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A meeting of the Federal Open Market Committee was held in the
offices of the Board of Governors of the Federal Reserve System in
Washington on Tuesday, July 31, 1962, at 10:00 a.m.


Martin, Chairman
Hayes, Vice Chairman

Messrs. Bopp, Scanlon, and Irons, Alternate Members
of the Federal Open Market Committee
Mr. Swan, President of the Federal Reserve Bank of
San Francisco
Mr. Young, Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Noyes, Economist
Messrs. Brandt, Garvy, Hickman, Holland, and
Parsons, Associate Economists
Mr. Stone, Manager, System Open Market Account
Mr. Molony, Assistant to the Board of Governors
Mr. Cardon, Legislative Counsel, Board of
Mr. Williams, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Katz, Associate Adviser, Division of
International Finance, Board of Governors
Mr. Knipe, Consultant to the Chairman, Board
of Governors
Mr. Yager, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors

Messrs. Heflin and Francis, First Vice
Presidents of the Federal Reserve Banks
of Richmond and St. Louis, respectively
Messrs. Sanford, Eastburn, Ratchford, Baughman,
Jones, Tow, Coldwell, and Einzig, Vice
Presidents of the Federal Reserve Banks of
New York, Philadelphia, Richmond, Chicago
St. Louis, Kansas City, Dallas, and San
Francisco, respectively
Mr. Eisenmenger, Acting Director of Research,

Federal Reserve Bank of Boston
Mr. Cooper, Manager, Securities Department,
Federal Reserve Bank of New York
Upon motion duly made and seconded, and by
unanimous vote, the minutes of the meetings of
the Federal Open Market Committee held on June
21 (telephone conference) and July 10, 1962,

were approved.

Before this meeting there had been distributed to the members
of the Committee a report on open market operations in United States
Government securities covering the period July 10 through July 25,

1962, and a supplementary report covering the period July 26 through
July 30, 1962.

Copies of both reports have been placed in the files

of the Committee.

In supplementation of the written reports, Mr. Stone commented
as follows:
The money market has been generally firm since the last
meeting of the Committee. Federal funds have traded for the
most part at 2-3/4 - 3 per cent, while rates on three-month
bills have been in the general range of 2-7/8 - 3 per cent.
Free reserve statistics, meanwhile, have fluctuated widely,

owing in good part to the erratic and unpredictable behavior
of float.

All the past patterns from which we draw our daily

estimates of float of course reflect the operation of the
entire network of airlines, and with a major air carrier

such as Eastern out of operation, the predictive value of
those past patterns is seriously impaired--a fact, however,
that seems to be well understood by the market, which has
not been misled by the higher free reserve figures that have

An atmosphere of marked uncertainty developed in the market
for fixed income securities during the recent period. Questions
were raised as to whether and at what rate the balance of pay
ments and the gold situation are improving; as to where the
domestic economy is headed; as to whether credit policy might
give greater emphasis to the balance of payments; and as to
whether this would be true if the economy should slide into
recession. Questions were also raised as to the size of the
budgetary deficit if we do not have a tax cut; and if we do;
and how, in either case, the deficit might be financed. On all

of these questions, and on their implications for rate levels,
the market found it inordinately difficult to reach a consensus.
And with the uncertainties connected with the Treasury financing
superimposed on those already enumerated, trading activity slowed
down perceptibly as the financing approached.
It was in such an atmosphere that the Treasury selected
and announced the terms of its financing operation, which, it
is hoped, will activate existing accumulations of funds and
galvanize the market into a more spirited pace of activity.
The financing operation was generally regarded by the market
as an imaginative and constructive piece of debt management,
particularly in its effort to reach out for a part of the supply
of savings. Early indications suggest a successful operation,
especially in the case of the two shorter issues. At the close
of trading yesterday, market guesses as to the allotment per
centage for the 3-1/2 per cent certificates were in the
neighborhood of 15-20 per cent and for the 4 per cent bonds
around 35-40 per cent. Guesses on the amount of subscriptions
for the 4-1/4 per cent bonds are particularly uncertain, but
range from $400 million up to $750 million.
Since the Treasury will raise up to $1-1/4 billion new
money in this operation, it is not anticipated that any further
cash borrowing will be necessary until the latter part of
September--apart, of course, from the $600 million likely to be
raised over the next few weeks until the regular bill cycle is
rounded out in late August. Other things being equal, of course,
the rounding out of that cycle, and the consequent absence of
continuous additions to the supply of bills, may well bring
renewed downward pressures on bill rates.

Thereupon, upon motion duly made and
seconded, and by unanimous vote, the open
market transactions in Government securities

during the period July 10 through July 30,
1962, were approved, ratified, and confirmed.

Mr. Noyes presented the following statement with respect to
economic developments:

The tr-weekly cycle of Committee meetings means that it

is sometimes too soon to estimate accurately what has transpired
in the month just completed, while what happened in the month
before seems almost irrelevant to problems at hand. That is

the case today.
We now have quite a few figures for June that were not
available at the time of the last meeting, but they have been
so widely discussed that it is needless to review them in detail.

In order to put what I shall say about developments since then
in proper perspective, however, it should be said that they were

preponderantly bearish.

Most impressive, perhaps, was the

significant further decline in manufacturers'

new orders for

durable goods. But average hours worked at factories also
declined, and unemployment edged up slightly. Retail sales were
down and so were housing starts. Manufacturers' sales were off
significantly, and the stock market was down sharply. Moreover,
even the series that were up showed less gain than in earlier
months. This was true, for example, of production, personal
income, and payroll employment.
Taken altogether, the June data not only confirmed that at
mid-year the economy had fallen far short of the optimistic
forecasts but raised serious question as to the sustainability
of present rates of activity.
From what we know, it appears that there had been some
improvement in July. It is expected that unemployment may be
down a tenth of a per cent, and retail sales will probably be
up a little.
Common stock prices were also up from the June low.
With auto production back to normal, there is a chance that the
production index may show a gain, but this is far from a certainty.
These scraps of information are fragmentary--and obviously
not well balanced, but taken together with developments in the

credit markets, they suggest to me that it

is unlikely that the

economy moved decisively in July, one way or the other.
Nor does
it seem probable that expectational data collected in July will
provide strong evidence on either side. We know nothing yet



about the results of the survey conducted for us by the Bureau
of the Census, but consumer buying expectations, as reported by

Sindlinger on a weekly basis, generally declined from late May
through June, and then picked up a little

in July.


literally, however, they indicate, even after the pickup, a
lower level of consumer durable goods purchases in the second
half of the year than in the first.
The preliminary tabulations of the capital appropriations
survey of the National Industrial Conference Board seem equally
inconclusive. There was a sizeable decline in such appropria
tions by durable goods manufacturers, offset in part by an
increase in nondurable lines.
The most likely prospect seems to be for a further period
of uncertainty, extending for some weeks, or perhaps even months.
Such a prospect is, of course, far from satisfactory. The
possibility of the resumption of vigorous expansion and any
substantial inroad into the present levels of unemployment and
unutilized capacity seems very remote indeed. At the same time
the danger of a precipitous decline does not seem great.
Moderate inventory positions generally, and the special situa
tion in steel, will operate to maintain production in the period
just ahead. Consumers' financial condition is relatively strong.
Despite widespread expressions of concern, there is, as yet, no
hard evidence of weakness in real estate markets. In fact,
field reports generally suggest that the reduced volume of
single family homes being offered by builders this season is
moving fairly well. There are reports of considerable conces
sions being offered to fill new rental units, but these are
usually followed shortly by reports that they have accomplished
their purpose.
At a time like this it is important to be sure that the
uncertainty is really in the economy and is not in the observer's
mind. I have pushed both the data and my mind pretty hard for
the last week or so, and I am convinced, on the one hand, that a
major downturn is a risk that still
lies ahead; and on the other,
that there is no assurance that activity will rise, or even be
well maintained over the next few months.
Thus, an appropriate monetary policy would seem to be one
which recognizes that the possibility of vigorous expansion is
practically nil, but that the range within which activity may
short of it is fairly wide.

