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FIFTY-FOURTH
Annual Report
BOARD OF GOVERNORS
OF THE FEDERAL RESERVE SYSTEM
•0
*
*
*
COVERING OPERATIONS FOR THE YEAR
1967
Letter of Transmittai
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
Washington, May 22, 1968
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-Fourth Annual Report of the Board of Governors of the Federal Reserve System. This report covers
operations for the year 1967.
Yours respectfully,
W M . M C C . MARTIN, JR.,
Chairman.
Contents
Part I—REVIEW OF 1967
PAGE
MONETARY POLICY, BANK RESERVES, AND INTEREST RATES
Monetary ease and rapid expansion of bank credit: first
quarter of 1967
Monetary developments in the spring and summer
Moves toward restraint: fourth quarter of 1967
Operations in foreign currencies
Foreign credit restraint program
DIGEST OF PRINCIPAL POLICY ACTIONS
DEMANDS, RESOURCE USE, AND PRICES
Demands
Inventories
Final sales
Labor market
Wages and costs
Prices
U.S. BALANCE OF PAYMENTS
Transactions in goods and services
Unilateral transfers
Flows of U.S. capital
Inflows of foreign capital
Errors and omissions
FINANCIAL FLOWS IN 1967
Borrowers and lenders
Federal Government
Nonfinancial businesses
State and local governments
Consumers
Rest of the world
Financial intermediation
Commercial banks
Nonbank financial institutions
3
7
9
11
14
17
22
24
24
25
27
31
33
35
37
39
41
41
43
45
46
47
47
50
53
54
56
57
58
64
Part II—RECORDS, OPERATIONS, AND ORGANIZATION
PAGE
RECORD OF POLICY ACTIONS—BOARD OF GOVERNORS
72
RECORD OF POLICY ACTIONS—FEDERAL OPEN
MARKET COMMITTEE
85
OPERATIONS OF THE SYSTEM OPEN MARKET ACCOUNT
Review of Open Market Operations in Domestic Securities
Review of Open Market Operations in Foreign
Currencies
SPECIAL STUDIES BY THE FEDERAL RESERVE SYSTEM
Reappraisal of the Federal Reserve discount mechanism
U.S. Government securities market study
Foreign operations of member banks
Effects of monetary policy on economic activity
INTERNATIONAL LIQUIDITY
Rational control of reserve-asset supply
Universalist approach
Nature of the facility: absence of currency "backing"
Attractiveness of SDR's
Creation of SDR's
Use of SDR's
Activation
BANK SUPERVISION BY THE FEDERAL RESERVE SYSTEM
Examination of Federal Reserve Banks
Examination of member banks
Federal Reserve membership
Bank mergers
Bank holding companies
Foreign branches of member banks
Acceptance powers of member banks
Foreign banking and financing corporations
Bank Examination Schools and other training activities
LEGISLATION ENACTED
Real estate loans by national banks
Loans to executive officers
Antitrust exemptions for voluntary agreements or programs
Interest on deposits; reserves of member banks;
open market operations
Acquisition of stock of small business investment companies
207
208
276
309
309
309
309
310
311
312
313
313
314
314
315
317
318
318
318
320
321
322
323
325
325
326
327
327
327
327
327
327
PAGE
LEGISLATION ENACTED—Cont.
Lottery ticket sales by State member banks
Salaries of members of Federal Reserve Board
Tax status of bank holding company distributions
LEGISLATIVE RECOMMENDATIONS
Lending authority of Federal Reserve Banks
"Par clearance"
Reserve requirements
Margin requirements for securities transactions
Purchase of obligations of foreign governments by Federal
Reserve Banks
Loans to bank examiners
LITIGATION
Investment Company Institute et al. v. Camp
Baker Watts & Co. et al v. Saxon
Detroit Bank & Trust Co. et al. v. Saxon and Board of
Governors of the Federal Reserve System
RESERVE BANK OPERATIONS
Earnings and expenses
Holdings of loans and securities
Volume of operations
Fiscal agency function: Premature disclosure of information
Loan guarantees for defense production
Foreign and international accounts
Bank premises
PUBLIC INFORMATION, ORGANIZATION, AND PROCEDURE
Public information
Delegation of authority
Formal hearings
Organization and procedure
BOARD OF GOVERNORS
Building annex
Income and expenses
328
328
328
329
329
329
330
331
332
332
333
333
335
335
336
336
337
338
338
338
339
340
341
341
341
341
342
343
343
343
TABLES:
1. Detailed Statement of Condition of All Federal Reserve
Banks Combined, Dec. 31, 1967
2. Statement of Condition of Each Federal Reserve Bank,
Dec. 31, 1967 and 1966
3. Federal Reserve Holdings of U.S. Government Securities, Dec. 31, 1965-67
4. Federal Reserve Bank Holdings of Special Short-Term
Treasury Certificates Purchased Directly from the
United States, 1953-67
348
350
354
355
PAGE
TABLES—Cont.
5. Open Market Transactions of the Federal Reserve System During 1967
6. Bank Premises of Federal Reserve Banks and Branches,
Dec. 31, 1967
7. Earnings and Expenses of Federal Reserve Banks During 1967
8. Earnings and Expenses of Federal Reserve Banks,
1914-67
9. Number and Salaries of Officers and Employees of
Federal Reserve Banks, Dec. 31, 1967
10. Volume of Operations in Principal Departments of
Federal Reserve Banks, 1964-67
11. Maximum Interest Rates Payable on Time and Savings
Deposits
12. Margin Requirements—Effective Date of Change
13. Federal Reserve Bank Discount Rates, Dec. 31, 1967
14. Member Bank Reserve Requirements
15. Fees and Rates Under Regulation V on Loans Guaranteed Pursuant to Defense Production Act of 1950,
Dec. 31, 1967
16. Member Bank Reserves, Federal Reserve Bank Credit,
and Related Items, End of Year 1918-67 and End
of Month 1967
17. Principal Assets and Liabilities, and Number of Commercial and Mutual Savings Banks, by Class of
Bank, Dec. 30, 1967, and Dec. 31, 1966
18. Member Bank Income, Expenses, and Dividends, by
Class of Bank, 1967 and 1966
19. Changes in Number of Banking Offices in the United
States During 1967
20. Number of Par and Nonpar Banking Offices, Dec. 31,
1967
21. Description of Each Merger, Consolidation, Acquisition of Assets or Assumption of Liabilities Approved by the Board of Governors During 1967
MAP OF FEDERAL RESERVE SYSTEM—DISTRICTS
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
356
357
358
360
362
362
363
363
364
364
365
366
368
369
370
372
374
395
396
396
398
399
400
422
PART I
Review of 1967
MONETARY POLICY, BAiNK RESERVES, AND
INTEREST RATES
The Federal Reserve followed a monetary policy of relative
ease during most of 1967, but moved toward restraint in the final
months of the year. The rapid growth in bank reserves early in
the year contributed to an easing of credit market conditions
and to ready accommodation of the rising liquidity demands of
financial institutions and the public. At the same time, the increased availability of funds helped to moderate the slowdown of
the economy during the first half of the year and contributed to
the strengthening of economic activity that became evident as the
summer approached. Construction outlays began to expand early
in the year, and this growth continued. The inventory adjustment of businesses was relatively short lived, and in the summer
the rate of business inventory accumulation began to rise again.
Toward the end of the year, with the Federal budget continuing
to be a major stimulative force in the economy, monetary policy
became more restraining in an effort to dampen the inflationary
price pressures that were accompanying renewed and rapid
economic growth and to encourage improvement in the U.S.
balance of payments position.
Monetary policy moved vigorously to ease domestic credit
conditions further in the first few months of 1967 through complementary changes in open market policy, reserve requirements,
and the discount rate. The measures taken contributed to a relatively rapid growth in bank reserves that extended through
most of the year. As a result, banks were able to improve
liquidity positions that had been eroded during the previous
year's monetary restraint.
Pressures on nonbank financial intermediaries also eased
considerably, until late in the year. For most of the year, the
combination of reduced interest rates in short- and intermediateterm markets, the structure and level of ceiling rates permitted
on time and savings accounts at banks and nonbank savings in-
ANNUAL REPORT OF BOARD OF GOVERNORS
stitutions, and the increased propensity of individuals to save out
of current income produced a sharp rise in inflows of savings to
these institutions.
In large part because of the improved position of banks and
other financial institutions, credit to businesses and consumers
became more readily available than in 1966. Funds available to
homebuilders increased sharply, encouraging a recovery in construction outlays. At the same time demands for credit began to
IBANK RESERVES rise rapidly for most of '67;
1I BORROWINGS relatively
low until late in year
BILLIONS OF DOLLARS
BILLIONS OF DOLLARS
NET FREE
RESERVES
NET BORROWED
1965
1966
1967
Total and nonborrowed reserves: seasonally adjusted monthly averages of daily figures for
all member banks, adjusted to eliminate effects of changes in reserve requirement ratios
Series reflects current percentage requirements effective March 16, 1967. Borrowings and
net borrowed and net free reserves: monthly averages of daily figures, not seasonally adjusted, for all member banks.
FEDERAL RESERVE SYSTEM
build up. A drive by corporations to restore liquidity and to
lengthen debt was reflected in increasing long-term market interest rates after midwinter. And short-term rates turned up in early
summer despite rapid expansion in bank credit and the money
supply, as large Federal demands for credit were added to the
continued, very heavy demands of corporations during the second
half of the year.
Long- and short-term INTEREST RATES rise
substantially in last half of '67
PER CENT PER ANNUM
FHA MORTGAGES
STATE & LOCAL GOVT. Aaa
TREASURY BILLS
1965
1966
1967
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, market yields adjusted to constant maturity (20 years) by U.S. Treasury;
U.S. Treasury bills, market yields on 3-month issues.
ANNUAL REPORT OF BOARD OF GOVERNORS
During 1967, measures of fiscal restraint, including a tax
increase, were proposed by the administration. As the year progressed, the need for such restraint was enhanced as increases in
Federal expenditures, recovery in construction, and resumption
of accumulation in business inventories led to an acceleration
of economic expansion in the third quarter, accompanied by
more intense and widespread price and cost pressures. However, there was no legislative action to raise taxes during the
year. Meanwhile, the enlargement of the U.S. balance of payments deficit and the devaluation of the pound sterling around
mid-November underscored the need to restrain the advance
in costs and prices in order to achieve international as well as
domestic economic objectives.
Against this background of acceleration in domestic economic
expansion and of continued strains on our balance of payments—and in light of the change in the international value of
the pound—the Federal Reserve in mid-November raised the
discount rate back to AV2 per cent from 4 per cent, to which
it had been lowered in April. And open market operations were
adjusted in the direction of restraint. In late December the Board
of Governors of the Federal Reserve System also announced an
increase of ¥1 percentage point, effective in mid-January 1968,
in reserves that member banks are required to maintain against
demand deposits in excess of $5 million. The action raised reserve requirements on such deposits to 17 per cent at reserve
city banks and YlVi per cent at other member banks.
