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FIFTY-THIRD

Annual Report
BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM

COVERING OPERATIONS FOR THE YEAR

1966

La: i

BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM

Washington, April 19, 1967
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-Third Annual Report of the Board of Governors of the Federal Reserve System. This report covers
operations for the year 1966.

Yours respectfully,
W M . M C C . MARTIN, JR.,

Chairman.

Contents

Part I—REVIEW OF 1966
PAGE
INTRODUCTION

DIGEST OF PRINCIPAL POLICY ACTIONS

DEMANDS, RESOURCE USE, AND PRICES

Demands
Labor market
Wages and costs
Prices
MONETARY POLICY

Open market operations: January-June 1966
Adaptations in the mix of policy instruments:
July-September 1966
Move toward less monetary restraint:
October-December 1966
Operations in foreign currencies
Voluntary foreign credit restraint program
FINANCIAL FLOWS IN 1966

Borrowers and lenders
Nonfinancial business
Federal Government
Consumers
State and local governments
Rest of the world
Financial intermediation
Nonbank financial institutions
Commercial banks
Credit markets and interest rates
U.S. BALANCE OF PAYMENTS

Transactions in goods and services
Flows of U.S. capital
Flows of foreign capital
Official reserve transactions

13
19
21
21
25

25
28
33
35
37
43

45
45
48
52
54
55
57
57
62
69
75

77
79
81
83

Part II—RECORDS, OPERATIONS, AND ORGANIZATION
PAGE
RECORD OF POLICY ACTIONS—BOARD OF GOVERNORS

RECORD OF POLICY ACTIONS—FEDERAL OPEN
MARKET COMMITTEE

111

OPERATIONS OF THE SYSTEM OPEN MARKET ACCOUNT

202

Review of Open Market Operations in Domestic
Securities
Review of Open Market Operations in Foreign
Currencies

203
269

SPECIAL STUDIES BY THE FEDERAL RESERVE SYSTEM

291

INTERNATIONAL LIQUIDITY AND BALANCE OF
PAYMENTS ADJUSTMENT

295

BANK SUPERVISION BY THE FEDERAL RESERVE SYSTEM

Examination of Federal Reserve Banks
Examination of member banks
Misleading advertising
Federal Reserve membership
Bank mergers
Bank holding companies
Foreign branches of member banks
Acceptance powers of member banks
Foreign banking and financing corporations
Bank Examination Schools and other training activities
LEGISLATION ENACTED

Bank Merger Act amendments of 1966
Asian Development Bank
Destruction of unfit Federal Reserve notes
Defense Production Act of 1950
Direct purchases of Government obligations by
Federal Reserve Banks
Bank Holding Company Act and related statutes
Administrative Procedure Act
Interest on deposits; reserves of members banks; open
market operations
Financial Institutions Supervisory Act; Federal deposit
insurance
Member banks dealing in certain insured obligations;
real estate loans by national banks
Delegation of functions of Board of Governors
LEGISLATIVE RECOMMENDATIONS

Lending authority of Federal Reserve Banks
"Par clearance"
Reserve requirements

298

298
298
300
301
302
302
304
305
306
306
307

307
307
308
308
308
308
309
309
309
310
310
310

310
311
311

PAGE
LEGISLATIVE RECOMMENDATIONS—Cont.

Margin requirements for securities transactions
Purchase of obligations of foreign governments by Federal
Reserve Banks; loans to bank examiners; loans to
executive officers
LITIGATION

Whitney Holding Corporation, New Orleans, Louisiana
Baker, Watts & Co., et al. v. Saxon
Detroit Bank & Trust Co. et al. v. Saxon and Board of
Governors of Federal Reserve System
RESERVE BANK OPERATIONS

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

312
313
314

314
314
316
317

317
318
319
319
320
321

BOARD OF GOVERNORS

322

Building annex
Income and expenses

322
322

TABLES:

1. Detailed Statement of Condition of All Federal Reserve
Banks Combined, Dec. 31, 1966
2. Statement of Condition of Each Federal Reserve Bank,
Dec. 31, 1966 and 1965
3. Federal Reserve Holdings of U.S. Government Securities, Dec. 31, 1964-66
4. Federal Reserve Bank Holdings of Special Short-Term
Treasury Certificates Purchased Directly from the
United States, 1953-66
5. Open Market Transactions of the Federal Reserve System During 1966
6. Bank Premises of Federal Reserve Banks and Branches,
Dec. 31, 1966
7. Earnings and Expenses of Federal Reserve Banks During 1966
8. Earnings and Expenses of Federal Reserve Banks,
1914-66
9. Number and Salaries of Officers and Employees of
Federal Reserve Banks, Dec. 31, 1966
10. Volume of Operations in Principal Departments of
Federal Reserve Banks, 1963-66
11. Maximum Interest Rates Payable on Time and Savings
Deposits

326
328
332
333
334
335
336
338
340
340
341

PAGE

TABLES—Cont.

12. Margin Requirements
13. Federal Reserve Bank Discount Rates, Dec. 31, 1966
14. Fees and Rates Under Regulation V on Loans Guaranteed Pursuant to Defense Production Act of
1950, Dec. 31, 1966
15. Member Bank Reserve Requirements
16. Member Bank Reserves, Federal Reserve Bank Credit,
and Related Items, End of Year 1918-66 and End
of Month 1966
17. Principal Assets and Liabilities, and Number of Commercial and Mutual Savings Banks, by Class of
Bank, Dec. 31, 1966, and Dec. 31, 1965
18. Member Bank Income, Expenses, and Dividends, by
Class of Bank, 1966 and 1965
19. Changes in Number of Banking Offices in the United
States During 1966
20. Number of Par and Nonpar Banking Offices, Dec. 31,
1966
21. Description of Each Merger, Consolidation, Acquisition of Assets or Assumption of Liabilities Approved by the Board of Governors During 1966
MAP OF FEDERAL RESERVE DISTRICTS

341
342
342
343
344
346
347
348
350
352
379

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
INDEX

380
382
383
384
406

PART I
Review of 1966

I 7 \j f3 presented to monetary policy the challenge of coping
first with a too-exuberant upsurge in economic activity, and
later with a less ebullient economic outlook. The expansionary
forces in the economy, which had gathered momentum after
mid-1965, accelerated even more rapidly later that year and into
1966—with demands for goods, services, and credit expanding
faster than resource availability and financial savings. The convergent pressures on resources resulted in a strong and pervasive
rise in costs and prices—a rise that threatened the life of the
economic expansion—and in a further larger rise in U.S. imports,
which greatly reduced our surplus on international trade transactions.
Before the year ended, however, final demands for goods and
services were expanding at a more moderate pace. Monetary
policy therefore shifted toward less restraint on bank credit expansion, and interest rates began to decline from the high levels
attained during the year.

In late 1965 and early 1966 total spending had increased at
a very rapid pace. An acceleration in defense spending after
mid-1965, superimposed on a fast rise in civilian spending—
notably by businesses for new investment in plant and equipment—resulted in sharp upward pressures in many markets
for goods and labor. Demands for most types of credit soared.
To blunt the inflationary impact of credit-financed spending,
the Federal Reserve endeavored to slow the rate of monetary
expansion, first, by raising the discount rate in December 1965,
and then beginning in February, by reducing the rate at which
it supplied reserves to commercial banks through operations of
the System Open Market Account. With demands for credit
and capital remaining strong, with smaller amounts of nonbor-

ANNUAL REPORT OF BOARD OF GOVERNORS

rowed reserves being made available to banks, and with bank
credit constituting a smaller component of the total credit supply,
interest rates rose sharply.
The rise in interest rates and the related structural shifts in
credit and capital markets tended to divert flows of the public's
savings from financial intermediaries into direct acquisitions of
market securities. In this period mutual savings banks and
savings and loan associations were not subject to any fixed Federal ceiling rates on deposits and shareholdings. But because most
of their holdings were concentrated in long-term assets acquired
when interest rates were at lower levels, they could not increase
their returns on investments enough to make it possible for them
to pay rates on savings that would meet the competition. Insurance companies also experienced financial pressure; a sharp
increase in the demand for policy loans absorbed a larger
than normal proportion of their already heavily committed cash
flows, and there was a slowing down of prepayments on mortgage
loans and other credits.
While all depositary institutions were under strong competitive pressure from more direct types of investment in the
first half of 1966, commercial banks were able to maintain inflows of savings better than could other types of financial institutions because the maximum permissible rates payable by
banks on time deposits and the more rapid turnover of their
assets allowed more prompt compensatory upward adjustment
in portfolio yields. Banks also benefited from their ability to
offer a variety of deposit instruments geared to the needs of a
variety of savers. The continued sizable net inflow of new funds
enabled commercial banks to continue to expand their loans to
businesses rapidly through midsummer.
On the other hand, the reduced flow of savings to financial institutions other than commercial banks—which invest a major
share of their resources in real estate mortgages—resulted not
only in an increase in the cost of mortgage funds but also in a
sharp dropoff in their availability. Thus, the impact of restraint

FEDERAL RESERVE SYSTEM

on credit-financed spending during much of 1966 was most
evident in residential construction activity and in transfers of
existing dwellings.
Other areas of the economy were also affected by restraint on
credit and monetary expansion in 1966. Some of the moderation
in consumer spending for durable goods—for automobiles in
particular—was probably attributable to the higher charges
and more stringent lending policies that developed for consumer
instalment credit.
State and local government expenditures, too, were affected
by monetary restraint. Some units of government postponed
bond issues because of higher interest rates and the difficulties
they encountered in borrowing, as commercial banks—which as
a general rule buy large amounts of municipal issues—became
less inclined to buy such securities because of the very heavy
demand for loans by nonfinancial businesses and by finance companies.
Through midsummer, the business sector of the economy—
considered as a whole—felt the effect of monetary restraint less
than other sectors. Although their cost was high and was
rising, borrowed funds remained in relatively ample supply to
businesses, which in turn furnished some financing to their suppliers and customers. Despite their higher costs, both new corporate security issues and business borrowing from banks rose
sharply. As a result, aggregate spending by businesses on plant,
equipment, and working capital appeared to be little dampened
by financial restraint through the spring and early summer. But
by late summer monetary restraint also affected business financing, and total funds raised by corporate borrowers began to
decline sharply.
The rapid rise in business spending adversely affected the
U.S. balance on international trade. Demands for imported
materials rose, and as backlogs of orders of domestic producers
of machinery and fabricated products increased, purchases of
foreign goods mounted. Although our exports continued to

ANNUAL REPORT OF BOARD OF GOVERNORS

rise, imports showed a much sharper increase, and the result
was a significant drop in the trade balance.
However, monetary restraint in 1966 served to retard capital
outflows and to stimulate inflows. The changes in capital flows
were substantial and they served to offset the decline in the U.S.
balance on current account. Overseas branches of U.S. banks
attracted funds from foreign money markets and provided a substantial volume of funds to their head offices for lending in this
country, especially after midyear. There was also a large inflow
of foreign long-term capital to the United States—in part through
shifts from shorter- to longer-term assets on the part of international institutions and foreign central banks.
In response to the voluntary foreign credit restraint program
(VFCR), U.S. commercial banks in 1965 had brought almost
to a halt the rise in their outstanding credits to foreign borrowers.
The added pressure of financial market conditions in this
country resulted in some reduction in these credits in 1966.
During the summer the Federal Reserve took steps to alleviate
the uneven effects of financial restraint among the various
sectors of the economy by restraining the rapid growth of business loans at banks and also to dampen the escalation of interest
rates. The Board of Governors maintained the ceiling rate on
time deposits of commercial banks, fixed in December 1965 at
5Vi per cent. However, by early summer the intensification of
monetary restraint had caused market rates for financial instruments that are competitive with negotiable time certificates of
deposit (CD's) to rise to levels above the CD ceiling rate. During
the summer the Federal Reserve took several actions to make
it more expensive for banks to compete for large time deposits
—twice raising reserve requirements on time deposit holdings in amounts of more than $5 million at each member bank.
Further, on September 1 a letter was sent to each Federal Reserve member bank urging moderation in business loan expansion
in the interest of achieving a more balanced economic and
credit expansion. The letter assured banks losing deposits that
6

FEDERAL RESERVE SYSTEM

they would be able to borrow from the Federal Reserve Banks
for longer periods than normal if their adjustments to the deposit
losses were achieved through curtailment of lending activity
rather than through the sale of securities.
As a continued high volume of credit demands and increased monetary restraint resulted in rising market rates of
interest, commercial banks found themselves less able to accommodate business and other credit demands by competing for
the liquid funds of corporations. Because of the great pressure for
loanable funds, however, there was still the possibility that
these banks would intensify their competition for consumer
savings being held in nonbank financial institutions and thereby
put further pressure on such institutions and indirectly on the
homebuilding industry.
Under existing legislation the Federal Reserve could not base
any limitation of rate competition by banks on criteria of type
of saver or size of saving. But in late September the Congress
enacted broader enabling legislation, and promptly thereafter
the Federal Reserve and other regulatory authorities acted to
limit further, or to reduce, interest rates payable on certain types
of deposits and shareholdings in commercial banks, mutual savings banks, and federally insured savings and loan associations.
The purpose of this legislation, to be in effect for a year, was to
dampen the rate competition for savings among the various
types of financial institutions and to reduce the upward ratcheting
of interest rates to which such competition contributed. Over-all
pressures on financial markets reached their peaks in August
and early September.
By the early fall it became evident that monetary policy, aided
by certain fiscal restraints, including the suspension of the investment tax credit and accelerated depreciation privileges, was
achieving the objectives of curbing excessive aggregate demand
and of damping inflationary pressures. Defense spending did continue to rise sharply in the fall. But the rate of expansion in final
takings by the private sectors of the economy declined; indus-

ANNUAL REPORT OF BOARD OF GOVERNORS

trial production, retail sales, and new orders for durable goods
leveled off; and the rise in industrial prices moderated over this
time period.
In this situation Federal Reserve open market operations,
while still directed at maintaining firm money market conditions, were modified in light of the lack of growth in bank credit.
Then in November the Federal Open Market Committee shifted
its policy so as to stimulate a moderate renewed expansion of
bank credit and easier conditions in financial markets. And in
late December the Federal Reserve terminated the special discount arrangements of the September 1 letter.
By the end of 1966, pressures in financial markets had eased
significantly. Most market rates of interest had declined sharply
from their late summer peaks; banks were again able to compete successfully for funds with large negotiable CD's and also
to obtain consumer-type time deposits; and mutual savings banks
and savings and loan associations were beginning to have
larger inflows of funds. Bank credit was again expanding at
a substantial rate, and the mortgage market began to reflect an
easier availability of funds.

DIGEST OF PRINCIPAL FEDERAL RESERVE POLICY ACTIONS IN

1966

Action

Purpose

January

Reduced System holdings of U.S. Government securities, on balance, by about $650 million. Member bank
borrowings averaged about $400 million.

To continue to moderate money and credit market adjustments to the December 1965 discount rate increase early in the month, and then to offset seasonal
reflow of funds and maintain about the same money
market conditions that had prevailed in early January.

Februaryearly June

Limited the increase in System holdings of U.S. Government securities to about $1.5 billion. Average member bank borrowings rose to nearly $600 million.

To effect gradual reduction in net reserve availability
and thereby to restrain the growth in the reserve base,
bank credit, and the money supply.

June

Raised from 4 to 5 per cent the reserve requirements
against time deposits, other than savings deposits,
in excess of $5 million at each member bank, effective July 14 and 21 for reserve city and country member banks, respectively, thereby increasing required
reserves by about $420 million.

To exercise a tempering influence on the issuance of
time certificates of deposit by larger banks and to
apply some additional restraint on the expansion of
banks' loanable funds, thus reinforcing the operations of other instruments of monetary policy in containing inflationary pressures.

Made shorter-term bank promissory notes and similar
instruments issued after June 26, 1966, subject to regulations governing reserve requirements and payment
of interest on deposits, effective September 1, 1966.

To prevent future use of these relatively new instruments as a means of circumventing statutory and regulatory requirements applicable to bank deposits.

Period

%
xsi

DIGEST OF PRINCIPAL FEDERAL RESERVE POLICY ACTIONS IN
Action

Purpose

Limited the increase in System holdings of U.S. Government securities to about $800 million. Average
member bank borrowings rose to $750 million.

To continue to restrain bank credit expansion while
maintaining about the same state of net reserve availability and/or money market conditions and taking
account, at various times, of scheduled financings by
the Treasury, any unusual liquidity pressures, and any
significant deviations of required reserves or bank
credit from current expectations.

Period

Early JuneSeptember

July

1966—Continued

To help forestall excessive interest rate competition
among financial institutions for consumer-type time
deposits.

Granted temporary authority to the Federal Reserve
Banks to provide emergency credit facilities, under
certain conditions, to nonmember depositary-type institutions, including mutual savings banks and savings
and loan associations. No lending was necessary
under this authority.
August

Lowered from 5 /i to 5 per cent the maximum rate payable by member banks on new multiple-maturity time
deposits of 90 days or more, and from 5Vi to 4 per
cent the maximum rate payable on such deposits with
maturities of less than 90 days.

To assure that funds could be provided to assist in meeting unusual withdrawals that might develop at nonmember depositary institutions and to safeguard
against the possibility of additional pressures on mortgage and securities markets resulting from such exceptional withdrawals.

Raised reserve requirements from 5 to 6 per cent against
time deposits, other than savings deposits, in excess
of $5 million at each member bank, effective September 8 and 15 for reserve city and country banks,
respectively, thereby increasing required reserves by
about $450 million.

To exert a tempering influence on the issuance of certificates of deposit by the larger banks and to apply
some additional restraint upon the expansion of bank
credit to businesses and other borrowers.

H
O

I
1

September

\
)
j
I
!
f

Requested member banks to moderate their rate of expansion of loans, particularly business loans; indicated that bank use of Reserve Bank discount facilities
would be expected to be in a manner consistent with
this objective; and noted the continuing availability
of discount facilities to cushion deposit shrinkages.

To moderate excessive expansion of business loans at
banks and at the same time to avoid additional pressure on financial markets resulting from further substantial liquidation by banks of municipal securities
and other investments to obtain loanable funds; also
to reaffirm availability of Federal Reserve credit assistance in case of deposit shrinkages.

j In exercise of authority given by new temporary legislaj
tion, reduced from 5 ^ to 5 per cent the maximum
j
interest rate payable on any time deposit under
\
$100,000, other than savings deposits, effective Sep!
tember 26.

To limit further escalation of interest rates paid in competition for consumer savings, and to help keep the
growth of commercial bank credit to a moderate pace.

October\
late Novem- \
ber
i

Increased System holdings of U.S Government securities by nearly $500 million. Average member bank
borrowings declined to $680 million.

To permit somewhat less firm conditions in the money
market in view of the recent lack of growth in bank
credit.

Late Novem- j
ber-Decem- j
ber
j
;

Increased System holdings of U.S. Government securities by about $970 million, including about $660 million in repurchase agreements. Average member bank
borrowings declined to $550 million.

To relax monetary restraint somewhat in the light of
both the outlook for slower economic growth and
persisting lack of expansion in bank credit.

December

Issued new 1967 guidelines for banks and other financial institutions as part of broader governmental program of voluntary foreign credit restraint.

To continue, and in some respects to intensify, the voluntary effort to restrain the outflow of private capital.

Terminated special discount arrangements announced
on September 1 when member banks were asked to
curtail their business loan expansion.

To eliminate discount arrangements that were no longer
needed, since expansion in business loans had been
reduced to a moderate rate and banks were no longer
unloading securities in unreceptive markets to obtain
loanable funds.

ANNUAL REPORT OF BOARD OF GOVERNORS

DEMANDS, RESOURCE USE, AND PRICES

During 1966 the economy extended the expansion in output,
employment, and incomes that had been under way since the
cyclical low in February 1961. Under the impetus of sharp
increases in defense spending and in business expenditures for
plant and equipment, the economy approached full use of resources. Unemployment declined to the lowest rate in more than
a decade, and industrial capacity was more fully utilized than at
any time since 1953.
But the achievement of substantially full employment had its
costs. As activity pressed harder on resource availability, a
pervasive rise in prices and costs threatened a return to inflationary
conditions that had been characteristic of earlier postwar upswings, but that had been avoided in the prolonged and balanced
expansion from 1961 to 1965. The expansion in domestic demand stimulated a surge of merchandise imports, which rose half
again as much as exports; the U.S. foreign trade surplus, which
had declined substantially in 1965, fell even further in 1966. And
the pressure of defense and business investment demands preempted financial as well as physical resources—forcing a sharp
curtailment in homebuilding.
As the monetary and fiscal restraints took hold, the excessively
rapid rate of expansion moderated. Industrial production leveled
off after August, and the rate of capacity utilization in manufacturing eased slightly. The pace of price increases diminished—
led by lower prices for farm products and for industrial materials.
Expansion in over-all economic activity was maintained at a fast
pace late in the year by the unusually large proportion of output
that went into business inventories; in some industries, such
as steel and autos, production schedules were being reduced.
The prompt easing of monetary policy, however, was giving evidence before the year-end of laying the groundwork for a revival
in the homebuilding industry.
12

FEDERAL RESERVE SYSTEM

DEMANDS

Our gross national product totaled $740 billion (in current
dollars) in 1966, an increase of $58 billion, or 8.6 per cent, from
1965. This was a larger increase than had been anticipated by
most official and private projections early in the year, in part
because prices advanced more than expected. The GNP price
deflator rose on average by 3.0 per cent, the largest advance
since 1957. The rise in GNP in constant dollars amounted to 5.4
per cent, compared with 5.9 per cent in 1965 and 5.3 per cent
in 1964.
Expansion was most rapid in the first quarter. After that,
the rate of gain was slower, as declines in some important sectors
—particularly residential construction and autos—partially offset continued expansion in other key areas of demand. A
stepped-up rate of increase in the fourth quarter represented a
bulge in inventory accumulation; Government purchases rose
less rapidly than in the third quarter, while expansion in final
purchases of goods by the private sector virtually halted.
Industrial production also showed a very large increase in
1966, with the Board's index rising by 9 per cent, to 156 per cent
of the 1957-59 average, from 143 per cent in 1965. In 1965
the increase had amounted to about 8.5 per cent. By this
measure, too, growth was most rapid early in 1966; after August
the index showed little net change.
Defense needs associated with the escalation of military activity in Vietnam exerted a substantial expansive influence on
over-all economic activity throughout 1966. Federal spending
for defense had begun to rise in the spring of 1965, and it accelerated during most of 1966, with an exceptionally sharp rise in
the third quarter. New and unfilled orders for defense rose
rapidly until late in the year, and the Armed Forces were expanded in substantial numbers. Defense outlays for the calendar
year totaled $60 billion, up $10 billion from 1965 and considerably in excess of the rise contemplated early in the year.
Federal expenditures other than for goods and services also

ANNUAL REPORT OF BOARD OF GOVERNORS

rose sharply in 1966, reflecting mainly increased social security
benefits and grants-in-aid to State and local governments. Payments under the new medicare program increased sharply after
the program went into effect at midyear. Altogether, total Federal expenditures on the national-income-accounts basis totaled
$142 billion in 1966, up almost $19 billion from 1965.
The Federal Government budget as measured in the national
income accounts shifted from a moderate surplus in the first half
of the year to a sizable deficit in the fourth quarter. For the
calendar year as a whole, despite the very large increase in
outlays, there was a slight surplus—$0.3 billion. In the calendar
year 1965, the surplus had amounted to $1.6 billion. The virtual
balance of receipts and expenditures in 1966 was achieved
in part by higher tax receipts from sharply increased incomes.
But it also resulted from several policy actions in the fiscal area;
these included (1) an increase effective at the beginning of the
year in social security tax rates and a rise in the taxable
wage base; (2) the withdrawal beginning April 1 of excise tax
reductions on automobiles and telephone service, which had gone
into effect on January 1; (3) the establishment of a graduated
schedule for withholding taxes on individual incomes, effective
in May; and (4) the institution of taxes at midyear to cover
payments under the medicare program.
State and local government purchases rose by almost $7 billion in 1966, the largest dollar increase on record. The sharp
increases in grants from the Federal Government were a significant influence. The large expansion in purchases by these governments placed further pressure on available resources, particularly
of manpower.
In the private sector, business spending on fixed capital was
a major expansive force in 1966. Such outlays increased by
$9.6 billion, or almost 14 per cent, to $79.3 billion. For the
year such expenditures accounted for 10.7 per cent of GNP, the
highest annual ratio of the postwar period, slightly exceeding
14

FEDERAL RESERVE SYSTEM

the previous peak of 10.4 per cent reached in 1948 and again
in 1956.
Expenditures on equipment increased sharply throughout the
year, but investment in structures declined after the first quarter, as builders of commercial structures—which are more dependent on mortgages than are industrial plants—found increasing difficulty in obtaining credit. Expenditures on fixed capital
increased less rapidly in the second half of the year than in the
first, and as reported in the Commerce-SEC survey taken in
November, nonfarm business concerns significantly scaled down
earlier intentions to spend for the first time since 1963. The
survey also indicated a marked reduction in the prospective pace
of expansion in business spending for fixed capital in the first
half of 1967.
Influences contributing to the sharp increase in spending for
fixed capital in 1966 included the continued rapid rise in output
—particularly in late 1965 and early 1966, when spending
plans for the year were largely formulated; the sharp stepup in
defense requirements; the high rates of capacity utilization in
manufacturing throughout the year; the high levels of profits and
flows of internal funds; and the stimulus exerted by the investment tax credit and provisions for accelerated depreciation.
Profits both before and after taxes were at record highs in the first
half of the year.
But after midyear profits declined, in part because of rising
unit labor costs. For the year as a whole, corporate profits after
taxes totaled about $48.5 billion, a rise of nearly $4 billion, or
9 per cent, from 1965. This was a distinct slowdown from the
15 per cent rise in 1965. There was some increase for the year in
internal funds—that is, chiefly undistributed profits and depreciation allowances—but it was less than the rise in outlays for fixed
capital. At the same time, further steps in the transition to a full
pay-as-you-go system for corporate income taxes were taken. This
speedup in tax payments did not show in the national income accounts (which are on an accrual basis), but it intensified corpo-

ANNUAL REPORT OF BOARD OF GOVERNORS

rate needs for external financing. Altogether, business concerns
early in the year apparently underestimated the extent to which
they would have to resort to external financing and did not foresee
the difficulty they would encounter in obtaining that financing.
In the manufacturing sector, growth in output early in the
year exceeded, and then until late in the year about matched, the
exceptionally large rise in capacity, which amounted to around 7
per cent compared with about 6.5 per cent in 1965 and 4 per
cent in 1964. The capacity utilization rate for 1966 averaged
91 per cent, with only the fourth quarter—at 90 per cent—
slightly below this. The average for the year was 2 percentage
points higher than in 1965 and was the highest since 1953.
Utilization rates were particularly high in such industries as
nonferrous metals, fabricated metals, instruments, nonelectrical
machinery, aircraft, and rubber and plastics.
The pressure of rising demands for defense and for business
fixed capital, along with expectations that materials would be
scarce and that prices would rise, provoked the largest inventory buildup of the expansion period. Almost one-half of
the increase in the book value of inventories at the manufacturing
level from late 1965 to late 1966 occurred in the business and
defense equipment industries.
For manufacturing and trade as a whole, accumulation tended
to exceed the growth in sales, which changed little after midyear, and the stock/sales ratio rose persistently after the first
quarter, particularly for durable goods. This development was
in contrast to earlier years of this expansion when the over-all
ratio of stocks to sales had tended downward. A sharp upward
bulge in the rate of accumulation during the fourth quarter
appears to some extent to have been involuntary. For consumer
durable goods, with sales lagging late in the year, stocks became
excessive at both factory and distributive outlets, and production
curtailments were instituted by manufacturers of automobiles
and some major appliances. Farm stocks decreased slightly for
the year as compared with moderate accumulation in 1965.
16

FEDERAL RESERVE SYSTEM

In contrast to expansion in most other sectors, residential construction activity declined sharply. Nonfarm housing starts,
which had shown an irregular downtrend during the previous
2 years, dropped to unusually low levels after midyear and in the
fourth quarter were at a seasonally adjusted annual rate of less
than 1 million units. The total of 1.2 million starts for the
year, the lowest since 1957, compared with 1.5 million in 1965
and a recent peak of 1.6 million in 1963.
The steepness of the drop in housing starts reflected for the
most part the restrictive conditions that developed in the mortgage market toward the end of 1965 and the further tightening
during most of 1966. But there were other contributing factors,
such as overbuilding in the West and in some other regions in
earlier years and the dampening effects on demand of continuing increases in costs of land, materials, and wages. While the
decline was relatively greater for multifamily buildings, it affected all types of structures and all areas of the country.
Residential construction expenditures, which are far less volatile than starts and which tend to lag them, dropped appreciably
after April and were still declining at the year-end. However,
the decline over the year was not so pronounced as it was in the
case of starts, owing to rising unit prices and a further shift in
the mix from multifamily structures to the more expensive singlefamily units. For 1966 as a whole, the total value of nonfarm
residential construction activity approximated $25 billion, only
moderately below the record 1964 and 1965 totals.
Consumer spending on goods and services is dependent primarily on after-tax income, but other influences also affect consumer propensity to spend and save. During 1966 some significant fluctuations appeared in the allocation of consumer income
between spending and saving, although for the year as a whole
the saving rate was close to the 5.4 per cent average of the years
1960-65. A slowdown in consumer spending in the second
quarter of 1966 was associated with a relatively slow growth in
after-tax income. A renewed upsurge in consumer spending in

ANNUAL REPORT OF BOARD OF GOVERNORS

the summer reflected both a stepped-up rise in after-tax income
and a reduction in the saving rate. In the fourth quarter after-tax
income showed a sharp increase, but consumer purchases of
goods leveled off and the saving rate rose from 4.8 to 5.9 per
cent of income.
In total, consumers increased their spending by almost 8 per
cent in 1966, compared with 7.5 per cent in 1965. But with
consumer prices rising rapidly, the increase of about 5 per
cent in the physical volume of purchases, while large, was somewhat less than in 1965. The increase in constant dollars
amounted to only 3 per cent when measured from the fourth
quarter of 1965 to the fourth quarter of 1966.
Spending for services increased sharply throughout 1966. In
current dollars the increase was about 8.5 per cent: and in constant dollars 4.7 per cent, a little more than in 1965. Purchases
of nondurable goods showed sizable increases for the first three
quarters, but virtually leveled off in the fourth quarter. For the
year such purchases were up 8 per cent in current dollars; in
constant dollars the rise was 4.2 per cent, about the same as
in 1965.
In contrast, purchases of durable goods, particularly automobiles, slumped in the spring quarter, in part because of adverse
publicity on auto safety and also because of the relatively slow
rise in disposable personal income as large final settlements were
made on 1965 tax liabilities and the graduated withholding tax
went into effect. Subsequently, total purchases of durable goods,
but not automobiles, recovered to a level close to that of the first
quarter. For the year as a whole, sales of automobiles totaled 9
million units, including imports, compared with the record 9.3
million units sold in 1965.
Substantial increases in output, employment, and wages resulted in an increase of 8.5 per cent in personal income in 1966,
more than in 1965. Wages and salaries, as usual, accounted for
the bulk of the rise, but all other major types of income were up
for the year as a whole. Farm income peaked in the first quar18

FEDERAL RESERVE SYSTEM

ter, as prices received by farmers climbed steeply; and then it
declined as prices of farm products came down. Transfer payments showed the largest dollar increase of the postwar period.
Disposable personal income (that is, personal income after
taxes) also showed a large increase for the year, but when measured from fourth quarter to fourth quarter the relative rise was
considerably smaller than it had been during 1965. Personal tax
payments rose sharply throughout 1966, in part because of the
introduction of graduated withholding rates. With consumer
prices up considerably, the rise in constant-dollar disposable income from the fourth quarter of 1965 to the fourth quarter of
1966 amounted to only 3 per cent, compared with about 7 per
cent over the preceding year. In fact, it was the smallest increase
for such a period since 1960.
LABOR MARKET

Demands in the labor market were strong in 1966. Employment
in nonfarm industries expanded vigorously, and the labor market became very tight. Increased Government expenditures for
defense, augmenting already strong demands at the end of
1965 for both capital goods and consumer durable goods, generated the largest annual rise in nonfarm employment since early
in the Korean war. Meanwhile, unemployment averaged less
than 4 per cent for the first time in more than a decade. In the
fourth quarter of 1966 nonfarm payroll employment was 2.9
million persons, or 5 per cent, higher than a year earlier, and the
unemployment rate was 3.7 per cent, down 0.4 of a percentage
point from a year earlier.
The influence of spending for defense and capital goods was
reflected in very large gains in employment in durable goods
manufacturing, where employment rose by 8 per cent over the
year. The impact of military spending was especially strong in
the electrical equipment and aircraft industries. In other durable
goods industries, however, employment gains were not nearly so
impressive, especially after the spring when employment in the

ANNUAL REPORT OF BOARD OF GOVERNORS

automobile industry leveled off and manufacturers of construction materials began to feel the effect of the reduction in residential building. Employment in the construction industry dipped
after the spring, and by the year's end the number of jobs was
140,000 below the March peak.
Employment in the trade and service industries continued to
grow at a rapid pace in 1966. Government needs helped to put
increased pressure on the labor supply. Government civilian
employment expanded by 800,000, or 8 per cent, the most rapid
increase since the Korean war; more than two-thirds of the rise
was in the State and local government sector. In addition, in the
12 months ending December, the Armed Forces were expanded
by about 500,000 men—drawn largely from those 20 to 24
years old who otherwise would have been in the civilian labor
force.
The intense demands for labor put pressure on the available
supply of skilled and experienced workers during 1966, and
the unemployment rate for adult men was reduced to close to
2 per cent—virtually a frictional level. As a result, employers
turned more and more to women and to youths to fill their
labor needs. Record numbers of teenagers entered the labor
force during the summer, and they found jobs readily available.
But large numbers were interested only in vacation-time jobs,
and they left the labor force when schools reopened in September. Altogether, teenagers provided less than 300,000 of the
1.6 million increase in the labor force between the fourth quarters of 1965 and 1966. Since so few men were available, either
among the unemployed or outside the labor force, women contributed most—almost three-fourths—of the increase in the
civilian labor force over the year.
Increased manpower requirements were also met through
expansion of on-the-job training, upgrading of workers, and
additional overtime. For most of 1966, hours of work in manufacturing were higher than during the Korean war.
The decline of about 250,000 in total unemployment from
20

FEDERAL RESERVE SYSTEM

the fourth quarter of 1965 was reflected in lower unemployment
rates in a wide range of occupations and industries. But most of
the decline occurred early in the year, and after that the unemployment rate remained on a plateau, ranging—with one exception—from 3.7 to 3.9 per cent. Little improvement was evident
in the typically high unemployment rates of teenagers. The
unemployment rate among nonwhite workers showed virtually
no change at an average of 7.3 per cent.
WAGES AND COSTS

Earnings rose substantially during the year in most industries—reflecting upward adjustment of wage rates in a
tightened labor market, more overtime work at premium pay,
rapid increases in consumer prices, and cost-of-living wage adjustments for some 2 million workers. Many new settlements in the
second half of the year provided for annual increases of around
5 per cent. For production workers in manufacturing, average
hourly earnings in the fourth quarter of 1966 were 4 per cent
higher than a year earlier; the annual increase from 1960 to
1965 had averaged less than 3 per cent. Larger than average
increases were reported in construction and trade and in some of
the service industries.
In manufacturing, increases in wages exceeded the gains in
productivity during 1966, which were smaller than in 1965 and
other recent years. As a result unit labor costs, which had been
holding steady for several years, rose and toward the end of
1966 averaged 2.6 per cent higher than a year earlier. For the
private economy as a whole, gains in productivity were also
quite modest; for the year they averaged 2.8 per cent—about
equal to the rise in 1965 but substantially below the average of
3.6 per cent for the 5 years from 1960 through 1965.
PRICES

The pressures on resources that had begun to accumulate
during the second half of 1965 were followed by an accelerated

ANNUAL REPORT OF BOARD OF GOVERNORS

rise in prices of goods and services in 1966. The consumer price
index rose by 3.3 per cent over the 12 months ending December
1966, as compared with 2 per cent the year before; in the
period 1961—64 the average annual increase had been about
1.5 per cent.
While the rise in the wholesale price index over the 12 months
ending December was only half the increase that had occurred
in 1965—1.7 per cent versus 3.4 per cent—the moderation
reflected an easing of supply pressures in markets for agricultural
products and for some sensitive industrial materials that more
than offset in the total index the intensified pressures on industrial products. Wholesale prices of foodstuffs, after rising in 1965
and during much of 1966, turned down in the autumn in response
to some improvement in supplies and supply prospects. As a
result the net increase over the 12 months ending December was
considerably less than that for 1965, when market supplies of
some foodstuffs were sharply reduced. In contrast, the increase
in wholesale prices of industrial commodities was the largest
since 1956.
There were several distinctive features of the behavior of
prices in 1966. For one thing, consumer services played an
unusually important role in the rise. Secondly, supplies of certain agricultural commodities became short in 1965 for the first
time in many years and remained short during much of 1966,
with a consequent effect on their prices. Thirdly, the rise in industrial commodity prices, although the largest in a decade, was
not especially large for an economy that was expanding as fast as
the U.S. economy was in 1966; at wholesale, the December-toDecember increase was only around 2 per cent as compared
with 1.5 per cent during 1965. At the year-end the industrial
average was only about 3 per cent higher than in late 1959 and
early 1960, prior to the slight decline that occurred in the
1960—61 business recession.
The increase in prices of consumer services in 1966 amounted
to 5 per cent. This was more than twice the average increase
22

FEDERAL RESERVE SYSTEM

in the preceding 4 years. Services included in the consumer price
index are diverse, and the acceleration in the price rise in 1966
reflected more rapidly rising wages and labor costs in response
to labor market pressures, in addition to continued expansion
in consumer demands.
The rise in costs of medical care, led by hospital services, was
especially large; the increase—8 per cent—was double that for
1965 and was equal to the increase in 1946 when war-time price
controls were removed. Mortgage interest rates, which have a
relatively large weight in the consumer index for services,
rose sharply in 1966 as a consequence of monetary policies designed to restrain the excessive expansion in aggregate demands
and an associated rise in the general price level. Costs of transportation and other groups of services showed average increases
of between 4.0 and 5.5 per cent; and rent rose by 1.6 per cent.
The small net increase in wholesale prices of foods and foodstuffs, following the large rise of 1965, reflected substantially
offsetting movements for major commodity groups. Prices of
livestock and meats, which had accounted for so much of the
over-all rise in 1965, advanced somewhat further in early 1966.
Later they declined sharply in response to expansion in supplies, and at the end of the year they were considerably lower
than at the beginning. Late in the year, improvement in actual
and prospective supplies brought about decreases in prices of
grains and soybeans, but prices remained well above their levels
at the end of 1965. Prices of milk and dairy products and of
bakery products, on the other hand, rose substantially.
Increases in prices of industrial products were fairly widespread in 1966—although they were large in relatively few cases
—and seemed to reflect a combination of pressures of demands
against resources and some increases in labor and other costs.
In a few instances, prices were influenced by special supply
problems. Prices of machinery and equipment, for example, rose
by 5 per cent compared with less than 2 per cent in 1965; booming demands for both business and defense equipment were

ANNUAL REPORT OF BOARD OF GOVERNORS
confronted by the limitations of plant capacity and by shortages
of certain labor skills, which resulted in a large buildup of order
backlogs and undoubtedly some increases in costs.
Prices of consumer goods other than foods rose by about
2 per cent at both wholesale and retail levels, after rising by
about 1 per cent during 1965; increases were more prominent
among nondurable goods than among durable goods. Costs and
prices of finished goods were subject to some upward pressures
because of increases in prices of materials. Reflecting supply
problems as well as strong demands, prices of hides, lumber, and
copper and copper scrap—and prices of certain intermediate
products that embody these materials—rose quite sharply in
early 1966. As a result the average for all industrial materials
showed a rapid upward trend. Prices of these sensitive or basic
materials turned down during the spring and summer—bringing
prices of some of the intermediate products down moderately—
and the rise in prices of many other materials tapered off. At the
year-end average prices of industrial materials were only 1.5 per
cent higher than a year earlier; this was the same amount of
increase as during 1965.

FEDERAL RESERVE SYSTEM

MONETARY POLICY

The policy of monetary restraint pursued by the Federal
Reserve during most of 1966 was carried out through a wide
variety of instruments—including open market operations, discount window administration, reserve requirements, and policy
regarding maximum interest rates on time deposits. The intensity
of restraint and the mix of monetary policy instruments were
adjusted flexibly during the course of the year, as inflationary
pressures generated by the business investment boom and expansion in defense spending intensified and then moderated, and
as it became necessary to modify the uneven impact of over-all
monetary restraint on different sectors of the economy. During
the final months of the year, monetary restraint was relaxed
as certain additional Federal fiscal actions of a restrictive nature
were taken and as evidence of moderating tendencies in economic
activity and commodity prices accumulated.
OPEN MARKET OPERATIONS: JANUARY-JUNE 1966

Following the increase in the Federal Reserve discount rate to
AVi per cent and in maximum interest rates payable on time deposits to 5Y2 per cent in December 1965, short- and long-term
market interest rates rose sharply. Credit demands, which had
expanded substantially in late 1965, continued to expand in early
1966. Operations for the Federal Open Market Account in that
period were conducted so as to smooth the adjustments in credit
markets. Because nonborrowed reserves were supplied generously in December 1965 and in January 1966, member banks
had no need to increase their borrowings from the Federal Reserve Banks. The 3-month Treasury bill rate, which had closed
1965 at almost 4.50 per cent, generally fluctuated within a range
of 4.50-4.65 per cent during the early weeks of 1966.
After the usual year-end ebbs and flows of funds had subsided,
and credit markets had adjusted to the new higher level of interest rates, monetary policy gradually exerted further restraint

ANNUAL REPORT OF BOARD OF GOVERNORS

through open market operations. With credit demands strong,
prices of goods continuing to rise, and the balance of payments
still unsatisfactory, the Federal Reserve began to supply reserves
less freely to banks. Over the February-June period, nonborrowed reserves rose by only 1.7 per cent (seasonally adjusted
annual rate), as compared with a 4.8 per cent rate of rise from
mid-1965 through January 1966. However, around the MarchApril tax period, and again around midyear, the Federal Reserve
supplied nonborrowed reserves to banks in substantial volume to
NONBORROWED RESERVES decline after mid-1966 but rise late in the

1 year as monetary policy eases and member bank borrowings decline

23.0

22.5
NONBORROWED RESERVES

22.0 c

21.5
BORROWINGS

NET BORROWED RESERVES

1965

1966

Nonborrowed reserves: Seasonally adjusted monthly averages of daily figures for all member
banks, adjusted to eliminate effects of changes in reserve requirement raitios. Series reflects
current percentage requirements effective Sept. 15, 1966. Borrowings and net borrowed and
net free reserves: Monthly averages of daily figures, not seasonally adjusted, for all member
banks.

FEDERAL RESERVE SYSTEM

help moderate the additional money market pressures being
generated by the enlarged temporary needs of corporations for
funds to meet accelerated tax payments. Banks borrowed increasingly more from the Federal Reserve Banks' discount window as the first half of the year progressed, and these borrowings
rose from an average of about $400 million in January to about
$675 million by June. With the rise in borrowed reserves, total
reserves of banks rose at a rate of about 4 per cent in FebruaryJune, little different from the pace of aggregate reserve expansion
of the previous 7 months.
Over-all, during the February-June period the increased
restraint in the provision of nonborrowed reserves and the continued large demands for credit were reflected in generally rising
money market rates—including those on Federal funds, dealer
loans, commercial and finance company paper, and short-term
Federal agency issues. Banks raised their prime loan rate during
this period; and there were marked increases in most long-term
interest rates in conjunction with a surge of security issues,
especially of corporate bonds and of issues by the Federal Government of participation certificates. Despite the pressure being
exerted on financial markets, however, the 3-month Treasury
bill rate generally remained within its early-in-the-year range,
as market pressure from bank liquidations of U.S. Government
securities was offset by a very sizable decline in the volume of
Treasury tax bills outstanding.
As a result of the advances in interest rates on a variety of
short- and long-term market instruments, both banks and nonbank financial institutions found it difficult to hold and attract
funds of individuals and other investors, who increasingly placed
their funds directly in relatively high-yielding market instruments.
In March, after the prime loan rate was raised, banks bid much
more actively to attract funds into time deposits. They sought
funds from corporations by raising rates on negotiable CD's toward the ceiling rate of 5Vi per cent; they also increased their
efforts to attract time deposit money from consumers through the

ANNUAL REPORT OF BOARD OF GOVERNORS

issuance of a variety of savings instruments. With increased competition for savings flows not only from market instruments but
also from banks, other depositary institutions (savings and loan
associations and mutual savings banks) found it especially
difficult to attract savings funds, and in consequence the availability of new mortgage commitments from these lenders was
severely restricted.
ADAPTATIONS IN THE MIX OF POLICY INSTRUMENTS:
JULY-SEPTEMBER 1966

The problem of retaining savings funds was particularly acute
for savings and loan associations around the midyear interestcrediting period, and in July savings shares outstanding at these
institutions declined, after seasonal adjustment. Bank credit,
meanwhile, had expanded fairly fast during the spring, and
the pace of expansion accelerated around midyear. Borrowings
from banks by businesses grew very rapidly in June and July, in
part to finance the large accelerated tax payments that businesses had to make in that period but also to finance their
increased capital outlays.
With business loan expansion adding to inflationary pressures
and with the impact of tighter credit conditions falling heavily
on nonbank institutions and therefore on mortgage markets, the
Federal Reserve adapted the mix of policy instruments to help
redistribute the impact of financial restraint. On June 27 the
Board of Governors announced an increase in reserve requirements from 4 per cent to 5 per cent on time deposits in excess
of $5 million to be effective in mid-July. In mid-August it announced another increase in such requirements to 6 per cent, to
be effective around mid-September. Also, promissory notes of
banks maturing in less than 2 years were made subject to regulations governing reserve requirements and payment of interest
on deposits. In addition, in mid-July the Board of Governors
had lowered the maximum rate of interest payable on new
multiple-maturity time deposits to 5 per cent on such deposits
28

FEDERAL RESERVE SYSTEM

maturing in 90 days or more and to 4 per cent on such deposits
maturing in less than 90 days in order to help forestall excessive
interest rate competition among financial institutions. At the
same time the Board supported legislation containing broader
authority for itself and for the Federal Deposit Insurance Corporation and the Federal Home Loan Bank Board to govern the
interest rate practices of banks and savings and loan associations.
INTEREST RATES hit new highs in late summer,
then decline

-6

FHA MORTGAGES

-5
BONDS:

CORPORATE Aaa
NEW ISSUES

4
U.S. GOVERNMENT

m
STATE AND LOCAL GOVERNMENT Aaa
FEDERAL FUNDS

F.R. DISCOUNT
RATE - N . Y . ^ ^

_____

TREASURY BILLS

-3

1963

1964

1965

1966

Federal funds, effective rate. For other notes see p. 71.

Under a program authorized by the Board of Governors, the
Federal Reserve also instituted procedures whereby emergency
credit facilities could be provided through the Federal Reserve

ANNUAL REPORT OF BOARD OF GOVERNORS

Banks under specified conditions to nonmember depositary-type
institutions, including mutual savings banks and savings and
loan associations. While no actual use was made of these
emergency credit facilities, their availability provided a safeguard
against the possibility of additional pressures on mortgage and
securities markets resulting from exceptional deposit losses at
nonmember financial institutions.
Open market operations during the summer complemented
the changes in reserve requirements and in time deposit rates—by
limiting the availability of reserve funds to banks to the extent
consistent with orderly market conditions. Nonborrowed reserves
declined during the third quarter, and banks were forced to rely
somewhat more heavily on borrowed reserves and on funds attracted from abroad. With restraints on the supply of funds
intensifying and with loan demands still basically strong, banks
raised the prime loan rate further to 6 per cent by midsummer,
continued to reduce their portfolios of U.S. Government securities, and sharply curtailed their participation in the market for
State and local government securities.
As the summer progressed, commercial banks found that
negotiable time CD's, with interest rates limited by the 5Vi per
cent ceiling, were no longer competitive with other short-term
market instruments. The rate on 3-month Treasury bills rose to
around SVi per cent and in the third week of September
reached its peak for the year of 5.59 per cent (on a discount
yield basis). Yields on longer-term bills and other types of money
market paper, including Federal agency issues, rose further to
levels consistently well above 5.50 per cent. With rates at such
levels, banks were unable to roll over all maturing negotiable
CD's after mid-August, and their holdings of such deposits began
to decline. As this source of funds dried up, large banks sought
money elsewhere. They obtained more funds in the Euro-dollar
market through their foreign branches; and they bid more
aggressively in the Federal funds market—at times paying 6 per
cent or more for such 1-day money.
30

FEDERAL RESERVE SYSTEM

Upward pressure on money market rates was exerted not only
by the cumulative impact of restraint on the banking system but
also by the financing needs of the U.S. Government. In addition
to a large offering of tax bills in midsummer, there were sizable
offerings of Federal agency issues in the 6-month to 2-year
maturity range in the late spring and summer. These agency
issues included a large amount of funds raised by the Federal
home loan banks and the Federal National Mortgage Association to help ease pressures on savings and loan associations and
on the mortgage market.
Money market rates were also influenced by a larger volume
of commercial and finance company paper offered, as borrowers
sought alternatives to bank loans. And finally U.S. Government
securities dealers kept their bill positions unusually low, as
expectations of rising interest rates intensified and dealers' borrowing costs rose further.
Bond yields also rose markedly in the summer and reached a
peak in late August. The new-issue rate on high-grade corporate
bonds (with 5-year call protection) briefly touched 6 per cent;
20-year U.S. Government bonds for a few days yielded more
than 5 per cent; and seasoned high-grade tax-exempt municipal
issues averaged just over 4 per cent. The sharpness of the rise in
yields reflected strong demands in capital markets. But it was
also influenced by expectational forces generated by the gathering of pressures on banks and other financial institutions, by the
high yields that had been required to sell participation certificates mainly in FNMA and Small Business Administration
assets, by the prospect of additional issues of certificates, and by
uncertainties about the course of the conflict in Vietnam and
about Federal fiscal policy.
During the summer the Board of Governors disapproved discount rate increases that had been proposed at various times by
several of the Federal Reserve Banks. An attempt to avoid further escalation of interest rates was among the reasons for the
Board's decisions.

ANNUAL REPORT OF BOARD OF GOVERNORS

The late summer rise of yields in short- and long-term markets was the culmination of financial market pressures during
the year; interest rates in the mortgage market, however, continued to rise into the autumn. A number of fiscal and monetary
policy developments contributed to the moderation of adverse
market expectations and of credit market pressures after late
August.
The administration's announcement in early September of a
program of fiscal restraint had a tonic effect on market psychology, especially in long-term markets. The program included
measures to reduce relatively low-priority Government expenditures, a recommendation for suspension of the investment tax
credit and of accelerated depreciation, postponement of sales
of participation certificates, and a limitation on Federal agency
issues to the public to no more than the amounts that would be
needed to roll over maturing debt.
Meanwhile, on September 1 the Board of Governors released
a letter that was sent by the Federal Reserve Banks to all member
banks. In an attempt to moderate financial pressures on securities markets the letter urged moderation in bank extensions of
loans to business. The letter indicated the desirability of banks'
reducing business loan expansion and of avoiding further substantial liquidations of municipal securities or other investments.
It was recognized that banks that adjusted their positions by
tightening lending standards further rather than by selling securities might require accommodation at the discount window for
longer periods than usual.
Finally, in late September the Board of Governors reduced to
5 per cent from 5Vi per cent the maximum rate of interest
member banks might pay on time deposits of less than $100,000.
This action was taken under temporary authority granted by the
Congress that broadened the basis for setting interest rate ceilings
on time and savings deposits. Rate ceilings were also established
for insured nonmember banks, mutual savings banks, and savings and loan associations under parallel authority granted to the
32

FEDERAL RESERVE SYSTEM

FDIC and to the Federal Home Loan Bank Board. The rate
ceilings established by the three agencies had the objective of
limiting further escalation of interest rates paid for consumer
savings.
MOVE TOWARD LESS MONETARY RESTRAINT:
OCTOBER-DECEMBER 1966

Federal Reserve open market operations in the early fall were
directed at maintaining orderly and generally steady conditions
in the money market. With market interest rates remaining high,
though below their peak levels, the decline in bank credit that
had begun in late summer continued into the autumn. This was
partly the result of reductions in negotiable CD's outstanding,
which dropped by $2.7 billion from mid-August through the end
of October. Concurrently, the rate of business loan expansion at
banks was sharply reduced. This slower expansion was the result
in part of restrictive lending policies of banks and in part of a
reduction in loan demands, following the very large increase in
bank loans related to the speed-ups in tax payments around midyear. The money stock did not show any tendency to rise following its summer decline.
The behavior of bank credit, money stock, and aggregate
reserves was even weaker than might have been expected under
the prevailing money market conditions. Under the circumstances, and with excessive credit demand pressures in the economy appearing to abate, open market operations were conducted
so as to lessen somewhat the restraint on banks. Member bank
borrowings began to decline after reaching a peak of $878
million on the average during the first two statement weeks in
October. Treasury bill rates began to decline again, and banks'
net losses of CD money in November were only about one-third
of the amounts in each of the previous 2 months.
As moderating tendencies in the economy became more widespread, the Federal Open Market Committee moved in late November and December to attain a further easing in money market

ANNUAL REPORT OF BOARD OF GOVERNORS

conditions through open market operations. As a result of these
actions, member bank borrowings at Federal Reserve Banks declined to an average of $557 million in December; the Federal
funds market eased, with most trading in a 5—SV2 per cent range;
and the 3-month Treasury bill rate dropped to around 4.80 per
cent by the year-end.
Long-term interest rates also declined sharply during the final
months of the year. Investor receptivity to long-term issues was
enhanced by the gradual realization that monetary policy had
shifted to a stance of less restraint; by the apparent tapering of
the investment boom, as indicated by various surveys of business
plans for capital spending; and by various other indications that
the economic outlook was no longer so buoyant as earlier in the
year. By the year-end yields on U.S. Government, new high-grade
corporate, and municipal bonds were 40 to 60 basis points below
their late summer peaks, and there were signs of an easing in
mortgage market conditions. On December 27, with business
loan expansion at banks having moderated substantially and with
security markets showing renewed strength, the Board of Governors issued a statement terminating the special discount arrangements announced in the September 1 letter.
Growth in bank credit—as indicated on a weekly basis by
data for total member bank deposits—resumed in the latter part
of November, and the money supply also rose during the last
few weeks of the year. In December banks actually experienced
a modest increase in outstanding negotiable CD's, despite
record maturities during the month.
Over the year 1966, outstanding bank credit expanded by 6
per cent—reflecting mainly the relatively rapid growth in the
first half of the year; such credit had risen by 10 per cent in
1965. With open market operations generally exerting restraint
throughout the year, nonborrowed reserves of banks grew by
less than 1 per cent, compared with a rise of more than 4 per
cent in 1965. Member bank borrowings from the Federal Reserve

FEDERAL RESERVE SYSTEM

first rose and then fell during the year and were a relatively
minor source of reserve funds for the year on balance.
With reserve growth very restrained, the 6 per cent expansion
of bank credit was made possible by a rise in time and savings
deposits and by the increased use of funds obtained through
branches abroad. Time and savings deposits grew by 8 per cent
in 1966, while demand deposits expanded by less than 1 per
cent. And the money supply—demand deposits and currency in
the hands of the public—rose by less than 2 per cent, a rate of
growth less than half that in 1965.
OPERATIONS IN FOREIGN CURRENCIES

During 1966 the Federal Reserve—-in cooperation with the U.S.
Treasury, foreign central banks, and the Bank for International
Settlements (BIS)—continued to engage in operations in foreign
currencies for the purpose of alleviating temporary strains in
foreign exchange markets and curbing speculative developments.
The sterling crisis during the summer provided the main focus
of these operations. Early in the year sterling was relatively
strong in foreign exchange markets, and the Bank of England
repaid the $475 million of drawings that had been outstanding
at the end of 1965 under its reciprocal currency arrangement
with the Federal Reserve. But during the spring the pound weakened again as Britain's economic problems persisted and were
aggravated by a prolonged maritime strike. As confidence in sterling waned during the summer, Britain experienced very large
outflows of capital, and the Bank of England drew heavily on
its credit facilities with the Federal Reserve and the U.S. Treasury and also borrowed from the central banks of other countries.
At the end of September its outstanding drawings from U.S.
authorities totaled $575 million.
Some of the funds converted from sterling into dollars flowed
to the United States, as foreign branches of U.S. banks bid
actively for Euro-dollar deposits and placed them at the disposal

ANNUAL REPORT OF BOARD OF GOVERNORS

of their head offices. But there were also substantial flows of
dollars into continental European currencies, and the dollar
came under pressure in foreign exchange markets. As a result,
the United States was called upon to make use of its own credit
lines. The Federal Reserve made swap drawings of $570 million
during the third quarter—$325 million in lire and the remainder
in Swiss francs, Dutch guilders, and Belgian francs. Of the lira
drawings, it repaid $225 million in August with the proceeds of
a U.S. Treasury drawing of $250 million of lire from the International Monetary Fund (IMF).
The tensions and uncertainties that developed in foreign exchange markets during the spring and summer prompted the
Federal Reserve to initiate discussions aimed at increasing its
reciprocal currency facilities with partner central banks. In midSeptember the Federal Reserve announced a general increase in
these swap lines from $2.8 billion to $4.5 billion. At the same
time the Bank of England announced an increase in its credit
facilities with a number of other central banks as well as with the
Federal Reserve.
Meanwhile the sweeping measures adopted in July by the
British Government to check inflation and correct the payments
deficit began to take effect. Also, financial markets became less
strained. As a result of these developments as well as of the announcement of expanded international credit facilities, financial
markets and foreign exchange markets began to calm. During
the fourth quarter of 1966, the Bank of England was able to make
repayments on its outstanding credits. The Federal Reserve, too,
reduced its liabilities during this period.
In the closing weeks of the year the System joined in efforts
to moderate year-end pressures in the Euro-dollar market that
threatened to disturb foreign exchange markets. The System
intervened moderately in the New York market for German
marks and pounds sterling; and it agreed to drawings by the
BIS on its swap line for the purpose of placing funds in the Euro-

FEDERAL RESERVE SYSTEM

dollar market. At the same time several continental European
central banks acted either to reduce commercial bank withdrawals from that market or to rechannel official reserve accruals
to that market. Also in December, the Federal Reserve drew
$140 million on its reciprocal currency arrangements with the
German Federal Bank to absorb some of that bank's large
reserve gains.
During 1966, drawings of foreign currencies by the Federal
Reserve under reciprocal currency arrangements totaled $710
million, of which $280 million were outstanding at the yearend. Drawings by foreign central banks and the BIS, which also
involve acquisitions of foreign currencies by the Federal Reserve,
totaled $928 million, $550 million of which remained outstanding on December 31.
A detailed review of Federal Reserve operations in foreign
currencies during 1966 is found on pages 269-90.
VOLUNTARY FOREIGN CREDIT RESTRAINT PROGRAM

During 1966 the Federal Reserve System continued to coordinate that part of the President's balance of payments program
applicable to banks and other financial institutions in accordance
with revised guidelines announced on December 6, 1965.
By December 1965 an increasing scarcity of loanable funds
in the face of rapidly rising demands for credit from domestic
borrowers clearly had begun to supplant the voluntary program
as the dominant factor affecting the foreign lending activity of
U.S. financial institutions. At the same time a narrowing of the
differences between interest rates in the United States and those
abroad, associated with the increasing tightness of the U.S.
domestic money market, reduced foreign demand for credit in
the U.S. markets. Outstanding foreign credits of the reporting
commercial banks trended downward during 1966, as shown by
Table 1, to $9,496 million at the year-end. This was $156 million
below the total on December 31, 1965, $864 million below the

ANNUAL REPORT OF BOARD OF GOVERNORS

TABLE 1
U.S.

BANKS: FOREIGN CREDITS SUBJECT TO VOLUNTARY PROGRAMS

1966

Item

1965,
Dec. 31
Mar.
31

June
30

Sept.
30

Dec. 31,
calculated on
guidelines for
19661

Number of reporting
banks

161

159

3 148

19672

3 148

Millions of dollars
Total foreign credits
subject to ceiling
Target ceiling
Net expansion of credit
since December 1964..
Net leeway for expansion within target ceiling up to specified date

9,652
9,973

9,367
10,076

9,429
10,179

9,142
10,290

9,496
10,360

9,496
9,640

156

-134

-77

-369

-3

319

709

751

864

144

1,148

1
2

Target ceiling generally 109 per cent of December 1964 base.
Interim target ceiling generally the amount outstanding on Sept. 30,1966, plus
40 per cent of the difference between that amount and 109 per cent of the December 1964 base.
3 Beginning with Dec. 31, 1966, data exclude banks with foreign credits of less
than $500,000 on the reporting date.

109 per cent ceiling suggested by the 1966 guidelines, and $144
million below the interim ceiling for the end of 1966 suggested
by the 1967 guidelines, described below.
This decline in foreign credits may be compared with the
substantial further expansion in total bank loans outstanding
during 1966. Total loans of U.S. banks increased by 8.4 per
cent in 1966, while their foreign credits declined by 1.6 per
cent. At the end of the year credits reported under the voluntary
program were equivalent to 4.4 per cent of total commercial
bank loans outstanding as compared with 4.9 per cent on
December 31, 1965.
38

FEDERAL RESERVE SYSTEM

The number of banks having foreign loans in excess of their
individual target ceilings and the aggregate amount of such
excess continued to decline for the year as a whole, as shown in
Table 2, although there was some increase in the last quarter
from the low reached on September 30. However, a large number
of banks had foreign credits in excess of the interim target calculated in accordance with the 1967 guidelines, owing to the fact
that these guidelines were not announced until mid-December
1966.
TABLE 2
BANKS WITH FOREIGN CREDITS IN EXCESS OF TARGET CEILING

1966

Item

1965,
Dec. 31

Mar.
31

June
30

Sept.
30

Dec. 31,
calculated on
guidelines for
19661

Number of banks
Aggregate credit in excess of target (millions
of dollars)

19672

114

155

1
2

Foreign assets of nonbank financial institutions declined
slightly over the first 9 months of 1966, as shown in Table 3.
Liquid assets, which had been reduced substantially during 1965,
were reduced by an additional $59 million or 22 per cent. Loans
and investments with maturities of 10 years or less and net
financial investments in foreign financial branches, subsidiaries,
and affiliates rose by 1 per cent, but on September 30, 1966,
they were still 3 per cent below the target ceiling that applied to

ANNUAL REPORT OF BOARD OF GOVERNORS

TABLE 3
FOREIGN ASSETS OF REPORTING NONBANK FINANCIAL INSTITUTIONS

(Amounts shown in millions of dollars)

Guideline, and area
All countries—total
Guideline 1 (Liquid investments)
Guideline 2 (Credits with maturities of 10
years or less and net investment in financial subsidiaries)
Guideline 3 (Credits with maturities of more
than 10 years and equity securities)—total
By type of asset:
Bonds of international institutions...
Other bonds and credits
Stocks

Amount
Sept. 30,
1966

Change from
Dec. 31, 1965:
Amount
Per cent

13,049

208

- 22.2

1.0

1,280

16
443
-452

8,561
7,284
1,277

293
423
-130

3.5
6.2
- 9.3

Other developed countries—total1
Bonds and credits
Stocks

1,373
580
794

-271
- 22
-250

-16.5
- 3.6
-23.9

All other countries—total2
Bonds and credits
Stocks

1,626
1,504
122

By area and type of asset:
Canada—total
Bonds and credits
Stocks

1
2

11,561

842
8,525
2,193

47
26
72

1.8
5.5
-17.1

2.8
1.7
-37.2

Excluding Japan.
Japan, less developed countries, and international institutions.

such assets. Investment in longer-term foreign assets was about
unchanged, as an increase of $427 million in bonds and other
long-term loans—largely to Canadian borrowers—was more
than offset by reductions in the reported value of holdings of
foreign corporate stocks. Total long-term loans and investments
in developed countries other than Canada and Japan declined by
$270 million and on September 30, 1966, were 10 per cent below_
the target ceiling suggested for these assets.
40

FEDERAL RESERVE SYSTEM

Despite the reduction in holdings of foreign assets achieved
by banks and other financial institutions, the U.S. balance of payments deficit as measured on the liquidity basis remained at
about the 1965 level for reasons discussed later in this REPORT.
On December 12, 1966, the President, in a memorandum addressed to the Secretary of the Treasury, stated that the nation's
objective was to continue to move toward balance of payments
equilibrium as fast as the continuing foreign exchange costs of
Vietnam would permit. The President accepted the appraisal of
the Cabinet Committee on the Balance of Payments that achievement of the objective would require continued restraint of both
Government overseas expenditures and private capital outflows,
and he accepted the recommendation of the Committee that the
voluntary programs be continued in 1967. The Board of Governors issued revised guidelines for banks and nonbank financial
institutions on December 13, 1966.
The bank guidelines for 1967 remain substantially in the
form in use since 1965. The ceiling for outstanding credits to
foreigners remains at 109 per cent of the end-of-1964 base (the
same as in the last quarter of 1966); no increase was provided
in view of the fact that on October 1, 1966, there existed a potential leeway under the voluntary ceiling for an outflow of bank
credit in excess of $1.2 billion. To guard against the possibility
of a large-scale outflow of funds in any short period of time, in
the event of a shift in international credit conditions and interest
rates, the banks were requested to restrain their foreign credits
so as to use not more than 40 per cent of the leeway available on
October 1, 1966, before April 1, 1967; not more than 60 per
cent before July 1, 1967; and not more than 80 per cent before
October 1, 1967.
The priorities suggested in the guidelines for 1965 and 1966
were continued for 1967 and were reinforced by a request that
banks in the last quarter of 1966 and in 1967 use not more than
10 per cent of the leeway available on October 1, 1966, for
nonexport credits to developed countries. This request was made

ANNUAL REPORT OF BOARD OF GOVERNORS

to give utmost emphasis to the importance attached to meeting
requirements for priority credits—that is, credits to finance
exports of U.S. goods and services, and credits to meet the needs
of developing countries.
Banks with bases between $500,000 and $10 million were
permitted to use the 1964 base plus $900,000 as their ceiling
rather than 109 per cent of the 1964 base, and provision was
made for banks with bases lower than $500,000, or no base, to
discuss with their Federal Reserve Banks the possibility of adopting a special ceiling. These provisions reflected a continuing effort
to minimize the inequities inherent in any program based on a
state of affairs existing at a particular moment in time, and to
insure that these smaller banks would be in a position to meet
requirements for priority credits arising in their trade areas.
The program for nonbank financial institutions has been considerably simplified for 1967. A single guideline ceiling has replaced the three different ones in effect in 1966, and several types
of assets are no longer subject to a ceiling. Under the 1967 program each nonbank institution is requested to limit its total holdings of "covered assets" to not more than 105 per cent of its
"base date" holdings. Such base-date holdings are equal to the
lesser of (1) covered foreign assets held as of September 30,
1966, or (2) the amount of such assets that could have been held
on that date in compliance with the 1966 guideline ceilings.

FEDERAL RESERVE SYSTEM

FINANCIAL FLOWS IN 1966
Until the final months of 1966, financial markets were placed
under pressures by the record volume of credit demands and an
increasingly restrictive monetary policy. In the late fall, easing of
demands permitted the Federal Reserve to reduce the degree of
restraint, and by the year-end a good part of the increase that had
occurred in interest rates earlier in the year had been erased.
CREDIT FLOWS rise sharply in first half,
decline in second half

1963

1964

1965

1966

Flow of funds data. Net funds raised by consumers, nonfinancial businesses, foreigners,
and all levels of government. Quarterly totals for 1966 are at seasonally adjusted annual
rates. Data for fourth quarter of 1966 are preliminary.

The stresses and strains created by financial market pressures
in the first 6 months of 1966 were reflected not only in interest
rate movements but also in the composition and volume of credit
flows. In the first half of the year the total of funds raised by the
nonfinancial public rose to a record rate about one-eighth more
than in 1965. All of this increase, however, reflected greater reliance of businesses on external financing and an increased demand for funds by the Federal Government. The expanded credit
demands of these sectors—in conjunction with monetary policy—
led to rising interest rates on securities. These higher rates induced
the public to increase sharply its direct investment in credit and

ANNUAL REPORT OF BOARD OF GOVERNORS

equity market instruments and to reduce the rate at which it was
acquiring deposits and shares at financial intermediaries.
In the summer and early fall, strains on financial markets became more intense. Deposit inflows to financial institutions slackened further, as market interest rates continued to advance, and
the flow of bank credit to businesses contracted.
BUSINESSES and U.S. GOVERNMENT raise more funds, and PUBLIC
increases sharply its purchases of securities
50

FUNDS RAISED

FUNDS SUPPLIED

NONFINANCIAL DOMESTIC PUBLIC
NONRNANCIAL BUSINESSES

20-

COMMERCIAL BANKS

U.S. GOVERNMENT

gio-

II
NONBANK FINANCIAL INSTITUTIONS

1964

1965

1966

1963

1964

Flow of funds data. Nonfinancial businesses are corporate and noncorporate concerns,
including farm. U.S. Govt. borrowing is net of official purchases by Treasury investment
accounts. Consumer borrowing includes that of nonprofit institutions, but excludes security
credit. The nonfinancial public is made up of consumers, businesses, and State and local
governments; its supply of funds is net of its security credit borrowing. Credit supplied
by commercial banks and by nonbank financial institutions is net of their security and
b
other credit market issues. Data for fourth quarter of 1966 are preliminary.

FEDERAL RESERVE SYSTEM

In the late fall the relaxation of monetary policy that accompanied reduced demand pressures contributed to a sizable reduction in market interest rates and to a sharp increase in deposits at
nonbank financial institutions in the fourth quarter. However,
efforts of banks and nonbank financial institutions to rebuild
their depleted liquidity, as well as reduced demands for credit,
held total credit flows to the reduced third-quarter pace. Total
funds raised in the second half of the year consequently were only
three-fourths as large as in the first half of 1966.
BORROWERS AND LENDERS

For the year as a whole, total funds raised in credit and equity
markets by the nonfinancial sectors—businesses, consumers,
foreigners, and all levels of government—amounted to $70 billion, somewhat less than in 1965. Businesses and the U.S. Government were the only sectors that increased their borrowing in
1966.
With securities becoming more attractive because of rising
market rates of interest, the nonfinancial public supplied directly
to the market almost 30 per cent of the total funds raised—well
above the average from 1961 through 1965. Financial institutions, on the other hand, with their deposit inflows reduced,
contributed a smaller proportion of the total funds supplied.
Nonfinancial business. Demands by businesses for credit to fill
the widening gap between their capital outlays and their internally
generated funds were a dominating element in credit and equity
markets in 1966. This gap had begun to widen in mid-1965, and
in the corporate sector it rose to a record $15 billion in 1966.
To bridge the gap, businesses sought more external financing at a
time when the supply of funds was being reduced by monetary
policy.
Despite the slowing in multifamily housing and commercial
construction, nonfinancial corporations spent $12 billion more
for fixed investment and inventories than in 1965. Meanwhile

ANNUAL REPORT OF BOARD OF GOVERNORS

their internal funds—primarily retained earnings and depreciation allowances—rose by only $3 billion. Noncorporate businesses too needed a large volume of external financing. As a result, corporate and noncorporate business together raised more
than $33 billion in credit and equity markets, one-eighth more
than in 1965.
-

CORPORATE external financing needs increase
sharply in 1966
CORPORATE NONFINANCIAL BUSINESS

CAPITAL
EXPENDITURES A

Flow of funds data; quarterly totals at seasonally adjusted annual rates. Capital expenditures are outlays for plant, equipment, and construction, and changes in inventories.
Internal funds are retained earnings, inventory valuation adjustment, and capital consumption allowances. Data for fourth quarter of 1966 are preliminary.

Business external financing grew at a fast rate in the first half
of the year, and especially in the second quarter when such financing reached a seasonally adjusted annual rate of over $43
billion. Some of this unprecedented volume undoubtedly reflected
efforts to meet prospective as well as current needs before credit
supplies became even more costly and restricted. Moreover, the
expanded corporate tax payments required under the revised
schedules for payment of Federal income and withheld taxes
increased the cash needs of business firms. These accelerations
46

FEDERAL RESERVE SYSTEM

are estimated to have amounted to $4 billion, more than one-half
of the year-over-year increase in tax payments in the second
quarter. Corporations apparently met their enlarged tax payments by increased borrowing rather than by reducing liquid
assets, since such holdings declined only a little more than seasonally in the quarter.
External financing slowed considerably in the second half of
the year, to a rate about 10 per cent below that in 1965. The
gap between capital expenditures and internal funds continued
to widen, but with the increasing restraint being applied by monetary policy, businesses found it more difficult to obtain external
financing, particularly from banks and other institutional lenders
whose liquidity had been sharply reduced over most of the year.
By the fourth quarter of 1966, the volume of funds raised in
credit and equity markets by businesses had declined to a seasonally adjusted annual rate of less than $27 billion, and cor6 I Nonfinancial businesses borrow more in 1966 by issuing more securities
TOTAL FUNDS RAISED

SECURITIES

15
,0

40
5
0
E
in «=>

§ 20
CO

BANK LOANS

NS OF DOl LARS

Bill 10NS OF D01

MORTGAGES

1963

1964

1965

1966

1963

1964

1965

1966

Flow of funds data. Includes domestic corporate and noncorporate (including farm) nonfinancial businesses. Funds raised exclude trade debt and miscellaneous liabilities. Bank
loans include acquisitions of commercial paper and domestic acceptances. Data for 1966
are preliminary.

ANNUAL REPORT OF BOARD OF GOVERNORS

porations resorted to drawing heavily on their low stock of liquid
assets. The sharp reduction in seasonally adjusted liquid asset
holdings in the second half more than wiped out the increase in
holdings over the first half. This was the first time since 1956
that holdings of liquid assets by corporations were reduced
significantly in a year of economic expansion.
All of the 1966 increase in external financing by nonfinancial
business was accounted for by issues of corporate bonds and
stocks, which rose to a record $11 billion. Earlier in the expansion, bank loans and mortgages had provided the predominant
share of funds raised by business in credit and equity markets.
But the increased volume of external financing in 1966, coupled
with reduced availability of credit at financial institutions, shifted
a greater share of business credit demands into the securities
market. Bond issues were nearly double the 1965 volume, and
net stock issues—despite some large retirements—provided considerably more funds than in most other recent years.
For 1966 as a whole, businesses borrowed less at banks than
they had in 1965, when bank borrowing had accounted for all
of the increase in external financing. In the first half, already
heavy business demands on banks were inflated by accelerated
tax payments, and banks were able to grant loans to businesses at
a rapid rate by liquidating securities, reducing credit supplied to
other borrowers, and by aggressively seeking time deposits. After
midsummer, however, business loans of banks expanded less
rapidly as demands abated and as the availability of bank credit
to businesses shrank in consequence of the drying up of time
deposit inflows, the erosion of bank liquidity, and the continuing
pressures on bank reserve positions.
Federal Government. The Federal Government increased pressures on financial markets in 1966 both directly and indirectly.
By accelerating tax payments and increasing defense orders, this
sector contributed greatly to the increased financing needs
of businesses. And by expanding issues of direct and agency
securities and of participation certificates, it sharply increased
48

FEDERAL RESERVE SYSTEM

its own borrowing in credit markets. On the other hand, the
Federal Government also expanded the amount of funds it supplied to credit markets, mainly by increases in its acquisitions of
mortgages.
The Government's cash deficit rose to $5.7 billion in the calendar year 1966, the highest level since 1961. The step-up of $12
billion in defense outlays accounted for more than one-half of
the $23 billion increase in total Federal cash payments.
Tax receipts also rose to a record level during the year. The
rapid growth of the economy accounted for a large share of this
increase, but an estimated $6 billion of the almost $22 billion
rise in receipts resulted from the acceleration in tax payments.
The January 1 increase in social security taxes and institution of
medicare taxes at midyear accounted for another $5.5 billion.
The types of securities issued by the Government and the size
of its borrowings were affected by the legal limits on the size of
the debt, the rate ceiling on U.S. Government bonds, the pattern
of receipts, and the increasing tension in financial markets that
developed in the spring and culminated in the late summer and
early fall. The 414 per cent interest ceiling on Treasury bonds
maturing in over 5 years precluded the issuance of any direct
long-term debt, and a substantial part of the lengthening in average maturity of the debt that had been achieved during the previous 6 years was erased. Late in the year the outstanding debt
approached its statutory ceiling, and at times the Treasury's
operating balance reached low levels. In early December the
Treasury borrowed $169 million directly from the Federal Reserve over one weekend.
During 1966 the Federal Government was a net seller of
$10.0 billion of securities, more than twice as much as in 1965.
This borrowing included a moderate amount of marketable
direct debt—$3.4 billion, all with maturities of less than 5 years;
a record volume of direct agency issues—$5.1 billion; and unusually large net sales of participation certificates in pools of
Government financial assets—$1.5 billion.

TABLE 4
U.S. TREASURY FINANCE AND TRANSACTIONS IN MARKETABLE OBLIGATIONS

(In billions of dollars)
Calendar year 1966

Calendar year 1965
II

Item

III

Total

III

Total

U.S. TREASURY FINANCE
Cash receipts
Cash payments
Cash surplus, or deficit (—)
Less: Change in cash balance...
Equals: Net cash borrowing, or repayment (—) 1

30.7
28.3
2.4
2.0

37 .7
32 .6
5
3 !l

—•5

-2.0

29 .2
33 .1
- 3 .9
- 4 .3
-.4

25. 8
34. 0
-8. 1
-2. 3

123 .4
127 .9
~ 4 .5
_ 1 .4

33 .3
34 .6
- 1 .3
—.1

46. 2
36. 2
10. 0
6. 6

34. 6
41. 3
-6. 7
-4. 1

31.1
38.8
-7.7
-2.5

145.1
150.9
-5.7
-.1

5.7

2.9

1.0

-3.7

2.4

5.1

4.8

6.3

3.4
5.1

TRANSACTIONS IN U.S. GOVERNMENT MARKETABLE OBLIGATIONS
Net issues of:
Direct marketable debt
Direct agency debt
Plus: Net issues of participation certificates2
,

.1
*

-3.8
1.1

-.3
.4

6.2
.2

^
2.2
1.7

.5
.9

„n
-6.0
2.6

„ .
2.6
.8

-.2

1.7

-.6

1.5

Less: Official purchases, or sales
By Government agencies and trust

1,2
.7
1.3
.8
Direct marketable debt
.5
-.3
.8
.2
1.2
.1
-.1
.5
3.2
.7
Direct agency debt
.....
. . . •.
-5
By Federal Reserve System 3 . . . .
1.0
1.4
.9
.7
4.0
.3
1.4
.7
4.9
4.3
Equals: Net Federal marketable and
agency obligations acquired by
., t
pu lic ..
-4.0
-1.
5.6
.9
1.4
-3 0
1.1
1 Netbcash. borrowing is less than the - 1 . 4 deficit minus the change1in cash balance by the-amount of seignorage. Net. cash borrowing or repayment is made up of
cash
issues of direct marketable and agency debt and of nonmarketable debt, less purchases (or plus sales) of direct marketable and agency debt by Government agencies
2 Included in cash payments of the Federal Government as a negative expenditure. Data include Export-Import Bank certificates, which are not as broadly marketable as other participation certificates.
3 Excludes repurchase agreements.
* Less than $50 million.
NOTE.—Data are not seasonally adjusted.

•a

8
w
o
>
o
o
o
o

FEDERAL RESERVE SYSTEM

Sales of these types of securities were relatively large in the
first quarter of the year. But with the expanded receipts resulting
from acceleration of tax payments and the seasonal rise in tax
receipts, the Federal Government reduced its outstanding debt
in the second quarter. The entire decline, however, was in direct
marketable debt; agency and PC debt rose sharply. The unprecedented volume of new issues of PC's and agency securities
contributed importantly to the rise in money market rates and
the congestion in capital markets. To ease these conditions,
Treasury investment accounts began after midyear to make
large purchases of agency securities, and after September the
Government refrained from selling new PC's. With sales of
agency securities and PC's reduced, the Treasury drew down its
cash balance in the second half and stepped up its sales of direct
securities as shown in Table 4.
Purchases by Treasury investment accounts and the Federal
Reserve absorbed more than one-half of all net new issues of U.S.
Government direct, agency, and PC debt during 1966. However,
private financial markets still had to absorb over $4 billion of
Federal obligations, a considerable turnaround from the liquidation of almost $1 billion of such securities by the public in 1965.
In addition, many large institutional investors were heavy net
sellers of Federal Government obligations during 1966. As a result consumers absorbed, at rising yields, a record amount of U.S.
Government securities—over $7.5 billion.
The Federal sector sharply increased its extensions of credit
to financial markets in 1966, mainly to alleviate pressures in
mortgage markets. It purchased record amounts of mortgages in
the secondary market as shown in Table 5 and increased its lending to savings and loan associations, a major source of mortgage
credit to the public. While increased inflows of funds to nonbank
institutions in late 1966 sharply reduced the need for these operations, credit extensions of the Federal Government for all of
the year exceeded its net demand on private financial markets
by a substantial margin. However, while Federal credit operations

ANNUAL REPORT OF BOARD OF GOVERNORS

served mainly to make funds available to one particular market,
Government borrowing tended to add considerable pressure to
financial markets in general, with the result that the Federal Government remained an important factor in the general upward
movement in interest rates over most of 1966.
TABLE 5
ACQUISITIONS OF CREDIT MARKET INSTRUMENTS BY U.S.