Mr. Katz presented the following statement with respect to the
United States balance of payments and related matters:



July has been marked by substantial foreign gold purchases.
For the month they total about $350 million compared with net
foreign purchases of $370 million for the first
half of 1962.
The rather optimistic preliminary figures for the second
quarter balance of payments have not been borne out.
The over
all deficit for that quarter is now estimated at an annual
rate of $900 million, or about half the first quarter rate.
The outlook for the third quarter, based on 3-1/2 weeks of July,
is for a deficit at least as large as in the second quarter
whereas earlier some had hoped that payments might have come
close to balance.
It is difficult to judge the third quarter
payments picture because the second quarter figures benefited
from the deterioration of the Canadian position and the July
figures were affected by the recent improvement.
It now looks as though the Canadian exchange crisis is in
the process of unwinding.
Funds are moving into Canada in sus
tained volume and official reserve accruals during July may

amount to as much as $300 million.

Shifts in commercial payments

(the so-called "leads and lags") in favor of Canada make up the
bulk of the inflow but some funds have moved into Canadian short
term securities, especially finance company paper, which has been
yielding 3.60-3.65 per cent on a fully-hedged basis.
The tightening of credit conditions in Canada has undoubtedly
contributed to the capital inflow. The chartered banks, near their
minimum reserve ratios, have had to borrow recently from the Bank
of Canada and have been large sellers of Government securities.
As a result, Canadian interest rates remain high and yesterday a
Because of credit
was offered at 5.69 per cent.
12-month bill
conditions at home, Canadians are now looking for long-term funds
in this country and several issues, comprising a sizeable volume
of flotations, are currently being discussed.

The London gold market was unusually active in July and
official support was indeed heavy, reflected in part in our July
On Thursday and Friday, July 12-13, and again on
gold losses.
July 19-20, the market was particularly active, but it has been
quiet since President Kennedy's telecast to Europe on July 23.

These private gold purchases in mid-July coincided with
general talk about the U. S. dollar in all European centers.
The European financial press had articles about whether the U. S.
would raise the price of gold and whether the U. S. dollar was
overvalued. Professor Haberler contributed to the debate a
statement in Frankfurt that the U. S. dollar was overvalued by

10 per cent.
You had a kind of irresistible force--that is, market views
that the price of gold or the value of the U. S. dollar might be



altered--meeting an immovable object--that is, the official
determination everywhere to maintain the present gold-price and
exchange-rate structure. In fact, Mr. Jacobsson of the Inter
national Monetary Fund made the point on "Meet the Press" that
was also made by Dr. Wolf of the Bundesbank in a speech in
Cologne that the United States wouldn't be allowed to devalue,
even if it wished, because "other countries would devalue at
the same rate as the dollar so the relative position would not
be changed to any important degree."
The U. S. dollar accruals which several European central
banks obtained during the past three weeks were mopped up, either
through transactions with the Fund, through debt prepayments, or
through utilization of Treasury or System holdings of foreign
currencies. Special Treasury operations reduced excess Swiss and
Dutch dollar holdings. The two large surplus countries--France
and Italy--made large debt prepayments.
Over the past week, the dollar's position has improved a
little in European centers and only France and Italy continue
significant reserve accruals. We have been unable to confirm the
French Finance Minister's alleged statement in Washington two
weeks ago that future inflows of dollars would not be used to
buy gold. However, it is reasonable to expect at least some
additional prepayments of the nearly $1 billion of French debt
still outstanding to this country.
Last Friday, the United Kingdom repaid the remaining $512
million of last year's drawing in various currencies. The Fund
granted the British a $1 billion one-year standby credit.
The experience of the past month suggests, in retrospect,

that the network of Treasury and central bank financial agree
ments now in effect has contributed to allaying uneasiness and
speculation in foreign exchange and gold markets. However, as

the recent figures indicate, the United States is continuing
with a serious balance of payments problem and further tests
of this mechanism are surely ahead.
Reports on his talks in Europe from Mr. Hersey, of the

Board's staff, who is currently visiting central banks in key
Continental countries, indicate that the European business
expansion is maintaining a strong momentum although the pace
In the first half of 1962,
of advance is slower than earlier.

output rose more than 3 per cent in both France and Germany.
With domestic demand and output continuing to expand in all
the Common Market countries, Mr. Hersey expresses the view
that Continental Europe is going to be staying at full employ
ment without serious disturbance one way or the other as far
ahead as one can look at this time.


In response to a question with respect to U. S. gold losses
during July, Mr. Sanford said that through the 25th of the month there
had been a decline in the gold stock of $227 million.

There would be

a further decline reported for the week ending tomorrow.
Mr. Holland presented the following statement with respect to
credit developments:
Applicable as the adjective "uncertain" is to the economic
situation, it fits
equally well the atmosphere to the credit
markets during most of the period since the last meeting of this
Further indications of sluggishness in the pace of
economic expansion and press reports of improvement in our

basic balance of payments position might ordinarily have been
expected to induce some declines in interest rates. These factors,
however, have been roughly counterbalanced by continued general
firmness in the money market, by discussions of a possible shift
to less monetary ease and a more expansionary fiscal policy, and
by persistent rumors of dollar weakness abroad.
The ebb and flow of market pressures have been outlined in
The overriding sense
the report of the Manager of the Account.

of these July market movements was that of a cresting of the wave
of reactions in investor attitudes to the speculations as to
changed Government policies which had become so prevalent around

midyear., As is so often true of financial markets, changed
dealer and investor expectations as to market prospects led to
price and yield adjustments which ran ahead of any changes in
the basic elements of market supply and demand. Now, with the
flush of attitudinal responses seemingly spent, analysts can
approach the tedious task of scanning the available evidence
for signs of the effects of changed policies upon the underly
ing financial flows. Such an effort is essential to the
continuing adaptation of policy, but it is never easy, and the
circumstances of the current moment are not particularly help
ful in this respect. Let me focus the remainder of my remarks
on this question, concentrating upon the banking sector in which
the first and most significant effects of changed monetary policy
upon actual credit flows are likely to be apparent.
Reported bank figures make it fairly clear that aggregate
bank credit, seasonally adjusted, will show a substantial
decline in the month of July, perhaps in the neighborhood of

$1-1/2 billion. If so, this would be the largest decline since
July 1958 and one of the few interruptions in the rising trend
of bank credit totals since that time. But a number of special
considerations reduce the significance of this bald fact. First,
and foremost, Treasury cash financing during July was much smaller
than is usual for the month, thus tending to reduce both outright
bank acquisitions of Governments and the temporary financing of
other subscribers. Securities loans for all purposes declined
sharply, with the reduced positions of Government dealers and
possibly also some persisting effects of the stock market break
being contributing factors. Business loan demand has been
generally flat, aside from tax date influences.
On the other hand, it should be pointed out that the lack
of Treasury financing or strong loan demand does not need to
preclude net bank credit expansion if sufficient reserve ease is


Banks can simply acquire assets from the market as they

did, for example, in similar circumstances in July a year ago.
In the current month, banks continued to show substantial addi
tions to their real estate loans and tb their holdings of other
securities, chiefly agency issues. Continued attention to the
banks' rate of acquisition of these more discretionary types of
earning assets may give some confirming clues as to the degree
of marginal credit availability prevailing within the banking

With aggregate bank earning assets shrinking unseasonally,
total bank deposits were also down during July. That contraction,
however, consisted primarily of a large drop in Government
deposits from their high midyear level. Aggregate time and savings
deposit growth continued, but apparently at a slower pace in July.
The private money supply, sustained by the shifts from Government
to private deposits and the reduced drain into time accounts, continued

changed from the second half of June.