Interest rates in long-term markets showed little reaction to
these moves. Partly because many borrowers had previously obtained funds in long-term markets so as to guard against potential credit restraint in the absence of a tax increase, most bond
yields had already risen to levels well above their 1966 peaks.
Interest rates on mortgages, however, did not reach the previous
year's peak until the last month of 1967.
Shorter-term market rates of interest did rise somewhat
further in the last few weeks of the year, and yields on time and
FEDERAL RESERVE SYSTEM
savings accounts of commercial banks and other financial intermediaries became less attractive to individuals and businesses,
given the existing ceiling rates on such accounts. As a result, the
net expansion of credit from financial institutions slowed.
While all long-term interest rates at the year-end were at or
above the peaks they reached in the 1966 period of monetary
stringency, short-term interest rates remained below their highs
of that year. In part, the greater pressures in long-term than in
short-term markets in 1967 reflected a shift in credit demands
away from banks and into security markets, as borrowers restructured their debt positions because of growing expectations
as the year progressed that interest rates were more likely to rise
than decline in the future. While these expectations tended to
raise long-term rates relative to short-term rates, the expanded
growth in bank reserves, bank credit, and money over the
year as a whole moderated the rise in the over-all interest rate
structure, despite the greatly increased demands for credit by the
Federal Government and the continued large demands of businesses and State and local governments.
In the course of 1967, total bank reserves rose by about 10
per cent, bank credit by 11 per cent, time and savings deposits
at banks by 16 per cent, and the money supply by 6.5 per cent
—all much more rapid rates of growth than in 1966. The rates of
growth in these monetary variables slowed in the latter part of
1967, after banks and nonbank institutions—and to a degree
the public generally—had rebuilt their liquidity.
MONETARY EASE AND RAPID EXPANSION OF BANK CREDIT:
FIRST QUARTER OF 1967
In increasing the degree of monetary ease, Federal Reserve open
market operations contributed to a quite rapid growth, 25 per
cent at an annual rate, in nonborrowed reserves during the first
quarter. This rate of growth, following a contraction during the
last half of 1966, permitted member banks to reduce their
borrowings at the Federal Reserve to near minimal levels, en-
ANNUAL REPORT OF BOARD OF GOVERNORS
abled banks to begin restoring their liquidity positions, and
supported a rapid expansion in bank credit, as it again became
possible for banks to compete effectively for time and savings
deposits. Reserves were also released to banks in March when the
Board reduced reserve requirements against savings deposits and
the first $5 million of other time deposits from 4 to 3 per cent.
Member bank borrowings at Federal Reserve Banks declined
from an average of $557 million during December 1966 to a
little less than $200 million in March 1967. Largely because of
the decline, the net reserve position of banks—the difference
between their excess reserves and their borrowings—moved from
a net borrowed reserve average of $165 million in the last month
of 1966 to a net free reserve average of around $235 million in
March. With the supply of reserves to the banking system increased and with individual banks in more comfortable reserve
positions, the Federal funds rate—the price at which banks with
excess reserves lend reserves to other banks—declined sharply
from around 5.50 per cent at the end of 1966 to about 4 per cent
by early April.
As banks repaid borrowings from the Federal Reserve, the
accompanying rise in banks' free reserves absorbed part of the
increase in nonborrowed reserves, but the reserve expansion was
still sufficient to support an annual rate of growth of more than
14 per cent in banks' total loans and investments during the first
quarter. About two-thirds of the rise in outstanding bank credit
was in holdings of U.S. Government securities, including Federal
agency debt, and of State and local government issues, as banks
rebuilt portfolios that had been reduced as a result of monetary
restraint in the latter part of the previous year.
Banks obtained most of their funds for investment through a
sharp expansion in time and savings deposits. These deposits
grew at an annual rate of 19 per cent in the first quarter, about
three times the pace of the last half of 1966. A marked decline
in interest rates in the short-term market—typified by a drop in
the 3-month Treasury bill rate over the first 3 months of the year
FEDERAL RESERVE SYSTEM
from around 4.80 per cent to near 4 per cent—enabled banks
to compete effectively for time and savings deposits.
During the first quarter of 1967 banks restored their holdings
of large negotiable time certificates of deposit (CD's), which had
declined markedly during the late summer and fall of 1966 when
short-term interest rates moved to and above the 5Vi per cent
ceiling rate on such deposits. Meanwhile, banks with branches
operating abroad in the Euro-dollar market effected a net reduction in the funds they obtained abroad through their foreign
branches. Such borrowings in the Euro-dollar market had risen
sharply in the last half of 1966 when banks' ability to compete
for time deposit funds domestically was constrained by high interest rates in the market relative to the Regulation Q ceiling.
Net inflows of funds to other savings institutions—savings
and loan associations and mutual savings banks—were also at
exceptionally high rates early in 1967 following depressed rates
of growth in 1966. Since these institutions are key lenders in
mortgage markets, there was a consequent decline in interest
rates on mortgages.
The increased availability of funds at banks and other financial
institutions helped to reduce pressures in long-term markets
generally. In the early weeks of 1967 long-term markets were
also influenced by expectations of a further easing in monetary
policy. As a result yields on U.S. Government, corporate, and
municipal bonds declined very sharply at that time, and banks
reduced their prime rate on business loans. However, market
yields rose somewhat after midwinter, amid indications that corporations were likely to generate strong demands for long-term
credit in security markets as they sought to improve their
financial positions by lengthening their debt structure and restoring their credit lines at banks.
MONETARY DEVELOPMENTS IN THE SPRING AND SUMMER
After the winter, money market conditions, as typified by yields
on day-to-day money, showed little change until late in the year.
ANNUAL REPORT OF BOARD OF GOVERNORS
The discount rate was reduced from AV2 per cent to 4 per cent
in early April, and Federal funds traded at rates around that
level throughout the spring and summer. The 3-month Treasury
bill rate, however, fluctuated rather widely. It declined further in
the spring to an average of around 3.50 per cent in June. An
unusually large Treasury cash surplus during the first half of the
year led to a substantial, though temporary, reduction in outstanding Treasury bills in consequence of maturities of tax-anticipation bills in March, April, and June. Also, downward pressures on short-term rates were generated as the Federal home
loan banks both purchased large amounts of bills and repaid their
outstanding short-term debt with the proceeds of loan repayments
from member savings and loan associations. After June, however, bill rates began to rise as the market focused on the unusually large Federal cash deficit in prospect for the second half
of 1967. By the end of summer the 3-month Treasury bill rate
had risen to around 4.50 per cent, while the Treasury was in
process of raising a large amount of cash in short-term markets.
The large needs of the Federal Government for cash after midyear, in conjunction with uncertainties about whether the tax
increases recommended by the administration would become
effective, also led to further increases in longer-term interest rates.
Borrowing by corporations in bond markets rose to a record
volume, and demands of State and local governments remained
very large, as many borrowers attempted to obtain funds to
hedge against the possibility that credit markets would become
very tight, especially if there were no action on taxes. By late
August the yields on new high-grade corporate bonds and longterm U.S. Government bonds had risen to highs—of around 6
per cent and 5.15 per cent, respectively—that were just above
their 1966 peaks.
The rise in interest rates was accompanied by a considerably
less rapid growth in reserves of banks during the second and
third quarters of the year as compared with the first quarter.
10
FEDERAL RESERVE SYSTEM
Nonborrowed reserves expanded at an annual rate of about 8 per
cent. Borrowings from the Federal Reserve, which were already
near minimal levels, declined slightly further to a daily average
level of somewhat less than $100 million during the summer.
In providing reserves during the winter, the Federal Reserve
had made security purchases for the System Open Market Account almost entirely in the Treasury bill area. But during the
spring and summer—with pressures in bond markets increasing—
the System bought a moderate amount of Treasury coupon issues
with more than 1 year to maturity. However, it accomplished the
bulk of its net-reserve-supplying operations through transactions
in Treasury bills.
Growth in outstanding bank credit generally moderated during
the six spring and summer months. But growth was quite rapid
in July and August, when banks bought sizable amounts of U.S.
Government securities in a period of large cash financings by the
Treasury.
Banks continued to acquire time and savings deposits at a substantial rate over the 6-month period—though the pace was
somewhat slower than it had been early in the year, when banks
had been rebuilding such deposits after the losses suffered the
year before. Private demand deposits and the money supply continued to rise strongly during the spring and summer as businesses and consumers made further efforts to restore their
liquidity positions, given the drains on liquidity in the previous
year and the uncertainties about the nature and extent of any
future monetary restraint.
MOVES TOWARD RESTRAINT: FOURTH QUARTER OF 1967
Monetary policy became less expansive in the fourth quarter of
the year in view of developments in the domestic economy and
of developments affecting the international position of the dollar.
In the light of the action of the British Government to reduce the
parity of the pound sterling and of other measures of monetary
11
ANNUAL REPORT OF BOARD OF GOVERNORS
and fiscal restraint in Britain, the Federal Reserve discount rate
was raised from 4 to AV2 per cent in the second half of November so as to contribute to the availability of reserves to the banking system on terms and conditions that would foster sustainable
economic growth domestically and a sound international position
for the dollar. Open market operations became less expansive,
and an increase of Vi percentage point in the reserve requirement against demand deposits in excess of $5 million was announced in late December. These moves in the direction of
monetary restraint were taken in an effort to resist the domestic
inflationary pressures that developed as economic activity was
expanding vigorously following the pause in growth during the
first half of the year.
As a result of these changes in monetary policy, member
banks came under pressure to increase their borrowings from the
Federal Reserve and to reduce free reserves, and short-term
interest rates rose further in the last few weeks of the year. The
Federal funds rate rose above the new discount rate, and the
3-month bill rate rose to about 5 per cent.
The general rise in short- and intermediate-term market rates
of interest since summer had made it more and more difficult for
banks and other savings institutions to attract consumer and
corporate funds, in the light of the existing ceilings on rates that
could be offered by such institutions. During the fourth quarter
net inflows of time and savings deposits to banks declined to an
annual rate of 11 per cent from 15 per cent in the third quarter.
The slowdown was particularly marked in December when there
was a moderate net decline, in part seasonal, of outstanding
negotiable CD's and when growth in consumer-type time and
savings deposits slowed further.
Not only did banks have less scope for expanding time and
savings deposits in late 1967, but also the cost of the funds they
obtained through branches in the Euro-dollar market rose further
as a result of the increase in the British discount rate and of un-
12
FEDERAL RESERVE SYSTEM
certainties in connection with the devaluation of sterling in midNovember. Banks' liabilities to their overseas branches, which
had shown a steady rise since late spring, reached a peak of $4.9
billion in mid-November. After that these liabilities declined,
although again partly for seasonal reasons.
With funds from time deposits and Euro-dollar borrowings less
readily available and more costly, and with growth in reserves
constrained, bank credit in the last quarter of the year expanded
at a reduced annual rate, about 6 per cent, and the money supply
showed relatively little growth after early November. Banks also
raised their prime loan rate back to the 6 per cent level, which
had prevailed from August 1966 to January 1967.
