED

PER CENT

SHORT-TERM

TOTAL RESERVES

1967
TABLE 3 :

SELECTED M O N E T A R Y AGGREGATES

Seasonally adjusted annual rate of change, in per cent
1968
Item

1967

1968

st H
Member bank deposits
Member bank deposits plus
liabilities to foreign branches..
Time and savings deposits at
banks
Money stock
Savings accounts at nonbank
thrift institutions

1969

1969

11.8

9.0

-4.0

11.7

9.8

-1.7

4.4
5.7

15.9
6.6

11.5
7.2

-5.3
2.5

5.3
7.2

9.4

6.3

3.3

2nd H

1st H

2nd H

13.4

-3.5

-4.6

13.5
17.3
7.0

-.2

1-3.2

-4.0
4.3

-6.7
.6

6.4

5.0

1.7

i Beginning on May 28, 1969, the following data were collected: Euro-dollars borrowed directly or
through brokers and dealers, liabilities to own branches in U.S. territories and possessions, commercial
paper sold by bank holding companies or other bank affiliates, and loans sold under repurchase agreement to the nonbank public. If funds raised from these sources during the second half of 1969 were
added to member bank deposits and liabilities to foreign branches, the resultant rate of change would
be —1.2 per cent.




15

FIRST HALF OF YEAR
During the first half of 1969 the Federal Reserve continued on the
course of monetary restraint initiated in December 1968. Total reserves
of member banks rose at an annual rate of less than 1 per cent as compared with nearly 11 per cent in the latter half of 1968. Nonborrowed
reserves—those provided by sources other than by member bank borrowing—actually declined at an annual rate of almost 4 per cent, in
sharp contrast to a rate of growth that had exceeded 10 per cent in
the preceding half year. In addition to the pressure exerted on banks
through open market operations, in April the Federal Reserve raised
the discount rate from 5Vi to 6 per cent and increased reserve requirements by V2 of a percentage point on demand deposits at member
banks.
DEPOSIT FLOWS DECLINE
Commercial bank deposits declined sharply during the first half of
1969. As market yields became more attractive relative to the maximum interest rates that banks were permitted to offer on their time
and savings deposits, funds began to be withdrawn or diverted from
these instruments for investment in higher yielding market securities.
During the first half of the year total member bank deposits declined
at an annual rate of 3.5 per cent, as compared with a rate of increase
exceeding 13 per cent in the second half of 1968. Nonbank depositary institutions were affected to a much lesser extent by such shifts out
of their savings accounts in the first half, although deposit inflows
at savings and loan associations and mutual savings banks did slow
to an annual rate of 5 per cent as compared with more than 6 per cent in
the latter part of 1968.
The decline in commercial bank deposits during this period occurred
largely in time and savings deposits, most of which reflected outflows
of CD's in denominations of $100,000 or more. By early December
1968 short-term market rates had risen to levels at which maximum offering rates on CD's allowable under Regulation Q ceilings were no
longer competitive, and sizable attrition of CD's ensued. Over the first
half of 1969, outstanding CD's at large commercial banks declined by
$7.5 billion, seasonally unadjusted, or by about one-third of the amount
outstanding at the end of 1968. The bulk of this attrition took place at
large banks in the major financial centers where depositors tend to be

16



more interest-sensitive; banks in New York City and Chicago, which
held about 35 per cent of the outstanding CD's at the end of 1968, accounted for 60 per cent of the run-off of CD's during the first half of
1969. Toward midyear, however, banks outside New York and Chicago began to account for an increased share of the attrition.
Time and savings deposits other than CD's also were influenced by
rising market rates of interest. At large banks, time and savings deposits held by individuals and businesses (exclusive of their holdings
of large negotiable CD's) grew during the first quarter at about onehalf of the rate for the last 6 months of 1968 and then declined on
balance over the second quarter. At country banks, net inflows of total
time and savings deposits dwindled fairly steadily over the first 6 months
of 1969 and for the period the inflow was only about half as large as in
the latter half of 1968.
Rising market rates of interest and the growing squeeze on the
availability of funds also induced private holders to economize on
their cash balances. During the first half of the year the money
stock—currency and privately held demand deposits—grew at an annual rate of 4.3 per cent, down sharply from the 7.0 per cent rate in
the second half of 1968. Privately held demand deposits rose at an
annual rate of 3.7 per cent, about half the rate of growth in the latter
part of 1968, whereas currency in the hands of the public continued
to expand rapidly—at an-annual rate of 6.5 per cent. Demand deposits
held by the Federal Government remained essentially unchanged on
balance.

BANKS SEEK OTHER SOURCES OF FUNDS
In view of these deposit outflows individual banks increased their borrowing at the discount window and in the Federal funds and Euro-dollar
markets and issued other nondeposit liabilities. Borrowings from Federal
Reserve Banks rose rather steadily over the first half to an average of
about $1.4 billion in June; this was almost double the highest monthly
average reached in the latter part of 1968. In the Federal funds market
—where excess reserves of banks are bought and sold on a day-to-day
basis—the volume of funds traded through New York rose to a daily
average of around $9.0 billion in May and June, as compared with
about $7.5 billion in December 1968. The cost of these funds also rose
markedly, reaching an average of 8.90 per cent in June, well above the




17

maximum of around 6.00 per cent that banks had paid on such borrowings in the second half of 1968.
Banks also increased sharply their borrowings in the Euro-dollar
market. The total of such borrowings doubled in the first half and by
the end of June had reached almost $14.3 billion. Banks had to pay
increasingly higher rates to obtain these funds; Euro-dollar rates generally ranged from 10 to 12 per cent in June, depending on maturity,
as compared with 6 to 7 per cent in December 1968,
As these sources became more scarce and more costly, banks sought
increasingly to raise funds through the sale of commercial paper by
bank holding companies, affiliates, and subsidiaries, the proceeds of
which were transferred to banks by purchases of bank loans. By midyear about $1.2 billion of such paper was outstanding. Banks also
borrowed through the sale of loans to the nonbank public, subject to
repurchase agreements; by June 30 such outstandings had reached
about $850 million.
During the first half of the year the Board of Governors proposed
several amendments to its regulations affecting borrowing in the Eurodollar and Federal funds markets, most of which became effective later
in the year. On June 26 the Board proposed that a 10 per cent reserve
requirement be established on borrowings of U.S. banks from their
foreign branches to the extent that these borrowings exceed the dailyaverage amounts outstanding in the 4 weeks ending May 28, 1969; this
proposal was designed to moderate the inflow of Euro-dollars to U.S.
banks from their foreign branches. On June 27 it issued a proposal to
narrow the categories of "Federal funds" transactions that are exempt
from Regulations D (governing reserves of member banks) and Q
(governing payment of interest on deposits by member banks). On May
29 the Board had also proposed an amendment to Regulation D designed to ensure that checks resulting from transfers involving foreign
branches are not used to effect reductions in required reserves.
CREDIT RESTRICTED AT DEPOSITARY INSTITUTIONS
With their lendable funds becoming more limited in the face of continued strong demands for credit, depositary institutions undertook
substantial adjustments in their investment portfolios. Banks reduced
their liquidity; cut back sharply on acquisitions of longer-term U.S.
Government, Federal agency, and municipal securities; sold loans out-

18



right; and tightened their terms and conditions of lending. Total loans
and investments at commercial banks expanded at an annual rate of
only 4 per cent during the first half, well below the exceptionally rapid
rate—15 per cent—in the previous 6 months.
During the first half banks reduced their holdings of U.S. Government securities by more than $5 billion—largely Treasury bills and
short-term notes and bonds—and virtually ceased their acquisitions of
other securities. Large banks, in fact, made substantial reductions in
their holdings of municipal issues over the first half. Consequently, by
midyear total liquid assets held by banks had dropped sharply, and
the ratio of these assets to deposit and other liabilities had fallen to a
lower level than at any time during the period of monetary restraint
in late 1966. In addition, the accommodation of new loan demands
was partially satisfied by outright sale of existing loans by banks; such
sales to others than banks and bank-related affiliates and subsidiaries
amounted to about $750 million by midyear.
Banks also began in this period to tighten the terms and conditions
of lending. For example, they raised the prime rate three times—from
63A per cent to 7 per cent in early January, to IVi per cent in midMarch, and to %Vi per cent in early June. As a result, expansion of
total bank loans slowed during the first half of the year. Among the
major categories, only loans to businesses continued to expand rapidly.
Growth in such loans increased at about the same fast pace as in the
latter part of 1968—and even picked up somewhat if loan sales are
included—as corporate demands for funds intensified and banks continued to make a large volume of new loan commitments to businesses.
The advance in real estate loans began to moderate in the second quarter,
accompanied by a decline in housing starts. Expansion of consumer
loans slowed, as did growth of total consumer credit from all sources.
And security loans, which had expanded rapidly in the autumn of
1968, declined on balance during the first half of 1969 as dealers reduced
their positions, in response to the high cost of carrying inventories of
securities and to expectations that interest rates would rise further.
Nonbank thrift institutions were able to increase substantially their
net acquisitions of credit market instruments in spite of somewhat reduced net inflows of funds to their savings accounts. Savings and loan
associations—the dominant residential mortgage lender—relied heavily
on borrowings from the Federal home loan banks (FHLB) in order to




19

increase their net takings of mortgages. At mutual savings banks net
acquisitions continued to grow—but less rapidly than in the latter half of
1968, as both mortgage lending and acquisitions of corporate bonds
were reduced. Moreover, the growing pressure on available funds resulted in a slowing of new-commitment activity in the mortgage area as
the year progressed. After April the backlog of outstanding mortgage
commitments at both types of institutions began to decline.
At life insurance companies, the contractual nature of fund inflows
significantly insulated such intermediaries from the type of pressure
experienced by depositary institutions. But there was a substantial rise
in policy loans at insurance companies—as policy holders faced increased costs and reduced availability of credit from other sources.
Hence, these companies were able to maintain funds for other investments at the level of the second half of 1968 only by reducing their cash
balances. As a result, they became more cautious about making new
commitments and about scheduling takedowns of funds.
PRESSURES IN SECURITIES MARKETS INTENSIFY
As economic activity remained strong and bank loans came under
increasing restraint, nonfinancial businesses turned more and more to
the issuance of market securities and shorter-term paper to obtain
needed funds. Plant and equipment expenditures were rising sharply
and internal funds generation was slowing somewhat; hence, total
corporate financing requirements were rising on balance. The volume
of funds raised through bond and stock offerings in the first half of
1969 was significantly larger than that in the second half of 1968; stock
issues accounted for about two-thirds of the increase, despite the lack
of buoyancy in average stock prices—which reached a peak in December 1968 and then declined by 7 per cent through June 1969. Offerings
of bonds and stocks by large industrial companies were relatively small,
but both public utility and communications companies and small to
medium-sized industrial companies issued debt in volume. Corporations
borrowed heavily in the commercial paper market as well—raising about
$4 billion at a seasonally adjusted annual rate, or $1 billion more than
in the previous 6 months.
Borrowing by State and local governments was significantly affected
by the pressures that developed in securities markets and by the drying
up of demand for these securities by commercial banks—ordinarily the

20



principal institutional purchasers of municipal debt. Rising market rates
of interest on long-term municipal securities resulted in a sizable cutback in the issuance of such debt in the first quarter; net long-term
borrowing in that period amounted to $4 billion, annual rate, less than
one-half the exceptionally high rate in the fourth quarter of 1968. Many
governmental units were forced to postpone or cancel planned borrowing because of interest rate ceilings. To a considerable extent, the reduced volume of long-term borrowing was offset by a sharp rise in the
flotation of short-term debt by units having authority to enter this market and not subject to restrictive rate ceilings. As a result, total market
issues declined only moderately during the first quarter.
Early in the second quarter yields on municipal securities declined,
largely as a result of expectational factors, and the volume of long-term
borrowing increased significantly from the unusually low first-quarter
rate. At the same time, municipal demands on the short-term market
dropped from the peak rates of the first quarter, but they were still
quite high. However, a renewal of upward pressures on interest rates
as the quarter progressed resulted in more cutbacks and postponements
of long-term borrowing plans, with short-term or interim financing being substituted in some instances.
Federal Government demands on credit markets were substantially
reduced in the first half of 1969 relative to a year earlier. Although
the budget showed a deficit of $2 billion in the first quarter, this was
less than one-fourth of that in the comparable quarter a year earlier.
Moreover, in the second quarter the budget swung into substantial surplus, reflecting a sharp year-over-year gain in revenues—attributable
to receipts from the tax surcharge as well as higher incomes—and
constraint on expenditures. Hence, the Federal Government, on balance, repaid debt in volume. At seasonally adjusted annual rates, there
was a turnaround from net borrowing of $12 billion in the latter half
of 1968 to net repayment of $18.3 billion in the first half of 1969.
On the other hand, federally sponsored credit agencies not included
in the budget increased their demands on securities markets. Net debt
issuance by these agencies aggregated $6.3 billion, annual rate, in the
first half, more than three times the volume in the second half of 1968.
The Federal home loan banks and the Federal National Mortgage Association accounted for a substantial portion of this borrowing, as they
sought funds to channel to the mortgage market.




21

INTEREST RATES ADVANCE
With demands for credit remaining in excess of the available supply
in nearly all financial markets, most market rates of interest rose
further. Banks, facing persistent loan demands and reduced availability
of lendable funds, not only raised their prime lending rates but also bid
up rates paid on Federal funds and Euro-dollars as they aggressively
sought funds in these markets.
Other short-term rates also rose substantially. Corporate demands
for funds spilled over into the commercial paper market, and bank
affiliates began to issue commercial paper, with the result that rates
on 4- to 6-month paper had advanced to more than 8.50 per cent by the
end of June, an increase of more than 2 percentage points during the
first half. Yields on Treasury bills and short-term Federal agency issues
changed relatively little through the spring; large sales of Treasury
bills by banks were readily absorbed by the market as the demand for
bills was increased in large part by the shifting of investor funds out
of large CD's and into other market instruments, and also by demands
for bills by many investors who wished to increase their liquidity positions because of financial uncertainties. However, as a result of continued sales of bills by banks, as well as reduced demands by some institutional investors, bill yields rose to an average that was about 50 basis
points higher in June than the December 1968 average.
In long-term markets upward pressures on interest rates were substantial as banks withdrew from the market and other investors remained cautious in anticipation that tighter market conditions might
follow. By the end of June the average yield on municipal bonds had
risen more than 80 basis points from the level prevailing in December
1968. Rates on corporate Aaa new issues (with 5-year call protection)
and secondary market yields on home mortgages insured by the Federal
Housing Administration rose by about 80 and 85 basis points, respectively. Yields on long-term Government bonds, however, increased
relatively little, with no bonds being issued by the Treasury because
of the AVAT per cent statutory rate ceiling on such instruments.
SECOND HALF OF YEAR
During the second half of 1969 both total and nonborrowed reserves
of member banks declined slightly—at annual rates of about 4 and 2.5
per cent, respectively—as the policy of restraint in Federal Reserve

22



open market operations was continued. Moreover, on July 24 and
August 12 the Board of Governors of the Federal Reserve System
adopted amendments to its Regulations D and M, proposed earlier in
the year; these amendments were designed to moderate borrowing by
member banks in the Euro-dollar market and to prevent reductions in
required reserves through transfers involving their foreign branches.
Also on July 24 the Board took action to narrow the scope of member
bank liabilities under repurchase agreements that are exempt from
Regulations D and Q. On October 29 it announced that it was considering amendment of its rules governing the payment of interest on deposits
(Regulation Q) to apply to funds received by member banks from the
issuance of commercial paper or similar obligations by banks' affiliates.
All of these pressures led banks to maintain their borrowings at the
Federal Reserve Banks at about the high level reached in the early
summer. Banks also relied increasingly on the Federal funds market,
and about $10 billion of these funds were traded through New York
on a daily-average basis during December, or about $1.0 billion more
than at midyear. The Federal funds rate in December averaged close to
9 per cent, about the same as in June.
Total borrowing by U.S. banks in the Euro-dollar market rose
sharply further in July, but remained essentially unchanged at an average level of about $15.5 billion during the balance of the second half,
probably to some extent in response to Board actions concerning such
borrowing. Rates on Euro-dollars dropped slightly from those prevailing in June and averaged from 10 to 11 per cent in December, depending on maturity.
After borrowing through sales of loans under repurchase agreement
became subject to Regulations D and Q in late July, such net borrowings from the nonbank public declined steadily to a level of about $200
million at the end of the year. But outstanding commercial paper issued
by bank holding companies or other bank affiliates rose sharply, by an
additional $3 billion in the second half.
DEPOSIT FLOWS TO INTERMEDIARIES
CURTAILED FURTHER
As market rates of interest continued to increase, the availability of
deposit funds at major types of depositary institutions became more
restricted. The outflow of total deposits at member banks was some-




23

what larger than in the first half—at an annual rate of nearly 5 per
cent—and funds obtained by these banks from nondeposit sources
failed to offset fully this decline; total member bank deposits plus
nondeposit funds fell at an annual rate of about 1 per cent during the
second half. Net inflows at nonbank thrift institutions were cut sharply
during the latter half of the year.
Declines in outstanding time and savings deposits at commercial
banks—at an annual rate of more than 6.5 per cent in the second half
—continued to account for a large part of the reduction in total deposits after midyear. CD attrition began to moderate from the rapid
pace of the first half, however, as the volume of maturing issues
declined and deposits of foreign official holders, which are not subject
to interest rate ceilings under Regulation Q, increased. The run-off
in CD's during the second half was approximately $4.5 billion, seasonally unadjusted, or about 60 per cent of that earlier in the year. In
contrast to the first half, the bulk of this attrition took place outside the
major financial centers; banks outside New York City and Chicago
experienced more than 90 per cent of the run-off, or more than twice
their share earlier in the year. The additions to time deposits of foreign
official holders in the fourth quarter, mainly at banks in New York City,
appeared to reflect in part a shifting of balances previously held in the
form of Euro-dollar deposits with foreign branches of U.S. banks.
Net withdrawals of time and savings deposits other than CD's became increasingly important in the decline in total time and savings
deposits at commercial banks. At large banks, seasonally unadjusted
outflows of consumer-type time and savings deposits were, on the average, about 20 per cent greater than the total for the second quarter.
And at country banks the progressively reduced inflows, seasonally
unadjusted, of the first half of the year turned to sizable net outflows
during the second half.
Banks also lost demand deposits, on balance, during the second half;
the decline in such deposits privately held more than offset the rise in
those held by the U.S. Government. Growth in currency in the hands
of the public, however, was fairly well sustained, so the reduction in
privately held demand deposits was more than offset in the money
stock statistics. The total money stock rose slightly—at an annual rate
of less than 1 per cent—during the second half of the year.
Net inflows of funds to thrift institutions continued to decline dur-

24



ing the second half of the year, as yields on market securities rose
further above the rates paid on savings accounts. Both savings and
loan associations and mutual savings banks experienced substantial
outflows during the July and October interest-crediting periods, and net
inflows remained depressed in other months of the second half. As a
result, deposits at these institutions grew at a seasonally adjusted annual
rate of only 1.7 per cent, about one-third the rate in the first part of
the year.
RESTRICTION OF INTERMEDIARY CREDIT
CUMULATES
With lendable funds becoming increasingly limited and with liquidity
already at very low levels by midyear, commercial banks were obliged
to curtail their lending activity further. In adjusting their asset portfolios to the reduced supply of funds, they continued to rely on liquidation of securities and on more intense rationing of loans, and after
midyear total bank credit rose only slightly further.
Again the bulk of the liquidation of security holdings by banks,
which totaled almost $6 billion, was in U.S. Government securities—
mainly Treasury bills and short-term notes and bonds. However, banks
did reduce their portfolios of other securities—generally municipal
issues—as holdings of short-term U.S. Government securities were
probably approaching minimum amounts needed for pledging requirements and other purposes. Outright sales of loans by banks to others
than banks or bank-related affiliates and subsidiaries continued, reaching a level of about $1.2 billion outstanding by the year-end, about
$500 million more than at midyear.
Banks also reported further significant tightening in their lending
terms and conditions. There were substantial cutbacks in the dollar
amount of new commitments made, and total bank loans rose at an
annual rate of only about 5 per cent, about half that of the already
reduced pace in the first 6 months. Inclusion of loans sold to bank holding companies, affiliates, and subsidiaries would raise the annual rate
to about 6.5 per cent, still well below the pace of expansion earlier in
the year.
The further slowing in bank loans was evident in virtually all major
loan categories. Business loans, which had risen rapidly in the second
half of 1968 and the first half of 1969, grew at a sharply reduced rate




25

after midyear. Expansion of real estate loans slowed substantially
further—in line with the continued declines in housing starts and in
residential construction activity—as did growth in consumer loans.
At nonbank thrift institutions net acquisitions of mortgages declined,
but by less than would have been suggested by the reduction in net
savings inflows. Flows of funds from mortgage repayments remained
moderate, in view of the reduced over-all level of real estate activity
and of the limited volume of repayments owing in part to assumptions
of outstanding mortgages when existing properties were transferred. Net
extensions of mortgage credit by these intermediaries were financed by
reductions in liquidity positions, by record borrowing by savings and
loan associations from the Federal home loan banks, and in the case of
mutual savings banks by putting money into mortgages at the expense
of securities. New mortgage commitment activity was cut back further,
and outstanding commitments at the year-end were well below the
end-of-1968 level.
Growth in total mortgage debt, seasonally adjusted, continued to
decline from the record rate reached in the fourth quarter of 1968.
However, mortgage credit supplied by FNMA and, to a lesser extent,
expanded lending by the Government National Mortgage Association
became increasingly important factors in holding total net residential
mortgage lending for the full year close to the level in 1968.
PRIVATE SECURITY ISSUES MODERATE
Private nonfinancial borrowing in security markets declined in the second half from the advanced pace registered earlier. The reduction was
attributable in large part to the further increase in cost and the reduced
availability of credit. Net new issues of long-term securities by State
and local governments, at an annual rate of $4.5 billion, were slightly
below the already reduced rate for the first half of the year. Many
governmental units were forced to defer long-term financing because
their ceiling rates were below market levels. Even some units that had
had their ceilings raised earlier in the year were limited in the extent to
which they could finance programs by borrowing, as reductions in bank
holdings of municipal issues and investor concern over provisions in
the proposed tax reform bill—related to the tax treatment of interest
income on municipal securities—contributed to a substantial further
increase in rates on these securities. While some governmental units

26



borrowed at short term, or reduced their liquid assets, and/or used other
sources of funds, growth in aggregate expenditures of State and local
governments nevertheless moderated in the second half of the year.
Flotations of corporate securities in this period were somewhat above
the exceptionally high rate of the first half. While public offerings of
bonds by corporations rose somewhat, the increase was offset by the
developing tightness in private placements. Equity offerings advanced
sharply and were unusually large in view of the continued decline, on
balance, in average stock prices. Although gross corporate security offerings were a record for the full year, maintenance of a high and rising
level of net investment during the second half put added pressure on
corporate financial positions. Because declining profits were restraining
growth in internal funds and bank loans were increasingly difficult to
obtain, corporations relied on further issuance of commercial paper and
other sources of funds.
The Federal Government was a net borrower of funds during the
second half, whereas it had made net repayment of debt earlier in the
year. Three factors in particular caused the budget surplus to decline
to a seasonally adjusted annual rate of $5 billion, or roughly one-half
that in the first 6 months; these were enlarged Federal expenditures, the
earlier ending of make-up payments on 1968 tax liabilities, and the
slower growth in incomes—and consequently, tax receipts. Continuing
a pattern evident in the first half, federally sponsored agencies outside
the budget offered a sizable volume of debt issues to raise new money,
mainly in connection with FHLB and FNMA borrowing in support of
the mortgage market. When combined with borrowing in the budget,
net funds raised by the Federal sector in total amounted to about $14
billion at a seasonally adjusted annual rate. This compares with net repayment at an annual rate of $11 billion in the first half of the year.
INTEREST RATES RISE TO POSTWAR HIGHS
Most interest rates in both short- and long-term markets rose substantially further over the second half of the year. Continued large demands
for funds by banks kept rates high in the Federal funds market and
pushed rates up further in the commercial paper market. Treasury bill
yields came under substantial upward pressure as the Treasury raised
new cash through additional bill sales at a time when commercial banks
and other intermediaries were reducing liquidity positions; yields on




27

3-month Treasury bills rose to new highs and averaged about 7.80
per cent in December, 140 basis points above the June level.
Interest rates also continued to press upward in capital markets. With
commercial banks reducing their holdings of municipal securities and
individual investors concerned over tax reform and the future course
of interest rates, municipal yields advanced more than 1 percentage
point in the second half—reaching a record average of 6.90 per cent
in December. Corporate Aaa new issues (with 5-year call protection)
were also marketed at new highs in the latter part of the year—increasing about 120 basis points, to 8.75 per cent in December. Continuing
strong demands for construction and the reduced availability of mortgage credit combined to push up interest rates on mortgages in the
second half. However, despite upward adjustments in some cases, ceiling constraints on conventional and Government-underwritten mortgages tended to limit the over-all rise in rates on home loans. Longterm U.S. Government bond yields followed the upward trend in interest
rates and increased about 60 basis points during the period to a year-end
level of approximately 6.80 per cent.
•

28



Demands, Resource Use, and Prices
Expansion of aggregate output in the United States slowed markedly
in 1969 and halted in the fourth quarter. For the full year, growth in
real GNP amounted to 2.8 per cent, compared with 4.9 per cent in
1968; except for 1967 this was the smallest increase since the recession
year of 1961. In large measure the slowing reflected the sustained pressure exerted by the restrictive fiscal and monetary policies that had
been adopted to dampen persistent inflation and inflationary expectations. Nevertheless, inflationary pressures remained strong throughout
1969. Prices, as measured by the implicit GNP deflator, advanced
4.7 per cent, the largest rise since 1951; increases had amounted to
4.0 per cent in 1968 and 3.2 per cent in 1967.
The fourth quarter of 1969 was the first since the spring of 1967
in which real GNP had failed to rise. The diminishing strength of
demand for goods, particularly in the second half of the year, was
especially evident in the pattern of industrial production. The Board's
index averaged about 4.5 per cent higher in 1969 than in 1968, but it
declined in every month after July. In December the index was 2 per
cent below its summer high and was only about 1.5 per cent above
a year earlier. Although some of the decline after midyear was attributable to a major strike in the electrical equipment industry, most of it
reflected weakening demands for consumer goods, particularly automobiles and other durable goods, and reductions in output of defense
equipment and materials.
As expansion of output diminished, the capacity utilization rate in
manufacturing declined appreciably and signs of easing began to appear in the labor market. Growth in employment slowed perceptibly.
In manufacturing, employment was lower in December than in June
(exclusive of those not working because of the major work stoppage
mentioned above) and the average workweek was shorter. Unemployment claims were rising. But the over-all unemployment rate, which
had risen in the second and third quarters, changed little in the fourth
quarter and in December was only slightly higher than it had been a
year earlier.
Unit labor costs in the private nonfarm economy rose steeply in
1969—nearly 6.5 per cent according to preliminary estimates, compared with 4 per cent in 1968. The rise in output per manhour for the




29

E C O N O M I C DE V E L O P M EN I S
Increase in G N P
BILLIONS OF D L A S Prices and costs
O L R,

RATIO SCALE,
1957-59=100

ANNUAL RATE

20
CONSUMER PRICES

10
1

PER CENT, ANNUAL RATE

12

10
0
1965 i

t

1967 ,

i 1969

1965

Output and capacity use

1967

1969

R

" ^ Industrial production

^° 7 .

INDUSTRIAL PRODUCTION
TOTAL

170

BUSINESS EQUIPMENT

120
CAPACITY USE
MANUFACTURING

1965

i

i

1967

80
|

i

1969
R

Employment

]

i

1967 i

I

1969

MILLIONS S™ER SO N S U n e m p l o y m e n t r a t e s

NONAGRICULTURAL

1965

1965

C LE

1967

•70

1969

1965

t 1967 \

1969

Monthly data, except quarterly for GNP and capacity utilization in manufacturing. Data are
seasonally adjusted, except for consumer prices and industrial wholesale prices. Sources:
GNP, Dept. of Commerce; prices, employment, workweek, and unemployment rates, Dept.
of Labor; unit labor costs, Bureau of Census; industrial production and capacity utilization
in manufacturing, Federal Reserve.

30



year was small, and average wage rates continued to advance sharply,
although a little less so than in 1968. In manufacturing the gain in output per manhour was appreciably larger than for the private nonfarm
economy as a whole and the increase in unit labor costs was about the
same as in 1968.
The sustained strength of inflationary pressures reflected a number
of interacting influences. Demands continued strong in markets for
some important goods, particularly for machinery and equipment and
for metals. Until late in the year, labor markets were tight, demands
for labor were strong, and consumer incomes were rising sharply. Increases in consumer prices were being used as a floor in wage negotiations as workers endeavored not only to catch up with earlier price
advances but also to improve their standard of living. Profit margins
were under pressure, and producers and distributors made efforts to
recoup sharply rising unit labor costs and advancing nonlabor costs—
including materials—through higher selling prices. The pervasive nature of inflationary expectations affected labor's wage demands, employer willingness to grant sizable settlements, and business pricing
policies. Finally various other factors also affected prices—for the most
part tending to raise them. These included such diverse developments as
the strength of demands in Western Europe and Japan—which placed
pressure on prices of internationally traded commodities—and unexpectedly low U.S. supplies of both beef and pork, which boosted prices
of foods.
DEMANDS
In the first half of 1968 real GNP had increased at an annual rate of
6.3 per cent, an exceptionally rapid pace, but by the fourth quarter
of that year expansion was down to a 3.5 per cent rate. This slowing
continued during 1969, and in the fourth quarter the expansion halted.
Indeed, a prolonged work stoppage in the electrical equipment industry
contributed to a slight absolute decline in real GNP (Table 4 ) . The
deceleration of expansion in 1969—in both current and constant dollars
—reflected successively smaller increases in final sales as the year progressed. The rate of inventory accumulation fluctuated within a relatively moderate range, but it was larger in the second half of the year
than in the first.
The slowing in expansion of final sales was evident in most major
categories of spending (Table 5 ) . Early in the year sizable increases




31

in consumer spending, business fixed investment and residential construction, and State and local government purchases added up to a large
advance in total final sales. In the second half, on the other hand, the
rise in consumer spending was much smaller and so was that in State
and local government purchases; business fixed investment was not
quite so strong as in the first half; and residential construction activity
declined. Federal purchases edged down over the year, except for a
rise in the third quarter, when there was a pay increase for both civilian
and military personnel.
Exports of goods and services—which had been adversely affected
in the first quarter of 1969 by the prolonged strike of longshoremen at
East Coast and Gulf ports—gained strength in the second half of the
TABLE 4: GROSS NATIONAL

PRODUCT
19691
1967

Item

1968

1969
I

II

III

IV

952.2

In billions of dollars
793.5

Final sales
Private 2
Federal

932.1

908.7

924.8

942.8

7.3

8.0

6.6

6.9

10.7

7.7

786.2
695.5
90.7

Inventory change

865.7

7.4

Total

858.4
758.9
99.5

924.1
822.2
101.9

902.1
800.5
101.6

917.9
817.3
100.6

932.0
828.8
103.2

944.5
842.2
102.3

Change from preceding period
In billions of dollars
43.6

Inventory change
Final sales
Private 2
Federal

...

72.2

66.4

16.2

16.1

18.0

9.4

-7.4

Total

-.1

.7

-3.9

.3

3.8

-3.0

51.1
38.2
12.9

72.2
63.4
8.8

65.7
63.3
2.4

20.1
20.4
-.3

15.8
16.8
-1.0

14.1
11.5
2.6

12.5
13.4
-.9

In per cent, at annual rates
GNP in current dollars

5.8

9.1

7.7

7.3

7.1

7.8

4.0

GNP in 1958 dollars

2.5

4.9

2.8

2.5

2.0

2.1

-.5

GNP implicit deflator
(1958—100)

3.2

4.0

4.7

4.7

5.1

35.6

4.4

1 Quarterly figures are at seasonally adjusted annual rates.
Adjusted to include State and local governments.
Excluding Federal pay increase, 4.3 per cent.
NOTE.—Basic data from Dept. of Commerce.
2
3

32



TABLE 5: GROSS NATIONAL PRODUCT: FINAL SALES
Change from preceding period, in billions of dollars, except for saving rate
1969
Item

Total final sales
Personal consumption expenditures.
Durable goods
Nondurable goods
Services
Addendum: Saving rate (per cent).
Fixed investment
Residential structures.
Nonresidential
Net exports of goods and services
Exports
Imports
Govt. purchase of goods and services
Federal
Defense
Other
State and local

1967

1968

1969
I

II

III

IV

65.9
39.4
6.3
13.2
19.7

20.1
11.3
2.1
4.3
4.9

15.8

14.1

10.8
2.2
3.5
5.1

7.0
-.8
3.0
4.8

12.5
9.7
.6
3.6
5.4

6.5

6.0

5.3

5.3

6.7

6.4

10.4
5.2
5.1
- . 1 -2.7
4.4
2.8
7.1
2.9
23.3 20.2
12.9 8.8
11.7
5.6
1.3
3.
10.3 11.4

12.5
2.0
10.5

5.2
1.4
3.

1.9
-.6
2.5

2.0
-1.3
3.3

1.6
.2
1.4

.3
-3.0
-3.3

.1
9.5
9.4

1.1
.7
-.3

.0
.8
.7

3.3
-.3
-.3
.1
3.7

2.9
-1.0
-.5
-.5
3.8

4.1
2.6

1.3

51.2
26.0
2.2
8.2
15.6
7.4
2.0
.0
2.1

72.2

44.3
10.3
15.5
18.6

5.1
14.4
2.5
1.3
1.3
12.0

1.5

.2
2.2

NOTE.—Basic data from Department of Commerce.

year. But imports also advanced until near the end of 1969, and for the
year as a whole the merchandise trade surplus barely matched the very
small balance of 1968. Over-all net exports of goods and services were
smaller than in 1968 because of a reduction of about $0.5 billion in the
surplus on services.
GOVERNMENT
Federal fiscal developments made a significant contribution to the
slowing of economic expansion in 1969. A major turn in fiscal policy
had occurred with enactment of the Revenue and Expenditure Control
Act of 1968 in late June of that year. This Act imposed a 10 per cent
surcharge on corporate income taxes, retroactive to January 1, and on
most individual income taxes, retroactive to April 1. In addition, it
provided for restraints on some expenditures. The Act was to be in
effect until mid-1969.
As a result of those actions, the Federal fiscal position as measured
in the national income accounts (NIA) shifted from a large deficit to a
large surplus in 1969. In the first half of calendar year 1968 the Federal deficit had amounted to about $9 billion, annual rate, but by the
fourth quarter the Federal fiscal position (NIA basis) was in balance.




33

For the full calendar year 1968, the deficit amounted to about; $5 billion, compared with almost $13 billion in 1967. In calendar year 1969
the surcharges on both corporate and individual income taxes were extended at 10 per cent from midyear to the year-end, spending was subject to further restraint, and a surplus of about $10 billion emerged.
Total receipts for the year increased by $25 billion while total expenditures rose by $ 10 billion.
Another striking development in 1969, apart from the over-all fiscal
position, was the virtual cessation of growth in direct Federal demands
on resources. Federal purchases of goods and services rose by less than
$3 billion for the calendar year 1969, a far smaller increase than in
either of the two preceding years. Moreover, the rise in such purchases
from late 1968 to late 1969 amounted to only about $0.5 billion, annual
rate, even including the sizable pay increase in the third quarter (Table
4 ) . Spending for defense, apart from the pay increase for the military,
drifted down throughout 1969—reflecting the reduction in activity in
Vietnam.
Federal expenditures other than for goods and services increased
by about $8 billion in the calendar year 1969, moderately less than in
1968. More than half of the increase was in transfer payments, mostly
social security benefits. Most of the remainder was in interest on the
public debt and in grants-in-aid to State and local governments.
State and local government purchases of goods and services increased
by $12 billion in the calendar year 1969; the rate of growth-—12 per
cent—was a little less than in 1968. But expansion in the July-December period was only about half as large as in the first 6 months (Table
5). In large part this slowdown reflected developments in the capital
markets. Commercial banks—which are usually the major institutional
purchaser of municipal securities—were net sellers of such securities in
the second half of the year and interest rates rose to record highs. Many
States and municipalities were impelled to trim borrowing and capital
spending either because legal interest rate ceilings were below prevailing market rates or because they were unwilling to borrow at the current
market rates.
BUSINESS FIXED INVESTMENT
Business spending on fixed investment was the principal stimulus to
over-all expansion in 1969. The increase for the year—12 per cent—
was double that for 1968 and was the largest for any broad category

34



of final demand. Moreover, such spending maintained its upward
momentum much better in the second half of 1969 than did other
major sectors of demand, and year-end surveys indicated plans for a
substantial further rise in 1970, particularly in the first half of the
year. More than half of the 1969 increase, however, represented higher
prices, both for structures and for producers' durable equipment.
Spending on plant and equipment turned out to be somewhat
smaller than had been indicated by an official survey of intentions
early in the year. But the shortfall represented mainly the failure of
actual spending to match anticipations in the first two quarters, and it
probably resulted primarily from delays in construction schedules and
in equipment deliveries, given the high rate of resource use in these
industries. Tight financial markets and less buoyant views about prospects undoubtedly contributed to some cutbacks, but in the aggregate
these cutbacks appear to have been marginal. The President's recommendation—made in late April but not enacted until close to the yearend—that the investment tax credit be repealed as of April 18 apparently
exerted only a limited effect on spending in 1969.
Factors underlying the sizable expansion in spending for fixed capital
included optimism about sales prospects, rising prices of plant and
equipment, and sharply increasing unit labor costs. In some major
industries—electric utilities, for example—existing capacity was being
pressed, and the need for more capacity was obvious. In others, technological advance was the major stimulus to expenditure programs.
Altogether, about half of total capital spending in 1969 was for expansion of capacity and half was for modernizaton and cost reduction.
The strength of these various incentives is underscored by the fact
that profits after taxes were up only slightly from 1968 to a total of
$50.5 billion for 1969 and that such profits were declining after the first
quarter of the year.
In manufacturing, however, the extent of the rise in outlays—12 per
cent—was somewhat surprising in view of the rather moderate rate
of capacity utilization in that sector in recent years. This rate in 1969
averaged less than the rate of approximately 85 per cent in 1968, and
by the end of the year it had declined to about 81 per cent. Only 3
years earlier, in 1966, manufacturing industries had been using their
capacity at an average rate of more than 90 per cent. From the end
of 1966 to the end of 1969, manufacturers had increased their capacity
about 16 per cent, while their output had risen by only 8 per cent.




35

BUSINESS INVENTORY ACCUMULATION
Businesses accumulated inventories at a relatively moderate rate in
1969, about in line with the historical average relationship of inventory
investment to GNP. Nevertheless, by the end of the year—as sales and
new orders slowed—inventory levels appeared to be more burdensome
than they had been at the beginning of the year. In November and December, the over-all inventory/sales ratio for manufacturing and trade
rose to the level of early 1967, which was a period of slowing in inventory accumulation.
Producers of consumer goods began to reduce output in the second
half of the year in response to weaker consumer demands. The declines
were not sufficient to bring inventories back into line with sales, however, and by late 1969 the inventory/sales ratio for retail establishments had risen to the highest level in many years. Auto stocks relative
to sales were at a record high. Inventories of other consumer durable
goods—including appliances and television sets—also remained fairly
high relative to sales, despite the cuts in production and a strike at a
major producer of electrical products.
Additions to inventories of durable goods manufacturers were sizable in 1969. Most of this rise occurred in the machinery and transportation equipment (particularly aerospace) industries, and mainly in
work in process. Expansion in stocks of materials was relatively small,
as manufacturers appeared to be holding these in line with current
output. Even though output of defense equipment was drifting down,
stocks in the defense-related industries continued to rise until late in
the year.
RESIDENTIAL CONSTRUCTION
About 1.5 million private farm and nonfarm housing units were started
in 1969, approximately the same number as in 1968. The rate of
starts had risen irregularly through most of 1968. In 1969, however,
after peaking at an unusually high rate—1.7 million units—in the first
3 months, the number moved substantially downward. In the fourth
quarter the rate averaged 1.3 million units, more than one-fifth below
the first-quarter level.
Outlays for new residential construction, which lag the pattern of
starts, declined after the first quarter, but for 1969 as a whole they
were about 7 per cent larger than in 1968. The increase reflected

36



primarily higher costs and, to some extent, increased activity in additions and alterations—which, along with nonhousekeeping units, account for about one-fourth of the residential construction total. Indeed,
the increase in additions and alterations in the fourth quarter offset
a further decline in outlays for new dwelling units.
The persistent decline in starts through most of 1969 resulted primarily from the limited availability of mortgage financing. Competing
demands for funds were very strong, and monetary policy was restrictive. The limited ability of the thrift institutions—savings and loan
associations and mutual savings banks—to compete for funds in a
period when interest rates were rising to new highs resulted in greatly
reduced inflows of funds in the second half of the year, as described
earlier in this REPORT. However, considerable support for residential
mortgage markets was provided by FNMA through its free-market
commitment auctions, and by the FHLB, which accounted for a record
volume of advances to savings and loan associations. Reflecting for
the most part such support, the rate of single-family housing starts
tended to stabilize in the fourth quarter at the reduced third-quarter
rate—at a level that was appreciably above the low in the final quarter
of 1966.
One important feature of the year as a whole was a further increase
in the number of multifamily units started. Even though these shared
in the decline after the early part of the year, they reached a record
total for 1969 and accounted for 44 per cent of all housing starts,
compared with the previous high of 40 per cent in 1968. Investors in
multifamily units were often better able to compete for financing than
were purchasers of single-family units, particularly since such financing
frequently incorporated various forms of equity-type participations and
also because it was generally less restricted by the usury laws of some
States. Late in the year, however, the rate of multifamily starts declined
sharply.
Demands for housing continued very strong in the face of advancing
prices and development costs and record interest rates. Vacancy rates
fell to the lowest level in over a decade. The supply of new housing
was augmented by a sharp further year-over-year expansion in shipments of mobile homes to a total for the year of nearly 400,000 units.
These units, which are factory-produced and are low-priced, are not
included in the statistics on housing starts nor reflected in residential
construction expenditures.




37

CONSUMER EXPENDITURES AND INCOME
Consumer spending on goods and services increased 7.5 per cent from
1968 to 1969, compared with an increase of 9 per cent the year before.
But prices advanced more rapidly in 1969 than in the earlier period,
and the physical volume of consumer takings was up only 3 per cent
following an increase of more than 5 per cent in 1968. Real takings
of durable goods increased 5 per cent for the year, while those of nondurable goods rose only 1.3 per cent and services, 3.8 per cent. In all
three cases the 1969 advances were significantly smaller than in 1968.
Consumer spending was relatively strong in the first half of 1969,
but growth slowed considerably in the second half, with the third
quarter particularly sluggish. Employment gains were large early in
the year, and wages and salaries and total personal income continued
to increase rapidly. Growth in disposable (after-tax) income slowed in
the first quarter, however, when large final settlements began to be made
on 1968 income tax liabilities, including retroactive payments on the
surcharge for the second quarter of 1968. Nevertheless, the increase
in consumer spending was sizable and was made possible in part because consumers reduced their saving rate to 5.3 per cent from the
6.0 per cent level maintained in the second half of 1968. In the second
quarter of 1969 consumer spending again increased by a sizable
amount, as a large rise in disposable income provided support to consumer demands while the saving rate was unchanged from its firstquarter level.
The third-quarter increase in consumer spending was the smallest
of the year, even though disposable income—bolstered by the Federal
pay raise and by the earlier ending of large tax payments on 1968
liabilities—showed an exceptionally large rise. The saving rate increased sharply to 6.7 per cent, from 5.3 per cent in the first half
of the year. (This increase of 1.4 percentage points in the saving rate
represented almost $9 billion, annual rate, of disposable income and
a roughly equivalent amount of consumer spending foregone.) The
weakness in the consumer sector in the third quarter is indicated not
only by current-dollar figures but also by the fact that there was virtually no rise in the physical volume of purchases. Real takings of durable
goods were off a little, those of nondurable goods were unchanged, and
growth of services was not so rapid as earlier.
Expansion of both personal and disposable income slowed con-

38



siderably in the fourth quarter, largely because gains in employment
and in wages and salaries were much smaller than they had been earlier
in the year. But the increase in consumer spending was larger than in
the third quarter, as the saving rate declined.
For the second half of 1969 as a whole, consumer demands can best
be characterized as sluggish. Real takings of durable goods were down a
little, with weakness evident in demands for furniture and appliances and
particularly for new automobiles late in the year. Although about 8.5
million new domestic autos were sold in 1969, only slightly fewer than
in 1968, the sales rate was down to about 8 million units in the fourth
quarter; and in December sales were at an annual rate of 7.7 million
units. Sales of imported autos continued to rise and for the year totaled
more than 1 million units; this number was 6 per cent higher than in
1968 and accounted for 11 per cent of total auto sales.
Weakness of consumer demand in the second half appears to have
reflected a combination of influences. Perhaps most important was the
pervasive effect of the steep rise in consumer prices; rapid price increases completely offset income gains for many employees—in fact,
real average weekly earnings in manufacturing declined slightly over the
year—and provoked some consumer resistance to purchases. Growing
concern about employment and income prospects in 1970, as indicated
in various surveys of consumer attitudes, also tended to limit spending.
And a decline in the volume of housing units completed and in sales of
existing houses adversely affected demands for furniture and other
household durable goods. Finally, declining prices of common stocks
probably exerted some dampening influence on the over-all propensity
of consumers to spend.
LABOR MARKET
Demands for labor were very strong early in 1969, reflecting the vigorous expansion of final demand. Increases in employment in the first
quarter were the largest since the 1965-66 period, and the unemployment rate reached a post-Korean-war low of 3.3 per cent in February.
As the year progressed, however, growth of employment moderated,
and in the latter part of 1969 insured unemployment rose as employment in the manufacturing sector declined.
Manufacturing employment rose at a rapid pace in the first 6 months
of 1969, but declined between June and December as output of autos




39

TABLE 6: CHANGES IN NONFARM PAYROLL EMPLOYMENT
Thousands of persons
Period
6 months ended:
December 1968.
June 1969
December 1969

Total

Manufacturing

Nonma nufacturing

1,059
1,425
356

168
240
-185

891
1 ,185
541

NOTE.—Adjusted for seasonal variation.

and other goods softened, defense-related employment edged down, and
a major strike interrupted production in the electrical equipment industry. Reflecting the reduction in demand, the average factory workweek declined to about 40.5 hours in the last quarter of the year, 0.3
hour less than in the same period a year earlier.
Employment also declined after midyear in construction activities
and in the Federal Government, but neither sector recorded a large reduction. Growth in employment in trade, services, and State and local
government slowed after midyear, but the slowing was moderate and
followed a period of relatively large increases.
There were marked differences in the incidence and pattern of unemployment changes in 1969. Easing demand for labor was most
noticeable in the industrial sector—where the labor force is made up
largely of men. For men aged 25 years and over the jobless rate rose
from a post-World-War-II low of 1.6 per cent in the first quarter to
1.8 per cent in the fourth quarter. Reflecting both more layoffs and
longer spells of unemployment, the number of persons drawing unemployment insurance benefits began to rise after midyear and in December reached the highest level for any month since the summer of 1967.
Among women and younger workers, unemployment changes were
more uneven during the year, and joblessness among such "secondary"
workers was not appreciably higher at the year-end than in the first
quarter. The decline to relatively low unemployment rates among
women and younger workers, after a rise in September, was instrumental in lowering the over-all unemployment rate to 3.5 per cent in
November and December after it had risen from 3.4 per cent in the
first quarter of the year to 3.6 per cent in the third.
The civilian labor force increased by 2.0 million persons on the
average between 1968 and 1969—the largest gain since 1947. The rise
was substantially more than might normally be expected from popula-

40



tion growth and long-term increases in participation rates and was
probably a function of strong demands early in the year, buttressed by
the desire of secondary workers to maintain or raise family income at a
time of rapid price increases. Reflecting in part the latter factor, the
average number of adult women in the labor force increased by nearly
1.2 million; this number accounted for about three-fifths of the net rise
in the civilian labor force.
Continuing the large increases of the prior 2 years, another half a
million men aged 20 years and over were added to the labor force in
1969. The bulk of this expansion was a result of the continued flow into
the labor market of young men born during the post-World-War-II
baby boom. The teenage labor force—male and female—rose by
350,000, the largest increase since 1966, when 650,000 teenagers
entered. The size of the armed forces changed little from 1968 to 1969.
WAGES AND COSTS
Hourly earnings rose a little less rapidly in the 12 months ending in
December 1969 than over the preceding year. However, increases were
still very large—6.8 per cent for production and nonsupervisory
workers on private nonfarm payrolls and 5.4 per cent for manufacturing production workers. Despite the large current-dollar increases
in wages, the average production worker was no better off in 1969
than in 1968 after allowance for the rise of consumer prices. In fact,
average weekly earnings in constant dollars have increased only slightly
since 1965, and even these gains have been offset by higher Federal
income and social security taxes.
There was a strong emphasis on large and immediate wage increases
in collective bargaining settlements during 1969. The renewed emphasis
on wage rates was attributable to some extent to the efforts of skilled
workers to regain former wage differentials and to the growing influence of younger workers, who tend to be more interested in current
income than in retirement pay or other deferred benefits. But the main
factor underlying large wage boosts was the continued and, indeed,
accelerated rise of consumer prices. Wage settlements were large for both
union and nonunion workers and for both public and private employees.
Union contracts signed in 1969 provided a median first-year wage
boost in excess of 8 per cent. In some of these instances, of course,
wages had lagged behind price increases in earlier years of extended




41

contracts, and workers were bargaining for a "catch-up" in wages. It
should be noted that collective bargaining activity was at a relatively
low level in 1969; the number of workers covered by major contracts
negotiated during the year was only 2.4 million, compared with 4.6
million in 1968 and an estimated 5 million expected in 1970. Reflecting
in part this reduced level of bargaining activity, there was a slight drop
in the rate of growth of compensation per manhour (which includes
both wages and fringe benefits). For the private nonfarm economy, compensation per manhour rose by about 7 per cent between 1968 and 1969
compared with nearly 7.5 per cent in the prior year.
Usually, any decline—however slight—in growth of compensation
per manhour provides an opportunity for pressures on unit labor costs
to subside. However, presently available statistics suggest that in 1969
there was less than a 1 per cent increase in output per manhour in the
private nonfarm economy whereas the increase in 1968 in that sector had
amounted to 3.3 per cent. Inasmuch as productivity increased only a
little in 1969, most of the rise in compensation costs was reflected in
higher costs per unit of output. Such costs are estimated to have risen
6.4 per cent in 1969—the largest increase since 1956.
In the manufacturing sector the productivity performance was better,
and unit labor costs rose less in 1969 than in the private nonfarm
economy as a whole. Output per manhour in manufacturing rose by
about 2.5 per cent, about as much as in 1968 but less than the longterm trend.
PRICES
As already indicated, inflationary pressures were strong throughout
1969, even though expansion of real output was moderating (and at
a standstill late in the year) and despite signs of easing in the second half
in the demand for manpower and the use of industrial resources. All of
the broad measures of prices showed substantially larger increases over
the year than during 1968. Indeed, the increases were the largest since
1951 for both consumer prices and the implicit GNP price deflator and
were the largest since 1956 for wholesale prices of industrial commodities. For farm products and processed foods and feeds, the increase was
the largest since 1950 with the single exception of 1965. Moreover, the
advance in comprehensive measures of prices over the fourth quarter
was not much different from the pace early in the year (Table 7 ) . The
extent of the inflationary upsurge of recent years is indicated by the

42



fact that the consumer price index—so critical in wage negotiations—
rose by more than 18 per cent during the 4 years from December 1965
to December 1969. This was about as large an increase as had occurred
over the preceding decade.
Numerous factors contributed to the rapid rise of prices in 1969.
Consumers' dollar incomes were rising rapidly during much of the year,
and demands in several important sectors of the economy remained
strong—strong enough to put pressure on available resources. These
sectors included producers' goods, total construction, and—in the consumer sector—such services as medical care, home maintenance services, and other labor-intensive services.
A major contributory factor was the steep rise in unit labor costs for
the private nonfarm economy as a whole and the lesser—but still significant—increase in unit labor costs in manufacturing, as discussed
earlier in this REPORT. Rising prices of materials and of transportation
also affected over-all costs. And booming economies in Western Europe
and Japan added to upward pressures on prices of internationally traded
materials.
Of the other contributory factors that emerged during the year, the
most important related to supplies of foods. In the spring an unexpected
decline in cattle marketings relative to demand boosted prices of beef
precipitously, and retail prices remained high for the remainder of the
year. In the autumn pork was in very short supply as a result of an unexpectedly small pig crop in the spring, and wholesale and retail prices
TABLE 7: PRICE CHANGES
Per cent
Year
Index

1966

1967

1969 annual rate

1968

1969

DecMar.

Mar.June

JuneSept.

Sept.Dec.

Wholesale prices, total
Industrial commodities 1
Foods and foodstuffs 1

1.7
.8
1.8
1.9
1.3 -2.4

2.8
2.4
4.0

4.8
3.8
8.1

6.9
6.2
9.4

5.4
1.4
.7
3.6
18.7 -4.4

5.3
4.6
8.2

Consumer prices, total
Foods
Other commodities
Services

3.3
3.8
1.9
4.9

3.1
1.2
3.2
3.9

4.7
4.3
3.7
6.1

6.1
7.2
4.4
7.4

6.1
4.0
5.6
8.1

6.4
10.1
4.1
6.8

5.3
6.4
2.4
7.5

6.2
7.5
5.4
6.3

GNP implicit deflator*

3.5

3.5

4.0

5.1

4.8

5.1

5.3

4.7

1
2

Federal Reserve groupings.
Quarters compared rather than months; seasonally adjusted data.
NOTE.—Annual changes calculated from December to December.




43

of pork moved up sharply. Over the year ending December, wholesale
prices of livestock were up 15 per cent. In addition to meats, supplies of
eggs and some fresh vegetables were also short late in the year.
WHOLESALE PRICES
From December 1968 to December 1969 average wholesale prices of
industrial commodities increased almost 4 per cent; materials rose more
than 4 per cent and finished goods, excluding foods, about 3.5 per cent.
Increases over the year were widespread among commodities; only a few
showed declines. Prices of producers' goods rose faster than those of
consumer goods—reflecting in large part continued strong demand for
business equipment.
Costs of producers' goods were affected more than consumer goods
by the sharp increase in prices of metals. The index for metals and metal
products rose about 10 per cent over the year, by far the largest increase
among the 13 major groups of industrial commodities. Within the broad
metals group, prices of nonferrous metals rose 22 per cent and those
of iron and steel and their products more than 7 per cent.
The price increase for the metals group compares with 4.8 per cent
for nonmetallic minerals, which registered the second largest increase
of the major industry groups. Prices rose in all of the major industries
except lumber and wood products (which fell about 8 per cent after
soaring 24 per cent over the preceding year), but some of the increases
were relatively small. For example, prices of furniture and household
durable goods, textiles and apparel, and chemicals and allied products
all rose less than 2.5 per cent.
During the year prices of industrial commodities, as well as those
of the normally more volatile farm products, rose at uneven rates. In
the first quarter the rise in industrial prices was very rapid—more than
6 per cent at an annual rate—reflecting in part exceptional increases for
nonferrous metals and for steel and steel products, and in part a record
advance in prices of lumber and plywood caused by a rapid growth in
demand coupled with strikes and other supply bottlenecks. In the second
quarter the increase slowed to a rate of less than 1 per cent, as plywood and lumber prices plummeted, and steel and nonferrous metals
rose more slowly. The rise in average wholesale prices was sustained
at a rate of about 5.5 per cent, however, by a surge in prices of
foodstuffs.

44



In the third quarter there was another general round of steel price
increases; nonferrous metals rose more briskly; and the decline in prices
of lumber and plywood was smaller than in the second quarter. As a
result, the rise in industrial commodity prices accelerated to an annual
rate of 3.6 per cent. But wholesale prices of foods and foodstuffs declined
from the very high level of June as cattle marketings increased. Wholesale prices of all commodities thus rose at a rate of only 1.5 per cent,
which may have conveyed the unwarranted impression that inflationary
pressures were already being significantly reduced.
In the fourth quarter, however, a rapid pace of price increase was
resumed (Table 7 ) . Prices of farm products and foods were up considerably over the quarter, with pork, eggs, and fresh vegetables all
moving up sharply. For industrial commodities the price rise also accelerated, as prices of finished goods—including those of passenger cars
and machinery and equipment—moved up faster.
CONSUMER PRICES
Consumer prices rose more than wholesale prices in 1969 largely because of exceptionally big increases in the prices of foods and
services, which together account for more than one-half of the total
weight of the consumer price index. Prices of services were about 7.5
per cent higher in December than a year earlier—reflecting sharp increases in costs of mortgage finance, medical care, insurance, and housekeeping services and home-maintenance. Rents and utility costs rose
less sharply.
Among commodities, food prices rose faster than other groups and
in December were 7.2 per cent above a year earlier; prices of meat,
poultry, and fish were up 11 per cent. Apparel and shoe prices also
rose rapidly over the year—by more than 5 per cent.
As in other recent years, prices of durable commodities rose less
than those of nondurable goods. The increase for new passenger cars
was about 2 per cent after adjustment for quality improvement. For
household durable goods the increase amounted to about 3.5 per cent
—with a much slower rate of advance in the second half of the year,
reflecting in part the rather sluggish demand for furniture and appliances r




45

International Payments and Reserves
Progress was made in 1969 toward establishing economic conditions
in the United States and other countries that would help to reduce
imbalances in international payments while fostering economic growth
at sustainable rates. Toward the same end, changes in the exchange
parities of certain important currencies were made. At the same time
there was further development of international arrangements relating
to gold, Special Drawing Rights (SDR's), and the traditional operations
of the International Monetary Fund, and there was also continuing
international discussion of whether a better working of the international
monetary system might be promoted by some increase in the flexibility
of exchange rates.
U.S. BALANCE OF PAYMENTS
Despite the persistence of widespread expectations that price inflation
in the United States would continue, the slackening of demand pressures
in this country during 1969 was an important factor in the moderate
improvement that occurred after midyear in the balance of U.S. transactions in goods and services with the rest of the world. The volume of
net exports, however, was still much too small to support the flow of
resources to developing countries and the growth of U.S. private investments abroad. Balance in the country's international accounts in 1969
was maintained by a further massive inflow of private foreign capital,
the major part of which came through the channel of short-term investments by foreigners in the Euro-dollar market linked with borrowings
by U.S. banks from their foreign branches operating in that market. The
underlying imbalance between the current and the long-term capital
transactions of the United States with the rest of the world still remained
to be overcome.
The current account of the U.S. balance of payments was adversely
affected in the first half of 1969 by a prolonged dock strike at East
Coast and Gulf ports, but in the course of the year merchandise exports
gained some strength, and income on foreign investments rose considerably. These gains were offset, however, by a persistent albeit
slackening rise in imports and by large interest payments on the
increasing total of U.S. liabilities to the rest of the world.

46



Governmental restrictions on major types of U.S. private capital outflows were eased somewhat in April, and further changes were made
in December. The predominant influence on private capital flows, however, was higher interest rates, which attracted foreign liquid funds to
the United States and also affected the flow of longer-term capital.
Recorded outflows of U.S. private capital were slightly larger
than in the previous year, but there were probably large unrecorded
capital outflows in the first three quarters, reflected in the extremely
large negative residual item in the balance of payments accounts. These
unrecorded outflows were only partly offset by return flows in the last
weeks of the year. Some of the recorded and unrecorded outflows, subsequently reversed, were induced by speculation on a revaluation of the
German mark, but a large part probably was drawn by high Eurodollar interest rates. While such flows from the United States added to
the supply of funds available to those U.S. banks that were borrowing
in the Euro-dollar market, far more important in this respect were the
movements of foreign short-term capital provided through this channel.
Weakness in the U.S. stock markets, combined with the enhanced advantages of holding investible funds in more liquid forms with high
yields, resulted in a reduction in foreign purchases of U.S. corporate
stocks and of the corporate securities sold abroad to finance U.S. direct
investments. These inflows of capital to acquire securities nevertheless
remained very large by the standards of the years before 1968.
Liabilities to foreign monetary authorities were significantly reduced
in 1969. In particular, acquisitions by foreign governments of nonliquid claims on the U.S. Treasury and of long-term deposits, which
had served in 1968 to reduce the deficit as conventionally measured
on the "liquidity" basis, were reversed in 1969, and this shift in direction of transactions accounted for a large part of the deterioration in
the liquidity balance for the year.
TRANSACTIONS IN GOODS AND SERVICES
The balance on goods and services increased after the middle of 1969,
reaching an annual rate of about $3 billion in the second half. For the
year as a whole, net exports of goods and services were only $2 billion,
about $0.4 billion less than in 1968 (Table 8). This result fell far short
of the average surpluses of the earlier 1960's.
Merchandise exports in 1969 continued to perform reasonably well,




47

TABLE 8: U.S. BALANCE OF PAYMENTS
Billions of dollars, seasonally adjusted
1969
Item

Balance on goods and services
Goods
Services, including investment income
Remittances and pensions
U.S. Government grants and capital, net
U.S. private capital flows, net
Foreign capital flows, net, excl. U.S. liquid liabilities. .
Private, incl. international organizations
Foreign governments and central banks
Errors and omissions
Balance on liquidity basis (deficit, —)
Balance on liquidity basis, NSA
Financed by changes in:
U.S. reserve assets (increase, —)
Liquid liabilities to foreign commercial b a n k s . . . .
Liquid liabilities to nonbanks2
Liquid liabilities to reserve holders
Balance on official reserve transactions basis (deficit, — )•
Balance on official reserve transactions basis, N S A . . . .
Financed by changes in :
U.S. reserve assets (increase, — )
Gold
Reserve position in IMF
Convertible currencies
Liabilities to foreign reserve holders
Liquid
Nonliquid

1968

1969*

2.5
.6
1.9

2.1
.7

-1.2
-4.0

-1.2
-3.9

-5.2

-5.0

8.6
6.3
2.3

3.9
4.6
-.7

-.6

-3.0

.2
.2

1.4

III
.7
.3
.4

.7
.5
.2

-1.2

-.3
-1.0

-.3
-.9

-2.1

-1.3

-.3

.3

'A
-.3
-.8
-1.4

IV*

-.3

.4
.6
-.3

.3
.9
-.6

-1.2

-1.0

-1.0

.3

-7.1
-7.1

-1.7
-1.3

-3.9
-3.8

-2.6
-3.0

1.1
1.0

-.9
3.4
.4
-3.1

-1.2
9.3
_ ^
-.5

-0)

-f.7

-.3
4.7
-.1
-.5

-.7
1.6
-.1
2.2

-.2
-.1
-.2
-.5

1.6
1.6

2.7
2.7

1.2
1.2

-.9
-1.0

1.3

1.7

.9 -1.2
-1.0
-1.0
.8
-1.5
-.5
-1.0

1.6
1.7

-0)

1..2

.9
-I! .2
.8
-3.1
2.3

-0)
-1.7
-1.7

+0)

-.3
-.3
2
'.2
-.9
-.5
-.4

-.4
1.7
2.2
-.5

1.5
1.4
.2

- .2
7
!
-.7
-.5
-.2

p
NSA—Not seasonally adjusted.
Preliminary
2
i Less than $50 million.
Including international organizations.
3 In the accounts on this basis, "foreign capital flows" include changes in U.S. liquid liabilities to
foreign commercial banks, to other private holders, and to international organizations, and exclude
all transactions of foreign reserve holders.
NOTE.—Details may not add to totals because of rounding.

though the U.S. share of world exports of manufactures declined
slightly. Exports advanced by about 8 per cent over the 1968 total,
despite some loss of sales occasioned by the dock strike, and in the
second half of 1969 they were 12 per cent higher than a year before.
The year-to-year gain occurred despite a marked reduction in exports
of agricultural products during the first half. As the year progressed,
exports of machinery were especially strong and exports of coal and
steel also advanced sharply. Exports of automotive products to Canada
continued to rise as they have since the 1965 U.S.-Canadian automotive pact. Most of the export rise was in response to demands stemming from cyclically rising economic activity in the industrial countries.

48



On the import side, there was a marked slowing in 1969 in the rate
of intake of foreign goods as compared with the hectic pace of 1968,
but the rise of 8 per cent still exceeded the rate of growth of our current-dollar GNP. Imports were rising in many major categories—most
notably in capital goods, in autos from Europe and Japan as well as
from Canada, and in other consumer goods. Imports of industrial materials and of foods were little changed from the already high levels of
1968. Thus, the momentum of import demand generated by the cyclical
upswing appeared to be yielding, but only slowly, to efforts to stabilize
the economy. The trade surplus for the year showed scant change from
the $0.6 billion of 1968, though by the second half the annual rate had
recovered to about $1.5 billion.
The decline in the balance on goods and services from 1968 to 1969
occurred principally in investment income flows. Income on U.S. private investments and assets abroad rose by $1 billion to about $8
billion, reflecting mainly higher earnings by foreign affiliates of U.S.
firms. However, income paid to foreign holders of short-term and other
claims rose by $1.4 billion, as interest rates rose and such holdings
increased. Net changes in receipts and payments for other services were
relatively minor. Military expenditures abroad rose somewhat faster
than receipts from military sales, leaving the net payments balance on
these military transactions at well over $3 billion.
TRANSFERS AND U.S. GOVERNMENT CREDITS
Private remittances, net, and U.S. Government pensions and other
transfers were little changed in 1969, resulting in net payments of a
little over $1 billion. U.S. Government grants (other than military)
held at close to $1.7 billion. Disbursements under Government credits
(including changes in related currency holdings) were down slightly
for the year. Scheduled repayments on outstanding credits were about
$0.2 billion higher, partly because the United Kingdom resumed repayment of postwar credits on schedule, but there was a negative shift of
some $0.3 billion in nonscheduled receipts from foreign governments.
PRIVATE CAPITAL FLOWS
In 1969, as in the year before, the net flow of private capital was toward the United States and was undergoing marked changes in both
size and composition. The net inflow in 1969 reached about $8 bil-




49

lion, which far exceeded the nearly $5 billion of 1968, and was unparalleled, of course, in any earlier experience.
U.S. direct investors maintained a keen interest in expanding their
productive facilities abroad, as evidenced by projections that indicated
their expenditures for foreign plant and equipment would rise sharply
in 1970. The financing of such investment through capital outflows
from the United States, or from earnings retained abroad, has been
limited by mandatory regulations since the beginning of 1968, but a
great deal of leeway has been built up by the companies that stayed
under their ceilings, and there was some loosening of the restraints in
April 1969. Net corporate capital outflows associated with direct foreign investments (that is, capital outflows intended for direct investment less funds borrowed abroad) appear to have risen by about $0.4
billion in 1969. Sales of new issues abroad to finance direct investments
were cut in half—from $2.1 billion to about $1 billion—but the companies made up for this difference by adding very little to balances
held abroad out of the proceeds of such new issues, which they had
done in 1968 to the extent of $1 billion.
U.S. banks increased their claims on foreigners subject to the Federal Reserve's foreign credit restraint program (pages 55-59) by a
moderate amount during 1969, whereas they had reduced such claims
substantially in the previous year. Claims on foreigners, reported by
banks, of types not covered by the Federal Reserve restraint program
also increased by a sizable amount in 1969.
U.S. net purchases of foreign securities amounted to about $1.4
billion in 1969, slightly more than in 1968. New foreign bond issues
sold here (very largely by Canadian borrowers and international institutions) remained at about $1.6 billion, but there was some increase in
U.S. purchases of foreign stocks.
While the outflow of U.S. private capital—influenced primarily by
restrictions and tight credit conditions in the United States—did not
change significantly in 1969, there was a dramatic shift in the behavior
of foreign private investors. These investors were affected in several
ways by the tightening of credit conditions in the United States and in
most other countries during the year. One result was the greater difficulty encountered by U.S. companies seeking financing abroad for
direct investments, as mentioned above. Similarly, after the early
months of the year there was a reduced inflow into U.S. corporate
stocks, resulting in a drop from a $2.1 billion inflow in 1968 to about

50



$1.5 billion in 1969. Nevertheless, this rate of investment was still very
high, and the continuation of the inflow in the winter when U.S. equity
markets were declining indicated a persistent underlying demand. One
type of long-term foreign capital inflow that grew significantly in 1969
was direct investments, which were estimated at a record high of $0.7
billion, about double the previous high of 1968. Taking into account
all forms of foreign private investments in U.S. long-term assets, the
inflow in 1969 was about $4.5 billion, compared with an extraordinary
inflow of $6 billion in 1968.
The decline in inflows of long-term private foreign capital was far
more than offset by an acceleration of the increase in liquid liabilities
to foreign commercial banks and other private foreigners as reported
by U.S. banks. Additions to such liabilities reached $8.8 billion in
1969, compared with an already high $3.8 billion in 1968. About $7
billion of the inflow took the form of an increase in liabilities of U.S.
banks to their foreign branches, representing principally funds obtained
in the Euro-dollar market. Liabilities to all commercial banks abroad,
including these branches, rose by $9.3 billion through July, then rose
more moderately until the final weeks of the year, when they dropped
back to about the midyear level.
Some part of the funds borrowed in the Euro-dollar market may
have represented deposits of U.S. residents attracted by the much higher
deposit rates paid there than on deposits in banks in the United States.
Other parts may have been derived from transfers of private nonbank
foreign funds previously held in U.S. banks, which were reduced by
$0.5 billion during the year, and from placements of funds by foreign
central banks. However, the major supply factor in the market was the
accumulation by private foreigners of dollar-denominated assets, typically purchased from foreign central banks, as an alternative to holding
short-term investments or deposits denominated in other currencies.
In the first quarter of the year borrowing in the Euro-dollar market
by U.S. banks was facilitated by a reflow of funds previously placed in
German mark assets, and Euro-dollar interest rates moved up only moderately. By late April, however, renewed speculative flows into German
marks, coupled with strong U.S. bank demand, were rapidly driving
Euro-dollar interest rates to unprecedented highs. Although the speculative pressures were reversed in May, after the German authorities reiterated their intention not to revalue the currency upward, the demand




51

by U.S. banks became intense in June. By that stage the pressure on
reserves of a number of countries had become acute. In the United States
there was some concern that large-scale use of Euro-dollars by some
banks deflected the impact of domestic credit restraint. To remove the
existing advantages with respect to reserve requirements of this means of
adjustment, and to moderate the flow of funds between U.S. banks and
their foreign branches and other foreign banks, on June 26 the Board
of Governors proposed changes in Regulations M and D. The amendments finally adopted, which became effective in September, established
a 10 per cent marginal reserve requirement on banks' borrowings from
foreign branches and a reserve requirement on borrowings from unaffiliated foreign banks. 1 The banks were required to maintain the required reserves beginning in October.
Borrowings by U.S. banks through the Euro-dollar market moved
within a relatively narrow range from about the end of July until near
the year-end. At that time an extraordinarily large flow of funds to
the United States produced a sharp drop in U.S. banks' liabilities to
foreign branches. At the year-end liabilities to foreign branches were
about $13 billion, which represented—as noted earlier—an increase
of $7 billion for the year.
As a result of the year-end inflows, which apparently included also
a considerable movement out of German marks, there was a surplus in
the balance of payments measured on the liquidity basis in the fourth
quarter, in contrast to very large deficits in the first three quarters when
liquid liabilities accumulated. The deficit for the year on the liquidity
basis amounted to $7.0 billion. This was a drastic change from the
small surplus for 1968, but the deterioration can be traced in large
part to such transient features as the reversal of "special" intergovernmental transactions, which accounted for more than $3 billion of the
change and a net increase of perhaps $2 billion in unrecorded outflows.
lr
The marginal reserve requirement under Regulation M applies to a bank's
net liabilities to its branches in excess of a reserve-free base amount, initially a
May 1969 4-week average but subject to automatic reduction if average liabilities
in a reserve-computation period fall below the base. Also covered are assets held
by domestic offices at the time of the proposal and later sold to branches, and loans
by branches to U.S. residents. An alternative reserve-free base equal to 3 per cent
of total deposits subject to ordinary reserve requirements may be used by a bank;
this base is not subject to automatic reduction. The special reserve requirement
(under Regulation D) on borrowings from unaffiliated foreign banks is 10 per
cent on the excess of such borrowings over 4 per cent of a bank's deposits, and 3
per cent up to that.

52



As noted above, this probably included a circular flow of U.S. funds
to the Euro-dollar market and back to U.S. banks, not entirely unwound
at the year-end. The net balance of transactions other than "special"
transactions or circular flows apparently worsened by about $2 billion.
OFFICIAL RESERVE TRANSACTIONS
As measured on the official settlements basis the U.S. balance of payments registered a surplus of nearly $3 billion in 1969. The principal
factor in the difference between the liquidity deficit and this surplus
was the very large inflow of private funds through the borrowings of
U.S. banks, described above, which had the effect of reducing U.S.
liabilities to foreign official accounts and, at a further stage, of increasing U.S. reserve assets.
During the year U.S. international reserve assets increased by $1.25
billion. The increase reflected purchases of nearly $1 billion of gold by
the U.S. Treasury from foreign monetary authorities, the addition of
$1 billion to the reserve position in the IMF, and a reduction of $0.75
billion in holdings of convertible foreign currencies as a result of net
repayments of earlier central bank swap drawings, notably by the
United Kingdom. The increase in U.S. gold holdings resulted primarily
from purchases from France in the first half of the year and from Germany at the year-end. Developments in 1969 affecting gold markets are
discussed on pages 62-64.
The net reduction in U.S. liabilities to foreign monetary authorities
was $1.5 billion, compared with a decline of $0.75 billion in 1968.
About $1 billion of the decline occurred in certain nonliquid claims
on the U.S. Treasury and on U.S. commercial banks held by foreign
monetary authorities; in 1968 such claims had increased by $2.3 billion.
FEDERAL RESERVE OPERATIONS IN FOREIGN
CURRENCIES
Serious imbalances in international trade and payments kept the international financial system under strain in 1969—as in most recent years.
Along with the developments in the U.S. balance of payments discussed
above, particularly noteworthy were the persistence of large currentaccount surpluses for Germany and Japan and the continuation during
part of the year of a large payments deficit for France. The U.K.
balance of payments showed marked improvement, as the result of the




53

November 1967 devaluation of the pound and subsequent policy actions restraining the British domestic economy.
By the end of the year important tendencies toward better balance
had been set in motion by the devaluation of the French franc in
August, which was accompanied by measures of domestic restraint,
and by the revaluation upward of the German mark in October (following a 4-week period in which the exchange rate for the mark was
allowed to float upward). But before these currency adjustments were
initiated, massive speculative flows had occurred, especially into German marks—once in the spring and again in September after the
French franc devaluation and before the German elections.
The French franc was under substantial selling pressure in the spring
and early summer. Some other European currencies also experienced
speculative buying and selling then and later, occasioned by expectations or fears that their parities might be adjusted along with that of
one or the other of the major currencies. An additional cause of
strain on the reserves of many continental European central banks during the first 7 months of 1969 was the massive flow of funds to the
United States through the Euro-dollar market discussed above.
After the exchange rate for the mark was allowed to float at the end
of September, a reverse flow of funds began—out of the German mark
into other European currencies and the dollar. This flow continued to
be heavy through the rest of the year.
As in earlier years, the Federal Reserve's foreign currency operations were aimed at cushioning the impact of destabilizing flows of
international payments, in cooperation with foreign central banks and
the U.S. Treasury. Foreign central banks continued to make substantial use of their swap facilities with the Federal Reserve during 1969.
However, their repayments exceeded their drawings by $1.0 billion,
and total drawings outstanding at the end of the year were reduced
to $650 million. The Bank of France drew on the facility during the
May speculative crisis, but by the end of June had repaid these and
earlier drawings with the proceeds of gold sales and credits from other
sources. Drawings were also made at times by the Netherlands Bank,
the National Bank of Belgium, the National Bank of Denmark, and
the Austrian National Bank, but these were all repaid by October. The
Bank of England, which was able to retire a substantial amount of
short-term indebtedness to foreign central banks during 1969, reduced
its outstanding indebtedness under Federal Reserve swaps from $1,150

54



million to $650 million. During the year the bank made new drawings
on the facility during the periods of speculation on a mark revaluation
in early May and in the summer.
The Federal Reserve, for its part, made less use of its network of
swap facilities in 1969 than it had in any other year since 1963, the first
full year of System foreign currency operations. This resulted from the
fact that foreign reserve holdings in dollars were in many cases being
reduced.
At the beginning of 1969 the Federal Reserve had about $430
million of swap drawings outstanding in German marks and Swiss
francs. The mark drawings were fully repaid by the end of January as
funds continued to flow out of marks in the unwinding of the November 1968 speculative episode. The Swiss franc drawings were sharply
reduced in February and were fully liquidated in April with the proceeds of a Swiss franc-denominated U.S. Treasury security issued to the
Swiss National Bank. In the spring the System drew again on the facilities with both the Swiss National Bank and the Netherlands Bank, but
by September it had repaid all swap drawings.
In October the Federal Reserve drew $200 million of Swiss francs
on the Swiss National Bank to cover increased dollar holdings of that
bank resulting from repatriations by Swiss commercial banks as credit
conditions tightened in Switzerland. It also drew $300 million of
guilders on the Netherlands Bank as Dutch residents repatriated funds
from Germany and speculative funds moved into guilders. By year-end
the outstanding amount of these Federal Reserve swap drawings had
been reduced to $330 million.
The Federal Reserve's reciprocal currency arrangements with 14
central banks and the BIS were increased by $475 million during 1969
to a total of $10,980 million. Facilities with the Bank of Norway, the
National Bank of Denmark, the National Bank of Belgium, and the
Austrian National Bank were increased and that with the Netherlands
Bank decreased during the year.
FOREIGN CREDIT RESTRAINT PROGRAM
During 1969 the Board continued to administer that portion of the
Government's balance of payments programs that applied to banks and
other financial institutions, initially in accordance with guidelines revised on December 23, 1968, which were described in the ANNUAL
REPORT for

1968.




55

In issuing the revised guidelines in December 1968, the Board
indicated its intention to review the program again early in 1969, particularly to determine whether additional flexibility for financing U.S.
exports might be provided in the guidelines. During the first quarter
of 1969, meetings were held in seven Federal Reserve Bank cities by
representatives of the Board with officers of the Federal Reserve Banks
and with representatives of banks and other financial institutions reporting to the Federal Reserve Banks under the program.
It was concluded that, while there was adequate capacity for the
financing of exports under the existing aggregate ceiling, it would be
possible to provide greater flexibility by giving relatively larger ceilings
to small and medium-sized banks whose major interest in international
lending was the financing of exports. At the same time, larger ceilings
for these banks would reduce competitive inequities among reporting
institutions. Accordingly, revised guidelines were issued by the Board
on April 4, 1969.
For about half of the reporting banks, accounting for more than
90 per cent of total foreign assets reported, the ceilings remained at
the level suggested by the guidelines issued in December 1968. The
remaining banks, whose foreign assets were a relatively small proportion of their total assets, were permitted to calculate their ceilings at
1.5 per cent of total assets as of December 31, 1968. This provision
added $400 million to the aggregate ceiling of the banks.
The guidelines for nonbank financial institutions remained essentially unchanged although the ceiling was increased from 95 per cent
of the end-of-1967 base figure to 100 per cent of the base.
A continued restrictive monetary policy and high domestic demand
for credit held down the banks' foreign lending and investment during
1969. In fact, these factors may have had a greater impact than the
foreign credit restraint program in moderating the foreign activities of
financial institutions. As described in the ANNUAL REPORT for 1968,

the banks had reduced their foreign claims covered by the guidelines
by $612 million in 1968, or by $212 million more than the objective
set on January 1, 1968. These assets fluctuated during 1969 and at
the year-end were $165 million above the total outstanding on December 31, 1968. At the end of 1969 such assets were about $75 million
below the December 31, 1964, base figure (Table 9 ) .
Nonbank financial institutions reduced their holdings of foreign
assets subject to the guideline ceiling by $174 million in 1969 (Table
56



10). Such holdings had declined by $240 million in 1968, considerably
more than the targeted reduction of $100 million. Holdings of foreign
assets not subject to the ceiling were increased by $ 1,055 million in 1969,
compared with an increase of $632 million in 1968.
TABLE 9: FOREIGN CREDITS OF U.S.

BANKS

1969

End of year
Ttem
1965
Number of reporting banks

161

1966
148

1967

1968

151

161

Mar.
31
159

June
30
162

Sept.
30
167

Dec.
31
169

!Vlillions of dollars
Total foreign credits subject to
General Ceiling
Change from previous d a t e . . . .
Ceiling
Net leeway for further expansion of credit
Export term loans subject to
ceiling*
Export-Term-Loan Ceiling
Net leeway for further expansion of export term loans

9,652 9,496 9,865
+ 156 - 1 5 6
+369
9,973 10,360 10,409
321

864

544

9,253
-612
9,729
476

9,127 9,502 9,115 19,403
+ 375 - 3 8 7 1+288
-126
9,706 10,102 10,135 210,092
578

600

1,020

3689
16
1,614
1,598

1 From Dec. 1, 1969, excludes export term loans.
2 From Dec. 1, 1969, General Ceiling, excluding Export-Term-Loan ceiling.
3
From Dec. 1 1969, leeway under General Ceiling.
4 Foreign credits with maturities of 1 year or longer that finance exports of U.S. goods and services

On December 17, 1969, in connection with a modest modification
of the Government's balance of payments programs, the Board issued
revised guidelines for banks and nonbank financial institutions. For the
first time, a separate Export-Term-Loan Ceiling was established for
credits with a maturity of 1 year or longer extended to finance exports
of U.S. goods and services shipped or provided on or after December
1, 1969. Banks also were provided with a General Ceiling, equal to
their adjusted ceiling as of November 30, 1969, within which they
could make loans of any maturity and for any purpose. However, in
using the General Ceiling, the banks were requested to continue to
observe an absolute priority for export credits, and in making nonexport credits, to meet the needs of the developing countries. The
General Ceiling continued to be reduced by repayments of nonexport
term loans to residents of developed countries of continental Western
Europe. In addition, repayments of export term loans outstanding




57

when the revision was made were to be deducted from tbe General
Ceiling and added to the Export-Term-Loan Ceiling.
The Export-Term-Loan Ceiling was calculated at 0.5 per cent of a
bank's total assets as of December 31, 1968. Adoption of this formula
TABLE 10: FOREIGN ASSETS OF REPORTING NONBANK FINANCIAL INSTITUTIONS
Amounts shown in millions of dollars

Type of asset

Amount
Dec. 31,
1969

Change from Dec. 31, 1968
Amount

Per cent

ASSETS 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 businesses3 3
Investment in nonfinancial businesses
Long-term bonds and credits
Stocks*
TOTAL holdings of assets subject to guideline . .
Adjusted base-date holdings6
ASSETS NOT SUBJECT TO GUIDELINE
Investments in Canada:
Deposits'and money market instruments
Short- and intermediate-term credits*
Investment in financial businesses 3 3
Investment in nonfinancial businesses
Long-term bonds and credits
Stocks
Bonds of international institutions, all maturities
Long-term investments in the developing countries and in
Japan:
Investment in financial businesses3 3
Investment in nonfinancial businesses
Long-term bonds and credits
Stocks
Stocks, "other" developed countries7
TOTAL holdings of assets not subject to guideline.