GOVERNMENT

(In billions of dollars)
1966, by quarters 1

Calendar year
Item
Mortgages
Loans—Total
To savings and loan assns..
To all businesses
To others2

1964

1965

1966

III

1.0

3.5

4.6

4.1

3.1

2 .4

3.5
.5
.9
2.1

3.7
.7
1.0
2.0

3.9
.9
1.0
2.0

6.7
2.8
1.7
2.2

5.8
2.3
1.0
2.5

3.3
1.1
.9
1.3

.1
- 2 .5
.7
1 .7

Quarterly totals at seasonally adjusted annual rate.
Loans to consumers, State and local governments, and foreigners.
NOTE.—Flow of funds data. Data for fourth quarter of 1966 are preliminary.
2

Consumers. The increased volume of securities offered by corporations and the Federal Government, the reduced pace of
acquisitions of Treasury issues by financial institutions, and restrictive monetary policy led to a sharp rise in the yields on
market securities over the first three quarters of 1966. Reacting
to these higher yields, consumers purchased a record $11.5
billion of securities over the year, more than four times the
amount they acquired in 1965. Most of the increase represented
purchases of Federal, State, and local government obligations.
The larger purchases of open market securities by consumers
apparently were made at the expense of their money holdings and
their acquisitions of deposits and shares at financial institutions.
The increase in their time and savings deposits at: commercial
banks was somewhat less rapid than in 1965, and the increase
in their deposits and shares at nonbank institutions was only a
52

FEDERAL RESERVE SYSTEM

CONSUMERS increase their purchases of securities, while acquiring
fewer financial assets and borrowing less
INCREASE IN FINANCIAL ASSETS
MARKET SECURITIES
! NONBANK SAVINGS
OTHER

RATIO TO DISPOSABLE INCOME
TOTAL FINANCIAL
ASSETS

50-

INCREASE IN DEBT
MORTGAGES
OTHER

1966

Flow of funds data. Consumer sector includes nonprofit institutions. Increase in total
financial assets excludes investment in noncorporate business and net security credit, with
security credit subtracted from market security acquisitions. Mortgages are 1- to 4-family
and other. Liquid financial assets are money, deposits at commercial banks and other
financial institutions, U.S. sayings bonds, and short-term marketable U.S. Govt.
securities, all less security credit. Borrowing/investment ratio is consumer borrowing by
mortgages, consumer credit, and bank and other loans (except security credit) divided by
value of residential construction, nonprofit plant and equipment outlays, and outlays for
consumer durable goods. All ratios based on quarterly totals at seasonally adjusted annual
rates. Data for fourth quarter of 1966 are preliminary.

little more than half that of the previous year. Indeed, the proportion of financial asset acquisitions allocated by consumers to
nonbank deposit-type claims was the smallest in the postwar
period. In the last quarter of the year, however, when market
yields began to decline and many financial institutions took
advantage of new regulations to raise their offering rates, consumers stepped up their acquisitions of nonbank deposits and

ANNUAL REPORT OF BOARD OF GOVERNORS

shares and reduced their purchases of market securities. Their
acquisitions of time and savings deposits at banks continued to
slow, in part because many banks were required to lower their
deposit rates in compliance with the lower rate ceilings on time
deposits enacted in September.
Despite record purchases of market securities, total acquisitions of financial assets by consumers declined in 1966. One
reason was that their disposable income grew at a slower rate.
Personal incomes continued to mount as fast as in 1965, but
higher social security taxes and increased withholdings of income
taxes cut deeply into this growth. Another factor was that the
supply of consumer credit—particularly mortgage credit—was
reduced and consumers had to finance a larger share of their
outlays out of income; they were thus left with smaller amounts
of surplus funds to put into financial assets. Indeed, the proportion of consumer expenditures for durable goods and housing
financed on credit was the smallest since 1961.
Instalment credit outstanding increased by $6.1 billion, or
about three-fourths of the record amount in 1965. Much
of the reduction in growth was in automobile credit, but the
expansion in personal loans and repair and modernization loans
was also more moderate. The slowdown was most noticeable in
the spring and fall, times of relative weakness in consumer demands for automobiles and other durable goods. In addition, as
the supply of credit available to them became more limited and
the cost greater, consumer credit lenders adopted increasingly
restrictive lending policies; they screened credit applications
more carefully, and they raised charges on many types of consumer loans.
State and local governments. In 1966 net new issues of securities of State and local governments rose somewhat less than in
1965. Their gross issues of long-term bonds were about the same
as in the previous year—the first time since 1960 that the
volume of such issues did not register a significant year-to-year

FEDERAL RESERVE SYSTEM

increase—and their short-term issues contracted. The failure of
long-term issues to exceed the 1965 pace reflected the higher
level of interest rates; some interest-sensitive borrowers voluntarily postponed issues, while others were forced to defer financing because of statutory and other interest rate limitations. However, funds raised to finance new construction actually rose by 5
per cent in 1966, and only the much smaller volume of refunding
issues kept total gross long-term issues from rising above the
1965 level.
The sharp cutback in short-term financing by State and local
governments reflected chiefly the rapid increase in tax receipts
and Federal grants-in-aid, which not only sharply increased the
surplus of these governments but also reduced their need to
borrow in anticipation of tax revenues. The increased revenues
also help to explain why State and local government postponements of long-term borrowing did not appear to necessitate the
substitution of short-term funds for financing construction projects under way.
The increase in financial assets administered by State and local
governments, including those related to employee retirement systems, was only moderately larger than in 1965. However, in
response to higher yields, these funds were used mostly to buy
corporate securities, providing support to the market in a year
of record offerings.
Rest of the world. Pressures on domestic financial markets in
1966 tended to restrain outflows of U.S. private capital, to
increase inflows of foreign funds to U.S. financial markets, and
to change the composition of assets acquired by foreigners.
The reflow of bank funds from abroad was an important factor
in holding down net outflows of U.S. private capital. Bank credits
to foreigners in the form of loans and acceptances, after expanding by a record $2.1 billion in 1964 and by $300 million in 1965,
declined by more than $200 million in 1966. Long-term foreign
credits by U.S. banks fell substantially, as repayments and

ANNUAL REPORT OF BOARD OF GOVERNORS

amortization of earlier credits exceeded new disbursements;
short-term credits to foreigners showed a small increase.
Relatively unfavorable terms available in this country to
foreign borrowers in 1966 reinforced the cooperative efforts of
U.S. banks under the VFCR program. When new guidelines for
banks were issued in late 1966—as described on pages 37-42—
outstanding foreign credits by U.S. banks were more than $1
billion below the target ceiling that had been established in
December 1965. In addition, foreign private investors increased
their purchases of securities offered abroad by U.S. companies
to finance foreign direct investments in a manner consistent with
the voluntary program of the Department of Commerce.
The net total inflow of foreign capital, liquid and nonliquid,
amounted to almost $3 billion in 1966. Foreign official holders'
claims on the United States were reduced. But dollar borrowings
by U.S. banks through their foreign branches from foreign depositors exceeded %2Vi billion. These borrowings reflected efforts by large domestic banks to supplement their financial positions by drawing on the Euro-dollar market, particularly at those
times when they faced slow growth, and then declines, in their
total time deposits after midyear.
The composition of foreign dollar asset acquisitions in the
United States changed considerably in 1966. In part as a result
of changes in yield relationships, foreign holders and international institutions liquidated more U.S. Government obligations
than in any other postwar year and increased their holdings of
other credit market instruments—mainly time deposits with maturities of more than 1 year and Federal agency issues—at a
record rate.
The U.S. gold stock declined by $571 million in 1966—of
which foreign purchases accounted for $430 million net, about
one-third as much as in 1965. The gold outflow was held down
by the high yields available on dollar assets—both in this country
and in the Euro-dollar market—which induced foreign private
investors to hold dollars that might otherwise have accrued to
foreign central banks.
56

FEDERAL RESERVE SYSTEM

FINANCIAL INTERMEDIATION

In 1966, the public's increased purchases of market securities
and reduced acquisitions of claims on financial institutions
limited the ability of these institutions to extend credit. As a
result, the share of all credit supplied by financial institutions
declined sharply.
Nonbank financial institutions. Financial institutions other than
commercial banks added about one-fifth less to their assets in
1966 than they had in 1965, and their share of total funds supplied to credit markets declined to the lowest level of the postwar
period. Virtually all of the reduction in asset growth occurred
at depositary-type institutions—chiefly savings and loan associations, but also mutual savings banks. At life insurance companies, changes in interest rate relationships influenced the composition of assets acquired, but because of the contractual nature
of their net savings inflows, their total asset growth was little
affected. For the same reason, growth of assets in pension funds
was not significantly affected.
Depositary institutions. The much smaller inflows to nonbank
depositary institutions in 1966 reflected, on the one hand, high
and rising yields on market instruments and continued aggressive
competition of commercial banks, and on the other, a general
reluctance or inability on the part of these institutions to raise
rates on their own deposits and shares. The latter stemmed
largely from the relatively fixed returns and long-term character
of their investment portfolios—which had been acquired when
rates were generally appreciably lower and which inhibited these
institutions from raising rates paid on claims. In addition, during
much of the year savings and loan associations were further constrained from raising rates by regulatory restrictions on Federal
home loan bank advances. Under these circumstances, claims on
nonbank institutions became increasingly less attractive than
market instruments during the first three quarters of the year,
and public acquisitions of savings and loan shares and mutual
savings bank deposits were sharply reduced.

ANNUAL REPORT OF BOARD OF GOVERNORS

As investors shifted to higher-yielding financial assets, dollar
inflows at savings and loan associations in 1966 dropped to the
lowest volume since 1952, and inflows at mutual savings banks
dropped to the smallest level since 1961. Inasmuch as these two
types of institutions generally account for more than one-half of
all new residential mortgage credit, this reduction in their net
inflows of funds caused a sharp reduction in supplies of mortgage
credit and a consequent further marked increase in interest rates
on mortgages. While other factors were also involved, these unfavorable financial conditions contributed to a substantial decline
in the volume of new mortgage commitments and in housing
starts in 1966.
During the first quarter of 1966 seasonally adjusted net
inflows of funds to savings and loan associations declined to the
lowest amount in almost 10 years. Then in April there was a very
large net withdrawal of share capital following the crediting of
March dividends. Until this point, the associations had generally
maintained loan commitments at their earlier levels despite the
decline in first-quarter inflows. However, the April experience
caused them to reduce new loan activity abruptly, for it indicated
not only that the associations were overcommitted in relation to
current savings flows but also that net inflows were likely to deteriorate further, particularly in July when share capital withdrawals normally reach a seasonal peak.
At midyear—subsequent to a Federal Home Loan Bank
Board decision to relax its earlier restrictions on advances to
associations that raised their rates—some associations raised
their dividend rates. But in spite of this action, competitive pressures on interest rates led to a record volume of aggregate withdrawals of share capital in July. Because of the April withdrawals and the generally reduced pace of new inflows, share
capital at savings and loan associations showed the smallest
seasonally adjusted second-quarter increase since the late 1940's;
and in the third quarter, which included large withdrawals in
July, the increase was the smallest postwar quarterly expansion
experienced by the industry.
58

FEDERAL RESERVE SYSTEM

In the face of heavy gross withdrawals, savings and loan
associations increased their borrowing at the Federal home loan
banks to a record amount. However, to avoid adding to pressures
in capital markets by further increases in its own borrowing,
the Federal Home Loan Bank Board felt constrained to husband
the banks' lending power so that they would be in a position to
cover withdrawals at member associations. For this reason, advances for purposes of expanding mortgage credit had to be disTABLE 6
NONBANK DEPOSITARY INSTITUTIONS:
N E T INFLOWS AND NET MORTGAGE ACQUISITIONS

(In billions of dollars)
1966, by quarters1

Calendar year
Item
1964
Mutual savings banks:
Savings deposits
Mortgage acquisitions....
Savings and loan assns.:
Savings shares
Mortgage acquisitions....
Memo: Borrowing
fromFHLB

1965

1966

III

4.2
4.4

3.6
4.1

2.6
2.8

2.8
3.0

1.0
2.0

3.0
3.0

3.8
3.1

10.6
10.4

8.4
8.9

3.5
3.6

5.7
8.3

1.7
5.1

1.2
.5

5.6
.7

2.8

2.3

1.1

-2.5

Quarterly totals at seasonally adjusted annual rates.
NOTE.—Flow of funds data. Mortgages are 1- to 4-family and other. Data for
fourth quarter are preliminary.

continued after early spring; in addition, member associations
were required to draw down their liquid assets before they could
borrow from the system against share capital withdrawals.
With loanable funds from both the public and the home loan
banks thus constricted, new loan commitments by savings
and loan associations were at very low levels throughout the
summer and early fall. By the end of the third quarter, with the
backlog of outstanding commitments worked down, new mortgage acquisitions by savings and loan associations were no larger
than the amounts received as repayments.

ANNUAL REPORT OF BOARD OF GOVERNORS

Like savings and loan associations, the nation's mutual savings
banks experienced sharp declines in deposit growth during 1966.
However, reduced inflows were neither so severe nor so prolonged. Growth in seasonally adjusted savings deposits slowed
sharply in the first quarter, and a record net outflow in April,
followed by slow growth in May and June, reduced the seasonally
adjusted second-quarter net inflow to the lowest level since late
1959 and early 1960. Early in July, however, most large savings
banks increased their dividend rates to 5 per cent, and net inflows
of funds increased.
While reduced net inflows at savings banks led to some reduction in mortgage commitments and acquisitions, these declines
were less severe than at savings and loan associations. The ability
of the mutual savings banks to better maintain their mortgage
acquisitions reflected not only their deposit experience but also
their more diversified portfolios, which permitted them to liquidate other securities in order to limit the reduction in their mortgage lending.
In late September the Federal Home Loan Bank Board,
operating under new legislative authority, and the Federal Deposit Insurance Corporation established ceiling rates on deposits
and shares for the first time. These ceilings, by modifying previous regulations on Federal home loan bank advances, permitted many savings and loan associations to raise their dividend
rates. By that time market rates of interest had reached their
peaks and had begun to decline, and rates on consumer-type
time deposits at a number of the more aggressive commercial
banks had been rolled back from 5Vi to 5 per cent. As a result
of these developments, growth of share capital at the savings and
loan associations improved substantially during the fourth quarter, and savings bank deposits also increased more rapidly.
At first, savings and loan associations used their enlarged
savings flows mainly to repay borrowings from the Federal
home loan banks and to rebuild liquid assets. Savings banks also
added to their depleted liquid assets. By the year-end, however,
60

FEDERAL RESERVE SYSTEM

some savings and loan associations were beginning to make
new loan commitments more freely, and savings banks had resumed a more nearly normal mortgage lending pattern, thus
contributing to a generally improved tone of the mortgage market.
Other institutions. Insulated by the contractual nature of their
cash inflows, life insurance companies acquired as many financial
assets in 1966 as in the previous year, despite the pressures on
financial markets. However, the effects of higher interest rates
and general credit restraint caused some unexpected drains on
the supply of lendable funds available to these companies.
For example, most life insurance companies are committed to
extend policy loans at rates no higher than 5 per cent. Thus, as
rates on other forms of credit were increased and the availability
of credit was reduced, policy loans became an attractive means of
borrowing. These loans grew from less than 5 per cent of the
lendable funds at life insurance companies in the fourth quarter
of 1965 to nearly 20 per cent in the third quarter of 1966;
at some institutions the rate of expansion was even more rapid.
Because these companies generally make loan commitments far
in advance, on the basis of normally predictable projections of
cash availability, the rate of increase in policy loans in 1966,
and the large potential for still further increases, created widespread concern among life insurance company officials.
A decline in mortgage prepayments also reduced the volume of
cash available to meet commitments below expected levels. This
change reflected the reduced turnover of existing homes and the
smaller volume of refinancings caused by the tight mortgage
market. In addition, withdrawals of policy proceeds that had
been left on deposit with life insurance companies increased as
the public took advantage of the higher yields available on
market securities. Life insurance companies were thus forced to
draw down cash balances, liquidate securities, reschedule mortgage acquisitions, borrow at banks, and stretch out new commitments to prepare themselves for meeting takedowns on large
outstanding obligations.

ANNUAL REPORT OF BOARD OF GOVERNORS

The easing of tensions in financial markets in the fourth quarter
also reduced these pressures on life insurance companies. Increases in policy loans tapered off, and the supply of funds
immediately available came into better balance with takedowns
on outstanding commitments. By the year-end some companies
had again begun to increase loan commitments.
As would be expected, inflows to other types of insurance
companies and to pension funds were not greatly affected by
rising interest rates. However, finance companies—confronted
with record borrowing costs and reduced availability of bank
credit, as well as some cutback in consumer demands for credit
—added only a little over $3 billion to their loans, considerably
less than the record increase in 1965. For 1966 as a whole,
finance companies reduced their bank debt for the first time
since 1960, and they raised a record $3.2 billion through the sale
of open market paper.
Commercial banks. In 1966, commercial banks provided almost
$17 billion of credit, or less than one-fourth of total funds supplied to credit and equity markets—their smallest share since
1959. The decline in the bank share from an average of more
than one-third in the 1961-65 period reflected mainly the reduced demand by the public for time and savings deposits associated with their increased purchases of securities.
Time deposits. From the end of 1961 through 1965 net inflows
of time and savings deposits to banks had increased at an average
annual rate of 15 per cent, in large part because four increases in
Regulation Q ceilings permitted banks to maintain relatively
attractive offering rates on such deposits. During the first 8
months of 1966, as banks took advantage of the higher rate
ceilings on time deposits established in December 1965, their
time and savings deposits continued to increase, but at a somewhat slower annual rate—11 per cent.
While the slowing of inflows was modest during January-August, the composition changed dramatically. After the prime
rate was raised to 5Yi per cent in March, large banks began
62

FEDERAL RESERVE SYSTEM

aggressively to seek negotiable CD's in large denominations.
During the first half of 1966, banks increased their outstanding
CD's by $1.6 billion, most of which occurred after mid-March.
But with the cost of CD's rising sharply and with the ceiling rate
on passbook savings accounts unchanged, banks turned increasingly to other forms of time deposits—especially those designed
for consumers.
TIME DEPOSIT growth slows in '66 and COMPOSITION OF NET INFLOWS
changes sharply
ALL COMMERCIAL BANKS

WEEKLY REPORTING
BANKS
PASSBOOK SAVINGS

110

• 90
o
TIME DEPOSITS OTHER

'mi
130

J
m

110

* 90
1964

1965

1966

Total time and savings deposits are seasonally adjusted monthly averages of daily figures
and exclude domestic interbank and U.S. Goyt. deposits. Data have been adjusted to
eliminate the effect of a reclassification of deposits in June 1966. Data for weekly reporting
banks are as of the last Wednesday of each month, and are not seasonally adjusted. The
effect of a change in the reporting panel of weekly reporting banks at the end of June 1966
has been eliminated by subtracting from figures for each of the last 6 months the difference
between the two sets of data at midyear.

At the large weekly reporting banks, consumer-type CD's
began to rise sharply in early 1966 as banks offered higher rates
on small-denomination time deposits. Passbook savings accounts,
on the other hand, with their less attractive yields, declined
abruptly because the more interest-sensitive depositors shifted
their funds to other financial assets. Indeed, a large proportion of
the growth of consumer time deposits resulted from shifts out of

ANNUAL REPORT OF BOARD OF GOVERNORS

passbook savings accounts. Banks were not able to maintain
their share of the consumer savings market by issuing time deposits, however, because consumers increasingly shifted their
savings flows to direct purchases of market securities; at large
weekly reporting banks the combined inflow of savings deposits
and consumer-type time deposits generally remained below the
pace of 1965.
In the late summer, inflows of interest-bearing deposits to
banks slowed considerably, particularly at the large banks, which
had been large issuers of CD's. As early as midyear, typical
offering rates on 90-day CD's had reached the 5Yz per cent
ceiling, and CD growth ceased as banks replaced their maturing
paper with 30- to 90-day maturities. However, by early August,
rates on these shorter-term deposits had also reached 5Y2 per
cent, and with yields on other money market instruments above
the ceiling rate, banks found themselves unable to replace all of
their maturing paper. Between mid-August and mid-December
banks lost $3.2 billion of large-denomination CD's, mainly in
September and October. It was to supplement their resources and
to help offset this outflow that large banks in the second half of
1966 borrowed more than $2 billion through their foreign
branches—mainly in Euro-dollars.
Over the period that large banks were losing negotiable CD's,
inflows of consumer-type time deposits slowed—and some banks
had net outflows. The development reflected both the late September rollback to 5 per cent of ceiling rates on time deposits
below $100,000 and the movement of some funds into longerterm market instruments with higher yields.
As a result of outflows of negotiable CD's and the moderation
in other time deposit inflows, the seasonally adjusted annual
rate of growth of total interest-bearing deposits at all commercial
banks (excluding the funds obtained through foreign branches)
slowed. Growth during the 3 months September-November was
at an annual rate of less than 1 per cent; in fact such deposits
declined in October—for the first time since 1960. Large banks
64

FEDERAL RESERVE SYSTEM

lost deposits during the 3 months. But the smaller country banks
—with fewer interest-sensitive depositors—continued to attract
total time and savings deposits at the 10 to 11 per cent rate prevailing earlier in the year—only slightly below the 1965 pace.
In December, rapidly declining market yields restored the
relative attractiveness of time deposits, and these deposits rose
at a seasonally adjusted annual rate of 9.1 per cent. Despite a
record $5.6 billion of CD maturities during the month, banks
were able to add to their outstanding negotiable CD's; their
consumer-type time deposits also rose somewhat.
Bank credit. Continued relatively large inflows of time deposits
permitted banks in the first half of 1966 to expand credit at a
rate only slightly below their postwar record pace of over 10
per cent in 1965. In the second half of the year, as time deposit
inflows moderated—and monetary policy became more restrictive until fall—bank loans and investments expanded at a much
slower pace. For all of 1966, bank credit expanded about 6 per
cent, a little more than half the pace in 1965, and banks reduced
their total holdings of securities for the first time since 1959.
Over the first 7 months of the year, with business demands for
credit large, and with time deposit inflows relatively well maintained, banks increased their business loans at an annual rate of
more than 20 per cent, despite three increases in the prime rate
over this period. These demands for credit reflected the large and
rising external financing requirements of businesses, and
borrowing in anticipation of more severe credit stringencies and
to help finance acceleration in tax payments. Demands were generally broad-based but were particularly strong on the part of
manufacturers of machinery and transportation equipment—a
group under great pressure from the accelerated pace of capital
outlays and/or defense expenditures.
Despite the large inflows of time deposits, banks found it
increasingly necessary to cut back on additions to other parts of
their portfolios in order to maintain this rate of business loan
expansion. Treasury issues were liquidated, but requirements that

ANNUAL REPORT OF BOARD OF GOVERNORS

these securities be held against public and other deposits and the
already low levels of holdings of Government securities limited
the ability of many banks to liquidate enough of these issues to
accommodate the intense business loan demands. Consequently,
large banks reduced the rates at which they were acquiring State
and local bonds and expanding nonbusiness loans; they also
raised their standards for business and other credits.
9 | BANK CREDIT expands less rapidly in 1966
TOTAL LOANS AND INVESTMENTS
-

5
I

DOMESTIC BUSINESS LOANS

BILLIONS

- »g
^ ^ ^ ^ ^ ^
CONSUMER LOANS
10
T R U H S L S FN N E C S
H O G AE I A C O .
Illlllllllllllll

Illlllllllllllll
Illllllllllllll

f LI

DIRECT

STATE AND LOCAL GOVT. SECURITIES
1

5
l

U.S. GOVT. SECURITIES
n

i |

p 5

Flow of funds data. Business loans are to all domestic nonfinancial businesses and include
commercial paper and domestic acceptances. Consumer credit includes loans to, and
purchases of commercial paper issued by, finance companies. U.S. Govt. securities include
nonguaranteed debt of the U.S. Govt. and loan participation certificates.

FEDERAL RESERVE SYSTEM

After midyear, business demands for loans apparently remained large, and with time deposit inflows leveling off, banks
again raised the prime rate—to 6 per cent—in August. In
addition, large banks became sellers of tax-exempt and agency
securities and reduced their loans to finance companies. Large
money market banks also cut back on their loans to security
dealers by raising interest charges to very high levels. Bank loans
to foreigners were also reduced over the year.
These adjustments in bank portfolios had a large impact on
key credit markets. For example, banks' net acquisitions of State
and local government bonds—which on the average had equaled
about 75 per cent of the net volume of new issues in 1962-65—
declined to 40 per cent of new issues in the first half of 1966
and to less than 20 per cent in the second half. Furthermore,
reductions in credit extended by banks to sales finance companies had a significant effect on the banks' share of the total
consumer credit market. In terms of their direct loans to consumers, the banks' share of the consumer credit market declined
only slightly—from about 50 per cent in 1965 to less than 45 per
cent in 1966. But when their credits to finance companies are
included, their share of total consumer credit financing declined
from almost three-fourths in 1965 to less than one-half in 1966.
Banks also reduced somewhat the rate at which they acquired
mortgages in 1966. Nonetheless, with total mortgage financing
declining, banks accounted for slightly more than the nearly
one-fifth of the mortgage market they had in 1965.
These portfolio adjustments contributed to intense financial
pressures in some credit markets, particularly during the summer.
It was in an effort to reduce these pressures that the Federal
Reserve Bank Presidents on September 1 sent letters to member
banks requesting them to rely more on curtailment of business
loans—and less on other parts of their portfolios—in adjusting to
liquidity pressures.
During the late summer and early fall, bank credit declined.
As the cumulative impact of monetary policy curtailed deposit

ANNUAL REPORT OF BOARD OF GOVERNORS

inflows and eroded bank liquidity and as business demands for
credit—including loans to meet tax payments—abated, growth
in business loans also slowed substantially. In the final 5 months
of the year growth in such loans moderated to an annual rate of
less than 5 per cent, compared with more than 20 per cent earlier
in the year.
With demands for credit reduced and with signs that the pace
of economic expansion was moderating, monetary policy was
eased in the late fall. Business loans did not expand, however, and
banks began to rebuild their liquidity, an adjustment that is
typical of early stages of relaxation of monetary restraint. After
mid-November, bank holdings of securities rose sharply. In
December, with time deposit inflows rising faster and reserve
availability increased, bank loans and investments increased by
$2.3 billion, seasonally adjusted—the largest monthly increase
since midsummer.
Money stock. In the first half of 1966 the private money stock
increased at a seasonally adjusted annual rate of 4.7 per cent—
10 MONEY STOCK increases sharply in first half, declines in second half

155

1964

1965

1966

Seasonally adjusted monthly averages of daily figures. Money stock consists of demand
deposits and currency outside the Treasury, the FR System, and the vaults of commercial
banks. Demand deposits exclude those due to domestic commercial banks and the U.S.
Govt., cash items in process of collection, and FR float, but include foreign demand
balances at FR banks.

FEDERAL RESERVE SYSTEM

the same as for the year 1965. Reflecting the increased pace
of economic activity, the turnover of demand balances at banks
outside of New York also rose sharply because of increased efforts
to economize on cash in response to rising interest rates.
As interest rates continued to increase after midyear, and then
later as industrial production moderated, the money stock declined and the rate of growth of the turnover of demand deposits
slowed. From midyear through mid-November the money stock
declined at an annual rate of 2.4 per cent. About mid-November
the money stock began to increase again—due in part to the
downturn in market yields, and in part to a sharp decline in
Treasury cash balances; late in the year it rose at a rate of more
than 7.0 per cent.
CREDIT MARKETS AND INTEREST RATES

Interest rates rose sharply in the first 8 months of the year and
many would-be borrowers—especially in mortgage markets—
found their ability to obtain credit reduced. Most interest rates
reached their peaks in late summer and then turned down. By
the year-end a large share of the year's rise had been erased.
Within this general profile, however, interest rate movements
were not continuous but showed important temporary deviations
from the dominant trend in accordance with variations in supplydemand pressures and expectations.
Early in the year market yields rose steeply. Heavy business
demands for credit caused an increase in the number of offerings scheduled in capital markets and contributed to an acceleration in sales of securities by banks. Borrowing by Federal and
State and local governments was also large. At the same time,
the pace of the rate upswing was intensified by expectations of
greater monetary restraint.
Expectations ran ahead of the more basic demand-supply
forces until near the end of the first quarter when rates turned
down. Much of this decline stemmed from the presumption that

ANNUAL REPORT OF BOARD OF GOVERNORS

TABLE 7
SELECTED INTEREST RATES,

1966

(Per cent per annum)
Net change
Type of rate i

12/31/65
to 1966
high

Date
of
high

1966
high to
12/31/66

+1.05
+1.26
+1.13
+1.33

9/23
9/23
MO/22 to)
112/31 /
11/16

- .72
-1.00

Level
on
12/31/66

Short-term

3-mo. Treasury bill
6-mo. Treasury bill
Finance company paper
Federal funds

.00
.39

4.80
4.92
5.88
5.57

.97

4.86

.,33
.47
.,47

4.54
35.51
5.83

.05

6.65

Medium-term

3-5-year U.S. Govt

+ .93

9/2

+ .43
+1.12
+1.00

.9/2
9/2
8/26

+ .70

Oct.-Nov.

Long-term

U.S. Govt
Corporate (new issues)2 4
Municipal (Moody's Aaa)
Conventional mortgages
(FHA series, new homes)

1
2

Weekly averages except for conventional mortgage rate, which is monthly.
Adjusted to an Aaa basis.
3\Veekof Jan. 6, 1967.
4
Tax-equivalent yield calculated for individuals in the 36 per cent personal income
tax bracket.

the administration would ask for a Federal tax increase by midyear. But rate pressures also moderated because of a brief pause
in demands for long-term funds and because of scattered signs of
slower economic expansion—notably in the auto industry—
which led to some readjustment of expectations about the pace of
the economic boom.
As the second quarter progressed it became evident that
slackness in the economy was limited chiefly to autos and housing
and that substantial further growth in aggregate spending could
be expected in the third quarter. With business credit demands at
new records and with a growing consensus that no tax increase
was forthcoming, upward pressures on interest rates were renewed. Efforts of banks to accommodate expanded business loan
70

FEDERAL RESERVE SYSTEM

demands—by selling assets, rationing other types of credit, and
competing more actively for savings—put special pressures on
rates in money and securities markets and spread the effects of
growing policy constraints to other types of lenders.
INTEREST RATES in 1966 rise steeply until September and then

11 decline in both LONG-TERM

U.S. GOVERNMENT BONDS
CORPORATE Aaa
NEW ISSUES

and SHORT-TERM markets

TREASURY
BILLS

Monthly averages of daily figures except for mortgages (based on quotations for 1 day
each month). Yields: FHA-insured mortgages, weighted averages of private secondary
market prices of certain new-house mortgages converted to annual yield; State and local
Aaa—tax-equivalent, from Moody's Investors Service, adjusted to a tax-equivalent basis
assuming a 36 per cent individual income tax rate; Corporate Aaa new issues, calculated
from bonds rated Aaa, Aa, and A by Moody's Investors Service and adjusted to an Aaa
basis; U.S. Govt. bonds, due or callable in 10 years or more; U.S. Treasury bills,
market yields on 3-month issues; and finance company paper, 3- to 6-month directly
placed paper.

ANNUAL REPORT OF BOARD OF GOVERNORS

While the major impact of these influences on other lenders
was centered in mortgage markets, there was also a substantial
shrinkage in the amount of funds insurance companies had available for private placements. Businesses were thus forced to
finance a larger share of their total needs through public offerings
of longer-term securities. In addition, the shrinkage in flows to
mortgage markets increased pressures on the resources of the
Federal Home Loan Bank System and the Federal National
Mortgage Association, and in turn greatly expanded the volume
of security offerings by these two agencies.
Treasury bill rates, on the other hand, declined during the
spring. The resultant widening of spreads between bill rates and
other short-term rates—particularly on newly issued short-term
offerings of Federal agencies—reflected the very large net reduction—$7 billion—in Treasury bills from March through June.
This reduction was possible because normal seasonal inflows of
funds were augmented by accelerated tax payments and by sales
of PC's.
From the end of June to the end of September, however,
Treasury bill rates rose more than 100 basis points. To a large
extent, the advance was caused by the expansion in actual financing needs of the U.S. Government—including a $3.5 billion increase in outstanding bills—and in its anticipated needs. As
bill rates rose relative to the SV2 per cent ceiling rate on
bank CD's, the resulting constraints on bank credit availability caused a further increase in the prime rate to 6 per
cent and reinforced the general advance in other short- and
long-term rates. In addition, costs of financing made it more
difficult and expensive for dealers and underwriters to take positions and thus impeded secondary market trading in securities
markets as well as the distribution of new securities. Moreover,
with large city banks facing a sizable net runoff of their neardated CD's and with new loan commitments at some life insurance companies being drastically curtailed, many market partici-

FEDERAL RESERVE SYSTEM

pants began to wonder whether a serious imbalance might not
develop between available funds and prospective credit demands
during the autumn.
In these circumstances, money market banks attempted to
anticipate expected net runoffs of their CD's in September by
liquidating large blocks of municipal securities. At the same
time, some large corporations moved to float new security issues
in the capital markets in what is usually a slack period of financing. Both actions accentuated interest rate increases and contributed to market fears of a severe credit squeeze.
Expectations again ran ahead of basic supply-demand factors,
however, and by early September the steep summer advance in
long-term rates began to be reversed. Some of the decline
reflected the response of administration policies to the August
upsurge in rates—for example, the request for temporary suspension of the investment tax credit, the announcement that nonmilitary Federal spending would be cut, and that Federal agency
borrowing from the public as well as further PC sales would be
postponed until market pressures abated, and indications that
further tax action might be requested to balance potential
increases in spending for the Vietnamese war.
After early September several factors reinforced the general
decline in bond yields, which by late September began to influence the most sensitive short-term rates as well. These included
the reduction in credit demands due in part to previous anticipatory borrowing and evidence suggesting that economic and financial developments in the private sector might not meet earlier
market expectations. Some of the decline in rates was temporarily
offset in November when a heavy year-end buildup in capital
market financing by businesses and State and local governments
threatened to combine with usual year-end money market pressures to create renewed financial market stringency. But evidence
suggesting that the pace of economic activity might be slowing,
and that the Federal Reserve's policy of monetary restraint had

ANNUAL REPORT OF BOARD OF GOVERNORS

been moderated, subsequently created market expectations that
interest rates would decline further.
In these circumstances, the large volume of capital market
offerings in December was quickly distributed at declining rates,
and money market conditions eased substantially. By the yearend, Treasury bill rates had erased two-thirds to four-fifths of
their rise from the preceding December; long-term bond yields
had offset about two-fifths to three-quarters of theirs. At these
lower yields, bank CD's and other deposits and shares at financial
institutions became more competitive, and flows to financial institutions increased dramatically.

FEDERAL RESERVE SYSTEM

U.S. BALANCE OF PAYMENTS
War in Vietnam and excessive demand pressures in the
domestic economy prevented any significant further adjustment
of the U.S. balance of payments toward equilibrium in 1966. A
sharp deterioration in the balance on goods and services was
offset by an improvement on capital account. But the drain on
U.S. monetary reserves continued at a pace that, while slower
than in 1965, was more rapid than in the two preceding years.
The net deterioration on current account in 1966 could be
attributed in large part to cyclical forces of excess demand
that lifted merchandise imports well above trend before they
began to level off toward the end of the year. However, a
renewed advance in domestic prices and costs, after several years
of better price-cost performance in this country than abroad,
indicated an interruption of the fundamental competitive adjustment that had been under way earlier.
J CONSUMER PRICES rise as much in U.S. as in most other countries

1 1 during 1966
JAPAN

ITALY

U.K.

4
PERCENTAGE INCREASE

ANNUAL REPORT OF BOARD OF GOVERNORS

The capital account benefited greatly from the effects of
unusually tight domestic credit conditions, reinforced by the
interest equalization tax (IET) and by voluntary programs to
restrain net outflows of U.S. capital; it also benefited from some
large official transactions. Toward the year-end, when some
easing of the credit stringency became appropriate for domestic
needs, it became clear that the capital account was in danger of
worsening again as the current account improved. Hence, the
voluntary restraint programs were tightened and extended
through 1967, and in January 1967 the administration proposed
a 2-year extension of the IET and greater flexibility in its
application.
The over-all payments deficit measured on the liquidity basis
remained about unchanged in 1966, $1.4 billion compared with
$1.3 billion the year before. U.S. official reserve assets declined
by $568 million, and total U.S. liquid liabilities to foreigners and
international institutions increased by about $850 million. In
addition, however, long-term time deposits of foreign official and
international institutions, which are not counted as liquid, increased by about $900 million. And holdings by international
nonmonetary institutions of long-term securities of U.S. Government agencies, which are not direct debt of the U.S. Government
and which are also classified as nonliquid, increased by about
$250 million.
An alternative measure of the over-all balance—on the basis
of official reserve transactions—showed a surplus of $0.3 billion
in 1966, in contrast with a deficit of $1.3 billion in 1965. The
difference between the two balances reflected an inflow of more
than $2 billion of foreign liquid funds through the foreign
branches of U.S. commercial banks. This record inflow resulted
both from intense pressure on the reserve and liquidity positions
of large U.S. banks, which led them to bid aggressively for foreign
funds, and from the sterling crisis of the summer, which encouraged shifts of funds out of sterling into dollars. By the end
of the year, the inflow appeared to have ceased.
76

FEDERAL RESERVE SYSTEM

TRANSACTIONS IN GOODS AND SERVICES

The dominant feature of the current account in 1966, as in 1965,
was a very rapid rise in merchandise imports. Imports were 19
per cent larger than the year before and 37 per cent larger than
in 1964. They would have risen even more if the Government
had not released from its stockpiles about $400 million of materials in 1965 and about $900 million in 1966. In each of the
13|

MERCHANDISE IMPORTS rise rapidly until late 1966;
I trade surplus narrows

IMPORTS

1962

1964

1966

Seasonally adjusted balance of payments data.

past 2 years, imports increased more than twice as fast as GNP.
The 1965-66 import boom was the most rapid and sustained,
both absolutely and relative to GNP, since 1950-51. It provided
early and persuasive evidence of the emergence and persistence of
excessive domestic demand pressures.
The surge in merchandise imports was broadly based. Imports
of capital equipment rose very sharply—by 41 per cent in 1965

ANNUAL REPORT OF BOARD OF GOVERNORS

and by 64 per cent in 1966—reflecting intense domestic
demand and pressures on capacity in that sector. The rise in
imports of nonfood consumer goods was also rapid, even excluding the tripling of automotive imports from Canada under
the agreement of 1965 between Canada and this country. And
imports of industrial materials and supplies, which account for
almost half of total imports, increased by 11 per cent despite
the substantial releases of materials from Government stockpiles
noted earlier; this rise reflected strong domestic demands for
additions to inventories as well as for current use.
Exports of merchandise also increased in 1966. The 11 per
cent gain over 1965 was high by historical standards, thanks to
a further advance in agricultural exports and strong demands for
other products by Canada, Japan, and nonindustrial countries.
But with imports rising so much faster than exports, the trade
balance shrank to $3.7 billion—its lowest level since 1959—
compared with $4.8 billion in 1965 and a peak of $6.7 billion
in 1964.
There was also a marked worsening during the year in military
transactions in goods and services. Military expenditures abroad
increased by about $800 million from 1965 to 1966, and by the
end of the year they were running at an annual rate of $3.8
billion, compared with a low of $2.7 billion in late 1964 and
early 1965. Nearly all of the increase could be attributed to
operations in Vietnam, but outlays in Europe still constituted
about 40 per cent of the global total. Meanwhile sales of military
goods and services increased by only about $100 million to about
$950 million.
Income receipts from foreign investments increased very
little more than income payments on the investments of foreigners
in the United States. The balance on other service transactions—
travel, transportation, fees and royalties, and miscellaneous—
also remained about unchanged. Travel receipts increased almost
as much as travel expenditures.
The balance on all goods and services shrank to about $5.3
78

FEDERAL RESERVE SYSTEM

billion, compared with $7.0 billion in 1965 and $8.5 billion in
1964. At the end of the year it was running at an annual rate of
less than $5 billion.
FLOWS OF U.S. CAPITAL

Outflows of U.S. private capital—net of investment abroad of
funds borrowed abroad for that purpose by U.S. corporations
(see below)—declined further in 1966 to about $3.3 billion. This
was the smallest outflow since 1959. During the year the unusually tight credit conditions in the United States became the
main force limiting outflows. However, the voluntary restraint
programs remained effective, particularly in connection with the
financing of direct investments, and the IET continued to deter
U.S. purchases of foreign securities and extensions of long-term
bank loans.
U.S. banks reduced their claims on foreigners by about $160
million during 1966, although the voluntary program would
have permitted an increase of $700 million. (The last year prior
to 1966 in which U.S. banks reduced their outstanding claims on
foreigners was 1953.) Japanese borrowers made substantial net
repayments to banks of long- and short-term credits, and European borrowers repaid term loans. Credits to other areas increased only moderately, as U.S. banks adopted an even more
restrictive attitude than the voluntary program would have
required.
The foreign affiliates of U.S. nonfinancial corporations continued to increase their spending for plant and equipment in
1966, though not so rapidly as in earlier years. But in response to
the Commerce Department's voluntary program to limit direct
investment outflows of U.S. capital, domestic and foreign affiliates of U.S. corporations borrowed heavily abroad to finance
foreign investments, and outflows from the United States net of
the use of proceeds of such borrowing declined to about $3.0
billion from a record $3.3 billion the year before.
Purchases by U.S. residents of foreign securities newly issued

ANNUAL REPORT OF BOARD OF GOVERNORS

in this country, mainly by Canadian governments and businesses,
were smaller in 1966 than in 1965, despite the postponement
into early 1966, at government request, of about $150 million
of Canadian issues originally scheduled for late 1965. Redemptions of foreign securities held by U.S. residents rose well above
the usual level as the Canadian Government redeemed $140
million in advance of maturity—and also purchased bonds of the
International Bank for Reconstruction and Development (IBRD)
from U.S. holders—in order to fulfill an intergovernmental
understanding reached in connection with Canada's exemption
from the IET. Finally, U.S. holdings of foreign securities that had
not originally been issued in the United States continued to decline, as they had in every calendar quarter since mid-1963,
when the IET took effect. Altogether, net U.S. purchases of
foreign securities, at about $400 million, were the smallest since
1957.
As the year ended, outflows of U.S. private capital were on
the increase. However, the fourth-quarter rise in direct investment outflows may have been only temporary; there was evidence
that U.S. corporations, for the first time since 1961, were not
planning a large further increase in foreign outlays and that they
would continue to seek maximum financing abroad as requested
by the Government. It seemed likely, nevertheless, that total outflows could not long remain so far below the long-run trend as
they were in 1966 once domestic credit conditions became less
tight, although continuation and strengthening of the voluntary
restraint programs and the IET insured against a dangerous
hemorrhage of the sort experienced in late 1964.
The extension of grants and credits by the U.S. Government
to other countries increased by about $400 million in 1966,
mainly as a result of larger disbursements by the Export-Import
Bank to finance U.S. sales of civilian jet aircraft and military
equipment. The United Kingdom made a scheduled year-end
repayment on the U.S. loan of 1946—after obtaining waivers

FEDERAL RESERVE SYSTEM

in each of the two preceding years—and nonscheduled repayments of $430 million were received, mainly from Germany,
Italy, and France, as against only $220 million in 1965; as a
result the flow of Government grants and credits net of repayments remained about unchanged, at $3.4 billion.
FLOWS OF FOREIGN CAPITAL

Tight money in the United States had even greater effects in 1966
on flows of foreign capital than on flows of U.S. capital. It led
to a massive inflow of foreign private liquid funds, which reduced the dollar holdings of foreign central banks and thus
tended to reduce U.S. reserve losses and to support the dollar
in foreign exchange markets. Tight money also facilitated shifts
of U.S. funds by foreign official and international institutions
out of short-term deposits and Treasury securities into somewhat
less liquid long-term deposits and nonguaranteed U.S. Government agency securities. These shifts had the effect of preventing
the large increase in the liquidity deficit that might otherwise
have occurred.
The main inflow of liquid funds came from the Euro-dollar
market through the foreign branches of large U.S. banks, as
noted earlier. Liabilities of U.S. head offices to their foreign
branches increased by more than $2 billion during the year;
at the year-end they were triple their level at the end of 1965.
Half of the inflow in 1966 occurred in the third quarter when
U.S. banks were under the most intense pressure to seek alternative sources of funds to meet domestic credit demands.
Major U.S. investors were not free to take advantage of the
high Euro-dollar rates because of the strictures of the voluntary
programs against such outflows and the policies of the foreign
branches not to accept deposits from U.S. residents. And private
foreigners, on balance, apparently did not withdraw significant
amounts of funds from this country for placement in Euro-dollar
accounts; holdings of liquid assets in the United States by private

ANNUAL REPORT OF BOARD OF GOVERNORS

foreign residents other than banks increased at about the same
pace as in earlier years, and holdings of foreign commercial banks
other than branches of U.S. banks did not change appreciably.
Therefore, those foreigners who made Euro-dollar deposits
with U.S. branches were mainly using dollars that they had
acquired (or would otherwise have sold) in foreign exchange
markets for other currencies, or that they had obtained by
reducing their outstanding dollar loans to other foreigners, who
in turn then had to buy more dollars in the foreign exchange
markets. The resulting additions to the demand for, and reductions in the supply of, dollars in foreign exchange markets
reduced the dollar accruals and holdings of foreign central banks
to levels below those they would otherwise have reached.
The Bank of England in particular lost dollars heavily to the
market during the summer, when confidence in sterling was at
a low ebb. Even though confidence in sterling began to be
restored following the restrictive fiscal and monetary actions
taken by the British Government in July, high yields on Eurodollars tended to slow the return flow of funds into sterling.
Later in the year flows of private funds out of assets denominated in continental European currencies and into dollars helped
to reduce or reverse the earlier reserve gains of France and other
countries. By the year-end, however, the inflow to the United
States from the Euro-dollar market appeared to haive ceased,
and there were signs that U.S. banks were beginning to make
repayments to that market as domestic credit conditions eased.
The acquisition by foreign official and international institutions
of a substantial volume of over-1-year time deposits and
U.S. Government agency securities was only partly related
to interest rate considerations. International institutions, notably
the IBRD, have for several years invested the proceeds of their
new security offerings in the United States in nonliquid U.S.
assets, and they have allowed their liquid assets to decline gradually, so as to minimize the adverse impact of their transactions
on the U.S. payments deficit as measured on the liquidity basis.
82

FEDERAL RESERVE SYSTEM

In 1966, however, they invested substantially more in nonliquid
assets than they borrowed—about $450 million compared with
about $100 million.
A number of foreign central banks placed in the United States
a total of nearly $750 million in long-term deposits during
the year. The outstanding volume of such deposits had not
exceeded $200 million at any earlier time. These placements,
and the corresponding reduction in more liquid holdings, served
to reduce the liquidity deficit; they did not affect the balance
calculated on the basis of official reserve transactions. Liquidation of U.S. securities other than Treasury issues by the British
Government worked to increase both measures of the deficit,
but such liquidations were much smaller in 1966 than they had
been in 1965.
Residents of foreign countries other than the United Kingdom
made net purchases of about $130 million of U.S. corporate
securities (other than those sold to finance direct investments
abroad) in 1966, in contrast to net sales of $130 million in 1965.
OFFICIAL RESERVE TRANSACTIONS

The United States had a small payments surplus—$270 million
—in 1966 as measured on the basis of official reserve transactions. Yet U.S. reserve assets declined, as noted earlier, by
$568 million net. The gold stock was reduced by $571 million;
sales of $601 million of gold to France during the first 9 months
of the year, of smaller amounts to other countries, and of $140
million to domestic users for industrial and artistic purposes
outweighed net purchases, including $200 million from Canada,
and gold deposits of $177 million made during the year by the
International Monetary Fund. In addition, the IMF gold tranche
position of the United States was reduced by $537 million net,
as the United States drew foreign currencies from the Fund on
several occasions (see pages 269-90). On the other hand, the
U.S. Treasury and the Federal Reserve added $540 million

ANNUAL REPORT OF BOARD OF GOVERNORS

equivalent to their holdings of foreign convertible currencies
during the year.
While U.S. reserve asset holdings declined, U.S. liabilities to
foreign official agencies—which constitute an important element
in their reserve holdings—declined even more sharply—by $840
million. The decline in liquid liabilities to official holders was
considerably greater than this, but there was an increase in
certain nonliquid liabilities to foreign central banks and governments, as noted above. The outstanding amount of Treasury
securities—some liquid, some nonliquid—denominated in foreign currencies fell from $1,208 million at the end of 1965 to
$860 million at the end of 1966.
The favorable balance on the official reserve transactions
basis was clearly temporary, depending heavily as it did upon a
massive inflow of foreign private liquid funds. At the year-end it
appeared that some of these funds were flowing out again as
domestic credit conditions eased.
141 U.S. RESERVE ASSETS continue to decline in 1966

IMF GOLD TRANCHE
CONVERTIBLE
CURRENCIES

~ 10

1962

1964

FEDERAL RESERVE SYSTEM

During most of the postwar period, deficits in the U.S. balance
of payments have been financed in part by increases in U.S.
liabilities to foreign central banks and governments and only
partly through declines in U.S. reserves. Thus these deficits have
added more to the reserves of other countries than they have
subtracted from U.S. reserves.
In 1965, however, this situation changed. In that year the U.S.
deficit on the reserve transactions basis was financed almost
entirely by a reduction in U.S. reserves. Indeed, the reduction
in U.S. reserves exceeded the deficit if the latter is adjusted to
take account of declines in U.K. official holdings of U.S. securities, which are not usually included in the calculation (Table 8);
TABLE 8
OFFICIAL RESERVE TRANSACTIONS, 1964-66

(In millions of dollars)
Type of transaction

1964

1965

1966

Balance on official reserve transactions basis

-1,546

-1,305

+271

-2,580

Decline in U.S. reserve assets (increase, —), total
Gold
Convertible currencies
IMF gold tranche position

171
125
-220
266

1,222
i.21,665
-349
i -94

568
571
-540
537

1,961
^ 2,361
-1,109
*709

Increase in U.S. liabilities to foreign official agencies, total 3 ....
Liquid liabilities
Certain nonliquid liabilities 3 . . . .

1,375
1,073
302

1964-66

Settled by:

Memo: Net U.K. sales ( - ) of U.S.
securities other than Treasury
issues (including private as well
as official sales)

-3

83
-17
100

-510

-839
-1,574
735

-82

619
-518
1,137

-605

1
Reflects $259 million payment of gold portion of increased U.S. subscription to
the2 IMF.
Reflects IMF gold deposits with the United States, and corresponding increase
in 3
U.S. liabilities to IMF, of $34 million in 1965 and $177 million in 1966.
These liabilities do not include official U.K. holdings of U.S. securities other than
Treasury issues; the memorandum item gives some indication of changes in those
holdings.

PART II
Records, Operations, and Organization

ANNUAL REPORT OF BOARD OF GOVERNORS

foreign official claims on the United States including U.K. official
holdings of securities actually declined in 1965.
This pattern was continued in 1966. Both U.S. reserves and
U.S. reserve liabilities declined. Hence the reserve transactions of
the United States with other countries had the effect of reducing
total world reserves—rather than increasing them as in the years
before 1965.
It will be seen from Table 8 that over the past 3 years combined the United States has not significantly increased its
reserve liabilities if rough allowance is made for declines in
official U.K. security holdings. Reserve assets of the United States
have declined by almost the full amount of the cumulative U.S.
deficit on the reserve transactions basis during this period. It is
this persisting decline in U.S. reserves that gives increasing
urgency to the task of restoring payments equilibrium.

FEDERAL RESERVE SYSTEM

RECORD OF POLICY ACTIONS
OF THE BOARD OF GOVERNORS

March 29, 1966
Amendment to Regulation R, Relationships with Dealers in Securities
under Section 32 of the Banking Act of 1933.

Effective March 29, 1966, Regulation R was amended to include among
the types of obligations excepted in Section 218.2 of the Regulation certificates of interest issued by the Commodity Credit Corporation.
Votes for this action: Messrs. Martin, Robertson,
Shepardson, Daane, Maisel, and Brimmer. Votes
against this action: None.

Section 32 of the Banking Act of 1933 provides that no officer,
director, or employee of any corporation or unincorporated association, no partner or employee of any partnership, and no
individual primarily engaged in the issue, flotation, underwriting,
public sale, or distribution, at wholesale or retail, or through
syndicate participation, of stocks, bonds, or other similar securities, shall serve at the same time as an officer, director, or employee of any member bank of the Federal Reserve System.
However, the statute authorizes the Board of Governors, by general regulations, to except limited classes of relationships from
the prohibitions of the statute.
Pursuant to such authority, the Board had heretofore permitted
officers, directors, or employees of member banks to serve at the
same time as officers, directors, or employees of securities firms
dealing only in U.S. Government securities, obligations fully
guaranteed as to both principal and interest by the United States,
general obligations of territories, dependencies, and insular possessions of the United States, obligations of Federal intermediate
credit banks, Federal land banks, Central Bank for Cooperatives,
Federal home loan banks, the Federal National Mortgage Association, and the Tennessee Valley Authority; and, subject to

ANNUAL REPORT OF BOARD OF GOVERNORS

specifications contained in paragraph Seventh of Section 5136
of the U.S. Revised Statutes, obligations of the International Bank
for Reconstruction and Development, the Inter-American Development Bank, public housing agencies, or any local public
agency, and obligations insured by the Federal Housing Administrator.
The current amendment to Regulation R added to this list
certificates of interest issued by the Commodity Credit Corporation, it appearing to the Board that the certificates were in the
same general category as obligations previously listed.
Governor Maisel, while supporting the action, reiterated his
preference that the list of exceptions be expanded to include all
obligations that member banks are authorized to deal in or underwrite pursuant to paragraph Seventh of Section 5136, including
general obligations of States and political subdivisions.

June 24, 1966
Amendments to Regulation D, Reserves of Member Banks, and Regulation
Q, Payment of Interest on Deposits.
(1) Effective with the reserve computation periods beginning July 14,
1966, for reserve city banks and July 21, 1966, for other member banks,
the Supplement to Regulation D was amended to increase from 4 per cent
to 5 per cent the reserve requirement against time deposits (other than
savings deposits) in excess of $5 million at each member bank.
(2) Effective September 1, 1966, Regulations D and Q were amended
to bring promissory notes, with the exception of certain designated types
of underlying transactions, within the coverage of the definition of "deposit."
Votes for these actions: Messrs. Martin, Robertson, Mitchell, Maisel, and Brimmer. Votes against
these actions: None.

The reserve requirement action was designed to exert a tempering influence on issuance of time certificates of deposit (CD's)
by banks. It also served to apply a moderate additional measure
of restraint upon the expansion of loanable funds and thus re90

FEDERAL RESERVE SYSTEM

inforce the operation of other instruments of monetary policy in
containing inflationary pressures.
The effect of the action was to increase required reserves by
approximately $350 million at reserve city banks and $70 million at other member banks. However, since the increased reserve requirement was not applicable to savings deposits and
applied only to time deposits in excess of $5 million held by any
member bank, it appeared that only about 950 banks throughout the country—primarily those issuing savings certificates
and other CD's in large volume—would be affected.
The purpose of the action on shorter-term promissory notes
and similiar instruments was to prevent the future use of those
instruments as a means of circumventing the regulations governing reserve requirements and payment of interest on deposits.
The types of promissory note transactions specifically excluded
from the expanded deposit definition included Federal funds
transactions, interbank borrowings, transfers of assets with
agreements to repurchase, and bank notes issued for capital purposes with a maturity of more than 2 years and subordinated to
claims of depositors. Although the action was not effective until
September 1, 1966, it applied to all promissory notes covered by
the action that were issued on or after June 27, 1966, and were
outstanding on or after the effective date. Such notes and similar
instruments had come into use only in the past few years, and
the volume outstanding at this time was relatively small.
July 1, 1966
Credit facilities for nonmember depositary-type institutions.

Effective July 1, 1966, and until September 1, 1966, the Board authorized a program under which the Federal Reserve Banks could make credit
facilities available to nonmember depositary-type institutions under certain
conditions.
Votes for this action: Messrs. Robertson, Shepardson, Daane, Maisel, and Brimmer. Votes against
this action: None.

ANNUAL REPORT OF BOARD OF GOVERNORS

Information available to the Board suggested the possibility
that during the period ahead some nonmember depositary-type
institutions, including mutual savings banks and savings and loan
associations, might be subjected to unusual withdrawals of funds.
After consultation with the Federal Reserve Banks, the Board
concluded that the Reserve Banks should be prepared to provide
emergency credit facilities to such institutions in accordance
with certain basic principles.
The Board advised the Federal Reserve Banks that in order
to provide for prompt implementation of such a program if
needed, it had taken the following action, effective immediately
and until September 1, 1966:
(a) Member banks in your district are permitted, pursuant to the eighth
paragraph of Section 19 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 and other banks that are not members of the Federal Reserve System, but only in accordance with, and subject to, specified limitations; 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 mutual savings banks and other depositary-type
institutions paper of the kinds described in that paragraph, subject, however, to the limitations therein contained and in accordance with, and
subject to, further limitations now specified by the Board.

Although occasion did not arise to use the emergency credit
facilities, as a precautionary measure the Board subsequently
twice extended the time during which such facilities were authorized, first to December 1, 1966, and then to March 1, 1967.

July 11, 1966
Termination of Regulation P, Holding Company Affiliates—Voting Permits.

Effective as of July 1, 1966, Regulation P was terminated.
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FEDERAL RESERVE SYSTEM

Votes for this action: Messrs. Robertson, Shepardson, Maisel, and Brimmer. Votes against this
action: None.

Public Law 89-485, approved July 1, 1966, made numerous
amendments, generally of a strengthening nature, to the Bank
Holding Company Act of 1956. It also amended Section 2 of
the Banking Act of 1933, Section 5144 of the Revised Statutes of
the United States, and related statutes so as to eliminate the
provisions pertaining to holding company affiliates and the issuance of permits to such affiliates to vote the stock of member
banks. Since Regulation P was based on the provisions of law
now repealed, the Regulation was terminated effective as of the
date of enactment of Public Law 89-485.

July 11, 1966
Amendment to Regulation R, Relationships with Dealers in Securities
under Section 32 of the Banking Act of 1933.
Effective July 11, 1966, Regulation R was amended to include among
the types of obligations excepted in Section 218.2 of the Regulation securities of the Asian Development Bank.
Votes for this action: Messrs. Robertson, Shepardson, Maisel, and Brimmer. Votes against this
action: None.

This amendment reflected the fact that Public Law 89-369,
dated March 16, 1966, authorizing participation of the United
States in the Asian Development Bank, permitted member banks
of the Federal Reserve System to underwrite securities issued
by that organization. The effect of the amendment was to allow
interlocking relationships between member banks and securities
firms dealing in or underwriting the securities in question. The
prohibition in Section 32 of the Banking Act of 1933 and the
Board's authority to grant exceptions are described in the entry
regarding a previous amendment to Regulation R on March 29,
1966.

ANNUAL REPORT OF BOARD OF GOVERNORS

July 15, 1966
Disapproval of proposed discount rate increase.

The Board disapproved action taken by the Boards of Directors of the
Federal Reserve Banks of New York, Cleveland, Chicago, and St. Louis
on July 14 establishing a rate of 5 per cent (an increase from AVi 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. Robertson, Shepardson, Daane, Maisel, and Brimmer. Votes against
this action: None.
(In accordance with provisions of the Federal Reserve Act, the Federal
Reserve Banks establish rates on discounts and advances to member banks
at least every 14 days and submit such rates to the Board for review and
determination. No changes had been made in such rates since those referred to on pages 63-70 of the Board's ANNUAL REPORT for 1965.)
In considering the discount rates established by the several

Federal Reserve Banks, the Board was not unmindful of considerations that might have formed a basis for approval. As
described in the Record of Policy Actions of the Federal Open
Market Committee, published elsewhere in this ANNUAL REPORT,
the Committee had been pursuing for several months in the winter and spring a policy of reducing net reserve availability gradually in an effort to resist inflationary pressures. This monetary
policy process, together with strong credit demands, had resulted
in an upward movement of market interest rates that left the 4Vi
per cent discount rate substantially out of alignment. This circumstance had led to rather widespread expectations of a discount rate increase and had contributed to market uncertainties.
The directors of the Reserve Banks concerned reasoned that
an adjustment of the discount rate would serve as a stabilizing
influence. They also believed that a discount rate increase could
be helpful in symbolizing continued concern about the persistent
deficit in the U.S. balance of international payments and that the
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FEDERAL RESERVE SYSTEM

use of the discount rate instrument, along with other instruments
of Federal Reserve policy, was called for to maximize the effectiveness of monetary policy in the absence of greater fiscal restraint, in the form of a tax increase, to limit excessive credit
expansion.
For a variety of reasons, however, it was the conclusion of the
Board that on balance a discount rate increase was not warranted
at this particular time. Those reasons were not necessarily subscribed to in toto or accorded equal weight by each of the members of the Board.
There had been a recent international development on which
some members placed considerable stress. On the preceding day,
announcement had been made of an increase from 6 per cent to 7
per cent in the discount rate (Bank rate) of the Bank of England.
This raised the question whether the effect of the British action,
designed to strengthen the position of the pound sterling, should
be weakened by offsetting action here.
With respect to the domestic situation, some doubt was expressed within the Board as to whether a discount rate increase
of one-half of 1 percentage point would be sufficient to quiet
prevailing uncertainties, and therefore to provide a stabilizing influence, or whether such an increase might not simply promote
speculation concerning the possibility of additional discount rate
action. In view of the many strains and crosscurrents prevailing
in financial and credit markets, it also appeared possible that the
announcement effect of even a modest change in the discount
rate could be exaggerated and such action misconstrued, with
ramifications extending beyond the intended scope of the action.
Further, although the discount rate was lower than usual relative to market rates, it was not evident that this circumstance
was hampering the pursuit of a policy of monetary restraint or
that it was causing unmanageable problems in the administration
of the Reserve Bank discount windows.
Another factor contributing to the Board's decision was the
widespread desire to avoid further escalation of interest rates, in-

ANNUAL REPORT OF BOARD OF GOVERNORS

eluding those being offered for funds by banks and nonbank
financial institutions. Action was being announced today (July
15) by the Board (and also by the Federal Deposit Insurance
Corporation) to lower the maximum rates payable by banks
on time deposits with multiple maturities, and the Board had
only recently raised the reserve requirement against time deposits
in excess of $5 million at each member bank. In addition, the
Board was even now submitting to the Congress, with a recommendation for prompt action, a legislative proposal to broaden
the regulatory power over rate practices of banks and savings
and loan associations.
As to the point that an increase in the discount rate could be
regarded as primarily a technical adjustment in view of current
money market rates, it was suggested that if the discount rate were
moved regularly in order to conform to market rates and market
expectations, that would tend to reinforce the role of expectations
and make them still more dominant. Thus, control of monetary
policy would tend to shift from the monetary authority to the
market.
Members of the Board noted that, although the preceding
reasons weighed against increasing the discount rate at this
particular juncture, the rate might usefully be varied from time
to time.
The effect of the Board's action was that the rates on discounts
and advances contained in the existing rate schedules of the respective Federal Reserve Banks automatically continued in effect.

The Boards of Directors of several Federal Reserve Banks subsequently submitted to the Board of Governors additional proposals, as follows, for discount rate increases. The rates were
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FEDERAL RESERVE SYSTEM

disapproved in each instance for reasons generally similar to those
stated above.
Reserve Bank
Boston
Philadelphia
Minneapolis
Cleveland
Chicago
Boston
Philadelphia

Proposed rate
(per cent)
5
5
5*4
5
5V2

5
5

Date of Board
action
July 19
July 22
August 24
August 25
August 26
August 30
September 2

July 15, 1966
Amendment to Regulation Q, Payment of Interest on Deposits.

Effective July 20, 1966, Regulation Q was amended to define multiplematurity time deposits, and the Supplement to the Regulation was amended
to prescribe maximum rates of interest on such deposits as follows: 5 per
cent on such deposits of 90 days or more and 4 per cent on those of less
than 90 days.
Votes for this action: Messrs. Robertson, Shepardson, Daane, Maisel, and Brimmer. Votes against
this action: None.

The term "multiple-maturity time deposit" was defined as any
time deposit (1) payable at the depositor's option on more than
one date, whether on a specified date or at the expiration of a
specified time after the date of deposit (for example, a deposit
payable at the option of the depositor either 3 months or 6 months
after the date of deposit), (2) payable after written notice of withdrawal, or (3) with respect to which the underlying instrument or
contract or any informal understanding or agreement provides
for automatic renewal at maturity.
Previously, member banks had been able to pay as high as
5Vi per cent on such deposits. The Board's action, which made
no change in the maximum permissible rate for time deposits

ANNUAL REPORT OF BOARD OF GOVERNORS

having a single maturity (5Vi per cent) or savings accounts (4
per cent), was designed to help forestall excessive interest rate
competition among financial institutions at a time when monetary
policy was aimed at curbing the rate of expansion of bank credit.
On the same day this action was taken, the Board sent to the
congressional Committees on Banking and Currency draft legislation that would broaden existing authority to regulate interest
rates payable by insured banks on time and savings deposits and
extend parallel authority to the Federal Home Loan Bank Board
with respect to dividend rates payable by savings and loan associations. The Board's letters pointed out that, although separate
ceilings were being imposed on multiple-maturity time deposits
in an effort to differentiate between money market CD's and consumer-type deposits, the multiple-maturity concept was not
ideally suited for the purpose. However, it appeared to be the
best alternative available under existing law. The Board noted
that the only effective means for accomplishing the purposes
sought to be achieved in the current situation might be to differentiate on the basis of amount of deposit, even though the Board
had previously expressed reservations about such an approach
except as a temporary expedient.
In its letters the Board also expressed doubt as to the efficacy of
attempting to prevent a rate war by limiting rates payable only
by banks and pointed out that the draft legislation therefore included authority for imposition of rate ceilings by the Federal
Home Loan Bank Board. The Board observed that under the
proposed legislation the imposition of rate ceilings would not be
mandatory; instead, such ceilings could be imposed or placed
on a standby basis by the appropriate agency, after consultation
with the others, in the light of conditions existing at any given
time.

August 17, 1966
Amendment to Regulation D, Reserves of Member Banks.

Effective with the reserve computation periods beginning September 8,
1966, for reserve city banks and September 15, 1966, for other member

FEDERAL RESERVE SYSTEM

banks, the Supplement to Regulation D was amended to increase from 5
per cent to 6 per cent the reserve requirement against time deposits (other
than savings deposits) in excess of $5 million at each member bank.
Votes for this action: Messrs. Robertson, Shepardson, Mitchell, and Brimmer. Votes against this action: None.

On June 24, 1966, effective on specified dates of the following
month for reserve city and other member banks, respectively, the
Board had increased from 4 per cent to 5 per cent the reserve
requirement on time deposits (other than savings deposits) in
excess of $5 million at each member bank.
On August 11, 1966, the Board considered a proposal that
the requirement be increased from 5 per cent to 6 per cent (the
maximum that could be imposed under existing law). The proposal was presented on the basis that such action would further
discourage reliance on CD's as a base for credit expansion in the
face of continuing strong loan demands. It was pointed out that
banks might attempt to increase the issuance of negotiable CD's
in anticipation of large September maturities and tax-period
credit demands, and in the circumstances might be inclined to
raise offering rates generally to the ceiling on minimum maturities, and perhaps on denominations under as well as over $100,000. In such an environment any additional increase in the cost
of replacing CD's should reinforce the inducement to banks to
restrict customer loan accommodation and to husband the liquidity of their asset portfolios. An increase in the reserve requirement to the legal maximum would also afford further indication
that the Board meant to moderate both inflationary credit expansion and overly aggressive rate competition for savings.
Of the members of the Board present on August 11, three
(Governors Robertson, Shepardson, and Mitchell) favored such
action. However, the other two members present (Governors
Daane and Brimmer) opposed it. Accordingly, since the provisions of Section 19 of the Federal Reserve Act require the affirmative votes of not less than four members of the Board of Gover

ANNUAL REPORT OF BOARD OF GOVERNORS

nors for a change in reserve requirements, the proposal failed of
approval.
Governor Daane agreed that the System, in the absence of
sufficient fiscal restraint, should move further in the direction of
credit tightening, but in view of the existing sensitive state of the
money market he believed that the announcement of an increase
in reserve requirements could have severe repercussions. He also
felt that such action would intensify the problem faced by banks
in September in replacing CD's without achieving the differential
impact on bank credit expansion that was intended, and he noted
that the action could trigger an increase in the commercial bank
prime rate. Furthermore, a cushioning of the impact of the reserve requirement increase, coming at a time when the System
would normally be supplying reserves, would necessarily mean
much larger open market operations than otherwise, with related
technical difficulties. It seemed to him that further gradual credit
tightening through open market operations would be a preferable
course of action.
Governor Brimmer concurred to some extent in those views,
with emphasis on his concern that the proposed action, if announced, might trigger an increase in the prime rate. Considering the delicacy of the present financial situation, including the
state of money market conditions, he felt that alternative credittightening procedures should be explored carefully before a decision was made, especially the possibility of tightening through
open market operations.
On August 17, 1966, when the proposed reserve requirement
action was again considered by the Board, an increase in the commercial bank prime rate had been announced. Another development taken into account, from the standpoint of timing, was the
fact that an auction of $3 billion of Treasury tax-anticipation
bills was imminent, and it seemed appropriate on grounds of
equity that any increase in reserve requirements be announced
before rather than after bids had been made for the bills. Governor Daane, who was prevented from returning from out of town
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FEDERAL RESERVE SYSTEM

because of transportation difficulties related to the airline strike,
made known to the Board by telephone that in light of the Treasury financing he would not request deferral of the action if a
majority of the Board favored it, although he continued to have
the serious reservations that he had expressed previously.
The members of the Board present at the August 17 meeting
recognized the risk involved in announcement of a reserve requirement increase, given the sensitive state of the money market.
However, they concluded that the risk was warranted by the need
for further credit tightening and the greater prospect of obtaining
a differential impact through the reserve requirement mechanism
than through the use of other instruments. The members noted
that some cushioning through open market operations might be
required, along with assistance to individual member banks
through the System's discount facilities, and it was suggested that
clarification of the purposes for which the discount window could
properly be used in the forthcoming period would be advisable.
The Board's announcement of the reserve requirement change
pointed out that the increase was designed to exert a tempering
influence on bank issuance of CD's and to apply some additional
restraint upon the expansion of bank credit to businesses and
other borrowers. While it was estimated that the action would
increase required reserves by about $450 million—approximately $370 million at reserve city banks and $75 million at other
member banks—the increase was expected to affect mainly the
larger banks issuing savings certificates and other CD's in substantial volume.
The Board noted that monetary actions already taken had resulted in some moderation of the rate of bank credit growth, but
that in view of increasing price pressures stemming from recent
developments in the economy, this action was being taken to
reinforce the anti-inflationary effects of over-all monetary restraint. The Board expressed recognition that in the period
ahead some banks might be faced with unusual pressures, but it
stated that in such circumstances Federal Reserve discount

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ANNUAL REPORT OF BOARD OF GOVERNORS

facilities would be available to assist member banks while they
were making an orderly adjustment in their positions. Such
adjustments, however, would be expected to emphasize increased
restraint in lending policies and maintenance of an appropriate
degree of liquidity on the part of borrowing banks.
September 1, 1966
Use of discount facilities in the current economic environment.

A letter was sent to all member banks of the Federal Reserve System
expressing System views on bank credit expansion in the current economic
environment and on the use of Federal Reserve discount facilities in such
circumstances.
Votes for this action: Messrs. Robertson, Shepardson, Mitchell, Maisel, and Brimmer. Votes against
this action: None.

While the growth of total bank credit and total bank lending
had moderated somewhat as compared with the preceding year,
total bank loans plus investments had grown at an annual rate
of more than 8 per cent during the first 8 months of 1966 and
total bank loans at a rate of more than 12 per cent. Meanwhile,
bank lending to business had increased at an annual rate of about
20 per cent. Credit-financed business spending had tended toward unsustainable levels and had added appreciably to current
inflationary pressures. Furthermore, the exceedingly rapid expansion in business loans was being financed in part by liquidation of other banking assets and by curtailment of other lending
in ways that could contribute to disorderly conditions in credit
markets.
Against that background a decision was made by the Board,
in consultation with the Presidents of the Federal Reserve Banks,
that a letter should be sent to each member bank over the signature of the President of the Reserve Bank in the member bank's
district expressing System views on bank credit expansion in the
current economic environment and on the use of Reserve Bank
discount facilities.
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FEDERAL RESERVE SYSTEM

The text of the letter follows:
It is the view of the Federal Reserve System that orderly bank credit
expansion is appropriate in today's economy. However, that expansion
should be moderate enough to help insure that spending—and particularly
that financed by bank credit—does not exceed the bounds that can be accommodated by the nation's growing physical resources. An excessive expansion of bank credits would aggravate inflationary pressures that are
already visible.
While the growth of total bank credit and total bank lending has moderated somewhat as compared with last year, total bank loans plus investments have grown at an annual rate of over 8 per cent during the first 8
months of this year, and total bank loans at a rate of over 12 per cent.
Meanwhile bank lending to business has increased at an annual rate of
about 20 per cent.
It is recognized that business demands for bank credit have been particularly intense. While such credit requests often appear justifiable when
looked at individually, the aggregate total of credit-financed business spending has tended towards unsustainable levels and has added appreciably
to current inflationary pressures. Furthermore, such exceedingly rapid
business loan expansion is being financed in part by liquidation of other
banking assets and by curtailment of other lending in ways that could
contribute to disorderly conditions in other credit markets.
The System believes that the national economic interest would be better
served by a slower rate of expansion of bank loans to business within the
context of moderate over-all money and credit growth. Further substantial
adjustments through bank liquidation of municipal securities or other investments would add to pressures on financial markets. Hence, the System
believes that a greater share of member bank adjustments should take the
form of moderation in the rate of expansion of loans, and particularly
business loans.
Accordingly, this objective will be kept in mind by the Federal Reserve
Banks in their extensions of credit to member banks through the discount
window. Member banks will be expected to cooperate in the System's
efforts to hold down the rate of business loan expansion—apart from normal seasonal needs—and to use the discount facilities of the Reserve
Banks in a manner consistent with these efforts. It is recognized that banks
adjusting their positions through loan curtailment may at times need a
longer period of discount accommodation than would be required for the
disposition of securities.

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ANNUAL REPORT OF BOARD OF GOVERNORS

This program is in conformity with the provision in Section 201.0, par.
(e) of the Board's Regulation A governing lending to member banks:
"In considering a request for credit accommodation, each Federal Reserve Bank gives due regard to the purpose of the credit and to its probable
effects upon the maintenance of sound credit conditions, both as to the
individual institution and the economy generally. . . . "
Federal Reserve credit assistance to member banks to meet appropriate
seasonal or emergency needs, including those resulting from shrinkages
of deposits or of other sources of funds, will continue to be available as in
the past.
A slower rate of business loan expansion is in the interest of the entire
banking system and of the economy as a whole. All banks should be aware
of this consideration, whether or not they need to borrow from the Federal
Reserve. Management of bank resources in accordance with the principles
outlined above can make a constructive contribution to sustained economic
prosperity, and the Federal Reserve System is confident that the banks
will give their whole-hearted support to this effort.

Termination of the special discount arrangements set forth in
the September 1 letter was announced on December 27, 1966.
Credit conditions had changed in the interim, the expansion of
business loans had been reduced to a more moderate rate, and
banks were no longer unloading securities in unreceptive markets.
Consequently, the purpose of the letter had been served.

September 21, 1966
Amendments to Regulation Q, Payment of Interest on Deposits.
Effective September 26, 1966, the Supplement to Regulation Q was
amended (1) to reduce from 5Vi per cent to 5 per cent the maximum rate
of interest permitted to be paid by member banks on an)'' time deposits
under $100,000, and (2) to permit the effects of compounding to be
disregarded in calculating the rate of interest on time or savings deposits,
but with provision that the basis of compounding be stated explicitly.
Votes for this action: Messrs. Martin, Robertson,
Shepardson, Mitchell, Daane, Maisel, and Brimmer.
Votes against this action: None.
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FEDERAL RESERVE SYSTEM

The action reducing to 5 per cent the maximum rate of interest
permitted to be paid on time deposits of less than $100,000 was
taken under the authority contained in Public Law 89-597, approved by the President earlier on this same date, providing
increased flexibility for establishing maximum rates payable on
time and savings deposits at commercial banks and other depositary institutions. (Actions under authority of the new legislation
were also announced by the Federal Deposit Insurance Corporation and the Federal Home Loan Bank Board, such actions being
applicable to rates payable by institutions under the respective
jurisdictions of those agencies.)
The purpose of the reduction of the maximum rate payable on
time deposits of less than $100,000 was to limit further escalation
of interest rates paid in competition for consumer savings. The
action, which also was expected to help in keeping the growth
of commercial bank credit to a moderate pace, was the latest of
a series of measures taken by the Federal Reserve System to
temper the aggressive competition for funds by commercial banks
and other financial institutions and at the same time to help assure an orderly and moderate rate of growth in bank credit in
order to restrain inflationary pressures. The earlier actions had
included a reduction of maximum rates on time deposits with
multiple maturities, two increases in the reserves required to be
maintained by member banks against a portion of their time
deposits, and issuance of a letter to member banks concerning the
need to follow lending policies that would result in reducing the
rate of growth of business loans.
The current reduction in maximum rate did not, in itself, require any change in the rate of interest being paid on CD's and
other time deposits outstanding on the effective date (September
26); if a member bank had agreed to pay a specified rate of interest on such a deposit, it could continue to pay the contract rate to
maturity. If the obligation was then renewed, however, the rate
of interest could not exceed the new 5 per cent maximum.
The action on compounding of interest was designed to permit

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ANNUAL REPORT OF BOARD OF GOVERNORS

member banks slightly greater flexibility in the terms of their
deposit contracts and in their operations by authorizing the compounding of interest at the applicable maximum permissible rate
on any basis that the member bank might choose to adopt. However, if a member bank elected to compound interest, either at
the maximum permissible rate or at a lower rate, it must state
the basis of compounding (such as semiannually, quarterly,
monthly, weekly, daily, or continuously) in every advertisement,
announcement, solicitation, and agreement relating to the rate
of interest paid.
September 27, 1966
Increase in maximum interest rate on Regulation V loans.

Effective September 27, 1966, the Board raised from 6 per cent to IVi
per cent the maximum permissible rate of interest on loans made pursuant
to Regulation V, Loan Guarantees for Defense Production, with retention
of the ceiling of 6 per cent for purposes of calculating guarantee fees, and
with no change in the maximum commitment fee of one-half of 1 per cent
or in the schedule of guarantee fees.
Votes for this action: Messrs. Martin, Robertson,
Shepardson, Mitchell, Maisel, and Brimmer. Votes
against this action: None.

Under the provisions of the Defense Production Act of 1950
and implementing Executive Orders, certain designated procurement agencies of the Government are authorized to guarantee
loans made by commercial banks and other private institutions
to finance and expedite production for national defense and to
finance contractors and subcontractors in connection with, or in
contemplation of, the termination of their defense contracts. The
Federal Reserve Banks act as fiscal agents of the guaranteeing
agencies in receiving applications and in the making of contracts
of guarantee. The Board's Regulation V, issued pursuant to the
aforementioned statutory authority, provides that rates of interest, guarantee fees, commitment fees, and other charges that may
106

FEDERAL RESERVE SYSTEM

be made with respect to guaranteed loans and guarantees executed
through the agency of any Federal Reserve Bank pursuant to the
Regulation will from time to time be prescribed, either specifically
or by maximum limits or otherwise, by the Board of Governors
after consultation with the guaranteeing agencies.
The action on the maximum permissible interest rate, which
was taken after such consultation, was designed to permit a net
return to financing institutions more in line with current lending
and money market rates and thus help to assure financing from
commercial sources for contractors and subcontractors engaged
in defense work. The net return to financing institutions under
the former ceiling rate, in effect since 1957, had become increasingly noncompetitive with alternative loan and investment opportunities, and the amounts disbursed under authorized Regulation V loans had dropped from $152 million in the fiscal year
1964 to $119 million and $78 million in the fiscal years 1965
and 1966, respectively, notwithstanding the substantial increase
in military procurement.
Regulation V was reissued, effective September 27, 1966, in
a form that included a Supplement setting forth the maximum
permissible rate of interest, the schedule of guarantee fees, and
commitment fees. In addition, minor technical changes were
made in the body of the Regulation.
December 6, 1966
Amendments to Regulation D, Reserves of Member Banks, and Regulation Q, Payment of Interest on Deposits.
(1) Effective January 1, 1967, Regulations D and Q were amended to
sharpen the technical distinctions between "time deposits" and "savings
deposits."
(2) Effective January 5, 1967, the Supplement to Regulation D was
amended to reduce from 6 per cent to 4 per cent the reserves required to
be maintained against Christmas and vacation club accounts. (The lower
rate of required reserves had already been in effect at member banks whose
total time deposits, other than savings deposits, did not exceed $5 million.)

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ANNUAL REPORT OF BOARD OF GOVERNORS

Votes for these actions: Messrs. Martin, Shepardson, Mitchell, Daane, Maisel, and Brimmer. Votes
against these actions: None.

Prior hereto, deposits of individuals or certain nonprofit organizations as to which the depositor was required by the deposit
contract to give notice in writing not less than 30 days before
making a withdrawal might be either "savings deposits" or "time
deposits" (time certificates of deposit or time deposits, open account). Under the amended regulations, such a deposit could
only be a "time deposit," the distinguishing feature of "savings
deposits" being the reservation by the bank of the right to require
30 days' notice of withdrawal. In practice, banks routinely
reserve such a right, although it is rarely exercised.
The amendments also were designed to make clear that a deposit payable on a specified date or at the expiration of a specified
period of time after the date of the deposit (sometimes referred
to as a "fixed maturity" deposit) does not constitute a "savings
deposit."
As to Christmas and vacation club accounts, technically classified as time deposits, the Board concluded that with such accounts serving the same function as savings deposits there was no
reason why reserves required to be maintained against them
should be higher than for savings deposits.

December 9, 1966
Voluntary foreign credit restraint.

The Board adopted guidelines for 1967 for the use of banks and nonbank financial institutions in limiting foreign credits voluntarily as part
of the President's balance of payments program.
Votes for this action: Messrs. Shepardson, Mitchell, Daane, Maisel, and Brimmer. Votes against this
action: None.

In a message to Congress in February 1965, the President had
presented a program aimed at achieving improvement in the U.S.
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FEDERAL RESERVE SYSTEM

balance of payments position, the principal focus of which was on
measures to reduce the outflow of U.S. capital. One part of the
program called upon the Federal Reserve System to work with
financial institutions in limiting their foreign lending and investing on a voluntary basis. In March 1965 the Board adopted
sets of guidelines applicable to banks and nonbank financial institutions, respectively. Several amendments to the guidelines were
adopted during 1965, and in December revised guidelines were
issued for use in 1966. On April 1, 1966, the guidelines applicable to nonbank financial institutions were amended to remove acquisition by such institutions of foreign equity securities
held by U.S. investors from the purview of the guidelines for longterm lending and investing abroad.
After a series of discussions in which all of the members of the
Board had participated, the Board at this time adopted revised
guidelines for the use of banks and nonbank financial institutions
in 1967.
The new bank guidelines were in substantially the same form
as those that had been in use since 1965. The volume of outstanding credits to foreigners on December 31, 1964, was retained
as the base, along with the ceiling of 109 per cent of that base
that was in effect during 1966. However, banks were requested
to limit the use of their leeway as of September 30, 1966 (the
leeway for the banking system as a whole approached $1.2 billion), to a rate not exceeding 20 per cent thereof per quarter,
beginning with the fourth quarter of 1966. Banks were also requested to limit the increase in nonpriority credits (defined as
credits other than those that financed U.S. exports or met credit
needs of developing countries) over the amount outstanding on
September 30, 1966, to 10 per cent (about $120 million) of the
total possible expansion. This change was designed to give added
stimulus to priority credits by suggesting a quantitative limit for
nonexport credits to developed countries.
The program for nonbank financial institutions was greatly
simplified. The three guidelines used in the 1966 program were

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ANNUAL REPORT OF BOARD OF GOVERNORS

replaced by a single guideline that permitted an increase of 5 per
cent during the 15 months ending December 31, 1967, in assets
covered by that guideline. Covered assets were redefined to
exclude certain types of assets previously subject to target ceilings—for example, bonds of the International Bank for Reconstruction and Development and of the Inter-American Development Bank.

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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 1966, including the votes on the policy decisions made at those meetings as
well as a resume of the basis for the decisions, as reflected by the
minutes of the Committee. The summary descriptions of economic
and financial conditions included in the entries are based on the
information that was available to the Committee at the time of
the meetings, rather than on data for the periods in question as
they may have been subsequently revised.
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.
The policy directives of the Federal Open Market Committee
are issued to the Federal Reserve Bank of New York as the
Bank selected by the Committee to execute transactions for the

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System Open Market Account. Both the Manager of the System
Open Market Account and the Special Manager of the Account
for foreign currency operations attend the meetings of the
Committee. In the area of domestic open market activities the
Bank operates under two separate policy directives from the
Open Market Committee—a continuing authority directive and
a current economic policy directive. At the beginning of the
calendar year the continuing authority directive in effect was
as follows:
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 at market discount rates; provided that the aggregate amount
of bankers' acceptances held at any one time shall not exceed $125
million or 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;
(c) To buy U.S. Government securities with maturities as indicated
below, and prime bankers' acceptances with maturities of 6 months or
less at the time of purchase, from nonbank dealers for the account of
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the Federal Reserve Bank of New York under agreements for repurchase of such securities 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 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. U.S. Government securities bought under the provisions of
this section shall have maturities of 24 months or less at the time of
purchase, except that, during any period beginning with the day after
the Treasury has announced a refunding operation and ending on the
day designated as the settlement date for the exchange, the U.S. Government securities bought may be of any maturity.
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 shortterm certificates of indebtedness as may be necessary from time to time
for the temporary accommodation of the Treasury; provided that the rate
charged on such certificates shall be a rate VA of 1 per cent below the discount rate of the Federal Reserve Bank of New York at the time of such
purchases, and provided further that the total amount of such certificates
held at any one time by the Federal Reserve Banks shall not exceed $500
million.