There was little reaction in long-term markets to the policy
moves. In part, this was because some increase in monetary restraint had been expected and to some extent discounted in the
market. As it began to appear less and less likely that a tax increase would be enacted, and with the volume of bond offerings
showing no let-up until the last few weeks of the year, long-term
interest rates had already risen sharply further by around midNovember. Yields on U.S. Government bonds (with 20-year maturity) rose to a peak of about 5.80 per cent toward mid-November and subsequently declined about 25 basis points by yearend. Yields on new high-grade corporate bonds showed little
change from the 6.50 per cent level reached by mid-November.
And average yields on State and local government securities,
which banks had bought in large volume during the year, reached
a peak of around 4.45 per cent in early December, about 20 basis
points above their 1966 high.
Meanwhile mortgage yields continued to advance as the year
drew to a close—representing in part the usual belated reaction
to earlier advances in yields on market instruments. In addition,
the slower net inflow of savings to thrift institutions that specialize
in mortgages led to some reduced willingness on the part of these
institutions to undertake mortgage commitments.
13
ANNUAL REPORT OF BOARD OF GOVERNORS
OPERATIONS IN FOREIGN CURRENCIES
The international monetary system was subjected to greater
strains during 1967 than at any time since the 1930's. Large and
potentially disruptive flows of funds were generated by the crisis
in the Middle East during the summer; by the recurrent weakness
of the pound sterling and its devaluation in November; by speculation about possible changes in other exchange rates and in the
price of gold; and by the worsening of the U.S. payments deficit.
A wide variety of cooperative actions were taken by the monetary
authorities of leading countries to counter the resultant pressures
in gold and foreign exchange markets and in international money
markets. The Federal Reserve System and the U.S. Treasury
participated actively in these effects.
Early in 1967 international economic tensions appeared to be
subsiding, although the underlying payments deficits of the
United States and the United Kingdom and the surpluses of continental European countries, notably Germany and Italy, persisted. By the end of February the Federal Reserve had repaid
the $280 million equivalent of its drawings of foreign currencies
under reciprocal currency arrangements that had been outstanding at the end of 1966. The pound sterling was relatively strong
early in 1967 as a result of some underlying improvement in the
U.K. balance of payments, some revival of confidence, and an
easing of monetary conditions elsewhere that facilitated a reflow
of short-term capital into sterling. By the end of April the Bank
of England had repaid all the short-term credits that it had obtained in 1966 from foreign central banks, including the Federal
Reserve, and from the U.S. Treasury.
During the spring, however, foreign exchange markets again
began to reflect concern about the disappointing trend of British
trade figures. A deepening of the business recession in Germany
and some slackening of economic activity in other European
countries contributed to this trend and reinforced the payments
surpluses of continental European countries.
The eruption of the crisis in the Middle East late in May and
14
FEDERAL RESERVE SYSTEM
the outbreak of hostilities there in early June provoked very
heavy selling of sterling and large flows of funds into continental
European currencies, particularly the Swiss franc. Speculative
buying of gold intensified briefly, and the Euro-dollar market
tightened sharply.
The Bank for International Settlements (BIS) acted in early
June to relieve pressures in the Euro-dollar market by placing in
that market the funds drawn under its reciprocal currency arrangement with the Federal Reserve and the funds received from
other central banks. The Gold Pool continued to operate to keep
the price in the London market from rising above $35.20. In
June and throughout the summer the Bank of England drew
heavily on its credit facilities with the Federal Reserve and the
U.S. Treasury and with other central banks and the BIS. Meanwhile, the Federal Reserve made extensive use of its swap lines to
provide cover for the large amounts of dollars accruing to the
Swiss National Bank and for the smaller gains of Belgium and
the Netherlands. Beginning in September, it drew also on its facilities with Italy as that country's reserves increased much more
than seasonally. German reserve gains remained small during this
period, despite Germany's continuing large surplus on current
and long-term capital transactions because monetary conditions
in that country were easy and it was profitable for German commercial banks to add to their foreign assets.
Pressures on sterling mounted irregularly in October and early
November as the figures for foreign trade and reserves continued
to be disappointing—partly because of port strikes—and there
were recurrent heavy flows of funds into continental currencies.
On November 18 the British Government announced the devaluation of the pound by 14.3 per cent to $2.40.
No other large industrial country devalued its currency, and
new standby assistance for the support of the pound was promptly
arranged in the form of central bank credit lines and a $1.4
billion standby arrangement with the IMF. The British Government announced a number of new austerity measures designed to
15
ANNUAL REPORT OF BOARD OF GOVERNORS
fortify the new rate and achieve the needed internal and external
economic adjustments.
Despite these and other evidences of international solidarity
in support of the new parity for sterling and of existing parities
for the currencies of other leading countries, widespread uncertainty prevailed in markets for a time—as might have been expected—about both the exchange rate structure in general
and the price of gold in particular. Buying of gold in the London
market rose to record levels, and additional funds were shifted
into some continental European currencies. Accumulating evidence that the U.S. payments deficit had been worsening added
to market uncertainties, despite official assurances that the dollar
price of gold would not be changed.
A number of cooperative actions were taken jointly by the
monetary authorities to calm the markets: The active members of
the Gold Pool reaffirmed their policy of stabilizing the London
market and sold very large amounts of gold there. The Federal
Reserve made further drawings on its swap lines to provide cover
for some of the dollar gains of European central banks. The BIS
made use of its swap facilities with the Federal Reserve to obtain
dollars and place them in the Euro-dollar market, where rates
had soared. At the same time, the German Federal Bank provided swaps to its commercial banks on favorable terms—selling dollars spot and buying them forward—to encourage the
banks to keep funds invested in the Euro-dollar market. And
the central banks of Belgium, the Netherlands, and Switzerland
bought dollars forward for the account of the U.S. Treasury and
the Federal Reserve.
By the year-end the markets had become calmer. In November the Bank of England repaid $300 million of the $1,350 million drawn earlier under its reciprocal currency arrangement with
the Federal Reserve. But there was little opportunity for the Federal Reserve to begin repaying its large drawings under reciprocal currency arrangements. At the year-end outstanding Federal Reserve drawings totaled $1,776 million. And it was widely
16
FEDERAL RESERVE SYSTEM
recognized that the next step must be the announcement of an
effective program to halt and reverse the deterioration in the
U.S. balance of payments.
The Federal Reserve's reciprocal currency arrangements with
foreign central banks and the BIS were considerably enlarged
during 1967. New facilities were established with the central
banks of Denmark, Norway, and Mexico, and existing facilities
with other central banks and the BIS were expanded. These
actions brought the total swap network to $7,080 million at the
end of 1967.
In addition, during 1967 the Federal Reserve continued to
participate actively in international negotiations concerning a
plan for the creation within the IMF of Special Drawing Rights
(SDR's). The plan was adopted in outline form at the annual
meeting of the IMF in September. (See pages 311-17.)
A detailed review of Federal Reserve operations in foreign
currencies during 1967 is given beginning on page 276.
FOREIGN CREDIT RESTRAINT PROGRAM
During 1967 the Board continued to administer that portion of
the President's balance of payments program that applied to
banks and other financial institutions in accordance with guidelines issued in December 1966 and described in the ANNUAL
REPORT for
1966.
Bank credit to foreigners moved seasonally during the year,
with an inflow during the first quarter of 1967 partially offsetting
an outflow in the fourth quarter of 1966. At the end of October
1967, the final reporting date before the announcement of a
program for 1968, banks had increased their holdings of those
foreign assets covered by the program by $ 115 million over the
amount held on December 31, 1966. During the remaining 2
months of the year such holdings increased by an additional $254
million, bringing the total increase for the year to $369 million.
On December 31, 1967, the banking system was $544 million
17
ANNUAL REPORT OF BOARD OF GOVERNORS
TABLE 1
FOREIGN CREDITS OF UNITED STATES BANKS
Item
1965
Dec. 31
1967
1966
Dec. 31
Mar. 31
Number of reporting banks..
Total foreign credits subject
to ceiling
Target ceiling to end of 1967
Net expansion of credit since
December, 1964
Net leeway for further expansion of credit within target
ceiling for 1967
161
148
9,652
9,496
10,360
June 30
Sept. 30
Dec. 31
149
148
148
151
Millions of dollars
+ 156
- 3
9,278
10,408
9,475
10,401
9,618
10,402
9,865
10,409
-222
-18
+ 125
+370
1,130
926
784
544
NOTE.—Beginning with Dec. 31, 1966, data exclude banks with foreign credits of less than $500,000
on reporting date.
below the target ceiling established for that date by the guidelines issued in December 1966 (Table 1).
"Covered" foreign assets of nonbank financial institutions increased only $10 million during the first 9 months of 1967.
Long-term credits to developed countries other than Canada and
Japan increased, largely because of long-standing commitments
to borrowers in these countries, but most of the increase was
offset by reductions in liquid investments, short- and intermediate-term credits, and holdings of covered equities. Nevertheless,
reporting institutions as a group were $58 million over their
target ceiling as of September 30, 1967.
On November 16, 1967, revised guidelines for banks and
nonbank financial institutions were announced by the Board of
Governors for the period through 1968. The bank program retained the 1967 ceiling of 109 per cent of the end-of-1964 base
for banks accounting for about 95 per cent of that ceiling. To
give more equitable treatment to banks whose 1964 bases were
relatively small, the guidelines provided that any reporting bank
whose foreign assets were less than 2 per cent of its total assets
as of December 31, 1966, might take the latter figure as its ceiling for 1968. This provision added about $650 million to the
18
FEDERAL RESERVE SYSTEM
TABLE 2
FOREIGN ASSETS OF REPORTING NONBANK FINANCIAL INSTITUTIONS
(Amounts shown in millions of dollars)
Type of asset
Amount,
Sept. 30,
1967
Change from
Dec. 31, 1966
Amount Per cent
SUBJECT TO GUIDELINE
Deposits and money market instruments, all foreign countries
Short- and intermediate-term credits, all foreign countries 1
Long-term investments, "other" developed countries: 2
Investment in foreign branches and subsidiaries
Long-term bonds and credits
Stocks (except those acquired after Sept. 30, 1965, in U.S.
markets from U.S. investors)
TOTAL holdings subject to guideline
Adjusted base-date holdings 4
Target ceiling 5
Leeway under ceiling (target less TOTAL above)
161
424
-34
-55
-17.3
-11.5
87
692
(3)
117
-0.5
20.4
-3.0
583
-18
1,947
10
0.5
1,798
1,888
-58
-103
-108
-118
-5.4
-5.4
(6)
1,060
34
3.3
NOT SUBJECT TO GUIDELINE
Bonds of international institutions, all maturities
Long-term investments in Canada, Japan, and the developing
countries:
Investment in foreign branches and subsidiaries
Long-term bonds and credits:
Canada and Japan
Developing countries
Stocks:
Canada and Japan
Developing countries
Stocks, "other" developed countries (if acquired after Sept. 30,
1965 in U.S. markets, from U.S. investors)
TOTAL holdings not subject to guideline
556
(3)
(7)
7,843
278
36
3.7
7.7
181
55
14.0
44.2
245
125
103.9
11.862
708
6.3
502
1,478
179
1
2
Bonds and credits with final maturities of 10 years or less at date of acquisition.