1

9.8

205

-26

-11.2

129
9
546

17
1
-67
-101

15

352

-174

1,257

15.5
12.4

-10.9
-22.3
-12.1
-5.6

1,491

91
21
34

70.9
14.1
5.8
j

8,286
1,319
1,002

-18
15

4*. 7
-1.3
1.5

26
12
787
503
569

3
2
17
316
199

14.6
24.2
2.2
169.4
53.7

13,563

1,055

8.4

220
168
625
44

1 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 affiliates, in which the U.S. institution has
ownership interest of 10 per cent or more.
4 Less than $500,000.
5 Except those acquired after Sept. 30, 1965, in U.S. markets from U.S. investors.
6 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.
7 If acquired after Sept. 30, 1965, in U.S. markets from U.S. investors.
2
3

added about $1.6 billion to the aggregate ceiling and distributed it
more widely among banks. Twenty of the Nation's largest banks accounted for about three-quarters of the General Ceiling, which is calculated as a percentage of foreign assets. These banks received slightly

58



more than one-half of the new Export-Term-Loan Ceiling. At the
year-end reporting banks were about $700 million below the General
Ceiling effective on that date, and they also had a leeway of $1.6 million
within which to make export term loans (Table 9 ) .
The guidelines for nonbank financial institutions contained only one
substantive change. In view of Japan's strong reserve and balance of
payments position, special treatment accorded to long-term investment
in that country was terminated. Long-term loans and investments in
Japan after January 1, 1970, were to be counted against the reporting
institution's ceiling under the guidelines. Each institution's ceiling was
revised to include any such loans and investments held on December
31, 1969.
INTERNATIONAL MONETARY ARRANGEMENTS
AND THE IMF
Important developments in international monetary arrangements in
1969 centered in, or were closely related to, the structure and operations of the International Monetary Fund. The outstanding event,
which marked the culmination of years of study and negotiation, was
the launching of a system for the deliberate creation of international
reserve assets. After completion of the process of amending the IMF
Articles of Agreement to establish the legal framework for the system
of Special Drawing Rights, the Fund in October made the decision to
allocate SDR's for the first period, a period of 3 years beginning January 1, 1970.
The establishment of the SDR system and the decision to begin
creation of SDR's were of landmark significance for orderly growth
of international liquidity. Also important to the sound growth of international liquidity in the years ahead was the Fund's decision to recommend to its members a substantial increase in quotas.
A development that had immediate stabilizing effects was the settlement of the question of the circumstances under which the Fund will
buy gold from South Africa. Toward the year-end, expectations that this
question would soon be settled appeared to have reinforced other influences that had already caused a marked easing in free-market prices
of gold during the summer and the autumn.
The year was also marked by open discussion of the possible desirability of a limited increase in the flexibility of exchange rates and
by a decision of the IMF to continue its study of this subject.




59

AMENDMENT OF THE ARTICLES OF AGREEMENT
In 1969 the IMF Articles of Agreement were amended for the first
time since their entry into force on December 27, 1945. The main
purpose of the amendment was to establish the legal framework for the
system of SDR's. Certain changes in Fund rules and practices relating
to its traditional operations were also made.
The Outline Plan for SDR's had been agreed upon at the annual
meeting of the Fund's Board of Governors held at Rio de Janeiro in
September 1967. At Stockholm, in March 1968, a consensus on controversial issues had been reached by the Ministers and the Governors
of the central banks of the Group of Ten. On these bases, the detailed
text of the amendment was prepared by the Executive Directors, recommended by them on April 16, 1968, and approved by the Fund's
Board of Governors on May 31, 1968. The amendment entered into
force on July 28, 1969, following its acceptance—as required under
the Articles—by three-fifths of the Fund's member countries representing four-fifths of the total voting power.
The amended Articles of Agreement establish two separate accounts
in the Fund, a General Account and a Special Drawing Account. The
traditional operations and transactions of the Fund are carried out
through the General Account, while the Fund's functions relating to
SDR's are carried out through the Special Drawing Account. In order
to become a participant in the Special Drawing Account, a member
country of the Fund—and only Fund members are eligible to become
participants—must deposit with the Fund an instrument setting forth
that it undertakes all the obligations of a participant in that Account.
But no member could become a participant until instruments of participation had been deposited by members having at least 75 per cent
of total quotas in the Fund. This requirement was fulfilled on August
6, 1969.
The main features of the SDR system were summarized in the
ANNUAL REPORT of the Board of Governors of the Federal Reserve
System for 1968 (pages 329 and 330).
ALLOCATION OF SPECIAL DRAWING RIGHTS
The main event of the annual meeting of the IMF in 1969 was the
approval by the Governors of the proposal by the Managing Director
for the allocation of SDR's for the "first basic period."
SDR's come into existence via "allocation" of them to each member

60



country that is a participant in the Special Drawing Account and that
wishes to receive an allocation. A decision to allocate SDR's is made
by the Board of Governors of the Fund on the basis of a proposal of
the Managing Director concurred in by the Executive Directors—a
decision to cancel SDR's would be made in the same way. A decision
to allocate covers a basic period of 5 years (running consecutively),
unless the Fund decides otherwise.
Before making any allocation proposal, the Managing Director "shall
conduct such consultations as will enable him to ascertain that there
is broad support among participants for the proposal." And before
making the proposal for the first allocation, the Managing Director
had to assure himself: that a collective judgment existed that there was
a global need to supplement reserves; that a better balance of payments
equilibrium had been attained; and that there was a likelihood of a
better working of the balance of payments adjustment process in the
future. (All these provisions form part of Article XXIV.)
On September 12 the Managing Director, having conducted the
necessary consultations and having assured himself of the existence of
the conditions just referred to, made a proposal to the Fund Governors, with the concurrence of the Executive Directors. The essential
features of the proposal were as follows: (1) The first basic period
would run for 3 years beginning on January 1, 1970; (2) allocations
during this basic period would be made on January 1 in each of the
years 1970 through 1972, on the basis of quotas on the day before
the allocation dates; and (3) the total amounts of SDR's allocated on
the three allocation dates would be approximately as follows: $3.5 billion, $3 billion, and $3 billion, respectively, or a total of about $9.5
billion for the 3 years.
On October 3 the Fund Governors, assembled in their annual meeting, approved the Managing Director's proposal. On January 1, 1970,
in accordance with this decision and the terms of the Articles of Agreement as amended, the Fund allocated $3,414 million of SDR's to 104
participants. Of the total amount allocated the United States received
$866.9 million of SDR's.

PROPOSED INCREASE IN QUOTAS
Under Section 2 of Article III of the Fund Agreement, the Fund is required to conduct periodically a general review of quotas and to propose an adjustment of them if it deems such action appropriate.




61

Increases made following general reviews in 1958 and 1965 (together
with additions of new members and occasional adjustments of individual quotas) raised total quotas from the original $7 billion to about
$21 billion at the end of 1969.
In 1969, with another general review of quotas due in 1970 at the
latest, a new factor was present in the weighing of the pros and cons
of quota increases. This was the growing possibility of early activation
of the SDR system, which gave rise to new considerations. On the
one hand, some countries tended to feel that provision for unconditional liquidity in the form of SDR's (to the extent that SDR use is
unconditional) would reduce the need for more conditional liquidity
under larger quotas. On the other hand, the fact that SDR allocations
are based on the quotas of participants tended to give every participant
or potential participant in the SDR system a somewhat greater interest
in enlarging its own quota (in the forthcoming new round of quota
increases) than it would otherwise have had, although other considerations also strengthened the desire of some countries for larger
quotas.
At its 1969 annual meeting the Board of Governors of the Fund
requested the Executive Directors to submit an appropriate proposal
by December 31 for the adjustment of members' quotas. In December
the Executive Directors, having completed the fifth general review of
quotas, submitted their proposal. If each member country were to avail
itself of the maximum increase proposed for it, total Fund quotas
would rise to $28.9 billion, an increase of 35.5 per cent from total
quotas as of the end of December 1969. The U.S. quota could rise to
$6,700 million from its present level of $5,160, an increase of 30 per
cent.
Under the proposal, no increase will take place before October 30,
1970; and members will be able to consent to the proposed increases in
their quotas at any time on or before November 15, 1971.

DEVELOPMENTS RELATING TO GOLD
Under the two-tier system of gold marketing established 2 years ago
by the communique issued in Washington on March 17, 1968, by the
central bank Governors of the seven active member countries of the
then existing Gold Pool, central banks generally have neither sold gold
in private gold markets nor bought gold there. (For the text of the

62



communique see the Federal Reserve Bulletin for March 1968, page
254. The two-tier system was discussed in the ANNUAL REPORT

of the Board of Governors for 1968, pages 331 and 332.) Since that
time, and especially in the closing months of 1969, the question of the
appropriate handling of newly mined South African gold and reserves
within the framework of the two-tier system has been discussed among
officials of the United States, South Africa, certain other countries,
and the IMF.
On December 16 the U.S. Treasury, in a statement referring to those
discussions, suggested that a basis for a satisfactory mutual understanding might be emerging and noted that it was anticipated that the
discussions would subsequently be pursued in the framework of the
IMF. The question was settled before the end of the year by an arrangement embodied in an IMF decision announced by the Fund on
December 30. In its announcement the Fund said it would buy gold
offered to it by South Africa whenever the latter indicates that the
offer is in accord with the South African policy statement set forth
on December 23 in a letter to the Managing Director. In a letter of
December 24 to the Managing Director the U.S. authorities indicated
their willingness to support IMF decisions to buy gold offered by
South Africa under the conditions outlined in the South African letter,
assuming that there is an understanding among Fund members generally that they do not intend to initiate official gold purchases directly
from South Africa.
In general, the arrangement provides that when the market price
of gold is $35 per ounce or less, the Fund will buy gold from South
Africa in amounts related to South Africa's current needs for foreign
exchange. In addition, the Fund may buy gold from South Africa in
limited amounts when the market price is above $35 per ounce, under
circumstances specified in the South African letter.
The three documents mentioned above—the IMF announcement,
the South African letter, and the U.S. letter—were published in the
Federal Reserve Bulletin for January 1970, pages 107-10.
Throughout the first 3 months of 1969, gold prices in private
markets had advanced fairly steadily, reaching $43.80 per ounce on
the London market in early March—the high for the year on that
market. Factors contributing significantly to this rise were the general
absence of new production coming into the market, increased tensions




63

in the Middle East, and purchases by French residents increasingly
concerned about the parity of the French franc.
In early June prices dropped to around $41 per ounce, probably
because of the obvious imminence of ratification of the plan for SDR's,
the rising cost of holding gold as interest rates advanced rapidly in all
major European money markets and in the Euro-dollar market, and
an increase in the amount of new gold production coming on the
market with the waning of earlier strength in the balance of payments
position of South Africa.
After a temporary firming in July to about $42, gold prices
declined more or less steadily from early August to late October,
at which time the price on the London market was about $40.
The French devaluation in August, the general relaxation of tensions
in foreign exchange markets after the revaluation of the German mark
in October, and an increase in market offerings of newly produced gold
by South Africa to finance its worsening balance of payments position
—all of these contributed to the easing. Downward pressures on market prices of gold were reinforced by a growing belief that the question
of South African gold sales to the IMF might be nearing settlement.
In early November gold prices began to decline quite rapidly, and
by December 9 the price of gold on the London market had fallen to
the official level. During the remainder of December the price ranged
between $35 and about $35.30.
STUDY OF GREATER EXCHANGE-RATE FLEXIBILITY
The question whether somewhat greater flexibility should be introduced
into the exchange-rate system has come increasingly to the fore in
recent years. Most of the attention has centered on two proposals:
one, some increase in the margins within which rates for currencies of
IMF member countries may fluctuate in spot markets; and two, a
system for parity-rate changes limited in their annual amounts, this
system being known by such terms as the crawling peg, the sliding
or gliding parity, and the self-adjusting peg. Promulgated initially by
some of the academic economists who believe that systems of freely
floating exchange rates (favored by many other economists) are undesirable, or unacceptable to government authorities, or both, these
proposals have become of increasing interest to some businessmen and
bankers, as well as to government officials, in many countries.

64



One reason for the rise of interest in greater exchange-rate flexibility
has been growing awareness that, under the Bretton Woods system of
exchange-rate adjustment as it has evolved thus far, changes in rates
are sometimes delayed too long and that such delays frequently result
in prolonged periods of economic uncertainty and market disruption.
Another reason, particularly influential among the U.S. businessmen
and bankers who have become interested in these proposals, has been
the belief that some increase in exchange-rate flexibility might from
their point of view be preferable to the increase of direct restrictions on
international transactions that many of them regard as likely to develop
if payments imbalances are not adjusted more smoothly.
In their annual report for 1969 the Executive Directors of the IMF
disclosed that in the past year they had discussed extensively the
mechanism by which exchange rates can be changed, considering the
subject "in the framework of the international adjustment process and
with a view to a better working of the international monetary system."
They plan to continue to study this subject. At the 1969 annual meeting the question of greater exchange-rate flexibility was touched on for
the first time by many of the Fund's Governors. Although most of the
speakers stressed the need for caution in considering fundamental
changes in the existing exchange-rate system, all in effect endorsed the
plan for further study of the subject by the Fund.
•




65

c

R^cordsy Operations, and
Uion




Record of Policy Actions of the
Board of Governors
JANUARY 7, 1969
AMENDMENT TO REGULATION K, CORPORATIONS ENGAGED IN FOREIGN BANKING AND FINANCING UNDER
T H E FEDERAL RESERVE ACT.
Effective January 7, 1969, Regulation K was amended to reinstate a general consent for "Edge" and "agreement" corporations to make certain investments in foreign businesses.
Votes for this action: Messrs. Martin, Robertson,
Mitchell, Daane, Maisel, Brimmer, and Sherrill.
Votes against this action: None.
A previous general consent was eliminated temporarily from Regulation K in February 1968 in connection with the U.S. balance of
payments program then in effect. As a result, all equity investments
abroad by member banks and Edge or agreement 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 of Governors. The Board now deemed it appropriate to reinstate its general consent for any Edge or agreement corporation to
invest, directly or indirectly, in the shares of foreign corporations not
doing business in the United States, provided that no such investment
would cause the Edge or agreement corporation to have invested more
than $500,000 in the shares, or to hold more than 25 per cent of the
voting shares, of any such foreign corporation.

J A N U A R Y 10, 1969
ADOPTION OF REGULATION P, MINIMUM SECURITY DEVICES AND PROCEDURES FOR FEDERAL RESERVE
BANKS AND STATE MEMBER BANKS.
Effective January 13, 1969, a new Regulation P was adopted to implement the Bank Protection Act of 1968 with respect to Federal Reserve




69

Banks and to State chartered banks that are members of the Federal Reserve System.
Votes for this action: Messrs. Martin, Robertson,
Mitchell, Maisel, and Sherrill. Votes against this action: None.
Absent and not voting: Messrs. Daane and Brimmer.
The new regulation: (1) provided minimum standards for security
devices and procedures both to discourage robberies, burglaries, and
larcenies involving financial institutions and to facilitate the identification and apprehension of persons committing such crimes; (2) established time limits for compliance and procedures for reporting on
compliance; and (3) assured flexibility in the application of such
standards to accommodate differing circumstances of individual banking offices.

J A N U A R Y 27, 1969
DISAPPROVAL OF PROPOSED DISCOUNT RATE
INCREASE.
The Board disapproved action taken by the executive committee of the
Board of Directors of the Federal Reserve Bank of St. Louis on January
23, 1969, establishing a rate of 6 per cent (rather than SVi per cent) on
discounts for and advances to member banks under Sections 13 and 13a of
the Federal Reserve Act, along with appropriately corresponding subsidiary rates on advances under other sections of the Act.
Votes for this action: Messrs. Martin, Robertson,
Mitchell, Daane, Maisel, Brimmer, and Sherrill.
Votes against this action: None.
The discount rate of the Federal Reserve Banks had been increased
from 5Vx to 5x/i per cent in December 1968, at which time the Board
had reviewed carefully the arguments in favor of an increase of Vi
percentage point, the amount of increase that had originally been

70



voted by the directors of two Federal Reserve Banks, including St.
Louis. The Board decided that a V4 point advance, together with the
firmer stance in open market policy that had just been adopted by the
Federal Open Market Committee, would be sufficient in the economic
circumstances then existing.
In proposing now that the discount rate be raised to 6 per cent,
the St. Louis directors noted that such a move would place the rate
closer to its historical relationship with other money market rates and
would reduce the incentive for member banks to borrow from the
Federal Reserve Banks. Further, in the opinion of the directors, the
recent slowing that had occurred in the rate of growth of commercial
bank credit reflected a rechanneling of funds around the banks, with
little net effect on total credit extended in the economy, more than
it represented evidence of monetary restraint. In their view a realignment of the discount rate with current market rates would indicate
to the public that the Federal Reserve was in earnest in combating the
prevailing strong inflationary expectations.
After consideration of the proposal the Board of Governors concluded that an increase in the discount rate at this juncture would not
be appropriate in light of the imminent Treasury refinancing, the terms
of which were to be announced within the next few days. Moreover,
apart from the refinancing, the Board had reservations as to whether a
discount rate increase, particularly one of as much as Vi percentage
point, was called for by prevailing and prospective economic and
financial conditions. The Board advised the St. Louis Bank, however,
that its disapproval of the proposed rate increase should not be construed as indicating that the Board would not be prepared at a later
date to consider whatever discount rate action the directors might
believe to be justified, depending on all of the circumstances then
existing. The Board noted that if there appeared to be a need for
further monetary tightening, an adjustment could be made through
use of one or more of the several instruments of monetary policy,
including perhaps the discount rate, and that the Board would be
considering these possibilities.
The effect of the Board's action was that the rates on discounts and
advances contained in the existing rate schedule of the St. Louis Bank
continued in effect.




71

JANUARY 29, 1969
ADOPTION OF REGULATION Z, TRUTH IN LENDING.
Effective July 1, 1969, a new Regulation Z was adopted to implement
Title I (Truth in Lending Act) and Title V (General Provisions) of the
Consumer Credit Protection Act.
Votes for this action: Messrs. Martin, Robertson,
Mitchell, Daane, Maisel, Brimmer, and Sherrill.
Votes against this action: None.
The new regulation was designed to assure meaningful disclosure
so that consumers would be able to compare more readily the various
credit terms available to them and avoid the uninformed use of credit.
It provided that in most cases the cost of consumer credit must be
expressed in the dollar amount of finance charge and as an annual
percentage rate computed on the unpaid balance of the amount
financed. Other relevant credit information was also required to be
disclosed.
The regulation also provided, as required by the Act, that a customer had a right in certain circumstances to cancel a credit transaction that involved a lien on his residence. Advertising of consumer
credit terms was required to comply with specific provisions, and credit
terms were not permitted to be advertised unless the creditor usually
and customarily extended such terms.
Neither the Act nor the regulation was intended to control charges
for consumer credit, or to interfere with trade practices except to the
extent that such practices might be inconsistent with the purpose of
the Act.

M A R C H 17, 1969
AMENDMENTS TO REGULATION H, MEMBERSHIP OF
STATE BANKING INSTITUTIONS IN THE FEDERAL RESERVE SYSTEM.
Effective March 18, 1969, Regulation H was amended in certain technical respects.

72



Votes for this action: Messrs. Martin, Robertson,
Mitchell, Daane, Maisel, Brimmer, and Sherrill.
Votes against this action: None.
The effect of these technical amendments was (1) to authorize
Federal Reserve Banks, for good cause shown, to extend the time
for publishing of reports of condition by State member banks, and (2)
to permit or require a published report of condition to differ from
the report submitted to the Reserve Bank in various respects. These
amendments were necessitated by certain changes in the call report
procedures that had recently been approved by the Board, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation.

M A R C H 27, 1969
REVISION OF FOREIGN CREDIT RESTRAINT PROGRAM
GUIDELINES.
Effective April 4, 1969, the guidelines covering foreign credits and investments by U.S. banks and other financial institutions were revised.
Votes for this action: Messrs. Martin, Mitchell,
Brimmer, and Sherrill. Votes against this action:
None.
Absent and not voting: Messrs. Robertson,
Daane, and Maisel.
The voluntary foreign credit restraint program, in force since February 1965, had last been revised in December 1968, when guidelines
for 1969 were issued. At that time the Board had concluded that
U.S. balance of payments prospects for 1969 did not permit any
basic change in the program. However, the Board announced that
it was planning to reexamine the program early in 1969 to determine
whether additional flexibility for financing U.S. exports might be provided in the guidelines. The current revisions in the guidelines were
designed for that purpose and to reduce inequities in the program
among banks of different size.




73

APRIL 3, 1969
1. INCREASE IN RATES ON DISCOUNTS AND ADVANCES
BY FEDERAL RESERVE BANKS.
Effective April 4, 1969, the Board approved actions that had been taken
by the boards of directors of all of the Federal Reserve Banks except
Boston establishing a rate of 6 per cent (rather than 5l/i per cent) on discounts for 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 Federal Reserve Bank of Boston effective
April 8, 1969.
Effective the same dates the Board approved for the respective Federal
Reserve Banks a rate of 6V2 per cent (rather than 6 per cent) on advances
to member banks under Section 10(b) of the Federal Reserve Act. In
addition the Board approved for most of the Banks increases 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 December 1968, as described on pages
95-97 of the Board's ANNUAL REPORT for 1968.)
2. AMENDMENT TO REGULATION D, RESERVES OF
MEMBER BANKS.
Effective for the reserve computation period beginning April 17, 1969,
and with applicability to average deposits for the period April 3-9, 1969,
the Supplement to Regulation D was amended to increase by V2 percentage
point the reserve requirement against demand deposits at all member banks.
Votes for this action: Messrs. Martin, Robertson,
Mitchell, Daane, Brimmer, and Sherrill. Vote against
this action: Mr. Maisel.

74



In December 1968, as recorded in the Records of Policy Actions
of the Board of Governors and the Federal Open Market Committee
contained in the Board's ANNUAL REPORT for 1968, the Federal Re-

serve System embarked on a policy of increased monetary restraint, in
recognition of the continued excessive strength of economic expansion,
the accompanying resurgence of inflationary expectations, and the
adverse impact of rapidly rising domestic prices on the country's
balance of payments. At that time the Federal Open Market Committee voted to foster firmer conditions in money and short-term
credit markets, and the Board of Governors approved an increase in
the Federal Reserve Bank discount rate from 5XA to 5Vz per cent.
The Board had also considered the arguments for an increase of Vi
percentage point in the discount rate and for an increase in reserve
requirements, but it had concluded that the actions then taken were
adequate in the current economic circumstances and that further steps
should await an assessment of the impact of those firming actions.
Details of the intervening economic and financial developments
may be found in the Record of Policy Actions of the Federal Open
Market Committee beginning on page 95 of this ANNUAL REPORT.
The actions now taken on the discount rate and on reserve requirements constituted a further move against inflation that was considered
necessary in the light of those developments.
The reserve requirement action meant that the nearly 6,000 member
banks of the Federal Reserve System had to set aside as reserves an
additional $650 million, approximately $375 million at reserve city
banks and $275 million at other member banks. The requirement at reserve city banks was raised from 16Vi to 17 per cent on net demand deposits under $5 million and from 17 to XlVi per cent on net demand
deposits over $5 million. The top rate of XlVi per cent was the highest
since 1960. The increases for other member banks were from 12 to 12V^
per cent on demand deposits under $5 million and from 1 2 ^ to 13 per
cent on those over $5 million.
The new discount rate of 6 per cent was the highest in 40 years.
Governor Maisel, who voted for the discount rate increase but
against the increase in reserve requirements, stated that he had no
disagreement with the majority of the Board on either the ultimate
goal being sought for the economy or with the view that demand for




75

output and services was continuing to rise at an inflationary pace.
However, current money market relationships had, for the preceding
5 months, led to modest growth in most monetary aggregates, a sharp
rise in interest rates, and a rapid reduction of bank liquidity, and the
existing relationships appeared to him proper to sustain a long period
of noninflationary growth of money and credit. He concluded that
until evidence arose that the demand for funds was leading to an undesirable, upward shift in the rate of monetary expansion, an increase
in reserve requirements was not called for.

A P R I L 4, 1969
AMENDMENT TO REGULATION A, ADVANCES AND
DISCOUNTS BY FEDERAL RESERVE BANKS.
Effective April 4, 1969, Regulation A was amended in respect to obligations eligible as collateral for advances.
Votes for this action: Messrs. Robertson, Mitchell,
Daane, Maisel, and Brimmer. Votes against this action: None.
Absent and not voting: Messrs. Martin and Sherrill.
This action eliminated the authorization in Regulation A for Federal Reserve Banks to make 90-day advances to member banks on
the security of certificates of interest issued by the Commodity Credit
Corporation in a pool of notes evidencing loans made by the Corporation pursuant to a commodity loan program. Simultaneously the
Board issued an amended interpretation relating to obligations eligible
as collateral for advances, to add CCC certificates of interest in a pricesupport loan pool to the list of eligible obligations. The list included
direct obligations of, and obligations fully guaranteed as to principal
and interest by, the United States or any agency thereof.

76



M A Y 28, 1969
DISAPPROVAL OF PROPOSED DISCOUNT RATE
INCREASE.
The Board disapproved action taken by the executive committee of the
Board of Directors of the Federal Reserve Bank of St. Louis on May 22,
1969, establishing a rate of 7 per cent (rather than 6 per cent) on discounts for and advances to member banks under Sections 13 and 13a of
the Federal Reserve Act, along with appropriately corresponding subsidiary
rates on advances under other sections of the Act.
Votes for this action: Messrs. Martin, Robertson,
Mitchell, Daane, Maisel, Brimmer, and Sherrill.
Votes against this action: None.
The directors of the St. Louis Bank had proposed the action on
the grounds that it would bring the discount rate into better alignment with relevant market interest rates and would reduce the incentive for member banks to make excessive use of the Federal Reserve
discount window. The directors, who saw little evidence of a change
in economic indicators to suggest a lessening of current inflationary
pressures, also believed that an increase of 1 percentage point in the
discount rate might help to convince the public that the Federal Reserve
was serious in resisting the inflation and might therefore help to reduce
inflationary expectations and hasten a turnaround in interest rates.
The St. Louis directors again proposed a 7 per cent discount rate
on June 9 and June 12, 1969, for substantially the same reasons.
The Board decided to disapprove the proposed rate increase on
the basis that it would be untimely in the light of prevailing conditions
and uncertainties in financial markets. While the 6 per cent discount
rate was generally out of line with short-term market interest rates,
the Board noted that no difficulties appeared to have developed in
member bank use of the discount window that administrative procedures could not deal with satisfactorily. The Board advised the Reserve
Bank, however, that its decision to disapprove the proposed discount




77

rate was taken without prejudice to any future consideration of such
discount rate action as the Bank's directors might deem appropriate
in the prevailing circumstances.
The directors of the following Reserve Banks also submitted proposed
discount rate increases to the Board, for reasons generally similar to
those given by the St. Louis directors, and these proposed rates were
likewise disapproved by the Board, the action in each instance being by
unanimous vote of the members present:
Bank
Chicago
Boston
Chicago
Kansas City
Chicago

Date of
directors' action
June 12
June 16
June 26
July 10
July 24

Proposed rate
7
61/2

7
7
7

The effect of the Board's actions was that the existing discount
rate schedules of the respective Banks automatically continued in
effect.
J U N E 2, 1969
AMENDMENTS TO MARGIN REGULATIONS.
1. Effective July 8, 1969, Regulations G, T, and U were amended principally to implement the provisions of P.L. 90-437, adopted in 1968, which
authorized the Board to expand the margin regulations to cover credit extended for the purchase of over-the-counter stocks.
Votes for this action: Messrs. Martin, Robertson,
Mitchell, Maisel, and Sherrill. Votes against this action: None.
Absent and not voting: Messrs. Daane and
Brimmer.
(With these amendments, the regulations were issued under new titles as
follows: G, Securities Credit by Persons Other Than Banks, Brokers, or
Dealers; T, Credit by Brokers and Dealers; and U, Credit by Banks for the
Purpose of Purchasing or Carrying Margin Stocks.)

78



Margin regulations limit generally the amount of credit that may
be obtained to purchase securities. Previously, the requirements imposed by those regulations had applied to stocks that were registered
on a national securities exchange. The main purpose of the amendments now adopted by the Board was to extend the margin regulations
to cover credit extended for the purchase of certain over-the-counter
stocks.
The amendments included the criteria that would be employed in
selecting over-the-counter stocks that would become subject to margin
requirements, and the Board announced that an initial list of such
stocks subject to margin would be published on July 8, 1969, the date
the amendments were to become effective.
The amendments also: (1) exempted from margin regulation bank
loans to broker-dealers against inventory positions in over-the-counter
stocks when such credit was used to make a bona fide market in those
stocks; (2) broadened the definition of "creditor" in Regulation T
to cover all brokers and dealers and thus bring under the new margin
requirements all brokers and dealers handling over-the-counter accounts
exclusively; (3) limited the exemption from margin regulation available through a special omnibus account to members of national stock
exchanges and brokers and dealers registered with the Securities and
Exchange Commission; and (4) clarified the application of Regulations
G and U to loans on mutual funds.
Under the announced criteria, over-the-counter stocks subject to
margin requirements would have characteristics similar to stocks
registered on national exchanges.
The amendments provided that margin requirements would apply
only to loans made after July 8, 1969, to purchase or carry over-thecounter stocks on the Federal Reserve list or debt securities convertible
into such stocks.
Clarifying changes unrelated to implementing P.L. 90-437 included
changes in one section of Regulation G regarding stock option and
employee stock purchase plans. Governor Maisel dissented from these
particular changes because he regarded them as a tightening rather
than a clarification and his inclination was to relax in this area rather
than tighten.




79

2. Effective September 1, 1969, Regulations G, T, and U were amended
to limit the amount of credit permitted to be extended in connection with
the purchases of equity funding plans or programs.
Votes for this action: Messrs. Martin, Robertson,
Mitchell, and Sherrill. Vote against this action: Mr.
Maisel.
Absent and not voting: Messrs. Daane and Brimmer.
Equity funding plans or programs offer a customer a package of
mutual fund shares and life insurance, the shares being pledged as
collateral for a loan to pay the insurance premium. The Board concluded that there would be a serious potential for a new kind of credit
expansion in the securities field if loans made in connection with such
plans or programs were left entirely outside the margin regulations.
On the other hand, the Board desired to permit the equity funding
industry to continue to operate without serious dislocation, which dislocation seemed likely if the same margin requirement (80 per cent)
were prescribed as for exchange-listed stocks. Accordingly, after
consideration of comments received on proposed changes in the
margin regulations, and after an oral presentation at which industry
representatives were given an opportunity to present their views, the
Board set the margin requirement for such plans or programs sold
after August 31, 1969, at 60 per cent. This meant that a lender would
be able to finance $40 in insurance premiums for every $100 in mutual
funds bought by a customer.
Governor Maisel dissented because he felt that the potential for credit
expansion and abuse was minor. The Board ought not to feel that it was
derelict in its duty if it avoided regulating each possible area of credit
use. This was particularly true when programs had desirable aspects and
threatened no ill effects to the economy.
J U N E 16, 1969
AMENDMENT TO REGULATION Q, PAYMENT OF
INTEREST ON DEPOSITS.
Effective August 1, 1969, Regulation Q was amended to incorporate
regulations governing the advertising of interest paid on deposits by member
banks of the Federal Reserve System.

80



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 adoption by the Board of regulations governing the advertising of
interest paid on deposits by member banks of the Federal Reserve
System implemented the authority granted to the Board in the Act of
September 21, 1968 (P.L. 90-505). Similar regulations were issued
by the Federal Deposit Insurance Corporation and by the Federal
Home Loan Bank Board with respect to institutions under their supervision.
The new rules, which superseded advertising guidelines set forth in
a 1966 statement of policy, provided that any member bank that advertised a percentage yield on deposits based on 1 year was required
to include an equally prominent disclosure of the simple interest rate,
together with reference to the method of compounding. Advertising
of percentage yields based on periods in excess of 1 year was prohibited.

JULY 1, 1969
ADOPTION OF SUPPLEMENT TO REGULATION Z, TRUTH
IN LENDING.
Effective immediately, the Board adopted Supplement II to Regulation
Z, which supplement set forth rules and procedures the Board would follow
in granting exemption of State-regulated credit disclosures from Federal
truth-in-lending requirements.
Votes for this action: Messrs. Martin, Robertson,
Mitchell, and Maisel. Votes against this action:
None.
Absent and not voting: Messrs. Daane, Brimmer,
and Sherrill.
A section of the Federal Truth in Lending Act provided machinery
under which the Board could exempt certain consumer credit transac-




81

tions in States that have substantially similar State laws with adequate
provision for enforcement. The Board's Regulation Z contained a
statement that on or before July 1, 1969, the effective date of the
regulation, the Board would promulgate and publish a supplement
setting forth the procedures and criteria under which any State could
apply for an exemption of certain State-regulated transactions.
The supplement now adopted set forth the rules and procedures
the Board would follow in granting exemptions and also informed a
State how to apply for such an exemption. It was noted that exemptions could be granted only with respect to the disclosure and rescission
requirements of the law and Regulation Z and that advertising of
credit must remain subject to the Federal jurisdiction under the Truth
in Lending Act.

J U L Y 24, 1969
AMENDMENT TO REGULATION D, RESERVES OF
MEMBER BANKS.
Effective July 31, 1969, Regulation D was amended to limit certain
transactions involving member banks and foreign branches that had resulted in what the Board considered an unwarranted reduction in required
reserves.
Votes for this action: Messrs. Martin, Robertson,
Mitchell, Maisel, Brimmer, and Sherrill. Votes against
this action: None.
Absent and not voting: Mr. Daane.
The amendment required member banks to include in deposits used
to compute reserve requirements all so-called "London checks" and
"bills payable checks" used in settling transactions involving foreign
branches. Such checks had been used to effect repayments of Eurodollar borrowings and to settle transactions among foreign branches
of different member banks. A number of banks had issued such checks
without including them in gross demand deposits, as is required for
officers' (for example, cashiers') checks. At the same time, banks
receiving such checks were allowed to deduct the amount from demand
deposits used to compute reserve requirements. Use of these check

82



devices resulted in reduced reserves for the one day the check was in
the collection process and had afforded some member banks a special
advantage in using Euro-dollars for adjustment to domestic credit
restraint.

J U L Y 24, 1969
AMENDMENTS TO REGULATION D, RESERVES OF MEMBER BANKS, AND REGULATION Q, PAYMENT O F INTEREST ON DEPOSITS.
Effective July 25, 1969, Regulations D and Q were amended to narrow
the scope of a member bank's liabilities under repurchase agreements
(those involving sales of instruments with an agreement for subsequent repurchase) that are exempt from those regulations.
Votes for this action: Messrs. Martin, Robertson,
Maisel, Brimmer, and Sherrill. Vote against this action: Mr. Mitchell.
Absent and not voting: Mr. Daane.
The previous exemptions from Regulations D and Q had permitted
a member bank to exclude from deposits any indebtedness arising from
a transfer of any assets under a repurchase agreement. Under the
amendments now adopted, beginning August 28, 1969, every bank
liability on a repurchase agreement entered into on or after July 25,
1969, with a person other than a bank became a deposit liability subject to Regulations D and Q' if it involved: (1) any assets other than
direct obligations of the United States or its agencies (and obligations
fully guaranteed by them), or (2) a part interest in any obligation or
obligations (including U.S. Government obligations).
Limitation of the exemption was considered necessary because of
the recent and contemplated use by some banks of repurchase agreements to avoid reserve requirements and the rules governing payment
of interest on deposits.
Governor Mitchell dissented on the grounds that repurchase agreements entered into by banks to achieve liquidity in a period of monetary restraint were no more inappropriate to monetary objectives than a




83

sale of bank assets. In either case, in his opinion, restraint was not
dissipated but was merely shifted in part from the bank and bank
customers to market participants. Moreover, in his view the addition
of this action to the other amendment to Regulation D announced
today ran the risk of putting unduly severe pressures on some sectors
of the banking system.
Subsequently, effective August 15, 1969, the Board issued a minor
clarifying amendment to Regulations D and Q to permit member banks
to continue to execute repurchase agreements on a part interest in
U.S. Treasury or Federal agency obligations that are eligible for purchase by Federal Reserve Banks, and to classify their liability thereon
as a nondeposit borrowing.

A U G U S T 8, 1969
AMENDMENT TO REGULATION Z, TRUTH IN LENDING.
Effective immediately, Regulation Z was amended to clarify a provision relating to discounts granted by creditors on sales to their customers
for prompt payment of bills.
Votes for this action: Messrs. Martin, Robertson,
Mitchell, Brimmer, and Sherrill. Votes against this
action: None.
Absent and not voting: Messrs. Daane and Maisel.
Under the amendment, creditors offering discounts for prompt payment of single-payment transactions were required to state the "annual
percentage rate" only if the discount exceeded 5 per cent. The amendment also simplified the computation of the "annual percentage rate"
when that rate must be stated.
It had come to the Board's attention since Regulation Z went into
effect on July 1 that many creditors had discontinued the use of discounts for prompt payment. This was especially true in agricultural
types of credit, where there had been special difficulty with compliance.
The amendment was designed to alleviate these problems.

84



A U G U S T 12, 1969
AMENDMENTS TO REGULATION D, RESERVES OF MEMBER BANKS, AND REGULATION M, FOREIGN ACTIVITIES
OF NATIONAL BANKS.
Effective September 4, 1969, a 10 per cent marginal reserve requirement
was established on certain foreign borrowings, primarily Euro-dollars, by
member banks and on the sale of assets to their foreign branches.
Votes for this action: Messrs. Martin, Robertson,
Maisel, Brimmer, and Sherrill. Votes against this action: Messrs. Mitchell and Daane.
Liabilities of U.S. banks to their foreign branches had more than
doubled since the beginning of 1969—reaching a record of $14.6
billion during the week ending July 30. The purpose of the action
now taken by the Board was to moderate the flow of foreign funds between U.S. banks and their foreign branches and also between U.S.
banks and foreign banks by removing a special advantage to member banks that had used Euro-dollars not subject to reserve requirements
to adjust to domestic credit restraint.
The amendments to Regulation M established a 10 per cent reserve
requirement on net borrowings of member banks from their foreign
branches to the extent that these borrowings exceeded the daily-average amounts outstanding in the 4 weeks ending May 28, 1969. This
marginal requirement also applied to assets acquired by foreign
branches from U.S. head offices of banks except for assets representing
credits extended by head offices to nonresidents after June 26. To reduce potential inequities, the Board established a minimum base equal
to 3 per cent of deposits subject to reserve requirements for any bank
with a foreign branch regardless of its previous use of Euro-dollars.
The amendments to Regulation M also established a 10 per cent
reserve requirement on branch loans to U.S. residents to the extent
that such loans exceeded either the amount outstanding on June 25
or 26, 1969, or the daily-average amounts outstanding in the 4 weeks
ending May 28, 1969. The choice of the base was at the option of the
member bank. This amendment included three exemptions, as follows:
It did not apply to any foreign branch with $5 million or less in credit




85

outstanding to U.S. residents; to credit extended to enable a borrower
to comply with requirements of the Office of Foreign Direct Investments, Department of Commerce; and to credit extended under lending
commitments entered into before June 27, 1969.
The amendment to Regulation D established a 10 per cent reserve
requirement on borrowings by member banks from foreign banks, with
one exception: only a 3 per cent reserve was required against such
deposits that did not exceed 4 per cent of a member bank's dailyaverage deposits subject to reserve requirements. This latter provision
was designed to reduce inequities for banks without foreign branches
that would have no reserve-free base under the Regulation M amendments.
The Board provided that the reserve-free base under the amendment
establishing a reserve requirement on borrowings of U.S. banks from
their foreign branches would be reduced when and to the extent that the
liabilities of any bank to its foreign branches dropped below the original
base during any period used to compute the reserve requirement.
Governors Mitchell and Daane dissented because they felt that the
flows were attributable to tight monetary policy in the United States
rather than to the Euro-dollar mechanism and that such flows would
occur despite the regulation. Furthermore, in the absence of any
evidence that the Euro-dollar flow was weakening over-all monetary
policy, they objected to regulating unnecessarily one of the nondeposit sources of funds for banks.
A U G U S T 15, 1969
AMENDMENT TO REGULATION J, COLLECTION OF
CHECKS AND OTHER ITEMS BY FEDERAL RESERVE
BANKS.
Effective October 1, 1969, Regulation J was amended in respect to
tenders of defense in litigation involving Federal Reserve 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 purpose of the amendment was to provide a procedure under
which a Federal Reserve Bank that is sued in connection with a cash

86



item collected by it may recover from the sending bank expenses of
such litigation and the amount of any adverse judgment by charging
the account of the sending bank if the Reserve Bank has tendered defense of the suit to the sending bank and such tender has not been accepted.

OCTOBER 27, 1969
AMENDMENT TO REGULATION V, LOAN GUARANTEES
FOR DEFENSE PRODUCTION.
Effective October 27, 1969, the Supplement to Regulation V was
amended to provide that an agency guaranteeing a particular loan may
from time to time prescribe a rate higher than IV2 per cent if it determines the loan to be necessary in financing an essential defense production
contract.
Votes for this action: Messrs. Martin, Robertson,
Daane, Maisel, Brimmer, and Sherrill. Votes against
this action: None.
Absent and not voting: Mr. Mitchell.
The regulation had prescribed that the interest rate charged a
borrower by a financing institution with respect to a guaranteed loan
may not exceed IV2 per cent per annum. It had come to the Board's
attention, however, that under existing conditions it might sometimes
be impossible to arrange V-loan financing even at the prescribed
maximum rate. The purpose of the amendment, therefore, was to permit a Government agency guaranteeing a loan under the Defense
Production Act, as amended, to prescribe from time to time an interest
rate higher than IV2 per cent if the guaranteeing agency determined
that the higher rate was necessary to obtain V-loan financing of an
essential defense production contract.

NOVEMBER 5, 1969
AMENDMENT TO REGULATION Q, INTEREST ON
DEPOSITS.
Effective November 5, 1969, Regulation Q was amended: (1) to expand the categories of organizations on whose time deposits member banks




87

of the Federal Reserve System may pay rates of interest in excess of those
permitted generally, and (2) to provide an alternative method by which
any exempt organization may transfer a certificate of deposit to a nonexempt holder.
Votes for this action: Messrs. Martin, Robertson,
Mitchell, Daane, Maisel, Brimmer, and Sherrill.
Votes against this action: None.
Previously a time deposit of a foreign government, a monetary or
financial authority of a foreign government when acting as such, or an
international financial institution of which the United States is a
member was exempt from the interest rate limitations. The amendment
exempted time deposits having a maturity of 2 years or less and representing funds deposited and owned by: (1) a foreign government, or
an agency or instrumentality thereof engaged principally in activities
that are ordinarily performed in the United States by governmental
entities, (2) an international entity of which the United States is a
member, or (3) any other foreign, international, or supranational
entity specifically designated by the Board as exempt. This broadening
of the categories of exempt organizations was consistent with the
purposes of the underlying statute, that is, to encourage the maintenance of foreign governmental time deposits in American banks.
An alternative method of transferring to a nonexempt holder a
certificate of deposit issued to an exempt organization also was provided. The alternative method carried the same safeguards as the
method theretofore prescribed.

N O V E M B E R 5, 1969
REVISION OF FOREIGN CREDIT RESTRAINT PROGRAM
GUIDELINES.
Effective December 1, 1969, the guidelines covering foreign credits and
investments by U.S. banks and other financial institutions were revised.
Votes for this action: Messrs. Martin, Robertson,
Mitchell, Daane, Maisel, Brimmer, and Sherrill.
Votes against this action: None.

88



The revised guidelines continued the program of voluntary restraint
that had been in effect since 1965. However, in keeping with the
Government's efforts to help stimulate U.S. exports, the guidelines
were now changed to give greater and more explicit recognition to the
established priority for export financing.
Under the revised program each participating bank was to have a
ceiling, separate from its general ceiling, exclusively for loans of 1
year or longer that financed U.S. goods exported on or after December 1, 1969. The guidelines for nonbank financial institutions continued to provide for a single ceiling. However, such an institution
could exceed its ceiling moderately if the excess reflected new export
credits that could not be accommodated under the ceiling. In addition,
a nonbank institution that had had either a low ceiling or none at all
could now hold certain covered foreign assets up to a total of $500,000.
The current modifications of the program had two objectives. The
first was to direct greater attention to the existing priority for export
financing, particularly long-term export loans, within the limits of total
lending restraints. The second was to enhance the opportunities among
U.S. financial institutions to compete for foreign lending business.
Announcement of the revised guidelines was made on December 17,
1969, to permit coordination with other parts of the Government
interested in the U.S. balance of payments program.

N O V E M B E R 6, 1969
AMENDMENT TO REGULATION Z, TRUTH IN LENDING.
Effective immediately, Regulation Z was amended to facilitate meaningful disclosure of credit terms in certain types of agricultural credit
extensions.
Votes for this action: Messrs. Martin, Robertson,
Daane, Maisel, Brimmer, and Sherrill. Votes against
this action: None.
Absent and not voting: Mr. Mitchell.
The amendment provided that where the dates or amounts of payments or advances cannot be determined at the time of a credit trans-




89

action because they are tied to the needs of the farmer—which change
during the year—the creditor may disclose the method of computing the amount of the finance charge rather than a total dollar figure.
At the same time the creditor may omit disclosure of the annual percentage rate, but he must disclose the number, amount, and due dates
of the payments and the total amount to be repaid to the extent known.
A problem had arisen because some agricultural loans are made
on terms governed by production and seasonal needs that cannot be
determined at the time a credit transaction is arranged. In such cases
the dates or amounts of advances or payments cannot be ascertained
and consequently the amount of the finance charge, the repayment
schedule, and sometimes the annual percentage rate must be estimated.
These estimates are at best crude and often misleading, and in some
cases physically impossible to make. The amendment was designed to
meet these problems, reduce the burden on agricultural lenders, and
insure the customer a clear and full description of his credit transaction.

N O V E M B E R 10, 1969
AMENDMENT TO REGULATION R, RELATIONSHIPS WITH
DEALERS IN SECURITIES UNDER SECTION 32 OF T H E
BANKING ACT OF 1933.
Effective January 1, 1970, Regulation R was amended to permit an
officer, director, or employee of a member bank of the Federal Reserve
System to be an officer, director, or employee of a securities company
that confined itself to underwriting and dealing in securities a member
bank itself may lawfully underwrite.
Votes for this action: Messrs. Martin, Robertson,
Mitchell, Daane, Maisel, Brimmer, and Sherrill.
Votes against this action: None.
Section 32 of the Banking Act of 1933, which prohibits interlocking personnel relationships between member banks and securities
companies, authorizes the Board of Governors to provide exemptions
upon determining that such exemptions would not unduly influence the
investment policies of the banks or the investment advice given to bank

90



customers. Regulation R had provided an exemption for relationships
between member banks and those securities companies that confined
their business to types of obligations listed in the regulation. The effect
of the amendment was to bring within the regulatory exemption general obligations of a State or political subdivision, obligations of the
Government National Mortgage Association, and obligations issued
by a State or political subdivision (or their agencies) for housing,
university, or dormitory purposes. The first class of obligations had
long been eligible for underwriting and dealing in by member banks,
and the latter two classes became eligible upon the enactment of the
Housing and Urban Development Act of 1968.

D E C E M B E R 18, 1969
AMENDMENT TO REGULATION F, SECURITIES OF
MEMBER STATE BANKS.
Effective December 31, 1969, Regulation F was amended in a number
of respects relating to the form and content of bank financial statements
and proxy solicitation provisions.
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 major purpose of the amendments was to implement the "net
income" concept in bank income reports. The revisions were intended
to make financial reports required by the regulation consistent with the
format and instructions for the preparation of other financial reports
that banks are required to publish.
Extensive revisions of the regulatory provisions relating to proxy
solicitations were also included in the amendments. These were intended mainly to clarify the applicability of the various provisions of
the regulation and to incorporate administrative practices adopted in
the 5 years since Regulation F was first issued.




91

D E C E M B E R 24, 1969
EMERGENCY CREDIT FACILITIES
DEPOSITARY INSTITUTIONS.

FOR

NONMEMBER

Effective immediately and until April 1, 1970, Federal Reserve Banks
were authorized to provide, in accordance with certain specified principles,
emergency credit facilities to nonmember depositary institutions.
Votes for this action: Messrs. Mitchell, Daane,
Maisel, Brimmer, and Sherrill. Votes against this
action: None.
Absent and not voting: Messrs. Martin and
Robertson.
The sharp further advance in market yields during the fourth
quarter, unusually large net savings withdrawals at depositary institutions in the October quarterly reinvestment period, and preliminary
reports of rather poor savings experience in some areas thus far in
December had all created some concern about the possibility of substantially enlarged savings attrition at such institutions during late
December and January. In those circumstances the Board believed
that as a matter of general policy the Reserve Banks should be prepared, as in the summer of 1966, to provide emergency credit facilities
to nonmember depositary institutions in difficulty as to the adequacy
of their liquidity reserves.
Because the Federal Home Loan Bank System is responsible for
providing a lender-of-last-resort accommodation to its members, the
Board believed that it was more efficient for the Federal home loan
banks to continue to exercise full responsibility for providing such
assistance as long as their resources permitted. Accordingly, pending
further exploration with the Federal Home Loan Bank Board, the
Board advised the Federal Reserve Banks that they need be prepared
to provide emergency credit assistance only to mutual savings banks,
other banks, and savings and loan associations that are members of
neither the Federal Reserve nor the Federal Home Loan Bank Sys-

92



terns. Emergency credit to those types of institutions was to be provided in accordance with certain principles specified by the Board.
To provide for prompt implementation of such a program of
emergency credit facilities, the Board advised the Federal Reserve
Banks that, effective immediately and until April 1, 1970:
(a) member banks are permitted, pursuant to Section 19(e) of the Federal Reserve Act and
Section 201.5 of Regulation A, to use as security for advances from your Bank, whether
under Section 13 or Section 10(b) of the Act,
assets acquired from mutual savings banks,
other banks, and savings and loan associations
that are members of neither the Federal Reserve nor the Federal Home Loan Bank Systems, but only in accordance with, and subject
to, limitations specified by the Board; and
(b) your Bank is authorized, in accordance with the
third paragraph of Section 13 of the Federal
Reserve Act, in unusual and exigent circumstances to discount for the same types of nonmember institutions paper of the kinds described in that paragraph, subject, however, to
the limitation therein contained and in accordance with, and subject to, limitations specified
by the Board.




93

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 1969, 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 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




95

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 1969. No revisions were made in the foreign currency 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 1,1969)
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
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

96



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 Vx 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.

CURRENT ECONOMIC POLICY DIRECTIVE
(in effect January 1, 1969)
The information reviewed at this meeting suggests that over-all economic
activity is expanding rapidly and that upward pressures on prices and costs




97

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.

AUTHORIZATION FOR SYSTEM FOREIGN CURRENCY
OPERATIONS
(in effect January 1, 1969)
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
Pounds sterling
French francs
German marks
Italian lire
Japanese yen

98



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 $300
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 $1 billion 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"
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:




99

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

3. 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.
4. It shall be the practice to arrange with foreign central banks for the
coordination of foreign currency transactions. In making operating arrangements 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.

100



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 ( l ) of
the Board of Governors' Statement of Procedure with Respect to Foreign
Relationships of Federal Reserve Banks dated January 1, 1944.
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, 1969)
1. The basic purposes of System operations in foreign currencies are:
A. To help safeguard the value of the dollar in international exchange
markets;




101

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.
Special 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 re-establish supply and demand
balance at a level more consistent with the prevailing flow of underlying

102



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,
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.




103

MEETING HELD ON JANUARY 14, 1969
Authority to effect transactions in System Account.

According to the preliminary Commerce Department estimates, expansion in real gross national product moderated to an annual rate
of 3.8 per cent in the fourth quarter of 1968 from 5.0 per cent in
the third quarter and more than 6 per cent in the first half of the
year. However, the pace of advance in average prices—as measured
by the GNP deflator—increased in the fourth quarter. Staff projections
suggested that the rate of expansion in economic activity would slacken
further in the first half of 1969.
Growth in consumer spending slowed sharply in the fourth quarter
as the increase in disposable income remained moderate and the rate
of personal saving rose. Growth in Federal outlays on goods and services continued to slacken. At the same time, the rate of business
inventory accumulation increased substantially, and both business
spending on plant and equipment and residential construction outlays
advanced considerably.
In December retail sales declined markedly—perhaps partly because
of an influenza epidemic—and reached their lowest level since the
spring of 1968. However, industrial production and nonfarm payroll
employment continued to rise rapidly, and the unemployment rate
remained at the low level of 3.3 per cent to which it had fallen in
November. With tight conditions persisting in labor markets, average
wage rates in all major industry groups advanced considerably further.
Average wholesale prices of industrial commodities rose during the
month ending in mid-December to a level 2.5 per cent above a year
earlier, and an unusually large number of increases in such prices
were announced subsequently. The consumer price index advanced
substantially further in November and was 4.8 per cent above its
year-earlier level—the largest increase in any 12-month period since
1951.
The staff projections for the first half of 1969 suggested that increases in consumer spending would remain moderate—partly because of the effects on disposable income of higher social security
taxes and retroactive payments on 1968 income taxes—and that the
rate of inventory accumulation would decline as businesses adjusted

104



to the slower growth in final sales. It appeared likely that there would
be little further rise in Federal outlays, with a sizable surplus emerging
in the fiscal position of the Government, and that residential construction activity would be increasingly limited by the reduced availability of
mortgage funds. On the other hand, prospects were for continued rapid
growth in business capital outlays.
With respect to the U.S. balance of payments, in the last week of
December there was an exceptionally large volume both of foreign
official transactions that reduced U.S. liquid liabilities and of inflows
of private funds, including a sizable volume of funds drawn from the
Euro-dollar market by direct-investment affiliates of U.S. corporations.
These inflows were large enough to produce a substantial, although
probably temporary, surplus in the fourth quarter in the payments balance on the liquidity basis of calculation.1 The surplus on the official
reserve transactions basis was lower in the fourth quarter than in the
third, in part because there was a year-end decline in Euro-dollar liabilities of U.S. banks to their foreign branches as a counterpart of the
private capital inflows. In early January liabilities to foreign branches
increased sharply and interest rates in the Euro-dollar market, which
had reached record levels in late 1968, rose further.
For the full year 1968, despite a sharp deterioration in the merchandise trade balance, there was a small surplus in the over-all payments balance on the liquidity basis and a larger one on the official
settlements basis; on both bases, substantial deficits had been incurred
in 1967. While data were still preliminary and incomplete, it appeared
that the elements making for the shift to surplus in 1968 included a
heavy volume of foreign private long-term investment in the United
States, particularly in equity securities; a reduction in net use of U.S.
funds for direct investment abroad that was apparently larger than
1
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.




105

the $1 billion required by the Commerce Department guidelines; and
a larger net inflow of bank-reported claims than was required under
the Federal Reserve guidelines, in contrast to the outflow of 1967.
Also affecting the liquidity balance was a substantial volume of special
transactions with foreign governments; and affecting the official settlements balance was a large net inflow of liquid funds through foreign
branches of U.S. banks and other foreign banks. With respect to U.S.
merchandise trade, the surplus for the first 11 months of 1968 totaled
only about $300 million, compared with about $3.5 billion for the
full year 1967.
On the day of this meeting the Treasury was auctioning $1.75
billion of tax-anticipation bills due in June for payment on January
20. The Treasury was expected to announce around the end of January
the terms on which it would refund notes and bonds maturing in midFebruary, of which about $5.4 billion were held by the public.
Open market operations since the December 17, 1968, meeting of
the Committee had been directed toward attaining firmer conditions
in money and short-term credit markets, while taking account of the
increase from 5VA to SVi per cent in Federal Reserve Bank discount
rates announced on the day of that meeting. The System absorbed
reserves early in the interval and again near the close. But in the
intervening period it supplied reserves to cushion an unduly sharp
market reaction to the increase in restraint and to cope with substantial year-end strains. The effective rate on Federal funds fluctuated
widely—with some trading at rates as high as 7Vs per cent, a new
record, at the end of December—but was mostly in a range of 6lA to
6% per cent, considerably above the range of previous weeks. In the
single week ending January 1 member bank borrowings averaged $1.3
billion, a 16-year high; and in the 4 weeks ending January 8 they
averaged $815 million, compared with an average of $515 million
in the preceding 4 weeks. Average excess reserves also increased
substantially in the interval, however, so that the rise in net borrowed
reserves was relatively moderate.
Interest rates on both short- and long-term Treasury securities rose
to new highs in the week following the mid-December meeting of the
Committee, and although these yields subsequently declined somewhat, they remained well above earlier levels. The market rate on 3-

106



month Treasury bills, for example, advanced from 5.94 per cent on
December 16 to a peak of 6.29 per cent on December 24 and then
declined irregularly to 6.13 per cent on the day before this meeting.
Yields on other short-term market instruments also rose considerably
on balance. In markets for corporate and municipal bonds, yields
fluctuated in a rather narrow range around the highs reached in midDecember. New-issue volume in December was unusually small for
corporate bonds; for municipal bonds, it was below the monthly average for the year largely because of the withdrawal of several scheduled offerings.
Net inflows of deposits to nonbank financial intermediaries slackened
somewhat in November and apparently also in December. Yields on
home mortgages in the secondary market continued to advance and by
early January were close to the high that had been reached in the
preceding June.
Since late November most major banks had been offering the maximum permissible rates under Regulation Q for large-denomination
negotiable certificates of deposit (CD's) of all maturities. But as shortterm market rates of interest continued to rise, CD's became progressively less competitive, and during December and early January
there were declines in the volume outstanding—particularly at large
money market banks—of considerably greater than seasonal dimensions. However, inflows of consumer-type time and savings deposits
remained substantial during much of December, and on the average
total time and savings deposits at banks increased at about the relatively rapid rate of November. The money stock expanded in December at an estimated annual rate of about 6 per cent—roughly half the
November rate—although it bulged sharply around the turn of the
year.
The prime lending rate of commercial banks, which had been
raised to 6V2 per cent on December 2, was advanced to 6% per cent
on December 18—the day after the increase in discount rates was
announced—and then to a record 7 per cent on January 7. In December, according to preliminary estimates, growth in business loans
slowed considerably, as did bank acquisitions of municipal securities.
However, the sharp decline in bank holdings of Treasury securities
that had occurred in November was not repeated in December. Total




107

bank credit, as measured by the bank credit proxy—daily-average
member bank deposits 2—rose from November to December at an
annual rate of about 13 per cent, compared with 11 per cent in the
previous month and 13 per cent in the second half of 1968. After
adjustment for changes in the daily average of U.S. bank liabilities
to foreign branches—which increased slightly in November but fell
sharply in December—the proxy series expanded at an annual rate of
about 11.5 per cent in both months.
Staff projections suggested that if existing Regulation Q ceilings
and prevailing money market conditions were maintained there would
be further large declines in the volume of CD's outstanding and a
marked slowing of inflows of consumer-type time and savings deposits.
The average level of the money stock was expected to be considerably
higher in January than in December because of the sharp but largely
temporary increase in late December and early January. With respect
to bank credit, the staff projections suggested that the proxy series
would expand in January at an annual rate in the range of zero to 3
per cent. After adjustment for the marked increase in U.S. bank liabilities to foreign branches that had already occurred in early January,
growth in the credit proxy was projected in a range of 2 to 5 per cent.
For February, prospects were for continued run-offs of CD's and no
significant increase in the rate of bank credit growth.
2

In recent years the Committee has 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 month-end 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 table in the statistical section of the Federal Reserve BULLETIN (on page A-17 of the January 1969 issue). 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.
As indicated in that note, movements in total member bank deposits and in
commercial bank credit can diverge for various reasons, including changes in
nondeposit liabilities of banks. Because changes in U.S. bank liabilities to foreign
branches recently have been an important source of divergence from time to
time, an "adjusted" proxy series, taking approximate account of such changes, is
now also being calculated for Committee use.

108



In the Committee's discussion it was noted that, despite the indications of slowing in the rate of economic expansion, upward pressures
on prices persisted and inflationary expectations remained widespread.
It also was noted that the recent improvement in the U.S. balance of
payments, while encouraging, did not imply that a sustainable equilibrium had been achieved, particularly in view of the marked deterioration in the U.S. trade surplus during 1968.
The Committee agreed that under these circumstances it would be
desirable at present to maintain the existing degree of monetary restraint. The fact that the Treasury would be announcing a refunding
around the end of January also was mentioned as militating in favor of
an unchanged policy. The sharp slowing of growth in bank credit projected for January and February was generally considered to be appropriate, especially in light of the high growth rates of recent months. The
view was expressed, however, that it would be undesirable to curtail
bank credit drastically for an extended period.
The Committee decided that open market operations should be directed at maintaining the prevailing firm conditions in money and
short-term credit markets, with the proviso that operations should be
modified—to the extent permitted by the forthcoming Treasury refunding—if bank credit expansion appeared to be deviating significantly in either direction from current projections. Comments were
made as to the desirability, on the one hand, of moderating any undue
liquidity pressures that might develop and, on the other hand, of also
moderating any tendency toward easing of money market conditions
that might be brought about by seasonal forces.
The following current economic policy directive was issued to the
Federal Reserve Bank of New York:
The information reviewed at this meeting suggests that expansion
in real economic activity has been moderating, with slower growth
in consumer outlays but higher rates of business inventory accumulation and capital expenditures. Upward pressures on prices and
costs, however, are persisting. Since the mid-December firming of
monetary policy, most interest rates have risen further and, with the
outstanding volume of large-denomination CD's declining sharply,
bank credit expansion has slowed. Growth in the money supply
moderated somewhat on average in December from its rapid November pace. The U.S. foreign trade surplus remains very small but near




109

the end of the year unusual capital inflows had a markedly favorable effect on the over-all balance of payments. 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
maintaining the prevailing firm conditions in money and short-term
credit markets; provided, however, that operations shall be modified,
to the extent permitted by the forthcoming Treasury refunding, if
bank credit expansion appears to be deviating significantly from
current projections.
Votes for this action: Messrs. Martin, Brimmer,
Daane, Galusha, Hickman, Kimbrel, Maisel,
Mitchell, Robertson, Sherrill, and Treiber. Vote
against this action: Mr. Morris.
Absent and not voting: Mr. Hayes. (Mr. Treiber
voted as his alternate.)
Mr. Morris dissented from this action because he thought the directive as adopted could be consistent with an unduly restrictive monetary
policy. In his judgment the current state of the economy called for a
substantial moderation of bank credit growth from the 13 per cent
rate that had prevailed over the second half of 1968, but not for so
sharp a change as was implied by the projections for January and February.

110



MEETING HELD ON FEBRUARY 4, 1969
Authority to effect transactions in System Account.

According to the information reviewed at this meeting, expansion in
real economic activity had been moderating but upward pressures on
prices and costs were persisting. Staff projections continued to suggest
that the rate of expansion in economic activity would slow further in
the first half of 1969.
Available weekly figures indicated that retail sales, which had declined in December, rose in January to about the November level.
Tentative estimates implied that industrial production increased further
in January but at a slower rate than in late 1968. The labor market
continued tight, and the number of persons receiving unemployment
compensation remained small.
There were widespread increases in wholesale prices of industrial
commodities from mid-December to mid-January, and the average
of such prices rose considerably further. The rate of advance in the
consumer price index slowed somewhat in December, partly for
seasonal reasons, but the index for that month was 4.7 per cent above
its year-earlier level.
Growth in real GNP had moderated to an annual rate of 3.8 per
cent in the fourth quarter of 1968 from 5.0 per cent in the third
quarter. Expansion in consumer and Federal Government expenditures on goods and services slowed, but there were substantial
increases in business capital outlays, residential construction activity,
and inventory accumulation. The staff projection? for the first half
of 1969 suggested that consumer spending would expand only moderately faster than in the fourth quarter, partly because growth in
disposable income would be limited by higher social security taxes
and retroactive income tax payments. In line with the recently released
Federal budget figures, Government purchases of goods and services
were projected to remain at the fourth-quarter level. The projections
also implied that residential construction activity would be increasingly restricted by the reduced availability of mortgage funds; that
the current surge in business capital outlays would slow by the second




111

quarter; and that the rate of inventory accumulation would level off
in the first quarter and then decline.
Longer-range staff projections prepared for this meeting suggested
that in the second half of 1969 growth in real GNP would remain at
a reduced rate and inflationary pressures would diminish. These projections incorporated the budget estimates of Federal expenditures and
assumed that the income tax surcharge, which under existing legislation was scheduled to expire on June 30, 1969, would be continued
at least through the end of the year. They also assumed that a substantial degree of monetary restraint would be maintained. It was
noted that the budget estimates implied that fiscal policy would become less restrictive after midyear even if the surtax were continued.
Preliminary data indicated that the U. S. balance of payments on the
liquidity basis had reverted to deficit in January, following the substantial surplus recorded in the fourth quarter of 1968. Although little
detailed information was available, it appeared likely that the strike of
longshoremen, which had begun with the expiration of the Taft-Hartley
Act injunction on December 20, was one factor affecting the January
balance adversely. In December the balance on merchandise trade was
in deficit, and for 1968 as a whole there was a trade surplus of only
about $100 million, compared with about $3.5 billion in 1967. Exports
were 10 per cent higher in 1968 than in 1967, but imports increased
by nearly 25 per cent.
The over-all payments balance on the official settlements basis was
in substantial surplus in January as a result of a sharp increase in liabilities of U.S. banks to their foreign branches, which more than offset
the marked decline that had occurred just before the year-end. To a
large extent this heavy inflow of liquid funds through the Euro-dollar
market reflected outflows from Germany that were encouraged by the
policies of the German Federal Bank and by the ebbing of speculation
on a revaluation of the mark.
On January 29 the Treasury announced that in exchange for
securities maturing in mid-February, of which about $5.4 billion were
held by the public, it would offer two new issues—a 15-month, 6%
per cent note and a 7-year, 6V4 per cent note, priced to yield 6.42 and
6.29 per cent, respectively. The initial market reaction to the offering
was mixed and trading activity associated with the new issues was
relatively limited.

112



System open market operations since the January 14 meeting of the
Committee had been directed toward maintaining the firmer conditions
achieved in money and short-term credit markets following the midDecember increase in Federal Reserve discount rates. Federal funds
continued to trade mostly in a range of 6V4 to 65/s per cent. Borrowings
by large banks in the major money centers were relatively light in the
3 weeks ending January 29, both because seasonal forces tended to shift
reserves toward these centers and because the sizable inflows of Eurodollars were concentrated at such banks. For all member banks borrowings averaged about $790 million, not much changed from the $810
million average of the previous 4 weeks. Average excess reserves fell
sharply, however, and net borrowed reserves increased considerably.
Interest rates on various types of short-term securities, which had
declined somewhat from their late-December highs in the first half of
January, subsequently changed little on balance. The market rate on
3-month Treasury bills moved down from 6.13 per cent on the day
before the previous meeting to 6.01 per cent a week later and then
advanced to 6.19 per cent on the day before this meeting. Yields on
long-term securities fluctuated near their recent highs during most of
the period, although lately they had come under renewed upward pressure as a result of limited investor interest in new corporate and municipal bond offerings. The volume of new bond issues was relatively large
in January, but a smaller volume appeared to be in prospect for
February.
Yields on home mortgages in the secondary market rose further in
January and late in the month exceeded the high that had been recorded
in the preceding June. Average contract interest rates on conventional
mortgages had reached postwar record levels in December, the latest
month for which data were available. Effective January 24 the regulatory maximum contract rate on federally underwritten home mortgages
was increased from 63A to IVi per cent. Net inflows of deposits to
nonbank financial intermediaries had moderated further in December,
and withdrawals during the turn-of-the-year interest-crediting period
were somewhat larger than a year earlier.
The volume of large-denomination CD's outstanding at banks continued to decline sharply in January as short-term market interest rates
remained at levels relative to the Regulation Q ceilings that placed




113

banks at a competitive disadvantage in their efforts to replace maturing
CD's. The CD attrition was heaviest at large money market banks. Net
inflows of other time and savings deposits weakened, partly because of
withdrawals after the year-end interest-crediting date, and total time
and savings deposits declined at an annual rate of about 10.5 per cent
from December to January. Expansion in private demand deposits and
the money stock moderated—the latter to an annual rate of about 4.5
per cent from 7.5 per cent in the previous month—as U.S. Government
deposits rose.
Business loans at banks increased markedly in January. However,
other loans declined slightly, net acquisitions of municipal securities
remained at a reduced rate, and holdings of Treasury securities declined
considerably. Total bank credit, as measured by the proxy series—
daily-average member bank deposits—was estimated to have declined
at an annual rate of 4.5 per cent from December to January, compared
with growth at about a 13 per cent rate in the previous month and also
over the second half of 1968 as a whole. After adjustment for changes
in the daily average of U.S. bank liabilities to foreign branches—-which,
as noted earlier, increased substantially in January—the proxy series
declined at an annual rate of about 1.5 per cent.
Some slowing of the growth of business loans from the rapid January
pace was expected in February. Staff projections suggested that if existing Regulation Q ceilings and prevailing money market conditions were
maintained, the run-off of CD's outstanding would continue at a rapid
rate—although not so rapid as in January, mainly because it appeared
that the volume of CD's maturing would be smaller than in that month
—and that inflows of other time and savings deposits would improve
only moderately from January. The projections for February implied
that U.S. Government deposits would rise substantially further and
that private demand deposits and the money stock would decline somewhat. The bank credit proxy was projected to decline from January to
February at an annual rate of 3 to 6 per cent. After adjustment for the
increase in U.S. bank liabilities to foreign branches that had occurred
over the course of January, the decline in the proxy series was projected
to fall in a range of zero to 3 per cent.
The Committee agreed that current and prospective economic conditions did not call for a change in monetary policy at this time, and that

114



in any case the Treasury refunding now under way militated against a
change in policy. Some members, noting the decline in the bank credit
proxy experienced in January and the small further decline projected
for February, expressed concern about the risk that the current stance
of policy might have unduly restrictive consequences and thus might
have to be reversed shortly. While others thought that current bank
credit developments were not unduly restrictive, particularly in light of
the rapid expansion in the latter part of 1968, there was general agreement that a resumption of bank credit growth, although at a moderate
rate, would be desirable before long.
The Committee decided that open market operations should be directed at maintaining the prevailing firm conditions in money and shortterm credit markets. The proviso was added that operations should be
modified, to the extent permitted by the Treasury refunding, if bank
credit appeared to be deviating significantly from current projections.
It was suggested that the allowable deviation in bank credit before the
proviso was to be implemented should be smaller if the deviation were
in a downward direction than in the opposite case. It also was suggested
that, if the proviso clause were implemented in the direction of less firm
money market conditions, care should be taken to avoid giving misleading signals about the basic stance of monetary policy.
The following current economic policy directive was issued to the
Federal Reserve Bank of New York:
The information reviewed at this meeting suggests that expansion
in real economic activity has been moderating, but that upward
pressures on prices and costs are persisting. Prospects are for some
further slowing in economic expansion in the period ahead. Market
interest rates recently have fluctuated near the highs reached around
the turn of the year. Bank credit contracted slightly in January on
average, as the outstanding volume of large-denomination CD's continued to decline sharply, inflows of other time and savings deposits
slowed, and growth in the money supply moderated. The U.S. balance
of payments on the liquidity basis appears to have reverted to deficit
in early 1969, but large inflows of Euro-dollars have had the effect
of keeping the official settlements balance in surplus. 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




115

growth and attaining reasonable equilibrium in the country's balance
of payments.
To implement this policy, while taking account of the current
Treasury refunding, System open market operations until the next
meeting of the Committee shall be conducted with a view to maintaining the prevailing firm conditions in money and short-term credit
markets; provided, however, that operations shall be modified, to the
extent permitted by the Treasury refunding, 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.

116



MEETING HELD ON MARCH 4, 1969
1. Authority to effect transactions in System Account.

Growth in real GNP was now estimated by the Commerce Department
to have moderated somewhat more in the fourth quarter of 1968 than
indicated earlier, and staff projections suggested that it would moderate
further in the first half of 1969. However, upward pressures on prices
and costs were persisting, and it appeared that expectations of continuing inflation were still an important factor underlying business spending
decisions.
In February, according to available weekly data, retail sales were
about unchanged from January—when, in turn, they had risen to a
level close to that of the preceding November. Tentative estimates indicated that industrial production continued to increase at a slower rate
than in late 1968. In January nonfarm employment rose substantially
further, and the unemployment rate was unchanged at the low level of
3.3 per cent. The labor market remained tight, and average hourly
earnings of production workers continued upward at a rapid rate.
Average wholesale prices of industrial commodities increased considerably further from mid-January to mid-February, but by less than
in the preceding month when, according to revised data, the largest
monthly increase in more than 13 years had been recorded. In January
average consumer prices continued to advance at a rapid pace, particularly after allowance for the usual seasonal declines in prices of some
major commodities.
Revised Commerce Department estimates indicated that growth in
real GNP had moderated from an annual rate of 5.0 per cent in the
third quarter of 1968 to 3.4 per cent in the fourth quarter, rather than
to 3.8 per cent as had been shown in the preliminary report. The
slackening in the fourth quarter was attributable largely to a marked
slowing of the rise in consumer and Federal expenditures on goods and
services; business outlays on plant and equipment and on inventory
accumulation had increased considerably, as had residential construction activity.
The staff projections for the first half of 1969 suggested that growth
in disposable income would be held down by the increase in social




117

security tax rates that became effective January 1 and by retroactive
payments on 1968 personal income tax liabilities. It was expected that
the rate of personal saving would decline from its high fourth-quarter
level and that consumer spending would rise at a pace moderately
faster than in the fourth quarter. Federal purchases were projected to
remain close to the fourth-quarter level. The projections also implied
that as the first half of the year progressed residential construction
activity would be increasingly limited by the reduced availability of
mortgage funds; that the rapid current expansion in business capital
outlays would slow; and that the rate of inventory accumulation would
be reduced.
Preliminary data indicated that there had been a substantial deficit
in the U.S. balance of payments on the liquidity basis in the first 2
months of 1969. But the extent to which both payments and receipts
had been affected by the longshoremen's strike—which began on December 20 and ended in mid-February in New York and later at certain other Atlantic and Gulf Coast ports—was not clear. On the official
settlements basis a large surplus was recorded in January, as liabilities
of U.S. banks to their foreign branches rose sharply to a new high. In
February, however, a deficit apparently developed on the official settlements basis, as net inflows of Euro-dollars through foreign branches
were substantially smaller. Interest rates in the Euro-dollar market
advanced considerably further to new record levels in February.
On February 27 the Bank of England raised its discount rate by 1
percentage point to the 8 per cent level that had been maintained for
about 4 months after the devaluation of sterling in November 1967.
This action was taken to reinforce Britain's policy of severe domestic
credit restraint and was officially described as consistent with the recent
marked increases in short-term interest rates in international financial
markets. Shortly thereafter, discount rates were raised by the Bank of
Sweden from 5 to 6 per cent, and by the Bank of Canada from 6Vi
to 7 per cent.
The Treasury refunding of notes and bonds maturing in mid-February was accorded an unenthusiastic reception by the market. Of the
$5.4 billion of maturing issues held by the public, about $2 billion, or
36 per cent, were redeemed for cash; $2.6 billion were exchanged for
the new 15-month, 6% per cent note; and $885 million were exchanged

118



for the new 7-year, 6lA per cent note. Subsequently, on February 25,
the Treasury auctioned a $1 billion strip of bills consisting of five
issues maturing in 1 to 5 months. Banks, which were allowed to pay
for the new bills through credits to Treasury tax and loan accounts,
successfully bid for the bulk of the issue.
Most interest rates had risen on balance since the previous meeting
of the Committee. To a large extent the advances reflected growing
expectations—particularly after recent congressional testimony by
Federal Reserve and administration officials—that monetary restraint
would be maintained in an effort to contain inflationary pressures. The
higher rates also reflected anticipations of a possible near-term increase
in the prime lending rate of banks and perhaps also in the Federal
Reserve discount rate. Yields in capital markets moved up to or above
their earlier peaks, despite the somewhat smaller volumes of new corporate and municipal issues offered in February and scheduled for
March. In the mortgage market interest rates rose further to new postwar highs, as demands for mortgage loans remained strong and, according to available data for early February, net inflows of funds to thrift
institutions continued to moderate.
Most short-term interest rates also rose in the period, but rates on
Treasury bills maturing within 6 months changed little on balance. For
example, the market rate on 3-month Treasury bills was 6.17 per cent
on the day before this meeting, compared with 6.19 per cent 4 weeks
earlier. During the interval the 3-month bill rate had declined to around
6.00 per cent—reflecting substantial liquidity demands for shorter-term
bills and relatively limited dealer inventories—but it subsequently rose
again, particularly after the increase in the discount rate of the Bank
of England.
System open market operations since the previous meeting of the
Committee had been directed at maintaining firm conditions in the
money and short-term credit markets. Conditions in the money market
tended to tighten during the period as a result of the cumulative reduction in bank liquidity and a seasonal shift in reserves away from the
major money market banks. This tendency was not fully offset by System action, however, because shorter-term bill rates were under downward pressure for much of the period. Federal funds traded mainly in
a range around 6% per cent, up from a range centering closer to 6Vi




119

per cent in the previous period. Member bank borrowings averaged
$835 million in the 4 weeks ending February 26, compared with about
$790 million in the previous 3 weeks. Average excess reserves were
little changed, so net borrowed reserves also increased.
With short-term market interest rates remaining high relative to
maximum rates payable by banks on large-denomination CD's, the
volume of such CD's outstanding declined considerably further in February—although by less than in January when the amount maturing
was larger. During the first 2 months of the year the rate of expansion
in consumer-type time and savings deposits was well below that in
comparable periods of other recent years, and in both months total
time and savings deposits contracted at an annual rate in the neighborhood of 10 per cent. Growth in private demand deposits and in
the money stock moderated further in February; for January and
February together the money stock rose at an annual rate of less than
3 per cent, about half the rate of the second half of 1968. U.S. Government deposits increased sharply further in February to their highest
average level in several months.
Although moderating in February, growth in business loans remained
rapid. Other loans, which had declined slightly in January, increased
substantially. In accommodating the large loan demand, banks stepped
up the rate at which they had been liquidating holdings of Treasury
securities, and for the first time since April 1968, they failed to increase
their holdings of municipal securities. In February total bank credit,
as measured by the adjusted proxy series—daily-average member bank
deposits, adjusted to include changes in the daily average of U.S. bank
liabilities to foreign branches—rose 2 per cent from January, at an
annual rate, and was about unchanged from December.
Staff projections suggested that if prevailing money market conditions and existing Regulation Q ceilings were maintained the volume
of large-denomination CD's outstanding was likely to decline at about
the same pace in March as in February. It was expected that total
time and savings deposits would contract further from February to
March, but at a slower rate than in the previous month. Growth in
the money stock was projected to accelerate temporarily on the average
in March, when it was anticipated that U.S. Government deposits would
be drawn down sharply.

120



With respect to bank credit, the projections suggested that the adjusted proxy series would decline at an annual rate of 3 to 6 per cent
from February to March, if U.S. bank liabilities to foreign branches
were unchanged on the average in March from the level to which they
had risen by the end of February. It appeared likely that loan demands
would remain strong, and banks were expected to continue to liquidate
holdings of U.S. Government securities and to limit their participation
in the market for municipal securities.
The Committee agreed that, in light of the persistence of inflationary
pressures and expectations, the existing degree of monetary restraint
should be continued at present. The members decided that open market
operations should be directed at maintaining on balance about the
prevailing firm conditions in money and short-term credit markets, subject to the proviso that operations should be modified if bank credit
appeared to be deviating significantly from current projections.
Some concern was expressed about the projection that the bank
credit proxy would decline in March after 2 months of no net growth,
and about the risks that undue liquidity pressures might develop. The
Committee agreed that the proviso clause should be implemented in
the direction of firmer money market conditions only if bank credit
appeared to be growing at more than a moderate rate. It also agreed
that the clause should be implemented in the direction of less firm conditions if bank credit appeared to be contracting any more rapidly
than projected, so long as such action did not tend to create the impression that the basic stance of monetary policy had been relaxed.
The following current economic policy directive was issued to the
Federal Reserve Bank of New York:
The information reviewed at this meeting suggests that expansion
in real economic activity has been moderating, but that upward pressures on prices and costs are persisting. Prospects are for some further
slowing in economic expansion in the period ahead. Most market
interest rates have edged up on balance in recent weeks. In the first
2 months of the year bank credit changed little on average, as investments contracted while loan demands, especially from businesses, remained strong. The outstanding volume of large-denomination CD's
continued to decline sharply and inflows of other time and savings
deposits slowed. Growth in the money supply moderated as U.S.




121

Government deposits rose considerably. It appears that a sizable
deficit re-emerged in the U.S. balance of payments on the liquidity
basis in January and February and, with Euro-dollar inflows moderating, a deficit also reappeared in the balance on the official settlements
basis in February. 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
maintaining on balance about the prevailing firm 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,
Bopp, Brimmer, Clay, Coldwell, Daane, Maisel,
Mitchell, Robertson, Scanlon, and Sherrill. Votes
against this action: None.
2. Amendments to authorization for System foreign currency
operations.

The Committee amended paragraphs 1 and 2 of the authorization for
System foreign currency operations in a number of respects at this
meeting. On recommendation of the Special Manager, the limit on
outright holdings by the System of authorized foreign currencies specified in the paragraph previously numbered as IB(2)—but, after other
amendments made at this meeting, renumbered as IB(3)—was increased from $150 million to-$250 million equivalent. In addition,
clarifying amendments were made in the introductory text to paragraph
1, in paragraphs IB and 1C(1), and in paragraph 2. Except for the
changes resulting from these amendments, the Committee renewed the
authorization in the form outstanding at the beginning of the year 1969.
As amended, paragraphs 1 and 2 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

122



Account, to the extent necessary to carry out the Committee's foreign
currency directive and express authorizations by the Committee pursuant thereto:
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
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 purchased spot, including currencies purchased
from the Stabilization Fund, and sold forward to the Stabilization
Fund, up to $1 billion equivalent;
(2) Currencies purchased spot or forward, up to the amounts
necessary to fulfill other forward commitments;
(3) Additional currencies purchased spot or forward, up to the
amount necessary for System operations to exert a market influence
but not exceeding $250 million equivalent; and
(4) Sterling purchased on a covered or guaranteed basis in terms
of the dollar, under agreement with the Bank of England, up to $300
million equivalent.
C. To have outstanding forward commitments undertaken under




123

paragraph A above to deliver foreign currencies, up to the following
limits:
(1) Commitments to deliver foreign currencies to the Stabilization Fund, up to the limit specified in paragraph 1B(1) above;
(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 delaty.
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:

_ . . t
Foreign bank
6

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

124



Amount of
arrangement
, M1.
£
(millions of
dollars equivalent)
100
225
1,000
100
2,000
1,000
1,000
1,000
1,000
130
400
100

Foreign bank

Amount of
arrangement
(millions of
dollars equivalent)

Bank of Sweden
250
Swiss National Bank
600
Bank for International Settlements:
Dollars against Swiss francs
600
Dollars against authorized European currencies
other than Swiss francs
1,000
Votes for this action: Messrs. Martin, Hayes,
Bopp, Brimmer, Clay, Coldwell, Daane, Maisel,
Mitchell, Robertson, Scanlon, and Sherrill. Votes
against this action: None.
With respect to the increase in the limit on outright holdings of
foreign currencies, the System's current holdings were close to the previous limit of $150 million. That limit had been established in 1963,
at a time when the foreign exchange operations of the Federal Reserve
had not yet assumed the scale of more recent years. The Committee
concurred in the judgment of the Special Manager that more leeway
was now desirable to permit acquisitions from time to time of foreign
currencies that were likely to prove useful in future operations.
The amendment to the introductory text of paragraph 1 consisted
of the addition, after the words "to the extent necessary to carry out
the Committee's foreign currency directive," of the phrase "and express
authorizations by the Committee pursuant thereto." This amendment
was for the purpose of making clear that the language of the authorization extended not only to operations undertaken under the specific
language of the foreign currency directive but also to those undertaken
under express authorities given by the Committee, for which provision
was made at a number of points in the directive.
The main amendment to paragraph IB involved a clarification of
the form of authorization for foreign currency transactions undertaken
in connection with System "warehousing" operations for the Stabilization Fund. While the forward commitments associated with such ware-




125

housing operations were separately authorized in paragraph 1C(1), the
spot holdings had been subsumed under general language in IB authorizing holdings "up to the amounts necessary to fulfill outstanding forward commitments." As amended, the authorization contained a new
paragraph 1B(1) separately covering the spot holdings in question.
Concurrently, a number of other conforming and clarifying changes
were made in IB and in 1C(1).
The amendment to paragraph 2, which affected the table contained
in that paragraph listing authorized swap arrangements, involved the
incorporation of more precise descriptions of the System's two swap
arrangements with the Bank for International Settlements.
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, 1969, and their assumption
of duties, the Committee followed its customary practice of reviewing
all of its continuing authorizations 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
1969.
Votes for these actions: Messrs. Martin, Hayes,
Bopp, Brimmer, Clay, Coldwell, Daane, Maisel,
Mitchell, Robertson, Scanlon, and Sherrill. Votes
against these actions: None.

126



MEETING HELD ON APRIL 1, 1969
Authority to effect transactions in System Account.