This directive was amended on five occasions during the year,
as noted in the entries.
The current economic policy directive was changed frequently
during the year. The directive in effect at the beginning of 1966
instructed the Federal Reserve Bank of New York as follows:
The economic and financial developments reviewed at this meeting
indicate that domestic economic expansion is gaining in strength in a
climate of optimistic business sentiment, with continuing active demands
for credit and some further upward creep in prices. Although there

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ANNUAL REPORT OF BOARD OF GOVERNORS

appears to have been some recent improvement in our international payments, the need for further progress remains. In this situation, it is the
Federal Open Market Committee's policy to complement other recent
measures taken to resist the emergence of inflationary pressures and to
help restore reasonable equilibrium in the country's balance of payments,
while accommodating moderate growth in the reserve base, bank credit,
and the money supply.
Until the next meeting of the Committee, and taking into account the
forthcoming Treasury financing activity and widely fluctuating seasonal
pressures at this time of year in addition to the recent increase in Reserve
Bank discount rates, System open market operations shall be directed to
moderating any further adjustments in money and credit markets that
may develop.
In the foreign currency area, until June 7, 1966, the Federal
Reserve Bank of New York operated under three instruments—
(1) an authorization regarding open market transactions in foreign currencies, (2) a statement of guidelines for System foreign currency operations, and (3) a continuing authority directive on System foreign currency operations. On June 7, as indicated in the entry for that date, these were replaced by two new
instruments.
The foreign currency instruments in effect at the beginning of
the year were as follows:

AUTHORIZATION REGARDING OPEN MARKET TRANSACTIONS
IN FOREIGN CURRENCIES

Pursuant to Section 12A of the Federal Reserve Act and in accordance
with Section 214.5 of Regulation N (as amended) of the Board of
Governors of the Federal Reserve System, the Federal Open Market Committee takes the following action governing open market operations incident to the opening and maintenance by the Federal Reserve Bank of New
York (hereafter sometimes referred to as the New York Bank) of
accounts with foreign central banks.
I. Role of Federal Reserve Bank of New York
The New York Bank shall execute all transactions pursuant to this
authorization (hereafter sometimes referred to as transactions in foreign
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FEDERAL RESERVE SYSTEM

currencies) for the System Open Market Account, as defined in the
Regulation of the Federal Open Market Committee.
II. Basic Purposes of Operations
The basic purposes of System operations in and holdings of foreign
currencies are:
(1) To help safeguard the value of the dollar in international exchange
markets;
(2) To aid in making the existing system of international payments
more efficient and in avoiding disorderly conditions in exchange
markets;
(3) To further monetary cooperation with central banks of other
countries maintaining convertible currencies, with the International Monetary Fund, and with other international payments
institutions;
(4) Together with these banks and institutions, to help moderate
temporary imbalances in international payments that may
adversely affect monetary reserve positions; and
(5) In the long run, to make possible growth in the liquid assets
available to international money markets in accordance with the
needs of an expanding world economy.
III. Specific Aims of Operations
Within the basic purposes set forth in Section II, the transactions shall
be conducted with a view to the following specific aims:
(1) To offset or compensate, when appropriate, the effects on U.S.
gold reserves or dollar liabilities of disequilibrating fluctuations
in the international flow of payments to or from the United States,
and especially those that are deemed to reflect temporary forces
or transitional market unsettlement;
(2) To temper and smooth out abrupt changes in spot exchange rates
and moderate forward premiums and discounts judged to be
disequilibrating;
(3) To supplement international exchange arrangements such as those
made through the International Monetary Fund; and
(4) In the long run, to provide a means whereby reciprocal holdings
of foreign currencies may contribute to meeting needs for international liquidity as required in terms of an expanding world
economy.

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IV. Arrangements with Foreign Central Banks
In making operating arrangements with foreign central banks on System
holdings of foreign currencies, the New York Bank shall not commit
itself to maintain any specific balance, unless authorized by the Federal
Open Market Committee.
The Bank shall instruct foreign central banks regarding the investment
of such holdings in excess of minimum working balances in accordance
with Section 14(e) of the Federal Reserve Act.
The Bank shall consult with foreign central banks on coordination of
exchange operations.
Any agreements or understandings concerning the administration of the
accounts maintained by the New York Bank with the central banks designated by the Board of Governors under Section 214.5 of Regulation N
(as amended) are to be referred for review and approval to the Committee, subject to the provision of Section VIII, paragraph 1, below.
V. Authorized Currencies
The New York Bank is authorized to conduct transactions for System
Account in such currencies and within the limits that the Federal Open
Market Committee may from time to time specify.
VI. Methods of Acquiring and Selling Foreign Currencies
The New York Bank is authorized to purchase and sell 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
Stabilization Fund of the Secretary of the Treasury established by Section
10 of the Gold Reserve Act of 1934 and with foreign monetary authorities.
Unless the Bank is otherwise authorized, all transactions shall be at
prevailing market rates.
VII. Participation of Federal Reserve Banks
All Federal Reserve Banks shall participate in the foreign currency
operations for System Account in accordance with paragraph 3 G (1) of
the Board of Governors' Statement of Procedure with Respect to Foreign
Relationships of Federal Reserve Banks dated January 1, 1944.
VIII. Administrative Procedures
The Federal Open Market Committee authorizes 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

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FEDERAL RESERVE SYSTEM

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) to give
instructions to the Special Manager, within the guidelines issued by the
Committee, in cases in which it is necessary to reach a decision on operations before the Committee can be consulted.
All actions authorized under the preceding paragraph shall be promptly
reported to the Committee.
The Committee authorizes 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:
(1) 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;
(2) 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;
(3) From time to time, to transmit appropriate reports and information
to the National Advisory Council on International Monetary
and Financial Problems.
IX. Special Manager of the System Open Market Account
A Special Manager of the Open Market Account for foreign currency
operations shall be selected in accordance with the established procedures
of the Federal Open Market Committee for the selection of the Manager
of the System Open Market Account.
The Special Manager shall direct that all transactions in foreign currencies and the amounts of all holdings in each authorized foreign currency
be reported daily to designated staff officials of the Committee, and shall
regularly consult with the designated staff officials of the Committee on
current tendencies in the flow of international payments and on current
developments in foreign exchange markets.
The Special Manager and the designated staff officials of the Committee
shall arrange for the prompt transmittal to the Committee of all statistical
and other information relating to the transactions in and the amounts of
holdings of foreign currencies for review by the Committee as to conformity with its instructions.
The Special Manager shall include in his reports to the Committee a

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ANNUAL REPORT OF BOARD OF GOVERNORS

statement of bank balances and investments payable in foreign currencies,
a statement of net profit or loss on transactions to date, and a summary of
outstanding unmatured contracts in foreign currencies.
X. Transmittal of Information to Treasury Department
The staff officials of the Federal Open Market Committee shall transmit
all pertinent information on System foreign currency transactions to designated officials of the Treasury Department.
XL Amendment of Authorization
The Federal Open Market Committee may at any time amend or
rescind this authorization.

GUIDELINES FOR SYSTEM FOREIGN CURRENCY OPERATIONS

1. Holdings of Foreign Currencies
Until otherwise authorized, the System will limit its holdings of foreign
currencies to that amount necessary to enable its operations to exert a
market influence. Holdings of larger amounts will be authorized only when
the U.S. balance of international payments attains a sufficient surplus to
permit the ready accumulation of holdings of major convertible currencies.
Foreign currency holdings shall be invested as far as practicable in conformity with Section 14(e) of the Federal Reserve Act.
2. Exchange Transactions
System exchange transactions shall be geared to pressures of payments flows so as to cushion or moderate disequilibrating movements of
funds and their destabilizing effects on U.S. and foreign official reserves
and on exchange markets.
In general, these transactions shall be geared to pressures connected
with movements that are expected to be reversed in the foreseeable future;
when expressly authorized by the Federal Open Market Committee, they
may also be geared on a short-term basis to pressures connected with other
movements.
Subject to express authorization of the Committee, the Federal Reserve
Bank of New York may enter into reciprocal arrangements with foreign
central banks on exchange transactions ("swap" arrangements), which
arrangements may be wholly or in part on a standby basis.
Drawings made by either party under a reciprocal arrangement shall

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FEDERAL RESERVE SYSTEM

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.
The New York Bank shall, as a usual practice, purchase and sell authorized currencies at prevailing market rates without trying to establish rates
that appear to be out of line with underlying market forces.
If market offers to sell or buy intensify as System holdings increase or
decline, this shall be regarded as a clear signal for a review of the System's evaluation of international payments flows.
It shall be the practice to arrange with foreign central banks for the
coordination of foreign currency transactions in order that System transactions do not conflict with those being undertaken by foreign monetary
authorities.
3. Transactions in Spot Exchange
The guiding principle for transactions in spot exchange shall be that,
in general, market movements in exchange rates, within the limits established in the International Monetary Fund Agreement or by central bank
practices, index affirmatively the interaction of underlying economic forces
and thus serve as efficient guides to current financial decisions, private
and public.
Temporary or transitional fluctuations in payments flows may be
cushioned or moderated whenever they occasion market anxieties, or undesirable speculative activity in foreign exchange transactions, or excessive
leads and lags in international payments.
Special factors making for exchange market instabilities include (i)
responses to short-run increases in international political tension, (ii) differences in phasing of international economic activity that give rise to
unusually large interest rate differentials between major markets, or (iii)
market rumors of a character likely to stimulate speculative transactions.
Whenever exchange market instability threatens to produce disorderly
conditions, System transactions are appropriate if the Special Manager, in
consultation with the Federal Open Market Committee, or in an emergency with the members of the Committee designated for that purpose,
reaches a judgment that they may help to reestablish supply and demand
balance at a level more consistent with the prevailing flow of underlying
payments. Whenever supply or demand persists in influencing exchange
rates in one direction, System transactions should be modified, curtailed,
or eventually discontinued pending a reassessment by the Committee of
supply and demand forces.
Insofar as is practicable, the New York Bank shall purchase a cur-

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ANNUAL REPORT OF BOARD OF GOVERNORS

rency through spot transactions at or below its par value, and sell a currency through spot transactions at rates at or above its par value.
Spot transactions at rates other than those set forth in the preceding
paragraph shall be specially authorized by the Committee or by the members of the Committee designated in Section VIII of the Authorization
for Open Market Transactions in Foreign Currencies, except that purchases of exchange to meet System commitments may be executed without
special authorization at rates above par when necessary.
4. Transactions in Forward Exchange
Transactions in forward exchange, either outright or in conjunction
with spot transactions, may be undertaken:
(1) When forward premiums or discounts are inconsistent with interest rate differentials and are giving rise to disequilibrating movements of short-term funds;
(2) When it is deemed appropriate 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;
(3) To allow greater flexibility in covering System commitments, including those under swap arrangements;
(4) To facilitate the use of holdings of one currency for the settlement of commitments denominated in other currencies.
Forward sales of authorized currencies to the U.S. Stabilization Fund
out of existing System holdings or in conjunction with spot purchases of
such currencies also may be undertaken in order to allow greater flexibility
in covering commitments of the U.S. Treasury.
In all other cases, proposals of the Special Manager to initiate forward
operations shall be submitted to the Committee for advance approval.
CONTINUING AUTHORITY DIRECTIVE
FOR SYSTEM FOREIGN CURRENCY OPERATIONS

The Federal Reserve Bank of New York is authorized and directed to
purchase and sell through spot transactions any or all of the following
currencies in accordance with the Guidelines for System Foreign Currency Operations as amended November 23, 1965; provided that the aggregate amount of foreign currencies held under reciprocal currency arrangements shall not exceed $2.8 billion equivalent at any one time, and provided further that the aggregate amount of foreign currencies held as a

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FEDERAL RESERVE SYSTEM

result of outright purchases shall not exceed $150 million equivalent at any
one time:
Pounds sterling
French francs
German marks
Italian lire
Netherlands guilders
Swiss francs
Belgian francs
Canadian dollars
Austrian schillings
Swedish kronor
Japanese yen
The Federal Reserve Bank of New York is also authorized and directed
to operate in any or all of the foregoing currencies in accordance with the
Guidelines and up to a combined total of $275 million equivalent, by
means of:
(a) Purchases through forward transactions,
for the purpose of allowing greater flexibility in covering commitments under reciprocal currency agreements;
(b) Purchases and sales through forward as
well as spot transactions, for the purpose
of utilizing its holdings of one currency
for the settlement of commitments denominated in other currencies;
(c) Purchases through spot transactions and
concurrent sales through forward transactions, for the purpose of restraining
short-term outflows of funds induced by
arbitrage considerations; and
(d) Sales through forward transactions, for
the purpose of influencing interest arbitrage flows of funds and of minimizing
speculative disturbances.
The Federal Reserve Bank of New York is also authorized and directed
to make purchases through spot transactions, including purchases from
the U.S. Stabilization Fund, and concurrent sales through forward transactions to the U.S. Stabilization Fund, of any of the foregoing curren-

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ANNUAL REPORT OF BOARD OF GOVERNORS

cies in which the U.S. Treasury has outstanding indebtedness, in accordance with the Guidelines and up to a total of $100 million equivalent.
Purchases may be at rates above par, and both purchases and sales are
to be made at the same rates.
The Federal Reserve Bank of New York is also authorized and directed
to make purchases of sterling on a covered or guaranteed basis in terms
of the dollar up to a total of $200 million equivalent.
The Federal Reserve Bank of New York is also authorized and directed
to assume commitments for forward sales of lire up to $500 million
equivalent as a means of facilitating the retention of dollar holdings by
private foreign holders.

The continuing authority directive on foreign currency operations was amended on one occasion, as noted in the entry for
April 12, 1966, prior to the adoption of the new foreign currency instruments.

January 11, 1966
Authority to effect transactions in System Account.

Economic activity was rising vigorously at the end of 1965,
according to reports at this meeting, and over the year it had
grown more rapidly than previously estimated. Although both
plant capacity and the labor force expanded substantially in 1965,
the margins of unutilized resources at the year-end were the
narrowest in more than 8 years. Price increases had remained
selective and moderate, but rises persisted and the wholesale price
index for industrial commodities in December was about 2 per
cent higher than in the summer of 1964. Despite uncertainties
regarding the course of hostilities in Vietnam and the size of
Federal outlays for defense, the outlook appeared to be for
continued large gains in activity and further upward pressures on
prices. Optimism about business prospects was reflected in the
stock market; average prices of common stocks ended the year at
a record high.
Estimates of gross national product in the first three quarters
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FEDERAL RESERVE SYSTEM

of 1965 had been raised substantially by the Department of Commerce. Preliminary indications were that GNP rose considerably
further in the fourth quarter, and that for the year as a whole it
was 7.5 per cent above 1964. The rate of capacity utilization in
manufacturing, which had been rising since 1961, remained high
throughout 1965. The total labor force expanded much more
than expected—in the fourth quarter it was about 1.8 million
persons larger than a year earlier, compared with the previous
year's rise of 1.1 million persons—but employment increased by
2.2 million in the corresponding period, and the unemployment
rate declined to 4.1 per cent in December 1965 from 5.0 per
cent a year earlier.
Business plans called for another large increase in production
facilities in 1966, and the labor force was expected to show substantial further growth. Nevertheless, if—as now seemed probable
—GNP continued to expand at its recent high rate, it was likely
that pressures on productive capacity would be as great or greater
than in 1965 and that shortages of various types of labor would
become increasingly severe. Under such circumstances prices
probably would be under increased upward pressures.
Aggregate private demands for credit were particularly large
in the fourth quarter of 1965, paralleling the vigorous rise in
physical investment. Bank credit appeared to share about proportionately in the growth of total credit. For the year as a whole
both bank credit and the money supply (private demand deposits
plus currency outside of banks) rose more than in 1964—10
per cent and 4.8 per cent, respectively, compared with 8.4 per
cent and 4.3 per cent in the prior year. Growth in time and
savings deposits at commercial banks, at 16 per cent, also was
more rapid than in 1964.
In December, bank credit expanded at a rate slightly faster
than in the year as a whole, chiefly as a result of heavy demands
for business loans. The money supply rose sharply during the
month. The inflow of time and savings deposits slackened, however, despite advances in interest rates on new certificates of

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ANNUAL REPORT OF BOARD OF GOVERNORS

deposit (CD's), particularly on certificates of shorter maturity.
Required reserves of member banks increased markedly, not only
because of rapid growth in total deposits, but also because of
relative shifts in the deposit "mix," involving accelerated rates of
expansion in high-requirement demand deposits and in deposits
at high-requirement reserve city banks.
The Treasury had been active in security markets recently.
On the day before this meeting subscriptions had been accepted
for a cash offering of $1.5 billion of 10-month certificates, bearing a 4% per cent coupon and priced to yield 4.85 per cent;
early indications were that the offering had been well received
by investors. Near the end of December $1 billion of tax-anticipation bills maturing in June had been auctioned, and beginning
in January the size of the weekly auctions of 3-month bills was
increased from $1.2 billion to $1.3 billion to raise $100 million
in new cash each week. The next Treasury financing operation
would involve the refunding of $4.8 billion in notes maturing
February 15, of which $2.5 billion were held by the public. An
announcement concerning the terms of the refunding was anticipated late in January.
Conditions in financial markets had been unsettled in recent
weeks as a result of the conjunction of year-end seasonal pressures, heavy private credit demands, the successive Treasury
financing operations, continuing adjustments to the official actions
of early December increasing the discount rate and the maximum
rates permitted to be paid on time deposits, and a transit strike
in New York City,. which reduced the efficiency with which
market transactions could be conducted. At the same time, investor expectations were affected by conflicting reports of developments with respect to Vietnam, growing concern over inflationary
pressures, and uncertainty about Federal budget prospects. On
balance, yields on long-term securities changed little after the
rises of early December that followed the official rate actions.
Short- and intermediate-term yields advanced substantially further, however, with the market rate on 3-month Treasury bills
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FEDERAL RESERVE SYSTEM

moving up about 20 basis points to 4.55 per cent on the day preceding this meeting. Money market conditions were quite firm,
partly because of the large increase in required reserves of member banks and the concentration of pressures on large banks.
Open market operations during the period were directed at
accommodating the enlarged needs for reserves and at moderating
the upward pressures on short-term rates. As a result of these
operations, in December the supply of nonborrowed reserves
of member banks increased at the unusually rapid annual rate of
21 per cent, and borrowings of member banks on the average
exceeded their excess reserves by only $25 million, as compared
with $80 million in November and $135 million in October.
Tentative estimates of the U.S. balance of payments in 1965
suggested that the deficit was substantially diminished from
the prior year on both the "liquidity" and "official reserve transactions" bases of calculation.1 On the former basis the deficit appeared likely to have been about $1V4 billion, or less than half
that in 1964, and on the latter basis it was estimated at about
$750 million, compared with $1.2 billion in the prior year. Prospects for further substantial reductions in the "liquidity" deficit
in 1966 appeared to depend heavily on improvement in the U.S.
trade surplus; changes from recent levels in other categories of
the payments accounts seemed likely to be roughly offsetting.
In the discussion of policy, Committee members noted that
short-term interest rates were higher at present than had been
expected at the time of the preceding meeting as a result of developments in the market and despite sizable additions to the
supply of bank reserves. The Committee decided that open market
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 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 as ordinary
capital flows.

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operations until the next meeting should be directed toward
maintaining about the prevailing conditions in the money market.
It recognized, however, that economic, military, or Federal
budget developments might lead to sharp changes in market conditions, which System operations should be expected only to
moderate.
The Treasury financing schedule was a primary consideration
in the decision to maintain relatively steady money market conditions, but other reasons for this course also were advanced.
Thus, it was noted that the need for actively seeking changes in
conditions could be determined better after the President's Budget
Message and Economic Report were transmitted to the Congress
later in the month; that market adjustments to the official rate
actions of December were still under way; and that more time was
required to appraise the effects of recent increases in interest
rates.
At the same time, a number of members expressed concern
over the recent pace of growth in reserves, bank credit, and the
money supply, in view of the potential for inflationary developments in the period ahead. The Committee agreed that for the
longer run some moderation in these growth rates would be
desirable and, accordingly, it modified the statement of policy in
the first paragraph of its current economic policy directive to the
Federal Reserve Bank of New York. The directive issued read as
follows:
The economic and financial developments reviewed at this meeting
indicate that domestic economic expansion has strengthened further in a
climate of optimistic business sentiment and with some further upward
creep in prices. Interest rates are higher in most markets in response to
strong credit demands and recent official rate actions. Our international
payments position improved considerably during 1965 but further progress
is needed to attain effective balance. In this situation, it is the Federal
Open Market Committee's policy to resist the emergence of inflationary
pressures and to help restore reasonable equilibrium in the country's
balance of payments, by moderating the growth in the reserve base, bank
credit, and the money supply.

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FEDERAL RESERVE SYSTEM

In light of the Treasury financing schedule, System open market operations until the next meeting of the Committee shall be conducted with a
view to maintaining about the current conditions in the money market.
Votes for this action: Messrs. Martin, Hayes,
Balderston, Daane, Ellis, Galusha, Maisel,
Mitchell, Patterson, Robertson, Scanlon, and
Shepardson. Votes against this action: None.

February 8, 1966
Authority to effect transactions in System Account.

Business activity continued to advance vigorously in early
1966, and the outlook was becoming increasingly expansive. In
addition to sharply rising Federal expenditures, large consumer
demands, and record business outlays on plant and equipment,
heavy inventory accumulation was adding to aggregate demands.
Total business inventories had risen sharply in the fourth quarter
of 1965 despite rapid liquidation of steel stocks following the
wage settlement in that industry; and in the current quarter, with
liquidation of steel stocks ending, further substantial accumulation seemed probable.
The recent surge in activity carried rates of resource use to
advanced levels. In December the rate of capacity utilization in
manufacturing edged up to a 10-year high. In January the
unemployment rate declined again, reaching the administration's
"interim" target of 4.0 per cent. As yet, pressure on resources
had not been reflected in an accelerated rate of advance in
average industrial prices—the price index continued to creep up
at about the 1.5 per cent annual rate of the last 15 months—but
reports of moderate price advances were becoming more frequent.
Loan expansion at commercial banks was unusually strong
in January as business borrowing remained heavy. The money
supply continued to rise rapidly, although the increase was concentrated in the early part of January and for the month as a
whole was less than the sharp December advance. The inflow of

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time and savings deposits to commercial banks slowed considerably further from the reduced December pace. Net borrowed reserves of member banks averaged about $60 million in January;
they had been below $100 million in November and December
also, but earlier in 1965 they had fluctuated around $150 million.
Yields on long-term Treasury and corporate bonds, which had
been relatively stable following their initial adjustments to the
early December increase in the discount rate, had advanced by 10
to 15 basis points since the preceding meeting of the Committee.
Contributing to the advances were the resumption of bombing
in North Vietnam; the growing calendar of new corporate issues;
the prospect of large sales of financial assets by the Federal Government under provisions of the administration's budget document; and increasing market discussion of the possibility that a
firmer monetary policy might be required to restrain inflationary
pressures in the months ahead. Short-term interest rates also
moved irregularly higher, with the market yield on 3-month
Treasury bills advancing by about 5 basis points to above 4.60
per cent.
Money market conditions had been, on the whole, relatively
comfortable in the recent period as earlier heavy pressures on
banks in the central money markets moderated. System operations
generally had been directed toward maintaining an "even keel" in
the money market, as is customary during periods of Treasury financing. The current financing involved both a refunding of issues maturing in mid-February and an advance refunding of
April, May, and August maturities, with settlement scheduled for
February 15. In exchange for these securities, of which $13.7
billion were held by the public, the Treasury offered two new
issues: a 5 per cent 4%-year note (priced to yield 4.97 to 5.00
per cent, depending on the issue exchanged), and a 4% per cent
18-month note (priced to yield 4.96 per cent). The refunding was
well received by investors despite the weakening of prices on outstanding issues subsequent to its announcement; $6.5 billion of
subscriptions were entered for the 4%-year note and $0.9 billion
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for the 18-month note. Subscriptions by Government security
dealers were relatively small, and there appeared to be little
speculative activity in the new issues.
The deficit in U.S. international payments in 1965 was now
estimated to have been about $1.3 billion on both the "liquidity"
and "official reserve transactions" bases, compared with $2.8 billion and $1.2 billion, respectively, in 1964. Growth of merchandise exports had resumed in the second half of the year, and
prospects for further increases were favorable. However, the rate
of expansion of imports—of both manufactured goods and materials—had accelerated during 1965. In the fourth quarter, despite some reduction in imports of steel, total imports reached a
level relative to GNP that was quite high by historical standards.
In the judgment of the Committee, recent and prospective
economic developments clearly called for added policy measures
to dampen the rise in aggregate demands. It was noted that
efforts had been made to develop a Federal budget for fiscal year
1967 that would avoid adding to inflationary pressures. The
budget estimates recently submitted to the Congress had to be
regarded as more than usually uncertain, however, because of the
difficulty of predicting the course of developments in Vietnam.
The Committee concluded that, while unfolding developments might lead to additional fiscal counteraction at some later
date, the appropriate objective for monetary policy in the immediate future was a somewhat greater degree of restraint. Members
observed that reserve availability had been permitted to increase
in recent months so as to moderate market adjustments to the official rate actions of early December. It also was noted that the
market situation with respect to the securities involved in the
current Treasury financing probably would make it unnecessary
to maintain an "even keel" policy for the entire period until the
Committee's next meeting. Accordingly, the Committee agreed
that gradual action to reduce net reserve availability should be
initiated as soon as feasible in the light of the financing.

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The following current economic policy directive was issued to
the Federal Reserve Bank of New York:
The economic and financial developments reviewed at this meeting
indicate that the domestic economy is expanding vigorously, with prices
continuing to creep up and credit demands remaining strong. Our international payments continue in deficit. In this situation, it is the Federal Open
Market Committee's policy to resist the emergence of inflationary pressures and to help restore reasonable equilibrium in the country's balance
of payments, by moderating the growth in the reserve base, bank credit,
and the money supply.
To implement this policy, System open market operations until the
next meeting of the Committee, with appropriate regard for the current
Treasury financing, shall be conducted with a view toward a gradual
reduction in reserve availability.
Votes for this action: Messrs. Martin, Hayes,
Balderston, Daane, Ellis, Galusha, Maisel,
Mitchell, Patterson, Robertson, Scanlon, and
Shepardson. Votes against this action: None.

March 1, 1966
1. Authority to effect transactions in System Account.

Estimates of the pace of the business expansion had been
scaled upward recently, according to reports at this meeting, and
activity was now expected to increase more in 1966 than had
appeared likely a few weeks earlier. Revised data indicated that
GNP had advanced at a $16 billion annual rate in the fourth
quarter of 1965—compared with the $12 billion average rate
of the two preceding quarters—and recent developments suggested that it was continuing to rise at about the same rate in
the current quarter.
Pressures on manpower and industrial resources were increasing as enlarged defense expenditures were superimposed on high
and rising private demands. From October through January
nonfarm employment grew at an annual rate of 7 per cent, and
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FEDERAL RESERVE SYSTEM

with tightening labor markets, wages were advancing somewhat
more rapidly than earlier in many industries. Industrial production rose sharply further in January, and the rate of capacity
utilization in manufacturing edged up again. Retail sales, which
had increased more in late 1965 than previously estimated,
declined slightly in January but appeared to be rising again in
early February.
Only a slight acceleration in the rate of advance in industrial
commodity prices was indicated by data for January and preliminary estimates for February. It seemed likely, however, that
the continued rapid expansion of demands expected in coming
months and the associated pressures on resources would be conducive to somewhat larger and more widespread price increases.
The pace of bank credit expansion was considerably reduced
in late January and early February, according to data for city
banks. Growth of business loans moderated from the earlier high
rate but remained fairly rapid. Growth in time and savings
deposits at commercial banks slackened further to a rate less
than half that of the fourth quarter, with the slowdown concentrated at city banks. The money supply, which reached a peak
in early January and declined substantially later in that month,
was estimated to have changed little in February.
Unusually large demands were being made on capital markets.
The volume of new corporate and municipal bond issues in January and February, and the calendar of prospective offerings for
March, suggested that the combined total of offerings in the
first quarter would be greater than in any prior quarter. In addition, a sizable volume of Government agency issues was being
sold. Against a background of inflationary expectations associated with the vigorous economic expansion and of continuing
market discussions of a possibly firmer monetary policy, investor
response to the offerings was cautious and interest rates on longterm corporate, municipal, and Treasury issues rose sharply
further. Yields on some maturities of Treasury bonds were now
at the highest levels in more than 40 years. Average prices of

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common stocks reached a new peak in early February but subsequently declined in active trading.
Recent open market operations were directed at restraining
net reserve availability, and conditions in money markets were
firm. Since the preceding meeting of the Committee, yields on
3-month Treasury bills advanced by about 5 basis points on
balance, to around 4.65 per cent; rates offered by large banks
on negotiable CD's edged higher; and the effective rate on Federal funds was usually above the discount rate. For February
as a whole, member bank borrowings rose somewhat, to about
$470 million from $430 million in January, and net borrowed
reserves averaged about $110 million compared with a revised
figure of $50 million for January. Growth rates of total and
nonborrowed reserves declined substantially.
Partial data on the U.S. balance of payments for early 1966
suggested a continued deficit on the "liquidity" basis of calculation, after allowance for seasonal influences. U.S. banks reduced
the volume of their credits to foreigners more than seasonally in
January, partly as a result of the pressures of domestic credit
demands. On the other hand, the surplus on U.S. merchandise
trade was reduced; in January, as well as in December, exports
were lower than the October-November average, and imports
were higher.
The Committee agreed that, in the light of existing and prospective inflationary pressures, it should continue to pursue the
policy initiated at the preceding meeting of moving gradually
to reduce net reserve availability with a view to limiting growth
of bank reserves, bank credit, and the money supply to moderate
rates. A number of reasons were advanced for proceeding
cautiously in reducing net reserve availability. These included
the existing strains in financial markets and the seasonal pressures
expected around the March tax and dividend dates; the need for
more time to determine the effects of recent System policy actions
on the growth trends of bank credit and the money supply; and
the desirability of avoiding further rises in market interest rates
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FEDERAL RESERVE SYSTEM

to levels that would require consideration of another increase in
the discount rate. Several members expressed the hope that
Federal fiscal policy would soon assume an increased share of
the burden of curbing excessive increases in aggregate demands,
and some mentioned that possibility as a further reason for
moving slowly in firming monetary policy.
The following current economic policy directive was issued to
the Federal Reserve Bank of New York:
The economic and financial developments reviewed at this meeting
indicate that the domestic economy is expanding vigorously, with prices
continuing to creep up and credit demands remaining strong. Our international payments continue in deficit. In this situation, it is the Federal
Open Market Committee's policy to resist inflationary pressures and to
help restore reasonable equilibrium in the country's balance of payments,
by moderating the growth in the reserve base, bank credit, and the
money supply.
To implement this policy, System open market operations until the next
meeting of the Committee shall be conducted with a view to attaining some
further gradual reduction in reserve availability.
Votes for this action: Messrs. Martin, Hayes,
Bopp, Clay, Daane, Hickman, Irons, Maisel,
Mitchell, Robertson, and Shepardson. Votes
against this action: None.
2. Amendment of continuing authority directive.
Section l ( a ) of the continuing authority directive to the
Federal Reserve Bank of New York regarding domestic open
market operations was amended to reduce from $2 billion to
$1.5 billion the limit on changes in holdings of U.S. Government
securities in the System Open Market Account between meetings
of the Committee. With this amendment, Section 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

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ANNUAL REPORT OF BOARD OF GOVERNORS

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 $1.5
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.

Except for the change resulting from this amendment, the
directive was renewed in its existing form, as set forth in the
preface to this record of Federal Open Market Committee policy
actions for 1966.
Votes for this action: Messrs. Martin, Hayes,
Bopp, Clay, Daane, Hickman, Irons, Maisel,
Mitchell, Robertson, and Shepardson. Votes
against this action: None.

The limit in question had been increased from $1.5 billion to
$2 billion in early December, when the Manager of the System
Open Market Account reported that transactions in excess of the
prior limit might conceivably be necessary to carry out the intent
of the current economic policy directive then in effect. It was
reduced at this meeting on recommendation of the Manager,
who indicated that the circumstances calling for the higher limit
seemed to have passed.
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 M'arch 1, 1966,
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 continuing
authority directive for domestic open market operations has been
described in the preceding portion of the entry for this date.
The Committee reaffirmed its authorization regarding open
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FEDERAL RESERVE SYSTEM

market transactions in foreign currencies, its guidelines for System foreign currency operations, and its continuing authority
directive on foreign currency operations, in the forms in which
all three were outstanding at the beginning of the year 1966, as
set forth in the preface to this record of policy actions.
Votes for these actions:
Hayes, Bopp, Clay, Daane,
Maisel, Mitchell, Robertson,
Votes against these actions:

Messrs. Martin,
Hickman, Irons,
and Shepardson.
None.

March 22, 1966
Authority to effect transactions in System Account.

Economic activity was still advancing rapidly, and pressures
on available resources were growing. Although business inventory accumulation tentatively was estimated to have slowed somewhat in the first quarter of 1966 from the high fourth-quarter
rate, final demands appeared to be rising more rapidly.
Federal defense purchases were undergoing a particularly large
increase in the first quarter. Consumer spending also appeared
to be running well above the fourth quarter; January retail sales
figures, originally estimated to show a slight decline, were being
revised upward substantially, and estimates for February indicated that sales were maintaining an advanced pace. Businesses
planned to increase their spending on plant and equipment
throughout 1966, according to a Commerce Department-Securities and Exchange Commission survey taken in February. For
the year as a whole, planned capital expenditures were reported
to be about 16 per cent larger than the high outlays of 1965.
With industrial production recording another sizable increase
in February, capacity utilization rates in manufacturing again
edged up, and the average workweek lengthened to a new postwar record. Nonfarm employment increased substantially further,

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ANNUAL REPORT OF BOARD OF GOVERNORS

and the unemployment rate dropped from 4.0 per cent in January to 3.7 per cent, the lowest level since the early 1950's.
Pressures on resources were being reflected increasingly in cost
and price developments. Average hourly earnings in manufacturing continued to rise at a moderate and steady pace, and unit
labor costs now also appeared to be moving up. New data
suggested some acceleration in the rate of advance of industrial
commodity prices in the first 2 months of the year, accompanied
by a broadening of the range of commodities that were showing
increases. Weekly indexes indicated little further change in
average industrial prices through mid-March, but other information suggested that a further rise was in process. Average wholesale prices of foodstuffs rose sharply in February, but apparently
declined slightly thereafter.
Growth in member bank reserves slackened considerably in
February and early March, and bank credit expanded only
slightly. In the face of continuing strong demand for loans,
city banks reduced their holdings of both Treasury and other
securities in early March, and on March 10 major banks increased their prime lending rate from 5 to SVi per cent. Time
and savings deposits continued to grow relatively slowly. The
money supply declined in February but then rose quite sharply in
the first half of March; for the first quarter as a whole, its growth
was tentatively estimated at an annual rate of 5.5 per cent, compared with 7.5 per cent in the preceding quarter.
Treasury coupon securities experienced their first sustained
rally in several months during the first 3 weeks of March, with
yields on 5- to 10-year maturities falling by almost V4 of a percentage point and longer-term bond yields declining by as much
as Vs of a percentage point. The rally appeared to be partly a
technical reaction to the extended increases in yields of previous
months, but it drew strength from a decline in common stock
prices and, in particular, from growing discussion of possible
additional Federal tax measures to contain inflationary pressures.
Yields on State and local government bonds and new corporate
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FEDERAL RESERVE SYSTEM

issues also turned down after 6 weeks of nearly continuous advance. Contributing to the declines in municipal yields were
cancellations and postponements of some new issues that had
been planned and a reduction in dealer inventories to the lowest
level in several years.
System open market operations since the preceding meeting
of the Committee had been directed toward limiting net reserve
availability while facilitating the large financial flows associated
with quarterly corporate payments of dividends and taxes. In the
3 weeks ending March 16, net borrowed reserves of member
banks averaged almost $215 million and borrowings from the
Reserve Banks about $540 million, compared with revised averages for February of $120 million and $475 million, respectively.
Money market conditions were generally firm, and most shortterm interest rates continued to move up. However, yields on
3-month Treasury bills declined irregularly from about 4.65
per cent in early March to 4.52 per cent on the day preceding
this meeting, as a result of strong investor demand and low dealer
inventories.
The U.S. balance of payments position improved in the first 2
months of 1966, according to incomplete data, as tightening U.S.
credit markets contributed to large net reflows of bank credit.
The demand for imports continued to expand under the influence
of the rapidly advancing pace of domestic activity, however, and
the outlook for U.S. foreign trade suggested that it might be
difficult to maintain the favorable payments trend in coming
months.
In the Committee's discussion it was noted that the policy
actions taken at the two preceding meetings apparently were
beginning to have the desired effect of moderating growth rates
in bank reserves, bank credit, and the money supply. As to the
policy to be pursued in the coming 3 weeks, some members
favored continuing the process of gradually increasing the reserve
pressure on the banking system. Others expressed a preference
for maintaining about the current state of net reserve availability,

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or of money market conditions in general, pending a clearer
indication of the consequences of previous policy actions. Some
members in each of these groups thought that the conduct of
open market operations should be conditioned in part by the
strength of demands that might be made on the banking system;
they felt that net reserve availability could be allowed to become
tauter than otherwise if bank credit and money supply growth
proved strong and required reserves consequently expanded
sharply.
Despite these shadings of opinion, the range of difference in
views on policy for the next 3 weeks was not great; no members
advocated overt firming action at this time, and none favored
relaxation. At the conclusion of the discussion the Committee
agreed to renew the current economic policy directive adopted
at the preceding meeting without change.
Votes for this action: Messrs. Martin, Bopp,
Brimmer, Clay, Daane, Hickman, Irons, Maisel, Mitchell, Robertson, Shepardson, and
Treiber. Votes against this action: None.

April 12, 1966
1. Authority to effect transactions in System Account.

Rapid economic advance continued unabated through the end
of the first quarter, according to reports at this meeting. The
driving forces of the expansion—defense outlays and business
capital expenditures—showed no signs of slackening, and consumer spending was being spurred by sharp rises in incomes
and employment. Further large gains in expenditures by Government, business, and consumers were expected in the second
quarter.
Industrial production rose considerably further in March; for
the first quarter as a whole it increased at an annual rate of about
13 per cent from the fourth quarter of 1965. Retail sales also
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FEDERAL RESERVE SYSTEM

expanded further in March, according to preliminary estimates,
after rising substantially in February. Nonfarm employment continued to grow rapidly, and shortages of experienced workers
were becoming increasingly serious. In March, after six consecutive months of decline, the unemployment rate rose
slightly—from 3.7 per cent to 3.8 per cent—but the rise was
accounted for mainly by teenagers, a group for which monthly
unemployment changes tend to be volatile.
Average prices of industrial commodities advanced further in
March, but because of a slight decline in prices of farm products
and foods, the total index of wholesale prices was unchanged
from" February. Over the first 3 months of the year average
prices of industrial commodities had increased at an annual rate
of about 3 per cent, approximately twice the rate of 1965. The
consumer price index rose in February to a level about 2.5 per
cent above a year earlier. Most of the February rise was accounted for by foods, but average prices of other commodities and of
services also advanced.
Commercial bank credit, which had changed little in February,
expanded substantially in March. Business loan demands in
particular were strong over the corporate tax and dividend payment dates. Finance companies, which had a substantial volume
of open market paper maturing in the same period, also borrowed heavily. Banks liquidated a large volume of securities,
including municipals, to help finance these loan demands. Some
reduction in the rate of growth of bank loans was expected after
the April tax date, but underlying credit demands appeared
likely to remain strong.
The money supply rose sharply in March, in part reflecting a
contraseasonal reduction in Treasury deposits at commercial
banks. Growth in time and savings deposits continued at the
more moderate February rate. Time deposit inflows at city
banks expanded considerably in response to higher offering rates
on both negotiable and nonnegotiable certificates of deposit.
However, some of the funds probably were withdrawn from sav-

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ANNUAL REPORT OF BOARD OF GOVERNORS

ings deposits at these banks, and possibly also from time and
savings deposits at country banks, where growth slackened.
In security markets, the declines in yields on Treasury notes
and bonds and on new corporate and municipal issues that had
begun in early March continued into early April. The monthlong rally—in which one-half to two-thirds of the yield advances
following the December increase in the discount rate were erased
—apparently reflected increasing expectations of a Federal tax
increase, a growing belief that earlier yield advances had outpaced economic developments, and some moderation in the flow
of new private offerings. Most recently, however, a general note
of caution appeared to have returned to security markets, and
some yields edged up again. Near the end of April the Treasury
was expected to announce the terms on which it would refund
securities maturing in mid-May, of which about $2.5 billion
were held by the public.
Recent System open market operations had kept bank reserve
positions under pressure. Over the three statement weeks ending
April 6, net borrowed reserves averaged about $230 million and
member bank borrowings about $580 million—in each case
slightly higher than the levels of the previous 3-week period. For
March as a whole, higher member bank borrowing accounted
for all of the increase in total reserves; nonborrowed reserves declined for the first time since September. The effective rate on
Federal funds had been 43A per cent on most days since the
preceding meeting of the Committee, and on one day a small
volume of funds traded at a new high rate of 4% per cent. Most
other short-term yields remained at the recent highs established
after the March 10 increase in the prime loan rate of banks, or
they edged up further. The yield on 3-month Treasury bills fluctuated but on balance rose somewhat to 4.59 per cent on the day
preceding this meeting.
The Committee agreed that additional stabilization policy
measures would be desirable in light of present and prospective
inflationary pressures. In the course of the discussion note was
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FEDERAL RESERVE SYSTEM

taken of the President's recent request that businesses reduce their
planned capital outlays, and also of the possibility that the administration might recommend an increase in Federal taxes. It
was pointed out, however, that large cutbacks in actual investment expenditures probably could not be expected quickly because of the long lead-times of most capital projects and the
firm commitments already made. As to a tax increase, even if one
were recommended soon—and that issue remained in doubt—
some time would be required for congressional consideration, and
additional time probably would elapse before any increase enacted had substantial effects on aggregate spending.
In the area of monetary policy divergent views were expressed
about the appropriate interpretation of recent banking and capital market developments. Some members felt that the recent high
growth rates in the money supply and bank credit had been undesirable in light of the objective of resisting inflationary pressures,
and a similar view was advanced with respect to the declines in
longer-term market interest rates. Of the members who held
these views some thought that, in retrospect, the Committee's
recent policy directives might better have been formulated in
terms calling for greater resistance to such developments, which
they considered to be evidences of a relaxation in monetary
conditions.
Other members shared the view that monetary relaxation
would be undesirable under present circumstances, but thought
that there had been no relaxation in the pressure the System was
placing on banks nor in the trend toward firmer lending policies
at banks. In their judgment the recent developments had to be
interpreted in light of the fact that there often were marked shortrun fluctuations in banking variables and interest rates—in the
latter partly because of the effects of changing expectations.
At the conclusion of the discussion the Committee agreed
that its policy of gradually reducing net reserve availability, initiated at the February 8 meeting, should be continued until the next
meeting; and that consideration should be given in the conduct

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ANNUAL REPORT OF BOARD OF GOVERNORS

of open market operations to the trends in aggregate reserves,
with somewhat tauter reserve conditions permitted if the aggregates rose sharply. However, it was felt that at this juncture
reserve pressures should not be intensified to the point at which
rising market rates would call into question the viability of the
current discount rate and the maximum rates permitted to be
paid by member banks on time and savings deposits. At the
same time it was agreed that the forthcoming Treasury financing
should be taken into account although, because of the moderate
size and probable routine nature of the financing, it was expected
that the requirements for maintaining an "even keel" in the
money market would be less than usually was the case during
Treasury operations.
The following current economic policy directive was issued
to the Federal Reserve Bank of New York:
The economic and financial developments reviewed at this meeting
indicate that the domestic economy is expanding vigorously, with industrial prices continuing to creep up and credit demands remaining strong.
Our international payments continue in deficit. In this situation, it is the
Federal Open Market Committee's policy to resist inflationary pressures
and to help restore reasonable equilibrium in the country's balance of payments, by restricting the growth in the reserve base, bank credit, and the
money supply.
To implement this policy, System open market operations until the next
meeting of the Committee shall be conducted with a view to attaining
some further gradual reduction in reserve availability, while taking into
account the forthcoming Treasury financing.
Votes for this action: Messrs. Martin, Hayes,
Bopp, Brimmer, Clay, Daane, Hickman, Irons,
Maisel, Mitchell, and Shepardson. Votes against
this action: None.
2. Authority to purchase and sell foreign currencies.

The Committee amended the third paragraph of its continuing
authority directive for System foreign currency operations to
increase, from $100 million to $200 million, the dollar limit
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FEDERAL RESERVE SYSTEM

on spot purchases and concurrent forward sales to the U.S.
Stabilization Fund of currencies in which the U.S. Treasury had
outstanding indebtedness. With this amendment, the paragraph
read as follows:
The Federal Reserve Bank of New York is also authorized and directed
to make purchases through spot transactions, including purchases from the
U.S. Stabilization Fund, and concurrent sales through forward transactions to the U.S. Stabilization Fund, of any of the foregoing currencies
in which the U.S. Treasury has outstanding indebtedness, in accordance
with the Guidelines and up to a total of $200 million equivalent. Purchases
may be at rates above par, and both purchases and sales are to be made
at the same rates.
Votes for this action: Messrs. Martin, Hayes,
Bopp, Brimmer, Clay, Daane, Hickman, Irons,
Maisel, Mitchell, and Shepardson. Votes against
this action: None.

Transactions of the kind authorized by this paragraph, which
involved no risk of loss, were for the purpose of facilitating
payment by the Treasury of maturing bonds denominated in foreign currencies. The amendment was approved after the Special
Manager of the System Open Market Account reported that a
larger sum than previously authorized probably could be usefully
devoted to this purpose at present.

May 10, 1966
Authority to effect transactions in System Account.

Economic activity continued to expand in April, following a
first quarter in which personal consumption expenditures, business fixed investment, and Federal outlays all increased substantially. For the first quarter, GNP was officially estimated to have
been at a seasonally adjusted annual rate $17 billion higher than

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ANNUAL REPORT OF BOARD OF GOVERNORS

in the fourth quarter of 1965. This was the largest quarterly rise
since the Korean war. About one-third of the advance reflected
price increases, but growth in real output was large considering
the high rate of plant utilization and the reduced supply of available labor. Some developments in April and early May, including
declines in sales of new automobiles and in prices of common
stocks, suggested that the economy was somewhat less ebullient
than earlier. The over-all outlook, however, was for further substantial expansion and upward pressures on prices.
In April, retail sales weakened somewhat, primarily because
purchases of new domestic automobiles declined by about 15 per
cent from the advanced first-quarter rate. Nonfarm employment,
which was affected by strikes, was unchanged for the month, but
the unemployment rate edged down to the February level of 3.7
per cent from 3.8 per cent in March. Incomplete figures suggested
that industrial production had increased in April, but by less than
in other recent months. Wholesale prices of foodstuffs declined
appreciably further, but prices of industrial commodities continued to advance at the accelerated first-quarter rate.
Growth in consumption expenditures seemed likely to moderate in the current quarter from the rapid first-quarter pace, but
further substantial advances in Federal outlays and in business
capital spending appeared to be in process. In connection with the
latter, a private survey taken in March found that business concerns planned to spend 19 per cent more on plant and equipment
in 1966 as a whole than in 1965. First-quarter developments were
more nearly in line with this finding than with the 16 per cent
planned increase reported in the Commerce-SEC survey a month
earlier.
Commercial bank credit expanded substantially further in
April, at a rate about the same as in March and almost half again
faster than in the first quarter as a whole. Growth in business
loans was moderate relative to the first-quarter rate, but bank
holdings of securities increased markedly as corporations sold
securities to help finance Federal tax payments.
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FEDERAL RESERVE SYSTEM

Expansion in the money supply, which had been rapid in
March, accelerated in April to an annual rate of 13.5 per cent,
compared with about 4.5 per cent in the first quarter. Growth in
time and saving deposits also accelerated, to more than twice the 7
per cent rate of the first quarter. Earlier in the year inflows of
savings funds to commercial banks—as well as to savings and loan
associations and mutual savings banks—had been sharply reduced as investors, attracted by rising interest rates on market
securities, acquired such instruments in a volume unprecedented
in the postwar period. Inflows to commercial banks recovered in
late March and April, however, after many banks increased rates
paid on time deposits (other than passbook savings) following
the rise in their prime lending rates. Partial data suggested that
nonbank intermediaries experienced larger than seasonal withdrawals of funds in April.
Despite the reduction of savings flows to depositary-type institutions in the first quarter, total mortgage debt outstanding
grew more than in any prior first quarter. Savings and loan
associations and mutual savings banks reduced their mortgage
acquisitions moderately, but the Federal National Mortgage Association greatly increased its net purchases and banks and other
lenders generally maintained their earlier rates of acquisition.
Recently, savings and loan associations and mutual savings banks
reportedly had become more restrictive in their lending policies,
and a future slackening in the rate of growth of mortgage debt
appeared probable as outstanding commitments were worked
down. In March, yields on mortgages on new homes reached their
highest levels in 5 years.
In security markets, average prices of common stocks edged
down in late April and then fell more sharply in early May. Yields
on new corporate bonds and on State and local government securities had risen since the preceding meeting of the Committee;
new issues were marketed in sizable volume in April, and many
market participants apparently concluded that prospects for a
tax increase were diminished and that those for further firming

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of monetary policy were enhanced. Treasury note and bond yields
also advanced over most of the period, but they subsequently
declined again as common stock prices fell and automobile production cutbacks were announced. The 3-month Treasury bill rate
was little changed over the interval, closing at 4.61 per cent on
the day before this meeting, but yields on a variety of other shortterm instruments moved higher. Late in the period Federal funds
traded at 5 per cent for the first time, and a few transactions were
reported at 5Vs per cent.
The Treasury's mid-May refunding, involving a new 18-month
47/8 per cent note priced to yield 4.98 per cent, was accorded a
relatively poor reception; of the $2.5 billion of maturing issues
held by the public, 43 per cent were redeemed for cash. This
refunding reportedly completed the Treasury's financing activity
for the current fiscal year. However, large offerings by Federal
agencies were scheduled before the end of June, and these were
likely to add considerably to pressures in financial markets.
System open market operations since the Commitee's preceding
meeting had been aimed at reducing net reserve availability further, while taking due account of the Treasury refunding operation. Net borrowed reserves in April averaged around $275 million, compared with $210 million in March; and average borrowings increased to about $640 million from $545 million. Yet
nonborrowed reserves rose at the rapid annual rate of about 13
per cent in April as the System supplied most of the reserves to
accommodate the sharp rise in deposits.
The first-quarter deficit in the U.S. balance of payments was
estimated at about a $2 billion annual rate on the "liquidity" basis
of calculation, after seasonal adjustment. This was somewhat
above the rate in the second half of 1965 and higher than had
been expected. The surplus on merchandise trade was reduced as
imports rose faster than exports, and although there were further
reflows of bank credit, the outflow of U.S. capital into new foreign security issues increased.
It was the consensus of the Committee that recent growth rates
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FEDERAL RESERVE SYSTEM

in bank reserves, bank credit, and the money supply were excessive, particularly in the light of prevailing inflationary pressures. While it was noted that April banking developments reflected a number of special factors and were not necessarily indicative of underlying trends, the members agreed that both
domestic and balance of payments considerations called for further monetary restraint.
There were differences in view, however, with respect to the
manner in which such a policy decision should be implemented.
Some members indicated that they would be prepared to accept
a relatively large reduction in net reserve availability in the period
before the next meeting if that should prove necessary to restrict
growth in bank reserves. Other members, noting the stresses
evident in various financial markets and the risks of precipitating
undesirably large market adjustments, favored a more cautious
approach toward reducing net reserve availability. No members
recommended increases in the discount rate or in ceiling rates on
time and savings deposits at present, although some noted that
conditions might develop that would require consideration of an
increase in the discount rate.
The Committee concluded that net reserve availability should
be reduced gradually further and that the reduction should be
greater if growth in required reserves failed to moderate substantially. The following current economic policy directive was
issued to the Federal Reserve Bank of New York:
The economic and financial developments reviewed at this meeting
indicate that the domestic economy is expanding vigorously, with industrial
prices continuing to rise and credit demands remaining strong. Our international payments continue in deficit. In this situation, it is the Federal
Open Market Committee's policy to resist inflationary pressures and to
strengthen efforts to restore reasonable equilibrium in the country's
balance of payments, by restricting the growth in the reserve base, bank
credit, and the money supply.
To implement this policy, while taking into account the current
Treasury financing, System open market operations until the next meeting
of the Committee shall be conducted with a view to attaining some further

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ANNUAL REPORT OF BOARD OF GOVERNORS

gradual reduction in net reserve availability, and a greater reduction if
growth in required reserves does not moderate substantially.
Votes for this action: Messrs. Martin, Hayes,
Bopp, Brimmer, Clay, Daane, Hickman, Irons,
Maisel, Mitchell, Robertson, and Shepardson.
Votes against this action: None.

June 7, 1966
1. Authority to effect transactions in System Account.

Reports at this meeting indicated that the pace of economic
expansion had slowed thus far in the second quarter, mainly because of a sharp decline in sales of new automobiles, but that
activity was likely to accelerate again in the third quarter. Experienced labor continued in short supply, although employment rose
in May among teenagers and other new entrants to the labor force
and the over-all unemployment rate increased to 4.0 per cent from
3.7 per cent in April.
Prices of industrial commodities, which rose on average at an
annual rate of about 3.5 per cent in the first 4 months of the
year, apparently advanced in May also and were expected to remain under upward pressure. Consumer prices increased further
in April to a level 2.9 per cent above a year earlier.
Total retail sales declined again in May, according to preliminary indications, as a result of a further reduction in new-automobile sales. Consumer spending of other types remained strong,
however, and renewed strength in demand for autos over coming
months was suggested by results of a buying intentions survey
conducted by the Census Bureau in mid-April. Also, consumer
spending was expected to be stimulated after midyear by inauguration of payments under the medicare program and by pay
increases now under consideration in Congress for Federal military and civilian employees.
Both defense expenditures and business capital outlays con148

FEDERAL RESERVE SYSTEM

tinued to be strong expansive forces. While the rate of defense
spending after midyear was uncertain, available information on
new defense orders and on order backlogs through April suggested a further substantial rise in the third quarter. Additional
indications that business capital outlays would continue to expand
sharply throughout 1966 were contained in a Commerce-SEC
survey of spending plans taken in May. For the year as a whole,
the survey showed a rise in capital spending of 17 per cent over
1965, compared with 16 per cent shown by the corresponding
February survey. An 18 per cent increase was found in a May
"recheck" of results of a private survey that had yielded a 19
per cent figure in a March canvass.
Residential construction activity, on the other hand, appeared
likely to decline in coming months. Mortgage market conditions
continued to tighten through April as many lenders cut back new
commitments because of reduced net inflows of savings funds,
concern about possible outflows after the midyear interest-crediting date, and uncertainties about prospective market conditions
and other factors. The cutbacks, which reportedly were particularly large at savings and loan associations and mutual savings
banks, were not as yet fully reflected in current mortgage lending,
much of which was based on takedowns of earlier commitments.
Growth in time and savings deposits at commercial banks
moderated somewhat in May. The money supply declined sharply
following rapid gains in March and April, and bank credit expanded at a rate only half that of the two preceding months.
Banks liquidated a substantial volume of Treasury securities but
increased by nearly the same amount their holdings of other
securities, including Federal agency issues. Business loan demand
was strong and was expected to continue so in coming weeks,
partly because of large tax payments by corporations.
Interest rates on most types of market securities had increased
since the preceding meeting of the Committee as a result of
heavy demands for funds. Treasury, corporate, and municipal
bond yields all advanced, with yields on new corporate issues

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moving above the previous postwar highs reached in early March.
In short-term markets, rates rose on Federal agency issues, a large
volume of which were sold in the period, and on bankers' acceptances, finance company paper, and commercial paper. The effective rate in Federal funds transactions reached 5V\ per cent late
in the period. The 3-month Treasury bill rate, however, declined
somewhat to 4.54 per cent on the day before this meeting.
Contributing to the bill rate decline were reduced market supplies
of short-term Treasury issues, heavy demands for bills by corporations and other investors, and Federal Reserve purchases.
Recent System open market operations were directed toward
reducing net reserve availability further. In May net borrowed
reserves averaged about $340 million compared with about $275
million in April, and member bank borrowings rose slightly to
$650 million. Country banks were especially heavy borrowers
from the Reserve Banks; for the first time since 1933, their
borrowings exceeded their excess reserves. Nonborrowed reserves declined in May, following a large rise in April.
The U.S. balance of payments deficit in April and May together
appeared to have been at roughly the same seasonally adjusted
annual rate as in the first quarter, now estimated at %2Vi billion
on the "liquidity" basis of calculation. Most of the increase from
the $1Y2 billion rate of deficit in the fourth quarter of 1965
resulted from a decline in the merchandise trade surplus. The
deficit thus far in 1966 would have been larger if a sizable
volume of liquid assets held by foreign official and international
institutions had not been shifted into long-term time deposits
and U.S. Government agency bonds and notes—assets not classified as liquid in the U.S. balance of payments statistics.
The Committee concluded that continuing inflationary pressures in the economy warranted maintaining the lower net reserve availability and tighter money market conditions that had
prevailed recently. It was agreed that a further gradual reduction
in net reserve availability, such as had been called for at most
of the recent meetings, would not be desirable at present unless
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FEDERAL RESERVE SYSTEM

required reserves of member banks expanded considerably more
than would be expected on seasonal grounds. Several reasons
were advanced against deepening the net borrowed reserve position of member banks at this particular time in the absence of
unusually large growth in required reserves. These included the
tight conditions prevailing in mortgage markets and the uncertainties regarding flows of funds at savings and loan associations and mutual savings banks around the midyear interestcrediting date; the currently slower pace of the domestic economic expansion; and the reduced rate of growth in bank credit.
Also mentioned in this connection were the stresses expected in
financial markets later in June in association with corporate tax
and dividend payments and the large prospective volume of
corporate, municipal, and Federal agency financing.
The following current economic policy directive was issued
to the Federal Reserve Bank of New York:
The economic and financial developments reviewed at this meeting
indicate that, while the mortgage market is tight, automobile sales have
fallen off, and some concern exists about the liquidity of nonbank financial
institutions, the domestic economy is continuing to expand, with industrial
prices rising further and credit demands remaining strong. The foreign
trade surplus has declined and the international payments deficit has increased. In this situation, it is the Federal Open Market Committee's policy
to resist inflationary pressures and to strengthen efforts to restore reasonable equilibrium in the country's balance of payments, by restricting the
growth in the reserve base, bank credit, and the money supply.
To implement this policy, System open market operations until the next
meeting of the Committee shall be conducted with a view to maintaining
net reserve availability and related money market conditions in about
their recent ranges; provided, however, that if required reserves expand
considerably more than seasonally expected, operations shall be conducted with a view to attaining some further gradual reduction in net
reserve availability and firming of money market conditions.
Votes for this action: Messrs. Martin, Brimmer, Clay, Irons, Maisel, Mitchell, Robertson,
Shepardson, Scanlon, Treiber, and Wayne.
Votes against this action: None.

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ANNUAL REPORT OF BOARD OF GOVERNORS

2. Authority to purchase and sell foreign currencies.

At this meeting the Committee replaced its three previously
existing instruments governing System foreign currency operations with two new instruments, primarily for the purpose of
simplifying and clarifying its instructions on this subject. The
three instruments previously in effect—an authorization regarding open market transactions in foreign currencies, a statement
of guidelines for System foreign currency operations, and a continuing authority directive on System foreign currency operations—are set forth in the form in which they were outstanding
at the beginning of the year 1966 in the preface to this record
of policy actions, and an amendment to the continuing authority
directive made on April 12, 1966, is recorded in the entry for
that date. The two new instruments adopted by the Committee—
an authorization for System foreign currency operations and a
foreign currency directive—are shown at the end of this entry.
Votes for these actions: Messrs. Martin,
Brimmer, Clay, Daane, Irons, Maisel, Mitchell,
Robertson, Shepardson, Scanlon, Treiber, and
Wayne. Votes against these actions: None.

With one exception noted below, no changes were made in
the substance of the Committee's instructions on foreign currency operations. The main purpose of recasting the instruments
was to reformulate their essential content in a clearer and more
concise manner by (1) removing duplication of content; (2)
drawing together related instructions previously occurring at
separate points and clarifying their language; (3) deleting language considered superfluous in light of operating experience;
and (4) simplifying language found to be unnecessarily detailed.
Other clarifying changes also were made, such as listing in the
new authorization all of the reciprocal currency arrangements
that had been individually authorized by the Committee.
The one substantive change made in the new instruments re152

FEDERAL RESERVE SYSTEM

lated to the authority of the Special Manager for foreign currency operations to engage in market transactions when exchange
market instability threatened to produce disorderly conditions.
Previously, the Special Manager was required (by the terms of
the fourth paragraph of Section 3 of the Guidelines for System
Foreign Currency Operations) to consult with the Committee, or
in an emergency with the members of the Committee designated
for that purpose, prior to engaging in transactions at such times.
Experience at the time of the assassination of President Kennedy
had demonstrated that in a sudden major crisis it might be impossible for the Special Manager to reach all of the designated
Committee members in time to obtain authorization for necessary protective operations, although he might have no doubt
that the required authority would have been granted by them.
Accordingly, the Special Manager was authorized (by the terms
of paragraph 2(C) of the new foreign currency directive) to
engage in operations on his own initiative to meet a threat of
disorderly conditions, with the requirement that he consult as
soon as practicable with the Committee or, in an emergency,
with the members of a Subcommittee designated (in paragraph
6 of the new authorization) for that purpose. The new instruction was intended to require advance consultation if practicable,
but to permit operations if it were not.
The two new foreign currency instruments approved by the
Committee at this meeting were as follows:
AUTHORIZATION FOR SYSTEM FOREIGN CURRENCY OPERATIONS

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

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ANNUAL REPORT OF BOARD OF GOVERNORS

foreign monetary authorities, and with the Bank for International Settlements :
Austrian schillings
Belgian francs
Canadian dollars
Pounds sterling
French francs
German marks
Italian lire
Japanese yen
Netherlands guilders
Swedish kronor
Swiss francs
B. To hold foreign currencies listed in paragraph A above, up to the
following limits:
(1) Currencies held spot or purchased forward, up to the amounts
necessary to fulfill outstanding forward commitments;
(2) Additional currencies held spot or purchased forward, up to
the amount necessary for System operations to exert a market influence
but not exceeding $150 million equivalent; and
(3) Sterling purchased on a covered or guaranteed basis in terms
of the dollar, under agreement with the Bank of England, up to $200 million equivalent.
C. To have outstanding forward commitments undertaken under
paragraph A above to deliver foreign currencies, up to the following
limits:
(1) Commitments to deliver to the Stabilization Fund foreign
currencies in which the U.S. Treasury has outstanding indebtedness, up to
$200 million equivalent;
(2) Commitments to deliver Italian lire, under special arrangements with the Bank of Italy, up to $500 million equivalent; and
(3) Other forward commitments to deliver foreign currencies, up
to $275 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

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FEDERAL RESERVE SYSTEM

Bank of New York to maintain reciprocal currency arrangements ("swap"
arrangements) for System Open Market Account with the following
foreign banks, which are among those designated by the Board of
Governors of the Federal Reserve System under Section 214.5 of
Regulation N, Relations with Foreign Banks and Bankers, and with the
approval of the Committee to renew such arrangements on maturity:

Foreign bank

Amount of
arrangement
(millions of
dollars equivalent)

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

Period of
arrangement
(months)

50
100
250
750
100
250
450
250
100
50
150

12
12
12
12
3
6
12
12
3
12
6

150

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

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ANNUAL REPORT OF BOARD OF GOVERNORS

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.
6. A Subcommittee consisting of the Chairman and the Vice Chairman
of the Committee and the Vice Chairman of the Board of Governors (or
in the absence of the Chairman or of the Vice Chairman of the Board
of Governors the members of the Board designated by the Chairman as
alternates, and in the absence of the Vice Chairman of the Committee his
alternate) is authorized to act on behalf of the Committee when it is
necessary to enable the Federal Reserve Bank of New York to engage in
foreign currency operations before the Committee can be consulted. All
actions taken by the Subcommittee under this paragraph shall be reported
promptly to the Committee.
7. The Chairman (and in his absence the Vice Chairman of the Committee, and in the absence of both, the Vice Chairman of the Board of
Governors) is authorized:
A. With the approval of the Committee, to enter into any needed
agreement or understanding with the Secretary of the Treasury about the
division of responsibility for foreign currency operations between the
System and the Secretary;
B. To keep the Secretary of the Treasury fully advised concerning
System foreign currency operations, and to consult with the Secretary on
such policy matters as may relate to the Secretary's responsibilities; and
C. From time to time, to transmit appropriate reports and information to the National Advisory Council on International Monetary and Financial Policies.
8. Staff officers of the Committee are authorized to transmit pertinent
information on System foreign currency operations to appropriate
officials of the Treasury Department.
9. All Federal Reserve Banks shall participate in the foreign currency
operations for System Account in accordance with paragraph 3 G (1) of
the Board of Governors' Statement of Procedure with Respect to Foreign Relationships of Federal Reserve Banks dated January 1, 1944.

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FEDERAL RESERVE SYSTEM

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

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

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ANNUAL REPORT OF BOARD OF GOVERNORS

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

June 28, 1966
1. Authority to effect transactions in System Account.

Despite the slowdown in the rate of economic expansion in
the second quarter, pressures on industrial capacity, manpower,
and prices remained strong. And because the pace of expansion
was expected to accelerate again after midyear, there appeared
to be little prospect for relaxation of these pressures.
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FEDERAL RESERVE SYSTEM

Average industrial prices continued to rise in May at an annual rate of 3.5 per cent and were estimated to have increased
further in June at about the same rate. Consumer prices advanced only slightly in May following 3 months of rapid increase.
In various current labor negotiations unions reportedly were
pressing for wage increases well above the administration's guideposts, against a background of strong demands for labor, high
corporate profits, and rising consumer prices.
The rate of growth in GNP appeared likely to be higher in
the second half of 1966 than in the quarter now ending, although
somewhat lower than the exceptionally high rates of the two
preceding quarters. Large further gains were anticipated in business capital outlays and Federal defense expenditures, and
growth in consumer spending—the lag in which accounted for
most of the second-quarter slowdown in GNP—was expected to
pick up again as a result of more rapid increases in disposable
income. Data for early June suggested that sales of new automobiles were recovering part of their declines of April and May.
Residential construction remained the main weak factor in the
outlook; housing starts declined sharply in May, and further declines appeared likely. Interest rates on mortgages on new homes,
which had been rising sharply in recent months, reached new
highs in May as many lending institutions drastically reduced
their commitments to make new loans. Net inflows of funds to
savings and loan associations and mutual savings banks were
much smaller in May and early June than in comparable periods
of other recent years. There was considerable apprehension
among such institutions that large net outflows would occur
around midyear—after quarterly and semiannual interest accruals were credited—as customers shifted funds to higheryielding market securities and to commercial bank time deposit
instruments.
At commercial banks total time and savings deposits were
estimated to be expanding in June at a rate slightly below that
of May and well below that of April. Growth in outstanding

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ANNUAL REPORT OF BOARD OF GOVERNORS

negotiable CD's moderated sharply at city banks, although
major New York banks had recently increased posted rates to
5 ^ per cent—the maximum permitted under Regulation Q—
on negotiable CD's with maturities of 3 months, and some reportedly were willing to negotiate that rate on maturities as
short as 30 days. Loan demands were strong, particularly after
mid-June when businesses needed funds to finance income tax
payments and accelerated payments of withheld individual and
social security taxes. The money supply was estimated to be
increasing in June about as sharply as it had declined in May.
Long-term interest rates changed little on balance in recent
weeks despite heavy flotations of corporate and municipal bonds.
A lower volume of such security issues was in prospect for July;
and Federal agency offerings, which were at an unprecedented
level in June, also were expected to diminish. Most short-term
interest rates were stable or somewhat higher. However, yields
on 3-month Treasury bills declined by about 20 basis points
further, to 4.33 per cent on the day before this meeting, as strong
demands continued to press against extremely scarce market
supplies.
System open market operations since the previous meeting
had been directed toward maintaining net reserve availability in
about the range of recent weeks, as required reserves of member
banks increased on balance about in line with expectations.
Money market conditions were firm throughout the period and
had become quite firm in recent days in response to strong loan
demands. Bank lending rates to Government securities dealers
were raised to new high levels, and the effective rate on Federal
funds reached a record 5Vi per cent, with some transactions at
5% per cent.
The deficit in the U.S. balance of payments for the first 5
months of 1966 was now estimated to have been at a seasonally
adjusted annual rate of %21A billion on the "liquidity" basis of
calculation. Prospects favored some recovery in the trade surplus
from the unusually low levels to which it fell in A,pril and May,
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FEDERAL RESERVE SYSTEM

but deterioration seemed probable in other categories of U.S.
international payments.
On the day before this meeting, the Board of Governors announced two actions designed to moderate further growth of
bank credit and deposits. Reserve requirements were increased
from 4 to 5 per cent against time deposits (other than savings
deposits) in excess of $5 million at each member bank, effective
with the reserve computation period beginning July 14, 1966,
for reserve city banks and July 21, 1966, for all other member
banks. This action, which would increase required reserves by
an estimated $420 million, was expected to exert a tempering
influence on issuance of CD's and thereby to apply a moderate
additional measure of restraint upon the expansion of banks'
loanable funds. At the same time, the Board brought shorterterm bank promissory notes and similar instruments under the
regulations governing reserve requirements and payment of interest on deposits, effective September 1, 1966.
In its discussion of policy the Committee agreed that net reserve availability should be reduced if the pace of bank credit
expansion led to larger than expected increases in required reserves. At the same time it was agreed that operations might
need to be modified to ease reserve conditions if unusual liquidity pressures developed at financial institutions as the result
of deposit or share account withdrawals.
Divergent judgments were expressed regarding the appropriate
level of net reserve availability if increases in required reserves
were not unusually large. Some members felt that deeper net
borrowed reserves should be sought. They cited the economic
outlook, the strong continuing demands for bank credit, and the
undesirability of offsetting the full impact on net borrowed reserves of the Board's action on reserve requirements. Other
members favored maintaining net reserve availability around its
recent levels, primarily because of the uncertainties with respect
to possible financial developments in the period immediately
ahead. There was considerable sentiment for giving the Account

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ANNUAL REPORT OF BOARD OF GOVERNORS

Manager latitude to reduce net reserve availability somewhat if
and when he thought financial conditions permitted.
At the conclusion of the discussion the following current economic policy directive was issued to the Federal Reserve Bank
of New York:
The economic and financial developments reviewed at this meeting
indicate that, while there has been some reduction in automobile sales and
residential construction, over-all domestic economic activity is continuing
to expand, with industrial prices rising further. Mortgage market conditions remain tight and total credit demands continue strong. The foreign
trade surplus has declined and the international payments deficit has
increased. In this situation, it is the Federal Open Market Committee's
policy to resist inflationary pressures and to strengthen efforts to restore
reasonable equilibrium in the country's balance of payments, by restricting the growth in the reserve base, bank credit, and the money supply.
To implement this policy, System open market operations until the next
meeting of the Committee shall be conducted with a view to maintaining
about the current state of net reserve availability and related money market
conditions, except as changes may be needed to moderate unusual liquidity
pressures at financial institutions; provided, however, that if such liquidity
pressures are not unusually strong and required reserve increases are
larger than expected, operations shall be conducted with a view to attaining some further gradual reduction in net reserve availability and firming
of money market conditions.
Votes for this action: Messrs. Martin,
Hayes, Bopp, Brimmer, Clay, Daane, Hickman, Irons, Maisel, and Mitchell. Votes against
this action: None.
2. Amendment of continuing authority directive.

The Committee amended Section l ( c ) of the continuing authority directive to the Federal Reserve Bank of New York regarding domestic open market operations, to remove the 24month maturity limitation on Government securities that might
be held under repurchase agreements with nonbank dealers. As
amended, Section l ( c ) read as follows:
To buy U.S. Government securities, and prime bankers' acceptances
with maturities of 6 months or less at the time of purchase, from nonbank
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FEDERAL RESERVE SYSTEM

dealers for the account of the Federal Reserve Bank of New York under
agreements for repurchase of such securities 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 covered by any such agreement are not repurchasd 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.
Votes for this action: Messrs. Martin,
Hayes, Bopp, Brimmer, Clay, Daane, Hickman, Irons, Maisel, and Mitchell. Votes against
this action: None.

This action was taken after the Account Manager described
certain procedures that might prove necessary in supplying reserves to the banking system around the July 4 holiday period,
when the usual seasonal rise in currency holdings of the public
was expected to result in a large decline in reserves. It appeared
that opportunities for outright purchases of bills might be limited
because of the very low level of market supplies; and that supplying the needed reserves through repurchase agreements of the
usual type—that is, agreements related to the dealers' current
needs for financing—might not prove feasible because such
needs recently had been minimal and might continue so. The
procedure suggested was to arrange repurchase agreements with
dealers in the expectation that they would obtain the necessary
securities by entering into similar agreements with banks and
others seeking a temporary supply of funds over a period of expected money stringency. A temporary removal of the maturity
limitation was proposed in order to give maximum flexibility to
the operations. The Committee's action was taken on the understanding that operations of the type described would be under-

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ANNUAL REPORT OF BOARD OF GOVERNORS

taken only if found necessary to supply needed reserves. It was
expected that the continuing authority directive would be
amended again to restore the maturity limitation after the current
period of reserve need had passed.

July 26, 1966
1. Authority to effect transactions in System Account.

GNP was now officially estimated to have increased by $11
billion in the second quarter. This was considerably less than
the $17 billion rise in the first quarter, with the slowdown attributable mainly to lack of growth in consumer spending for
goods. Since prices advanced as much in the second quarter as
in the first, real GNP rose at an annual rate of only 2.5 per cent,
compared with 6 per cent in the first quarter. Growth in industrial production and nonfarm employment also slowed in the
second quarter.
Imbalances in the economy appeared to have increased recently. Thus, the rate of business inventory accumulation in the
second quarter was the highest in many years—partly because of
a build-up in dealer stocks of automobiles—and probably was
not sustainable; and the outlook for residential construction remained weak. However, substantial increases appeared in prospect in the third quarter for disposable incomes and consumer
spending, and both business capital outlays and defense expenditures were likely to continue their upward trends. As a result,
GNP was expected to grow more rapidly in the third quarter
than in the second.
In June, industrial production rose moderately further, and
retail sales increased following sharp declines in April and May.
Nonfarm employment expanded substantially as a record number
of teenagers entered the labor force and most of them found jobs.
The over-all unemployment rate was unchanged at 4 per cent,
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FEDERAL RESERVE SYSTEM

but there was a marked further decline in long-duration unemployment.
The advance in average industrial prices continued in June
and apparently also in early July. The consumer price index rose
substantially in June, partly for seasonal reasons, and was 2.5
per cent above a year earlier.
Private housing starts, which had dropped sharply in May,
edged down somewhat further in June to the lowest rate in 5
years. The recent decline reflected acute pressures in mortgage
markets, based in part on uncertainties about the extent of withdrawals from savings and loan associations and mutual savings
banks at the midyear dividend-crediting period. As it turned
out, withdrawals appeared to have been substantial but smaller
than had been widely feared. Nevertheless, mortgage markets
continued under great strain.
Commercial banks apparently benefited to some extent from
the July withdrawals from competing institutions; total time and
savings deposits were estimated to be increasing more rapidly
than the May-June average rate of about 10 per cent. The
money supply was declining in July after increasing sharply in
June, as U.S. Government deposits were rebuilt following a substantial reduction in the preceding month. However, total deposits, including Government deposits, and required reserves of
member banks were increasing substantially. Staff projections
for August suggested a fairly low growth rate in total deposits
and very small growth in required reserves.
Loan demand remained strong, and money markets tightened
further in the period since the Committee's previous meeting.
Yields on short-term instruments generally continued to increase.
Dealer loan rates posted by major New York City banks reached
new highs as those banks developed large basic reserve deficiencies and were heavy buyers of Federal funds at rates ranging
up to 534 per cent. On June 29 the commercial bank prime
lending rate was raised to 5% per cent from SVi per cent. In
this environment Treasury bill rates moved sharply higher to

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ANNUAL REPORT OF BOARD OF GOVERNORS

levels somewhat more in line with other short-term rates. The
3-month bill rate, after rising above 4.90 per cent after mid-July,
closed at 4.78 per cent on the day before the meeting, compared
with 4.33 per cent 4 weeks earlier. Yields in longer-term securities markets also moved sharply higher in late June and early
July, but subsequently tended to stabilize.
The Treasury was expected to announce on July 27 the terms
on which it would refund securities scheduled to mature in midAugust. About $3.2 billion of the maturing issues were held by
the public.
System open market operations since the preceding meeting
had been directed toward maintaining net reserve availability
and money market conditions in about the range of recent weeks,
while keeping alert to movements in required reserves and also
to possible liquidity pressures at financial institutions around
the end of the quarterly interest-crediting period. Operations
were complicated, however, by a large increase in float stemming from an airline strike that began on July 8 and the resulting delays in transmittal of checks between Federal Reserve
Banks. This rise in float led to a sharp increase in net reserve
availability in the statement week ended July 13. In the following week surplus reserves were absorbed by sales of Treasury
bills with matching forward purchase contracts, in accordance
with an understanding reached during a telephone meeting of
the Committee on July 11. Weekly average net borrowed reserves fluctuated from about $90 million to $480 million in the
first 3 weeks of July and averaged about $340 million, slightly
below the June average of $355 million.
The deficit in the balance of payments in the second quarter
was estimated at a seasonally adjusted annual rate of about $600
million on both the "liquidity" and "official reserve transactions"
bases. The apparent improvement in the liquidity deficit from
its first-quarter rate of $2Vi billion was accounted for by an
increased flow of funds of foreign official and international institutions out of liquid claims on the United States into certain
types of claims classed as nonliquid—specifically, time deposits
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FEDERAL RESERVE SYSTEM

with original maturities of more than 1 year, and agency bonds
or notes of over-1-year original maturity. Since the magnitude of
further net shifts of these kinds was not predictable, the reduction in the liquidity deficit provided no guide to current trends,
particularly in view of the sharp decline in the merchandise trade
surplus.
During the period since the previous Committee meeting there
had been an increase from 6 per cent to 7 per cent in the discount
rate of the Bank of England, followed by announcement by the
British Government of a broad program designed to dampen
private and public spending in Britain and to limit overseas expenditures. Nevertheless, strong speculative pressures against
the pound sterling persisted.
There was a general desire within the Committee to keep a
tight rein on bank credit expansion. However, there was also a
recognition that the forthcoming Treasury refunding constituted
an important reason for continuing approximately the current
state of net reserve availability and money market conditions,
in accordance with the customary practice of maintaining an
"even keel" during periods of Treasury financing activity. Some
members—citing factors such as present and prospective inflationary pressures, the continuing strong business loan demand
and the risk of another upsurge in bank credit such as had occurred in March and April, the lack of steps to date toward a
more restrictive fiscal policy, and the balance of payments situation and outlook—expressed the view that a good case could be
made for a further gradual firming of monetary policy at this
time to the extent that the Treasury financing permitted. It was
the consensus, however, that even if the Treasury financing
permitted, such firming should not be sought unless the rate of
growth in required reserves, after seasonal adjustment, was more
rapid than the very small rise currently projected by the staff.
Accordingly, the following current economic policy directive
was issued to the Federal Reserve Bank of New York:
The economic and financial developments reviewed at this meeting
indicate that over-all domestic economic activity appears to be expanding

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ANNUAL REPORT OF BOARD OF GOVERNORS

somewhat more rapidly than in the second quarter despite weakness in
residential construction, with industrial prices rising further. Total credit
demands continue strong and financial markets, particularly for mortgages, remain tight. Despite the statistical improvement resulting largely
from special transactions, the balance of payments situation continues to
reflect a sizable underlying deficit. In this situation, it is the Federal Open
Market Committee's policy to resist inflationary pressures and to
strengthen efforts to restore reasonable equilibrium in the country's balance of payments, by restricting the growth in the reserve base, bank
credit, and the money supply.
To implement this policy, while taking into account the forthcoming
Treasury financing, System open market operations until the next meeting
of the Committee shall be conducted with a view to maintaining about the
current state of net reserve availability and related money market conditions; provided, however, that if required reserves expand more rapidly
than expected and if conditions associated with the Treasury financing
permit, operations shall be conducted with a view to attaining some
further gradual reduction in net reserve availability and firming of money
market conditions.
Votes for this action: Messrs. Hayes, Bopp,
Brimmer, Clay, Hickman, Irons, Maisel,
Mitchell, Robertson, and Shepardson. Votes
against this action: None.

2. Amendment of continuing authority directive.

The Committee amended Section l ( a ) of the continuing
authority directive to the Federal Reserve Bank of New York
regarding domestic open market operations, to raise from $1.5
billion to $2 billion the limit on changes in holdings of U.S.
Government securities in the System Open Market Account between meetings of the Committee. With this amendment, Section 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 securi-

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FEDERAL RESERVE SYSTEM

ties 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.
Votes for this action: Messrs. Hayes, Bopp,
Brimmer, Clay, Hickman, Irons, Maisel,
Mitchell, Robertson, and Shepardson. Votes
against this action: None.

This action was taken after the Account Manager reported
that the previously existing "leeway" might conceivably prove
too small. There was a prospective need for the System to supply
a rather large volume of reserves in the period until the next
meeting, and in addition the uncertain duration of the airline
strike was a complicating factor.
At the meeting of June 28, 1966, as indicated in the entry
for that date, the Committee had amended Section l ( c ) of the
continuing authority directive to remove the 24-month maturity
limitation on Government securities that might be held under
repurchase agreements with nonbank dealers, in the expectation
that the directive would be amended again to restore the maturity limitation after the then-current period of reserve need had
passed. Because of the possibility that procedures similar to those
described in the preceding entry might again be required in the
period before the next meeting, the Committee agreed to continue paragraph l ( c ) in its existing form for the time being.
August 23, 1966
Authority to effect transactions in System Account.
The economic outlook remained expansive, and prospects
were for continuing high levels of resource use and strong upward pressures on wages and prices. Defense expenditures apparently were rising at an unabated rate, business fixed investment
outlays were continuing to grow, and consumer spending was
showing renewed strength after lagging in the spring.