Developed countries other than Canada and Japan.
3 Less than $500,000.
Base-date holdings of assets subject to guideline, less equities included therein but sold to American
investors during the quarter.
5
Adjusted base-date holdings multiplied by 105 per cent.
6
Not computed.
7
Less than one-half of 1 per cent.
4
aggregate ceiling for the banking system and affected about onehalf of the 150 banks reporting under the program. The leeway
available under the new program approximated $1.4 billion, but
the banks again were asked to limit any expansion in holdings of
foreign assets during the fourth quarter of 1967 and throughout
1968 to 20 per cent per quarter, cumulative, of the difference
between the new ceiling and the amount of foreign assets held
on October 31, 1967.
19
ANNUAL REPORT OF BOARD OF GOVERNORS
The new guidelines for nonbank financial institutions were
substantially the same as those used during 1966, but there was
a major change in the reporting requirement: only institutions
holding $500,000 in covered foreign assets or $5 million
in total foreign assets were asked to report. It was estimated that
this provision would reduce the number of reporters from about
580 to 350 institutions.
In view of disturbed conditions in gold and foreign exchange
markets after the British devaluation of sterling in November,
and in view also of increasing evidence of further deterioration
in the U.S. balance of payments, the President on January 1,
1968, announced a more restrictive program designed to improve the balance of payments, including mandatory controls on
direct foreign investment. As part of the President's program,
the Board on January 1 announced further revisions of the guidelines for banks and nonbank financial institutions, under its
voluntary foreign credit restraint program, making them substantially more restrictive.
The major objective of the revised program was to produce
a net capital inflow to banks and other financial institutions of
at least $500 million during 1968. The program was designed
to have a minimum effect on export credits or credits to meet
the capital needs of developing countries; its major impact was
focused on nonexport credits to developed countries of continental Western Europe.
Under the revised guidelines effective January 1, 1968, the
ceilings of those banks that had remained at 109 per cent of
the end-of-1964 base under the guidelines issued on November
16, 1967, were reduced to 103 per cent of that base. Banks
whose ceilings had been set at 2 per cent of total assets as of
December 31, 1966, were requested to reduce that ceiling to an
amount equal to their 1967 ceiling plus one-third of the difference between that ceiling and 2 per cent of total assets. Banks
were requested further to reduce their ceilings monthly by the
amount of scheduled repayments of term loans outstanding on
20
FEDERAL RESERVE SYSTEM
December 31, 1967, to developed countries of continental
Western Europe, and further, during the course of the year, by
40 per cent of the amount of short-term credits to those countries
outstanding on December 31, 1967. On the basis of foreign
assets held by banks on December 31, 1967, this reduction in
the ceilings reduced the immediate aggregate leeway available
in 1968 to $225 million. Further reductions in the ceilings
during the year were expected to bring about an actual and substantial reflow.
The banks also were requested not to make any new loans
with maturities in excess of 1 year during 1968 to developed
countries of continental Western Europe and not to renew loans
then outstanding to those countries. The only exceptions to this
general prohibition were for bona fide export credits or for
legally binding commitments.
The guidelines for nonbank financial institutions requested
these institutions to reduce their holdings of liquid funds abroad
during 1968 to zero or to the minimum absolutely necessary for
working balances. The nonbank financial institutions also were
requested during 1968 to reduce their holdings of covered
assets by at least 5 per cent from the amount outstanding on
December 31, 1967, and to make no new loans to the developed
countries of continental Western Europe except to finance bona
fide export credits, or to meet legally binding commitments. The
liberalized reporting requirement was retained in the revised
guidelines.
21
to
to
DIGEST OF PRINCIPAL FEDERAL RESERVE POLICY ACTIONS IN
Period or
announcement
date
1967
Action
Purpose
January
through
April
Directed that System open market operations be conducted with a view to attaining easier conditions in
the money market, with provision for modification
of operations depending on the course of bank
credit growth.
To foster money and credit conditions, including bank
credit growth, conducive to combatting the effects
of weakening tendencies in the economy, while recognizing the need for progress toward reasonable
equilibrium in the country's balance of payments.
February 28
Reduced from 4 to 3 per cent reserve requirements
on savings deposits, Christmas and vacation club
accounts, and the first $5 million of other time
deposits at each member bank, in two steps: from
4 to V/i per cent, effective March 2; and from
3Vi to 3 per cent, effective March 16.
To assist in meeting developing credit needs throughout the country in a manner consistent with the
Federal Reserve's policy objective of assuring adequate credit availability to provide for orderly economic growth.
Reduced discount rates at 10 Reserve Banks from
AV2 to 4 per cent, effective April 7. (Reductions at
the two remaining Reserve Banks were effective
April 10 and April 14.)
To bring the discount rate into better alignment with
market interest rates and to assure adequate credit
availability to provide for orderly economic growth.
Directed that System open market operations be conducted with a view to maintaining prevailing conditions in the money market, with provision for modification of operations if bank credit expanded significantly more than expected.
To foster financial conditions, including bank credit
growth, conducive to continuing economic expansion, while recognizing the need for reasonable price
stability for both domestic and balance of payments
purposes.
April 6
May
through
late
November
Z
Z
G
>
r
w
O
O
T\
dd
%
o
o
w
&
z
o
CO
November 19
Increased discount rates at 10 Reserve Banks from
4 to AVi per cent, effective November 20. (Increases
at the two remaining Reserve Banks were effective
November 21 and November 27.)
To assure the continuing orderly functioning of U.S.
financial markets following the devaluation of the
British pound, and to maintain the availability of
reserves to the banking system on terms and conditions that would foster sustainable economic
growth at home and a sound international position
for the dollar.
Late
November
through
December
Directed that System open market operations be conducted with a view first to facilitating orderly market adjustments to the increase in the discount rate;
and then to attaining slightly firmer conditions in
the money market, with provision for modification
of operations depending on the course of bank credit
growth.
To foster financial conditions conducive to resistance
of inflationary pressures and progress toward reasonable equilibrium in the country's balance of
payments.
December 27
Increased reserve requirements against demand deposits in excess of $5 million per bank from 16Vi
to 17 per cent for reserve city banks, effective January 11, 1968; and from 12 to YlVi per cent for
other member banks, effective January 18, 1968.
To further the Federal Reserve's objectives of fostering financial conditions conducive to resistance of
inflationary pressures and progress toward equilibrium in the U.S. balance of payments.
>
r
to
ANNUAL REPORT OF BOARD OF GOVERNORS
DEMANDS, RESOURCE USE, AND PRICES
1967 marked the seventh consecutive year of expansion in
output, employment, and incomes from the cyclical low in February 1961—the longest sustained run-up in U.S. history. But
for the year as a whole the gain in real output was small and
significantly less than the growth in potential. As a result, use
of resources was less intense than in 1966, particularly for
manufacturing capacity, and the rate of gain in productivity
flagged markedly. Nevertheless, strong inflationary pressures
appeared again after midyear as resumption of more rapid
growth in the economy encouraged manufacturers and distributors to recoup increases in their unit labor and other costs.
The U.S. export surplus on transactions in goods and services
with other countries was slightly smaller than in 1966. After a
rise in the first quarter, merchandise exports were virtually stable
through the summer and then fell off a little in the autumn. Imports, which had surged during 1966 in response to strong domestic demands, were at unusually high levels relative to our gross
national product during 1967. Late in the year imports increased
sharply.
At the outset of 1967 the economy was confronted with a
sizable overhang of inventories, in part because private final
demands had weakened in major areas in late 1966. These developments had induced expectations in some quarters of a recession in early 1967. But a recession did not occur. Real GNP
showed no growth in the first quarter; then it resumed its advance, and in both the third and the fourth quarters it expanded
at an annual rate of about 4.5 per cent. At the year-end, expansion in the economy was vigorous, the labor market was tightening, and prices were rising sharply at the industrial and consumer
levels in response to both cost-push and demand-pull forces.
DEMANDS
GNP in 1967 totaled $785 billion, an increase of $42 billion,
or about 5.5 per cent, from 1966. Prices as measured by the
24
FEDERAL RESERVE SYSTEM
GNP deflator rose by 3.0 per cent, however—the largest advance
in a decade—and GNP in constant dollars increased by only
2.5 per cent. This represented much the smallest advance since
1961.
Over-all developments in the first half of the year were dominated by a record reduction in inventory investment on the one
hand and by substantial increases in total final sales on the other.
The net result was almost no change in real GNP in the first
quarter, as already noted, and then a modest rise in the spring.
In the second half, real GNP advanced at a faster pace, and in
the fourth quarter inventory investment accounted for a sizable
portion of the growth in GNP. Final sales, however, increased
less rapidly in the second half than they had earlier—and
markedly less after allowance for price increases.
In the first half of the year the drastic reduction in inventory
investment and relatively small declines in some other demand
areas resulted in a decline of about 2.5 per cent in industrial
production from its record level in December 1966. From June
to December, however, it advanced by almost 4 per cent, with
intervening declines in September and October caused by strikes.
After major strikes had been settled, expansion was both rapid
and widespread, and in December industrial production reached
a new high, 1.5 per cent above a year earlier. For 1967 as a
whole the Board's index averaged 158 per cent of the 1957-59
average. This too was an increase of only 1 per cent from the
1966 average and was in sharp contrast to the increase of 9 per
cent in 1966.
Inventories. At the beginning of 1967, the over-all ratio of
nonfarm business inventories to sales was at the highest level
since the first half of 1961. But the situation was far from uniform among major industry groups. In manufacturing, stock/
sales ratios were low in nondurable goods lines but high for
durable goods, largely because of the build-up of work-in-process
stocks associated with the preceding extended boom in business
outlays for plant and equipment and with the rapid expansion
25
ANNUAL REPORT OF BOARD OF GOVERNORS
of defense output. Distributors' inventories too were low in nondurable goods lines and high in the durable goods.
Stocks of durable goods manufacturers rose persistently in
1967 but at a much slower pace than they had in 1966. Meanwhile, stocks of durable goods at distributors—particularly retailers—declined substantially in the first half of 1967. Weakness
in sales of automobiles, television sets, and appliances in late
1966 had led to curtailments in output of these goods that were
extended in the opening months of 1967, and stocks of these
goods were drawn down. Stocks of nondurable goods continued
to rise in early 1967 and then leveled off in the spring and summer; near the end of the year they rose again.
The result of these diverse situations was a very rapid reduction in the rate of nonfarm inventory accumulation in the first
half of 1967—from an annual rate of $19 billion in the fourth
quarter of 1966 to little change in over-all stocks in the second
quarter. But in only one month—June—did total business inventory holdings, in terms of book value, decline absolutely. At
midyear, the over-all stock/sales ratio was about the same as 6
months earlier.