According to the information reviewed at this meeting, expansion in
real GNP had moderated somewhat further in the first quarter from
the 3.4 per cent annual rate of increase recorded in the fourth quarter
of 1968. It appeared, however, that the expansion had slowed less than
had been anticipated in earlier projections, and that the slowing was
attributable to a decline in the rate of business inventory accumulation;
the pace of advance in final sales was estimated to have increased.
Moreover, it now appeared that activity in coming months also would
be stronger than expected earlier. Substantial upward pressures on
prices and costs persisted, and inflationary expectations remained
widespread.
Previous projections of economic activity had been revised upward
largely because a Commerce-SEC survey, taken in February, indicated that businesses planned a large increase in their outlays on new
plant and equipment in 1969—to a total about 14 per cent above
1968. In addition, retail sales data for February and revised figures
for earlier months suggested that growth in consumer expenditures had
stepped up more from the low fourth-quarter rate than anticipated.
The most recent data, in which new seasonal adjustment factors had
been incorporated, indicated that retail sales had reached a new record
level in January and that they had continued at about that level in
February.
Nonfarm employment again expanded sharply in February, and
unemployment remained at the low rate of 3.3 per cent which it had
reached in December. Average hourly earnings of production workers
continued to increase at a rapid pace. The consumer price index rose
considerably further in February, to a level about 4.7 per cent above
a year earlier. From mid-February to mid-March average wholesale
prices of industrial commodities increased substantially; since midDecember such prices had advanced at an annual rate of more than
6 per cent.
Projections for the second quarter suggested that growth in real
GNP would remain at about the first-quarter pace. Another decline in




127

the rate of business inventory accumulation—such as had held down
over-all growth in the first quarter—was not expected, but it appeared
likely that the expansion in various major categories of final sales would
slow. According to the Commerce-SEC survey, a sizable part of the
anticipated 1969 increase in plant and equipment outlays would be
concentrated in the first quarter. Moreover, it seemed likely that consumer spending would rise less rapidly in the second quarter than in
the first, when a sharp decline in the rate of personal saving apparently
had occurred. Federal purchases of goods and services were projected
to remain relatively stable in the second quarter, and residential construction activity was expected to turn down as a result of reduced
availability of mortgage credit.
Data available through mid-March suggested that a very large
deficit had been incurred in the first quarter in the U.S. balance of
payments on the liquidity basis. One major contributing factor was a
substantial deficit in the merchandise trade balance for February, as
imports began to recover more rapidly than export shipments after
the dock strike ended in New York in mid-February. Also, it seemed
likely that outflows of corporate capital funds, data for which were
not yet available, were substantial. On the other hand, in the first 2
months of the year foreign net purchases of U.S. equity securities were
sizable, and bank-reported claims on foreigners were reduced more
than seasonally.
In contrast to the deficit on the liquidity basis, it appeared that a
large surplus would be recorded for the first quarter on the official
settlements basis, as a result of substantial inflows of liquid funds
through banks abroad. Liabilities of U.S. banks to their foreign
branches again expanded rapidly in the first half of March, after
increasing only slightly in February. Interest rates in the Euro-dollar
market advanced to a new high in early March but subsequently
changed little.
Most major foreign currencies were under some selling pressure
during March. Financial markets in most industrial countries had
tightened in recent months, in part because of domestic demand pressures but also in some instances in reaction to capital outflows resulting
from the restrictive stance of U.S. monetary policy and high Eurodollar interest rates.

128



On March 25 the Treasury auctioned a $1.8 billion strip of bills
consisting of additions to outstanding issues maturing in about 6 to 12
weeks. Commercial banks, which were allowed to make payment for
the new bills through credits to Treasury tax and loan accounts, bid
aggressively in the auction and were awarded the bulk of the offering.
The financing was expected to cover the Treasury's cash requirements
from market sources for the balance of the fiscal year.
Long-term interest rates had risen further since the previous meeting
of the Committee in an atmosphere of continuing concern about inflationary pressures in the economy. Yield increases were especially
pronounced in the corporate and the municipal bond markets where
new issues were accorded generally unenthusiastic receptions and a
number of offerings were either postponed or reduced in size. In late
March a somewhat improved tone emerged in the capital markets,
reflecting in part rumors of progress in the Vietnam peace talks.
Movements in short-term interest rates had been mixed since early
March. Rates on most Treasury bills had declined to the lowest levels
since mid-December, as continuing strong liquidity demands, augmented by sizable seasonal demands, impinged on limited dealer inventories. The market rate on 3-month Treasury bills had fallen to
slightly below 6 per cent after mid-March and at the time of this
meeting was 5.99 per cent, compared with 6.17 per cent 4 weeks
earlier. Market rates on other short-term securities had declined less
or had risen in recent weeks. On March 17 most large commercial
banks raised their prime lending rate from 7 per cent to a new record
high of IVi per cent.
System open market operations since the previous meeting of the
Committee had been directed at maintaining firm conditions in the
money and short-term credit markets. With Treasury bill rates under
downward pressure, the System met reserve needs mainly through
short-term repurchase agreements and purchases of Treasury couponbearing securities rather than by buying bills in the market. The effective rate on Federal funds continued to fluctuate in a range centering
around 63A per cent. Member bank borrowings averaged $835 million
in the 4 weeks ending March 26, the same as in the previous 4 weeks.
Excess reserves declined somewhat and net borrowed reserves increased correspondingly.




129

In March total bank credit, as measured by the adjusted proxy series
—daily-average member bank deposits, adjusted to include changes in
the daily average of U.S. bank liabilities to foreign branches—was
estimated to have declined from February at an annual rate of 6.5
per cent, after changing little over the first 2 months of the year. Banks
continued to liquidate holdings of U.S. Government securities during
March but added somewhat on balance to holdings of other securities.
Total bank loans declined during the month—reflecting large reductions in security loans and in loans to nonbank financial institutions
and a substantial slowing in the growth of business loans after midmonth. Also, some part of the March decline in loans may have reflected sales of loans by U.S. banks to foreign branches. In the first
quarter as a whole banks financed a net growth in loans, which was
particularly sizable for business loans, mainly by liquidating holdings
of Government securities.
The volume of large-denomination CD's outstanding declined considerably further in March, as yields on competing short-term debt
market instruments remained above the maximum interest rates payable on such CD's under Regulation Q. Consumer-type time and
savings deposits expanded moderately, however, and total time and
savings deposits—which had declined at a rapid rate in January and
February—were about unchanged in March. Private demand deposits
also changed little, and the money stock expanded at a 2 per cent
annual rate—about the same as in the first 2 months of 1969 and well
below the growth rate over the second half of 1968. U.S. Government
deposits declined substantially, following sizable increases earlier in
the year.
Loan demands at banks were expected to rebound in April, partly
in connection with needs to finance income tax payments. Staff projections suggested that the adjusted bank credit proxy would grow
from March to April at an annual rate of 2 to 6 per cent if prevailing
money market conditions and existing Regulation Q ceilings were
maintained. This projection assumed that there would be some further
increase in Euro-dollar liabilities of U.S. banks to their foreign
branches.
Total time and savings deposits at banks were expected to change
little again from March to April. It appeared probable that the pace

130



of the run-off of large-denomination CD's outstanding would moderate
after mid-April when Treasury bill rates were likely to decline seasonally. However, growth in consumer-type time and savings deposits
was projected to slow as a result of withdrawals following the quarterly
interest-crediting period and in connection with income tax payments.
It was expected that U.S. Government deposits would rise considerably
from March to April, that private demand deposits would remain about
unchanged, and that the money stock would expand only slightly faster
than in the first quarter.
Prior to this meeting the boards of directors of eight Reserve Banks
had acted, subject to the approval of the Board of Governors, to
increase discount rates from the present level of 5Vi per cent. It was
reported to the Committee that the Board of Governors planned to
take action on discount rates within a few days, and concurrently to
consider the desirability of an increase in member bank reserve requirements, to be effective shortly after mid-April. The staff had prepared
alternative projections of the adjusted proxy series that took account
of other possible monetary policy action. These projections suggested
that bank credit would be weaker than otherwise in April if open
market operations were directed at maintaining the firmer money
market conditions expected to ensue from such action and if existing
Regulation Q ceilings were continued.
It was the consensus of the Committee that some further monetary
policy action was called for at this time in light of the greater-thanexpected pace of the economic expansion and the continuation of
pervasive inflationary pressures and expectations. An increase in discount rates was generally considered to be appropriate, but differing
views were expressed regarding the desirability of an increase in
reserve requirements at present. In one view both actions, along with
supportive open market operations, were needed to make clear the
System's determination to resist inflationary pressures. An alternative
view was that, while an increase in reserve rquirements might prove
desirable at a later time, it was not required at present.
With respect to open market operations, a majority of the Committee agreed that such operations should be directed at maintaining
firm conditions in money and short-term credit markets, and at confirming the effects on those markets of any other monetary policy




131

actions that might be taken. 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, while
expansion in real economic activity has moderated somewhat further,
current and prospective activity now appears stronger than earlier
projections had indicated. Substantial upward pressures on prices and
costs are persisting. Most long-term interest rates have risen further
on balance in recent weeks, but movements in short-term rates have
been mixed. In the first quarter of the year bank credit changed little
on average, as investments contracted while loans expanded further.
In March the outstanding volume of large-denomination CD's continued to decline sharply; inflows of other time and savings deposits
were moderate; and growth in the money supply remained at a
sharply reduced rate. It appears that a sizable deficit re-emerged in the
U.S. balance of payments on the liquidity basis in the first quarter
but that the balance on the official settlements basis remained in surplus as a result of further large inflows of Euro-dollars. 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
maintaining firm 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
appears to be deviating significantly from current projections.
Votes for this action: Messrs. Martin, Bopp,
Brimmer, Clay, Daane, Mitchell, Robertson, Scanlon,
Sherrill, and Treiber. Votes against this action:
Messrs. Coldwell and Maisel.
Absent and not voting: Mr. Hayes. (Mr. Treiber
voted as his alternate.)

132



Messrs. Coldwell and Maisel dissented from this action for different
reasons. Mr. Coldwell noted that the directive favored by the majority
could be interpreted as calling for no monetary firming unless the
Board acted in the coming period with respect to discount rates or
reserve requirements. Since he believed that greater monetary restraint
was imperative under current circumstances, he favored adopting a
directive that called unconditionally for the attainment of firmer conditions in money and short-term credit markets.
Mr. Maisel believed that, insofar as the Committee's action reflected
a desire to affect the prevailing inflationary psychology directly, it
represented a shift from the Committee's proper concern with flows
of credit and money to an improper target not readily susceptible to
such influence. He particularly objected to the directive as adopted
because he thought that operations under it were likely to depress
flows of the monetary aggregates to rates below those that seemed to
him to be desirable and maintainable for a considerable period, and
that such operations would thus be inconsistent with the gradualist
approach to the ultimate objective of price stability that he favored.




133

MEETING HELD ON APRIL 29, 1969
Authority to effect transactions in System Account.

Preliminary estimates of the Commerce Department indicated that in
the first quarter real GNP expanded at an annual rate of 2.9 per cent
—only slightly slower than the 3.4 per cent growth rate of the fourth
quarter of 1968—and that average prices, as measured by the GNP
deflator, increased a little faster than in late 1968. Staff projections
suggested that real GNP would expand about as rapidly in the second
quarter as in the first and that upward pressures on prices would continue strong.
In March retail sales rose further, according to the advance report.
Industrial production also reached a new high as output of many final
products and materials increased. The labor market remained tight,
although nonfarm employment expanded less rapidly than it had earlier
in 1969 and the unemployment rate edged up to 3.4 per cent from the
3.3 per cent level of preceding months.
Average wholesale prices of industrial commodities, which had advanced substantially in the first quarter, rose only slightly further from
mid-March to mid-April. To a considerable extent the slowing of the
rise reflected declines in prices of lumber and plywood following extremely large advances earlier; among other industrial commodities
price increases continued widespread. The consumer price index rose
more in March than in any other month since February 1951, partly
because of a sharp advance in homeownership costs, including mortgage interest charges, property taxes, insurance, and repairs.
According to the preliminary GNP figures for the first quarter, there
were large increases in final sales—particularly in business outlays on
plant and equipment and in consumer expenditures—and a substantial
decline in the rate of business inventory accumulation. The advance in
consumer spending was associated with a sizable reduction in the rate
of personal saving, as growth in disposable income slowed. Residential
construction outlays also expanded appreciably further, although housing starts declined substantially in February and March from the very
high January rate. Federal purchases of goods and services increased
only slightly in the quarter.

134



While the staff projections for the second quarter suggested that
GNP would continue to expand at about the pace of the first quarter,
they contemplated a different pattern of change among the major components. Specifically, it was expected that inventory accumulation
would remain at about the first-quarter rate, instead of slowing substantially as in the first quarter, and that net exports of goods and
services would rise significantly as a result of a faster recovery in exports than in imports following the end of the longshoremen's strike.
At the same time, it was anticipated that growth in business fixed investment and in consumer spending would slow, that residential construction outlays would turn down, and that Federal expenditures
would rise only slightly further.
For the second half of 1969, staff projections suggested that expansion in real GNP would slow further but that upward pressures on
prices were likely to persist. Both the lagged effects of monetary restraint and a restrictive stance of fiscal policy were expected to contribute to the slowing of expansion in real activity. The administration
recently had announced that it planned to reduce Federal outlays in the
fiscal year 1970 from the January budget estimates. In addition, it had
proposed that the surtax on incomes be continued at 10 per cent
through the end of the calendar year 1969, and then be reduced to 5
per cent; and that the 7 per cent investment tax credit be repealed
effective April 21. The repeal of the investment tax credit, if enacted,
was not expected to have much effect on capital spending until late in
1969, and the influence of the surtax on spending seemed likely to
moderate as the end of the year approached. Nevertheless, it now appeared that the Federal fiscal position would be more restrictive in the
second half of the year than had been anticipated earlier.
The latest data on the U.S. balance of payments in the first quarter
confirmed earlier estimates of a very large deficit on the liquidity basis
and a large surplus on the official settlements basis. Both imports and
exports declined from the fourth quarter of 1968 as a result of the
longshoremen's strike, but exports fell more and the trade balance was
in substantial deficit. In addition, there was a large outflow of corporate capital funds, reversing in part the net inflow of the fourth
quarter. On the other hand, foreign purchases of U.S. equity securities
remained sizable in the quarter—although the rate apparently dimin-




135

ished in March—and bank-reported claims on foreigners declined
more than seasonally.
The first-quarter surplus on the official settlements basis was primarily the result of a huge expansion of liabilities of U.S. banks to
their foreign branches. While such liabilities declined substantially in
late March, they subsequently increased to a new high in April. Interest rates in the Euro-dollar market changed little after late March at
levels close to earlier peaks.
In foreign exchange markets demands for German marks increased
sharply in the latter part of April as a result of revived expectations of
a revaluation, and the British pound came under some brief selling
pressure. The French franc was under pressure throughout April, in
part because of uncertainties associated with the national referendum
scheduled for April 27. However, the initial reaction in the market to
the negative vote in the referendum and to the resignation of President
de Gaulle was relatively mild.
A number of industrial countries had taken restrictive public policy
measures in recent months, for domestic or balance of payments reasons. The latest of these measures included increases in central bank
discount rates in Germany and the Netherlands, to help dampen reemerging inflationary pressures, and in Belgium and Denmark, mainly
to limit capital outflows resulting from high interest rates abroad.
Also, in mid-April the British Government announced a restrictive
budget for the fiscal year beginning April 1, in light of the absence
of sufficient improvement in the payments balance of the United
Kingdom.
The U.S. Treasury was expected to announce on the day after this
meeting the terms on which it would refund notes maturing in midMay, of which about $3.8 billion were held by the public. It was
generally anticipated that bonds maturing in mid-June, of which
about $2.1 billion were publicly held, would be included in the
refunding.
The Treasury's cash balances at both commercial banks and Federal
Reserve Banks had been drawn down to very low levels prior to the
mid-April tax date, and in the period April 8-16 the Treasury financed
part of its cash needs temporarily through sales to the Federal Reserve

136



of special certificates of indebtedness.1 The Treasury redeemed all outstanding special certificates on April 17 and subsequently rebuilt its
cash balances to relatively high levels.
Commercial bank credit and the money stock, both of which had
changed relatively little over the first quarter, rose substantially in the
first half of April. For the month as a whole the adjusted bank credit
proxy—daily-average member bank deposits, adjusted to include
changes in the daily average of U.S. bank liabilities to foreign branches
—was tentatively estimated to have increased at an annual rate of
about 7 per cent from March, following a decline of similar magnitude
in the previous month. There was a sharp, although temporary, increase in bank holdings of Treasury bills during the statement week
ending April 2, as banks were awarded nearly all of the $1.8 billion
strip of bills auctioned by the Treasury in late March. In addition, a
marked upsurge in bank loans—especially to businesses, nonbank
financial institutions, and securities dealers—occurred around the midmonth tax date.
The early-April bulge in private demand deposits and the money
stock apparently was associated in part with temporary technical factors relating to Euro-dollar flows and the 4-day Easter holiday in
Europe. Private demand deposits subsequently declined and by late
April were estimated to be close to their end-of-March level. However, the money stock was tentatively estimated to have increased at
an annual rate of nearly 15 per cent from March to April, as a result
of the higher average level of such deposits in recent weeks. U.S.
Government deposits also were estimated to have expanded by a sizable
amount on the average in April.
The volume of large-denomination CD's outstanding was reduced
further in the first half of April—reflecting in part the use by corporations of proceeds of maturing CD's to help finance large tax payments.
Available data suggested that there were sizable net outflows of consumer-type time and savings deposits at banks—and also at other thrift
institutions—following the interest-crediting period and around the
1
The volume of such certificates held by the Federal Reserve totaled $151
million on April 8, $519 million on April 9, $490 million on April 10, $976
million on April 11 through 13, $514 million on April 14, $502 million on
April 15, and $627 million on April 16.




137

tnidmonth tax date. In April as a whole, total time and savings deposits at banks were estimated to have declined slightly from their
March average.
On April 3 the Board of Governors announced an increase in Federal Reserve Bank discount rates from SV2 to 6 per cent, effective
April 4, and an increase of Vi of a percentage point in member
bank reserve requirements against demand deposits, effective
April 17. System open market operations subsequently were directed
at maintaining the firmer conditions in money and short-term credit
markets that were consistent with those actions. Pressures in the money
market were intensified around the middle of April by massive shifts
of reserves away from money center banks—shifts that stemmed in
part from the rundown in the Treasury's cash balances. Moreover, open
market operations were modified in the direction of greater firmness as
the period progressed, when it became increasingly clear that bank
credit was expanding at a pace significantly in excess of the range projected at the time of the previous meeting. The effective rate on Federal
funds, which had fluctuated around 694 per cent in March, rose to the
7% to 7% per cent area in mid-April and again late in the month.
Member bank borrowings averaged slightly more than $1 billion in the
4 weeks ending April 23, compared with an average of about $835
million in the previous 4 weeks. Net borrowed reserves increased somewhat more than borrowings, as excess reserves declined further on the
average.
Most short-term interest rates had risen following the announcement
on April 3 of the increases in discount rates and member bank reserve
requirements. Market rates on Treasury bills maturing within 6 months
continued under upward pressure through the midmonth tax date—
reflecting sizable sales by banks and higher dealer financing costs—
but they receded from their peaks after mid-April under the influence
of strong seasonal demands. The market rate on 3-month Treasury
bills, for example, reached a high of 6.22 per cent on April 16, but
by the day before this meeting it had declined to 6.00 per cent, about
the same as 4 weeks earlier. Rates on most other short-term instruments advanced during the month, in many instances to new highs.
Long-term interest rates had moved down in recent weeks, as rumors
of progress in the Vietnam peace negotiations and indications of in-

138



creasingly restrictive fiscal and monetary policies fostered growing
expectations that inflationary pressures would be contained. A large
volume of new corporate and municipal bonds was marketed during
April, including a number of issues that had been postponed earlier.
Bond yields leveled out late in the month, partly as a consequence of
these offerings and of expectations that a new intermediate-term issue
would be included in the Treasury's forthcoming refunding.
Business loan demands at banks, which had been enlarged in April
by needs to finance tax payments, were expected to moderate in May.
Staff projections suggested that the adjusted bank credit proxy would
decline at an annual rate of 2 to 5 per cent from April to May if
prevailing conditions were maintained in money and short-term credit
markets. It appeared likely that the run-off of outstanding CD's would
continue and that consumer-type time and savings deposits would expand at a low rate. Private demand deposits and the money stock were
projected to decline slightly on the average from April to May, and a
reduction also was anticipated in U.S. Government deposits.
In the Committee's discussion a number of members expressed the
view that it would be desirable at present to maintain at least the existing degree of monetary restraint in light of the persistence of strong
inflationary pressures, and some question was raised as to whether
restraint was being pursued with sufficient vigor. At the same time,
recognition was given to the likelihood that the combined restrictive
effects of current fiscal and monetary policies would become visible in
economic developments later in the year, and the view was advanced
that such a prospect argued against a further intensification of monetary
restraint now.
The Committee agreed that in any event the forthcoming Treasury
refunding militated against a change in monetary policy at this time. It
decided that open market operations should be directed at maintaining
the firmer conditions in money and short-term credit markets that had
been achieved, with the proviso that operations should be modified,
insofar as the Treasury financing permitted, if bank credit appeared to
be deviating significantly from current projections. Some members suggested that any doubts arising in the conduct of operations should be
resolved on the side of restraint. In addition, concern was voiced about
the unexpectedly large increases now estimated for April in both bank




139

credit and the money stock. While it was the consensus of the members
that those increases probably reflected temporary factors to an important
extent, the view was expressed that the proviso clause should be implemented quite promptly if bank credit developments in May suggested the contrary.
The following current economic policy directive was issued to the
Federal Reserve Bank of New York:
The information reviewed at this meeting suggests that expansion
in real economic activity has moderated only slightly since the fourth
quarter of 1968. At the same time, substantial upward pressures on
prices and costs are persisting. Long-term interest rates have generally declined in recent weeks, but most short-term rates have risen
somewhat. In the first quarter of the year bank credit changed little
on average and the money supply grew at a sharply reduced rate. In
early April both measures increased substantially, influenced in part
by large tax-date borrowing and deposit bulges around Easter. The
outstanding volume of large-denomination CD's has continued to decline and there was a net outflow of consumer-type time and savings
deposits from banks and other thrift institutions in the first half of
April. A sizable deficit re-emerged in the U.S. balance of payments
on the liquidity basis in the first quarter but the balance on the official settlements basis remained in surplus as a result of large inflows
of Euro-dollars. 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, while taking account of the forthcoming
Treasury refunding, System open market operations until the next
meeting of the Committee shall be conducted with a view to maintaining the prevailing firm conditions in money and short-term credit
markets; provided, however, that operations shall be modified, to the
extent permitted by the Treasury refunding, if bank credit appears to
be deviating significantly from current projections.
Votes for this action: Messrs. Martin, Hayes,
Bopp, Brimmer, Clay, Coldwell, Daane, Maisel,
Mitchell, Robertson, and Scanlon. Votes against this
action: None.
Absent and not voting: Mr. Sherrill.

140



MEETING HELD ON MAY 27, 1969
1. Authority to effect transactions in System Account.

According to the information reviewed at this meeting, the pace of expansion in economic activity was moderating slightly further but substantial upward pressures on prices and costs were persisting. New staff
projections for the second quarter suggested that the increase in real
GNP would be a little less than the 2.8 per cent annual rate now estimated by the Commerce Department for the first quarter. Prices, however, were expected to continue rising rapidly.
Available data for April showed some signs of a less rapid pace of
economic advance. Growth in personal income, industrial production,
and nonfarm employment slowed, and the unemployment rate edged
up by 0.1 per cent for the second successive month, to 3.5 per cent.
Housing starts declined for the third successive month. Retail sales increased considerably, but from a March figure that had been revised
downward; in April retail sales were only moderately above the level
of September 1968, even though prices had risen substantially in that
period. On the other hand, new orders for durable goods rebounded
in April after declining in March. Much of the April surge of orders
may have been in anticipation of the administration's recommendation,
made on April 21, for repeal of the 7 per cent investment tax credit
as of that date.
Advances in wholesale prices of industrial commodities remained
widespread in April, but the average of such prices rose relatively little
because of an abrupt reversal of the earlier rapid run-up for lumber
and plywood. The consumer price index increased sharply further,
with much of the rise accounted for by higher food prices and homeownership costs. Over the past year consumer prices had increased by
5.4 per cent. Unit labor costs in the private nonfarm sector as a whole
were reported to have risen markedly in the first quarter.
The staff projections for the second quarter suggested that business
inventory accumulation would remain at about the first-quarter rate
but that expansion in total final sales would slow. It was anticipated
that consumer spending would rise less than in the first quarter, that
Federal expenditures on goods and services would increase relatively




141

little, and that residential construction outlays would decline. Only a
small increase appeared in prospect for business spending on plant and
equipment after the sharp expansion of the first quarter. Net exports
were still expected to turn up as a result of the ending of the longshoremen's strike, but by considerably less than had been thought likely
earlier.
Projections for the second half of 1969 suggested that expansion in
real GNP would slow further but that upward pressures on costs and
prices would still be strong. The GNP projections assumed that Federal expenditures would remain under substantial restraint and that,
as recommended by the administration, the surtax would be continued
at 10 per cent through the end of the year and the investment tax credit
would be repealed. Although growth in disposable income was expected
to be stimulated temporarily in the third quarter by the ending of retroactive tax payments and by the scheduled Federal pay increase, it
seemed probable that generally moderate rates of expansion in employment and income in the second half of the year would limit increases
in consumer spending. Prospects appeared to be for a continuing downdrift in residential construction outlays and for only small further increases in business capital expenditures.
In April both exports and imports of the United States were above
normal as movements of merchandise recovered from the earlier longshoremen's strike. With respect to the over-all international payments
of the United States, another large deficit was incurred on the liquidity
basis in April while payments on the official settlements basis—which
had been in substantial surplus in the first quarter—were about in balance. Extremely large deficits were incurred on both bases in the first
half of May, when expectations of a revaluation of the German mark
led to a massive flow of capital into Germany.
Beginning in late April, funds moved into marks out of dollars, sterling, French francs, and many other currencies, causing relatively severe
reserve losses for a number of countries. Movements out of dollars,
from both the United States and the Euro-dollar market, were exceptionally heavy, and earlier flows of Euro-dollars to the United States
through foreign branches of U.S. banks were temporarily reversed. Interest rates in the Euro-dollar market, already high in April in consequence of U.S. bank demands and of reduced supplies from banks

142



in some European countries, rose sharply further in the first half of
May. Subsequently, despite interest costs in the neighborhood of 9lA
per cent, U.S. banks again increased their liabilities to foreign branches.
In its May refunding the Treasury offered two new notes—a 15month, 6% per cent note priced to yield 6.42 per cent and a 7-year,
6Vi per cent note priced at par—in exchange for securities maturing
in mid-May and mid-June. Of the $5.9 billion of maturing issues held
by the public, about $2.1 billion were exchanged for the shorter-term
note, and $2.2 billion—considerably more than had been anticipated
in the market—for the 7-year note. The rate of attrition, slightly more
than one-fourth of public holdings, was high by historical standards
but lower than had been generally expected.
System open market operations since the previous meeting of the
Committee had been directed at maintaining firm conditions in the
money and short-term credit markets. Money market conditions were
quite taut during the interval. The effective rate on Federal funds
fluctuated mostly in a range of 8 to 9 per cent, compared with rates
in the 7 3 4 to 7% per cent area in the latter part of April. Member
bank borrowings rose to an average of about $1.3 billion in the 4
weeks ending May 21 from about $1.0 billion in the previous 4 weeks,
and net borrowed reserves increased by a corresponding amount.
The tautness in the money market in part reflected aggressive bidding
for funds by large banks as they adjusted to the cumulative effects of
monetary restraint, the reduced availability of funds from the Eurodollar market, and a shift of reserves away from the money centers over
the course of the period. Although the System supplied a substantial
volume of reserves on balance, it did not fully offset reserve drains
stemming from market factors in light of the tendency during much of
the interval for short-term Treasury bill rates to move to or below the
lower end of recent ranges. For example, the market rate on 3-month
Treasury bills, which had been in a range of 6.00 to 6.20 per cent
during most of April, declined to a low for the year—5.87 per cent—
at the end of that month and subsequently fluctuated mostly in a range
below 6.10 per cent. Relatively strong investor demands for bills in the
period were augmented by heavy foreign official purchases resulting
from the speculative flows into the German mark.
Interest rates on other short-term debt instruments and on long-term




143

securities had risen in recent weeks under the influence of taut money
market conditions, expectations of a possible increase in the prime
lending rate of banks, and dampened hopes for a settlement of the
Vietnamese war in the near future. Also contributing to upward pressures was the sizable calendar of corporate bond offerings in May and
June. The advance in municipal yields was particularly sharp,, reflecting limited bank interest in new issues and efforts by dealers to dispose
of bonds for which they had made commitments in April in the expectation of declining yields. Postponements of municipal offerings increased
in May, and the calendar for that month—as well as for June—was
considerably smaller than the unusually large volume marketed in April.
Business loan demands at banks, which were augmented in April by
needs to finance tax payments, apparently continued strong in early
May. Bank holdings of municipal securities declined slightly in April
but holdings of U.S. Government securities increased a little, in part
because of bank participation in the Treasury's late-March bill financing.
Bank credit and the money stock had risen sharply in the first week
of April, and although both had declined later in the month, their
average levels for April as a whole were considerably above those for
March. According to revised estimates, the adjusted bank credit proxy
—daily-average member bank deposits, adjusted to include changes in
the daily average of U.S. bank liabilities to foreign branches—expanded
at an annual rate of 6 per cent from March to April, and the money
stock grew at a rate of more than 10 per cent. However, total time and
savings deposits of banks declined slightly. Tentative estimates for May
indicated that the average level of both the adjusted proxy series and
the money stock would be about the same as in April, and that time
and savings deposits would again decline slightly. The volume of largedenomination CD's outstanding was being reduced further in May, and
other time and savings deposits apparently were recovering sluggishly
from the sizable net outflows that marked much of April. The data
available for savings flows at nonbank thrift institutions in early May
also suggested only modest improvement over the weak April performance.
It appeared likely that the banking system—and financial markets
generally—would be under heavy pressure in June. A near-record

144



volume of corporate income tax payments due at midmonth was expected to contribute both to substantial demands for business loans
and to continuing run-offs of outstanding large-denomination CD's.
Staff projections suggested that bank credit would grow relatively little
from May to June if prevailing conditions were maintained in money
and short-term credit markets. Specifically, the proxy series adjusted
for changes in Euro-dollar liabilities was projected to increase at an
annual rate in a range from zero to 5 per cent. Some further recovery
was anticipated in consumer-type time and savings deposits, at least
until the midyear interest-crediting period. U.S. Government deposits
were projected to decline on the average in June as a result of net debt
repayments by the Treasury in the latter half of the month. Partly for
this reason, and partly in consequence of the expected heavy demands
for business loans, sharp increases appeared in prospect for private
demand deposits and the money stock; the latter was projected to rise
at an annual rate of 7 to 10 per cent.
It was noted at the meeting that in recent months banks had begun
to draw increasingly on nondeposit sources of funds other than Eurodollars—such ,as funds obtained through sales of commercial paper by
bank holding companies and sales of loan participations to nonbank
customers under agreements to repurchase—and that credit based on
funds from these sources was not reflected in the proxy series as currently calculated. While data for firm estimates of the amounts involved
were lacking, it was suggested that funds raised from such nondeposit
sources might have grown at a rate equivalent to 1 or 2 percentage
points in the adjusted proxy series in May and might possibly grow
more in June.
In its discussion of policy the Committee took note of the signs of
some slowing in the economic expansion and of the indications of
stringency in financial markets. In view of the persistence of strong
inflationary pressures and expectations, however, the members agreed
that a relaxation of the existing degree of monetary restraint would
not be appropriate at this time. There was some comment about the
possible need for a slight further firming of policy, but it was noted
that the strains anticipated in financial markets in connection with corporate tax payments in June militated against such a course. A number of members expressed the view that—while disorderly market con-




145

ditions should be avoided—concern among market participants over
the possibility of a "credit crunch" would not in itself warrant an easing of monetary policy.
The Committee decided that open market operations should be
directed at maintaining the prevailing pressure on money and shortterm credit markets, with the proviso that operations should be modified if bank credit appeared to be deviating significantly from current
projections. Although not all members were of the same view on the
matter, a number suggested that it would be desirable for the change
in the adjusted bank credit proxy in June to be kept to the lower end
of the projected range, particularly since the measure currently understated the resources actually available to the banking system. And a
number of members expressed the hope that growth in the money
stock in June could be held below the rate projected.
The following current economic policy directive was issued to the
Federal Reserve Bank of New York:
The information reviewed at this meeting suggests that expansion
in real economic activity is continuing to moderate slightly, but that
substantial upward pressures on prices and costs are persisting. Interest
rates have risen in recent weeks. Bank credit and the money supply
appear to be changing little on average in May after bulging in April.
The outstanding volume of large-denomination CD's has continued to
decline, and the available evidence suggests only modest recovery in
other time and savings deposits at banks and in savings balances at
nonbank thrift institutions following the outflows of the first half of
April. The U.S. balance of payments on the liquidity basis was in
sizable deficit in the first 4 months of 1969 but the balance on the
official settlements basis remained in surplus as a result of large inflows of Euro-dollars. However, there were substantial outflows of
funds from the United States in the first half of May, during the period
of intense speculation on a revaluation of the German mark, and the
payments balance was in very large deficit on both bases. In light of
the foregoing developments, 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

146



next meeting of the Committee shall be conducted with a view to
maintaining the prevailing pressure on 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,
Bopp, Brimmer, Clay, Coldwell, Daane, Maisel,
Mitchell, Robertson, Scanlon, and Sherrill. Votes
against this action: None.
2. Amendment to authorization for System foreign
operations.

currency

The Committee ratified an action taken by members on May 14, 1969,
effective on that date, equalizing the System's swap arrangements with
the National Bank of Belgium and the Netherlands Bank at $300 million, and making the corresponding amendment to paragraph 2 of the
authorization for System foreign currency operations. Previously, the
arrangement with the National Bank of Belgium had been in the
amount of $225 million and that with the Netherlands Bank in the
amount of $400 million. As a result of this action, paragraph 2 of the
authorization 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




Amount of
arrangement
( m i u i o n s of

dollars equivalent)
100
300
1,000
100

147

Foreign bank
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 against Swiss francs
Dollars against authorized European
currencies other than Swiss francs

Amount of
arrangement
(millions of
dollars equivalent)
2,000
1,000
1,000
1,000
1,000
130
300
100
250
600
600
1,000

Votes for ratification of this action: Messrs.
Martin, Hayes, Bopp, Brimmer, Clay, Coldwell,
Daane, Maisel, Mitchell, Robertson, Scanlon, and
Sherrill. Votes against ratification of this action:
None.
The System's swap arrangements with the two central banks in
question had been of equal size for several years before the gold crisis
of March 1968, when the arrangement with the Netherlands Bank had
been increased by $175 million. Members of the Committee had voted
in mid-May to approve the restoration of equality in the size of the
two swap arrangements at $300 million upon recommendation of the
Special Manager, who advised that the action was agreeable to the
central banks of Belgium and the Netherlands.

148



MEETING HELD ON JUNE 24, 1969
Authority to effect transactions in System Account.

The information reviewed at this meeting suggested that expansion in
real economic activity was continuing to moderate slightly in the second
quarter but that prices and costs were remaining under substantial upward pressure. Staff projections for the second half of the year implied
further slowing of the rise in real GNP but only a moderate diminution
of the rate of price advance.
Data for May offered a rather mixed picture of economic developments. Retail sales, according to the advance report, were virtually the
same as in April; after allowing for price increases, reported sales were
no higher in May than a year earlier. Housing starts declined for the
fourth consecutive month to a level about one-fifth below the very high
January rate. New orders for durable goods, which had surged in April
prior to the administration's recommendation for repeal of the 7 per
cent investment tax credit, declined in May to nearly the level in March.
Nonfarm employment again expanded at a slower pace than in late 1968
and early 1969. Nevertheless, the labor market continued tight and
unemployment remained at the April rate of 3.5 per cent. In addition,
industrial production rose considerably from an April level that had
been revised upward. In both April and May the advance was concentrated in industries producing business equipment and industrial
materials.
Average wholesale prices increased sharply from mid-April to midMay—mainly because of an exceptionally large rise in prices of farm
products and foods, particularly livestock. Average prices of industrial
commodities advanced only slightly; as in April, marked declines for
lumber and plywood nearly offset increases for other commodities.
Staff estimates of GNP in the second quarter continued to suggest a
slowing of growth in consumer expenditures, little change in defense
outlays, and a decline in residential construction. However, on the basis
of the latest Commerce-SEC survey of capital investment plans of businesses, the estimate of growth in outlays on new plant and equipment in
the quarter had been revised upward. The survey results suggested that
such outlays had expanded rather steadily in the first half of the year,
contrary to earlier indications of a sharp increase in the first quarter and




149

a slight decline in the second. The survey also implied that growth in
capital outlays would decelerate markedly after midyear, and that for
the year as a whole the rise from 1968 would be less than previously
indicated—about 12.5 per cent rather than nearly 14 per cent.
Growth in GNP was expected to slow further in the second half of
1969 in part because of expectations of a downdrift in residential construction outlays and slackened expansion in business capital spending.
In the latter connection, the staff projections assumed that the investment tax credit would be repealed. They also assumed that Federal
expenditures would remain under substantial restraint and that the income tax surcharge would be continued at 10 per cent through the end
of the year. Except for the third quarter, when the flow of disposable
income was expected to be augmented temporarily by the Federal pay
raise and the termination of payments on 1968 income tax liabilities, it
appeared likely that growth in consumer spending would be held down
by smaller employment and income gains. While the rate of price advance was expected to slow somewhat because of reduced demand pressures, it was anticipated that continuing substantial increases in costs
would keep prices under considerable upward pressure throughout the
year.
Developments in international financial markets had been dominated
in recent weeks by extremely large borrowings of Euro-dollars by U.S.
banks through their foreign branches. In the 3 weeks ending June 18
such borrowings rose by more than $3 billion. Together with seasonal
pressures in foreign financial markets, the strong bidding for funds by
U.S. banks led to sharp further increases in Euro-dollar interest rates
until June 10, when the 3-month rate briefly reached 13 per cent. Although Euro-dollar rates subsequently declined, they remained above
their levels in late May.
The pull of high Euro-dollar rates apparently added to the outflow
of funds from Germany that had begun after the German Government
announced on May 9 that the existing parity of the mark would be maintained. It also led to some selling pressure on a number of Western
European currencies, although the market for sterling remained relatively firm and the Swiss franc was strong. Central bank discount rates
were increased in a number of countries, including Belgium in late May
and Canada, France, and Germany in June.

150



As a result of the Euro-dollar inflows, the U.S. balance of payments
on the official settlements basis reverted to substantial surplus after midMay. Heavy deficits had been recorded in late April and early May when
expectations of a revaluation of the German mark had led to a massive
flow of capital to Germany, but the subsequent inflows of funds borrowed by U.S. banks appeared large enough to produce a small official
settlements surplus for the second quarter as a whole. On the liquidity
basis, however, the U.S. balance of payments was in heavy deficit in the
first half of June and a substantial deficit seemed to be in prospect for
the second quarter. Outflows of private nonbank funds from the United
States to the Euro-dollar market apparently had contributed to the large
liquidity deficit of recent weeks.
System open market operations since the May 27 meeting of the
Committee had been directed at maintaining the prevailing pressure on
money and short-term credit markets. Money market conditions were
particularly taut in the first half of June as banks aggressively sought
funds to meet substantial loan demands, including expected heavy demands from businesses to finance tax payments due at midmonth. Also
contributing to the pressures were large shifts of deposits away from
money center banks as the Treasury drew down its tax-and-loan account
balances. During the period as a whole the effective rate on Federal funds
fluctuated mostly in a range of %Vi to 9Vi per cent, compared with a
range of about 8 to 9 per cent in the previous interval. In the 4 weeks
ending June 18 member bank borrowings averaged about $1,350 million, little changed from the preceding 4 weeks, and the average for net
borrowed reserves also was close to its earlier level.
With credit demands remaining strong and the banking system continuing under considerable restraint, most market interest rates had risen
appreciably further on balance in recent weeks. Particularly sharp rate
advances occurred after major banks increased their prime lending rate
by 1 percentage point—to a record high of %Vi per cent—on June 9.
Upward pressures on Treasury bill rates were augmented by sales from
foreign official accounts—most of which were associated with movements of funds from Germany into the Euro-dollar market—and the
3-month bill rate rose from around 6.10 per cent in late May to a new
high of 6.81 per cent on June 12. Subsequently, when foreign official
sales diminished and demands developed from investors who were re-




151

deeming maturing Treasury securities for cash, the 3-month rate declined
to a range around 6.50 per cent.
Yields on new corporate and municipal bonds advanced for most of
the period since the preceding meeting, but yields on Treasury bonds
turned down shortly after the increase in the prime rate and at the time
of this meeting were slightly below their levels in late May. The volume
of corporate bonds coming to market in June—and in prospect for July
—was large, but most of the recent issues had been well received by
investors at the higher yields offered. In contrast, the volume of municipal
issues had declined substantially—in part because of cancellations and
postponements of previously scheduled issues—but distribution of recent issues was proceeding slowly as a result of limited bank demand.
Prices of common stocks turned down after mid-May and fell steadily
in subsequent weeks.
Average yields on new-home mortgages were unchanged from April
to May, but secondary-market yields on federally underwritten mortgages rose sharply to a new high in June, following the increase in the
prime rate. Savings inflows at nonbank thrift institutions increased in
May from the low April pace but for the 2 months together inflows were
at a rate well below that for the first quarter. In May mortgage commitments outstanding at such institutions declined for the first time in 1969.
Thrift institutions reportedly were continuing to follow cautious commitment policies in June, in anticipation of possibly heavy savings outflows
following midyear interest and dividend crediting.
In May, according to revised estimates, declines at a 2 per cent annual
rate were recorded for both the money stock and the adjusted bank credit
proxy—daily-average member bank deposits, adjusted to include
changes in the daily average of U.S. bank liabilities to foreign branches.
Large-denomination CD's continued to run off at a rapid pace, and net
inflows of consumer-type time and savings deposits were unusually
small. In the face of strong business loan demands and net deposit outflows, banks substantially reduced their holdings of securities, particularly U.S. Government securities. In addition to enlarging their Eurodollar liabilities to foreign branches, banks apparently made increased
use of funds from other nondeposit sources, including sales of loan participations to nonbank customers under repurchase agreements and sales
of commercial paper by bank holding companies.

152



In the first 5 months of 1969 as a whole, growth in the money stock
slowed to an annual rate of less than 3 per cent from about 6 per cent
in the second half of 1968. The adjusted bank credit proxy declined at
about a 1 per cent annual rate after increasing at a 13 per cent pace in
the preceding half year. Since the beginning of 1969 business loans of
banks had expanded at a 17 per cent annual rate, holdings of U.S. Government securities had declined at a rate of more than 21 per cent, and
holdings of other securities had changed little on balance.
Business loan demands remained strong in early June, although borrowings around the midmonth tax date were smaller than many observers
had expected. Staff projections suggested that the adjusted bank credit
proxy would decline in both June and July—at annual rates in the
ranges of 2 to 4 and 3 to 5 per cent, respectively—if prevailing conditions were maintained in money and short-term credit markets. The projections allowed for the large rise in Euro-dollar borrowings through
foreign branches that had already occurred in June and for some anticipated further increases in coming weeks. While the projections did not
incorporate allowances for funds raised by banks from other nondeposit
sources, it was observed at the meeting that the use of such funds might
increase on the average in June by an amount about equivalent to the
projected decline in the adjusted proxy series.
With respect to various categories of deposits, the staff projections
suggested that in both June and July large-denomination CD's would
continue to run off at a substantial rate and that there would be net outflows of other time and savings deposits, particularly around the midyear
interest-crediting period. On the other hand, expansion in private demand deposits and the money stock was projected to resume in June
and to accelerate in July. In the 2 months together, U.S. Government
deposits were expected to decline on the average by an amount roughly
twice the projected increase in private demand deposits.
In the Committee's discussion it was noted that, while there had been
some moderation in the rate of growth of real economic activity, inflationary pressures and expectations remained strong. A few members
commented that the continuing inflationary environment might offer
grounds for a slight further firming of money market conditions, or at
least the resolution of any doubts arising in the conduct of open market
operations in that direction. But the consensus of the Committee was




153

that open market policy should remain unchanged at present. In this
connection, some members noted the extent to which growth of money
and bank credit had already been curtailed, the strains evident in financial markets, and the possibility of unusual liquidity pressures in the
weeks ahead.
Comments also were made in the discussion about the desirability of
System policy actions in areas other than open market operations—
including increases in discount rates, increases in Regulation Q ceiling
rates on large-denomination CD's, and actions to limit bank access to
various nondeposit sources of funds. While there were some differences
of view on these matters, the majority of those commenting thought that
increases in discount rates or Regulation Q ceiling rates would not be
appropriate at this time but that it would be desirable for the Board to
consider some actions with respect to nondeposit sources of funds.
With respect to open market policy, the Committee agreed that operations should be directed at maintaining the firm conditions currently
prevailing in the money and short-term credit markets. The proviso was
added that operations should be modified if bank credit appeared to be
deviating significantly from current projections or if unusual liquidity
pressures should develop. The following current economic policy directive was issued to the Federal Reserve Bank of New York:
The information reviewed at this meeting suggests that expansion
in real economic activity is continuing to moderate slightly, but that
substantial upward pressures on prices and costs are persisting. Most
market interest rates have risen considerably on balance in recent
weeks, as credit demands continued strong against the background of
considerable restraint on the banking system. Growth in bank credit
and the money supply thus far in 1969 has been limited, and both
declined somewhat on average in May. Large-denomination CD's
have continued to run off at a rapid pace recently, and net inflows of
consumer-type time and savings deposits have remained small. At
nonbank thrift institutions, savings inflows slowed somewhat on average in April and May. Very heavy Euro-dollar borrowing by U.S.
banks through their foreign branches produced a large surplus in the
balance of payments on the official settlements basis after mid-May.
On the other hand, high Euro-dollar interest rates apparently also
stimulated outflows of funds from the United States that contributed
to a large deficit on the liquidity basis thus far in June. In light of the

154



foregoing developments, 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
maintaining the firm conditions currently prevailing 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 or if unusual liquidity pressures should develop.
Votes for this action: Messrs. Martin, Bopp,
Brimmer, Clay, Coldwell, Daane, Mitchell, Robertson, Scanlon, Sherrill, and Treiber. Vote against this
action: Mr. Maisel.
Absent and not voting: Mr. Hayes. (Mr. Treiber
voted as his alternate.)
In dissenting from this action, Mr. Maisel observed that on balance
conditions in money and short-term credit markets were now considerably firmer than at the end of April while the monetary aggregates had
been declining. He was concerned that further tightening to an undesirable degree might occur under the directive favored by the majority
today, since the language of the second paragraph was similar to that
of the directives the Committee had issued on April 29 and May 27. In
addition, he noted that the staff projections suggested that the bank credit
proxy, before adjustment for Euro-dollar borrowings, and total reserves
of member banks might fall at an annual rate of 10 to 12 per cent in June
and July together even if conditions in money and short-term credit
markets were unchanged. In his judgment, moderate positive rates of
growth in bank credit were appropriate under current circumstances,
and he thought it would be desirable for the Committee to act now to
bring about a transition to maintainable financial conditions. Accordingly, he preferred a directive calling for maintenance of the money and
short-term credit market conditions that had prevailed on the average in
the second quarter rather than the tighter conditions currently prevailing.




155

MEETING HELD ON JULY 15, 1969
Authority to effect transactions in System Account.

According to information reviewed at this meeting, real GNP apparently had continued to rise in the second quarter at an annual rate
close to that of the first quarter and slightly below the rate of the final
quarter of 1968. Average prices, as measured by the GNP deflator,
were estimated to have continued upward at the rapid first-quarter
pace. There were indications—including further large declines in prices
of common stocks—that some attitudes regarding the outlook were
beginning to change, but it appeared that inflationary expectations on
the whole were still strong.
The) latest economic information continued to exhibit the crosscurrents that had been evident in preceding months. Retail sales, according to the advance report, declined in June, and revised estimates
for May indicated that they had declined in that month also. On the
other hand, industrial production was estimated to have risen considerably further in June, and nonfarm employment expanded more
rapidly than in the two preceding months. The labor market remained
tight, and the unemployment rate edged down to 3.4 per cent from 3.5
per cent in May.
Average wholesale prices rose sharply further from mid-May to
mid-June as prices of farm and food products again advanced substantially. However, average prices of industrial commodities were unchanged for the first time since mid-1968, as further increases for a
variety of commodities, particularly metals and products, were offset
by continued marked declines in prices of lumber and plywood. The
consumer price index rose much less in May than in March and April
—partly because of a smaller advance in service costs, including mortgage interest charges and property taxes—but it appeared likely that
the index for June would show a substantial increase. Average hourly
earnings continued to advance rapidly in the first half of 1969, although not so rapidly as in late 1968. In the limited number of wage
contracts on which negotiations had recently been completed, there had
been provision for large increases in wage rates.
Staff projections for the second half of 1969 suggested that expansion of real GNP would slow further—reaching a relatively low rate

156



in the fourth quarter—but that the advance in prices would diminish
only moderately from the rapid pace of the first half. Although prospects for congressional action on the administration's tax recommendations were uncertain, the projections assumed that the income tax surcharge would be continued at 10 per cent through the end of 1969 and
at 5 per cent in the first half of 1970, and that the investment tax
credit would be repealed.
One of the major forces expected to retard economic growth in
the second half was a sharp deceleration in the expansion of fixed
capital outlays by businesses, as had been suggested by the recent
Commerce-SEC survey. In addition, it appeared likely that outlays on
residential construction would decline as a result of limited availability
of mortgage funds. Growth in consumer spending was expected to be
stimulated temporarily in the third quarter by the Federal pay raise
and the ending of retroactive payments on 1968 income tax liabilities,
but to slow later on in line with smaller increases in employment and
income. Apart from the pay raise, Federal expenditures were expected
to remain under substantial restraint.
With respect to the U.S. balance of payments, tentative estimates
for the second quarter indicated that the deficit on the liquidity basis
had increased substantially further from the high first-quarter rate and
that there had been another sizable surplus on the official settlements
basis. The liquidity deficit was swollen by very large capital outflows.
These included movements of funds into Germany during the period
of intense speculation on a revaluation of the German mark in late
April and early May and flows of funds to the Euro-dollar market—
especially in June—in response to record high interest rates there.
There was a sharp decline in foreign purchases of U.S. corporate securities, a shift from inflow to outflow in bank-reported claims on foreigners, and apparently some increase in the outflow of direct investment capital. Merchandise exports and imports both increased following the termination of the longshoremen's strike, and in April and May
combined there was a very small trade surplus, in contrast to the small
deficit of the first quarter.
The second-quarter surplus in the payments balance on the official
settlements basis reflected the movements of foreign funds out of other
currencies into Euro-dollars that accompanied a huge increase in bor-




157

rowings by U.S. banks from their foreign branches. These developments were concentrated mainly in June; in the 4 weeks ending June
25, Euro-dollar borrowings of U.S. banks rose by $3.6 billion to a
new high of $13.6 billion. Some further net increase occurred in early
July.
In recent weeks interest rates in the Euro-dollar market had fluctuated below the peaks reached on June 10 but had remained high.
On June 26 the Board of Governors announced certain proposals designed to moderate the flow of Euro-dollars between U.S. banks and
their foreign branches, including a proposal for a 10 per cent reserve
requirement on borrowings by U.S. banks from their branches—to
the extent that these borrowings exceeded the daily-average amounts
outstanding in the 4 weeks ending May 28, 1969.
On July 9 and 11 the Treasury auctioned tax-anticipation bills
due in December 1969 and March 1970, respectively. Each issue
amounted to $1.75 billion, and payment on each was scheduled for
July 18. Commercial banks, which were permitted to pay for the bills
in full through credits to Treasury tax and loan accounts, successfully
bid for the bulk of the issues. The Treasury was expected to announce
at the end of July the terms on which it would refund $3.4 billion of
notes maturing in mid-August, of which $3.2 billion were held by the
public. Current estimates suggested that the Treasury also would need
to raise some additional new cash during August.
With the banking system remaining under considerable restraint,
short-term interest rates recently had risen further on balance. Treasury
bill rates fluctuated over an unusually wide range as shifting demand
and supply pressures impinged on a market in which dealers were attempting to hold inventories to minimal levels. The market rate on
3-month bills, for example, declined from around 6.50 per cent at
the time of the previous meeting of the Committee to about 6.10 per
cent in late June in response to strong seasonal demands; the rate then
advanced to a range around 7 per cent in reaction to the Treasury's
offering of tax-anticipation bills and a large prospective volume of
Federal agency financing.
In capital markets, yields on municipal bonds had declined in recent weeks as a result of a sharply reduced volume of current and
prospective offerings and light dealer inventories. Yields on long-term

158



Treasury and corporate bonds—particularly the latter—also declined
for a time in the latter part of June but they turned up near the end
of the month, partly because of sizable additions to an already large
calendar of corporate offerings. Also contributing to the weakening
in the market atmosphere were the delays in congressional action on
extension of the income tax surcharge and the announcement by the
Federal Reserve of two proposed regulatory actions. These were the
proposal on June 26 regarding reserve requirements on Euro-dollar
borrowings by U.S. banks and a proposal on June 27 to bring certain
Federal funds transactions within the coverage of Regulations D and
Q. However, the Government bond market rallied sharply on the Friday before this meeting, following the announcement by a major automobile manufacturer that it had cut back on its capital investment program. On balance, Treasury and corporate bond yields at the time of
this meeting were little changed from their levels of 3 weeks earlier.
Secondary market yields on federally underwritten new-home mortgages reached a new high in early July, and the available evidence
suggested that mortgage lenders were following highly selective lending
policies. Net savings inflows to nonbank thrift institutions slackened
considerably in June and for the second quarter as a whole were
well below earlier quarters. According to preliminary indications,
thrift institutions experienced substantial net outflows of savings in
early July, following quarterly interest and dividend crediting.
System open market operations since the previous meeting of the
Committee had been directed at maintaining the firm conditions prevailing in the money and short-term credit markets. Day-to-day variations in the Federal funds rate were more pronounced than earlier,
but the average effective rate—approximately 9 per cent—was about
the same as in the preceding interval. Member bank borrowings averaged $1,325 million in the 3 weeks ending July 9, little changed from
the previous 4 weeks, and average net borrowed reserves also remained close to their earlier level.
Commercial bank holdings of securities declined slightly in June.
Business loans outstanding were unchanged over the month after rising rapidly earlier in the year, and total loans declined slightly. The
volume of loans reported as outstanding at the end of June was reduced significantly by sizable sales of loans during the month to bank




159

affiliates, but there apparently had also been some diversion of borrowers' demands to the commercial paper market following the increase
in the prime lending rate of banks on June 9.
Total bank credit, as measured by the adjusted proxy series—dailyaverage member bank deposits, adjusted to include changes in the
daily average of U.S. bank liabilities to foreign branches—was estimated to have declined at an annual rate of about 3 per cent from
May to June. The decline in the adjusted proxy series reflected a large
reduction in member bank deposits and a partly compensating expansion in the Euro-dollar liabilities of domestic banks to their foreign
branches. Rough estimates suggested that, if a further adjustment were
made for assets sold to affiliates and to customers with bank guarantees, the proxy series would be about unchanged in June.
The money stock was estimated to have increased at an annual rate
of about 1 per cent from May to June after declining at a 3 per cent
rate in the previous month. The resumption of growth in money reflected an expansion in currency; private demand deposits 1 declined
slightly. U.S. Government deposits were reduced considerably on the
average in June. The run-off of large-denomination CD's continued
without abatement; since mid-December the outstanding volume of
such CD's at weekly reporting banks had contracted by about $9 billion, or nearly 40 per cent. Other time and savings deposits of banks
changed little on the average in June and—as at nonbank thrift institutions—there apparently were substantial net outflows from consumer-type accounts in early July.
Revised staff projections suggested that the adjusted bank credit
proxy would decline at an annual rate of 5 to 8 per cent from June
to July if prevailing conditions were maintained in money and shortterm credit markets. The projections allowed for some further growth
in Euro-dollar borrowings of U.S. banks from the high level of early
1
It was reported at the meeting that, under present accounting procedures for
cash items generated by Euro-dollar transactions of U.S. banks, the recent growth
in such cash items appeared to be producing some downward bias in measures
of private demand deposits—and hence in measures of the money stock and, to
a relatively smaller extent, the bank credit proxy. The staff was studying methods
for correcting the bias in question. The information on recent and projected
changes in these variables presented at the meeting and included in this policy
record does not include such corrections.

160



July, but they did not include any allowance for possible changes in
the extent to which banks were utilizing funds from other nondeposit
sources. It was noted, however, that banks were likely to continue to
increase their reliance on funds from such sources.
With respect to the various categories of deposits, it was expected
that private demand deposits—and the money stock—would expand
moderately from June to July and that U.S. Government deposits
would decline sharply. Also anticipated were a continuing rapid runoff in large-denomination CD's and a reduction in the average level
of consumer-type time and savings deposits.
Projections for August suggested only a slight further decline in
the average level of member bank deposits. Credit demands in that
month were expected to be influenced by dealer and bank support of
Treasury financing operations. In addition, with maturities of CD's
in August less than in earlier months, it appeared likely that the runoff would moderate; and prospects seemed to favor some net inflow
of consumer-type time and savings deposits.
In the Committee's discussion a number of members commented
that the response of the economy to existing monetary and fiscal restraints was as yet inadequate. Considerable concern was expressed
about the persistence of inflationary pressures and expectations and
about the uncertain prospects for congressional action on extension
of the income tax surcharge.
The members agreed that the forthcoming Treasury refunding militated against any appreciable change in open market policy at this
time. Some, however, expressed the opinion that a slight shift toward
greater restraint might be warranted. A contrary view was also advanced, favoring a shading toward slightly less restraint in light of the
projections for slackened growth in real GNP, recent and prospective
changes in bank credit, and the risk that maintenance of current tight
money market conditions for an extended period might lead to developments that would necessitate an undesirably large adjustment toward ease later on.
Other members took the intermediate position that further firming
would not be appropriate in view of the high degree of restraint already in effect but that, at the same time, the inflationary environment
and the uncertain status of tax legislation militated against even a




161

slight move toward easing. In the latter connection, it was noted that
any indications that monetary restraint was being relaxed might reinforce inflationary expectations just at a time when signs were beginning to appear that some attitudes about the outlook were changing.
At the conclusion of the discussion the Committee agreed that open
market operations should be directed at maintaining the currently
prevailing firm conditions in money and short-term credit markets,
with the proviso that operations should be modified, to the extent permitted by the Treasury refunding, 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 expansion
in real economic activity, after moderating slightly in the first quarter, has continued at about the same pace since then. Substantial
upward pressures on prices and costs are persisting. Market interest
rates have fluctuated widely recently, partly because of varying expectations, although credit demands remain relatively strong. Shortterm rates on balance have continued under upward pressure,
against the background of considerable restraint on the banking system. In June bank credit showed little change, after allowance for
assets sold to affiliates and to customers with bank guarantees.
Growth in the money supply resumed at a slow pace, and the runoff of large-denomination CD's which began in mid-December continued without abatement. There apparently were substantial net
outflows from consumer-type time and savings accounts at banks
and nonbank thrift institutions around midyear, following a period
of slackened growth. The over-all balance of payments deficit on
the liquidity basis rose sharply in the second quarter; there were
large outflows into German marks and into Euro-dollar deposits,
and there was no significant improvement in net exports. In contrast, there was another large surplus on the official settlements basis
as U.S. banks borrowed heavily in the Euro-dollar market. In light
of the foregoing developments, 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.

162



To implement this policy, while taking account of the forthcoming Treasury refunding, System open market operations until the
next meeting of the Committee shall be conducted with a view to
maintaining the currently prevailing firm conditions in money and
short-term credit markets; provided, however, that operations shall
be modified, to the extent permitted by the Treasury refunding, if
bank credit appears to be deviating significantly from current projections.
Votes for this action: Messrs. Martin, Bopp,
Brimmer, Clay, Coldwell, Daane, Maisel, Robertson, Scanlon, Sherrill, and Treiber. Votes against
this action: None.
Absent and not voting: Messrs. Hayes and
Mitchell. (Mr. Treiber voted as Mr. Hayes' alternate.)




163

MEETING HELD ON AUGUST 12, 1969
Authority to effect transactions in System Account.

According to preliminary Commerce Department estimates, real GNP
had expanded in the second quarter at an annual rate of 2.4 per cent,
close to the 2.5 per cent rate of the first quarter and somewhat slower
than the 3.5 per cent rate of the second half of 1968. However, substantial upward pressures on prices and costs were persisting; average
prices, as measured by the GNP deflator, had increased at an annual rate of nearly 5 per cent in both the first and second quarters.
Staff projections suggested some further slowing of growth in real
GNP in the second half of 1969 but only a moderate reduction in
the rate of price advance.
Recent economic developments continued to present a mixed picture. Industrial production was tentatively estimated to have risen
sharply further in July. On the other hand, weekly figures suggested
that retail sales were about unchanged from June and no higher than
they had been in February. Nonfarm employment expanded less than
it had on the average in earlier months of the year, and the unemployment rate rose to 3.6 from 3.4 per cent in June.
Average wholesale prices increased only slightly further from midJune to mid-July. Average prices of farm products and foods, which
had accounted for most of the rise in the wholesale price index in
recent months, were unchanged. Price advances continued widespread among industrial commodities, but the average for such commodities rose only moderately because of further declines in prices
of lumber and plywood. The consumer price index increased sharply
in June with foods, particularly meats, accounting for much of the
advance.
In the second quarter, according to the preliminary Commerce Department figures, expansion in real GNP had been sustained by a
rise in inventory investment. Declines were recorded in residential
construction expenditures and Federal outlays on goods and services,
and the rate of increase was slower than in the first quarter for consumer spending and business capital outlays.
One uncertainty in the outlook for the second half of 1969 had
been removed by the enactment in early August of legislation to ex-

164



tend the income tax surcharge at 10 per cent through the end of the
year. The mid-1969 Government pay raise was expected to lead to
an increase in Federal outlays in the third quarter and to provide
some temporary stimulus to growth in disposable income and consumer spending, but it seemed likely that the decline in Federal outlays would resume in the fourth quarter and that growth in consumer income and spending would again be moderating. Prospects
were that residential construction activity would continue to decline
in the third and fourth quarters. Further slowing in the expansion
of business capital outlays was anticipated in both quarters, as suggested by the June Commerce-SEC survey of business plans and also
by a special Federal Reserve survey of capital spending authorizations of about 200 large corporations conducted in late July.
With respect to the balance of payments, it appeared that outflows
of U.S. capital remained sizable in July and that the very large deficits
that had been recorded on the liquidity basis earlier in the year were
continuing. The official settlements balance was still in surplus in the
first half of July, a period in which the outstanding Euro-dollar borrowings of U.S. banks increased considerably further. After mid-July,
however, there was relatively little net change in such borrowings and
the official settlements balance shifted toward deficit. Interest rates in
the Euro-dollar market declined from early July to early August but
remained at relatively high levels.
On the Friday before this meeting the French Government announced an 11.1 per cent devaluation of the franc. This action was
taken against the background of recent substantial losses of international reserves by France and in the interests of avoiding a deflationary policy "that would impose unbearable sacrifices and massive unemployment on the country." Although certain Western European
currencies had come under some selling pressure following the announcement, the initial reaction in foreign exchange markets appeared on the whole to be orderly. Earlier—around mid-July—the
Bank of Canada had increased its discount rate and the German Federal Bank had announced an increase in reserve requirements against
deposit liabilities of domestic banks; and around the end of the month
discount rates had been increased by the central banks of Belgium
and the Netherlands.




165

In its August refunding the Treasury offered a new 18-month, 7%
per cent note priced to yield about 7.82 per cent in exchange for $3.4
billion of securities maturing on August 15. The new issue was well
received and was quoted at a premium in the market. Of the $3.2
billion of maturing issues held by the public, about 14 per cent were
redeemed for cash. The Treasury was expected to raise about $1.5
billion to $2 billion of new cash later in the month through an
offering of short-term securities.
The atmosphere in securities markets had improved recently—
partly because of the enactment of legislation extending the income
tax surcharge, of further indications that the rate of real economic
expansion was gradually slowing, and of signs that credit demands
from some sectors might be moderating. Yields on new long-term
corporate bonds and municipal securities, which had been rising
in the latter part of July, declined somewhat in early August. Municipal bond markets had been under particularly severe pressures
partly as a result of congressional discussion of possible changes in
the tax treatment of earnings on such bonds, and these pressures
moderated after the House Ways and Means Committee modified
certain earlier proposals in this area. Various short-term interest rates
also had declined recently. For example, the market rate on 3-month
Treasury bills, at about 7 per cent on the day before this meeting,
was down from a peak of 7.13 per cent in late July, although it was
little changed from its level 4 weeks earlier.
Commercial bank holdings of U.S. Government securities rose
during July as a result of bank underwriting of the tax-anticipation
bills sold by the Treasury at midmonth, but holdings of other securities decreased considerably. Business loans outstanding were
about unchanged for the second successive month after expanding
rapidly earlier in the year. To some extent the lack of growth in business loans since May reflected outright sales of loans to bank affiliates.
Even with the inclusion of such loans, however, the increase in the
last 2 months would have been at a rate only about one-third of that
earlier in the year.
Total bank credit, as measured by the adjusted proxy series, was
estimated to have declined at an annual rate of about 12 per cent
from June to July, as a large reduction in daily-average member

166



bank deposits was only partly offset by a rise in the average level
of Euro-dollar liabilities of U.S. banks to their foreign branches.
Banks increased their reliance on funds from other nondeposit
sources, including funds obtained by selling assets to affiliates and to
customers with bank guarantees. Rough estimates suggested that with
a further adjustment for such funds the proxy series would have
declined at an annual rate of 7 to 8 per cent from June to July.
Private demand deposits1 and the money stock rose on the average in July—the latter at an annual rate of 6 per cent—partly as a
consequence of a large further contraction of U.S. Government
deposits. The run-off of large-denomination CD's continued without
abatement; since mid-December the outstanding volume of such
CD's at weekly reporting banks had been reduced by more than
$10.5 billion, or about 45 per cent. There also were sizable outflows of other time and savings deposits following midyear interest
crediting. Nonbank thrift institutions similarly experienced heavy outflows early in July.
In general, System open market operations since the previous
meeting of the Committee had been directed at maintaining firm conditions in the money and short-term credit markets. Money market
pressures had tended to ease for a time after mid-July as a result
of a shift of reserves toward the money center banks. This tendency
was not fully offset through System operations because bank credit
appeared to be significantly below earlier projections. However, the
extent to which operations were influenced by bank credit developments was affected by "even keel" considerations related to the
1

Estimates of private demand deposits—and hence of the money stock and
the bank credit proxy—had recently been corrected for a downward bias produced, under previously employed accounting procedures, by the recent growth
in cash items generated by Euro-dollar transactions of U.S. banks. For the
money stock the correction raised the estimated annual rate of increase for July
by about IVi percentage points—from 3.7 to 6.1 per cent; and for the first 6
months of the year by about \Vi percentage points—from 2.2 to 3.6 per cent.
The effects of the correction on the adjusted proxy series were smaller. For
July, the estimated annual rate of decline was reduced by about W2 points,
from 13.5 to 11.8 per cent; and for the first half of the year an estimated
decline at an annual rate of about 1 per cent was revised to an estimate of no
change.




167

Treasury refunding. Subsequently, a redistribution of reserves away
from major banks had contributed to tighter money market conditions despite sizable reserve-supplying operations by the System.
In the two statement weeks following the July 15 meeting, the
effective rate on Federal funds had averaged about %VA per cent—
compared with a rate centering around 9 per cent in earlier weeks
—and since then had risen to a range around 93A per cent. In the 4
weeks ending August 6, member bank borrowings had averaged
$1,250 million, down somewhat from the previous period. A corresponding decline in excess reserves had left net borrowed reserves
about unchanged on the average.
Prospective changes in the bank credit proxy and related variables
were affected by the expected consequences of certain regulatory
actions taken by the Board of Governors on July 24, 1969. These
were (1) an amendment to Regulation D, effective July 31, requiring
member banks to include in deposits used to compute reserve requirements all so-called "London checks" and "bills payable checks"
used in settling transactions involving foreign branches; and (2)
amendments to Regulations D and Q defining deposit liabilities subject to those regulations to include, beginning August 28, every
bank liability on a repurchase agreement (RP) entered into on or
after July 25 with a person other than a bank and involving any
assets other than direct and fully guaranteed obligations of the United
States or its agencies.
The first of these actions was expected to increase required
reserves of member banks by about $450 million in the statement
week ending August 20. The second action was not expected to
have much effect on required reserves, since it appeared unlikely
that a sij^nificant volume of newly written RP's of the types affected
would be outstanding after late August. It was noted, however, that
outstanding RP's were expected to decline as current agreements
matured and that this decline would tend to reduce bank credit by
an equivalent amount, other things equal. Moreover, it was considered likely that bank attitudes toward alternative sources of funds
and toward their own lending and investing policies were already
being affected by this action, and by the expectation that the Board
would soon implement two other regulatory actions it had proposed

168



near the end of June. The latter were proposals to amend Regulations
D and M, among other things to place a 10 per cent reserve requirement on borrowings by U.S. banks from their foreign branches, to
the extent that these borrowings exceeded the daily-average amounts
outstanding in the 4 weeks ending May 28, 1969; and a proposal to
amend Regulations D and Q to bring a member bank's liability on
certain Federal funds transactions within the coverage of those regulations.
The staff projections suggested that the adjusted bank credit proxy
would decline at an annual rate of 9 to 12 per cent from July to
August if prevailing conditions were maintained in money and shortterm credit markets. The projections allowed for only a small further
rise in the average level of Euro-dollar borrowings of U.S. banks.
While no specific allowance was made in the projections for possible
changes in the extent to which banks were utilizing funds from other
nondeposit sources, it was noted that the outstanding volume of funds
obtained from such sources probably would grow less rapidly than
in July.
Among deposit categories, private demand deposits—and the
money stock—were projected to decline moderately from July to
August, and a further reduction in the average level of U.S. Government deposits was anticipated. Given prevailing levels of market
interest rates, it was expected that large-denomination CD's would
continue to run off, although less rapidly than earlier because the
volume of maturing CD's was smaller. And it appeared unlikely that
consumer-type time and savings deposits would show a marked expansion after the large net outflows of July.
In the Committee's discussion account was taken of the indications that the rate of expansion of over-all economic activity was
moderating somewhat, of the recent legislation extending the 10
per cent income tax surcharge through the end of the year, and of
the substantial degree of monetary restraint already in effect. The
Committee agreed that no further increase in monetary restraint
would be warranted at present. In particular, it agreed that any
tendencies toward firmer money market conditions that might
result from recent regulatory actions by the Board of Governors or
from other causes should be resisted through open market operations.




169

At the same time, a majority of the members thought that action
to ease money market conditions would not be warranted now, in
view of the persistence of inflationary pressures and the risk that
such action would encourage a new surge of inflationary expectations.
Some members of the majority expressed the view that System operations should not necessarily, be undertaken to offset fully any
easing tendencies that might be produced by market forces. On the
other hand, it was suggested that the implementation of policy should
not be unduly influenced by temporary swings in market psychology.
The Committee concluded that open market operations should be
directed at maintaining the prevailing firm conditions in money and
short-term credit markets. The proviso was added that operations
should be modified if bank credit appeared to be deviating significantly from current projections. It was also agreed that operations
should be modified if pressures arose in the aftermath of the devaluation of the French franc or in connection with the regulatory actions
taken by the Board of Governors.
The following current economic policy directive was issued to the
Federal Reserve Bank of New York:
The information reviewed at this meeting indicates that expansion
in real economic activity slowed somewhat in the first half of
1969 and some further moderation is projected. Substantial upward pressures on prices and costs are persisting. Most market interest rates recently have receded slightly from their earlier highs.
In July the money supply expanded as U.S. Government deposits
decreased further; bank credit declined on average, after adjusting
for an increase in assets sold to affiliates and to customers with bank
guarantees. The run-off of large-denomination CD's which began in
mid-December continued without abatement in July, and there
apparently were net outflows from consumer-type time and savings
accounts at banks and nonbank thrift institutions combined. The
over-all balance of payments deficit on the liquidity basis remained
very large in July; the balance on the official settlements basis was
still in surplus in the first half of the month but subsequently shifted
toward deficit as U.S. banks' borrowings of Euro-dollars leveled off.
Foreign exchange markets appear initially to be adjusting in an orderly fashion to the announced devaluation of the French franc. In
light of the foregoing developments, it is the policy of the Federal

170



Open Market Committee to foster financial conditions conducive to
the reduction of inflationary pressures, with a view to encouraging
sustainable 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 maintaining the prevailing firm conditions in money and shortterm credit markets; provided, however, that operations shall be
modified if bank credit appears to be deviating significantly from
current projections or if pressures arise in connection with foreign
exchange developments or with bank regulatory changes.
Votes for this action: Messrs. Martin, Hayes,
Bopp, Brimmer, Coldwell, Daane, Robertson, ScanIon, Sherrill, and Swan. Votes against this action:
Messrs. Maisel and Mitchell.
Absent and not voting: Mr. Clay. (Mr. Swan
voted as his alternate.)

In dissenting from this action Messrs. Maisel and Mitchell indicated that they did not advocate lessening monetary and credit
restraint. However, they did not want monetary policy to become
more and more restrictive. It appeared to them that trends in monetary aggregates and the availability of credit were indicative of increased tightening that would be heightened if money market conditions were maintained at the levels called for in the directive
favored by the majority. In order to guard against an undesired
further tightening, they favored a directive calling for operations to
moderate such contractive tendencies, if prospective declines in
monetary aggregates should in fact occur, while maintaining the
position of over-all monetary and credit restraint.




171

MEETING HELD ON SEPTEMBER 9, 1969
1.

Authority to effect transactions in System Account.

Revised estimates by the Commerce Department indicated that real
GNP had expanded at an annual rate of 2.0 per cent in the second
quarter, after rising at rates of 2.5 per cent in the first quarter and 3.5
per cent in the second half of 1968. Average prices, as measured by
the GNP deflator, advanced at an annual rate of 5.1 per cent in the
second quarter, a little faster than in the first. Staff projections continued to suggest that growth in real GNP would slow further during
the second half of 1969, particularly in the fourth quarter, but that
upward pressures on prices would diminish only moderately.
Recent economic information offered additional evidence that the
expansion in final demands was slowing somewhat. Contrary to earlier
indications, both retail sales and nonfarm employment were now estimated to have declined in July, and it was expected that the preliminary
estimate of the industrial production index for that month—which had
shown a sharp increase—would be revised downward. In August,
according to weekly figures, retail sales rose but, after adjustment for
price increases, remained below the level of a year earlier. Nonfarm
employment advanced at a considerably slower pace in August than
earlier in the year, and tentative indications were that the industrial
production index would at most rise only slightly. On the other hand,
the unemployment rate edged down to 3.5 from 3.6 per cent in July.
Increases in prices of industrial commodities continued widespread
from mid-July to mid-August, and the average rose appreciably. However, the total wholesale price index declined slightly as a result of a
reduction in prices of farm and food products. The consumer price
index again rose sharply in July, largely because of increases in prices
of foods and services.
The si:aff projection suggested that real GNP would expand in the
third quarter at about the second-quarter rate but would rise less
in the final 3 months of the year. Growth in private final sales was
expected to slow further in the second half, but it appeared likely that
the expansion in GNP would be sustained in the third quarter by some
increase in business inventory accumulation and by a rise in Federal

172



expenditures resulting from the July pay increase. The projections for
the fourth quarter suggested little further change in inventory investment and a renewal of earlier declines in Federal outlays on goods and
services.
With respect to other categories of private expenditures, consumer
spending was now projected to rise at a slower rate in both the third
and fourth quarters than it had in the second, despite an anticipated
increase in the growth rate of disposable income in the third quarter.
Declines in residential construction outlays were expected to continue.
The latest Commerce-SEC survey of business plans, taken in August,
suggested that spending on new plant and equipment would rise more
in the third quarter than the May survey had indicated but that such
spending would remain about unchanged in the fourth quarter. For
1969 as a whole, the survey implied a level of capital outlays 10.6 per
cent above that of 1968, compared with the increases of 12.6 and 14
per cent, respectively, that had been indicated by the surveys taken
in May and February.
The deficit in the U.S. balance of payments on the liquidity basis
remained very large in both July and August. The official settlements
balance was in surplus for July as a whole, mainly because of a large
increase in outstanding Euro-dollar borrowings of U.S. banks in the
first half of the month. In August, however, when there was a much
smaller increase in such borrowings, the payments balance shifted into
deficit on the official settlements basis also. Both exports and imports
declined in July, but imports fell more and a slight surplus was recorded
in merchandise trade that month.
Following the announcement of the devaluation of the French franc
on August 8, interest rates in the Euro-dollar market reversed the decline that had been under way since early July, and conditions in foreign exchange markets became unsettled; sterling, the lira, and the
Belgian franc were under selling pressure, and the guilder and mark
were in strong demand. Although activity in the exchange markets was
greatly reduced after mid-August, uncertainties persisted—partly because of possibilities of a revaluation of the mark following the German
elections scheduled for September 28. In mid-August the Bank of Italy
increased its basic discount rate from 3Vi to 4 per cent.
On August 20 the Treasury auctioned a $2.1 billion strip of bills




173

consisting of additions to outstanding issues maturing from mid-September to late October. Commercial banks, which were allowed to
make payment for the new bills through credits to Treasury tax and
loan accounts, bid successfully for the bulk of the offering. The Treasury was expected to announce around mid-September the terms on
which it would refund notes and bonds maturing on October 1, of
which the public held about $5.6 billion.
In the early part of September the Treasury's cash balances at both
commercial banks and Federal Reserve Banks had been drawn down
to quite low levels. The Treasury temporarily financed part of its cash
needs by selling $322 million of special short-term certificates of indebtedness to the Federal Reserve on September 5. It appeared likely
that the Treasury would experience further cash drains prior to the
mid-September tax date and would need to borrow a substantial amount
of additional funds directly from the System in the period through midmonth.
After declining somewhat in earlier weeks, long-term interest rates
turned up around mid-August and subsequently reached new highs in
an atmosphere of renewed concern over the persistence of inflationary
pressures and expectations of continuing monetary restraint. The advances in yields also reflected a sizable volume of new issues by various Federal agencies, a growing calendar of new corporate bonds, and
the possible offering of an intermediate-term issue in the Treasury's
forthcoming refunding. The volume of State and local government
securities coming to market had remained relatively light, as many
potential issuers had been unable to offer bonds because market interest rates exceeded statutory ceilings. However, uncertainties arising
out of legislative proposals affecting the tax-exempt status of municipal
obligations and further reductions in bank holdings had contributed to
sizable increases in yields on such obligations.
Most short-term interest rates, while fluctuating over a fairly wide
range, had changed little on balance since the previous meeting of the
Committee. The market rate on 3-month Treasury bills, which ranged
from about 6.75 to 7.15 per cent over the interval, was at 7.09 per
cent on the day before this meeting—up slightly from its level 4 weeks
earlier.
System open market operations since the previous meeting had been

174



directed at maintaining firm conditions in the money and short-term
credit markets. Operations were complicated over much of the period
by the alternating tendencies towards tautness and ease in the money
market and in early September by the sizable declines in the Treasury's
cash balances at Reserve Banks. The Federal funds rate fluctuated
widely, but the average effective rate—about 9 per cent—was approximately the same as in the previous interval. Member bank borrowings
averaged $1,250 million in the 4 weeks ending September 3, unchanged
from the preceding 4 weeks, and average net borrowed reserves also
were little changed from their earlier level.
Preliminary estimates suggested that commercial banks had increased their holdings of U.S. Government securities in August in connection with bank underwriting of the tax-anticipation bills sold by the
Treasury late in the month. However, bank holdings of municipal and
Federal agency securities decreased substantially for the second consecutive month. Business loans outstanding, which had changed little
in June and July, rose considerably during August but other loans
declined by a nearly equal amount.
Total bank credit, as measured by the adjusted proxy series—dailyaverage member bank deposits, adjusted to include changes in the
daily average of liabilities of U.S. banks to foreign branches—declined
at an annual rate of about 10 per cent from July to August. It was
estimated that with a further adjustment for funds raised from nondeposit sources other than Euro-dollars, the proxy series would have
declined at an annual rate of about 8 per cent. The volume of funds raised
through sales of commercial paper by bank affiliates increased somewhat further on the average in August, but outstanding loans sold to
nonbank customers under repurchase agreements declined. As a result
of an action taken by the Board of Governors in late July, any such
repurchase agreements entered into on or after July 25 became subject
to Regulations D and Q on August 28.
Private demand deposits and the money stock were estimated to
have decreased from July to August—the latter at an annual rate of
about SVi per cent—as U.S. Government deposits rose somewhat on
the average following 2 months of substantial decline. There was a
further sizable reduction in the outstanding volume of large-denomination CD's, notably at banks outside of New York and Chicago. Net




175

outflows of other time and savings deposits continued, although they
were considerably smaller than those in July, following midyear interest crediting. At nonbank thrift institutions, which also had experienced sizable net outflows of savings funds in early July, flows appeared to have remained relatively weak in the first half of August.
Staff projections suggested that the average level of member bank
deposits would increase at an annual rate of 2 to 5 per cent from
August to September if prevailing conditions were maintained in money
and short-term credit markets. It was thought likely that there would
be little net change in the combined total outstanding of Euro-dollar
liabilities of banks, funds raised by sales of loans under RP's, and
funds raised through sales of commercial paper by bank affiliates. Expectations with regard to Euro-dollar borrowings by U.S. banks were
affected by the fact that on August 13 the Board of Governors had
established a 10 per cent marginal reserve requirement on such borrowings by member banks. The reserve requirement was to be met beginning with the week of October 16, based on an initial 4-week computation period beginning September 4.
All of the increase in the average level of member bank deposits
anticipated in September reflected an expected sharp rise in U.S. Government deposits; both private demand deposits—as well as the money
stock—and time and savings deposits were projected to contract further. It appeared likely, however, that the rate of reduction in time
and savings deposits would moderate from that experienced earlier in
the summer, because a smaller volume of large-denomination CD's
would be maturing and because prospects were for somewhat less
weakness in other time and savings deposits.
The Committee decided that no change in monetary policy should
be made at this time, both on general economic grounds and in light
of the forthcoming Treasury refunding. Note was taken of the indications that the rate of real economic growth was slowing, but it was
agreed that the persistence of strong inflationary pressures and expectations militated against a relaxation of monetary restraint at present. At
the same time, a number of members emphasized the desirability of
avoiding any firming in the stance of policy.
The Committee concluded that open market operations should be
directed at maintaining the prevailing firm conditions in money and

176



short-term credit markets, subject to the proviso that operations should
be modified, to the extent permitted by the Treasury refunding, if bank
credit appeared to be deviating significantly from current projections.
It was also agreed to renew the additional provisos that had been included in the previous directive; these called for modification of operations if pressures arose in connection with foreign exchange developments or in connection with regulatory actions taken by the Board of
Governors.
The following current economic policy directive was issued to the
Federal Reserve Bank of New York:
The information reviewed at this meeting indicates that expansion
in real economic activity slowed somewhat in the first half of 1969
and some further moderation during the second half is projected.
Substantial upward pressures on prices and costs are persisting. Longterm interest rates recently have risen to new peaks, while short-term
rates have changed little on balance. In August the money supply
decreased while U.S. Government deposits rose somewhat; bank
credit declined further on average; the run-off of large-denomination
CD's continued without abatement; and there were further net outflows from consumer-type time and savings accounts at banks. The
U.S. foreign trade surplus was very small in July. The over-all balance of payments deficit on the liquidity basis remained very large
in both July and August, while the balance on the official settlements basis shifted into deficit in August as U.S. banks' borrowings
of Euro-dollars leveled off. In light of the foregoing developments,
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 sustainable economic growth and
attaining reasonable equilibrium in the country's balance of payments.
To implement this policy, while taking account of the forthcoming
Treasury refunding, System open market operations until the next
meeting of the Committee shall be conducted with a view to maintaining the prevailing firm conditions in money and short-term credit
markets; provided, however, that operations shall be modified, to the
extent permitted by the Treasury refunding, if bank credit appears
to be deviating significantly from current projections or if pressures
arise in connection with foreign exchange developments or with bank
regulatory changes.