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ANNUAL REPORT OF BOARD OF GOVERNORS

Industrial production rose further in July, and nonfarm employment continued to expand vigorously. The unemployment
rate, at 3.9 per cent, was little changed from the 4.0 per cent
rate of the two prior months. On the other hand, private housing starts declined sharply further to the lowest monthly level
in 6 years, as mortgage funds remained quite limited.
The wholesale price index increased appreciably in July,
mainly because of a large rise in prices of foodstuffs; average
industrial prices advanced only slightly further. Consumer prices
continued to rise at a substantial rate, leading to further wage
increases in industries with cost-of-living escalator contracts
and stimulating demands for higher wages in industries where
negotiations were under way or imminent. The settlement of the
recent strike of airline machinists involved an increase in wages
and other benefits well above administration guideposts.
Commercial banks increased their prime lending rate in midAugust to 6 per cent, from the 53A per cent rate that had been
established near the end of June. Growth in business loans,
which had reached the unusually high annual rate of 30 per cent
in the June-July period, was slackening in August., in part because cash needs of corporations were temporarily reduced
following the earlier accelerated payments of withheld Federal
taxes. Banks reportedly were expecting loan demands to intensify
again in September despite the increase in the prime rate. Inflows
of private liquid funds through foreign branches of U.S. banks,
which had been sizable in the first half of 1966, were exceptionally large in July and early August.
Total time and savings deposits of commercial banks continued to grow relatively rapidly, but most of the recent expansion was outside the major money centers. Large city banks,
already paying the ceiling rate of 5Vi per cent on negotiable
CD's, were finding it increasingly difficult to replace maturing
certificates as market interest rates rose. A large volume of such
certificates would mature in September, and some run-off seemed
likely although its dimensions were highly uncertain. Private
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FEDERAL RESERVE SYSTEM

demand deposits were estimated to have shown little net change
over the 3 months since May, and Government deposits were
estimated to have declined. For August it appeared that both
total deposits 2 and required reserves of member banks would
fall below the levels projected earlier by the staff. With underlying loan demands remaining strong, however, staff projections
for September suggested some acceleration in growth of member bank deposits, perhaps to an annual rate of 6 per cent,
although the outlook was clouded by the uncertainties associated
with possible run-offs of CD's.
The atmosphere in security markets since the preceding meeting of the Committee was one of marked uncertainty and apprehension. During this period average prices of common stocks
declined to new lows for 1966, and yields on Treasury, corporate, and municipal bonds advanced sharply to the highest levels
since the 1920's and early 1930's. Short-term interest rates also
rose markedly further, with the yield on 3-month Treasury bills
reaching 5.10 per cent—more than 30 basis points above its
level 4 weeks earlier—before receding somewhat. Money market
conditions continued to firm; dealer loan rates posted by major
banks again reached new record levels, and Federal funds traded
at rates as high as 6 per cent.
The recent pressures, which were evident in all maturity
ranges and in all sectors of the financial markets, reflected the
extremely large demands currently being made on those markets and concern over the extent of credit demands ahead. Total
2
In recent months the Committee had been making increased use of dailyaverage 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. Since 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 recent statistics on daily-average member bank deposits, see the
Federal Reserve Bulletin for October 1966 (p. 1478) and subsequent months.
Some brief comments on the relation between the deposit series and bank credit
statistics are given in the note on p. 1460 of the October Bulletin.

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ANNUAL REPORT OF BOARD OF GOVERNORS

offerings of new corporate issues in August appeared likely to
exceed those of any August on record, and the calendar of
municipal issues was sizable. In addition, the Treasury, after
completing its mid-August refunding, announced an auction of
$3 billion in tax-anticipation bills for payment on August 26.
Also contributing to the uncertain atmosphere were concern
about inflationary developments and prospective monetary policy and the possibility of a substantial run-off of negotiable CD's.
Recent System open market operations were directed towards
keeping continued pressure on bank reserve positions while
maintaining an "even keel" in the money market during the
Treasury's refunding operation. Weekly average net borrowed
reserve figures fluctuated in a range of $300 million to $465
million in three statement weeks ending August 17; over the
period they averaged $400 million, compared with $365 million
in the preceding 4 weeks. Member bank borrowings averaged
about $765 million, up about $25 million from the preceding
4-week period.
The balance of payments deficit on the "liquidity" basis
widened to an annual rate of roughly $3 billion in July and
early August, twice the rate of the first half of 1966 when the
deficit had been held down by large shifts of foreign official
funds from liquid to nonliquid claims on the United States. The
balance on the "official reserve transactions" basis behaved differently, however. Following a deficit at a rate of nearly .$1 billion in the first half of 1966, there was a substantial surplus in
July and early August, as private liquid funds in unusually large
volume were attracted to the United States from abroad.
On August 17 the Board of Governors announced a further
increase in reserve requirements on time deposits in excess of
$5 million, from 5 to 6 per cent, effective September 8 at reserve city banks and September 15 at other member banks. The
action, which would increase required reserves by an estimated
$450 million, was taken for purposes similar to those under172

FEDERAL RESERVE SYSTEM

lying the increase in such reserve requirements from 4 to 5 per
cent that had been announced on June 26; namely, to exert a
tempering influence on bank issuance of time certificates of
deposit, and to apply some additional restraint upon the expansion of bank credit to businesses and other borrowers.
The Committee agreed that no relaxation in the prevailing
degree of monetary restraint would be warranted at this juncture, unless unusual liquidity pressures developed or money
market conditions threatened to become disorderly. A substantial number of members thought that, absent such developments,
open market operations should be conducted so as to reduce net
reserve availability somewhat further, in coordination with the
Board's action to increase reserve requirements. Some of these
members favored seeking still greater restraint if bank credit
appeared to be expanding at a rate in excess of that projected
by the staff for September. At the same time it was noted that
any move toward further restraint should be implemented gradually and cautiously, in view of current and prospective strains
in financial markets.
Other members, who tended to give somewhat greater weight
to the risks of placing undue pressures on financial markets and
to the recent moderation of bank credit growth, favored reducing net reserve availability only if bank credit were expanding
more rapidly than expected. A third view expressed was that
the risks of developments disruptive to financial markets and to
the economy in general might be sufficiently great to militate
against any further increase in credit restraint at this juncture.
At the conclusion of the discussion, the following current economic policy directive was issued to the Federal Reserve Bank
of New York:
The economic and financial developments reviewed at this meeting indicate that over-all domestic economic activity is expanding more rapidly
than in the second quarter, despite further weakening in residential construction. Recent wage and price developments suggest that inflationary
pressures are becoming more intense. Credit demands continue strong,
financial markets have tightened further, and interest rates have risen

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ANNUAL REPORT OF BOARD OF GOVERNORS

substantially in an atmosphere of great uncertainty. The balance of payments continues to reflect a sizable underlying deficit. In this situation,
it is the Federal Open Market Committee's policy to resist inflationary
pressures and to strengthen1 efforts to restore reasonable equilibrium in
the country's balance of payments, by restricting the growth in the reserve
base, bank credit, and the money supply.
To implement this policy, System open market operations until the next
meeting of the Committee shall be conducted with a view to supplying
the minimum amount of reserves consistent with the maintenance of
orderly money market conditions and the moderation of unusual liquidity
pressures; provided, however, that if bank credit expands more rapidly
than expected, operations shall be conducted with a view to seeking still
greater reliance on borrowed reserves.
Votes for this action: Messrs. Hayes,
Bopp, Brimmer, Clay, Daane, Hickman, Irons,
Maisel, Mitchell, Robertson, and Shepardson.
Votes against this action: None.

September 13, 1966
1. Authority to effect transactions in System Account.

Economic expansion remained vigorous, according to reports
at this meeting, with the main stimuli continuing to come from
defense spending and business outlays on fixed investment. On
September 8 the President proposed a number of fiscal actions
to reduce inflationary pressures, including (1) measures to reduce lower-priority Federal spending and (2) a 16-month suspension of two tax incentives for corporate investment: the
7 per cent tax credit on machinery and equipment investment
and the accelerated depreciation allowances on commercial
and industrial building.
Defense spending was now estimated to be rising more rapidly in the third quarter than the second. Earlier estimates of
the pace of business capital outlays were supported by results
of the August Commerce-SEC survey of spending plans. That
survey, like the May canvass, indicated that capital spending
in 1966 as a whole would be 17 per cent above 1965, but would
rise at a slower pace in the second half of the year than in the
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FEDERAL RESERVE SYSTEM

first. With respect to consumer spending, a Census Bureau survey taken in mid-July indicated that consumer intentions to buy
new automobiles were about as numerous as a year earlier, and
that plans to buy household durable goods were considerably
stronger.
Industrial production rose substantially further in August,
according to preliminary estimates. Nonfarm employment also
continued to rise quite vigorously, and the unemployment rate
remained unchanged at 3.9 per cent. The gains in employment
were somewhat more selective than earlier; in particular, advances in manufacturing were increasingly concentrated in industries oriented to defense and business capital goods. The latest
data for manufacturers' inventories—for July—indicated a sharp
step-up in the pace of accumulation from the high second-quarter
level, with all of the acceleration in durable goods industries.
Estimates suggested that average wholesale prices rose further
in August, but by less than in July. It appeared that food price
advances were smaller than in the preceding month and that
increases in industrial prices were at the reduced July rate. The
recent moderation in the rise of average industrial prices was
attributable mainly to declines for sensitive materials, which
began in June. Price developments in the months ahead seemed
likely to be especially influenced by the outcome of wage negotiations, more of which would take place in coming months than
earlier in the year. An early-September wage settlement affecting
telephone installers—like the August airline-machinists settlement—involved an increase well above administration guideposts.
The money supply declined somewhat further in August,
bringing growth for the first 8 months of 1966 to an annual rate
of about 1.5 per cent, compared with 4.8 per cent for the full
preceding year. Time and savings deposits of commercial banks
increased rapidly in the first half of August, but the rate of
growth fell off sharply after midmonth when major banks began
to experience declines in their negotiable CD's outstanding.
Daily averages of both total deposits of member banks—the
"bank credit proxy"—and required reserves were weaker in

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ANNUAL REPORT OF BOARD OF GOVERNORS

August than had been expected earlier. Between the last Wednesdays of July and August total commercial bank credit expanded
at about a 6 per cent annual rate, but the growth appeared to be
attributable wholly to bank acquisitions of tax-anticipation bills
issued by the Treasury late in August.
New staff projections for September, which allowed for a
substantial further run-off in negotiable CD's, suggested little or
no increase in total deposits of member banks, in contrast with
an earlier expectation of moderate growth. At the same time,
loan demands were expected to intensify, and the conjuncture
of heavy loan demands with run-offs of CD's was expected to
result in substantial pressures on banks in coming weeks.
On September 1 the Presidents of the Federal Reserve Banks
addressed a letter 3 to all member banks indicating that, while
the System considered orderly bank credit expansion appropriate
in today's economy, it regarded the recent growth in business
loans as excessive. The letter went on to indicate that the System
believed a greater share of member bank adjustments should
take the form of moderation in the rate of expansion of loans,
particularly business loans, and it stated that member banks
would be expected to cooperate in the System's efforts to hold
down the rate of business loan expansion—apart from normal
seasonal needs—and to use the discount facilities of the Reserve
Banks in a manner consistent with those efforts. The letter added
that Federal Reserve credit assistance to member banks to meet
appropriate seasonal or emergency needs, including those resulting from shrinkages of deposits or of other sources of funds,
would continue to be available as in the past.
The atmosphere of apprehension in security markets that had
been evident before the August 23 meeting of the Committee
intensified in the week following that meeting. Yields on Treasury, corporate, and municipal bonds rose sharply further and
market conditions became increasingly unsettled, requiring special intervention in the market by the Federal Reserve to supply
reserves. On August 30, however, following a statement by a
3

For the full text of the letter, see p. 103.

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FEDERAL RESERVE SYSTEM

Treasury official that was generally interpreted as foreshadowing
a change in prospects for fiscal policy measures, a sharp, sustained rally began that brought bond yields down by the time of
this meeting to levels below those of 3 weeks earlier. The downward tendency of yields was reinforced by the President's announcement concerning fiscal policy measures on September 8;
by a Treasury announcement on September 10 that until yearend no additional new money would be raised in the open market
by Government agencies and that there would be no sales of
participation certificates in that interval unless market conditions
warranted; and by the suggestion of the System's September 1
letter that banks would be under less pressure to liquidate
securities.
In contrast, markets for short-term securities remained under
strain, partly because of expectations that a large increase in
Treasury bill financing would be required over the remainder of
the year as a result of the change in Federal agency financing
plans. Money market conditions became quite taut late in the
period as the September tax and dividend dates approached.
Banks in the major money centers experienced deep basic reserve deficits. Posted rates on dealer loans again reached new
highs and, for the first time, some Federal funds transactions
occurred at a rate as high as 6V4 per cent. Yields on 3-month
Treasury bills advanced to about 5.30 per cent from a level
that was slightly below 5 per cent at the time of the preceding
meeting.
System open market operations continued to be directed toward keeping bank reserve positions under pressure, while at
the same time giving close attention to the unsettled conditions
that pervaded securities markets. Net borrowed reserves averaged $370 million in the three statement weeks ending September 7, compared with a revised figure of about $410 million in
the preceding 3 weeks. Member bank borrowing averaged $720
million in the latest period, down about $45 million from the
preceding 3 weeks.
The underlying international payments position of the United

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ANNUAL REPORT OF BOARD OF GOVERNORS

States remained one of substantial deficit; in July and August
together, the deficit was estimated at an annual rate of roughly
%2Vi billion to $3 billion on the "liquidity" basis. The trade
balance continued to deteriorate in July as imports increased
sharply further. Inflows of liquid funds through foreign branches
of U.S. banks kept U.S. payments in surplus in August on the
"official reserve transactions" basis, but the rate of inflow in
August was only about half that of July and appeared likely
to slacken further. In foreign exchange markets, sterling continued under intermittent pressure.
One view expressed in the course of the Committee's discussion was that recent trends in bank credit and other monetary
aggregates suggested that the degree of restraint resulting from
the Committee's earlier policy actions was substantially greater
than might have been thought, and that operations now might
well be directed toward seeking more nearly normal growth
rates. On the other hand, it was argued that a slowdown in bank
credit expansion that simply reflected the process of financial
"disintermediation" at banks (that is, shifts of depositor funds
out of bank time deposits and into credit market instruments in
response to relatively more attractive rates on the latter) need
not importantly affect total credit availability, even though the
distribution of total credit would undoubtedly be altered.
The Committee concluded that the current degree of monetary
restraint should be maintained unless unusual liquidity pressures
developed or there were significant deviations of bank credit
from its expected course. An overt change in policy toward
greater ease was considered undesirable at present in light of the
persistence of inflationary pressures. At the same time, a number
of factors were cited as militating against further intensification
of restraint; these included the fiscal measures proposed by the
President, the cumulating evidence that past monetary policy
actions were having substantial impact, the continuing strains in
markets for short-term securities, and the special pressures expected in financial markets over coming weeks.
178

FEDERAL RESERVE SYSTEM

It was noted that widely different levels of member bank borrowings and net borrowed reserves might be consistent with the
current degree of monetary restraint, depending on the intensity
of strains in financial markets and the extent to which banks
chose to make reserve adjustments with or without recourse to
the discount window under the terms of the System's September
1 letter. For this reason the Committee agreed that measures of
net reserve availability should be given subordinate importance
in operations and that the degree of restraint should be judged
primarily by general money market conditions.
The following current economic policy directive was issued
to the Federal Reserve Bank of New York:
The economic and financial developments reviewed at this meeting indicate that over-all domestic economic activity is expanding vigorously,
despite the substantial weakening in residential construction, with inflationary pressures persisting. Aggregate credit demands continue strong
and short-term financial markets remain under strain. The balance of payments continues to reflect a sizable underlying deficit. In this situation,
and in light of the new fiscal program announced by the President, it is
the Federal Open Market Committee's policy to resist inflationary pressures and to strengthen efforts to restore 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 but orderly conditions in the money market; provided, however, that
operations shall be modified in the light of unusual liquidity pressures or
of any apparently significant deviations of bank credit from current
expectations.
Votes for this action: Messrs. Martin,
Hayes, Bopp, Brimmer, Clay, Daane, Hickman, Irons, Maisel, Mitchell, Robertson, and
Shepardson. Votes against this action: None.
2. Ratification of amendment to authorization for System foreign currency
operations.

At this meeting the Committee ratified an action taken by
members on September 9, 1966, amending paragraph 2 of its

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authorization for System foreign currency operations to 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 with the following
foreign banks, which are among those designated by the Board of Governors of the Federal Reserve System under Section 214.5 of Regulation
N, Relations with Foreign Banks and Bankers, and with the approval of
the Committee to renew such arrangements on maturity:

Foreign bank

Amount of
Maximum
arrangement
period of
(millions of
arrangement
dollars equivalent) (months)

100
150
500
1,350
100
400
600
450
150
100
200
200
200

Votes for ratification of this action: Messrs.
Martin, Hayes, Bopp, Brimmer, Clay, Daane,
Hickman, Irons, Maisel, Mitchell, and Shepardson. Votes against ratification of this
action: None.

180

12
12
12
12
3
6
12
12
3
12
6

FEDERAL RESERVE SYSTEM

This action increased the authorized amounts of the System's
swap arrangements with most of the foreign banks with which
such arrangements were maintained, for the purpose of providing a broader margin of safety for the stability of the international monetary system. The increases raised the aggregate size
of the network to $4.5 billion from $2.8 billion.
At its preceding meeting the Committee had authorized the
Special Manager of the System Open Market Account to undertake negotiations looking toward an enlargement of the swap
network, subject to notification by the Secretary of the Treasury
to the Chairman or Acting Chairman of the Board that the
proposed program was fully consistent with U.S. international
financial policy at this time. Following receipt of such notification by the Acting Chairman of the Board and advice from the
Special Manager that preliminary discussions had been completed with the foreign banks involved, Committee members approved the amendment to the authorization. In addition to the
revisions of the dollar amounts of individual arrangements,
shown in the second column of the table contained in the affected paragraph, the caption to the third column was modified
by adding the word "maximum" before the words "period of
arrangement." This change was made to permit different maturities, not exceeding those indicated, to be employed for different portions of individual arrangements.

October 4, 1966
Authority to effect transactions in System Account.

GNP rose more in the third quarter than in the second, according to tentative staff estimates, as defense expenditures accelerated sharply. About half of the third-quarter rise in GNP
apparently reflected higher prices. Further sizable increases in
both defense spending and business capital outlays appeared

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ANNUAL REPORT OF BOARD OF GOVERNORS

probable in the fourth quarter—suggesting another large gain in
GNP and continuing pressures on available manpower and plant
resources. Wage rates were advancing more rapidly than earlier,
and rising costs seemed likely to reinforce the effects of strong
demands on prices.
While business activity continued to expand vigorously, sentiment appeared less ebullient than earlier, and signs of growing
economic imbalance raised some uncertainties about the longerrun outlook. Average prices of common stocks, which had rallied
in early September, later declined again. Residential construction
activity continued to contract in August as the supply of mortgage funds remained highly limited; private nonresidential building also had declined appreciably in recent months. Some of an
unusually large increase in manufacturers' inventories in July
and August was probably involuntary; stock-sales ratios rose
abruptly, and a Commerce Department survey of anticipations
suggested a sharp drop in the growth of inventories in the fourth
quarter.
The money supply, which had declined in July and August,
was estimated to have risen at an annual rate of about 7 per cent
in September. Total time and savings deposits of commercial
banks increased much less than in preceding months as a substantial run-off occurred in negotiable CD's outstanding. Estimates indicated that growth in business loans was smaller than
expected and considerably below the average rate of recent
months—perhaps because of both restrictive lending policies of
banks and lighter demands than anticipated. Daily-average
figures on member bank deposits implied little change in total
bank credit in September, and required reserves appeared to
have declined slightly.
Business loan demand was expected to be strong in October,
partly because cash needs would again be increased by accelerated payments of withheld Federal taxes. Reflecting this expectation, staff projections suggested resumed growth in daily-average
member bank deposits—the "bank credit proxy"—at an annual
rate of perhaps 5 or 6 per cent, and a more rapid increase in
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FEDERAL RESERVE SYSTEM

required reserves. The projections allowed for a rise in Government and private demand deposits, the former as a result of an
anticipated Treasury financing. Little or no increase was anticipated in total time and savings deposits, however, partly because
further substantial run-offs of negotiable' CD's were expected.
Also, it appeared that banks would be in a slightly less favorable
position than formerly in competing for other time deposits under
the new ceiling rates that had been established for various depositary institutions in late September, following enactment of
new legislation.
The strains evident in short-term financial markets at the time
of the preceding meeting of the Committee continued through
the mid-September tax and dividend dates, and the yield on
3-month Treasury bills rose by about 30 basis points further to a
peak of 5.59 per cent. Subsequently, however, the atmosphere
improved considerably, and the 3-month bill yield fell below 5.35
per cent. Federal funds rates and posted rates on dealer loans
also moved down.
Yields on long-term securities had fluctuated widely in recent
weeks, first rising and then declining in response chiefly to shifting expectations regarding fiscal and monetary policy and changing assessments of the buoyancy of the economy and the prospects for peace in Vietnam. On the whole, however, long-term
yields remained significantly below their late-August levels and
showed little net change over the interval. The volume of new
corporate bond flotations in September was somewhat lower
than had been anticipated, and the calendar for October was
smaller than offerings in September, although larger than those
of October 1965. On the other hand, the Treasury was expected
to be making heavy demands on capital markets over the rest of
the year, with gross new borrowings of perhaps $8 billion. An
announcement of an auction of $3 billion to $3Vi billion in
tax-anticipation bills, to be held around mid-October, was
anticipated shortly; and the terms of the Treasury's November
refunding, in which some new money probably also would be
raised, were expected to be announced near the end of October.

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ANNUAL REPORT OF BOARD OF GOVERNORS

System open market operations over most of the recent period
were directed toward absorbing reserves supplied by movements
in market factors, but day-to-day operations were conditioned
by the shifting market atmosphere. Thus, only a moderate
amount of reserves was absorbed early in the period, when shortterm markets were under strain, but reserve absorption was
stepped up later when market conditions became more comfortable. As a result, weekly-average figures for net borrowed
reserves fluctuated over a wide range—from about $190 million
to $570 million—with the bulk of the fluctuation occurring in
excess reserve positions of country banks. For September as a
whole, net borrowed reserves averaged about $375 million, a
little less than the August average; member bank borrowings, at
$765 million, were slightly above those of August.
The U.S. balance of payments in the third quarter was tentatively estimated to have been in deficit at a seasonally adjusted
annual rate of about $2 billion on the "liquidity" basis of calculation. However, a substantial surplus was recorded on the "official reserve transactions" basis. The divergence in the two
measures was a consequence primarily of the substantial inflows
of liquid funds through foreign branches of U.S. banks. The
surplus on merchandise trade, which had declined markedly in
the second quarter, fell further in the third quarter as imports
increased more rapidly than exports.
Committee members differed somewhat in their assessments of
the various elements in the economic outlook. Some stressed the
implications of rising defense expenditures for the course of
over-all developments and the persistence of inflationary pressures, while others placed greater emphasis on the evidences of
recent and prospective weakening in the expansion of aggregate
private demands.
The Committee agreed, however, that no change in policy
should be made at this time, both because the economic situation at present did not appear to warrant an overt move in
either direction and because Treasury financing activity was im184

FEDERAL RESERVE SYSTEM

minent. The desirability of encouraging moderate expansion in
bank credit was noted, and it was agreed that account should
be taken in open market operations of any apparently significant
deviations of bank credit growth from current expectations.
The following current economic policy directive was issued
to the Federal Reserve Bank of New York:
The economic and financial developments reviewed at this meeting indicate that over-all domestic economic activity is expanding vigorously,
despite the substantial weakening in residential construction, uncertainties
in equity markets, and a sharp increase in business inventories. Inflationary
pressures are persisting and aggregate credit demands still remain strong.
The balance of payments continues to show a sizable liquidity deficit. In
this situation, and in light of the new fiscal program announced by the
President, it is the Federal Open Market Committee's policy to resist
inflationary pressures and to continue efforts to restore reasonable
equilibrium in the country's balance of payments.
To implement this policy, and taking account of forthcoming Treasury
financings, System open market operations until the next meeting of the
Committee shall be conducted with a view to maintaining firm but orderly
conditions in the money market; provided, however, that operations shall
be modified in the light of unusual liquidity pressures or of any apparently
significant deviations of bank credit from current expectations.
Votes for this action: Messrs. Martin,
Hayes, Bopp, Brimmer, Clay, Daane, Hickman, Irons, Maisel, Mitchell, Robertson, and
Shepardson. Votes against this action: None.

November 1, 1966
1. Authority to effect transactions in System Account.

Reports at this meeting indicated that economic activity was
continuing to expand under the stimulus of rising defense expenditures, although moderating tendencies were appearing in
some sectors of the private economy. The outlook was clouded
by uncertainties relating to Vietnam and to prospects for fiscal
policy actions in addition to the temporary suspension, approved

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ANNUAL REPORT OF BOARD OF GOVERNORS

by Congress in late October, of the 7 per cent investment tax
credit and accelerated depreciation allowances.
Preliminary figures of the Commerce Department indicated
that growth in GNP had stepped up to about a $14 billion rate in
the third quarter from $11 billion in the second, despite the
sharp contraction in residential construction that brought housing starts in September down nearly to the recession trough of
December 1960. The capacity utilization rate in manufacturing
remained high, shortages of skilled workers persisted, and the
unemployment rate continued low—3.8 per cent in September,
little changed from the August figure of 3.9 per cent. A large
increase in orders to defense-related industries in September
implied that defense spending would continue to rise rapidly,
and tentative staff estimates suggested that the faster pace of
GNP growth of the third quarter would be maintained in the
fourth.
The evidences of moderating tendencies in private demands
included slight declines in retail sales in September and early
October and lack of growth in both industrial production and
nonfarm employment in September. In addition, recent private
surveys of business plans suggested a marked slowing of growth
in spending on plant and equipment in 1967.
Prices of industrial commodities remained generally stable in
September, as further declines in prices of sensitive materials
and some consumer appliances continued to offset increases in
machinery and equipment and other metal products. Consumer
prices rose slightly more than seasonally, partly because of continued rapid increases in the prices of services. Average hourly
earnings of manufacturing employees were advancing faster than
they had earlier, reflecting cost-of-living adjustments and the
larger wage increases provided by contracts recently negotiated.
Both the money supply and total time and savings deposits
of commercial banks appeared to have declined in October, the
latter partly because of another sizable run-off in negotiable
CD's. Commercial bank credit was estimated to have changed
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FEDERAL RESERVE SYSTEM

little between the last Wednesdays of September and October;
the step-up in business loan growth was smaller than expected,
and banks liquidated a large volume of Government securities.
With both demand and time deposits weaker than anticipated,
the "bank credit proxy"—daily-average member bank deposits—
declined at an annual rate of about 3 per cent in October in
contrast with the earlier expectation of growth. Required reserves of member banks also fell short of expectations.
Staff projections for November suggested some further decline
in member bank deposits—at perhaps a 2 per cent annual rate—
and a slight reduction in required reserves. The projections allowed for continued run-offs in outstanding CD's, but at a slower
rate than in September and October. Some reduction in the rate
of business loan expansion was expected, mainly because corporate payments of withheld taxes normally made in November
had been shifted into October.
Recent System open market operations were directed at maintaining generally steady but somewhat less firm conditions in the
money market, in view of the lack of growth in bank credit. Net
borrowed reserves averaged about $340 million in the last 2
weeks of October, compared with $495 million earlier in the
month and $390 million (revised) in September. Member bank
borrowings also declined in the second half of October, although
the average for the month was about the same as in September.
Yields on 3-month Treasury bills declined by about 10 basis
points on balance to 5.22 per cent on the day before this meeting, and various other short-term rates had edged down since the
preceding meeting. Yields on long-term securities had also declined, with those on Treasury bonds reaching their lowest levels
since June.
The Treasury raised $3.5 billion of new cash in mid-October
through an auction of tax-anticipation bills, and subscription
books for the November refunding were open on the day of this
meeting. The refunding involved a cash offering of $2.5 billion
of 5% per cent 15-month notes and $1.6 billion of 5% per cent

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ANNUAL REPORT OF BOARD OF GOVERNORS

5-year notes, to replace $4.1 billion of maturing obligations, of
which $3.2 billion were held by the public.
The third-quarter deficit in the U.S. balance of payments on
the "liquidity" basis was now estimated to have been at an
annual rate of less than $1 billion. The revision from the earlier
estimate of about $2 billion reflected special receipts at the end
of September—consisting of foreign official debt prepayments
and purchases of nominally nonliquid assets—rather than any
fundamental change in underlying payments conditions. The inflows of liquid funds through foreign branches of U.S. banks,
which had been extremely large in the third quarter, continued in
October on a reduced, although still sizable, scale.
Committee members agreed that the recent tendency towards
somewhat less firmness that had been allowed to develop in the
absence of bank credit expansion was appropriate. The Committee concluded that the current Treasury financing precluded
a marked shift in policy at present and that generally steady
conditions in the money market should be sought. Most members felt that a significant change in policy was not warranted
pending clarification of the outlook for the Federal budget and
further evidence on the likely strength of private demands, although some members expressed concern about the risks of overstaying a policy of restraint in view of recent moderating tendencies in some sectors of the private economy. The Committee
agreed that it would be desirable to foster expansion in bank
credit at a moderate pace and that open market operations should
be modified, insofar as feasible given the Treasury financing, if
bank credit were either declining further or rising at an unduly
rapid rate.
The following current economic policy directive was issued to
the Federal Reserve Bank of New York:
The economic and financial developments reviewed at this meeting indicate that over-all domestic economic activity is continuing to expand with
sharply rising defense expenditures but some evidences of moderating
tendencies in sectors of the private economy. While prices of some

188

FEDERAL RESERVE SYSTEM

materials have declined recently, upward demand and cost pressures persist for many finished goods and services. Bank credit expansion has
slackened. Earlier strains in financial markets have abated and certain
fiscal policy measures have recently been enacted by the Congress. The
balance of payments remains a serious problem. In this situation, it is the
Federal Open Market Committee's policy to maintain money and credit
conditions conducive to the restraint of inflationary pressures and progress toward reasonable equilibrium in the country's balance of payments.
To implement this policy, and taking account of the current Treasury
financing, System open market operations until the next meeting of the
Committee shall be conducted with a view to maintaining generally steady
conditions in the money market; provided, however, that operations shall
be modified, insofar as the Treasury financing permits, in the light of bank
credit developments during the month.
Votes for this action: Messrs. Martin,
Hayes, Bopp, Brimmer, Clay, Daane, Hickman, Irons, Maisel, Mitchell, Robertson, and
Shepardson. Votes against this action: None.
2. Amendment of continuing authority directive.

The Committee amended Section l ( c ) of the continuing authority directive to the Federal Reserve Bank of New York to
authorize repurchase agreements in obligations of U.S. Government agencies. Previously, repurchase agreements had been
authorized only in U.S. Government securities and bankers'
acceptances. With this amendment, Section 1 (c) read as follows:
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

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ANNUAL REPORT OF BOARD OF GOVERNORS

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.
Votes for this action: Messrs. Martin,
Hayes, Bopp, Brimmer, Clay, Daane, Hickman, Irons, Maisel, Mitchell, Robertson, and
Shepardson. Votes against this action: None.

Section 6 of Public Law 89-597, enacted in late September,
amended Section 14(b) of the Federal Reserve Act to authorize
the Reserve Banks "To buy and sell in the open market, under
the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully
guaranteed as to principal and interest by, any agency of the
United States." The amendment of the continuing authority
directive was made pursuant to that legislation, after the Account
Manager indicated that he would consider repurchase agreements in agency issues to be a useful addition to the tools presently available for reserve management. It was agreed to postpone a decision regarding authorization of outright transactions
in agency issues pending further study of their potential value
in implementing monetary policy objectives.
November 22, 1966
1. Authority to effect transactions in System Account.

Evidences of moderating tendencies in the pace of business
expansion were increasing. The Commerce Department had reduced its estimate of GNP for the third quarter and now indicated an increase only about $1 billion larger than that for the
second quarter. Staff projections of fourth-quarter growth in
GNP also had been lowered somewhat, primarily because of a
downward revision in the estimate for consumer expenditures.
Substantial gains in defense spending and business fixed investment were still projected for the fourth quarter.
Industrial production rose relatively little in October after
190

FEDERAL RESERVE SYSTEM

remaining stable in September, and with manufacturing capacity
continuing to expand, the plant utilization rate apparently edged
down. Total retail sales were about unchanged in October as
declines at automobile dealers and other durable goods stores
offset advances at nondurable goods stores. Housing starts
dropped sharply further to the lowest level since World War II.
Expansion in nonfarm employment resumed, however, and labor
market conditions continued tight. The unemployment rate, at
3.9 per cent, was little different from the 3.8 per cent rate of
September, and the average workweek in manufacturing continued close to the postwar peak.
The wholesale price index declined in October as a result of
a substantial drop for foodstuffs. Average prices of industrial
commodities, which had been stable for several months, continued unchanged in October and were about 2 per cent above
a year earlier. The progressive decline in sensitive materials
prices, which offset increases in prices of finished industrial
products, seemed to be tapering off, however, and labor costs
were rising as the pattern of larger wage increases continued.
For both reasons average industrial prices appeared likely to
begin rising again, although perhaps at a slower pace than early
in the year.
The money supply declined in October by somewhat more
than had been estimated earlier. Since April the money supply
had fallen on balance at an annual rate of about 1.5 per cent.
Commercial bank credit, on a last-Wednesday-of-the-month
basis, was now estimated to have contracted further in October
after declining on balance over the two preceding months.
Growth in business loans slackened to an annual rate of about 7
per cent in the 3 months ending in October, from 21 per cent in
the first 7 months of the year and more than 18 per cent in 1965
as a whole.
New staff projections for daily-average member bank deposits
—the "bank credit proxy"—suggested a decline at an annual
rate of 3 per cent in November, slightly more than anticipated

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ANNUAL REPORT OF BOARD OF GOVERNORS

3 weeks earlier. Private demand deposits appeared to be expanding less rapidly than expected as loan growth weakened, and
Government deposits at banks appeared to be declining somewhat more rapidly than anticipated. Some further decline in
member bank deposits seemed likely in December, if money
market conditions remained unchanged, as a result of continuing run-offs of negotiable CD's and reductions in Government
balances. Treasury deposits at both commercial banks and Federal Reserve Banks were expected to reach relatively low levels
by midmonth, perhaps requiring the Treasury to borrow directly
from the Federal Reserve for short periods.
Yields on long-term bonds moved higher over the first 3 weeks
of November, partly as a result of substantial additions to the
calendar of prospective new corporate and municipal bond offerings. Long-term yields also were affected by press reports that
the Federal National Mortgage Association might resume sales
of participation certificates before the end of the year and by
continuing uncertainties regarding the prospects for further fiscal
measures.
System open market operations since the preceding meeting of
the Committee had been directed at maintaining steady conditions
in the money market while the distribution of securities issued
in the Treasury's November refinancing was under way. Pressures
on reserve positions of central money market banks developed
early in November partly as a result of a marked shift in reserves
toward-other banks. Rates on Federal funds and dealer loans
advanced, and 3-month Treasury bill yields rose by about 20
basis points to around 5.45 per cent at midmonth. In view of
the pressures in the central money market and of the relatively
weak performance of bank credit, the Federal Reserve provided
a large volume of reserves through open market operations early
in the period, expanding net reserve availability somewhat. Net
borrowed reserves averaged about $230 million in the two
statement weeks ending November 16, compared with $340
million in the two preceding weeks and $430 million in October.
192

FEDERAL RESERVE SYSTEM

The pressures eased after midmonth, and by the date of this
meeting Treasury bill yields and money market rates had fallen
back to about their levels of 3 weeks earlier.
The U.S. balance of payments in the first 9 months of 1966
was estimated to have been in deficit at an annual rate of about
$1.2 billion on the "liquidity" basis, and to have been in surplus
at a rate of $0.8 billion on the "official reserve transactions"
basis. Preliminary data suggested that the liquidity deficit in
October and early November was at a rate of roughly $2 billion,
about the same as would have been recorded earlier in the year
in the absence of shifts of foreign official funds from liquid to
nonliquid form. Inflows of liquid funds through foreign branches
of U.S. banks accelerated sharply in late October and early
November; in the 4 weeks ending November 9 they were at a
rate approaching the July peak, although some reflow occurred
in the following week. With net inflows of liquid funds thus
continuing large, the balance on the official reserve transactions
basis apparently remained near zero early in the fourth quarter.
A cessation, and possibly a reversal, of those flows seemed likely
in coming weeks as a result of year-end seasonal pressures in
the Euro-dollar market.
In the Committee's discussion it was noted that the appropriate course for monetary policy over the coming months would
depend importantly on the nature of fiscal policy actions. The
Committee concluded, however, that an overt, although modest
and gradual, lessening of monetary restraint was warranted at
present in view of the evidences of moderating tendencies in
private demands and the recent lack of expansion in bank credit
and money. Accordingly, it was agreed that somewhat easier
money market conditions should be sought unless bank credit
expansion became unduly rapid.
The following current economic policy directive was issued
to the Federal Reserve Bank of New York:
The economic and financial developments reviewed at this meeting indicate that over-all domestic economic activity is continuing to expand, with

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ANNUAL REPORT OF BOARD OF GOVERNORS

sharply rising defense expenditures but with evidences of moderating
tendencies in various sectors of the private economy. While there has been
some slowing in the pace of advance of broad price measures, upward
price pressures persist for many finished goods and services. Bank credit
and money have shown no expansion in recent months. Long-term interest
rates have again risen somewhat after declining from their late summer
peaks. The balance of payments remains a serious problem. In this situation, it is the Federal Open Market Committee's policy to maintain
money and credit conditions conducive to noninflationary economic
expansion and progress toward reasonable equilibrium in the country's
balance of payments.
To implement this policy, System open market operations until the next
meeting of the Committee shall be conducted with a view to attaining
somewhat easier conditions in the money market, unless bank credit
appears to be resuming a rapid rate of expansion.
Votes for this action: Messrs. Martin, Bopp,
Brimmer, Clay, Hickman, Irons, Maisel,
Mitchell, Robertson, and Shepardson. Votes
against this action: Messrs. Hayes and Daane.

In dissenting from this action, Messrs. Hayes and Daane,
recognizing the less rapid pace of expansion in the private sector
of the economy, indicated that they would have preferred to
maintain the somewhat easier money market conditions already
prevailing at the time of this meeting and to resolve doubts on
the side of ease. In their judgment, with defense expenditures
apparently continuing to rise rapidly, inflation—both demandpull and cost-push—remained a serious threat to both the
domestic economy and the U.S. balance of payments in which
the trade balance was a crucial element. Furthermore, they felt
that any premature pronounced easing could bring about adverse
effects on capital outflows. Hence, they deemed it unwise to shift
more overtly to a posture of less monetary restraint at this time,
particularly in advance of more concrete information on Federal
taxes and expenditures.
2. Amendment of continuing authority directive.
The Committee amended Section 2 of the continuing authority directive to the Federal Reserve Bank of New York to
194

FEDERAL RESERVE SYSTEM

increase, from $500 million to $1 billion, the dollar limit on
special short-term certificates of indebtedness purchased directly
from the Treasury that might be held by the Federal Reserve
Banks at any one time. With this amendment, Section 2 read as
follows:
The Federal Open Market Committee authorizes and directs the Federal
Reserve Bank of New York to purchase directly from the Treasury for the
account of the Federal Reserve Bank of New York (with discretion, in
cases where it seems desirable, to issue participations to one or more
Federal Reserve Banks) such amounts of special short-term certificates of
indebtedness as may be necessary from time to time for the temporary
accommodation of the Treasury; provided that the rate charged on such
certificates shall be a rate VA of 1 per cent below the discount rate of the
Federal Reserve Bank of New York at the time of such purchases, and
provided further that the total amount of such certificates held at any one
time by the Federal Reserve Banks shall not exceed $1 billion.
Votes for this action: Messrs. Martin,
Hayes, Bopp, Brimmer, Clay, Daane, Hickman, Irons, Maisel, Mitchell, Robertson, and
Shepardson. Votes against this action: None.

This action was taken after the Account Manager reported
that the amount the Treasury might have to borrow directly from
the Federal Reserve Banks in December was highly uncertain
and that it appeared at least possible that the amount might be
somewhat in excess of the $500 million limit previously specified.
December 13, 1966
Authority to effect transactions in System Account.
Additional indications that the pace of economic expansion
was moderating were reported at this meeting. Growth was slowing in business capital expenditures and apparently in Federal
defense outlays. Expansion in consumer spending also was
slackening, despite continued rapid gains in nonfarm employment through November and a dip in the unemployment rate to
3.7 per cent from 3.9 per cent in October. Staff projections of

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ANNUAL REPORT OF BOARD OF GOVERNORS

GNP growth in the fourth quarter had again been reduced
somewhat.
A Commerce Department-SEC survey taken in late October
and November indicated that business expenditures on plant and
equipment had been somewhat lower in the third quarter than
estimated earlier, and that outlays planned for the fourth quarter
had been reduced appreciably—the first significant downward
revision in capital spending plans in 3 years. Plans for the first
half of 1967 implied an increase less than one-third the size of
the large gain actually recorded in the corresponding half of
1966. While estimates of current and prospective defense expenditures were conjectural, the best available evidence suggested continued sizable increases in the fourth quarter of 1966
and the first quarter of 1967, but at rates progressively slower
than the extraordinarily rapid rate of the third quarter of 1966.
The proportions of consumers planning to buy automobiles
and major appliances within 6 months were significantly lower
in mid-October than a year earlier, according to a Census Bureau
survey. Retail sales, which had changed little in September and
October, declined by 1 per cent in November according to preliminary data, mainly because of a 5 per cent reduction in sales
at automobile dealers. Retail inventories rose sharply in October,
and manufacturers of automobiles and some other consumer
durable goods subsequently announced production cutbacks.
With output of steel and construction materials also declining,
the industrial production index for November was tentatively
estimated at only slightly above its August-September average.
The rate of housing starts was likely to be lower in the fourth
quarter as a whole than in the third, although not so low as in
October. It appeared that the extended decline in residential
construction might taper off in the first quarter of 1967; if so,
this would provide some offset to the slowing of growth foreseen
for other categories of demand.
The consumer price index rose in October at the substantial
pace of the preceding 4 months, with prices of services continu196

FEDERAL RESERVE SYSTEM

ing to increase rapidly. It was likely that a smaller increase
would be shown in the consumer index for November, as earlier
declines in wholesale prices of foodstuffs carried over to retail
prices. At the wholesale level, on the other hand, the declines in
prices of both foodstuffs and sensitive materials appeared to be
leveling off after the end of October, and industrial commodities
were under upward pressure from rising labor costs.
The money supply declined further on the average from October to November, but turned up after mid-November as Government deposits were drawn down. With the run-off of negotiable CD's at banks slackening to less than half the SeptemberOctober rate, total time and savings deposits increased slightly.
Daily-average member bank deposits—the "bank credit proxy"
—declined at an annual rate of about 5 per cent from October
to November, somewhat more than expected earlier. On a lastWednesday-of-the-month basis, bank credit rose slightly in November because of bank acquisitions of tax-anticipation bills
issued by the Treasury late in the month. Bank holdings of other
securities declined, and loan volume was unchanged on balance.
New staff projections for December suggested that member
bank deposits would show relatively little increase from November if money market conditions remained unchanged. Total time
and savings deposits were expected to grow slightly, despite
anticipated further attrition in outstanding CD's at a rate probably somewhat above that of November. Private demand deposits and the money supply were expected to continue rising as
Government deposits were reduced further. On Friday, December 9, the Treasury replenished its cash balances by selling a
special certificate of indebtedness in the amount of $169 million
to the Federal Reserve. The certificate was redeemed 3 days
later.
System open market operations since the preceding meeting
of the Committee had been directed at attaining somewhat easier
conditions in the money market. A substantial volume of reserves was provided through outright purchases of Treasury bills

197

ANNUAL REPORT OF BOARD OF GOVERNORS

and through repurchase agreements with nonbank dealers, including some repurchase agreements involving obligations of
Federal agencies as authorized by the Committee on November
1. Various money market rates moved lower, partly as a result
of System operations and of market interpretations that these
operations reflected a shift of monetary policy in the direction
of less restraint. The 3-month Treasury bill rate declined by
nearly 20 basis points, to 5.03 per cent on the day before this
meeting. Long-term interest rates also edged down, despite increased current and prospective borrowing by corporations and
State and local governments and market expectations of a sale
of participation certificates by the Federal National Mortgage
Association.
The deficit in the U.S. balance of payments on the "liquidity"
basis was relatively large in October and November, and the
balance on official reserve transactions reverted to deficit from
the surplus recorded in the third quarter. It was likely that the
liquidity balance would improve in December, particularly if
British debt service payments were not waived—as they had
been in the two prior years—and if an expected payment under
the German military offset agreement were made before the end
of the year. The December balance on official reserve transactions could depend heavily on the changes in liabilities of U.S.
banks to their foreign branches; if these liabilities declined toward the year-end, as they had in earlier years, the deficit incurred in the fourth quarter could be enlarged. Such liabilities
had fluctuated widely in November and early December, but had
increased on balance.
Guidelines and targets for 1967 in the President's voluntary
program to improve the nation's balance of payments were announced on the day of this meeting by the Board of Governors
and the Department of Commerce. The Federal Reserve guidelines for banks retained the existing ceiling for outstanding foreign assets, but banks were asked to limit the rate at which they
used their leeway under the ceiling. Nonbank financial institu198

FEDERAL RESERVE SYSTEM

tions were asked to limit the increases in covered assets to 5 per
cent over the period from September 1966 through December
1967. The new target formula set by the Department of Commerce for corporations' direct investment transactions was designed to keep the total net outflow on direct investments in
1967 close to the volume presently expected for 1966.
The Committee concluded that the additional evidence of
moderation in the pace of the business expansion confirmed the
appropriateness of the decision at the preceding meeting to
relax monetary restraint somewhat, and a majority of the members thought that some further relaxation would be desirable at
present in light of both the outlook for slower economic growth
and the persisting lack of expansion in bank credit. While it was
agreed that the balance of payments continued to pose a serious
problem, the view was expressed that the voluntary program in
that area, as extended, would serve to enlarge the scope for
adaptation of monetary policy to developments taking place in
the domestic economy.
Within the majority favoring further relaxation of monetary
restraint there were divergent views regarding the manner in
which the goals for open market operations over the next 4
weeks might best be specified in the current economic policy
directive to be issued to the Federal Reserve Bank of New York.
One group suggested specifying the objective of operations in
terms of attaining moderate expansion in the money supply and
bank credit, noting that relatively vigorous operations might
possibly be required to achieve that goal under present circumstances. Another group favored continuing the approach initiated
at the preceding meeting, by calling again for somewhat easier
conditions in the money market unless bank credit expansion
became unduly rapid. At the conclusion of the discussion, however, the members of both groups joined in voting for the following current economic policy directive:
The economic and financial developments reviewed at this meeting indicate that over-all domestic economic activity is continuing to expand, with

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ANNUAL REPORT OF BOARD OF GOVERNORS

rising defense expenditures but with additional evidences of moderating
tendencies in the private economy. While there has been some slowing in
the pace of advance of most broad price measures, upward price pressures
persist for many finished goods and services. Bank credit and money have
shown no net expansion in recent months. Although demands on bond
markets have increased, upward pressures on long-term interest rates have
moderated. The balance of payments remains a serious problem. In this
situation, it is the Federal Open Market Committee's policy to foster
money and credit conditions conducive to noninflationary economic
expansion and progress toward reasonable equilibrium in the country's
balance of payments.
To implement this policy, System open market operations until the
next meeting of the Committee shall be conducted with a view to attaining
somewhat easier conditions in the money market, unless bank credit
appears to be resuming a rapid rate of expansion.
Votes for this action: Messrs. Martin, Brimmer, Clay, Hickman, Maisel, Mitchell, Robertson, and Wayne. Votes against this action:
Messrs. Hayes, Daane, Irons, and Shepardson.

The members dissenting from this action favored maintaining the easier money market conditions achieved under the
approach initiated at the preceding meeting, but not actively
seeking further easing of conditions at this time. While the
emphasis on particular factors varied, they generally stressed
the underlying strength of the economy and their continuing
concern about the balance of payments situation. They also
voiced concern about recent and prospective cost and price
developments. Despite the recent evidences of slower growth,
the private sector of the economy did not appear to them as
fundamentally weak and there were expansionary forces in the
public sector. They thought, therefore, that the possibility of a
reappearance of general strength and resurgence of pressures
could not be ruled out.
Dissenting members were skeptical that defense spending
would decelerate and emphasized that the continuing uncertainties regarding fiscal policy were grounds for proceeding cautiously in making monetary policy changes. Caution was par200

FEDERAL RESERVE SYSTEM

ticularly called for, in their view, because of the possible threat
to the balance of payments from any deterioration in the capital
account. The voluntary guidelines did not appear to provide full
safeguard against such outflows.
Furthermore, it was noted that there were indications that
the money supply had begun growing again in recent weeks.
Efforts of banks to improve their liquidity positions before expanding loans and investments might have accounted for the
seeming lack of response of bank credit thus far to the easing of
monetary restraint already accomplished. The latter view was
shared by some members of the majority.

201

ANNUAL REPORT OF BOARD OF GOVERNORS

OPERATIONS OF THE SYSTEM OPEN MARKET ACCOUNT

The following two reports describe the actions taken during
1966 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 0>pen Market
Account, who supervises the Federal Reserve's operations in such
currencies. The Federal Reserve has been buying and selling
foreign currencies since early 1962 as part of the efforts to defend the dollar and strengthen the world payments system. All
of these operations for the System Account are carried out,
under the authorization of the Federal Open Market Committee, by the Federal Reserve Bank of New York, which also
handles foreign currency transactions for the U.S. Treasury.
The report on operations in foreign currencies begins on
page 269.

202

FEDERAL RESERVE SYSTEM

REVIEW OF OPEN MARKET OPERATIONS
IN DOMESTIC SECURITIES

In broad terms, the objectives of open market operations
passed through five phases during the year 1966. Operations were
directed first at moderating the adjustment of financial markets
to the increase in the discount rate in December 1965. Then
they were used to bring steadily increasing pressure on bank
reserve positions in order to restrict the growth of the reserve
base, bank credit, and the money supply in the face of mounting
inflationary pressures in an overheated economy. Later on, as the
effects of earlier steps took hold, the objective was to maintain
firm but orderly conditions in the money market, while moderating
the unusual liquidity pressures that were prevailing in a market
atmosphere of considerable uncertainty. Operations toward the
end of the year permitted some relaxation of the pressure on
banks reserve positions, and finally, after a while, sought a modest
but overt easing in money market conditions and a resumption
of growth in the money and credit aggregates amid signs of
moderating tendencies in some sectors of the economy.
The heavy burden placed on monetary policy to counter
inflationary pressures during the year—in the absence of greater
fiscal restraint on spending and incomes—led to considerable
stresses and strains on financial institutions and markets, and
these strains in turn often complicated the conduct of System
operations. In late August interest rates mounted to the highest
levels in 40 years, and fears of a market crisis began to be
expressed by some participants. While these fears were exaggerated, it was necessary to take them into account in the conduct
of open market operations. The fears subsided after further
restrictive fiscal actions were proposed in September. By the end
of the year, many interest rates had returned to levels near those
existing at the start of the year, a better atmosphere prevailed in
financial markets, and a resumption of bank credit expansion
appeared to be under way.

203

ANNUAL REPORT OF BOARD OF GOVERNORS

In carrying out open market operations in the economic and
financial environment that prevailed in 1966, several innovations
were made, and considerable flexibility was required. An innovation in early May involved the addition of a "proviso clause" to
the content of the Federal Open Market Committee's current
policy directive, instructing the Manager of the System Open
Market Account to make some modifications in operations in
the light of cumulating evidence of developments in required
reserves or bank credit. In early July, when very unsettled conditions prevailed in the Treasury bill market and an airlines strike
added suddenly to the supply of reserves by increasing float, the
System introduced a new operating technique of "matched salepurchase transactions" to absorb reserves on a temporary basis
with as little impact on the general market atmosphere as possible. These transactions involved the sale by the System of
Treasury bills for immediate delivery and the simultaneous purchase of the same issues of bills at competitive prices for delivery
at a future date. This new technique was employed on a number
of other occasions during the year, and it proved to be an effective
means for the temporary absorption of reserves, somewhat akin
to the function performed by repurchase agreements in dealing
with temporary reserve needs. Finally, the Committee broadened
the avenues for reserve injections during the year by removing
the 2-year limitation on the maturity of Treasury securities that
might be purchased for the Open Market Account under repurchase agreements, and by authorizing—pursuant to new legislation—repurchase agreements against direct obligations of
Government agencies and obligations fully guaranteed by such
agencies.
On an over-all basis, including repurchase agreements and
matched transactions, the System bought and sold nearly $45.5
billion of securities during the year, with the net increase in
System holdings over the year amounting to $3.5 billion. (See
table on page 207.) These net purchases served to offset the drain
on reserves resulting from the continuing outflow of gold and the
204

FEDERAL RESERVE SYSTEM

rise in currency in circulation over the year. The purchases also
provided for an increase of $1.1 billion in the reserve base over
the year.
In describing the System's open market operations in 1966
in more detail, it is useful to divide the year into the following
five periods:
1. January 1-February 8: Transition to a Firmer Policy
Posture
2. February 9-June 7: Gradual but Steady Increase in Pressure on Bank Reserve Positions
3. June 8-September 13: Peaking of Financial Market
Pressures
4. September 14-November 22: Relaxation of Market
Tensions
5. November 23-December 31: Modest but Overt Move
Toward Ease
January 1-February 8: Transition to a firmer policy posture. The first
6 weeks of 1966 were a period of transition for Federal Reserve
open market operations. Economic activity and credit demands
were expanding vigorously, as a rapidly growing military effort
for the war in Vietnam was added to the strong demands of the
private sector. Capacity limits were being approached, inflationary pressures were increasing, and the outlook was for further
strength in economic activity and credit demands over the year
ahead.
In response to these forces the Federal Reserve had, in early
December 1965, raised the discount rate and the maximum permissible rates on time and savings deposits under Regulation Q.
During the weeks immediately following, open market operations
were directed at moderating the sharp upward adjustments in
interest rates that ensued and at preserving a generally "even
keel" situation while the Treasury conducted several sizable
financing operations. In this way, operations helped to accommo-

205

ANNUAL REPORT OF BOARD OF GOVERNORS

date the widely fluctuating seasonal pressures around the end
of the year, which—as it happened—were accentuated by a
transit strike in New York City.
These adjustments worked themselves out during the period
under review, and by early February open market operations had
restored average net borrowed reserves in the banking system to
approximately the level that prevailed before the increase in the
discount rate. Meanwhile, the Federal Open Market Committee
set the stage for a shift in its general policy stance by moving at
its January 11 meeting from a position of "accommodating
moderate growth in the reserve base, bank credit, and the money
supply," as had been the case throughout 1965, to "moderating
the growth" in these aggregate measures.
Implementing the Committee's objectives in the environment
of considerable market churning and of wide fluctuations in
various factors affecting reserve availability and distribution
—such as usually occur in the opening weeks of a new year—
involved a fairly large volume of open market operations over
the 6-week period. Gross outright purchases of Treasury bills
for the System Open Market Account over the period totaled
$1.4 billion, while gross sales and redemptions amounted to
$1.2 billion. In addition, $1.7 billion of Treasury issues were
purchased under repurchase agreements with nonbank securities
dealers, and $1.6 billion of such contracts matured or were withdrawn by the dealers. Operations in bankers' acceptances, also
relatively large during the period, were a useful supplement in
meeting the Committee's reserve objectives. In all, gross transactions by the System on an outright basis and under repurchase
agreements averaged more than $250 million a day during the
period; there were net purchases in the opening days of January,
net sales in the 2 weeks ended January 19, and net purchases
again in the final 3 weeks of the interval.

206

FEDERAL RESERVE SYSTEM

SYSTEM OPERATIONS IN GOVERNMENT SECURITIES DURING
(In millions of dollars)
Jan. 1Feb. 8

Feb. 9June 7

June 8Sept. 13

Sept. 14Nov. 22

Outright purchases:
Treasury bills:
From markei
From foreign accounts..
Coupon issues
Special certificate of indebtedness

784
629

3,381
466
2 254

14,769
767
185

i 2,764
326

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

677
287

2,210
524

i 3,570
500

12,185
344

228

524

257

664

Type of operation

Redemptions:
Treasury bills
Special certificate of indebtedness
Repurchase agreements:
Government securities:
Purchases
Sales...
Government agency
issues:
Purchases
Sales
Net change in holdings
Memorandum item:
Matched sale - and - purchase transactions:
Sales
Purchases

Nov. 23Dec. 31

1966

Total

963
327
35

112,661
2,515
2 474

169

169
i 8,642
1,655

+344

+431

716
716

1,021
1,021

+ 1,394

-103

2,836
2,836

1,220
1,220

169

4,779
4,153

9,756
9,419

197
163

1,499
1,911

2,176

169
1,741
1,618

503

197
163

+ 1,482

+3,548

4,056
4,056

1
See "Memorandum" item at bottom of table for amounts of matched sale-and-purchase transactions included in this total.
2 Includes $28 million from foreign accounts.
NOTE.—All figures are as of date of delivery.

The pattern of financial market developments that accompanied
these operations varied considerably over the period. On the one
hand, there was a continuing upward adjustment in many shortterm interest rates. Leapfrogging of rates on negotiable time
certificates of deposit (CD's) led the parade, as banks competed
aggressively for funds under the new, more liberal rate ceilings.
By the end of the period a 5V* per cent rate on deposits maturing
in more than a year was available at major New York City banks,
compared with a high of 4% per cent in late 1965. Offering rates
on 3-month CD's were up as much as 20 basis points to 5 per

207

ANNUAL REPORT OF BOARD OF GOVERNORS

cent. This upward ratcheting of rates on CD's, among other
things, contributed to a state of nervousness in the Treasury bill
market through much of the period, and the market rate on
3-month bills moved up by 15 basis points to 4.64 per cent bid
on February 8. Rates on bankers' acceptances and commercial
and financial paper rose by Vs of a percentage point.
In the money market, on the other hand, tautness in the first
2 weeks of the period, when the major money market banks had
very large basic reserve deficits, was followed by somewhat more
relaxed conditions in subsequent weeks as reserves shifted back
to the money centers. Although nationwide net borrowed reserves
gradually deepened to the levels prevailing prior to the change
in the discount rate, Federal funds were generally available in
sizable volume at rates of AV2 or 4% per cent—the same range
as in December. Member banks' borrowings from the Federal
Reserve fluctuated from week to week, but the daily average of
$440 million over the period as a whole was about the same as
the average in the last 2 months of 1965.
Finally, although demands for bank credit and capital market
financing proved considerably stronger than usual for that time
of year, these demands were met without major difficulty at the
higher rate levels that developed in the wake of the increase in
the discount rate. Outstanding business loans at commercial
banks declined by only about half as much as normal, and on a
seasonally adjusted basis total bank credit rose at an annual rate
of more than 12 per cent in January. In the capital markets, a
total of $5.5 billion of new cash was raised through sales of
corporate, municipal, Treasury coupon, and Government agency
issues in the first 6 weeks of the year. Despite these demands,
prices of most long-term securities rose for a time in January.
Although subsequent price declines in the final weeks of the
period more than erased the earlier gains, the atmosphere for
Treasury financing remained sufficiently promising through
January for the Treasury to seek and achieve a helpful lengthening of the debt in its February refunding. As the period drew to a
208

FEDERAL RESERVE SYSTEM

close, however, there was renewed concern over the tenability of
existing interest rates in the face of signs that still stronger credit
demands lay ahead.
System operations. Several developments complicated the conduct of open market operations as the period unfolded. The first
was a transit strike in New York City, which began on January 1
and for a time prevented many employees of banks and securities
firms in the city from getting to their offices. This made it difficult
for the banks to obtain accurate estimates of their reserve positions and tended to make them cautious in managing their
reserves, a situation which in turn made the System's evaluation
of underlying conditions in the money market more difficult. The
strike also impeded the consummation of securities transactions,
including those carried out by the System to inject and absorb
reserves, as only limited work forces were available for the
physical processing and delivery of the securities involved. To
ease some of the delivery problems, the New York Reserve Bank
requested on Monday, January 3, that dealers in Government
securities avoid making outright transactions for "cash" (that is,
same day) delivery for the duration of the strike.
The first several days of the strike coincided with a period of
reserve need by the banking system and an emerging tightness
in the money market. Heavy year-end demands for bank credit
persisted somewhat longer than expected into the new year. As
a result, banks in the major money centers, where much of the
demand often converges, continued to experience very deep basic
reserve deficits, which averaged more than 15 per cent of their
aggregate required reserves.
In injecting reserves to head off undue tightness in the market,
the System made extensive use of repurchase agreements and also
purchased large amounts of Treasury bills being sold by foreign
accounts. In all, these operations added $721 million of reserves
over the January 3-10 period and enabled the System to avoid
outright transactions in the market at the height of the strike
difficulties. The repurchase agreements also served to mitigate

209

ANNUAL REPORT OF BOARD OF GOVERNORS

the nervousness pervading the Treasury bill market and to moderate the upward pressure on short-term interest rates that stemmed
from the sharply higher dealer loan rates posted by the New York
City banks.
Conditions in the Treasury bill market increasingly complicated open market operations as January wore on. In this period,
the System had to shift from reserve-supplying to reserveabsorbing operations to offset movements in factors that were
releasing reserves—particularly the decline in required reserves
of member banks as some of the year-end bulge in loans and
deposits gradually was liquidated. Around this time, however,
dealers were reluctant buyers and aggressive sellers of bills, as
they reacted to the rise in rates on CD's, to high financing costs,
to the addition of $100 million to the volume of Treasury bills
sold in each weekly auction and the sale (after overallotments)
of more than $1.6 billion of Treasury certificates in a cash
financing on January 10, and finally, to the general difficulties
in trading securities before the New York City transit strike was
settled on January 13. In this environment the System proceeded
cautiously in absorbing reserves. Repurchase agreements with the
nonbank dealers were allowed to mature or be withdrawn without
replacement, and a small amount of bills was sold outright in
response to unsolicited dealer bids for scarce issues and directly
to foreign accounts. In addition, some of the System's holdings
of maturing bills were redeemed in the auction on January 10.
Because of this only gradual absorption of reserves, net reserve availability bulged to an average of $98 million of free
reserves in the week ended January 12 (see Chart 1). Net borrowed reserves in the preceding week had been deeper than expected—at $243 million. Even with the extra reserve availability,
money market conditions did not ease immediately. Major money
center banks moved into an even deeper basic reserve deficit position than earlier, and most of the extra reserve availability was
lodged in country banks, whose average excess reserves rose to a
very high level of $617 million in the January 12 statement week.
210

FEDERAL RESERVE SYSTEM

DECEMBER 29, 1965-FEBRUARY 9, 1966
Reserves and Borrowings

2.00

Member Bank Required Reserves

FEDERAL FUNDS

20-YEAR

2.00

TAX-EXEMPT BONDS

DEC

JANUARY

FEB

DEC

JANUARY

FEBRUARY

Finance company paper, offering rate. Treasury bills, daily bid rate.
Federal funds, effective rate. New corporate issues, Aaa basis.

In the following statement week, excess reserves accumulated
earlier by country banks did flow into the money centers, and
somewhat easier market conditions emerged. Not until the end
of that week, however, did the atmosphere in the bill market
improve sufficiently to permit large-scale sales of bills by the
System to absorb some of the redundant reserves. By then Treas-

211

ANNUAL REPORT OF BOARD OF GOVERNORS

ury bill rates had moved up to levels that dealers thought might
begin to attract greater investor demand. The average issuing
rate on 3-month bills auctioned on January 17 was at a record
(to that date) of 4.673 per cent, 22 basis points higher than the
rate in the final auction of December 1965.
Further sales of bills by the System toward the end of the
week ended January 26—after it was learned that nationwide net
reserve availability was higher than had been thought earlier—
were accomplished without difficulty. For several days dealers
had been rebuilding inventories in anticipation of possible demand for bills arising out of the Treasury's forthcoming refunding operation. In any event, investment demand for bills proved
rather disappointing to the dealers over the next several days.
By this time, however, the System was in the process of meeting
month-end reserve needs, and it purchased a sizable volume of
bills from the dealers over the January 28-February 1 period.
These purchases exerted some steadying influence on the bill
market while the books were open for the refunding operation.
The System also injected reserves around this period through the
purchase under repurchase agreements of rights to the refunding
issues. These agreements facilitated financing of the rights until
the February 15 payment date in a period when there was renewed concern among market participants over the high cost of
alternative sources of funds.
Capital markets. Developments in the longer-term securities
markets during the period have already been summarized briefly.
In general, the markets were in a technically strong position in
early January, following the sharp decline in prices in December
and the preceding months of 1965. By the week ending January
12, dealers' total positions in Treasury coupon issues had fallen
to a daily average of $160 million, and they had a net short position in issues maturing in more than 1 year. Moreover, dealers
and investors reacted favorably to limitation by the Treasury of
its early January cash financing to the short-term area. Indeed,
the offering of the 4% per cent 10-month certificate priced to
212

FEDERAL RESERVE SYSTEM

yield 4.85 per cent, which was announced on January 5 for sale
on January 10, attracted subscriptions totaling more than $10
billion. Allotments totaled a little more than $1.6 billion. As
switching activity for tax purposes expanded and investor and
professional demand emerged, prices of outstanding Treasury
notes and bonds rose sharply, with gains ranging from Ys to more
than a full point over the first 12 days of January.
Market participants remained generally cautious even during
this rally, however, and as the period progressed, some of their
apprehensions gradually came to the forefront again. A major
concern—which was to affect the securities markets in varying
degrees throughout the year—related to Vietnam; in this period
there was a disappointment over waning prospects for a peace
settlement during the pause in U.S. bombing attacks on North
Vietnam and a feeling that resumption of the air strikes was close
at hand. There was also a growing realization of the strength of
the economic outlook, especially with the continued fighting in
Vietnam, and of the likely strength of credit demands ahead.
The size of these demands was underscored by a steady
stream of large additions to the calendar of prospective corporate
and municipal bond offerings. In addition, some market participants were disappointed that the President had not recommended
stronger measures of fiscal restraint in his messages to the
Congress. Skepticism over the possibility of attaining an administrative budget deficit of only $1.8 billion for the fiscal year
1967, and a growing awareness that very large sales of Government assets were projected in the budget, contributed to the
apprehension in the market.
Despite these latent worries, prices held generally steady for
a time and activity gradually decreased in anticipation of the
Treasury's February financing operation. A number of participants thought that the market would be receptive to and might
derive direction from an offering in the 5-year area, the longest
maturity that could be sold given the 4Y\ per cent coupon ceiling
on longer-term issues. The financing that was announced on

213

ANNUAL REPORT OF BOARD OF GOVERNORS

January 26 offered holders of February, April, May, and August
maturities the right to exchange their holdings for a new 5 per
cent note to mature in 4 years and 9 months. Holders of the
February and April maturities were also offered the right to exchange into a 4% per cent 18-month note, priced to yield 4.96
per cent. A total of $13.7 billion of publicly held securities, plus
holdings by the Federal Reserve and other official accounts, were
eligible for exchange. Initial reaction to the combination refunding and prerefunding was favorable, and when-issued prices of
the two new notes rose to premiums of % 4 and % 2 of a point
above their offering prices.
The general market atmosphere deteriorated soon thereafter,
however, as bombing of North Vietnam was resumed, as credit
demands continued to grow, and as concern increased that, in the
absence of more restrictive fiscal policies, monetary policy would
move toward further restraint once the refunding was completed.
Syndicates handling several corporate and municipal bond issues
that were moving slowly were terminated, with yields on these
issues adjusted upward by 4 to 6 basis points. Prices of outstanding Treasury coupon issues fell sharply; those on the refunding
issues also came under downward pressure, although this was
cushioned somewhat by Treasury trust account purchases of the
new issues. In this atmosphere, dealers were reluctant to assume
large underwriting positions in the refunding.
Investors at large, on the other hand, apparently placed greater
weight on the high, intermediate-term yield than on current market developments, for the total public exchange into the new issues
was unexpectedly large—$6.5 billion for the 5 per cent issue and
$860 million for the 4% per cent notes. This very successful
completion of the refunding added about 1 month to the average
maturity of the Federal debt and reduced the sizes of the prospective May and August financings to routine proportions.
Over the remainder of the period bond prices continued to fall
in an unfavorable market atmosphere. Rumors of a peace feeler
from North Vietnam had a temporary, buoyant effect, but this
214

FEDERAL RESERVE SYSTEM

soon faded. By February 8 prices of some long-term Treasury
issues had fallen by more than 2 points from their mid-January
highs, and most issues were Vs to 2V4 points below the prices
prevailing at the year's start. At these lower prices longterm Treasury issues yielded as much as 4.70 per cent, 11 basis
points higher than at the end of December. In the corporate
market, where the calendar of future offerings was growing, a
utility issue rated Aa was offered without special call protection
at a yield of 5.04 per cent on February 9, compared with a 4.89
per cent yield offered on a similarly rated issue in early January.
Reoffering yields on municipal securities were also up somewhat from earlier in the year, with the Bond Buyer's index of
yields on 20 seasoned tax-exempt issues at 3.58 per cent on February 10, compared with 3.54 per cent on the last Thursday-of
December.
February 9-June 7: Gradual but steady increase in pressure on bank
reserve positions. By the second week of February, the period of
even keel requirements in connection with the Treasury's refunding operation was nearing an end. The economy was expanding
vigorously amid rising prices and continuing strong demands for
credit. Against this background, a series of steps were taken,
beginning with actions at the meeting of the Federal Open Market
Committee on February 8, to bring gradually increasing pressure
on bank reserve positions. Implementation of these actions led to
a progressive deepening in nationwide net borrowed reserves
from an average of about $70 million in the 6 weeks ended February 9 to around $200 million by late March, $300 million by
early May, and $350 million in the final three statement weeks of
the period under review here (see Chart 2). There was a corresponding steady rise in borrowings by member banks from the
Reserve Banks, from an average of $440 million in the opening
6 weeks of the year to an average of $670 million in the final 3
weeks of the period under review.
The interaction of this increased pressure on bank reserve
positions and of still swelling demands for credit led to consider-

215

ANNUAL REPORT OF BOARD OF GOVERNORS
FEBRUARY 9 - JUNE 8, 1966
Reserves and Borrowings

NET

BORROWED

RESERVES

I | i j i i | j | j i ] i 1 i |

Money Market Rates

3-MONTH CD'S
/SECONDARY

MARKET

I l : h i i I 1 : 1 T i I I I .1.-1 i l l 1 I H i l l 1 I t . I I I I

90-DAY FINANCE
COMPANY PAPER

I 1 111 I

For note see p. 211.

able further upward movement of most interest rates over the
period. These rate increases in turn, and the related flows of
funds that were set in motion, served somewhat to temper the
speed and degree of the System's moves toward greater monetary
restraint.
Rates on Federal funds rose in steps of Vs of a percentage
216

FEDERAL RESERVE SYSTEM

Member Bank Required Reserves

-22.8E

il , i i i h n i 1 i i u 1 i

i 1ii

i i 1 ii i i [ i j ii 1 i i i i 1 j iii

| i i i 1 i

Long-Term Bond Yields

NEW CORPORATE ISSUES

U.S. GOVT. SECURITIES

20-YEAR TAX-EXEMPT BONDS
I | | i i | i 1 j i. i

MAY

JUNE

point, and by the end of the period these funds were often being
traded at 5lA per cent, compared with only limited trading
at rates as high as 4% per cent in the early weeks of the year.
Rates available on CD's at major banks in New York City moved
up from 5VA per cent on 12-month money at the start of the
period to the 5Yi per cent ceiling on deposits as short as 3

217

ANNUAL REPORT OF BOARD OF GOVERNORS

months by early June. Increases in rates on bankers' acceptances and commercial and sales finance company paper ranged
from Vi to % of a percentage point over the period, and rates
on short-term Government agency securities moved up by
approximately 45 basis points. Even then, a 9-month issue of
the Federal intermediate credit banks yielding 5.60 per cent
was accorded a poor reception in late May. Meanwhile, commercial banks raised their lending rate to prime business customers from 5 to SVi per cent on March 10, and a general increase in borrowing costs also occurred in most sectors of the
capital markets as the period progressed.
Only Treasury bill rates were insulated from this general upward pressure. In fact most bill rates actually showed net declines
over the period. This reflected, in large part, the heavy seasonal
demand for bills from State and local governments, combined
with a reduction in the supply of bills outstanding as tax-anticipation bills matured in March and another sizable volume of
maturities was in prospect for June. In addition, however, many
investors continued to prefer the added liquidity provided by
bills in a period of generally rising interest rates, and under these
circumstances market supplies of bills were continually being
depleted despite the widening rate spread between bills and other
instruments. One period in which there was an acute scarcity
of bills was around March 24, when the rate on 3-month bills
dipped to a low for the year to date of 4.46 per cent bid. On
June 7, 3-month bills were bid at yields of 4.60 per cent compared with 4.64 per cent on February 8. This performance of the
Treasury bill market was a dramatic demonstration of how independent the various sectors of the securities markets can be, even
over an extended period of time, when special circumstances
dominate.
Despite the increased pressure on bank reserve positions and
the sharp upward movement of most interest rates, credit continued to expand at a rapid rate. Businesses had particularly heavy
demands for credit during the spring and early summer as they
218

FEDERAL RESERVE SYSTEM

sought to finance accelerated payments of taxes to the Treasury.
The speedup of tax payments had been one of the fiscal measures
proposed by the President in January.
The strength of the credit-deposit expansion at the banks was
reflected in movements in member banks' required reserves. In
each of 11 consecutive statement weeks from early March
through early May, the actual level of aggregate required reserves turned out to be higher than the estimates prepared at the
start of each week for use by the Manager of the System Open
Market Account, and the level continued to run well above a
normal seasonal pattern in subsequent weeks (see Chart 2 ) . In
the capital markets, despite the cancellation of some offerings,
underwriters were continually facing a heavy calendar of corporate, municipal, and especially Federal agency securities. Furthermore, a steady stream of announcements forewarned of
large future flotations.
In underscoring its concern over the rapid expansion of
credit, the Federal Open Market Committee voted at its April
12 meeting to change the statement of its policy stance in the first
paragraph of its directive from a position of "moderating" to one
of "restricting" the growth in the reserve base, bank credit, and
the money supply. Then, at the May 10 meeting, the Committee
changed the content of the operating instructions contained in
the second paragraph of its directive. As before, the Committee
called for operations "with a view to attaining some further
gradual reduction in net reserve availability." But to this it added
a "proviso clause" calling for "a greater reduction if growth in
required reserves does not moderate substantially."
Such a proviso clause, which had been under discussion by
the Committee and its staff for several months, was designed to
permit the Manager to modify day-to-day operations if cumulating evidence of an undesirably rapid expansion of credit developed during the interval between Committee meetings. The
initial choice of required reserves as the conditioning variable
in the proviso was made largely on practical considerations in-

219

ANNUAL REPORT OF BOARD OF GOVERNORS

volving the timely availability of data relating to current bank
credit and money supply expansion. Later in the year the conditioning variable was shifted to total member bank deposits
subject to reserve requirements, the so-called "bank credit
proxy."
The proviso clause was used in one form or another in the directives throughout the rest of the year. It provided a means of
responding to unexpectedly or undesirably large movements in
the banking aggregates, while still allowing open market operations to facilitate a generally smooth day-to-day functioning of
the banking system and the over-all payments mechanism in the
face of sharply fluctuating flows of reserves and deposits in the
short run.
System operations. In conducting its day-to-day operations
during the period February 9 through June 7, the System purchased slightly more than $3.8 billion of Treasury bills on an
outright basis and sold or redeemed about $3.2 billion of bills.
It made somewhat less use of repurchase agreements against
Treasury issues than it had earlier in the year. Gross purchases
under such agreements totaled about $1.5 billion, and terminations of these and earlier contracts amounted to $1.9 billion. On
the other hand, the System did reenter the market for Treasury
coupon securities during this period after an absence from this
market since early September 1965.
The System's first purchases of coupon issues, on February
17, were confined to very short maturities. Later on, the maturity
range of the System's purchases was lengthened gradually, although the Federal Reserve remained only a marginal factor in
over-all market activity in coupon issues. System purchases of
coupon securities for the whole period amounted to $254 million, of which all but $31 million had maturities of 3 years or
less. These purchases proved especially helpful as a means of
injecting reserves in March and again in early June when acute
scarcities prevailing in the Treasury bill market were hampering
System operations. Repurchase agreements against bankers' ac220

FEDERAL RESERVE SYSTEM

ceptances also were a helpful supplement to operations when
Treasury bills were scarce.
While the total volume of System operations was somewhat
less on a daily-average basis than it had been in the opening
weeks of the year, swings between buying and selling securities
were considerably more frequent than they had been earlier. This
variability resulted from the System's efforts to maintain continuing pressure on member bank reserve positions in the face of
inter- and intra-weekly cycles in the level and distribution of
nationwide net reserve availability and/or in bank reserve management strategy.
The statement week ended February 9, the last week covered
in the preceding period, and the following 4 weeks (through
March 9) witnessed an extended series of short-run reversals of
System operations. The distribution of nationwide reserve availability tended to favor the major banks in New York City during
the period, as these banks evidently sought to improve their basic
reserve positions in anticipation of the seasonal pressures expected around the corporate dividend and tax payment dates in
mid-March. On the other hand, banks in other money centers and
country banks generally were under some reserve pressure. These
banks managed their reserve positions cautiously and were fairly
aggressive bidders in the Federal funds market on the opening
days—Thursday and Friday—of each of the 5 statement weeks
from February 3 through March 9.
With nationwide net reserve ayailability at generally low levels
on Thursdays and Fridays, conditions in the money market became rather taut and virtually all trading in Federal funds on
such days was in the 4% or 4% per cent area. To meet some of
the indicated reserve needs and forestall undue tightness in the
money market, the Federal Reserve injected roughly $200 million to $450 million of reserves at the beginning of each of the
weeks in question, mostly through outright purchases of Treasury bills. In the wake of these operations, banks generally were
able to cover most of their deficiences, and their borrowings at

221

ANNUAL REPORT OF BOARD OF GOVERNORS

Federal Reserve Banks on each Thursday and Friday of the
period were only a little above the weekly average.
Money market pressures tended to subside for a time following
the weekends in each of the statement weeks. As it turned out,
nationwide net reserve availability persistently exceeded earlier
estimates, and many banks came through the weekends with
accumulated reserve surpluses. In this environment, banks that
still had deficiences were able to cover their needs in the Federal
funds market on Monday and Tuesday of each week at rates
generally Vs to XA of a percentage point below those prevailing
before the weekend, and aggregate member bank borrowings
from the Reserve Banks dropped appreciably on these days. Undue easing was headed off, however, .as the System reversed direction in each of the 5 statement weeks and absorbed about
$150 million to $550 million of reserves through outright sales
of Treasury bills. Generally by Wednesday of each week a renewed firmness appeared in the money market, with Federal
funds again trading at the higher rates prevailing before the
weekend and borrowings from the Reserve Banks expanding.
System open market operations were of more limited scope
and did not shift direction so often in the following several
weeks, which included the March dividend and tax payment
dates and the unwinding after these dates. The rise in the bank
prime rate on March 10 temporarily caused some nervousness in
financial markets, and as usual for this time of year there was
considerable market churning. In the week ended March 16,
credit demands converged on the New York City banks, and
their total loans and investments rose by $1.4 billion. At the
same time these banks lost a net of around $160 million of CD's,
and they also lost other funds as repurchase agreements with
corporations matured. These developments led to some deterioration in basic reserve positions at New York City banks. In general, however, the pressures were less than anticipated and advance preparations proved to be more than adequate. In fact,
money market conditions were fairly comfortable in the week
222

FEDERAL RESERVE SYSTEM

immediately surrounding the tax date, and this fact helped to
calm the nervousness in other markets. Thus the System waited
until late in the week to meet the modest reserve need that was
indicated.
The New York City banks soon moved back into a basic reserve surplus after mid-March as a result of an unusually rapid
repayment of loans made earlier and also of their success in
attracting new CD money at somewhat higher rates. Other banks,
however, continued to be under pressure, and nationwide net
reserve availability now tended to fall progressively short of
levels initially expected by the Account Manager. The System
moved to head off some of the emerging tautness in the money
market late in the week ended March 23, but it proceeded cautiously in making these reserve injections because of the current
scarcities of Treasury issues in the market.
Money market pressures mounted further around mid-April
when banks, particularly those in New York City, experienced a
much larger than anticipated expansion of credit over the midmonth tax date. In the week ended April 20 the basic reserve
deficit of the major New York City banks rose to an average
of nearly $1 billion. System operations during this period were
directed toward absorbing the reserves supplied by the midmonth
rise in float; other reserves were absorbed when the Treasury
initially used part of its tax receipts to replenish its depleted
balances at the Reserve Banks. Money center banks as a group
apparently did not realize for a time how large their reserve
deficiencies would be. When the deficiencies became apparent,
after the April 16-17 weekend, these banks bid strongly for
Federal funds, and a large amount of trading took place for the
first time at 4% per cent. Even so, large reserve needs remained
to be filled, and borrowings from the Reserve Banks bulged to
$1,026 million on Tuesday, April 19, and to $1,587 million on
Wednesday, April 20. By not acting to mitigate these pressures,
the System gave financial markets a clear indication of its basic
policy stance.