Thus, the money supply

continued on the rough plateau it has traced since late last year,
following the sizable demand deposit increases of last fall. Deposi
tors continued gradually to step up their rate of use of demand

balances, with demand deposit turnover increasing moderately
further outside New York City during June. The total of liquid
assets in public hands has continued to grow moderately and some
what unevenly, but there have been some changes in the composition
of such growth, with money supply little changed, smaller additions
to deposit-type claims, and a jump in liquid Government securities

Aggregate reserves available to support private deposits
moved upward during the first three reserve weeks in July,
reflecting both expected and unexpected additions of reserves



from market factors, heavy System securities purchases followed
by midmonth sales, and also member bank borrowings at times to
supplement the reserves supplied by market factors and System
open market operations. In the latest reported week of July 25,
however, aggregate required reserves behind private deposits
turned downward again, dropping nearly $90 million below the
standard projected in the staff memorandum.
These reserve movements took place in an environment of
free reserves averaging $450 million since the last meeting of

the Committee. Sizable week-to-week fluctuations and erratic
distribution of such reserves, however, often resulted in con
siderably less easy market conditions than might normally be
associated with this level. There was a tendency for bank bor
rowing to rise when average free reserves dipped below $400
million, a clue that at such levels banks were not always finding
the market availability of reserves equal to their desires.
Present projections suggest the current reserve week may
again see free reserves in the neighborhood of $350 million or
lower, in the absence of further System operations, despite an
average $310 million addition to reserves from open market

operations already conducted.

Operations of the same general

order of magnitude may be called for next week in order to off

set the drain of reserves from market factors, chiefly vault
cash and currency.

The degree to which banks press to meet any

of these reserve needs not supplied by System operations may
give us some further clues as to the impingement of somewhat
reduced marginal reserve availability upon over-all credit
Pending the accumulation of this and other confirming
evidence, a judicious observer would be justified in withholding

judgment as to the trends in the bank credit base of the
credit pyramid which are developing in the altered policy
environment. A bold observer, though, could point out that
the early signs are consistent with a modest dampening of bank
credit expansion.
In reply to a question from Mr. Balderston as to how an even
keel policy for the next three weeks might be defined in view of the
recent fluctuations in free reserves and even in bill

rates, Mr. Holland

suggested that the term "even keel" would have to be applied in a broad
and flexible sense.

The Account Manager would need latitude to make

interpretations on the basis of interest rates and feel of the market as



well as the free reserve level.

Free reserve figures themselves had been

particularly unreliable as a measure of reserve pressures in past weeks,
and they were not likely to be much more dependable as an indicator in
the period immediately ahead.
Mr. Hayes presented the following statement of his views with
respect to the economic situation and monetary policy:
There is not much doubt that the pace of business expansion
slowed down during June, and there has been a widespread tend
ency to point to these June statistics as a forerunner of a
major turn in the business cycle. However, if we consider the
important contribution made to this "pause" by special factors
in the steel and auto industries, the June development becomes
somewhat less disturbing than it would otherwise be. Such
July data as are available seem to be midly encouraging but
are much too fragmentary to permit any valid conclusions. We
might characterize business as being generAlly quite good, with
no convincing evidence of any imminent downturn, but also with
no forces in sight--apart from the possibility of a tax cutto give the economy a significant new push upward. It is dis
turbing that so little progress has been made in closing the
gap between available resources of labor and plant capacity
and their utilization--although, of course, there is a favorable
"other side of the coin" in the continuing improvement in

productivity that has contributed importantly to the marked
price stability of the last few years.
Turning to the credit picture, including partial July
figures, together with complete statistics for June, we get an
overall impression of a fairly vigorous expansion of bank


The performance of business loans has been only about

"average" in comparison with other recent years, whereas real

estate loans have continued their sharp expansion. Bank
liquidity dropped off a little in New York this month, but it
remains at a very satisfactory level both here and in other
parts of the country. As for nonbank liquidity, while the
money supply proper has grown by about 2 per cent in twelve

months--with most of this gain confined to the second half of
1961--time deposits and other liquid assets have been growing
at a strong pace.

In fact, the rather sharp rise in total

liquid assets during recent months--both absolutely and in
relation to GNP--has been unusual for an upward phase of the
economy. The country's liquidity seems ample. Granted that



more liquidity will be needed over the longer run to support
further business expansion, the risks at the moment seem to
be more in the direction of excessive liquidity, which has

tended to have an adverse balance of payments effect.
The balance of payments and the international position of
the dollar continue to give cause for serious concern. This
remains true in spite of the marked improvement in the gold
and exchange markets since the President's comments a few days
ago, and despite a somwhat improved statistical showing in
the second quarter balance of payments figures as compared
quarter. With respect to the latter, it is
with the first
unfortunate that the revised figures are so much less favorable
than the preliminary estimates, which received a fair degree of
publicity. Also, the market is well aware of the important part

played by Canada's difficulties in permitting the good second
quarter showing in this country's accounts. The second quarter
improvement seems pretty mediocre if we allow for this factor.
It is widely recognized that during the present month and
quarter, Canadian developments will undoubtedly have a reverse
influence, thus becoming an important unfavorable factor in
our balance of payments; and the important offset provided by

the large debt prepayments by France and Italy tends to be

viewed as a "one shot" phenomenon that should not be given
too much weight.


is disturbing to note that so far in July

we appear to have lost gold and dollars on balance in
the large French and Italian debt prepayments.

spite of

Although the trade balance has behaved very well to date,
it seems unlikely to improve and in fact may deteriorate
slightly during the rest of the year. Short-term capital
movements have been rather small lately, but unfortunately
there has been no real return of such funds to this country.

At the same time, longer term capital flows remain a signif
icant unfavorable element in the current balance of payments
picture, with a growing tendency to arrange for foreign bor
In particular we can look for heavy
rowing in this market.
Canadian borrowing in the current quarter.

It seems clear that the "margin of safety" in our gold
stock is being reduced to a rather dangerous level. The gold
outflow of the last two or three months can hardly be con
sidered unreasonable in view of our balance of payments deficit
position and the already large holdings of dollars by foreigners,
yet the French taking of $112 million in particular gave rise

to a good deal of nervous comment, and such comment is bound
to recur as we get closer to or below the $16 billion mark. I

do not wish to minimize the excellent measures that have been



taken to improve our balance of payments situation, especially
on the military side; but in view of some probable future
shrinkage in the trade surplus, and perhaps some tendency
toward greater long-term capital outflows,

the net improve

ment in 1962 in what might be called the "basic" deficit will
probably be negligible.
The question may well be raised
whether the time is not close at hand, therefore, for addi
tional decisive steps, including some in the area of monetary

policy, to ward off a full-fledged exchange crisis. The matter
of timing may take on added importance when we recollect that
nervousness with respect to the dollar and other currencies
frequently flares up in the weeks preceding the annual meeting
of the International Bank and International Monetary Fund.
The outlook for the Federal budget also carries puzzling
and difficult implications for monetary policy. It is now
generally admitted that a sizeable deficit is in prospect for
fiscal 1963, in the magnitude of at least $5 billion and possibly
considerably more, even in the absence of any pending or new
legislation affecting the budget. Bearing in mind that a tax
reduction within the next few months appears to be a very real
possibility, we may soon be confronted with the prospect of an
aggregate deficit somewhere near the magnitude of that of fiscal

1959. I am sure this Committee is well aware of the disturbing
psychological effects that might develop both here and abroad
if this were to happen. Of course, these effects might be
greatly mitigated if the type of tax cut involved was generally
expected to bring a rapid upsurge in revenues. Also, the situa
tion could be greatly helped if the reduction were accompanied
by a freeze on additional expenditures--or perhaps even some
cutback--and if the Administration were to announce its deter
mination to finance as much of the deficit as possible out of
savings. All of this suggests that the interest rate structure
may be subjected to significant upward pressures in the coming
months, and of course expectations may accelerate the appearance
of such tendencies. The question we may soon face is whether we
should support such an upward rate adjustment or perhaps even
anticipate it with a signal designed to stress our determination
to defend the position of the dollar. At such time we shall of
course have to give due consideration to domestic as well as
international factors.
It seems to me that we should welcome the Treasury's refund
ing program, with its frank recognition that long-term issues
should have some place in the financing of the current year's
sizeable deficit. The refunding operation does, of course,
point to the desirability of our encouraging as much stability
in the money and capital markets as possible during the next
few weeks.