177

Votes for this action: Messrs. Martin, Hayes,
Bopp, Brimmer, Clay, Coldwell, Scanlon, and Sherrill. Votes against this action: Messrs. Maisel and
Mitchell.
Absent and not voting: Messrs. Daane and
Robertson.
Messrs. Maisel and Mitchell dissented from this action for reasons
similar to those underlying their dissent from the directive adopted at
the previous meeting. They believed that in measuring the degree of
monetary firmness or restraint the Committee should give more weight
to movements in key monetary aggregates—such as the money stock,
private demand deposits, total and nonborrowed reserves, and bank
credit—and in longer-term interest rates. In their judgment, the fact
that the monetary aggregates had been declining and longer-term interest rates had been rising in recent weeks indicated that restraint had
been steadily increasing, even though money market conditions had
been relatively stable. They favored maintaining the over-all posture of
restraint measured in terms of such aggregates and interest rates, and
permitting more flexibility in money market conditions in order to do so.
2.

Amendment to continuing authority directive.

The Committee amended paragraph 2 of the continuing authority directive to the Federal Reserve Bank of New York regarding domestic
open market operations, to increase the dollar limit on Federal Reserve
Bank holdings of short-term certificates of indebtedness purchased
directly from the Treasury from $1 billion to $2 billion. With this
change, paragraph 2 read as follows:
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 V*
of 1 per cent below the discount rate of the Federal Reserve Bank of

178



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 $2 billion.
Votes for this action: Messrs. Martin, Hayes,
Bopp, Brimmer, Clay, Coldwell, Maisel, Mitchell,
Scanlon, and Sherrill. Votes against this action:
None.
Absent and not voting: Messrs. Daane and
Robertson.
This action was taken on recommendation of the System Account
Manager, who advised that the Treasury's needs for temporary accommodation might well exceed the existing $1 billion limit in the period
before the mid-September tax-payment date. It was agreed that the
limit in question would revert to $1 billion at the close of business on
October 7, 1969, the day on which the next meeting of the Committee
was scheduled, unless otherwise decided by the Committee on or
before that date.
3.

Ratification of amendment to authorization for System
foreign currency operations.

The Committee ratified an action taken by members on August 27,
1969, effective September 2, 1969, to increase the System's swap
arrangement with the National Bank of Belgium from $300 million
to $500 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 of the authorization 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:




179

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:
Dollars against Swiss francs
Dollars against authorized European
currencies other than Swiss francs

Amount of
arrangement
(millions of
dollars equivalent)
100
500
1,000
100
2,000
1,000
1,000
1,000
1,000
130
300
100
250

600
600
1,000

Votes for ratification of this action: Messrs. Martin, Hayes, Bopp, Brimmer, Clay, Coldwell, Maisel,
Mitchell, Scanlon, and Sherrill. Votes against ratification of this action: None.
Absent and not voting: Messrs. Daane and
Robertson.
The action in question had been taken by members on recommendation of the Special Manager of the System Open Market Account. The
latter had advised that the increase in the swap line would be helpful
in permitting the National Bank of Belgium to cope with short-run
speculative pressures on the Belgian franc arising out of the recent
devaluation of the French franc and would thus contribute to stability
in foreign exchange markets.

180



MEETING HELD ON OCTOBER 7, 1969
1. Authority to effect transactions in System Account.

According to staff estimates, expansion in real GNP continued in the
third quarter at about the 2 per cent annual rate of the second quarter,
as an increase in inventory investment approximately offset further
slackening in growth of private final sales. Average prices, as measured
by the GNP deflator, were estimated to have advanced substantially.
Staff projections suggested that real GNP would grow more slowly in
the fourth quarter and that it might change little in the first half of
1970. With pressures on resources expected to ease over that period,
some moderation in the rate of price advance was projected.
A number of monthly measures of economic activity had weakened
recently. Nonfarm employment was about unchanged in September
and the unemployment rate rose sharply to 4.0 from 3.5 per cent in
August. Industrial production edged down in August, and tentative
estimates suggested that it changed little or declined slightly in September. It appeared from weekly data for most of September that retail
sales in that month were about the same as in August and that, after
adjustment for price increases, such sales remained below the level of
a year earlier. New orders at manufacturers of durable goods declined
appreciably in August, and housing starts fell for the seventh consecutive month.
Prices of a large number of industrial commodities increased from
mid-August to mid-September and the average advanced substantially
further. The over-all wholesale price index rose only slightly, however, as a result of another decline in prices of farm products and
foods. In August the consumer price index again increased considerably.
The staff projections of GNP for the current and the next two
quarters were based on the assumptions that the income tax surcharge
would be continued at 5 per cent through the first half of 1970, that
the investment tax credit would be repealed, and that social security
benefits would be increased by 10 per cent on April 1. The projections
suggested that expansion in aggregate final demands would continue to
moderate through the second quarter of 1970 and that the rate of inventory accumulation would be declining after the turn of the year.




181

U.S. merchandise exports rose more than imports in August, so the
trade surplus increased a little. With respect to the over-all balance of
payments, available data indicated that in August and September the
deficit on the liquidity basis had been very large, although not so large
as in preceding months, and that the balance on the official settlements
basis had shifted into deficit. The official settlements balance had been
in surplus for more than a year prior to August mainly as a result of
increases in outstanding Euro-dollar borrowings of U.S. banks through
their foreign branches, but there apparently had been little net change
in those borrowings after July. Speculative flows of funds into Germany during September contributed to the shift in the official settlements balance.
Recent developments in foreign exchange markets had been dominated by events connected with the German mark. Demands for marks
increased in early September in anticipation of a possible revaluation
of that currency after the German elections scheduled for September
28, and by Wednesday, September 24, the German Federal Bank had
acquired a substantial volume of dollars in active but orderly trading.
The German authorities closed their exchange niarkets the next 2
days and, after a brief resumption of trading, again on Monday, September 29. The Government then announced that the mark would be
allowed to float temporarily, and the exchange rate immediately broke
through its previous upper limit. Subsequently the mark strengthened
further, reaching a premium above par of about 6 ^ per cent at the
time of this meeting. During the period, the German Federal Bank
frequently sold dollars to moderate fluctuations in the rate. The rise in
the exchange rate and the expectation that the mark would be revalued
once a new German Government was formed led to some reduction
in the earlier tensions in foreign exchange markets, although the
French franc and the Italian lira remained under selling pressure.
Earlier in September discount rates had been increased by the central banks of Germany, Belgium, Switzerland, Austria, and Norway.
Despite the tightening of conditions in domestic European money
markets, interest rates in the Euro-dollar market—which had risen
steadily during August—declined moderately after early September,
partly because of the easing in demands by U.S. banks for Eurodollars.

182



On September 17 the Treasury announced that in exchange for
securities maturing on October 1 and December 15, 1969, it would
offer three new notes having, respectively, maturities of about 20
months, 3 years and 8 months, and 6 years and 10 months, and yields
of 8, 7.75, and 7.59 per cent. The new issues were initially well received and rose to a premium in the market. Of the $7.6 billion of
maturing securities held by the public, about $5.8 billion were exchanged for the new issues, including somewhat more than $1 billion
for each of the two longer-term notes. Following this financing, the
Treasury announced that on October 8 it would auction $2 billion
of tax-anticipation bills due in April 1970. The Treasury was expected
to raise additional funds during the fourth quarter to meet further cash
needs.
Treasury cash balances at both commercial banks and Federal Reserve Banks had been reduced to very low levels prior to the midSeptember tax date, and in the period September 5-16 the Treasury
had temporarily financed some of its cash needs through sales of
special short-term certificates of indebtedness to the Federal Reserve.
The volume of such certificates reached a 16-year high of $1.1 billion
on September 10,1 but the Treasury was able to redeem all outstanding
certificates by September 17 and subsequently to rebuild its cash balances to a substantial level.
System open market operations since the previous meeting of the
Committee had been directed at maintaining firm conditions in the
money and short-term credit markets. Sizable operations were required to offset the impact on bank reserves and money market conditions of substantial changes in Treasury cash balances and large
shifts of funds among banks stemming from the Treasury refunding
and from foreign central bank transactions. Federal funds traded
mainly in a range of 8Vi tb 9Vi per cent; the average effective rate
of about 9V& per cent was slightly higher than in the preceding interval. Member bank borrowings averaged $1,075 million in the 4 weeks
1
The volume of special certificates held by the Federal Reserve totaled $322
million on September 5 through 7, $653 million on September 8, $830 million on
September 9, $1,102 million on September 10, $862 million on September 11,
$759 million on September 12 through 14, $513 million on September 15, and
$972 million on September 16.




183

ending October 1, down from an average of $1,250 million in the
previous 4 weeks. Excess reserves were little changed on the average,
and so net borrowed reserves also declined.
Against the background of continuing credit restraint and limited
availability of funds, most market interest rates had risen to new highs in
the period since the previous meeting of the Committee. Yield increases
were relatively pronounced in the capital markets which absorbed large
amounts of new corporate, Federal agency, and intermediate-term
Treasury issues. Most recently, however, yields on Treasury and new
corporate bonds had stabilized following the good reception accorded
a sizable new Federal agency offering, some purchases of Treasury
notes and bonds by official accounts, and the publication of the 4 per
cent unemployment figure for September. Yields on State and local
government bonds had moved counter to the general trend in September; they had declined somewhat as a result of a continuing light volume of new issues and of developments in the Congress relating to
proposed legislation affecting the tax-exempt status of such obligations.
Most short-term interest rates also had risen since the previous
meeting. Rates on Treasury bills were an exception; they were relatively stable for most of the period—mainly because of reinvestment
demands generated by the Treasury refunding and by foreign central
bank purchases—and had declined in recent days. The market rate on
3-month Treasury bills, at 6.94 per cent on the day before this meeting, was 15 basis points below its level 4 weeks earlier.
Condiitions in markets for residential mortgages continued to tighten
in September. It appeared that savings flows at nonbank thrift institutions had remained weak during that month, and limited data available for the first few days of October suggested that net outflows following quarterly interest crediting would be larger than usual
At commercial banks, business loans outstanding increased moderately in September but holdings of U.S. Government securities declined sharply as banks sold Treasury bills acquired in the late-August
bill-strip financing. The bank credit proxy—daily-average member
bank deposits—increased at an annual rate of 2.5 per cent from
August to September. On balance, there was a small reduction in the
average outstanding volume of funds obtained by banks from "nondeposit" sources—including Euro-dollar borrowings, funds obtained

184



by sales of loans to nonbank customers under repurchase agreements,
and funds obtained through sales of commercial paper by bank affiliates. After adjustment for this development, the proxy series was estimated to have risen at an annual rate of about 2 per cent on the
average in September. In the third quarter as a whole the proxy series
so adjusted was estimated to have declined at an annual rate of 4.2
per cent.
The increase in the average level of member bank deposits in September was attributable almost entirely to a sharp rise in U.S. Government deposits after the midmonth tax date. Private demand deposits
and the money stock 2 changed little. Total time and savings deposits
declined at a much slower rate than earlier in the year, partly because
of a marked reduction in net outflows of consumer-type deposits. In
addition, there was a substantial increase in late September in foreign
official time deposits. Further run-offs of large-denomination CD's
occurred during the month, particularly at banks outside of New York.
Staff projections suggested that the average level of member bank
deposits would decline from September to October at an annual rate
of 5 to 8 per cent if prevailing conditions were maintained in money
and short-term credit markets. It appeared likely that the combined
total outstanding of funds obtained from nondeposit sources would
increase a little on the average—perhaps by an amount equivalent to
1 percentage point or less in the credit proxy. Among deposit categories, reductions were anticipated in the average level of both Government and private demand deposits, and the money stock was projected to decline at an annual rate of 2 to 5 per cent. Continued
reductions were expected in both large-denomination CD's and other
time and savings deposits. The run-off of CD's appeared likely to
moderate appreciably, however, partly because the volume of foreign
official deposits was expected to increase further.
The Committee decided that a relaxation of monetary restraint
2
The regular annual benchmark corrections and revisions of seasonal adjustment
factors for the money stock series had been made since the previous meeting of the
Committee. The effect of the adjustment on the statistics for 1969 was to raise the
estimated annual rate of growth during the first quarter from 2.9 to 4.1 per cent,
and to lower the estimated second-quarter growth rate from 4.7 to 4.5 per cent.
During the third quarter the annual rate of increase in the money stock series (on
the new basis) was estimated at a fraction of 1 per cent.




185

would not be appropriate at this time in light of the persistence of
inflationary pressures and expectations. It was also noted in this connection that fiscal policy was likely to become less restrictive in early
1970 even if, as recommended by the administration, the income tax
surcharge was continued at 5 per cent through the first half of the
year. At the same time, the Committee agreed that an intensification
of monetary restraint would not be desirable at present in view of the
considerable degree of restraint already in effect and of the indications
that the rate of economic expansion was moderating.
The Committee concluded that open market operations should be
directed at maintaining the prevailing firm conditions in money and
short-term credit markets, subject to the proviso 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 the pace of
expansion in real economic activity was sustained in the third quarter
by an acceleration of inventory investment, which about offset a
further slackening in growth of private final sales. Some monthly
economic measures have weakened recently, and slower over-all
growth is projected for the fourth quarter. Substantial upward pressures on prices and costs are persisting. Most market interest rates
recently have risen to new highs as demands for funds have pressed
against limited supplies. In September, on average, the money supply
changed little as U.S. Government deposits rose considerably further,
and bank credit increased slightly after 2 months of substantial decline. The outstanding volume of large-denomination CD's decreased
further in September, and flows of consumer-type time and savings
funds at banks and nonbank thrift institutions appear to have remained relatively weak. The U.S. foreign trade surplus increased a
little in August. In August and September the deficit in the over-all
balance of payments on the liquidity basis was very large, although
not as large as in preceding months; and the official settlements balance, which had been in surplus for more than a year, shifted into
deficit, reflecting slackened Euro-dollar borrowing by U.S. banks and
new speculative flows into Germany. Exchange market tensions were
reduced somewhat when the German Government decided to cease

186



temporarily official sales of marks, after which the exchange rate for
that currency rose above the official parity. In light of the foregoing
developments, 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 sustainable 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
maintaining the prevailing firm 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,
Bopp, Brimmer, Clay, Coldwell, Daane, Mitchell,
Robertson, Scanlon, and Sherrill. Vote against this
action: Mr. Maisel.
In dissenting from this action Mr. Maisel noted that interest rates
on all types of market securities had risen substantially on balance in
the period since late April, and that during this period the Committee's directives—like that favored by the majority today—had called
for maintenance of prevailing firm conditions in money and short-term
credit markets. He also noted that the behavior of key monetary aggregates, including member bank reserves, the money stock, and bank
credit, had been considerably weaker in the third quarter—either declining more rapidly or rising more slowly—than in the first half of
the year; and that sharp declines in the aggregates were projected for
October if prevailing money market conditions were maintained. As
at the two previous meetings, Mr. Maisel expressed the view that such
evidence indicated a steady increase in monetary restrictiveness. He
favored permitting more flexibility in money market conditions in order
to maintain but not intensify the present degree of monetary restraint
measured in terms of key aggregates and interest rates.
2. Amendments to continuing authority directive.

On recommendation of the Manager of the System Open Market Account, the Committee made two amendments to the continuing author-




187

ity directive issued to the Federal Reserve Bank of New York regarding domestic open market operations. In addition, the dollar limit
specified in paragraph 2 of the directive on Federal Reserve Bank
holdings of special short-term certificates of indebtedness purchased
directly from the Treasury, which had been temporarily increased from
$1 billion to $2 billion at the previous meeting, reverted to $1 billion
under the terms of the action the Committee had taken then.
One of the amendments made today also affected paragraph 2; it
involved the addition of language authorizing Reserve Banks other
than the New York Bank to purchase special short-term certificates
from tbs Treasury for their own account at times when the New York
Reserve Bank was closed. With this amendment, paragraph 2 read as
follows:
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,
or, if the New York Reserve Bank is closed, any other Reserve Bank
for its own account (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 V* 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 title total amount of such certificates held at any one time by the
Federal Reserve Banks shall not exceed $1 billion.
The second amendment to the directive consisted of the addition
of a new paragraph 3, authorizing the Reserve Banks to engage under
certain conditions in lending of U.S. Government securities held in the
System Open Market Account. The new paragraph read as follows:
3. In order to insure the effective conduct of open market operations, the Federal Open Market Committee authorizes and directs the
Federal Reserve Banks to lend U.S. Government securities held in the
System Open Market Account to Government securities dealers and to
banks participating in Government securities clearing arrangements
conducted through a Federal Reserve Bank, under such instructions
as the Committee may specify from time to time.

188



Votes for these actions: Messrs. Martin, Hayes,
Bopp, Brimmer, Clay, Coldwell, Daane, Maisel,
Mitchell, Robertson, Scanlon, and Sherrill. Votes
against these actions: None.
The amendment to paragraph 2 was made in view of the possibility
that the Treasury might need temporary accommodation at times, such
as the forthcoming Columbus Day holiday, when the New York Reserve Bank was closed and some other Reserve Banks remained open.
The action to add the new paragraph 3 was taken after the Manager
had advised that the problem of delivery failures in the Government
securities market had worsened significantly over the past year, partly
because private facilities for lending such securities had become inadequate; that delivery failures were markedly impairing the performance of the market; and that the functioning of the market would be
improved if securities held in the System Open Market Account could
be lent, for the express purpose of avoiding delivery failures, to Government securities dealers doing business with the Federal Reserve
Bank of New York and to banks participating in securities clearing
arrangements conducted through a Reserve Bank. The Committee
concurred in the Manager's judgment that under existing circumstances such lending of securities from the System Open Market Account was reasonably necessary to the effective conduct of open
market operations and to the effectuation of open market policies. It
was agreed that the authorization would be reviewed periodically to
determine whether the contemplated lending activity remained necessary.
The initial instructions specified by the Committee in conjunction
with this authorization included a $75 million limit on the par value
of securities involved in outstanding loans to any individual dealer at
any time and a limit of three business days on the duration of loans
to dealers, with those loans eligible for renewal under certain circumstances. The instructions also specified that both the dealers and the
banks that borrowed securities were to deposit and pledge collateral
consisting of U.S. Government securities of greater current market
value than the securities borrowed. In addition, the lending fee to be
charged on such securities loans was set at a rate higher than the pre-




189

vailing fee charged by private lenders, in order to encourage continued
maximum use of available private facilities for lending of Government
securities.
3. Amendment to authorization for System foreign currency
operations.

The Committee approved increases from $100 million to $200 million
equivalent in the System swap arrangements with the Austrian National Bank, the National Bank of Denmark, and the Bank of Norway,
and the corresponding amendments to paragraph 2 of the authorization
for System foreign currency operations, effective immediately. As a
result of this action, paragraph 2 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:

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

190



Amount of
arrangement
(millions of
dollars equivalent)
200
500

1,000
200

2,000
1,000
1,000
1,000
1,000
130
300
200
250
600

_
Foreign bank

Amount of
arrangement
( m i u i o n s Q£

dollars equivalent)
Bank for International Settlements:
Dollars against Swiss francs
Dollars against authorized European
currencies other than Swiss francs

600
1,000

Votes for this action: Messrs. Martin, Hayes,
Bopp, Brimmer, Clay, Coldwell, Daane, Maisel,
Mitchell, Robertson, Scanlon, and Sherrill. Votes
against this action: None.
While Austria, Denmark, and Norway each had a strong current
account in its international payments balance, all three countries had
experienced reserve losses recently, for the most part as a result of
the pull of high Euro-dollar interest rates and of speculation on a
revaluation of the German mark. The indicated action was taken on
recommendation of the Special Manager, who advised that it should
prove helpful in providing against the contingency of destabilizing
short-run speculative pressures on the currencies of the countries
involved.




191

MEETING HELD ON OCTOBER 28, 1969
Authority to effect transactions in System Account.

Preliminary estimates of the Commerce Department indicated that
expansion in private final sales had slackened further in the third quarter,
but that growth in real GNP was sustained at a 2 per cent annual rate
by an acceleration of inventory investment. Prices and costs continued
to rise rapidly.
Some crosscurrents were evident in the recent behavior of monthly
economic measures. On the one hand, industrial production declined in
September for the second successive month; nonfarm employment did
not increase, and the unemployment rate rose to 4.0 from 3.5 per cent
in August; and growth in personal income slowed considerably. Retail
sales advanced moderately, but after adjustment for price increases,
sales remained below the year-earlier level.
On the other hand, new orders at manufacturers of durable goods rose
sharply in September. The advance was widespread among industries,
but was exceptionally large for the machinery and equipment industries.
In addition, housing starts increased markedly from an August level
that had been revised upward.
Average prices of industrial commodities and the over-all index of
wholesale prices rose slightly more from mid-August to mid-September
than earlier estimates had indicated. During the third quarter as a whole
prices of industrial commodities increased more rapidly than in the
preceding quarter. However, the rise in the over-all wholesale price index
slowed substantially, as prices of farm products and foods declined somewhat following their sharp advance in the second quarter. The consumer
price index increased considerably further in September.
Staff projections continued to suggest that real GNP would grow more
slowly in the fourth quarter than in the third, and that there might be no
growth In the first half of 1970. As before, the projections assumed that
the income tax surcharge would be reduced to 5 per cent on January 1,
1970, and would remain at that rate through the first half of the year;
that the investment tax credit would be repealed; and that social security
benefits would be increased by 10 per cent on April 1. It was expected
that Federal purchases of goods and services would decline over the
interval, mainly because of reduced defense outlays, and that expansion

192



of aggregate demands in the private sector would moderate further. It
was also expected that the rate of inventory accumulation would slow
in the first half of 1970. Prospects were for continued increases in costs,
but with demand pressures expected to ease, some moderation in the
rate of price advance appeared likely.
The U.S. foreign trade surplus increased further in September as
exports remained near the high August level and imports declined. The
trade balance showed a small surplus in the third quarter as a whole,
following the small deficit recorded in the first half of 1969. With respect
to the over-all balance of payments, in September the deficit was large
on the liquidity basis and even larger on the official settlements basis. On
both bases the balance was in deficit for the third quarter as a whole.
On October 24 the German Government announced that, effective
October 27, the official parity of the mark would be revalued upward by
9.3 per cent—somewhat more than had been generally expected. Before
this announcement the exchange rate for the mark, which had been permitted to float since late September, had risen to a premium of about 8
per cent. The appreciation of the mark and its subsequent revaluation
led to a partial reversal of the earlier speculative flow of funds into Germany. Also, interest rates in the Euro-dollar market declined considerably further despite some increase in early October in outstanding
Euro-dollar borrowings by U.S. banks.
During October the Treasury auctioned $5 billion of tax-anticipation
bills; on October 8 it auctioned a $2 billion issue due in April 1970, and
on October 23 a $3 billion issue due in June 1970. It was expected that
the Treasury would raise an additional $2 billion to $2.5 billion of new
cash later in the fourth quarter to meet further needs for funds.
Since early October interest rates on long-term securities had declined
considerably despite a continued heavy calendar of public offerings of
new corporate bonds and a marked increase in bond offerings by State
and local governments. To a large extent the declines reflected changing
expectations among market participants: The publication of certain economic statistics—including the 4 per cent unemployment figure for September—and renewed hopes for peace in Vietnam had led to a growing
belief that the pace of the economic expansion would slow in the months
ahead and that the pressures in financial markets would moderate. These
attitudes subsequently were tempered by new developments, and in




193

recent days bond yields had retraced part of their earlier declines.
Most short-term interest rates also had declined on balance since early
October, and Treasury bill rates had been relatively stable despite the
Treasury's two large bill offerings. The market rate on 3-month Treasury
bills was 6.99 per cent on the day before this meeting of the Committee,
compared with 6.94 per cent 3 weeks earlier.
System open market operations in the first part of the period since the
preceding meeting had been directed at moderating tendencies toward
undue tightness in the money market while maintaining the firm conditions that had prevailed earlier. The tendencies toward easing that
emerged subsequently were not fully offset, because estimates for October of the bank credit proxy—daily-average member bank deposits—
that were prepared shortly after the middle of the month indicated a
significantly larger decline than had been projected at the time of the
previous meeting. However, the objectives of operations were modified
only marginally, and near the close of the period—when new estimates
indicated that the proxy series was not so weak as it had appeared for a
time—operations were again directed at maintaining firm conditions.
Over the period as a whole the effective rate on Federal funds, while
fluctuating in a fairly wide range, averaged slightly more than 9 per cent
—little changed from the previous period. Member bank borrowings
averaged about $1.1 billion in the 3 weeks ending October 22, about the
same as in the preceding 4 weeks, but net borrowed reserves increased
somewhat as excess reserves declined.
The latest staff estimates suggested that the bank credit proxy was
declining on the average in October at an annual rate of 7 .to 9 per cent.
It appeared that the total outstanding of funds obtained by banks from
"nondeposit" sources was increasing; Euro-dollar borrowings of U.S.
banks and funds obtained through sales of commercial paper by bank
affiliates, taken together, evidently were rising by more than enough to
offset further reductions in funds obtained by sales of loans to nonbank
customers under repurchase agreements. After adjustment for these developments the proxy series was estimated to be declining on the average
in October at an annual rate of 5.5 to 7.5 per cent. In the third quarter
as a whole the proxy series so adjusted had declined at an annual rate
of 4.3 per cent.
The money stock, which had changed little on balance in the third

194



quarter, was now estimated to be rising on the average in October at
an annual rate of 1 to 4 per cent. Both U.S. Government deposits and
total time and savings deposits were estimated to be declining—the latter
slightly faster than in September but much more slowly than in preceding
months. Net outflows of large-denomination CD's had diminished
markedly in recent weeks, apparently in large part because of an increase
in foreign official deposits. There were rather sizable net outflows of
consumer-type time and savings funds at banks—and at nonbank thrift
institutions as well—following quarterly interest crediting.
Staff projections suggested that, if prevailing conditions in money and
short-term credit markets were maintained, the average level of member
bank deposits would rise from October to November at an annual rate
of 5 to 8 per cent but would change little in December. All of the growth
anticipated for November reflected an expected rise in U.S. Government
deposits, in large part as a result of bank underwriting of the Treasury's
bill financing in late October; private demand deposits and the money
stock were projected to remain about unchanged on the average in
November, and further declines in time and savings deposits appeared to
be in prospect. It seemed likely that there would be some further net
increase in November in funds obtained from nondeposit sources, primarily through sales of commercial paper by bank affiliates. After adjustment for such an increase, the proxy series was projected to rise at a
rate of 6 to 10 per cent from October to November.
The Committee agreed that no change in monetary policy would be
appropriate at this time. It was noted in the discussion that prices were
still rising rapidly and, despite the indications of further slowing in the
economic expansion, expectations of continued inflation remained widespread. It was also noted that fiscal policy was likely to become less
restrictive in 1970, and some members expressed concern about the possibility that the shift in the stance of fiscal policy might be marked.
The Committee concluded that open market operations should be
directed at maintaining the prevailing firm conditions in money and
short-term credit markets, subject to the proviso that operations should
be modified if bank credit appeared to be deviating significantly from
current projections. A number of members expressed the view that operations should not be undertaken to resist tendencies toward lower interest
rates that might be produced by market forces.




195

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 pace
of expansion in real economic activity was sustained in the third
quarter by an acceleration of inventory investment, which about
offset a further slackening in growth of private final sales. Slower overall growth is projected for the fourth quarter, although some crosscurrents have been evident in the recent behavior of monthly
economic measures. Prices and costs are continuing to rise at a rapid
pace. Most market interest rates have declined considerably on
balance from their recent highs, in large part because of changing
expectations. In the third quarter, average monthly bank credit
declined and the money supply changed little; in October it appears
that bank credit is decreasing further on average but that the money
supply is growing somewhat. In recent weeks the net contraction of
outstanding large-denomination CD's slowed markedly, apparently
reflecting mainly an increase in foreign official time deposits, but
flows of consumer-type time and savings funds at banks and nonbank
thrift institutions appear to have remained relatively weak. The U.S.
foreign trade surplus increased further in September, but the deficit
in the over-all balance of payments was still large on the liquidity
basis and even larger on the official settlements basis. The appreciation
of the German mark since the end of September, culminating in the
revaluation of the official parity, has led to a partial reversal of
speculative flows, and conditions in the Euro-dollar market have
eased. In light of the foregoing developments, 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 sustainable 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 maintaining the prevailing firm conditions in money and shortterm 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,
Bopp, Brimmer, Clay, Coldwell, Daane, Maisel,
Mitchell, Robertson, Scanlon, and Sherrill. Votes
against this action: None.

196



MEETING HELD ON NOVEMBER 25, 1969
1. Authority to effect transactions in System Account.

According to reports at this meeting, growth in real GNP apparently
was slowing further in the fourth quarter from the 2 per cent annual
rate of the second and third quarters. Prices and costs were continuing
to rise at a rapid pace. Staff projections suggested that there might be
no growth in real GNP in the first half of 1970, and that the rate of
price advance might moderate somewhat as a result of reduced demand
pressures.
Data for October were generally consistent with the view that the
economic expansion was weakening. Industrial production edged down
for the third successive month. Although total nonfarm employment
increased, the unemployment rate, at 3.9 per cent, was little changed
from the 4.0 per cent level to which it had risen in September. In manufacturing, both the number employed and the average length of the
work-week declined. As in September, personal income increased
much less than it had earlier in the year. In addition, two important
series that had risen sharply in September—new orders for durable
goods and housing starts—declined in October.
Average prices of industrial commodities increased considerably
further from mid-September to mid-October, and the over-all wholesale price index advanced substantially even though prices of farm
products and foods changed little. The consumer price index continued
upward at a rapid pace despite a seasonal decline in food prices.
In contrast to most broad categories of final demand, both recent and
prospective business outlays on plant and equipment now appeared to
be stronger than they had earlier. In revising the GNP figures for the
third quarter, the Commerce Department had raised its estimates of
the increase in business capital spending while reducing its estimates of
growth in spending by consumers and State and local governments.
Similarly, in staff projections for the fourth quarter and for the first half
of 1970, growth rates for business capital outlays had been revised upward somewhat, partly on the basis of the results of a recent private
survey of business spending plans. But despite these revisions, it was
expected that growth in capital outlays would slow progressively




197

through mid-1970—particularly if, as assumed, the investment tax
credit were repealed.
In other respects, the broad outlines of the staff projections were essentially unchanged. It was still anticipated that Federal purchases of
goods and services would decline through mid-1970, mainly because
of reductions in defense outlays, and that inventory accumulation
would slow in the first half of the new year. The expansion of final
demands in the private sector was expected to remain moderate even if,
as assumed, the income tax surcharge were reduced to 5 per cent
at the end of 1969 and social security benefits were increased by 10
per cent on April 1.
A small surplus re-emerged in the U.S. foreign trade balance in the
third quarter, following three quarters of deficit. With respect to the
over-all balance of payments, the deficit on the liquidity basis was again
very large, although smaller than in the second quarter. The official
settlements balance, after having been in surplus for more than a year,
shifted into deficit in the third quarter as a result of a marked slackening of the rise in Euro-dollar borrowings of U.S. banks. Tentative estimates suggested that there had been considerable improvement in the
liquidity balance in October and early November—apparently in large
part because of a reversal of earlier speculative flows into German
marks.
Since the revaluation of the German mark on October 27, that currency had been under fairly persistent selling pressure in foreign exchange markets. Demand had been strong for sterling and had firmed
for the lira and the French franc. In the Euro-dollar market interest
rates had declined until late October, but they then advanced sharply
and steadily—in part as a result of renewed bidding for Euro-dollars
by U.S. banks. The price of gold in the London market had declined
sharply in recent weeks—from about $40 to a little more than $35,
the lowest level since the "two-tier" arrangement had been put into
effect in March 1968.
On November 21 the Treasury auctioned $2.5 billion of tax-anticipation bills, of which $1 billion were due in April 1970 and $1.5
billion in June. This financing, together with the addition of $100
million to each of the weekly bill auctions, was expected to cover the
Treasury's cash requirements through early 1970.

198



System open market operations since the October 28 meeting of the
Committee had been directed at maintaining prevailing firm conditions
in money and short-term credit markets. Operations were complicated
by heavy reserve drains, stemming in part from repayments by foreign
central banks of swap drawings on the Federal Reserve. To offset the
resulting tendencies toward tighter money market conditions, the System supplied an unusually large volume of reserves, making net purchases of about $2.6 billion of U.S. Government securities. During the
period the effective rate on Federal funds averaged slightly more than
9 per cent, little changed from the preceding interval. Member bank
borrowings averaged about $1.2 billion in the 4 weeks ending November
19, compared with about $1.1 billion in the preceding 3 weeks.
Interest rates on most short- and long-term securities had declined
during much of October, but in the latter part of that month such rates
began to rise sharply and by the time of this meeting they had reached
levels close to or above earlier peaks. To a large extent the upturn in
rates reflected a reversal of earlier expectations that pressures in financial
markets would soon abate. Recently, market participants had come increasingly to the view that monetary restraints were not likely to be
relaxed soon, as a result of both a growing belief that fiscal policy
would be eased significantly and fading hopes for a near-term settlement in Vietnam. In the judgment of many financial observers, that
view was supported by the announcement of the Board of Governors
on October 29 that it (1) was considering an amendment to Regulation Q under which the rules regarding the payment of interest on deposits would apply to funds received by member banks from the issuance of commercial paper or similar obligations by bank affiliates and
(2) had determined that such obligations of subsidiaries of member
banks were subject to Regulations D and Q.
Also contributing to the recent advance in interest rates was the continuing heavy demand for funds reflected in the large current and
prospective volume of security issues by corporations, State and local
governments, and Federal agencies. Upward pressures on Treasury bill
rates were augmented by the substantial supply of new bill issues and
by large sales of bills by the German Federal Bank following the
revaluation of the mark. On the day before this meeting the market
rate on 3-month Treasury bills was at a record 7.42 per cent,




199

more than 40 basis points above its level of 4 weeks earlier.
Average interest rates on home mortgages rose to new highs in
October in both the primary market for conventional loans and the
secondary market for FHA-insured loans. New mortgage commitments appeared to have declined somewhat at savings and loan associations during October, and the backlog of outstanding commitments
edged lower for the sixth consecutive month. There were unusually large
net outflows of savings funds at such associations following quarterly
interest crediting at the end of September.
Commercial banks also experienced net outflows of consumer-type
time and savings deposits during October. The run-off of large-denomination CD's at banks continued, but at a much slower rate than earlier
in the year because increases in foreign official deposits largely offset
further reductions in holdings of domestic depositors. Private demand
deposits and the money stock changed little from September to October
—the former declined slightly, but the latter edged up as a result of
an increase in currency outstanding. U.S. Government deposits fell
considerably on the average.
Daily-average member bank deposits—the bank credit proxy—declined at an annual rate of about 9 per cent from September to October.
Euro-dollar borrowings of U.S. banks changed little on the average,
and there were further reductions in funds obtained by sales of loans
to nonbank customers under repurchase agreements. However, the outstanding total volume of funds obtained by banks from "nondeposit"
sources increased as a result of a substantial rise in funds obtained
through sales of commercial paper by bank affiliates. After adjustment
for these developments, the proxy series declined at an annual rate
of 7.5 per cent.
Staff estimates suggested that the bank credit proxy would probably
rise at an annual rate of 9 to 12 per cent from October to November,
and that the advance would be even more rapid—perhaps at a 12 to
15 per cent rate—after adjustment for an increase in the outstanding
volume of funds obtained from nondeposit sources. Whereas the expansion in the proxy series was attributable in large part to a rise in
the average level of U.S. Government deposits, the estimates suggested
relatively rapid increases also in private demand deposits and the

200



money stock—for the latter, the increase was estimated at a rate in a
4 to 7 per cent range.
Much slower growth in the bank credit proxy appeared to be in
prospect for December. Staff projections suggested that if prevailing
conditions were maintained in money and short-term credit markets,
the proxy series would rise from November to December at an annual
rate in the range of 0 to 3 per cent, and in a 1 to 4 per cent range
after adjustment for an expected further increase in funds from nondeposit sources. It seemed likely that the money stock would decline
slightly on the average in December.
In its discussion of policy the Committee took account of the indications that the economic expansion was slowing further and of the
evidences of strain in financial markets. The members agreed, however, that a relaxation of monetary restraint would not be appropriate
at this time in view of the continuing strength of inflationary pressures
and expectations. The uncertainties with respect to fiscal policy, particularly the possibility of significant easing of fiscal restraint in 1970,
were also cited in this connection.
The Committee concluded that open market operations should be
directed at maintaining the prevailing firm conditions in money and
short-term credit markets, subject to the proviso that operations should
be modified if bank credit appeared to be deviating significantly from
current projections. It was also agreed that operations should be
modified if pressures arose in connection with regulatory action by the
Board of Governors in the area of bank-related commercial paper. A
number of members expressed the view that operations should not be
undertaken to resist tendencies toward lower interest rates should they
develop as a result of market forces.
The following current economic policy directive was issued to the
Federal Reserve Bank of New York:
The information reviewed at this meeting indicates that real economic activity has expanded only moderately in recent quarters and
that a further slowing of growth appears to be in process. Prices and
costs, however, are continuing to rise at a rapid pace. Most market
interest rates have again been advancing in recent weeks, in many
cases reaching new highs as a result of demand pressures, including
heavy Treasury and foreign official bill sales, and a reversal of earlier




201

market expectations partly stemming from growing concern about the
outlook for fiscal policy. In October bank credit declined on average
and the money supply changed little, but both appear to be increasing
relatively rapidly in November. Recently the net contraction of outstanding large-denomination CD's* has slowed markedly, apparently
reflecting mainly an increase in foreign official time deposits. However,flowsof consumer-type time and savings funds at banks and nonbank thrift institutions have remained weak. In the third quarter a
small surplus in U.S. foreign trade re-emerged, but there was another
very large deficit in the over-all balance of payments on the liquidity
basis and the official settlements balance, which had been in surplus
earlier, was also in deficit. More recently, return flows out of the German mark have apparently contributed to some short-run improvement in the U.S. payments position. In light of the foregoing developments, 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 sustainable 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 maintaining the prevailing firm conditions in money and short-terrn credit
markets; provided, however, that operations shall be modified if
bank credit appears to be deviating significantly from current projections or if pressures arise in connection with possible bank regulatory
changes.
Votes for this action. Messrs. Martin, Hayes, Bopp,
Brimmer, Clay, Coldwell, Daane, Mitchell, Robertson, Scanlon, and Sherrill. Votes against this action:
None.
Absent and not voting: Mr. Maisel.
2. Actions with respect to continuing authority directive.

At this meeting the Committee ratified an action taken by members on
November 14, 1969, effective on that date, amending paragraph l ( a )
of the continuing authority directive to the Federal Reserve Bank of
New York regarding domestic open market operations. The effect of
the amendment was to raise from $2 billion to $3 billion the limit on
changes in holdings of U.S. Government securities in the System Open

202



Market Account between meetings of the Committee. With this amendment, paragraph l ( a ) read as follows:
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 $3.0 billion during the period commencing with the opening of business on the day following such meeting and ending with the
close of business on the day of the next such meeting.
Votes for ratification of this action: Messrs. Martin, Hayes, Bopp, Brimmer, Clay, Coldwell, Daane,
Mitchell, Robertson, Scanlon, and Sherrill. Votes
against ratification of this action: None.
Absent and not voting: Mr. Maisel.
Later in the course of this meeting the Committee amended paragraph l ( a ) of the continuing authority directive to restore the $2 billion limit in effect prior to November 14.
Votes for this action: Messrs. Martin, Hayes,
Bopp, Brimmer, Clay, Coldwell, Daane, Mitchell,
Robertson, Scanlon, and Sherrill. Votes against this
action: None.
Absent and not voting: Mr. Maisel.
The action of November 14 was taken after the Account Manager
advised that a temporary increase in the "leeway" was needed to accommodate the large reserve-supplying operations found necessary in
implementing the current economic policy directive then in effect. The
paragraph was restored to its previously existing form on recommendation of the Manager, who advised that the temporary need for the
larger leeway had passed.




203

MEETING HELD ON DECEMBER 16, 1969
Authori ty to effect transactions in System Account.

Reports at this meeting suggested that growth in real GNP, which had
been only moderate earlier in the year, was slowing further and perhaps
coming to a halt in the fourth quarter. Prices and costs were continuing
to rise rapidly. Staff projections suggested that there would be little or
no expansion in real GNP in the first half of 1970 and some slowing
in the rate of increase in prices.
With few exceptions, data for November supported the view of a
weakening in economic expansion. Industrial production declined for
the fourth consecutive month. Although the unemployment rate fell
sharply—to 3.4 per cent from 3.9 per cent in October—other measures
suggested some further easing of labor market conditions; in particular,
total nonfarm employment did not increase, employment and overtime
hours in manufacturing fell, and claims for unemployment compensation rose further. Retail sales declined in November and, after adjustment for price increases, remained below the level of a year earlier.
The wholesale price index advanced considerably further from midOctober to mid-November, partly because of an exceptionally large rise
in average prices of farm products and foods. Average prices of industrial products also increased substantially.
The latest Commerce-SEC survey of business plans, taken in November, suggested that outlays on new plant and equipment would rise
sharply in the first half of 1970. As a result, staff projections of fixed
investment spending by business in that period had again been revised
upward. However, the strengthening of the outlook in this sector did
not appear sufficient to change materially the prospect for little or no
growth in real GNP in the first half. On the other hand, it was noted
that legislation now under consideration in Congress relating to Federal
taxes and social security benefits, if enacted, would result in a considerably greater relaxation of fiscal restraint than had been assumed in
the projections.
The U.S. balance of payments appeared to be improving in the
fourth quarter; in November the deficit on the liquidity basis had diminished further and the official settlements balance had reverted to
surplus. However, the improvement seemed to reflect such relatively

204



volatile elements as return flows from the German mark and a sharp
increase in November in outstanding Euro-dollar borrowings of U.S.
banks. In recent weeks interest rates in the Euro-dollar market had
remained under upward pressure, in part as a result of actions by the
German monetary authorities to encourage German banks to reduce
their net foreign assets.
Interest rates on most types of domestic market securities had risen
considerably further in recent weeks. Yields on long-term Treasury
and municipal bonds currently were at new highs, and yields on new
corporate bonds were close to peaks that had been reached in early
December. On the day before this meeting the market rate on 3-month
Treasury bills was at a record level of 7.92 per cent, 50 basis points
above its level of 3 weeks earlier.
These rate advances had occurred against the background of continued heavy demands for funds, and—in the Treasury bill market—
large dealer inventories and sustained high financing costs. To an important extent, however, they appeared to reflect expectational factors,
including market concern about the possibility that fiscal restraint
would be relaxed significantly and the related prospect that the period
of severe monetary restraint would be prolonged.
System open market operations since the preceding meeting of the
Committee had been directed at maintaining prevailing firm conditions
in the money market while taking account of strains in the Treasury
bill market as bill rates adjusted sharply upward. The effective rate on
Federal funds continued to fluctuate mostly in a range of %Vi to 9XA
per cent. Member bank borrowings averaged $1.2 billion in the 3 weeks
ending December 10, unchanged from their average in the preceding
4 weeks.
At nonbank thrift institutions there were net outflows of savings
funds in October, after quarterly interest crediting, and the inflows in
November and early December were at a rate well below that usually
expected for the season. Moreover, there was widespread concern about
the possibility of very heavy outflows at such institutions around the
turn of the year, following year-end interest crediting.
At commercial banks the volume of business loans outstanding
changed little over the course of November, and holdings of U.S. Government securities declined somewhat further despite bank underwriting




205

of the tax-anticipation bills auctioned by the Treasury late in the month.
Holdings of other securities and loans to securities dealers increased
sharply, cilthough perhaps only temporarily. From October to November the bank credit proxy—daily-average member bank deposits—
expanded on the average at an ailnual rate of 11 per cent. After adjustment for further growth in the outstanding volume of funds obtained
by banks from "nondeposit" sources—including Euro-dollar borrowings and funds acquired through sales of commercial paper by bank
affiliates—the proxy series increased at a rate of about 13.5 per cent.
So adjusted, the proxy series had declined at annual rates of 7.5 per
cent in October and 4.3 per cent in the third quarter.
Private demand deposits and the money stock also expanded on the
average in November. The latter grew at an annual rate of about 3.5
per cent, after rising only fractionally in October and remaining unchanged in the third quarter. U.S. Government deposits increased
sharply in November, mainly as a result of Treasury financing operations. Outflows of consumer-type time and savings deposits continued,
but the net contraction in the volume of large-denomination CD's outstanding remained more moderate than earlier in the year as a result
of further sizable increases in foreign official time deposits.
Revised staff projections suggested that if prevailing conditions in
the money market were maintained there would be little change in the
bank credit proxy from November to December and a slight rise after
adjustment for an expected further increase in funds from nondeposit
sources. It was anticipated that total time and savings deposits would
increase somewhat on the average, but that U.S. Government deposits
and private demand deposits—as well as the money stock—would decline somewhat. Projections for January suggested that the proxy series
would decline at an annual rate of 1 to 4 per cent—and less after adjustment for another expected increase in nondeposit funds—and that
the money stock would remain about unchanged.
The Committee agreed that no relaxation of monetary policy would
be appropriate at this time, in view of the persistence of inflationary
pressures and expectations and the high degree of uncertainty with
respect to the extent to which fiscal policy might be relaxed. The members concluded that open market operations should be directed at
maintaining the prevailing firm conditions in the money market. It was
also agreed that operations should be modified if unusual liquidity

206



pressures should develop. A number of members expressed the view
that any tendencies toward lower interest rates that might be produced
by market forces should not be resisted.
The following current economic policy directive was issued to the
Federal Reserve Bank of New York:
The information reviewed at this meeting indicates that real economic activity has expanded only moderately in recent quarters and
that a further slowing of growth appears to be in process. Prices and
costs, however, are continuing to rise at a rapid pace. Most market
interest rates have advanced further in recent weeks partly as a result
of expectational factors, including concern about the outlook for fiscal
policy. Bank credit rose rapidly in November after declining on average
in October, while the money supply increased moderately over the 2month period; in the third quarter, bank credit had declined on balance
and the money supply was about unchanged. The net contraction of
outstanding large-denomination CD's has slowed markedly since late
summer, apparently reflecting mainly an increase in foreign official
time deposits. However, flows of consumer-type time and savings
funds at banks* and nonbank thrift institutions have remained weak,
and there is considerable market concern about the potential size of
net outflows expected around the year-end. In November the balance
of payments deficit on the liquidity basis diminished further and the
official settlements balance reverted to surplus, mainly as a result of
return flows out of the German mark and renewed borrowing by U.S.
banks from their foreign branches. In light of the foregoing developments, 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 sustainable 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
maintaining the prevailing firm 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,
Bopp, Brimmer, Clay, Coldwell, Maisel, Mitchell,
Robertson, Scanlon, and Sherrill. Votes against this
action: None.
Absent and not voting: Mr. Daane.




207

Operations of the System Open
Market Account
The following two reports describe the actions taken during 1969
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 effort 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 256.

208



REVIEW OF OPEN MARKET OPERATIONS IN
DOMESTIC SECURITIES
The year 1969 was a period of intensifying monetary restraint. Open
market operations were used in combination with other Federal Reserve actions to restrain the expansion of bank credit and to emphasize
the System's determination to combat entrenched inflationary pressures
and expectations. In the early part of the year operations enforced
the shift to intensified monetary restraint that had been signaled by
an increase of V\ percentage point in the discount rate to 5 Vz per cent
in mid-December 1968. Operations underscored firm restraint following
a further Vi percentage point increase in the Federal Reserve discount
rate announced on April 3, which was accompanied by a similar increase in reserve requirements against member bank demand deposits.
Firm pressure on bank reserve positions was maintained over the balance of the year, thereby restraining the growth of the monetary and
credit aggregates.
The pressure exerted by sustained monetary restraint was manifest
in the indexes of pressure in the money market. Member bank borrowing from the Federal Reserve Banks rose from an average of less
than $600 million in the last quarter of 1968 to $900 million in March
1969 and $1.4 billion in May and June. After that it fluctuated around
$1.2 billion. The Federal funds rate rose from an average of 6 per cent
in December to nearly 7.5 per cent in April and around 9 per cent over
the remainder of the year.
The stringency of Federal Reserve policy was also evident in the
behavior of the monetary aggregates during 1969. The money supply-^private demand deposits plus currency outside banks—rose by only
2.5 per cent, compared with 7.2 per cent in 1968. With market rates
of interest above the Regulation Q ceiling rates on time deposits, commercial bank time deposits declined by 5.3 per cent during 1969,
compared with an increase of 11.5 per cent in 1968. And total loans
and investments at commercial banks grew by 2.3 per cent, or by 3.3
per cent if loans sold to banks' own affiliates are included.
System outright purchases, sales, and redemptions of U.S. Government securities during 1969 totaled $19 billion (not including the
purchase and redemption of $2.7 billion of special securities issued
directly by the Treasury for brief periods). While this total was prac-




209

tically unchanged from the year before, the temporary provision and
absorption of bank reserves through repurchase agreements and
matched sale-purchase transactions increased by 49 per cent to $100
billion. These techniques, which enabled the System to inject or absorb
reserves with minimal impact on the securities markets, were particularly useful when swift reversals of operations were required to maintain steadily firm conditions in the money market.
For the third year in a row, outright transactions in U.S. Government securities for foreign accounts exceeded the volume undertaken
for the System Open Market Account by a substantial amount. These
operations reflected considerable turbulence in the exchange markets—
particularly the speculation in the German mark and the French franc.
The System injected, net, $4.2 billion of reserves into the banking
system during the year, compared with $3.8 billion in 1968 and $4.8
billion in 1967. The large expansion of the System portfolio in 1969,
when money became very tight as compared with 1968, reflected
primarily increases in reserve requirements against member banks'
demand (deposits and the imposition of marginal reserve requirements
against liabilities to their foreign branches. System holdings of U.S.
Government securities on December 31 totaled $57.2 billion.
JANUARY 1-APRIL 2:
OPERATIONS REINFORCE SHIFT TO INTENSIFIED
MONETARY RESTRAINT

Economic and financial environment. Federal Reserve policy
moved decisively to restraint in mid-December 1968 with an increase
of V\ percentage point in the Federal Reserve discount rate to 5Vi per
cent and a reinforcing shift in open market operations. The first 3
months of 1969 were a period of intensifying monetary restraint. Open
market operations were conducted with a view to increasing the pressure on the banking system, thereby underscoring the determination
of the System to combat inflation. Widespread skepticism about the
System's resolve at the beginning of the year began to give way during
the period. However, there were lingering doubts about the System's
perseverance should the results of restrictive policy begin to appear in
output and employment.
Few such results made their appearance during the first quarter.

210



Rather, the economy continued to exhibit considerable strength. The
marked swing of the Federal budget from deficit to surplus, in combination with increased monetary restraint, did not seriously discourage
consumer and business spending during the period. Despite payment
of the income tax surcharge, consumers maintained a high level of
spending by reducing their rate of saving. Moreover, personal income
continued to rise rapidly and the unemployment rate remained at or
near a 15-year low. The volume of expansionary spending by businesses clearly reflected an inflationary psychology. Consumer and
wholesale prices rose at an accelerated rate in the first quarter. A
sizable deficit re-emerged in the Nation's balance of international payments on the liquidity basis, although the balance remained in surplus
on the official settlements basis—thanks to heavy Euro-dollar borrowings by large U.S. banks.
The shift of monetary policy toward restraint was evident both in
the change in money market conditions and in the behavior of the
monetary and credit aggregates. Member bank borrowing from the
Federal Reserve Banks averaged $813 million during the first quarter
of 1969, compared with $587 million during the final quarter of 1968.
And net borrowed reserves—member bank borrowings from the Reserve Banks less excess reserves—averaged $592 million as compared
with $241 million during the previous quarter. Federal funds traded
predominantly in a 6.5 to 7 per cent range during March 1969, a full
percentage point higher than the range prevailing before the increase
in the discount rate in mid-December 1968. (See Chart 1.)
Among the monetary aggregates, the money supply—private demand deposits plus currency outside banks—increased at a seasonally
adjusted annual rate of about 4 per cent over the first quarter; during
1968 the money supply had risen at an annual rate of 7 per cent in
the final quarter and also for the year as a whole. Time and savings
deposits declined at an annual rate of 5 per cent in the first quarter,
after growing at a rate of 17 per cent over the last 3 months of 1968.
The sharp reversal of time deposit growth reflected largely a decline of
$4 billion (not seasonally adjusted) in negotiable certificates of deposit
(CD's) over the first quarter as short-term market rates rose above the
rates banks were allowed to pay on CD's. Total member bank deposits
subject to reserve requirements—the so-called bank credit proxy—fell
at a 5 per cent annual rate during the first quarter of 1969. Adjusted




211

1. JANUARY 1, 1969 - APRIL 2, 1969
Reserves and borrowings

BILLIONS OF DOLLARS

1.5

EXCESS RESERVES

I

\

\

s

i l l

1

i

i I

f

Basic reserve deficit
4 6 MAJOR MOHFf

I

I

f

7

t II o

BILLIONS OF DOLLARS

MARKET BANKS

I

Money market rates

ri

i

i

i I)i

PER CENT PER ANNUM

Money market rates: Federal funds, daily effective rates; call
loans, daily range on new loans to U.S. Govt. securities dealers
posted by New York City banks. Adjusted bank credit proxy is
total member bank deposits plus liabilities to foreign branches;
ranges shown are those projected at FOMC meetings (dates of
which are shown by dashed lines)—cross-hatched areas indicate revised ranges for same month as projected at next meeting; slight
revisions in ranges not shown; F.R.B. and N.Y. Bank projections

212



Adjusted bank credit proxy

ANNUAL RATE OF CHANGE, PER CENT
i
f

I

10

j
5

I

I

I

5

I
• it
i

i

i

1111 i

it

i

«t

Other short-term rates

fil I I I 1 I l l If 1

J

if

•
i

•
111

PER CENT PER ANNUM

tin u h i n l m illi n l n 11 i 11 M I n 1111111 4

Long-term rates

PER CENT PER ANNUM

BONDS .

NEW CORPORATE

TAX-EXEMPT

ilit I M i l l i i n If i n l u l t I m l n i H n H In u l l r t i I n nF H nf M M h l i l 4

made on Fridays. Other short-term rates: bid rate on 3-month
Euro-dollars; daily bid rate on 3-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.




213

for the rapid growth of Euro-dollar borrowings, the proxy showed a 2
per cent rate of decline, compared with a 10 per cent growth rate in
1968.
The determined efforts of the monetary authorities to reduce inflationary pressures exerted steady pressure on most short-term interest
rates. Yields on 3-month Euro-dollar deposits reached %Vi per cent by
early March, a full percentage point above the December high. (See
Chart 1.) The commercial bank prime rate was raised by 1 percentage
point in 3 steps, to IVi per cent in mid-March, following the December 1968 increase in the discount rate. Rates on bankers' acceptances
and commercial paper also rose.
In contrast to the rise in rates on most other short-term investments,
Treasury bill rates, after adjusting upward to the new level of the discount rate, declined somewhat during the first quarter of 1969. As
early market skepticism over the Federal Reserve's determination to
combat inflation gradually gave way to expectations of a sustained
period of monetary restraint, many investors shifted to short-term
Treasury bills while awaiting increases in long-term yields. Furthermore, a steady decline in stock prices contributed to demand for bills
from investors seeking a temporary haven for their funds; the New
York Stock Exchange index during March, for example, averaged
about 8 per cent lower than in December. The net increase in the
supply of bills, resulting from the Treasury's sale of additional bills
during the interval, was readily absorbed by investors. In this atmosphere the market bid rate for the latest 3-month Treasury bill averaged
6.01 per cent in March, 12 basis points below the January average rate.
Capital market yields, however, rose to record levels during the first
quarter of 1969. Pressure on bank reserves heightened fears of largescale bank liquidation of U.S. Government and municipal securities.
Although sales did not materialize in large volume, bank demand for
such issues was sharply curtailed. As prices deteriorated, other investors also displayed a marked reluctance to commit funds. In such an
atmosphere, many corporate and municipal financings that had been
scheduled were postponed or reduced in size, but the pressure of new
offerings remained heavy. Most new Aa-rated public utility bonds were
reoffered to yield slightly over 7 per cent during January, but reoffering
yields rose to more than 7.5 per cent during March. The Bond Buyer's
index of yields on 20 municipal bonds rose from 4.85 per cent near the

214



end of December to 5.30 per cent at the end of March. In the market
for U.S. Treasury securities long-term bond yields averaged 6.05 per
cent in March as compared with 5.65 per cent in December, while
yields on 3- to 5-year maturities rose to 6.33 per cent from 5.99 per
cent.
The Treasury's mid-February refunding was conducted against an
unsettled background. Holders of the $14.5 billion of 55/s per cent notes
and 4 per cent bonds maturing in February (including $5.5 billion held
by private investors) were offered the option of exchanging their securities for a new 15-month, 6% per cent note due in May 1970 or a new
7-year, 6 & per cent note due in February 1976. The new 15-month
V
and 7-year notes were priced to yield about 6.42 and 6.29 per cent,
respectively. Public response to the offerings was cool despite the fact that
the issues carried the highest offering yields on new Treasury securities
since the Civil War. Approximately 36 per cent of the maturing securities held outside official accounts were not exchanged. Reflecting prevailing interest rate expectations, only $885 million of the 7-year notes
were taken by .the public. Government agency financings, which raised
$1.1 billion of net new money during the period, were confined to the
short-term market.
Open market operations. System open market operations during
the first 3 months of the year were directed toward maintaining the
firmer conditions in the money and short-term credit markets that had
been achieved following the mid-December increase in the Federal Reserve discount rate. Over the period January 1 to April 2, System open
market operations in Government securities absorbed nearly $600 million of reserves, net. (See table.) System outright purchases and sales
of Treasury securities during the period totaled $1.5 billion and $1.6
billion, respectively, and the System redeemed $0.8 billion of maturing
Treasury bills. The System also absorbed $4.1 billion of reserves on a
short-term basis through matched sale-purchase transactions, largely in
January, and injected $5.5 billion temporarily through repurchase
agreements against Treasury and Federal agency securities, mostly in
February and March.
The System supplied reserves during the first few days of 1969 in
order to relieve year-end pressures and facilitate adjustments in the
money and securities markets generated by the December 1968 increase
in the Federal Reserve discount rate. Then from January 8 to February




215

5 it absorbed reserves steadily to offset the seasonal reflux of reserves.
The Account Manager made frequent use of matched sale-purchase
transactions when unexpected additions to reserve availability threatened
to erode the prevailing firm tone of the money market. This technique,
which had been introduced in July 1966, enabled the System to effect
much greater short-term reserve absorption than would have been feasible through outright sales, which would have required dealers to assume market risks.
SYSTEM OPERATIONS IN GOVERNMENT SECURITIES DURING

1969

In millions of dollars
Jan. 1Apr. 2

Apr. 3 May 28

May 29Sept. 3

Sept. 4Dec. 31

Outright purchases:
Treasury bills:
From market
From foreign accounts
Coupon i ssues
Special certificates of indebtedness.

134
1,098
253

1,235
498
196
1,130

710
1,633
67

2,401
3,293
192
1,561

4,480
6,522
708
2,691

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

605
1,015

11
400

473
598

663
1,880

1,752
3,893

Matched Scile—purchase transactions:
With dealers:
Sales
Purchases
With foreign accounts:
Sales..
Purchases

3,920
3,920

2,329
2,329

8,053
8,053

8,187
8,187

22,489
22,489

225
225

50
50

Redemptions:
Treasury bills
Special certificates of indebtedness.,

786

206
1,130

207

5,059
4,796

5,745
5,900

421
358
-595

Type of operation

Repurchase agreements:
Government securities:
Purchases
Sales
Federal agency securities:
Purchases
Sales
Net change.

Total

275
275
649
1 ,561

1,848
2,691

4,843
4,951

8,142
8,142

23,789
23,789

976
966

847
920

1,362
1,362

3,606
3,606

1,167

+951

+2,694

+4,217

NOTE.—All figures are as of date of delivery.

The first use of the matched sale-purchase technique in 1969 occurred on January 8, a reserve-settlement day, when year-end pressures
in the money market faded and excess reserves accumulated in the
banking system. The Account Manager resisted the developing ease by
arranging $550 million in matched sale-purchase transactions. Subse-

216



quently, a sizable inflow of currency to the banking system and a lessthan-anticipated decline in float threatened to lead to a continuation of
comfortable conditions in the money market. Over the next several
days, therefore, the System sold $395 million of bills in the market and
to foreign accounts. Additional reserves were temporarily absorbed on
Wednesday, January 15, through $690 million of matched sale-purchase agreements.
The maintenance of steadily firm money market conditions was challenged during the next 3 weeks by a massive shift in reserves toward
the money center banks. The basic reserve deficit of the eight major New
York City banks swung from an average of $1.4 billion during the 3
weeks ended January 15 to an average of less than $100 million during
the next 3 weeks.1 The larger-than-seasonal improvement reflected both
increased borrowings in the Euro-dollar market and higher U.S. Government deposits and a decline in required reserves. The System countered the effect of these developments by aggressively absorbing reserves on all but 4 days of the 3 weeks ended February 5. In addition
to six rounds of matched sale-purchase transactions totaling $2.7 billion, the System sold outright a total of $651 million of bills in the
market and to foreign accounts and redeemed $225 million of maturing
bills.
Despite the contrary influence of market factors during the 3-week
period ended February 5, including the periodic emergence of high
levels of float, open market operations maintained generally firm conditions in the money market. Federal funds traded predominantly in a
6V4 to 65/s per cent range, and the 3-month Treasury bill generally
traded in a 6 to 6.20 per cent range. To maintain firm conditions in the
money market, member bank borrowing was allowed to rise to an
average of $806 million as compared with an average of $593 million
during the first 2 weeks of the year. Net borrowed reserves rose to
an average of $574 million during the same 3 weeks, almost $200
million higher than during the previous 2 weeks.
A sharp swing in reserve factors and in the distribution of reserves
conditioned open market operations during the next two statement
weeks, which ended on February 19. Movements in market factors,
1

The basic reserve position of a group of banks is defined as the group's
excess reserves less its net purchases of Federal funds from member banks and
less its borrowings from the Reserve Banks.




217

particularly increases in currency outside the banking system and in
Treasury balances at the Reserve Banks, drained a substantial volume
of bank reserves. The major money center banks, especially those in
New York City, came under renewed reserve pressure, and they bid
more aggressively for funds. Open market operations provided reserves—but not in sufficient volume to offset the upward pressure on
the Federal funds rate. Rates on these funds rose to a range of 6% to
IV4 per cent in mid-February. The taut conditions contributed to heavy
borrowing by member banks. Such borrowing averaged $922 million
over the 2 weeks ended February 19, and net borrowed reserves rose
to an average of $630 million.
The System supplied reserves daily over these 2 weeks, primarily
through repurchase agreements. The heavy use of this technique was
dictated by two factors. First, repurchase agreements make it possible
for the Account Manager to respond quickly to unexpected pressures
in the money market while still keeping the supply of reserves on a
short string. Secondly, Treasury bill rates had been moving down, reflecting steady investor demand, and the System did not wish to add
to that pressure by making outright purchases of bills in the market.
The scarcity of bills was underscored on February 18 when a System
go-around elicited only $284 million of offerings of bills by dealers, of
which the Account Manager accepted $134 million for the System and
an additional amount for foreign accounts. In order to meet further reserve needs, the System purchased $85 million of Treasury coupon
issues the next day. The scarcity of bills in the market even tended to
make it difficult for the System to provide reserves through repurchase
agreements because nonbank dealers did not always have sufficient collateral to match System needs to supply reserves.
Thus, on occasion, the Trading Desk departed from its normal practice of considering only financing needs of nonbank dealers and permitted these dealers to round up additional securities from customers
to place under repurchase contract with the System. During the 2 weeks
ended February 19 the Account Manager arranged a total of $2 billion
of repurchase agreements against Treasury and agency securities. These
were supplemented by $329 million of such contracts against bankers'
acceptances. With Treasury bills in scarce market supply, repurchase
agreements against bankers' acceptances proved a particularly useful
means of injecting reserves.

218



Open market operations were generally routine over the succeeding
6 weeks—the interval from February 20 to April 2. With Treasury
bill rates declining persistently, the System avoided altogether any outright transactions in the bill market. Instead, the Account Manager
continued to meet reserve needs primarily through short-term repurchase agreements, which totaled $3 billion against Treasury and agency
issues and $402 million against bankers' acceptances during the interval. The System also purchased outright $495 million of Treasury bills
directly from foreign accounts and $253 million of coupon issues in
market go-arounds. Reserve absorptions were accomplished by sales of
$343 million of bills to foreign accounts and redemptions of $556
million of maturing bills.
All of the statement weeks in the interval from February 20 to April
2 followed a similar pattern. In each one, Federal funds traded primarily in a range of 65/s to 7 per cent before the weekend. In order
to meet indicated reserve needs, the System injected reserves through
repurchase agreements before each weekend, and then it geared its
subsequent operations to money market conditions. In the 3 weeks
ended March 12, the System either absorbed reserves or took no action
after the weekend. In the following 3 weeks, which ended on April 2,
it injected additional reserves in the latter part of the week. During
most of the 6-week period, Federal funds traded predominantly in a
6V^ to 63A per cent range on the last 3 days of each statement week.
For the 5 weeks ended March 26, member bank borrowing from the
Federal Reserve averaged $821 million, and net borrowed reserves averaged $619 million. Amid the churning in the market surrounding the
March 31 quarterly-statement publishing date and the April 1 Cook
County, Illinois, personal property tax date, however, member bank
borrowings at the discount window rose to an average of $1.2 billion
in the statement week ended April 2. Net borrowed reserves in that week
averaged $886 million—the deepest weekly level since February 1953.
Although day-to-day open market operations encountered no unusual
problems during March, the interpretation of the bank credit proxy in
the light of the proviso clause of the directive was unusually difficult.
(The proviso clause, which has been included in most of the Committee's directives in recent years, typically calls for modification of
money market objectives if it appears that bank credit growth is proceeding more quickly or more slowly than expected.) The projec-




219

tions of the credit proxy including Euro-dollar borrowings quickly
settled near the bottom of the range that had been anticipated by the
Committee at its March 4 meeting—a 3 to 6 per cent annual rate of
decline in March.
On the surface, the levels projected might have suggested implementation of the proviso clause on the side of slightly less restraint. But
several factors argued against such implementation. First there was considerable market belief that the System would not persevere in its policy
of restraint, so such a move would have ri§ked being interpreted as a
greater relaxation of monetary restraint than intended—particularly in
view of the decline in Treasury bill rates after early March. Second,
there was growing evidence that banks might be expanding credit in
ways net measured by the proxy. And finally, the estimates for April
pointed to a probable rise in the proxy, reversing the March decline. In
light of all these circumstances, the proviso clause was not implemented.
APRIL S-MAY 28:
OPERATIONS UNDERSCORE FIRM RESTRAINT

Economic and financial environment. Inflationary pressures and
expectations showed little sign of abating in the early spring. Economic
activity remained disconcertingly strong. Underlining the System's determination to resist inflationary pressures, the Board of Governors
announced on April 3 an increase of Vi percentage point in reserve
requirements against demand deposits, effective April 17, and concurrently announced approval of a similar increase in the discount rate to
6 per cent (by April 8 the increase was in effect at all Reserve Banks).
The Federal Open Market Committee directed the Account Manager
to maintain firm conditions in the money and short-term credit markets
while taking account of the effects on those markets of the other monetary policy actions.
The second phase of monetary policy in 1969 was not accomplished
without complications and stresses. Banks managed reserve positions
more cautiously in the restrictive environment, usually amassing reserves each week well in excess of requirements to protect against
adverse developments in the uncertain atmosphere. Federal funds rates
ratcheted higher over the interval, not only in reflection of these pressures but also in response to the rising cost of Euro-dollar borrowing,
which resulted in part from increased speculation on an upward

220



revaluation of the German mark. Treasury bill rates, on the other hand,
were relatively steady, and the capital markets did not reflect mounting
pressures until near the end of the period.
These crosscurrents posed something of a dilemma for the conduct
of open market operations. In keeping with the sentiment of the Committee, the Account Manager tended to resolve doubts on the side of
restraint. This tendency was reinforced by the strength of the bank
credit proxy in April, by the apparent proliferation of bank credit expansion that was not reflected in the bank credit proxy, and by the
tenacity of doubts concerning the resolution of the System to hold fast
to a policy of stern restraint. The net result of System operations in the
April-May interval was to make amply clear that the Federal Reserve
was serious about monetary restraint.
Monetary aggregates were a prime concern over the interval. Time
and savings deposits continued to decline in the face of competition
from money market instruments. Private demand deposits, however,
bulged in early April (reflecting in part technical factors related to
Euro-dollar flows). Consequently, the money supply spurted at an annual rate of almost 8 per cent for the full month. Meanwhile, the bank
credit proxy expanded at an annual rate of 5.5 per cent when adjusted
for Euro-dollar borrowings. Open market operations during the month
were conditioned by these developments. Over the next month these two
aggregates weakened—the money supply rose by only about 1 per
cent and the proxy adjusted for Euro-dollar borrowings showed virtually
no change.
Total reserves, after being adjusted for the increase in reserve requirements and for seasonal variation, declined at an annual rate of 8
per cent in April but rose at an annual rate of nearly 20 per cent in
May. Nonborrowed reserves declined at a 12 per cent rate in April
and rose at a rate of 6 per cent in May. The divergent rates for total and
for nonborrowed reserves indicate how sparingly the System supplied
reserves through open market operations and the resultant greater recourse by member banks to the Federal Reserve discount window.
Such borrowing rose from an average of $918 million in March to
$996 million in April and $1,402 million in May. The effective rate for
Federal funds escalated by about 2 percentage points over the AprilMay interval to around 8.75 per cent. Net borrowed reserves climbed




221

from $701 million in March to $844 million in April and $1,102 million in May. (See Chart 2.)
Bank credit, as measured by last-Wednesday-of-the-month figures for
loans and investments, spurted over the April-May interval—rising at
a seasonally adjusted annual rate of 8 per cent, compared with 2 per
cent during the first quarter. Bank loans advanced at a 15 per cent rate
over April and May, up from 9 per cent over the first quarter. By
April the liquidity position of the banking system had deteriorated considerably. With holdings of Treasury securities at a very low level, bank
liquidation proceeded at a somewhat slower pace than in the first quarter. However, banks did reduce further the already meager rate at
which they had been acquiring tax-exempt securities. The reduced
availability of Euro-dollars during the interval also made it difficult for
banks to obtain much in the way of additional funds from this source.
Hence, banks relied increasingly on other nondeposit sources of funds,
including sales of commercial paper by affiliates and sales of loans either
outright or under repurchase agreements—a development that also had
an effect on open market operations.
Increases in most short-term market rates were substantial during the
April-May interval. The rate on 90-day Euro-dollars rose from 8Vi
per cent in March to around 10 per cent by the end of May. (See
Chart 2.) Rates offered by dealers on 4- to 6-month commercial paper
were raised from 6% per cent in late March to IV2 per cent at the end
of May. And during the same interval dealers' offering rates on bankers'
acceptances were raised from 65/s to IVi per cent.
Treasury bill rates during April-May generally fluctuated within the
same 6 to 6.25 per cent range that had prevailed since the turn of the
year. Investor demand remained relatively strong, and during the latter
half of the interval demand was augmented by the German official placement of dollars acquired as a result of increased speculation in the mark.
However, downward pressure on rates stemming from such demand
was tempered by the increasing cost of financing dealer inventories as
money market rates climbed. In this atmosphere dealers were particularly sensitive to. any shifts in supply and demand, and they became
restive whenever inventories tended to rise above the very low levels
that dealers maintained during most of the period. Although the
Treasury did not replace $200 million of the maturing April 30 bill in
the regular monthly auction (the portion sold earlier as part of a "strip"),

222



2. APRIL 2, 1969 - MAY 28, 1969
Reserves and borrowings
Adjusted bank credit proxy
BILLIONS OF DOLLARS

I

I

I

I

Basic r e s e r v e deficit

!

I

l

BILLI0NS 0F D0LLARS

ANNUAL RATE OF CHANGE, PER CENT

O

i

!

f

i

i

!

O t h e r short-term rates

i

PER CENT PER ANNUM

46 MAJOR MONEY
MARKET BANKS

I

I

I

I

I

!

Money market rates

I

I

M

h i l l MM h i II I MM

M M I I II I I M M I 4

PER CENT PER A N M
NU

Long-term rates

PER CENT PER ANNUM

BONDS

10

F E D E R A L FUNDS

NEW CORPORATE

F.R. D I S C O U N T R A T E

TAX-EXEMPT

Hi
2

9

16
APRIL

23

30

23

30

7

14
MAY

For notes see pp. 212-13.




223

it did replace the outstanding "strip" bills sold in March 1969 by adding
$300 million to each weekly auction of bills starting May 8.
Although the Treasury reduced its debt as the budget swung to substantial surplus, financing by federally sponsored credit agencies expanded. Led by the Federal home loan banks and the Federal National
Mortgage Association, such agencies raised about $1.4 billion in new
money during the April-May interval (while budgeted agencies retired
nearly $1 billion of debt). The bulk of this total was used to cushion
the impact of monetary policy on housing. The financing was confined
to the shorter-term sector of the market—the longest maturity being 39
months. Around mid-April yields on new agency offerings were as low
as 6.70 per cent, but as the market grew more congested during May,
yields edged higher. One of the last offerings during the interval, $200
million of 39-month debentures, was priced to yield 7.40 per cent.
Capital market yields actually declined somewhat in April but rose
again in May. The initially better tone in the markets was related
largely to the widespread sentiment that interest rates had reached
their peaks, an expectation that stemmed from the feeling that antiinflation programs being pursued by the Federal Reserve and the administration would prove effective. This confidence was dissipated during May as evidence of sustained inflationary pressures accumulated
and as money market rates climbed sharply.
The Treasury's May refunding was conducted in the earlier buoyant
atmosphere, however. The terms of the financing were similar to those of
the February refunding. The Treasury offered holders of notes and
bonds maturing in May and June 1969 the right to exchange their holdings into either a 15-month, 63/8 per cent note yielding 6.42 per cent or
a 7-year, 6 ^ per cent note priced at par. The yield on the short note
was the same as that offered for a comparable note in February, but the
longer maturity yielded about 21 basis points more than the 7-year note
offered 3 months previously.
In the improved atmosphere, private holders subscribed for $2.2 billion of the longer-term note in contrast to $885 million in February. As
market psychology changed, however, prices declined and by May 28
the new 15-month and 7-year notes were bid about % 2 and 1 % 2 >
respectively, below their original offering prices. Reflecting this deterioration, average yields on 3- to 5-year Treasury securities, after declining from an average of 6.33 per cent in March to 6.15 per cent during

224



April, rose to 6.52 per cent by May 28. Long-term Government bond
yields, which had fallen from an average of 6.05 per cent in March to
5.84 per cent in April, rose to 6.15 per cent by the end of May.
Demand for high-yielding corporate issues expanded sharply in
April, since many investors believed bond prices had reached bottom.
Investor demand prompted many corporations to reschedule sales of
issues postponed during the first quarter, and ultimately almost $1.3
billion of publicly offered issues were marketed, the largest monthly total
since June 1968. An innovative feature of the period was the sale of
3- to 5-year maturities instead of the typical 20- to 30-year maturities.
The expanded supply of new corporate issues soon generated investor resistance, market ebullience faded, and again yields rose toward
the end of the period. In early May, for example, new Aa-rated utility
issues were marketed to yield 7.25 per cent, 25 basis points less than
a similar issue at the beginning of April. At the end of May a similarly
rated telephone issue was reoffered to yield 7.65 per cent.
The municipal bond market was faced with two fundamental problems during the interval. The most immediate was the virtual withdrawal of banks—in recent years the major buyers of tax-exempt bonds
—from active participation in the market for new issues. Furthermore,
the intensifying pressure on bank reserve positions continued to forebode a potential liquidation of bank investments in municipal issues.
The outlook grew more clouded as the Congress considered tax-reform
measures that would have reduced the attractiveness of municipal securities to investors, especially banks. Nevertheless, municipal yields followed the pattern in other sectors of the capital markets. By the end
of April the Bond Buyer's index of yields on municipal bonds had
reached 5.09 per cent, a 20-basis-point decline since the end of March.
A surge of financing activity accompanied the improved market tone—
driving the index above it postdepression high to 5.60 per cent by the
end of May.
Open market operations. System open market operations in the
April-May interval were directed first at maintaining firm conditions in
the money market—confirming the effects of the April increases in reserve requirements and the discount rate. As the period progressed, the
System moved toward still firmer conditions in resisting excessive
growth of the bank credit proxy in the second half of April, and in the
face of mounting evidence that banks were expanding credit increasingly




225

with funds obtained in ways not measured by the proxy. Reflecting in
part some cushioning of the increase in reserve requirements, as well as
accommodation of seasonal needs, System open market operations in
Government securities supplied a net of $1.2 billion of reserves from
April 3 to May 28.
Outright purchases of Treasury bills totaled $1.7 billion, including
$498 million purchased directly from foreign accounts, while purchases
of Treasury notes and bonds totaled $196 million. Outright sales of
Treasury bills amounted to $411 million, largely to foreign accounts.
In addition, $206 million of Treasury bills were redeemed at maturity.
Temporary reserve injections and absorptions were accomplished
through $6.7 billion of new repurchase agreements and $2.4 billion of
matched sale-purchase transactions. In order to tide the Treasury over
its mid-April period of cash stringency, the System also purchased a
total of $1.1 billion of special certificates of indebtedness, which were
redeemed by the Treasury when income tax payments flowed in. The
maximum amount of such securities outstanding in this period was $976
million.
In coordinating open market operations with the April 3 announcement of increases in the discount rate and in reserve requirements
against demand deposits, the System supplied the bulk of the projected
reserve needs for the statement week ended April 9 by repurchase
agreements at the start of the period. Thereafter the rate on Federal
funds edged progressively higher in the wake of the Board's initiatives.
The predominant trading level climbed from 6% per cent on the first
day of the period to 1V% per cent on Monday, April 7. When the rate
rose to 7% per cent on Tuesday, the Desk made a moderate amount
of repurchase agreements to mitigate further escalation. Conditions
were less taut on the settlement day, however, and the Desk sold a
small amount of Treasury bills to a foreign account under a 1-day
matched sale-purchase agreement aimed at preserving the money market firmness achieved during the week.
Federal funds rates reached new highs over the Federal tax-payment
date despite expanded over-all availability of bank reserves. This is a
prime example of the effects that a massive ebb and flow through the
Treasury's accounts can have on reserve availability and on the money
market when the buffer normally provided by tax and loan accounts
disappears. Balances in these accounts were drained prior to the April

226



15 tax date, and the Treasury covered deficits by large-scale borrowing
from the Federal Reserve Banks. These operations injected about $1
billion of reserves during the statement week ended April 16. In view
of the short-term nature of the reserve provisions, the Desk arranged
matched sale-purchase transactions—$439 million of 7-day agreements on April 10 and $235 million of 3-day agreements on April 14
—to offset the Treasury's operations. The major money center banks
bore the brunt of these operations. In the first place, the drawing down
of Treasury tax and loan balances was felt mainly by the major depositaries ("C" banks), and in the second place, matched agreements
extinguished reserves largely in the money centers. Although net borrowed reserves for the week averaged only $615 million, the lowest
level in more than a month, the skewed reserve distribution resulted in
a tighter money market, with Federal funds trading at an average of
about 7.60 per cent. The Account Manager was prepared to countenance these conditions in light of the strength of the bank credit proxy
in April. In addition, the bond markets were buoyant, reflecting expectations that the restrictive monetary policy would rapidly contain
inflationary pressures and thus be of short duration.
The System continued to exercise restraint in providing reserves over
the second half of April but was swift in absorbing reserves when
money market conditions displayed a tendency to ease. The strength of
the credit proxy in April remained a major factor guiding this conduct.
Rates on Federal funds rose to a IVi to 7% per cent range, although at
times rates were even higher; the effective rate averaged 7.63 per cent.
Member bank borrowings from the System averaged more than $1.1
billion over the two statement weeks ended April 30, and net borrowed
reserves averaged $1 billion.
The increase of Vi percentage point in reserve requirements against
demand deposits impounded about $700 million of reserves during the
statement week ended April 23, and additional reserves were drained
by the rebuilding of Treasury balances after the tax date. In this
environment banks managed reserve positions cautiously by amassing
excess reserves early in the statement week. The Desk provided necessary reserves through repurchase agreements and outright purchases of
bills at the start of the week but did not attempt to relieve entirely the
mounting pressures in the money market. When conditions began to
reflect the accumulation of superfluous reserves toward the end of the




227

week, matched sale-purchase agreements were used to absorb reserves
and underscore the System's commitment to restraint.
Banks generally switched to the opposite strategy of reserve management in the statement week ended April 30—borrowing relatively little
at the discount window over the weekend and accumulating reserve deficiencies. The Desk again provided for projected reserve needs early in
the week through repurchase agreements and outright purchases of
Treasury bills. Reserve availability turned out to be less than projected
after the; weekend, however, and the money market remained firm.
But then pressures intensified at the end of the period as banks scrambled to cover reserve deficiencies. In this event the System provided
$697 million in reserves through repurchase agreements over the final
2 days of April. Nevertheless, bank bidding for a diminishing supply
of funds forced the Federal funds rate briefly to a new high of 9lA
per cent on the settlement day, April 30.
The Federal funds rate eased to 8.25 per cent on May 1 but ratcheted
upward over the rest of the month—reaching new high ground prior
to each weekend before dipping as the weekly settlement date approached. For May as a whole, the effective rate on Federal funds
averaged 8.67 per cent, a full percentage point higher than the average
of the last 3 weeks of April. To some extent, this increase reflected a
diversion of funds out of the Euro-dollar market into speculation in the
German mark, which intensified demands for Federal funds. The cautious management of banks' reserve positions also contributed to the
outcome. In the uncertain climate, and in view of the deep basic reserve
deficit in the money centers, banks continued to bid aggressively for
Federal funds at the start of each statement week.
In this environment, the Account Manager used repurchase agreements on each Thursday and Friday to moderate the strong pre-weekend pressures in the money market. After midmonth, tautness also
tended to persist after the weekends and repurchase agreements were
used on several other occasions. The generally buoyant state of the
Treasury bill market and low dealer inventories precluded more than
modest reserve injections through outright purchases of bills in the
market during the interval. Outright purchases of Treasury bills from
foreign accounts, when possible, were helpful in providing for longerterm reserve needs, and after the Treasury's refunding was completed,
the Desk purchased some coupon-bearing Government obligations.