In the second half of the year nonfarm inventory investment
increased again despite the disruptive effects of strikes in the
automobile and some pther industries; and in the fourth quarter
accumulation reached an annual rate of over $7.5 billion. The
rate of accumulation was stepped up substantially for both durable and nondurable goods but, as usual, the more pronounced
movements were in the durable sector. At distributors of durable
goods, there was a shift from the sizable net liquidation of the
second quarter to appreciable accumulation in the fourth quarter.
Dealer stocks of autos rose in the last 2 months of 1967, but
at the year-end they were still well below the excessive yearearlier level. Holdings of other consumer durable goods also rose
late in the year. Inventory accumulation in industries manufacturing business and defense equipment was maintained at a high
level through the last half of the year, despite earlier declines
26
FEDERAL RESERVE SYSTEM
in output of producers' durable goods and a slowing of the rate
of expansion in defense production. Steel stocks were beginning
to be built up late in the year as a hedge against a possible strike
in the summer of 1968.
At the end of 1967, the stock/sales ratio for total nonfarm
business was down slightly from the high rate of a year earlier—
owing mainly to pronounced declines in the ratios for nondurable goods at both the manufacturing and retail levels, to new
lows for the expansion period. For durable goods the ratio was
little changed from a year earlier and well above the 1965 level,
before the sharp defense build-up began.
Farm stocks increased slightly for the year, following a small
decline in 1966.
Final sales. Final sales increased rapidly in the first half of 1967
and by progressively smaller amounts in the third and fourth
quarters. Early in the year, when the downdrag from weakening
inventory demands was heaviest, expansion in Government purchases was also at its maximum rate—accounting for more than
one-half of the first-quarter rise in final sales. Thereafter, Government purchases expanded much more slowly.
Expenditures for defense bulged in the first quarter, but thereafter grew at the slowest rate since late 1965, even though the
fourth quarter included a sizable increase in pay for the military
as well as for Federal civilian defense workers and other employees. For the calendar year defense purchases totaled $72.5
billion, up $12 billion from 1966. Altogether, Federal expenditures on the national-income-accounts (NIA) basis—including
both defense and other purchases, transfer payments, grants to
State and local governments, and so forth—totaled $164 billion
for the calendar year 1967, an increase of $21 billion from 1966.
A sharp rise in the Federal deficit (NIA basis) in the first half
of the year reflected both the rise in expenditures and a failure
of receipts to advance beyond the level reached in late 1966.
Underlying the leveling off in receipts was the slowdown in
economic activity, which resulted in a decline in corporate
27
ANNUAL REPORT OF BOARD OF GOVERNORS
profits and hence in corporate tax accruals. Another influence
was the unusually high level of tax refunds resulting from the
establishment of a graduated schedule for withholding taxes on
individual incomes effective in May 1966. The Federal deficit
continued large in the second half of the year, even though receipts rose appreciably.
Needs for all sorts of State and local government services have
been mounting persistently, and purchases by this sector rose by
$9 billion in 1967 compared with the previous record increase
of $7.5 billion in 1966. In 1967, as in earlier years, much of
the increase was for wages and salaries and reflected both increases in the number of teachers and other employees and higher
rates of pay.
In the private sector total final purchases increased throughout
the year, but at an uneven pace. A small decline in business expenditures on fixed capital had a dampening effect on expansion
in over-all output during the first half of 1967, and the subsequent
increase in these outlays was moderate. For the year as a whole
the increase in such spending amounted to less than 3 per cent
in current dollars; after adjustment for higher prices, there was
virtually no increase in real investment. The only major industry
grouping that showed a significant rise in spending for the year
1967 was public utilities. Spending by other major sectors of
the economy, including manufacturing, was either little changed
or down.
The modest rise in business spending for fixed capital in 1967
coincided with a marked slowing in the economy's growth rate
and followed sharp increases in such outlays during the 1964-66
period, when the average yearly rise amounted to about 14 per
cent. Additions to capacity were substantial during this period
and, indeed, continued in 1967. Manufacturing capacity was
estimated to have increased more than 6 per cent in 1967,
compared with a rise of close to 7 per cent in 1966. But
the rate of capacity utilization in manufacturing, which had averaged over 90 per cent in 1966, declined considerably during the
28
FEDERAL RESERVE SYSTEM
first three quarters of 1967 before edging up late in the year, and
for 1967 it averaged only 85 per cent.
Another factor adversely affecting businesses' decisions to invest in fixed capital was the sharp decline in corporate profits in
the first quarter, when real GNP was unchanged and output of
goods declined. Profits rose sharply in the fourth quarter to a
new high, and for 1967 as a whole, corporate profits after taxes
totaled $47.5 billion, down $1.5 billion, or 3.5 per cent, from
1966. With dividends rising further, undistributed profits were
off even more than after-tax profits, and total internal funds—
undistributed profits and depreciation allowances—declined for
the first time since 1960. The investment tax credit and provisions for accelerated depreciation, which had been suspended
in the early autumn of 1966, were reinstated in the spring.
In 1966 a steady decline in residential construction activity
had been the major offset to expansion in other sectors. In 1967,
in contrast, expansion in such activity operated to offset declines
in some other areas. Residential construction advanced throughout the year as housing starts moved upward from the postwar
low in October of 1966. The major factor in the recovery was
the increased availability of mortgage funds. Also, with housing
completions at reduced levels through most of 1967 and with
rental and homeowner vacancy rates declining further through
the year, demands for available units were maintained even
though interest rates in the mortgage market turned upward
again after May.
Housing starts in the fourth quarter of 1967 were at an annual
rate of 1.44 million units, the highest quarterly rate in 2 years.
For the year as a whole, starts totaled about 1.3 million units—
compared with less than 1.2 million in 1966 and 1.6 million in
1963. Recovery in 1967 was fairly uniform by region; it was
sharper for multifamily than for single-family units. Although
there were more housing starts in 1967 than in 1966 and construction costs rose further, expenditures for homebuilding were
about the same in both years, and the lowest since 1961.
29
ANNUAL REPORT OF BOARD OF GOVERNORS
While consumer spending on goods and services rose substantially in 1967, it did not keep pace with after-tax incomes.
As a result, the saving rate increased to 7 per cent of after-tax
income; this compared with 6 per cent or less in each of the preceding 3 years and was the highest in over a decade. This pattern
of consumer behavior has been ascribed to a number of possible
causes, including the build-up of stocks of consumer durable and
semidurable goods in the immediately preceding years, concern
over developments in Vietnam and civil disorders in many cities
during the summer, resistance to steadily rising consumer prices,
less confidence in prospects for increases in family incomes, and
recurring expectations of a surcharge on Federal personal income taxes.
For 1967 as a whole, consumers increased their spending by
about 5.5 per cent, compared with 7.5 per cent in 1966. But
the rise in the physical volume of purchases was less than 3 per
cent. This was only half the average increase of the preceding 3
years and was the smallest advance since 1961.
Outlays for services maintained their uninterrupted advance.
The increase in current dollars was about 7.5 per cent, a little
more than in 1966, but in constant dollars it was less than 4
per cent.
Purchases of nondurable goods increased at a fairly brisk
pace in the first half of the year and then much more slowly. For
the whole year such spending was up less than 5 per cent in
current dollars and less than half of that in constant dollars.
For durable goods the increase for the year was 2.5 per cent
in current dollars and only 1 per cent in constant dollars. For
both durable and nondurable goods the increases were far less
than in 1966.
One reason for the sluggishness of consumer outlays on durable goods late in 1967 was the limited availability of new automobiles because of work stoppages in the industry. But even
after allowing for this, automobile sales in 1967 were less than
had been widely expected. For the year as a whole new-car sales
30
FEDERAL RESERVE SYSTEM
totaled 8.3 million units. This number included imports, which
increased sharply—in contrast to the decline for domestic cars—
and accounted for an increased proportion of all sales. In 1966,
9 million autos had been sold, and in 1965 a record 9.3 million
units. Sales of furniture and appliances edged up during 1967,
with the modest nature of the rise attributable in part to the reduced rate of housing completions and turnover during much
of the year.
Because of the slower pace of economic expansion, growth in
total personal income was less in 1967 than in 1966—7 per cent
compared with 8.5 per cent. For wages and salaries alone, the
1967 increase was 7.5 per cent compared with 10 per cent in
1966. Farm proprietors' incomes were down for the year, mainly
because of sizable reductions in prices of farm products. Transfer
payments increased twice as much as the previous record gain in
1966, but increases from late 1966 to late 1967 were far more
moderate; much of the big step-up in the scale of such payments
had occurred in the second half of 1966 when the medicare
program was gaining momentum.
Personal income after taxes increased by 7 per cent in 1967,
compared with close to 8 per cent in 1966. Consumer prices went
up by about the same amount in both years, and in constant
dollars the increase in income amounted to about 4.5 per cent
in 1967 compared with 5 per cent in 1966.
LABOR MARKET
Demands for labor were much less expansive during most of
1967 than in 1966, primarily because of developments in the
manufacturing sector. In the first half, gains in employment were
curtailed by the softening in output of goods, and the manufacturing workweek was appreciably below the high level of 1966.
During the summer and early autumn, strikes in the automobile
industry and others curtailed growth in nonfarm employment.
Late in the year, however, such employment increased sharply;
the ending of major strikes was a contributing influence, but
31
ANNUAL REPORT OF BOARD OF GOVERNORS
gains were large and widespread. In addition, the workweek in
manufacturing recovered much of its earlier loss. Altogether,
nonfarm employment increased by 1.9 million persons in the
year ending December 1967, compared with the extraordinary
rise of 2.9 million during the preceding year. On balance, all of
the increase in 1967 occurred in nonmanufacturing activities.
The unemployment rate showed little sensitivity to the slowed
expansion of job opportunities through the summer. During the
first quarter a decline in the civilian labor force helped to keep
the rate from rising above the level of late 1966. Later, the rate
edged up to a high for the year of 4.3 per cent in October,
dropped rapidly after that, and in December was down to 3.7
per cent, the same as a year earlier. The average unemployment
rate for the year—3.8 per cent—also was the same as in 1966.
In the first half of 1967 manufacturing employment declined
by 240,000, mostly in durable goods industries. Strikes interrupted the revival in employment after midyear, but the number
of workers in both durable and nondurable goods industries rose
in November and December. In defense-related industries employment advanced by 70,000 workers during the year, but this
was only one-fourth as much as during 1966. Altogether, for the
year ending December 1967, manufacturing employment declined slightly in contrast to an increase of nearly 1 million persons over the preceding year.
In nonmanufacturing activities, employment increased by 1.9
million persons during 1967, virtually the same as in 1966.
Sectors with strong growth trends—particularly State and local
governments, trade, and finance and service activities—all maintained their upward sweep. Despite the revival in homebuilding
activity, the number of workers employed in the construction
industry changed little. Federal Government civilian employment
—which had expanded by more than 200,000 in 1966, largely
because of the military build-up in Vietnam—continued to rise
rapidly to midyear; in the autumn, however, it turned down and
by December was only 50,000 above a year earlier.