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ANNUAL REPORT OF BOARD OF GOVERNORS

Similarly tight money market situations recurred at the end of
alternate weeks over the next month or so, a period when System
open market operations again frequently reversed direction,
this time to counter repetitive 2-week cycles in nationwide reserve availability and bank reserve management strategy. The
cycles took the form of a generally cautious approach to reserve
management on the part of banks on the opening days of each
of the statement weeks ended April 27, May 11, and May 25 ? the
first week in each 2-week cycle. Banks sought to avoid carrying
reserve deficiencies over the weekend by bidding aggressively for
Federal funds at progressively higher rates on Thursdays and
Fridays and borrowing heavily from the Reserve Banks.
As it turned out, reserves became more plentiful after the
weekends, partly because of the overborrowing earlier; the
result was that money market conditions eased and member bank
borrowings dropped progressively on Monday, Tuesday, and
Wednesday of each of these weeks. This ease carried over into
the opening days of the new statement weeks, the second week
of the cycles. This was particularly true in the weeks ending May
4 and May 18, when banks as a group tended to borrow only
modest amounts from the Federal Reserve discount windows on
Thursdays and Fridays. Then as the reserve needs became more
apparent late in the week, there was a scrambling for funds in
the Federal funds market and a bulge in borrowings at the Reserve Banks on Tuesdays and Wednesdays. This return of tautness in the money market marked the full swing of the 2-week
cycle, and as the tautness carried over into a new reserve
settlement period a new cycle was begun.
Open market operations during this period generally sought
to counter these swings in conditions in the money market, insofar as possible, to prevent undue easing that would undermine a steadily restrictive policy toward bank credit expansion or
to head off extreme tautness that might generate instability in financial markets. This involved providing some reserves to meet
apparent needs in the tight money market environment at the
224

FEDERAL RESERVE SYSTEM

beginning of the 2-week cycles and then absorbing at least part
of the excess that emerged after the weekends. As a rule, the
absorptions were not sufficient to head off completely the money
market ease that was developing, although they did serve as an
indication of the System's intent to keep the banks under pressure. In the second half of the cycle, when money market pressures become quite intense, the System generally provided only
limited amounts of reserves and thereby allowed most of the
weight of the pressures to be felt.
The cumulative effects of the tightening of System policy were
being felt more and more as the February-early June period
drew to a close. Most System operations during this period were
directed at offsetting drains from other factors, but the money
market was generally quite firm, with some Federal funds transactions at 5VA per cent for the first time and with borrowings
from the Reserve Banks heavy. In this environment, banks in the
money centers stepped up their bidding for CD's and adjusted
their asset portfolios to improve their basic reserve positions in
apparent anticipation of very heavy pressures around the June
dividend and tax payment dates.
The acceleration of corporate tax payments as well as of payments of withheld Federal income taxes and social security taxes
—anti-inflationary measures enacted by the Congress earlier in
the year—was expected to make pressures over the coming
weeks more intense than usual. In addition, with most market
rates of interest having moved sharply higher, there was increasing concern at thrift institutions over potential large-scale withdrawals of funds in search of higher yields during the interestcrediting period at the end of June. Savings banks and savings
and loan associations had experienced heavy losses of deposits
and shares at the end of the first quarter of the year, and many
had already virtually ceased to make any new mortgage commitments in order to preserve at least some liquidity cushion.
Treasury bill market. As noted earlier, little of the steady
increase in money market pressures over the February-June

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ANNUAL REPORT OF BOARD OF GOVERNORS

period carried into the Treasury bill market. To be sure, with
dealer financing costs high—and moving higher—through the
period, dealers continually were constrained from taking any
overly optimistic view of future developments in the bill market.
And at times, the high costs of financing and the concern over
increases in supplies of bills combined to produce a very cautious atmosphere in the market. This happened for example,
in the first several weeks of the interval when the Treasury's
weekly bill auctions were continuing to be enlarged by $100
million and when participants began to focus on the possibility
of a large return of bills to the market around the March
dividend and tax payment dates. The Treasury raised a total
of $1.3 billion of new money through additions to the weekly
auctions during the first 3 months of the year; however, the extra
supply of bills from this source was more than offset when $3
billion of tax-anticipation bills matured in late March. Another
period of hesitancy occurred in late April and early May when
dealers were disappointed over the lack of demand for bills
arising out of the Treasury's May refunding operation.
Even in the periods of greatest caution, however, rates on 3month bills rose no more than 5 basis points above the level
prevailing at the start of the interval. The more dominant tendency by far was for rates to drift lower—a testimony to the
very strong demand for bills that prevailed on balance over the
period from a wide range of investors. As usual during this
time of year, public funds managed by State and local governments were the largest and most persistent buyers. They continually sought a temporary investment outlet for growing tax
receipts as well as for some of the proceeds of the heavy volume
of tax-exempt issues floated in the capital market.
From the end of January through the end of May, State and
local governments increased their bill holdings by more than $1.1
billion. Proceeds of corporate bond flotations also often found
their way temporarily into the bill market. In addition, some investors, both large and small, used the bill market as a haven
226

FEDERAL RESERVE SYSTEM

for funds while awaiting more favorable conditions in the stock
or bond markets. And finally, there was the Federal Reserve's
activity in the bill market, which, while somewhat less than in
comparable periods of other recent years, took up about $600
million of bills, net, from the supply of bills over the period
as a whole.
Capital markets. The capital markets were marked by very
sharp swings in sentiment over the February-early June period
—from deepening gloom through the end of February to considerable optimism in March and early April and then back to
a heavy atmosphere by late May and early June. Demands for
credit in these markets were quite heavy throughout the period.
In dollar amounts, the greatest demands came from corporate
and State and local government borrowers, which together sold
$10.1 billion of new securities from early February through
early June, or about IVi per cent more than during the comparable period of the preceding year.
The source of greatest pressure during most of the period—
and particularly in May and June—however, was the sharp increase in borrowings by Government agencies. These agencies,
both through increases in the size of regular issues and through
heavy sales of new participation certificates by the Export-Import
Bank and the Federal National Mortgage Association, offered
issues totaling $8.1 billion from early February through early
June and raised a net of $3.8 billion of new money, volumes
in both cases that were about twice as large as in the comparable
period of the preceding year. In terms of market impact, this
agency financing far more than offset the effects of an actual
reduction in the outstanding amount of direct Treasury obligations over the period.
A number of factors underlay the swings in sentiment that
confronted this heavy financing schedule. These included alternately pessimistic and optimistic interpretations of the latest
business developments, of the need for and prospects of a tax
increase to restrain inflationary pressures, of the probable extent

227

ANNUAL REPORT OF BOARD OF GOVERNORS

of further moves toward monetary restraint by the Federal Reserve, and finally, of the prospects for a peaceful settlement of the
war in Vietnam. A mere listing of these factors, however, does
not tell the whole story; it was not uncommon for similar developments to have a bearish impact in the bond market at one time
and a bullish impact at another time.
In February, for example, participants in the bond market
tended to view reports of further sharp rises in business activity
and increasing inflationary pressures as being bearish for bond
prices. In this environment new issues coming to market were
accorded generally unenthusiastic receptions; prices of outstanding bonds moved sharply lower; and yields on Government, corporate, and municipal securities reached the highest levels in
more than 40 years. At their peak near the beginning of March,
long-term Treasury issues yielded as much as 4.86 per cent compared with a high of 4.70 per cent 3 weeks earlier. At about the
same time, a new Aa-rated corporate bond was released from
syndicate pricing restrictions and was traded in the free market
at a yield of 5.30 per cent, 30 basis points higher than the yield
on similar issues traded in early February.
Later, after a technical reaction had sparked the March rally
in prices—which was then fueled by investor and dealer buying
amid talk of a possible tax increase—reports of rising economic
activity tended to have quite a different influence on most
sectors of the bond markets. In particular, reports of increasing
pressures on capacity, of higher prices, and of business plans to
expand capital expenditures were generally interpreted as enhancing prospects for a tax hike and thus were followed by increases in bond prices. Some temporary caution emerged after
the announcement of the increase in the commercial bank prime
rate on March 10—which for a time led to some fears that the
Federal Reserve discount rate might soon be raised—and also
on occasion after publication of reports indicating successively
deeper levels of net borrowed reserves.
Other factors, however, quickly helped to restore the general
228

FEDERAL RESERVE SYSTEM

feeling of optimism about the outlook for bond prices. Among
these factors was the cancellation of a large tax-exempt bond
issue that had been scheduled for sale on March 17. As funds
previously put aside for this issue were released, demand improved in all sectors of the markets. Remarks by President Johnson on March 29 that he would not hesitate to ask for a tax increase if consumer and wholesale prices should continue to rise
too fast led to still further large gains in bond prices. So too did
Secretary of the Treasury Fowler's plea in early April for restraint on bank lending "without skyrocketing of interest rates."
Developments in Vietnam generally had little effect on bond
markets during this period.
The buoyancy in the market extended generally through the
first week of April. By that time prices of most Treasury notes
and bonds had more than regained their February losses and
yields on some short-term issues—which were in scarce supply—
were at their lows for the year. Offerings of new corporate and
municipal issues were well received during this period, and underwriters were left with little in the way of unsold issues. In this
environment an Aa-rated corporate issue was brought to market
on April 5 at a yield of 5.00 per cent. The Bond Buyer's index
of 20 seasoned tax-exempt bonds reached a low of 3.53 per cent
a week or so later, on April 14, compared with 3.83 per cent at
its peak on March 3.
The improvement in general atmosphere also appeared in
the market for Government agency securities, and prices of outstanding agency issues rose for a time. On the other hand, the
heavy volume of new agency issues coming to market, which
included the sale of $410 million of FNMA participation certificates around mid-March, generated somewhat mixed reactions.
Receptions of these issues generally turned out quite good, but
only because offering yields remained near their earlier highs.
The rally in the capital markets came to an end around midApril. Prices drifted lower for a time and then fell off more
sharply in late May and early June. Further discussion of the

229

ANNUAL REPORT OF BOARD OF GOVERNORS

need for a tax increase intermittently buoyed the markets on
individual days—as did occasional rumors of peace efforts in
Vietnam. On the whole, however, participants came to the view
that prospects for fiscal action had dimmed while hopes for
peace usually were quickly dashed by new belligerent statements
from North Vietnam or its allies. In this atmosphere, increased
attention was paid to the gradual further increase in monetary
restraint.
Meanwhile, scheduled offerings of corporate and municipal
bonds began to build up, and there was particular concern over
the capacity of the market to digest the very large volume of
Government agency issues that still had to be sold before the end
of the fiscal year. Dealers' inventories of agency issues had built
up even further from an already high level. Indeed, by the end
of April, inventories of such securities were up to about $950
million, compared with average holdings of about $300 million
in the first 3 months of the year.
It was in this environment that the Treasury had to conduct
its May refunding operation. Public holdings of the maturing
issues, fortunately, had been reduced by earlier prerefundings
to the relatively modest amount of $2.5 billion. To keep the
operation as routine as possible, the Treasury offered holders
a straightforward exchange into a new 4% per cent 18-month
note priced at a discount to yield 4.98 per cent. This was in line
with market expectations, and the announcement had no apparent effect on prices of outstanding issues.
Interest in the new issue proved extremely apathetic, however,
and despite some when-issued purchases by Treasury trust
accounts, the price of the notes dropped almost immediately to a
level just below the initial offering price. Dealers took an extremely small underwriting position in the new issue, and only a
little more than half of the maturing issues held by the public
were exchanged. The 43 per cent "attrition" was the highest in
any modern refunding. With market attention diverted around
this time by sharp declines in stock prices and reports of cutbacks
230

FEDERAL RESERVE SYSTEM

in automobile production, the actual results of the refunding had
little impact on bond prices, and the Treasury announced that its
cash position was sufficiently strong to absorb the attrition without any modification of its current financing plans for the months
immediately ahead.
A plethora of Federal agency securities came to market over
the following weeks. Despite successively higher yields, all were
accorded slow initial receptions as investors held back, waiting to
buy at lower prices in the secondary market. Anticipation of
heavy future offerings, including a probable large-sized offering
of participation certificates under authorization of the recently
enacted Participation Sales Act of 1966, added to the heavy
atmosphere overhanging the market.
By the end of the period under review prices of most Treasury
notes and bonds had dropped to levels near their lows for the
year, and yields on long-term issues were as*high as 4.78 per cent.
Aa-rated corporate issues with 5 years of protection against
special call were trading at yields around 5.5 per cent, about the
same as at the April peak and up 50 basis points from the rates
prevailing in early February. The Bond Buyer's index of yields
on 20 seasoned tax-exempt issues was up to 3.78 per cent by early
June, within 5 points of the March peak. And in the market for
agency issues, where the upward pressures on rates were most
intense, the participation certificates that came to market on
June 9 carried yields as high as 5.70 per cent on 1-year maturities, about 60 basis points higher than rates on similar maturities
in mid-February.
June 8-September 13: Peaking of financial market pressures. Stresses
and strains on the nation's financial system mounted to a peak
of intensity during the June 8-September 13 interval. To be sure,
there were intermittent lulls when participants in the money and
bond markets tentatively began to hope that the crest of pressures
had passed. One such lull occurred in the opening weeks of the
period. New corporate, municipal, and agency issues began to
attract good investment demand, and for a time prices of securi-

231

ANNUAL REPORT OF BOARD OF GOVERNORS

ties generally rose. Very heavy credit demands over the June
dividend and tax payment period had pushed money center banks
into deep basic reserve deficits, but no undue stress was in evidence. Near the end of June the thrift institutions seemed to be
weathering the midyear interest-crediting period with smaller
than expected withdrawals of deposits and shares. Another lull
occurred in the second half of July, when market participants
cautiously took heart from the fact that the Federal Reserve had
not raised the discount rate, as it had been widely expected to do.
Except for these respites, however, the period was marked by
progressively deepening gloom in all financial markets. Indeed,
by late August—before official policy actions succeeded in restoring a degree of calm in early September—there were even some
fears being expressed that a financial crisis might be near at hand.
Although such fears were not borne out, the feeling of apprehension led a number of borrowers to accelerate their capital market
offerings, and this in turn added to an already congested market
situation. At the depths of the gloom in the second half of
August, conditions in the market for tax-exempt securities were
on the verge of disorder, and yields throughout short- and longterm markets were at the highest levels in more than 40 years.
In addition to the heavy current demands for credit, the major
immediate cause of the highly unsettled conditions in late August
was a growing apprehension over the ability of the markets to
accommodate the pressures that seemed to be building up for
September. In particular, it was expected that large fall loan
demands would at that time be converging on a banking system
that faced the possibility of a large-scale runoff of maturing
negotiable CD's. To this was added a growing concern over the
capacity of the market to digest a sizable offering of Treasury
tax-anticipation bills in late August and an expected sale of
FNMA participation certificates and other Federal agency offerings in September. The prospective FNMA and agency financings
were of particular concern because of the already heavy schedule
of new corporate and municipal offerings.
232

FEDERAL RESERVE SYSTEM

Meanwhile, hopes for a tax increase to combat inflationary
pressures had waned, and the conviction spread that the major
burden of economic restraint would continue to rest on monetary
policy. Federal Reserve actions on June 27 and August 17 to
raise reserve requirements against certain time deposits of
member banks were interpreted as consistent with such a view. In
this environment, market participants came to feel not only that
the squeeze on the banks imposed by current Regulation Q
ceilings would not be removed by increases in the ceilings, but
also that general monetary policy might tighten further.
These various apprehensions became particularly heavy on
Friday afternoon, August 26, and securities prices, which had
eroded throughout the capital markets in preceding weeks, began
to drop at an accelerated pace. Some temporary steadiness
emerged in the market for Treasury securities the next Monday
after sizable purchases of Treasury bills by the Federal Reserve
early in the day. But a second break in prices occurred late that
afternoon in the wake of an upward adjustment of about 25 basis
points in the yield of a recent corporate bond offering that had
been moving slowly. Finally, late on Tuesday, August 30, a better
atmosphere seemed to be in the making, and it was kept alive by
a series of statements and actions over the next 2 weeks.
The initial spark to the rally was a sudden revival of hopes for
a tax increase, following a statement by the Under Secretary of
the Treasury to the effect that monetary policy should not be
called on for further restraint and that, if such restraint were
needed, it would have to come in the form of a rise in taxes or a
cut in Government spending. To this was added a report late
on the following day that the FNMA might reconsider its offering
of participation certificates now widely expected in September.
On the next day, September 1, the Federal Reserve System
issued a letter seeking to assure member banks that funds would
be available at the discount window to meet unusual liquidity
pressures over the period ahead and calling on banks to accomplish additional necessary adjustments in their portfolios over

233

ANNUAL REPORT OF BOARD OF GOVERNORS

ensuing weeks by holding down the growth of business loans
rather than by further substantial liquidation of tax-exempt and
other securities. Then on Thursday, September 8, President
Johnson announced a program of fiscal and debt management
actions to restrain inflationary forces and help moderate financial
market pressures. The program included cutbacks in "lower
priority" Federal expenditures, a temporary suspension of certain
tax benefits applicable to business investment, and a sharp curtailment in Federal agency borrowing in the capital markets. Taken
together, the actions succeeded in restoring a feeling of confidence in the markets.
Open market policy. Federal Reserve open market policy was
conditioned in an important way by the gyrations in market sentiment in August and September as well as by several other developments during the period under review here. Open market
operations through much of the period were directed primarily at
maintaining net reserve availability and related money market
conditions in about the range reached in late May and early June,
with continued reliance on the "proviso clause" to provide for
modifying operations in the light of developments in required
reserves and bank credit. In addition, however, operations had
also to be concerned with a series of special considerations.
In late June, for example, the Federal Open Market Committee was concerned with the possible need for moderating unusual
liquidity pressures at financial institutions that might develop
around the midyear interest-crediting period. In the event, as
noted earlier, mutual savings banks and savings and loan associations got through the period better than many observers had
expected, and no special System action was needed. Beginning
in late July there was a need for maintaining generally "even
keel" conditions around the time of the Treasury's August
refunding operation. And then later in August, against the background of the extreme uncertainty in the markets, the Committee directed that operations be conducted specifically with a
view to supplying the minimum amount of reserves consistent
234

FEDERAL RESERVE SYSTEM

with maintenance of orderly money market conditions and moderation of unusual liquidity pressures.
As these policies were carried out, nationwide net borrowed
reserves in the banking system fluctuated around an average of
$370 million for the period as a whole. In general, net reserve
availability was allowed to run somewhat higher than average
in the first half of the 2-week reserve settlement periods for
country banks, to accommodate the large amounts of excess
reserves that these banks typically held at that time. This was
followed by a somewhat deeper than average level of net
borrowed reserves in the second half of the 2-week settlement
period when the previously accumulated excess reserves generally
were released into the money market. In this way bank reserve
positions were kept under a fairly constant degree of pressure,
as reflected in the rather narrow week-to-week fluctuations in
member bank borrowings from the Reserve Banks around an
average of $755 million for the period as a whole (see Chart 3).
Meanwhile, bank credit did bulge temporarily in the latter
half of June, as the banking system accommodated business
demands arising out of the need to make enlarged corporate tax
payments around midmonth and also the accelerated payments
of withheld income taxes and of social security taxes that went
into effect on June 20. Total loans and investments at weekly
reporting banks rose by $3.7 billion in the 2 weeks ended June
22, compared with a net rise of only $1.9 billion in the roughly
comparable weeks of the preceding year. Later on, however,
growth in bank credit slackened somewhat and weekly averages
of required reserves fell rather persistently short of the levels
projected as each week began. Indeed, in August the so-called
"bank credit proxy"—daily-average member bank deposits subject to reserve requirements—actually declined on a seasonally
adjusted basis, following the sharp increases earlier in the year.
With banks' reserve positions maintained under steady pressure over the June-September period, short-term interest rates
continued to climb. Federal funds traded at successively new high

235

ANNUAL REPORT OF BOARD OF GOVERNORS

JUNE 8-SEPTEMBER 14, 1966
Reserves and Borrowings

NET BORROWED RESERVES

Money Market Rates
3-MONTH CD's SECONDARY
90-DAY

FINANCE

COMPANY

MARKET

PAPER

3-MONTH
TREASURY

BILLS
FEDERAL FUNDS

For notes see p. 211.

rates of 5% per cent by June 24, 53/4 per cent by July 8, 5%
per cent by August 4, 6 per cent 2 weeks later, and even 6XA per
cent in the final statement week of the period. Major banks raised
the prime loan rate to 53A per cent at the end of June and then
to 6 per cent in mid-August, and New York City banks posted
dealer lending rates generally in a range of 61/4-61/2 per cent.
236

FEDERAL RESERVE SYSTEM

Member Bank Required Reserves

23.6

22.0

Projected

Long-Term Bond Yields

NEW CORPORATE ISSUES

Some banks occasionally posted even higher rates or were not
willing to make loans at all. Rates on bankers' acceptances and
commercial and finance company paper all rose by lA to Vi of a
percentage point over the period. Even Treasury bill rates, which
had been lower than other short-term rates by an unusually wide
margin in the first half of the year, moved up sharply from their

237

ANNUAL REPORT OF BOARD OF GOVERNORS

late June lows, with increases of more than a full percentage
point recorded on some maturities over the next V/i months.
There was one exception, of course, to this upward march in
short-term rates, namely the rates offered on negotiable CD's.
After having led the parade through the early months of the year,
rates offered on CD's by some banks in New York City reached
the 5Vi per cent Regulation Q ceiling on deposits of any maturity
by late June, amid the pressures following the corporate tax
dates. The banks were able to about hold their own in replacing
sizable amounts of maturing CD's—albeit generally with new
deposits of only very short term—up through mid-August.
In subsequent weeks, however, with market rates on competing instruments well above the 5Vi per cent ceiling rate on CD's,
banks experienced a steady erosion in their outstanding volume
of CD's—the apprehension of which, as noted earlier, was one
of the main factors underlying the late-August gloom throughout
the financial markets. As one means of offsetting the potential
and actual loss of domestic funds, several of the major money
market banks with overseas branches became active seekers of
funds in the Euro-dollar market during the period under review
here. In the 2 months through the end of August a group of these
banks increased their outstanding Euro-dollar liabilities by nearly
$1.2 billion, and such liabilities rose by another $1.2 billion
through mid-December.
System operations. In conducting open market operations over
the June-September period, the Account Manager sought to
carry out over-all System policy objectives without adding unnecessarily to the basic apprehensions dominating market psychology. Operations were complicated by the fact that the
markets for Government securities tended to be quite thin. Dealers were reluctant to hold sizable positions in the face of the
uncertain environment, the rapid upward movement of interest
rates, and the high cost and limited availability of dealer financing. Over the first 2 months of the period, until the Treasury
auctioned $3 billion of tax-anticipation bills in mid-August, the
238

FEDERAL RESERVE SYSTEM

total amount of Treasury bills held by dealers in their trading
positions averaged only $1.1 billion, compared with an average
of $3 billion in the comparable months of 1965. On occasion,
such as around the end of June and again in early August, their
holdings of bills in trading accounts dropped to around $250
million. In the environment of this period large outright purchases or sales by the System would have risked contributing to
exaggerated movements in bill rates.
Difficulties in injecting reserves in the face of market scarcities
of bills had been present in varying degrees throughout the
spring, as noted in the preceding period. They became pressing
again in the second half of June as the System moved to meet
part of the sizable reserve needs accompanying the large expansion of credit over the tax date, and to provide for the needs
around the July 4 holiday. The money market had become taut
in the statement week ended June 22 as the convergence of credit
demands had produced a basic reserve deficit of more than $1.5
billion at major money center banks. On the last day of that week
Federal funds traded predominantly at 5% per cent, and there
was some trading for the first time at SVi per cent. The System
moved to head off further tightening by purchasing $308 million
of Treasury bills from dealers and foreign accounts, for both
cash and regular delivery. These purchases, plus heavy demand
for bills from public funds as well as from commercial banks,
which were buying bills to include in midyear statements, reduced
dealers' holdings of bills in trading positions to less than $270
million on June 23.
With the July 4 reserve needs still to be met, the Federal Open
Market Committee at its June 28 meeting broadened the avenues
for reserve injection by removing the 2-year limitation on the
maturity of Treasury issues that the System could purchase under
repurchase agreements. In recommending approval of this added
flexibility, the Manager noted that it might be necessary over
the period immediately ahead to make repurchase agreements
against Treasury issues that the dealers themselves might acquire

239

ANNUAL REPORT OF BOARD OF GOVERNORS

under repurchase agreements with investors. Such "back-toback" agreements would in effect make use of the dealers as
direct channelers of funds to points of need in the market.
In the event, there proved to be no real problems in injecting
reserves, as a large supply of bills became available over succeeding days directly from foreign accounts that had to meet midyear liquidity needs and also in the market as banks unwound
their midyear window-dressing operations. As a result, there was
no need for using back-to-back repurchase agreements, and only
limited use was made of the authorization to purchase Treasury
issues of any maturity under repurchase agreements. The broader
authorization remained in effect throughout the rest of the year,
however, and proved helpful in meeting reserve needs on other
occasions.
Reserve injections were also accomplished in late June by
System purchases of a sizable amount of bankers' acceptances
under repurchase agreements and of Treasury coupon issues, with
the maturity range of the coupon issues purchased extending, for
the first time during the year, to more than 10 years. After the
end-of-June operation the System remained out of the coupon
market during the period of unsettled conditions during the
summer and fall and did not make any additional purchases of
coupon issues until late December.
The operating difficulties of absorbing a large amount of
reserves in an uneasy market environment came into particular
prominence in the wake of a strike against five major domestic
airlines beginning on Friday, July 8. The strike hampered the
clearing of checks through the banking system. As the Federal
Reserve continued to grant credit on the uncollected checks according to normal schedules, however, there was a sharp rise in
Federal Reserve float and a corresponding bulge in nationwide
net reserve availability. By Tuesday, July 12, float had risen to a
level about $1 billion higher than normal for that time of year,
and it remained $800 million or more above normal throughout
the strike, which was not settled until August 19.
240

FEDERAL RESERVE SYSTEM

Although some of these extra reserves were absorbed as the
Treasury agreed to increase its balance at the Reserve Banks, a
sizable amount remained to be absorbed by open market operations. Treasury bill rates were rising sharply at the time, however,
and the market was not expected to be receptive to large outright
sales of bills. Moreover, any such sales might have had to be
followed quickly by large outright purchases, if the strike were
suddenly settled. Thus, in the thin market then existing, the use
of outright transactions to deal with the rise in float could have
resulted in very large fluctuations in interest rates.
In this situation the Account Manager—after consultation with
the Open Market Committee in a special telephone meeting on
July 11—initiated a new operating technique of selling selected
issues of Treasury bills to dealers for cash and simultaneously
making a commitment to purchase the same issues of bills at
competitively determined prices for delivery to the System a few
days later. Such matched sale-purchase transactions could be
carried on in large size because they did not involve an indeterminate market risk for the dealers. Furthermore, they automatically kept the reserve absorption on a short-term basis, while
leaving open the possibility of extending the period of reserve
absorption with new transactions if the airline strike continued.
The first of these operations was undertaken too late in the
statement week ended July 13 to have more than a small effect on
the average level of net reserve availability for that week as a
whole, during which net borrowed reserves turned out to be only
$94 million. In the next several weeks, however, such operations
were a major factor in pushing net borrowed reserves back over
the $400 million level. In all, more than $1.9 billion of bills were
sold in six matched sale-purchase operations through the end
of July, with outstanding commitments to purchase under such
transactions reaching a high of $822 million in the July 15-18
period.
Subsequently, matched sale-purchase transactions were used
on other occasions when reserves had to be absorbed temporarily.

241

ANNUAL REPORT OF BOARD OF GOVERNORS

Many of these cases involved mopping up short-lived reserve
redundancies that emerged late in a statement week. Only a
limited amount of reserves had to be absorbed through other
means during the strained market situation in August. This was
easily accomplished by a redemption of bills in the regular
weekly auction on August 8 and the sale around the same time of
a few short-dated bills—which were in demand—to the market
and directly to foreign accounts.
The System injected reserves at the beginning of August to
offset reserve drains from other factors, and again toward the
end of the month to supply the reserves needed around the Labor
Day holiday. In each case the injections were made in the way
that seemed most likely to contribute to the continued orderly
functioning of the market. Early in the month, when dealers
were concerned about the high cost of financing positions that
had been swollen by acquisitions of rights to the Treasury's August refunding, the System confined its operations to the purchase of rights and other Treasury issues under repurchase agreements. In the latter part of the month, on the other hand, after
dealers' positions in longer-term bills had begun to weigh rather
heavily on the market in the wake of the Treasury's auction of
tax-anticipation bills, the System made large outright purchases
of bills. One such operation was conducted at the opening of the
market on Monday, August 29, following the sudden acceleration in the pace of price declines in all market sectors late the preceding Friday afternoon. In all, the System purchased $419 million of Treasury bills from dealers in this operation, for both
cash and regular delivery. As noted above, these purchases had
a temporary, steadying influence on the markets.
For the June 8-September 13 period as a whole, the System's
outright transactions in Treasury bills included gross purchases of
$5.5 billion and gross sales and redemptions of $4.3 billion, with
$2.8 billion of each representing bills sold and simultaneously
purchased under matched transactions. Purchases of coupon
issues, all of which were consummated before the end of June,
242

FEDERAL RESERVE SYSTEM

totaled $185 million. Except for the use of repurchase agreements against rights during the Treasury's August refunding, the
System made only limited use of this instrument over the period.
Thus, total purchases of Treasury issues under such agreements
amounted to only $716 million, of which nearly two-thirds were
arranged in early August. All of these repurchase agreements
were arranged at the AV2 per cent discount rate, which at times
was 2 percentage points or more below the cost of alternative
sources of dealer financing.
Treasury finance. The uncertainty and progressively heavier
atmosphere in securities markets presented problems over the
period for Treasury debt management operations as well as for
Federal Reserve open market operations. In a number of
Treasury bill auctions during the period, investor bidding was
so weak that the total offering was covered by only a small
margin—and then only at sharply higher rates than prevailed
on outstanding bills. This was particularly true of the first two
weekly auctions in July, which followed the increase in reserve requirements against certain time deposits and the rise
in the bank prime rate at the end of June. The auctions also came
at a time when there was widespread expectation in the markets
that the Federal Reserve discount rate would soon be raised. In
each of these auctions the average issuing rates on the new 3- and
6-month bills were 15 or more basis points higher than the bid
rates on comparable bills at the close of the day preceding the
auction. Moreover, tenders were accepted in these auctions at
rates as much as 10 basis points above the average issuing rates,
although such margins generally run no more than 2 or 3 basis
points in more normal times.
Similarly weak bidding prevailed in the weekly bill auction
held in mid-August and in the auction of 1-year bills held about a
week later. Although the atmosphere in the bond markets
changed for the better shortly thereafter, it remained quite
heavy in the bill market, and bidding in the auctions was still
generally restrained throughout the rest of the period. In part,

243

ANNUAL REPORT OF BOARD OF GOVERNORS

this reflected dealers' concerns over continued high financing
costs—with loan rates at some New York City banks occasionally reaching 65/s per cent. There was also considerable apprehension over the increased supply of bills stemming from the
auction of $3 billion of tax-anticipation bills on August 28 as
well as over the impending return of bills to the market around
the September dividend and tax dates.
Toward the end of the period, there was also concern over
prospects of large-scale Treasury financing in the bill area
throughout the rest of the fall. The curtailment of agency financing, included as part of the President's program announced
on September 8, was generally expected to mean that the Treasury would have to sell more bills to raise the needed cash. In
this environment, bidding was weak in the final weekly auction
of the period, and rates on most bill issues closed on Tuesday,
September 13, at new highs. Rates on 3- and 6-month bills that
day were 5.43 and 5.85 per cent bid, respectively, compared with
4.60 and 4.76 per cent at the start of the period in June.
Financing in the Federal agency market also ran into difficulties over the period. Despite the progressively higher yields that
were offered, each of the new agency issues that came to market
during July and August encountered investor resistance. By the
end of August a 2-year issue of 5% per cent debentures, which
had been offered at a yield of 5.91 per cent earlier in the month,
was trading in the secondary market at a yield as high as 6.15
per cent. By way of comparison, a 1-year issue of debentures had
been sold in mid-June, during the temporary improvement in
the markets, at a yield of 5.75 per cent.
This continued upward pressure on yields in the agency
market reflected, among other things, the very large amount of
new money being raised through sales of agency issues. To be
sure, the volume of such financing fell off in July and August
from the extraordinary pace in May and June. Still, more than $1
billion of new funds were raised in this market during July and
August, more than double the amount raised in the comparable
244

FEDERAL RESERVE SYSTEM

period of the preceding year. Moreover, as noted above, there
was growing apprehension that a still larger volume of offerings
would be forthcoming in September, including the sale of a large
volume of FNMA participation certificates, in accordance with
the provision for $4.2 billion of such sales in the 1967 Federal
budget. It was in an effort to quiet these apprehensions that the
President's program included a curtailment of agency financing
in the public sector during the last 4 months of 1966.
Against this background of the general deterioration in market
atmosphere over the period as a whole, the Treasury had to refund its August 15 maturities. Fortunately, from the Treasury's
standpoint, one of the periods of temporary improvement in the
market began after mid-July and continued through the period
that the subscription books were open on August 1-3. The improvement stemmed in large part from the fact that uncertainties
in the market associated with the widespread expectation of an
increase in the Federal Reserve discount rate had temporarily
been resolved because the AV2 per cent rate was left intact.
In the absence of a change in the discount rate, some participants came to feel that prices had declined too much and that
yields might be near their peaks. By late July the market seemed
receptive to a Treasury issue maturing in 4 or 5 years, and in
fact the announcement of an offering on a rights basis of both
a 5VA per cent 1-year certificate and a 5lA per cent note due in
May 1971 was accorded a favorable response. Holders of the
issues maturing in August were allowed to exchange for either
of the new maturities, and holders of issues due to mature in
November were offered the opportunity to exchange into the
new note.
The 5V\ per cent coupons, which represented the highest rate
paid on Treasury coupon issues since 1921, proved attractive,
and the exchanges were sufficient to extend the average maturity
of the marketable Federal debt by 1 month. Nearly 80 per cent
of the $3.1 billion of publicly held August maturities and about
a third of the $4.9 billion of the November maturities held by

245

ANNUAL REPORT OF BOARD OF GOVERNORS

the public were exchanged. By the time the subscription books
had closed, however, the atmosphere in the markets had begun
to change. The steel industry announced a price increase on
August 3, the day the books closed, and around the same time
large additions were being made to the already heavy calendar
of future corporate bond offerings. As prices in all securities
markets weakened over subsequent days, some of the new Treasury issues that were overhanging the market were bought for
Treasury trust accounts. Even so, by the payment date for the
refunding, on August 15, the new certificates and notes were
trading at discounts of %2 and *%2 of a point below par.
Yield movements. Prices of both new and outstanding Treasury issues moved steadily lower over most of the balance of August. In some cases they fell by as much as 2 points. At the
lows on Monday, August 29, the new 5-year notes were bid at
97 3 % 2 to yield 5.75 per cent. Yields throughout the Treasury
coupon market were at the highest levels since the 1920's. Some
issues in the 2- to 5-year range were yielding as much as 6.25
per cent; some 5- to 10-year issues 5.96 per cent; and some
long-term bonds 5.26 per cent. At the start of the period, in
early June, the highest available yields in these three maturity
ranges had been 5.08, 4.99, and 4.78 per cent, respectively.
The subsequent very sharp improvement that took place in
the markets in early September—the causes for which were reviewed above—brought yields on Treasury coupon issues down
by as much as 54 basis points from their peaks. By the close on
September 13 the highest yield in the 2- to 5-year range was
down to 5.80 per cent, while maximum yields in the 5- to 10-year
range and on longer-term issues were down to 5.48 and 5.04
per cent, respectively. Yields on outstanding longer-term agency
issues also declined, especially as it became clear that there
would be no offering of FNMA participation certificates, though
in the short-term market two new issues that were offered around
the middle of September bore record rates of 6.05 and 6.20 per
cent.
246

FEDERAL RESERVE SYSTEM

Movements in yields on corporate and municipal bonds generally paralleled those on Treasury issues. More than $3.3 billion
of corporate bond issues were floated between mid-June and the
end of August, with about half coming in the month of August
alone, when many borrowers accelerated their market offerings.
The offerings encountered increasing investor resistance as the
period progressed, and even with record yields buyers generally
were not interested unless the borrower extended special protection against early call to 10 years and also agreed to accept delayed payment. At the late August peak, an Aa-rated issue with
10 years of special call protection was offered at a yield of 6.34
per cent, compared with an offering yield of 5.75 per cent in
early June on a slightly lower-rated issue with only 5 years of
special call protection. Yields on corporate issues fell by as much
as 40 basis points over the first 2 weeks of September, and
shortly after the period under review here, an Aa-rated issue
was sold quickly at a 5.90 per cent yield.
In the tax-exempt market, which became by far the most unsettled of all the markets during August, there was only a routine
volume of new issue activity. Several large commercial banks,
however, were making very sizable sales of tax-exempt issues in
order to ease some of the pressures on their reserve positions. On
a nationwide basis, commercial banks' holdings of securities
other than Governments (a balance sheet category that in fact
includes mostly tax-exempt issues) fell by $200 million in August. With commercial banks acting as net sellers rather than in
their normal role of net buyers, and with other investors and
dealers generally discouraged, it was difficult to find bidders for
offerings of tax-exempt issues even at sharply reduced prices and
higher yields. By the end of August the Bond Buyer's index of
yields on 20 seasoned tax-exempt bonds had risen to 4.24 per
cent, a full Vi of a percentage point above the level prevailing
around mid-June. The over-all market atmosphere improved
over subsequent weeks, and by mid-September the index had
declined to 4.11 per cent.

247

ANNUAL REPORT OF BOARD OF GOVERNORS

September 14-November 22: Relaxation of market tensions. The

better atmosphere that developed in financial markets in early
September—in the wake of the various official measures taken
to stem inflationary pressures and ease stresses in securities
markets—continued and was consolidated, with occasional setbacks, over the September 14-November 22 interval. The markets were alternately buoyed and depressed by a number of factors on individual days and within particular short intervals. On
the whole, however, the feeling prevailed that the strains of late
August would not soon recur, and although the banking system
continued under pressure, confidence reappeared that the financial markets could cope with the demands immediately ahead.
Among the various factors affecting the markets during the
period were shifting views on (1) the adequacy of the new fiscal
measures and the likelihood of still further fiscal action to redress continuing imbalances in the economy, (2) prospects for
peace in Vietnam, (3) the outlook for the domestic economy in
the face of weakness in some sectors, and (4) the prospects for
monetary policy. With respect to the last, the conviction developed among participants that monetary policy would not permit
a renewed buildup of money market pressures that would propel
interest rates back toward their late summer peaks. To this was
added—as the period drew to a close—an emerging feeling that
some slight easing of monetary policy already was in process.
In this environment, bond prices rose fairly steadily in all
markets through October, at which point yields were down to
levels not seen since early June. However, a buildup in the
corporate and municipal bond calendar after a post-August
breather led to renewed caution in the capital markets during the
first half of November, and prices declined again for a time. Net
price changes over the period as a whole were mixed. In the
Treasury bill market, a deepening apprehensiveness persisted
through the third week of September amid worries over prospective large increases in the supply of bills outstanding around the
corporate tax payment date and as the Treasury sought to meet
248

FEDERAL RESERVE SYSTEM

its enlarged cash needs over the remainder of the year in the
wake of the curtailment of Federal agency financing. As it turned
out, the additions were absorbed rather easily and bill rates
moved down rather sharply over the balance of the period (see
Chart 4).
The banking system emerged from the September tax payment period in a considerably better position than many had expected. Despite continued losses of outstanding CD's, banks
were able to cover their reserve deficits in a money market
atmosphere that was more relaxed than a few weeks earlier. This
easier money market environment may have reflected in part
firmer lending policies at the banks and in part some abatement
in demands for credit in the wake of overborrowing earlier in
the year and the slower pace of economic expansion. Whatever
the reasons, total outstanding bank credit declined by $2.7 billion on a seasonally adjusted basis between the end of August
and the end of October.
As in earlier months of the year, open market operations in
the September-November period were directed at both proximate and "provisory" objectives. The proximate objective over
much of the period was the maintenance of "firm but orderly"
conditions in the money market—though this was modified to
the maintenance of "generally steady" conditions in the market
during the last 3 weeks of the interval around the time of the
Treasury's November refunding operation. Throughout the period, however, the directive included a proviso clause calling for
modification of operations in the light of developments in bank
credit and, for a time, also in the light of unusual liquidity pressures.
In contrast to the proviso clauses in effect during the late
spring and throughout the summer—which provided only for
resistance to undesirably or unexpectedly rapid increases in required reserves (or bank credit)—a "two-way" clause was
adopted by the Committee at its September 13 meeting. The new
clause called for seeking either greater or less firmness in the

249

ANNUAL REPORT OF BOARD OF GOVERNORS

SEPTEMBER 14 - NOVEMBER 23, 1966
Reserves and Borrowings

o £

Money Market Rates
3-MONTH CD'S
SECONDARY MARKET\

SEPTEMBER

OCTOBER

90-DAY FINANCE

NOVEMBER

For notes see p. 211.

money market, depending upon developments in bank credit.
Because there were persistent shortfalls of bank credit below projected levels as the period progressed, System operations gradually
leaned toward a little less firmness.
Over the period as a whole, the System's outright purchases
of Treasury bills totaled $3.1 billion, while sales and redemp-

250

FEDERAL RESERVE SYSTEM

Member Bank Required Reserves

23.6

Projected
23.2

22.8 E

s
22.4 £

21.6

Long-Term Bond Yields

NEW CORPORATE ISSUES

U.S. GOVT.

SECURITIES

5.00 c

20-YEAR
TAX-EXEMPT BONDS

tions of bills amounted to $3.2 billion. With the market for
coupon issues still in a state of flux—albeit with prices generally
rising in contrast to the sharp declines during the summer—no
outright purchases were made of such issues over the period.
The System continued to use repurchase agreements rather
sparingly, although in all it did purchase a little more than

251

ANNUAL REPORT OF BOARD OF GOVERNORS

$1 billion of securities under such agreements during the period.
Most of these agreements were arranged in early November when
high rates on dealer loans at the New York City banks were
causing some nervousness in the securities markets at a time
when issues from the Treasury's November refunding remained
to be distributed. Over the period the System absorbed reserves
for several weeks around the middle of each of the months of
September, October, and November, and only briefly provided
reserves around the ends of September and October when Federal Reserve float was at a low ebb.
In the wake o i these operations the general atmosphere in the
money market became more relaxed than it had been in the
summer, although quantitative indicators of money market conditions tended at times to move in somewhat divergent directions.
Nationwide net borrowed reserves, for example, fluctuated in a
wide range in the first several weeks of the interval before being
eased back to a persistently lower level around mid-October. By
that time, staff projections were pointing to a third consecutive
month of weakness in daily-average member bank deposits subject to reserve requirements—the proxy for bank credit. With the
weakness in bank credit persisting, net borrowed reserves were
allowed to fall to an average of about $220 million in the final
2 weeks of the period reviewed here, compared with weekly
averages of more than $400 million during the summer and
early fall.
Member banks' borrowings from the Reserve Banks also
tended to decline as the period progressed, although there were
wide week-to-week fluctuations, in part because a few banks apparently shifted their strategies for managing their reserve positions. Banks borrowed particularly large amounts from the
Reserve Banks in the week ended October 12 even though Federal funds appeared to be relatively abundant. This development
for a time impaired the System's abilty to judge the state of the
money market and the true state of reserve availability. In the
final 2 weeks of the period borrowings averaged $575 million,
252

FEDERAL RESERVE SYSTEM

compared with an average of about $755 million over the JuneSeptember period.
In the Federal funds market, on the other hand, the most relaxed atmosphere seemed to prevail during the first month and a
half of the interval—that is, through late October—when a considerable volume of trading occurred on a number of days at
rates below 6 per cent. Later, in the opening weeks of November,
reserves shifted sharply away from banks in the major money
centers. Bidding for funds was fairly aggressive, and trading was
for the most part at rates of 6 per cent or more, even with the increased level of nationwide net reserve availability. In the final
week of the period, the Federal funds rate eased again as reserves
flowed back toward the money center banks.
Other short-term interest rates showed mixed changes over the
period. Rates on commercial and finance company paper rose in
two steps by a total of lA of a percentage point. Rates on dealer
loans at the New York City banks held generally in a 6 to 6V2
per cent range through the end of October, then moved up to as
high as 634 and even 6% per cent over much of the next 3 weeks,
a time when dealers' financing needs were enlarged by their
recent acquisitions of Treasury bills and other securities. Rates on
Treasury bills and CD's of major money market banks trading
in the secondary market, on the other hand, declined generally
by Vs to % of a percentage point, net, over the period.
System operations. At the beginning of the period there was
still some apprehension in the money and securities markets
stemming from the churning and pressures around the mid-September corporate tax date. Major banks across the country faced
CD maturities on the tax date itself totaling about $1.2 billion,
and they had large amounts maturing throughout the rest of the
month as well.
In the event, open market operations insured that the banking
system had the funds needed to avoid undue strain during the
period. The banks were able to replace about three-fourths of
their maturing certificates over the period with new CD's, albeit

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ANNUAL REPORT OF BOARD OF GOVERNORS

mostly of 1-month maturity. This performance—along with a
sharp, further buildup of Euro-dollar deposits by a few banks—
and a temporary rise in nationwide net reserve availability helped
the banking system to operate during the period of seasonal pressure with considerably less strain than many observers had expected. Even at major banks in New York City, which lost about
$560 million of CD's and experienced an increase in credit of
$540 million over the September 21 statement week, pressure
on reserve positions was only about average for a tax period.
Moreover, with the very quick payoff of many of these loans
the next week, New York City banks found themselves in quite
comfortable reserve positions by the end of September.
Open market operations during the last 2 weeks of September
generally proceeded cautiously to absorb a part of the bulge in
reserves generated by the midmonth rise in float and other factors. Early in the period rates on Treasury bills were rising
sharply, because market participants thought the decision to avoid
sales of participation certificates and to limit Government agency
financing in the market would require an increase in direct
Treasury financing. In this nervous market atmosphere the
System for a time made considerable use of matched sale-purchase transactions, which absorbed reserves with minimal effects
on market rates of interest. Outright sales by the System during
this period were limited to responding to unsolicited dealer bids
and to orders from foreign accounts. Partly because of this cautious approach, net borrowed reserves declined to an average of
$179 million in the week ended September 21, helping to accommodate the churning in the markets and an unusually large
increase in excess reserves held by country banks.
The spillover of accumulated excess reserves into the following
week preserved a generally comfortable money market environment, which in turn contributed to a gradual strengthening in the
bill market. Rates on Federal funds remained at 5 per cent or less
until the very end of the week. As the week progressed, the
System made fairly large-scale sales of Treasury bills, both out254

FEDERAL RESERVE SYSTEM

right and under matched transactions, and net borrowed reserves
were deepened to an average of $583 million, the deepest level
of the year.
Estimates of bank credit were persistently revised downward
over succeeding weeks. In response to this development the System began around mid-October to absorb less than the full
amount of reserves released by movements in other factors and
thus allowed net reserve availability to expand somewhat. As a
generally relaxed atmosphere emerged and persisted in the money
market, some market participants began to feel that the System's
policy had shifted slightly in an effort to avoid a renewed escalation of interest rates. The actions in late September by the
Board of Governors of the Federal Reserve System and by the
Federal Deposit Insurance Corporation and the Federal Home
Loan Bank Board in exercising newly enacted powers to set
interest rate ceilings on consumer-type savings deposits were
interpreted as generally consistent with this view.
In early November, reserves began to shift away from banks in
the money centers. This reflected in large part the Treasury's
drawing down of its tax and loan accounts at these and other
banks as its cash balances began moving toward a seasonal low.
Funds coming into the banking system, on the other hand, were
widely dispersed among banks outside money centers, which
tended to hold onto somewhat larger than normal amounts of
excess reserves, partly because of the uncertainties around that
time of year caused by the closing of the markets for the Veterans'
Day and Election Day holidays. With New York City banks bidding strongly for the limited amount of money available in the
Federal funds market, the funds rate moved quickly to 6 per cent
and above on the first of November, and a generally taut situation
became evident in the money market. As the New York City
banks raised their lending rates to securities dealers above 6V2
per cent, a feeling of nervousness began to pervade the Treasury
bill market—and longer-term markets as well—at the time the
Treasury was conducting its November refunding.

255

ANNUAL REPORT OF BOARD OF GOVERNORS

Under these circumstances the System moved promptly to
supply additional reserves. It arranged $122 million of repurchase agreements on Tuesday, November 1, and bought about
$270 million of bills on an outright basis from the market and
foreign accounts the next morning. With pressures still in evidence, the System reentered the market that same day and purchased an additional $202 million of Treasury issues under repurchase agreements. Further prompt injections of reserves over
subsequent days continued to help avoid undue tautness in an
environment of expanding net reserve availability. Not until the
week ended November 22, however, when reserves shifted back
toward banks in the money centers, did the money market regain
the tone prevailing in the second half of October.
Securities markets. Conditions in the securities markets, as
noted earlier, generally showed further improvement over the
September-November period, even though there was a temporary reemergence of caution in the first 2 weeks of November.
The sharp curtailment of financing by Government agencies, one
of the actions included in the administration's September package, removed one of the most pressing sources of supply overhanging the market. As it turned out, agency financing in the
public sector over the period actually involved a net reduction of
$560 million in outstanding issues. All the new money raised by
the agencies during the period came through sales of issues to the
Treasury trust accounts, a new debt management procedure
initiated by the Treasury earlier in the year.
This curtailment of agency financing in the market, of course,
necessitated increased Treasury borrowing on its own behalf
over the balance of the year. The Treasury indicated on September 20 that its over-all cash needs over the final months of
the year would total about $8 billion and that most of these
funds would be raised through sales of bills. In anticipation of
this heavy financing, the bill market continued to exhibit considerable nervousness in the opening week of the period, as noted
earlier. By Monday, September 19, guesses about rates on the
256

FEDERAL RESERVE SYSTEM

3-month bills to be auctioned that afternoon reached as high
as 5.65 per cent. In any event, the rates turned out to be somewhat lower than initial expectations, but were still at records of
5.586 and 6.039 per cent for the 3- and 6-month bills, respectively. This marked the high in bill rates for the year, and over
subsequent weeks these rates declined by as much as 53 basis
points. At the close of the period, rates on 3-month bills were
at 5.28 per cent bid, compared with 5.59 per cent around midSeptember.
A very good demand for bills prevailed over the period, and
dealers made net sales at a rate averaging about $200 million a
day. As in the spring, public funds were a predominant source
of demand, although there was also considerable interest on the
part of individuals, who were attracted by the high yields. In
the face of this demand, the supply of new bills coming to the
market was readily absorbed, and dealers were often aggressive
bidders in the various auctions as they sought to rebuild their
inventories.
Part of the Treasury's financing in the bill market involved a
change in the cycle of monthly offerings of bills. Instead of
selling $1 billion of 1-year bills at the end of each month, the
Treasury began in late September to sell $900 million of 1-year
bills and $500 million of 9-month bills. The latter represented a
reopening of an issue that had been sold initially 3 months
earlier. Previous experience suggested that the initial offering of
the 1-year bill series had been a little large, but that the issue
had become quite scarce after a few months. The new cycle
was designed to remedy these difficulties and also to raise a total
of $1.6 billion of new cash over the last 4 months of the year.
The remainder of the bill financing during the period involved
the sale of $3.5 billion of tax-anticipation bills on October 11
and the sale of a strip of $1.2 billion of month-end bills on
November 17, just after the early November hesitation in the
bill market had run its course. These auctions were well received.
Financing activity in the longer-term markets took something

257

ANNUAL REPORT OF BOARD OF GOVERNORS

of a breather in the second half of September and during October. Offerings of new corporate bonds during this period were
considerably lighter than in the immediately preceding months,
and most issues were sold out by underwriters in fairly quick
order. New tax-exempt offerings also sold well over this interval. For a while it appeared that some potential borrowers were
holding back on their offerings, waiting to see how far the trend
toward lower yields would go.
Then, after several aggressively priced issues failed to move
well in early November, the calendar of corporate and taxexempt offerings scheduled for November and December began
to build up to considerable size. This, along with discussion of
the possibility of renewed sales of FNMA participation certificates before the end of the year, exerted a renewed measure of
caution in the capital markets, where the atmosphere was also
affected in part by the temporary, renewed tautness that emerged
in the money market at this time. The possibility of additional
sales of participation certificates had been left open when the
administration announced its fiscal and debt management package early in September, but market participants had for a time
generally assumed that no such offering would be forthcoming.
The growing calendar of future offerings continued to weigh
on the corporate and tax-exempt markets over the rest of the
period. By the end of the period an Aa-rated corporate issue
was trading at a yield of 5.80 per cent after having been offered
in late October at a yield of 5.70 per cent. The Bond Buyer's
index of 20 seasoned tax-exempt bonds, after reaching a low of
3.74 per cent in early November, moved up to 4.00 per cent by
the end of the period.
The renewed hesitancy in the longer-term markets occurred
at the time that the Treasury was refunding $4.1 billion of issues
coming due at mid-November. Before this had happened, the
prolonged price rise during October had led many observers to
feel that the market would be receptive to an oifering beyond
the short-term maturity area. Indeed, when the Treasury an258

FEDERAL RESERVE SYSTEM

nounced on October 27 a cash offering of $2.5 billion of new
55/s per cent 15-month notes and $1.6 billion of new 5% per
cent 5-year notes, prices of outstanding issues actually improved,
and a firm tone was in evidence. Subsequently, the new issues
came under some selling pressure, and by November 14 whenissued prices had dropped by as much as %2 of a point below
par. Prices of some outstanding Treasury issues fell by more
than 2VA points over this period—erasing about two-thirds of
the gains since mid-September.
After mid-November, however, the return of more comfortable conditions in the money market and renewed demand for
Treasury bills and coupon issues sparked a better atmosphere.
Prices in the short- and intermediate-term sectors were the first
to improve, while gains in the longer-term area were delayed
until the end of the month. At the end of the period yields on
long-term Treasury issues were generally around 4.95 per cent,
compared with about 5.00 per cent in mid-September.
November 23-December 31: Modest but overt move toward ease.

Federal Reserve open market operations during the final 6 weeks
of 1966 were directed at attaining somewhat easier conditions in
the money market and providing the base for a resumption of
bank credit growth. The easing that had already been permitted
in the immediately preceding weeks under the proviso clause
had contributed to a more relaxed atmosphere throughout financial markets, but bank credit had remained weak and interest
rates had risen again for a time in the first half of November.
Against this background, the Federal Open Market Committee voted at its November 22 meeting to take a modest but overt
step toward ease, with a revised proviso clause calling for modification of this stance only if bank credit appeared to be resuming a rapid rate of expansion. A move toward somewhat greater
ease was voted at the Committee's December 13 meeting. Financial markets reacted strongly to the System's shift toward less
restraint, and bank credit showed signs of picking up again as
the period progressed.

259

ANNUAL REPORT OF BOARD OF GOVERNORS

In carrying out the Committee's policy, the Manager of the
System Open Market Account moved promptly, and at times
aggressively, to inject reserves ahead of developing needs, and
as it turned out, the System made no outright sales of securities
to absorb reserves. In the wake of these operations, most Federal funds trading was in a 5 to 5 ^ per cent range during the
period, compared with a range generally from SYi to 6 per cent
in the preceding period. Treasury bill rates declined by as much
as 65 basis points over the period, and New York City banks
lowered their rates on dealer loans first to a 6Y4-6Y2 per cent
range and then to a 53A—6Y4 per cent range for a time around
mid-December. Rates on bankers' acceptances were reduced by
YA of a percentage point over the period. Member banks' net
borrowed reserves and their borrowings from the Reserve Banks
moved irregularly downward, averaging about $190 million and
$510 million, respectively, in the final 2 weeks of December (see
Chart 5).
Market participants, many of whom had for a time been looking for concrete signs of a change in System policy, were quick
to react to the new money market environment. This was especially true following aggressive actions by the System to inject
reserves in late November when it appeared that net reserve
availability after the Thanksgiving Day holiday was falling far
short of expected levels. Dealers bid aggressively for Treasury
bills in each of the following bill auctions, both to build up
positions in expectation of lower rates and to meet a heavy demand for bills from public funds and corporations, and later on
from banks. Demand for Treasury coupon issues also expanded,
from both dealers and investors. In the corporate and municipal
markets a heavy buildup of the calendar had caused considerable
concern earlier, but the new issues moved readily at declining
yields.
By mid-December the 3-month Treasury bill rate had fallen
below 5 per cent, and the 6-month bill rate was nearly a full
percentage point below September's high of 6.04 per cent. Rates
260

FEDERAL RESERVE SYSTEM

NOVEMBER 23-DECEMBER 30, 1966
Reserves and Borrowings

Member Bank Required Reserves

NET BORROWED
RESERVES

400 -

I M i I ; i I I I i

Money Market Rates
3-MO. CD's
SEC MKT
6.00 ~A

' N CO.
PAPER

Long-Term Bond Yields

NEW CORPORATE ISSUES

3-MONTH
TREASURY BILLS

6.00

U.S. GOVT. SECURITIES

I M 1 i i I i 1 I

NOV

DECEMBER

NOV

DECEMBER

For notes see p. 211.

on short-term Federal agency issues had also retreated sharply,
and 3-month CD's were trading in the secondary market at rates
as low as 5.60 per cent, compared with rates of around 5% per
cent in November. In this environment new CD's offered at the
5Y2 per cent Regulation Q ceiling began to become competitive
again. Thus, after 4 months of decline and a net loss of $3.2
billion in CD's, the volume of outstanding CD's at weekly re-

261

ANNUAL REPORT OF BOARD OF GOVERNORS

porting banks increased in each of the last two statement weeks
of December.
The greater availability of funds encouraged banks to begin rebuilding their liquidity. For example, large banks that report
weekly expanded their holdings of Treasury bills by $1.1 billion
during December, which was considerably more than in comparable weeks of earlier years. They also sharply increased their
lending to Government securities dealers. Both of these developments played a key role in the renewed expansion of bank credit
in December.
Moreover, with funds from domestic sources more readily
available and less expensive, some banks that previously had been
aggressive bidders for Euro-dollars also began around midDecember to cut back somewhat on their participation in that
market. This, together with cooperative central bank action to
maintain availability in the Euro-dollar market, enabled that
market to get through December without undue pressures.
System operations. The System's open market operations during the period involved extensive use of repurchase agreements,
an instrument well suited to dealing with the seasonal pressures
and uncertainties in financial markets that are characteristic of
December. In all, $5 billion of Treasury and Government agency
securities were purchased under such agreements during the
period, more than half of the total for the year as a whole, while
$4.3 billion of such agreements were terminated. The amount
of agreements outstanding at any one time reached as high as
$800 million on December 27, and the average amount outstanding over the period as a whole was just over $450 million.
The Account Manager initiated purchases of Federal agency
issues under repurchase agreements on December 5, under
authority voted by the Federal Open Market Committee at its
November 1 meeting, pursuant to new legislation enacted by the
Congress earlier in the fall.
Other System operations during the period included the outright purchase of nearly $1.3 billion of Treasury bills from the
262

FEDERAL RESERVE SYSTEM

market and from foreign accounts and the purchase of $35 million of Treasury coupon issues. The purchases of coupon issues
were the first since late June, and they reaffirmed the System's
intent to supply some portion of the normal growth in the reserve
base in this manner, while remaining a marginal participant in
the market. In addition, on Friday, December 9, the System
purchased directly from the Treasury a special 4V4 per cent 3-day
certificate of indebtedness in the amount of $169 million to assist
the Treasury through a period of seasonally low cash balances.
This marked the first use of this special facility since 1958.
There were no outright sales of securities by the System during
the period, as the pursuit of easier money market conditions generally called for leaving in the banking system the few excesses
of reserve availability that did emerge. However, the System did
bid in several of the weekly bill auctions to redeem part of its
holdings of bills scheduled to mature the following Thursday.
Bills totaling $503 million were redeemed over the period.
The heavy use of repurchase agreements during the period
reflected several considerations. In particular, there was the
desire to preserve as much day-to-day flexibility as possible in
dealing with the wide and uncertain swings in reserve needs that
generally are typical of the last weeks of the year. This is a period
usually marked by surging credit demands around the quarterly
tax payment date, as well as by large fluctuations in float and
currency in circulation. By using repurchase agreements rather
than outright purchases, the System could afford to inject large
amounts of reserves temporarily on days when the money market
threatened to tighten without committing itself to a possibly more
permanent addition to the reserve base since the agreements
were scheduled to mature automatically a few days later.
As it turned out, with the renewed expansion of bank credit in
December persistently pushing required reserves beyond initial
estimates, the maturing agreements tended to be constantly replaced and supplemented. The eventual maturity of most of the
agreements around the end of December left room at that time

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ANNUAL REPORT OF BOARD OF GOVERNORS

for large outright purchases of Treasury bills by the System from
foreign accounts, which were selling bills in quantity to make
year-end payments. Purchases of bills were also made at that
time from the market where demands were drying up after
completion of banks' purchases before the year-end statement
publishing date.
The use of repurchase agreements also served to inject reserves
at what threatened to be the point of greatest pressure in the
money market. Dealers' financing needs expanded progressively
over the period, as dealers steadily built up their net trading
positions to around $4.5 billion toward the end of December
from about $3 billion at the end of November. Moreover, the
availability of such agreements reduced the financing burden on
the major New York City banks, which were already experiencing some deterioration in basic reserve positions, and contributed
to the easing of money market rates. The proportion of dealers'
trading positions financed in December through System repurchase agreements, on the average, was not much larger, however, than in other recent Decembers.
A few specific examples illustrate the general character of
System operations during the period. At the very beginning of
the period the System was concerned with meeting indicated
reserve needs around the Thanksgiving Day holiday and over
the November month-end. For this purpose the Account Manager
had made net purchases of securities, both outright and under
repurchase agreements, totaling $652 million on Wednesday,
November 23, and Friday, November 25.
After the ensuing weekend, however, it was learned that net
reserve availability for the week was turning out considerably
short of earlier expectations. At the same time, trading in Federal
funds opened at 6 per cent on Monday—above the levels generally prevailing on other recent days—and dealers needed substantial amounts of funds. Under these circumstances, the System
moved quickly to head off further tightening in the money
market. It purchased $126 million of bills in the market and from
264

FEDERAL RESERVE SYSTEM

foreign accounts and bought an additional $185 million of bills
from the market for foreign accounts, which had funds to invest
that day. As soon as these outright purchases had been consummated, the System moved aggressively back into the market
and purchased an additional $424 million of Government
securities and bankers' acceptances under new 10-day repurchase
agreements. In arranging these repurchase agreements against
Government securities, the Account Manager gave the dealers
time to acquire additional collateral over whatever amounts
might have been immediately available.
The money market turned more comfortable after this massive
reserve injection, and some Federal funds traded as low as 5 per
cent on Monday, November 28, and as low as 4% per cent on
the following day. The reappearance of a firm tone on Wednesday, November 30, was countered with the injection of an additional $289 million of reserves, net, under new repurchase agreements. All in all, over this 8-day period the System injected about
$1.1 billion of reserves. These injections more than offset the
reserve drains stemming from movements in other factors, and
member banks' net borrowed reserves declined in the week to
an average of $175 million.
Operations over subsequent weeks, while generally more
modest in size, followed a similar pattern. Net reserve availability
fell rather persistently short of initial estimates, partly because
of greater than expected bulges in required reserves as expansion of bank credit resumed. The shortfalls in net reserve availability were particularly large in the weeks ended December 21
and 28. The bulk of the credit expansion during this period occurred at major banks in money centers throughout the country.
These banks accumulated basic reserve deficits averaging nearly
$2.2 billion in the statement week ended December 21 before
benefiting from a gain in reserves in the following week. By
quickly renewing maturing repurchase agreements, however, and
then injecting additional reserves through further purchases late
in the statement weeks, the System maintained an ample level of

265

ANNUAL REPORT OF BOARD OF GOVERNORS

reserve availability throughout the banking system, and the
pressures were accommodated quite smoothly.
Some pressures did emerge on the next to last business day of
the year, Thursday, December 29. Banks sought to meet, in
advance, their reserve needs for the following holiday weekend
so as to avoid having to borrow on the year-end statement date.
Dealer financing needs were also quite heavy, in part because
more than $500 million of repurchase agreements with the
System matured that day. Trading in Federal funds opened at 6
per cent that morning and threatened to move to higher rates
as the availability of money appeared limited.
In these circumstances the System purchased $233 million of
bills in a go-around of the market and an additional $260 million
of bills directly from foreign accounts. To this amount was added
a total of $532 million of Treasury and Government agency
securities and bankers' acceptances purchased under new repurchase agreements, bringing the net reserve injection for the day to
about $500 million. The Federal funds market did not tighten further after these operations, although member banks borrowings
from the Reserve Bank bulged to $2.1 billion that day. The next
day—Friday, December 30, which was the statement publishing
date—the Federal funds market eased again and member banks'
borrowings dropped back to $173 million.
Securities markets. The sizable injections of reserves around
the end of November were generally interpreted by participants
in the securities markets as a clear signal that System policy had
shifted. This view became stronger as the easier conditions in
the money market continued in subsequent weeks. To the buoyancy in the markets stemming from this factor was added further discussion of a slowing in the pace of the over-all economic
advance, of the possibility that the administration's forthcoming
annual messages to the Congress would include a request for
additional fiscal action to redress imbalances in the economy,
and finally, renewed hopes for peace negotiations in Vietnam.
In this environment the feeling prevailed that prices of securities
266

FEDERAL RESERVE SYSTEM

would rise. As demand from professional and investment sources
expanded, prices in fact did rise quite sharply.
In the short-term markets, demand for Treasury bills was
especially strong. Dealers built up their net trading positions in
bills to nearly $3.5 billion by the end of December and still sold
sizable amounts of bills to public funds and commercial banks.
Bill rates moved down by 20 to 65 basis points over the period,
with 3-month bills bid at 4.81 per cent on December 30. This
was 78 basis points below the high reached in mid-September
and only 29 basis points above the rate prevailing at the beginning of the year. The spread between rates on 3- and 6Tmonth
bills, which had widened to as much as 50 basis points in early
September, was only 11 basis points at the year-end—reflecting
the increased confidence in the outlook for interest rates generally among market participants.
Demand for Treasury coupon issues also expanded over the
period, and there was a considerable amount of tax switching
transactions as the year drew to a close. In the corporate and
municipal markets, underwriters approached the forthcoming
heavy supply of new issues with increasing confidence, and when
the offerings attracted good investor response, all sectors of the
markets were encouraged further. Against this background, further discussion of the possibility of renewed sales of FNMA
participation certificates had little effect on market sentiment,
and indeed by midmonth participants seemed to be optimistically
awaiting formal announcement of the terms of sale. The announcement, which came on December 19, indicated that the
offering early in the new year would consist of $600 million to
be sold to the public and $500 million to be sold to Government
trust accounts. The size of the offering to the public was somewhat less than had been expected, and prices of outstanding
bond issues rose sharply further in all market sectors.
The markets took further encouragement from the Federal
Reserve's formal announcement on December 27 that due to
the change in credit conditions, including the more moderate

267

ANNUAL REPORT OF BOARD OF GOVERNORS

rate of expansion of business loans, the special discount arrangements announced in the System's September 1 letter were terminated. This was taken as additional evidence of the System's
move toward an easier policy stance. By the month-end, prices
of Treasury coupon issues were up by as much as 4Vs points
from their levels on November 22. Yields in the 1- to 5-year
and long-term sectors of the Treasury market were down to 4.98
and 4.63 per cent, respectively. These were 127 and 63 basis
points below the peaks reached around the end of August and
indeed were not very far from the levels prevailing at the year's
start.
The decline in tax-exempt yields over the period brought the
Bond Buyer's index of yields on 20 seasoned tax-exempt issues
down to 3.77 per cent by the end of December. While this level
was nearly 50 basis points below the August peak, it was still
about 25 basis points higher than at the year's start. In the corporate market, on the other hand, the better atmosphere in the
final weeks of the year had less of an impact on yields. Over the
year as a whole, borrowers had sold a total of $17 billion of
new issues in this market, or 9 per cent more than in 1965, and
yields at the year-end were still well above their beginning-ofyear levels. Indeed, yields were only about 30 basis points below
their August peaks. Thus, by mid-December an index of yields
on new corporate issues, adjusted to an Aaa basis—calculated
by the staff of the Board of Governors—was 5.63 per cent,
compared with 5.98 per cent in early September and 4.82 per
cent at the start of the year.

268

FEDERAL RESERVE SYSTEM

REVIEW OF OPEN MARKET OPERATIONS IN
FOREIGN CURRENCIES

There were very heavy flows of funds across the foreign exchanges and in the Euro-dollar market during 1966. These stemmed from the continuing deficit in the U.S. balance of payments,
from sharp shifts in the balance of payments positions of several
other industrial countries, and from the emergence of another
major crisis for the pound sterling. The potentially adverse effects of some of these developments on the U.S. dollar and the
U.S. gold stock were cushioned to a considerable extent by large
inflows of private capital to the United States induced by tightening monetary conditions in this country. At the same time, the
use of official international credit facilities again helped to protect
a number of major currencies, including the dollar, from too
much buffeting.
One of the significant developments of the year was the further
strengthening of the international monetary system to withstand
the pressures generated by speculative shifts and payments swings.
This strengthening included an enlargement of the Federal Reserve System's reciprocal currency arrangements with foreign
central banks and the Bank for International Settlements (BIS)
from $2.8 billion to $4.5 billion and an increase of more than 25
per cent in the resources of the International Monetary Fund
(IMF). Moreover, the scope of official operations was extended
at the year-end as several monetary authorities and the BIS
entered into operations designed to ease year-end pressures in
the Euro-dollar market.
With the United States still in payments deficit, partly as a
result of the Vietnam war, the dollar again experienced a backwash from a major sterling crisis. During the late spring and
early summer very large amounts of sterling were converted into
dollars, some of which flowed to continental European central
banks. Moreover, the payments surpluses of France and Italy
remained large—although they moderated during the course of

269

ANNUAL REPORT OF BOARD OF GOVERNORS

the year—while Germany's balance of payments swung sharply
from deficit to surplus.
These developments would have resulted in a much greater
pressure on the dollar in the exchange markets had it not been
for the increasing stringency of monetary policy in the United
States. U.S. commercial banks, through their branches in Europe,
bid actively for Euro-dollar deposits at rates high enough to induce private foreigners to hold larger amounts of dollars in this
form rather than convert them into local currencies. Inflows
through the branches were particularly large during the third
quarter, when the sterling crisis was at its peak, and thus greatly
reduced the flow of dollars to continental central banks and the
amount of U.S. official financing that might otherwise have been
required. Nevertheless, the over-all flow of dollars through central banks was very large during the year, and in response to these
flows the foreign exchange operations of the Federal Reserve and
the Treasury continued to expand.
During the first part of 1966 the Federal Reserve was able to
repay all of its outstanding drawings under swap agreements.
In addition, significant progress was made in reducing other foreign exchange commitments of the United States. The deficit in
Germany's payments position that had emerged in the latter half
of 1965 persisted into 1966, and the U.S. Treasury was able to
acquire enough marks to liquidate $252 million of its outstanding
German mark-denominated securities. The Treasury also reduced
its indebtedness in Swiss francs and Austrian schillings.
In the first quarter the tone of the sterling market continued
to reflect the improvement that had begun in September 1965,
and the Bank of England was able to repay its swap drawings
from the Federal Reserve. However, the position of sterling
began to deteriorate in late spring, as Britain's payments deficit
persisted and the country suffered a prolonged maritime strike.
In early summer, sterling again came under extremely heavy
pressure in exchange markets, and the British Government
enacted a drastic stabilization program. To finance its support of
270

FEDERAL RESERVE SYSTEM

the pound, the Bank of England relied heavily on short-term
international credit facilities, including those with the Federal
Reserve and U.S. Treasury, the Basle group of central banks,
and the BIS.
As part of the outflow of funds from Britain and from the
continuing U.S. deficit found its way into the hands of central
banks on the continent, the United States was called upon to
make use of its own credit lines. Swap drawings totaling $570
million were made in the third quarter by the Federal Reserve
in Swiss francs, Dutch guilders, Belgian francs, and Italian lire.
In August the Treasury made a new drawing of $250 million
equivalent of lire on the IMF and sold the lire to the Federal
Reserve, which used them to repay short-term borrowings. In
addition, in September the Italian and French Governments
prepaid some of their postwar debt to the United States, as the
German Government was to do at the year-end.
TABLE 1
FEDERAL RESERVE RECIPROCAL CURRENCY ARRANGEMENTS
Amount of facility
(in million 5 of dollars
equivalent)
Other party to arrangement
Dec. 31,
1965
Austrian National Bank
National Bank of Belgium
Bank of Canada
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Netherlands Bank
Bank of Sweden
Swiss National Bank
Bank for International Settlements
Total

Dec. 31,
1966

50
100
250
750
100
250
450
250
100
50
150

100
150
500

1,350

100
400
600
450
150
100
200

1300

1400

2,800

4,500

i Half available in Swiss francs and half in other European currencies.

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ANNUAL REPORT OF BOARD OF GOVERNORS

The pressures that developed in exchange markets during the
spring and summer created widespread apprehension and
prompted the Federal Reserve to initiate discussions aimed at
increasing its reciprocal currency facilities with a number of
major central banks. As market fears intensified, these talks
were broadened to include virtually all parties to the swap network. In mid-September the Federal Reserve announced a general enlargement of the swap lines from $2.8 billion to $4.5
billion (Table 1). These increases brought the credit lines to
levels well above the size of any routine drawings that might
reasonably be expected and thus created a broad margin of
safety against any unforeseeable threats to international currency
stability. At the same time the Bank of England announced an
increase in its credit facilities with a number of other central
banks as well as with the Federal Reserve.
Following the announcement of this reinforcement of the
international financial mechanism, and as some of the extreme
pessimism in financial markets began to lift, the exchanges started
to calm. Although U.S. banks continued to attract Euro-dollar
funds, the markets were much less strained, and sterling staged
a strong recovery in the exchange market.
As the year-end approached, however, there was the danger
that the customary large flows of funds back into continental
European centers for year-end payments and balance-sheet
window dressing would put a severe strain on the Euro-currency
and exchange markets, and on sterling in particular. In order
to head off such a development, the Federal Reserve, the BIS,
and several major continental central banks joined forces in
operations in Euro-dollars. The BIS injected into the Eurodollar stream some $275 million of funds drawn from the
Federal Reserve under the swap facility and from its own resources, while the Swiss National Bank, as in past years, rechanneled into the Euro-dollar market its dollar gains stemming
from year-end flows. The Federal Reserve and the U.S. Treasury moved into the market for sterling and executed a total
272

TABLE 2
FOREIGN CURRENCY TRANSACTIONS OF THE FEDERAL RESERVE,

1966

(In millions of dollars equivalent)

Other transactions

Transactions under swap lines
Acquisitions
of funds for
repaying swaps

Currency

Operations initiated by
the System:
Belgian franc
Pound sterling
German mark
Italian lira
Dutch guilder
Swiss franc
Total

Swap operations
initiated by others:
Pound sterling
Other
Total

Drawings

30.0

Repayments

Third-currency
swaps

With U.S.
Treasury
Disbursements
Purof swap- From
chases Sales
acquired U.S. From and re- and re- Purbalances Treas- others acqui- pay- chases Sales
ury
sitions ments

65.0

30.0

64.9

140.0
325.0
65.0
150.0

410.0
30.0
60.0

140.0
325.0
65.0
150.0

225.0

2.5
140.9
30.0
61.0

710.0

565.0

710.0

225.0

625.0
302.6

Purchases

Sales

31.7
54.8

430.0
72.3
23.9

304.0
61.2

48.0

88.9

134.5

615.1

750.0
102.6

927.6

With others1

852.6

299.3

50.0
40.1
250.0

50.0
50.0

25.5

40.1
140.1

140.1

25.5

367.7

includes forward as well as spot transactions; excludes Italian lira forward operations and renewals of forward sales.
Used to repay swap drawing.