228



Because of the low levels of dealer inventories, the Desk also found it
necessary on several occasions to request Government securities dealers
to use customer collateral to expand the volume of repurchase contracts.
More than $4.6 billion in repurchase agreements against Treasury
and Federal agency securities were arranged during the four statement
weeks ended May 28. Outright purchases of bills in the market, mainly
at midmonth, amounted to $568 million, while purchases of coupon
securities totaled $195 million. Purchases of bills from foreign accounts
totaled $329 million. Although money market conditions tended to be
more comfortable after the weekends, the absorption of redundant
reserves was necessary only in the statement week ended May 14, when
System foreign currency swap agreements generated an unexpected
volume of reserves. During that period the Desk extinguished reserves
by selling $349 million of bills to a foreign account on an outright basis
and $1.1 billion in the market in 1-day matched sale-purchase transactions. For the month of May as a whole, member bank borrowing
from the Federal Reserve and net borrowed reserves averaged $1.4
billion and $1.1 billion, respectively.
MAY 29-SEPTEMBER 3:
MONETARY AGGREGATES WEAKEN AS STEADY
PRESSURE IS MAINTAINED ON BANK RESERVE
POSITIONS

Economic and financial environment. After 5 months of intensifying restraint the System held monetary policy to a generally steady
course of firm restraint over the 3 months June through August. During
this period the Federal funds rate and marginal reserve measures fluctuated around the levels achieved in May. However, the cumulative effects
of firm monetary restraint became manifest in the money and credit
markets. Banks grew quite cautious in managing their reserve positions
—often accumulating reserves well in excess of their needs. This resulted in an alternating pattern of tautness and ease in the Federal funds
market, which in turn prompted a strategy of countervailing open market operations that required frequent reversals of direction. In another
manifestation of the cumulative effects of months of pressure on bank
reserve positions, most of the monetary aggregates weakened considerably. Indeed, the decline in total member bank deposits (adjusted to




229

include Euro-dollar borrowings) induced the Account Manager to relieve pressures slightly in the latter part of July under the proviso clause
of the Committee's current policy directive.
Real economic growth slowed further during the period, but inflation continued apace, and the unemployment rate remained quite low.
Fiscal restraint was strengthened by an enlarged budget surplus in the
second quarter, and some uncertainty over fiscal policy was removed
by the early-August extension of the 10 per cent income tax surcharge
to the end of the calendar year. The Nation's balance of payments remained in a deep deficit on the liquidity basis. On the official settlements basis the balance continued in substantial surplus through the
first half of the period, but turned negative around mid-July when
borrowing of Euro-dollars by U.S. banks leveled off.
Open market operations during the June through August interval
were conducted with a view to maintaining the prevailing pressure on
the money and short-term credit markets. Member bank borrowing
from the Federal Reserve Banks averaged $1.3 billion, about the same
as during the latter half of May. Excess reserves rose somewhat, reflecting the cautious management by banks of their reserve positions in
a period of severe monetary restraint. Net borrowed reserves, therefore, declined to $1 billion on the average over the June through
August interval from $1.2 billion during the latter half of May. The
effective rate on Federal funds averaged 8.90 per cent, about the same
as in the second half of May. (See Chart 3.)
Most other short-term interest rates rose over the period, partly
under the influence of the largely unexpected boost in the prime lending rate of commercial banks to 8Vi per cent near the start of the
period, a full percentage-point increase. Offering rates on bankers' acceptances rose by % percentage point over the 3-month interval to 8Vs
per cent;, while rates on prime dealer-placed commercial paper rose
by 3A percentage point to 8V4 per cent. Rates on 90-day Euro-dollars
rose as high as 13 per cent briefly in June and closed in August at
11 VA per cent, up about 1XA percentage points for the period.
The bank credit proxy, when adjusted for a massive inflow of Eurodollars, declined at an annual rate of about 1 per cent during June.
(See Chart 3.) During July, however, the proxy declined at an annual
rate of more than 11 per cent, even after adjustment for Euro-dollar
liabilities. The sharp decline reflected largely time deposit losses in the

230



absence of any modification of maximum permissible interest rates on
such deposits. (Negotiable CD's declined by $4.7 billion, not seasonally adjusted, over the May 29-September 3 interval.) Estimates of
funds received from nondeposit sources in July, including sales of
loans to affiliates financed by sales of commercial paper, did not significantly mitigate the decline of the credit proxy in July. Consequently,
open market operations permitted somewhat more comfortable conditions to develop in the money market during the second half of July
in accordance with the Committee's directive to modify operations if
bank credit deviated significantly from projections. Despite a further
heavy drain of time deposits in August, the decline in the credit proxy
eased to an annual rate of 9.5 per cent after adjustment for a slackened
rate of growth in banks' Euro-dollar liabilities.
Over the June-August interval as a whole, the credit proxy (adjusted not only for Euro-dollar but also for other nondeposit liabilities x )
declined at an annual rate of about 4 per cent, as compared with growth
at a rate of about 1 per cent over the first 5 months of the year. Commercial bank loans and investments were little changed over the JuneAugust period. The growth in bank loans practically ceased, and net
liquidation of tax-exempt securities began. Moderate net investment in
U.S. Government securities resumed, however, largely because of bank
underwriting of $3.5 billion of tax-anticipation bills sold by the
Treasury in July. The money supply rose at a seasonally adjusted
annual rate of 1.4 per cent during the interval, down from 4.3 per
cent over the first 5 months of the year.
After 5 months of relative stability Treasury bill rates rose sharply,
reflecting in part the cumulative effects of monetary restraint. Rates on
3-month bills had averaged between 6.01 and 6.13 per cent on a
monthly basis over the January-May period but rose to an average of
6.43 per cent in June and 6.98 per cent during July and August. Upward rate momentum was evident in the bill market even before the
June 9 increase in the bank prime rate. The cost of financing dealer
positions had become increasingly burdensome, and apprehension among
dealers was raised by bill sales by foreign central banks that were
related to a movement of funds from Germany into the Euro-dollar
Commercial paper issued by bank affiliates, liabilities to branches in U.S.
territories and possessions, and loans sold under repurchase agreements to others
than banks or banks' own affiliates. In Chart 3 the proxy is adjusted only for liabilities to foreign branches.




231

3. MAY 28, 1969 - SEPTEMBER 3, 1969
Reserves and borrowings

BILLIONS OF DOLLARS

NET BORROWED RESERVES

1

I

I

I

EXCES
RESERVES

—
I

I

I

I

M

l

I

1

Basic reserve deficit

I

I 0

BILLIONS OF DOLLARS

46 MAJOR MONEY MARKET BANKS

If
t I I II 1 ! 1
Money market rates

[

1

I 1

1

1

1

PER CENT PER ANNUM

lift It if 1 1 1 1 1 1 1 1 ( 1 f n it Iti i l l m i l 1 i l l ii i l l m i h f n h hi 4
1 1 1 1 1 1 1 1 1 1
1
28
4
1
1
18
25
2
9
1
6
23
30
6
13
20
27
3
MAY
JUNE
JULY
AUGUST
SEPT.

For notes see pp. 212-13.

232



Adjusted bank credit proxy

ANNUAL RATE OF CHANGE, PER CENT

10

5

;

F R B

5

10

i

i

i I ti

i

i

i I

i

Other short-term rates

Ii

l

l

PER CENT PER ANNUM

EURODOLLAR

l i t i f l i t n l i i f i l t m h h i h i f f f i n J n i 11 t i n !
Long-term rates

il 4
PER CENT PER ANNUM

BONDS

«EW CORDATE

"[

"

•"•""•"

, '

'"'"'

TAXEXEMPT

I f i n f n n i i i 111 H 11111 n I m 11111! i n i i f 1111 M 11111111 m 1111 i 1 4
1
1

8

1
5
22
JANUARY




29

5

1
3
1
9
FEBRUARY

26

5

12
19
MARCH

26

2
APRIL

233

market. The increase in the prime rate sparked a sharper rise in bill
rates, and rates climbed still higher in the wake of the June 26 announcement of the Board of Governors' proposal to apply a 10 per
cent reserve requirement against Euro-dollar borrowings by member
banks to the extent that such borrowings exceeded the daily-average
amounts outstanding in the 4 weeks that ended May 28, 1969. (The
proposal was adopted on August 12, with the new requirement to be
met beginning October 16, based on an initial 4-week computation
period beginning September 4.)
The Treasury's sale of $3.5 billion of tax-anticipation bills early in
July resulted in even higher rate levels. By mid-July, however, sentiment in the market had improved and rates were generally stable over
the remainder of the interval, although the added market supply resulting from the Treasury's sale of the $2.1 billion "strip" of bills with
an average maturity of 45 days caused some uncertainty during the
second half of August.
Yields on intermediate-term Treasury notes and bonds also worked
higher over the interval. Average yields on 3- to 5-year Government
securities rose from 6.33 per cent in May to 6.64 per cent in June and
then stabilized around 7.05 per cent during July and August. Investor
demand was light during most of the interval, and activity was dominated by professional trading. In this atmosphere, price movements
reflected largely shifts in expectations over the future course of interest
rates—with uncertainty over congressional passage of the extension of
the income tax surcharge being a matter of concern. Activity expanded
somewhat toward the end of the interval as attention focused on the
Treasury's August refunding, and the reinvestment of the proceeds
of the sale of Alaskan oil-land leases generated some demand for Government securities.
In its quarterly refunding the Treasury offered a single 18-month
note in exchange for the $3.4 billion of notes maturing on August 15
(of which $3.2 billion were held by private investors). The new note
carried a coupon of 7% per cent and was priced to yield 7.82 per
cent, 140 basis points more than the yield offered on a 15-month note
only 3 months earlier. The terms were enthusiastically received by
market participants, who were encouraged by the absence of a longerterm issue and the Treasury's decision not to pre-refund the large
October maturity. While the 11.1 per cent devaluation of the French

234



franc injected a note of uncertainty into the market, the atmosphere
was improved by congressional extension of the 10 per cent tax surcharge to the end of the year. All but 13 per cent of the maturing
issue held by the public was exchanged for the new note, a relatively
low rate of attrition by recent standards.
Federal agencies raised about $2.4 billion, net, of new money in
the short- and intermediate-term markets during the interval, with more
than half of this new debt coming to market toward the end of August.
The Federal home loan banks and the Federal National Mortgage
Association were again the heavy borrowers, accounting for about
$1.7 billion. In addition, the Commodity Credit Corporation, which
does not usually tap the central money market, sold $700 million of
39-day certificates through competitive bidding in June. Yields offered
by the agencies on 6- to 24-month maturities, which were predominant among the new issues, were in a 7.85 to 8 per cent range at the
start of the period, but at the end of August a 14-month issue was
priced to yield 8.30 per cent. This figure was a new high for yields
on agency securities, except for the CCC issue, which sold at an average
discount rate of 8.723 per cent. Two sizable 5-year issues marketed in
August resulted in downward pressure on prices of similar maturities of
Treasury obligations.
The corporate and Treasury bond markets were relatively stable
over the interval. The increase in the prime rate at the start of the
period generated sharp price declines, but prices fluctuated in a relatively narrow range thereafter. New corporate financing was heavy, but
higher yields attracted fairly good investor demand for most new
issues that were attractively priced. Most Aa-rated utility bonds marketed during the period were priced to yield between 7.75 and 8.15
per cent as compared with the 7.25 to 7.65 per cent range prevailing
during May. In the secondary market average yields on Aaa-rated corporate bonds fluctuated in a 6.90 to 7.10 per cent range on a weekly
basis; and in the market for long-term Treasury bonds weekly average
yields ranged from 5.98 to 6.11 per cent through the end of August.
The municipal bond market continued to labor under the threat of
modification of the tax-exemption privilege. The Bond Buyer's index of
yields on 20 tax-exempt issues rose from 5.60 per cent at the end of
May to 5.82 per cent after the prime rate increase. (This was the
highest point reached by this index since it was first calculated in 1904.)




235

New financing activity was light during the summer—reflecting in large
part the restrictions of locally imposed interest rate ceilings—and by
mid-July the Bond Buyer's index had fallen almost to the level of late
May.
However, conditions deteriorated sharply in the wake of the House
Ways and Means Committee's tentative approval of a "minimum tax"
on previously tax-free income. The heavy tone lifted somewhat when
it appeared that new tax-reform proposals would not inhibit future
buying of municipal securities by commercial banks. Nevertheless,
major uncertainties remained and market participants preferred to stay
on the sidelines until the outlook became clearer. Accordingly, prices
resumed their downward course, and the Bond Buyer's yield index
climbed to a new high of 6.26 per cent by the end of August.
Open market operations. System open market operations during the June through August interval were aimed essentially at maintaining the degree of pressure on the money and short-term credit
markets that had been achieved during the first 5 months of the year.
A tendency for market pressures to ease during the latter half of July
was not fully offset by open market operations, however, in view of the
substantial decline in the bank credit proxy. Even so, the Account
Manager responded very cautiously to the weakness in bank credit in
order to avoid giving the impression of a basic shift in the thrust of
monetary policy on the eve of a Treasury refunding.
Throughout the period there was a tendency for banks to manage
their reserve positions cautiously—piling up reserves in excess of their
requirements in order to avoid being caught short at the last minute.
In consequence, money market pressures tended to intensify early in
each statement week and to ease toward the end of each statement
week. To counter this alternating pattern of stringency and ease in the
money market, the System frequently had to reverse direction within a
statement week, first injecting and then absorbing reserves.
On a net basis, operations in Government securities supplied $951
million of reserves over the period May 29 to September 3. The System injected reserves through outright purchases of $2.4 billion of
Treasury securities and repurchase agreements of $5.7 billion against
Treasury and Federal agency securities. In order to absorb reserves,
the Account Manager made frequent use of matched sale-purchase
transactions—arranging a total of $8.1 billion during the interval—as

236



a means of countering easing conditions in the money market with little
effect on Treasury bill rates. The System absorbed additional reserves
through outright sales of $1.1 billion of Treasury bills and redemptions of $207 million of maturing bills.
Early June was a period of stringency in the money market, as the
basic reserve deficit of the major money center banks deteriorated
sharply. The large banks acted vigorously to curb credit demands and
deposit drains and to acquire funds from other sources: On June 9
several of these banks announced an increase of 1 percentage point in
the prime rate to 8Vi per cent; borrowings of Euro-dollars rose by
$3 billion over the 3 weeks ended June 18—driving 90-day rates for
these funds as high as 13 per cent; bidding for Federal funds intensified; and heavy use was made of the discount window, especially by
banks outside the major money centers.
In this climate, banks accumulated excess reserves early in each
statement week, and money market conditions tended toward alternate
tautness and ease. This pattern was not a serious problem during the
first statement week of June. The System injected reserves by making
$665 million of repurchase agreements against Treasury and agency
securities and bankers' acceptances and by purchasing outright $505
million of bills from foreign accounts. Federal funds traded predominantly at 9% per cent through Monday, June 2, and the System took
no action to counter a slight easing of the effective rate to 8.50 per
cent on the settlement day. Pressures intensified in the statement week
ended June 11, however. Federal funds climbed as high as 10 per
cent before the weekend, and the System responded by providing $789
million of reserves through repurchase agreements and $71 million
through outright purchases of bills from foreign accounts.
The increase in the prime rate on Monday, June 9, threw the
Treasury bill market into a state of temporary disruption. Further complicating the System's operations, foreign accounts presented the Desk
with more than $700 million of Treasury bills to be sold over the three
remaining days of the statement week, an abnormal volume of transactions that reflected primarily movements of funds from Germany
into the Euro-dollar market.
Given the state of the bill market, it was doubtful that the market
could have absorbed this volume even at sharply higher interest rates.
On the other hand, money market conditions were becoming more




237

comfortable, and purchases of these bills by the System would have
added undesirably to reserve availability. Faced with this predicament,
the Account Manager compromised by selling more than $300 million
of the bills in the market and purchasing $395 million for the System
Account. By the settlement day, June 11, the effective rate on Federal
funds fell to 6 per cent and the Desk executed $500 million in overnight
matched sale-purchase agreements—partially offsetting the reserve effect of the outright purchases. Even so, net borrowed reserves for the
week averaged $812 million, the lowest level since mid-April.
Reflecting in part advance preparations by both banks and corporations, the statement week encompassing the June corporate income
tax date was relatively uneventful. However, System operations continued to be complicated by sales of bills for foreign accounts. Although money market conditions tended to be relatively comfortable
and some reserve absorption was called for, the System purchased
$337 million of bills offered by foreign accounts rather than press them
on a nervous bill market. The Desk partially offset this activity, however, by selling in the market $124 million of short-dated bills for
which there was a good demand and by arranging a $200 million
matched sale-purchase transaction over the weekend. When money
market conditions became decidedly easier toward the end of the statement period, the System became more aggressive and sold $1,350 million of bills under matched agreements in the market and $150 million
to foreign accounts on an outright basis.
Open market operations continued to supply and absorb reserves
alternately in seeking to maintain prevailing pressure in the money and
short-term credit markets over the next 4 weeks, which ended on July
16. During this interval the Account Manager arranged $1,220 million
of repurchase agreements and $2,170 million of matched sale-purchase transactions. The System also purchased outright $559 million of
Treasury securities, including $67 million of coupon issues, and sold
$300 million of short-term Treasury bills outright. Member bank borrowing from the Federal Reserve Banks and net borrowed reserves
averaged $1.3 billion and $1.1 billion, respectively, about the same
average levels as during the prior 4-week interval.
Preparations for the quarterly bank-statement publishing date at the
end of June and the Independence Day holiday weekend elicited aggressive bidding for Federal funds, however, and rates reached high

238



levels at times. Just before the end of June, for example, the effective
rate rose to 10.5 per cent, a rate that was not to be exceeded in 1969.
Tautness reemerged on the July 16 settlement date, and although the
System combated pressures by repurchase agreements, Federal funds
traded briefly at 11 per cent, also a record that was not to be surpassed
for the remainder of the year. During the 4-week interval ended July
16, however, the effective rate averaged 8.9 per cent, the same as over
the June-August period as a whole.
Indications of weakness in the credit proxy in July brought about a
change of emphasis in open market operations after midmonth. Given
some uncertainty about the actual course of credit and in view of the
forthcoming Treasury financing, the Account Manager cautiously invoked the proviso clause but sought to avoid giving an impression of
a basic shift in monetary policy. Interacting with a seasonal decline in
money market pressures, open market operations were aimed at allowing a natural abatement of pressures to occur. The slight relaxation of
the System's stance was not apparent in marginal measures of reserve
availability, but the average effective Federal funds rate for the 2 weeks
ended July 30 eased to about 8.25 per cent.
The Account Manager arranged $216 million of overnight repurchase agreements on Thursday, July 17, in order to moderate early
firmness in the money market. Soon, however, a swing of reserves to
the money center banks generated an easier tone; in fact, the basic
reserve positions of the 46 major money center banks improved by
$1.5 billion over the last 2 weeks of July. But the Desk did not allow
the full effect to remain. On Tuesday and Wednesday, July 22 and
23, the System absorbed $1 billion in reserves through matched salepurchase agreements and $186 million through outright sales of
Treasury bills to foreign accounts.
The Desk took no additional significant action until the final 2 days
of the July 30 statement period. At that time a large accumulation of
excess reserves prompted the Desk to arrange a total of $1.2 billion
of matched sale-purchase agreements. The reserve absorption over the
2 weeks was sizable but not so large as it would have been if the
Account Manager had not been acting under the proviso clause to permit some modification of money market conditions.
Firmer money market conditions emerged during the first 2 weeks
of August as the major money center banks came under pressure and




239

revised estimates of the credit proxy indicated that there was no need
to continue the moderation of money market pressures engendered
earlier. Open market operations aggressively supplied reserves during
the first week of the interval to offset a heavy drain of reserves by
market factors and to moderate mounting pressures. The Desk made
a total of $1.7 billion of repurchase agreements, arranging them on all
but the first day of the statement week ended August 6. Even so, the
effective Federal funds rate rose from 8.75 per cent on Thursday to
9.50 per cent over the next 2 days and to a 10.00 to 10.25 per cent
range over the final 2 days of the period. One factor restraining the
Account Manager from injecting still larger amounts of reserves was
the possibility that publication of abnormal weekly reserve data might
convey a misleading impression of System action to ease up in order to
assist the Treasury financing then in progress.
Taut conditions persisted into the next statement week. Federal
funds traded mainly at 10 per cent on Thursday, August 7, and in a
10.50-10.75 per cent range the next day. In this event, the Desk supplied $789 million in reserves through repurchase agreements. Pressures abated after the weekend, however, reflecting heavy member
bank borrowing at the Reserve Banks and the extremely cautious accumulation of $4.8 billion in excess reserves over the weekend. The
System resisted the easing that this generated after the weekend, but it did
not do so aggressively in view of the high rates that had prevailed in the
recent past and the desirability of giving banks an incentive to change
their overly cautious behavior. On Tuesday the System absorbed $350
million of reserves through overnight matched sale-purchase transactions, and on Wednesday it absorbed $335 million through similar
agreements. This token resistance did not prevent the Federal funds
rate from declining to as low as 2 per cent before the close on the
settlement; date.
Open market operations during the three statement weeks ended
September 3 consisted of alternately supplying and absorbing reserves
in response to widely fluctuating money market conditions. The middle
week of the interval provided some noteworthy variation, since banks
apparently misjudged reserve availability. As usual, the weekend accumulation of excess reserves in the banking system began to be felt
on Monday. Federal funds traded around 8 per cent but the System,
aware thatt reserve availability was not unduly high, showed only token

240



resistance to the easing in the funds market by arranging a modest
amount of matched transactions. As expected, banks were too aggressive in paring excess reserves and a scramble for the remaining supply
occurred on Tuesday. The Desk then injected reserves through repurchase agreements to relieve the stringency.
Over the 3 weeks ended September 3, the Account Manager arranged repurchase agreements totaling $769 million and matched salepurchase transactions aggregating $973 million. On an outright basis,
the System purchased $512 million and sold $222 million of Treasury
bills. The effective rate on Federal funds averaged a shade over 9
per cent during the 3-week interval, while member bank borrowing
from the Federal Reserve Banks and net borrowed reserves averaged
$1.2 billion and $1 billion, respectively.
SEPTEMBER 4-DEGEMBER 31:
FIRM CONDITIONS MAINTAINED IN THE
MONEY MARKET WHILE DOWNWARD PRESSURE
ON MONETARY AGGREGATES RELAXES SOMEWHAT

Economic and financial environment. The concluding 4 months
of 1969 were an exceptionally trying period for the money and securities
markets and for the conduct of open market operations. Despite intervals of market optimism, yields rose to historic highs as the markets
reflected discouragement over the tenacity of inflationary pressures and
expectations. Contributing to the deepening concern were disappointment over the progress made toward ending the Vietnam conflict and
concern about a premature end to fiscal restraint, which might necessitate a prolongation of stern monetary policy.
The market for Treasury bills was subject to especially intense pressure during the last 2 months of the year as foreign accounts liquidated
bills in large volume while the Treasury was adding to the supply. In
these circumstances the System often faced the task of delicately
balancing disparate objectives. The Account Manager sought both to
maintain firm conditions in the money market and to avoid exacerbating the weakness in the Treasury bill market. But it was also necessary to avoid giving any false signals that monetary restraint was being
relaxed.
Prices and costs continued to rise rapidly during the final months of
the year, although real growth in the economy came to a halt. Industrial




241

production declined each month after July, and expansion in personal
income *ind in retail sales slowed markedly after August. Growth in
employment also slowed. The unemployment rate jumped sharply in
September, then fell just as sharply in November. Businessmen, however, tending to believe that the slowdown in the economy would be
brief, continued to make plans for large capital outlays in 1970. A
sharp improvement in the balance of payments in the fourth quarter
reflected in large part a massive—and to some extent temporary—
influx of funds from abroad in the latter half of December.
On the average, reserve availability eased slightly during the final
4 months of the year, but short-term interest rates rose. Net borrowed
reserves during the September-December period averaged $915 million, about $100 million below the average of the preceding 3 months.
And member bank borrowing from the Federal Reserve averaged $1.1
billion, about $150 million less than during the previous 3 months.
However, Federal funds traded at an average effective rate of about
9 per cent, slightly above the average of the previous period. (See
Chart 4.)
Rates on 90-day Euro-dollars fell from about 11V4 per cent in early
September to less than 9 per cent in late October but climbed thereafter
to a range of ll 1 /^ to HVi per cent in the latter half of December.
Prime commercial paper rates rose 3A of a percentage point over
the final 4 months of the year to 9 per cent on 4- to 6-month maturities.
(See Chart 4.) Posted rates on bankers' acceptances rose by the same
margin to record highs of 9Vs per cent bid and 8% per cent offered.
The monetary aggregates were quite volatile during the last 4 months
of 1969, but on the average they showed more strength than had prevailed during the summer. Total member bank deposits were little
changed on balance over the last 4 months of the year, following the
steep decline of the previous 3-month period. Euro-dollar liabilities of
member banks, after more than doubling during the first 8 months of
the year to more than $14 billion, also showed little net change during
the succeeding 4 months. A number of large banks, however, obtained
substantial amounts of funds through sales of commercial paper by holding companies or subsidiaries, and lesser amounts were obtained through
branches in U.S. territories and possessions. After adjustment to include
these funds, the bank credit proxy grew at an annual rate of about 2 per
cent over the last 4 months of the year, compared with a 4 per cent rate

242



of decline during the preceding 3 months. The expanded proxy rose
slightly in September, but then declined sharply in October—prompting
the Account Manager to modify operations temporarily under the proviso clause of the Committee's directive. The expanded proxy rebounded strongly in November but increased only slightly further in
December.
The rapid growth of commercial paper issued by affiliates of banks
to raise funds for the banks prompted the Board of Governors to consider steps to stop the flow. Bank-related commercial paper outstanding had increased from $1 billion at the end of June to $3.6 billion
by October 29. On that date the Board of Governors proposed amendments to Regulation Q that would impose interest rate ceilings on paper
issued by bank holding companies. At the same time it ruled that such
paper issued by subsidiaries of banks was already subject to Regulations
Q and D (reserve requirements). However, the Board of Governors
suspended interest rate ceilings and waived reserve-requirement penalties on the latter paper, to the extent that the volume did not exceed
amounts outstanding on October 29, and it took no final action on
holding company paper before the end of the year. Bank-related commercial paper continued to grow during the final 2 months of the year,
but at a slower pace than in immediately preceding months.
Loan demand remained strong during the interval, and in view of the
lack of significant deposit growth, the banks were hard pressed for funds.
To obtain funds, they liquidated U.S. Government securities at a rapid
rate and continued to reduce holdings of tax-exempt securities during
the last 4 months of the year. Over the period the rate of decline in time
deposits slowed considerably as some banks, particularly those in New
York City, succeeded in placing negotiable CD's with foreign and international official accounts, which are exempt from Regulation Q ceilings
on interest rates. Although total CD's in the banking system continued
to decline over the final 4 months of the year—bringing the decrease
for the year to nearly $12 billion—CD's at the New York City banks
rose by about $500 million. The money supply grew at an annual rate
of 1 per cent—about the same as over the previous 3 months.
In the securities markets, a spirited rally during October provided
the only respite from the bleak atmosphere that engulfed the markets
during most of the final 4 months of the year. In September bond yields
had risen to new highs as a result of heavy financing demands and mar-




243

4. SEPTEMBER 3, 1969 -DECEMBER 31, 1969
Reserves and borrowings

BILLIONS OF DOLLARS

EXCESS
RESERVES

I

I

I

I

ll

I

I

I

I

I

il

I

I

Basic reserve deficit

i

1 0

BILLIONS OF DOLLARS

46 MAJOR MONEY MARKET BANKS

2

i
i
\
I il
E
M o n e y market rates

l

I

1f I

i

i

1 1 1 \

I

I 1

PER CENT PER ANNUM

i it i H H h i H 1 H i i h M 1 1 iif f m hmiii11f nI
1

Adjusted bank credit proxy is adjusted, beginning Sept. 3, not only for liabilities
to foreign branches but also for commercial paper issued to bank affiliates, liabil-

244



Adjusted bank credit proxy

ANNUAL RATE OF CHANGE, PER CENT

10
5
f

+

•
gN.Y. BANK

°

f

5

!
i
I t
Other short-term rates

liiithiitlf iithi i h i i n h i i h i f

I

!lll

I

f

10

il

!

1

I

I I

PER CENT PER ANNUM

i l li n l i l t h i i h m l n u th i h u t l u i i h i f i t t i i l 4

Long-term rates

P R C N P R ANNUM
E ET E

BONDS
10
HEW CORPORATE

111ii1111i 1 i1111111111tt111i111milliu111i1111111111m\1111111uf i M111111JrnI 4
3

10

17
SEPTEMBER

24

1

8

15
22
OCTOBER

29

5

12
19
NOVEMBER

26

3

10
17
DECEMBER

24

31

ities to branches in U.S. territories and possessions, and loans sold under repurchase agreements to others than banks and banks' own affiliates. For other
notes see pp. 212-13.




245

ket fears. The news in early October that the unemployment rate had
leaped to 4 per cent in September sparked a shift in sentiment, but as
time passed, hopes for a fundamental change in the market environment faded. The President's policy statement on Vietnam on November 3 disappointed those market participants who had hoped for a more
dramatic peace initiative.
Even more discouraging were subsequent statements by the monetary
authorities suggesting the need for restraint well into the future. Disillusionment—even disarray—was caused by the possibility that the
combined effects of congressional spending and tax reform measures
would be inflationary. Heavy sales of Federal agency issues were a
major factor in the rise in interest rates during the period. Against this
background, the average yield on long-term Treasury bonds climbed
from an average of 6.02 per cent in August to a high of 7.13 per cent
in late December, while the average yield on 3- to 5-year issues rose
from 7.08 per cent to a high of 8.36 per cent.
The Treasury's massive refunding in October was the highlight of
activity in the market for Treasury notes and bonds during the interval.
Three new notes were offered in exchange for $6.4 billion of notes and
bonds maturing on October 1 and almost $2.5 billion of bonds maturing on December 15. The new notes included a 19^-month maturity
yielding 8 per cent; a 3-year, IV2 -month maturity yielding 7% per
cent; and a 6-year, lO1/^-month maturity offered with a IV2 per cent
coupon at a discount to yield about 7.59 per cent. The public's response to the offering was better than had been expected in light of the
unsettled market conditions, and 76 per cent of the private holdings of
the eligible issues were exchanged for the new notes. The exchange
attrition was met the next month by the sale of $2 billion of taxanticipation bills.
Altogether, through sales of tax bills and additions to the regular
weekly auctions, the Treasury increased the amount of bills outstanding by a net of $6.5 billion during the last 3 months of 1969. In addition, the supply of bills was augmented by heavy sales by foreign
accounts in the wake of the revaluation of the German mark; such
sales exerted strong upward pressure on bill rates. The System often
facilitated orderly adjustments in rates by purchasing a substantial part
of the bills sold by foreign accounts. Over time, of course, these purchases correspondingly reduced System purchases in the market to

246



meet seasonal reserve needs. Faced with high financing costs, dealers
often sought aggressively in this period to reduce their swollen inventories. Against this background, average issuing rates on both the 3and 6-month bills rose to records of 8.10 per cent in the weekly auction
on December 29. For the 3-month bill, this represented an increase
of 108 basis points from early September and 190 basis points from
the end of 1968.
During the final 4 months of 1969, the Federal home loan banks
and the Federal National Mortgage Association each came to the market about once a month to obtain a large volume of new funds. Federally sponsored credit agencies as a whole raised nearly $3.4 billion
of net new money during the last 4 months of the year, with most
offerings having maturities of 3 years or less. The highest offering
rate occurred in mid-December, when the Federal intermediate credit
banks sold a 9-month issue yielding 8.80 per cent; earlier these banks
had sold issues with similar maturities at 8.125 per cent (in midAugust) and at 7.95 per cent (in mid-October).
The corporate bond market labored under a heavy schedule of new
issues from September through mid-December. Illustrative of the yield
movements, a new Aaa-rated issue of a telephone company was sold at
a record 9.10 per cent on December 2, compared with 8 per cent on a
similar issue 6 weeks earlier. New-issue yields on Aa-rated electric utility bonds rose from 8.10 per cent in late August to a high of 9.20 per
cent on December 1; the last such offering of the year yielded 8.95 per
cent.
Gloom also pervaded the tax-exempt bond market during most of
the interval. To be sure, the Bond Buyer's index of yields on 20 bonds
declined to 5.92 per cent in mid-October, reflecting in part news that
the tax-exempt status of municipal bonds would not be modified by
the pending tax-reform legislation. But as in other market sectors,
hopes for a sustained market improvement were soon deflated. The
inability of many borrowers to market issues under local rate ceilings
remained the dominant characteristic of the market during the interval.
Indeed, nearly half of the federally guaranteed bonds of local housing authorities offered in September and November failed to receive
bids under the statutory 6 per cent ceiling. Although new-issue activity
remained severely hampered by high levels of interest rates, investment demand was also limited by the steady pressure on bank liquidity.




247

The Bond Buyer's index of yields on 20 municipal bonds rose to a new
high of 6.90 per cent in mid-December and then closed the year at
6.79 per cent.
Open market operations. System open market operations during
the final 4 months of 1969 were aimed at maintaining firm conditions
in the money and short-term credit markets, while at the same time trying to moderate strains in these markets. Extraneous events made it
extremely difficult to achieve these goals. Among the complicating
factors were sharp swings in the Treasury's cash balance, unexpected
changes in Federal Reserve float, erratic movements in the monetary
aggregates, sharply escalating interest rates, and the threat of the
emergence of disorderly markets. Speculation in the German mark and
large-scale sales of Treasury bills by foreign accounts were added problems. Although weakness in the credit proxy prompted implementation
of the proviso clause on the side of less restraint for a brief period
in October, the Account Manager did not seek tighter conditions to
resist the rebound in deposit growth in November because of sharply
rising interest rates. Rather, as the year drew to a close, the Account
Manager sought to alleviate undue pressures in financial markets—
pursuant to the directives of November 25 and December 16, which
called for modification of operations if unusual pressures arose—without forsaking reserve objectives or giving misleading signals of the
System's intentions.
The System injected a net of $2.7 billion of reserves through operations in Government securities during the period September 4-December 31, a time of heavy seasonal reserve drains. It purchased $2.4 billion of Treasury bills and $192 million of coupon securities in the
market and $3.3 billion of bills directly from foreign accounts, all on
an outright basis. The System also purchased directly from the Treasury—and subsequently redeemed—$1.6 billion of special certificates
of indebtedness in anticipation of mid-September corporate income tax
receipts; the maximum amount of such securities outstanding in this
period was $1.1 billion. In addition, the Account Manager arranged a
total of $9.5 billion of repurchase agreements against Treasury and Federal agency securities.
The System withdrew reserves during the interval through outright
sales of $663 million of Treasury bills in the market and $1.9 billion
to foreign accounts and through the redemption of $649 million of

248



maturing bills. Short-term reserve absorptions were also accomplished
by means of $8.2 billion of matched sale-purchase transactions.
The heavy recourse to direct Treasury borrowing from the System
resulted from a substantial underestimation by the Treasury of its
cash needs in early September. By September 10 the Treasury had
found it necessary to borrow a total of $1.1 billion through issuance
of special certificates of indebtedness to the Federal Reserve; this was
the highest volume of such certificates outstanding in 16 years. The
resultant swing in reserves was pronounced: Treasury operations and
other market factors injected $1.9 billion of reserves on the average
during the September 10 statement week; however, 2 weeks later $1.3
billion of reserves were absorbed by Treasury operations and other
market factors.
In order to maintain prevailing conditions in the money market early
in the interval, the System absorbed reserves. Nevertheless, outright
sales were hampered by the unwillingness of dealers to increase positions substantially under existing market conditions. Hence, the System
sold only $226 million of Treasury bills outright in the market and an
additional $247 million to foreign accounts during the statement week
ended September 10. The matched sale-purchase technique again
proved invaluable for short-term reserve absorptions. But there were
still complications.
Normally this technique tends to be used when the money market
is comfortable—that is, when banks have built up substantial excess
reserve positions. Due to the urgency of the task, however, the System
sought to execute matched agreements at a time when bidding for funds
by banks was quite strong. For example, on Friday, September 5,
after some outright sales of bills for foreign accounts proved the market to be unreceptive, the Desk attempted to generate between $500
million and $800 million of matched transactions. With Federal funds
trading at around 9XA per cent, however, only $360 million of overthe-weekend agreements could be arranged at reasonable rates.
On the following Monday and Tuesday banks were somewhat more
responsive to System offers of matched agreements, and by Wednesday
excess reserves were sufficiently plentiful that the System was able to
conclude $1.2 billion of overnight matched agreements. In all, $2.7 billion of matched agreements were arranged over the four business days




249

September 5-10. Nevertheless, the superfluity of reserves was not entirely offset, and net borrowed reserves fell to $349 million, the lowest
level since the first week of 1969.
To facilitate the necessary absorption of reserves during the following statement week, which included the tax date, the Desk indicated
to dealers during the afternoon of Wednesday, September 10, that the
System might seek the next day to arrange matched agreements of as
long as 1 week in duration. The unusual advance notice made it possible for dealers to explore potential sources of funds and paved the
way for the large operation that followed. Thursday's operation proceeded smoothly, and dealers submitted a broad range of propositions
for matched agreements; of these the Desk accepted $1 billion for 7
days and $142 million for shorter periods. The next day it arranged
$750 million of matched agreements for 3 days. Float failed to provide
the volume of reserves projected, however, and the System reversed
gears the day after the September 15 tax date—providing $430 million
in repurchase agreements for 1 day to moderate the tautness that was
emerging in the money market.
The drain of reserves from the banking system after the tax date was
offset with a minimum of direct open market operations. The redeliveiy
of Treasury bills sold earlier under matched agreements provided substantial reserves during the statement week ended September 24, and
movements in market factors supplied a satisfactory cushion. The subscription books for the Treasury's final 1969 refunding were open at
the end of this period—making it necessary for the System to maintain
an even keel in the money market. Since reserve availability was ample,
the System sold $182 million of bills to foreign accounts on Monday,
September 22, to keep money market conditions from easing ;and so as
to be in a position to relieve upward pressures on rates if they should
emerge. When trading in Federal funds did firm late in the period, the
Desk arranged $175 million of short-term repurchase agreements and
also $218 million of 8-day agreements—the latter against issues eligible for exchange in the Treasury's financing—to mature on the payment date, October 1.
For the three statement weeks ended September 24, the effective rate
on Federal funds averaged about 9.10 per cent. Reflecting the superfluity of reserve availability early in the period, however, borrowings
and net borrowed reserves over the interval averaged $954 million and

250



$712 million, respectively—both about $300 million below the average
of the preceding 3 months. Market observers were aware of the unusual
circumstances leading to these results, and there was no tendency to
read any policy significance into these developments.
During the three statement weeks ended October 15 open market
operations aggressively supplied reserves to offset the effects of market
factors and to relieve taut money market conditions. The System arranged $3.1 billion of repurchase agreements during the period and supplemented these agreements by outright purchases of $1.1 billion of
Treasury bills. In consideration of longer-term reserve needs, it also purchased $129 million of Treasury coupon securities on October 1.
Against this background, rates on Federal funds were held in a 9V4 to
93A per cent range, with the effective rate averaging about 9.40 per
cent. Member bank borrowings and net borrowed reserves averaged
about $1.3 billion and $1.0 billion, respectively, approximately the
levels that had prevailed, on the average, over the 3 months before the
September tax period.
Revised projections on Friday, October 17, indicated that the bank
credit proxy was declining in October at an undesirably sharp rate. In
line with the proviso clause of the Committee's directive, therefore, the
Account Manager permitted somewhat more comfortable money market conditions to develop. On the first 2 days of the statement week
ended October 22, the System purchased outright $332 million of
Treasury bills and arranged a total of $679 million of repurchase agreements to combat lingering tautness in the money market. Thereafter,
market factors began to supply a substantial volume of reserves, and
the Federal funds rate eased steadily.
The System did not resist this trend aggressively, but it did absorb
a portion of the superfluity of reserves by executing $1.9 billion of
matched sale-purchase agreements over the final 3 days of the statement week ended October 22. Reflecting the System's implementation
of the proviso clause, net borrowed reserves averaged $859 million,
while the effective rate on Federal funds averaged 8.68 per cent, 1 percentage point lower than the previous week's average.
The estimate of the credit proxy was revised upward on October 24,
and the Account Manager was less tolerant of comfortable money market conditions during that statement week. The Desk was swift in absorbing superfluous reserves—selling $284 million of bills outright and,




251

over 4 days, arranging $1.4 billion in matched agreements. In this event
net borrowed reserves rose to $1.1 billion, a level at the higher end
of the range prevailing since May, although the average effective Federal funds rate slipped to 8.39 per cent as reserves shifted toward the
money center banks.
Money market developments during the three statement weeks ended
November 19 were most unusual. Fortunately, the divergent pressures
that emerged dovetailed satisfactorily and steady conditions were preserved, although an exceptional volume of open market operations was
required. Market factors absorbed more than $2.2 billion of reserves,
net, during this interval. The reserves were drained chiefly from the 46
major money center banks, and during the second week of the period
these banks had a basic reserve deficit averaging $5.2 billion, the deepest deficit of the year.
The international money flows that followed in the wake of the revaluation of the German mark on October 24 had confronted the Desk
with the task of selling a very large volume of Treasury bills for foreign
accounts. Since the absorption of reserves by market factors was projected to be of a relatively long duration, the System was in a position
to buy most of these bills on an outright basis, thereby leaving the
apprehensive bill market largely undisturbed by the foreign liquidation
of bills. Purchases from foreign accounts during the period October
29-November 13 totaled $1.6 billion.
In spite of these reserve injections, money market conditions remained unduly firm, and the System injected $1.4 billion of aidditional
reserves through repurchase agreements from October 31 through November 10. The flow of bills from foreign accounts slowed toward the
end of the interval, and since reserve injections were still called for, the
Desk purchased $526 million of Treasury bills and $64 million of
Treasury coupon securities in the market on an outright basis. In all, outright System holdings of Treasury securities rose by more than $2 billion
from October 30 through November 19, about matching the absorption
of reserves by market factors. Federal funds traded at an average effective rate of slightly more than 9 per cent, and member bank borrowings and net borrowed reserves averaged $1.2 billion and $943 million,
respectively, all within the range of recent experience. Treasury bill
rates, however, edged somewhat higher, portending the sharper rise
that was to follow.

252



The Account Manager continued to seek to maintain the prevailing
pressures on bank reserves over the next 3 statement weeks, which
ended on December 10, but the conduct of open market operations
reflected serious concern by the System over the distressed state of the
securities markets. Apprehension over the possibility that an expansive
fiscal policy would necessitate monetary restraint well into the next year
altered market expectations and precipitated a sharp rise in Treasury
bill rates. The incidence of three Treasury bill auctions on consecutive
business days—that is, on November 21, 24, and 25—accentuated the
decline of market confidence, and rates in each auction shattered previous records.
To facilitate orderly rate adjustments, the System purchased a total
of $571 million of Treasury bills through market go-arounds on November 21 and 24 and also avoided an increase in market supply by
purchasing $69 million of bills from foreign accounts. Further purchases were restrained by bank reserve considerations, however. After
about midmonth the distribution of reserves had favored the money
center banks and the money market had tended to be relatively comfortable. Therefore, the System sold a small amount of sought-after
short-dated bills in the market to offset the earlier reserve injection, and
on Wednesday, November 26, it sold $331 million of bills to foreign
accounts. The latter operations also provided room for outright purchases—should the extent of unsettlement in the bill market again
become critical. In view of the decline in the Federal funds rate, the
System also executed $370 million of 2-day matched sale-purchase
agreements.
The need to inject reserves to offset market factors over the next
2 weeks—November 28 to December 10—coincided with the secondary objective of preventing disorderly short-term rate adjustments. The
System purchased $241 million of bills outright in the market on the
first day of the interval and an additional $483 million from foreign
accounts on three occasions early in the period. Taut money market
conditions also prompted the Account Manager to arrange $1.7 billion
of repurchase agreements. On the other hand, projections of bank
reserve availability indicated a need to absorb reserves in coming
weeks. Accordingly, the System redeemed $246 million of maturing
Treasury bills. The Desk also sold $417 million of bills to foreign
accounts over the final 3 days of the period, an operation aimed in part




253

at maintaining stability in the bill market. The foreign orders were for
short-dated bills that were not in great supply in the market, and by
selling these bills from its portfolio the System obtained leeway to purchase $349 million of longer-dated bills in the market on the last day
of the period for future delivery, thereby removing some of the glut of
bills that was putting upward pressure on rates.
Open market operations during the final 3 weeks of 1969 were conducted against a background of seasonal uncertainties. Reserves were
more plentiful, but money market conditions tended to be somewhat
firmer on the average as desired excess reserves rose seasonally. Member bank borrowings from the System averaged about $1.1 billion
during the 3 weeks ended December 31—about $100 million below
the level of the preceding 3-week interval. And average net borrowed
reserves fell by $200 million, to $800 million. Nevertheless, the
average effective Federal funds rate rose to 9 per cent, approximately
¥s of a percentage point higher than the average of the preceding
3-week period. In part this firmness reflected the mid-December tax
date, the uncertainties accompanying reserve flpws during the holiday
season, and preparations for year-end financial statements.
Pressures during the tax period were not unusual, and Desk activity
during the statement week ended December 17 was confined mainly to
injecting reserves through repurchase agreements on two occasions
after it was learned that reserve availability had fallen short of earlier
expectations. Projections were unusually tenuous because of the uncertain effects of bad weather on float, but available data indicated a need
to absorb reserves over the period extending into the new year. Therefore, the System chose to redeem at maturity a total of $349 million of
Treasury bills.
Sales orders for foreign accounts complicated the task of absorbing
reserves during the week ended December 24. Because of the delicate
state of the bill market, the System purchased from foreign accounts
on Thursday, December 18, $241 million of bills, the bulk of the sales
orders that day. To offset the reserve effect of such purchases, the
Desk sold almost $225 million of Treasury bills to foreign accounts
over the next 2 days and also sold $100 million in the market in
response to unsolicited bids. Sales for foreign accounts were again
heavy on the 2 days before Christmas. On December 23 the System
managed to sell most of these bills in the market—taking only a small

254



amount into its own portfolio. But since money market tautness appeared to be emerging on Christmas Eve, the Account Manager injected reserves by buying $119 million of bills from foreign accounts,
supplemented by repurchase agreements with nonbank dealers.
Money market conditions and reserve projections were contradictory
after Christmas. Consequently, the Desk stood ready either to supply
or to absorb reserves, depending on developments. Since the money
market remained quite taut before the December 31 settlement day,
the Desk arranged a total of $1.3 billion of repurchase agreements over
the 3 days, December 29-31. As it later became clear, earlier projections of excessive reserve availability were somewhat off the mark,
since float fell sharply below projections. Even so, average net borrowed reserves fell to $596 million during the last week of the year, as
member bank holdings of excess reserves rose seasonally.
•




255

REVIEW OF OPEN MARKET OPERATIONS IN
FOREIGN CURRENCIES
The disturbances in foreign exchange markets that had characterized the
two preceding years continued in 1969. The root difficulty was the persistence of serious imbalances in international trade and payments,
notably the German and Japanese trade surpluses and the French deficit, to which was added an abnormally heavy short-term capital flow
from Europe to the United States via the Euro-dollar market. The
revaluation of the mark and devaluation of the French franc dealt
with the most acute of these problems, however, and by the year-end
the foreign exchange markets were pervaded by an unaccustomed
calm.
As 1969 opened, the speculative funds that had moved into Germany between late August and the November 1968 Bonn conference
were still flowing out at a rapid pace. The Bank of France succeeded
in recovering a substantial portion of the reserves it had lost the preceding autumn, while the pound sterling showed a healthier tone and
the Bank: of England made sizable dollar gains.
In late April, however, reports spread that the German Government
might be prepared to consider a revaluation of the mark in the context
of a multilateral realignment of parities, and speculation burst out in
favor of the mark and against a number of other currencies. In 10
days the flow of funds into the German Federal Bank amounted to
$4.1 billion, with $2.5 billion flooding into Germany on Thursday
and Friday, May 8 and 9. A substantial share of this flow apparently
resulted from hedging and related operations by U.S. corporations, with
a consequent inflation of the U.S. payments deficit at that time. Many
European countries were even more severely affected: 10 of them
suffered reserve losses approximating $1.9 billion during the speculative crisis. On May 9 a German Government communique flatly rejecting revaluation broke the speculative wave, and the exchange markets
settled back to orderly trading as money flowed out of Germany
through midsummer. The reflux of funds from Germany was accelerated by the strong pull of high Euro-dollar rates.
During the spring and early summer of 1969 the Euro-dollar market
was subjected to unprecedented credit demands, generated in large part
by the effects of increasing monetary restraint in the United States. As
U.S. commercial banks borrowed heavily in the Euro-dollar market

256



through their overseas branches, Euro-dollar rates moved steadily upward, reaching historic highs by mid-June and strongly attracting funds
from foreign financial centers. As Euro-dollar pressures built up, a
number of European countries took steps to protect their domestic
money markets and international reserves, and in the summer months
the Board of Governors issued amendments to its regulations in order
to reduce the attractiveness of Euro-dollars to U.S. banks. Euro-dollar
rates declined throughout July and early August, as the continuing flow
of dollars from the United States was augmented by further dollar outflows from Germany.
Reacting to the payments difficulties that had beset France since the
events of May 1968, the French Government devalued the franc by
11.1 per cent on August 8. Although the Belgian franc and, to some
extent, sterling and the Italian lira experienced some backwash from
the French move, other currencies were relatively unaffected as it
became clear that the new franc rate could be readily accommodated
within the international structure of currency parities.
Funds began to move into Germany again in early September, with
the approach of that country's parliamentary elections in which the
future parity of the mark was an issue. With the inflow mounting, the
German authorities moved to forestall a repetition of the earlier speculative onslaughts by suspending official foreign exchange dealings during the last two business days before the September 28 elections. Moreover, when the election results pointed to the formation of a new government and a probable mark revaluation, the authorities decided not
to attempt to maintain official trading limits for the mark until the
new government could take office, some 3 weeks later.
The German mark immediately began to appreciate, reaching a
premium of about IVA per cent by midmonth. With little divergence
of market views regarding the prospective size of a revaluation, and
with the German Federal Bank, in effect, putting a floor under each
successive advance of the rate, orderly conditions were maintained
during the transition period. On October 24 the new government revalued the German mark by 9.3 per cent. The fixing of the new parity—
at a higher level than the market had expected—was followed by a
sustained capital outflow of massive proportions; for the entire period
between September 29, when the mark was allowed to "float," and
December 31, German official net losses totaled some $5 billion.
The reflux of funds ended the pressures to which the currencies of a




257

TABLE 1: FEDERAL RESERVE RECIPROCAL CURRENCY ARRANGEMENTS

Amount of facility
(in millions of dollars
equivalent)
Other party to arrangement
Dec. 31,
1968

Dec. 31,
1969

Austrian National Bank
National Bank of Belgium
Bank of Canada.
National Bank of Denmark
Bank of England

100
225
1,000
100
2,000

200
500
1,000
200
2,000

Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank

1,000
1,000

1,000
1,000

1,000

1,000

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

1,000
130
400

1,000
130
300

100
250
600

200
250
600

600

600

1,000

1,000

10,505

10,980

number of other countries had been intermittently subjected earlier
in the year. The Bank of England and the Bank of France, in particular, benefited from considerable market gains and thus were able to
make good progress in reducing their short-term foreign debts. The
outflow of funds from Germany also led to a substantial easing in the
Euro-dollar market where, initially, interest rates dropped sharply.
Starting toward the end of October, however, the expectation of continuing tight credit conditions in the United States, the announcement
that the Board of Governors was contemplating steps to discourage
excessive recourse by U.S. banks to the domestic commercial paper
market, *ind, later, year-end withdrawals by U.S. corporate depositors
and foreign banks pushed interest rates in the Euro-dollar market to
exceptionally high levels.
During the year under review, the pressures on central bank reserves

258



generated by trade imbalances, capital flows in response to interest
rate differentials, and speculative disturbances were relieved to a large
extent through financing by the Federal Reserve swap network, associated international short-term credit facilities, and substantial recycling
arrangements.
At the beginning of 1969 the U.S. authorities had $432.1 million of
outstanding foreign currency commitments under central bank swaps
—$112.1 million to the German Federal Bank and $320 million to
the Swiss National Bank. The System's obligations to the German
Federal Bank were fully liquidated in January, and those to the Swiss
National Bank sharply reduced in February. New drawings of $40
million equivalent on the Netherlands Bank and of $100 million equivalent on the Swiss National Bank during the spring were fully repaid
by May and July, respectively. By then the other outstanding Swiss franc
drawings also had been repaid, so by mid-July the System was out of
debt.
Beginning in October, however, the System had to reactivate
some of its swap lines, drawing the equivalent of $200 million on the
Swiss National Bank, $300 million on the Netherlands Bank, and, later,
$55 million on the National Bank of Belgium, as funds flowed into
these countries with the unwinding of mark positions and on the expectation that the Netherlands and Belgium might follow Germany in
revaluing. In subsequent weeks, however, it was possible for the Federal Reserve to reduce its outstanding commitments to the Netherlands
Bank to $130 million and to the Swiss National Bank to $145 million
equivalent. Thus, at the year-end over-all System commitments were
down to $330 million.
During the year foreign central banks and the Bank for International
Settlements (BIS) continued to make substantial use of their swap
lines with the System. Their repayments, however, exceeded their drawings by about $1.0 billion, and total borrowings outstanding had
been reduced to $650 million by the end of the year. Since the inception of the swap network in March 1962, total drawings on the swap
lines by the Federal Reserve and its partner foreign central banks have
amounted to $20.5 billion.
The Bank of England's swap borrowings from the Federal Reserve,
wThich had totaled $1,150 million at the end of 1968, were reduced in
the early months of 1969, but rose to a peak of $1,415 million during
the speculative rush into German marks in early May. Subsequently,




259

to

TABLE 2 : FOREIGN CURRENCY TRANSACTIONS OF THE FEDERAL RESERVE, 1969

O

In millions of dollars or their equivalent

ON

Operations initiated by the System
Other transactions

Transactions under swap lines

Currency
Drawings

Austrian schilling
Belgian franc
Canadian dollar
Danish krone
Sterling
French franc
German mark . . . .
Italian lira
Netherlands
guilder
Swiss franc
Total

Acquisitions
Disof funds for
burserepaying swaps
Repay- ments
of
ments
balances From
acquired U.S.
From
through Treas- others
swaps
ury

Sales

Purchases

Sales

0.8

2.4
(2)

55.0

55.0

2.5

112.1

98.4

651.3
199.5
124.2

704.6
199.5
165.0
124.2

221.6
15.1

340.0
300.0

210.0
475.0

340.0
300.0 " i 4 4 ! 7

209.8
326.5

6.7

0.5
2.9

695.0

797.1

695.0

634.7

975.0 1,197.3

240.1

1
Includes forward as well as spot transactions.
2 Less than $0.05 million.
3 By the BIS.




With others

With U.S.
Treasury1

Purchases

Swap
operations
initiated
by others

144.7

63.3
4.7
10.2
5.0

Drawings

50.0
513.0

Repayments

50.0
520.5

125.0
125.0
795.0 1,295.0
290.0
720.0
3 142.0 3 222.0
300.0
300.0
191.9

191.9

85.6 2,406.9 3,424.4

the Bank of England made additional repayments, but it had to draw
again in August and September—primarily as a consequence of the
French devaluation. In the final quarter of 1969, however, the Bank
of England resumed its repayments, and by the year-end outstanding
swap drawings had been reduced to $650 million.
The Bank of France, after making repayments earlier in the year on
its $430 million swap indebtedness to the Federal Reserve, had to
utilize its line again in February and March, bringing commitments
outstanding to a high of $461 million at the end of that month; subsequent pressures on the French franc during the rush into marks in
early May were financed by drawings on the $200 million credit provided by the U.S. Treasury under the Bonn credit package of November
1968 and on other foreign central banks. Before the end of June the
Bank of France had repaid the entire $461 million outstanding under
the Federal Reserve swap line.
The National Bank of Denmark reactivated its swap facility with the
Federal Reserve in January, drawing $25 million; the full amount was
repaid in mid-March. In April, however, the National Bank made a
new drawing, of $50 million, and it drew another $50 million during the
mark crisis in May. During June, an inflow of funds to Denmark enabled the National Bank to repay the $100 million to the Federal Reserve, restoring the Federal Reserve swap line to a standby basis.
The Austrian National Bank made its first drawing on the swap facility, in the amount of $50 million, to replenish reserves lost in the mark
crisis early in May. This drawing was fully repaid in August.
The Netherlands Bank suffered reserve drains late in the second
quarter as a result of the strong pull of the Euro-dollar market, and it
drew on the Federal Reserve swap line during June and July for a
total of $192 million. Defensive measures by the Netherlands Bank
subsequently reversed the flow of funds and enabled the Netherlands
Bank to reduce its swap debt and, when speculative funds began flowing
in, to fully liquidate such debt in October.
The National Bank of Belgium also experienced reserve pressures
originating in the Euro-dollar market early in the year and raised its
outstanding drawings on the Federal Reserve swap line to $40.5 million by the end of January. After making some net repayment during the
rest of the first quarter, the National Bank found it necessary to increase its swap drawings to $175.5 million during the mark crisis in




261

May, but it was able to bring down the total of this debt to $114
million as of the end of June. At the end of July Belgium utilized
resources immediately available to it at the International Monetary
Fund in order to discharge its remaining commitments to the Federal
Reserve. The devaluation of the French franc gave rise to rumors that
the Belgian franc might also be devalued, and the National Bank made
new drawings totaling $244 million. These rumors were quickly dispelled, however, and the National Bank was able to repay its debt completely by the end of October.
The Bank of Italy activated its swap line with the Federal Reserve
in late September, drawing $300 million to cover market losses incurred
after the French devaluation and prior to the German elections. With
funds flowing back from Germany after mid-October, the Bank of Italy
fully repaid the drawing in mid-November.
Finally, relatively minor drawings on its swap line were made by the
BIS to finance brief imbalances in cash flows. In contrast to earlier
years, the: BIS did not draw on the swap line to finance intervention
in the Euro-dollar market during either the June or the December
window-dressing periods, since it was judged that the pressures then
impinging on the Euro-dollar market had originated primarily in conditions governed by fundamental economic policy decisions.
No operations in forward markets were undertaken by the Federal
Reserve during 1969. Technical forward commitments in lire assumed
by the U.S. Treasury in earlier years were fully liquidated by the end
of November 1969.
From time to time beginning in May 1969, the Federal Reserve
bought foreign currencies on a 3-month swap basis from the Treasury's
Exchange; Stabilization Fund in order to free some of the Fund's resources for current operations, primarily gold purchases from foreign
countries. These swaps reached $975 million by the end of the year.
(After rising to a peak of $1 billion early in January 1970, the swaps
were fully reversed later that month, when the U.S. Treasury had
monetized $1 billion of gold previously held by the Exchange Stabilization Fund.)
GERMAN MARK
During 1968 there were recurrent rumors of imminent revaluation of
the mark as Germany continued to show a very large surplus in its balance of payments on current account. Although the current-account

262



surplus was offset by an equally substantial outflow of long-term capital,
the markets remained apprehensive that the outflow could not be sustained and that German competitive strength eventually would force a
mark revaluation. These fears culminated in a huge rush of funds into
Germany in November 1968, but speculation receded in the face of the
determined refusal by the German Government to revalue the mark,
backed up with border-tax measures designed to encourage imports and
slow the growth of exports. Reversal of the massive influx took some
time, but by early 1969 German monetary reserves were back to their
pre-November 1968 level.
In order to encourage the outflow, the German Federal Bank offered
in December 1968 to undertake swaps with its banks at more favorable rates and for a wider range of maturities than it had previously
provided. The German banks responded to the improved incentives,
enabling the authorities to roll over into 1969 the very large December maturities of earlier swaps. Moreover, the German Federal Bank
sold very substantial amounts of spot dollars outright, as foreigners
withdrew funds from Germany and commercial leads and lags began
to unwind.
Heavy demand for dollars, both spot and on a swap basis, continued
into January 1969, reinforced by seasonal reflows from the German
money market. As the outflows continued, the spot mark eased below
par and the Federal Bank raised the cost of its official swaps moderately
in several steps. During the period of heavy outflows from Germany
beginning in late 1968, the Federal Reserve was able to accumulate
substantial amounts of German marks. By late January the System
had purchased sufficient marks in the market and from the German
Federal Bank to repay in full its outstanding $112.1 million equivalent
swap indebtedness to the Federal Bank.
The flow of funds from Germany continued unabated through most
of the first quarter of 1969, as the authorities pursued a policy of
monetary ease at a time when Euro-dollar rates were rising sharply.
In addition to the substantial flow into the short-term Euro-dollar market, long-term capital exports rose to record levels as foreign borrowers flooded the German capital market with loan demands and securities issues in response to the relatively low borrowing costs in Germany.
With the mark consequently trading below par, the Federal Reserve
and the Treasury purchased marks to add to balances throughout the
first quarter.




263

Such capital outflows from Germany more than offset the currentaccount surplus and by mid-March had contributed to a tightening
of the German money market and to the appearance of the first signs of
indigestion in the capital market. Meanwhile, with domestic credit demand intensifying, German monetary policy shifted toward somewhat
less ease. In order to prevent too rapid a tightening of domestic liquidity,
however, the Federal Bank had raised its market swap rate, thereby reducing the incentive for banks to make covered placements abroad.
By early April congestion in the capital market was becoming severe
and the West German Capital Market Committee acted to space out
issuance of securities by foreign borrowers. With capital outflows
dropping sharply, the steady decline in German reserves came to an
end. Moreover, the gradual shift in official policy toward restraint
aroused concern that reliance on monetary means to curb inflationary
pressures might result in reflows of funds to Germany and hence to
renewed buying pressure on the mark. The 1 percentage point increase
to 4 per cent in the Federal Bank's discount rate on April 18 pointed
up this potential dilemma inherent in official efforts to avert domestic
inflation while avoiding internationally disruptive shifts of funds into
Germany.
Against this background, the market grew increasingly apprehensive
as the April 27 referendum in France approached—fearing that a defeat for President de Gaulle and his resignation from office might lead
to new speculation on changes in currency parities. Demand for marks
rose sharply, and on April 22 the Federal Bank began purchasing
dollars. The bank immediately resumed swap operations with German
banks, in order to push the dollars back into the market. The news of
the referendum defeat for President de Gaulle touched off substantially
heavier demand for marks on April 28, but the authorities permitted
the spot rate to rise steeply and this helped to dissipate the buying
pressure. Meanwhile, it soon became clear that the transfer of power
in France following President de Gaulle's resignation would be orderly
and that a franc devaluation by the interim government was unlikely.
Consequently, demand for marks began to taper off, and the Federal
Bank succeeded in rechanneling to the international money markets
most of the $500 million taken in during this period.
The market atmosphere changed dramatically overnight, however,
following reports that German official circles might be willing to con-

264



sider a mark revaluation as part of a multilateral realignment of parities. Demand for marks soared as firms with commitments in marks
rushed to hedge them, as commercial payments leads and lags began to
swing heavily in favor of the mark, and as outright speculation began
again on a massive scale. The huge shifts of funds to Germany exerted
strong pressure on the Euro-dollar market and dangerously strained the
international reserves of some of Germany's trading partners. The
speculation did not halt until the German Government announced late
on May 9 that it would not revalue the mark and that supporting measures would be announced in a few days. By then the exchange markets
had witnessed the heaviest flow in international financial history. The
speculative onslaught between the end of April and May 9 increased
German *nonetary reserves by some $4.1 billion—including $2.5 billion on May 8 and 9 alone—to a record level of $12.4 billion.
The exchange markets began returning to normal following the German Government's decision not to revalue, which was backed up by an
official communique from Basle declaring that agreement had been
reached among the central banks on steps to recycle the speculative
flows. The unwinding of speculative positions brought a sharp fall in
the mark rate and the German Federal Bank began to sell dollars on
a large scale.
On May 13 the German authorities announced new measures to be
submitted to parliament, including: (1) authority for the German
Federal Bank to impose minimum reserve requirements of up to 100
per cent on all foreign-owned mark deposits in German banks, and (2)
extension beyond the March 31, 1970, expiration date of the bordertax adjustments introduced in late 1968 to raise export prices and lower
import costs.
The outflow of funds from Germany continued through early June,
as Euro-dollar rates moved higher and as the Federal Bank resumed
market swap operations. A tightening of liquidity conditions in Germany around the mid-June tax date checked the outflow temporarily,
but despite a further increase in the Federal Bank's discount rate to
5 per cent, the flow resumed toward the month-end and continued into
early July. By then nearly $3 billion had returned to the international
markets.
In subsequent weeks the market began to show signs of nervousness
once again, with the growing pre-election debate among German politi-




265

cal figures keeping the issue of revaluation of the mark in the foreground. Thus, when the German Federal Bank moved to tighten monetary policy further by raising the minimum reserve requirements of
commercial banks in mid-July, there was a brief flare-up of demand for
marks. This scare passed quickly, however, and the outflow of funds
resumed.
The devaluation of the French franc on August 8 introduced new
uncertainties and triggered a fresh rush of demand for marks. The
Federal Bank once again purchased dollars, but the buying pressures
were not sustained as traders became convinced that there would be
no change in the mark's parity, at least not until after the September
28 elections, and the authorities were able to swap back to the market
a substantial part of the inflow. The mark remained firm into early
September in relatively light trading, and there was no further official
intervention in the spot market. With funds beginning to come into the
reserves as a result of maturing swaps, however, the Federal Bank progressively reduced its swap rate in order to encourage banks to renew
these transactions.
Demand for marks soon picked up again as the date of the German
elections approached. There was sizable covering of foreign currency
positions by Germans as well as mark hedging by foreigners, and the
Federal Bank purchased increasing amounts of dollars as September
progressed. The bank continued in the meantime to sell dollars on a
swap basis, but on September 18, after such sales had reached $0.7
billion over a 10-day period, it raised its swap rate, thus bringing to a
virtual halt the covered movements of German bank funds into the
Euro-dollar market. Although anxious to encourage a reflow of funds,
the authorities felt that the market swaps were again beginning to be
used to finance speculative purchases of marks. The spot inflow continued unabated, however, and by September 24, the Wednesday before
the election weekend, the Federal Bank had purchased $1.5 billion in
active but orderly markets.
After the close of the Frankfurt market on that day, the German
authorities announced their decision to suspend official foreign exchange dealings until after the elections, thereby forestalling an influx
of funds into Germany that might well have approached the massive
proportions of the two preceding crises—in November 1968 and May
1969. The mark continued to be traded that afternoon in New York
and on Thursday and Friday in all international exchanges, but activity

266



was limited. With no official intervention and with conflicting opinions
swaying the market, the rate moved above its ceiling of $0.2518%, to
as high as $0.2570 on Thursday, September 25.
The election returns, which came in Sunday night, showed that no
party had won a parliamentary majority. Negotiations were promptly
undertaken, however, by the Social Democratic and Free Democratic
parties to form a coalition government, which would presumably favor
revaluation. Against this political background, when the Federal Bank
reentered the market on Monday morning. September 29, it was immediately flooded with $245 million in the first hour and a half of
trading. At that point the German Government accepted a recommendation by the Federal Bank that the mark be permitted to "float"
temporarily—by suspension of intervention at the ceiling.
The mark immediately rose above the ceiling and within a week, by
early October, it had reached a premium of about 6% per cent; it
advanced more slowly thereafter to a premium of some IV* per cent
by midmonth and then fluctuated narrowly around that level. Despite
continuing nervousness, the market adapted to the changed circumstances satisfactorily as two factors combined to ensure orderly conditions during the transition period.
First, by October 2 it had become reasonably clear that a Social
Democratic-Free Democratic coalition government would take office
when the Bundestag reconvened on October 21 and would revalue the
mark shortly thereafter. Thus, the main question in the market became
the size, rather than the possibility, of a parity change. And even on
this score there was little diversity of views in the market, with traders
widely expecting the new parity to be set at $0.27027 (DM 3.70).
Second, the German Federal Bank exerted a strongly stabilizing
influence by standing ready each day to buy marks at rates slightly
below those prevailing in the market, thereby in effect placing a floor
just below each successive advance of the rate. Since the mark was
technically weak at the time because of the withdrawal of foreign funds
that was already under way, there could have been wide fluctuations
in the spot rate and repeated departures from the longer-term equilibrium rate had the Federal Bank not stood ready to prevent disorderly fluctuations. The Federal Bank's dollar sales in these operations varied widely from day to day, but amounted to $1 billion by
the time the new parity was fixed.
On Friday, October 24, the German Government revalued the mark




267

by 9.3 per cent, to $0.27321/4. As had been expected, it also eliminated the special border-tax adjustments that had been introduced
in November 1968 to make exports more expensive and imports
cheaper, and which had been temporarily suspended on October 11,
1969. The revaluation was larger than had been generally anticipated,
thus decisively removing the mark from the realm of speculation while
setting into action economic forces that would foster both internal and
external equilibrium. The move was well received by the market, which
quickly became convinced that a period of much greater calm would
ensue.
The German mark traded at its new floor of $0.2710 as soon as the
markets opened on Monday, October 27, and apart from a shortlived rally in early December, it remained there through the end of the
year as the substantial positions built up in September and during
earlier periods were being unwound. Moreover, with interest rates
lower in Germany than abroad, foreign firms made large drawings on
credit lines established with German banks earlier in the year. Consequently, there were extremely heavy dollar sales by the Federal Bank.
By the j^ear-end, such sales totaled more than $6x/2 billion (including
the $1 billion sold during the period when the mark was permitted to
float), but they were partly offset by almost %\Vi billion in maturing
forward contracts. The net outflow of $5 billion created both internal
and external problems. Domestically, the authorities were not averse
to having some additional pressure exerted on liquidity, since this
would only reinforce their policy of monetary restraint, but they were
anxious to avoid the development of too severe or abrupt a squeeze.
Externally, a considerable reflow of capital was desirable, since it
would help rebuild the reserves of other countries, but the size of the
reflow was such as to reduce sharply Germany's holdings of liquid
dollars.
To provide some relief to the commercial banks, the Federal Bank,
effective November 1, reduced minimum reserve requirements by 10
per cent for resident deposits and by 30 per cent for nonresident deposits. The bank also eliminated the special 100 per cent marginal
reserve requirement that had been imposed earlier on foreign deposits;
reserve requirements against nonresident liabilities were thus again
brought in line with those applying to domestic liabilities. Credit conditions continued to tighten, however, as the outflow persisted, and
commercial banks were induced to borrow heavily from the Federal

268



Bank. When year-end stringencies began to add to the pressure, the
Federal Bank lowered reserve requirements by another 10 per cent,
but for the month of December only. At the same time, to discourage
both domestic credit expansion and capital outflows, the Federal Bank
on December 4 raised its "Lombard" rate on secured advances by
W2 percentage points to 9 per cent—thus widening the spread between that rate and the discount rate (which had been raised to 6
per cent on September 11) to 3 percentage points, an unusually large
amount. Furthermore, in mid-December the authorities eliminated the
prohibition against payment of interest by German banks on foreignowned deposits, which had been designed to discourage inflows of
short-term funds.
On the external side, in financing the outflow, the Federal Bank
had used up by mid-November most of its liquid dollar holdings,
although total official reserves remained very large. As a consequence,
the German authorities encashed in advance of maturity four markdenominated U.S. Treasury notes totaling DM 800 million and had
recourse to their creditor position within the IMF—drawing $540
million on November 26 and, on December 9, an additional $550
million that represented their claims under the General Arrangements
to Borrow. There were further heavy outflows in the second half of
December, and Germany sold $500 million of gold to the U.S. Treasury on December 29.
STERLING

The unwinding of the speculative excesses of November 1968 had
brought an improvement in sterling rates, but as the year 1969 began,
the exchange markets continued to take a very cautious view of the
future. Progress in reducing the U.K. trade deficit was slow and uneven
during the winter months, and sporadic labor difficulties and tensions
in the Mideast tended further to delay the return of confidence. In
addition, increasing monetary restraint in the United States was quickly
transmitted to the Euro-dollar market at the beginning of 1969 through
the rapid rise in dollar placements with head offices by the European
branches of U.S. banks. The contraseasonal upswing in Euro-dollar
rates probably kept sterling from benefiting fully from the normal seasonal reflows of funds from continental centers, augmented on this
occasion by the sizable outflows from Germany.
About mid-January Euro-dollar pressures eased temporarily, and




269

as the market aigain expected favorable trade figures, buying of sterling
picked up, only to taper off once more later in the month. Although
the December trade results failed to measure up to expectations, the
release in mid-February of sharply reduced deficit figures for January
again gave a boost to the market, which was also encouraged by prospects for a considerable reduction in British Government domestic
borrowing during the coming year. On February 27 the discount rate
of the Bank of England was raised by 1 percentage point to 8 per
cent, to help achieve the desired reduction in bank credit and to help
insulate sterling from the pull of continuing high Euro-dollar rates.
The first quarter of the year, moreover, is generally favorable to
sterling because of seasonal strength in the export trade of the overseas sterling area (OSA). Since most of the official sterling holdings of
those countries are now guaranteed under the terms of the September
1968 arrangements, OSA countries were encouraged to retain rather
than convert their sterling balances, thus strengthening the net demand
for sterling in the markets. And with the London money market under
tight official rein, foreigners tended to buy rather than borrow sterling.
In these circumstances, sterling was firm and the Bank of England
was able to make substantial dollar gains. The British authorities used
the dollar inflow to meet repayment obligations to the IMP' and to
begin repaying outstanding shorter-term indebtedness. By the end of
March the Bank of England had reduced its drawings from the Federal
Reserve by $50 million to $1,100 million. In addition, the bank had
liquidated part of the credits drawn under the 1968 sterling balances
arrangement.
Sterling remained seasonally strong in early April, and the Bank of
England was able to make a further repayment of $150 million to the
Federal Reserve. As the month wore on, however, the seasonal strength
began to fade., and at midmonth the latest U.K. trade figures showed
a smaller improvement than the market had expected, with imports
remaining high. In this setting the Government's new budget stirred
little market enthusiasm, despite general satisfaction with the further
tightening of fiscal policy. To bolster the austerity program, the U.K.
authorities provided for substantially increased taxes and an over-all
surplus of more than £ 8 0 0 million for the fiscal year 1969-70.
Sterling was also adversely affected in late April by developments
abroad. Euro-dollar rates had advanced to relatively high levels in
March, and pressures in that market were intensified in April when the

270



Federal Reserve Banks raised their discount rates and several continental European central banks followed suit. Moreover, in a number
of countries, steps were taken to curtail capital outflows or to induce
repatriations of funds. Throughout this period there was no incentive
to move covered funds into London, and indeed little net incentive for
users of sterling to build their balances above minimum levels.
In these circumstances, sterling was vulnerable to the uncertainties
generated by President de Gaulle's decision to stake his presidency on
the outcome of the April 27 constitutional referendum. Sterling weakened as the voting date approached, but there was no large-scale selling and official support costs were modest. The rate dropped sharply
following the referendum and President de Gaulle's resignation, but
demands for sterling for month-end payments absorbed most of the
immediate selling pressure.
Just as the market was beginning to regain its equilibrium, a new
wave of speculation on possible parity realignments was set off by
reports of German official willingness to consider revaluing the mark
as part of a broader readjustment of parities. As funds flowed from virtually every major center into Germany, sterling was particularly hard
hit, with the familiar build-up of selling pressure in advance of the
weekends. Over 10 days of hectic speculation, Bank of England support costs in the spot market were very large, while forward sterling
discounts widened sharply. This episode, of course, interrupted the
progress that the U.K. authorities had been making in reducing their
external indebtedness, and the Bank of England had to draw on the
swap line with the Federal Reserve to help cover market losses. At
their peak, swap drawings reached $1,415 million.
Sterling had been very heavily oversold, however, and it rebounded
sharply following the German Government's May 9 rejection of a
revaluation of the mark. During the remainder of May and through
June the Bank of England was able to make sizable reserve gains,
despite the further upsurge of interest rates in the Euro-dollar market.
The reserve gains once again were used to make repayments of debt
under various international credit lines. By the end of June the Bank
of England had reduced its outstanding drawings from the Federal Reserve to $1,025 million, $75 million below the end-of-March level. In
addition, during May and June the United Kingdom made a large scheduled repayment to the IMF and liquidated the bulk of the credit still
outstanding under the 1968 sterling balances arrangement.




271

On the other hand, the Bank of England obtained new credit from
the German Federal Bank under a recycling arrangement designed to
neutralize part of the speculative flow from the United Kingdom into
Germany, and it drew $500 million from the IMF under a new standby
facility. On balance, the British authorities succeeded in making sizable
net repayments of debts during the second quarter. In July a generally
quieter atmosphere prevailed and the Bank of England further reduced
its drawings on the Federal Reserve, to $815 million.
The basic situation was still of concern to the market, however, as
the trade figures failed to show the expected gains and as hostilities in
the Mideast intensified. Thus sterling was vulnerable to the uncertainties
resulting from the devaluation of the French franc on August 8. Both
spot and forward sterling rates dropped sharply, and pressures became
substantial on August 13 with the release of figures showing an enlarged British trade deficit. Heavy market support was required for
a few days, and the Bank of England drew $160 million on its swap
line with the Federal Reserve. But once again, more sterling had been
sold than the market could deliver, and as speculators paid high prices
to cover short sales, the Bank of England recouped a significant part
of its losses. Nevertheless, the underlying tone of the market remained
pessimistic, and once the cash squeeze had ended, sterling again drifted
down close to its floor and required modest support. At the end of
August drawings on the swap line stood at $975 million.
This atmosphere persisted into early September, and on September
2 and 3 the Bank of England again drew on its swap line with the
System. Thereafter, however, sterling recovered strongly, particularly
following the release of data indicating that the United Kingdom's
underlying balance of payments had been in substantial surplus during
the second quarter. The approach of the German elections brought
sterling under modest pressure, but the Bank of England had to make
only a small additional drawing on its Federal Reserve swap line,
bringing the total outstanding to $1,145 million. When the German
mark was allowed to appreciate, sterling moved up smartly and the
Bank of England resumed its dollar purchases. The bank then made
repayments on the swap line, reducing drawings outstanding to $1,100
million at the end of September. It also liquidated the remainder of
its commitments under the 1968 sterling balances arrangement.
The recovery continued throughout October, sustained by oil company purchases of sterling for tax and royalty payments, by the an-

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nouncement of the second consecutive monthly trade surplus, and by
the rise in the market value of the German mark (which made further
speculation in marks unattractive and induced some profit-taking).
The spot sterling rate reached the $2.39 level by mid-October, for the
first time since early August; it rose further in the second half of the
month and fluctuated just below parity during most of the remaining
2 months of the year. At the same time forward sterling discounts
narrowed sharply, the 3-month rate moving down to less than 1 per
cent per annum from a range of 6 to 9 per cent in August-September.
The much improved tone of the market reflected a new confidence in
the basic soundness of the U.K. balance of payments position, a belief
that was bolstered by continued monthly trade surpluses and reserve
gains as well as by the announcement that, in the third quarter, the
United Kingdom had achieved its second consecutive quarterly surplus
on current and long-term capital accounts. The renewed confidence led
to a strong reversal of the unfavorable shift in commercial leads and
lags that had occurred in late summer, and enabled sterling to remain
firm even toward the year-end, when the very high levels to which
Euro-dollar interest rates had advanced were exerting a considerable
pull.
With this strong undertone in the market, the Bank of England was
able to purchase dollars throughout the fourth quarter. Although
U.K. reserves were allowed to increase moderately, the bulk of the
reserve gains were used to repay debts to the United States, to other
countries, and to the IMF. Thus, the Bank of England's swap drawings
on the Federal Reserve were reduced by $450 million during the
fourth quarter—$200 million were repaid in both October and November, and an additional $50 million in December—bringing outstanding
drawings down to $650 million by year-end. Also during this quarter
the U.S. Treasury and the Federal Reserve received scheduled repayments of borrowings-associated with the June 1966 sterling balances
arrangement, of which the System's share was $19.5 million.
FRENCH FRANC
The French franc had come under heavy speculative attack during the
rush for German marks in November 1968, and the Bank of France
had sustained large reserve losses in support of the franc. In the aftermath of that assault, the French Government had bolstered its defenses
with anti-inflationary measures, $2 billion in new international credits,




273

and reimposition of exchange controls. Late in 1968 and early in 1969
the exchange controls were tightened to require French commercial
and banking interests to surrender substantial amounts of foreign exchange to the Bank of France. The French authorities used these
exchange inflows partly to cover the large current deficit in the French
balance of payments, but also to reduce their outstanding indebtedness
under short-term international credits. Thus, by early March the Bank
of France had cut its swap drawings from the Federal Reserve to $306
million from the November 1968 peak of $611 million and had repaid
credits drawn from other members of the European Economic Community (EEC) and the BIS.
As these induced reserve inflows tapered off, however, the currentaccount deficit again began to drain French official reserves. Apart
from the weakening reserve position, a number of background factors
were cause for continuing concern. Inflationary pressures were still in
evidence, and large unresolved wage demands were a potential threat
to France's international competitive position. At the same time, recalling the November 1968 Bonn conference, the market remained fearful
of a possible currency realignment involving both the German mark
and the French franc. These uncertainties kept the franc market off
balance, and in spite of tight exchange controls, the franc remained
in an exposed position.
New fears of devaluation emerged on March 6 when the French
trade union leadership backed up its wage claims by calling a general
strike for March 11. The strike call triggered the heaviest burst of
selling since November 1968. The devaluation scare receded almost as
quickly as it had arisen, however, when the general strike was orderly
and, as scheduled, lasted only one day. Although it appeared that the
unions were not yet prepared to force the issue on wage claims that
far exceeded the official guidelines, uncertainties persisted through the
end of March and the official reserves were subjected to further erosion.
Accordingly, the Bank of France made new drawings on the Federal
Reserve swap line, raising its swap obligations to $461 million by the
end of March, and sold $50 million of gold to the U.S. Treasury.
In early April the Bank of France was able to repay $25 million of
its swap drawings from the Federal Reserve, but selling of francs soon
resumed before the Easter holidays. Near the middle of April a new

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element of doubt suddenly was injected into the situation by President
de Gaulle's decision to stake his political future on a constitutional
referendum on April 27. At the same time, news of a large trade deficit
in March underscored the difficulties involved in restoring the franc to
a position of strength. Market tensions increased with the approach of
the referendum date. The Bank of France met the pressure in both the
Paris and New York markets, at heavy cost to its reserves.
As was to be expected, the news of President de Gaulle's referendum defeat and immediate resignation from office generated still
heavier selling pressure on April 28. The selling soon began to fade,
however, as it became clear that France's calm response to President
de Gaulle's withdrawal from office presaged an orderly transfer of governmental authority. Moreover, the market quickly concluded that no
official decision on the franc parity was likely before the formation
of a new government in June.
Just as the uncertainties in the franc market were receding, new
speculation on a possible revaluation of the German mark and adjustments in other currency parities burst upon the markets. The franc
again came under heavy pressure and forward franc rates declined precipitously. The speculative fever abated after the German Government
announced on May 9 that it would not revalue the mark, and thereafter the spot franc moved from its floor and the Bank of France
began to recoup some of its losses.
Although the latter part of May was a quieter period for the franc,
the impending presidential elections, scheduled for June 1 and June 15,
aroused renewed uneasiness. Mr. Georges Pompidou's impressive victory was seen by the market as assuring the continuity of stable government in France, but there remained an overriding concern for the
viability of the parity. Sharply rising Euro-dollar rates also aggravated
the strain on the franc. On June 13 the Bank of France reinforced the
authorities' anti-inflationary program by raising its basic discount rate a
full percentage point to 7 per cent. Even so, during June the franc required further sizable official support.
In view of the heavy strain on official reserves, the Bank of France
made substantial drawings during the second quarter on the international assistance available under the November 1968 package, including the full $200 million provided by the U.S. Treasury. France




275

also sold $275 million of gold to the U.S. Treasury in the second
quarter. In order to avoid an undue prolongation of credits outstanding undeir the Federal Reserve swaps, the Bank of France used part
of the proceeds of these gold sales, and some of the new drawings
on the November 1968 credits, to liquidate its obligation to the System. During the second quarter the Bank of France repaid the $461
million outstanding on the swap line—restoring the $1 billion facility
to a fully available standby basis.
The underlying situation remained unchanged as the summer progressed. Although the exchange market received favorably the new
cabinet appointments of President Pompidou and the vacation period
contributed to quieter markets, the franc remained weak. Faced with
a continuing attrition of official reserves, the French Government announced on August 8 that it had decided to devalue the franc, rather
than impose too severe a deflation on the French economy. The 11.1
per cent devaluation, to a new parity of $0.180044, had been discussed at the Group of Ten meeting of Finance Ministers in November 1968 at Bonn and was judged to be within the limits that could be
accommodated by the existing framework of exchange rates.
Explaining the reasons for the devaluation, the French Minister of
Finance and Economic Affairs, Mr. Giscard d'Estaing, noted that
French reserve losses had averaged $500 million a month in the second
half of 1968 and $300 million a month in the first half of 1969. Thus,
France was faced with the prospect of seeing its reserves dwindle to
practically nothing by the end of the year. Moreover, he said, further
defense of the former par value would have left the franc overvalued
and France with a weak competitive position in world markets. The
Minister made clear that devaluation would be backed up by a further
tightening of economic policy and by continuation of exchange controls. For the rest of the month of August the franc held firmly above
its new par and the Bank of France began to accumulate dollars as a
steady reflow of funds to France developed.
At the end of August the French Government announced that it
had $1.6 billion of international credits available and was applying
to the IMF for a standby credit of $985 million. In support of the
devaluation, the authorities strengthened their austerity program in
early September with further curbs on consumer credit, closer limitation of b>ank lending, measures to encourage savings, and substantial
cuts in public spending. A temporary price freeze imposed immediately

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after devaluation was replaced by strict official surveillance of domestic
prices. Minister Giscard d'Estaing declared that the new measures were
designed to bring the French trade balance into equilibrium by July 1,
1970.
These measures at first met with a rather lukewarm reception in
the exchange market, since even more severe action had been expected,
and the French franc tended to weaken early in September in both
spot and forward markets. It came under increasing pressure later
that month as renewed labor militancy and several major strikes added
to the uncertainties generated by the approaching German elections.
The franc remained under pressure through mid-October, even after
the German mark had been allowed to appreciate considerably above
its old ceiling, because the market remained disturbed by France's
large current-account deficit and by its labor situation. As a consequence, the Bank of France had to provide substantial support to the
spot market throughout this period. On September 25 the Bank of
France reactivated its swap line with the Federal Reserve—drawing
$65 million to help cover recent market losses; this credit was repaid
the following day with the initial $500 million takedown on France's
standby agreement with the IMF.
A clear improvement began after mid-October. By the end of that
month the spot franc was firmer and—although forward discounts remained relatively large—the Bank of France was purchasing dollars
almost every day. While reflows of funds from Germany provided the
initial strength, it is now clear that the firming of the spot franc
reflected the improved underlying situation as well as both tight
domestic credit conditions and a change in market sentiment. Several
measures underscored the French authorities' resolve to restrain the
growth of domestic demand: The Bank of France raised its basic discount rate from 7 per cent to the exceptionally high level of 8 per cent
on October 8; the Government approved a very tight budget for 1970;
and it was announced that bank credit would not be permitted to expand between December 1969 and June 1970.
This significant stiffening of French economic policy was well received by the market and the atmosphere was also improved by
Finance Minister Giscard d'Estaing's reaffirmation of his confidence
that France's trade deficit would be eliminated by mid-1970. The
release of trade figures that showed considerable progress in October
and November reinforced that forecast.