With respect to policy, there would seem to be no need to
depart, within the next three weeks, from our current policy of

moderate ease. I think the minor modification that took place
in our policy six weeks ago was amply justified and worked out
very satisfactorily--and I would hope that the consistently
firmer tone in the money market that has prevailed, apart from
a few unavoidable temporary lapses attributable to erratic
market factors, would be continued in the coming three weeks.

Specifically, I would hope that both the 90-day bill rate and
the Federal funds rate would hold in a range close to 3 per cent,
with whatever free reserve levels this may involve.
Thus the
objective would be to preserve the general feel of the market

that has prevailed in the past three weeks. Perhaps the violent
and unpredictable swings in market factors in the last few weeks

have done us a service in getting the market more used to fluc
tuations in free reserves that carry no policy implications.
I would think that no change is

called for at this time

in the discount rate, although I believe it is quite probable
that we shall be confronted with the need to give serious con
sideration to the discount rate within the next couple of months.
As for the directive, I see no need for a change, except
that the reference to "the unsettlement of financial markets"
might now appropriately be omitted, together with the phrase
in the second paragraph "to the extent consistent with the
behavior of capital markets."
Secretary's Note:

The suggestions made

by Mr. Hayes contemplated the following
changes in the policy directive:

It is the current policy of the Federal Open Market
Committee to permit the supply of bank credit and money to
increase further, but at the same time to avoid redundant
bank reserves that would encourage capital outflows inter

nationally. This policy takes into account, on the one hand,
the gradualness of recent advance in economic activity AND
the availability of resources to permit further advance in
On the
activity [strikeout],and the unsettlement of financial markets[/strikeout].
other hand, it gives recognition to the bank credit expansion
over the past year and to the role of capital flows in the

country's adverse balance of payments.
To implement this policy, operations for the System Open
Market Account during the next three weeks shall [strikeout],to
be conducted
with a view to providing moderate reserve expansion in the

banking system and to fostering a moderately firm tone in money


Mr. Ellis reported that although New England economic indicators

continued to register gains in the month of June, they fell short of

expectations based on seasonal patterns.

Manufacturing and nonmanufac

turing employment showed a slight decline from May on a seasonally
adjusted basis, and the change in unemployment also was less than

Consumer income continued to rise through June, if one could

rely on income tax payments as evidence,
firm as far as could be judged.

and consumer spending remained

Cool summer weather was affecting resort

areas, and those who depended heavily on Canadian dollars complained that
the discount had affected their business.
District reporting banks continued to receive new time money at
a fast clip. The banks continued to build up their investments in State
and local government securities while running down their holdings of U. S.
Government securities with maturities exceeding 12 months.

Loan demands

remained strong.
As to policy, Mr. Ellis said he was in close agreement with the
analysis and prescription presented by Mr. Hayes.


seemed to him that

in the period since the preceding Committee meeting an easy availability
of reserves had been maintained, with the short-term bill rate generally
in the 2.90 - 3 per cent range.

Excessive apprehension that the Federal

Reserve was moving abruptly toward tightness had been avoided.

A con

tinuation of recent policy seemed appropriate for the next three weeks,

especially in view of the current Treasury refinancing.



Mr. Ellis also said that he would not change the discount rate
at this time.

As to the policy directive, he had studied the two phrases

suggested by Mr. Hayes for possible deletion, starting with the thought
that they should be dropped, and he would concur in their delection if

that was the majority view.

Someone closer to the financial markets

could perhaps make a better judgment as to whether they were sufficiently
settled so that the language in question could appropriately be stricken.

If such a conclusion seemed justified, he would go along with the suggested

Mr. Irons commented that there seemed to have been relatively
little change in either the Eleventh District or the national economic


No very good or reliable District data for July were yet avail

In any event, however, the current Treasury refinancing would

appear to preclude any significant change in the policy that the Commit
tee had been following for the past several weeks.

Accordingly, he

would come out with the view that the status quo should be maintained
as closely as possible, with no appreciable change in Federal Reserve
actions that influence the market.

By the time of the Committee meeting

on August 21 the Treasury financing would be completed, and there might
be economic and financial statistics at hand that would be more meaning
ful than those presently available.

Mr. Swan reported that Twelfth District department store sales
held up fairly well in June and the first

couple of weeks of July.




sales recovered somewhat in June after a sharp dip in May, and defense

related employment continued to rise in June.

The over-all rate of

unemployment in the Pacific Coast States, seasonally adjusted, rose
rather sharply in June, but this had to be related to the secondary
effects of labor disputes in construction along with a delay in the
usual seasonal rise in food processing.

Another major labor market area

in Southern California had been reclassified from substantial to moderate
unemployment, this change undoubtedly being related to employment in
defense industries.

In general, the District picture was not greatly

different from what had been reported previously.

It showed some strength,

but the over-all situation was rather mixed.
There was an increase in loans at District weekly reporting banks
in the three weeks ended July 18 compared with a decline for all weekly
reporting banks; the District increase was again heavily concentrated in
real estate loans.
in July.

The larger banks continued in a rather tight position

They were rather substantial purchasers of Federal funds during

the four weeks ended July 25, and they were expected to be net buyers
again this week.
Turning to policy, Mr. Swan commented that in view of the Treasury
refinancing, the uncertainty as to business activity--with increasing
indications that the top of the cycle might not be far away--and the lack
of any marked change in the international situation, it was his conclusion
that certainly no less ease was in order at this time.

He would be satis

fied with a continuation of approximately the same conditions that had



existed since around the 18th of July.
opinion, for the 90-day bill

It would be desirable, in his

rate to be at 2.90 per cent or somewhat below,

but not higher; and for Federal funds to trade at 2-3/4 per cent, rising
to 3 per cent only occasionally.

As far as it

could be pinned down, he

would favor a free reserve position above $400 million.

In summary, he

would continue about the situation that had prevailed recently but resolve
doubts, if

any, on the side of ease.

at this time.

He would not change the discount rate

As to the policy directive, he felt rather strongly that

the language mentioned by Mr. Hayes should be eliminated.
Mr. Deming reported that although little

information was yet

available for July, in general the Ninth District seemed to show no
appreciable change from what had been happening earlier this year.


agricultural employment was up as compared with June 1961, along with

manufacturing employment.

Minnesota figures for July were up seasonally;

data on nonagricultural employment looked a little better against the
previous year than the June data.

The agricultural situation continued

to look good, particularly against last year; wheat production would

be up, according to July estimates, 37 per cent from 1961.

Farm cash

income for this crop year should be better than last year.

Retail sales

showed no particular signs of strength, with the lengthy newspaper strike
in Minneapolis apparently having some effect.

Income figures in June

were a little higher relative to June 1961 than for the nation as a whole,
but in general the Ninth District was just about in

on the income side.

line with the country


Loan demand at country banks continued to be about as strong as


had been all


At city banks, loan demand likewise continued to

show through mid-July about the same strength as earlier in the year,
but in the next two weeks it

was off somewhat.

This tendency had been

observed in other years at about this time, and whether a change in trend
or just a pause was involved could not yet be told.

Deposit growth was

much above the national rate.
Turning to policy, Mr. Deming expressed satisfaction with what
had been done in the period since the preceding Committee meeting.


would not like to see conditions easier than at present or to err on the
side of ease.

However, he would prefer a bill

rate of 2.90 to a rate of

3 per cent, with Federal funds at 2-3/4 per cent about half the time and
3 per cent about half the time.

There seemed little

purpose in talking

about free reserves in view of the difficulties of estimating that had
prevailed for some time and apparently were likely to continue.
As to the policy directive, Mr. Deming said that he did not like
to take issue with those who were closer to financial markets.

did seem to him that there was still

speaking in

a broad sense.

unsettlement in


financial markets,

Hence, he would prefer to leave in the direc

tive the language mentioned by Mr. Hayes.

He would not change the discount

rate at this time.
Mr. Scanlon commented that the Seventh District economic picture
was quite similar to the picture that Mr. Noyes had described nationally.