>
r
w
H

ANNUAL REPORT OF BOARD OF GOVERNORS

of $88 million of 1-month swaps to help insulate sterling from
the year-end strain. During the closing weeks of the year the
Netherlands Bank also redeposited some funds in the Euro-dollar
market, while the German Federal Bank and the Bank of Italy
took action to reduce the seasonal pullback of funds by their
commercial banks. The effect of these coordinated actions was
to damp emerging pressures in the Euro-dollar market and
to enable that market to pass through a potentially dangerous
period without undue strain.
The remainder of this report presents a more detailed review
of Federal Reserve operations in sterling, German marks, Swiss
francs, Italian lire, Netherlands guilders, and Belgian francs.
It also gives an account of U.S. transactions with the IMF; some
of these were related to System activities.
Sterling. During the first few weeks of the year, sterling was
riding the crest of a recovery that had begun with the September 10, 1965 announcement of renewed international support
for the pound. By early February the Bank of England had completely paid off the $890 million of credits received from the
Federal Reserve and U.S. Treasury in 1965, including $475
million outstanding at the end of the year under the reciprocal
currency arrangement with the Federal Reserve.
During February, however, the exchange markets became
more cautious in view of disappointing January trade results and
the impending British general election. By the end of February,
the sterling rate had moved below par for the first time since
September 1965, and the rate eased further in March as uncertainties about sterling were reinforced by a tightening of the
Euro-dollar market.
The Labor Party's decisive victory at the polls on March 30
had been expected by the market, and relatively quiet conditions
prevailed throughout April in guarded anticipation of Chancellor
Callaghan's budget for the new fiscal year. The market interpreted the budget announced on May 3 as being only moderately
restrictive, particularly since the principal provisions were not
274

FEDERAL RESERVE SYSTEM

scheduled to take effect until the fall, and initially there was
some selling of pounds. This was countered by support from the
Bank of England and the U.S. Treasury, and the market quickly
regained its equilibrium; but it remained vulnerable to new setbacks as British imports continued at abnormally high levels.
In this atmosphere, the outbreak of the British seamen's strike
in mid-May brought a rapid deterioration of confidence in sterling, and a series of intensive selling waves began on June 3.
Temporary relief from these pressures was provided by the announcement in mid-June that the credit lines from U.S., European, and other sources that had been made available in support of the pound during the autumn of 1965 had now been
placed on a continuing basis. The respite for sterling provided
by this announcement was short-lived, however, as increasing
stringency in the Euro-dollar market left British interest rates
not fully competitive, with consequent outflows from sterling
in late June.
While spot sterling came under pressure, forward sterling
quotations narrowed and a sizable arbitrage incentive in favor
of the United Kingdom developed in relation to short-term
instruments in the New York market. Consequently, the Federal Reserve Bank of New York, with the agreement of the
Bank of England, undertook market swap transactions in which,
for System and Treasury accounts, it bought a total of $67 million equivalent of sterling spot against delivery 1 month forward.
This operation both reduced the arbitrage incentive to shift funds
from New York and eased exchange market pressures on spot
sterling quotations.
Although the seamen's strike was settled by the end of June,
market attitudes had deteriorated and sales of sterling rose to
a climax during July. Figures that were released on July 4 indicated that during the preceding 4 months British reserves had
declined $372 million, even after recourse to international assistance (including $275 million from the United States). In addition, there was disagreement within the Labor Party over the

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ANNUAL REPORT OF BOARD OF GOVERNORS

proposed tightening of the incomes policy, an important element
in the long-term resolution of Britain's payments difficulties. As
selling of sterling reached very heavy proportions toward midJuly, the Bank of England continued to provide firm support for
the pound in both spot and forward markets. On July 14 it raised
its discount rate from 6 per cent to 7 per cent and doubled the
special deposits required of the London and Scottish banks.
However, the market shrugged off the discount rate increase as
merely a technical adjustment to rising interest rates abroad.
Selling of sterling then intensified when the Prime Minister, in
speaking to Parliament, confirmed that Britain faced a new
financial crisis and warned of new restrictive measures.
Against this background of massive sales of sterling, the British Government, on July 20, introduced a drastic austerity
program, including a wage freeze, restraint on prices and
dividends, additional taxes, reduced travel allowances, and
further curbs on public expenditures at home and overseas. In
order to emphasize to the market the confidence of U.S. authorities in the ultimate success of the British program and to help
stem and possibly reverse reserve losses by the Bank of England
in the market, the Federal Reserve Bank of New York moved
into the sterling market in New York and began buying pounds
for both System and U.S. Treasury account as the sterling rate
advanced from $2.7866 before the announcement of the new
program-to above $2.7900 by July 22.
During the next few weeks, sterling remained vulnerable,
both because the market was skeptical of the political feasibility
of the strong new measures and because British foreign trade
figures remained disappointing. In addition, a sharp rise in
yields on dollar-denominated instruments exerted a strong pull
on funds from sterling, while the approach of the IMF-World
Bank meeting, which was to be held in September, tended to unsettle market sentiment. Against this background of uncertainty
in the exchange market and the seriously strained conditions in
many national money markets, the Federal Reserve on September
276

FEDERAL RESERVE SYSTEM

13 announced the increase in its over-all reciprocal currency
facilities with other central banks from $2.8 billion to $4.5
billion. Included was an increase of $600 million to $1,350
million in the arrangement with the Bank of England. The
Bank of England simultaneously announced that it had arranged
additional facilities with other central banks.
With this renewed evidence of central bank solidarity, the
market atmosphere improved and selling pressures on sterling
subsided. In following weeks the restrictive measures initiated
by the British Government in earlier months began to show results, and as public opinion rallied in support of the Government's defense of sterling, speculative talk about sterling died
down and short-covering began. Additional demand for sterling
came from the requirements of international oil companies and
from favorable reaction to a progressive improvement in Britain's trade performance. In October and November the Bank
of England took in a substantial amount of dollars; of this, $120
million was added to reserves, while a start was made on repaying central bank assistance.
During the final weeks of the year, the market atmosphere
was somewhat uneven, although on balance the Bank of England was still able to add to reserves from market operations.
Some selling of sterling was occasioned by concern about mounting tension surrounding the Rhodesian issue. Even more importantly, the year-end preparations in several financial centers
gave rise to very large flows of funds across the exchanges, and
in the process money moved out of sterling on a short-term
covered basis. The flow of covered funds contributed to an appreciable narrowing in the discount for 1-month sterling; simultaneously, U.S. money rates were declining. As under similar
circumstances earlier in the year, the Federal Reserve and the
Treasury, in consultation with the Bank of England, again purchased spot sterling against sales for 1-month forward delivery
at increasingly wide discounts. These operations—totaling $88
million—complemented coordinated action taken by several

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ANNUAL REPORT OF BOARD OF GOVERNORS

other central banks and the BIS to relieve potentially disruptive
year-end pressures in the Euro-dollar market.
Sterling thus was insulated from year-end window-dressing
pressures, and during December it benefited again from encouraging trade figures and from some repatriation of corporate
profits at the end of the year. Consequently, in December British
reserves would have increased $11 million even after some
further repayment of short-term central bank debt, had it not
been for $193 million of year-end debt payments on North
American loans. Because of these repayments, reserves dropped
by $182 million in December to $3,100 million.
As sterling moved through crisis to convalescence, the Bank
of England made extensive use of the network of central bank
credit facilities of various types that have been constructed during the past 5 years. In the case of the Federal Reserve swap
line, Bank of England drawings rose to a peak of $450 million
at the end of July, declined to $400 million by the end of September and to $350 million at year-end, and were paid off completely by early March 1967. In addition to these drawings on
the Federal Reserve swap line, the Bank of England made use
of sizable special credits provided by the U.S. Treasury, and to
a lesser extent—that is, a maximum of $50 million—by the
Federal Reserve. After rising to a peak during the midsummer
months, such special credits declined to $175 million at the end
of September and to $ 160 million at the year-end and were fully
liquidated during January 1967. At the height of the crisis the
Bank of England also secured credit assistance from other
central banks with repayments being effected later.
German mark. The German balance of payments swung from
deficit to substantial surplus during 1966. This swing was
related largely to a cyclical slowdown in the German economy,
which had been overheated during most of 1965 and early
1966. As German imports stabilized early in 1966 and exports
began to rise sharply, the trade surplus expanded. This improvement on the trade account was a major force in 1966 behind
278

FEDERAL RESERVE SYSTEM

an over-all improvement in Germany's external position, as
other current-account items continued in deficit and the capital
accounts were about in balance.
At various intervals both German and U.S. authorities acted
to moderate the impact of the German payments position on the
exchange markets and on German official reserves. The German
Federal Bank intervened in support of the mark early in the
year, but as an over-all payments surplus emerged during the
second quarter, the German Federal Bank began to purchase
dollars, and it closed the year with a net gain of $419 million in
holdings of gold and convertible currencies. Similarly, the U.S.
authorities purchased sizable amounts of marks in the first half
of the year and liquidated $252 million of mark-denominated
U.S. Treasury securities. In December, however, the Federal
Reserve sold a sizable amount of marks in the New York market
and absorbed $155 million of official German gains—using
mainly marks drawn under the Federal Reserve swap line, which
had been increased in September by $150 million to $400
million.
During the first 4 months of the year the German balance
of payments was still in deficit, primarily because of seasonal
outflows of short-term funds from German banks and because
of rising German expenditures for services from abroad. Consequently, the mark was generally on offer at rates somewhat below
its parity of $0.2500, and support operations by the German
Federal Bank resulted in a decline of $281 million in official
German reserves by April 30.
The ready availability of German marks enabled the U.S.
authorities to buy marks as they had been doing since June 1965
in order to repay mark-denominated U.S. Treasury indebtedness
to the German Federal Bank. During the first half of 1966 a total
of $232 million of marks was bought for Treasury account,
mostly in the New York market. The Treasury used these marks,
together with balances on hand, to redeem at maturity a total of
$252 million equivalent of mark-denominated securities held by

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ANNUAL REPORT OF BOARD OF GOVERNORS

the German Federal Bank. With these repayments, and with those
that had been initiated in the second half of 1965, the Treasury
within the 12-month period ended July 1 had reduced its markdenominated indebtedness by $329 million, to $350 million
equivalent.
The German Federal Bank pursued a generally restrictive
monetary policy during the year, and the resulting firmness in
the money market encouraged German firms to borrow abroad.
On May 26 the Federal Bank announced an increase in its discount rate to 5 per cent from 4 per cent, and in June the money
market tightened further in connection with large tax payments
and the usual midyear window-dressing operations. Moreover,
in late June and during July the sterling crisis led to flows of
funds to Germany.
As a result of these developments, as well as of the recovery
of the German trade position, the German balance of payments
began moving into surplus during the second quarter, and the
demand for marks increased. In June and July the spot rate
moved back to parity and above, and the German Federal Bank
added $467 million to its reserves of gold and convertible currencies, thus more than recouping losses incurred during the first
4 months of the year.
More balanced conditions prevailed later in the summer, but
by October demand for marks began to increase again as the
German trade surplus continued to widen and a tight German
money market prompted German firms to continue borrowing
abroad. As a result, spot quotations for the mark resumed their
rise. The German Federal Bank purchased dollars on a large
scale in October and again beginning in late November, when
demand for marks intensified in connection with mounting yearend liquidity requirements in Germany.
The German Federal Bank had sought to relieve some of these
pressures by announcing in early November a 9 per cent reduction in commercial banks' reserve requirements for December.
Nevertheless, beginning in late November large short-term capital
280

FEDERAL RESERVE SYSTEM

flows to Germany took place in preparation for the year-end and
for a mid-December tax payment. The spot rate for the mark
advanced almost to its ceiling, and during December the Federal
Bank made very sizable purchases of dollars.
Under the circumstances, the System acted in December to
relieve pressures on two fronts. First, in order to meet the
demand for marks that had spilled over to the New York market,
the System, in consultation with the German monetary authorities, sold marks in that market from its available balances; early
in the month it sold spot $29 million equivalent. Then just before
Christmas the market began to bid strongly for marks on a 1month swap basis. The System shifted its intervention accordingly
and sold $17.5 million of marks spot against 1-month forward
purchase. In addition, the System absorbed $155 million of the
large gains in Germany's official dollar holdings; it purchased
$15 million with marks accumulated during 1965 and $140
million with marks drawn under its swap facility with the German
Federal Bank.
In the last 2 days of December, when trading was for delivery
after the year-end, marks began coming on offer in connection
with a reversal of some of the earlier short-term flows of funds to
Germany. The German Federal Bank then gave up some of its
earlier December gains as the rate for the mark declined to
$0.2514^, while the System began buying marks on a small
scab in New York to help cover swap commitments.
Swiss franc. The rate for the Swiss franc declined steadily
during the first quarter of 1966 as a result of seasonal influences
and of sizable outflows of capital induced by easy monetary conditions in the Swiss market, rising Euro-dollar rates, and attractive yields on offshore U.S. corporate issues. By early March, the
Swiss franc had fallen to $0.23041/s and the Swiss National Bank
began selling dollars to moderate the rate decline. At the same
time, payments to foreign countries by the Swiss Government
and by federal agencies further reduced the reserves of the National Bank. To replenish its dollar balances the Swiss National

281

ANNUAL REPORT OF BOARD OF GOVERNORS

Bank between February and May bought $133 million from the
Federal Reserve and the U.S. Treasury, mostly against Swiss
francs but also through sales of $18 million of gold.
The Federal Reserve and the Treasury in turn used the Swiss
francs they acquired to repay Swiss-franc-indebtedness and to
add to balances. The Federal Reserve fully repaid its $40 million
equivalent German mark-Swiss franc swap with the BIS, while
the Treasury liquidated a similar swap for $15 million equivalent. The System temporarily added $46 million equivalent to
its balances—simultaneously selling the Swiss francs forward to
the Treasury for delivery on May 16 and July 20, on which dates
the Treasury repaid at maturity two Swiss-franc-denominated
securities issued to the Swiss National Bank as fiscal agent for the
Swiss Confederation. (These repayments reduced the amount of
outstanding Treasury securities denominated in Swiss francs to
$304 million equivalent.) At the same time, the Treasury added
$17 million equivalent to its Swiss franc balances.
During April, monetary conditions in Switzerland tightened
and the Swiss franc began to strengthen. The rate reached its
effective ceiling of $0.2317Vi in early May, and the Swiss National Bank entered the market as a buyer of dollars for the first
time in 1966. The franc remained at the ceiling in subsequent
weeks as the Swiss banking community began to repatriate funds
to meet midyear liquidity needs and as foreigners who had previously borrowed Swiss francs switched to less costly Eurocurrencies—purchasing Swiss francs outright to pay off their
franc borrowings. At the same time, mounting pressures on sterling added to the demand for Swiss francs. During May and June
the Swiss National Bank took in $200 million through outright
purchases and an additional $82 million in short-term swaps with
Swiss commercial banks to help provide for their temporary midyear requirements.
By July uncertainties generated by the pressures on sterling
again dominated the foreign exchange markets, and the usual
seasonal outflow of funds from Switzerland was replaced by
282

FEDERAL RESERVE SYSTEM

an inflow. Accordingly, in July the Federal Reserve reactivated
its swap facilities with the Swiss National Bank and with the BIS
—drawing $75 million of francs from each bank to absorb dollars
from the Swiss central bank. The Swiss authorities also purchased
$20 million of gold from the U.S. Treasury.
Beginning in late July, Swiss francs gradually came on offer.
As pressure on sterling subsided and high money market rates
abroad induced extensive foreign investments on a short-term
basis, the spot rate declined. By autumn, the rate had eased to
$0.2305XA, and the Swiss National Bank began selling dollars to
the market. In addition, Swiss reserves were drawn down in connection with fairly sizable official requirements between September and November. With its dollar holdings reduced the Swiss central bank once again purchased dollars from the System against
francs. The System used the $60 million equivalent so acquired
to reduce its $75 million franc swap drawing from the Swiss
National Bank to $15 million equivalent. The System's Swiss
franc swap drawing of $75 million equivalent from the BIS, however, remained unchanged through the year-end.
The facilities with the Swiss National Bank and with the BIS
that provide for swaps against Swiss francs were each increased
on September 13, 1966, from $150 million to $200 million;
another swap facility with the BIS, which provides for swaps
against European currencies other than Swiss francs, was increased from $150 million to $200 million on the same date.
In the final weeks of 1966, Swiss banks began to repatriate
large amounts of funds to cover their usually heavy year-end requirements, and by November 23 the spot rate for the franc had
again reached its ceiling. The Swiss National Bank first purchased $75 million spot, but toward the end of November it
announced that it was ready to buy dollars from banks on a swap
basis, as it had under similar circumstances on previous occasions. The spot rate thereupon quickly receded from its ceiling
and held in a range of $0.23 lOVi to $0.2315^2 throughout December; the Swiss National Bank purchased a total of $398

283

ANNUAL REPORT OF BOARD OF GOVERNORS

million on a swap basis from Swiss banks. In order to prevent
these movements of funds from putting pressure on the Eurocurrency markets, the Swiss National Bank, as usual, rechanneled
to the Euro-dollar market the dollars it acquired during November and December. At the year-end the market for the Swiss
franc was calm.
Italian lira. Italy's balance of payments surplus declined significantly in 1966 from its exceptionally high level of $1.6 billion in 1965. But it still remained large—$0.7 billion. The reduction stemmed in part from a wider trade deficit, but mainly
from substantial outflows of capital associated with relatively
easy conditions in Italian financial markets and active bidding for
funds by foreigners, including industrial firms. Both Italian and
U.S. authorities again employed a variety of techniques to moderate gains in Italian official dollar reserves.
At first Italy's reserve gains were moderate. The Italian authorities provided swap facilities to Italian commercial banks,
and those banks reinvested in the Euro-dollar market a substantial amount of the funds they had repatriated late in 1965 in
connection with year-end requirements; in addition, the Italian
Government purchased some IBRD bonds.
Also during the first quarter U.S. authorities were able to reduce short-term lira commitments arising from an August 1965
System drawing of $100 million equivalent of lire under the
swap facility with the Bank of Italy. In February the System
liquidated this drawing by using $50 million equivalent of lire
purchased in a special transaction with a foreign central bank
and $50 million acquired through a sterling-lira swap with the
BIS. In March and May there were some small offerings of lire
in the New York market and the Federal Reserve purchased a
total of $10 million equivalent. These lire were used on May 25
to reduce the third-currency swap with the BIS from $50 million
to $40 million equivalent.
About midyear, however, demand for lire began to rise as
Italy's tourist season moved into full swing, Italy's trade account
284

FEDERAL RESERVE SYSTEM

improved seasonally, and the mounting sterling crisis precipitated
flows of funds out of sterling into lire. By then, moreover, most
Italian banks had eliminated any net liabilities to foreigners, and
the Bank of Italy was no longer prepared to shift dollars abroad
through short-term swaps with those commercial banks at preferential rates.
All these factors contributed to a marked rise in official Italian
reserves. In July and early August the Federal Reserve drew $225
million of lire under its $450 million swap facility with the Bank
of Italy and used the lire to absorb dollars that had accrued to
the Italian authorities. These drawings were repaid on August
22 when the U.S. Treasury drew $250 million of lire from the
IMF and sold the lire to the System. The System used the remaining $25 million of lire, plus $1 million equivalent in balances, to reduce its sterling-lira swap with the BIS from $40
million to $14 million.
Additional large amounts of dollars continued to flow into
official Italian reserves during August. In early September the
System reactivated its swap—drawing lire to absorb $100 million
from the Italian authorities. Soon afterward, however, Italian
reserves began to decline as strong seasonal inflows of funds
subsided, a tighter Euro-dollar market exerted a renewed pull on
Italian bank funds, and the Italian authorities prepaid $145
million of postwar debt to the United States. In late September
the System purchased $14 million of lire from the Bank of Italy
and extinguished its remaining sterling-lira swap with the BIS.
As the fall progressed, dollars were generally in demand in
Italy in response to the conversion of lira borrowings by foreign
firms and outflows to the Euro-dollar market. Lira quotations
eased steadily toward par, offerings of lire in the market were
sizable, and the System made large purchases in New York
through the remainder of the year. By the year-end the swap
commitment had been reduced from $100 million equivalent to
$15 million.
Although the change in Italy's balance of payments in late

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ANNUAL REPORT OF BOARD OF GOVERNORS

1966 was sufficient to make possible the reduction in System lira
commitments, Italy's over-all reserve position strengthened over
the year as a whole. In particular, its creditor position in the IMF
increased some $336 million. In view of the substantial surplus
in their payments position, the Italian authorities at the year-end
purchased $60 million of gold from the U.S. Treasury in order
to replenish their gold holdings.
Federal Reserve and Treasury technical forward commitments
in Italian lire that had been undertaken in 1965 were rolled over
periodically during 1966. As the year closed, U.S. commitments
in lire—aside from technical forward commitments—consisted
of: (1) $15 million under the $600 million swap facility with
the Bank of Italy (this facility had been increased by $150
million in September 1966) and (2) $125 million equivalent in
medium-term U.S. Treasury bonds issued to the Bank of Italy.
Netherlands guilder. The Dutch guilder was generally on offer
during the first 4 months of 1966, as both seasonal weakness
and some special factors contributed to a widening in the Netherlands trade deficit. As early as January the guilder was quoted
below its par of $0.2762%, and by late April it had reached
$0.2750%, the lowest level since the revaluation of March
1961.
Effective May 2 the Netherlands Bank raised its discount rate
to 5 per cent from AVi per cent in an effort to curb the growth
of domestic bank credit and stem the deterioration of the Dutch
balance of payments. The guilder rallied at once and by early
June had reached par. After midyear, increasingly tight money
market conditions in Amsterdam and growing tensions in the
sterling market led to a sizable inflow of funds. Dutch reserves
increased by $94 million in July and rose further in early
August. At that point the Federal Reserve reactivated its $100
million swap facility with the Netherlands Bank; it drew $65
million of guilders and used them, together with $2.5 million of
guilder balances, to purchase an equivalent amount of dollars
from the Netherlands Bank.
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By mid-August, however, the Dutch money market had eased,
and as increasingly attractive interest rates on dollar investments
exerted a pull on Dutch funds, the spot guilder began to drift off
and went below parity by mid-September. In order to moderate
the decline, the Netherlands Bank sold some dollars to the market and later bought $10 million from the System against guilders. The System in turn used the guilders to reduce its swap
commitment to $55 million equivalent. (As part of the September 1966 increase in the Federal Reserve's reciprocal swap
facilities, the System and the Netherlands Bank agreed to increase their arrangements from $100 million to $150 million.)
During the autumn the guilder moved back to a level somewhat above par. It fluctuated within a narrow range during the
remaining weeks of the year as the Dutch trade account displayed seasonal strength and as an intermittently tight money
market in Amsterdam exerted a pull on funds. The Netherlands
Bank intervened only sporadically during this period to relieve
money market pressures in Amsterdam, which were particularly
strong in early November and in mid-December. When it did intervene, it used the technique of market swaps, as on some earlier
occasions—buying dollars spot from Dutch commercial banks
and selling them forward for January 1967 delivery. To help
moderate year-end pressures in the Euro-currency markets, the
Netherlands Bank reinvested its December dollar purchases in
the Euro-dollar market.
At the year-end foreign currency requirements of the Dutch
Government led the Netherlands Bank to buy $20 million against
guilders from the Federal Reserve. The Federal Reserve immediately used the guilders to reduce its outstanding swap drawings
from that bank to $35 million equivalent.
Belgian franc. During the latter part of 1965 the National
Bank of Belgium had intervened in the Brussels market in support of the franc on several occasions and had recouped its dollar losses by purchases from the Federal Reserve against Belgian
francs. As a result, by January 1, 1966, the System's swap obli-

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gation to the National Bank had been reduced to $35 million
equivalent. During the first 2 weeks of January 1966 the Belgian
central bank continued these activities, thus enabling the System
to repay its remaining swap drawings. The only remaining official U.S. debt in Belgian francs early in 1966 consisted of two
U.S. Treasury bonds totaling $30 million equivalent held by the
National Bank.
During the next few months the market was steady as the Belgian balance of payments was about in equilibrium. In the late
spring, however, credit policy in Belgium tightened, the money
market firmed, and the spot rate for the franc began to strengthen.
The National Bank reinforced its existing measures of restraint
by raising its discount rate by V2 of a percentage point to 5V4
per cent on June 2. Nevertheless, official reserve gains remained
small until July. At that time funds were repatriated to Belgium
as a result both of the domestic liquidity squeeze and of the
speculative pressure on sterling. As the spot rate for the franc
moved to its ceiling in late July, the National Bank began to
buy fairly sizable amounts of dollars.
In order to absorb some of Belgium's rapidly increasing holdings of dollars, the Federal Reserve in August drew $30 million
equivalent of funds under the $50 million standby portion of its
$100 million swap facility with the National Bank of Belgium
and used these funds to purchase dollars from the Belgian authorities. Later in August, however, the trade account moved into
sizable deficit, and with an easing in the Belgian money market,
funds again began to flow abroad in response to higher rates for
dollar investments. The National Bank then began supplying foreign exchange to the market and later covered these losses by purchasing dollars from the Federal Reserve against Belgian francs.
By late September such purchases totaled $30 million, and the
System had no uncovered Belgian franc commitments to the
National Bank of Belgium under the reciprocal swap facility;
the facility had been increased from $100 million to $150 million
earlier in the month.
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During the early fall the Belgian franc drifted somewhat below
par because of a continued deterioration on the trade account. In
late November the Belgian central bank once again began to lose
dollars. Because of these market losses, coupled with the exchange needs of the Belgian Treasury, the National Bank again
needed dollars in the last few weeks of the year. It bought $30
million from the U.S. Treasury against Belgian francs, which the
Treasury used to build up a balance for future contingencies.
Thus, by the end of 1966 the U.S. authorities no longer had an
uncovered position in Belgian francs; the Treasury's franc balances matched its franc-denominated bond indebtedness.
International Monetary Fund. During 1966 the United States
made two types of drawings on the IMF. The first, designated
"technical," extended the practice—initiated in February 1964
—of obtaining currencies from the IMF for sale to other countries that were making repayments to the Fund. For this purpose
the U.S. Treasury obtained drawing facilities totaling $400 million equivalent in Canadian dollars and $30 million equivalent
in German marks. Whereas early in the year the facilities were
fully used at the time they were arranged, later drawings were
usually made as needed.
The second type of drawing was the conventional kind in
which member countries obtain currencies for direct use in
financing their international payments deficits. The United
States first had such recourse to the Fund in July 1965. On
August 22, 1966, the Treasury again went to the Fund for this
purpose; this time it drew $250 million equivalent of Italian
lire. As noted earlier, it sold the lire to the Federal Reserve, which
used them to liquidate its $225 million equivalent outstanding
swap drawings from the Bank of Italy and to repay part of a
sterling-lira swap with the BIS. The Fund, whose lira balances
were at a low level, borrowed the required lire from the Italian
Government under an agreement outside the $6 billion General
Arrangements to Borrow (GAB). This was the first occasion
on which the IMF had employed its authority under the articles

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of agreement to borrow a needed currency from a member country other than under the GAB, and it marked another significant
step in the evolution of the Fund's credit machinery.
U.S. drawings from the Fund between February 1964 and
December 1966 totaled $1,640 million equivalent. During this
period, other countries drew dollars from the Fund; thereby the
Fund's holdings of dollars and this country's repayment obligation to the Fund were reduced. Consequently at the end of 1966,
the net U.S. obligation to the Fund was $964 million.
The resources of the IMF were reinforced in February 1966.
At that time a general Fund quota increase of 25 per cent or
more, approved in 1964 by the Governors of the Fund, became
effective for 58 members who had accepted the proposal and
whose combined quotas as of February 23, 1965, constituted the
requisite two-thirds majority for approval. By December 31 an
additional 34 members had submitted their ratifications, and
Fund resources had been increased from $16 billion to $20.6
billion—close to the $21 billion target for the Fund's entire 105nation membership.
A member must pay a part of its quota increases to the Fund
in its own currency and a part in gold. The gold payments have
entailed gold losses for the two key-currency countries—the
United States and the United Kingdom—because other members
have converted dollar and sterling reserves into gold for payment
of their gold subscriptions. In order to compensate for these
losses, the quota increase arrangement provides that the Fund
will deposit a total of up to $350 million of gold with the Federal Reserve Bank of New York and the Bank of England. As
of December 31, 1966, the Federal Reserve Bank of New York
held for U.S. Treasury account $211.5 million of gold so deposited by the IMF.

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FEDERAL RESERVE SYSTEM

SPECIAL STUDIES BY THE FEDERAL RESERVE SYSTEM
From time to time the Federal Reserve System has undertaken
extensive economic studies to reappraise the workings of its
various instruments of monetary and regulatory policy. The
broad aim of these studies has been to keep Federal Reserve
policy and action adapted to the changing economic and financial scene. The four studies currently under way are described
below.
Reappraisal of the Federal Reserve discount mechanism. The fundamental reappraisal of the Federal Reserve discount mechanism,
announced in last year's ANNUAL REPORT (page 216), is still
in progress. A number of research studies have been commissioned and are being brought to completion; included are historical and analytical studies of Federal Reserve experience, as
well as of the activities of other governmental financial institutions in this country and of central banks in other major industrial nations.
Investigations to date have come to focus on several present
and potential functions of discount operations that might, in
combination, lead to a more active role for the discount mechanism in the future.
For the reappraisal of certain important uses of the discount
window, it has proved useful to distinguish between what might
be termed operational and strategic reserve demands within the
banking system. Operational reserve needs of banks are regarded
as those arising from such factors as random short-falls from
money position projections, seasonal patterns of loan demand,
and short-term deposit shifts. Strategic needs, on the other hand,
are considered to include borrowing demands arising from
changes in general monetary policy. In practice, of course, these
two dimensions of discounting often blend together, since operational needs tend to increase somewhat during periods of credit
restraint, and alternative means of adjustment become less
readily available.
In addition to studying means of meeting these reserve needs

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ANNUAL REPORT OF BOARD OF GOVERNORS

as effectively as possible through a combination of open market
operations and discount window assistance, consideration is
being given to other means of contributing to better utilization
of reserves and to better functioning of secondary markets for
various types of bank assets.
One other basic function of the discount window that is receiving special attention is the provision of emergency credit
assistance. Such assistance is being studied with a view to better
definition and implementation of appropriate System responsibilities and objectives in this area.
A paramount consideration in these studies is the maintenance of an appropriate control of over-all reserve availability.
A variety of methods for regulating discounting activity are
being reviewed, some growing out of Federal Reserve experience
and others drawn from the discount mechanisms employed by
various other central banking systems. One early conclusion suggested by this review is the wisdom of maintaining a degree of
flexibility in the design and operation of the discount window
to make it adaptable to changing circumstances.
During the coming months the results of the research outlined
above will be interpreted and evaluated by System authorities.
The ultimate objective of this entire reappraisal is to insure that
the means for provision of central bank credit through the discount window are kept up to date with the significant changes
that are taking place in the financial system and in the economy
that it serves.
U.S. Government securities market. Considerable progress was
made during 1966 in the study of the U.S. Government securities market being undertaken jointly by the Treasury and the
Federal Reserve. Questionnaires were sent to, and responses
received from, dealers in U.S. Government securities and also
several hundred financial and nonfinancial institutional investors
in such securities. In addition, individual consultations were held
with dealers. Moreover, a number of staff studies were undertaken on a variety of topics relating to the structure, perform292

FEDERAL RESERVE SYSTEM

ance, and financing of the market for direct U.S. Government
and Federal agency securities. These studies were in varying
stages of completion by the year-end.
It is anticipated that the results of the study will be made
public in phases as they are completed during the course of 1967.
Foreign operations of member banks. The study on the foreign
operations of member banks is intended to provide additional
knowledge and understanding of the nature and expanded scope
of the international lending and deposit activities of U.S. banks
and of the forces influencing these operations. To obtain new
and up-to-date information on these activities, extensive discussions were held during 1966 with U.S. banks and bankers—at
offices in this country and abroad—and with their subsidiary corporations organized under Sections 25 and 25(a) of the Federal
Reserve Act. The information obtained, supplemented by staff
analyses, was to serve as a basis for a report of the study's findings. This report was in preparation at the end of the year.
Effects of monetary policy on economic activity. Work on the
longer-run Federal Reserve research effort to fill the gaps in
knowledge about the processes through which monetary policy
affects the general economy, the so-called "linkage" project,
continued in 1966.
It is still too early to give a comprehensive review of the results
of the work to date on this project, but individual pieces of inquiry have been completed and in some cases have been made
available to the public. Several have been summarized in the
Staff Economic Studies section of the Federal Reserve Bulletin
and have been made available in full in mimeograph form on
request. Other papers will follow from time to time as they
become available.
The Federal Reserve's research work in the general area of
the effects of monetary policy on economic activity continues to
involve System-wide working groups of economists. It also includes a large econometric project involving a number of economists on the Board's staff who are working with a group of

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ANNUAL REPORT OF BOARD OF GOVERNORS

university economists led jointly by Professor Modigliani of the
Massachusetts Institute of Technology and Professor Ando of
the University of Pennsylvania. The university portion of the
project is being financed by the Board of Governors through the
Social Science Research Council.
The group is involved in the construction and testing of a 50to 60-equation quarterly model of the U.S. economy. The main
purposes of the model are to establish the likely effects of alternative monetary policies on major economic aggregates and to
aid in short-term forecasting. This quantitative model will be
used as a supplement to, and in conjunction with, judgmental
models now being used in policy formulation. It is hoped that
the initial construction of the model will be completed and that
testing will be begun in 1967.

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FEDERAL RESERVE SYSTEM

INTERNATIONAL LIQUIDITY AND BALANCE
OF PAYMENTS ADJUSTMENT

During 1966 the Federal Reserve continued its active participation with the Treasury Department in the international discussions and negotiations regarding arrangements for the future
creation of reserve assets that would supplement gold and reserve
currencies.
A major benchmark was passed in 1966 with the initiation of
a second stage in the negotiations. Joint meetings of the Executive Directors of the International Monetary Fund and the Deputies of the Finance Ministers and Central Bank Governors of the
Group of Ten were held in Washington in November 1966 and
were continued in London in January 1967. It is hoped that
these joint meetings, which have already shown great promise,
will by the time of the next annual meeting of the Fund lead to
a further convergence of views on the structure and major provisions of a contingency plan for creating reserve assets.
The need for drawing up such a contingency plan for deliberate reserve creation became increasingly evident in 1966. For one
thing, there was a growing awareness of the fact that since 1964
deficits in the U.S. balance of payments had not made any net
contribution to the rise in world reserves. Taking the two years
1965 and 1966 together, the declines in the U.S. gold stock
and in the gold tranche position in the IMF were more than
twice as large as the cumulative deficit on official settlements.
Hence the manner in which the U.S. deficit was financed had
the effect of reducing, rather than augmenting, the total of world
reserves.
Another development contributing to the growing urgency of
contingency planning was the sharply reduced flow of gold into
monetary stocks. In 1965 only $240 million of new gold was
taken into monetary holdings, and in 1966 monetary stocks
actually showed a slight decline. By contrast, in the years preceding 1965 monetary gold stocks had increased on the order
of $500 million to $600 million per year.

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ANNUAL REPORT OF BOARD OF GOVERNORS

Given these considerations, it was encouraging to find that
the international liquidity negotiations were making significant
progress in 1966. Although much still remained to be done before complete agreement could be obtained on the details of
machinery for deliberately creating new reserves, the principles
and many of the characteristics of a possible agreement were
beginning to emerge by the end of the year. For example, it was
agreed that reserve creation should not be geared or directed to
the financing of balance of payments deficits of individual countries, but rather should take place on the basis of a collective
judgment of the reserve needs of the world as a whole. It was
agreed that new reserve assets should be distributed to all members of the IMF, either on the basis of Fund quotas or some other
objective standard.
There also seemed to be wide and growing acceptance of the
view that the same type of reserve asset should be created for all
countries, regardless of size or stage of development. In general,
the principle of "universality"—treating all countries alike—
seemed to gain broad acceptance. The major issues at the end of
1966 on which a consensus had not yet been reached were the
provisions governing the holding and use of the new asset and
the detailed procedures for voting, both for entry into force of the
agreement and for subsequent activation.
In their statement of August 1964 the Ministers and Governors of the Group of Ten had requested Working Party 3 of the
Organization for Economic Cooperation and Development to
make a thorough study of the measures and instruments best
suited for achieving faster and more effective adjustment of international imbalances without sacrificing the pursuit of essential
domestic objectives and to report their findings. This important
report, entitled "The Balance of Payments Adjustment Process,"
was completed and published in August 1966.
One significant aspect of the report was its emphasis on the
need for the balance of payments objectives of individual countries to be mutually consistent. Working Party 3 has instituted
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FEDERAL RESERVE SYSTEM

informal arrangements under which it will continue to be informed of, and will discuss the implications of, the balance of
payments aims of individual countries. The report also stressed
the necessity for early identification and better diagnosis of payments imbalances, for the development of a set of informal guidelines regarding the appropriate use of various policy instruments
in specified situations of payments imbalance, and for a continued development of intergovernmental consultation and cooperation. The report as agreed upon clearly recognized that the
correction of payments imbalances is the responsibility of both
surplus and deficit countries.
The Group of Ten countries have agreed that improvements
in the adjustment process are needed and possible. It is important
that further progress be made along these lines together with
progress in achieving agreement on the creation of new reserve
assets.

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BANK SUPERVISION
BY THE FEDERAL RESERVE SYSTEM
Examination of Federal Reserve Banks. The Board's Division of
Examinations 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.
Examination of member banks. National banks, all of which are
members of the Federal Reserve System, are subject to examination by direction of the Board of Governors or the Federal Reserve Banks. However, as a matter of practice they are not examined by either, because the law charges the Comptroller of
the Currency directly with that responsibility. The Comptroller
provides reports of examinations of national banks to the Board
of Governors upon request, and each Federal Reserve Bank
purchases from the Comptroller copies of reports of examination
of national banks in its district.
State member banks are subject to examinations made by
direction of the Federal Reserve Bank of the district in which
they are located by examiners selected or approved by the Board.
The established policy is to conduct at least one regular examination of each State member bank, including its trust department, during each calendar year, with additional examinations
if considered desirable. Wherever practicable, joint examinations are made in cooperation with the State banking authori-

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FEDERAL RESERVE SYSTEM

ties, or alternate independent examinations are made by agreement with State authorities. All but 27 of the 1,351 State member banks were examined during 1966.
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 banks within its jurisdiction that are registered under the provisions of the 1934 Act; and
under provisions of the Federal Reserve Act and other statutes,
passes on applications for permission, among other things, to
(1) merge banks, (2) form or expand bank holding companies,
(3) establish domestic and foreign branches, (4) exercise expanded powers to create bank acceptances, (5) establish foreign banking and financing corporations, or (6) invest in bank
premises in an amount in excess of 100 per cent of a bank's
capital stock.
By Act of Congress approved September 12, 1964 (Public
Law 88-593), insured banks are required to inform the appropriate Federal banking agency of any changes in control of management of such banks and of any loans by them secured by
25 per cent or more of the voting stock of any insured bank. In
1966, 38 instances of changes in ownership of the outstanding
voting stock of State member banks were reported to the Reserve
Banks as changes in control of such member banks. In addition,

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ANNUAL REPORT OF BOARD OF GOVERNORS

reports of 29 loans secured by 25 per cent or more of the stock
of a State member bank were forwarded to the System. Arrangements continue among the three Federal supervisory agencies for
appropriate exchanges of reports received by them pursuant to
the Act. The Reserve Banks send copies of all the reports they
receive to the appropriate district office of the Federal Deposit
Insurance Corporation, the regional 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. The findings of any investigation and the Reserve Bank's conclusions based on such
findings are forwarded to the Board. The investigations made by
the Reserve Banks have disclosed no instance where failure or
serious deterioration in a bank's condition could be expected to
result from the change in control reported.
Misleading advertising. Because of concern with respect to misleading advertising practices of some financial institutions in their
quest for funds, the Comptroller of the Currency, the Federal
Deposit Insurance Corporation, the Federal Home Loan Bank
Board, and the Board of Governors of the Federal Reserve
System sent a uniform letter in December to the executive officer
of each of the institutions that they supervise. The letter emphasized the concern of the four agencies regarding the effect on the
public's attitude toward the nation's financial system, and outlined the following principles that the institutions should follow
in their efforts to attract funds:
(1) Interest or dividend rates should be stated in terms of
annual rates of simple interest, and the advertisement should
state whether such earnings are compounded and, if so, the basis
of compounding. Neither the total percentage return if held to
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FEDERAL RESERVE SYSTEM

final maturity nor the average annual rate achieved by compounding should be stated unless the annual rate of simple
interest is presented with equal prominence.
(2) No reference should be made to "profit" to the investor
for use of his funds over a period of time.
(3) If an advertised rate is payable only on investments or
deposits that meet fixed time or amount requirements, such
requirements should be stated.
(4) No statement should be made implying that more than
$15,000 of Federal insurance is provided for each depositor in
a bank or each member in a savings and loan association.
Federal Reserve membership. As of the end of December 1966,
member banks accounted for 45 per cent of the number of all
commercial banks in the United States and for 63 per cent of all
commercial banking offices, and they held approximately 84 per
cent of the total deposits in such banks. State member banks
accounted for 15 per cent of the number of all State commercial
banks and 30 per cent of the banking offices, and they held 60
per cent of total deposits in State commercial banks.
Of the 6,150 banks that were members of the Federal Reserve
System at the end of 1966, 4,799 were national banks and 1,351
were State banks. During the year there were net declines of 16
national and 55 State member banks. The decline in the number
of national banks reflected 48 conversions to branches incident
to mergers and absorptions and 7 conversions to nonmember
banks, which was partly offset by the organization of 25 new
national banks and the conversion of 10 nonmember banks to
national banks. The decrease in State member banks reflected
mainly 18 conversions to branches incident to mergers and
absorptions and 32 withdrawals from membership.
At the end of 1966 member banks were operating 12,900
branches, 837 more than at the close of 1965; this included 773
de novo establishments.
Detailed figures on changes in the banking structure during
1966 are shown in Table 19, page 348.

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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. 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, unless it finds
that it must act immediately to prevent the probable failure of
one of the participating banks. 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 1966 the Board disapproved 1 and approved 21 applications, and it submitted 101 reports on competitive factors
to the Comptroller of the Currency and 52 to the Federal Deposit Insurance Corporation. As required by Section 18(c) of
the Federal Deposit Insurance Act, a description of each of the
21 applications acted on and approved by the Board, together
with other pertinent information, is shown in Table 21 on pages
352-78.
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. On July 1, 1966, the Bank Holding
Company Act of 1956 was amended as described under "Legislation Enacted" (see page 308). As a result of the amendments thereto and pursuant to Section 5(a) of the Act, 5 bank

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FEDERAL RESERVE SYSTEM

holding companies registered with the Board prior to the yearend 1966.
Pursuant to Section 3 (a) (1) of the Act, the Board approved
6 applications for prior approval to become a bank holding
company and denied 2 applications. Pursuant to the provisions
of Section 3(a) (2) of the Act and Section 3(a) (3), as amended,
the Board approved applications by 12 bank holding companies,
involving acquisition of shares in 15 banks, and denied 2 applications. Two of the approved acquisitions involved 2 affiliated bank
holding companies, both of which were required to file applications. To provide necessary current information, annual reports for 1965 were obtained from all registered bank holding
companies pursuant to the provisions of Section 5 (c) of the Act.
Statements and orders of the Board with respect to applications to form or to expand bank holding companies, whether
approved or disapproved, are released immediately to the press
and the public and are published in the Federal Reserve Bulletin.
These statements and orders set forth the factors considered, the
conclusions reached, and the vote of each Board member present.
The July 1, 1966 Act that amended the Bank Holding Company Act also repealed the provisions of law relating to holding
company affiliates. Therefore, since that date, no voting permits
or determinations have been issued, and outstanding permits
and determinations, including the conditions and agreements
imposed for their issuance, are no longer in effect.
Before the Act was repealed—during the period January 1 to
July 1, 1966—pursuant to Section 5144 of the Revised Statutes
and Section 9 of the Federal Reserve Act, the Board authorized
the issuance of 8 voting permits for general purposes and 6 for
limited purposes to holding company affiliates of member banks.
In accordance with established practice, several holding company affiliates were examined by examiners for the Federal Reserve Banks in whose districts the principal offices of the holding
companies are located.

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Until July 1, 1966, Section 301 of the Banking Act of 1935
provided that the term "holding company affiliate" should not
include—except for the purposes of Section 23A of the Federal
Reserve Act, which restricts loans to affiliates and loans on, or
investments in, the stock or obligations of affiliates—any organization that is determined by the Board not to be engaged, directly or indirectly, as a business in holding the stock of, or
managing or controlling, banks, banking associations, savings
banks, or trust companies. During the period January 1 to July
1, 1966, the Board made such a determination with respect to 25
organizations.
Foreign branches of member banks. At the end of 1966, 13
member banks had in active operation a total of 244 branches
in 53 foreign countries and overseas areas of the United States;
7 national banks were operating 230 of these branches, and 6
State member banks were operating 14 such branches. The number and location of these foreign branches were as shown in the
tabulation on the following 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 1966 approved
46 applications made by member banks for permission to establish branches in foreign countries and overseas areas of the
United States.
During the year member banks opened branches in foreign
countries as follows: 1 branch in Bombay and Calcutta, India;
Lahore, Pakistan; Riyadh, Saudi Arabia; Tamuning, Guam; La
Paz, Bolivia; Valparaiso, Chile; Quito, Ecuador; Callao and
Lima, Peru; Santo Domingo, Dominican Republic; Puerto Rico;
Tegucigalpa, Honduras; Colon, Panama; Antwerp and Brussels, Belgium; Duesseldorf and Frankfurt-am-Main, Germany;
Zurich, Switzerland; and London, England; 2 branches in
Panama, Republic of Panama; Saigon, South Vietnam; and
Hong Kong; and 4 branches in Santiago, Chile. One member
bank closed a branch in London, England.
304

FEDERAL RESERVE SYSTEM

Latin America
102
Argentina
17
Bahamas
3
Bolivia
1
Brazil
15
Chile
8
Colombia
6
Dominican Republic
5
Ecuador
3
El Salvador
1
Guatemala
2
1
Guyana . .
1
Honduras
1
Jamaica .
5
Mexico
1
Nicaragua
15
Panama .
2
Paraguay
4
Peru . . .
3
Trinidad
Uruguay
2
Venezuela
4
Virgin Islands (British) 2
Continental Europe
Austria
Belgium
Germany
France
Greece
Italy
Netherlands
Switzerland

.... 2 6
1
6
8
4
1
1
3
2

England
Ireland

Africa
Liberia
Nigeria

...

2
1
1

Near East
.
Dubai
Lebanon
Saudi Arabia

6
1
3
2

Far East
Hong Kong
India . . .
Japan .
Malaysia .
Okinawa .
Pakistan .
Philippines
Singapore
Taiwan .
Thailand
Vietnam .

57
8
8
12
5
2
3
5
8
2
2
2

U.S. Overseas Areas and
Trust Territories
29
Canal Zone
2
Guam
2
Puerto Rico
16
Truk Islands
1
Virgin Islands
8
Total
244

Acceptance powers of member banks. During the year the Board
approved the application of 2 member banks, pursuant to the

305

ANNUAL REPORT OF BOARD OF GOVERNORS

provisions of Section 13 of the Federal Reserve Act, for increased acceptance powers. The banks were granted permission
to accept drafts or bills of exchange drawn for the purpose
of furnishing dollar exchange as required by the usages of
trade in such countries, dependencies, or insular possessions of
the United States as may have been designated by the Board
of Governors.
Foreign banking and financing corporations. At the end of 1966
there were 4 corporations operating under agreements with
the Board pursuant to Section 25 of the Federal Reserve Act
relating to investment by member banks in the stock of corporations engaged principally in international or foreign banking.
Three of these "agreement" corporations with head offices in
New York were examined during the year by examiners for the
Board of Governors. The fourth "agreement" corporation is a
national bank in the Virgin Islands and is owned by a State
member bank in Philadelphia.
During 1966, under the provisions of Section 25 (a) of the
Federal Reserve Act, the Board issued final permits to 5 corporations to engage in international or foreign banking or other
international or foreign financial operations. Four of these corporations commenced operations in 1966. At the end of the
year there were 41 corporations in active operation under Section 25(a): 24 have home offices in New York City, 3 in
Boston, 4 in Philadelphia, 1 in Pittsburgh, 1 in Winston-Salem,
1 in Atlanta, 2 in Chicago, 2 in Detroit, 2 in San Francisco, and
1 in Seattle. The corporation in Seattle has 4 active branches in
Hong Kong. Examiners for the Board of Governors examined
39 of these corporations during 1966.
Bank Examination Schools and other training activities. In 1966 the
Bank Examination School conducted three sessions of the
School for Examiners, four sessions of the School for Assistant
Examiners, and one session of the School for Trust Examiners.
The Bank Examination School, established in 1952 by the three
Federal bank supervisory agencies, has been conducted jointly
306

FEDERAL RESERVE SYSTEM

by the Federal Reserve System and the Federal Deposit Insurance Corporation since withdrawal of the Office of the Comptroller of the Currency in 1962.
Since the establishment of this program, 3,033 persons have
attended the various sessions. This number includes representatives of the Federal bank supervisory agencies; the State Banking
Departments of California, Connecticut, Idaho, Indiana, Louisiana, Maine, Michigan, Mississippi, Montana, Nebraska, New
Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island,
Tennessee, Vermont, Virginia, and Washington; the Treasury
Department of the Commonwealth of Puerto Rico; and 13
foreign countries.
LEGISLATION ENACTED
Bank Merger Act amendments of 1966. An Act of Congress
approved February 21, 1966 (Public Law 89-356), amended
the Bank Merger Act of 1960 (Section 18(c) of the Federal
Deposit Insurance Act) to (1) modify the standards for
approval or disapproval of bank mergers by the Federal bank
supervisory agencies, (2) make the modified standards applicable also in court actions under the antitrust laws challenging
agency-approved bank mergers, and (3) exempt such mergers
from the antitrust laws where not challenged by suit brought
within 30 days following agency approval. The 1966 amendments also granted amnesty to certain bank mergers consummated pursuant to agency approval under the 1960 Act and
subsequently challenged in antitrust court actions.
Asian Development Bank. An Act of Congress approved March
16, 1966 (Public Law 89-369), providing for participation of
the United States in the Asian Development Bank, amended
Section 5136 of the Revised Statutes to permit member banks
to deal in and underwrite, subject to a specified limitation on
amount, obligations issued by the Asian Development Bank that
are eligible for purchase by a national bank for its own account.

307

ANNUAL REPORT OF BOARD OF GOVERNORS

The Act also authorized the Federal Reserve Banks to act as depositories and as fiscal agents for the Asian Development Bank.
Destruction of unfit Federal Reserve notes. An Act of Congress
approved May 20, 1966 (Public Law 89-427), amended certain
provisions of law, including Sections 11 (d) and 16 of the
Federal Reserve Act, so as to authorize decentralization of the
destruction of Federal Reserve notes that are unfit for further
circulation.
Defense Production Act of 1950. An Act of Congress approved
June 30, 1966 (Public Law 89-482), extended through June
30, 1968, the termination date of the Defense Production Act of
1950, Section 301 of which is the basis for guarantees of loans
for defense production.
Direct purchases of Government obligations by Federal Reserve Banks.
An Act of Congress approved June 30, 1966 (Public Law 89484), extended through June 30, 1968, the authority of Federal Reserve Banks, under Section 14(b) of the Federal Reserve Act, to purchase direct or fully guaranteed obligations
of the United States directly from the United States.
Bank Holding Company Act and related statutes. An Act of
Congress approved July 1, 1966 (Public Law 89-485), made
numerous amendments to the Bank Holding Company Act of
1956, including (1) repeal of previous exemptions for certain
registered investment companies and religious, charitable, and
educational institutions; (2) inclusion within the coverage of
the Act of long-term trusts; (3) redefinition of "bank" to limit
the term to institutions accepting deposits withdrawable on demand; (4) application to the bank holding company field of
the standards and antitrust procedures made applicable to bank
mergers by the Act of February 21, 1966 (described earlier);
and (5) repeal of the provisions of Section 6 of the Act relating
to loans by holding company banks to other companies in the
holding company system. In addition, the Act made a number
of amendments to Section 23A of the Federal Reserve Act
(which relates to loans by member banks to their affiliates) and
308

FEDERAL RESERVE SYSTEM

extended the limitations of that section to nonmember insured
banks; amended Section 25 of the Federal Reserve Act to permit
direct investments by member banks in the stock of foreign banks
under regulations of the Board of Governors; and repealed the
provisions of Section 5144 of the Revised Statutes and of Section
9 of the Federal Reserve Act that required "holding company
affiliates" to obtain permits to vote the stock of member banks.
Administrative Procedure Act. An Act of Congress approved
July 4, 1966 (Public Law 89-487), amended Section 3 of the
Administrative Procedure Act to broaden public access to Government records effective July 4, 1967.
Interest on deposits; reserves of member banks; open market operations. An Act of Congress approved September 21, 1966 (Public
Law 89-597), (1) conferred on Federal supervisory agencies
more flexible authority to regulate the maximum rates of interest or dividends payable by banks and certain other financial
institutions on deposits or share accounts; (2) authorized higher
reserve requirements on time deposits of member banks; and (3)
authorized open market operations by Federal Reserve Banks in
direct or fully guaranteed obligations of any agency of the
United States. The additional powers granted by this law expire
September 21, 1967.
Financial Institutions Supervisory Act; Federal deposit insurance.
An Act of Congress approved October 16, 1966 (Public Law
89-695), strengthened the authority of the Federal agencies that
supervise and regulate banks and savings and loan associations,
and authorized such agencies to institute "cease and desist" proceedings and proceedings directed at the removal from office, in
prescribed circumstances, of directors or officers of institutions
under their supervision. The Act also provided for temporary
cease and desist and removal orders, and for judicial relief therefrom on petition of the affected institution or party. The foregoing provisions will be effective only through June 30, 1972.
The Act also increased from $10,000 to $15,000 the insurance
coverage of deposits insured by the Federal Deposit Insurance

309

ANNUAL REPORT OF BOARD OF GOVERNORS

Corporation and accounts insured by the Federal Savings and
Loan Insurance Corporation.
Member banks dealing in certain insured obligations; real estate loans
by national banks. An Act of Congress approved November 3,
1966 (Public Law 89-754), entitled the "Demonstration Cities
and Metropolitan Development Act of 1966," amended Section
5136 of the Revised Statutes of the United States so as to permit
member banks to deal in and underwrite obligations that are insured under the new Title XI of the National Housing Act, which
provides mortgage insurance on facilities for the group practice
of medicine, dentistry, and optometry. Purchase of such securities for investment is also excepted from the usual limitation of
10 per cent of the bank's capital and surplus. The Act also
amended Section 24 of the Federal Reserve Act so as to make
certain limitations and restrictions on real estate loans by national banks inapplicable to such insured obligations.
Delegation of functions of Board of Governors. An Act of Congress
approved November 5, 1966 (Public Law 89-765), amended
Section 11 of the Federal Reserve Act by adding a new subsection
(k) authorizing the Board of Governors to delegate certain of
its functions to hearing examiners, members or employees of the
Board, or Federal Reserve Banks.
LEGISLATIVE RECOMMENDATIONS
Lending authority of Federal Reserve Banks. Under present law,
when a member bank borrows from its Reserve Bank on collateral other than U.S. Government obligations or paper (such as
promissory notes of the member bank's customers) that meets
certain "eligibility" requirements, it must pay interest at a rate
one-half of 1 per cent higher than the Reserve Bank's normal discount rate. For several years the Board of Governors has urged
legislation that would permit a member bank, in appropriate circumstances, to borrow on any collateral satisfactory to its Reserve Bank without the necessity of paying a higher rate of interest
simply because "ineligible" collateral was presented.
310

FEDERAL RESERVE SYSTEM

The need for such legislation has increased as member banks
have reduced their holdings of Government securities and broadened the scope of their lending in order to meet the expanding
credit demands of their customers. Many of these loans cannot qualify as collateral for Federal Reserve advances except
at the "penalty" rate of interest, although their quality may be
equal to that of presently "eligible" paper.
To enable the Federal Reserve System always to be in a position to perform promptly and efficiently one of its principal responsibilities—the extension of credit assistance to enable the
banking system to meet the legitimate needs of the economy—
and to avoid penalizing those uses of credit that generate sound
paper that is not "eligible" under existing law, the Board again
urges legislation to permit member banks to borrow from Federal
Reserve Banks, at current discount rates, on the security of any
sound assets.
"Par clearance." Most banks pay the face amount of all checks
presented to them for payment; this practice is frequently described as "par clearance." In certain areas of the country,
however, many small banks deduct a so-called "exchange charge"
from the face amount of checks presented by mail and remit
only the balance. In such circumstances the drawee bank shifts
all or a portion of the expense incurred by it in connection with
the collection process to the payee of the check or to an indorsee. In the Board's view there is no justification for the increased costs, delays, and inefficiencies that result when banks do
not pay all checks at their face amount. Accordingly, the Board
reiterates the recommendation in its ANNUAL REPORT for 1965
that legislation be enacted to require all insured banks to pay
the face amount of all valid checks drawn upon them.
Reserve requirements. In its ANNUAL REPORTS for 1964 and
1965 the Board of Governors favored legislation that would (1)
authorize it to fix reserve requirements on a graduated basis according to the amount of a bank's deposits and (2) make such
requirements applicable to all federally insured banks (rather

311

ANNUAL REPORT OF BOARD OF GOVERNORS

than only to member banks). Legislation enacted in 1966 gave
the Board increased flexibility in fixing reserve requirements;
but that legislation is temporary in nature, it retains the outmoded
differentiation between reserve city and "country" banks, and
it does not apply to nonmember banks.
The reasons for changes in the structure of bank reserve requirements have become stronger with the passage of time. The
classification of member banks into reserve city and "country"
banks has become increasingly arbitrary as the differences between them, in both size and functions, have decreased. Since
deposits in nonmember banks are part of the country's money
supply just as are those in member banks, their exemption from
federally imposed reserve requirements cannot be justified. It
would be far more rational and equitable to require that every
federally insured bank maintain reserves against deposits solely
on the basis of their amount. Under such a requirement, all
federally insured banks of the same size, in terms of demand deposits, would carry equal reserves against such deposits.
Accordingly, the Board renews its recommendation that legislation be enacted (1) to authorize the Board to fix graduated
reserve requirements on the basis of the amount of a bank's demand deposits and (2) to bring all insured banks within the
coverage of such requirements. In connection with the latter
action, nonmember insured banks should be granted access to
Federal Reserve discount facilities.
Margin requirements for securities transactions. The Board again
urges enactment of legislation modifying Section 7 of the Securities Exchange Act of 1934 (15 U.S.C. 78g) to eliminate an
unwarranted difference in the status, for credit purposes, of
securities that are registered on a national securities exchange
and securities that are traded only "over the counter."
Section 7 now authorizes the Board of Governors to limit the
credit that brokers and dealers may extend on securities that are
registered on exchanges and the credit that banks (and other
lenders) may extend for the purpose of purchasing or carrying
312

FEDERAL RESERVE SYSTEM

equity securities that are so registered. With respect to over-thecounter securities, that section, generally speaking, forbids
brokers and dealers to extend any credit whatever, while permitting banks to extend credit unlimited by any governmental^
imposed margin requirements.
This legislative arrangement is inequitable in its divergent
treatment of brokers and banks; it unnecessarily deprives persons interested in purchasing over-the-counter securities of credit
facilities that might appropriately be extended by brokers and
dealers; and it limits the effectiveness of salutary controls over
security credit. The growth of the over-the-counter securities
market has given this problem increased importance, and the
Securities and Exchange Commission's Special Study of Securities Markets, submitted to Congress in 1963, recommended
amendment of the 1934 Act along the lines urged by the Board.
Purchase of obligations of foreign governments by Federal Reserve
Banks; loans to bank examiners; loans to executive officers. T h e Board
reiterates the recommendations included in its ANNUAL REPORTS

for 1964 and 1965 that legislation be enacted to:
(1) Amend Section 14(e) of the Federal Reserve Act to
permit Reserve Banks to invest in obligations of foreign governments or monetary authorities that will mature within 12 months
and are payable in a convertible currency;
(2) Relax the criminal prohibition against bank loans to
examiners in order to permit federally insured banks to make
home mortgage loans up to $30,000 to bank examiners; and
(3) Modify the provisions of Section 22(g) of the Federal
Reserve Act (a) to permit an executive officer of a member
bank to borrow from his own bank up to $5,000, or in the case
of a home mortgage loan up to $30,000; (b) to substitute, with
respect to such borrowings, a requirement of a report by the
officer to his board of directors in lieu of the present requirement
of prior approval by such board; and (c) to require an executive
officer to inform his board of directors of borrowings from other
banks only where they would exceed $5,000 in the aggregate,
rather than with respect to each such borrowing.

313

ANNUAL REPORT OF BOARD OF GOVERNORS

LITIGATION
Whitney Holding Corporation, New Orleans, Louisiana. A Louisiana Circuit Court of Appeal affirmed the decision of the lower
State court, holding the Louisiana anti-bank holding company
statute to be applicable to the Whitney proposal for becoming
a bank holding company, and not unconstitutional as so applied
(see ANNUAL REPORT for 1965,

pp. 242 and

243).

On November 7, 1966, the Louisiana Supreme Court denied
a petition for review of the holding of the Circuit Court of
Appeal. Following the Louisiana Supreme Court decision, and
on the basis of that decision, the opposing banks requested the
Board to deny the Whitney application, subsequent to which
counsel for Whitney filed a motion with the Board to withdraw
the Whitney application.
On December 30, 1966, the Board granted the motion to withdraw and vacated the Board's Order of May 3, 1962. The May
3 Order had granted approval of the Whitney bank holding
company plan and had been remanded to the Board by the
Fifth Circuit Court of Appeals for reconsideration in the light
of the U.S. Supreme Court opinion in Whitney v. Saxon, 379
LT.S. 411, indicating that the Board should determine the applicability and effect of the Louisiana anti-bank holding company
statute, which had become effective July 10, 1962. The Board's
Order of December 30, 1966, concluded the administrative
proceeding.
Baker, Watts & Co. et ah v. Saxon. In 1966, a group of
investment bankers filed suit in the U.S. District Court for the
District of Columbia for a declaratory judgment and an injunction, seeking to restrain the Comptroller of the Currency from
purporting to authorize national banks to underwrite and deal
in governmental securities known as "revenue bonds." Revenue
bonds are issued by governmental instrumentalities but are not
supported by general powers of taxation; interest and principal
are payable out of funds received from a specified source.
314

FEDERAL RESERVE SYSTEM

The problem arose out of interpretations by the Comptroller
of provisions of paragraph Seventh of Section 5136 of the Revised Statutes (12 U.S.C. 24), which prohibit national banks
from underwriting, purchasing, and dealing in securities, with
certain exceptions including "general obligations of any State
or of any political subdivision thereof." The question before the
Court was whether revenue bonds qualify as such "general
obligations."
Because the statutory provisions in question apply also to
member State banks (under Section 9 of the Federal Reserve
Act) and because the Board of Governors, in its interpretations
and enforcement of the provisions in question, has taken a
position different from that of the Comptroller, the Board was
invited by the District Court to submit a memorandum of law
on the subject, in the capacity of a "friend of the court" (amicus
curiae).
The Court rejected the Comptroller's interpretation of the
statute in question and adopted the position taken by the plaintiffs and the Board. In its final judgment, dated December 22,
1966, the Court concluded that the exception in Section 5136
of the Revised Statutes for "general obligations" of States and
political subdivisions is limited to "obligations that are supported
by an unconditional promise to pay, directly or indirectly, an
aggregate amount which (together with any other funds available for the purpose) will suffice to discharge, when due, all
interest on and principal of such obligations, which promise
(1) is made by a governmental entity that possesses general
powers of taxation, including property taxation, and (2) pledges
or otherwise commits the full faith and credit of said promisor;
said term does not include obligations not so supported that are
to be repaid only from specified sources such as the income
from designated facilities or the proceeds of designated taxes."
This interpretation is identical with a legislative proposal urged
by the Board in its ANNUAL REPORTS for 1964 and 1965 as a
means of reaffirming and clarifying existing law on the subject

315

ANNUAL REPORT OF BOARD OF GOVERNORS

of bank underwriting of revenue bonds and is the reason for
omission of such recommendation in this year's REPORT.
Detroit Bank & Trust Co. et ah v. Saxon and Board of Governors of Federal Reserve System. Four Michigan banks, of
which two are national banks and two are member State banks,
filed suit in 1966 in the U.S. District Court for the District of
Columbia, against the Comptroller of the Currency and the
Board of Governors of the Federal Reserve System, for the purpose of preventing consummation of a proposal by Michigan
National Bank, Detroit, Michigan, to increase its authorized
common stock and to exchange shares of the new issue for outstanding shares of stock of Michigan Bank N.A. The court permitted Michigan National Bank to intervene as a co-defendant.
The complaint asserts that consummation of the proposed
acquisition of stock would violate various Federal banking laws,
including (1) Section 5136 of the Revised Statutes prohibiting
a national bank from buying shares of stock for its own account,
except as authorized by law, (2) Section 5155 of the Revised
Statutes governing branch banking, (3) Section 5190 of the Revised Statutes specifying the locations where a national bank
may conduct business, and (4) the Bank Holding Company
Act of 1956. The complaint asserts also that consummation
of the said proposal would be violative of the dual banking
system concept as reflected by various provisions of the Michigan Financial Institutions Act and the Federal banking laws.
The plaintiffs have requested the Court to enter a declaratory
judgment to the effect that Michigan National Bank has no lawful right to acquire, or hold for its own account, the capital
stock of Michigan Bank N.A., and that neither the Comptroller
nor the Board of Governors is authorized to approve the proposed acquisition of stock; the plaintiffs have also asked the
Court to enjoin the Comptroller from issuing any certificate under 12 U.S.C. 57, or any approval purporting to authorize or
validate the issuance of shares of Michigan National Bank for
the purpose of the above-mentioned acquisition.
316

FEDERAL RESERVE SYSTEM

RESERVE BANK OPERATIONS
Earnings and expenses. The accompanying table summarizes the
earnings, expenses, and distribution of net earnings of the Federal
Reserve Banks for 1966 and 1965.
EARNINGS, EXPENSES, AND DISTRIBUTION OF NET EARNINGS
OF FEDERAL RESERVE BANKS, 1966 AND 1965
(In thousands of dollars)
1966

1965

1,908,500
207,401

1,559,484
204,290

1,701,099

1,355,194

996

1,022

Net earnings before payments to U.S. Treasury

1,702,095

1,356,215

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

33,696
1,649,455

32,352
1,296,810

18,944

27,054

Item
Current earnings.
Current expenses.
Current net earnings
Net addition to current net earnings*

1
Includes net losses on sales of U.S. Govt. securities of $2,476,000 in 1966 and of $9,000
in 1965.

Current earnings were $1,908 million, an increase of $349
million, or 22 per cent, from 1965. Of this increase $329 million
was from U.S. Government securities, $9 million from discounts
and advances, and $8 million from foreign currencies.
Current expenses were $3 million, or 1.5 per cent, more than
in 1965. Statutory dividends to member banks amounted to $34
million, an increase of $1 million from 1965. This rise in dividends reflected an increase in the capital and surplus of member
banks and a consequent increase in the paid-in capital stock of
the Federal Reserve Banks.
Payments to the Treasury as interest on Federal Reserve notes
totaled $1,649 million for the year, compared with $1,297 million in 1965. This amount consists of all net earnings after divi-

317

ANNUAL REPORT OF BOARD OF GOVERNORS

dends and the amount necessary to bring surplus to the level of
paid-in capital.
Expenses of the Federal Reserve Banks include costs of
$866.19 for 11 regional meetings incident to the Treasury Department Savings Bond program.
A detailed statement of earnings and expenses of each Federal
Reserve Bank during 1966 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 1966
amounted to $42,612 million—an increase of $3,382 million

RESERVE BANK EARNINGS ON LOANS AND SECURITIES,

Item and year

Total

Discounts
and
advances

Acceptances

1964-66
U.S.
Goyt.
securities

In millions of dollars
Average daily holdings: 1
1964
1965
1966
Earnings:
1964
1965
1966

34,985
39,230
42,612

294
492
649

76
77
117

34,615
38,661
41,846

1,337.0
1,545.0
1,885.8

10.5
19.8
29.2

2.8
3.2
5.8

1,323.7
1,522.0
1,850.8

In per cent
Average rate of interest:
1964
1965
1966
1

Based on holdings at opening of business.

318

3.82
3.94
4.43

3 .57
4 .03
4 .50

3 .67
4 .14
4 .96

3.82
3.94
4.42

FEDERAL RESERVE SYSTEM

over 1965. U.S. Government securities accounted for $3,185
million of the increase, and discounts and advances for $157
million.
The average rates of interest on holdings were up from 4.03
per cent to 4.50 per cent on discounts and advances, from 4.14
per cent to 4.96 per cent on acceptances, and from 3.94 per cent
to 4.42 per cent on U.S. Government securities.
Volume of operations. Table 10 on page 340 shows the volume
of operations in the principal departments of the Federal Reserve Banks for 1963-66.
Discounts and advances were the highest in number since
1960 and the highest in dollar amount since 1959, as the number of banks borrowing rose to 1,658 against 1,157 in 1965.
The upward trend in volume of most of the other operations
continued in 1966, particularly in food stamps redeemed and in
the dollar amount of transfers of funds. Coin received and
counted was almost back to the volume handled in 1962 before
the coin shortage began.
Conversion of the check handling operation to high-speed
electronic equipment, which was begun near the end of 1960, is
now about completed, with the last of the 36 Federal Reserve
Banks and branches scheduled to install such equipment early in
1967.
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, and the Atomic Energy Commission are authorized to guarantee loans for defense production
made by commercial banks and other private financing institutions. The Federal Reserve Banks act as fiscal agents of the
guaranteeing agencies under the Board's Regulation V.
During 1966 the guaranteeing agencies authorized the issuance of 5 guarantee agreements covering loans totaling $9 mil-

319

ANNUAL REPORT OF BOARD OF GOVERNORS

lion. Loan authorizations outstanding on December 31, 1966,
totaled $58 million, of which $55 million represented outstanding loans and $3 million additional credit available to borrowers. Of total loans outstanding, 79 per cent on the average was
guaranteed. During the year approximately $56 million was disbursed on guaranteed loans, most of which are revolving credits.
Authority for the V-loan program, unless extended, will terminate on June 30, 1968.
Table 14 (page 342) shows guarantee fees and maximum
interest rates applicable to Regulation V loans. The current
maximum permissible interest rate of IVi per cent was increased
from 6 per cent by the Board of Governors in September 1966,
after consultation with the guaranteeing agencies, to bring the
net return to financing institutions on loans under this program
more in line with current lending and money market rates and
thus help to assure financing from commercial sources for contractors and subcontractors engaged in defense work.
Foreign and international accounts. Assets held for foreign account at the Federal Reserve Banks declined $1,272 million in
1966. At the end of the year they amounted to $18,840 million:
$10,407 million of earmarked gold; $7,036 million of U.S. Government securities (including securities payable in foreign currencies); $174 million in dollar deposits; $191 million of bankers' acceptances purchased through Federal Reserve Banks; and
$1,032 million of miscellaneous assets. The latter item includes
mainly dollar bonds issued by foreign countries and international
organizations. Assets held for international organizations, including an IMF gold deposit, increased by $763 million to $9,517
million.
In 1966 new accounts were opened in the names of the central
banks of Ethiopia, Guyana, and Tanzania. An account was
opened also for the Asian Development Bank.
Gold collateral loans totaling $41 million, which were outstanding at the beginning of 1966, were repaid. New arrangements—including a standby commitment—amounted to $40
320

FEDERAL RESERVE SYSTEM

million. All drawings during the year under the loan arrangements were repaid by the end of the year. Loans on gold are
made to foreign monetary authorities to help them meet dollar
requirements of a temporary nature.
The Federal Reserve Bank of New York continued to act as
depositary and fiscal agent for international organizations. As
fiscal agent of the United States, the Bank continued to operate
the Exchange Stabilization Fund pursuant to authorization and
instructions of the Secretary of the Treasury. Also on behalf of
the Treasury Department, it administered foreign assets control
regulations pertaining to assets in the United States of North Vietnam, Cuba, Communist China, and North Korea, and their
nationals, and to transactions with those countries and their
nationals.
Bank premises. During 1966 the Board authorized construction
of a communications and records center for the Federal Reserve
Bank of Richmond, an addition to the Federal Reserve Bank
building in Kansas City, and a new building for the Denver
Branch.
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.

321

ANNUAL REPORT OF BOARD OF GOVERNORS

BOARD OF GOVERNORS
Building annex. The Board has authorized construction of an
annex to its present building on property acquired as part of the
original site in 1934. For this purpose it has employed Harbeson
Hough Livingston and Larson, the architectural firm that is successor to Paul P. Cret, architect of the original building.
Income and expenses. The accounts of the Board for the year
1966 were audited by the public accounting firm of Haskins &
Sells.

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, 1966 and the related statement of assessments and expenditures 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 accompanying financial statements present fairly
the financial position of the Board of Governors of the Federal Reserve
System at December 31, 1966 and its assessments and expenditures for
the year then ended, in conformity with generally accepted accounting
principles applied on a basis consistent with that of the preceding year.
Haskins & Sells
Washington, D. C.
January 27, 1967

322

FEDERAL RESERVE SYSTEM

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BALANCE SHEET, DECEMBER 31, 1966

ASSETS
OPERATING FUND :

Cash
Miscellaneous receivables and travel advances
Stockroom and cafeteria inventories—at cost

Total operating fund

659,103
18,446
22,697
700,246

PROPERTY FUND—At cost:

Land and improvements
Building
Furniture and equipment

792,852
4,273,349
1,405,091

Total property fund

6,471,292

TOTAL

$ 7,171,538
LIABILITIES AND FUND BALANCES

OPERATING FUND :

Current liabilities:
Accounts payable and accrued expenses
Income taxes withheld
Accrued payroll
Fund balance:
Balance, January 1, 1966
Excess of expenditures over assessments and
special item for the year

$ 395,211
275,533
250,233 $

920,977

(157,820)
(62,911)

Total operating fund

(220,731)
700,246

PROPERTY FUND :

Fund balance, January 1, 1966
Expenditures for additions
Property adjustments and disposals
Total property fund
TOTAL

6,153,098
347,700
(29,506)
6,471,292
$ 7,171,538

323

ANNUAL REPORT OF BOARD OF GOVERNORS

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENT OF ASSESSMENTS AND EXPENDITURES
FOR THE YEAR ENDED DECEMBER 31, 1966
ASSESSMENTS LEVIED ON FEDERAL RESERVE BANKS:

For Board expenses and additions to property
$ 9,021,600
For expenditures made on behalf of the Federal Reserve
Banks
19,158,370
Total assessments

28,179,970

EXPENDITURES :

For printing, issue and redemption of Federal Reserve notes,
paid on behalf of the Federal Reserve Banks

19,158,370

For expenses of the Board:
Salaries
$6,104,175
Retirement and insurance contributions
976,359
Traveling expenses
327,566
Consumer finances surveys
45,325
Banking markets and other economic surveys...
118,172
Legal, consultant and audit fees
66,516
Other contractual services
155,243
Printing and binding—net
367,173
Equipment and other rentals
206,107
Telephone and telegraph
136,942
Postage and expressage
99,405
Stationery, office and other supplies
112,820
Heat, light and power
54,937
Operation of cafeteria—net
60,302
Repairs, maintenance and alterations
101,702
Books and subscriptions
25,900
Insurance
2,755
System membership, Center for Latin American Monetary Studies
25,500
Miscellaneous—net
39,369

9,026,268

For property additions

347,700

Total expenditures

28,532,338

EXCESS OF EXPENDITURES OVER ASSESSMENTS BEFORE SPECIAL ITEM. .

352,368

SPECIAL ITEM (See Note)

289,457

EXCESS OF EXPENDITURES OVER ASSESSMENTS AND SPECIAL ITEM

FOR THE YEAR

62,911

NOTE.—During 1966 payment of $289,457 was received by the Board in
settlement of a court judgment in favor of the United States (on the Board's
behalf) for failure by the manufacturer to deliver an electronic digital computing
system under a 1956 contract.

324

Tables

1. DETAILED STATEMENT OF CONDITION OF ALL FEDERAL RESERVE BANKS
COMBINED, DECEMBER 31, 1966
(In thousands of dollars)
Gold certificates on hand:
Held by F.R. Banks
Held by F.R. Agents
Gold certificates due from U.S. Treasury:
Interdistrict settlement fund
F.R. Agents' fund

ASSETS
1,278
4,329,625
6,505,000

Redemption fund for F.R. notes

10,835,903
1,837,860

Total gold certificate reserves
F.R. notes of other F.R. Banks

12,673 763
857*513

Other cash:
United States notes
Silver certificates
National bank notes and F.R. Bank notes
Coin

14 ,305
8 ,745
108
277 ,525

Total other cash
Discounts and advances secured by U.S. Govt. obligations:
Discounted for member banks
Discounted for others

73,325

Other discounts and advances:
Discounted for member banks
Foreign loans on gold

99,125

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

300 683

69,121
123,998
331800
11,803,658
4,351,015
21,301,957
6,198,762
43,655,392
626,800
44,282,192

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

44,681,56*
9,632,534
354,744
308,882
10,296,160
115,169
61,649

Total buildings
176,818
Less depreciation allowances
100,688
Total bank premises
Other assets:
Claims account closed banks
Denominated in foreign currencies
GoldduefromU.S.TreasuryforaccountlnternationalMonetaryFund..
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

326

99,125
172,450

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

Total assets

73 f 325

30,371

76,130
106,501
1,121
874,607
211,490
3,823
317,896
972
2,112
1,134
4,691
1,130
1,418,976
70,335,157

1. DETAILED STATEMENT OF CONDITION OF ALL FEDERAL RESERVE BANKS
COMBINED, DECEMBER 31, 1966—Continued
(In thousands of dollars)
F.R. notes:
Outstanding (issued to F.R. Banks)
Less: Held by issuing F.R. Banks
Forwarded for redemption

LIABILITIES
1,856,224
165,114

42,217,291
2,021,338

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

40,195,953
19,791,748
415,774
174,045
70,566
11,694
43,973
289,802
173,682

Total other deposits

589,717

Total deposits
Deferred availability cash items

20,971,284
7,784,609

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

600
236,085
6,230
479
137

Total other liabilities

243,531

Total liabilities

69,195,377
CAPITAL ACCOUNTS

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

569,890
569,890
70,335,157
190,554

During the year this item includes the net of earnings, expenses, profit and loss items, and accrued
dividends which are closed out on December 31; see Table 7, pp. 336-37.
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 EACH FEDERAL RESERVE BANK, DECEMBER 31, 1966 and 1965
(In millions of dollars unless otherwise indicated)
Total

Boston

New York

Philadelphia

Cleveland

Richmond

Item
1966

1965

1966

1965

10,836
1,838

11,702
1,734

674
102

12,674

13,436

857
298

876
129

74
99

82
55

69
124

75
112

1966

1965

1966

702
99

2,048
444

2,478
409

699
96

787
94

776

801

2,492

2,887

795

58
9

74
9

189
31

151
17

48
6

7
25

19
11

2
2

69
124

75
112

1966

1965

1966

1965

831
155

1,028
148

1,044
157

1,012
143

881

986

1,176

1,201

1,155

66
6

98
50

70
12

87
16

102
9

1
2

1965

ASSETS
Gold certificate account
Redemption fund for F R notes
Total gold certificate reserves
F R notes of other Banks
Other cash
Discounts and advances:
Secured by U.S. Govt. securities
Other
Acceptances:
Bought outright
Held under repurchase agreements
Federal agency obligations held under repurchase
agreements
U.S. Govt. securities:
Bought outright
Held under repurchase agreements

2,326

2,097

10,899
627

9,744
290

2,289

2,114

3,562

3,435

3,163

2,863

41,092

2,327

2,099

11,785

10,251

2,290

2,118

3,562

3,439

3,167

2,866

10,281
107

8,758
103

1,994
9

1,677
9

542
3

484
3

723
5

166
34
76

700
5
31

229
211
86

586
5
57

811
6

629
34
314

615
3
42

519
3

875
211
332
...

40,478
290

44,682

Total loans and securities

43,655
627

Cash items in process of collection
Bank premises
Other assets:
Denominated in foreign currencies
IMF gold deposited *
All other
Total assets . . .

70,317

65,371

3,847

3,551

17,026

15,268

3,748

3,609

5,530

5,372

5,355

4,889

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

40,196

37,950

2,388

2,250

9,238

8,600

2,306

2,241

3,316

3,232

3,680

3,388

19,779
416
174

18,447
668
150

844
*
8

702
48
7

5,278
271
56

4,804
160
40

896
*
9

858
39
8

1,458
1
14

1,445
68
13

962
1
8

825
69
8

Total liabilities

355

211
185

184

19,620
6,510
189

861
532
12

763
474
10

6,001
1,418
73

5,188
1,142
50

914
457
11

911
387
10

1,486
608
18

1,538
487
15

985
615
15

914
518
13

69,177

Total deposits
Deferred availability cash items
Other liabilities

211
377
20,957
7,786
238

64,269

3,793

3,497

16,730

14,980

3,688

3,549

5,428

5,272

5,295

4,833

570
570

551
551

27
27

148
148

144
144

30
30

51
51

50
50

30
30

28
28

70,317

65,371

3,847

3,551

17,026

15,268

3,748

3,609

5,530

5,372

5,355

4,889

31.5%

35.4%

32.5%

35.6%

27.0%

33.6%

34.5%

39.3%

29.7%

36.4%

32.6%

34.1%

191

144

42,218

40,350

2,494

2,372

9,687

9,095

2,359

2,338

3,577

3,483

3,803

3,573

2,022

2,400

106

122

449

495

261

251

123

185

40,196

37,950

2,388

2,250

9,238

8,600

2,306

2,241

3,316

3,232

3,680

3,388

6,505
2
36,956

6,625
1
34,700

500

440

1,000

795

853

8,900

8,200

500
1
1,900

600

1,945

483
*
2,000

600

2,016

3,050

2,950

3,045

2,750

43,463

41,326

2,516

2,385

9,900

9,200

2,483

2,401

3,650

3,550

3,840

3,603

CAPITAL ACCOUNTS
Capital paid in
Surplus . ,,
..
Other capital accounts

....

Total liabilities and capital accounts
Ratio of gold certificate reserves to F.R. note
liability
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
Eligible paper •.
U.S. Govt. securities
to

Total collateral
For notes see end of table.

2. STATEMENT OF CONDITION OF EACH FEDERAL RESERVE BANK, DECEMBER 31, 1966 and 1965—Continued
(In millions of dollars unless otherwise indicated)
Chicago

Atlanta
Item

1966

1965

St. Louis

1966

1965

1966

Minneapolis

1965

1966

Kansas City

1965

1966

San Francisco

Dallas

1965

1966

1965

1966

1965

ASSETS
621
103

662
98

1,827
331

2,210
318

470
64

463
65

258
32

479
67

655
62

368
57

1,353
220

1,255
204

724

760

2,158

2,528

534

528

213
32
245

290

401
72
473

546

717

425

1,573

1,459

F.R. notes of other Banks
Other cash

76
37

79
13

86
46

85
22

30
31

42
7

23
8

35
4

34
14

35
7

41
18

47
6

87
32

90
17

Discounts and advances:
Secured by U.S. Govt. securities
Other

14
31

*
15

15
6

6
1

7
•

19
3

*
*

20
2

15
43

2,470

2,314

7,322

6,742

1,491

1,547

897

839

1,661

1,584

1,592

1,666

5,983

5,533

2,515

2,329

7,342

6,763

1,493

1,548

900

846

1,668

1,606

1,592

1,688

6,041

5,539

871
20

776
20

1,742
20

1,508
20

480
8

667
11

535
7

540
10

465
11

1,006
9

847
10

125

290
3
21

248
3

413
7
21

115

4,314

4,032

11,573

11,065

2,618

2,578

1,498

1,447

2,918

2,779

2,981

2,691

8,909

8,090

Gold certificate account
Redemption fund for F.R. notes
Total gold certificate reserves

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

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

2,327

2,257

7,293

6,891

1,471

1,451

706

700

1,511

1,433

1,278

1,194

4,682

4,313

1,187
1
9

1,084
14
9

2,754
*
23

2,814
49
21

727
1
6

691
55
5

482
1
4

493
37
3

877
1
7

833
52
7

1,065
137
9

1,034
21
9

3,249
2
21

2,864
56
20

Total deposits . .
Deferred availability cash items
Other liabilities

1,207
697
13

1,120
579
10

2,806
1,270
38

2,906
J ,080
30

740
360
7

761
321
7

490
270
4

539
177
5

892
456
9

898
393
7

1,218
411
8

1,070
356
7

3,357
692
30

3,012
596
25

4,244

3,966

11,407

10,907

2,578

2,540

1,470

1,421

2,868

2,731

2,915

2,627

8,761

7,946

35
35

33
33

83
83

79
79

20
20

19
19

14
14

13
13

25
25

24
24

33
33

32
32

74
74

72
72

4,314

4,032

11,573

11,065

2,618

2,578

1,498

1,447

2,918

2,779

2,981

2,691

8,909

8,009

31.1%

33.7%

29.6%

36.7%

36.3%

36.4%

34.7%

41.4%

31.3%

38.1%

56.1%

35.6%

33.6%

33.8%
19

2,459

2,438

7,653

7,322

1,538

1,536

743

734

1,579

1,509

1,373

1,291

4,953

132

181

360

431

271

346

2,327

2,257

7,293

6,891

1,471

1,451

706

700

1,511

1,433

1,278

1,194

4,682

4,313

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

450

550

1,100

127

225

180

735

1,900

6,700

6,400

310
2
1,310

315

2,050

1,310

655

615

1,400

1,300

1,230

1,130

4,600

4,300

2,500

2,450

7,800

7,500

1,622

1,625

782

742

1,625

1,525

1,410

1,310

5,335

5,035

* Less than $500,000.
1 Gold deposited by the I M F 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.

4,659

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

3. FEDERAL RESERVE HOLDINGS OF U.S. GOVERNMENT SECURITIES,
DECEMBER 31, 1964-66
(In thousands of dollars)

Type of issue
and date

Treasury bonds:
1962-67
1963-68
1964-69 June
1964-69 Dec
1965-Feb
1965-70
1966-71
1966 May
1966 Aug
1966 Nov
1967-72 June
1967-72 Sept
1967-Nov
1967-72 Dec
1968 May
1968 Aug
1968 Nov
1969 Feb
1969 Oct
1970 Feb
1970 Aug
1971 Aug
1971 Nov
1972 Feb
1972 Aug
1973 Aug
1973 Nov
1974 Feb
1974 May
1974 Nov
1975-85
1978-83
1980 Feb
1980 Nov
1985 May
1987-92
1988-93
1989-94
1990 Feb
1998 Nov
Total
Treasury notes:
Apr. 1, 1965—EA
May 15, 1965—A.
May 15, 1965—C.
Aug. 13, 1965—D.
Nov. 15, 1965—B..
Nov. 15, 1965—E..
Feb. 15, 1966—B..
Feb. 15, 1966—C.
May 15, 1966—D.
Aug. 15, 1966—A.
Nov. 15, 1966—E..
Feb. 15, 1967—B..
Feb. 15, 1967—C.
May 15, 1967—D .
Aug. 15, 1967—A.
Aug. 15, 1967—E..
Nov. 15, 1967—F..
Feb. 15, 1968—A.
Nov. 15, 1970—A.
May 15, 1971—A.
Nov. 15, 1971—B..
Total

332

Rate of
interest
'per cent)

Increase or decrease (—)
during—

December 31

4
4
4
4
3%
4
4
41/s
41/g
4%
3%
4%

1964

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

573,540
144,007

2%
3%
3%

1965

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

1966

573,540
144,007
252,200
36,550
232,100
54,566
44,052
594,550
95,858
278,100
295,000
75,500
1,111,300
183,150
49,850
115,800
160,100
198,450
133,000
102,900
113,450
166,000
66,200
132,800
37,150
68,090
1,250
34,800
22,400
20,800

107,560
169,085
306,740
335,199
480,600
573,540

54,566
44,052
595,450
95,858
291,065
315,200
97,500
1,117,800
193,950
64,750
130,200
160,600
203,450
138,000
102,900
117,650
178,000
74,700
147,750
37,150
68,090
3,250
34,800
23,400
23,800
135,100
13,500
24,400
61,450
14,250

144,007
252,200

36,550
209,100
54,566
44,052
590,550
95,858
253,700
224,100
29,500
84,000
103,450
86,800
158,100
153,900
132,000
97,600
83,200
91,400

6,549,797

5,274,497

340,000
1,892,950
6,387,293
5,791,865

6,198,762

61,450
14,250

45,300
37,150
47,090
500
34,800
22,400
20,800
58,500
13,500
21,400
61,450
14,250

15,000
206,700
3,911,506
3,891,732
76,500
6,282,232
340,000
1,892,950
6,387,293
1,643,959

127,100

13,500

21,400

545,100

342,900
2,951,032
6,374,082
338,850
1,245,000
6,694,993
837,100
1,017,000
1,500,000
1,000

251,000
2,939,132
6,358,732
321,650

21,301,957

24,827,722

244,000

295,650

1966

1965

-480,600
-252,200
-36,550
-232,100

23,000

900

4,000

12,965
20,200
22,000
6,500
10,800
14,900
14,400
500
5,000
5,000

24,400
70,900
46,000
1,027,300
79,700
49,850
29,000
2,000
44,550
1,000

4,200
12,000
8,500
14,950

5,300
30,250
74,600
66,200
87,500

2,000

21,000
750

1,000
3,000
8,000

68,600

3,000

-351,035

-340,000
-1,892,950
-6,387,293
-5,791,865
-545,100
91,900
11,900
15,350
17,200
1,245,000
6,694,993
837,100
1,017,000
1,500,000

1,275,300
-15,000
-206,700
-3,911,506
-3,891,732
-76,500
-6,282,232

4,147,906
545,100
7,000
2,939,132
6,358,732
26,000

1,000

25,187,522 -3,525,765

-359,800

3. FEDERAL RESERVE HOLDINGS OF U.S. GOVERNMENT SECURITIES,
DECEMBER 31, 1964-66—Continued
(In thousands of dollars)

Rate of
interest
(per cent)

Type of issue
and date

Certificates:
Aug. 15,1967

Increase or decrease (—)
during—

December 31
1966

1965

1964

1966

1965

4,351,015

Total .

4,351,015

Treasury bills:
Tax anticipation
Other due—
^Vithin 3 mos
3-6 mos
After 6 mos

541,200

484,600

130,500

56,600

354,100

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

4,723,263
2,624,726
1,268,080

3,818,045
1,534,480
561,250

1,708,931
816,024
121,434

905,218
1,090,246
706,830

Total

11,803,658

9,100,669

6,044,275

2,702,989

3,056,394

626,800

289,900

537,500

336,900

-247,600

44,282,192

40,768,088

37,043,794

3,514,104

3,724,294

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

10,549,826
24,881,514
7,458,186
990,626
402,040

7,338,213
17,530,414
14,065,888
1,448,533
385,040

3,211,613
4,647,157
7,351,100
16,798,888
13,505,586 -6,607,702
-457,907
1,797,473
17,000
294,690

2,691,056
731,526
560,302
-348,940
90,350

Repurchase agreements
Total holdings

4. FEDERAL RESERVE BANK HOLDINGS OF SPECIAL SHORT-TERM TREASURY
CERTIFICATES PURCHASED DIRECTLY FROM THE UNITED STATES, 1953-66
(In millions of dollars)
Amount

Date
1953
Mar. 18
19
20
21
22*
23
24
25
26

June

6
7*
8
9
10
11
12
13
14*

110
104
189
189
189
333
186
63
49
196
196
196
374
491
451
358
506
506
506

Date
1953
June 15
16
17
18
19
20
21*
22
23
24

1954
Jan. 14
15
16

Amount

Date

999

1954
Jan. 17*

1,172

823
364
992
992
992
908
608
296

Amount

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

18
19
20
21
22
23
24*
25
26

Mar. 15
16

22
169
169

1955
1956 •none
1957

Date

Amount

1958
Mar. 17
18

143
207

1959
1960
1961
1962 none
1963
1964
1965
1966
Dec. 9
10
11*

169
169
169

* Sunday or holiday.
NOTE.—Under authority of Section 14(b) of the Federal Reserve Act. On Nov. 9, 1953, the F.R.
Banks sold directly to the Treasury $500 million of Treasury notes; this is the only use that has been
made under the same authority to sell U.S. Govt. securities directly to the United States.
Interest rate y+ per cent through Dec. 3, 1957, and *4 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

OPEN MARKET TRANSACTIONS OF THE FEDERAL RESERVE SYSTEM DURING 1966
(In millions of dollars)
Outright transactions in U.S. Govt. securities by maturity
Treasury bills

Total

Other within 1 year

Month
Gross
purchases

Redemptions

Gross
sales

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

894
1,114
960
929
1,208
1,448
2,607
1,602
1,976
1,281
860
771

919
979
314
748
392
650
2,489
1,273
1,419
893
223

Total...