32
FEDERAL RESERVE SYSTEM
The civilian labor force increased by 1.75 million persons
during 1967, somewhat more than the expected "normal"
growth. But the Armed Forces expanded only slightly, compared
with a rise of more than 500,000 men during 1966. As in 1966,
adult women accounted for two-thirds of the growth in the
civilian labor force. However, a striking development was that
in 1967 the number of adult males in the civilian labor force
showed the largest increase in more than a decade. This reflected
the more moderate military manpower needs along with the fact
that an increased number of those born during the post-World
War II bulge in births had passed age 20.
While the over-all unemployment rate averaged the same in
1967 as in 1966, experience varied among major groups. For
men 25 years of age and over, the rate averaged about 2 per cent
—a level that reflects essentially only frictional unemployment—
and was somewhat below the 1966 level. For adult females, for
whom the unemployment rate is typically higher, the rate
averaged 3.7 per cent compared with 3.3 per cent in 1966. For
teenage workers as a group the rate averaged close to 13 per
cent, little higher than in 1966. There was no significant improvement in the position of nonwhite workers in 1967, and in
the fourth quarter their over-all unemployment rate—about 8
per cent—continued to be more than double that of white
workers.
WAGES AND COSTS
Hourly wages in both manufacturing and nonmanufacturing
activities rose more rapidly in the 12 months ending December
1967 than over the preceding year. In manufacturing, average
hourly earnings of production workers increased by 5.1 per cent;
over the preceding 2 years, the average increase had been 3.7
per cent. Average weekly earnings in constant dollars showed
only a small increase, however, from late 1966 to late 1967, as a
shorter workweek and higher consumer prices offset the sizable
increase in hourly earnings. In nonmanufacturing industries,
33
ANNUAL REPORT OF BOARD OF GOVERNORS
hourly earnings showed large increases in both the more
organized industries—such as construction, railroads, and
trucking—and the less well organized activities—such as trade
and services.
Large increases in wages during 1967 reflected several influences: continued and prospective sharp increases in consumer
prices; the direct and indirect effects of a statutory increase in
minimum wages early in the year; and the negotiation of a number of new collective bargaining contracts in key industries.
Contract settlements in 1967 provided increases in wages and
other benefits averaging about 5.5 per cent a year, compared
with 4.5 per cent in 1966.
Sharp increases in consumer prices over the past 2 years led
to a shift of major emphasis in negotiations to wage rates instead of fringe benefits. This emphasis also reflected the large
number of new—and younger—workers and their concern with
current income rather than retirement and other deferred benefits. Furthermore, skilled workers achieved some restoration of
wage differentials. Despite the rise in consumer prices, contracts
negotiated during the year did not result in the introduction of
many new cost-of-living escalator clauses. Indeed, in some
instances—notably the automobile industry—prior escalator
arrangements were restricted in the new contracts.
The rate of gain in productivity in manufacturing industries
slowed sharply until late in the year because of the reduced level
of output. As a result, output per manhour increased only 1 per
cent in the year ending with the fourth quarter of 1967. Over the
preceding year the increase had been 3 per cent, and from 1960
to 1965 gains had averaged almost 4 per cent. With hourly wage
compensation continuing to increase, unit labor costs in manufacturing increased steeply until late in the year, and in the
fourth quarter they were 4.7 per cent above a year earlier.
During 1966 the increase had been less than 3 per cent, and
from 1960 to 1965—when wage gains had been about in line
with growth in productivity—unit labor costs and industrial
prices had remained relatively stable. For the private nonfarm
34
FEDERAL RESERVE SYSTEM
economy as a whole—as in manufacturing—unit labor costs also
rose rapidly during most of 1967.
PRICES
The easing of private final demands in late 1966 and the sharp
reduction in business inventory investment during the first half
of 1967 resulted in a marked slowing of the pace of price advance. Indeed, average industrial prices were unchanged at
wholesale from February to July. Moreover, considerable improvement in actual and prospective supplies brought about a
sizable drop in prices of foods and foodstuffs from the early
autumn of 1966 to the spring of 1967. Reflecting these developments, the wholesale price index declined in late 1966 and early
1967, and the consumer price index rose much more slowly than
it had during most of 1966.
The decline in prices of foods and foodstuffs was temporarily
reversed in late spring and early summer, under the influence of
unusually cold, wet weather. This development coincided with
a pronounced pick-up in consumer spending, sharp recovery in
residential construction activity, reports of business plans to
resume expansion in fixed capital outlays, and spreading expectations that the economic pause of early 1967 would give way to
renewed rapid expansion. In this improved setting, businesses
initiated fairly widespread, and in some cases sizable, increases
in prices, in an effort to compensate for the sharp rise in unit labor
costs and the narrowing of profit margins beginning around mid1966.
After mid-July wholesale prices of industrial commodities
broke out of their pattern of stability and during the last 5
months of the year increased at an annual rate of more than
3 per cent. At retail, price increases were stepped up sooner, and
the consumer price index for nonfood commodities rose at an
annual rate of about 3.5 per cent from early spring to the end
of the year. Moreover, retail food prices, which reached a low in
April, rose moderately over the remainder of the year.
The rise in average prices of industrial commodities encom-
35
ANNUAL REPORT OF BOARD OF GOVERNORS
passed a wide variety of materials and products. Prices of sensitive industrial materials, whose sharp decline from mid-1966 to
mid-1967 had been a major influence on the slowing of the rise
in the over-all industrial price index over that period, by December had recovered three-fifths of their earlier decline. But a
large part of this recovery reflected very sharp increases for
copper and cotton—domestic supplies of which were drastically
limited. Prices of most building materials rose, beginning with
the recovery in residential building activity in the spring, and in
the latter part of the year increases were effected for steel mill
products.
Among industrial products, 1967 was marked by substantial
price increases for consumer durable goods at wholesale and
retail following several years of relative stability. The increase
for autos—at the introduction of 1968 models—was the largest
since the late 1950's. Increases were also widespread for consumer nondurable goods, with apparel showing a particularly
large gain, and with household furnishings and various other
nondurable products increasing by sizable amounts. Toward the
end of 1967, price increases for producers' equipment, which
had slowed appreciably during the first half, accelerated again to
the fast 1966 pace.
Despite the sharp rise for industrial commodities, the total
wholesale price index at the year-end was only a little higher
than at midyear as prices of farm products and foods declined
again on balance. For the entire year 1967, the total wholesale
index averaged only fractionally higher than in 1966.
The consumer price index in 1967 averaged 2.8 per cent
above 1966—increasing about as much as it had from 1965 to
1966. Retail food prices increased much less than in 1966. But
prices of other commodities showed a rise almost double that of
the preceding year, and service costs rose somewhat more, on
average, than in 1966. During the closing months of 1967 the
consumer price index was rising at an annual rate of more than
3.5 per cent, as fast as during the period of rapid economic expansion in late 1965 and early 1966.
36
FEDERAL RESERVE SYSTEM
U.S. BALANCE OF PAYMENTS
The imbalance in U.S. transactions with the rest of the world
became larger in 1967, and conventional measures showed a
very sharp increase in the balance of payments deficit on each
of two methods of calculation. Over the past 3 years the competitive position of the United States in world trade may have suffered
some impairment, for advances in domestic incomes and in
aggregate demand were substantially greater than the growth in
real domestic product and U.S. prices rose more rapidly than
they had in earlier years. In 1967, however, any adverse effects
on our goods and services export surplus stemming from unfavorable international cost relationships, as well as those clearly
caused by temporary slackening of demand abroad, were offset
until late in the year by a pause in the growth of U.S. import
demand, paralleling the pause in expansion of GNP. If the year as
a whole is compared with 1966, the increase in the external
deficit can be ascribed primarily to enlargement of the net outflow of capital. In the fourth quarter, however, the currentaccount balance again deteriorated sharply.
Capital flows reacted to a variety of forces—some tending to
improve the balance, others to worsen it. In some respects the
pattern of flows differed considerably from that of 1966. Thus,
there was no longer a net reflux of U.S. bank credit such as that
produced by the foreign credit restraint program in 1965 and by
tight monetary conditions in 1966. Similarly, the net inflow of
foreign funds through commercial banks abroad (including
foreign branches of U.S. banks) was not so large as in 1966. For
reasons not directly connected with current economic developments, there were no substantial advance repayments of debt by
foreign governments, as in previous years. Net acquisitions of
time deposits with maturities of more than a year and of other
near-liquid assets by foreign central banks or governments and
international institutions were still very large in the first half of
1967, but these dwindled after midyear. Toward the end of the
year the United Kingdom liquidated a large amount of U.S.
37
ANNUAL REPORT OF BOARD OF GOVERNORS
securities to augment its monetary reserves. Each of these developments was adverse for one or the other, or both, of the two
measures of the U.S. balance of payments deficit.
The over-all deficit measured on the liquidity basis amounted
to $3.6 billion, compared with $1.4 billion the year before. The
alternative measure—on the basis of official reserve transactions
—showed a deficit of $3.4 billion, compared with a small surplus
in 1966. The narrow difference between the two measures hid
substantial disparities between the two methods of computation.
Acquisitions by foreign monetary authorities of certain types of
claims on U.S. banks or the U.S. Treasury are treated differently
in the two computations: net acquisitions of $1.3 billion of these
claims in 1967 helped to reduce the liquidity deficit, while on the
alternative basis they counted as official reserve transactions,
financing the deficit. On the other hand, the official-reservetransactions deficit was held down by $1.5 billion of net acquisitions of liquid assets in the United States by foreign commercial
banks and private persons and international institutions—transactions that count in the liquidity balance as financing the deficit
rather than reducing it.
The liabilities of the United States to foreign central banks
and governments that count as financing the official-reservetransactions deficit increased by $3.3 billion in 1967 to a total
of $19.5 billion. Partly offsetting this rise in reserve liabilities,
U.S. official holdings of convertible currencies increased by $1.0
billion, reflecting mainly assistance extended to the United Kingdom in support of sterling. After sterling was devalued in
November, a wave of speculation arose in Europe regarding
potential future increases in the price of gold in terms of dollars
and other currencies. In order to quiet this speculation, the U.S.
Treasury and the monetary authorities of other leading industrial
countries made large sales of gold to hold the price steady in the
London free market. Largely because of such sales, the gold stock
of the United States decreased by $1.0 billion during the last 2
months of the year and by $1.2 billion over the year as a whole.
38
FEDERAL RESERVE SYSTEM
At the end of 1967 the total gold stock amounted to $12.1
billion.
In view of the strains placed on the international monetary
system—and in particular on the reserve asset and liability position of the United States—by 10 years of large deficits in the
U.S. payments balance and by the developments in the last few
weeks of 1967 described above, the President announced on
January 1, 1968, a new program to reduce the balance of payments deficit. The part of the program that concerns foreign
loans and investments of banks and other financial institutions
is described on pages 17-21 of this REPORT.
TRANSACTIONS IN GOODS AND SERVICES
The surplus on goods and services, which totaled $5.1 billion in
1966, ran at a somewhat larger rate during most of 1967, but
dropped in the fourth quarter to an annual rate of under $3
billion. For the year as a whole it fell short of $5 billion. Thus it
was again far below the 1963-65 average of $7.1 billion.