277

Benefiting from the shift in sentiment, as well as from the very
taut credlit conditions in France, the spot franc remained firm in
November and the first half of December while forward rates strengthened markedly. The franc rose sharply toward the close of the year,
bolstered by corporate purchases for year-end needs. In November
and December the Bank of France more than recouped its losses of the
two previous months and used the major portion of these gains to
repay short-term international debts and maturing foreign exchange
deposits of French commercial banks.
BELGIAN FRANC
At the beginning of 1969 outflows of funds to the Euro-dollar market
put the Belgian franc under some pressure, and the National Bank of
Belgium provided support for the franc rate. To cover the consequent
reserve losses, it made use of its swap line with the Federal Reserve,
drawing a net of $33 million during January and raising its swap debt
to the System to $40.5 million. A temporary easing of market pressures in February enabled the Belgian authorities to repay $27.5
million of these drawings, but by late March they again had to support
the franc as the outflow of funds accelerated. On March 31 drawings of
the National Bank of Belgium on the Federal Reserve stood at $23
million.
With little prospect that the demand for funds in the Euro-dollar
market would soon abate, and with domestic credit expanding at an
excessive rate, the National Bank of Belgium raised its discount rate
in two steps in March and April to 5Vi per cent. In addition, to relieve
pressures on the franc rate, the authorities instructed the Belgian banks
to reduce substantially their net foreign asset positions in several stages
by the end of June. These measures were followed by an immediate
firming of the franc, and by late April the rate had advanced to par.
But the strength was short-lived, as the worldwide rush for marks
in early May generated heavy sales of francs along with other currencies. The spot rate declined sharply, and the National Bank of
Belgium sold large amounts of dollars to support the spot franc at its
floor. The National Bank covered the heavy losses by further drawings
on the Federal Reserve swap line. Although pressures eased after the
German Government rejected a mark revaluation, there was no important immediate reflux of funds, and at mid-May the National

278



Bank's outstanding obligations under the swap line stood at $175.5
million. During the month the swap facility was increased by $75
million to $300 million.
Subsequently, as the exchanges calmed further, the Belgian franc
began to strengthen. Although there were occasional moderate outflows to the Euro-dollar market through shifts of nonbank funds, the
franc was reasonably well insulated from the heavy pressures in that
market in May and June by the directive regarding the commercial
banks' foreign asset positions. In late April, moreover, the National
Bank of Belgium placed Ceilings on the credit expansion and rediscount privileges of commercial banks and, on May 29, raised its discount rate by a further Vi percentage point, to 6 per cent. The
National Bank was able to purchase sufficient exchange to reduce its
outstanding swap obligation to the Federal Reserve by a net of $61.5
million to $114 million by the end of June.
The franc generally stayed firm in July as Euro-dollar rates eased
and there was also a modest commercial demand for francs, but market
conditions did not permit significant reserve gains by the National
Bank. At the end of the month the authorities moved further to reinforce both the curbs on domestic monetary expansion and the efforts
to reduce capital outflows. The National Bank raised its discount rate
by a full percentage point to 7 per cent and abolished its preferential
discount rates for export credits extended by Belgian banks to countries outside the EEC. These preferential rates had tended to shift
financing of other countries' trade to Belgian financial markets rather
than to stimulate Belgian exports and consequently had added to the
strain on the franc.
By this time the National Bank had been making use of the Federal
Reserve swap facility to some extent for a period of 10 consecutive
months. In keeping with the principle that whenever possible the use
of central bank credit should not be unduly prolonged, the Belgian
authorities decided to utilize some of the resources previously accumulated by them with the IMF to repay the swap drawings. Consequently, the Belgians drew $116.5 million from the IMF, representing
the credit available to Belgium as a result of IMF use of Belgian francs
under the General Arrangements to Borrow plus part of the Belgian
gold tranche. The National Bank used nearly all the proceeds to liquidate completely its $114 million swap obligation outstanding to the




279

Federal Reserve. The $300 million facility then reverted to a standby
basis.
Devaluation of the French franc on August 8 raised widespread market rumors that the Belgian franc might also be devalued. Under renewed pressure, the spot rate dropped to its floor, and in the first
week following the French move the National Bank of Belgium suffered
substantial reserve losses. To cover the drain, the National Bank
reactivated its swap line with the System, drawing a total of $244
million out of the $300 million then available. A calmer atmosphere
soon emerged, however, as the market came to appreciate the strength
of Belgium's underlying balance of payments position. The franc
strengthened markedly and the authorities began to recoup some of
the reserve loss. In late August Belgium repaid $20 million of the
outstanding drawings, reducing the total to $224 million. Meanwhile,
negotiations had been completed for an increase in the reciprocal
credit facility with the Federal Reserve by $200 million to $500
million and this was put into effect on September 2. The National
Bank of Belgium simultaneously obtained a new $100 million equivalent credit facility from the German Federal Bank.
The Belgian franc began rising sharply in September, despite growing speculation in German marks. The improved tone of the franc was
especially pronounced after midmonth when the Belgian authorities
announced a number of anti-inflationary measures: The introduction
of the value-added tax, scheduled for January 1, 1970, was postponed
for another year so as to avoid further increases in domestic prices,
while the National Bank raised its discount rate another Vi percentage point to IVi per cent, effective September 18, and tightened
quantitative credit restrictions. Supported by these domestic measures
and the increased availability of foreign official credit, the franc firmed
toward the end of September. As the rate strengthened, the National
Bank purchased dollars in the market, enabling it to repay $20 million
of outstanding drawings on its swap line with the Federal Reserve
System by the end of the month.
As soon as the German mark was allowed to rise above its ceiling,
the exchange markets again demonstrated their capacity for abrupt
changes; the Belgian franc suddenly was seen as a candidate for revaluation along with the mark only 2 months after it had been subjected to heavy speculative selling. The spot rate moved to parity

280



early in October and rose to its ceiling later that month, while the
National Bank made increasingly large market gains. The speculation
reached its climax on Monday, October 27, the first business day
after the German revaluation. The next day the Belgian Government
stated firmly that the franc would not be revalued, and the speculation died down. By that time the National Bank had acquired an
amount of dollars more than sufficient to repay in full during the
course of October its remaining $204 million swap indebtedness to the
Federal Reserve.
Even after the speculative outburst had ended, however, the demand
for francs remained very strong. Commercial leads and lags, which
had moved sharply against Belgium in August and September, were
being reversed in subsequent months. Credit conditions, moreover,
remained very tight, causing short-term funds to flow in. With the spot
rate not far from its ceiling, the National Bank took in dollars from
time to time throughout the rest of 1969. In order to provide cover for
some of these dollars, the Federal Reserve reactivated its swap line
with the National Bank, drawing a total of $55 million equivalent in
November and December.
DUTCH GUILDER
Early in 1969 there was a net inflow on current-account transactions
into the Netherlands, but the spot guilder rate fell below par as shortterm funds flowed to the relatively high-yielding Euro-dollar market.
At the beginning of March the Dutch money market tightened, and
on March 6 the flare-up of currency fears strengthened the guilder
along with the mark, and the Netherlands Bank purchased dollars to
slow the advance in the spot rate. On March 12 the Federal Reserve
drew $40 million equivalent of guilders from the Netherlands Bank
and used the guilders to purchase an equivalent amount of dollars
from that bank. This was the first Federal Reserve use of the swap
line since April 1968.
The flurry of demand for guilders soon ended and the market
calmed; with Euro-dollar investments becoming increasingly attractive,
the spot guilder eased once again. Outflows of funds from the Netherlands were small, however, since the domestic money market was still
tight. In early April, liquidity conditions in Amsterdam eased and
short-term capital outflows increased. The Netherlands Bank sold dol-




281

lars in support of the spot guilder rate, and then it replenished its dollar
balances by selling $20 million equivalent of guilders to the Federal
Reserve. The System used the guilders to reduce its outstanding swap
drawings from the Netherlands Bank to $20 million equivalent.
Although the pressure on the guilder reflected mainly the high interest rates in the Euro-dollar market, inflationary price increases in
the Netherlands also began to threaten the guilder's underlying position. Accordingly, on April 8 the Dutch Government imposed a price
freeze, and the Netherlands Bank announced a Vi percentage point
increase in its discount rate to 5Vz per cent, both to reinforce domestic
anti-inflationary policies and to reduce the incentive to move Dutch
funds abroad. Following these measures, the guilder market generally
remained in equilibrium in the latter part of April, and the Netherlands
Bank discouraged covered outflows through modest swap purchases
of dollars against forward sales, thus widening the forward premium
on the guilder,,
Near the end of April and in early May, however, the new eruption
of mark revaluation fears began pulling funds out of the Netherlands.
On May 8 the spot rate dropped to its floor, and the Netherlands Bank
provided support that day as the rush for marks reached major proportions. Following the German Government's announcement on May
9 that the mark would not be revalued, speculative pressures lifted
throughout the exchanges and the spot guilder moved up from its
floor.
The support operation had reduced the dollar position of the Netherlands Bank, v/hich then replenished its holdings by selling the System
$20 million equivalent of guilders. This enabled the System to liquidate
completely its outstanding swap drawing from the Netherlands Bank,
and on May 12 the entire facility reverted to a standby basis. Meanwhile, consultations had been taking place among the Federal Reserve,
the Netherlands Bank, and the National Bank of Belgium with a view
to restoring the previous equality of the Federal Reserve swap lines
with those two banks. On May 15 the System's swap facility with the
Netherlands Bank was lowered by $100 million to $300 million while
the line with the National Bank of Belgium was increased from $225
million to $300 million.
Higher Euro-dollar rates brought renewed selling of guilders starting at the end of May. With Euro-guilder rates at relatively low levels,
there was an incentive to borrow in guilders; as funds flowed out of the

282



Netherlands through such transactions, the spot rate again declined to
its floor during the early part of June. As a result, the Netherlands Bank
was obliged to provide a substantial amount of support and by June 12
found it necessary to draw upon its swap facility with the System. Selling pressure on the guilder continued through June, and by the end
of the month the bank's outstanding swap drawings on the Federal
Reserve had reached a total of $82.2 million.
Accordingly, in early July the Dutch authorities took measures to
prevent the pull of interest rates abroad from imposing a prolonged
strain on local interest rates, domestic liquidity, and official reserves.
The Netherlands Bank requested that during the latter half of 1969
the Dutch commercial banks reduce their net foreign exchange positions
by 10 per cent from either the March-April average or the levels reached
in May 1969. Nevertheless, the pressures continued, and with the guilder
requiring further official support, the Netherlands Bank drew again on
the swap facility.
In the latter part of July the pressure on the spot guilder began to
ease, as Euro-dollar rates dropped and Euro-guilder rates rose to levels
that discouraged further shifts of liquidity into dollars. At the same
time Dutch commercial banks began to repatriate funds in compliance
with the earlier official request, thus adding to the demand for guilders.
The spot rate consequently was firmer and the Netherlands Bank's
support operations tapered off. The Netherlands Bank, however, delivered a sizable amount of dollars to the market in connection with
maturing forward contracts, and it drew further on the swap facility
with the System to replenish its reserves. By the end of July outstanding drawings by the Netherlands Bank on the Federal Reserve swap
line had reached a total of $192 million.
On August 1 the Netherlands Bank announced an increase in its
discount rate by Vi percentage point (to 6 per cent) and in its other
rates by 1 percentage point as an adjustment to the rise of domestic
and foreign interest rates. Following these increases, the spot guilder
moved up sharply, as the higher interest rates in the Netherlands further
discouraged outflows of funds and as commercial bank repatriations
under the July directive continued. With seasonal strength in the balance of payments also exerting an influence, the spot guilder soon
moved above par, and the Netherlands Bank began adding to its reserves. Later in the month the Netherlands Bank repaid $82.2 million
in drawings outstanding on the swap facility, thereby reducing the




283

amount outstanding to $109.7 million. During the remainder of August
and in early September the market was quiet and the guilder was firm.
In mid-September the Dutch Government, after having lifted the
general price freeze earlier in the month, reinforced its anti-inflationary
program. In the same month agreement was reached between the
Netherlands Bank and the commercial banks to reduce further their net
foreign asset positions to the average of the first 9 months of 1968.
As September proceeded, market nervousness over the outcome of the
German elections built up, giving rise to further demand for guilders.
At the end of the month, as the German Federal Bank suspended
its intervention margins for the mark, buying of guilders intensified,
and inflows into the Netherlands became increasingly heavy through
October. With the mark rate well above its old ceiling, there was no
longer an incentive to move funds into Germany and, more importantly,
the market widely expected that the guilder, the only currency to be
revalued along with the mark in 1961, would again follow suit. The
Netherlands Bank at first held the spot rate just below the ceiling, but
later allowed the rate to move up to that level. By October 24, the
inflow into Dutch reserves during the period of the "floating" mark
had reached $785 million. Part of these gains had been used to liquidate by October 8 the $109.7 million commitment outstanding under
the Federal Reserve swap line. In order to provide cover for some
of the Netherlands Bank's additional dollar intake, the System in turn
subsequently reactivated the swap arrangement, drawing the full $300
million equivalent of guilders available under it, and sold guilders from
balances to absorb a further $5 million. In addition, on October 29
the U.S. Treasury covered $200 million of the intake through a special
1-week swap with the Netherlands Bank.
On the same weekend that the mark was formally revalued, the
Dutch Government made known its decision not to revalue the guilder.
The spot rate then quickly moved away from its ceiling as speculative
positions were unwound. By November 5 the Netherlands Blank had
sold slightly more than one-third of the dollars it had purchased in
October. Consequently, the U.S. Treasury had no difficulty in repaying
its swap, and the System repaid $70 million equivalent of its commitments on November 6—reducing its outstanding swap commitments
in guilders to $230 million.
More normal trading activity prevailed throughout November, with
the spot rate remaining fairly strong as local interest rates tended to

284



rise. The domestic money markets were further tightened by the rise
in the amount of penalty deposits to be held at the central bank by
those commercial banks that had exceeded the designated expansion
of credit in earlier months. In addition, several new issues on the Dutch
capital market strained liquidity positions and attracted funds from
abroad. During November the measures to reduce the commercial
banks' net external position were put on a standby basis and banks were
again permitted, within certain limits, to increase their net foreign assets.
With trading in guilders generally balanced, the Federal Reserve was
able to repay a further $30 million equivalent on its swap debt, using
guilders purchased from the Netherlands Bank after that bank had
converted into dollars guilders that Germany had obtained as part of an
IMF drawing at the end of the month.
Early in December domestic liquidity positions became somewhat
easier, especially after the penalty deposits to be made in mid-December
were sharply reduced. As a consequence, funds moved to the Eurodollar market where interest rates were rising rapidly, and the spot
guilder began to weaken. At times the Netherlands Bank provided
support to ease the decline in the rate. The dollar losses of the Netherlands Bank enabled the System to repay a further $70 million equivalent of its swap debt, reducing its outstanding commitments in guilders
to $130 million equivalent by the year-end.
SWISS FRANC
In early 1969 the seasonal reflux of funds from Switzerland was reinforced by the pull of high interest rates in the Euro-dollar market.
The Swiss franc rate declined and the Swiss National Bank sold a large
amount of dollars, providing the Federal Reserve with the opportunity
to purchase $190 million equivalent of francs from the National Bank.
The System used the francs to repay part of its outstanding swap indebtedness to that bank of $320 million equivalent. Additional repayments were made with $75 million equivalent of francs obtained
through U.S. Treasury issues of Swiss franc securities to the Swiss
National Bank and the BIS and with $15 million of francs from balances. (At the same time the Swiss National Bank purchased $25 million of gold from the Treasury.) Thus, by the end of February, the
System had reduced its Swiss franc swap drawings to only $40 million
equivalent.
The flow of excess liquidity from Switzerland tapered off by early




285

March, however, and the Swiss franc strengthened steadily. The rate
did not reach its official ceiling until late in the month, when the Swiss
commercial banks began to repatriate funds to cover their usual
quarter-end needs, but at that point the Swiss National Bank took
in $244 million. Despite the strong pull of Euro-dollar rates, there
was little reflow of funds after the quarter-end. In these circumstances
a special transaction was required to liquidate the residual $40 million
obligation outstanding under the swap line. On April 29 the U.S.
Treasury issued to the Swiss National Bank a 15-month, Swiss francdenominated note equivalent to $39.5 million. The Treasury sold the
francs to the JJystem, which used them, together with a small amount
of francs; from balances, to liquidate the swap. On April 30, however, in
view of the eruption of new uncertainties regarding currency parities,
the Swiss National Bank requested the System to reactivate the swap
line to provide cover for $100 million of the funds that had come into
its reserves at the end of the first quarter.
In eariy May the rush for German marks began pulling funds from
Switzerland, and as the franc rate declined, the Swiss National Bank
sold a small amount of dollars. These pressures subsided when the
German Government rejected a revaluation of the mark, but the pull
of the Euro-dollar market on Swiss franc funds grew stronger during
the remainder of May. As the Swiss franc weakened, the Federal Reserve was able to accumulate a small amount of francs in market transactions, and it reduced its outstanding swap obligation by $5 million
equivalent to $95 million on May 28.
Swiss banks added substantially to their Euro-dollar assets during
June, offsetting the large Swiss balance of payments surplus on current
account At midyear, in particular, the heavy pull from the Euro-dollar
market had a strong effect on Swiss banks' portfolio decisions, as the
banks preferred to reduce their seasonal repatriation of funds rather
than forego the high yields on Euro-dollar placements. Moreover, the
Swiss National Bank, while again offering market swap facilities to
bridge the quarter-end, limited such facilities to no more than $250
million. For the balance of their liquidity needs the Swiss banks rediscounted an unusually large volume of eligible paper with the central
bank. Following past practice, the Swiss National Bank rechanneled
to the Euro-dollar market the dollar proceeds of its market swap purchases of dollars, so that over-all there was no drain on the Euro-dollar
market from the midyear positioning of the Swiss banks.

286



Throughout July the Swiss franc market was quiet, and during the
month the Federal Reserve liquidated completely its outstanding $95
million swap drawing on the Swiss National Bank. Against the background of generally calm exchange markets and some Swiss Government need for dollars, the System purchased a total of $60 million
equivalent of francs directly from the Swiss National Bank and obtained
$30 million of francs from the U.S. Treasury, which had issued to the
Swiss National Bank a Swiss franc-denominated certificate of indebtedness for the same amount. Most of the remaining $5 million Swiss
francs needed to repay the swap drawing were acquired in the market.
On July 17 the entire $600 million facility with the Swiss National
Bank reverted to a standby basis.
Trading in Swiss francs remained quiet in August, with only a
minimal reaction to the devaluation of the French franc. The spot rate
continued very strong but held below the ceiling, and there was no
need for official intervention. Late in the month—in view of increasing pressures on the labor supply, industrial capacity, and prices—
the Swiss authorities began to move toward a more restrictive policy
stance. An understanding was worked out with the commercial banks
to limit domestic credit expansion to 9 per cent over the coming year,
and the Swiss cantons and municipalities were requested to hold back
on their expenditures. In mid-September, in response to rising interest
rates at home and abroad, the Swiss National Bank raised its discount
rate by % of a percentage point to 33A per cent and its "Lombard"
rate on secured advances by a full percentage point to 43A per cent.
The Swiss National Bank also advised the commercial banks that it
would undertake no September-quarter-end swaps and that discount
facilities would be limited. Accordingly, it requested the banks to
repatriate funds from abroad to meet their liquidity needs.
With domestic credit conditions beginning to tighten and the Swiss
banks meeting their quarterly requirements in large part through the
repatriation of funds, the franc rate was pushed to its ceiling and
the Swiss National Bank took in a substantial amount of dollars. The
Federal Reserve consequently reactivated its swap facility with the
National Bank on October 10, drawing $200 million equivalent of francs
to absorb most of that bank's dollar holdings. After the quarter-end,
however, the pull of high Euro-dollar interest rates began to draw funds
out of Switzerland and the franc soon began to weaken, reaching an
18-month low on November 6. During this period the Federal Reserve




287

acquired small amounts of Swiss francs in the New York market and
from a correspondent and on November 10 repaid $25 million equivalent of its swap debt to the Swiss National Bank.
Although there had been considerable press and market discussion
of the possibility of a Swiss franc revaluation linked to a large revaluation of the German mark, there was no speculative rush into
francs when the mark parity was changed. In mid-November a flurry
did occur, however, and the spot rate advanced sharply, but the rumors
were quickly dispelled by a reaffirmation of the Swiss Government's
decision not to revalue the franc.
The franc began to firm again in the second half of November,
reflecting largely the usual year-end demand. As in previous years,
to help the commercial banks cover their year-end liquidity requirements, the Swiss National Bank offered market swaps of Swiss francs
against dollars. These swaps, the first of which were contracted in
early December, totaled $793 million by the end of the month—a
record amount—and helped keep the spot rate below its ceiling. As
in the past, the Swiss National Bank returned the dollars thus acquired
to the Euro-dollar market so as to neutralize the effects of the yearend withdrawals on that market. On December 30 the System repaid
a further $30 million equivalent of swap debt, using mainly francs
purchased in the market in the latter part of November and early in
December. The Federal Reserve's outstanding Swiss franc swap commitment was thereby reduced to $145 million equivalent.
ITALIAN LIRA
During the early months of 1969 the upward surge of interest rates in
the Euro-dollar and Euro-bond markets resulted in heavy capital exports by Italy. Moreover, domestic political uncertainties spurred additional outflows of funds, particularly through the export of Italian bank
notes. Italian lire consequently were heavily offered in the foreign exchange markets, and the Bank of Italy provided substantial support
for the lira while allowing the rate to drop sharply below par.
In view of the continued outflow from Italy during the early spring,
the Italian authorities took several steps to protect the official reserves
and to alleviate the growing strain on domestic capital markets. Italian
banks were asked to repatriate by midyear an amount of foreign exchange equivalent to their net foreign assets (then about $800 million).

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Steps were taken to discourage long-term investment abroad, and the
authorities moved to reduce excess domestic liquidity and to align
Italian interest rates more closely with those prevailing elsewhere.
The cumulative impact of these measures and the beginning of the
tourist season brought the lira rate above par by late April, and the
Bank of Italy purchased some dollars. The recovery ended in early
May, however, with the renewed speculation on the mark. Italian residents joined the rush into marks and also sold lire in order to cover
the commitments in German marks, and to some extent in Swiss francs,
that they had undertaken because of relatively low interest rates in
Germany and Switzerland. The spot rate dropped to its official floor
and the Bank of Italy provided substantial support through May 9.
Once the speculation in marks subsided, the lira market improved,
and during late spring and early summer there was some reflow from
Germany. This reflow, combined with repatriations of funds by Italian
banks acting under the official request to eliminate their net foreign
asset positions, more than offset the further capital outflows via export
of Italian currency. Effective July 1, the Bank of Italy reinforced its
defensive measures by imposing a penalty rate Wi points above its
discount rate of 3Vi per cent for banks making excessive use of central
bank borrowing.
New uncertainties unsettled the lira market with the fall of the Italian
Government in early July. Despite the subsequent formation of a new
government, a strong undercurrent of apprehension persisted. When
the French franc was devalued, the lira dropped to its floor, and during the next few days of exchange market uncertainties lire were
offered in heavy volume, with the Bank of Italy extending sizable support. On August 14 that bank raised its discount rate to 4 per cent,
and as the speculative pressures subsided, the lira firmed. It held well
above the floor through the end of August, and the Bank of Italy was
able to take in dollars. The Italian authorities also replenished their
dollar balances that month by encashing prior to maturity a $100.2
million equivalent lira note issued by the U.S. Treasury to the Italian
Exchange Office in late 1968 in conjunction with the understanding
with Italy on the neutralization of U.S. military expenditures.
At the beginning of September, however, the lira came under
renewed pressure as sporadic strikes presaged difficult wage negotiations and possibly inflationary settlements late in the year, when large




289

labor contracts were due to expire. Moreover, with the German
elections approaching, Italian residents who had commitments outstanding in German marks and Swiss francs moved quickly to cover
themselves by buying these currencies. The lira dropped to its floor,
and the Italian authorities had to provide substantial support to the
market. To cover market losses, the Bank of Italy activated its swap
line with the Federal Reserve on September 23, drawing $300 million.
Under these circumstances, the U.S. and Italian authorities agreed that
it was appropriate to terminate the U.S. Treasury's remaining technical
forward lira commitments that had arisen in connection with dollarlira swaps extended by the Italian Exchange Office to its commercial
banks. Consequently, these commitments were reduced progressively
during the autumn, and by the end of November they had beeiv fully
liquidated.
Although the lira remained at the floor in early October, pressures
eased considerably as soon as the German mark was permitted to appreciate. By midmonth a firmer tone had set in as the unwinding of mark
positions got under way. With repatriations from Germany continuing,
the lira moved close to its parity by the middle of November. During this
period the Bank of Italy was a frequent purchaser of dollars, and on November 14 it repaid its outstanding $300 million commitment to the
Federal Reserve. Thus, at the year-end the swap line was again fully
available.
CANADIAN DOLLAR
Canada's trade position remained relatively strong in 1969—though
the surplus was less than in 1968—and Canadian residents
continued to borrow heavily in the U.S. capital market. Throughout
much of the year, however, the Canadian dollar, like other major currencies, was increasingly affected by short-term capital outflows in response to the high and rising level of interest rates in the United States
and in the Euro-dollar market. By mid-February the Canadian dollar
had moved down from its effective ceiling and the Bank of Canada
had provided a small amount of assistance. As of March 3 the Bank
of Canada raised its discount rate by Vi percentage point to 7 per cent
in order to reduce the incentive to move funds abroad and to combat
the strong demand for bank credit in Canada.
One major channel for these outflows was through the so-called
"swapped deposits" with Canadian banks. In these transactions, de-

290



posits in Canadian funds are converted into U.S. dollars on a covered
basis. Using the dollars thus obtained, Canadian banks acquired a substantial amount of short-term assets directly from U.S. banks in forms
not subject to Regulation Q. Some of the U.S. dollar proceeds also
were invested in the Euro-dollar market, although placements were
limited by Canadian official directives issued in 1968 (in conjunction
with Canada's exemption from all U.S. balance of payments programs)
to prevent Canadian financial institutions from acting as a "passthrough" channel for U.S. resident funds.
The pull of abnormally high yields on U.S. dollar instruments not
subject to Regulation Q contributed to a sharp rise in outstanding
swapped deposits during the spring and summer months. The large
short-term outflows from Canada resulting from these transactions and
other Canadian investments abroad were largely offset by a surplus on
current and long-term capital accounts combined and by short-term
capital inflows from the United States. American investors, seeking
outlets not subject to Regulation Q and discouraged by the U.S.
balance of payments program from taking advantage of the high rates
available in the Euro-dollar market, moved short-term funds to
Canada.
Such investments were attractive because the covered outflows from
Canada generated equally heavy demand for Canadian dollars in the
forward market, and as a result the forward rate moved out to a substantial premium. This premium increased the attraction of covered
investments in Canada, where interest rates were rising not only in
line with the increase in rates abroad, but also as a result of the tightening of Canada's anti-inflation program. This tightening included an
increase of Vz percentage point in the Bank of Canada's discount rate
to IV2 per cent on June 11.
By early July, however, the spot Canadian dollar had dropped below
par as a result of the overriding effect of short-term capital outflows.
To restrain such short-term outflows, the Bank of Canada asked the
Canadian banks to regard the existing level of their swapped deposits
as a temporary ceiling and, effective July 16, announced a further V2
percentage point increase in its discount rate to 8 per cent. These
measures sharply curtailed the outflow of short-term bank capital, and
the spot rate quickly moved up above par.
The Canadian dollar remained above its parity throughout the rest
of the year in orderly and uneventful trading. The rolling-over of a




291

large amount of maturing swapped deposits temporarily depressed
the spot irate in September and early October. However, the rate was
soon pushed up sharply again by strong commercial demand. Furthermore, because the Canadian chartered banks had previously built up
positions in U.S. dollars, they were able to accommodate the usual
year-end demand for U.S. dollars without having much recourse to the
spot market. This, along with tight monetary conditions in Canada,
helped push the Canadian dollar to its effective ceiling ($0.9324)
by the year-end. During this period of strength, the Bank of Canada
did not intervene very actively in the market, making only modest
purchases of dollars. For the year as a whole Canada's reserves, including the IMF creditor position, rose by $60 million, to $2,908
million.
OPERATIONS IN OTHER CURRENCIES
In January the National Bank of Denmark drew $25 million on the
swap facility with the Federal Reserve; this drawing was repaid in
March. Subsequently, the Danish krone was brought under pressure
by sharply higher interest rates abroad, as Danish commercial firms
shifted part of their borrowings from international to domestic markets. The National Bank suffered a sizable reserve drain in supporting
the krone rate and in the latter part of April drew $50 million under
the $100 million Federal Reserve swap arrangement.
Even greater outflows from Denmark occurred as speculation on
the German mark developed in late April and early May. To bolster
its reserves, the National Bank drew the remaining $50 million under
the Federal Reserve swap facility and drew $45 million under the
Danish gold tranche with the IMF. With the regular swap line with the
Federal Reserve fully utilized, the U.S. Treasury provided a supplementary standby facility for $50 million. The Danish authorities also
took several measures to stem the outflow, including a 2 percentage
point increase in the discount rate to 9 per cent. Thus reinforced,
the krone firmed after the end of the May crisis, and in June
the National Bank of Denmark was able to repay the full $100 million
of swap drawings on the Federal Reserve. In early October the swap
arrangement was increased by $100 million to $200 million and the
Treasury line was allowed to lapse. Substantial repatriations of funds
followed the German mark revaluation, and as tight domestic credit

292



conditions contributed to a resumption of commercial borrowing
abroad, the krone firmed further. It traded around par through the end
of the year, and the National Bank of Denmark made considerable
reserve gains.
The Austrian National Bank also lost reserves during the international rush into marks and in late May drew $50 million under the
Federal Reserve swap facility—its first drawing since the arrangement
was established in 1962. During the summer tourist season the National Bank began to accumulate reserves, and in August it fully
liquidated its $50 million swap drawing. In early October the Federal
Reserve's swap arrangement with the Austrian National Bank was
raised to $200 million from $100 million. Later in the month the revaluation of the German mark raised market expectations of an upward adjustment in the schilling parity. The Austrian National Bank
took in some funds, but the inflow was soon reversed after the Austrian
authorities indicated that the schilling would not be revalued.
At the same time that the swap facilities with Austria and Denmark
were raised from $100 million to $200 million, a similar increase was
made in the swap line with the Bank of Norway.
EURO-DOLLAR MARKET
As 1969 began, interest rates in the Euro-dollar market rose,
despite the unwinding of year-end positioning, as major U.S. banks
looked to that market to relieve liquidity drains imposed by large runoffs of CD's. The advance in rates gained new momentum following the
VA- percentage point rise in U.S. banks' prime loan rates to 7 per cent
per annum on January 7. U.S. banks bid aggressively for Euro-dollars
through their European branches, raising their takings to a new peak
of $8.5 billion by the end of January. Meanwhile, market supplies
were being augmented by further flows of funds from Germany and
reflows from Switzerland, and there was some reversal of the heavy
U.S. corporate repatriations just prior to the end of 1968. With demand
for funds heaviest in the short-term maturities, interest rates for 1month deposits advanced sharply, to nearly 8 per cent per annum in
early January compared with 7 per cent per annum at the year-end.
In late January, however, the heavy flow of funds to the Eurodollar market from Germany lessened temporarily, while French commercial banks soon began to withdraw funds from the market. Conse-




293

quently, even though U.S. banks increased their borrowings through
their foreign branches only a little in February, Euro-dollar rates moved
sharply higher. Then early in March, in anticipation of higher demands
for loans in connection with the March 15 corporate tax date, U.S.
banks began to bid more aggressively for Euro-dollars and by midmonth their aggregate dollar borrowings through foreign branches had
reached $9.7 billion. Euro-dollar rates, however, were not substantially
affected; with the 3-month rate around 8Vi per cent, funds were
attracted from a great many money markets. Indeed, several European central banks increased their discount rates late in February and
in March, as pressures on their reserves mounted and domestic shortterm rates rose.
Meanwhile, the growing stringency in U.S. financial markets caused
commercial banks in this country to raise their prime rates, on March
17, to IVi per cent from 7 per cent. Moreover, in early April Federal
Reserve discount rates were increased by Vi percentage point to 6
per cent amd reserve requirements against demand deposits were raised.
The impact of these measures was quickly transmitted to European
money market centers, and three central banks followed the Federal
Reserve move by raising their discount rates in April. Furthermore,
in March the Italian authorities, and in early April the Belgian authorities, imposed restrictions on their commercial banks' net foreign asset
positions—in effect requiring the banks to repatriate funds from the
Euro-dollar market.
The fresh outbreak of speculative activity in the foreign exchange
markets in late April and early May—especially the expectations of a
revaluation of the German mark—put very strong pressures on the
Euro-dollar market. As huge amounts of funds moved into marks and
U.S. banks attempted to maintain the level of their Euro-dollar borrowings, Euro-dollar rates jumped sharply, with the call rate bid up to 10
per cent per annum by May 8. Following the German Government's
rejection of a mark revaluation, rates declined briefly.
In June there was a heavy surge of borrowings by U.S. banks in the
Euro-dollar market. During the first 3 weeks of the month, when the
runoff of CD's was particularly severe, the liabilities of banks to their
foreign branches rose more than $3 billion, to $13.1 billion, and generated extreme pressures on Euro-dollar rates. On June 10—the day
after U.S. banks had raised their prime loan rates by a full percentage

294



point to 8V2 per cent—the Euro-dollar call rate rose to HVi per cent
and the 3-month rate was bid up to 13 per cent. The market withstood the high rates without serious dislocation, and rates eased
somewhat once preparations for the mid-June U.S. corporate tax date
had been completed.
Throughout this period there was evidence that a number of foreign
central banks were making substantial placements in the Euro-dollar
market, to which U.S. funds were also being drawn. Yet toward the
end of the month, there were indications that U.S. corporations pulled
substantial amounts of dollar balances and other foreign currency deposits out of Europe, only to redeposit these funds early in July following the month-end reporting date under regulations issued by the Commerce Department's Office of Foreign Direct Investments. At the same
time, midyear window dressing by continental European commercial
banks was on a much smaller scale than in past years.
In July U.S. banks' demand for Euro-dollars continued at a high
level, though the increase in the banks' liabilities to their branches,
which reached $14.4 billion on July 30, proceeded at a much slower
pace than in June. Euro-dollar rates declined substantially throughout
July, and by the end of the month call money was bid at 9 per cent and
3-month deposits at 10%r, per cent. The market continued to attract
substantial amounts from several European financial centers, and additional central banks took steps to protect their domestic money markets and monetary reserves from the pull of high Euro-dollar rates.
The devaluation of the French franc on August 8 triggered new
pressures in the Euro-dollar market. The 3-month Euro-dollar rate
jumped to 11 per cent by August 12 and moved irregularly around
that level through the rest of the month. The level of U.S. bank borrowings changed little, however, and at the end of August the liabilities
of U.S. banks to their foreign branches stood at $14.7 billion.
In the light of the heavy reliance of some U.S. banks on Euro-dollar
borrowings and the repercussions on foreign monetary reserves and
financial markets, the Board of Governors took a series of measures
in order to moderate the flow of Euro-dollars to U.S. banks. First,
the Board amended Regulation D (which governs reserves of member
banks) so as to eliminate a technical loophole that had led banks to
increase their use of overnight borrowings of Euro-dollars. Subsequently, it amended Regulation M (which governs the foreign activi-




295

ties of member banks) by placing a reserve requirement of 10 per cent
on member bank liabilities to foreign branches in excess of the levels
outstanding in a base period, and on U.S. assets acquired by foreign
branches from their home offices. Also, Regulation D was further
amended to establish reserve requirements against borrowings from
nonaffiliated foreign banks.
These measures reduced the incentive for U.S. banks to seek Eurodollar funds and encouraged them to look for other sources of funds.
One alternative that many banks found attractive was the commercial
paper market, and as Euro-dollar liabilities stabilized, commercial
paper borrowings rose sharply during the summer months. In September U.S. banks' liabilities to their own foreign branches declined
slightly, thus helping to bring about some easing of Euro-dollar rates
for the shorter maturities: the 3-month rate declined to less than
11 per cent by September 17. After a sharp but brief recovery around
the time of the German elections, the rates resumed their decline,
and under the pressure of the heavy reflux of funds from Germany in
October, they dropped below 9 per cent.
As the use of the commercial paper market by banks through the
intermediary of bank-affiliated holding companies or subsidiaries grew,
the Board of Governors became concerned that such borrowing
might reduce the impact of monetary restraint. Consequently, the Board
announced, on October 29, that it was considering an amendment to
Regulation Q that would subject all such bank-related commercial
paper to the interest rate ceilings that apply to large CD's. Moreover,
in a separate but related action, the Board ruled that commercial
paper issued by subsidiaries of member banks already is covered by
existing provisions of Regulations Q and D.
The prospect of closer regulation of member banks' use of the commercial paper market was swiftly reflected in the Euro-dollar market,
and this—in combination with the expectation of continuing tight
credit conditions in the United States—contributed to a surge in interest rates from late October to mid-November. In December shortterm rates moved even higher as banks attempted to maintain their
Euro-dollar borrowings in the face of year-end repatriations of funds
by U.S. corporations and foreign banks. By December 18 call money
was at 11 per cent, the rate for 1-month deposits had reached 12%
per cent, and that for 3-month funds 1 1 % 6 P e r c e n t - After allowance

296



for the 10 per cent marginal reserve requirement, the effective cost of
1-month Euro-dollars for U.S. banks that were above the ceiling of
their base period at times reached 14 per cent, exceeding the record
levels attained in June. However, during the last 2 weeks of December, as repatriations of funds by U.S. corporations preparing to meet
their balance of payments guidelines reached yet a new year-end high,
U.S. banks lost some $1.6 billion of Euro-dollar funds, bringing the
level of their liabilities to their foreign branches to $13.0 billion.
•




297

Legislation Enacted
Interest on deposits; deposit insurance coverage; commercial
paper as deposits; reserves against Euro-dollar borrowings;
selective credit controls. By Joint Resolution approved September
22, 1969 (Public Law 91-71), Congress extended until December 22,
1969, the flexible authority of the Board, 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. By Act of
December 23, 1969 (Public Law 91-151), Congress further extended
such authority until March 22, 1971.
The Act of December 23 also increased from $15,000 to $20,000
the insurance coverage of deposits insured by the Federal Deposit Insurance Corporation and of accounts insured by the Federal Savings
and Loan Insurance Corporation.
Included among other provisions of the Act are explicit authorizations for the Board (1) to apply rate limitations and reserve requirements to commercial paper issued "directly by a member bank or indirectly by an affiliate of a member bank or by other means" and (2)
to require member banks to maintain reserves against borrowings from
foreign banks in a ratio up to 22 per cent.
By repealing certain provisions of the Defense Production Act of
1950, the Act of December 23 restored to the President authority to
encourage representatives of all major sectors of the private economy
to enter into voluntary agreements and programs furthering the objectives of the Defense Production Act, and it exempted participants from
prosecution under the antitrust laws because of their activities in such
programs. In addition, the Act empowers the President to authorize the
Board to institute selective credit controls when necessary to curb inflation.
State taxation of national banks. An Act of Congress approved
December 24, 1969 (Public Law 91-156), expands the authority of
States to tax national banks. Certain limited expansion was effective immediately, and effective January 1, 1972, a national bank will, for the
purposes of any State tax law, be treated as a bank organized under the
law of the Staite within which its principal office is located. The Board
is required to study the probable consequences of the latter provision

298



and to report the results of its study to the Congress by December 31,
1970.
Salaries of members of the Board. Section 10 of the Federal
Reserve Act was in effect amended by the Executive, Legislative, and
Judicial Salary Recommendations included in the President's Budget
Message to Congress on January 15, 1969. Those recommendations,
in accordance with the Act of December 16, 1967 (Public Law 90206), raised—effective March 1, 1969—the salary of the Chairman of
the Board from $30,000 to $42,500, and the salary of each other
member from $29,500 to $40,000.
•




299

Legislative Recommendations
Lending authority of Reserve Banks; "par clearance"; reserve requirements; purchase by Reserve Banks of obligations
of foreign governments; loans to bank examiners. For several
years the Board has urged enactment of legislation:
(1) to permit a member bank, subject only to regulations of 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 does not meet statutory "eligibility" requirements for the basic
rate;
(2) to require all federally insured banks to pay at par all checks
drawn on them (without deducting "exchange charges");
(3) to establish required reserve-percentage ranges on a graduated
basis according to the amount of a bank's deposits, regardless of its
location, and to make such requirements applicable to all federally
insured banks (rather than to member banks only); 1
(4) to permit Reserve Banks to invest in obligations of foreign governments or monetary authorities that mature within 12 months and are
payable in a convertible currency; and
(5) to permit federally insured banks to make home mortgage loans
to bank examiners under appropriate statutory safeguards.
For the reasons stated in earlier ANNUAL REPORTS and reiterated in
its ANNUAL REPORT for 1968, the Board again urges enactment of
legislation to accomplish the recommendations outlined above.
Bank holding companies. Following its 1968 study of the problems
presented by the trend toward the formation of one-bank holding companies, the Board on February 20, 1969, issued the following statement
of principles with respect to amendments to the Bank Holding Company Act: 2

1

In its ANNUAL REPORT for 1968 the Board submitted an alternative recom-

mendation under which the Congress would establish only for member banks a
system of graduated reserve requirements on the basis of the amount of a bank's
demand deposits.
2
Vice Chairman Robertson did not join in the statement. He issued a separate
statement expressing his views as follows: "(1) [O]ne-bank holding companies
should be: brought within the coverage of the Bank Holding Company Act with-

300



Statement of Principles
For several months the Board of Governors has been engaged in an
intensive study of the problems presented by the recent trend in the
formation of one-bank holding companies. The Board's deliberations
have led it to adopt the following statement of principles with respect
to possible amendments to the Bank Holding Company Act of 1956:
1. The Board believes that it is essential that one-bank holding
companies be included within the purview of the Act.
2. The Board considers that under present circumstances the
law should not permit a bank to become a part of a conglomerate
organization. The unique characteristics of banks led the Congress
in 1933 to separate banking from nonbanking businesses, and in
1956 to reinforce that policy by limiting the activities of multibank holding companies to the management and control of banks
and closely related activities. The Board believes that this separation should be maintained.
It also believes, however, that, consistent with continued growth
and development of a dynamic and increasingly complex economy,
banks should be granted greater freedom to innovate new services
and procedures, either directly, or through wholly owned subsidiaries, or through affiliates in a holding company system, subject
to administrative approval of entry and acquisitions to prevent
activities inconsistent with the purpose of the Act.
3. Certain kinds of activities in holding company systems are
in the public interest if accompanied by proper safeguards against
perverse consequences. In determining whether a particular activity by bank holding company organizations is consistent with the

out a 'grandfather clause' (although small one-bank holding companies might be
given special consideration); and (2) some expansion of the powers of banks
through subsidiary corporations or through collateral affiliates in a holding company system is justified; but (3) the most important consideration is that the
administration of the Holding Company Act should be vested in one Federal
agency to assure uniformity in its application, which is essential from the standpoints of the banking community, the Government, and the public." Governor
Brimmer agreed with all elements of the Board's statement except item 7, regarding dispersal of authority among the three Federal bank regulatory agencies.
He issued a separate statement indicating that "as a matter of principle . . . the
administrative authority under the Bank Holding Company Act should be vested in
a single agency."




301

public interest, consideration must be given to whether the benefits
of such affiliation outweigh the potential dangers at which the separation of banking from nonbanking businesses has beten directed.
Such benefits would include greater convenience to the public,
increased competition, and gains in efficiency for the economy
generally as well as for the holding company organization. The
potential dangers which might result from bank affiliation with
nonbanking businesses are undue concentration of resources, decreased competition, conflicts of interest leading to less equality in
the availability of credit, and dangers to the soundness of the Nation's banking business.
4. The Board considers that one-bank holding companies and
multibank holding companies should be afforded equal treatment
under the law with respect to bank and nonbank acquisitions or
approvals of de novo entry.
5. Bank holding companies should be allowed to enter certain
nonbanking areas of activity, specified in statute or agency regulation, which would facilitate broader services for the public. Determinations by the appropriate banking agency would involve an
evaluation of the benefits and dangers of such entry. Unless
otherwise provided by law, entry by acquisition, purchase of assets, merger, consolidation, or otherwise should be on the basis
of considerations similar to the competitive and banking factors
contained in the present Act.1
6. The Board believes that it would be most effective for one
agency (preferably the Board) to continue to administer the Bank
1

Because of the risk of undue concentration of resources, an applicant
proposing an acquisition involving a relatively large amount of nonbank
asserts would ordinarily bear a greater burden of proving that the acquisition
was not contrary to the public interest.
Any expansion of bank holding company activities is predicated on the
assumption that the economy generally will also benefit from the ability of
such institutions to operate more efficiently in performing certain functions.
However, it should be recognized that entry into new activities, particularly
those that are financially related—whether de novo or by acquisition—raises
the question of the effect on competition between bank and nonbank institutions. Preserving the viability of such competition may be of overriding
importance. The probability of anticompetitive consequences appears
greeiter in acquisitions of existing concerns than in de novo entry.

302



Holding Company Act with respect to the holding companies
themselves and with respect to the approval of acquisitions by the
holding companies. Just as it believes the present system of a
single agency determining the approval of new acquisitions by
holding companies is proper, the Board believes that the approval
for acquisition of subsidiaries by individual banks should be
dispersed among the three bank regulatory agencies.
7. Alternatively, and less desirably, if the Bank Holding Company Act were to be amended so that administrative authority
over bank holding companies would be dispersed among the three
agencies which now share in the regulation of banks, dispersion
might occur in the following manner:
(a) Vest authority over multibank holding company acquisitions of banks and of nonbanking activities in the Board.
(b) Disperse authority over one-bank holding companies in
the three agencies with a requirement that regulations be jointly
promulgated as to permitted nonbank lines of activity and containing guidelines as to acquisitions and mergers, which because of size, or market, or related activities would be presumed
to be opposed to the public interest. These regulations would
also be applicable to nonbank acquisitions by multibank
holding companies.
8. Although one-bank holding companies should generally
be subject to the Act to the same extent as multibank holding
companies, one-bank holding companies in existence before the
recent trend to their formation should be given special consideration. This would mean a qualified exemption for those companies
with respect to which the Congress or the agency determines that
the combination of bank and nonbank assets does not give rise
to any significant extent to the evils at which the Act is directed.2
2
There are various possible forms such an exemption might take: (1)
exempting one-bank holding companies with relatively small bank and nonbank assets; (2) exempting one-bank holding companies in existence before
the recent trend began (generally accepted as July 1, 1968) as long as they
conduct no activities other than those conducted on the cut-off date and do
not acquire (by purchase of assets, merger, consolidation, or otherwise)
any interest in any other enterprise; (3) exempting such companies irrespective of their activities as long as they make no acquisitions; and (4)




303

On April 18, 1969, before the House Banking and Currency Committee, Chairman Martin expressed the views of the Board on holding
company legislation (H.R. 6778 and H.R. 9385), and Vice Chairman
Robertson expressed his personal views. In response to the committee's request, the Board submitted the following proposed revision of
Section 4 ( c ) ( 8 ) of the Holding Company Act, including the following list of activities in which the Board considers a registered holding
company should be permitted to engage through subsidiary corporations, with the safeguards specified:
(8) shares retained or acquired with the approval of the Board in any
company that engages solely in one or more of the following activities:
(A) lending funds on its own account or for the account of others,
(B) acting as investment adviser,
(C) operating a diversified open-end investment company registered under section 8 of the Investment Company Act of 1940, if the
shares of such company are sold at a public offering price that does
not include a sales load and if any redemption fee or similar charge
imjKJsed with respect to such shares does not exceed 1 per cent of the
value of the shares redeemed,
(D) leasing equipment, where the initial lease provides for payment of rentals that will reimburse the lessor for the full purchase
price of the equipment,
(E) acting as insurance agent or broker where more than half
of the premium income is derived from sales to customers who are
also customers of a noninsurance subsidiary of the holding company,
(F) acting as insurer principally in connection with extensions of
credit by one or more subsidiaries of the holding company.,
(G) providing accounting or data processing services functionally related to banking,
(H) acting as fiduciary,
(I) originating, servicing and selling mortgage loans,
exempting such companies irrespective of their activities or acquisitions but
require agency approval of any acquisition.
NOTE.—This statement of principles is directed to the major issues involved in bringing one-bank holding companies within the coverage of the
Bank Holding Company Act. Other amendments to the Act also merit
favorable action by Congress. Among these are amendments (1) to bring
partnerships within the coverage of the Act; (2) to broaden the Board's
authority to determine that a company owns or controls a bank; (3) to
give the Board jurisdiction over mergers where the resulting bank is a
subsidiary of a multibank holding company; (4) to prohibit a bank from
voting bank stock held in trust unless it has voting instructions from the
beneficiary; and (5) to prohibit tie-in arrangements.

304



(J) acting as travel agent or issuing travelers checks,
(K) making equity investments in community rehabilitation and
development corporations engaged in providing better housing and
employment opportunities for the low-income and moderate-income
population, or
(L) performing any other activity that the Board has determined,
after notice and opportunity for hearing, is functionally related to
banking in such a way that its performance by an affiliate of a bank
holding company can reasonably be expected to produce benefits
to the public, such as greater convenience, increased competition, or
gains in efficiency, that outweigh possible adverse effects, such as
undue concentration of resources, decreased competition, conflicts
of interest, or unsound banking practices.
The Board shall not approve any retention or acquisition under this paragraph (8) except in accordance with regulations prescribed by it, which
shall include guidelines taking into account any potential anticompetitive
effects, and any other risks of undue concentration of economic resources in
any market. Limitations on permissible activities may be established on the
basis of any relevant factors, including the size of the bank holding company
or its subsidiary banks, the size of the company to be acquired or retained,
and the size of the communities in which such activities are to be performed.
The Board shall not approve any retention or acquisition under this paragraph which would result in a monopoly, or which would be in furtherance
of any combination or conspiracy to monopolize any part of trade or commerce in any part of the United States, or whose effect in any line of commerce 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. In every case, the Board shall take into consideration the financial and managerial resources and future prospects of the companies and banks concerned, and the convenience and needs of the community to be served.
On November 5, 1969, the House passed legislation (H.R. 6778)
that in some respects is inconsistent with the Board's statement of
principles and its proposed list of permissible activities for holding
companies. Specifically, H.R. 6778 would add a new paragraph (f) to
Section 4 of the Bank Holding Company Act that would prohibit holding companies and their subsidiaries from engaging in certain of the
foregoing activities and limit their activities in certain other areas to a
greater extent than would be the case under the Board's recommendations. However, the Board continues to favor legislation in this area.
Credit cards. On several occasions during 1969, the Board was
asked for its views on legislative proposals relating to credit cards




305

issued by banks and other lenders. In responding, the Board indicated
that it does not favor legislation prohibiting unsolicited mailings of
credit cards because it believes that such mailings are essential to enable new competitors to enter the field. However, the Board stated that
it favors Federal legislation that would, by statute, limit a cardholder's
liability for unauthorized use of a credit card and impose some restrictions on unsolicited mailings, designed to protect consumers. Specifically,
the Board favored legislation requiring issuers who mail unsolicited
credit cards to use unmarked envelopes enclosing (1) an unmarked
return envelope containing the card and (2) a statement notifying the
addressee of the contents of the return envelope and that the card may
be refused merely by mailing the unopened return envelope.
•

306



Litigation
Investment Company Institute, et al. v. Camp. On appeals by
the Comptroller of the Currency and the First National City Bank of
New York, a ruling by the U.S. District Court for the District of
Columbia in favor of the plaintiffs (see ANNUAL REPORT for 1967,
page 333) was overturned by the U.S. Court of Appeals. The appellate
court held that a commingled managing agency account is a bona fide
fiduciary activity authorized for national banks under 12 U.S.C. 92a;
it upheld the validity of the provisions of the Comptroller's Regulation
9 (12 CFR 9) that permit national banks to operate that type of account; and it concluded that the Comptroller was authorized to empower First National City Bank to create, organize, and manage the
account in question. The appellate court rejected the view of the
lower court that the Federal banking laws (12 U.S.C. 24, 78, 377, and
378) make it illegal for a national bank to establish, operate, or be
affiliated with such a fund, but agreed with the District Court that the
Investment Company Institute had standing to bring the law suit. A
petition for certiorari, seeking review by the U.S. Supreme Court, is
pending.

United States v. First at Orlando Corporation, et al. The U.S.
Department of Justice filed suit in December 1969 in the U.S. District
Court for the Middle District of Florida, attacking a proposal of
First at Orlando Corporation, a registered bank holding company, for
the acquisition of 80 per cent or more of the voting shares of each of
three banks in Volusia County, Florida, namely, Commercial Bank at
Daytona Beach, Peninsula State Bank at Daytona Beach Shores, and
Exchange Bank at Holly Hill. Acting pursuant to its authority under the
Bank Holding Company Act, the Board had granted approval of the
proposed acquisitions (Federal Reserve Bulletin, December 1969, page
945). The suit alleges that the effect of the proposed acquisitions will
be substantially to lessen competition, or to tend to create a monopoly
in violation of Section 7 of the Clayton Act (15 U.S.C. 18).
•




307

Bank Supervision and Regulation
by the Federal Reserve System
Examination of member banks. Each State member bank is subject to examinations made by direction of the Board of Governors or
the Federal E.eserve Bank of the district in which it is located by
examiners selected or approved by the Board. The established policy
is for the Federal Reserve Bank 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 concurrent examinations are made in cooperation with the State banking authorities, while in others alternate independent examinations are made. All but 59 of the 1,202 State member
banks were examined during 1969.
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 upon
request, and each Federal Reserve Bank purchases from the Comptroller
copies of reports of examination of national banks in its district.
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.
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 State member banks within its jurisdiction under 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,

308



(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 8 8 593), 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. 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 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 forward 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.

LOANS TO EXECUTIVE OFFICERS

Total loans to
executive officers

Period covered
(condition report
dates)

Range of
interest rate
charged (per cent) i

Number
Oct. 21, 1968—
Dec. 31,1968...
Jan. 1, 1969—
Apr. 4,1969...
Apr. 5, 1969—
June 3 0 , 1 9 6 9 . . .
July 1, 1969—
Oct. 21,1969...
Oct. 22,1969—
Dec. 31, 1969...

Amount (dollars)

6,468

14,715,895

114—18

9,758

20,678,788

2—15

6,365

14,799,980

21/2-18

18,256

20,864,076

0—18

2

2

( )

( )

(2)

1
The rate of 18 per cent reflects the inclusion of rates of 1 V£ per cent per month charged on creditcard and check-credit plans.
2
Compilation of data for condition report of Dec. 31, 1969, has not been completed.




309

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 90-44),
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 olP all loans to its executive officers since the date of submission
of its previous report of condition. Since the Board's 1968 ANNUAL
REPORT was released, member banks have submitted, as required by
law, the data that appear in the table on the preceding page.

Federal Reserve membership. As of December 31, 1969, member banks accounted for 43 per cent of the number of all commercial
banks in the United States and for 62 per cent of all commercial banking offices, and they held approximately 81 per cent of the total deposits
in such banks. State member banks accounted for 13 per cent of the
number of all State commercial banks and 37 per cent of the banking
offices, aind they held 54 per cent of total deposits in State commercial
banks.
Of the 5,871 banks that were members of the Federal Reserve
System at the end of 1969, there were 4,669 national banks and 1,202
State banks. During the year there were net declines of 47 national
and 60 State member banks. The decline in the number of national
banks reflected 42 conversions to branches incident to mergers and
absorptions and 28 conversions to nonmember banks. The decline was
offset in part by the organization of 16 new national banks and the
conversion of 9 nonmember banks to national banks. The decrease in
State member banks reflected mainly 42 withdrawals from membership
and 17 conversions to branches incident to mergers and absorptions.
At the end of 1969 member banks were operating 15,204 branches,
663 more than at the close of 1968; this included 753 de novo establishments.
Detailed figures on changes in the banking structure during 1969
are shown in Table 18, pages 351 and 352.
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.

310



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
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 of Governors 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 1969 the Board disapproved three and approved 20 of these
applications, and it submitted 135 reports on competitive factors to the
Comptroller of the Currency and 77 to the Federal Deposit Insurance
Corporation. As required by Section 18(c) of the Federal Deposit Insurance Act, a description of each of the 20 applications approved by
the Board, together with other pertinent information, is shown in Table
21 on pages 355-81.
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 1969, pursuant to Section
3 ( a ) ( l ) of the Bank Holding Company Act of 1956, the Board ap-




311

proved 21 applications for prior approval to become a bank holding
company. Pursuant to the provisions of Section 3(a) (3) of the Act,
the Board approved 66 applications by bank holding companies, and
denied three applications. To provide necessary current information,
annual reports for 1968 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 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 1969, 53
member banks had in active operation a total of 460 branches in 59
foreign countries and overseas areas of the United States; 36 national
banks were operating 428 of these branches, and 17 State member banks
were operating 32 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 1969 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 85 branches overseas.

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. Of these five approvals, three granted banks 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. Two of the approvals
granted banks 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 1969
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

312



[Tabulation referred to on opposite page.]

Latin America
235
38
Argentina
32
Bahamas
3
Barbados
4
Bolivia
15
Brazil
18
Chile
23
Colombia
Dominican Republic . . . . 11
Ecuador
9
1
El Salvador
Guatemala
3
1
Guyana
Honduras
3
3
Jamaica
4
Leeward Islands
5
Mexico
2
Netherlands Antilles
3
Nicaragua
26
Panama
6
Paraguay
8
Peru
6
Trinidad and Tobago
Uruguay
4
Venezuela
4
3
Virgin Islands (British)
Europe
Austria
Belgium
Germany
France
Greece
Ireland
Italy
Luxembourg




103
1
10
17
11
8
2
3
1

Europe—Cont.
Netherlands
Switzerland
United Kingdom
Africa
Liberia

7
6
37
1
1

i V C-C4/ M-JIA*JV

Dubai
Lebanon
Saudi Arabia
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
Marshall Islands
Truk Islands
Virgin Islands
Total

1
3
2
77
13
11
6
13
3
5
2
4

5
9
2
2
2
38
2
3
18
1
1
13
460

313

in international or foreign banking. Three of these "agreement" corporations; have head offices in New York, and one has its head office in
Miami, Horida. 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 1969, under the provisions of Section 25(a) of the Federal
Reserve Act, the Board issued final permits to eight corporations to engage in international or foreign banking or other international or foreign
financial operations, and seven corporations commenced operations.
At the end of the year there were 63 corporations in active operation
under Section 25(a); 32 have home offices in New York City; five in
Philadelphia; three each in Boston, Chicago, Detroit, and San Francisco; two each in Dallas, Los Angeles, and Seattle; and one each in
Cleveland, Pittsburgh, Norfolk, Winston-Salem, Atlanta, Miami, St.
Louis, and Portland. One of the corporations with headquarters in
Seattle has five branches in Hong Kong; one of the corporations in
Philadelphia and one in New York operate branches in London, and
one New York corporation operates a branch in Nassau. Examiners for
the Board of Governors examined 57 of these corporations during
1969.

Actions under delegation of authority. Pursuant to the provisions
of Section l l ( k ) of the Federal Reserve Act, the Board of Governors
has delegated to the Reserve Banks (1) authority to approve, on behalf
of the Board, certain applications of State member banks to establish
domestic: branches, to invest in bank premises, to declare certain dividends, and to grant a waiver of 6 months' notice by a bank of its intention to withdraw from membership in the Federal Reserve System, and
(2) certain other less frequently used authorities. Under such authority
the Reserve Banks approved 116 branch applications, 39 investments
in bank premises, 43 waivers of notice of intention to withdraw from
membership in the Federal Reserve System, and 41 applications of
various other kinds.
The Board has delegated to the Director or Acting Director of the
Division of Supervision and Regulation authority to approve certain
applications to establish domestic branches and various other authorities.
Under this authority 77 branches and 88 applications of other kinds
were approved.

314



The Board has also delegated to any member of the Board, designated
by the Chairman, the authority to approve certain applications involving
the establishment of a foreign branch or agency by a member bank or
corporation organized under Section 25(a) (an "Edge" corporation)
or operating under an agreement with the Board pursuant to Section 25
(an "agreement" corporation) and also to grant specific consent to stock
acquisitions by an Edge or agreement corporation and to permit Edge
or agreement corporations to exceed limitations prescribed by statute.
Under this authority a member of the Board has approved 12 branches
and 90 investments by Edge or agreement corporations.
Bank Examination Schools. In 1969 the Bank Examination School
conducted four sessions of the School for Examiners, four sessions of
the School for Assistant Examiners, and two sessions of the School for
Trust Examiners. The Bank Examination School was established in
1952 by the three Federal bank supervisory agencies, and since 1962
it has been conducted jointly by the Federal Reserve System and the
Federal Deposit Insurance Corporation.
Since the establishment of this program, 4,149 persons have attended
the various sessions. This number includes representatives of the Federal
bank supervisory agencies; the State Banking Departments of Arkansas,
Arizona, California, Connecticut, Florida, Idaho, Indiana, Kentucky,
Louisiana, Maine, Michigan, Mississippi, Missouri, Montana, Nebraska,
New Hampshire, New Jersey, New Mexico, New York, North Carolina,
North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island,
South Dakota, Tennessee, Utah, Vermont, Virginia, Washington, and
Wyoming; the Treasury Department of the Commonwealth of Puerto
Rico; and 19 foreign countries.
Truth in Lending. A report entitled Annual Report to Congress on
Truth in Lending for the Year 1969 was submitted separately, pursuant
to the Truth in Lending Act (Title I of the Consumer Protection Act
(Public Law 90-321)).
•




315

Federal Reserve Banks
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 1969 and 1968.
EARNINGS, EXPENSES, AND DISTRIBUTION OF N E T EARNINGS
OF FEDERAL RESERVE BANKS, 1969 AND 1968
In thousands of dollars

Item

1969

1968

3,373,360
274,973

2,764,446
242,350

3,098,387

2,522,096

-557

8,520

Net earnings before payments to U.S. Treasury

3,097,830

2,530,616

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

39,237
3,019,161

36,960
2,463,629

39,432

30,027

Current earnings
Current expenses
Current net earnings
Net addition to or deduction from (—) current net
earnings

Transferred to surplus

Current earnings of $3,373 million in 1969 were 22 per cent higher
than in 1968, reflecting increases of $527 million on U.S. Government

316



securities, $45 million on foreign currencies, and $36 million on discounts and advances.
Current expenses were $33 million more than in 1968, or 13 per
cent. Statutory dividends to member banks amounted to $39 million,
an increase of $2 million from 1968. The 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 $3,019 million for the year, compared with $2,464 million in
1968. This amount consists of all net earnings after dividends and the
amount necessary to bring surplus to the level of paid-in capital.
The cost to the Federal Reserve Banks for separating silver coin
from clad coin during the year amounted to $83,921. This operation
was performed during the period May 1968 through July 1969, at the
request of the Bureau of the Mint, and yielded approximately $101
million in silver dimes and quarters, which were then made available
to the Mint for melting. Expenses of the Reserve Banks for the project
in both years totaled $391,141, after recovery of $12,000 from the
sale of separating equipment.
Expenses of the Federal Reserve Banks also included costs of
$210.32 for two regional meetings incident to the Treasury Department savings bond program.
A detailed statement of earnings and expenses of each Federal Reserve Bank during 1969 is shown in Table 7 on pages 336 and 337,
and a condensed historical statement in Table 8 on pages 338 and 339.

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.
Average daily holdings of loans and securities during 1969 amounted
to $55,198 million—an increase of $3,263 million over 1968. Holdings of acceptances decreased $6 million, whereas there were increases
of $2,736 million in U.S. Government securities and $533 million in
discounts and advances.
The average rates of interest on holdings were up from 5.22 per cent
to 5.93 per cent on discounts and advances, from 5.75 per cent to
7.01 per cent on acceptances, and from 5.17 per cent to 5.89 per cent
on U.S. Government securities.




317

RESERVE BANK EARNINGS ON LOANS AND SECURITIES, 1967-69

Discounts

Item and year

and

Total

advances

Acceptances

U.S.
Govt. 1
securities

In millions of dollars
Average daily holdings:2
1967
1968
1969

46,417
51,935
55,198

Earnings:
1967
1968
1969

2,164.6
2,687.4
3,250.8

178
569

1,102

104
73
67

7 .7
29 .7
65 .3

4 .8
4 .2
4 .7

46,135
51,293
54,029
2,152.1
2,653.5
3,180.8

In per cent
Average rate of interest:
1967
1968
1969
1
2

4.66
5.17
5.89

4. 33
5. 22
5. 93

4. 62
5. 75
7. 01

4.66
5.17
5.89

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

Volume of operations. Table 9 on page 340 shows the volume of
operations in the principal departments of the Federal Reserve Banks
for 1966-69.
Discounts and advances were the highest in number since 1959, and
the dollar volume reached a new peak as the number of banks borrowing rose to 1,714 against 1,310 in 1968.
The number of coins received and counted also rose sharply
during the year, a reflection of the continuing increase in coins in
circulation. Volume was again higher in most of the other operations,
particularly in checks handled, food stamps redeemed, and transactions in U.S. Government securities.

Loan guarantees for defense production. Under the Defense
Production 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, arid the Atomic Energy Commission are authorized to guarantee

318



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 1969 the guaranteeing agencies did not authorize the issuance
of any new guarantee agreements. Loan authorizations outstanding on
December 31, 1969, totaled $72 million, of which $71 million represented outstanding loans and $1 million additional credit available to
borrowers. Of total loans outstanding, 29 per cent on the average was
guaranteed. During the year approximately $66 million was disbursed
on guaranteed loans; of this total, $49 million was disbursed on a loan
authorized in 1968 as part of the financing for expansion of domestic
copper production.
Authority for the V-loan program, unless extended, will terminate
on June 30, 1970.
Table 11 (page 341) shows guarantee fees and maximum interest
rates applicable to Regulation V loans.

Foreign and international accounts. Assets held for foreign account at the Federal Reserve Banks declined $2,609 million in 1969.
At the end of the year they amounted to $19,217 million: $10,506
million of earmarked gold; $7,030 million of U.S. Government securities (including securities payable in foreign currencies); $134 million in dollar deposits; $146 million of bankers' acceptances purchased
through Federal Reserve Banks; and $1,401 million of miscellaneous
assets. The latter item consists mainly of dollar bonds issued by foreign
countries and international organizations. Assets held for international
organizations, including IMF gold deposits, declined $964 million to
$7,157 million.
In 1969 new accounts were opened in the names of the People's
Bank of the Union of Burma, Central Bank of Kuwait, Southern
Yemen Currency Authority, and National Bank of Somalia.
The System did not make any gold collateral loans during 1969.
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




319

North Korea, and their nationals, and to transactions with those countries and their nationals.
Bank premises. During 1969 the Board authorized construction of
new buildings for the Minneapolis Bank and the Cincinnati and Memphis Branches.
With the approval of the Board, a site was obtained for the new
building authorized for the Minneapolis Bank, and property adjacent
to the Los Angeles Branch was acquired for future expansion.
Table 6 on page 335 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.
•

320



Board of Governors
Building annex. In April 1969 the Board of Governors announced
it had postponed indefinitely the construction of an annex to its present
building in order to minimize competition for scarce goods and services
during a period of strong inflationary pressures. Construction had been
scheduled to begin in 1969 with completion in 1971.
Income and expenses. The accounts of the Board for the year 1969
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, 1969, 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, 1969 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
Washington, D.C.
February 2, 1970




321

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

1969

ASSETS
OPERATING F U N D :

Cash
Miscellaneous receivables and advances
Stockroom and cafeteria inventories at first-in, first-out cost

$ 1,241,526
56,380
33,318

Total operating fund

1,331,224

PROPERTY FUND :

Land and improvements
Building
'.
Furniture and equipment
Construction in progress

792,852
4,330,488
1,215,113
1,744,297

Total property fund

8,082,750
$ 9,413,974

LIABILITIES AND FUND BALANCES
OPERATING FUND :

Current liabilities:
Accounts payable and accrued expenses
Income taxes withheld
"
Accrued payroll
Fund balance:
Balance, January 1, 1969
Excess of expenses over assessments for the year
ended December 31, 1969

$1,247,215
158,752
143,542
$ 1,549,509
902,719
1,121,004
(

Total operating fund

218,285)
1,331,224

PROPERTY FUND :

Fund balance:
Balance, January 1, 1969
Additions
Property adjustments and disposals
Total property fund

6,841,299
1,265,211
( 23,766)
8,082,750
$ 9,413,974

The accompanying notes are an integral part of the financial statements.
[See page 324 for notes.]

322



BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

STATEMENT OF ASSESSMENTS AND EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1969

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

$15,067,500
21,234,263
36,301,763

EXPENSES:

Expenditures for printing, issue and redemption of Federal Reserve
Notes, paid on behalf of the Federal Reserve Banks
For the Board:
Salaries
$9,425,813
Retirement and insurance contributions
1,861,627
Travel expenses
503,338
Legal, consultant and audit fees
356,802
Contractual services
389,038
Printing and binding—net
479,736
Equipment and other rentals
1,036,928
Telephone and telegraph
194,247
Postage and expressage
200,402
Stationery, office and other supplies
117,561
Heat, light and power
63,901
Operation of cafeteria—net
77,843
Repairs, maintenance and alterations
85,845
Books and subscriptions
37,779
System membership, Center for Latin American
Monetary Studies
27,000
Miscellaneous—net
89,193

21,234,263

14,947,053
1,241,451

For property additions
Total expenses

37,422,767

EXCESS OF EXPENSES OVER ASSESSMENTS

$ 1,121,004

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




[See page 324 for notes.]

323

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

The Hoard 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 $339,638 under
leases expiring in 1972. These leases may be terminated with six months notice.
CONSTRUCTION

Except for those items previously committed amounting to approximately
$1,500,000, construction of the planned Federal Reserve North Building and North
Garage has been postponed indefinitely. The architect has estimated the total cost as
approximately $30,000,000.
RETIREMENT PLAN

There are tv/o contributory retirement programs for employees of the Board.
About 75% of the employees are covered by the Federal Reserve Board Plan. All
new members of the staff who do not come directly from a position in the Government are covered by this plan. The second, the Civil Service Retirement Plan, covers
all new employees who come directly from government service. Employee contributions and benefits are the same under both plans and are based upon the Civil Service
Plan.
Under the Civil Service Plan, Board contributions match employee payroll
deduction;? while under the Federal Reserve Plan, Board contributions are actuarially
determined annually.
Total Board contributions to these plans in 1969 totaled $1,797,467 including
$446,000 required to fund cost of living allowances to annuitants under the Federal
Reserve Plan. There are no unfunded prior service costs under either plan.

324



Statistical Tables




1. DETAILED STATEMENT OF CONDITION OF ALL FEDERAL RESERVE BANKS
COMBINED, DECEMBER 31, 1969
(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
6,813,114
3,222,000

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

10,036,392
770,380
1 ,453
71
43
108 ,794

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

110,361
130,487

130,487

52,885

52,885

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.
Notes
Bonds

183,372
63,914

22,265,236
31,391,861
3,496,413

Total bought outright

57,153,510

Held under repurchase agreement
Total U.S. Govt. securities
Total loans and securities
Cash items in process of collection:
Transit items
Exchanges for clearing house
Other casti items.
Total cash items in process of collection
Bank premises:
Land
Buildings (including vaults)
Fixed machinery and equipment

57,153,510
57,400,796
12,021,944
292,310
567,707

126,091
71,181

Total buildings
197,272
Less depreciation allowances
114,019
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
Interest accrued
Premium on securities
Deferred charges
Real estate acquired for banking-house purposes
Suspense account
All other
Total other assets
Total assets

326



12,881,961

u

33,274

83,253
116,527
1,966,722
219,110
5,342
414,340
527
2,960
2,383
15,230
972
2,627,586
83,944,003

1.—CONTINUED

LIABILITIES
F.R. notes:
Outstanding (issued to F.R. Banks)
Less: Held by issuing F.R. Banks
Forwarded for redemption

2,155,596
13,645

50,412,404
2,169,241

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
All other

48,243,163
21,979,906
1,312,290
133,608
49,356
23,105
77,570
305,788
351,339

Total other deposits

807,158

Total deposits
Deferred availability cash items

24,232,962
9,549,756

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

661
562,256
9,077
7,702
24

Total other liabilities

579,720

Total liabilities

82,605,601

CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts 1
Total liabilities and capital accounts
Contingent liability on acceptances purchased for foreign correspondents

669,201
669,201
83,944,003
145,948

1
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. 336 and 337.

NOTE.—Amounts in boldface type indicate items shown in the Board's weekly statement of condition
of the F.R. Banks.




327

2. STATEMENT OF CONDITION OF BACH FEDERAL RESERVE BANK, DECEMBER 31, 1969 AND 1968
(In millions of dollars)

Boston

Total

Item
1969

1968

10,036
771
110

10,026
784
207

570
76
5

130
53

163
25

2

64

58

57,154

52,937

2,899

Total loans and securities

57,401

53,183

Cash items in process of collection

12,883
116

11,817
113

1,967
219
441

2,061
230
481

83,944

78,902

New York

1969

1968

1969

Richmond

Cleveland

Philadelphia
1968

1968

1969

1969

1968

1969

1968

2,325
159
8

2,813
162
21

526
35
5

494
35
5

862
68
10

739
67
24

927
68
6

861
83
13

47
5

74

1

*

4

11

11
1

3

64

58

2,762

13,921

12,687

3,072

2,810

4,431

4,175

4,273

3,978

2,901

2,762

14,037

12,819

3,073

2,810

4,435

4,186

4,285

3,981

786
2
94

605
3

2,494
9

2,663
10

886
10

175

102

107

28

24

529
230
118

807
5
185

1,070
11

500
219
109

635
2
109

870
6

101

730
2
102
22

27

35

39

36

39

4,462

4,123

19,860

19,365

4.495

4,117

6,461

6,052

6,505

5,980

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

554
63
11

Federal agency obligations held under repurchase
agreements
U.S. Govt. securities:
Bousht outrisht

Other assets:
Denominated in foreign currencies
TMF cold deoosited i
All other
Total assets ..




LIABILITIES
F.R. notes.
.
Deposits:
Member bank reserves
U.S. Treasurer—General account
Foreign
Other:
IMF gold deposits *
All other
,

48,244

....

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

45,510

2 ,755

2 ,637

11 ,264

10,511

2 ,757

2 ,616

3 ,953

3 ,700

4,327

4,142

21,979
1,312
134

21,737
703
216

834
65
6

731
*
11

5 ,826
303
137

5,897
681
52

986
71
7

870
*
1?.

1 ,551
94
1?

1 ,538
*
70

1,090
131
7

1,021
1
11

219
588

230
517

16

13

2219
320

230
287

18

13

24

18

29

21

24,232
9,549
581

23 403
8,334
395

921
693
29

755
649
20

6 705
,398
139

7,147
1,292
95

1 ,082
557
31

895
520
20

1 ,681
663
44

1,257
809
44

1 054
688
30

82,606

77,642

4 ,398

4 ,061

19 ,506

19,045

4 ,427

4 ,051

6 ,341

1 576
632
32
5 ,940

6,437

5,914

669
669

630
630

32
32

31
31

177
177

160
160

34
34

33
33

60
60

56
56

34
34

33
33

83,944

78,902

4 ,462

4 ,123

19 ,860

19,365

4 ,495

4 ,117

6 ,461

6 ,052

6,505

5,980

146

109

7

5

37

28

8

6

13

10

8

6

50,412

47,560

2 ,875

2 ,714

11 ,793

11,038

2 ,829

2 ,684

4 ,200

3 ,933

4,456

4,272

2,168

2,050

120

77

529

527

72

68

247

233

129

130

48,244

45,510

2 ,755

2 ,637

11 ,264

10,511

2 ,757

2 ,616

3 ,953

3 ,700

4,327

4,142

CAPITAL ACCOUNTS
Capital paid in
Surplus i
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*
Collateral held by F.R. Agent for notes issued to
Bank:
Gold certificate account
U.S. Govt. securities
Total collateral
For notes see end of table.




3,222

4,057

180

280

500

500

300

300

510

600

545

665

48,152

44,691

2 ,717

2 ,451

11 ,400

10,600

2 ,620

2 ,500

3 ,750

3 ,400

3,955

3,690

51,374

48,748

2 ,897

2 ,731

11 ,900

11,100

2 ,920

2 ,800

4 ,260

4 ,000

4,500

4,355

O
2. STATEMENT OF CONDITION OF EACH FEDERAL RESERVE BANK, DECEMBER 31, 1969 AND 1968—Continued
(In millions of dollars)

Item

1969

St. Louis

Chicago

Atlanta
1968

1969

Kansas City

Minneapolis

1968

1969

1969

1968

344
43
12

1,640
102
19

1,286
107
23

14
3

5

1

7

1969

1968

1,468
49
14

1,491
58
27

345
29
10

353
33
25

131
21
3

229
18
3

424
44
7

338
35
16

324
29
8

19

50
15

5
10

1
*

3

4

17
1

8

1969

1968

San Francisco

Dallas

1968

1969

1968

ASSETS
Gold certificate account
F.R. notes of other F.R. Banks
Other c a s h . . . .
Discounts and advances:
Secured by U S Govt securities
Other
Acceptances:
Bought outright

494
91
15

524
80
27

6
33

10

3,188

2,937

9,499

8,698

2,106

1,869

1,150

1,023

2,231

2,050

2,458

2,253

7,926

7,695

3,227

2,947

9,518

8,763

2,121

1,870

1,153

1,027

2,249

2,058

2,475

2,258

7,927

7,702

622
10

574
8

432
6

882
18

824
19

714
8

577
9

977
9

908
9
272

.

Federal agency obligations held under repurU.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 cold deposited *
All other
Total assets




1,119
18

907
18

2,187
17

126

130

291

2,028
17
301

69

70

45

403
3
48

85

91

112

118

266

23

26

70

76

15

17

10

9

16

18

19

20

58

68

5,113

4,659

13,614

12,761

3,221

2,950

1,801

1,740

3,725

3,399

3,689

3,381

10,998

10,375

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

2,642

2 476

8 458

8 076

1,797

1,677

819

764

1,775

1,679

1,747

1,575

5,950

5,657

1,322
96
8

1,306
1
14

2 950
108
19

2 988
32

824
68
4

784
1
7

538
49
3

678
15
5

1,056
128
6

1,039
*
10

1,222
81
7

1,229
1
13

3,780
118
18

3,656
2
29

is

12

51

39

12

8

6

6

15

10

13

11

66

79

1,059
591
16

1,254
464
16

3,982
807
85

3,766
727
55

3,345

1,323
520
25
3,615

3,309

10,824

10,205

1,444
909
32
5,027

1,333
749
21

3,128
1,734
96

3,060
1,373
66

908
449
21

800
415
14

596
344
12

704
234
10

4 579

13 416

12 575

3,175

2 906

1 771

1,712

1,205
666
23
3,669

43
43

40
40

99
99

93
93

23
23

22
22

15
15

14
14

28
28

27
27

37
37

36
36

87
87

85
85

Total liabilities and capital accounts.

5,113

4,659

13,614

12,761

3,221

2,950

1,801

1,740

3,725

3,399

3,689

3,381

10,998

10,375

Contingent liability on acceptances purchased
for foreign correspondents

9

7

22

16

5

4

3

2

6

5

8

6

20

14

2,798

2,597

8,793

8,390

1,876

1,738

844

790

1,841

1,754

1,863

1,715

6,244

5,935

156

121

335

314

79

61

25

26

66

75

116

140

294

278

2,642

2,476

8,458

8,076

1,797

1,677

819

764

1,775

1,679

1,747

1,575

5,950

5,657

350

1,000

1,000

155

180

27

27

5

155

2,850

2,300

7,950

7,650

1,780

1,670

825

775

1,875

1,775

1,930

i,630

6,500

6,250

2,850

2,650

8,950

8,650

1,935

1,850

852

802

1,875

1,775

1,935

1,785

6,500

6,250

Total deposits
Deferred availability cash items.
Other liabilities and accrued dividends
Total liabilities
CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts

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
Eligible paper
U.S. Govt. securities
Total collateral

• 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.




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, 1967-69
(In thousands of dollars)

Type of issue
and date

Rate of
interest
(per cent)

1969

1968

Treasury bonds:
1963-68
1964-69 June..
1964-69 Dec...
1965-70
1966-71
1967-72 June..
1967-72 Sept..
1967-72 Dec...

1968 May
1968 Aug
1968 Nov
1969 Feb
1969 Oct
1970 F e b . . . . . .
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, 11968—A.
May 15, 1968—B.
Aug. 15, 11968—C.
Nov. 15, 11968—D.
Feb. 15, 1969—A.
May 15, 1969—B.
Aug. 15, 1969—C.
May 15, 1970—B.
May 15, 1970—C.
Aug. 15, 1970—D.
Nov. 15, 1970—A.
Feb. 15, 1971—C.
Feb. 15, 1971—D.
May 15, 1971—A.
May 15, 1971—E.
Nov. 15, 1971—B.
Feb. 15, 1972—A.
Apr. 1, 1972—E A
May 15, 1972—B.
May 15, 1972—A.
Aug. 15, 1974—B.
Nov. 15, 1974—A.
Feb. 15, 1975—A.
May 15, 1975—B.
Feb. 15, 1976—A.
May 15, 1976—B.
Aug. 15, 1976—C.
Total

332




Increase or decrease (—)
during—

December 31
1967

1969

107,850
169,750
184,400
255,900
165,650
120,050
179,150
295,350
123,650
239,650
46,700
90,340
6,250
66,200
33,850
27,800
285,200
23,500
42,350
74,450
2,100
25,750

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

169,085
307,840
307,840
358,199
358,199
573,540
145,007
9,000
54,566
1,000
46,552
1,000
4,000
95,858
304,315
348,200
104,900
1,135,100 -1,140,500
-310,750
217,550
5,000
86,150
19,350
142,300
2,500
170,400
6,000
213,900
7,000
151,650
2,900
114,150
2,900
168,450
2,900
268,950
7,500
94,300
1 ,200
1200
213,950
46,700
73,590
8,000
6,250
12 ,650
42,650
1 ,000
30,400
24,800
217,200
38,300
23,500
5 ,000
36,200
2 ,000
72,450
2,100
25,750

3,496,413

5,474,502

6,086,502 -1,978,089

573,540
154,007
55,566
47,552
99,858

5,297,750
6,123,543
305,590
1,179,250
70,590
46,400
1,571,850
435,599
79,650
119,300
1,800
2,357,660
130,500
4,938,382
1,092,050
954,650
3,692,297
2,506,000
292,100
196,900

307,840
358,199
573,540
145,007
54,566
46,552
95,858

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

1968

-169,085

-612,000

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
24500
24,500
8,750
10,900
2,450
3,000
29,700
1,150

-839,300
839,300
-3,313,432
3,313,432
-4,378,582
4,378,582
-5,975,165
5,975,165
87,350
7,353,993 -7,441,343
-148,050
148,050
-40,500
40,500
4,300 5,293,450
6,123,543
305,590
62,650
1,065,500
51,100
31,490
6,000
33,100
46,400
14,500
'24I656'
1,533,300
435,599
16,850
17,000
54,800
24,450
39,350
55,500
1,800
25,850
2,282,860
48,950
130,500
73,500 4,864,882
38,800 1,013,200
40,050
934,150
20,500
3,000 3,689,297
2,506,000
292,100
196,900

31,391,861 28,706,122 26,918,382

2,685,739

1,787,740

3 . _ CONTINUED

Treasury bills:
Tax anticipation.
Other due—

Increase or decrease (—)
during—

December 31

Rate of
interest
(per cent)

Type of issue
and date

1969

1968

1967

1969

1968

453,400

278,000

153,100

175 400

12,522,479 10,890,298
6,679,301 5,379,095
2,456,956 2,033,412

9 ,245,160

4 ,497,150
1 ,955,023

1,632,181
1,300,206
423,544

1,645 ns
881 945
78 389

22,265,236 18,756,205 15 ,975,333

3,509,031

2,780 872

4,216,681

3,824 412

606,500

...