As to policy, he would recommend maintenance of an even keel, defined in
the manner stated earlier by Mr. Holland in response to Mr. Balderston's


He would not change the discount rate, but he would agree with

the changes in the policy directive suggested by Mr. Hayes.
Mr. Tow commented that Tenth District member banks had increased
their loan portfolios this year more than in any recent year.

At the

smaller country member banks, the comparison with previous years appeared
even stronger than at the weekly reporting banks, but at both groups the

loan expansion had been unusually large.
The gain in real estate credits undoubtedly resulted mainly from
efforts of banks to increase current income.

On the other hand, the sub

stantial increase in loans to business and nonbank financial institutions,
and the rapid increase in consumer and other loans, pointed to the fact
that loan demands had been relatively strong.

might appear that the strength in loan demands in the Tenth

District stood in

sharp contrast with developments nationally, where loan

demands had not shown unusual strength.


if one considered the

markedly different behavior of loan portfolios in weekly reporting banks
and in all other banks in the United States, the behavior of Tenth District
bank loans appeared less unique.

Total loans (other than loans to banks)

increased $2.7 billion at all commercial banks in the United States during
the first

half of 1962.

The weekly reporting bank group contributed $0.4

billion; the remaining $2.3 billion took place at other commercial banks.



This evidence of marked divergence in the strength of credit demands
at large and small banks presumably had its
of the current economic advance.
relatively moderate,

durable goods.

origin in the characteristics

While the economic expansion had been

weakness had been most prominent in the demand for

Credit demands of durable goods producers typically are

expressed at relatively large banks, and this would seem to account for the

weak performance of loans at the weekly reporting banks.

This also would

be consistent with loan developments in the Tenth District, which does not
have any great concentration of durable goods industries.
These commercial bank loan developments, Mr. Tow noted, appeared
to indicate that the funds supplied by the Committee's expansive credit
policy had met a responsive loan demand at banks outside the weekly
reporting bank group.
Mr. Heflin reported that record or near-record levels of general
business activity, tempered by some hesitations and uncertainties, had
characterized recent economic developments in the Fifth District.


employment increased very slightly in June, but bank debits and factory
man-hours declined.

Textile man-hours remained close to their May peak,

and cotton consumption during the first half of the year was 9 per cent
above 1961, but the latest evidence pointed to recent declines in orders
and prices.

A sharp rise in furniture store sales in June and a successful

summer market in the second week of July provided new support for the
District's prosperous furniture industry.

Insured unemployment increased



a little more than usual early in July.

Department store sales rose

substantially more than seasonally in the first two weeks of July after
having declined quite sharply in June.
The Reserve Bank's latest survey of District businessmen and
bankers showed a small improvement in
first time since February.

general business sentiment for the

Manufacturers of nondurables included in this

panel reported on balance small gains in employment and hours.

But manu

facturers generally indicated substantial declines in new orders and
backlogs, a tendency toward larger inventories, a few instances of higher
wages, and some price declines.
District banks that began in

The upward trend in real estate loans of

April had accelerated markedly in the past

three weeks.
Mr. Mills expressed the opinion that the policy objectives set at
the preceding meeting of the Committee should be continued, with the drift

of the effects allowed, where possible, to maintain a steadily firm interest
rate structure.

There was the possibility, he note, that if what amounted

to a status quo in policy were continued too long the System would run into
the same kind of problem that in his opinion it suffered from earlier this


the financial and business community became accustomed to an un

changing policy, it

would be disturbed by any mild change that was sub

sequently made.
In rationalizing the justification for a continuation of present
policy, it

occurred to Mr.

Mills that there were two elements deserving


particular attention.

First, increasing symptoms were appearing of a

deterioration in Western European economic conditions, with the possi
bility that a turning point had already been reached that would not
become tangibly distinct for some time to come.

Against such a change

in the economic climate abroad, and pending its aftermath of effects,
there were good and substantial reasons for maintaining a firm interest
rate structure for balance of payments purposes and, as Mr. Hayes had
indicated, in order to be prepared alertly and promptly to meet a crisis
condition with conventional monetary policy antidotes should the necessity
arise in the next month or two.
The second key element that deserved the Committee's attention,
Mr. Mills said, went back to a suspicion that deterioration in the domestic
economy was inducing a contraction in bank loans which,

would create downward pressure on the money supply.




It seemed to him that

the money supply probably required increasing investigation on the part
of the Committee, not with a view to attempting to force an increase but
simply to maintain at best the present level.

If there was a contraction

in bank loans, this objective would require placing sufficient reserves
at the disposal of the commercial banking system to encourage and permit
the banks to replace losses in bank loans with investments, particularly
in U. S. Government securities.

If there was substance to that reasoning,

a free reserve level of $350 million could be assumed to be sufficient,
but free reserves should not be allowed to drop below that particular




Mr. Mills went on to comment that the privilege given to com

mercial banks to acquire Treasury bonds on tax and loan account in con
nection with the current refinancing would seem to have been a wise


The commercial banks had been given the means of either under

writing the bond issues or, if bonds were retained, giving support to the
money supply through the credit-granting process.
offered temptations for the future, although it

This was a vehicle that

could be abused if



granted too frequently and the banks were allowed to overload themselves
with longer term U.

S. Government securities.

If the economy was in fact

moving downward and was going to move downward further, while at the same
time it

was desirable to maintain the money supply, the over-all effect

of that kind of situation might well be--over a continued period of time--to
overliquify the banking system, with the risk that this would come into
full perspective only at a time of revival when there were inflationary
pressures with which to contend.
and if

Should such developments come to pass,

the banks held a substantial but not unreasonable load of U. S.

Government securities, a restrictive monetary policy would have the automatic

effect of forcing a depreciation in investment portfolios that would aid
and abet that policy.
Mr. Mills noted that what he had just said was in the nature of a

Returning to the subject of the moment, he would favor a

continuation of the policy objectives set at the July 10 Committee meeting.
Mr. Robertson presented the following statement:



I think it is imperative for monetary policy to recognize
the deteriorating prospects for domestic economic activity. An
increasing number of observers are flatly forecasting an early
recession, and most of the others are talking plateau or a marked
slowdown of expansion. These changed views are based on fact,
not fiction. A growing list of "bear signals" are being given by
indicators that have forecast declines in general activity in the
past. They include the persistent decline in new ordering and

commitments by businessmen, the sluggishness in employment and the
length of the work week, the drop in corporate profits, and the
slowdown in consumer spending. The leveling off of such broad
indicators of economic well-being as our industrial production
index and personal incomes are signs of a tired economy.
Signs of economic fatigue are also appearing in the financial
area. Most dramatic has been the break in stock prices, but there
has also been weakness in business borrowing, the most dynamic
element in bank loan portfolios, and in new capital financing. The
money supply, the keystone of our liquidity structure, has shown
no sustained growth since last fall and has been particularly flat
since May.
Moreover, there are increasing signs that monetary policy not
only is not providing the stimulus to the economy that it can and
should currently, but also that it has been less helpful than it
should have been for some months. Thus far in 1962, total bank
credit, seasonally adjusted, has not increased even as much as the
growth in time and savings deposits alone. True, some of this
growth in time deposits has represented a shift from previously
idle demand balances, but some of it surely has represented real

savings, either new savings or a shift from other savings media.
Hence much of the bank credit expansion we have experienced
thus far this year has been the investment of savings rather than

the creation of new dollars. If one makes the reasonable assumption
that half of the time deposit growth was a diversion of funds that
might otherwise have been invested directly in securities or placed
in nonbank financial institutions, bank credit expansion reflecting
new money creation has been very moderate in 1962, not much greater
than in the comparable period of 1959 when we had a restrictive
monetary policy, when labor and plant capacity were more fully
utilized, and when many observers still thought that further price
inflation was a real possibility.
Turning to the immediate situation, I am deeply disturbed by
the most recent bank reserve developments. Since the last meeting
of the Committee, free reserves have averaged about $450 million,
$90 million higher than the $350 million average the three preceding
weeks, and correspondingly higher than what I understood to be the