The fresh worsening in the current account of the balance of
payments toward the end of 1967 resulted from a sharp rise in
merchandise imports. After growing disproportionately to GNP
during 1965 and most of 1966, imports leveled off in the first
three quarters of 1967. Imports of industrial materials fell by 12
per cent from the peak level reached in the third quarter of 1966,
but the rise in other imports only slowed. For all of 1967, as for
1966, merchandise imports were equal to 3.4 per cent of GNP,
compared with 2.9 per cent in 1963 and 1964. With GNP now
above $800 billion, each 0.1 per cent rise in this ratio would
mean an addition of over $800 million of imports a year.
Merchandise exports increased until the spring of 1967, but
from then on growth was slowed by the slackness in demand in
most foreign countries—Japan, Italy, and Australia were important exceptions. Industrial output in Germany, now the leading
producer of Western Europe, was 6 per cent lower in the first
half of 1967 than a year earlier. At the year-end the stimulus to
39
ANNUAL REPORT OF BOARD OF GOVERNORS
world demand provided by renewal of expansion in the United
States and in Germany had not yet been sufficient to generate an
upturn in U.S. exports. The trade surplus for the year was $3.5
billion, a little less than that of 1966. The rise in imports late in
the year caused the export surplus in the fourth quarter to drop
to an annual rate of $1.0 billion.
Merchandise EXPORTS and IMPORTS both level oft
but IMPORTS jump again in fourth quarter
BILLIONS OF DOLLARS
30
20
IMPORTS
TRADE SURPLUS
1960
1962
1965
1967
Seasonally adjusted balance of payments data.
Income receipts from foreign investments increased substantially in 1967, and there were good gains also in receipts of fees
and royalties from direct investments and for other private services. On the other hand, travel expenditures (exclusive of fares)
were about $500 million greater than in 1966; this jump, nearly
three times the average annual increase in the preceding 5 years,
was due mainly to the attraction of Expo 67 in Canada.
40
FEDERAL RESERVE SYSTEM
There was a further large increase—by about $600 million—
in military expenditures abroad. These reached an annual rate of
$4.4 billion in the second half of the year, compared with the late
1964 and early 1965 low of $2.7 billion. Deliveries to other
countries under military sales contracts rose by $400 million, to
nearly $1.3 billion.
UNILATERAL TRANSFERS
U.S. Government economic aid grants of $1.8 billion in 1967
were less than the average of the preceding 6 years. Government pensions and other transfers amounted to $450 million.
Private remittances rose by $200 million to more than $800
million; transfers of contributions to Israel were a principal
factor in this increase.
FLOWS OF U.S. CAPITAL
The outflow of U.S. Government credits to foreign countries and
subscriptions to international agencies, net of changes in associated liabilities and after deducting loan repayments, amounted
to $2.4 billion in 1967. (This does not include increases in liquid
claims that count as U.S. official reserve assets.) Net disbursements rose by about $500 million, a major part of which was
related to the growing stream of loans by the Export-Import
Bank to finance U.S. sales of civilian jet aircraft and military
equipment. Receipts of loan repayments were about $200 million
less than the year before, as advance repayments—over $400
million in 1966—were negligible in 1967. The net outflow was
thus about $700 million larger than in 1966.
Outflows of U.S. private capital were also appreciably larger
than the year before. The largest change was a shift from about
$250 million of net inflows of credits reportable by banks in
1966 to about $450 million of net outflows of such credits in
1967. Those foreign assets of U.S. banks to which the foreign
credit restraint program applies increased by $370 million,
which was less than the program ceilings would have allowed,
41
ANNUAL REPORT OF BOARD OF GOVERNORS
while there were also increases in claims held for customers. This
resumption of a net outflow of bank credit resulted in part from
changes in monetary conditions here and abroad. In the United
INFLOWS of funds through increases in U.S. liquid liabilities to
commercial banks abroad and to other private foreign persons
are not so large as in 1966 while . . .
BILLIONS OF DOLLARS
U.S. LIQUID LIABILITIES TO:
OTHER
COMMERCIAL BANKS i
I—\
IMET OUTFLOW of U.S. bank credit resumes
OUTFLOW OF U.S. BANK CREDIT
1958
1961
1964
1967
Balance of payments data. "U.S. bank credit" represents claims on foreigners reported by
U.S. banks, including claims held for customers.
States bank liquidity was increasing and short-term market rates
of interest were lower than in 1966, whereas in Japan, which is a
heavy borrower from this country, short-term rates tended to rise.
Outstanding U.S. bank credits in continental Western Europe
42
FEDERAL RESERVE SYSTEM
were reduced; slackness of demand for credit in some European
countries reinforced the constraining effects of the interest equalization tax (IET) and the foreign credit restraint program.
Outflows of U.S. private capital to purchase newly issued
Canadian, Israeli, and World Bank bonds—all of which are
exempt from the IET—increased in 1967. Also U.S. investors
became net purchasers of foreign equity securities, whereas during the first 3 years that the IET was in effect they had made
sizable net sales. Total U.S. net purchases of foreign securities
in 1967 were about $1.3 billion, compared with $0.5 billion in
1966.
Outflows for direct investment in foreign affiliated companies
by U.S. corporations and other investors were smaller than in
1966. After deducting the amounts of such investment financed
through borrowings abroad by U.S.-incorporated companies, the
net outflow was about $2.7 billion, compared with $3.1 billion
the year before. The flow to Canada, which had been unusually
large in 1965 and 1966, contracted sharply.
In total, outflows of U.S. private capital, net of U.S. sales of
bonds in foreign capital markets in connection with the financing of direct investment, increased to $5.0 billion from $3.6
billion the year before.
INFLOWS OF FOREIGN CAPITAL
A new development that might, if it continued, help considerably in restoring international payments equilibrium was the
large inflow in 1967 of foreign capital to buy outstanding U.S.
equity securities. For the year as a whole net purchases of U.S.
stocks by foreigners—other than the U.K. Government and
private persons in the United Kingdom, who were net sellers—
were about $0.8 billion, but in the 6 months July-December
alone they were $0.7 billion. Inflows of this size were unprecedented; in the first half of 1961, for instance, total foreign net
purchases of U.S. stocks were unusually large but did not reach
$250 million.
43
ANNUAL REPORT OF BOARD OF GOVERNORS
In total, the inflows of foreign private capital through these
purchases of stocks, through purchases of U.S. corporate bonds,
through increases in commercial and other claims against U.S.
businesses other than banks, and through direct investments in
U.S. subsidiaries of foreign companies amounted to about $1.5
billion, compared with $0.7 billion in 1966. Not counted in these
totals are the purchases, about $450 million in 1967, of bonds
issued by U.S. companies for direct investment financing, which
were mentioned in the preceding section.
Another important category of foreign private capital inflow
in 1967 took the form of additions to foreign holdings of liquid
and near-liquid assets in the United States—such as interbank
balances, bank deposits, and U.S. Treasury and Federal agency
securities. Total U.S. liquid liabilities to commercial banks
abroad (including foreign branches of U.S. banks) increased by
about $1.3 billion. Although only about half as large as the 1966
inflow of $2.7 billion, which had been swollen by heavy bidding
by U.S. banks for Euro-dollar funds through their London
branches at a time when U.S. banks were under severe liquidity
pressures, this was still a very large amount; in only one other
year—1964—had the inflow been larger than it was in 1967.
Relatively easy short-term money market conditions in Germany
in 1967 and the persistent forward exchange discounts on sterling against the dollar and other currencies during a large part
of the year helped to generate movements of liquid funds to
the United States through the Euro-dollar market, and Canadian
and Japanese banks also increased their liquid assets in the
United States considerably.
Liquid liabilities of the United States to foreign private persons
other than commercial banks increased in 1967, as they had in
each of the preceding 6 years. The net inflow of funds in this
category totaled nearly $400 million for the year, substantially
more than the 1961-66 average of $250 million.
Liquid and near-liquid liabilities to international organizations (including certain regional organizations) increased by
44
FEDERAL RESERVE SYSTEM
about $100 million in 1967, after decreasing the year before by
a similar amount. Shifts by these holders from liquid assets to
long-term time deposits and Federal agency securities were
smaller than in 1966.
Finally, certain foreign official capital transactions had the
effect of increasing the U.S. payments deficit in 1967 on either
of the two methods of computation. In particular, the United
Kingdom in the latter part of 1967 liquidated about $500 million
of U.S. securities other than Treasury issues for the purpose of
increasing its monetary reserves. Partly offsetting this outflow,
there was an increase of under $100 million in U.S. liabilities
to foreign governments for prepayments made on military sales
contracts.
ERRORS AND OMISSIONS
The adverse balance of U.S. international payments and receipts
as measured by the resulting official reserve transactions
amounted to $3.4 billion in 1967, as noted above. This was substantially more than can be accounted for by the current-account
transactions and capital flows that have been discussed. While
some of the data are partly estimated and may eventually
undergo revision, it appears that the excess of unidentifiable
payments over unidentifiable receipts was only a little larger in
1967 than in the preceding years: perhaps $0.6 billion, compared with an average of $0.5 billion in the four preceding years.
These "errors and omissions" may reflect statistical deficiencies
in the measurement of current transactions, or they may imply
that the net outflow of private capital in various forms has been
larger than the available statistics and estimates have indicated.
45
ANNUAL REPORT OF BOARD OF GOVERNORS
FINANCIAL FLOWS IN 1967
The amount of funds raised in financial markets in 1967 as a
whole was very large in comparison with the reduced total in
1966. Most of the increase reflected a rapid acceleration of borrowing in the second half of the year, which drove interest rates
to new highs in long-term markets. Although all sectors other
than consumers stepped up their credit demands in 1967, most
of the expansion in borrowing stemmed from the large demands
of the Federal Government for funds to finance its record deficit
in the second half of the year.
Financial institutions were able to expand their lending activiU.S. GOVT. credit demands accelerate in second half of '67;
FINANCIAL INSTITUTIONS supply more funds
BILLIONS OF DOLLARS
TOTAL FUNDS SUPPLIED
TOTAL FUNDS RAISED
1966
1967
1966
1967
Flow of funds data. Half-year totals at seasonally adjusted annual rates. "All other" represents consumers, nonfinancial businesses, State and local governments, and foreigners. Data
for second half of 1967 are preliminary.
46
FEDERAL RESERVE SYSTEM
ties rapidly. Net inflows of funds to such institutions were enlarged not only by the return of more favorable spreads between
market rates and rates on intermediary claims but also by the
increased pace of consumer saving. However, credit flows
through intermediaries moderated in the final months of the year
as the public responded to the rising level of market yields by
diverting a larger share of its financial asset acquisitions directly
to market securities.
BORROWERS AND LENDERS
Financial markets in 1967 were dominated by the continued
attempts of both borrowers and lenders to readjust financial positions following the credit market stringencies that had developed
in 1966, by expectations of a return to tighter financial markets
in the period ahead, and by the borrowing activities of the Federal
Government. As a result, most sectors attempted to increase their
holdings of liquid assets, and many borrowers made strenuous
efforts to obtain large volumes of funds in long-term markets.