15,651

10,297

Gross
purchases

98
170
320
323
405

894
1,070
873
887
1,174
1,296
2,526
1,602
1,976
1,281
860
736

918
979
314
748
392
650
2,489
1,273
1,415
893
223

2,176

15,177

10,297

228
171
101
201
50
110

1-5 years

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

Gross
sales

11
9
25
34
88
29

Gross
sales

Redemptions

228
171
101
201
50
110

Gross
purchases

Gross
sales

-957
144
281
-108
76

957
-281
108

98
170
320
323
405

2,176

199

84
6,456
7,324

Over 10 years
Exch.
or
maturity
shifts

Gross
purchases

Gross
sales

Exch.
or
maturity
shifts

— 144
8
39

-6,253

208

-6,816

— 203

Net
change
in U.S.
Govt.
securities

-160

Repurchase
agreements
(U.S. Govt. securities)

Exch.,
maturity
shift
or
redemp.

33
78
18

5-10 years
Exch.
or
maturity
shifts

Gross
sales

Gross
purchases

5
-508

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

Gross
purchases

Gross
sales

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

1,595
272
222
682
421
185
120
364
97
275
1,775
3,751

1,545
611
222
682
421
185
26
457
97
275
1,153
3,746

-203
-376
545
-20
766
689
212
138
388
69
937
370

3
4
-1
2
-30
—3
-1
4
3
15

Total. . .

9,756

9,420

3,514

-5

-2

Net
change *

21
56
47

-280
-365
549
14
786
748
24
135
387
94
996
466

3,555

-75
12
1
30
20
58
-157

i 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, 1966
(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

2,756,131

New York
Annex
Buffalo

5,215,656
592,679
406,069

14,850,321
1,451,569
2,555,197

4,927,858
673,458
1,565,400

24,993,835
2,717,706
4,526,666

6,089,026
539,946
2,728,880

Philadelphia. . .

1,884,357

4,839,506

2,154,452

8,878,315

2,509,968

Cleveland
Cincinnati
Pittsburgh

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

6,619,378
1,171,259
3,006,088

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

11,486,826
3,159,645
7,199,325

1,042,759
549,870
3,353,054

469,944
299,758
24,045
250,487
347,071

4,164,663
387,722
547,802
2,009,381
1,069,026

2,497,936

7,132,543
687,480
571,847
3,328,313
2,041,218

1,735,629
587,221
571,847
1,436,433
1,183,640

Atlanta
Birmingham. . .
Jacksonville
Annex
Nashville
New Orleans...

988,562
410,775
164,004
107,925
592,342
1,268,878

5,804,778
1,989,111
1,706,794
76,236
1,474,678
4,517,204

3,514,144
1,019,618
772,071
15,842
1,098,924

10,307,484
3,419,504
2,642,869
200,003
3,165,944
5,786,082

8,515,786
2,224,810
1,450,611
191,972
2,117,181
5,786,082

Chicago
Detroit

6,275,490
1,147,734

17,615,460
2,851,558

9,846,057
1,376,442

33,737,007
5,375,734

16,919,290
2,665,361

St. Louis
Little Rock
Louisville
Memphis

1,675,780
871,699
700,075
128,542

3,171,719
2,730,568
2,859,819
294,763

2,285,317
206,575
1,041,202
218,883

7,132,816
3,808,842
4,601,096
642,188

1,620,867
3,367,159
3,254,109
184,253

Richmond
Annex 1
Annex 2
Baltimore
Charlotte

1,068,445
625,121

Minneapolis....
Helena
Kansas City... .
Denver
Oklahoma City
Omaha

600,521
15,709

4,689,718
126,401

2,688,921
62,977

7,979,160
205,087

2,852,372
57,851

1,251,213
2,828,465
592,435
445,663

5,574,110
763,078
1,511,600
1,491,117

1,337,725
91,693
834,845
731,925

8,163,048
3,683,236
2,938,880
2,668,705

3,721,840
3,181,828
2,362,875
1,711,777

Dallas
El Paso
Houston
San Antonio...

713,302
262,477
695,615
448,596

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
2,419,833

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

473,235
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

1,458,028
30,000
1,608,306
649,432
707,575
1,049,264

5,714,793
401,201
6,489,764
2,535,324
3,066,035
3,215,002

5,362,670
947 745
1,961,458
1,568,908
687,551
351,361
2,938,383
1,359,959
2,199,457
1,853,577

Total. . .

39,128,799 129,732,406

62,035,450 230,896,655 106,501,497

OTHER REAL ESTATE ACQUIRED FOR BANKING-HOUSE PURPOSES
Cincinnati
Richmond
Atlanta
Total
1

341,293
137,953
93,931

412,500

100,000

137,100

103,867

853,793
137,953
334,898

788,734
137,953
206,959

573,177

549,600

203,867

326,644

1 ,133,646

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

335

7. EARNINGS AND EXPENSES OF FEDERAL RESERVE BANKS DURING 1966
(In dollars)

Item

Total

Boston

New
York

Philadelphia

Cleveland

Richmond

Atlanta

Chicago

St. Louis

Minneapolis

Kansas
City

Dallas

San
Franciso

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

29,248,764 1,618,229
7.881,794
534,669 1,353,104 3,243,016 6,050,335 1,454,975
649,459
686,729 1,971,613 2,184,634 l,620,2(
5,764,167
5,764,167
1,850,809,375 96,255,481 465,754,256 95,513,283 150,967,301 129,428,481 101,018,982 309,998,076 65,929,753 38,020,021 70,779,540 71,722,638 255,421,51
21,986,545 1,054,797
5,760,474 1,188,387 1,978,789 1,120,757 1,318,636 3,143,519
768,972
527,121
967,965 1,275,220 2,881,9(
691,045
19,324
186,112
41,064
76,090
61,4:
24,444
30,208
108,538
22,390
35,483
29,787
56,153

Total.

1,908,499,896 98,947,831 485,346,803 97,375,573 153,521,823 131,932,549 105,656,724 319,300,468 68,176,091 39,263,658 73,775,271 75,217,975 259,985,1
CURRENT EXPENSES

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

8,536,990
103,121,311
18,401,945
653,959
2,528,592
25,052,905
2,126,531
8,956,124
327,840
5,328,784
5,491,623
2,085,994
1,170,683
153,730

482,822
6,099,158
1,160,692
34,035
151,913
1,635,983
98,759
619,462
21,371
501,973
130,423
137,152
53,398
12,844

1,539,616
25,095,823
4,220,849
78,759
469,489
3,131,379
450,513
1,707,928
38,311
977,344
464,642
285,004
75,651
7,314

633,022
4,856,224
902,024
30,468
97,487
1,091,868
85,692
476,246
15,018
179,902
76,596
90,189
104,849
7,567

618,354
7,997,048
1,471,139
63,216
179,385
2,088,219
144,287
657,270
38,826
484,087
471,511
253,471
83,492
26,214

737,160
7,146,483
1,298,204
51,365
171,684
2,728,074
155,941
717,567
26,485
215,246
195,795
165,447
100,766

3,447,193
8,287,079
3,415,019

88,498
468,146
123,977
62,178

1,181,382
912,267
769,777
-901,274

235,719
308,766
134,554
69,264

219,669
668,796
531,371
117,146

229,644
828,264
130,537
-4,867

199,086,302 11,882,784
20,167,481 1,059,141

40,504,774
2,592,136

9,021,600

435,100

228,275,383 13,377,025

2,359,700

11,727

853,511
665,483
6,904,978 14,915,743
1,228,834 2,522,814
72,551
42,101
206,191
303,504
2,289,330 3,312,662
248,659
248,947
752,550 1,335,406
36,254
24,373
953,022
338,603
792,270 1,358,739
314,104
185,969
150,950
105,491
43,951
34,117

647,462
6,063,918
1,050,915
61,766
147,794
1,472,868
111,751
619,167
27,790
210,265
237,225
134,588
175,871
1,574

475,302
3,402,868
640,542
42,284
169,344
966,902
82,644
256,845
18,646
311,079
343,370
91,214
37,085
1,301

577,175
5,776,683
1,077 648
38,233
158,896
1,968,685
139,498
614,344
11,985
299,055
284,954
149,397
56,814
3,883

288,152
1,586,702
617,762
186,266

173,245
596,309
158,032
47,897

121,439
336,466
138,152
32,049

77,627
688,469
204.858
59;811

504,499
483,750
181,875
82,673

9,395,455 16,113,501 14,905,522 15,102,484 29,070,302 11,938,437
1,294,988 1,399,194 2,128,880 2,159,967 4,078,113
742,481
483,300

813,900

462,000

541,700

1,292,300

313,000

45,456,610 11,173,743 18,326,595 17,496,402 17,804,151 34,440,715 12,993,918

588,124
718,9!
4,559,781 10,302,6(
827,475 2,000,8(
42,611
96,51
143,138
329,7(
1,424,875 2,942,0(
211,2:
148,617
774,2(
425,074
48,34
20,437
564,4?
293,754
690,260
445,8:
152,32
127,128
126,5S
99,721
1,5!
1,687
118,433
562,722
285,962
77,472

208,8?
846,42
138,16
171,38

7,467,532 12,188,015 10,437,271 20,080,22
794,780
517,660
929,795 2,470,34
215,800

399,000

524,400

1,181,40

8,200,992 13,381,795 11,891,466 23,731,97

Less reimbursement for certain
fiscal agency and other expenses
Net expenses

20,874,256

1,186,127

207,401,127 12,190,898

4,061,258

894,380

2,130,899

1,184,214

1,465,685

3,805,131

1,184,516

41,395,352 10,279,363 16,195,696 16,312,188 16,338,466 30,635,584 11,809,402

626,882

1,454,696

848,953

2,031,51

7,574,110 11,927,099 11,042,513 21,700,45

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

1,701,098,770 86,756,933 443,951,452 87,096,210 137,326,127 115,620,361 89,318,258 288,664,884 56,366,688 31,689,548 61,848,172 64,175,463 238,284,67

1,320,486
2,294,836

63,383
340

345,967
48,800

71,306
21,817

118,844
26,284

67,345
12,985

79,229
2,072,651

188,830
78,399

46,217
633

31,692
11,806

58,101
10,744

76,588

172,98
10,37

3,615,322

63,723

394,767

93,123

145,128

80,330

2,151,880

267,229

46,850

43,498

68,845

76,588

183,36

2,476 204
142,886

129,795
19,383

621,750
6,738

127,324
2,619

203,594
37,924

173,245
1,817

134,906
51,330

414,108
1,229

87,218
3,076

50,221
783

93,832
3,557

95,832
7,241

344,37
7,18

2,619,090

149,178

628,488

129,943

241,518

175,062

186,236

415,337

90,294

51,004

97,389

103,073

351,56

996,230

-85,454

-233,721

-36,820

-96,391

-94,732

1,965,644

-148,108

-43,444

-7,506

-28,544

-26,485

-168,20

Net earnings before payments to
U.S. Treasury

1,702,095,000 86,671,478 443,717,731 87,059,390 137,229,737 115,525,629 91,283,901 288,516,775 56,323,245 31,682,041 61,819,628 64,148,978 238,1
,116,46

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

1,649,455,164 84,347,453 431,063,425 84,885,673 132,810,629 112,294,941 87,066,838 279,707,237 54,536,279 30,501,382 59,327,964 60,937,912 231,975,42"

33,696,336

1,619,326

8,770,056

1,790,167

3,027,907

1,747,438

2,059,913

4,855,838

1,168,015

806,108

1,495,215

1,965,116

4,391,23;

Transferred to surplus.
Surplus, January 1

374,550
996,450 1,245,950 1,749,801
618,950
18,943,500
704,700
3,884,250
383,550 1,391,200 1,483,250 2,157,150 3,953,700
550,946,700 26,598,900 144,463,400 29,545,550 49,737,550 28,092,450 32,914,650 78,663,400 19,129,750 13,180,400 24,347,800 31,968,050 72,3O4,8O(

Surplus, December 31.

569,890,200 27,303,600 148,347,650 29,929,100 51,128,750 29,575,700 35,071,800 82,617,100 19,748,700 13,554,950 25.344,250 33,214,000 74,054,601

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

8. EARNINGS AND EXPENSES OF FEDERAL RESERVE BANKS, 1914-66
(In dollars)

Period or Bank
All F.R. Banks:
by years:
1914-15...
1916
1917
1918
1919

Current
earnings

Current
expenses

Net earnings
before payments to
U.S. Treasury l

Payments to U.S. Treasury
Dividends
paid

Franchise tax

Under
Sec. 13b

Interest on
F.R. notes

Transferred
to surplus
(Sec. 13 b)

Transferred
to surplus
(Sec. 7)

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

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

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

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

' '2,703,894*

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

1920
1921
1922
1923
1924

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

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

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

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

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

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

1925
1926
1927
1928
1929

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

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

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

6,915,958
7,329,169
7,754,539
8,458,463
9,583,913

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

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

1930
1931
1932
1933
1934

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

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

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

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

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

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

1935
1936
1937
1938
1939

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

31,577,443
29,874,023
28,800,614
28,911,608
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

1940
1941
1942
1943
1944

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

29,165,477
32,963,150
38.624,044
43^45,564
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

1945
1946
1947
1948
1949

142,209,546
150,385,033
158,655,566
304,160,818
316,536,930

48,717,271
57,235,107
65,392,975
72,710,188
77,477,676

92,662,268
92,523,935
95,235,592
197,132,683
226,936,980

10,182,851
10,962,160
11,523,047
11,919,809
12,329,373

247,659
67,054
35,605

262,133
27,708
86,772

81,969,625
81,467,013
8,366,350
18,522,518
21,461,770

1,134,234

75,223,818
166,690,356
193,145,837

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
109,732,931

231,561,340
297,059,097
352,950,157
398,463,224
328,619,468

13,082,992
13,864,750
14,681,788
15,558,377
16,442,236

196,628,858
254,873,588
291,934,634
342,567,985
276,289,457

21,849,490
28,320,759
46,333,735
40,336,862
35,887,775

1955
1956
1957
1958
1959

412,487,931
595,649,092
763,347,530
742,068,150
886,226,116

110,060,023
121,182,496
131,814,003
137,721,655
144,702,706

302,162,452
474,443,160
624,392,613
604,470,670
839,770,663

17,711,937
18,904,897
20,080,527
21,197,452
22,721,687

251,740,721
401,555,581
542,708,405
524,058,650
910,649,768

32,709,794
53,982,682
61,603,682
59,214,569
-93,600,791

1960
1961
1962
1963
1964

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

153,882,275
161,274,575
176,136,134
187,273,357
197,395,889

963,377,684
783,855,223
872,316,422
964,461,538
1,147,077,362

23,948,225
25,569,541
27,412,241
28,912,019
30,781,548

896,816,359
687,393,382
799,365,981
879,685,219
1,582,118,614

42,613,100
70,892,300
45,538,200
55,864,300
-465,822,800

1965
1966

1,559,484,027
1,908,499,896

204,290,186
207,401,126

1,356,215,455
1,702,095,000

32,351,602
33,696,336

1,296,810,053
1,649,455,164

27,053,800
18,943,500

Total 1914-66....

17,233,286,629

3,569,596,656

13,725,475,775

655,877,409

149,138,300

2,188,893

12,219,712,429

-3,657

698,562,399

Aggregate for each
F.R. Bank, 1914-66:
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta

967,921,360
4,367,742,619
1,019,310,141
1,483,295,739
1,096,175,601
920,906,521

244,832,669
770,277,465
218,889,434
317,131,893
245.812,428
221:610,374

728,427,135
3,617,564,489
808,191,469
1,169,996,845
854,585,190
701,354,271

38,069,804
202,900,953
47,646,781
63,045,493
29,389,431
29,478,540

7,111,395
68,006,262
5,558,901
4,842,447
6,200,189
8,950,561

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

645,431,254
3,161,117,349
709,713,399
1,037,673,338
783,439,083
622,502,074

135,411
-433,413
290,661
-9,906
-71,517
5,491

37,398,425
185,604,221
44,259,322
64,362,543
35,455,508
40,338,340

Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

2,819,859,064
718,042,279
413,562,591
745,281,323
693,709,710
1,987,479,681

506,451,642
194,976,553
123,902,133
193,177,609
169,917,757
362,616,699

2,318,159,046
523,947,811
292,167,929
554,090,671
526,118,680
1,630,872,239

84,562,138
22,545,442
15,323,735
24,993,753
30,029,941
67,891,398

25,313,526
2,755,629
5,202,900
6,939,100
560,049
7,697,341

151,045
7,464
55,615
64,213
102,083
101,421

2,110,174,802
473,797,462
254,088,646
492,618,079
457,879,790
1,471,277,153

11,682
-26,515
64,874
-8,674
55,337
-17,089

97,945,854
24,868,328
17,432,163
29,484,200
37,491,478
83,922,017

3,569,596,656 13,725,475,775

655,877,409

149,138,300

2,188,893

12,219,712,429

-3,657

2 698,562,399

Total

17,233,286,629

1 Current earnings less current expenses, plus or minus adjustment for profit and loss
items.
2 The $698,562,399 transferred to surplus was reduced by direct charges of $500,000
for charge-off on bank premises (1927), $139,299,557 for contributions to capital of the

Federal Deposit Insurance Corporation (1934), and $3,657 net upon elimination of Sec.
13b surplus (1958), and was increased by $11,131,013 transferred from reserves for contingencies (1945), leaving a balance of $569,890,200 on Dec. 31, 1966.
NOTE.—Details may not add to totals because of rounding.

9. NUMBER AND SALARIES OF OFFICERS AND EMPLOYEES OF
FEDERAL RESERVE BANKS, DECEMBER 31, 1966

Federal Reserve
Bank (including
branches)

President

Other officers

Employees1

Total

Annual
salary

Number

Annual
salaries

$ 40,000
75,000
45,000

24
71
31

$ 448,000
1,525,500
557,000

1,181
3,865
875

$ 6,233,337
25,197,578
4,807,957

1,206
3,937
907

$ 6,721.337
26,798,078
5 409,957

Cleveland
Richmond
Atlanta

45,000
45,000
35,000

34
41
37

579,500
715,500
601,450

1,337
1,387
1,358

7,701,707
7,147,251
6,795,397

1,372
1,429
1,396

8,326,207
7,907,751
7,431,847

Chicago
St. Louis
Minneapolis

55,000
35,000
37,500

44
37
28

791,000
623,660
447,000

2,866
1,183
616

14,714,738
5,874,393
3,234,681

2,911
1,221
645

15,560,738
6,533,053
3,719,181

Kansas City
Dallas
San Francisco....

42,500
45,000
46,000

34
36
42

518,900
545,720
678,500

1,160
937
1,895

5,652,157
4,434,353
10,117,014

1,195
974
1,938

6,213,557
5,025,073
10,841,514

$546,000

459

$8,031,730

Boston
New York
Philadelphia

Total
1

Number

Annual
salaries

Number

Annual
salaries

19,131 $110,488,293

18,660 $101,910,563

Includes 1,140 part-time employees.

10. VOLUME OF OPERATIONS IN PRINCIPAL DEPARTMENTS OF FEDERAL
RESERVE BANKS, 1963-66
(Number in thousands; amounts in thousands of dollars)
Operation

1966

1965

1964

1963

16
5,232,806
9,304,120

11
5,144,345
5,855,884

10
5,026,311
4,561,704

4,831,516
8,704,412

504,049
217,473
5,021,454

491,848
223,337
4,601,128

467,288
234,094
4,318,708

243,999
4,069,111

14,305
26,712

14,087
26,820

15,042
27,271

15,430
26,839

235,555
4,832
166,615

222,477
4,389
81,885

212,267
4,010
50,481

204,213
3,603
46,129

90,667,647
37,001,390
957,282

75,684,394
36,075,114
496,582

46,551,402
34,548,507
559,588

44,894,170
32,350,089
1,007,532

160,014,331
4,626,573
1,893,974,522

134,806,438
4,507,801
1,630,931,492

134,585,725
4,578,853
1,475,038,258

131,795,729
4,707,908
1,363,949,957

5,916,485
12,624,804

5,380,748
10,723,571

5,371,153
7,851,274

5,213,610
7,143,665

793,261,958
5,555,075,862
226,508

763,248,392
4,496,230,723
116,498

738,062,697
3,953,186,948
73,182

683,736,756
3,442,100,310
66,514

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

454,576

AMOUNTS HANDLED
Discounts and advances
Currency received and counted
Coin received and counted
Checks handled:
U.S. Govt. checks
Postal money orders
All others
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

1 Packaged items handled as a single item are counted as one piece.
2 Exclusive of checks drawn on the F.R. Banks.

340

11. MAXIMUM INTEREST RATES PAYABLE ON TIME AND SAVINGS DEPOSITS
(Per cent per annum)
Rates Nov. 1, 1933—July 19, 1966

Rates beginning July 20, 1966
Effective date

Effective date
Type of deposit

Type of deposit
Nov. 1,
1933

Feb. 1,
1935

Jan. 1,
1936

2i/ 2

21/2

Savings deposits:
12 months or m o r e . . . .
Less than 12 m o n t h s . . . ) 3
Postal savings deposits:
12 months or more.. . .
Less than 12 m o n t h s . . .

I
/

Other time deposits: i
12 months or m o r e . . . . I
6 months to 12 months. I
90 days to 6 months. . .
Less than 90 days
(30-89 days)

Nov. 24,
1964

July 20,
1966

Dec. 6,
1965

Sept. 26,
1966

Savings deposits
3

{ 3V2

01/

2Y2

i
3

/
1
/
\

4
31/2

2
1

2Y2

21/2

31/2

2V2
1

}

4
31/2

01/
^72

^/2

3
3

July 17,
1963

Jan. 1,
1962

Jan. 1,
1957

\
/

]

} 4

1
For exceptions with respect to foreign time deposits, see ANNUAL REPORTS
for 1962, p. 129, and 1965, p. 233.
NOTE.—Maximum rates that may be paid by member banks as established
by the Board of Governors under provisions of Regulation Q. Under this
Regulation the rate payable by a member bank may not in any event exceed

4^2 V
?

SI/4
J/2

Postal savings deposits:
12 months or more. . . \
Less than 12 months.. /

4
4

5
4

Other time deposits: 1
Multiple-maturity:
90 days or more
Less than 90 days...
(30-89 days)
Single-maturity:
$100,000 or m o r e . . .
Less than $100,000..

5V2

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. Effective
Feb. 1, 1936, maximum rates that may be paid by insured nonmember commercial banks, as established by the FDIC, have been the same as those in
effect for member banks.

12. MARGIN REQUIREMENTS—EFFECTIVE DATE OF CHANGE
(Per cent of market value)
July
Regulation
Regulation T:
For extension of credit by brokers and
dealers on listed securities
For short sales .
....
Regulation U:
For loans by banks on stocks

1945

Jan.
21,
1946

Feb.
1,
1947

Mar.
30,
1949

Jan.
17,
1951

Feb
20,
1953

Jan.
4,
1955

1955

Jan.
16,
1958

Aug.
1958

Oct.
16,
1958

July
28,
1960

July
10,
1962

Nov.
6,
1963

100

NOTE.—Regulations T and U, prescribed in accordance with Securities Exchange Act of 1934, limit the amount of credit that may be extended on a

security by prescribing a maximum loan value, which is a specified percentage
http://fraser.stlouisfed.org/of its market value at the time of extension; margin requirements are the difFederal Reserve Bank of St. Louis

ference between the market value (100%) and the maximum loan value.
Changes on Feb. 20, 1953, and Jan. 4, 1955, were effective after close of business on these dates. For earlier data, see Banking and Monetary Statistics,
1943, Table 145, p. 504.

13. FEDERAL RESERVE BANK DISCOUNT RATES
DECEMBER 31, 1966
(Per cent per annum)
Discounts for and advances to member banks
Federal Reserve
Bank

Boston
New Y o r k . . . .
Philadelphia. .

Advances and
discounts under
Sees. 13 and 13a*

Advances under
Sec. 10(b)2

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

Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis. .

41/2

Kansas City..
Dallas
San Francisco

41/2

1 Discounts of eligible paper and advances secured by such paper or by U.S. Govt. obligations.
Rates shown also apply to advances secured by obligations of Federal intermediate credit banks maturing within 6 months. Maximum maturity: 90 days except that discounts of certain bankers' acceptances and of agricultural paper may have maturities not over 6 months and 9 months, respectively,
and advances secured by Federal intermediate credit bank obligations are limited to 15 days.
2
Advances secured to the satisfaction of the F.R. Bank. Maximum maturity: 4 months.
3
Advances to individuals, partnerships, or corporations other than member banks secured by U.S.
Govt. direct obligations. Maximum maturity: 90 days.

14. FEES AND RATES UNDER REGULATION V ON LOANS
GUARANTEED PURSUANT TO DEFENSE PRODUCTION ACT OF 1950,
DECEMBER 31, 1966
Fees Payable to Guaranteeing Agency by Financing Institution on Guaranteed Portion of Loan

70 or less
75
80
...
85
90
95
Over 95

Guaranteed fee
(percentage of
interest payable
by borrower)

Percentage of
any commitment
fee charged
borrower

10
15
20
25
30
35
40-50

Percentage of loan guaranteed

10
15
20
25
30
35
40-50

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

JVz per cent per annum
l
/i P e r cent per annum

NOTE.—In any case in which the rate of interest on the loan is in excess of 6 per cent, the guarantee
fee shall be computed as though the interest rate were 6 per cent.

342

15. MEMBER BANK RESERVE REQUIREMENTS
(Per cent of deposits)
Net demand deposits l
Effective date

1917—June
1936—Aug.
1937—Mar.
May
1938—Apr.
1941—Nov.
1942—Aug.
Sept.
Oct.
1948—Feb.
June
Sept

21
16
1
1
16
1
20
14
3
27
11
16 ..
24
1949 May 1
June 30 ..
July 1
AUE 1

Central
reserve
city banks 2
13
19i/ 2

Reserve
city banks
10
15

Feb
1953 Julv
1954—June
July

22
21
20

231/2

191/2

16
18
25
1
11
16
25
1
1
9
16
24
29

1958—Feb. 27
Mar 1
20
Apr 1
17
24
1960—Sept. 1
Nov 24
Dec. 1
1962—July 28
Oct. 25
Nov. 1
1966 July 14
21
Sept 8
15

Central
reserve and
reserve city
banks2

Country
banks

IOI/2

12
14

n:::::::::::.:

Sept.
1951—Jan.

Country
banks

\VA

1
*
24
22
20
22
24
26

Time deposits

19
20

21
20

191/2

I8I/2
18
171/2

15
14
13
12

6
5
6

71/2
71/2
7

7
6
5

6
5

171/2

it*

23
24

6
5
6

I6I/2

14
13
5

12
H1/2

I61/2

4
(3)
(4)

In effect Jan 1 1967

I6I/2

()

Present legal requirements:
Minimum
Maximum

10
22

7
14

3
10

1
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).
2
Authority of the Board of Governors to classify or reclassify cities as central reserve cities was
terminated effective July 28, 1962.
3 On savings deposits—4 per cent; on other time deposits up to $5 million—4 per cent; on other
time deposits in excess of $5 million—5 per cent.
4
On savings deposits—4 per cent; on other time deposits up to $5 million—4 per cent; on other
time deposits in excess of $5 million—6 per cent.
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.

343

16. MEMBER BANK RESERVES, FEDERAL RESERVE BANK CREDIT, AND RELATED ITEMS—END OF YEAR 1918-66 AND END OF MONTH 1966
(In millions of dollars)
Factors supplying reserve funds

Factors absorbing reserve funds

F.R. Bank credit outstanding
Period

U.S. Govt. securities

Total

Discounts
and
RepurBought chase
adoutagree- vances
right
ments

Float

All
other

Gold
stock 2
Total

Treasury
currency
outstanding 3

Currency
circulation

Treasury
cash
holdings 4

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

Treas- Foreign
ury

Member bank reserves
Other
F.R.
accounts 5

Oth-

With
F.R.
Banks

Currency
and
coin 6

ReExquired 7 cess 7

1918.
1919.

239
300

1,766
2,215

199
201

294
575

2,498
3,292

2,873
2,707

1,795
1,707

4,951
5,091

288
385

51
31

96
73

25
28

118
208

1,636
1,890

1,585
1,822

51
68

1920.
1921.
1922.
1923.
1924.

287
234
436
134
540

287
234
436
80
536

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

5,325
4,403
4,530
4,757
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

1,781
1,753
1,934
1,898
2,220

1,654

54
4

2 687
1,144
618
723
320

1,884
2,161

14
59

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

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

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

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

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

375
354
355
360
241

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

2,375
1,994
1,933
1,870
2,282

96
-33
576
859
1,814

1935.
1936.
1937.
1938.
1939.

2,431
2,430
2,564
2,564
2,484

2,430
2,430
2,564
2,564
2,484

5
3
10
4
7

12
39
19
17
91

38
28
19
16
11

2,486
2,500
2,612
2,601
2,593

10,125
11,258
12,760
14,512
17,644

2,476
2,532
2,637
2,798
2,963

5,882
6.543
6;550
;
6,856
7,598

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

544
244
142
923
634

29
99
172
199
397

226
160
235
242
256

253
261
263
260
251

5,587
6,606
7,027
8,724
11,653

2,743
4,622
5,815
5,519
6,444

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

1940.
1941.
1942.
1943.
1944.

2,184
2,254
6,189
11,543
18,846

3
3
6
5
80

80
94
471
681
815

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

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

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

368 1,133
867
774
799
793
579 1,360
440 1,204

599
586
485
356
394

284
291
256
339
402

14,026
12,450
13,117
12,886
14,373

7,411
9,365
11,129
11,650
12,748

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

446
314
569
547
750

495
607
563
590
706

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

14,457
15,577
16,400
19,277
15,550

1,458
562
1,499
1,202
1,018

,293
,270
,270
761
796

668
247
389
346
563

895
526
550
423
490

565
363
455
493
441

714
746
111
839
907

17,681
20,056
19,950
20,160
18,876

16,509
19,667
20,520
19,397
18,618

1,172
389
-570
763
258

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

767
775
761
683
391

394
441
481
358
504

402
322
356
272
345

554
426
246
391
694

925
901
998
1,122
841

19,005
19,059
19,034
18,504
18,174

310

18,903
19,089
19,091
18,574
18,619

102
-30
-57
-70
-135

5,398
5,585
5,567
5,578
5,405
5,575

32,869
33,918
35,338
37,692
39,619
42,056

377
422
380
361
612
760

485
465
597
880
820
668

217
279
247
171
229
150

533
320
393
291
321
355

941
1,044
1,007
1,065
1,036
211

17,081
17,387
17,454
17,049
18,086
18,447

2,544
2,823
3,262
4,099
4,151
4,163

18,988
20,114
20,071
20,677
21,663
22,848

637
96
645
471
574
-238

5,639
5,679
5,739
5,792
5,882
5,978
5,997
6,053
6,109
6,182
6,244
6,317

41,092
41,252
41,469
41,538
42,102
42,554
42,708
42,910
42,802
43,113
44,246
44,663

817
823
800
805
898
521
922
512
976
902
1,049
766
1,038 1,232
1,037 1,614
760
1,077
1,144
809
1,151
299
1,176
416

283
140
329
192
263
313
548
170
159
194
196
174

241
246
383
401
389
437
419
395
430
426
399
588

447
869
613
408
603
379
46
224
73
-84
301
-147

18,751
18,014
18,000
18,736
18,119
18,567
19,155
17,399
19,538
19,338
19,093
19,779

3,591
3,656
4,268
3,437
3,574
4,433
3,574
4,507
4,332
3,766
4,871
4,310

22,026
21,744
21,946
22,336
21,799
22,680
23,612
22,406
23,225
22,237
22,134
24,321

316
-74
322
-163
-106
320
-883
-500
645
867
1,830
-232

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

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

53
196
663
598
44

67
19
156
28
143

1,368
1,184
967
935
808

22,216
25,009
25,825
26,880
25,885

22,706
22,695
23,187
22,030
21,713

4,636
4,709
4,812
4,894
4,985

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

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

27,384
28,881
30,820
33,593
37,044
40,768

26,984
28,722
30,478
33,582
36,506
40,478

400
159
342
11
538
290

33
130
38
63
186
137

1,847
2,300
2,903
2,600
2,606
2,248

74
51
110
162
94
187

29,338
31,362
33,871
36,418
39,930
43,340

17,767
16,889
15,978
15,513
15,388
13,733

40,565
40,189
40,734
40,713
41,480
42,169
42,380
42,518
42,907
42,975
43,912
44,316

40,225
40,189
40,734
40,713
41,480
42,169
42,287
42,518
42,907
42,975
43,290
43,655

340

239
315
327
452
441
292
877
386
773
410
458
173

2,171
2,091
1,653
1,961
1,839
1,957
2,508
1,485
1,748
2,044
1,780
2,495

110
122
126
159
180
238
51
48
47
72
131
193

43,085
42,717
42,840
43,285
43,940
44,656
45,816
44,437
45,475
45,501
46,281
47,177

13,733
13,730
13,634
13,632
13,532
13,434
13,331
13,259
13,258
13,257
13,159
13,159

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

1950.. .
1951.. .
1952...
1953...
1954...

20,778
23,801
24,697
25,916
24,932

20,725
23,605
24,034
25,318
24,888

1955.. .
1956...
1957...
1958...
1959.. .

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

1960.. .
1961...
1962.. .
1963...
1964...
1965...

Dec.

862
508
392
642
767

578
580
535
541
534

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

1966—
Jan...
Feb...
Mar..
Apr. .
May..
June..
July..
Aug..
Sept..
Oct...
Nov..

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

249
163
85
223
78

1945. . .
1946. . .
1947.. .
1948...
1949. . .

622
661

1
Principally acceptances and industrial loans; authority for industrial loans expired
Aug. 21, 1959.
2 Before Jan. 30, 1934, included gold held by F.R. Banks and in circulation.
3
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 minor 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 the Treasury and the F.R.
Banks as well as that in circulation.
4
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.
5 The total of F.R. Bank capital paid in, surplus, other capital accounts, and other
liabilities and accrued dividends, less the sum of bank premises and other assets.
6 Part allowed as reserves Dec. 1, 1959-Nov. 23, 1960; all allowed thereafter.
7
These figures are estimated through 1958. Before 1929 available only on call dates
(in 1920 and 1922, the call dates were Dec. 29).
NOTE.—For description of figures and discussion of their significance, see "Member
Bank Reserves and Related Items," Section 10 of Supplement to Banking and Monetary
Statistics, Jan. 1962.

17. PRINCIPAL ASSETS AND LIABILITIES, AND NUMBER OF COMMERCIAL AND MUTUAL SAVINGS BANKS, BY CLASS OF BANK
DECEMBER 31, 1966 AND DECEMBER 31, 1965
(In millions of dollars)
Mutual savings banks

Commercial banks
Item

All
banks

Member banks

Nonmember banks

Total
Total

National

State

Total

Insured

Total

Insured

Noninsured

December 31, 19661
Loans and investments, total
Loans
Investments
,
U.S. Govt. securities
Other securities
Cash assets

382,140
267,580
114,560
60,420
54,140
69,660

322,940
219,100
103,840
55,600
48,240
68,750

264,373
183,795
80,578
41,618
38,960
60,072

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

58,567
35,305
23,262
13,982
9,280
8,678

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

59,200
48,480
10,720
4,820
5,900
910

n.a.
n.a.
n.a.
n.a.
n.a.
na..

Deposits, total
Interbank
Other demand
Other time
Total capital accounts

403,090
25,430
165,070
212,590
36,870

348,100
25,430
165,010
157,660
32,000

287,004
23,509
135,514
127,981
26,223

n.a.
n.a.
n.a.
n.a.
n.a.

61,096

n.a.
n.a.
n.a.
n.a.
n.a.

54,990

1,921
29,496
29,679
5,777

60
54,930
4,870

n.a.
n.a.
n.a.
n.a.
n.a.

14,274

13,770

6,149

4,799

7,621

7,385

236

504

330

Number of banks

,350

December 31, 1965
Loans and investments, total
Loans
Investments
U.S. Govt. securities
Other securities
Cash assets

362,320
246,946
115,373
65,016
50,357
61,916

306,060
201,658
104,402
59,547
44,855
60,899

251,577
169,800
81,777
44,992
36,785
52,814

176,605
118,537
58,067
32,347
25,720
36,880

74,972
51,262
23,710
12,645
11,065
15,934

54,483
31,858
22,625
14,555
8,070
8,085

52,028
30,310
21,718
14,137
7,581
7,513

2,455
1,549
906
418
489
572

56,260
45,288
10,971
5,470
5,501
1,017

48,735
39,964
8,770
3,760
5,010
904

Deposits, total
Interbank
Other demand
Other time
Total capital accounts

385,196
18,235
167,668
199,293
34,935

332,436
18,234
167,294
146,908
30,272

275,517
17,315
137,846
120,356
24,926

193,860
12,077
96,234
85,550
17,434

81,657
5,238
41,612
34,806
7,492

56,919
919
29,448
26,552
5,345

54,806
735
28,181
25,890
4,912

2,113
185
1,267
662
434

52,760
1
374
52,385
4,663

45,887
1
366
45,520
3,957

14,309

13,804

6,221

4,815

1,406

7,583

7,320

263

505

328

Number of banks
n.a. Not available,
i Estimated.

NOTE.—All banks in the United States.

Noninsured

18. MEMBER BANK INCOME, EXPENSES, AND DIVIDENDS, BY CLASS
OF BANK, 1966 AND 1965
Reserve city banks
Item

Total

1966

New York
City

1965

1966

1965

City of
Chicago
1966

Country
banks

Other

1965

1966

1965

1966

1965

In millions of dollars
Revenue
On U.S. Govt.
securities
On other securities
On loans
All other

16,107 13,842 2,793 2,296

689

576 6,035 5,240 6,590 5,730

1,686
176
180
1,079
212
204
9,295 1,997 1,563
349
1,781
408

58
52
478
101

60
987
897
519
549
52
550
448
447
374
382 4,284 3,616 4,328 3,734
82
725
785
700
651

Expenses
Salaries and wages....
Interest on deposits. ..
All other

11,986 10,206 1,988 1,607
3,284 3,024
484
441
5,271 4,214
952
713
3,431 2,968
454
552

479
109
231
139

401
100
192
110

209

175 1,535 1,369 1,571 1,403

Net current earnings
before income taxes . . .
Recoveries and profits 2
*..
Losses and charge-offs . .
Net increase (or decrease,
+ ) in valuation
reserves
Net income before
related taxes
Taxes on net income
Net income
Cash dividends declared 3.

1,740

1,261
11,087
2,019

4,120 3,635

805

688

4,500
1,238
1,992
1,270

3,871
1,139
1,632
1,100

5,019
1,453
2,096
1,470

4,327
1,345
1,677
1,305

270
572

22
68

18
23

93
206

137
276

351

137

111

3,076 2,983
882
880
2,193 2,103
1,135 1,058

544
155
389
259

506
131
375
240

161
51
110
49

165 1,160 1,144 1,211 1,168
351
340
51
358
325
808
828
114
787
886
452
45
426
375
347

In per cent
Ratios:
Net current earnings
before income taxes
toAverage total capital
accounts
Average total assets..
Net income to—
Average total capital
accounts
Average total assets..
Average return on—
U.S. Govt. securities.
Loans

15.1
16.1
1.28 1.21

15.5 14.1
1.30 1.21

18.1
1.43

16.0 16.6 15.6 15.7 15.1
1.22 1.24 1.20
1.28 1.29

86
.
.8
6

87
.
.70

75
.
.3
6

77
.
.66

9 5 10.4
.
.5
7
.3
8

87
.
.67

90
.
.70

89
.
.70

8.9
.71

4.12
6.25

3.69
5.85

3.64
5.71

3.32
5.13

3.64
5.64

3.95
6.33

3.69
5.90

4.37
6.54

3.80
6.28

3.38
5.05

1
2

Includes recoveries credited to valuation reserves.
Includes losses charged to valuation reserves.
3 Includes interest on capital notes and debentures.
NOTE.—Data for 1966 are preliminary; final figures will be published in the May 1967 F.R. Bulletin.

347

19.

CHANGES IN NUMBER OF BANKING OFFICES IN THE
UNITED STATES DURING 19661
Commercial banks (incl. stock savings
banks and nondeposit trust companies)

Type of office
and change

All
banks

Member
Total

Banks, Dec. 31,1965...
Changes during 1966
New banks 3
Suspensions
Consolidations and absorptions:
Banks converted into branches
Other
Voluntary liquidations 4.
Ceased banking operations
Interclass changes :
Nonmember to:
National

14,309 13,804

Nonmember

National i

State 2

6,221

4,815

1,406

Total

119
-1

118

-115
-24
-4

-113
-24
-4

-66
-9

-48
-6

-18
-3

-10

-1
10
4

Noninsured 2

Insured
7,320

-1

State member to:
National
Nonmember
National to:
State member . . . .
Nonmember
Noninsured to in-

-32
7

13
-2
7

Mutual
savings
banks

70
—1

-46
-6

Noninsured

Insured

263

328

-1
-9
-4

-1

177

-9

— 10
-4

-13
-32
2

32
7
23

-23

-2

-34

-71

-16

-55

-28

-3

Number of banks Dec.
31,1966

14,274 13,770

6,150

4,799

1,351

7,385

235

330

174

Branches and additional offices, Dec. 31,
1965

16,201 15,486 12,063

8,754

3,309

3,369

583

132

227
20
-12

307
24
-17

-1

-2

Net change

Changes during 1966

-35

1,139
114

1,096
113
-52

773
89
-34

546
69
-22

33
15

— 33
15

-45
-37

—4

Banks converted
Discontinued
Facilities reclassified as
branches
Interclass changes:
Nonmember to:

-16
4

837

653

184

317

17,405 - 16,648 12,900

9,407

3,493

3,686

614

143

KA
C

State member to:
37
National to:

Noninsured to inNet change
Number of branches
and additional offices, Dec. 31,1966..

348

1,204

1,162

19.

CHANGES IN NUMBER OF BANKING OFFICES IN THE
UNITED STATES DURING 19661—Continued
Commercial banks (incl. stock savings
banks and nondeposit trust companies)

Type of office
and change

All
banks

Member
Total

NaState 2
tional 1

Total
Banking facilities, Dec.
31,19655
Changes during 1966
Established
Discontinued
Facilities reclassified as
branches
Interclass change:
Nonmember to national
Net chance
Number of banking facilities, Dec. 31,1966.

Nonmember
Noninsured 2

Insured

270

235

210

2
-7

1
7

-5

1
-7
-2
2

— 10

—6

260

229

204

Noninsured

—4

260

Insured

— 10

Mutual
savings
banks

35
1

-2

-3

1 Includes a national bank (3 branches) in the Virgin Islands; other banks or branches located in
the possessions are excluded.
2
State member bank figures include and noninsured bank figures exclude 1 noninsured trust company without deposits.
3 Exclusive of new banks organized to succeed operating banks.
4
Exclusive of liquidations incident to the succession, conversion, or absorption of banks.
5 Provided at military and other Government establishments through arrangements made by the
Treasury.

349

20. NUMBER OF PAR AND NONPAR BANKING OFFICES
DECEMBER 31, 1966
Par

F.R. district,
State, or
other area

Total

Member

Nonpar
(nonmember)

Nonmember

Banks Branches Banks Branches Banks branches Banks branches Banks branches
& offices
& offices
& offices
& offices
& offices
DISTRICT
Boston
New Y o r k . . . .
Philadelphia...
Cleveland
Richmond....
Atlanta
Chicago
St. Louis
Minneapolis...
Kansas City...
Dallas
San Francisco.
Total. .

812
1,561
2,537
1,507
1,355
1,919
1,287
454

1,227
385
2,861
512
522
1,127
836
1,561
2,213
732
1,025 1,091
1,789 2,537
644 1,272
760
215
211 1,919
241 1,220
452
3,920

13,687

17,034 12,238

385
512
522
836

1 227
2,861
1,127
1,561
2,134
932
1 789
572
154
211
232
3,920

248
400
387
498

952

2,523
846

137
112
135
338

399
524
995
480
494
835
673
216

1,335
333
1,412
567
717
1 181 1,542
792
371
266
94
141 1,084
547
140
236
3,440

16,720 6,149

13,152 6,089

275
338
281
226

722
215
608
201
60
70
92
480

80
470

79
93

235
595

72
61

67
2

3,568

1,449

314

68
2

STATE
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut...
Delaware
District of
Columbia...
Florida

267
12
17

246
187
215
65
20

186
55

261

119
2,533
9
336
70

199
10
17

157
187
215
65
20

178
55

111

88
5

26
8

152
47

261

97
2,533

206

85
105

81
2 302

72
82

16
231

9
336
70

3
65
36

134
36
7

6
271
34

206

203

196
119

162
43

112

34
76

243

140

16
525
206
159
211

126

101

399
112
43

81
29
13

441

409

426
7
25
1,058

211
119

183
7

140

418
673
601

507
250
53

348
220
41

243
286
180

348
119
41

243
247
180

94
57
27

Maryland...
Massachusetts.
Michigan
Minnesota....
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hamp-

122
161
347
722
190
658
131
434
9

415
613
989
9
259
71

122
161
347
323
78
615
131
434
9

415
613
989
8
184
71

56
107
213
223
42
177
91
139
6

New Jersey....
New Mexico. .
New Y o r k . . . .
North
Carolina....
North
Dakota
Ohio
Oklahoma....

229
64
336

713
101
2,054

229
64
336

713
101
2,054

192
41
273

636
62
1,945

37
23
63

77
39
1109

132

790

716

383

333

166
537
419
51
541
11

61
1,009
42
273
1,338
128

67
537
419
51
541
11

26
1,009
42
273
1,338
128

45
351
243
15
39:

12
873
35
210
1,055
80

22
186
176
36
150
6

14
136

Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine

Pennsylvania..
Rhode Island..

350

1,058

28
70

418
673
601

507
250
53

28
70

337
55
34

9
533
212
514
390

161
173
127

254
62
14

254
493
812
6
112

66
54
134
100
36
438
40
295

IS
63

14
170
195
19

82
74
53

161
120
177
72
33
9

43
283
48

20. NUMBER OF PAR AND NONPAR BANKING OFFICES
DECEMBER 31, 1966—Continued
Par
Nonpar
(nonmember)

Total
F.R. district,
State, or
other area

Total

Member

Nonmember

Banks Branches Banks Branches Banks Branches Banks Branches Banks Branches
& offices
& offices
& offices
& offices
& offices
STATE—
Cont.
South
Carolina
South Dakota.
Tennessee
Texas
Utah
Vermont
Virginia
Washington.. .
West Virginia.
Wisconsin....
Wyoming

93
70
237
1,122
55
47
251
95
190
590
69

297
58
362
53
111
59
612
424

153

12
5

32
59
86
616
25
27
165
38
114
164
54

153

128
167
298
1,145
55
47
251
95
190
590
69

302
83
377
53
111
59
612
424

12
5

i73

173
1

200
49
258
23
87
33
487
387

97
9
104
30
24
26
125
37

39
1

61
11
151
506
30
20
86
57
76
426
15

137

35
97
61
23

5
25
15

134

OTHER
AREA
Puerto Rico2..
Virgin
Islands2. . . .

1
Includes 7 N.Y.C. branches of 2 insured nonmember Puerto Rican banks.
2 Puerto Rico and the Virgin Islands assigned to the N.Y. District for check clearing and collection
purposes. All member branches in Puerto Rico and all except 3 in the Virgin Islands are branches of
N.Y.C. banks. Certain branches of Canadian banks (2 in Puerto Rico and 3 in Virgin Islands) are
included above as nonmember banks; and nonmember branches in Puerto Rico include 7 other branches
of Canadian banks.

NOTE.—Comprises all commercial banking offices on which checks are drawn, including 260 banking
facilities. Number of banks and branches differs from that in Table 19 because this table includes
banks in Puerto Rico and the Virgin Islands but excludes banks and trust companies on which no
checks are drawn.

351

21.

DESCRIPTION OF EACH MERGER, CONSOLIDATION,
ACQUISITION OF ASSETS OR ASSUMPTION OF LIABILITIES
APPROVED BY THE BOARD OF GOVERNORS DURING 1966

CONTENTS

APPLICANT BANK

OTHER BANK OR BANKS

Page

Bank of the Commonwealth, Detroit, Mich.

Public Bank, Detroit, Mich.

367

Bank of New York, New York,
N.Y.

Empire Trust Company, New York,
N.Y.

373

Bank of Virginia, Richmond, Va.

Bank of LaCrosse, LaCrosse, Va.

377

Brazil Trust Company of Brazil,
Indiana, Brazil, Ind.

Farmers and Merchants Bank, Clay
City, Ind. (and change title to
First Bank and Trust Company of
Clay County, Indiana)

370

Central State Bank, Elkader, Iowa

Volga State Bank, Volga, Iowa

365

Citizens Bank and Trust Company,
Clare, Mich.

State Bank of Coleman, Coleman,
Mich.

361

Colonial Bank and Trust Company, Waterbury, Conn.

Puritan Bank and Trust Company,
Meriden, Conn.

372

County Trust Company, White
Plains, N.Y.

Goshen National Bank, Goshen,
N.Y.
Intercounty Trust Company, Monticello, N.Y.

354

Depositors Trust Company, Augusta, Maine

First Maine Trust Company, Augusta, Maine

371

Harter Bank & Trust Company,
Canton, Ohio

Waynesburg
Ohio

360

Lake City Bank, Warsaw, Ind.

Commercial State
Lake, Ind.

Bank,

Waynesburg,
Bank,

Silver
358

Ohio Citizens Trust Company, Toledo, Ohio

Whitehouse State Savings
Whitehouse, Ohio

Reading Trust Company, Reading,
Pa,

National Bank of Hamburg, Hamburg, Pa.

352

Bank,
368
355

21.

DESCRIPTION OF EACH MERGER, CONSOLIDATION,
ACQUISITION OF ASSETS OR ASSUMPTION OF LIABILITIES
APPROVED BY THE BOARD OF GOVERNORS DURING 1966

CONTENTS—Continued
APPLICANT BANK

OTHER BANK OR BANKS

Page

Rockbridge Bank & Trust Company, Lexington, Va.

Rockbridge National Bank of Lexington, Lexington, Va.

St. Joseph Valley Bank, Elkhart,
Ind.

First Old State Bank, Elkhart, Ind.

Security Bank, Webster, S. Dak.

Farmers and Merchants State Bank,
Roslyn, S. Dak.

377

State Bank of Provo, Provo, Utah
(and change title to Central Bank
and Trust Company)

359

Springville Banking
Springville, Utah

Company,

364
375

State Bank and Trust Company,
Defiance, Ohio

Ney State Bank, Ney, Ohio

United California Bank, Los Angeles, Calif.

Security National Bank of Monterey
County, Pacific Grove, Calif.

356

Upper Main Line Bank, Paoli, Pa.

Farmers Bank of Parkesburg,
Parkesburg, Pa. (and change title
to Community Bank and Trust
Company)

369

Wachovia Bank and Trust Company, Winston-Salem, N.C.

363

Bank of Ahoskie, Ahoskie, N.C.
366

353

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 19661
Name of bank, and type of transaction2
(in chronological order of determination)

No. 1—The County Trust Company,
White Plains, N.Y.
to merge with
The Goshen National Bank,
Goshen, N.Y.
and
Intercounty Trust Company,
Monticello, N.Y.

Resources
(in millions
of dollars)

Banking offices
In
operation

750.0

5.5

22.0

To be
operated

•

SUMMARY REPORTS BY ATTORNEY GENERAL (10-15-65)

(1) The Goshen National Bank, Goshen, New York:
Under the proposed merger County Trust, already a dominant institution in Westchester, Putnam, and Rockland Counties, New York, will
extend that position of dominance to Orange County. In our opinion,
County Trust would possess significant advantages over existing competitors in Orange County, and its expansion into that county may tend to
discourage new entrants. While the effect of the merger, standing alone,
may not have significant anticompetitive effects, it is part of a trend
whereby County Trust reaches a dominant position in expanding areas via
the merger route.
(2) Intercounty Trust Company, Monticello, New York:
Under the proposed merger County Trust, already a dominant institution in Westchester, Putnam, and Rockland Counties, New York, will extend that position of dominance to Sullivan and Orange Counties. In our
opinion, County Trust would possess significant advantages over existing
competitors in Sullivan and Orange Counties, and this expansion may
tend to discourage new entrants. While the merger standing alone does not
appear to have significant anticompetitive effects, it is part of a trend
whereby County Trust reaches a dominant position via merger.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (1-21-66)

Goshen Bank is located in Orange County, a rapidly expanding area
lying immediately west of the Hudson River and north of New York City.
Intercounty Bank is located in Sullivan County, a resort area of the
Catskill Mountains enjoying a rapid increase in year-round activities.
Goshen Bank's size has not permitted it to keep pace with the expansion in
Orange County, nor does it offer several services that would help meet
the needs and promote the convenience of the communities in the area.
Intercounty Bank, with a relatively moderate lending limit, has also not
been able to satisfy numerous credit demands. The intensive competition
in the resort industry requires the constant improvement and expansion of
facilities, causing a chronic condition of credit tightness that has been
aggravated by attempts to diversify the economy. Intercounty Bank, like
Goshen Bank, makes no FHA or VA loans, but this is apparently not unusual in either Sullivan or Orange Counties. Indications are that the deficit
of credit in these areas is likely to continue in coming years.
For notes see p. 378.

354

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 19661—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 BOARD OF GOVERNORS—Cont.

The areas now served by County Trust, Goshen Bank, and Inter county
Bank are separate and distinct, and there is no significant direct competition between the 3 banks. While County Trust is a forceful competitor, its
entry into Sullivan and Orange Counties should not have a significantly
adverse effect on the smaller locally based banks.
There is a need in both Sullivan and Orange Counties for an increased
supply of credit and other banking services, which Goshen Bank, Intercounty, and the other locally based banks have not been able to supply.
The entry of County Trust into these counties should help meet the need
for additional credit, while the smaller banks now located in the 2 counties
should continue to have sufficient demand for their services to enable them
to compete successfully.

No. 2—The Reading Trust Company,

Reading, Pa.
to merge with
The National Bank of Hamburg,

Hamburg, Pa.

81.8
7.3

SUMMARY REPORT BY ATTORNEY GENERAL (12-23-65)

The Reading Trust Company (hereinafter Reading Trust), with its main
office and a branch in Reading, Pennsylvania, and with branches in Shillington and West Lawn, Pennsylvania, had deposits of $71.4 million as of
June 30, 1965.
The National Bank of Hamburg (hereinafter Hamburg National),
Hamburg, Pennsylvania, had deposits of $6.6 million as of June 30, 1965.
The proposed merger, if consummated, would result in the elimination
of some competition between the merging banks and would increase the
already very high concentration of banking resources held by the 3 largest
of the 11 banking institutions in the service area by 1.67 per cent to
82.32 per cent. However, in view of Hamburg National's inability to provide vigorous competition, its failure to offer a complete range of banking
services to its customers, and its alleged management succession difficulties, any adverse competitive effects that would arise as a result of the
merger would not appear to be serious. In addition, the merger would
enable the resulting bank to provide better banking services to the residents of the Hamburg area as well as permit it to compete more effectively with 2 larger banks in the Reading area due to its resulting increased
lending limit.
Taking all factors presented into consideration, although the proposed
merger would produce some adverse competitive effects, these effects would
not appear serious.
For notes see p. 378.

355

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 19661—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 BOARD OF GOVERNORS (1-24-66)

The town of Hamburg (population about 4,000) is located in the northeast sector of Berks County about 17 miles north of Reading and 77 miles
northwest of Philadelphia. Although supported by agriculture in the surrounding area, the economy of the town is based on diversified small industry. Within the area served by Hamburg National are 3 other independent banks and offices of 2 larger banks headquartered outside the
area; however, Hamburg itself has only 1 other bank, an institution about
twice the size of Hamburg National. The latter does not offer a complete
range of banking services, and customers who desire an alternative source
for several services must seek them in other towns. Hamburg National's
lending limit is only $42,500 and inadequate to meet the needs of several
local industries.
While Reading Trust competes to some extent throughout Berks County,
the nearest offices of the merging banks are some 15 miles apart, with
offices of other banks located in the intervening area. Consummation of
the merger would have no adverse competitive effects on the well-established other local bank or on the other 2 banks located in the area served
by Hamburg National. Effecting the proposal would provide the Hamburg
area with a higher lending limit, greater depth in management, and
broader banking services, all of which would result in the introduction of
stronger competition into the northern sector of Berks County for business
of the kinds now serviced by the 2 larger banks having offices in the area.

No. 3—United California Bank,
Los Angeles, Calif.
to merge with
Security National Bank
of Monterey County,
Pacific Grove, Calif.

3,300.0

187

16.3

193

SUMMARY REPORT BY ATTORNEY GENERAL (12-9-65)

The proposed merger would combine Security National, with deposits
of $14.9 million, operating 6 offices in Monterey County communities,
with United California, 1 of 5 huge, statewide banks in California, with
current deposits of $2.8 billion. The merger will have the effect of eliminating the sole remaining local, independent bank in the communities of
Pacific Grove, Monterey, Carmel, and Marina. Security National has
shown exceptional vigor and competitive strength in recent years, and
there is evidence that it has been a truly independent competitor in the
area, providing services and following rate schedules much different from
For notes see p. 378.

356

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

SUMMARY REPORT BY ATTORNEY GENERAL—Cont.

the other, larger banks which operate in Monterey County. Since it appears, therefore, that Security National has been a significant, independent
competitive factor in the area, this merger, by ending that bank's independence, will have the effect of lessening competition in Monterey
County.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (2-7-66)

Security National Bank's 6 offices serve primarily the Monterey Peninsula of California. This area, also served by 14 offices of 4 of the largest
banks in California, has a population of approximately 114,000, including
the some 30,000 persons connected with Fort Ord. United California has
no office on the peninsula; its closest office is at Salinas, located about 15
miles from the nearest office of Security National and separated from the
peninsula by the vast expanse of the military base.
Since the acquisition of control of Security National in October of 1961
by the present chief executive officer, Security National has experienced
unusually rapid growth both in deposits and banking offices, but such
growth has caused several severe problems for the bank. Although capital
funds have been provided in recent years, the bank's capital position has
steadily deteriorated, and recent efforts to raise additional capital have
been unsuccessful. The bank's earnings, adversely affected by heavy expenses, are not expected to improve sufficiently in the near future to provide capital funds adequate in relation to need. In addition, while Security
National's management has been satisfactory, the present chief executive
officer must withdraw from active management for reasons of health. No
other officer in the bank has the necessary experience and demonstrated
ability to cope with present problems, and an extended search for a qualified replacement has been unsuccessful.
Part of Security National's growth is attributed to its efforts to provide
residents of the peninsula with locally oriented banking services and its
response to an area need for a service that none of the larger banks has
provided—extended and more convenient banking hours. Consummation
of the merger would thus not aid the convenience and needs of the public
on the peninsula and would deprive the area of its only small, locally
based bank. While consummation would eliminate little present competition between the 2 banks, it would further add to the concentration of
banking resources in the State, although by an insignificant amount.
Nevertheless, the proposed merger would solve Security National's problems of low capital, below-average earnings, and lack of an individual
capable of succeeding in the very near future to the position of chief
executive. The benefits expected to flow to the public through the resulting
solution to these problems more than offset the adverse considerations.
For notes see p. 378.

357

No. 4—Lake City Bank,
Warsaw, Ind.
to merge with
Commercial State Bank,
Silver Lake, Ind.

Resources
(in millions
of dollars)

Banking offices
In
operation

19.7

3.2

To be
operated

SUMMARY REPORT BY ATTORNEY GENERAL (2-28-66)

The Lake City Bank proposes to acquire Commercial State Bank. As
of December 31, 1965, the latter had total assets of $3.2 million, total
deposits of $2.9 million, and net loans and discounts of $1 million.
Lake City Bank functions through a head office and a branch, located
at Warsaw and Winona Lake, Indiana. As of December 31, 1965, Lake
City had total assets of $19.7 million, total deposits of $17.9 million, and
net loans and discounts of $9.6 million. The service areas for the constituent banks are entirely encompassed within Kosciusko County, Indiana,
and overlap only to a slight extent. Areas served by the resulting bank
will overlap marginally with areas served by nearly every other bank in
the county.
Of the 9 commercial banks operating in Kosciusko County, the acquiring bank ranks second, and the bank to be acquired is the smallest.
It is our view that the effect of the proposed merger on competition will
not be adverse.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (3-31-66)

Lake City Bank, located in Warsaw (population 8,000), operates its sole
branch in nearby Winona Lake, a community with an estimated population of 1,900. Warsaw is the seat and principal community of Kosciusko
County (population over 40,000). Commercial State Bank's sole office is
in the town of Silver Lake (population 500), which is also in Kosciusko
County about 12 miles south of Warsaw. While the areas served by the 2
banks overlap slightly, neither bank derives any significant amount of
deposits or loans from the area served by the other. A branch of the
county's largest bank is situated between offices of Lake City Bank and
Commercial State Bank. In addition to Lake City Bank, second largest in
the area, and Commercial State Bank, the smallest, there are 9 other banks
in the relevant area. With the exception of the largest of the 9 banks,
which has 4 offices, each of these banks operates a single office and each
serves primarily its own community.
Consummation of the proposal would not have adverse competitive
effects. Silver Lake and the surrounding area would benefit most from
consummation of the merger as the resulting bank would be in a position to improve the earnings prospects of the office now occupied by
Commercial Bank and also be able to provide more complete and convenient banking services to the Silver Lake area.
For notes see p. 378.

358

No. 5—Springville Banking Company,
Springville, Utah
to merge with
State Bank of Provo,
Provo, Utah
and change its title to
Central Bank and Trust Company

Banking offices
Resources
(in millions
of dollars)

In
operation

12.2

8.3

To be
operated

SUMMARY REPORT BY ATTORNEY GENERAL (12-15-65)

State Bank of Provo, Provo, Utah, and Springville Banking Company,
Springville, Utah, are located some 6 miles apart in north-central Utah.
As of June 30, 1965, Springville Banking Company reported total assets
of $12.2 million, net loans and discounts of $7.8 million, and total deposits
of $11.3 million. State Bank of Provo reported total assets of $8.3 million,
net loans and discounts of $5.7 million, and total deposits of $7.8 million.
Six commercial banks (including Springville Banking Company and
State Bank of Provo) operate 7 banking offices in the trade area of the
merging banks. This trade area is composed of the north-central Utah
communities of Orem, Provo, and Springville and has a population of
69,000 persons.
The proposed merger would eliminate substantial direct competition between Springville Banking Company and State Bank of Provo. The resulting bank would become the largest bank in the market area in terms of3
loans and would rank in a virtual tie for second place in terms of IPC
deposits, where the percentage of concentration of the 3 largest banks
would increase from 79.2 per cent to 92.4 per cent.
We conclude that the effect of the proposed merger on competition
would be adverse.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (4-8-66)

Provo (population 36,000), the largest town in Utah County, is located
about 44 miles south of Salt Lake City and 6 miles north of Springville
(population 8,000). Utah County, the leading agricultural county of the
State, has a population of about 120,000, over half of which is located
in Provo, Springville, and in Orem, a city of 20,000 located 4 miles north
of Provo. The areas served by Springville Bank and State Bank overlap
but, because of common management, there is no present competition between them.
The relevant area, Utah County, is also served by 8 other banks operating 11 offices in the county. These include the 2 largest banks in the State:
First Security Bank of Utah, N.A., Ogden, which operates 4 offices in the
county, including 1 in Provo and 1 in Orem, and holds 30 per cent of the
For notes see p. 378.

359

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

BASIS FOR APPROVAL BY BOARD OF GOVERNORS—Cont.

total deposits in the county; and Walker Bank and Trust Company, Salt
Lake City, which operates 1 office in the county (a branch in Provo) and
holds 18 per cent of the total deposits in the county. The applicant, which
holds 12 per cent of the total deposits of Utah County, is the third largest
bank in the county, and the resultant bank, holding slightly less than 20
per cent, would be the second largest in the country.
As a result of State Bank's recent rapid growth, its capital position has
deteriorated. The present chairman of the board of State Bank (formerly
its chief executive officer) is well past the normal retirement age and recently found it necessary to curtail his activity at the bank. As the bank
lacked personnel of management caliber, the president of Springville Bank
was elected president of State Bank. Consummation of the proposal would
result in operating economies, hasten needed improvement at the smaller
bank, and provide Utah County with a third bank capable of providing
enhanced service and more effective competition for the 2 largest banks.
These results would offset the slight and potentially adverse competitive
effects of the merger.
No. 6—The Harter Bank & Trust Company,
Canton, Ohio
to merge with
The Waynesburg Bank,
Waynesburg, Ohio

122.7

4.8

SUMMARY REPORT BY ATTORNEY GENERAL (3-2-66)

The Harter Bank & Trust Company, Canton, Ohio, proposes to merge
with The Waynesburg Bank, Waynesburg, Ohio, under the charter of The
Harter Bank & Trust Company and with this name.
Harter Bank presently is the largest bank in its own service area, closely
followed in size and number of branch offices by the First National Bank
of Canton. The Waynesburg Bank, 15 miles southeast of Canton, is a
small single-unit bank with local business only. The merger, if approved,
will not eliminate any substantial competition between the 2 banks. We
conclude that the effect on competition will not be adverse.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (4-20-66)

Canton (population 113,000), the largest city in Stark County, is about
60 miles southeast of Cleveland and 15 miles northwest of Waynesburg
(population 1,230). Harter Bank operates its 9 offices in Canton and its
For notes see p. 378.

360

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

BASIS FOR APPROVAL BY BOARD OF GOVERNORS—Cont.

suburbs. The sole office of Waynesburg, also located in Stark County,
serves only the small town of Waynesburg and, although Harter Bank
competes to some extent throughout Stark County, competition between the
2 banks is quite moderate.
Harter Bank could more adequately serve the banking needs of the
Waynesburg community. Waynesburg Bank, the only bank in Waynesburg,
has a relatively low ratio of loans to deposits and about two-thirds of its
loan portfolio is in real estate loans. Moreover, a sizable portion of its
loans are to borrowers who reside outside the Waynesburg area. Evidence
indicates there is an unfilled demand in Waynesburg for personal instalment loans and for business credit.
In the relevant market area—Stark County and the northwest corner of
Carroll County—18 banks operate 46 offices. Harter Bank, holding about
22 per cent of the IPC 3 deposits of the area, ranks 1st in size; Waynesburg Bank, with less than 1 per cent ranks 16th. The second largest bank,
First National Bank of Canton, holds about 21 per cent of the IPC 3
deposits held by all banking offices in the area. A single office bank, located
3 miles west of Waynesburg, and a branch of First National Bank of
Canton, located 5 miles east of Waynesburg, are the chief competitors of
Waynesburg Bank. There is no evidence that either of these offices would
be adversely affected by the merger.
The replacement of Waynesburg Bank by an office of Harter Bank
would benefit the banking convenience and needs of the Waynesburg area
by making available a full-service banking office. It would not result in
any significantly adverse consequences for banking competition.

No. 7—Citizens Bank and Trust Company,
Clare, Mich.

15.2

to consolidate with

The State Bank of Coleman,
Coleman, Mich.

3.2

SUMMARY REPORT BY ATTORNEY GENERAL (4-18-66)

The Citizens Bank and Trust Company (hereinafter Citizens), with its
main office in Clare, Michigan, and a branch in Rosebush, Michigan, proposes to consolidate with The State Bank of Coleman (hereinafter State),
Coleman, Michigan, under the former's title. The 2 banks are 10 miles
apart. As of December 31, 1965, Citizens had total deposits of approxiFor notes see p. 378.

361

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

SUMMARY REPORT BY ATTORNEY GENERAL—Cont.

mately $13.5 million, and State had total deposits of $2.9 million. State
suffered a sharp decline in earnings in 1965 and is experiencing management succession problems.
At present, 6 independent sources of commercial banking services are
located within 15 miles from an office of the resulting bank. This area is
served by modern highways, making the banks located therein easily accessible to any potential banking customer of the resulting bank. The effect of
the consolidation would be to reduce to 5 the number of independent
banking facilities available to customers in this geographical market. The
resulting bank would operate 3 of the area's 10 banking offices.
While the consolidation will result in the elimination of some competition between the consolidating banks and an increase in concentration in
the resulting geographical competitive market, State does not appear to
have been a particularly aggressive competitor, and the resulting bank
will remain subject to competition from a number of other banks in the
area.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (5-17-66)

Citizens Bank operates its main office in Clare (population 2,500) and
its sole branch in Rosebush (population 300), about 9 miles south. Coleman Bank's 1 office is located in Coleman, a community of about 1,300
persons, situated 10 miles southeast of Clare on the interstate highway
connecting Clare and Midland (population 28,000). There are no banking
offices between the 2 banks, and the areas served by them overlap somewhat. However, the extent of the competition existing between them is
greatly reduced by the nonaggressiveness of Coleman Bank.
Major portions of the 4 counties of Clare, Isabella, Midland, and Gladwin comprise the relevant market area, and within this area are 17 offices
of 10 banks competing with the consolidating banks. Citizens Bank and
Coleman Bank, respectively, rank 4th and 10th in terms of deposit size.
After consolidation with Coleman Bank, Citizens Bank would hold 12.5
per cent of total deposits in the relevant area, and its rank would be
unaltered.
Compared to banks with which it competes, Coleman Bank has a low
ratio of loans to deposits, and there is evidence that, due to the restrictive
lending policies of Coleman Bank, many residents of the area it serves
have had to secure loans elsewhere. While a variety of banking services are
available from competing banks in the relevant area, the proposed consolidation would benefit the convenience of the residents of the Coleman
area by affording them easy access to a more progressively operated banking office. This would be accomplished without significant adverse consequences for banking competition.
For notes see p. 378.

362

No. 8—The State Bank and Trust Company,
Defiance, Ohio
to merge with
The Ney State Bank,
Ney, Ohio

Resources
(in millions
of dollars)

Banking offices
In
operation

20.4

2.0

To be
operated

l 3

SUMMARY REPORT BY ATTORNEY GENERAL (3-15-66)

The State Bank and Trust Company ("State Bank"), Defiance, Ohio,
proposes to merge The Ney State Bank ("Ney"), Ney, Ohio.
State Bank operates its main office and a drive-in branch office in
Defiance, Ohio, and as of October 25, 1965, reported total assets of $20.4
million, net loans and discounts of $9.6 million, and total deposits of
$17.7 million. Ney operates its only office in Ney, Ohio, which is 12 miles
northwest of the State Bank. As of October 25, 1965, Ney reported total
assets of $2 million, net loans and discounts of $.5 million, and total
deposits of $1.8 million.
Although State Bank undoubtedly provides an alternative source of
banking services for individuals, businesses, and farms located in Ney's
service area, the location of a number of other banks within approximately
the same distance from Ney, together with Ney's very small size, indicates that the proposed merger will not have an adverse effect on competition.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (6-1-66)

Defiance, the location of both offices of State Bank, is located in rural
Defiance County in northwestern Ohio. The city and its environs (population 17,000) are becoming increasingly developed and industrialized. Ney
is a small village of about 350 persons located in a rural area 12 miles
northwest of Defiance. The 2 banks serve overlapping areas but the volume
of business obtained by each from the area served by the other is relatively small. Ney Bank is not an aggressive competitor—it does not actively
seek new business and offers a limited range of loans and banking services.
In addition to the merging banks there are 6 banks operating offices
within the relevant market area. State Bank, holding 30 per cent of total
area deposits, is the largest, and Ney Bank, with 3 per cent, ranks seventh.
The resulting benefits to the village of Ney and the surrounding area
would be the principal consequences that would flow from consummation
of the proposal. Residents of the Ney area who must now seek a number
of banking services elsewhere would be provided with a true alternative
source of services commensurate with the community's needs. Moreover,
the substitution of an office of State Bank for that of Ney Bank would be
expected to have a further beneficial effect by stimulating competition with
other banks in the northern part of the relevant area while not increasing
importantly the market power of State Bank.
For notes see p. 378.

363

No. 9—Rockbridge Bank & Trust Company,
Lexington, Va.
(an organizing bank)
to merge with
Rockbridge National Bank of Lexington,
Lexington, Va.

Banking offices
Resources
(in millions
of dollars)

In
operation

0.0

10.5

To be
operated

SUMMARY REPORT BY ATTORNEY GENERAL (4-28-66)

Rockbridge National Bank, located in Lexington, Virginia, has assets of
$9.2 million, deposits of $8.1 million, and loans and discounts of $5.7
million. Rockbridge Bank & Trust Company was incorporated on March
16, 1966, under Virginia banking laws but will not engage in business
until the Federal Reserve Board approves the acquisition by United Virginia Bankshares, Incorporated, a registered bank holding company, of all
the stock in new Rockbridge Bank & Trust Company. The effect of this
entire transaction is to convert Rockbridge National Bank into a State
bank under the name of Rockbridge Bank & Trust Company. The merger
itself is a change in form and not in substance, and there are therefore no
competitive factors involved in the proposed merger.
United Virginia Bankshares is the largest banking institution in Virginia; its subsidiary banks having deposits in excess of $587.0 million.
Sixty-three banking offices are operated in 22 communities in Virginia.
This holding company through its subsidiary banks controls 11.6 per cent
of total bank deposits in the State of Virginia. Through its acquisition of
the new Rockbridge Bank & Trust Company its percentage of deposits of
all Virginia banks will be increased by less than one-fifth of 1 per cent,
and the number of its banking offices will be increased from 63 to 65. Because of the distances involved, there appears to be no competition between any present subsidiary of United Virginia Bankshares and the
Rockbridge Bank.
It is our view that standing alone this contemplated transaction of converting the Rockbridge Bank from a national bank to a newly organized
State bank and the acquisition of such newly organized State bank by
United Virginia Bankshares will not affect competition adversely. However, this transaction may encourage the constantly increasing concentration of banking in Virginia in the hands of a few large organizations.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (7-26-66)

United Virginia Bankshares Incorporated, Richmond, Virginia, filed
with the Board, pursuant to Section 3 (a) of the Bank Holding Company
Act of 1956, as amended, an application for approval of the acquisition
of at least 90 per cent of the voting shares of Rockbridge Bank & Trust
For notes see p. 378.

364

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

BASIS FOR APPROVAL BY BOARD OF GOVERNORS—Cont.

Company, a proposed new bank into which would be merged Rockbridge
National Bank of Lexington under the charter and title of Rockbridge
Bank & Trust Company.
The proposed merger is only a procedural device to effect the affiliation
of Rockbridge National Bank of Lexington with United Virginia Bankshares as a State member bank subsidiary. Apart from this, the merger has
no significance. Under the proposal, the merger transaction will not be
effected unless United Virginia Bankshares' acquisition of Rockbridge
Bank & Trust Company is approved.

No. 10—Central State Bank,
Elkader, Iowa

7.5

to acquire the assets and
assume the liabilities of

Volga State Bank,
Volga, Iowa

SUMMARY REPORT BY ATTORNEY GENERAL (7-20-66)

Central State Bank (hereinafter referred to as the Charter Bank), with
deposits of $6.9 million, proposes to acquire the Volga State Bank (hereinafter referred to as the Acquired Bank), which has deposits of $639,774.
The banks, located in northeastern Iowa, are 12 miles apart and their
service areas overlap in considerable degree. Volga State Bank, established in 1947, has total loans outstanding of $137,043.
The competition between the Charter Bank and the Acquired Bank,
which would be eliminated by the proposed acquisition, does not appear
extensive, and the acquisition would not materially alter the structure of
banking competition in the area.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (8-15-66)

The sole office of Volga Bank is situated about 12 miles southwest of
Elkader, the location of Central Bank's main office. Volga is a small rural
community of less than 400 persons that has experienced a marked decline
in population in recent years, and since it does not serve as a trading or
marketing center, its prospects for growth appear limited. Volga Bank's
earnings are below average, and in these circumstances it seems improbable that a capable successor can be found for the bank's chief executive
officer who is well past the normal retirement age.
For notes see p. 378.

365

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

BASIS FOR APPROVAL BY BOARD OF GOVERNORS—Cont.

There is competition between Central Bank and Volga Bank but, because of the size of Volga Bank and its nonaggressive policies, the extent
of such competition is limited. Other banking offices in the relevant area,
because of their size and location in an agricultural region, tend to draw
the preponderance of their business from the communities in which they
are situated. It does not appear that any of these offices would be adversely
affected by the proposed transaction or that the structure of banking competition in the area would be materially altered. In view of the prospects
for Volga Bank and for the community it serves, and in light of the bank's
management succession problem, there is considerable question as to how
long Volga Bank can realistically be expected to continue as a unit bank.
Thus, in addition to the resulting benefit to the banking convenience and
needs of the Volga area, the proposal would assure the continuance of a
banking facility for the Volga community.

No. 11—Wachovia Bank and Trust Company,
Winston-Salem ,N.C.
to merge with
Bank of Ahoskie,
Ahoskie, N.C.

1,156 .7

11 .6

103

SUMMARY REPORT BY ATTORNEY GENERAL (7-27-66)

Wachovia Bank and Trust Company, Winston-Salem, North Carolina,
has applied for permission to merge Bank of Ahoskie, Ahoskie, North
Carolina. Wachovia is the State's largest bank, operating 91 offices in 32
North Carolina communities and having net loans and total deposits of
$661.7 million and $977 million, respectively. Bank of Ahoskie operates
4 offices and has net loans and total deposits of $5.9 million and $10.5
million, respectively.
Wachovia presently owns 50.41 per cent of the merging bank's stock
as a result of the 1960 merger of Wachovia and Guaranty Bank and Trust
Company, Greenville, North Carolina. Guaranty acquired the stock in
1937. This common ownership and the distance between the participants
indicates that the proposed merger will eliminate little, if any, competition.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (8-30-66)

In May 1960, prior to enactment of the Bank Merger Act, Wachovia
Bank acquired a majority interest in Ahoskie Bank through merger with
another bank that had held slightly more than 50 per cent of the stock of
Ahoskie Bank since 1937. A senior officer of Wachovia serves as chairFor notes see p. 378.

366

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

BASIS FOR APPROVAL BY BOARD OF GOVERNORS—Cont.

man of the board of Ahoskie Bank, and several of the latter's officers
formerly served with Wachovia. The 2 affiliated banks have a close operating relationship, and customers of Ahoskie Bank are frequently referred
to Wachovia for banking accommodations unavailable at the smaller
bank.
Three offices of Ahoskie Bank are in Ahoskie (population 4,600), the
largest city in Hertford County (population 22,700), situated near the
eastern end of the Virginia-North Carolina border. The bank's fourth
office is in Aulander (population 1,100), 8 miles southwest of Ahoskie in
Bertie County (population 24,400). Ahoskie is centrally located in the
two-county area and serves as the trade center for both counties. The
nearest office of Wachovia is located 34 miles south of Aulander. None of
the areas served by either bank overlaps.
The relevant area for considering the remaining competitive effects of
the proposal contains the offices of 8 banks, including Ahoskie Bank.
Aulander is served only by Ahoskie Bank, while Ahoskie is served also by
a branch of The Planters National Bank and Trust Company, Rocky
Mount, North Carolina, haying total deposits of $56 million at its 20
offices. The smaller banks in the relevant area serve chiefly their own
communities, and consummation of the proposal would not be expected
to have adverse effects on any of the banks that compete with Ahoskie
Bank.
Due to the distances between the closest offices of Wachovia and
Ahoskie Bank, consummation of the merger would eliminate little, if any,
competition even if the 2 banks were not affiliated. The merger would
formalize the relationship between the 2 banks and, while Wachovia has
been supplementing Ahoskie Bank's services, the operation of Ahoskie's
offices as branches of Wachovia would make the full range of complete
banking services of the larger bank more conveniently available to bank
customers in Ahoskie and Aulander.
No. 12—Bank of the Commonwealth,
Detroit, Mich.
to acquire the assets and
assume the liabilities of
Public Bank,
Detroit, Mich.

649.6

120.0

BASIS FOR APPROVAL BY BOARD OF GOVERNORS (9-23-66)

Approval of this merger promptly and without delay, as provided in
Public Law 89-356, was necessitated by an emergency situation existing at
Public Bank. According to information before the Board—including communications from the Federal Deposit Insurance Corporation (FDIC)
For notes see p. 378.

367

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

BASIS FOR APPROVAL BY BOARD OF GOVERNORS—Cont.

and the Commissioner of Banking of the State of Michigan—Public Bank
had problems that seriously threatened depositors' funds and only prompt
approval of the application to merge would prevent the probable failure
of the bank.
The Board concluded that any anticompetitive effects attributable to
effectuation of the proposal would be clearly outweighed in the public
interest by the considerations supporting and requiring its immediate action
on the application and that any other disposition of the application would
be inconsistent with the best interests of the depositors of Public Bank.
The merger was consummated following appointment of the FDIC as
receiver pursuant to court proceedings under Michigan law.

No. 13—The Ohio Citizens Trust Company,
Toledo, Ohio
to merge with
The Whitehouse State Savings Bank,
Whitehouse, Ohio

155.9

5.7

SUMMARY REPORT BY ATTORNEY GENERAL (8-9-66)

The Ohio Citizens Trust Company, Toledo, Ohio, the third largest
bank in the Greater Toledo area, proposes to acquire by merger the
Whitehouse Savings Bank, which has its head office 18Vi miles southwest
of downtown Toledo and a small branch office in Holland, about 8 miles
northeast of Whitehouse and halfway between Whitehouse and downtown
Toledo.
Although there is some competition between the 2 banks in the area
east and northeast of Holland, the very small size of Whitehouse Savings
Bank leads us to the conclusion that the proposed merger will not materially affect the structure of commercial banking in either of their service
areas.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (10-4-66)

Whitehouse, a small residential and farm community of about 1,300
population, is located approximately 18 miles southwest of downtown
Toledo (population 318,000). Whitehouse Bank operates its main office in
Whitehouse and its sole branch in Holland (population 1,300), about 12
miles northeast of Whitehouse. The nearest offices of the 2 banks are 6
miles apart, and there are 3 other banking offices in the intervening area.
The principal effect of the merger would be on banking needs and
convenience in the Whitehouse-Holland area, a growing suburb of Toledo,
which has an increasing demand for mortgage loans and also potential
For notes see p. 378.

368

21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 19661—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 BOARD OF GOVERNORS—Cont.

for industrial development. Whitehouse Bank operates under a restrictive
policy with respect to mortgage loans, does not aggressively pursue instalment loan business and, due to its small size, is unable to meet the credit
needs of several businesses in its area. The conversion of the 2 offices of
Whitehouse Bank into branches of Ohio Citizens would provide for the
Whitehouse and Holland communities more convenient access to broader
credit accommodations and to a generally wider range of banking services. This would be accomplished without any significantly adverse consequences for banking competition.
No. 14—Upper Main Line Bank,

Paoli, Pa.
to merge with
Farmers Bank of Parkesburg,

Parkesburg, Pa.

30.3
4.9

and change its title to
Community Bank and Trust Company

SUMMARY REPORT BY ATTORNEY GENERAL (8-22-66)

The Upper Main Line Bank (hereinafter referred to as the Charter
Bank) has total assets of $27.9 million and is located in the town of Paoli,
Chester County, Pennsylvania, an urban area of 23,000 population located
about 18 miles east of Philadelphia. The Farmers Bank of Parkesburg,
Parkesburg, Chester County, Pennsylvania (hereinafter referred to as the
Merging Bank) has total assets of $4.9 million and is located in the town
of Parkesburg, a town with a population of 3,000 located 27 miles southwest of Paoli. The Charter Bank was established in 1927 and merged once
with the Berwyn National Bank in 1957. The Merging Bank was established in 1912 and has no previous merger history.
Because of their distance apart and different service areas, the merging
banks do not presently compete with one another. However, any possibility of future competition due to the proximity of their present service
areas (they are within 3 miles of each other) would be foreclosed by the
merger.
There will be no appreciable competitive impact on the Charter Bank's
service area from the merger. Its ranking as the second largest locally
headquartered bank will be unchanged. It will continue to face competition from numerous other banks in the area, including the recently merged
National Bank of Chester County and Trust Company with $54 million in
IPC 3 deposits.
Aside from eliminating the potential competition of the Charter Bank,
there will be no appreciable adverse competitive impact in the Merging
Bank's service area. The resulting bank may be able to compete more
effectively through a greater lending limit, greater resources, and more
complete services.
For notes see p. 378.