wishes of the majority of the Committee.
Nonetheless we dropped
$88 million below our reserve provision guideline during late
July. Since the change in monetary policy in mid-June, required
reserves behind private deposits have actually declined on a

seasonally adjusted basis rather than showing a moderate rate
of expansion as called for in the current directive. Yet in
the face of these developments we seem to be dropping back down
to a free reserve figure perhaps below $350 million again this
(It is interesting to note that if vault cash were not
counted as reserves, as was the case in comparable periods of
previous cycles, this figure would be much lower, perhaps even
a negative figure.)
The accumulation of evidence is suggesting that the recent
shift in policy toward less monetary ease, undertaken in the
hope that higher interest rates might help internationally, is
generating contractive reserve pressures at home.
This, I think,
is a clear case of incurring a cost that is real for a benefit
that is illusory. I have seen no evidence of beneficial effects
of higher money rates upon our international gold and dollar

flows that would justify the domestic hazards we are running with
such a policy.
I, for one, want to be recorded as favoring a policy that

seeks to encourage further expansion in reserves, credit, and
money even if it means less firm money market conditions and some
what lower interest rates. This means, to me, that it is high
time we retraced our steps, returning at least to the degree of
reserve availability existing prior to mid-June.
More specifically,
I would aim at a free reserve figure between $450 and $550 million
and would seek to provide sufficient reserves to the banking
system to support some increase in bank demand deposits over and
above whatever growth continues in time and savings deposits.
Market confidence, both at home and abroad, is a problem,
but the confidence that is pre-eminently needed is confidence in
a growing, prosperous, and internationally competitive U. S.
Current monetary policy needs to be adapted to this
longer range objective and not merely to be utilized as a palli
ative to passing rumors and market fears.
Our leadership in the free world will not be enhanced by

Government economic and financial policies that add to the
deflationary forces that are building up all around us. Who
here or abroad is willing to see a domestic recession develop on
the risk--the very great risk, in my view--that slightly lessened

availability of credit and liquidity and slightly higher interest
rates will materially benefit our balance of payments problem and

yet will not dampen our domestic economy? We should realize that
the risk involved in trying in this way to attain, by monetary



policy action, a remedy for our international financial problems,
a remedy that is by no means of certain or significant effective
ness--a remedy that will become increasingly difficult to prescribe
as the market forces of declining economic activity and reduced
credit demands tend to widen the gap between interest rates in a
lagging economy at home and booming economies abroad--is too great
a risk to run.

Shepardson commented that certainly the economy did not appear

to be in an exuberant condition.

There was doubt as to how far and how

fast the economy was going to move in the immediate future.

On the other

hand, he believed that the factors principally affecting the growth and
direction of the economy were outside the impact of monetary policy.


had not seen any indication or heard any comments that would suggest a
lack of available funds to meet all of the credit demands that could be

To the contrary, most of the comments he had heard recently

from bankers and men associated with other financial institutions were to
the effect that they were looking for uses of funds.

Personally, he did

not agree with the thought that monetary policy could materially stimulate
the situation.

Instead, the solution seemed to lie in other areas.


that reason, he would concur in the kind of policy outlined by Mr. Hayes.
Mr. King stated that he would continue present policy and maintain
an even keel as nearly as possible.

In view of the Account Manager's

comments about market conditions, he did not think it would be particularly
desirable to delete from the policy directive the language mentioned by
Mr. Hayes.

Mitchell presented the following statement:



The economy continues to drift along in a lack-lustre
fashion. More and more economists and observers are saying

publicly that the upswing has ended or is ending or will

shortly end.

The Ways and Means Committee is holding hearings

to find out if the best informed opinion believes a tax cut is
needed to reinvigorate the economy. Uncertainty as to the final
demands by consumers, patently well founded in the recent
behavior of retail sales, is atrophying business spending for
plant, equipment, and inventories. The odds are long and
lengthening against the probability that the economy will advance
vigorously in the last half of the year. It may still
be an even
bet that it could bump along for another quarter or two at
about present levels. The major factor of reassurance on this
score is that in several respects the technical position of
the domestic economy is good: inventories are low relative
to sales, manufacturing conditions are good, capacity utiliza
tion is below optimal levels, and we have survived the worst
effects of the stock market revaluation.

The major disturbance in the current situation with which
we are concerned is the imbalance in the money and capital

markets that has been created by our efforts to use monetary
policy to deal with the balance of payments situation. The Fed
and the Treasury have created a highly artificial situation in
the money and capital markets by holding up the short-term
money rate through debt management and monetary policy. We
have encouraged expectations that long-term rates would rise,
and have induced a rise of some 20 basis points, in the face of
a preponderance of historical and analytical evidence that long
term rates have passed their sustainable peak.
How long can we artifically sustain a rate pattern of this
sort in a faltering economy? European advice and example is
not very helpful. The American System is not like that of
Western Europe, where the private sector is much smaller and is
in significant part dominated by cartels and agreements. The
Europeans plan, in the socialistic sense, a great deal more
than we do. Their money and capital markets are not only small
or nonexistent, they are often under direct control by govern
ments or financial agreements that would be illegal in the
United States.
We should be letting our domestic economy use our free
markets for money and capital at prices fixed by supply and
demand forces unconditioned by the expectations that the Fed
and the Treasury are going to hold up rates according to a
private Swiss banker's prescription. The issue of overriding
importance is the continued strength of internal demand. This



Committee should recognize the seriousness of the threat to the
domestic economy by supplying reserves somewhat more freely,
making it clear that there is no possibility of a discount rate

increase under current conditions and being prepared to see the
short-term rate decline by as much as 1/2 per cent.
Mr. Fulton characterized Fourth District business conditions as
rather mixed.

Declines in some areas had moderated, but the steel areas

had not shown any marked improvement.

Department store sales recovered

slowly in July from the sharp decline in June, although in the latest
Sales thus far this year were 3 per

week they headed downward again.

cent ahead of last year, compared with a 6 per cent gain nationally.
Unemployment increased slightly more than usual for the July period of
vacation closedowns and seasonal slowdown in auto manufacturing.


sales had been very good recently.
Mr. Fulton then commented on a meeting last week of 21 Fourth
District business economists, stating that their conclusions seemed to
parellel some of the comments made around the table today.

With respect

to industrial production, the median forecast was 117 for the fourth
quarter of this year, 116 for the first
figure for the second quarter.

quarter of 1963,

The economists based their conclusions

somewhat on the pattern of manufacturers'

new orders,

economic activity was foreseen over the next year.
to the effect that a recession,

and the same


foundation in several happenings,

so some decline in

Comments were made

it was substantial, would have its
including the stock market break, the

lack of full use of plant and equipment,

and the fact that customers



appeared to be adopting a policy of holding low inventories and expecting
immediate deliveries.
All in all,

Mr. Fulton said, the outlook was not buoyant.


the other hand, so far as monetary policy was concerned, some of the
factors that seemed to indicate a recession to the business economists
seemed to him to call for a continuation of present policy.

He did not

feel that monetary policy could change the factor of psychology on which
the economists put considerable store.

The Federal Reserve had supplied

substantial amounts or reserves to the banking system, but those reserves
had been used only sparingly so far as business loans were concerned.
Accordingly, he would favor continuing the present level of reserve

In his opinion, free reserves of around $350 million

would be appropriate and in line with expectations of the business com

He would not change the discount rate at this tie.

As to the

policy directive, since he was not sure that financial markets had
stabilized, he felt that the wording of the directive might well be left
Mr. Bopp commented that an evaluation of the trend of the Third
District economy, like an evaluation of the trend of the national economy,
was now a problem of weighing small and conflicting changes.

There was

the additional difficulty, of course, that District figures were not as

recent as those for the nation.

Taken individually, each of the latest

changes could be explained away as an unimportant jiggle in the statistics,
yet put together they indicated that the expansion may have stalled.



The condition of the labor force was not improving, the manu
facturing workweek declined in May, and manufacturing output apparently
decreased in June.