3—6 mos
After 6 mos
Total

- 1 3 2 200

132,200

Repurchase agreements.
Total holdings

57,153,510 52,936,829 49 ,112,417

Maturing—
Within 90 days . .
91 days to 1 y e a r . . . .
Over 1 year to 5 years.
Over 5 years to 10 yrs..
Over 10 years

13,315,369 19,584,141 9 ,878,080 -6,268,772 9,706 061
22,707,140 8,919,246 ?,1 ,662,432 13,787,894 -12,743.186
12,811,264 12,879,723 16 ,184,615
-68,459 -3,304 ,89?
7,641,947 10,942,879
832,400 -3,300,932 10,110 479
677,790
610,840
554,890
66,950
55 950

4. FEDERAL RESERVE BANK HOLDINGS OF SPECIAL SHORT-TERM TREASURY
CERTIFICATES PURCHASED DIRECTLY FROM THE UNITED STATES, 1954-69
(In millions of dollars)
Date
1954
Jan. 14
15

16
17*
18
19
20
21
22
23
24*
25
26

Mar.

15
16

1955
1956
1957
1958
Mar. 17
18

Amount

22
169
169
169
323
424
323
306
283
283
283
203
3
134
190

i none

143
207

Date
1959
1960
1961
1962
1963
1964
1965

1966
Dec. 9
10
11*
1967
Mar. 10
11
12*
June 15
Sept. 8
9
10*

Amount

none

Date

Amount

Date

Amount

1968
Sept. 9
Dec. 10

87
92

1969
Sept. 5
6

322
322

12
13
14
15*
16
17

45
430
430
430
447
596

169
169
169

149
149
149
87
153
153
153

1969
Apr. 8
9
10
11
12
13*
14
15

16

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

322

653
830
1,102
862
759
759
759
513
972

151

519
490
976
976
976
514
502
627

• 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 the 1 same authority to sell U.S. Govt. securities directly to the United States.
Interest rate /A per cent through Dec. 3, 1957, and 1/A 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. N O holdings on dates not shown.




333

5. OPEN MARKET TRANSACTIONS OF THE FEDERAL RESERVE SYSTEM
DURING 1969
(In millions of dollars)
Outright transactions in U.S. Govt. securities by maturity
Total

Treasury bills

O t h e r within 1 year

Month
Redemp- Gross
purtions
chases

Gross
purchases

Gross
sales

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

4,011
1,234
385
2,121
2,368
4,586
3,495
2,201
4,762
5,145
2,915
1,250

4,590
1,110
65
1,346
1,444
3,993
3,251
1,658
5,483
3,704
735
1,029

231
175
381
206

Total...

34,473

28,409

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

Gross
sales

Gross
sales

Exch.,
maturity
shifts,
or
redemp.

231
175
381
206

148
386

4,590
1,110
65
1,346
1,444
3,993
3,251
1,658
5,483
3,704
735
1,029

148
386

28

-694
+1,177

1,848

33,766

28,409

1,848

143

3,867

7
200
115

23
49

Exch.
Gross
or
purmaturity chases
shifts

Gross
sales

-8,479
574

33

7
200

10,883

10

407

115

Over 10 years

5-10 years
Exch.
or
maturity
shifts

Gross
purchases

33
73

6,095
-574

24
26

2,384

78

-10,895

60

12

Gross
sales

Exch.
or
maturity
shifts

6
20
24

24

23

10

-4,921

4 514

74
29

519
-40

52
3

175
-1,137

3
4

3111

-380

187

-3,488

67

Repurchase
agreements
(U.S. Govt. securities)

Net
change
in U.S.
Govt.
securities

Gross
purchases

Gross
sales

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

371
2,517
2,044
1,929
4,192
1,312
560
2,721
1,121
2,655
1,031
3,336

371
2,318
1,854
1,790
4,470
1,562
560
2,491
1,062
2,715
1,260
3,336

-810
148
130
708
646
336
44
773
-111
1,381
1,803
-165

Total.. .

23,790

23,790

4,217

1

Redemp- Gross
purtions
chases

4,011
1,149
217
2,121
2,173
4,586
3,428
2,201
4,762
5,016
2,852
1,250

1-5 years
Gross
purchases

Gross
sales

Federal
agency
Bankers' acceptances
obligations
(net repurchase
agreeNet
Net rements)
outright purchases

20
5
54
1
-80

—8
1
-4
5
-5
-5

39
-39
17
-17

- 3 "
4
8
15
6

40
7
43
-60
-30
22
-22

Net
change 1

-818
209
137
810
582
220
43
834
-841
1,402
1,794
-150
4,223

Net 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.


334


6. BANK PREMISES OF FEDERAL RESERVE BANKS AND BRANCHES,
DECEMBER 31, 1969
(In dollars)
Cost
F.R. Bank
or branch

Land

Buildings
(including
vaults) i

Fixed machinery and
equipment

Net
book value
Total

Boston

1,628,132

5,929,169

2,943,179

10,500,480

2,445,228

New York
Annex
Buffalo

5,215,656
592,679
673,076

13,074,174
1,491,116
2,562,224

7,262,901
716,472
1,565,400

25,552,731
2,800,267
4,800,700

5,822,133
535,324
2,639,882

Philadelphia

1,884,357

5,034,418

2,154,452

9,073,227

2,475,075

Cleveland
Cincinnati
Pittsburgh

1,295,490
1,331,016
1,667,994

6,642,801
2,132,391
3,007,764

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

11,510,249
5,050,902
7,201,001

1,023,422
2,298,895
3,137,487

513,524
146,875
91,644
250,487
347,071

4,207,163
256,000
6,451,457
2,009,381
1,069,026

2,497,936
2,313
1,097,455
625,121

7,218,623
405,188
6,543,101
3,357,323
2,041,218

1,602,714
277,008
6,543,101
1,315,870
1,119,498

Atlanta
Birmingham
Jacksonville
Annex
Nashville
New Orleans

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

5,804,778
2,000,619
1,706,794
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
2,649,669
200,003
3,165,944
5,760,115

7,478,943
1,839,654
1,364,012
182,645
1,742,591
5,043,794

Chicago
Detroit

6,275,490
1,147,734

17,656,444
3,030,742

10,119,048
1,580,801

34,050,982
5,759,277

14,393,119
2,764,653

St. Louis
Little Rock
Louisville
Memphis

1,675,780
800,104
700,075
731,122

3,215,472
1,963,152
2,859,819
1,087,369

2,541,989
962,372
1,056,659
218,883

7,433,241
3,725,628
4,616,553
2,037,374

1,720,802
3,408,368
2,904,487
1,558,319

958,535
15,709

7,180,196
126,401

2,688,921
62,977

10,827,652
205,087

5,481,488
51,791

1,340,561
2,319,280
647,685
996,489

6,989,491
3,783,339
1,511,600
1,551,742

2,984,751
2,218,604
834,845
731,925

11,314,803
8,321,223
2,994,130
3,280,156

6,128,335
8,071,038
2,081,716
2,098,278

Dallas
El Paso
Houston
San Antonio

713,302
262,477
695,615
278,180

4,826,831
787,728
1,408,574
1,400,390

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

9,110,937
1,443,506
2,818,376
2,249,417

4,292,434
861,151
1,773,175
1,314,469

San Francisco
Annex
Los Angeles
Portland
Salt Lake City
Seattle

684,339
247,201
777,614
207,380
480,222
21 A,112

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

1,801,463
30,000
1,608,576
649,432
707,575
1,049,264

6,269,332
401,201
6,490,034
2,535,324
3,066,035
3,215,002

1,043,431
343,921
2,692,152
1,259,248
1,945,247
1,452,280

Richmond
Annex 1
Annex 2
Baltimore
Charlotte

Minneapolis
Helena
Kansas City
Denver
Oklahoma City
Omaha

Total

42,005,131

140,522,840

71,567,165 254,095,136 116,527,178

O T H E R REAL ESTATE A C Q U I R E D FOR B A N K I N G - H O U S E P U R P O S E S
Boston
.
.
Cleveland
Richmond
Baltimore
. •
San Antonio
Los Angeles

.

Total
1

500,000
395,875
326,403
548,656
170,416
245,082
2,186,432

381,000

381,000

500,000
776,875
326,403
548,656
170,416
245,082

500,000
592,725
326,403
548,656
170,416
245,082

2,567,432

2,383,282

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




335

7. EARNINGS AND EXPENSES OF FEDERAL RESERVE BANKS DURING 1969
(In dollars)
OS

Item

Total

Boston

New
York

Philadelphia

Cleveland

Richmond

Atlanta

Chicago

St. Louis

Minneapolis

Kansas
City

Dallas

San
Francis<

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

65,335,755 5,341,655 15,458,720 2,015,031 2,559,153 3,404,671 4,736,538 13,014,720 2,456,725 1,990,330 3,860,139 3,116,739 7,381,2
4,676,398
4,676,398
3,180,795,133 162,446, 132 797,619,706 164,711,278 247,350,276 236,068,720 169,987,147 522,446,794 111
1,125,961 62,198,740 121,922,461 134,495,990 450,421
121,716,257 5,848,589 30,941,748 6,335,724 10,841,635 6,333,271 7,790,914 17,951,710 4,259,251 2,800,982 5,239,692 6,941,538 16,431,:
23,271
145,841
19,618
68,456
49,695
837,015
82,506
136,157
52,134
34,917
70,455
74/
79,499
3,373,360,557 173,659,647 848,842,412 173,081,651 260,819,520 245,856,357 182,597,105 553,549,381 117,876,854 67,042,186 131,101,791 144,624,722 474,308,S
CURRENT EXPENSES

Salaries:
Officers
Employees
Retirement and other benefits1.
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 l
Total




11,633,105
134,467,820
24,447,229
2,362,186
3,335,513
31,028,329
3,265,357
11,644,957
446,472
6,689,840
5,355,387
2,592,155
1,805,300
411,475

638,904 2,309,927
8,588,482 34,935,880
1,601,165 5,854,610
93,057 1,002,668
541,864
194,864
1,924,784 3,818,226
712,281
155,165
758,596 2,064,250
61,750
33,259
717,655 1,161,661
896,544
133,777
389,822
149,724
307,165
72,405
190,995
96,768

799,329
6,168,209
1,158,424
97,162
129,579
1,211,155
128,311
624,504
18,275
179,904
76,596
99,338
154,806
6,167

762,411
8,981,523
1,658,654
180,211
227,656
2,675,296
215,220
834,719
42,428
576,031
370,760
270,571
139,536
43,330

979,116
9,373,859
1,776,014
77,970
243,801
3,663,093
263,174
1,025,731
27,729
253,582
191,797
222,460
189,217
7,071

7,526,093
11,692,121
4,389,455

176,712 2,628,855
735,275 1,393,141
219,067 1,053,198
92,279 -1,312,575

281,365
468,688
179,669
95,882

835,811
675,032
417,252
163,878

461,697
1,239,254
179,953
3,087

844,607 1,139,626
9,227,533 18,805,893
1,677,535 3,299,431
100,771
261,958
373,066
377,230
2,838,991 3,979,576
370,560
394,765
964,551 1,645,244
44,837
43,345
433,063 1,171,900
924,585
689,810
238,072
345,061
70,016
268,165
1,744
55,147

986,564
7,485,308
1,378,210
83,195
233,400
2,012,778
170,507
862,154
33,829
266,099
308,729
179,171
196,773
2,193

666,038
5,073,616
984,146
113,037
240,732
1,326,343
133,727
454,215
20,489
385,510
75,145
107,284
46,664
1,470

855,006
7,674,483
1,494,792
80,523
213,986
2,202,885
219,102
880,177
28,860
551,723
802,325
286,566
201,925
3,832

353,409
2,275,223
889,104
276,107

259,170
809,614
207,417
68,854

178,024
593,497
198,426
45,731

321,834
834,216
289,068
84,032

362,900
932,255
209,585
124,794

715,120
936,4
5,927,334 12,225,'
1,134,719 2,429,!
179,1
92,447
330,!
228,823
1,850,604 3,524,?
294,!
207,993
523,995 1,006,*
61,(
30,586
666,!
326,185
363,(
522,252
163,2
140,771
113,1
45,528
1,180
308,286
786,420
370,958
109,416

1,358,(
949,!
175,1
248,!

263.092.787 16.381.938 58.010.262 11.877.363 19.070.319 20,178,605 19.903.325 36.107,135 15,543.965 10.644.094 17,025,335 13,322,617 25,027,$
376,623 1,346,175 1,214,216 3,018/
22,125,657 1,212,752 3,804,462 1,262,305 1,477,920 1,892,778 2,040,237 3,553,830
925,934
15,020,084

729,000

3,869,800

778,500

1,341,900

780,700

961,400

2,225,000

523,800

344,600

598,384

852,600

2.014/

300,238,529 18,323,690 65,684,524 13,918,168 21,890,139 22,852,083 22,904,963 41,885,965 16,993,699 11,365,317 18,969,894 15,389,433 3O,O6O,(

Less reimbursement for certain
fiscal agency and other expenses . .
...
Net expenses

25,265,206

1,416,862

5,251,835

1,176,421

2,479,458

1,335,108

1,800,951

4,486,505

1,479,092

792,671

1,691,198

960,534

2,394,5'

274,973,322 16,906,828 60,432,689 12,741,747 19,410,681 21,516,975 21,104,011 37,399,460 15,514,607 10,572,646 17,278,696 14,428,899 27,666,01
PROFIT AND LOSS

Current net earnings
Additions to current net earnings:
Profits on foreign exchange
transactions
Allother

3,098,387,238 156,752,820 788,409,724 160,339,904 241,408,839 224,339,381 161,493,094 516,149,921 102,362,247 56,469,541 113,823,095 130,195,823 446,642,8<

5,854,460
556,286

281,014
20,400

1,487,033
30,661

304,432
14,908

521,047
338,504

304,432
2,190

374,685
1,161

866,460
23,567

204,906
31,298

134,653
3,281

251,742
3,795

333,704
9,217

790,3:
77,3(

6,410,747

301,414

[,517,694

319,340

859,551

306,622

375,847

890,027

236,204

137,934

255,537

342,921

867,6:

Deductions from current net
earnings:
Losses on sales of U.S. Govt.
securities
All other

6,037,587
930,712

309,164
9,547

1,493,272
3,967

316,620
25,103

471,314
560,092

448,948
55,976

324,458
3,428

997,497
2,358

210,810
28,285

119,195
1,622

229,842
203,552

255,237
4,304

861,2:
32,4'

Total deductions....
Net addition to or deduction
from (—) current net earnings.

6,968,300

318,711

1,497,239

341,723

1,031,406

504,925

327,886

999,855

239,094

120,817

433,394

259,541

893,71

-557,553

-17,297

20,455

-22,384

-171,855

-198,302

47,961

-109,828

-2,890

17,117

-177,857

83,380

-26,0:

Total additions

Net earnings before payments to
U.S. Treasury

3,097,829,687 156,735,523 788,430,179 160,317,521 241,236,984 224,141,079 161,541,055 516,040,093 102,359,358 56,486,657 113,645,238 130,279,204 446,616,7'

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

3,019,160,636 153,469,452 761,717,549 157,082,482 233,808,166 220,778,681 155,964,193 504,505,165 100,168,047 55,080,773 110,834,786 126,489,927 439,261,4

39,236,598

1,884,421 10,237,179

1,999,838

3,544,719

2,008,398

2,524,011

1,350,761

888,334

1,668,102

2,205,326

5,145,8:

Transferred to surplus.
Surplus, January 1

517,550 1,142,350 1,583,950 2,209,5:
840,550
39,432,450 1,381,650 16,475,450 1,235,200 3,884,100 1,354,000 3,052,850 5,755,250
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:

Surplus, December 31.

669,201,100 31,924,600 176,548,750 34,017,000 59,891,800 34,203,350 43,214,800 98,996,250 22,840,500 14,992,250 28,264,900 37,349,700 86,957,21

i For 1970 will include contributions to Thrift Plan for Employees of the Federal
Reserve System.
NOTE.—Details may not add to totals because of rounding.




8. EARNINGS AND EXPENSES OF FEDERAL RESERVE BANKS, 1914-^9
(In dollars)

00

Current
earnings

Period or Bank

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

Current
expenses

Net earnings
before payments to
U.S. Treasury!

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

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

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

1930
1931
1932
1933
1934

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

1935
1936
1937
1938
1939
1940
1941
1942
1943
1944
1945
1946
1947
1948
1949




Payments to U.S. Treasury
Dividends
paid

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

Franchise tax

Under
Sec. 13b

Interest on
F.R. notes

Transferred
to surplus
(Sec. 13b)

Transferred
to surplus
(Sec. 7)

1 134 234
48,334,341
70 651 778

018
673
035
717
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

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

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

2,6ii 418
-60,323

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

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

2 703 894

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

607,422
352,524
2 616 352
1,862,433
4,533,977

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
77,477,61'6

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

5
6
6
6
6

654
119
307
552
682

1 134 234

75 223 818
166 690 356
193,145,837

1950
1951
1952
1953
1954

275,838,994
394 656 072
456^060,260
513 037 237
438',486'040

80,571 ,771
95 469 086
104 ,'694 ,'091
113 515 020
109 J 3 2 ',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
^54 873 588
291 ,934,634
34^ 567 985
276 ,289,457

21, 849, 490
28, 370, 759
46, 333, 735
40 336 862
35, 887, 775

1955
1956
1957
1958
1959

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

^51 740 721
401 555 581
54? ,708,405
524 ,058,650
910 649 768

32, 709, 794
5 3 , 987, 68?
6 1 , 603, 682

1 103 385 257
941,648,170
1,048,508,335
1,151 120 060
1,343,747,303

963 377 684
153 882 275
161,274 ^575
783,855,223
176,136 134
872 316 422
187 273 357
964 461'538
197,395 ',889 1,147,077,362

23 948
25,569
27,412
28 912
30,781

225
541
241
019
548

S96 816 359
687 ,393,382
799 ,365,981
879 685 219
,582 ,118,614

1965
1966
1967
1968
1969

1,559,484,027
1,908,499,896
2 190 403 752
2,764 445,943
3,373,360,559

204,290 186
207,401 ;i26
220 120 846
242*350 '370
274,973 ,320

32,351
33,696
35 027
36 959
39,236

602
336
312
336
599

1 ,796 ,810,053

Total 1914-69

I960
1961
1962
1963
1964.

.

. .

1 356 215 455
1,702,095,000
1 972 376 782
2 530 615 569
3^097,829^686

25,561,496,883 4,307,041 ,192 21,326,297,812

767,100 656

Aggregate for each
F.R. Bank, 1914-69:
Boston
New York.
Philadelphia
Cleveland.
Richmond
Atlanta.

1,400,898,001
6,469,178,167
1,444,959,097
2,124 518,080
1,700,456,436
1,373,428,277

291,155 927
925,315 ,502
253,675 725
370 485 183
303,524 '041
279,681 ,696

43,419
231,703
53,433
73 016
35,130
36,546

Chicago....
St Louis
Minneapolis
Kansas City
Dallas
San Francisco

4,185,058,505
1,010,592,926
580,020,973
1,071,626,119
1,046 300,253
3,154,460,049

609 640 350 3 581 808 632
237,321 ,487 '774,498^234
151 162 748
431 630 866
238,645 019
835 279 502
208 879 434
840 421 552
437,554 ,080 2,724,'362,'021

100 908 776
26,378 179
17,905 540
29,835 ,301
36,380 971
82,440 ,426

25,561,496,883 4,307,041 ,192 21,326,297,812

767,100 656

Total

-^
J2
VQ

59, 214 569
- 9 3 600 791

1 115 602 995
5,566,816,963
1 199 605 895
1 758 666 367
1'401'479'165
1,096,125,620

i Current earnings less current expenses, plus or minus adjustment for profit and loss
items.
2
The $797,873,299 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




983
726
901
790
593
470

42 613 100

70, 892 300
45, 538 200
5 5 , 864 300

- 4 6 5 , 822 800
27, 053 800
18, 943 500
29, 851 200

1 ,649 ,455,164
1 907 498 270
? ,463 628,983
3 ,019 ,160,638
149, 138, 300

30, 077 750
39, 432 450

- 3 ,657

797, 873 299

135 411

2,188, 893 19.610.000.320

7 i n 395
68, 006, 262
5 558 901
4 842 447
6 ?00 189
8, 950, 561

280, 843
369, 116
722, 406
82 930
172, 493
79, 264

5 ,491

42 019 425
213 805 371
48 347 222
73 175 593
40 083 158
48 481 340

25 313
2, 755,
5 9fP
6, 939.

7, 697, 341

151, 045 3 341 ,098,600
7, 464
717 ,423,349
389 ,532,479
55, 615
64, 713
766 ,044,713
761 ,695,931
102, 083
101, 421 2 ,537 ,315,306

11 687
- 2 6 ,515
64 ,874
- 8 ,674
55 ,337
- 1 7 ,089

114 375 004
27 960 ,128
18 869 463
32 404 850
41 677 178
96 824 617

149, 138, 300

2,188, 893 19,610,000,320

- 3 ,657

2797 873 299

526
629
900

100
560 049

1 ,07? ,635,936
5 ,053 ,365,948
1 ,091 ,252,804
1 607 608 514
,319 ,964,246
,002 ,062,494

- 4 3 3 ,413
290 661
- 9 906
- 7 1 517

Sec. 13b surplus (1958), and was increased by $11,131,013 transferred from reserves for
contingencies (1945), leaving a balance of $669,201,100 on Dec. 31,1969.
NOTE.—Details may not add to totals because of rounding;

9. VOLUME OF OPERATIONS IN PRINCIPAL DEPARTMENTS OF FEDERAL
RESERVE BANKS, 1966-69
(Number in thousands; amounts in thousands of dollars)
Operation

1969

1968

1967

1966

NUMBER OF PIECES
HANDLED i
Discounts and advances
Currency received and counted. . .
Coin received and counted2
Checks handled:
U.S. Govt. checks
Postal money orders
Allother3
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

23
5,720,491
12,931,413

11
5,561,500
10,957,259

6
5,338,781
10,958,606

16
5,232,806
9,304,120

575,118
187,123
6,504,161

554,813
195,871
5,904,929

540,065
205,343
5,419,583

504,049
217,473
5,021,454

13,160
27,902

13,255
'"26,299

14,355
25,203

14,305
26,712

283,151
6,660
519,393

'267,826
r
5,894
384,763

246,289
5,444
273,983

235,555
4,832
166,615

AMOUNTS HANDLED
84,525,110
30,968,332
90,667,647
Discounts and advances
154,305,388
40,585,320
37,001,390
Currency received and counted. . .
43,273,577
38,410,969
1,173,761
Coin received and counted
1,441,123
957,282
1,184,616
Checks handled:
190,653,523
U.S. Govt. checks.
208,155,031
160,014,331
175,068,179
4,640,992
4,860,925
4,626,573
Postal mo ley orders
4,603,938
Allother3
2,791,831,294 2,350,761,951 2,043,772,112 1,893,974,522
Collection items handled:
6,765,295
6,849,373
6,693,383
5,916,485
U.S. Govt. coupons paid
19,782,240
19,865,950
12,624,804
All other
15,299,519
Issues, redemptions, and exchanges
of U.S. Govt. securities
793,261,958
1,151,614,458 1,055,426,914
820,283,379
r
Transfers of funds
9,800,324,538 7,727,430,321 6,565,594,328 5,555,075,862
Food stamps; redeemed
368,569
513,618
226,508
694,394
r
1
2

Revised.
Packaged items handled as a single item are counted as one piece.
Excludes coins handled in separating operation.
3 Exclusive of checks drawn on the F.R. Banks.

340




10. NUMBER AND SALARIES OF OFFICERS AND EMPLOYEES OF
FEDERAL RESERVE BANKS, DECEMBER 31, 1969

Federal Reserve
Bank (including
branches)

President
Annual
salary

Other officers
Number

Annual
salaries

Employees
Number

]

Annual
salaries

Total
Number

Annual
salaries

564,500 1,289 $ 8,890,192 1,316$ 9,499,692
2,271,200 4,333 34,844,741 4,420 37,200,941
736,000
976
6,461,544 1,012
7,247,544

$ 45,000
85,000
50,000

26
86
35

Cleveland
Richmond
Atlanta

50,000
45,000
45,000

34
47
43

716,000 1,273
990,500 1,640
815,000 1,583

8,677,032 1,308
9,908,081 1,688
9,342,263 1,627

9,443,032
10,943,581
10,202,263

Chicago
St. Louis
Minneapolis..

67,500
50,000
50,000

48
46
28

1,032,000 2,880
969,000 1,248
601,500
722

18,946,237 2,929
7,777,594 1,295
5,012,800
751

20,045,737
8,796,594
5,664,300

Kansas City..
Dallas
San Francisco

50,000
45,000
60,000

42
35
45

816,750 1,289
670,100 1,005
870,750 1,890

7,902,151 1,332
6,227,981 1,041
12,295,515 1,936

8,768,901
6,943,081
13,226,265

Total....

$642,500

515

Boston
New York....
Philadelphia..

$11,053,300 20,128 $136,286,131 20,655 $147,981,931

i Includes 1,150 part-time employees.

11. FEES AND RATES UNDER REGULATION V ON LOANS
GUARANTEED PURSUANT TO DEFENSE PRODUCTION ACT OF 1950,
DECEMBER 31, 1969
Fees Payable to Guaranteeing Agency by Financing Institution on Guaranteed Portion of Loan

Percentage of loan guaranteed

Guarantee fee
(percentage of
interest payable
by borrower)

Percentage of
any commitment
fee charged
borrower

. .

10
15
20
25
30
35
40-50

10
15
20
25
30
35
40-50

70 or less
75
80
85
90
95
Over 95

. .

.

Maximum Rates Financing Institution May Charge Borrower
Interest rate
Commitment rate.

7Vi per cent per annum 1
Vi per cent per annum

1
Except that the agency guaranteeing a particular loan may from time to time prescribe a higher rate
if it determines the loan to be necessary in financing an essential defense production contract.

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.




341

CO

to
12. MAXIMUM INTEREST RATES PAYABLE ON TIME AND SAVINGS DEPOSITS
(Per cent per annum)
Rates Nov. i, 1933—July 19, 1966

Rates beginning July 20, 1966

Effective date
Type of deposit

Feb. 1,
1935

Jan. 1,
1936

}

3

2%

2%

3

}

3

2%

2%

2%

2%

ft

2
1

Nov. 1,
1933
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)

>;

Jan. 1,
1957

Effective date
July 17,
1963

Jan. 1,
1962

{ Ja

4
3%

3

{ k

4

3
2%

{ k
2%

m

Dec. 6,
1965

>:

July 20,
1966
Savings deposits

} •

4

}*

4

4%

1 Closing date for the Postal Savings System was Mar. 28, 1966.
2
For exceptions with respect to foreign time deposits, see ANNUAL REPORTS for
1962, p. 129; 1965, p. 233; and 1968, p. 69.
3 Multiple-maturity time deposits include deposits that are automatically renewable
at maturity without action by the depositor and deposits that are payble after written
notice of withdrawal.




Nov. 24,
1964

Type of deposit

4

5%

Other time deposits: 2
Multiple 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 o v e r . . .

Sept. 26, Apr. 19,
1966
1968

4

4

4

5
4

5
4

5
4

5%

5

5

5Vi

5%

6 4
6%

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, maximum rates that may be paid by nonmember insured commercial
banks, as established by the FDIC, 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

40

50

75

100

Feb. 1, 1947- Mar. 30,1949- Jan. 17,1951- Feb. 20, 1953Mar. 29, 1949 Jan. 16, 1951 Feb. 19, 1953 Jan. 3, 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...

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...

50
50

75
75

50

75

Apr. 23, 1955- Jan. 16, 1958Jan. 15, 1958
Aug. 4, 1958

60
60

70
70

50
50

60

70

50

50
50
50
Aug. 5, 1958Oct. 15, 1958

70
70
70

Oct. 16, 1958- July 28, 1960- July 10, 1962Nov. 5, 1963
July 27, 1960
July 9, 1962

Nov. 6, 1963Mar. 10, 1968

90
90

70
70

50
50

70
70

90

70

50

70

Mar. 11,1968June 7, 1968

Effective
June 8, 1968

70
50
70

80
60
80

70
50

80
60

70
50

80
60

Regulation T:
For extension of credit by brokers and dealers on listed seFor short sales
Regulation U:
For loans by banks on stocks...

Regulation T:
For credit extended by brokers and dealers on—
Margin stocks
Registered bonds convertible into margin stock s
For short sales
Regulation U:
For credit extended by banks on—
Margin stocks
Bonds convertible into margin stocks
Regulation G:
For credit extended by others tha n brokers and dealers and banks
on—
Margin stocks.
Bonds convertible into margin stocks
....

NOTE.—Regulations G, T, and U, prescribed in accordance with the Securities Exchange Act of 1934,
limit the amount of credit to purchase and carry margin stocks 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. The term margin stocks is denned in the
corresponding regulation.
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.




343

14. MEMBER BANK RESERVE REQUIREMENTS
(Per cent of deposits)
Through July 13, 1966
Net demand deposits2
Effective date *

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 _ j a n .
Jan.
1953—July
1954—June
July
1958—Feb.
Mar.
Apr.
Apr.
1960—Sept.
Nov.
Dec.
1962—July
Oct.

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.

13

s*

24
22
20
22
24
26
24

22
23
24
22
21
20

16
Feb. 1.
1
16
Aug. 1.
Mar. 1.
Apr. 1.
'.'.'.'.'.'.'.'.

16
15
14
13
12

\VA
18i/

221/2

18
19
20
19

5
6

12
14

13
14
13
12
H1/2

11

I61/2

17%

12

I61/2
(3)

Nov. 1.

14

2

18
171/2
17

IS*
it*

3
4%
5*

10%
1214

22
21
20

26

Time deposits
(all classes
of banks)

7

10
15

t

18
25
1
11,
25,
9,
24,
29,
27,
20,
24!
1
24
1
28
25,

Country
banks

Beginning July 14, 966
Time deposits 4- 3
(all classes of banks)

Net demand
deposits 2 4

Effective date

l

Reserve
city banks

Country
banks

Under Over Under Over
$5 mil- $5 mil- $5 mil- $5 million
lion
lion
lion

Under Over
$5 mil- $5 million
lion

64

6 12

6 16%

1967—Mar. 2
Mar. 16
12

17%

12%
12%

13

1969 Apr 17

17

In effect Dec. 31, 1969

17

Legal requirements—Dec. 31, 1969:
^^inimum .
Maximum
For notes see opposite page.




10
22

I*

3

3

3

3
10

3
10

3
10

5
6

13

17%

17

18

«4

12%

16%

344

Other
time deposits

3%

1966—July 14, 21
Sept 8 15

1968—Jan 11

Savings
deposits

7
14

15. FEDERAL RESERVE BANK DISCOUNT RATES, DECEMBER 31, 1969
(Per cent per annum)
Discounts for and advances to member banks
Federal Reserve
Bank

Advances and
discounts under
Sees. 13 and 13ai

Boston
New Y o r k . . . .
Philadelphia..
Cleveland
Richmond
Atlanta

Advances under
Sec. 10(b)2

Advances to all others
under last par. Sec. 13 3

V
7

Chicago
St. Louis
Minneapolis..

7
7

Kansas City..
Dallas
San Francisco

7
7
7

m

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. 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.
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
Beginning Oct. 16, 1969, a member bank is required under Regulation M to maintain, against its
foreign branch deposits, a reserve equal to 10 per cent of the amount by which (1) net balances due to,
and certain assets purchased by, such branches from the bank's domestic offices and (2) credit extended
by such branches to U.S. residents exceed certain specified base amounts. Regulation D imposes a
similar 10 per cent reserve requirement on borrowings by domestic offices of a member bank from foreign
banks, except that only a 3 per cent reserve is required against such borrowings that do not exceed a
specified base amount. For details concerning these requirements, see amendments to Regulations D
and M as described in "Record of Policy Actions of the Board of Governors" in this REPORT.
5
Effective Jan. 5, 1967, time deposits such as Christinas and vacation club accounts became subject
to same requirements as savings deposits.
6 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 2Vi 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.




345

16. MEMBER BANK RESERVES, FEDERAL RESERVE BANK CREDIT, AND
RELATED ITEMS—END OF YEAR 1918-69 AND END OF MONTH 1969
(In millions of dollars)
Factors supplying reserve funds
F.R. Bank credit outstanding
Period

Gold
stock ^

U.S. Govt. securities^

Total

Discounts
Repur- and
All
Float 2
other 3
adBought chase
agree- vances
outments
right

Treasury
currency
outstanding 5

Total

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

1920.
1921.
1922.
1923.
1924.

287
234
436
134
540

287
234
436
80
536

54
4

2,687
1,144
618
723
320

119
40
78
27
52

262
146
273
355
390

3,355
1,563
1,405
1,238
1,302

2,639
3,373
3,642
3,957
4,212

1,709
1,842
1,958
2,009
2,025

1925,
1926.
1927.
1928,
1929.

375
315
617
228
511

367
312
560
197
488

8
3
57
31
23

643
637
582
1,056
632

63
45
63
24
34

378
384
393
500
405

1,459
1,381
1,655
1,809
1,583

4,112
4,205
4,092
3,854
3,997

1,977
1,991
2,006
2,012
2,022

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

1,373
1,853
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

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

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

80
94
471
681
815

8
10
14
10
4

2,274
2,361
6,679
12,239
19,745

21,995
22,737
22,726
21,938
20,619

3,087
3,247
3,648
4,094
4,131

1945
1946.
1947,
1948,
1949,

24,262
23,350
22,559
23,333
18,885

24,262
23,350
22,559
23,333
18,885

249
163
85
223
78

578
580
535
541
534

25,091
24,093
23,181
24,097
19,499

20,065
20,529
22,754
24,244
24,427

4,339
4,562
4,562
4,589
4,598

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

67
19
156
28
143

1,368
1,184
967
935
808

3
5
4
2
1

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

1955
1956
1957
1958
1959

24,785
24,915
24,238
26,347
26,648

24,391
24,610
23,719
26,252
26,607

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

1960
1961
1962
1963
1964

27,384
28,881
30,820
33,593
37,044

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

1965,
1966.
1967,
1968,

40,768
44,316
49,150
52,937

40,478
43,655
48,980
52,937

290
661
170

137
173
141
186

2,248
2,495
2,576
3,443

187
193
164
58

43,340
47,177
52,031
56,624

13)(733
13,159
11,982
10,367

5,575
6,317
6,784
6,795

For notes see last two pages of table.

346



16.—CONTINUED

Factors absorbing reserve funds

Currency
in
circulation

Treasury
cash
holdings <
5

Deposits,
other than member
bank reserves,
with F.R. Banks

Treasury

Foreign

Member bank reserves
Other
F.R.
accounts 7

Oth-

With
F.R.
Banks

4,951
5,091

288
385

51
31

96
73

25
28

118
208

,636
,890

5,325
4,403
4,530
4757
4,760

218
214
225
213
211

57
96
11
38
51

5
12
3
4
19

18
15
26
19
20

298
285
276
275
258

,781
,753
,934
,898
2,220

4,817
4,808
4,716
4,686
4,578

203
201
208
202
216

16
17
18
23
29

8
46
5
6
6

21
19
21
21
24

272
293
301
348
393

4,603
5,360
5,388
5,519
5,536

211
222
272
284
3,029

19
54
8
3
121

6
79
19
4
20

22
31
24
128
169

5,882
6,543
6,550
6,856
7,598

2,566
2,376
3,619
2,706
2,409

544
244
142
923
634

29
99
172
199
397

8,732
11,160
15,410
20,449
25,307

2,213
2,215
2,193
2,303
2,375

368 1,133
867
774
799
793

579

1,360

28,515
28,952
28,868
28,224
27,600

977
2,287
2,272
393
1,336
870
1,325 1,123
1,312
821

27,741
29,206
30,433
30,781
30,509

1,293
1,270
1,270
761
796

31,158
31,790
31,834
32,193
32,591

Currency
and
coin 8

32,869
33,918
35,338
37,692
39,619
42,056
44,663
47,226
50,961

ReExquired 9 cess'

1,585
1,822

51
68

1,654

99

1,884
2,161

14
59

2,212
2,194
2,487
2,389
2,355

2,256
2,250
2,424
2,430
2,428

-44
-56
63
-41
-73

375
354
355
360
241

2,471
1,961
2,509
2,729
4,096

96
2,375
-33
1,994
576
1,933
1,870
859
2,282 1,814

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

2,844
1,984
1,212
3,205
5,209

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

6,615
3,085
1,988
1,236
1,625

862
508
392
642
767

446
314
569
547
750

495
607
563
590
706

15,915
16,139
17,899
20,479
16,568

14,457
,458
15,577
562
16,400
,499
19,277
,202
15,550 1,018

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

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

310

18,903
102
19,089 - 3 0
19,091 - 5 7
18,574 - 7 0
18,619 -135

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

18,988
20,114
20,071
20,677
21,663

637
96
645
471
574

668
760
1,176
416
1,344 1,123
695
703

150
174
135
216

355
588
653
747

211
-147
-773
-1,353

18,447
19,779
21,092
21,818

4,163
4,310
4,631
4,921

22,848
24,321
25,905
27,439

-238
-232
-182
-700

440 1,204

For notes see following two pages.




347

16. MEMBER BANK RESERVES, FEDERAL RESERVE BANK CREDIT, AND RELATED
ITEMS—END OF YEAR 1918-69 AND END OF MONTH 1969—CONTINUED
(In millions of dollars)

Factors supplying reserve funds
F.R. Bank credit outstanding
Month

U.S. Govt. securities1

Total

1969—
Jan....
Feb....
Mar....
Apr....
May. ..
June...
July....
Aug
Sept
Oct
Nov....
Dec...

Bought
outright

52,127
52,127
52,076
52,295
52,016
52,430
52,585
53,192
53,509
53,839
54,095
54,095
54,138
54,138
54,681
54,950
53,845
54,134
55,286
55,532
57,318
57,318
57,154 1057,154

1
2

Held
under
repurchase
agreement

219
414
607
330
269
289
246

Discounts
and
advances

Float

864
744
1,143
2,531
1,832
1,049
750
1,514
926
1,691
1,531
183

2,885
2,780
1,476
2,276
2,539
1,472
2,561
2,096
1,898
2,343
2,705
3,440

2

Other
All
F.R.
other 3 assets7

50
91
94
142
76
41
40
62
37
41
49
64

2,866
2,640
2,906
2,965
2,516
2,608
2,600
2,735
3,288
2,927
1,996
2,743

4

Treasury
currency
outstandings

10,367
10,367
10,367
10,367
10,367
10,367
10,367
10,367
10,367
10,367
10,367
10,367

6,799
6,719
6,713
6,719
6,725
6,736
6,748
6,765
6,783
6,802
6,823
6,848

Gold
stock
Total

58,792
58,550
58,049
61,106
60,802
59,265
60,089
61,357
60,283
62,534
63,599
63,584

U.S. Govt. securities include Federal agency obligations.
Beginning with 1960 reflects a minor change in concept; see Feb. 1961 Federal Reserve Bulletin,
p. 3
164.
Principally acceptances and industrial loans; authority for industrial loans expired Aug. 21, 1959.
* Before Ian. 30, 1934, included gold held by F.R. Banks and in circulation.
5
The stock of currency, other than gold, for which the Treasury is primarily responsible—silver
bullion at monetary value and standard silver dollars, subsidiary silver and mirfbr coin, and United
States notes;; also, F.R. Bank notes and national bank notes for the retirement of which lawful money
has been deposited with the Treasurer of the United States. Includes currency of these kinds held in
the6 Treasury and the F.R. Banks as well as that in circulation.
Gold other than that held against gold certificates and gold certificate credits, including the reserve
against United States notes and Treasury notes of 1890, monetary silver other than that held against
silver certificates and Treasury notes of 1890, and 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;.

348



16.—CONTINUED

"Factors absorbing reserve funds

Currency
in
circulation

48,983
48,996
49,475
49,642
50,399
50,936
51,120
51,461
51,336
51,710
52,991
53,885

Treasury
cash
holdings 6

Deposits, other
than member bank
reserves,
with F.R. Banks

Treasury

754
725
684
661
649
633
631
643
640
649
633
657

517
505
783
950
562
1,258
935
894
1,003
954
980
1,312

Foreign

126
121
164
130
107
155
158
143
143
131
130
134

Other 7

528
482
498
458
438
551
466
445
515
452
453
807

Other
F.R.
accounts 7

Other
F.R.
liabilities
and
capital 7

1,895
1,949
1,956
1,970
2,036
2,029
2,088
2,117
2,090
2,181
2,218
1,919

Member bank
reserves

With
F.R.
Banks

Currency
and
coin 8

Required ^

Excess 9

23,158
22,854
21,568
24,377
23,705
20,808
21,809
22,787
21,703
23,628
23,385
22,085

4,821
4,627
4,487
4,619
4,543
4,662
4,729
4,655
4,813
4,767
4,835
5,187

27,204
26,783
26,439
27,584
27,278
27,006
26,795
26,549
27,093
26,910
27,535
28,173

775
698
-384
1,412
970
-1,536
-257
893
-577
1,485
685
-901

7
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. Beginning Apr. 16, 1969, "Other
F.R. assets," and "Other F.R. liabilities and capital" are shown separately; formerly, they were netted
together and reported as "Other F.R. accounts."
8
Part allowed as reserves Dec. 1, 1959-Nov. 23, 1960; all allowed thereafter. Beginning with Jan.
1963, figures are estimated. Beginning Sept. 12, 1968, amount is based on close-of-business figures for
reserve period 2 weeks previous to report date.
9 These figures are estimated through 1958. Before 1929 available only on call dates (in 1920 and 1922,
the call dates were Dec. 29).
i o Includes securities loaned—fully secured by U.S. Govt. securities pledged with F.R. Banks.

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.




349

17. PRINCIPAL ASSETS AND LIABILITIES, AND NUMBER OF COMMERCIAL AND MUTUAL SAVINGS BANKS, BY CLASS OF BANK,
DECEMBER 31, 1969, AND DECEMBER 31, 1968
(Asset and liability items shown in millions of dollars)
Commercial banks
All
banks

Item

Mutual savings banks

Member banks

Nonmember banks

Total

Total
Total

National

State

Total

Insured

Insured

Noninsured

Noninsured

December 31, 19691
Loans and investments total
Loans
Investments
U S Treasury securities
Other securities
Cash assets
.. .

491,680
352,190
139,490
57,810
81,680
91,830

419,760
294,590
125,170
54,570
70,600
90,850

337,361
242 567
94,794
40,038
54,756
80,304

Deposits total
Interbank
Other demand
Other time
Total capital accounts

502,550
27,890
213,780
260,880
45,400

435,200
27,890
213 680
193,630
39,850

351,915
26,410
174 821
150,684
32,110

n.a.

14,155

13,659

5,869

4,668

Number of banks

.•

n.a.

n.a.

82,399
52,023
30,376
14,532
15,844
10,546

n.a

n.a.

71,920
57,600
14,320
3,240
11,080
980

n.a.

n.a.

n.a.

83,285
1,480
38,859
42,946
7,740

67,350

n.a.

n.a.

100
67,250
5,550

n.a.

n.a.

1,201

7,790

7,595

195

496

330

166

December 31, 1968
Loans and investments, total
Loans
Investments
U.S. Treasury securities
Other securities
Cash assets

471,383
321,278
150,105
68,285
81,820
84,748

402,477
266,474
136,003
64,466
71,537
83,752

326,023
221,222
104,801
47,881
56,920
73,756

236,130
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
31,202
16,585
14,617
9,997

73,553
43,378
30,175
16,155
14,020
9,305

2,901
1,875
1,026
429
597
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

500.160
24'697
206,502
268 962
42,275

435,238
24,694
205,991
204,553
37,006

356,351
23,540
169,124
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
6,945

76,368
960
35,344
40,064
6,482

2,519
194
1,522
803
464

64,922
2
511
64,408
5,269

56,859
2
490
56,367
4,481

8,062

Interbank
.
Other demand
Other time
Total capital accounts

21
8,041
788

14,179

13,679

5,978

4,716

1,262

7,701

7,504

197

500

333

167

Number of banks
n.a. Not available,
i Estimated.




NOTE.—All banks in the United States.

18. C H A N G E S I N N U M B E R O F BANKING O F F I C E S I N T H E
U N I T E D S T A T E S D U R I N G 19691
Commercial banks (incl. stock savings
banks and nondeposit trust companies)
Type of office
and change

Member

All
banks
Total

Number of banks,
Dec. 3 1 , 1968

14,179 13,679

Nonmember

National 1

Total

5,978

Mutual
savings
banks

State 2

4,716

1,262

Noninsured 2

Insured

7,504

Noninsured

Insured

197

333

167

Changes during 1969
New banks 3
Suspensions
Consolidations and absorptions :
Banks converted into
branches
Other
Voluntary liquidations 4
Interclass changes:
Nonmember t o —
National
State member
.
State member t o —
National
Nonmember
National t o —
State member

136
-4

134
-4

23
-3

16
-2

7
-1

92
-1

19

2

-132
-20
-1

-128
-18

-59
-10

-42
-5

-17
-5

-68
-6

-2

-3
-2

9
3

9

3

-9
-1

-2

8

-8
-42

41

28

-3
28

3

-17

-107

-47

-60

15
91

-15

14,158 13,662

5,871

4,669

1,202

7,595

196

330

166

Number of branches and
additional offices,
Dec. 3 1 , 19685
. . 19,675 18,777 14,352 10,797

3,555

4,379

46

729

169

1

79
4

9

Noninsured to insured
Net change
Number of banks
Dec. 31,1969

-42

-21

-•

1

28
-3

Changes during 1969
De novo.
Banks converted
Discontinued 5
Interclass changes:
Nonmember t o —
National
State member
State member t o —
National
Nonmember
National t o —
State member
Nonmembe r
Mutual savings to
nonmember
Facilities reclassified as
branches

1,244
132
-91

13

Net change

1,298

1,156
128
-90

753
81
-73

579
69
-46

31
8

31

— 60

200

174
12
-27

402
47
-17

8

— 31
-8

-200
-60

60

— 88

3
— 88

13

11

11

1,208

663

753

-90

544

1

81

9

Number of branches and
additional offices,
Dec. 31,19695
20,973 19,985 15,015 11,550

3,465

4,923

47

810

178

3

1

88
1
2

For notes see end of table.




351

18.—C0NTINUED

Commercial banks (incl. stock savings
banks and nondeposit trust companies)
Type of office
and change

Total

Number of banking facilities, Dec. 31,1968 «

236

Nonmember

Member

All
banks

236

National*

Total

201

188

Mutual
savings
banks

State*

Noninsured 2

Insured

13

Insured

Noninsured

35

Changes during 1969
Established

4
—4

4
—4

National to nonmember
Facilities reel ass ified as
Net change
Number of banking facilities, Dec. 31,1969

1
-2

3
-2

3
-2

2

-2

2
-2

Interclass changes:
State member to

-1

-13

-13

-11

-11

-13

-13

-12

-11

-1

223

223

189

177

12

34

1 Includes a national bank (7 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, a noninsured trust
company without deposits.
3
Exclusive of new banks organized to succeed operating banks.
* Exclusive of liquidations incident to succession, conversion, and absorption of banks.
5 Excludes banking facilities.
6
Provided at military and other Government establishments through arrangements made by the
Treasury.

352




19. NUMBER OF PAR AND NONPAR BANKING OFFICES,
BY FEDERAL RESERVE DISTRICT, DECEMBER 31, 1969
Par

Nonpar
(nonmember)

Total
Member

Total

F.R. district

Nonmember

Banks Branches Banks Branches Banks Branches Banks Branches Banks Branches
& offices
& offices
& offices
& offices
& offices
DISTRICT
379
488
483

1,502
3,253
1,416

236
364
345

1,118
2,865
1,017

143
124
138

384
388
399

806
749
1,612

806
1,853
699
2,754
1,301 1,278

1,853
2,729
1,180

475
366
538

1,536
1,697
863

331
333
740

317
1,032
317

50
334

121

2,547
Chicago
1,506
St. Louis
Minneapolis.. 1,358

2,198 2,547
809 1,354
263 1,179

2,198
757
209

952
465
490

1,448 1,595
889
442
689
121

750
315
88

152
179

52
54

Kansas City... 1,941
1,306
Dallas
403
San Francisco.

262 1,941
235 1,229
403
4,550

262
222
4,550

829
640
170

166 1,112
589
122
233
3,845

96
100
705

77

13

T o t a l . . . . 13,578

20,396 12,786

20,131 5,870

15,240 6,916

4,891

792

265

Boston
New York....
Philadelphia..

379
488
483

Cleveland
Richmond....
Atlanta

1,502
3,253
1,416

25

20. NUMBER OF PAR AND NONPAR BANKING OFFICES,
BY STATE AND OTHER AREA, DECEMBER 31, 1969
Par

Nonpar
(nonmember)

Total
Member

Total

State, or
other area

Nonmember

Branches
Branches
Branches
Branches
Branches
Banks & offices Banks & offices Banks & offices Banks & offices Banks & offices
STATE
Alabama
Alaska
Arizona
Arkansas
California....
Colorado
Connecticut.. .
Delaware
District of
Columbia...
Florida

268
10
12
248
149
223
59
19

247
58
300
155
2,898
12
405
79

206
10
12
176
149
223
59
19

232
58
300
144
2,898
12
405
79

109
5
5
80
77
137
31
7

190
52
221
99
2,599
8
314
37

97
5
7
96
72
86
28
12

42
6
79
45
299
4
91
42

14
471

100
29

14
471

100
29

12
218

93
13

2
253

7
16

Georgia
Hawaii
Idaho
Illinois
[ndiana
Iowa
Kansas
Kentucky
Louisiana....
Maine

432
7
26
1,086
409
668
603
345
231
41

268
260
130
7
149
26
74 1,086
602
409
301
668
61
603
306
345
360
133
206
41

256
130
149
74
602
301
61
306
295
206

72

199
7
133
56
384
75
36
183
205
152

188
6
11
585
218
514
394
251
74
14

57
123
16
18
218
226
25
123
90
54




15
501
191
154
209
94
59
27

62

15

72

11

172

12

98

65

353

20.—CONTINUED

Par
Nonpar
(nonmember)

Total
Total

State, or
other area

Member

Nonmember

Banks Branches Banks Branches Banks Branches Banks Branches Banks Branches
& offices
& offices
& offices
& offices
& offices
STATE—
Cont.
Maryland....
Massachusetts.
Michigan
Minnesota....
Mississippi . . .
Missouri
Montana. . . .
Nebraska
Nevada
New Hampshire
r

122
160
'131
723
1.81
665
135
437
8

491
711
1,157

491
711
1,157

54
102
203

81

122
160
331
723
89
665
135
437
8

75

52

75

52

226
64
313

890
120
2,298

226
64
313

890

120
2,298

10

323
85
5
39

304
565
952

10

223

6

251
85
5

44
170
89

143
38
4

39

138

23

81

5

71

68
58
128
500
45
495
46
299
3

51

47

24

5

173

767

39
253

72
2,175

53
25
60

123
48
U23

187
146
205
4
108
47
1
16
10

92

72

New Jerse> ...
New Mexico..
New York
North
Carolina. . .
North
Dakota
Ohio
Oklahoma . . .
Oregon
Pennsylvania..
Rhode Island.

106

1,015

77

993

25

499

52

494

29

22

168
521
425
51
491
13

68
1,216
58
318
1,616
161

77
521
425
51
491
13

36
1,216
58
318
1,616
161

46
339
240
11
342
5

13
1,024
47
240
1,216
89

31
182
185
40
149
8

23
192
11
78
400
72

91

32

South
Carolina. . .
South Dakota.
Tennessee....
Texas
Utah
Vermont
Virginia
Washington...
West Virginia.
Wisconsin....
Wyoming

105
163
304
1,165
51
43
233
92
195
601
70

378
84
94
75
451
257
66 1,145
127
51
78
43
766
233
521
92
195
601
252
70
2

375
72
440
66
127
78
766
521

26
58
88
585
17
26
145
35
115
165
53

229
59
296
27
93
45
570
453
2
77
1

58
17
169
560
34
17
88
57
80
436
17

146
13
144
39
34
33
196
68
3
175
1

21
88
47
20

3
22
11

13

182

13

182

17

13

165

7

20

7

20

•

20

6

£

252
2

OTHER
AREA
Puerto Rico 2 ..
Virgin
Islands 2 ....

i Includes 9 New York City branches of 3 insured nonmember Puerto Rican banks.

other branches of Canadian banks.
NOTE.—Comprises all commercial banking offices on which checks are drawn, including 223 banking
facilities. Number of banks and branches differs from that in Table 18 because this table includes banks
in Puerto Rico and the Virgin Islands but excludes banks and trust companies on which no checks are
drawn.

354




21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED
BY THE BOARD OF GOVERNORS DURING 1969

CONTENTS

APPLICANT BANK

OTHER BANK

Page

American Bank and Trust Company, Lansing, Mich.
Bank of Las Vegas, Las Vegas,
Nev.
Colonial Bank and Trust Company,
Waterbury, Conn.
Connecticut Bank and Trust Company, Hartford, Conn.

Woodruff State Bank, DeWitt,
Mich.
Valley Bank of Nevada, Reno,
Nev.
Brooks Bank and Trust Company, Torrington, Conn.
Tradesmens National Bank of
New Haven, New Haven,
Conn.
Continental Bank of Midvale,
Midvale, Utah
Trefoil Bank, Philadelphia, Pa.
Bank of New River Valley, Radford, Va.
South Penn Square Bank, Philadelphia, Pa.
Matinecock Bank, Locust Valley,
N.Y.
First National Bank of Bay
Shore, Bay Shore, N.Y.
Main State Bank, Chicago, 111.

357

Continental Bank and Trust Company, Salt Lake City, Utah
Fidelity Bank, Philadelphia, Pa.
First Virginia Bank of the Southwest, Christiansburg, Va.
Girard Trust Bank, Philadelphia,
Pa.
Hempstead Bank, Hempstead, N.Y.
Island State Bank, Patchogue, N.Y.
Main State Bank of Chicago, Chicago, 111.
Oregon Bank, Portland, Oreg.
Roachdale Bank and Trust Company, Roachdale, Ind.
Security Bank and Trust Company,
Danville, Va.
Sedan State Bank, Sedan, Kans.
Summit and Elizabeth Trust Company, Summit, N.J.
Trust Company of Georgia, Atlanta, Ga.
Union Bank, Los Angeles, Calif.
United California Bank, Los Angeles, Calif.
Walker Bank & Trust Company,
Salt Lake City, Utah




365
378
376
375
362
367
365
369
361
370

Citizens Bank of Oregon, Lake
Oswego, Oreg.
State Bank of Russellville, Russellville, Ind.
Bank of Danville, Danville, Va.

360

Peru State Bank, Peru, Kans.
Clark State Bank and Trust
Company, Clark, N.J.
Atlanta Bank & Trust Company,
Atlanta, Ga.
Oakland Bank of Commerce,
Oakland, Calif.
El Dorado State Bank, Napa,
Calif.
First National Bank of Coal ville,
Coalville, Utah

356
358

368
380

371
363
380
374

355

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED
BY THE BOARD OF GOVERNORS DURING 1969x—CONTINUED
Name of bank, and type of transaction 2
(in chronological order of determination)

No. 1—The Sedan State Bank,
Sedan, Kans.,

Resources
(in millions
of dollars)

Banking offices
In
operation

5.2

1

.6

1

1

to merge with

The Peru State Bank,
Peru, Kans.

To be
operated

SUMMARY REPORT BY THE ATTORNEY GENERAL (11-26-68)

Both banks are situated in Chautauqua County (population 5,956), which
has experienced a population decline of 50 per cent in the past 50 years.
During this period of population decline, substantially all businesses except
farming and cattle raising have moved from the county.
As of June 30, 1966, 4 banks operated in Chautauqua County: the 2
merging banks, The First National Bank of Sedan (total deposits $4.5 million) and The Cedar Vale National Bank, located about 15 miles west of
Sedan. The 2 merging banks are located about 7 miles apart; and, if the
proposed merger is approved, Sedan Bank plans to discontinue the office of
Peru Bank. Since the entire area served by Peru Bank is also served by Sedan
Bank, this merger will eliminate some existing competition. It will also
eliminate one of the 4 banking alternatives in Chautauqua County.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (1-9-69)

Sedan Bank operates its sole office in Sedan, which has a population of
about 1,700. Peru Bank's sole office is situated approximately 7 miles southeast of Sedan. The population of Peru has declined from about 500 in 1940
to about 340 at the present time. The resulting bank plans to close the banking office in Peru.
Consummation of the merger would eliminate Peru's only banking office,
causing some inconvenience to its residents and resulting in slightly less
banking competition. However, the future prospects of Peru Bank are not
favorable. Its limited resources and location in a small community with a
declining population have thwarted the bank's diligent efforts to recruit or
retain management.
For notes see p. 381.

356




21.—CONTINUED

Name of bank, and type of transaction2
(in chronological order of determination)

No. 2—American Bank and Trust Company,
Lansing, Mich.,
to consolidate with
Woodruff State Bank,
DeWitt, Mich.

Resources
(in millions
of dollars)

Banking offices
In
operation

144.5

9

3.1

1

To be
operated

10

J

SUMMARY REPORT BY THE ATTORNEY GENERAL (11-27-68)

American Bank and Trust Company, the second largest bank in Lansing,
operates all of its offices in Lansing, Ingham County. DeWitt, Clinton County,
is located about 5 miles north of Lansing, Ingham County, in central Michigan.
Woodruff Bank primarily serves an area within a 4-6-mile radius around
DeWitt. The main offices of the merging banks—their closest offices—are 7.5
miles apart, with 1 bank (total deposits $29 million) in the intervening area.
Although American Bank has no branches in Clinton County, and, under
Michigan law cannot establish de novo branches there, American Bank appears to constitute a banking alternative for residents of DeWitt who work
in Lansing. According to the application, American Bank derives about $1.5
million in demand deposits and $1.7 million in time deposits from the
DeWitt area. It also derives about $190,000 in commercial and industrial
loans, $840,000 in instalment loans, and $3.5 million in mortgage loans from
this area. Thus, there appears to be some direct competition between the
banks which would be eliminated by the merger.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (1-29-69)

American Bank operates its main office and 7 branches in the city of
Lansing, which has a population of about 132,000, and 1 branch in Holt,
which is 4 miles south of Lansing. Woodruff Bank is located in DeWitt, 8
miles north of the center of Lansing, and operates no branch offices.
Although the main offices of American Bank and Woodruff Bank are only
8 miles apart, 3 other banks each operate at least 1 office in the intervening
area. Woodruff Bank originates only a negligible amount of its loans and
deposits in Lansing, while American Bank originates a small proportion of
its deposits in the DeWitt area. However, American Bank does obtain a
sizable volume of instalment and real estate loans in DeWitt. The volume of
real estate loans arises primarily from Lansing building contractors who deFor notes see p. 381.




357

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED
BY THE BOARD OF GOVERNORS DURING 19691—CONTINUED

Name of bank,, and type of transaction2
tin 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.

velop real estate in the DeWitt area, and many of the instalment loans are
from merchants who sell their conditional sales contracts to American Bank.
The possibility of more effective competition developing in the future is
not significant. Under Michigan law, neither American Bank nor Woodruff
Bank may establish de novo offices in the community served by the other
bank.
There are 10 banks operating offices in the Lansing area. The largest bank
in the area is Michigan National Bank, which operates offices of substantial
size in other cities of Michigan and has total deposits approaching $1 billion.
American Bank ranks second in size in the area, with about 23 per cent of
area deposits. The third largest bank, which holds about 18 per cent of area
deposits;, is part of a chain of banks having considerable resources. Consummation of the consolidation would increase American Bank's share of area
deposits; by about 0.6 per cent.
Woodruff Bank's closest competitor is the Clinton National Bank and
Trust Company, St. Johns (deposits $29 million), which operates 3 offices
within a 6-mile radius of DeWitt. The proposed consolidation should not adversely affect that institution.
The net effect of the proposal on competition would be slightly adverse.
Some existing competition between the 2 banks would be eliminated, and
there would be a slight increase in the concentration of banking resources
in the Lansing area.
While the over-all effect of the proposed consolidation on competition
would be slightly adverse, the conversion of the sole office of Woodruff
Bank into a branch of American Bank would tend to serve better the convenience and needs of the DeWitt area in a time of impending population
growth and economic development.
No. 3—Summit and Elizabeth
Trust Company,
Summit, N.J.,

135.0

to merge with

Clark State Bank and Trust
Company,
Clark, N J .

18.6

SUMMARY REPORT BY THE ATTORNEY GENERAL (1-16-69)

Clark State Bank and Trust Company (hereinafter Clark Bank) operates
its 2 offices in Clark, a rapidly growing community in Union County,
For notes see p. 381.

358




21.—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.

located about 12 miles west of New York City and 6 miles southwest of
Elizabeth. Summit and Elizabeth Trust Company (hereinafter Summit Bank)
has 3 offices in Elizabeth and 2 offices in the Summit area. The closest offices of the merging banks are 5.9 miles apart, and all offices are within a
distance of about 8 miles. A few banks, including 2 with total deposits of
over $175 million, operate numerous banking offices in the intervening area.
However, because of the proximity of the merging banks and the residential
character of Clark, there is probably at least some direct competition which
would be eliminated by this merger.
On June 30, 1966, 16 banks operated 66 offices in Union County. As of
that date, Summit Bank, the third largest bank in the county, held 14 per
cent of county commercial bank deposits and Clark Bank held 2 per cent of
such deposits; the 4 largest banks in the county held 65 per cent of such deposits. Thus, this merger would appear to increase concentration only
slightly. However, because deposits in Clark Bank have increased 49 per cent
in the last 5 years, compared to an 18 per cent increase for deposits in the
Summit Bank, the above market shares would appear to understate the potential increase in concentration resulting from the merger.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (2-6-69)

Summit Bank operates its main office and 2 branch offices in the SummitNew Providence area, located in the northwestern corner of Union County
(1960 population 504,000). The Bank also operates 3 offices in the Elizabeth
area, which adjoins the city of Newark. Elizabeth is located about 10 miles
east of Summit in the northeastern portion of Union County.
Clark Bank operates its main office and 1 branch office in Clark Township (population about 18,000) in the south-central section of Union County.
The main offices of Summit Bank and Clark Bank are approximately 7 miles
apart, and the nearest branches of the 2 banks are about 6 miles apart.
In the area separating Summit, Elizabeth, and Clark Township, there are
a number of other banking offices. Only nominal amounts of deposits and
loans are derived by each of the 2 banks from the areas served by the other.
Recently, the Governor of New Jersey signed into law a revision of the
State's banking laws concerning branch banking and bank mergers. The new
law, like the old, does not permit a bank to establish a branch office in any
community wherein the home office of another bank is located. Consequently, the potential for increased competition between Summit Bank and
Clark Bank is limited. However, the new law does, for the first time, permit
a bank to establish a branch office in communities with populations of 7,500
or more in which are located only branch offices of other banks. Since Clark
Township has a population in excess of 7,500, consummation of the merger,
For notes see p. 381.




359

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED
BY THE BOARD OF GOVERNORS DURING 19691—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

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS—Cont.

by eliminating the only home office located there, would open the township
to the establishment of branches by other banks in the second of New
Jersey's 3 banking districts. In this respect, the consummation of the proposal
should eventually result in an increase in banking competition in the Clark
Township area.
Although an important competitive effect of the proposal would be in the
area served by Clark Bank, it should be noted that Summit Bank and Clark
Bank both operate in the greater Newark market. The resulting bank, however, would control only a small share of the market area deposits. Summit
Bank ranks 7th of the 34 banks in the market, but holds only 3.8 per cent of
the area deposits, while Clark Bank ranks 24th, with 0.5 per cent of the deposits. The resulting bank would hold only 4.4 per cent.
In the judgment of the Board, the effect of the merger on competition
would be slightly favorable. The resulting bank would be in a better position
to serve the convenience and needs of the Clark Township area.
No. A—The Oregon Bank,
Portland, Oreg.,
to merge with
Citizens Bank of Oregon,
Lake Oswego, Oreg.

73.1

13

76.4

4

17

SUMMARY REPORT BY THE ATTORNEY GENERAL (12-17-68)

The northwest corner of Clackamas County, where all of Citizens Bank's
offices are located, is a suburban area lying immediately south of the city
of Portland. Most residents commute to downtown Portland, 7 miles away.
The closest office of Oregon Bank is in Portland, about 7 miles from any
office of Citizens Bank, and there are intervening bank offices between the
2. It would appear that Citizens Bank competes to some extent with Portland banks, including Oregon Bank. This competition between the merging
banks would be eliminated by the proposed merger.
Commercial banking in Portland—and in Oregon as a whole—is dominated by 2 statewide banks, the First National Bank of Oregon and the
United States National Bank of Oregon, which together hold over 85 per
cent of IPC 3 deposits in the 3 Oregon counties in the Portland Standard
Metropolitan Statistical Area (SMSA). Oregon Bank and Citizens have,
respectively, about 2.6 per cent and 1.0 per cent of the total deposits in these
counties. Under these circumstances it does not appear that this merger
will have a significantly adverse effect on competition.
For notes see p. 381.

360




21.—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

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (2-6-69)

Oregon Bank's main office and 5 of its branches are in the Portland
Metropolitan Area. Citizens Bank's main office and 1 branch are in Lake
Oswego (estimated population 13,200), a residential community about 7
miles south of downtown Portland, and the bank's other 2 offices are in
communities to the southeast and southwest of Lake Oswego and are 13 and
16 miles from Oregon Bank's nearest office. Oregon Bank derives less than 3
per cent of its deposits and about 7 per cent of its loans from the area
served by Citizens Bank. It is believed Citizens Bank derives even smaller
percentages of its deposits and loans from the area served by Oregon Bank.
Existing competition between proponents appears to be minimal.
Citizens Bank enjoys "home-office protection" under State statutes. Due
to the size of the other communities where Citizens Bank operates offices
and because of the number of offices already in such communities, it seems
unlikely Oregon Bank would establish de noyo branches therein. Oregon
statutes preclude Citizens Bank from establishing a branch in Portland until
the bank increases its capital stock. The conversion of Citizens Bank's offices
into branches of Oregon Bank would provide residents of Lake Oswego and
Wilsonville with more convenient access to broader credit accommodations
and to a generally wider range of banking services.
No. 5—Island State Bank,

Patchogue, N.Y.,

31.4
11

to merge with

First National Bank of Bay Shore,
Bay Shore, N.Y.

48.9

SUMMARY REPORT BY THE ATTORNEY GENERAL (2-7-69)

Suffolk County, one of the 10 counties constituting the New York Standard Metropolitan Statistical Area, is the easternmost county on Long Island. It is a fast growing county, with forecasts for increased population and
business activity. The areas served by the merging banks are located irf the
western part of the county.
It would appear that direct competition between the merging banks would
be eliminated by the merger. The closest offices of the merging banks are 3
miles apart in Islip, with some banking alternatives in the intervening areas.
Island State Bank (hereinafter ISB) derives over $1 million in deposits and $3
For notes see p. 381.




361

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED
BY THE BOARD OF GOVERNORS DURING 1969a—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.

million in loans from the immediate areas in which First National Bank
(hereinafter FNB) is located, while FNB derives over $14 million in deposits and $12 million in loans from the immediate areas in which ISB is
located
ISB holds about 7.2 per cent of deposits in the area served by the 2 banks,
and FNB holds about 10.5 per cent of these deposits. If this merger were
consummated, the resulting bank would hold 17.7 per cent of deposits in
that area. Therefore, we conclude that the effect of this merger on competition would be significantly adverse.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (2-20-69)

Patchogue (population 9,900) is on Long Island's south shore about 60
miles east of New York City and 15 miles west of Bay Shore (population
10,700). Proponents' nearest offices are 3 miles apart, with offices of other
banks in the intervening area. The proposed merger would eliminate some
existing competition between proponents and potential for increased competition between them. However, these slightly adverse competitive effects
of the proposal are outweighed by the relevant market area's highly competitive nature (which would not be significantly altered by the proposed
merger), by the fact that the resulting bank (a medium-size one) would be
able to offer more effective competition to the larger banks that presently
operate in the area, and by the likelihood of entry by new banks or
branches. In addition, the resulting bank would offer expanded services, especially in the trust field, and would be of sufficient size to make efficient
use of electronic data processing equipment.
No. 6—The Fidelity Bank,
Philadelphia, Pa.,
to merge with
Trefoil Bank,
Philadelphia, Pa.

1,321.9

58

58

. 4 (Newly organized bank;
not in operation.)

SUMMARY REPORT BY THE ATTORNEY GENERAL (2-12-69)

The merger is merely part of a corporate reorganization which will make
Fidelity Bank a wholly owned subsidiary of a one-bank holding company
and as such will have no effect on competition.
For notes see p. 381.

362



21.—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 (3-12-69)

The proposed merger is one step in a plan of corporate reorganization
whereby Fidelity Corporation of Pennsylvania, a newly organized Pennsylvania corporation, would become a one-bank holding company. Fidelity
Corporation of Pennsylvania presently owns all of the stock of Trefoil; upon
the merger of applicant bank with Trefoil, stock of Fidelity Corporation of
Pennsylvania will be exchanged for stock of applicant bank.
The proposed merger of applicant bank and Trefoil—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 Trefoil Bank.
No. 7—Union Bank,
Los Angeles, Calif.,
to merge with
Oakland Bank of Commerce,
Oakland, Calif.

1,444.2

16

132.6

1

17

SUMMARY REPORT BY THE ATTORNEY GENERAL (2-11-69)

Oakland Bank is a unit bank operating in Oakland (approximate population 386,000), the largest city in Alameda County (approximate population
1,065,500), and the industrial center for the entire county. Oakland is part
of the San Francisco-Oakland Standard Metropolitan Statistical Area
(SMSA).
Since the nearest offices of Union Bank and Oakland Bank are about 380
miles apart, it does not appear that any significant direct competition would
be eliminated by the proposed merger.
Eleven banks now operate in Oakland. As of June 30, 1966, 3 banks held
about 73 per cent of IPC 3 deposits in Oakland Bank and 4 banks held about
82 per cent of such deposits. Oakland Bank, with 9 per cent of IPC 3 deposits in this market, held the fourth largest share.
California State law permits statewide de novo branch banking. Although
Union Bank has not exhibited a tendency to expand by de novo branching,
its financial resources and desire to serve customers in the northern part of
the State would indicate it to be a likely potential entrant by de novo
branching into the San Francisco-Oakland SMSA, and perhaps into OakFor notes seep. 381.




363

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED
BY THE BOARD OF GOVERNORS DURING 1969 '—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.

land itself. The proposed merger would foreclose the possibility of such
entry by Union Bank, and eliminate Oakland Bank as an independent competitor in an area that is already concentrated and dominated by the largest
California banks.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (3-17-69)

Union Bank, with 16 offices in Los Angeles, Orange, and San Diego
Counties, is California's seventh largest bank, holding about 3 per cent of
total commercial bank deposits.
Oakland Bank, with only 1 office in Alameda County, ranks 20th in size
in California, with 0.3 per cent of total deposits. The resulting bank would
operate the eighth statewide banking system, holding about 3.2 per cent of
total commercial bank deposits and operating 17 of the State's approximately
2,900 banking offices.
While there is a heavy concentration of banking resources in the State,
the fifth largest bank is more than double the size of the sixth or seventh
ranked banks, and the resulting bank would remain the seventh largest bank
in California.
Neither bank is dominant in its service area. Oakland Bank ranks fourth
among ithe 16 banks that operate 102 offices with an estimated $2 billion of
deposits. Union Bank holds a relatively minor share of deposits in the markets in which it presently operates.
Approximately 380 miles separate the nearest offices of the 2 banks, and
the amount of loan and deposit business that each bank derives from the
area or areas served by the other is minute. Although either bank could
enter the service area of the other by either merger or through de novo
branching, it is unlikely that Oakland Bank would become a competitor in
southern California; the record indicates that it is also unlikely that Union
Bank would enter Oakland by means of de novo branches.
The very slight adverse effect on competition that would result from entry
of Union Bank into the Oakland area, as proposed, would be offset by the
availability to the Oakland area of the services of the resulting bank.
For notes see p. 381.

364




21.—CONTINUED

Name of bank, and type of transaction2
(in chronological order of determination)

No. 8—Girard Trust Bank,
Philadelphia, Pa.,

Resources
(in millions
of dollars)

1,720.9

Banking offices
In
operation

To be
operated

62

62

to merge with

South Penn Square Bank,
Philadelphia, Pa.

. 3 (Newly organized bank;
not in operation.)

SUMMARY REPORT BY THE ATTORNEY GENERAL (3-10-69)

This merger is merely part of a corporate reorganization which will make
Girard Trust Bank a wholly owned subsidiary of a one-bank holding company and as such will have no effect on competition.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (5-5-69)

The proposed merger is one step in a plan of corporate reorganization
whereby The Girard Company, a newly organized Pennsylvania corporation,
would become a one-bank holding company. The Girard Company presently
owns all the stock of South Penn Bank; upon the merger of applicant bank
with South Penn Bank, stock of The Girard Company will be exchanged for
stock of the resulting bank.
The proposed merger of applicant bank and South Penn—the latter being
a bank with no operating history, formed solely to facilitate the corporate
reorganization plan described above—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 South Penn Bank.
No. 9—Bank of Las Vegas,
Las Vegas, Nev.,
to merge with

Valley Bank of Nevada,
Reno, Nev.

150.0

11

23.8

4

15

SUMMARY REPORT BY THE ATTORNEY GENERAL (4-14-69)

Both the Reno and Las Vegas markets are concentrated, with the 2
largest of the 5 banks which operate in each market, as of June 30, 1966,
For notes see p. 381.




365

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED
BY THE BOARD OF GOVERNORS DURING 1969a—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.

holding about 78 per cent and 67 per cent, respectively, of each market's
commercial bank deposits. Valley Bank, Reno's fourth largest bank, accounted for 6 per cent of the Reno area deposits, while Vegas Bank, the
second largest: bank in Las Vegas, accounted for 26 per cent of its deposits.
Since, however, there does not appear to be any direct local banking competition between Valley Bank and Vegas Bank—their closest offices are 450
miles apart—and since neither appears to be a factor in the other's market,
it would not appear that their merger would eliminate direct competition
or increase concentration in either market.
Nevada law permits statewide branching. The Reno Standard Metropolitan Statistical Area (SMSA) appears, on the basis of its current economic growth, to be capable of supporting additional banking facilities.
Vegas Bank has the resources to branch de novo and has demonstrated
its willingness to do so. Of the 3 largest Nevada banks, only Vegas Bank
does not presently operate offices both in the Reno SMSA and the Las
Vegas SMSA. Thus, it seems that Vegas Bank would be the most likely
potential entrant into the Reno area were it not for a continuous history of
affiliation between the merging banks. Valley Bank was organized by the
present management and substantial stockholders of Vegas Bank. The
principal officers and directors of Vegas Bank beneficially own over 50
per cent of Valley Bank stock. As of December 31, 1968, stockholders
common to both banks held 52 per cent of Vegas Bank and 81 per cent of
Valley Bank stock. Each bank has 9 directors, 4 of whom are directors of
both. So long as this relationship continues, it seems unlikely that Vegas
Bank would enter the Reno area and compete with its close affiliate.
The proposed merger would not eliminate direct, existing competition
between Valley Bank and Vegas Bank. Nor would it increase concentration
in commercial banking in the markets primarily served by each, namely the
Reno and Las Vegas SMSA's. Although Vegas Bank is the largest Nevada
bank now operating in the Reno SMSA, it would seem unlikely to enter this
area in competition with Valley Bank, which it helped organize and with
which it has maintained a close affiliation through common stockholders
and diirectors.
Accordingly, we conclude that the competitive effects of this proposed
transaction would not be adverse.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (5-23-69)

All of Reno Bank's offices are more than 400 miles from Las Vegas
Bank's offices. Since Reno Bank was organized in 1963 by the present
For notes see p. 381.

366



21.—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

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS—Cont.

management and substantial shareholders of Las Vegas Bank as an alternative to entering the Reno market through de novo branching, it seems unlikely there is potential for competition developing between them.
The principal effect of the transaction would be on the banking needs and
convenience in Reno and environs. The conversion of the offices of Reno
Bank into branches of Las Vegas Bank would provide for the inhabitants
of the Reno area convenient access to an alternative source of a generally
wider range of banking services without adversely affecting banking competition.
No. 10—First Virginia Bank of the Southwest,
Christiansburg, Va.,
to merge with
Bank of New River Valley,
Radford, Va.

4.2
8.7

SUMMARY REPORT BY THE ATTORNEY GENERAL (6-17-69)

First Virginia Bank of the Southwest and the Bank of New River Valley
are both owned by First Virginia Bankshares Corporation, a registered bank
holding company.
The merging banks are located about 10 miles apart, with no banks in
the intervening area, and have many mutual customers for both loans and
deposits. However, the proposed transaction will not eliminate competition
because both banks are owned by the same bank holding company.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (7-11-69)

The merger of Southwest Bank and Valley Bank—both subsidiaries of
First Virginia Bankshares Corporation, Arlington, Virginia, a registered
bank holding company—would have no adverse effect on banking competition. The banking needs of the communities served by the banks are being
met satisfactorily and without undue inconvenience, as they would be following the conversion of the offices of Valley Bank into branches of Southwest Bank. The financial and managerial resources and prospects of each
bank are satisfactory, as they would be with respect to the resulting bank.
For notes sec p. 381.




367

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED
BY THE BOARD OF GOVERNORS DURING 19691—CONTINUED

Name of bank, and type of transaction2
(in chronological order of determination)

No. 11—Roachdale Bank and Trust
Company,
Roachdale, Ind.,
to merge with
The State Bank of Russellville,
Russellville, Ind.

Banking; offices
Resources
(in millions
of dollars)

In
operation

7.6

2

1.7

To be
operated

1

3

SUMMARY REPORT BY THE ATTORNEY GENERAL (6-17-69)

The State Bank of Russellville is situated 10 miles west of Roaichdale.
There are no banks in the intervening area. According to the application,
in Roachdale Bank's area, State Bank of Russellville has 1.6 per cent of
total IPC 3 deposits, while in its own area, State Bank has 2.5 per cent and
Roachdale Bank, 11 per cent. Thus, it would appear that there Is some
competition between the 2 banks which would be eliminated by the merger.
Concurrently, with its proposal to merge The State Bank of Russellville,
Roachdale Bank has applied to the Federal Deposit Insurance Corporation for approval to acquire the assets and assume the liabilities of Russellville Bank ($1.7 million total deposits), the only other bank in the town.
Approval of both applications would eliminate the independent existence
of the only 2 banks in Russellville and would eliminate competition between them. It is contemplated that Russellville Bank would be closed
and The State Bank of Russellville would be operated as a branch of
Roachdale Bank. Acquisition of both Russellville banks is Roachdale
Bank's only means of entry in Russellville since Indiana law prohibits
branching in a town where another bank maintains its home office.
While Putnam County overstates the area in which this merger will have
its effect, the increase in concentration in the county as a whole will be
substantial. Each of the 2 acquired banks has 3 per cent of county deposits,
and the combined result will be to increase Roachdale Bank's share from
14 to 20 per cent of county deposits.
Since the proposed merger of State Bank of Russellville would eliminate
some direct competition between that bank and Roachdale Bank, and since
it is a step in a larger program of acquisition which would increase concentration of control over deposits, this merger will have an adverse competitive effect.
For notes see p. 381.

368




21.—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

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (7-11-69)

Roachdale Bank operates the only banking office in Roachdale (population 1,000). Russellville (population 400), 10 miles west of Roachdale,
contains the sole offices of State Bank and Russellville Bank (deposits $1.7
million), a private bank without deposit insurance. The merger would
eliminate a small amount of competition between Roachdale Bank and
State Bank. There are a number of alternative sources of banking services
available to area residents. Since State statutes restrict establishment of
branches, the merger of State Bank and Roachdale Bank cannot be effectuated unless Roachdale Bank obtains authority to acquire Russellville Bank.
Thus, the instant proposal would have an adverse effect on competition.
However, that adverse effect would be outweighed by the resolution of the
financial problems of State Bank and by the benefit to the convenience and
needs of the Russellville community.
No. 12—Hempstead Bank,

Hempstead, N.Y.,
to merge with
Matinecock Bank,

Locust Valley, N.Y.

147.5

19

23.1

3

22

SUMMARY REPORT BY THE ATTORNEY GENERAL (5-13-69)

Hempstead Bank has 3 branch offices within 9.4 miles of all Matinecock
Bank's offices. Each bank would appear to derive substantial business from
within the service area of the other bank. This competition will be eliminated by the proposed merger.
Hempstead Bank holds 5.3 per cent of the total deposits held by all
commercial banks in Nassau County and 7.6 per cent of such IPC 3 demand
deposits. Matinecock Bank holds 0.8 per cent of the total deposits held by
all of Nassau County's commercial banks and 0.7 per cent of such IPC 3
demand deposits. Together, the merging banks would hold 6.1 per cent
of such total deposits and 8.3 per cent of such IPC 3 demand deposits.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (7-24-69)

Both banks are headquartered in Nassau County, but the amount of direct
competition between them is limited by the fact that most of Hempstead
For notes see p. 381.




369

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED
BY THE BOARD OF GOVERNORS DURING 1969 '—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

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS—Cont.

Bank's offices are clustered more to the central and southern portion of the
county, while Matinecock Bank serves a small area of the North Shore.
The main offices are 15 miles apart; the closest 3 offices of Hempstead Bank
to Matinecock Bank's service area are in Oyster Bay, East Norwich, and
Syosset, which range from 3.3 miles to 7.4 miles from the nearest office of
Matinecock Bank. It is concluded there is some direct competition between
the subject banks. While there is potential for greater competition, this is
moderated by the fact that Matinecock Bank presently enjoys home-office
protection under New York statutes, so that entry by Hempstead Bank, or
any other bank, in effect is precluded.
The replacement of Matinecock Bank by offices of Hempstead Bank
would make a broader range of banking services more conveniently available in the communities presently served by Matinecock Bank, and while
there are a number of sources of such services already available, this factor
is consistent with approval. Further, the removal of home-office protection
from Locust Valley so that other banks may establish de novo branches
there should benefit the banking convenience and needs of the community
in the future.
In the judgment of the Board, the benefits of the proposed merger to the
banking convenience and needs of the area served by Matinecock Bank
would offset the no more than slightly adverse effect on banking competition.
No. 13—Main State Bank of Chicago,
Chicago, 111.,
to acquire the assets and assume
the deposit liabilities of
Main State Bank,
Chicago, 111.