369

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

BASIS FOR APPROVAL BY BOARD OF GOVERNORS (10-10-66)

Main Line Bank and Farmers Bank are not competitors, and it does not
appear that significant competition would develop between them if they
did not merge. The main office of Main Line Bank in Paoli (population
5,000) is about 27 miles from Parkesburg (population 3,000), and the
nearest office of that bank to Parkesburg is located 21 miles from Farmers
Bank's sole office.
The merger would have no material effect on banking competition in
the area served by Main Line Bank. The bank would continue to rank as
the second largest locally headquartered bank in the Paoli area and would
be faced with competition from numerous other banking offices, including
branches of large Philadelphia-based banks. The conversion of Farmers
Bank into an office of the larger and more progressive Main Line Bank
would benefit the banking convenience and needs of Parkesburg and
should stimulate competition among the banks in the area.

No. 15—The Brazil Trust Company
of Brazil, Indiana,
Brazil, Ind.
to merge with
Farmers and Merchants Bank,
Clay City, Ind.
and change its title to

12.7

6.0

First Bank and Trust Company
of Clay County, Indiana

SUMMARY REPORT BY ATTORNEY GENERAL (8-23-66)

The Brazil Trust Company (hereinafter referred to as the Charter
Bank) has total assets of $12.7 million and is located in the town of
Brazil, Indiana, a community of 8,750 population located about 50 miles
southwest of Indianapolis and 16 miles northeast of Terre Haute. The
Farmers and Merchants Bank (hereinafter referred to as the Merged
Bank) has total assets of $6.0 million and is located in Clay City, a town
with a population of 722 located 18 miles south of Brazil. The Charter
Bank was established in 1899 and the Merged Bank in 1895. Neither has
a previous merger history.
The Charter Bank and the Merged Bank do not presently compete with
each other to any significant degree, and the distance separating them,
together with their extensive common ownership, indicates that there is
little likelihood that the 2 banks will become competitors in the future.
The bank resulting from their merger will probably be in a better position
to meet the competition moving into the area from larger banks in Terre
Haute.
It appears that the proposed merger is not likely to have an adverse
competitive effect.
For notes see p. 378.

370

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

BASIS FOR APPROVAL BY BOARD OF GOVERNORS (10-10-66)

The 2 offices of Brazil Bank are in Brazil (population approximately
8,900), the Clay County seat, about 50 miles southwest of Indianapolis
and 16 miles northeast of Terre Haute. The sole office of the Clay City
bank in Clay City (population about 950) is about 18 miles south of
Brazil. There are other banking offices in the communities located on the
highway connecting the 2 towns, and competition to any meaningful
extent does not exist between the 2 banks. Shareholders who own approximately 34 per cent of the stock of Brazil Bank also own 37 per cent of
the stock of the Clay City bank. There is no evidence to indicate that the
banks would become significant competitors even if the common ownership were terminated. '
The relevant market for the resulting bank is Clay County and portions
of Vigo, Parke, and Owen Counties. In this area, 12 banks operate 24
offices, which hold total deposits of over $200 million. Following the merger, Brazil Bank would hold less than 10 per cent of total area deposits.
Brazil Bank is faced with competition from the larger Terre Haute banks,
in part because numerous residents of Brazil commute to work in Terre
Haute. The nearest banking office to the Clay City bank is located approximately 7 miles southeast of Clay City and is a branch of a bank that
has total deposits of about $8 million. The proposed merger would not
adversely affect banking competition, and the resulting bank would be able
to offer improved services that, in particular, would benefit the banking
needs and convenience of the Clay City community.

No. 16—Depositors Trust Company,
Augusta, Maine
to merge with
First Maine Trust Company,
Augusta, Maine
(an organizing bank)

132.9

SUMMARY REPORT BY ATTORNEY GENERAL (8-19-66)

Depositors Trust Company, Augusta, Maine, with assets of $132.9
million, proposes to merge with First Maine Trust Company, Augusta,
Maine, recently organized, with assets of $156,000.
Since the application states that First Maine Trust Company will not be
open for business until December 30, 1966, it is not possible to discern any
impact upon competition which would result from consummation of the
proposed merger.
For notes see p. 378.

371

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

BASIS FOR APPROVAL BY BOARD OF GOVERNORS (10-24-66)

Depositors Corporation, Augusta, Maine, filed with the Board, pursuant
to Section 3 ( a ) ( l ) of the Bank Holding Company Act of 1956, as
amended, an application for approval of action to become a bank holding
company through the acquisition of 100 per cent of the outstanding voting
shares of Depositors Trust Company, Augusta, Maine, and at least 80 per
cent of the outstanding voting shares of The Liberty National Bank in
Ellsworth, Ellsworth, Maine. Incident to the holding company proposal,
the Board's approval was also requested, pursuant to the Bank Merger
Act of 1960, as amended, of the proposed merger of Depositors Trust with
First Maine Trust Company, Augusta, Maine (a newly organized bank not
yet in operation), under the charter and title of Depositors Trust Company.
The merger proposal is primarily one of form—its purpose is to facilitate the acquisition of all the outstanding stock of Depositors Trust
Company by the newly formed bank holding company. It is not planned
that First Maine Trust Company will engage in the business of banking
as a separate corporate entity prior to the merger. The merger, in itself,
will have no effect on competition.

No. 17—The Colonial Bank
and Trust Company,
Waterbury, Conn.
to merge with
Puritan Bank and Trust Company,
Meriden, Conn.

145.8

12
15

11.8

SUMMARY REPORT BY ATTORNEY GENERAL (8-9-66)

The Colonial Bank and Trust Company, with deposits of $136.1 million,
proposes to merge with the Puritan Bank and Trust Company, which has
deposits of $10.5 million. The banks are located in west-central Connecticut and have offices as close together as 5 miles.
The merger would eliminate existing and potential competition between
the merging banks, would eliminate a vigorous independent bank, would
enhance Colonial Bank's position as the dominant bank in the area, and
would increase the already high level of banking concentration in the area.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (10-31-66)

Colonial Bank operates its main office and 3 of its branches in Waterbury (population 110,000), the fourth largest city in Connecticut. Its other
8 offices are located within a radius of 12 miles of the city. The main
office and 1 branch of Puritan Bank are 16 miles east of Waterbury in
Meriden, a community of about 55,000. Its other office is 6 miles south
of Meriden in Wallingford, which has a population of about 30,000. The
For notes see p. 378.

372

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

BASIS FOR APPROVAL BY BOARD OF GOVERNORS—Cont.

2 banks draw the vast bulk of their business from separate geographical
markets, and there is only minor competition between them.
The principal effect of the merger on banking competition would be in
the area served by Puritan Bank. In Meriden, Puritan Bank and 2 other
banks operate a total of 7 offices; Wallingford is served by 1 office of
each of these 3 banks and by 2 offices of a New Haven-based bank. Puritan
Bank holds about 11 per cent of the deposits held by the 12 banking
offices in the Meriden-Wallingford area. The other Meriden-headquartered
bank holds about 37 per cent of area deposits. The remaining deposits in
the area are held by offices of the State's 2d and 10th largest banks. Thus,
the extension of Colonial Bank with its greater resources than Puritan
Bank into the Meriden-Wallingford area would tend to strengthen banking
competition in that market. Moreover, the replacement of Puritan Bank,
the smallest bank in the Meriden-Wallingford area, by offices of Colonial
Bank would provide the Meriden and Wallingford communities with an
alternative source of full banking services and an additional facility for
meeting the growing credit needs produced by the area's rapid economic
development.

No. 18—The Bank of New York,
New York, N.Y.
to merge with
Empire Trust Company,
New York, N.Y.

932.0
341.1

SUMMARY REPORT BY ATTORNEY GENERAL (9-23-66)

The Bank of New York is the 9th largest of the 45 commercial banks
with head offices in New York City, and it has assets of $932 million,
deposits of $822.8 million, and loans of $432.7 million. Empire ranks 13th
among the 45 banks in New York City, and has assets of $341.1 million,
deposits of $294.6 million, and loans of $199.4 million. The Bank of New
York operates 6 offices and Empire has 2, all of which are located in
Manhattan. Both banks are engaged primarily in providing services to
large- and medium-sized depositors and borrowers, and both have extensive amounts of personal and corporate trust business. In addition, The
Bank of New York, but not Empire, offers a range of retail banking
services.
The banking structure in New York City and in the metropolitan area
in which both merging banks are vigorous competitors reflects a high
degree of concentration. The 5 largest banks in New York City have
approximately 75 per cent of IPC 3 deposits and loans and discounts and
over 72 per cent of the banking offices in New York City. This concenFor notes see p. 378.

373

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

SUMMARY REPORT BY ATTORNEY GENERAL—Cont.

tration is largely attributable to past merger activity. Since 1950, when
there were 70 banks in New York City, 35 have disappeared by way of
merger and there have been only 5 entirely new banks organized—none
of which have achieved or can be expected to achieve the competitive
stature of the larger merged banks.
The proposed merger would eliminate existing competition between
the merging banks, eliminate a vigorous competitive alternative source of
credit for large- and medium-sized customers, and reinforce the existing
high level of concentration in commercial banking in New York City
and the metropolitan area.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (11-7-66)

The head office of each bank is situated in the downtown financial
district of New York City. The 5 branch offices of Bank of New York
are in the midtown section of Manhattan, as is the single branch of
Empire. Although Bank of New York has made an effort to attract
retail business, both banks are essentially wholesale institutions, dealing
in large loan and deposit relationships and offering specialized services.
The retail market is considered to be preponderantly local in character
and dependent largely on branching locations. In that market, Empire
and Bank of New York are not present competitors. Nor is it probable
that the two would compete in this field in the future, were the application
denied, since neither bank has the resources to acquire the branches that
would be needed for any important expansion into retail banking. After
consummation of the merger, both offices of Empire would offer retail
services, and the addition of 2 offices to its present system would make
Bank of New York a slightly stronger competitor in the retail banking
field. Nevertheless, the effect on competition in the relevant market,
whether regarded as the metropolitan area, the City of New York (comprising the 5 boroughs), or the borough of Manhattan, would be minimal.
The resulting bank would operate 8 out of some 700 banking offices in
New York City and some 350 in Manhattan. Moreover, each of the 8
offices of the 2 banks is located in a highly competitive area with numerous
offices of commercial banks in the immediate vicinity.
In the wholesale banking field, there is competition between Bank of
New York and Empire, but such competition is not regarded as important
as the 2 banks have specialized and developed expertise in different fields
of industry. While changes in emphasis could bring the 2 into more active
competition in the future both now compete with other institutions of
comparable and larger size in a market that is not only far broader than
New York City, but that is national, and at times international, in scope.
In this broader market, each plays a relatively minor role. After consummation of the merger, the resultant bank would rank 9th among commercial banks headquartered in New York City compared with a rank of 10th
for Bank of New York at present. Accordingly, the merger would tend
For notes see p. 378.

374

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

BASIS FOR APPROVAL BY BOARD OF GOVERNORS—Cont.

to create a slightly stronger competitor for the largest banks not only in
New York but in other financial centers as well.
Customers of the 2 banks would benefit to some extent from the
availability of a larger lending limit as a result of consummation of the
merger. Both Bank of New York and Empire have experienced some
difficulty in serving corporate customers that have grown to a size where
banking prudence or statutory limits prevented 1 bank or the other from
maintaining its "lead" position in loans to such customers. In addition,
strengthening of the international department of the combined bank, as a
result of the merger, would be of some benefit to that segment of the community that is interested in international trade.
On balance, the effect of the merger on banking competition would not
be significantly adverse, and there would be some benefit to the community
as a result of the increased lending limit and improved international
department of the resulting bank.

No. 19—St. Joseph Valley Bank,
Elkhart, Ind.
to merge with
First Old State Bank,
Elkhart, Ind.

64.2
21.1

SUMMARY REPORT BY ATTORNEY GENERAL (7-19-66)

The merging banks are 2 of the 3 commercial banks headquartered and
operating offices in the city of Elkhart, the seat of Elkhart County.
St. Joseph Valley Bank (hereinafter referred to as the Charter Bank)
is the second largest commercial bank in Elkhart County. Its primary
service area is the northwest corner of said county. It also serves an
area in the southern part of the county through a branch in Nappanee.
Charter Bank holds about 20 per cent and 25 per cent, respectively, of the
total IPC 3 deposits and loans of the banks apparently competing within
these areas. The merged bank would have about 27 per cent and 34 per
cent, respectively, of such deposits and loans, while together with First
National Bank of Elkhart County, it would have about 60 per cent of the
deposits and 70 per cent of the loans.
The merger would result in a substantial increase in the already high
level of concentration in commercial banking in the area; would eliminate
1 of the 3 banking institutions in the city of Elkhart; and would eliminate
existing competition between the merging banks. According to the application, the merging bank is experiencing serious capital and management
problems. However, we question whether these problems are insoluble
except through merger with a direct competitor. So long as the possibility
exists that State Bank's problems can be solved in some way other than
For notes see p. 378.

375

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

SUMMARY REPORT BY ATTORNEY GENERAL—Cont.

by merger with 1 of its 2 principal competitors, we believe that such a
merger would have a substantially adverse effect on competition.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (11-30-66)

Elkhart, population about 45,000, is the location of the main office and
4 branches of St. Joseph Bank, the main office and sole branch of Old
State Bank, and the main office and 3 branches of The First National Bank
of Elkhart County (deposits $95.4 million). The area served by each of
these 3 banks encompasses the city of Elkhart and its immediate environs.
Competition between them is substantial.
Old State Bank, smallest of the 3 Elkhart banks, has experienced substantial growth in both deposits and loans during the past few years and
has als6 enjoyed gross operating revenues that are considerably above the
average for banks of comparable size in Indiana. The bank's growth in
deposits and loans, however, has been disproportionate to the growth of
its capital accounts. Moreover, due to loan losses resulting from imprudent
lending policies, net income since 1964 has been much less than the
average for similar size banks. While the bank has sold capital twice
within the past 5 years, its ability to sell additional capital is seriously
affected by its recent record of less-than-average net earnings and by its
greater-than-ayerage asset weaknesses. At the same time, these factors
impede the ability of the bank to attract the personnel needed to strengthen
the lending practices if both net earnings and asset condition are to be
improved.
Evidence indicates that the directors of Old State Bank have endeavored
—although not to the point of precipitating open discord, which could well
prove harmful—to effect reforms in the lending practices of the bank.
The failure of this effort must be attributed in part to the fact that the
directors and their families altogether hold only about 35 per cent of the
bank's voting shares. The largest stockholder of the bank is its chief
operating officer who enjoys a wide following among the bank's other
stockholders and in the community and is the dominant force in the bank.
Thus, it seems unlikely that Old State Bank will veer from its potentially
hazardous course, given the bank's present ownership. A solution by means
other than merger with 1 of the 2 remaining Elkhart banks is patently
desirable but, because of State law, the only other possibilities for Old
State Bank to be acquired by merger lie with 2 Elkhart County banks
that are far too small to materially alter the prospects for Old State Bank.
The merger would eliminate an alternative source of banking services
from the Elkhart community and would have a substantial adverse effect
on competition. However, it would result in an orderly disposition of the
serious capital and management problems faced by Old State Bank and,
considered in the light of the likely ramifications for the bank and the
community it serves if the merger is not ^allowed, the anticompetitive
consequences would be clearly outweighed in the public interest.
For notes see p. 378.

376

No. 20—Security Bank,
Webster, S. Dak.
to merge with
Farmers and Merchants State Bank,
Roslyn, S. Dak.

Resources
(in millions
of dollars)

Banking offices
In
operation

4.6

To be
operated

SUMMARY REPORT BY ATTORNEY GENERAL (11-8-66)

The proposed merger of Security Bank (deposits of $4.2 million), and
Farmers and Merchants (deposits of $820,000), involves 2 small banks
about 12 miles apart. The application shows that Farmers and Merchants
is the only bank located within its service area although 2 other banks may
be competing on the periphery of this area. There appears to be no
substantial competition between Security Bank and Farmers and Merchants.
We conclude that the merger would not have an adverse effect on
competition.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (12-22-66)

Webster, population about 2,700, is located in northeastern South Dakota
about 12 miles south of Roslyn (population 260). Each of the 2 banks
serves primarily its own community, and there is no significant competition
between them. In June of 1966, control of the Roslyn bank was acquired
by interests controlling Security Bank.
The nearest other banking offices to Roslyn and Webster are operated
by 6 small banks, which are situated from 11 to 24 miles distant and
range in deposit size from about $1 million to $4 million. These banks
draw the vast bulk of their business from their own communities and
would not be adversely affected by the merger.
The replacement of the Roslyn bank by an office of Security Bank
would have no adverse effect on competition and would bring to the
Roslyn area par banking, an increased lending limit, and other improved
banking services.

No. 21—The Bank of Virginia,
Richmond, Va.
to merge with
The Bank of LaCrosse,
LaCrosse, Va.

260.1

6.5

SUMMARY REPORT BY ATTORNEY GENERAL (10-31-66)

The Bank of Virginia (hereinafter referred to as the Charter Bank),
with assets of $260 million, operates 27 offices in 7 cities and 4 counties
For notes see p. 378.

377

Resources
(in millions
of dollars)

Banking offices
In
operation

To be
operated

SUMMARY REPORT BY ATTORNEY GENERAL—Cont.

in Virginia. The Charter Bank proposes to merge with LaCrosse Bank,
which has assets of $6.9 million. The closest branch of the Charter Bank
is 13 miles distant. The application states there is virtually no competition
between the 2 banks. Moreover, applicable State law would prevent the
Charter Bank from entering LaCrosse Bank's service area through the
establishment of a de novo branch. Accordingly, the proposed merger
would not appear to eliminate any significant actual or potential competition between the applicant banks.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (12-29-66)

Virginia Bank is one of the 7 subsidiary banks of Virginia Commonwealth Bankshares, Inc., a registered bank holding company and the
fourth largest banking organization in the State. The holding company's
subsidiaries hold about 6 per cent of the deposits held by the approximately 250 banks in Virginia, and the proposal would increase its share
of State deposits by about .1 per cent. No affiliate of the holding company
has offices nearer to LaCrosse Bank than Virginia Bank.
The small community of LaCrosse (population 750) is located in
Mecklenburg County about 80 miles southwest of Richmond. LaCrosse
Bank operates its single branch at South Hill (population 3,000), about 3
miles northwest of LaCrosse. The nearest office of Virginia Bank is at
Boydton (population 450), also in Mecklenburg County, about 16 miles
west of the LaCrosse-South Hill area. There is only a minor degree of
competition between LaCrosse Bank and Virginia Bank, and there is
nothing to indicate that they would become significant competitors if the
transaction were not consummated. Virginia Bank is precluded by State
law from branching into LaCrosse and South Hill except by merger.
The principal competition for LaCrosse Bank is provided by a bank
headquartered in South Hill and by the Broadnax branch (4 miles east of
LaCrosse) of a Lawrenceville bank. It does not appear that either of
these banks would be adversely affected by the merger. The replacement
of LaCrosse Bank by offices of Virginia Bank, with its larger lending limit
and broader range of bank services, would afford added convenience for
those businesses in the LaCrosse/South Hill area that presently deal with
out-of-area banks and other financial institutions. Moreover, it is expected
that the availability of full-scale banking services will have a favorable
influence on the local economy.
1
During 1966 the Board disapproved 1 merger, etc. However, under Section 18 (c) of
the Federal Deposit Insurance Act, only those transactions approved by the Board must
be2 described in its ANNUAL REPORT to Congress.
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.

378

THE FEDERAL RESERVE

SYSTEM

BOUNDARIES OF FEDERAL RESERVE DISTRICTS AND THEIR BRANCH TERRITORIES

HAWAII

Jane 23. 1965

Legend
• Boundaries of Federal Reserve Districts
Boundaries of Federal Reserve Branch Territories
© Board of Governors of the Federal Reserve System
<> Federal Reserve Bank Cities
•
• Federal Reserve Branch Cities

NOTE.—For a complete description of each Federal Reserve district see Description of Federal Reserve
Districts—Territorial Composition of Each Head Office and Branch, Including Population and Land Area,
a. pamphlet published in April 1966. This pamphlet is available upon request from the Division of Administrative Services, Board of Governors of the Federal Reserve System, Washington, D.C. 20551.

FEDERAL RESERVE DIRECTORIES AND MEETINGS

BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
(December 31, 1966)

WM. MCC. MARTIN, JR., of New York, Chairman
J. L. ROBERTSON of Nebraska, Vice Chairman

Term expires
January 31, 1970
January 31, 1978

CHAS. N. SHEPARDSON of Texas
GEORGE W. MITCHELL of Illinois
J. DEWEY DAANE of Virginia
SHERMAN J. MAISEL of California
ANDREW F. BRIMMER of Pennsylvania

January
January
January
January
January

RALPH A. YOUNG, Senior Adviser to the Board
ROBERT C. HOLLAND, Adviser to the Board
ROBERT SOLOMON, Adviser to the Board
CHARLES MOLONY, Assistant to the Board
ROBERT L. CARDON, Legislative Counsel
CLARKE L. FAUVER, Assistant to the Board
OFFICE OF THE SECRETARY
MERRITT SHERMAN, Secretary

KENNETH A. KENYON, Assistant Secretary
ELIZABETH L. CARMICHAEL, Assistant Secretary
ARTHUR L. BROIDA, Assistant Secretary
KARL E. BAKKE, Assistant Secretary
LEGAL DIVISION

HOWARD H. HACKLEY, General Counsel

DAVID B. HEXTER, Associate General Counsel
THOMAS J. O'CONNELL, Assistant General Counsel
JEROME W. SHAY, Assistant General Counsel
WILSON L. HOOFF, Assistant General Counsel
DIVISION OF RESEARCH AND STATISTICS
DANIEL H. BRILL, Director

ALBERT R. KOCH, Deputy Director
J. CHARLES PARTEE, Associate Director
KENNETH B. WILLIAMS, Adviser

STEPHEN H. AXILROD, Associate Adviser
LYLE E. GRAMLEY, Associate Adviser
STANLEY J. SIGEL, Associate Adviser
TYNAN SMITH, Associate Adviser

380

31,
31,
31,
31,
31,

1968
1976
1974
1972
1980

BOARD of GOVERNORS^-Cont.
DIVISION OF INTERNATIONAL FINANCE
ROBERT SOLOMON, Director

ROBERT L. SAMMONS, Associate Director
A. B. HERSEY, Adviser
REED J. IRVINE, Adviser
SAMUEL I. KATZ, Adviser
JOHN E. REYNOLDS, Adviser
RALPH C. WOOD, Adviser
DIVISION OF BANK OPERATIONS
JOHN R. FARRELL, Director

M. B. DANIELS, Assistant Director
JOHN N. KILEY, JR., Assistant Director
DIVISION OF EXAMINATIONS
FREDERIC SOLOMON, Director

BRENTON C. LEAVITT, Assistant Director
JAMES C. SMITH, Assistant Director

LLOYD M. SCHAEFFER, Chief Federal Reserve Examiner
FREDERICK R. DAHL, Assistant Director

CHARLES C. WALCUTT, Assistant Chief Federal Reserve Examiner
DIVISION OF PERSONNEL ADMINISTRATION
EDWIN J. JOHNSON, Director

JOHN J. HART, Assistant Director
DIVISION OF ADMINISTRATIVE SERVICES
JOSEPH E. KELLEHER, Director

HARRY E. KERN, Assistant Director
OFFICE OF THE CONTROLLER
JOHN KAKALEC, Controller
OFFICE OF DEFENSE PLANNING
INNIS D. HARRIS, Coordinator
DIVISION OF DATA PROCESSING
LAWRENCE H. BYRNE, JR., Director

LEE W. LANGHAM, Assistant Director
DAVID S. STAIGER, Assistant Director

381

FEDERAL OPEN MARKET COMMITTEE
(December 31, 1966)
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)
J. DEWEY DAANE (Board of Governors)

W. BRADDOCK HICKMAN (Elected by Federal Reserve Banks of Cleveland and
Chicago)
WATROUS H. IRONS (Elected by Federal Reserve Banks of Atlanta, St. Louis,
and Dallas)
SHERMAN J. MAISEL (Board of Governors)
GEORGE W. MITCHELL (Board of Governors)

J. L. ROBERTSON (Board of Governors)
CHAS. N. SHEPARDSON (Board of Governors)

OFFICERS
MERRITT SHERMAN,

ROBERT C. HOLLAND, Secretary
GEORGE GARVY,

Assistant Secretary
KENNETH A. KENYON,

Assistant Secretary
ARTHUR L. BROIDA,

Assistant Secretary
CHARLES MOLONY,

Assistant Secretary
HOWARD H. HACKLEY,

General Counsel
DAVID B. HEXTER,

Assistant General Counsel
DANIEL H. BRILL,

Econom ist
DAVID P. EASTBURN,

Associate Economist
RALPH T. GREEN,

Associate Economist
ALBERT R. KOCH,

Associate Economist
MAURICE MANN,

Associate Economist
J. CHARLES PARTEE,

Associate Economist
ROBERT SOLOMON,

Associate Economist
CLARENCE W. TOW,

A ssociate Econom ist
RALPH A. YOUNG,

Associate Economist
Associate Economist
ALAN R. HOLMES, Manager, System Open Market Account
CHARLES A. COOMBS, Special Manager, System Open Market Account
During 1966 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. 111-201 of this Report).

382

FEDERAL ADVISORY COUNCIL
(December 31, 1966)
MEMBERS
District No. 1—John Simmen, President, Industrial National Bank of Rhode
Island, Providence, Rhode Island.
District No. 2—William H. Moore, Chairman of the Board, Bankers Trust
Company, New York, New York.
District No. 3—William L. Day, Chairman, The First Pennsylvania Banking
and Trust Company, Philadelphia, Pennsylvania.
District No. 4—Leland A. Stoner, President, The Ohio National Bank of
Columbus, Columbus, Ohio.
District No. 5—John F. Watlington, Jr., President, Wachovia Bank and Trust
Company, Winston-Salem, North Carolina.
District No. 6—Sam M. Fleming, President, Third National Bank in Nashville,
Nashville, Tennessee.
District No. 7—Henry T. Bodman, Chairman of the Board, National Bank of
Detroit, Detroit, Michigan.
District No. 8—A. M. Brinkley, Jr., Chairman of the Board and Chief Executive Officer, Citizens Fidelity Bank and Trust Company, Louisville, Kentucky.
District No. 9—John A. Moorhead, President, Northwestern National Bank of
Minneapolis, Minneapolis, Minnesota.
District No. 10—Roger D. Knight, Jr., Chairman of the Board, Denver United
States National Bank, Denver, Colorado.
District No. 11—Robert H. Stewart, III, Chairman of the Board, First National Bank in Dallas, Dallas, Texas.
District No. 12—Ransom M. Cook, Chairman, Executive Committee, Wells
Fargo Bank, San Francisco, California.
OFFICERS
JOHN A. MOORHEAD, President

RANSOM M. COOK, Vice President

HERBERT V. PROCHNOW, Secretary

WILLIAM J. KORSVIK, Assistant Secretary

EXECUTIVE COMMITTEE
JOHN A. MOORHEAD, ex officio
RANSOM M. COOK, ex officio
WILLIAM L. DAY
JOHN F. WATLINGTON, JR.
SAM M. FLEMING

Meetings of the Federal Advisory Council were held on February 14-15,
June 20-21, September 19-20, and November 14-15, 1966. The Board of
Governors met with the Council on February 15, June 21, September 20, and
November 15. 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.

383

FEDERAL RESERVE BANKS and BRANCHES
(December 31, 1966)
CHAIRMEN AND DEPUTY CHAIRMEN OF BOARDS OF DIRECTORS
Federal Reserve
T»

Bank of—

Chairman and
r: A

i T»

_. .

Deputy Chairman

Federal Reserve Agent

Boston

Erwin D. Canham

William Webster

New York

Everett N. Case

Kenneth H. Hannan

Philadelphia

Willis J. Winn

Bayard L. England

Cleveland

Joseph B. Hall

Logan T. Johnston

Richmond

Edwin Hyde

William H. Grier

Atlanta

Jack Tarver

Edwin I. Hatch

Chicago

Franklin J. Lunding

John W. Sheldon

St. Louis

Frederic M. Peirce

Smith D. Broadbent, Jr.

Minneapolis

Judson Bemis

Robert F. Leach

Kansas City

Homer A. Scott

Dolph Simons

Dallas

Carl J. Thomsen

Max Levine

Frederic S. Hirschler

John D. Fredericks

San Francisco

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 1-2, 1966.
Mr. Hoadley, Chairman of the Federal Reserve Bank of Philadelphia, and
Mr. Rebsamen, Chairman of the Federal Reserve Bank of St. Louis, who were
elected Chairman and Vice Chairman of the Conference, respectively, in
December 1965, resigned as Reserve Bank directors early in 1966, and thus
terminated their association with the Conference. Mr. Tarver, Chairman of
the Federal Reserve Bank of Atlanta, who was the other member of the Executive Committee, served as Chairman of the Conference until the close of
the 1966 meeting.
On December 2, 1966, Mr. Hyde, Chairman of the Federal Reserve Bank
of Richmond, was elected Chairmari of the Conference and of the Executive
Committee to serve for the succeeding year; Mr. Thomsen, Chairman of the
Dallas Bank, was elected Vice Chairman of the Conference and a member of
the Executive Committee; and Mr. Winn, Chairman of the Federal Reserve
Bank of Philadelphia, was elected as the other member of the Executive Committee.

384

FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.

DIRECTORS
Class A and Class B directors are elected by the member banks of the district. Class C directors are appointed by the Board of Governors of the
Federal Reserve System.
The Class A directors are chosen as representatives of member banks and,
as a matter of practice, are active officers of member banks. The Class B
directors may not, under the law, be officers, directors, or employees of banks.
At the time of their election they must be actively engaged in their district in
commerce, agriculture, or some other industrial pursuit.
The Class C directors may not, under the law, be officers, directors, employees, or stockholders of banks. They are appointed by the Board of Governors as representatives not of any particular group or interest, but of the
public interest as a whole.
Federal Reserve Bank branches have either 5 or 7 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:
Darius M. Kelley

President, The Orange National Bank, Orange,
Mass
William I. Tucker
President, Vermont National Bank, Brattleboro, Vt
Lawrence H. Martin.... President, The National Shawmut Bank of
Boston, Mass

1966
1967
1968

Class B:
William R. Robbins. . . .Vice President for Finance, United Aircraft
Corporation, East Hartford, Conn
1966
James R. Carter
President, Nashua Corporation, Nashua, N.H. 1967
W. Gordon Robertson. . President, Bangor Punta Alegre Sugar Corporation, Bangor, Maine
1968
Class C.William Webster
Erwin D. Canham
Charles W. Cole

Chairman and Chief Executive Officer, New
England Electric System, Boston, Mass
Editor in Chief, The Christian Science Monitor,
Boston, Mass
President Emeritus, Amherst College, Mass.

1966
1967
1968

385

ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.

DIRECTORS—Cont.
Class A:
Robert H. Fearon
George A. Murphy
Robert G. Cowan

District 2 — N e w York
President, The Oneida Valley National Bank of
Oneida, N.Y
Chairman of the Board, Irving Trust Company,
New York, N.Y
Chairman of the Board, National Newark and
Essex Bank, Newark, N J

Class B:
Albert L. Nickerson.... Chairman of the Board, Mobil Oil Corporation, New York, N.Y
Arthur K. Watson
Chairman of the Board, IBM World Trade
Corporation, and Vice Chairman of the
Board, International Business Machines
Corporation, Armonk, N.Y
Milton C. Mumford.... Chairman of the Board, Lever Brothers Company, New York, N.Y

Term
expires
Dec. 31

1966
1967
1968

1966

1967
1968

Class C.Everett N. Case

President, Alfred P. Sloan Foundation, New
York, N.Y
James M. Hester
President, New York University, New York,
N.Y
Kenneth H. H a n n a n . . . . Executive Vice President, Union Carbide Corporation, New York, N.Y

1966
1967
1968

Buffalo Branch

Appointed by Federal Reserve Bank:
Charles W. Millard, Jr.. .Chairman of the Board, Manufacturers and
Traders Trust Company, Buffalo, N.Y
J. Wallace Ely
President, Security Trust Company of Rochester, N.Y
John D. Hamilton
Chairman of the Board, Marine Midland Chautauqua National Bank, Jamestown, N . Y . . . .
Arthur S. Hamlin
President, The Canandaigua National Bank
and Trust Company, Canandaigua, N . Y . . . .
Appointed by Board of Governors:
Thomas E. LaMont
Farmer, Albion, Orleans County, N.Y
Robert S. Bennett
General Manager, Lackawanna Plant, Bethlehem Steel Corporation, Buffalo, N.Y
Maurice R. F o r m a n . . . . President, B. Forman Company, Rochester,
N.Y

386

1966
1967
1967
1968
1966
1967
1968

FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.

DIRECTORS—Cont.

District 3 — Philadelphia

Class A:
Charles R. Sharbaugh.. .Senior Vice President, United States National
Bank, Ebensburg, Pa
Lloyd W. Kuhn
President, The Bendersville National Bank,
Bendersville, Pa
Howard C. Petersen.... Chairman of the Board, Fidelity-Philadelphia
Trust Company, Philadelphia, Pa

Term
expires
r>ec. 31

1966
1967
1968

Class B:
Leonard P. Pool

Chairman of the Board, Air Products and
Chemicals, Inc., Allentown, Pa
Philip H. Glatfelter, III..President, P. H. Glatfelter Company, Spring
Grove, Pa
Ralph K. Gottshall
Chairman of the Board, Atlas Chemical Industries, Inc., Wilmington, Del

1966
1967
1968

Class C:
Bayard L. England

Chairman of the Board, Atlantic City Electric
Company, Atlantic City, N.J
Willis J. Winn
Dean, Wharton School of Finance and Commerce, University of Pennsylvania, Philadelphia, Pa.. ,
D. Robert Yarnall, Jr.. .President, Yarway Corporation, Philadelphia,
Pa

1966

1967
1968

District 4 — Cleveland
Class A:
Richard R. Hollington.. President, The Ohio Bank and Savings Company, Findlay, Ohio
Seward D. Schooler
President, Coshocton National Bank, Coshocton, Ohio
Everett D. Reese
Chairman of the Board, The City National
Bank and Trust Company of Columbus, Ohio
Class B:
Edwin J. Thomas

David A. Meeker

Walter K. Bailey

Chairman of the Executive and Finance Committees, The Goodyear Tire and Rubber
Company, Akron, Ohio
Chairman of the Board and Chief Executive
Officer, The Hobart Manufacturing Company, Troy, Ohio
Chairman of the Board, The Warner and
Swasey Company, Cleveland, Ohio

1966
1967
1968

1966

1967
1968

387

ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.

DIRECTORS—Com.
Class C.Albert G. Clay
Joseph B. Hall
Logan T. Johnston

District 4 — Cleveland — Cont.

Term
expires
Dec. 31

President, Clay Tobacco Company, Mt. Sterling, Ky
1966
Director, former Chairman of the Board, The
Kroger Co., Cincinnati, Ohio
1967
Chairman of the Board, Armco Steel Corporation, Middletown, Ohio
1968

Cincinnati Branch

Appointed by Federal Reserve Bank:
John W. Humphrey
President, The Philip Carey Manufacturing
Company, Cincinnati, Ohio
James B. Pugh
President, The Security Central National Bank
of Portsmouth, Ohio
Kroger Pettengill
President, The First National Bank of Cincinnati, Ohio
Jacob H. Graves
President, The Second National Bank and Trust
Company of Lexington, Ky

1966
1966
1967
1968

Appointed by Board of Governors:
Walter C. Langsam
President, University of Cincinnati, Ohio
1966
Barney A. Tucker
President, Burley Belt Fertilizer Company, Lexington, Ky
1967
R. Stanley Laing
President, The National Cash Register Company, Dayton, Ohio
1968

Pittsburgh Branch

Appointed by Federal Reserve Bank:
Charles M. Beeghly
Chairman of the Board, Jones and Laughlin
Steel Corporation, Pittsburgh, Pa
Joseph S. Armstrong
President, The Grove City National Bank,
Grove City, Pa
Edwin H. Keep
President, First National Bank of Meadville, Pa.
Robert C. Hazlett
President, Wheeling Dollar Savings and Trust
Company, Wheeling, W. Va

388

1966
1966
1967
1968

FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.

DIRECTORS—Cont.

District 4 — Cleveland — Cont.

Term
expires
Dec. 31

Pittsburgh Branch — Cont.

Appointed by Board of Governors:
Lawrence E. Walkley... President, Westinghouse Air Brake Company,
Pittsburgh, Pa
1966
Robert Dickey, III
President, Dravo Corporation, Pittsburgh, Pa. 1967
F. L. Byrom
President, Koppers Company, Inc., Pittsburgh,
Pa
1968

District 5 — Richmond
Class A:
Robert T. Marsh, Jr
George Blanton, Jr
William A. Davis

Honorary Chairman of the Board, First and
Merchants National Bank, Richmond, Va... 1966
President, First National Bank, Shelby, N. C.. 1967
President, The Peoples Bank of Mullens, W. Va. 1968

Class B:
Robert E. L. Johnson.. .Formerly Chairman of the Board, Woodward
and Lothrop, Inc., Washington, D. C
1966
Robert R. Coker
President, Coker's Pedigreed Seed Company,
Hartsville, S. C
1967
Charles D. Lyon
President, The Potomac Edison Company,
Hagerstown, Md
1968
Class C.William H. Grier
Edwin Hyde
Wilson H. Elkins

President, Rock Hill Printing and Finishing
Company, Rock Hill, S. C
1966
President, Miller and Rhoads, Inc., Richmond,
Va
1967
President, University of Maryland, College
Park, Md
1968

Baltimore Branch

Appointed by Federal Reserve Bank:
John P. Sippel
President, The Citizens National Bank, Laurel,
Md
1966
Martin Piribek
Executive Vice President, The First National
Bank of Morgantown, W. Va
1967

389

ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.

DIRECTORS—Cont.

District 5 — Richmond — Cont.

Term
expires
Dec. 31

Baltimore Branch — Cont.

Appointed by Federal Reserve Bank—Cont.
Adrian L. McCardell
Joseph B. Browne

President, First National Bank of Maryland,
Baltimore, Md
1967
President, Union Trust Company of Maryland,
Baltimore, Md
1968

Appointed by Board of Governors:
Arnold J. Kleff, Jr
Manager, Baltimore Refinery, American Smelting & Refining Company, Baltimore, Md... 1966
Leonard C. Crewe, Jr... .Chairman of the Board, Maryland Specialty
Wire, Inc., Cockeysville, Md
1967
E. Wayne Corrin
President, Consolidated Gas Supply Corporation, Clarksburg, W. Va
1968

Charlotte Branch

Appointed by Federal Reserve Bank:
W. W. McEachern
Chairman and Chief Executive Officer, The
South Carolina National Bank, Greenville,
S.C
Wallace W. Brawley. .. .President, National Bank of Commerce of Spartanburg (organizing), Spartanburg, S.C
C. C. Cameron
Chairman of the Board, First Union National
Bank of North Carolina, Charlotte, N.C....
G. Harold Myrick
Executive Vice President and Trust Officer,
First National Bank, Lincolnton, N.C

1966
1967
1967
1968

Appointed by Board of Governors:
James A. Morris
Dean, School of Business Administration, University of South Carolina, Columbia, S.C... 1966
William B. McGuire
President, Duke Power Company, Charlotte,
N.C
1967
John L. Fraley
Executive Vice President, Carolina Freight Carriers Corporation, Cherryville, N.C
1968

390

FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.

DIRECTORS—Cont.
Class A :
George S. Craft
D. C. Wadsworth, Sr
John W. Gay
Class B:
W. Maxey Jarman
James H. Crow, Jr
Harry T. Vaughn
Class C.John A. Hunter
Jack Tarver
Edwin I. Hatch

District 6 — Atlanta

Term
expires
])ec% si

Chairman of the Board, Trust Company of
Georgia, Atlanta, Ga
1966
President, The American National Bank, Gadsden, Ala
1967
President, The First National Bank, Scottsboro,
Ala
1968
Chairman, Genesco, Inc., Nashville, Tenn
1966
Vice President, The Chemstrand Corporation,
Decatur, Ala
1967
President, United States Sugar Corporation,
Clewiston, Fla
1968
President, Louisiana State University, Baton
Rouge, La
1966
President, Atlanta Newspapers, Inc., Atlanta,
Ga
1967
President, Georgia Power Company, Atlanta,
Ga
1968

Birmingham Branch

Appointed by Federal Reserve Bank:
John A. Hand
President, The First National Bank of Birmingham, Ala
Rex J. Morthland
President, The Peoples Bank & Trust Company,
Selma, Ala
C. Willard Nelson
President, State National Bank, Decatur, Ala..
Major W. Espy, Sr
Chairman and President, The Headland National Bank, Headland, Ala

1966
1967
1967
1968

Appointed by Board of Governors:
Mays E. Montgomery.. .General Manager, Dixie Home Feeds Company, Athens, Ala
1966
C. Caldwell Marks
Chairman of the Board, Owen-Richards Company, Inc., Birmingham, Ala
1967
Eugene C. Gwaltney, Jr.Vice President and General Superintendent,
Russell Mills, Inc., Alexander City, Ala
1968

391

ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.

DIRECTORS—Cont.

District 6 — Atlanta — Cont.

Term
expires
Dec. 31

Jacksonville Branch

Appointed by Federal Reserve Bank:
William H. Dial
President, The First National Bank at Orlando,
Fla
William R. Barnett
Chairman, Barnett National Bank of Jacksonville, Fla
Dudley Cole
President, Florida First National Bank at Ocala,
Fla
Andrew P. Ireland
President, The American National Bank, Winter Haven, Fla

1966
1967
1967
1968

Appointed by Board of Governors:
J. Ollie Edmunds
President, Stetson University, DeLand, Fla.... 1966
Douglas M. Pratt
President, National City Lines, Inc., Tampa,
Fla
1967
Castle W. Jordan
President, Ryder System, Inc., Miami, Fla
1968
Nashville Branch

Appointed by Federal Reserve Bank:
William F. Earthman, Jr.. President, Commerce Union Bank, Nashville,
Tenn
S. N. Brown
President, Union National Bank, Fayetteville,
Tenn
J. A. Hill
President, Hamilton National Bank, Morristown, Tenn
Moses E. Dorton
President, The First National Bank of Crossville, Tenn

1966
1967
1967
1968

Appointed by Board of Governors:
James E. Ward
President, Baird-Ward Printing Company,
Nashville, Tenn
1966
Robert M. Williams. . . .President, ARO, Inc., Arnold Engineering Development Center, Tullahoma, Tenn
1967
Alexander Heard
Chancellor, Vanderbilt University, Nashville,
Tenn
1968
New Orleans Branch

Appointed by Federal Reserve Bank:
L. Y. Foote
Chairman of the Board, First National Bank of
Hattiesburg, Miss
1966

392

FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.

DIRECTORS—Cont.

District 6 — Atlanta — Cont.

Term
expires
Dec. 31

New Orleans Branch — Cont.

Appointed by Federal Reserve Bank—Cont.
Robert M. Hearin
President, First National Bank of Jackson,
Miss
1967
W. Richard White
President, First National Bank of Jefferson Parish, Gretna, La
1967
Donald L. Delcambre... President, State National Bank, New Iberia, La. 1968
Appointed by Board of Governors:
George Benjamin Blair. .General Manager, American Rice Growers Cooperative, Lake Charles, La
1966
Kenneth R. Giddens... .President, WKRG-TV, Inc., Mobile, Ala
1967
Frank G. Smith, Jr
Vice President, Mississippi Power and Light
Co., Jackson, Miss
1968

District 7 — Chicago
Class A:
Kenneth V. Zwiener.... Chairman of the Board, Harris Trust and Savings Bank, Chicago, 111
1966
John H. Crocker
Chairman of the Board, The Citizens National
Bank of Decatur, 111
1967
Harry W. Schaller
President, The Citizens First National Bank of
Storm Lake, Iowa
1968
Class B:
G. F. Langenohl
William E. Rutz
Joseph O. Waymire

Formerly Treasurer and Assistant Secretary,
Allis-Chalmers Manufacturing Company,
Milwaukee, Wis
1966
Director, Giddings and Lewis Machine Tool
Company, Fond du Lac, Wis
1967
Vice President and Treasurer, Eli Lilly and
Company, Indianapolis, Ind
1968

Class C.John W. Sheldon

President, Chas. A. Stevens and Company, Chicago, 111
1966
Franklin J. Lunding.... Chairman, Finance Committee, Jewel Companies, Inc., Chicago, 111
1967
Elvis J. Stahr
President, Indiana University, Bloomington,
Ind
1968

393

ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.
Term
expires
DIRECTORS—Cont.

District 7 — Chicago — C o n t

Dec. 31

Detroit Branch

Appointed by Federal Reserve Bank:
Franklin H. Moore
President, The Commercial and Savings Bank,
St. Clair, Mich
John H. French, Jr
President, City National Bank of Detroit, 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 Co.,
Grand Haven, Mich
Appointed by Board of Governors:
Max P. Heavenrich, Jr.. .President and General Manager, Heavenrich
Bros. & Company, Saginaw, Mich
James William Miller... President, Western Michigan University, Kalamazoo, Mich
Guy S. Peppiatt
Chairman of the Board, Federal-Mogul Corporation, Detroit, Mich

1966
1966
1967
1968

1966
1967
1968

District 8 — St. Louis
Class A:
H. Lee Cooper

President, Ohio Valley National Bank of Henderson, Ky
Bradford Brett
President, The First National Bank of Mexico,
Mo
Harry F. Harrington.... Chairman of the Board, The Boatmen's National Bank of St. Louis, Mo

Class B:
Roland W. Richards
Mark Townsend
Sherwood J. Smith

Senior Vice President, Laclede Steel Company,
St. Louis, Mo
Chairman of the Board, Townsend Lumber
Company, Inc., Stuttgart, Ark
Vice President, Whirlpool Corporation, Evansville, Ind

Class C.William King Self
President, Riverside Industries, Marks, Miss...
Smith D. Broadbent, Jr..Owner, Broadbent Hybrid Seed Co., Cadiz,
Ky
Frederic M. Peirce
President, General American Life Insurance
Company, St. Louis, Mo

394

1966
1967
1968

1966
1967
1968
1966
1967
1968

FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.
DIRECTORS—Cont.

District 8 — St. Louis — Cont.

Term
expires
Dec. 31

Little Rock Branch

Appointed by Federal Reserve Bank:
R. M. LaGrone, Jr
President, The Citizens National Bank of Hope,
Ark
Cecil W. Cupp
Chariman of the Board and Chief Executive
Officer, Arkansas Bank and Trust Company,
Hot Springs, Ark
Ross E. Anderson
Chairman of the Board, The Commercial National Bank of Little Rock, Ark
Louis E. Hurley
President, The Exchange Bank and Trust Company, El Dorado, Ark

1966

1966
1967
1968

Appointed by Board of Governors:
Frederick P. Blanks
Planter, Parkdale, Ark
1966
Reeves E. Ritchie
President, Arkansas Power and Light Company, Little Rock, Ark
1967
Carey V. Stabler
President, Little Rock University, Little Rock,
Ark
1968
Louisville Branch
Appointed by Federal Reserve Bank:

Ray A. Barrett
Wm. G. Deatherage
J. E. Miller
John H. Hard wick

President, The State Bank of Salem, Ind
1966
President, Planters Bank & Trust Co., Hopkinsville, Ky
1966
Executive Vice President, Sellersburg State
Bank, Sellersburg, Ind
1967
President, The Louisville Trust Company,
Louisville, Ky
1968

Appointed by Board of Governors:
Lisle Baker, Jr
Executive Vice President & General Manager,
The Courier-Journal & Louisville Times
Company, Louisville, Ky
1966
Richard T. Smith
Farmer, Madisonville, Ky
1967
C. Hunter Green
Vice President and General Manager, Southern Bell Telephone and Telegraph Company,
Louisville, Ky
1968

395

ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.

DIRECTORS—Cont.

District 8 — St. Louis — Cont.

Term
expires
Dec. 31

Memphis Branch

Appointed by Federal Reserve Bank:
Allen Morgan
President, The First National Bank of Memphis, Tenn
Con T. Welch
President, Citizens Bank, Savanffah, Tenn.....
Leon C. Castling
President, First National Bank at Marianna,
Ark
Wade W. Hollowell
President, The First National Bank of Greenville, Miss
Appointed by Board of Governors:
Edward B. LeMaster... .President, Edward LeMaster Company, Inc.,
Memphis, Tenn
<
j
James S. Williams
Assistant Vice President, American Greetings
Corporation, Osceola, Ark
Sam Cooper
President, HumKo Products Division, National Dairy Products Corporation, Memphis, Tenn

1966
1966
1967
1968

1966
1967

1968

District 9 — Minneapolis
Class A:
Harold C. Refling
John F. Nash
Curtis B. Mateer
Class B:
Ray C. Lange
Joyce A. Swan
John H. Toole
Class C:
Judson Bemis
Byron W. Reeve
Robert F. Leach

396

Executive Vice President, First National Bank
in Bottineau, N. Dak
President, The American National Bank of St.
Paul, Minn
Executive Vice President, The Pierre National
Bank, Pierre, S. Dak
President, Chippewa Canning Company, Inc.,
Chippewa Falls, Wis
Executive Vice President & Publisher, Minneapolis Star and Tribune, Minneapolis, Minn..
President, Toole and Easter Co., Missoula,
Mont
President, Bemis Company, Inc., Minneapolis,
Minn
President, Lake Shore, Inc., Iron Mountain,
Mich
Attorney, Oppenheimer, Hodgson, Brown,
Wolff & Leach, St. Paul, Minn

1966
1967
1968

FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.

DIRECTORS—Cont.

District 9 — Minneapolis — Cont.

Term
expires
Dec. 31

Helena Branch

Appointed by Federal Reserve Bank:
Charles H. Brocksmith.. President, First Security Bank of Glasgow
N. A., Glasgow, Mont
1966
Glenn H. Larson
President, First State Bank of Thompson Falls,
Mont
1966
B. Meyer Harris
President, The Yellowstone Bank, Laurel,
Mont
1967
Appointed by Board of Governors:
C. G. McClave
President and General Manager, Montana
Flour Mills Co., Great Falls, Mont
1966
Edwin G. Koch
President, Montana College of Mineral Science and Technology, Butte, Mont
1967
District 10 — Kansas City
Class A:
Eugene H. Adams
Kenneth H. Peters
Burton L. Lohmuller
Class B:
Fred W. Gilmore
Robert A. Olson
Stanley Learned
Class C:
Homer A. Scott
Dolph Simons
Dean A. McGee

President, The First National Bank of Denver,
Colo
1966
President, The First State Bank of Larned,
Kans
1967
Chairman of the Board, The First National
Bank of Centralia, Kans
1968
President, Union Stock Yards Company of
Omaha, Nebr
1966
President, Kansas City Power and Light Company, Kansas City, Mo
1967
President, Phillips Petroleum Company, Bartlesville, Okla
1968
Vice President and District Manager, Peter
Kiewit Sons' Company, Sheridan, Wyo
1966
Editor and President, The Lawrence Daily
Journal-World, Lawrence, Kans
1967
Chairman of the Board, Kerr-McGee Corporation, Oklahoma City, Okla
1968
Denver Branch

Appointed by Federal Reserve Bank:
J.P.Brandenburg
President, The First State Bank of Taos,
N. Mex
1966

397

ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.

DIRECTORS—Cont.

District 10 — Kansas City — Cont,

Term
expires
Dec. 31

Denver Branch — Cont.

Appointed by Federal Reserve Bank—Cont.
Theodore D. Brown
President, The Security State Bank, Sterling,
Colo
1966
Armin B. Barney
Chairman of the Board, Colorado Springs
National Bank, Colorado Springs, Colo
1967
Appointed by Board of Governors:
R. A. Burghart
Ingle Land and Cattle Company, Colorado
Springs, Colo
1966
Cris Dobbins
President and Director, Ideal Cement Company, Denver, Colo
1967
Oklahoma City Branch

Appointed by Federal Reserve Bank:
Guy L. Berry, Jr
President, The American National Bank and
Trust Company, Sapulpa, Okla
1966
C. M. Crawford
President, First National Bank, Frederick,
Okla
1966
Howard J. Bozarth
President, City National Bank and Trust Company, Oklahoma City, Okla
1967
Appointed by Board of Governors:
Otto C. Barby
Attorney and rancher, Beaver, Okla
1966
C. W. Flint, Jr
Chairman of the Board, Flint Steel Company,
Tulsa, Okla
1967
Omaha Branch

Appointed by Federal Reserve Bank:
W. B. Millard, Jr
Chairman of the Board, Omaha National
Bank, Omaha, Nebr
1966
Henry D. Kosman
Chairman of the Board and President, Scottsbluff National Bank, Scottsbluff, Nebr
1967
John W. Hay, Jr
President, Rock Springs National Bank, Rock
Springs, Wyo
1967
Appointed by Board of Governors:
Clifford Morris Hardin. .Chancellor, The University of Nebraska, Lincoln, Nebr
1966
John T. Harris
Merchant and cattleman, McCook, Nebr
1967

398

FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.

DIRECTORS—Cont.
Class A:
Murray Kyger
J. Edd McLaughlin
Ralph A. Porter
Class B:
D. A. Hulcy
H. B. Zachry
J. B. Perry, Jr
Class C:
Max Levine
Carl J. Thomsen
Kenneth S. Pitzer

District 11 — Dallas
Chairman of the Board, The First National
Bank of Fort Worth, Tex
President, Security State Bank and Trust Company, Rails, Tex
President, The State National Bank of Denison, Tex
Chairman of the Board, Lone Star Gas Company, Dallas, Tex
Chairman of the Board, H. B. Zachry Company, San Antonio, Tex
President and General Manager, Perry Brothers, Inc., Lufkin, Tex
Retired Chairman of the Board, Foley's,
Houston, Tex
Senior Vice President, Texas Instruments, Inc.,
Dallas, Tex
President, Rice University, Houston, Tex

Term
expires
Dec. 31

1966
1967
1968

El Paso Branch
Appointed by Federal Reserve Bank:
Dick Rogers
President, First National Bank in Alpine, Tex..
Robert W. Heyer
President, Southern Arizona Bank and Trust
Company, Tucson, Ariz
Robert F. Lockhart
Vice President, The State National Bank of El
Paso, Tex
Joe B. Sisler
President, The Clovis National Bank, Clovis,
N. Mex
Appointed by Board of Governors:
C. Robert McNally, Jr.. .Rancher, Roswell, N. Mex
Gordon W. Foster
Director, Shop Rite Foods, Inc., El Paso, Tex.
Joseph M. Ray
President, The University of Texas at El Paso,
Tex

1966
1966
1967
1968
1966
1967
1968

Houston Branch
Appointed by Federal Reserve Bank:
John E. Gray
President, First Security National Bank of
Beaumont, Tex

1966

399

ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.

DIRECTORS—Cont.

District 11 — Dallas — Cont.

Term
expires
Dec. 31

Houston Branch — Cont.

Appointed by Federal Reserve Bank—Cont.
J. A. Elkins, Jr
Chairman of the Board, First City National
Bank of Houston, Tex
1966
A. G. McNeese, Jr
President, Bank of the Southwest National
Assn., Houston, Tex
1967
Henry B. Clay
President, First Bank & Trust, Bryan, Tex
1968
Appointed by Board of Governors:
George T. Morse, Jr
President and General Manager, Peden Iron &
Steel Company, Houston, Tex
1966
Edgar H. Hudgins
Ranching—Partner in Hudgins Division of
J.D. Hudgins, Hungerford, Tex
1967
D. B. Campbell
Former Works Manager, Sabine River Works,
E. I. du Pont de Nemours & Company,
Orange, Tex
1968
San Antonio Branch

Appointed by Federal Reserve Bank:
Forrest M. Smith
President, National Bank of Commerce of San
Antonio, Tex
J. R. Thornton
Chairman of the Board and President, State
Bank and Trust Company, San Marcos, Tex.
Max A. Mandel
President, The Laredo National Bank, Laredo,
Tex
James T. Denton, Jr
President, Corpus Christi Bank & Trust, Corpus
Christi, Tex

1966
1966
1967
1968

Appointed by Board of Governors:
G. C. Hagelstein
President and General Manager, Union Stock
Yards, San Antonio, Tex
1966
Harold D. Herndon. . . .Independent Oil Operator, San Antonio, Tex.. 1967
Francis B. May
Chairman, Department of General Business,
The University of Texas, Austin, Tex
1968
District 12 — San Francisco
Class A:
Carroll F. Byrd

Chairman of the Board and President, The
First National Bank of Willows, Calif.
1966
Charles F. Frankland... Chairman of the Board and Chief Executive
Officer, The Pacific National Bank of Seattle,
Wash
1967
Ralph V. Arnold
President, First National Bank and Trust Company, Ontario, Calif.
1968

400

FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.

DIRECTORS—Cont.

District 12 — San Francisco — Cont.

Term
expires
Dec. 31

Class B:
Joseph Rosenblatt

Honorary Chairman of the Board, The Eimco
Corporation, Salt Lake City, Utah
1966
Marron Kendrick
President, Schlage Lock Company, San Francisco, Calif.
1967
Herbert D. Armstrong. . Treasurer, Standard Oil Company of California, San Francisco, Calif.
1968

Class C.John D. Fredericks
Frederic S. Hirschler

Bernard T. Rocca, Jr

Chairman of the Board and Chief Executive
Officer, Pacific Clay Products, Los Angeles,
Calif.
1966
Chairman of the Board and Chief Executive
Officer, The Emporium Capwell Company,
San Francisco, Calif.
1967
President, Pacific Vegetable Oil Corporation,
San Francisco, Calif.
1968

Los Angeles Branch

Appointed by Federal Reserve Bank:
Douglas Shively
President, Citizens State Bank of Santa Paula,
Calif.
1966
Harry J. Volk
President, Union Bank, Los Angeles, Calif.... 1966
Sherman Hazeltine
Chairman of the Board, Chief Executive Officer,
First National Bank of Arizona, Phoenix,
Ariz
1967
Appointed by Board of Governors:
S. Alfred Halgren
Vice President and Director, Carnation Company, Los Angeles, Calif
1966
Arthur G. Coons
President Emeritus, Occidental College, Los
Angeles, Calif.
1967
Portland Branch

Appointed by Federal Reserve Bank:
E. M. Flohr
President, The First National Bank of Wallace,
Idaho
1966
E. W. Firstenburg
Chairman of the Board and President, First
Independent Bank, Vancouver, Wash
1966
E. J. Kolar
Chairman of the Board and Chief Executive
Officer, United States National Bank of Oregon, Portland, Ore
1967

401

ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.

DIRECTORS—Cont.

District 12 — San Francisco — Cont.

Term
expires
Dec. 31

Portland Branch — Cont.

Appointed by Board of Governors:
Robert F. Dwyer
Lumberman, Portland, Ore
1966
Graham J. Barbey
President, Barbey Packing Corporation, Astoria, Ore
1967

Salt Lake City Branch

Appointed by Federal Reserve Bank:
Alan B. Blood
Executive Vice President, Barnes Banking Company, Kaysville, Utah
1966
Newell B. Dayton
Chairman of the Board, Tracy-Collins Bank &
Trust Company, Salt Lake City, Utah
1966
William E. Irvin
President, The Idaho First National Bank,
Boise, Idaho
1967
Appointed by Board of Governors:
Peter E. Marble
Rancher, Deeth, Nev
1966
Royden G. Derrick
President and General Manager, Western Steel
Co., Salt Lake City, Utah
1967

Seattle Branch

Appointed by Federal Reserve Bank:
M. F. Hastings
President, The First National Bank of Ferndale,
Wash
1966
Chas. H. Parks
Spokane and Eastern Advisory Board, SeattleFirst National Bank, Spokane, Wash
1966
Maxwell Carlson
President, The National Bank of Commerce of
Seattle, Wash
1967
Appointed by Board of Governors:
Robert D. O'Brien
Chairman of the Board and Chief Executive
Officer, Pacific Car and Foundry Company,
Seattle, Wash
1966
William McGregor
Vice President, McGregor Land and Livestock
Company, Hooper, Wash
1967

402

FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.
PRESIDENTS and VICE PRESIDENTS

Federal
Reserve
Bank

or branch

President
First Vice President

Vice Presidents

Boston

George H. Ellis
E. O. Latham

D. Harry Angney Ansgar R. Berge
R. W. Eisenmenger Luther M. Hoyle, Jr.
Charles E. Turner G. Gordon Watts
Parker B. Willis

New York

Alfred Hayes
William F. Treiber

Harold A. Bilby
William H.Braun, Jr.
John J. Clarke
Charles A. Coombs
Felix T. Davis
Marcus A. Harris
Alan R. Holmes
Robert G. Link
Fred W. Piderit, Jr. Walter H. Rozell, Jr.
T. M. Timlen, Jr. Thomas O. Waage
Angus A . Maclnnes, Jr.

Philadelphia....

Karl R. Bopp
Robert N. Hilkert

Hugh Barrie
Norman G. Dash
David C. Melnicoff
Harry W. Roeder
Richard G. Wilgus

Cleveland

W. Braddock Hickman George E. Booth, Jr. Paul Breidenbach
Walter H.MacDonald Roger R. Clouse
Phillip B. Didham
John J. Hoy
Elmer F. Fricek
Harry W. Huning Fred S. Kelly
Maurice Mann
Clifford G. Miller
Fred O. Kiel
Clyde E. Harrell

Buffalo

Cincinnati
Pittsburgh
Richmond

Edward A. Wayne
Aubrey N. Heflin

Baltimore
Charlotte

Joseph R. Campbell
David P. Eastburn
G. William Metz
J. V. Vergari

Robert P. Black
J. G. Dickerson, Jr.
Upton S. Martin
W. S. Farmer
James Parthemos
John L. Nosker
R. E. Sanders, Jr.
B. U. Ratchford
Joseph F. Viverette
D. F. Hagner
E. F. MacDonald

403

ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.
PRESIDENTS and VICE PRESIDENTS—Cont.

Federal
Reserve
Bank
or branch

President
First Vice President

Harold T. Patterson
Monroe Kimbrel

Harry Brandt
J. E. McCorvey
Brown R. Rawlings Richard A. Sanders
R. M. Stephenson Charles T. Taylor
Edward C. Rainey
Thomas A. Lanford
Robert E. Moody, Jr.
Morgan L. Shaw

Charles J. Scanlon
Hugh J. Helmer

Atlanta

Ernest T. Baughman A. M. Gustavson
Paul C. Hodge
L. H. Jones
Richard A. Moffatt H. J. Newman
Leland M. Ross
Harry S. Schultz
Bruce L. Smyth
Jack P. Thompson
Russel A. Swaney

Darryl R. Francis
Dale M. Lewis

Leonall C. Andersen Marvin L. Bennett
WoodrowW.GilmoreHomer Jones
Stephen Koptis
Howard H. Weigel
Joseph C. Wotawa Orville O. Wyrick
John F. Breen
Donald L. Henry
John W. Menges

Birmingham
Jacksonville
Nashville
New Orleans
Chicago

Detroit
St. Louis

Little Rock
Louisville
Memphis
Minneapolis....

Helena
Kansas

Vice Presidents

City....

Hugh D. Galusha, Jr.
W. C. Bronner
F. J. Cramer
M. H. Strothman, Jr. Kyle K. Fossum
R. K. Grobel
C. W. Groth
Howard L. Knous
Franklin L. Parsons
Clement A. Van Nice
George H. Clay
John T. Boysen

Denver
Oklahoma City
Omaha

404

Wilbur T. Billington Raymond J. Doll
J. R. Euans
Carl F. Griswold, Jr.
M. L. Mothersead George D. Royer, Jr.
R. E. Thomas
Clarence W. Tow
John W. Snider
Howard W. Pritz
George C. Rankin

FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1966—Cont.
PRESIDENTS and VICE PRESIDENTS—Cont.

Federal
Reserve
Bank

or branch

Dallas

President
First Vice President

Watrous H. Irons
Philip E. Coldwell

El Paso
Houston
San Antonio

Vice Presidents

Roy E. Bohne
James L. Cauthen
Ralph T. Green
G. R. Murff
James A. Parker
T. W. Plant
W. M. Pritchett
Thomas R. Sullivan
Fredric W. Reed
J. Lee Cook
Carl H. Moore

San Francisco... Eliot J. Swan

Los Angeles
Portland
Salt Lake City
Seattle

J. L. Barbonchielli J. Howard Craven
H. Edward Hemmings D. M. Davenport Irwin L. Jennings
E. J. Martens
A. B. Merritt
W. F. Scott
P. W. Cavan
William M. Brown
Arthur L. Price
Erwin R. Barglebaugh

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.
Wayne, President of the Federal Reserve Bank of Richmond, and Mr. Swan,
President of the Federal Reserve Bank of San Francisco, were elected Chairman of the Conference and Vice Chairman, respectively, in March 1966, and
served in those capacities during the remainder of 1966.
Mr. W. T. Cunningham, Jr., of the Federal Reserve Bank of Richmond and
Mr. Donald V. Masten of the Federal Reserve Bank of San Francisco were
appointed Secretary of the Conference and Assistant Secretary, respectively,
in March 1966, and served during the remainder of the year.

405

Index
Page
Acceptance powers of member banks
305
Acceptances, bankers':
Authority to purchase and to enter into repurchase agreements 112, 162, 169
Federal Reserve Bank holdings
318, 326, 328
Federal Reserve earnings on
318, 336
Open market transactions during 1966
334
Administrative Procedure Act, amendment
309
Advertising principles to be followed by financial institutions
300
Asian Development Bank
93, 307, 320
Assets and liabilities:
Banks, by classes
346
Board of Governors
323
Federal Reserve Banks
326-31
Balance of payments (See U.S. balance of payments)
Bank Examination School
306
Bank examiners, home mortgage loans to, legislative recommendation . . . 313
Bank holding companies:
Board actions with respect to
302
Litigation
314
Bank Holding Company Act, amendments
308
Bank Merger Act, amendments of 1966
307
Bank mergers and consolidations
302, 352-78
Bank premises, Federal Reserve Banks and branches. . .321, 326, 328, 330, 335
Bank supervision by Federal Reserve System
298
Board of Governors:
Audit of accounts
322
Building annex
322
Delegation of certain functions
310
Income and expenses
322-24
Legislative recommendations
310
Litigation
314
Members and officers
380
Policy actions
89-110
Regulations (See Regulations)
Salaries
324
Branch banks:
Banks, by classes, changes in number
348
Federal Reserve:
Bank premises
321, 335
Directors
385
Vice Presidents in charge
403
Foreign branches of member banks
293, 304

406

INDEX

Page
Capital accounts:
Banks, by classes
346
Federal Reserve Banks
327, 329, 331
Certificates of deposit {See Deposits)
Chairmen and Deputy Chairmen of Federal Reserve Banks
384
Clearing and collection:
Check mechanization program
319
Par clearance, legislative recommendation
311
Volume of operations
340
Collateral for Federal Reserve credit, legislative recommendation
310
Commercial banks:
Assets and liabilities
346
Banking offices, changes in number
348
Number, by class of bank
346
Par clearance, legislative recommendation
311
Voluntary foreign credit restraint program
37-42, 108
Commodity Credit Corporation, amendment to Regulation R
89
Condition statement of Federal Reserve Banks
326-31
Credit facilities for nonmember depositary-type institutions
29, 91
Defense Production Act, extension
308
Defense production loans
106, 319, 342
Deposits:
Banks, by classes
346
Demand deposits, graduated reserve requirements on, legislative
recommendations
311
Federal Reserve Banks, tables
327, 329, 331, 344
Promissory notes as deposits, amendments to Regulations D and Q. . .
90
Time and savings deposits:
Amendments to Regulations D and Q to sharpen distinctions between
107
Christmas and vacation club accounts, reduction in reserves required
to be maintained against
107
Maximum permissible interest rates on:
Flexible authority to set
309
Multiple-maturity time deposits, reduction
97
Table
341
Time deposits under $100,000, reduction
104
Reserve requirements against certain time deposits, increases in
90, 98
Deputy Chairman of Federal Reserve Banks
384
Directors, Federal Reserve Banks and branches
385
Discount facilities in the current economic environment, use of
102
Discount rates at Federal Reserve Banks:
Disapproval of proposed increase
94
Table
342

407

INDEX

Page
Discounts and advances by Federal Reserve Banks:
Collateral for Federal Reserve credit, legislative recommendation. . . . 310
Credit facilities for nonmember depositary-type institutions
29, 91
Earnings on
317, 336
Special study
291
Volume
319, 326, 328, 330, 340, 344
Dividends:
Federal Reserve Banks
317, 337, 338
Member banks
347
Earnings:
Federal Reserve Banks
317, 336, 338
Member banks
347
Economic review of 1966
3
Examinations:
Federal Reserve Banks
298
Foreign banking and financing corporations
306
Member banks
298
Executive officers of member banks, loans to, legislative recommendations 313
Expenses:
Board of Governors
322-24
Federal Reserve Banks
317, 336, 338
Member banks
347
Federal Advisory Council
383
Federal agency issues, Federal open market operations and/or Reserve
Bank holdings
189, 309, 326, 328, 334
Federal Open Market Committee:
Audit of System Account
298
Continuing authorizations
134
Foreign currency operations (See Foreign currency operations)
Meetings
111-201, 382
Members and officers
382
Operations in domestic securities, review
25, 202, 203-68
Operations in foreign currencies, review
35, 202, 269-90
Policy actions
111-201
U.S. Govt. agency obligations, open market operations in
309
Federal Reserve Act:
Section 9, repeal of holding company affiliate provisions
309
Section 11, amendment relating to delegation of certain functions of
Board of Governors
310
Sections 11 (d) and 16, amendment relating to decentralization of
destruction of unfit Federal Reserve notes
308
Section 14(b), extension of authority of Reserve Banks to purchase
Govt. obligations directly from U.S
308

408

INDEX

Page
Federal Reserve Act—Continued
Section 14(e), amendment recommended regarding purchase of obligations of foreign govts. by Reserve Banks
313
Section 23A, amendments relating to loans to affiliates
308-09
Section 24, amendment relating to real estate loans by national banks 310
Section 25, amendment providing for direct investments by member
banks in stock of foreign banks
308-09
Federal Reserve Agents
384
Federal Reserve Banks:
Asian Development Bank, authority to act as depositories and as fiscal
agents for
308
Assessment for expenses of Board of Governors
324, 336
Authority to purchase Govt. obligations directly from U.S., extension. . 308
Bank premises
321, 326, 328, 330, 335
Branches {See Branch banks, Federal Reserve)
Capital accounts
327, 329, 331
Chairmen and Deputy Chairmen
384
Check mechanization program
319
Condition statement
326-31
Directors
385
Discount rates:
Disapproval of proposed increase
94
Table
342
Dividends
317, 337, 338
Earnings and expenses
317, 336, 338
Examination
298
Foreign and international accounts
320
Lending authority of, legislative recommendation
310
Officers and employees, number and salaries
340
Presidents and Vice Presidents
403
Profit and loss
•. . 337
Purchase of obligations of foreign govts., legislative recommendation 313
U.S. Govt. securities:
Holdings
318, 326, 328, 330, 332, 344
Open market transactions during 1966
334
Special certificates purchased directly from the U.S
333
U.S. Govt. agency obligations {See Federal agency issues)
Volume of operations
319, 340
Federal Reserve notes:
Condition statement data
326-31
Cost of printing, issue, and redemption
324
Destruction of unfit notes, decentralization of
308
Interest paid to Treasury
317, 337, 338

409

INDEX

Page
Federal Reserve System:
Bank supervision by
298
Foreign currency operations (See Foreign currency operations)
Map of Federal Reserve districts
379
Membership
301
Special studies
291-94
Training activities
306
Voluntary foreign credit restraint program
37-42, 108
Financial flows in 1966
43
Financial institutions, advertising principles to be followed by
300
Financial Institutions Supervisory Act
309
Foreign banking and financing corporations, examination and operation. . 306
Foreign branches of member banks:
Number
304
Special study
293
Foreign currency operations:
Authorization and guidelines
114-20, 134, 152-57, 179
Continuing authority directive
120, 134, 142, 152-57
Federal Reserve earnings on foreign currencies
317, 336
Foreign Currency Directive
157
Legislative recommendation regarding purchase of obligations of foreign govts. by Reserve Banks
313
Review of operations
35, 202, 269-90
Gold certificate reserves of Federal Reserve Banks, tables
326, 328, 330
Govt. securities (See U.S. Govt. securities)
Holding company affiliates:
Number of voting permits issued to
303
Repeal of provisions of law relating to, and termination of
Regulation P
92, 303, 308-09
Home mortgage loans to bank examiners, legislative recommendation. . 313
Income, expenses, and dividends, member banks
347
Insured commercial banks:
Assets and liabilities
346
Banking offices, changes in number
348
Graduated reserve requirements on demand deposits, legislative
recommendations
311
Par clearance, legislative recommendation
311
Interest on deposits:
Promissory notes as deposits, amendments to Regulations D and Q. . .
90
Time and savings deposits:
Amendments to sharpen distinction between
107
Maximum rates on, flexible authority for supervisory agencies to
set, and related proposals
309

410

INDEX

Page
Interest on deposits—Continued
Time and savings deposits—Continued
Multiple-maturity time deposits, maximum permissible rate, reduction
97
Time deposits under $100,000, maximum permissible rate, reduction 104
Interest rates:
Discount rates at Federal Reserve Banks:
Disapproval of proposed increase
94
Table
342
Maximum rates on deposits or share accounts, flexible authority for
supervisory agencies to set, and related proposals
309
Regulation V loans
320
Time and savings deposits:
Multiple-maturity time deposits, maximum permissible rate, reduction
97
Table of maximum permissible rates
341
Time deposits under $100,000, maximum permissible rate, reduction 104
International liquidity discussions
295
Investments:
Banks, by classes
346
Federal Reserve Banks
326, 328, 330
Revenue bond underwriting by national banks, court opinion
314
Legislation:
Administrative Procedure Act, amendment
309
Affiliates of member banks, loans to, amendment to Section 23A of
Federal Reserve Act
308-09
Asian Development Bank
307
Authority of Reserve Banks to purchase Govt. obligations directly
from U.S., extension
308
Bank examiners, home mortgage loans to, legislative recommendation 313
Bank Holding Company Act and related statutes, amendments
308
Bank Merger Act, amendments of 1966
307
Board of Governors, delegation of certain functions
310
Certain insured obligations, underwriting and dealing in, by member
banks
310
Defense Production Act, extension
308
Executive officers, member banks, loans to, legislative recommendations
313
Federal Reserve notes, decentralization of destruction of unfit notes 308
Financial Institutions Supervisory Act
309
Lending authority of Reserve Banks, legislative recommendation . . . 310
Margin requirements for over-the-counter securities, legislative recommendation
312
Par clearance, legislative recommendation
311
Purchase of obligations of foreign govts. by Reserve Banks, legislative
recommendation
313

411

INDEX

Page
Legislation—Continued
Rate ceilings on deposits or share accounts, flexible authority for Federal supervisory agencies to set maximum, and related proposals 309
Real estate loans by national banks, amendment to Section 24 of
Federal Reserve Act
310
Reserve requirements:
Graduated reserve requirements on demand deposits, legislative
recommendations
311
Time deposits of member banks
309
U.S. Govt. agency obligations, open market operations in
309
Liquidity discussions
295
Litigation:
Baker, Watts & Co. et al. v. Saxon
314
Detroit Bank & Trust Co. et al. v. Saxon and Board of Governors of
Federal Reserve System
316
Whitney Holding Corporation
314
Loans:
Affiliates of member banks, loans to, amendment to Section 23A of
Federal Reserve Act
308-09
Banks, by classes
346
Executive officers of member banks, loans to, legislative recommendations
313
Federal Reserve Banks:
Collateral for Federal Reserve credit, legislative recommendation 310
Earnings on discounts and advances
317, 336
Volume of discounts and advances
319, 326, 328, 330, 340, 344
Home mortgage loans to bank examiners, legislative recommendation 313
Real estate loans by national banks, amendment to Section 24 of
Federal Reserve Act
310
Regulation V loans
106, 319, 342
Margin requirements:
Legislative recommendation relating to over-the-counter securities. . . . 312
Table
341
Member banks:
Acceptance powers
305
Assets, liabilities, and capital accounts
346
Banking offices, changes in number
348
Discount facilities in the current economic environment, use of
102
Examination
298
Foreign branches, number and special study
293, 304
Income, expenses, and dividends
347
Investment securities:
Asian Development Bank
93, 307, 320
Certain insured obligations, underwriting and dealing in
310

412

INDEX

Page
Member banks—Continued
Investments in stocks of foreign banks, amendment to Section 25 of
Federal Reserve Act, permitting
308-09
Loans to:
Affiliates, amendment to Section 23A of Federal Reserve Act
308-09
Executive officers of, legislative recommendations
313
Number
301, 346
Par clearance, legislative recommendation
311
Reserve requirements:
Christmas and vacation club accounts, reduction in reserves required
to be maintained against
107
Graduated reserve requirements on demand deposits, legislative recommendations
311
Increases in, against certain time deposits
90, 98
Table
343
Reserves and related items
344
Revenue bond underwriting by national banks, court opinion
314
Membership in Federal Reserve System
301
Mergers (See Bank mergers and consolidation)
Monetary policy:
Digest of principal policy actions
9
Effects on economic activity, special studies of
293
Review
25
Multiple-maturity time deposits, maximum permissible interest rate, reduction
97
Mutual savings banks
346, 348
National banks:
Assets and liabilities
346
Banking offices, changes in number
348
Foreign branches, number and special study
293, 304
Number
301, 346
Real estate loans, amendment to Section 24 of Federal Reserve Act. . 310
Revenue bond underwriting, court opinion
314
Nonbank financial institutions, voluntary foreign credit restraint
program
37-42, 108
Nonmember banks:
Assets and liabilities
346
Banking offices, changes in number
348
Credit facilities for nonmember depositary-type institutions under
certain conditions
29, 91
Open Market Committee (See Federal Open Market Committee)
Par and nonpar banking offices, number
350
Par clearance, legislative recommendation
311

413

INDEX

Page
Policy actions, Board of Governors:
Credit facilities for nonmember depositary-type institutions
29, 91
Discount facilities in the current economic environment, use of
102
Discount rate, disapproval of proposed increase
94
Guidelines for voluntary foreign credit restraint program
108
Regulation D, Reserves of Member Banks:
Christmas and vacation club accounts, reduction in reserves required
to be maintained against
107
Promissory notes as deposits, amendment to
90
Reserve requirements against certain time deposits, increases i n . . . . 90, 98
Time and savings deposits, amendments to sharpen distinctions
107
Regulation P, Holding Company Affiliates—Voting Permits:
Termination
92
Regulation Q, Payment of Interest on Deposits:
Maximum permissible rate on multiple-maturity time deposits,
reduction
97
Maximum permissible rate on time deposits under $100,000, reduction
104
Promissory notes as deposits, amendment to
90
Time and savings deposits, amendments to sharpen distinctions
107
Regulation R, Relationships with Dealers in Securities:
Amendment to broaden list of obligations exempted under Section
218.2
89,93
Regulation V, Loan Guarantees for Defense Production:
Maximum interest rate on Regulation V loans, increase
106
Policy actions, digest
9
Policy actions, Federal Open Market Committee:
Authority to effect transactions in System Account, including current
economic policy directive
111-201
Continuing authority directive on domestic operations. . . . 112, 133, 162, 168,
189, 194
Continuing authorizations
134
Foreign currency operations:
Authorizations and guidelines
114-20, 152-57, 179
Continuing authority directive
120, 134, 142, 152
Foreign Currency Directive
157
Presidents of Federal Reserve Banks:
Conference
405
List
403
Salaries
340
Profit and loss, Federal Reserve Banks
337
Promissory notes as deposits, amendments to Regulations D and Q
90
Real estate loans by national banks, amendment to Section 24 of Federal Reserve Act
310

414

INDEX

Page
Record of policy actions {See Policy actions)
Regulations, Board of Governors:
D, Reserves of Member Banks:
Christmas and vacation club accounts, reduction in reserves required
to be maintained against
107
Promissory notes as deposits, amendment to
90
Reserve requirements against certain time deposits, increases i n . . . . 90, 98
Time and savings deposits, amendments to sharpen distinctions
107
P, Holding Company Affiliates—Voting Permits, termination
92
Q, Payment of Interest on Deposits:
Maximum permissible rate on multiple-maturity time deposits, reduction
97
Maximum permissible rate on time deposits under $100,000, reduction
104
Promissory notes as deposits, amendment to
90
Time and savings deposits, amendments to sharpen distinctions
107
R, Relationships with Dealers in Securities:
Amendment to broaden list of obligations exempted under Section
218.2
89,93
V, Loan Guarantees for Defense Production, amendments
106
Repurchase agreements:
Bankers' acceptances
112, 162, 169, 326, 328, 334
U.S. Govt. agency (Federal agency) obligations
189, 326, 328, 334
U.S. Govt. securities
112, 162, 169, 326, 328, 333, 334, 344
Reserve requirements:
Graduated reserve requirements on demand deposits, legislative recommendations
311
Member banks:
Christmas and vacation club accounts, reduction in reserves required
to be maintained against
107
Increases in, against certain time deposits
90, 98
Promissory notes as deposits, amendments to Regulations D and Q 90
Table
343
Time and savings deposits, amendments to sharpen distinctions. . . . 107
Time deposits of, higher reserve requirements on
309
Reserves:
Federal Reserve Banks, tables
326-31
International liquidity discussions
295
Member banks:
Reserve requirements {See Reserve requirements)
Reserves and related items
344
Revenue bond underwriting by national banks, court opinion
314
Salaries:
Board of Governors
324
Federal Reserve Banks
340

415

INDEX

Page
Savings Bond meetings
* . . 318
Savings deposits {See Deposits)
Securities {See also U.S. Govt. securities):
Asian Development Bank
93, 307, 320
Certain insured obligations, underwriting and dealing in
310
Margin requirements for over-the-counter securities, legislative recommendation
312
Revenue bond underwriting by national banks, court opinion
314
U.S. Govt. agency obligations {See Federal agency issues)
Special studies of the Federal Reserve System
. .291-94
State member banks:
Advertising principles to be followed by
300
Assets and liabilities
346
Banking offices, changes in number
348
Changes in control of, reports on
299
Examination
298
Foreign branches, number and special study
293, 304
Mergers and consolidations
302, 352-78
Number
301, 346
Swap arrangements {See Foreign currency operations)
System Open Market Account:
Audit
298
Authority to effect transactions in
111-201
Operations in domestic securities, review
25, 202, 203-68
Operations in foreign currencies, review
35, 202, 269-90
Time deposits {See Deposits)
Training activities
306
U.S. balance of payments:
International liquidity discussions
295
Review
75
Voluntary foreign credit restraint program
37-42, 108
U.S. Govt. securities:
Authority of Reserve Banks to purchase directly from U.S., extension. . 308
Bank holdings, by class of bank
346
Federal Reserve Bank holdings
318, 326, 328, 330, 332, 344
Federal Reserve earnings on
317, 336
Open market operations
25, 111-201, 202, 203-68, 334
Repurchase agreements
112, 162, 169, 326, 328, 333, 334, 344
Special certificates purchased directly from the U.S
333
Study of market by Treasury and Federal Reserve
292
U.S. Govt. agency obligations {See Federal agency issues)
V loans
106, 319, 342
Voluntary foreign credit restraint program
37-42, 108
Voting permits {See Holding company affiliates)

416

Full text of Annual Report of the Board of Governors of the Federal Reserve System : 1966

FRASER