The help wanted index for Philadelphia reached a

high point in March and now stood several points below its

peak; in the

past this index had been a fairly reliable leading indicator.


stores, however, enjoyed good business in July after a lull in June.
The effects of somewhat less easy money had been reflected in
District banking data.
reporting banks.

Both loans and investments had declined at

Deposits, while increasing at country banks, had

declined somewhat at reserve city banks.

Borrowing from the Reserve Bank

and in the Federal funds market had been somewhat greater.

Mr. Bopp went on to comment that while the current Treasury
financing operation precluded any significant change in policy at this

time, other considerations also suggested a posture of watchful waiting.
Whether a recession had begun, was imminent, or was some way off, the

fact remained that the economy was operating at much less than optimum

Economic information for July and August might well turn out to

be no clearer than at present, but it could help in indicating the domestic
significance of any moves the Committee might consider making.
external problem,


As for the

would be important to see whether the recent improve

ment in psychology proved to be lasting.

And finally, it would be necessary

to observe the effects of the Treasury offering of longer term issues and
to consider further the role that fiscal and debt management policies
might play in coming months.


In short, Mr. Bopp said, he would continue policy essentially

unchanged, with reserve availability and market rates at about present

He would continue the existing discount rate and change the

directive as indicated by Mr. Hayes.
Mr. Bryan said that in reviewing the most recent data on the
Sixth District he found only three items of any significance that were
not available at the time of the preceding Committee meeting.


store sales were up in July, but this merely cancelled out the decline


Insured unemployment was up, along with bank loans.
After stating that he would not change the discount rate at this

time, Mr.

Bryan turned to the policy directive and said he would leave

unchanged for the reasons stated previously by others.

He found him

self in a position of agreement with present policy, but only because he
did not believe that any tightness existed.

Rather, as he read the

reserve figures, monetary policy had been fairly easy.

Like Messrs.

Robertson and Mitchell, he believed that the overriding consideration
was the condition of the domestic economy.

He would protest strongly

he felt that monetary policy actually was tight.
Mr. Francis reported that Eighth District business activity had

continued to show mixed trends.

While employment in major labor markets

rose more than seasonally from May to June, unemployment also increased.
Department store

The industrial use of electric power continued to rise.
sales declined in June, but apparently picked up in July.

Bank debits,



which had shown strength in the first
in June.

five months of the year, were down

Business loans rose sharply from May to June, but they were

changed through the first

three weeks of July, an increase in St.

Louis being offset by decreases elsewhere.
rose from May to the third week of July.

Deposits at District banks

Agricultural conditions were

generally favorable.
Mr. Balderston noted that a continuation of current policy for
at least the next two weeks was indicated because of the Treasury financ

It was his feeling that the System had gained some ground from the

fact that bill rates had varied moderately and the free reserve figuredue to uncontrollable forces--also had varied.

Bill rate developments

tended to counteract the view existing in some circles that the System,
in cooperation with the Treasury, was exercising sufficient control to
peg the rate.

While he could not be sure what would happen to the bill

rate later in the fall, he was impressed by the thought that deceleration
in the rate of inventory building, combined with the change in regulations
relating to allowable depreciation, would probably generate a strong
corporate demand for bills, thus exerting downward pressure on the bill

As to the directive, he had sympathy with the suggestions made by

Mr. Hayes because he felt that allusions to market disorders ought to be
confined to periods of great turbulence.
Chairman Martin commented that in his opinion a situation of easy
money existed.

He would be in complete agreement with the point of view

expressed by Messrs. Robertson and Mitchell if he thought that any further



easing would help the economy at the present time.

Instead, however, he

felt that such action would do harm to the economy.
The Chairman also commented that he had checked as carefully as
he could on the real estate situation around the country.

real estate values following a

the past he had noted a contraction in
stock market break.

At times in

However, he could detect at present no decline in

real estate values of any significance.

Wherever he had tapped sources

of information on mortgage funds, he had heard that such funds were press
ing on the market for investment.
In his opinion, Chairman Martin said, this was the kind of situ
ation in which easy money could compound difficulties.

He did not think

that the situation could be corrected by undergirding weak loan standards
or inducing people to

borrow money if

they did not believe they could

make a profit on it.
Turning to a summary of today's meeting, Chairman Martin said it
appeared to him that with two dissents (Messrs. Robertson and Mitchell)
the Committee was in favor of maintaining the status quo in terms of policy.
In his opinion, the status quo ought to be maintained, certainly, during
the period of Treasury financing, which would run through the August 15

payment date.

The next meeting of the Committee, he noted, would be held

on August 21.
Chairman Martin next turned to the policy directive and commented

that once again a problem of words seemed to be involved.

He would not



have any particular objection to the changes suggested by Mr. Hayes.

he thought a majority of the Committee probably would feel that

a decision to maintain the status quo applied also to the language of the
The Chairman then suggested that there be an expression as to the
number of Committee members who would favor maintenance of the status
quo in terms of the wording of the directive as well as policy.


he added, no particular free reserve target was going to add much to the
definition of status quo under present conditions.

In general, however,

he would propose to ascertain how many members of the Committee would like
to follow a policy of status quo--or even keel--during the next three weeks
and to retain the existing directive.
Mr. Hayes suggested that the questions be separated.
to be relatively little

There appeared

difference of opinion within the Committee on the

question of a policy of maintaining the status quo.

However, there seemed

to be more difference of opinion as to whether the changes that had been
proposed in the wording of the directive should or should not be adopted.
Chairman Martin indicated that he had no objection to proceeding
in such manner.

Accordingly, he called for a poll of the Committee on

the question of maintaining a policy position of status quo for the next
three weeks.
This poll revealed that all of the Committee members except Messrs.
Robertson and Mitchell favored maintaining the status quo during the next


three weeks.

Mr. Robertson qualified his dissent by saying that he would

not want to interfere with the Treasury financing and therefore would not
object to maintaining a status quo, or even keel,
such financing.

during the period of

Subject to that qualification, however,

he would vote

against the policy expressed in the current economic policy directive.
The positions of the Committee members on policy for the next
three weeks thus having been ascertained, the Chairman turned to the
question of preference as between retaining the language of the existing

current economic policy directive without change or eliminating the two
clauses mentioned earlier in the meeting by Mr. Hayes.
Of the ten members of the Committee who had previously indicated
that they favored maintenance of the status quo for the next three weeks,
Chairman Martin and Messrs. Bryan, Deming, Fulton, King, and Mills
expressed a preference for not changing the directive in any respect at
this time, while Vice Chairman Hayes and Messrs. Balderston, Ellis, and
Shepardson indicated that they would prefer to delete the two clauses in

Accordingly, it was understood that the suggested changes would

not be incorporated in the directive.
Thereupon, upon motion duly made and
seconded, the Federal Reserve Bank of New
York was authorized and directed until
otherwise directed by the Committee to
effect transactions for the System Open
Market Account in

accordance with the

following current economic policy directive:


It is the current policy of the Federal Open Market

Committee to permit the supply of bank credit and money to

increase further, but at the same time to avoid redundant bank
reserves that would encourage capital outflows internationally.
This policy takes into account, on the one hand, the gradualness
of recent advance in economic activity the availability of
resources to permit further advance in activity, and the

unsettlement of financial markets.

On the other hand, it

gives recognition to the bank credit expansion over the past
year and to the role of capital flows in the country's adverse

balance of payments.
To implement this policy, operations for the System Open
Market Account during the next three weeks shall, to the extent
consistent with the behavior of financial markets, be conducted

with a view to providing moderate reserve expansion in the bank
ing system and to fostering a moderately firm tone in money

Votes for this action:

Messrs. Martin,

Hayes, Balderston, Bryan, Deming, Ellis,
Fulton, King, Mills, and Shepardson. Votes
against this action:

Messrs. Mitchell and


was agreed that the next meeting of the Federal Open Market

Committee would be held on Tuesday, August 21, 1962.
There had been distributed to the Committee a report from the
Special Manager of the System Open Market Account regarding System and
Treasury operations in foreign currencies and on foreign exchange market
conditions for the period July 10 through July 25,

1962, as well as a

supplementary report for the period July 26 through July 30, 1962.


of these reports have been placed in the files of the Federal Open Market


Chairman Martin called upon Mr.

mentation of the written reports, and in

Sanford for comments in supple
response Mr.