(Newly organized bank;
not yet in operation.)
67.8

SUMMARY REPORT BY THE ATTORNEY GENERAL (7-2-69)

The proposed merger is part of a transaction which will result in Main
State Bank of Chicago becoming a wholly owned subsidiary of a one-bank
holding company. Thus, the merger is merely part of a corporate reorganization and as such will have no effect on competition.
For notes seep. 381.

370



21.—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

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (7-30-69)

Upon consummation of the proposal Main State Bank's sole office would
become the sole office of Main State Bank of Chicago, which is a newly
organized bank not yet in operation. The latter is the only subsidiary of
a holding company organized to facilitate the sale of Main State to persons
of demonstrated banking ability and experience familiar with the operations
of Main State Bank which, following the transaction, would be dissolved.
The proposed transaction would have no adverse effect on banking competition. There are about 90 other commercial banks with offices in the area
served by Main State Bank, and consummation of the proposal would not
change the number of banking institutions serving the relevant area. Considerations relative to financial and managerial resources and future prospects are satisfactory. While Main State Bank of Chicago would have a
lower loan limit than Main State Bank, it is not expected that this would
affect the former's ability to serve adequately the needs and convenience
of the relevant community.
No. 14—Trust Company of Georgia,
Atlanta, Ga.,

565.2

11

19.0

3

14

to merge with

Atlanta Bank & Trust Company,
Atlanta, Ga.

SUMMARY REPORT BY THE ATTORNEY GENERAL (8-8-69)

The head offices of the merging banks are located about 4 miles apart.
Trust Company has 2 branch offices 4VA and W* miles, respectively, from
Atlanta Bank's head office; 2 offices are IVi and 6 miles, respectively, from
Atlanta Bank's Ben Hill office; and 2 other offices are W2 miles, respectively,
from Atlanta Bank's new Roswell Road office. Only a few banks appear
to operate in the intervening areas. It would seem, therefore, that substantial direct competition exists between the merging banks. This competition will, of course, be permanently eliminated by consummation of the
proposed merger.
For notes see p. 381.




371

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED
BY THE BOARD OF GOVERNORS DURING 19691—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

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (9-18-69)

Trust Company of Georgia (hereinafter Trust Company), a registered
bank holding company, operates its head office and 10 branches in Atlanta.
Its wholly owned subsidiary, Trust Company of Georgia Associates, also
a registered bank holding company, has 6 subsidiary banks (aggregate
deposits of $276 million), one of which, Trust Company of Georgia Bank
of DeKalb, has offices in the Atlanta Standard Metropolitan Statistical Area
(SMSA). The main office of Atlanta Bank and Trust Company (hereinafter Atlanta Bank) is about 4 miles south of the main office of Trust Company, Atlanta Bank operates a branch at Ben Hill and a branch at Roswell
Road, about 7.5 miles west and 11.5 miles north, respectively, of its head
office. ITie nearest office of Trust Company to Atlanta Bank's main office
is its West End branch, W* miles to the northwest. Trust Company operates an office 6 miles north of Atlanta Bank's Ben Hill branch and an office
1.5 miles south of Atlanta Bank's Roswell Road branch. The 2 offices of
Trust Company's affiliate are within 4 miles of Atlanta Bank's Roswell
branch. There are 27 offices of 9 banks, other than Trust Company, in the
areas served by Atlanta Bank.
Trust Company, with 16 per cent of the deposits and 7 per cent of the
offices, is the third largest bank in the Atlanta SMSA. Together with its
affiliate, Trust Company holds about 17 per cent of area deposits and
operates 8 per cent of the banking offices; following the proposed merger
with Atlanta Bank, these figures would be increased to 17.2 per cent and
10 per cent, respectively. The two largest banks operating in the Atlanta
SMSA together hold about 51 per cent of area deposits and operate 32
per cent of the area's banking offices. The merger of the two banks would
eliminate some competition, as well as increase slightly the concentration
of banking resources in the Atlanta SMSA. The effect of the merger on
competition would be adverse.
Commercial banking in the city of Atlanta is highly concentrated. As of
June 30, 1968., the 11 commercial banks operating in Atlanta held IPC 3
demand deposits of $986.1 million and total deposits of $2.3 billion. Three
banks, including Trust Company, held 81.7 per cent of the IPC 3 demand
deposits and 75.8 per cent of the total deposits. Four banks held 94.0 per
cent of the IPC 3 demand deposits and 92.2 per cent of the total deposits.
Trust Company holds over 21 per cent of all deposits in Atlanta and is the
For notes seep. 381.

372




21.—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.

third largest of the 10 banks operating in the city. Atlanta Bank, the seventh
largest in the city, held 0.5 per cent of the I P C 3 demand deposits and 0.70
per cent of the total deposits.
Furthermore, under existing Georgia law, it is impossible for banks not
presently operating in Atlanta to enter that city either through branching or
through the use of a holding company. Hence, the likelihood of reducing
existing concentration through outside entry is nonexistent. In this context,
the absorption of a small but significant competitive force in a highly concentrated banking market by one of the 3 dominant firms, produces an anticompetitive result that is more substantial than the statistical increase in
concentration.
This merger will eliminate significant direct competition between the
merging banks. While Atlanta Bank's share of the city banking market is
small, this merger will result in increased concentration in a market already
highly concentrated. Moreover, the chances for significant deconcentration
do not appear favorable, particularly since Georgia law does not permit
entry into the city by banks headquartered outside of it. Consequently, we
think that the effect of this merger on banking competition in Atlanta will
be adverse.
The banking factors as they relate to both banks are satisfactory at the
present time, but Atlanta Bank has a management succession problem. The
president has a health problem that limits his activities and no one else on
the staff is familiar with the bank's construction lending program, which
is the bank's specialty. The efforts of the bank to employ a successor have
thus far proved futile. The merger would immediately and conclusively
resolve this problem.
The effect of the merger on banking convenience and needs would be
limited to the area served by Atlanta Bank, and its main impact would be
in the Lakewood Heights section (population 57,000), the site of its main
office. About 85 per cent of Atlanta Bank's deposits are in the main office
and virtually none of its construction loan business, which is substantial,
originates in this area. Trust Company would more adequately serve the
banking needs of the community; the bank's department that makes high
risk loans to businesses controlled by minority groups could be of particular benefit to the area.
For notes see p. 381.




373

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED
BY THE BOARD OF GOVERNORS DURING 1969a—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

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS—Cont.

While the case is viewed as a difficult one, it is the judgment of the
Board that the probable adverse effect of the merger on competition would
be outweighed by the benefits for the banking convenience and needs of
the Lakewood Heights community.
No. 15—Walker Bank & Trust Company,
Salt Lake City, Utah,
to acquire the assets and assume
the deposit liabilities of
The First National Bank of
Coalville,,
Coalville, Utah

308.1

15
16

5.6

SUMMARY REPORT BY THE ATTORNEY GENERAL

No report has been received. First National Bank has been closed for
insolvency by the Comptroller of the Currency, and requests for reports
on the competitive factors involved therein have been dispensed with as
authorized by the Bank Merger Act, as amended, 12 U.S.C. 1828(c), to
permit the Board to act immediately in order to safeguard depositors of
First National Bank.
B\sis FOR APPROVAL BY THE BOARD OF GOVERNORS (10-13-69)

First National Bank, Coalville's only banking office, has been closed for
insolvency by the Comptroller of the Currency and is under the receivership of the Federal Deposit Insurance Corporation. The application was
made to remedy the attendant emergency situation found by the Board, on
the basis of the information before it, including communications from the
Comptroller of the Currency and the Federal Deposit Insurance Corporation, to require that the Board act immediately pursuant to the provisions
of the Bank Merger Act in order to safeguard depositors of First National
Bank.
Such anticompetitive effects as may be attributable to consummation of
the transaction would be clearly outweighed in the public interest by the
considerations supporting and requiring the aforementioned finding. From
the record in the case, it is the Board's judgment that any disposition of the
application other than that permitted by the Board's Order would have been
inconsistent with the best interest of the depositors of First National. Accordingly, the Board concludes that the proposed transaction should be
approved on a basis that would not delay consummation of the proposal.
For notes see p,, 381.

374



21.—CONTINUED

Name of bank, and type of transaction2
(in chronological order of determination)

No. 16—The Continental Bank and Trust
Company,

Resources
(in millions
of dollars)

Banking offices
In
operation

115.5

6

3.2

To be
operated

1

Salt Lake City, Utah,
to merge with
Continental Bank of Mid vale,

Midvale, Utah

7

SUMMARY REPORT BY THE ATTORNEY GENERAL (9-19-69)

The applicant banks have had common ownership since 1956, when Midvale Bank was reactivated under its original charter. Management for Midvale Bank has been supplied from time to time by transferring personnel
from Continental Bank.
The closest office of Continental Bank to Midvale Bank is about 4 miles
east, with 1 bank in the intervening area. Considering the longstanding common ownership of the applicant banks, the proposed merger will not eliminate
any significant existing competition.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (10-17-69)

Salt Lake Bank operates its head office and 3 branches in Salt Lake City
(population 200,000); its other 2 branches are in adjacent unincorporated
areas of Salt Lake County. The sole office of Midvale Bank, which is also
in Salt Lake County, is in the city of Midvale (population 6,800), 12 miles
south of Salt Lake City. The nearest office of Salt Lake Bank to Midvale
Bank is AVi miles north of Midvale, and there are offices of 2 other banks
in the intervening area. The largest bank in Utah operates a branch 3.6
miles south of Midvale Bank, and the second largest bank in the State
operates 2 branches within 1.2 miles of Midvale Bank.
Salt Lake Bank, with 11 per cent of the deposits, is the fourth largest of
the 15 banks that operate offices in Salt Lake County; Midvale Bank, with
0.3 per cent of such deposits, ranks 13th. The 3 largest banks in the county
hold 72 per cent of the total deposits.
Other banks are precluded by the home-office-protection provision of
Utah law from establishing de novo branches in that community. The
proposed merger would remove home-office protection from the city of
Midvale. Midvale Bank could establish de novo branches in Salt Lake City,
and both it and Salt Lake Bank could establish such branches in unincorporated areas of Salt Lake County. The development of competition
between the two banks, however, appears unlikely. They have had common
ownership since 1956, when Midvale Bank, which was incorporated in
1911 and the assets of which were sold in 1934, was reactivated under its
For notes see p. 381.




375

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED
BY THE BOARD OF GOVERNORS DURING 1969a—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

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS—Cont.

original charter. The managing officers of Midvale Bank and other personnel have been furnished by Salt Lake Bank since 1956.
The replacement of Midvale Bank by an office of Salt Lake Bank would
provide a convenient alternative source of full-scale banking services for
Midvale, as well as remove home-office protection from the community so
that other banks could establish de novo branches there. The proposed
merger would benefit the banking convenience of the area served by Midvale Bank and would not have an adverse effect on banking competition.
No. 17—The Connecticut Bank and Trust
Company,
Hartford, Conn.,

965.1

47

to merge with

The Tradesmens National Bank of
New Haven,
New Haven, Conn.

31.6

51

SUMMARY REPORT BY THE ATTORNEY GENERAL (11-17-69)

The Connecticut Bank and Trust Company's (hereinafter CBT) Wallingford office is located about 9 miles northeast of Tradesmens Bank's Hamden
office. Data provided in the application indicate that both these offices draw
not insubstantial amounts of business from the areas immediately served
by the other, even though it appears that several other banks operate in
the intervening area. It is evident that at least some competition presently
exists between the merging banks; this competition will, of course, be
permanently eliminated by the proposed merger.
Connecticut law does not permit a commercial bank to establish de novo
branch offices in a township where there is already located the home office
of another bank. Under this law, both New Haven and Hamden are closed
to de novo entry by CBT. Most of the townships surrounding New Haven
and Hamden are similarly closed, but CBT could establish de novo
branches in East and West Haven (adjoining New Haven to the south) and
in Cheshire and Bethany (adjoining Hamden to the north). As Connecticut's second largest bank, CBT has the resources and capabilities for such
de novo expansion; moreover, it has shown a disposition in the past to
enlarge its operations through de novo branching. Since 1960 CBT has
opened a total of 16 de novo branch offices.
The proposed merger is essentially a market extension merger through
For notes see p. 381.

376




21.—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.

which CBT proposes to enter the New Haven banking market, being prevented by State law from entering through de novo branching. In such
circumstances, we consider it important, from a competitive standpoint,
that entry be made through merger with one of the smaller banks in the
local area. In this manner, leading local banks, most able to compete with
CBT, will be preserved. Tradesmens Bank, while a substantial bank in its
own right, is the fourth largest of 5 banks in New Haven, and is substantially smaller than the 3 leading banks in New Haven.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (11-24-69)

Hartford Bank has its head office and 9 of its branches in Hartford; the
bank operates its other 37 branches in 27 communities throughout most of
the central and eastern portions of Connecticut. Tradesmens operates its
head office and 2 branches in New Haven; it also has a branch in Hamden,
which is about 5 miles north of New Haven and within the New Haven
Standard Metropolitan Statistical Area.
The head offices of the 2 banks are 36 miles apart. Hartford Bank's nearest
office to an office of Tradesmens is its branch at Wallingford, 9 miles
northeast of Hamden. Hartford Bank also operates 2 branches in Meriden
and 2 branches in Middletown, which are 14 miles and 17 miles, respectively, northeast of Hamden. Both Tradesmens and the Wallingford branch of
Hartford Bank derive some business from the town of North Haven, but
there is no meaningful competition between the banks.
Hartford Bank is precluded by the home-office-protection feature of State
law from establishing de novo branches in New Haven and Hamden. Both
East Haven and West Haven are open to entry by de novo branching, but
it is questionable whether an office in either town would enable Hartford
Bank to compete effectively with the New Haven banks. There are several
towns that are open to entry by de novo branching, including Wallingford
and others in which Hartford Bank already has offices, where Tradesmens
could become a direct competitor of Hartford Bank. However, in view of
the size of Tradesmens and its posture in the New Haven-Hamden market,
it appears unlikely that it would undertake to establish such branches.
Tradesmens, with 5.3 per cent of the deposits, is the fourth largest of
the 11 banks operating in the New Haven-Hamden area. It is substantially
smaller than the three largest banks, which hold about 85 per cent of area
deposits. Following the proposed merger, Hartford Bank would be the
largest bank operating offices in the New Haven-Hamden area. Hartford
Bank, with 18.3 per cent of the deposits, is the second largest of Connecticut's 66 banks; Tradesmens, with 0.6 per cent of the total deposits, ranks
22nd in the State.
For notes see p. 381.




377

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED
BY THE BOARD OF GOVERNORS DURING 1969 a—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

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS—Cont.

Hartford Bank, Connecticut's second largest bank, would offer a much
greater variety of banking services than Tradesmens provides. While many
of the services that Hartford Bank would provide are already available
from the larger New Haven banks, the addition of a convenient alternative
source of full banking services would benefit the banking convenience and
needs of the residents of the New Haven-Hamden area. As already indicated, Hartford Bank is precluded by the restrictions of State law from
establishing de novo branches in New Haven and Hamden. In the judgment
of the Board, the slightly adverse effect of the merger on competition would
be outv/eighed by the benefits for the banking convenience and needs of the
New Haven and Hamden communities.
No. 18—Colonial Bank and Trust Company,
Waterbury, Conn.,

231.4

24

32.1

6

30

to merge with

The Brooks Bank and
Trust Company,
Torrington, Conn.

SUMMARY REPORT BY THE ATTORNEY GENERAL (11-25-69)

All of Brooks' offices are located in the town of Torrington. According
to the application, Brooks serves a relatively limited geographic area, primarily the towns of Torrington, Goshen, and Harwinton. Brooks draws
minimal deposits from Cornwall, New Hartford, Litchfield, and Winsted.
Colonial has no offices in any of these towns. The closest office of Colonial
is at Thomaston, 11 miles south of Brooks' main office. While there are no
banks in the intervening area, it would appear that Colonial draws only a
very small amount of deposit business from the area served by Brooks.
Therefore the proposed merger would eliminate only a limited amount of
existing competition.
Connecticut law permits commercial banks to establish de novo branches
anywhere in the State, provided no other bank is headquartered in the town
where a de novo branch is to be located. As long as Brooks remains independent and headquartered in Torrington, no other bank, including
Colonial, may be permitted to establish branches therein. Colonial could
be permitted'to open new offices in all but one of the towns adjacent to
Torrington.
Torrington is an attractive banking market. It is served by 2 commercial
banks operating 6 offices. Torrington is one of the largest communities in
For notes see p. 381.

378




21.—CONTINUED

Banking offices
Name of bank, and type of transaction2
(in chronological order of determination)

Resources
(in millions
of dollars)

In
operation

To be
operated

SUMMARY REPORT BY THE ATTORNEY GENERAL—Cont.

northwestern Connecticut. Some measure of its significance is afforded by
the fact that as of June 30, 1968, approximately 40 per cent of the total
deposits in commercial banks in Litchfield County (which encompasses
most of northwestern Connecticut) were held by Torrington's 6 banking
offices.
Absent Torrington's present home-office protection, Colonial would
clearly be among the most likely potential de novo entrants into Torrington. While there are larger banks in Connecticut, Colonial maintains strong
market positions in other sections of northwestern Connecticut. Its 1968
merger with the Litchfield County National Bank afforded entry into large
areas of the county and resulted in its present control of over 25 per cent
of the total deposits in commercial banks throughout the county. Were
Brooks acquired by some other smaller or more distant bank, and Torrington thereby opened to de novo branching, Colonial could be expected to
enter Torrington in a manner which would not unduly increase its leading
position in the banking markets of northwestern Connecticut, becoming
another important competitor in this important market.
Therefore, while the merger of Brooks into Colonial would open Torrington to de novo branching by any of Connecticut's commercial banks,
we conclude that its over-all effect on potential competition would be
adverse.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (12-1-69)

Colonial Bank operates 24 banking offices in 13 communities in New
Haven and Litchfield Counties. The 6 offices of Brooks Bank are in the
city of Torrington (population 32,000), which is in Litchfield County. The
head offices of the banks are 19 miles apart, and their nearest offices are
about 11 miles apart. Neither bank derives a significant amount of business
from the area served by the other. Connecticut law permits statewide
branching, but a de novo branch may not be established in a community
where a bank is headquartered. Brooks Bank is the only bank headquartered
in Torrington, and consummation of the proposed merger would remove
home-office protection from that community. The only other commercial
banking office in the community is a branch of Hartford National Bank
and Trust Company (total deposits $943 million), the State's largest bank.
Colonial Bank, the eighth largest commercial bank in Connecticut, holds
approximately 4 per cent of the commercial banking deposits in the State.
Brooks Bank, with less than 1 per cent of the State's commercial bank
deposits, ranks 19th in this respect. In the judgment of the Board, the proposed merger would not have an adverse effect on competition and would
benefit the banking convenience and needs of the Torrington community.
For notes see p. 381.




379

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED
BY THE BOARD OF GOVERNORS DURING 1969 *—CONTINUED

Name of bank, and type of transaction2
(in chronological order of determination)

Resources
(in millions
of dollars)

No. 19—Security Bank and Trust Company,
Danville, Va.,
to merge with
The Bank of Danville,
Danville, Va.

Banking offices

22.2

In
operation

To be
operated

. 2 (Newly organized bank;
not in operation).

SUMMARY REPORT BY THE ATTORNEY GENERAL (10-21-69)

The Blank of Danville is a nonoperating institution, having been organized as the vehicle through which Virginia Commonwealth Bankshares
(hereinafter VCB), a registered bank holding company, seeks to acquire
Security Bank and Trust Company as a wholly owned subsidiary. The proposed merger, therefore, is essentially part of a corporate reorganization
to facilitate this acquisition. As such, apart from any consideration of the
subsequent acquisition of the surviving bank by VCB, the proposed merger
will have no effect on competition.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (12-1-69)

The proposed merger of Security Bank and Trust Company and Bank of
Danville, 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 Virginia Commonwealth Bankshares, Inc.,
Richmond, Virginia, a registered bank holding company, would acquire all
the shares of Security Bank and Trust Company. The merger proposal, as
such, would have no effect on competition, no effect on the banking convenience and needs of the Danville community, and would not alter the
financial and managerial resources and prospects of Security Bank and Trust
Company.
No. 20—United California Bank,
Los Angeles, Calif.,
to merge with
Ell Dorado State Bank,
Napa, Calif.

5,276.2

224

9.8

1

225

SUMMARY REPORT BY THE ATTORNEY GENERAL (11-17-69)

The sole office of El Dorado Bank is located in a shopping center approximately W2 miles to the north of the Napa central business district
For notes see opposite page.

380




21.—CONTINUED

Banking offices
Name of bank, and type of transaction2
(in chronological order of determination)

Resources
(in millions
of dollars)

In
operation

To be
operated

SUMMARY REPORT BY THE ATTORNEY GENERAL—Cont.

in which its principal competitors are located. Although United California
Bank (hereinafter UCB) has no offices in the city of Napa or Napa County,
it does have offices in Vallejo County, 16 miles to the south, and Santa Rosa
in Sonoma County, 40 miles to the northwest. These offices derive some
deposit and loan business from El Dorado Bank's area; the proposed
merger would accordingly eliminate some direct competition.
El Dorado Bank presently has 4.1 per cent of the total deposits in Napa
County; Bank of America and Wells Fargo Bank, 2 of the largest banks in
the State, have 64 per cent and 19 per cent, respectively, of total deposits
in the county. Two other banks, both also headquartered outside Napa
County, hold approximately the same market share as El Dorado Bank.
Thus, Napa County presently has a highly concentrated banking structure,
and El Dorado Bank is the only bank with its headquarters in the county.
UCB has heretofore applied for and obtained approval to open a new
branch in Napa, but apparently in connection with this merger proposal
surrendered that approval to the Board of Governors and the California
State Banking Department. The fact that a de novo branch application was
made, and approved by 2 banking agencies, is indicative (1) that there is an
opportunity and need for additional banking facilities in Napa County, and
(2) that UCB, absent the merger, would very likely be that de novo entrant.
BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (12-11-69)

Napa Bank's sole office, in Napa (population 35,700), competes directly
with 4 offices of California's largest, third largest, and fourth largest banks
as well as a branch of Redwood Bank, San Rafael (deposits $25 million).
UCB has no office in Napa County; its closest office to Napa is at Vallejo,
16 miles to the south. UCB heretofore obtained authorization to establish
a de novo branch in Napa, which it subsequently abandoned. Thus, there
is some potential for the development of competition between proponents.
Consummation of the merger would add to the concentration of banking
resources in California, although by an insignificant amount. While the
effect of the proposed merger on competition would be slightly adverse,
the transaction would provide a ready solution for the management succession problem of Napa Bank and benefit the banking convenience and
needs of the Napa community.
1 During 1969 the Board disapproved 3 merger applications. 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.
3
The abbreviation "IPC" designates deposits of individuals, partnerships, and corporations.




381

00

to




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, 1969)
WM. MCC. MARTIN, JR., of New York, Chairman
J. L. ROBERTSON of Nebraska, Vice Chairman

Term expires
January 31, 1970
January 31, 1978

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

January
January
January
January
January

ROBERT C. HOLLAND, Secretary of the Board
J. CHARLES PARTEE, Adviser to the Board
ROBERT SOLOMON, Adviser 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
DAVJD B. HEXTER, General Counsel

THOMAS J. O'CONNELL, Deputy General Counsel
JEROME W. SHAY, Assistant General Counsel
ROBERT F. SANDERS, Assistant General Counsel
PAULINE B. HELLER, Adviser

DIVISION OF RESEARCH AND STATISTICS
J. CHARLES PARTEE, Director

STEPHEN H. AXILROD, Associate Director
LYLE E. GRAMLEY, Associate Director
STANLEY J. SIGEL, Adviser
TYNAN SMITH, Adviser
KENNETH B. WILLIAMS, Adviser

PETER M. KEIR, Associate Adviser
MURRAY S, WERNICK, Associate Adviser
JAMES B. ECKERT, Assistant Adviser
BERNARD SHULL, Assistant Adviser

Louis WEINER, Assistant Adviser
JOSEPH S. ZEISEL, Assistant Adviser

384



31,
31,
31,
31,
31,

1976
1974
1972
1980
1982

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

ROBERT F. GEMMILL, Associate Adviser
SAMUEL PIZER, Associate 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
MILTON W. SCHOBER, Assistant Director
THOMAS A. SIDMAN, Assistant Director

DIVISION OF PERSONNEL ADMINISTRATION
EDWIN J. JOHNSON, Director

JOHN J. HART, Assistant Director

DIVISION OF ADMINISTRATIVE SERVICES
JOSEPH E. KELLEHER, Director

JOHN D. SMITH, Assistant Director

OFFICE OF THE CONTROLLER
JOHN KAKALEC, Controller

HARRY J. HALLEY, Assistant Controller

OFFICE OF DEFENSE PLANNING
INNIS D. HARRIS, Coordinator

DIVISION OF DATA PROCESSING
JEROLD E. SLOCUM, Director

JOHN P. SINGLETON, Associate Director
GLENN L. CUMMINS, Assistant Director
RICHARD S. WATT, Assistant Director
* On leave of absence.




385

FEDERAL OPEN MARKET COMMITTEE
(December 31, 1969)

MEMBERS
WM. MCC. MARTIN, JR., Chairman (Board of Governors)
ALFRED HAYES, Vice Chairman (Elected by Federal Reserve Bank of New York)
KARL R. BOPP (Elected by Federal Reserve Banks of Boston, Philadelphia, and
Richmond)
ANDREW F. BRIMMER (Board of Governors)

GEORGE H. CLAY (Elected by Federal Reserve Banks of Minneapolis, Kansas City,
and San Francisco)
PHILIP E. COLDWELL (Elected by Federal Reserve Banks of Atlanta, St. Louis,
and Dallas)
J. DEWEY DAANE (Board of Governors)
SHERMAN J. JVIAISEL (Board of Governors)
GEORGE W. MITCHELL (Board of Governors)

J. L. ROBERTSON (Board of Governors)
CHARLES J. SCANLON (Elected by Federal Reserve Banks of Cleveland and
Chicago)
WILLIAM W. SHERRILL (Board of Governors)

OFFICERS
ROBERT C. HOLLAND, Secretary
ARTHUR L. BROIDA,

Deputy Secretary
KENNETH A. KENYON,

Assistant Secretary
CHARLES MOLONY,

Assistant Secretary
HOWARD H. HACKLEY,

General Counsel
DAVID B. HEXTER,

Assistant General Counsel
J. CHARLES PARTEE,

Economist
STEPHEN H. AXILROD,

Associate Economist
ERNEST T. BAUGHMAN,

Associate Economist

DAVID P. EASTBURN,

Associate Economist
LYLE E. GRAMLEY,

Associate Economist
RALPH T. GREEN,

Associate Economist
A. B. HERSEY,

Associate Economist
ROBERT G. LINK,

Associate Economist
JOHN E. REYNOLDS,

Associate Economist
ROBERT SOLOMON,

Associate Economist
CLARENCE W. TOW,

Associate Economist

ALAN R. HOLMES, Manager, System Open Market Account
CHARLES A. COOMBS, Special Manager, System Open Market Account
During 1969 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. 95-207 of this Report).

386



FEDERAL ADVISORY COUNCIL
(December 31, 1969)

MEMBERS
District No. 1—Mark C. Wheeler, President, New England Merchants National
Bank of Boston, Boston, Mass.
District No. 2—George S. Moore, Chairman of the Board, First National City
Bank, New York, N.Y.
District No. 3—George H. Brown, Jr., Chairman of the Board, Girard Trust Bank,
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 of the Board, Trust Company of Georgia, Atlanta, Ga.
District No. 7—Donald M. Graham, Chairman of the Board, Continental Illinois
National Bank and Trust Company, 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—John E. Gray, President, First Security National Bank of Beaumont, Beaumont, Tex.
District No. 12—Frederick G. Larkin, Jr., Chairman 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 COMMITTEE
JOHN A. MAYER, ex officio
GEORGE S. MOORE

J. HARVIE WILKINSON, JR., ex officio
PHILIP H. NASON
FREDERICK G. LARKIN, JR.

Meetings of the Federal Advisory Council were held on February 17-18, May
19-20, September 15-16, and November 17-18, 1969. The Board of Governors
met with the Council on February 18, May 20, September 16, and November 18.
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.




387

FEDERAL RESERVE BANKS and BRANCHES
(December 31, 1969)

CHAIRMEN AND DEPUTY CHAIRMEN OF
BOARDS OF DIRECTORS
Federal Reserve

Chairman and

IBank of—

Federal Reserve Agent

Deputy Chairman

Boston

Howard W. Johnson

John M. Fox

New York

Albert L. Nickerson

James M. Hester

Philadelphia

Willis J. Winn

Bayard L. England

Cleveland

Albert G. Clay

J. Ward Keener

Richmond

Wilson H. Elkins

Robert W. Lawson, Jr.

Atlanta

Edwin I. Hatch

John C. Wilson

Chicago

Franklin J. Lunding

Emerson G. Higdon

St. Louis

Frederic M. Peirce

Smith D. Broadbent, Jr.

Minneapolis

Robert F. Leach

David M. Lilly

Kansas City

Dolph Simons

Willard D. Hosford, Jr.

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 consult 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
4-5, 1969.
Mr. Peirce, Chairman of the Federal Reserve Bank of St. Louis, who was
elected Chairman of the Conference and of its Executive Committee in December
1968, served in that capacity until the close of the 1969 meeting. Mr. Winn,
Chairman of the Federal Reserve Bank of Philadelphia, and Mr. Clay, Chairman
of the Federal Reserve Bank of Cleveland, served with Mr. Peirce as members of
the Executive Committee; Mr. Winn also served as Vice Chairman of the Conference.
On December 5, 1969, Mr. Winn was elected Chairman of the Conference and
of its Executive Committee to serve for the succeeding year; Mr. Clay was elected
Vice Chairman of the Conference and a member of the Executive Committee;
and Mr. Nickerson, Chairman of the Federal Reserve Bank of New York, was
elected as the other member of the Executive Committee.

388



F.R. BANKS and BRANCHES—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 duties 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 :
Charles A. Beaujon, Jr.. .President, The Canaan National Bank, Canaan,
Conn
1969
William R. Kennedy
President, Merrimack Valley National Bank,
Haverhill, Mass
1970
John Simmen
Chairman of the Board, Industrial National
Bank of Rhode Island, Providence, R.I
1971
Class B:
F. Ray Keyser, Jr

Vice President and General Counsel, Vermont
Marble Company, Proctor, Vt
1969
James R. Carter
Chairman of the Board, Nashua Corporation,
Nashua, N.H
1970
W. Gordon Robertson.. Co-chairman of the Board and Chairman of
the Executive Committee, Bangor Punta
Corporation, Bangor, Maine
'.
1971

Class C.Howard W. Johnson

President, Massachusetts Institute of Technology, Cambridge, Mass
1969
John M. Fox
President, Chairman of the Board, and Chief
Executive Officer, United Fruit Company,
Boston, Mass
1970
James S. Duesenberry.. .Professor of Economics, Harvard University,
Cambridge, Mass
1971




389

F.R. BANKS and BRANCHES—Cont.

DIRECTORS—Cont.
Class A:
Eugene H. Morrison
R. E. McNeill, Jr
C. E. Treman, Jr

District 2—NEW YORK

Term
expires
Dec. 31

President, Orange County Trust Company,
Middletown, N.Y
.. 1969
Chairman of the Board, Manufacturers Hanover Trust Company, New York, N Y
1970
President, Tompkins County Trust Company,
Ithaca, N Y
1971

Class B:
Maurice R. Forman... .President, B. Forman Co., Inc., Rochester,
NY
1969
Arthur K. Watson......Chairman of the Board, IBM World Trade
Corporation, Armonk, N Y
1970
Milton C. Mumford... .Chairman of the Board, Lever Brothers Company, New York, N Y
1971
Class C.Albert L. Nickerson
James M. Hester
Roswell L. Gilpatric

Former Chairman of the Board, Mobil Oil
Corporation, New York, N.Y
1969
.President, New York University, New York,
N.Y
1970
Partner, Cravath, Swaine & Moore, New York,
N.Y
1971

BUFFALO BRANCH

Appointed by Federal Reserve Bank:
E. Perry Spink
Chairman of the Board, Liberty National Bank
and Trust Company, Buffalo, N.Y
Wilmot R. Craig
Chairman of the Board and Chairman of the
Executive Committee, Lincoln Rochester
Trust Company, Rochester, N.Y
Charles L. Hughes
President, The Silver Creek National Bank,
Silver Creek, N.Y
James I. Wyckoff
President, The National Bank of Geneva, N Y .

1969
1970
1970
1971

Appointed by Board of Governors:
Gerald F. Britt
President, L-Brooke Farms, Inc., Byron, N Y . 1969
Robert S. Bennett
General Manager, Lackawanna Plant, Bethlehem Steel Corporation, Buffalo, N.Y
1970
Norman F. Beach
Vice President, Eastman Kodak Company,
Rochester, N.Y
1971

390



F.R. BANKS and BRANCHES—Cont.

DIRECTORS—Com.

District 3—PHILADELPHIA

Class A:
(Vacancy)
H. Lyle Duffey
Harold F. Still, Jr

Term
expires
Dec. 31

1969
Executive Vice President, The First National
Bank, McConnellsburg, Pa
1970
President, Central-Penn National Bank of
Philadelphia, Pa
1971

Class B:
Edward J. Dwyer
President, ESB Incorporated, Philadelphia, Pa. 1969
Philip H.Glatfelter, III. .President, P. H. Glatfelter Co., Spring Grove,
Pa
1970
Henry A. Thouron
President, Hercules Incorporated, Wilmington, Del
1971

Class C:
Bayard L. England
Willis J. Winn

D. Robert Yarnall, Jr

Chairman of the Board, Atlantic City Electric
Company, Atlantic City, N.J
1969
Dean, Wharton School of Finance and Commerce, University of Pennsylvania, Philadelphia, Pa
1970
President, Yarway Corporation, Blue Bell, Pa. 1971

District 4—CLEVELAND
Class A:
Richard R. Hollington. .President, The Ohio Bank and Savings Company, Findlay, Ohio
1969
Seward D. Schooler. . . .President, Coshocton National Bank, Coshocton, Ohio
1970
George F. Karch
Chairman of the Board and Chief Executive
Officer, The Cleveland Trust Company,
Cleveland, Ohio
1971
Class B:
R. Stanley Laing

President, The National Cash Register Company, Dayton, Ohio
1969
John L. Gushman
President and Chief Executive Officer, Anchor
Hocking Corporation, Lancaster, Ohio
1970
J.William Henderson, Jr. President, Buckeye International, Inc., Columbus, Ohio
1971




391

F.R. BANKS and BRANCHES—Cont.

DIRECTORS—Cont.

District 4—CLEVELAND—Cont.

Class C.Albert G. Clay
J. Ward Keener
Horace A. Shepard

Term
expires
Dec. 31

President, Clay Tobacco Company, Mt. Sterling, Ky
1969
Chairman of the Board, The B. F. Goodrich
Company, Akron, Ohio
1970
Chairman of the Board and Chief Executive
Officer, TRW Inc., Cleveland, Ohio
1971

CINCINNATI BRANCH
Appointed by Federal Reserve Bank :
John W. Humphrey. . . .Chairman of the Board, The Philip Carey Manufacturing Company, Cincinnati, Ohio
Robert J. Barth
President, The First National Bank, Dayton,
Ohio
Fletcher E. Nyce
Chairman of the Board and Chief Executive
Officer, The Central Trust Company, Cincinnati, Ohio
Robert B. Johnson
President, Pikeville National Bank & Trust
Company, Pikeville, Ky

1969
1969

1970
1971

Appointed by Board of Governors:
Phillip R. Shriver
President, Miami University, Oxford, Ohio. . . 1969
Orin E. Atkins
President, Ashland Oil & Refining Company,
Ashland, Ky
1970
Graham E. Mtarx
President and General Manager, The G. A.
Gray Company, Cincinnati, Ohio
1971

PITTSBURGH BRANCH
Appointed by Federal Reserve Bank:
Charles M. Beeghly
Chairman of the Executive Committee, 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
Charles H. Bracken
President, Marine National Bank, Erie, Pa

392



1969
1969
1970
1971

F.R. BANKS and BRANCHES—Cont.

DIRECTORS—Cont. District 4—CLEVELAND—Gont.

Term
expires
Dec. 31

PITTSBURGH BRANCH—Cont.

Appointed by Board of Governors:
Lawrence E. Walkley.. .President and Chief Executive Officer, Westinghouse Air Brake Company, Pittsburgh, Pa.. 1969
B. R. Dorsey
President, Gulf Oil Corporation, Pittsburgh, Pa. 1970
Richard M. Cyert
Dean, Graduate School of Industrial Administration, Carnegie-Mellon University, Pittsburgh, Pa
1971
District 5 — R I C H M O N D
Class A.Robert C. Baker

Chairman of the Board and President, American Security and Trust Company, Washington, D.C
1969
Giles H. Miller, Jr
President, The Culpeper National Bank, Culpeper, Va
1970
Douglas D. Monroe, Jr..President, Chesapeake National Bank, Kilmarnock, Va
1971
Class B:
Thaddeus Street
President, Carolina Shipping Company, Charleston, S.C
1969
H. Dail Holderness
President, Carolina Telephone and Telegraph
Company, Tarboro, N.C
1970
Charles D. Lyon
Former President, The Potomac Edison Company, Hagerstown, Md
1971
Class C:
Robert W. Lawson, Jr... Managing Partner of Charleston Office, Steptoe
& Johnson, Charleston, W. Va
1969
Stuart Shumate
President, Richmond, Fredericksburg and Potomac Railroad Company, Richmond, Va
1970
Wilson H. Elkins
President, University of Maryland, College
Park, Md
1971
BALTIMORE BRANCH

Appointed by Federal Reserve Bank:
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, Bank of Ripley, W.
Va
Tilton H. Dobbin
President and Chairman of the Executive Committee, Maryland National Bank, Baltimore,
Md




1969
1970
1970
1971

393

F.R. BANKS and BRANCHES—Cont.

DIRECTORS—Cont.

District 5—RICHMOND—Gont.

Term
expires
Dec. 31

BALTIMORE BRANCH—Cont.
Appointed by Board of Governors:
Arnold J. Kleff, Jr
Manager, Baltimore Refinery, American Smelting and Refining Company, Baltimore, Md.. 1969
John H. Fetting, Jr
President, A. H. Fetting Company, Baltimore,
Md
1970
James M. Jarvis
Chairman of the Board, Jarvis, Downing &
Emch, Inc., Clarksburg, W. Va
1971

CHARLOTTE BRANCH
Appointed by Federal Reserve Bank:
J. Willis Cantey
President, The Citizens and Southern National
Bank, Columbia, S.C
C. C. Cameron
Chairman of the Board and President, First
Union National Bank, Charlotte, N.C
H. Phelps Brooks, Jr
President, The Peoples National Bank, Chester,
S.C
L. D. Coltrane, III
President, The Concord National Bank, Concord, N.C

1969
1970
1970
1971

Appointed by Board of Governors:
James A. Morris
Commissioner, South Carolina Commission on
Higher Education, Columbia, S.C
1969
William B. McGuire
President, Duke Power Company, Charlotte,
N.C
1970
John L. Fraley
Executive Vice President, Carolina Freight
Carriers Corporation, Cherryville, N.C
1971

District 6—ATLANTA
Class A:
William B. Mills
A. L. Ellis
John W. Gay

394



President, The Florida National Bank, Jacksonville, Fla
1969
Chairman of the Board, First National Bank,
Tarpon Springs, Fla
1970
President, The First National Bank, Scottsboro,
Ala
1971

F.R. BANKS and BRANCHES—Cont.

DIRECTORS—Cont.

District 6—ATLANTA—Gont.

Class B:
Philip J. Lee
Hoskins A. Shadow
(Vacancy)
Class C.John A. Hunter
John C. Wilson
Edwin I. Hatch

Term
expires
Dec. 31

Vice President, Tropicana Products, Inc.,
Tampa, Fla
1969
President, Tennessee Valley Nursery, Inc., Winchester, Tenn
1970
1971
President, Louisiana State University, Baton
Rouge, La
1969
President, Home-Wilson, Inc., Atlanta, Ga
1970
President, Georgia Power Company, Atlanta,
Ga
1971
BIRMINGHAM BRANCH

Appointed by Federal Reserve Bank:
Will T. Cothran
Chairman of the Board, Birmingham Trust
National Bank, Birmingham, Ala
Arthur L. Johnson..... President, Camden National Bank, Camden,
Ala
George A. LeMaistre... President, City National Bank, Tuscaloosa, Ala.
K. M. Varner, Jr
President, The First National Bank, Auburn,
Ala

1969
1970
1970
1971

Appointed by Board of Governors:
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
W. Cecil Bauer
President, South Central Bell Telephone Company, Birmingham, Ala
1971
JACKSONVILLE BRANCH

Appointed by Federal Reserve Bank:
L. V. Chappell
President, First National Bank, Clearwater, Fla.
Harry Hood Bassett
Chairman of the Board, The First National
Bank, Miami, Fla
John Y. Humphress.... Executive Vice President, Capital City First
National Bank, Tallahassee, Fla
Edward W. Lane, Jr.. .. President, The Atlantic National Bank, Jacksonville, Fla




1969
1970
1970
1971

395

F.R. BANKS and BRANCHES—Cont.

DIRECTORS—Cont.

District 6—ATLANTA—Gont.

Term
expires
Dec. 31

JACKSONVILLE BRANCH—Cont.
Appointed by Board of Governors:

Henry K. Stanford
Henry Cragg...,
Castle W. Jordan

President, University of Miami, Coral Gables,
Fla
1969
Vice President, Coca-Cola Company Foods
Division, Orlando, Fla
1970
President, AO Industries, Inc., Coral Gables,
Fla
1971

NASHVILLE BRANCH

Appointed by Federal Reserve Bank:
Andrew Benedict.
Chairman of the Board, 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..
Hugh M. Willson
President, Citizens National Bank, Athens,
Tenn

1969
1970
1970
1971

Appointed by Board of Governors:

James E. Ward
Robert M. Williams
Edward J. Boling

Chairman of the Board, Baird-Ward Printing
Company, Nashville, Tenn
1969
President, ARO, Inc., Tullahoma, Tenn
1970
Vice President, Development and Administration, The University of Tennessee, Knoxville,
Tenn
1971

NEW ORLEANS BRANCH
Appointed by Federal Reserve Bank:

A. L. Gottsche
Lucien J. Hebert, Jr
Morgan Whitney
E. W. Haining

396



Executive Vice President, First Mississippi National Bank, Biloxi, Miss
Executive Vice President, Lafourche National
Bank, Thibodaux, La
Senior Vice President, Whitney National Bank,
New Orleans, La
President, The First National Bank of Vicksburg, Miss

1969
1970
1970
1971

F.R. BANKS and BRANCHES—Cont.

DIRECTORS—Cont.

District 6—ATLANTA—Gont.

Term
expires
Dec. 31

NEW ORLEANS BRANCH—Cont.

Appointed by Board of Governors:
George B. Blair
General Manager, American Rice Growers Cooperative Association, Lake Charles, La
1969
Robert H. Radcliff, Jr...President, Southern Industries Corporation,
Mobile, Ala
1970
Frank G. Smith
Vice President, Mississippi Power & Light Company, Jackson, Miss
1971

District 7—CHICAGO
Class A:
Kenneth V. Zwiener
Melvin C. Lockard
Floyd F. Whitmore

Chairman of the Board, Harris Trust and Savings Bank, Chicago, 111
1969
President, First National Bank, Mattoon, 111... 1970
President, The Okey-Vernon National Bank,
Corning, Iowa
1971

Class B:
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
Joseph O. Waymire
Former Vice President for Finance and Treasurer, Eli Lilly and Company, Indianapolis,
Ind
1971
Class C.Emerson G. Higdon.... President, The Maytag Company, Newton,
Iowa
1969
Franklin J. Lunding.... Chairman of the Finance Committee, Jewel
Companies, Inc., Melrose Park, 111
1970
William H. Franklin
President, Caterpillar Tractor Co., Peoria, 111.. 1971




397

F.R. BANKS and BRANCHES—Cont.

DIRECTORS—Cont.

District 7—CHICAGO—Cont.

Term
expires
Dec. 31

DETROIT BRANCH

Appointed by Federal Reserve Bank:
John H. French, Jr
President, City National Bank, Detroit, Mich..
George L. Whyel
President, Genesee Merchants Bank & Trust
Company, Flint, Mich
Raymond T. Perring... .Chairman of the Board, The Detroit Bank and
Trust Company, Detroit, Mich
B. P. Sherwood, Jr
President, Security First Bank & Trust Company, Grand Haven, Mich

1969
1969
1970
1971

Appointed by Board of Governors:
Max P. Heavenrich, Jr. .President, Heavenrich's, Saginaw, Mich
1969
L. Wm. Seidman
Resident Partner, Seidman & Seidman, Grand
Rapids, Mich
1970
Peter B. Clark
Chairman of the Board and President, The
Detroit News, Detroit, Mich
1971

District 8—ST. LOUIS
Class A:
Cecil W. Cupp, Jr
Bradford Brett
James P. Hickok
Class B:
Roland W. Richards
Mark Townsend
Sherwood J. Smith

Class C.Sam Cooper

President, Arkansas Bank & Trust Company,
Hot Springs, Ark
1969
President, First National Bank, Mexico, Mo., 1970
Chairman of the Board, First National Bank in
St. Louis, Mo
1971
Senior Vice President, Laclede Steel Company,
St. Louis, Mo
1969
Chairman of the Board, Townsend Lumber
Company, Inc., Stuttgart, Ark
1970
Vice President, D/P Computer Services, Inc.,
Evansville, Ind
1971

President, HumKo Products, Division of Kraftco Corporation, Memphis, Tenn
1969
Smith D. Broadbent, Jr.. Broadbent Hybrid Seed Co., Cadiz, Ky
1970
Frederic M. Peirce
Chairman of the Board and Chief Executive
Officer, General American Life Insurance
Company, St. Louis, Mo
1971

398



F.R. BANKS and BRANCHES—Cont.

DIRECTORS—Cont.

District 8—ST. LOUIS—Cont.

Term
expires
Dec. 31

LITTLE ROCK BRANCH

Appointed by Federal Reserve Bank:
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 and Chief Executive Officer, Worthen
Bank & Trust Company, Little Rock, Ark...
Louis E. Hurley
Chairman of the Board, The Exchange Bank &
Trust Company, El Dorado, Ark

1969
1969
1970
1971

Appointed by Board of Governors:
Jake Hartz, Jr
President, Jacob Hartz Seed Co. Inc., Stuttgart,
Ark
1969
Fred I. Brown, Jr
President, Arkansas Foundry Company, Little
Rock, Ark
1970
Al Pollard
President, Brooks-Pollard Company, Little
Rock, Ark
1971

LOUISVILLE BRANCH

Appointed by Federal Reserve Bank:
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
Hugh M. Shwab
Vice Chairman of the Board, First National
Bank of Louisville, Ky

1969
1969
1970
1971

Appointed by Board of Governors:
John G. Beam
President, Thomas Industries Inc., Louisville,
Ky
1969
Harry M. Young, J r . . . . Farmer, Herndon, Ky
1970
Ronald E. Reitmeier... .President, Catalysts and Chemicals Inc.,
Louisville, Ky
1971




399

F.R. BANKS and BRANCHES—Cont.

DIRECTORS—Cont.

District 8—ST. LOUIS—Cont.

Term
expires
Dec. 31

MEMPHIS BRANCH
Appointed by Federal Reserve Bank:
Allen Morgan
Chairman of the Board, The First National
Bank of Memphis, Tenn
Con T. Welch
President, Citizens Bank, Savannah, Tenn
J. J. White
President, Helena National Bank, Helena, Ark.
Wade W. Hollowell
President, The First National Bank of Greenville, Miss

1969
1969
1970
1971

Appointed by Board of Governors:
William L. Giles
President, Mississippi State University, State
College, Miss
1969
Alvin Huffman, Jr
President, Huffman Brothers Inc., Blytheville,
Ark
1970
C. Whitney Brown
President, S. C. Toof & Company, Memphis,
Tenn
1971

District 9—MINNEAPOLIS
Class A:
John Bosshard

Executive Vice President, The First National
Bank, Bangor, Wis
1969
Warren F. Vaughan.... President, Security Trust & Savings Bank, Billings, Mont
1970
G. A. Dahlen
President, First National Bank, Ironwood,
Mich
1971

Class B.Leo C. Studness
Dale V. Andersen
John H. Bailey

Class C:
David M. Lilly
Byron W. Reeve
Robert F. Leach

400



Manager, Studness Company, Devils Lake,
N. Dak
1969
President, Mitchell Packing Company, Inc.,
Mitchell, S. Dak
1970
President, The Cretex Companies, Inc., Elk
River, Minn
1971

Chairman of the Board, Toro Manufacturing
Corporation, Minneapolis, Minn
1969
.President, Lake Shore, Inc., Iron Mountain,
Mich
1970
Attorney, Oppenheimer, Hodgson, Brown,
Wolff and Leach, St. Paul, Minn
1971

F.R. BANKS and BRANCHES—Cont.

DiRECTORS-Cont.

District 9—MINNEAPOLIS—Gont.

Term
expires
Dec. 31

HELENA BRANCH

Appointed by Federal Reserve Bank:
B. Meyer Harris
President, The Yellowstone Bank, Laurel,
Mont
1969
Charles H. Brocksmith.. President, First Security Bank of Glasgow
N. A., Glasgow, Mont
1970
Glenn H. Larson
President, First State Bank, Thompson Falls,
Mont
1970
Appointed by Board of Governors:
Edwin G. Koch
President, Montana College of Mineral Science
and Technology, Butte, Mont
1969
Warren B. Jones
Secretary-Treasurer, Two Dot Land & Livestock Co., Harlowton, Mont
1970

District 10—KANSAS CITY
Class A:
Eugene H. Adams
C M. Miller
John A. O'Leary
Class B.Cecil O. Emrich
Alfred E. Jordan
Stanley Learned

President, The First National Bank, Denver,
Colo
1969
President, The Farmers & Merchants State
Bank, Colby, Kans
1970
Chairman of the Board, The Peoples State
Bank, Luray, Kans
1971
Manager, Norfolk Livestock Market, Inc.,
Norfolk, Nebr
1969
Vice President, Trans World Airlines, Inc.,
Kansas City, Mo
1970
Member of Finance Committee, Phillips Petroleum Company, Bartlesville, Okla
1971

Class C:
Willard D. Hosford, Jr..Vice President and General Manager, John
Deere Company, Omaha, Nebr
1969
Dolph Simons
Editor, Journal-World, Lawrence, Kans
1970
Robert W. Wagstaff
President, Kansas City Coca-Cola Bottling
Company, Kansas City, Mo
1971




401

F.R. BANKS and BRANCHES—Cont.

DIRECTORS-Cont.

District 10—KANSAS CITY—Gont.

Term
expires
Dec. 31

DENVER BRANCH
Appointed by Federal Reserve Bank:

Armin B. Barney
Theodore D. Brown
Robert L. Tripp.

Chairman of the Board, The Colorado Springs
National Bank, Colorado Springs, Colo
1969
President, The Security State Bank, Sterling,
Colo
1970
President, Albuquerque National Bank, Albuquerque, N. Mex
1970

Appointed by Board of Governors:

Cris Dobbins
David R. C. Brown

Chairman of the Board and President, Ideal
Basic Industries, Inc., Denver, Colo
1969
President, The Aspen Skiing Corporation,
Aspen, Colo..
1970

OKLAHOMA CITY BRANCH
Appointed by Federal Reserve Bank:

Howard J. Bozarth

Vice Chairman of the Board, The Fidelity
National Bank and Trust Company, Oklahoma City, Okla
1969
Charley M. Crawford.. .President, First National Bank, Frederick, Okla. 1970
Marvin Millard
Chairman of the Board, National Bank of
Tulsa, Okla
1970
Appointed by Board of Governors:

C. W. Flint, Jr
F. W. Zaloudek

Chairman of the Board, Flint Steel Corporation, Tulsa, Okla
1969
Manager, J. I. Case Implements, Kremlin, Okla. 1970

OMAHA BRANCH
Appointed by Federal Reserve Bank:

John W. Hay, Jr
S. N. Wolbach
Edward W. Lyman

402



President, Rock Springs National Bank, Rock
Springs, Wyo
1969
President, First National Bank, Grand Island,
Nebr
1969
President, The United States National Bank,
Omaha, Nebr
1970

F.R. BANKS and BRANCHES—Cont.

DIRECTORS—Cont.

District 10—KANSAS CITY—Gont.

Term
expires
Dec. 31

OMAHA BRANCH—Cont.

Appointed by Board of Governors:

A. James Ebel
Henry Y. Kleinkauf

Vice President and General Manager, Cornhusker Television Corporation, Lincoln,
Nebr
1969
President, Natkin & Company, Omaha, Nebr.. 1970

District 11—DALLAS
Class A:

Murray Kyger
J. V. Kelly
A. W. Riter, Jr

Chairman of the Board, The First National
Bank, Fort Worth, Tex
1969
President, The Peoples National Bank of
Belton, Tex
1970
President, The Peoples National Bank, Tyler,
Tex
1971

Class B:

C. A. Tatum, Jr
Carl D. Newton
Hugh F. Steen
Class C.Max Levine
Carl J. Thomsen
Chas. F. Jones




President and Chief Executive Officer, Texas
Utilities Company, Dallas, Tex
1969
President, Fox-Stanley Photo Products, Inc.,
San Antonio, Tex
1970
President, El Paso Natural Gas Company, El
Paso, Tex
1971
Retired Chairman of the Board, Foley's,
Houston, Tex
1969
Senior Vice President, Texas Instruments Incorporated, Dallas, Tex
1970
President, Humble Oil & Refining Company,
Houston, Tex
1971

403

F.R. BANKS and BRANCHES—Cont.

DIRECTORS—Cont.

District 11—DALLAS—Cont.

Term
expires
Dec. 31

EL PASO BRANCH

Appointed by Federal Reserve Bank:
Robert W. Heyer
Consultant, Southern Arizona Bank & Trust
Company, Tucson, Ariz
Archie B. Scott
President, The Security State Bank of Pecos,
Tex
C. J. Kelly
President, The First National Bank of Midland,
Tex
Joe B. Siisler
President, The Clovis National Bank, Clovis,
N. Mex

1969
1969
1970
1971

Appointed by Board of Governors:
C. Robert McNally, Jr. .Rancher, Roswell, N. Mex
1969
Gordon W. Foster
Vice President, Farah Manufacturing Company,
Inc., El Paso, Tex
1970
Joseph M. Ray
Benedict Professor of Political Science, The
University of Texas at El Paso, Tex
1971

HOUSTON BRANCH

Appointed by Federal Reserve Bank:
W. G. Thornell
President, The First National Bank of Port
Arthur, Tex
John E. Whitmore
Chairman of the Board, Texas National Bank
of Commerce, Houston, Tex
A. G. McNeese, Jr
Chairman of the Board, Bank of the Southwest
National Association, Houston, Tex
Henry B. Clay
President, First Bank & Trust, Bryan, Tex

1969
1969
1970
1971

Appointed by Board of Governors:
Geo. T. Morse, Jr
President and General Manager, Peden Iron &
Steel Company, Houston, Tex
1969
M. Steele Wright, J r . . . . President and General Manager, Texas Farm
Products Company, Nacogdoches, Tex
1970
R. M. Eiuckley
President, Eastex Incorporated, Silsbee, Tex... 1971

404



F.R. BANKS and BRANCHES—Cont.

DIRECTORS—Cont.

District 11—DALLAS—Gont.

Term
expires
Dec. 31

SAN ANTONIO BRANCH

Appointed by Federal Reserve Bank:
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, San
Antonio, Tex
Ray M. Keck, Jr
President, Union National Bank of Laredo,
Tex
James T. Denton, J r . . . . President, Corpus Christi Bank and Trust,
Corpus Christi, Tex
Appointed by Board of Governors:
W. A. Belcher
Veterinarian and Rancher, Brackettville, Tex..
Lloyd M. Knowlton
General Manager and Partner, Knowlton's
Creamery, San Antonio, Tex
Francis B. May
Professor of Business Statistics, The University
of Texas, Austin, Tex

1969
1969
1970
1971
1969
1970
1971

District 12—SAN FRANCISCO
Class A:
Carroll F. Byrd

President, The First National Bank, Willows,
Calif.
1969
Charles F. Frankland.. .Chairman of the Board, The Pacific National
Bank, Seattle, Wash
1970
Ralph V. Arnold
Chairman of the Board and Chief Executive
Officer, First National Bank and Trust Company, Ontario, Calif.
1971

Class B:
Joseph Rosenblatt

Honorary Chairman of the Board, The Eimco
Corporation, Salt Lake City, Utah
1969
Marron Kendrick
President, Schlage Lock Company, San Francisco, Calif.
1970
Herbert D. Armstrong. .Treasurer, Standard Oil Company of California,
San Francisco, Calif
1971

Class C:
S. Alfred Halgren

Senior Vice President, Carnation Company,
Los Angeles, Calif.
1969
O. Meredith Wilson. .. .President and Director, Center for Advanced
Study in the Behavioral Sciences, Stanford,
Calif
1970
Bernard T. Rocca, Jr.... Chairman of the Board, Pacific Vegetable Oil
Corporation, San Francisco, Calif.
1971




405

F.R. BANKS and BRANCHES—Cont.

DIRECTOR;}—Com District 12—SAN FRANCISCO—Cont.

Term
expires
Dec. 31

LOS ANGELES BRANCH

Appointed by Federal Reserve Bank:
Sherman Hazeltine
Chairman of the Board, First National Bank' of
Arizona, Phoenix, Ariz
T. H. Shearin.
President, Community National Bank, Bakersfield, Calif
Carl E. Schroeder
President, The First National Bank of Orange
County, Orange, Calif.
Harry J. Yolk
Chairman of the Board and Chief Executive
Officer, Union Bank, Los Angeles, Calif....

1969
1970
1970
1970

Appointed by Board of Governors:
Leland D. Pratt
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
J. Leland Atwood
President and Chief Executive Officer, North
American Rockwell Corporation, El Segundo, Calif.
1971
PORTLAND BRANCH

Appointed by Federal Reserve Bank:
Ralph J. Voss
President, First National Bank of Oregon,
Portland, Oreg
1969
James H. Stanard
Vice President, First National Bank, McMinnville, Oreg
1970
E. W. Firstenburg
Chairman of the Board and President, First
Independent Bank, Vancouver, Wash
1970
Appointed by Board of Governors:
Frank Anderson
Farmer, Heppner, Oreg
1969
Robert F. Dwyer
Dwyer Forest Products Company, Portland,
Oreg
. . . . 1970
SALT LAKE CITY BRANCH

Appointed by Federal Reserve Bank:
William E. Irvin
President, The Idaho First National Bank,
Boise, Idaho
1969
Newell B. Dayton
Chairman of the Board, Tracy-Collins Bank
and Trust Company, Salt Lake City, Utah.. 1970
Roderick H. Browning. .President, Bank of Utah, Ogden, Utah
1970

406



F.R. BANKS and BRANCHES—Cont.

DIRECTORS—Cont.

District 12—SAN FRANCISCO—Gont.

Term
expires
Dec. 31

SALT LAKE CITY BRANCH^Cont.

Appointed by Board of Governors:
Royden G. Derrick
President and General Manager, Western Steel
Company, Salt Lake City, Utah
1969
Peter E. Marble
Rancher, Deeth, Nev
1970

SEATTLE BRANCH

Appointed by Federal Reserve Bank:
Maxwell Carlson
President, The National Bank of Commerce of
Seattle, Wash
1969
A. E. Saunders
President, Puget Sound National Bank, Tacoma,
Wash
1970
Philip H. Stanton
President, Washington Trust Bank, Spokane,
Wash
1970
Appointed by Board of Governors:
William McGregor
Vice President, McGregor Land & Livestock
Company, Hooper, Wash
1969
C. Henry Bacon, Jr
President, Simpson Timber Company, Seattle,
Wash
1970




407

F.R. BANKS and BRANCHES—Cont.
PRESIDENTS and VICE PRESIDENTS

Federal
Reserve
Bank

President
First Vice President

Vice Presidents

or branch
Boston

Frank E. Morris
E. O. Latham

New York... Alfred Hayes

William F. Treiber

Buffalo
Philadelphia. Karl R. Bopp

Robert N. Hilkert

Cleveland...

Cincinnati
Pittsburgh
Richmond...

D. Harry Angney
Lee J. Aubrey
R. W. Eisenmenger
Harry R. Mitiguy
J. M. Thayer, Jr.
Parker B. Willis

Daniel Aquilino
Ansgar R. Berge
Luther M. Hoyle, Jr.
Laurence H. Stone
G. Gordon Watts

W. H. Braun, Jr.
John J. Clarke
Charles A. Coombs Richard A. Debs
Peter Fousek
Edward G. Guy
Marcus A. Harris
Alan R. Holmes
Robert G. Link
Fred W. Piderit, Jr.
Peter D. Sternlight T. M. Timlen, Jr.
Thomas O. Waage
Angus A. Maclnnes, Jr.
Edward A. Aff
Joseph R. Campbell
David P. Eastburn
William A. James
G. William Metz

Hugh Barrie
Norman G. Dash
Ralph E. Haas
David C. Melnicoff
James V. Vergari

W. Braddock Hickman George E. Booth, Jr. Paul Breidenbach
Walter H.MacDonald Roger R. Clouse
Elmer F. Fricek
William H.Hendricks William J. Hocter
John J. Hoy
Harry W. Huning
Frederick S. Kelly Clifford G. Miller
Fred O. Kiel
Clyde E. Harrell
Aubrey N. Heflin
Robert P. Black

Baltimore
Charlotte

408



J. G. Dickerson, Jr. W. S. Farmer
William C. Glover Upton S. Martin
J. R. Monhollon
Arthur V. Myers, Jr.
James Parthemos
John L. Nosker
Aubrey N. Snellings
R. E. Sanders, Jr.
William F. Upshaw Joseph F. Viverette
D. F. Hagner
H. Lee Boatwright, III
A. A. Stewart, Jr.
E. F. MacDonald
Stuart P. Fishburne

F.R. BANKS and BRANCHES—Cont.
PRESIDENTS and VICE PRESIDENTS—Cont.

Federal
Reserve
Bank
or branch
Atlanta

President
First Vice President

Monroe Kimbrel
Kyle K. Fossum

Vice Presidents

Harry Brandt
Billy H. Hargett
J. E. McCorvey
Richard A. Sanders
Charles T. Taylor

W. M. Davis
R. E. Moody, Jr.
Brown R. Rawlings
R. M. Stephenson

BirmingDan L. Hendley

ham
Jacksonville
Nashville
New
Orleans
Chicago

Edward C. Rainey
Jeffrey J. Wells
Arthur H. Kantner
Charles J. Scanlon
Hugh J. Helmer

Ernest T. Baughman Carl E. Bierbauer
George W. Cloos
LeRoy A. Davis
Elbert O. Fults
A. M. Gustavson
Edward A. Heath
Laurence H. Jones
Ward J. Larson
Richard A. Moffatt
James R. Morrison Karl A. Scheld
Harry S. Schultz
Bruce L. Smyth
Joseph Srp, Jr.
Lynn A. Stiles
Jack P. Thompson
Daniel M. Doyle
G. W. Lamphere

Darryl R. Francis
Dale M. Lewis

Leonall C. Andersen
Gerald T. Dunne
Wilbur H. Isbell
Jerry L. Jordan
John W. Menges
Howard H. Weigel

Detroit
St. Louis

jLittie
Rock
Louisville
Memphis
Minneapolis. Hugh D. Galusha, Jr.
M. H. Strothman, Jr.

Helena




Marvin L. Bennett
W. W. Gilmore
Homer Jones
Stephen Koptis
F. G. Russell, Jr.
Joseph C. Wotawa

John F. Breen
Donald L. Henry
Eugene A. Leonard
F. J. Cramer
Ralph J. Dreitzler
L. W. Fernelius
L. G. Gable
C. W. Groth
Douglas R. Hellweg
John A. MacDonald Clarence W. Nelson
J. P. Olin
Clement A. Van Nice
Robert W. Worcester
Howard L. Knous

409

F.R. BANKS and BRANCHES—Cont.
PRESIDENTS and VICE PRESIDENTS—Cont.

Federal
Reserve
Bank

President
First Vice President

Vice Presidents

or branch
Kansas City.. George H. Clay
John T. Boysen

Denver
Oklahoma
City
Omaha
Dallas

Wilbur T. Billington D. R. Cawthorne
Raymond J. Doll
J. R. Euans
C. F. Griswold, Jr. M. L. Mothersead
Maurice J. Swords Robert E. Thomas
Clarence W. Tow
John W. Snider
Howard W. Pritz
George C. Rankin

Philip E. Coldwell
T. W. Plant

El Paso
Houston
San
Antonio
San
Francisco.. Eliot J. Swan
A. B. Merritt
Los
Angeles
Portland
Salt Lake
City
Seattle

410



R. E. Bohne
Robert H. Boykin
James L. Cauthen
Leon W. Cowan
Ralph T. Green
James A. Parker
W. M. Pritchett
Tony J. Salvaggio
Thomas R. Sullivan E. W. Vorlop, Jr.
Fredric W. Reed
J. Lee Cook
Carl H. Moore
J. Howard Craven
Irwin L. Jennings
E. J. Martens
J. B. Williams

D. M. Davenport
Gerald R. Kelly
R. Maurer, Jr.

P. W. Cavan
W. G. DeVries
William M. Brown
Arthur L. Price
W. R. Sandstrom

F.R. BANKS and BRANCHES—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. Scanlon,
President of the Federal Reserve Bank of Chicago, and Mr. Hickman, President
of the Federal Reserve Bank of Cleveland, were elected Chairman of the Conference and Vice Chairman, respectively, in March 1969, and served in these
capacities during the remainder of 1969.
Mr. Wm. J. Hocter then of the Federal Reserve Bank of Chicago. and Mr.
Lester M. Selby of the Federal Reserve Bank of Cleveland were appointed
Secretary of the Conference and Assistant Secretary, respectively, in March
1969. Mr. Selby served for the remainder of the year. Mr. Arthur G. Stone of
the Federal Reserve Bank of Chicago was appointed Secretary at the June 23,
1969, meeting and served for the remainder of the year.

CONFERENCE OF FIRST VICE PRESIDENTS
In 1969 a Conference of First Vice Presidents was organized to meet from time
to time, primarily for the consideration of operational matters. Mr. Helmer, First
Vice President of the Federal Reserve Bank of Chicago, and Mr. MacDonald, First
Vice President of the Federal Reserve Bank of Cleveland, were selected as Chairman of the Conference and Vice Chairman, respectively.
In May 1969 Mr. Arthur G. Stone and Mr. Lester M. Selby were appointed
Secretary of the Conference and Assistant Secretary, respectively.




411

Index
Page

Acceptance powers of member banks
312
Acceptances, bankers':
Authority to purchase and enter into repurchase agreements
96-97
Federal Reserve Bank holdings
318, 326, 328, 330
Federal Reserve earnings on
318, 336
Open market transactions during 1969
,
334
Assets and liabilities:
Banks, by classes
350
Board of Governors
322
Federal Reserve Banks
326-31
Balance of payments {See U.S. balance of payments)
Bank Examination Schools
315
Bank examiners, home mortgage loans to, legislative recommendation. . 300
Bank holding companies:
Board actions with respect to
311
Litigation
307
Bank Holding Company Act, legislative recommendations
300
Bank mergers and consolidations
310, 355-81
Bank premises, Federal Reserve Banks and branches. .320, 326, 328, 330, 335
Bank supervision and regulation by Federal Reserve System
308-15
Banking offices:
Changes in number
351
Par and nonpar offices, number
353
Board of Governors:
Audit of accounts
321
Building annex
321
Delegation of authority, actions under
314
Income and expenses
321-24
Legislative recommendations
300-06
Litigation
307
Members and officers
384
Policy actions
69-93
Regulations {See Regulations)
Salaries:
Legislation regarding
299
Total for 1969
323
Truth in Lending {See Truth in Lending)
Branch banks:
Banks, by classes, changes in number
351

412



INDEX
Page
Branch banks—Continued
Federal Reserve:
Bank premises
Directors
Vice Presidents in charge
Foreign branches of member banks:
Certain deposits of, new requirement against, amendments to
Regulations D and M
Certain transactions involving member banks and,
amendment to Regulation D to limit
Number

320, 335
389-407
408-10
85
82
312

Capital accounts:
Banks, by classes
350
Federal Reserve Banks
327, 329, 331
Chairmen and Deputy Chairmen of Federal Reserve Banks
388
Clearing and collection:
Checks, collection of, and other items, amendment to Regulation J
regarding litigation
86
Par clearance, legislative recommendation
300
Volume of operations
340
Commercial banks:
Assets and liabilities
350
Banking offices, changes in number
351
Foreign credit restraint program
55-59, 73, 88
Number, by class of bank
350
Par clearance, legislative recommendation
300
Commercial paper as deposits, rate limitations and
reserve requirements against
298
Condition reports of State member banks, technical amendments to
Regulation H
72
Condition statement of Federal Reserve Banks
326-31
Credit:
Emergency facilities for nonmember depositary institutions
92
Equity funding plans or programs, amendments to Regulations
G, T, and U limiting credit for purchase of
80
Legislative recommendation on credit cards
305
Over-the-counter stocks, margin requirements for, amendments
to Regulations G, T, and U
78
Truth in Lending (See Truth in Lending)
Credit markets and financial flows
13-28
Defense Production Act, repeal of certain provisions
Defense production loans




298
87, 318, 341

413

INDEX
Page
Demands, resource use, and prices
29-45
Deposits:
Banks, by classes
350
Federal Reserve Banks
327, 329, 331, 347, 349
Foreign branches of member banks, reserve requirement against
certain deposits, amendments to Regulations D and M
85
Liability on repurchase agreements as deposits, amendments to
Regulations D and Q
83
Reserve requirements (See Reserve requirements)
Time and savings deposits:
Adve rtising of interest, amendment to Regulation Q
80
Federal insurance coverage, increase
298
Foreign time deposits, exemption of interest on certain deposits
87
Maximum permissible interest rates on:
Flexible authority to set, extension of law
298
Table
342
Reserve requirements against demand deposits, increase
74
Deputy Chairmen of Federal Reserve Banks
388
Directors, Federal Reserve Banks and branches
389-407
Discount rates at Federal Reserve Banks:
Approval of increase
74
Disapprovals of proposed increases
70, 77
Table of rates
345
Discounts and advances by Federal Reserve Banks:
Collateral for Federal Reserve credit:
Amendment to Regulation A, and issuance of amended interpretation.
76
Legislative recommendation
300
Earnings on
318, 336
Volume
318, 326, 328, 330, 340, 346, 348
Dividends, Federal Reserve Banks
316, 337, 338
Earnings, Federal Reserve Banks
316, 336, 338
Equity funding plans or programs, amendments to Regulation G,
T, and IT limiting credit for purchase of
80
Euro-dolkrs (See also U.S. balance of payments):
Reserves against Euro-dollar borrowings by member banks, legislation 298
Use in L969
47, 51-53
Examinations:
Federal Reserve Banks
316
Foreign banking and financing corporations
314
Member banks
308
State member banks
308
Executive officers of member banks, loans to, reporting requirements.... 309

414



INDEX
Page
Expenses:
Board of Governors
Federal Reserve Banks

321-24
316, 336, 338

Federal Advisory Council
387
Federal agency obligations:
Federal Reserve Bank holdings
318, 326, 328, 330
Open market transactions of Federal Reserve System
during 1969
334
Federal Open Market Committee:
Audit of System Account
316
Continuing authorizations...
126
Domestic securities operations, review
208, 209-55
Foreign currency operations, review
53-55, 208, 256-97
Meetings
95, 386
Members and officers
386
Policy actions
95-207
Federal Reserve Act:
Section 10, amendment, salaries of members of Board of Governors
299
Federal Reserve Agents
388
Federal Reserve Banks:
Advances by:
Amendment to Regulation A, and issuance of amended interpretation
76
Collateral for, legislative recommendation
300
Assessment for expenses of Board of Governors
323, 336
Bank premises
320, 326, 328, 330, 335
Branches (See Branch banks, Federal Reserve)
Capital accounts
327, 329, 331
Chairmen and Deputy Chairmen
388
Collection of checks and other items, amendment to
Regulation J regarding litigation
86
Condition statement
326-31
Directors
389-407
Discount rates (See Discount rates)
Dividends
316, 337, 338
Earnings and expenses
316, 336, 338
Emergency credit facilities for nonmember depositary
institutions
92
Examination
316
Federal agency obligations (See Federal agency obligations)
Foreign and international accounts
319
Lending authority
76, 300
Officers and employees, number and salaries
341




415

INDEX
Page
Federal Reserve Banks—Continued
Presidents and Vice Presidents
408-10
Profit and loss
337
Purchase of obligations of foreign govts., legislative
recommendation
300
Security devices and procedures for, adoption of Regulation P
69
U.S. Govt. securities (See U.S. Govt. securities)
Volume of operations
318, 340
Federal Reserve notes:
Condition statement data
326-31
Cost oi: printing, issue, and redemption
323
Interest paid to Treasury
316, 337, 338
Federal Reserve System:
Bank supervision and regulation by
308-15
Foreign credit restraint program
55-59, 73, 88
Foreign currency operations (See Foreign1 currency operations)
Map of Federal Reserve districts
382
Membership
310
Training activities
315
Financial flows and credit markets
13-28
Foreign banking and financing corporations:
Amendment to Regulation K
69
Examination and operation
312, 314
Foreign branches of member banks (See Branch banks)
Foreign credit restraint program
55-59, 73, 88
Foreign currency operations:
Authorization and directive
96, 98-103, 122, 126, 147, 179, 190
Federal Reserve earnings on foreign currencies
336
Investment by Reserve Banks of foreign currencies in obligations of
foreign govts., legislative recommendation
300
Review
53-55, 208, 256-97
Foreign deposits:
Exemption of interest on certain time deposits
87
Reserve requirements against certain deposits, amendments to
Regulations D and M
85
Gold:
Developments relating to
62-64
Tables showing gold certificate accounts of Reserve
Banks and gold stock
326, 328, 329, 330, 331, 346, 348
Guidelines for banks and nonbank financial institutions
55-59, 73, 88
Home mortgage loans to bank examiners, legislative recommendation....

416



300

INDEX
Page
Insured commercial banks:
Assets and liabilities
350
Banking offices, changes in number
. 351
Federal insurance coverage of deposits, increase
298
Graduated reserve requirements on deposits, legislative recommendation 300
Par clearance, legislative recommendation
300
Interest on deposits:
Advertising of, amendment to Regulation Q
80
Exemption of interest on certain foreign time deposits
87
Maximum rates on deposits or share accounts, flexible
authority for supervisory agencies to set, extension of law
298
Interest rates:
Discount rates at Federal Reserve Banks {See Discount rates)
Regulation V loans
87, 319, 341
Time and savings deposits:
Exemption of interest on certain foreign time deposits
87
Maximum rates on deposits or share accounts, flexible authority
for supervisory agencies to set, extension of law
298
Table of maximum permissible rates
342
Interlocking relationships between securities companies and member
banks, amendment to Regulation R
90
International Monetary Fund
59-65
(See also Special Drawing Rights)
International payments and reserves, review
46-65
Investments:
Banks, by classes
350
Federal Reserve Banks
326, 328, 330
Legislation:
Bank examiners, home mortgage loans to, legislative recommendation
Bank Holding Company Act, legislative recommendations
Collateral for advances by Reserve Banks, legislative recommendation
Commercial paper as deposits, rate limitations and
reserve requirements against
Credit cards, legislative recommendation
Defense Production Act, repeal of certain provisions
Federal insurance coverage of deposits and accounts, increase
Lending authority of Reserve Banks, legislative recommendation
Par clearance, legislative recommendation
Purchase of obligations of foreign govts. by Reserve Banks,
legislative recommendation
Rate ceilings on deposits or share accounts, flexible authority for
Federal supervisory agencies to set maximum, extension
Reserve requirements, graduated, on deposits, legislative recommendation




300
300
300
298
305
298
298
300
300
300
298
300

417

INDEX
Page
Legislation—Continued
Reserves against Euro-dollar borrowings by member banks
298
Salaries of members of the Board of Governors
299
Selective credit controls
298
State taxation of national banks
298
Litigation:
Investment Company Institute, et al. v. Camp
307
United States v. First at Orlando Corporation, et al
307
Loans:
Advances by Reserve Banks (See Federal Reserve Banks)
Banks, by classes
350
Defense production (Regulation V) loans
87, 319, 341
Euro-dollar borrowings by member banks, reserves against
298
Executive officers of member banks, loans to, reporting requirements. . 309
Home mortgage loans to bank examiners, legislative recommendation. . 300
Margin requirements:
Over-the-counter stocks and equity funding plans or programs,
amendments to Regulations G, T, and U
Table
Member banks:
Acceptance powers
Advances by Reserve Banks to (See Federal Reserve Banks)
Advertising of interest on deposits, amendment to Regulation Q
Assets, liabilities, and capital accounts
Banking offices, changes in number
Commercial paper issued by, rate limitations and reserve
requirements against
Euro-dollar borrowings, reserves against
Examination
Executive officers of, loans to, reporting requirements
Foreign branches (See Branch banks)
Interlocking relationships between securities companies and,
amendment to Regulation R
Number
Par clearance, legislative recommendation
Reserve requirements (See Reserve requirements)
Reserves and related items
Membership in Federal Reserve System
Mergers (See Bank mergers and consolidations)
Monetary policy:
Digest of principal policy actions
Review of 1969
Mutual savings banks

418



78, 80
343
312
80
350
351
298
298
308
309
90
310, 350
300
346-49
310

10-12
3-65
350, 351

INDEX
Page
National banks:
Assets and liabilities
350
Banking offices, changes in number
351
Foreign branches, number
312
Litigation
307
Number
310, 350
Reserve requirement against certain foreign branch deposits,
amendments to Regulation ,M
85
State taxation
298
Nonbank financial institutions, foreign credit restraint
program
55-59, 73, 88
Nonmember banks:
Assets and liabilities
350
Banking offices, changes in number
351
Emergency credit facilities for nonmember depositary institutions
92
Over-the-counter securities {See Securities)
Par and nonpar banking offices, number
353
Par clearance, legislative recommendation
300
Policy actions, Board of Governors:
Discount rates at Federal Reserve Banks:
Approval of increase
74
Disapprovals of proposed increases
70, 77
Emergency credit facilities for nonmember depositary institutions
92
Foreign credit restraint program guidelines, revisions
73, 88
Regulations (for details of Board actions, see Regulations,
Board of Governors)
Policy actions, digest of principal Federal Reserve actions
10-12
Policy actions, Federal Open Market Committee:
Authority to effect transactions in System Account, including
current economic policy directive
95-207
Continuing authority directive on domestic operations
96, 178, 187, 202
Continuing authorizations
126
Foreign currency operations, authorization
and directive
96, 98-103, 122, 126, 147, 179, 190
Presidents and Vice Presidents of Federal Reserve Banks:
Conference of Presidents and Conference of First Vice Presidents
411
List
408-10
Salaries
341
Profit and loss, Federal Reserve Banks
337
Record of policy actions {See Policy actions)




419

INDEX
Page
Regulations, Board of Governors:
A, Advemces and Discounts by Federal Reserve Banks:
Amendment, and issuance of amended interpretation
76
D, Reserves of Member Banks:
Certain transactions involving member banks and
foreign branches, amendment to limit
82
Liability on repurchase agreements as deposits, amendment
83
Reserve requirement against certain foreign deposits, amendment
85
Reserve requirements against demand deposits, increase
74
F, Securities of Member State Banks:
Financial statements, form and content, and proxy solicitations,
amendments
91
G, Securities Credit by Persons Other Than Banks,
Brokers, or Dealers:
Margin requirements, extension to certain over-the-counter
securities, and limitation on credit for purchase of
equity funding plans or programs
78, 80
H, Membership of State Banking Institutions in the Federal Reserve
System:
Amendments, technical
72
J, Collection of Checks and Other Items by Federal
Reserve Banks:
Amendment regarding litigation
86
K, Corporations Engaged in Foreign Banking and Financing Under the
Federal Reserve Act:
Amendment to reinstate general consent for "Edge" and "agreement"
corporations to make certain equity investments in foreign businesses
69
M, Foreign Activities of National Banks:
Reserve requirement against foreign branch deposits, amendments .
85
P, Minimum Security Devices and Procedures for Federal Reserve
Banks and State Member Banks:
Adoption
69
Q, Interest on Deposits:
Advertising of, amendment
80
Foreign time deposits, exemption of interest on certain deposits,
amendment
87
Liability on repurchase agreements as deposits, amendment
83
R, Relationships with Dealers in Securities under Section 32 of the
Banking Act of 1933:
Amendment regarding interlocking relationships
90
T, Credit by Brokers and Dealers:
Margin requirements, extension to certain over-the-counter
securities, and limitation on credit for purchase of
equity funding plans or programs
78, 80

420



INDEX
Page
Regulations, Board of Governors—Continued
U, Credit by Banks for the Purpose of Purchasing or Carrying
Margin Stocks:
Margin requirements, extension to certain over-the-counter
securities, and limitation on credit for purchase of
equity funding plans or programs
78, 80
V, Loan Guarantees for Defense Production:
Amendment regarding interest rate charged borrower
87
Z, Truth in Lending:
Adoption and amendments
72, 84, 89
Adoption of supplement
81
Repurchase agreements:
Bankers' acceptances
97, 326, 328, 330, 334
Federal agency obligations
326, 328, 330, 334
Liability on, as deposits, amendments to Regulations D and Q
83
U.S. Govt. securities
97, 326, 328, 330, 333, 334, 346, 348
Reserve requirements:
Graduated reserve requirements on deposits, legislative recommendation 300
Member banks:
Certain foreign deposits, new requirement against, amendments to
Regulations D and M
85
Certain transactions with foreign branches,
amendment to Regulation D to limit
82
Commercial paper issued by, rate limitations and requirements against 298
Euro-dollar borrowings
298
Increase, against demand deposits
74
Repurchase agreements as deposits, liability on, amendments to
Regulations D and Q
83
Table
344
Reserves:
Member banks:
Reserve requirements {See Reserve requirements)
Reserves and related items
346-49
Salaries:
Board of Governors
299, 323
Federal Reserve Banks
341
Savings bond meetings
317
Securities {See also U.S. Govt. securities):
Eligible for advances by Reserve Banks {See Federal Reserve Banks)
Federal agency obligations {See Federal agency obligations)
Financial statements of State member banks, form and content, and
proxy solicitations, amendments to Regulation F
91
Over-the-counter stocks and equity funding plans or programs,
margin requirements for, amendments to Regulations G, T, and U. .78, 80




421

INDEX
Page
Securities companies, interlocking relationships between member banks
and, amendment to Regulation R
90
Security devices and procedures for Reserve Banks and State member
banks, adoption of Regulation P
69
Special Drawing Rights
46, 59, 60-62
State member banks:
Assets and liabilities
350
Banking offices, changes in number
351
Changes in control of, reports
309
Examination
308
Financial statements, form and content, and proxy solicitations,
amendments to Regulation F
91
Foreign branches (See Branch banks)
Mergers and consolidations
310, 355-81
Number
310, 350
Reports of condition, technical amendments to Regulation H
72
Security devices and procedures for, adoption of Regulation P
69
Stock market credit, margin requirements for
over-the-counter stocks and equity funding plans or programs
78, 80
System Open Market Account:
Audit
316
Authority to effect transactions in
95-207
Domestic securities, review of operations
208, 209-55
Foreign currencies, review of operations
53-55, 208, 256-97
Training activities
Truth in Lending:
Regulation Z, adoption, and amendments
Report submitted to Congress
Supplement to Regulation Z, adoption

315
72, 84, 89
315
81

U.S. balance of payments:
Foreign credit restraint program
55-59, 73, 88
46-53
Review
U.S. Gcivt. securities:
350
Bank holdings, by class of bank
Federal Reserve Bank holdings
318, 326, 328, 330, 332, 346, 348
316, 336
Federal Reserve earnings on
I,
...95-207, 20* 209-55, 334
Open market operations
Repurchase agreements
97, 326, 328, 330, 333, 334, 346, 348
Special certificates purchased directly from the United States
333
U.S. Govt. agency obligations (See Federal agency obligations)
V loans

422



87, 319, 341


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102