Sanford made a

statement substantially as follows:
The time since the last Open Market Committee meeting
breaks down into two distinct periods. The first ran from
July 10 to July 20, during which the dollar continued to be
under constant strain, and the second began on Monday, July 23,
and continues up to the present time, during which there has
been a considerable firming of the dollar. The marked change,
of course, is related to President Kennedy's firm statement at
the Press Conference of July 23 transmitted by Telstar that
"The United States will not devalue its dollar. And the fact
of the matter is the United States can balance its balance of
payments any day it wants if it wishes to withdraw its support
of our defense expenditures overseas and our foreign aid."
Even before the President's statement, a slight easing of the
Swiss franc rate and reduction in the demand for gold had
already occurred early in the day on July 23, but by far the
larger impact came after the President's statement reached
On July 10 it will be recalled that the principal European
continental currencies, with the exception of the German mark,
were at or very close to their ceilings. Now the Swiss franc,
the Netherlands guilder, and the Belgian franc and, of course,
the German mark are appreciably below their ceilings. The
French franc and the Italian lira, however, remain firmly
anchored to their ceilings, and showed only slight tremors
immediately after the President's statement. For several days
the Italian authorities did not have to take in dollars, part
of which are absorbed by the U. S. Stabilization Fund, but more
recently the inflow has been resumed. In talking with the
Bundesbank on the telephone yesterday, the head of their foreign
exchange activities took the occasion to point out that over the
past weekend the dollar improved--the first weekend improvement
in some time. With the DM now at $0.250237 (par being 25 cents),
we have placed with the Bundesbank an order to acquire up to
$15 million equivalent of DMs at par as and when that level
should be reached, in order to replace DMs sold during the hold
ing operation of June and July. I would mention at this point
that further small sales of DMs (0.5 million) were made in the
early days of the past three-week period--by the System and the
Treasury. The System sales early in the period, like the sales



of DMs made in the preceding three weeks, were made under the
Open Market Committee's Authorization and Guidelines dated
February 13, 1962.
Turning to the guilder, the total amount of the $50 million
swap arrangement with De Nederlandsche Bank has now been used in
mopping up dollars accumulated by De Nederlandsche Bank. This
has been done in several steps and throughout the period the
thought was always present that the Dutch were free to take gold
if they felt they were compelled to do so. Actually this was
avoided by the Dutch suggesting that another swap arrangement of
$50 million be entered into, and as the Dutch did not wish to
give any publicity to this further amount, arrangements were
made for the U. S. Stabilization Fund to enter into this under
taking. A part ($15 million) of the Treasury's arrangement with
the Dutch has been used to provide guilders to the Bank of England,
which needed them for its repayment to the International Monetary
Fund, and thus to take the Bank of England out of the market as
soon as possible so that the Treasury could proceed with its
operations in the forward guilder market; and $5 million of
guilders has been drawn and placed on deposit. It was also
believed that a shorter-term swap arrangement was in order
because of the possibility in August of a substantial repayment
of funds by K.L.M. to United States banks. This morning the
guilder stands at 27-3/4 cents, appreciably down from its ceiling.
In other operations, I would mention that the $50 million
reciprocal swap arrangement with the Bundesbank, approved by the
Federal Open Market Committee by telegram, is being made effective
on August 2; a press statement will be issued on that day.
arrangement is on a standby basis and drawings may be made at any
time on two days' notice, if they should be required.
The French
have also indicated that their swap arrangement should be on a
standby basis and it now seems appropriate to accede to their
wishes coincident with establishing the German arrangement on a
standby basis. The Dutch, Germans, and French have all wanted
their swap arrangements to be on a standby basis, a pattern which
is now becoming more widespread, with the Netherlands, Bank for
International Settlements, Swiss National Bank, and German
arrangements on that basis.
We have had discussions with the
Banque de France, and subject to Committee approval, will
liquidate on August 2 the swap drawing and the arrangement will
be put on a standby basis as from that date.
Within the past three-week reporting period, the Swiss

franc swap arrangements with the Swiss National Bank and the
Bank for International Settlements were established, as you
know, and half of the $200 million was drawn and used to mop



up dollars acquired by the Swiss National Bank.

These arrange

ments were approved by the Committee at its last meeting, and
subsequently reported to the members and other Presidents.


morning the Swiss franc is quoted at $0.2313, also appreciably
below the Swiss intervention point.
Now a few words on the London gold market. The demand
there increased markedly between July 10 and July 20. The volume
of transactions reached record levels and the fixing price went

from $35.1138 on July 10 to $35.1434 on July 20.

Since that time

the turnover has declined very considerably, although it is still
at a higher level than earlier this year, and the price has
receded, to $25.1121, today. During the period of greatest volume,
the Bank of England had to sell more gold than it had accumulated
in previous months and it has replaced the greater part of this
gold by a purchase of $50 million from the United States in the
reporting week ended last Wednesday. Reactivation of the central
bank selling consortium has been considered with the central banks

but no action has been taken pending further observation of
developments in the London gold market.
Sterling, like the Continental currencies, was very firm
in the period between July 10 and 20, rising from about $2.80-1/2
to $2.80-3/4, but since that time has tended downward, and is now
back to $2.80-1/2. The Canadian dollar was very strong during
most of the three weeks, advancing from $0.9269 to as high as
$0.9277, but has recently eased back to $0.9272. In the process

the Bank of Canada has accumulated very large amounts of United
States dollars, perhaps in the order of $300 million.
At this moment I would request your approval of the revision
of the swap arrangement with the Bank of France. The other swap
arrangements referred to before have already been approved by the
And I also request ratification
of the sales of
DM 0.5 million, plus 1 million sold in the previous period and

delivered in the three-week period just closed.
Following Mr. Sanford's comments there was a discussion during
which question was raised with regard to public announcement of swap
arrangements on a standby basis, particularly in a case such as the
proposed conversion of the swap with the Bank of France to a standby
Mr. Sanford's reply brought out that in all of the swap arrange
ments entered into thus far the terms of the public announcement had been



the same no matter whether the swap was immediately activated (as, for
example, in the case of the British and French swaps) or whether the swap
was on a standby basis (as originally was true in the Dutch case).


other words, no distinction was made on that account so far as the press
release was concerned.

Accordingly, if the French swap or others were

converted to a standby basis, it was not contemplated that any public
announcement would be made.


was not expected that the mechanics of

at least on the Federal Reserve side, would be such as to

elicit any questions.

However, if any questions should be asked, it was

proposed to answer in terms that a technical change was involved and the
swap arrangement continued in force.

Sanford also brought out that presumably a standby swap

arrangement would be drawn upon only to spend the proceeds immediately,
so the transactions would wash out from the standpoint of foreign currency

When an active swap arrangement was converted to a standby basis,

there would of course be an effect on "other assets," but there are large
swings in that account for other reasons.

reply to another question,


Sanford confirmed that all


the outstanding swap arrangements were subject to renewal only upon agree
ment by the two parties.
on a three-month basis.

With one exception, the swap arrangements were
One swap (with the Bank of France) had been renewed

for a three-month period.
In reply to a question as to whether an initial swap arrangement
with the Netherlands Bank in an amount larger than $50 million would not



appear to have been desirable, Mr. Sanford expressed his understanding
that at the time the Netherlands Bank was not inclined to enter into an

arrangement in excess of that figure.

In the light of subsequent develop

ments, it now appeared that an arrangement involving more than $50 million
could have been useful, but that was in the nature of hindsight.

Thereupon, upon motion duly made and
seconded, and by unanimous vote, the open
market transactions in foreign currencies
during the period July 10 through July 30,
1962, were approved, ratified, and confirmed.

Upon motion duly made and seconded, and
by unanimous vote, authorization was given
for the liquidation of the existing swap
arrangement with the Bank of France and its
replacement by an arrangement on a standby

The meeting then adjourned.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102