Federal Government. The Federal Government's financing
needs dominated financial developments in 1967. Total Federal
borrowing increased to about $14.5 billion—including $4.6
billion in issues of fully marketable participation certificates—or
almost twice as much as the year before. In the first half of the
year, accelerated tax payments and Treasury decisions to hold its
cash balances at lower levels than usual permitted a more than
seasonal repayment of debt—mostly of tax-anticipation bills. But
after midyear, with cash balances lower than normal and with
the gap between receipts and expenditures widening, total borrowing rose to record postwar levels.
Offerings of direct U.S. marketable securities alone totaled,
net, about $16 billion during the second half—over $11 billion
of which were Treasury bills. New issues of Treasury debt were
confined to short- and intermediate-term maturities because market yields on long-term issues throughout 1967 remained above
47
ANNUAL REPORT OF BOARD OF GOVERNORS
the statutory AVA per cent interest ceiling on Treasury bonds. On
several occasions during the year the Treasury made offerings of
issues with 5-year maturities, and in November it sold $1.7 billion of 7-year Treasury notes under new legislation. Even so, the
average maturity of the Federal debt continued to decline from
its recent peak reached in early 1965; by the end of 1967 it was
down to 4 years and 1 month.
TABLE 3
FINANCIAL TRANSACTIONS OF U.S.
GOVERNMENT
(In billions of dollars)
Calendar year 1966
Item
,
Calendar year 1967
. . . I ,
1st H. I 2nd H,
Cash receipts
Cash payments *
Cash surplus or deficit (—) i
Change in cash balance
Total borrowing
Nonmarketable securities 2
Marketable securities, total
Direct U.S
Nonguaranteed Federal agency
Participation certificates 3
Less: Official purchases or sales (—):
By Govt. agencies and trust funds
By Federal Reserve System 4
Equals: Net Federal marketable obligations acquired by the public
1
Participation certificates are included in cash payments of the Federal Government as a negative
expenditure.
2 Nonmarketable securities include the excess of cash sales over redemptions for savings bonds,
and the change in outstanding savings notes, foreign series securities, depositary bonds, retirement
plan bonds, and Rural Electrification Administration bonds.
3
Includes only fully marketable participation certificates.
4
Excludes repurchase agreements.
NOTE.—Data are not seasonally adjusted.
Borrowing in the market by Federal agencies, while large, was
somewhat less than the record volume of 1966. Nonguaranteed
debt of such agencies actually declined by $0.4 billion, in large
part because the Federal home loan banks were able to retire
substantial amounts of obligations as savings and loan associations repaid borrowings from the FHLB System. Marketable
48
FEDERAL RESERVE SYSTEM
participation certificates, on the other hand, were issued in record
volume during 1967, mostly in the first half.
The Federal Reserve Open Market Account and Treasury trust
accounts absorbed a sizable volume of direct U.S. Government
and Federal agency securities. Net purchases by these official accounts totaled $8.5 billion—more than two-thirds of the rise in
such debt outstanding. The Federal Reserve purchased more
than $5 billion of marketable U.S. Government securities (excluding purchases made under repurchase agreements). Net purchases by Treasury trust accounts and agencies totaled $3.2 billion. Although most of this amount represented direct U.S.
Government debt issues, it included more than $1 billion of
participation certificates. The Treasury completed all of its
acquisitions in the first half; during the second half it reduced its
holdings.
With the increase in official purchases, absorption of Federal
debt into private portfolios during 1967 was about the same as
during 1966—around $4 billion. However, there was a much
sharper than usual seasonal swing from the first to the second
half, and private investors had to absorb $16 billion of Federal
TABLE 4
FEDERAL LENDING
(In billions of dollars)
1964
Total
Mortgages
Loans, total
To savings and loan assns
To foreigners
To othersi
1965
1966
1967
3.8
4.7
7.9
4.5
0.2
3.5
0.5
1.6
1.4
1.0
3.7
0.7
1.5
1.5
3.4
4.6
0.9
1.3
2.4
2.7
1.8
-2.5
2.6
1.7
i To consumers, nonfinancial businesses, and State and local governments.
NOTE.—Flow of funds data; figures for 1967 are preliminary. Components may
not add to totals due to rounding.
49
ANNUAL REPORT OF BOARD OF GOVERNORS
direct and agency securities during the July—December period.
Most of these were acquired by commercial banks and other
financial institutions, but takings by the nonbank public rose as
interest rates moved to higher levels.
The Federal sector reduced its extension of credit to financial
markets in 1967 as pressures on mortgage markets subsided. Its
net purchases of mortgages, although still quite large and increasing in the second half of the year, dropped by one-fifth and,
as noted earlier, a large portion of its advances to savings and
loan associations through the FHLB were repaid. Outstanding
loans to foreigners, however, rose sharply—reflecting larger disbursements of loans by the Export-Import Bank, as well as
smaller advance repayments by foreign governments.
Nonfinancial businesses. Total funds raised by nonfinancial
businesses in credit and equity markets amounted to $37 billion
in 1967, one-tenth more than in 1966. Noncorporate businesses
raised less, but external financing by corporations rebounded
early in 1967 from the reduced volume of the second half of the
previous year and remained at advanced levels thereafter. For
1967 as a whole, nonfinancial corporations raised nearly $28
billion in credit and equity markets—$4 billion more than in
1966, though somewhat below the annual rate reached in the
first half of that year.
Needs to obtain external financing to fill the gap between
corporations' internal funds and their capital outlays abated
only moderately in 1967. While the gap was narrower than the
$16 billion experienced in the second half of 1966, it was still—
at $12 billion—considerably wider than in years prior to 1966.
Efforts of nonfinancial corporations to rebuild liquidity and to
acquire long-term funds in advance of expected sharp increases
in interest rates also contributed significantly to the volume of
the external financing of these corporations, and especially to the
predominantly long-term nature of that financing.
Sharp curtailment in corporate spending for inventories was
offset only in part by the moderate rise in outlays for plant and
50
FEDERAL RESERVE SYSTEM
equipment and the sharp expansion in multifamily housing and
commercial construction. As a result, nonfinancial corporations
spent $4 billion less for fixed assets and inventories than in 1966.
Funds available from internal sources also declined, for the first
time since 1960, but by only $0.6 billion. Profits fell in early
1967 and remained below 1966 levels throughout the year, despite some improvement in the fourth quarter. But the continued
rise in capital consumption allowances—primarily provision for
depreciation—offset almost all of the $3 billion decline in retained earnings.
Corporations raised an unusually large share of the external
funds they needed in 1967 in the securities market. Issues of
bonds and stocks, amounting to $16.6 billion, accounted for
60 per cent of all funds raised in credit and equity markets by
nonfinancial corporations, compared with 49 per cent in 1966
and an average of 44 per cent in 1961-65. Net new issues were
largest in the third quarter when financing undertaken in expectation of intense credit strains in the fall swelled the total to
a seasonally adjusted annual rate of $22 billion.
Until the closing months of the year, corporate demands
centered on the public bond market, and the volume of issues
offered there was more than double the previous record amount
sold in 1966. Meanwhile, reflecting the constraints on newcommitment activity in 1966, the volume of issues placed privately with institutional investors was the smallest in several
years. Late in the year, however, private placements increased
and the pace of public offerings slowed.
In addition to raising an unprecedented volume of funds
through security issues, nonfinancial corporations obtained a record amount of mortgage credit and increased the sale of their open
market paper, in part to commercial banks. Even so, they obtained
less financing from banks than in either of the two preceding
years. Relatively large direct borrowing at banks occurred mainly
around Federal income tax payment dates in the spring and near
the year-end when inventory investment accelerated. But even at
51
ANNUAL REPORT OF BOARD OF GOVERNORS
these times, such borrowing was well below the rate reached in
the spring of 1966. Acceleration of Federal income tax payments
caused a much larger drain on corporate funds in 1967, but to
meet this drain corporations relied mostly on other sources of
funds, including their own liquid assets, rather than on bank
loans.
CORPORATE NONFINANCIAL BUSINESSES borrow more in '67 as
security issues rise to record levels
BILLIONS OF DOLLARS
ALL NONFINANCIAL BUSINESSES
BILLIONS OF DOLLARS
NONFINANCIAL CORPORATIONS
„,
15
CORPORATE
SECURITIES
NONCORPORATE
10
30
5
20
MORTGAGES
5
n n ri
BANK LOANS
10
*
5
1964
1965
1966
1967
1964
1965
1966
1967
Flow of funds data. All nonfinancial businesses represent domestic corporate and noncorporate
(including farm) nonfinancial businesses; total funds raised by them exclude trade debt and
miscellaneous liabilities. Bank loans include bank acquisitions of commercial paper and
domestic acceptances. Half-year data are at seasonally adjusted annual rates. Data for the
second half of 1967 are preliminary.
The marked shift toward long-term financing in 1967 reflected, among other things, the fact that nonfinancial corporations were trying to improve their liquidity positions by reducing
their dependence on short-term funds and by rebuilding liquid
balances. However, despite the 80 per cent expansion in security
market and mortgage financing between the second half of 1966
and the first half of 1967, liquid asset holdings were reduced and
the conventional measure of corporate liquidity—the ratio of
52
FEDERAL RESERVE SYSTEM
liquid assets to total current liabilities—continued to decline
as the drop in profits in the first quarter and very large tax payments in the second put pressure on liquid funds. Thus, the only
way in which corporations may be said to have improved their
liquidity positions over the first half of the year was in lengthening
the average maturity of their debt.
But over the second half of the year the liquidity ratio probably stabilized and may even have risen a little more than seasonally. Holdings of liquid assets increased—and by more than the
reduction in the first half. For the year as a whole, liquid asset
holdings of nonfinancial corporations rose by about $2 billion—
a moderate amount but the largest annual increase since 1963.
Increases in time deposits and holdings of open market paper
were more than enough to offset reductions in demand deposits
and holdings of U.S. Government securities.
State and local governments. Net borrowing by State and local
governments in 1967 rose sharply from the reduced pace of the
previous year—to more than $10 billion—despite postponements of substantial amounts of new issues in the final months
of the year in reaction to the high level of interest rates in capital
markets. With the level of interest rates high, the volume of refunding issues continued to be negligible and nearly all of the
increase in borrowing by State and local governments was used
for capital outlays.
Some portion of the expanded borrowing by States and their
subdivisions represented issues that had been postponed in 1966
because of high interest rates and the congestion in the capital
markets. The relative facility with which issues were marketed
during most of 1967 reflected not only the generally increased
availability of credit but also the return of commercial banks to
the market for tax-exempt issues. In 1966 commercial banks had
diverted their reduced supply of funds from such investments to
loans to their established customers, but in 1967—with their
deposit inflows expanded and loan demands relatively modest—
banks purchased municipals at a record rate.
53
ANNUAL REPORT OF BOARD OF GOVERNORS
Another factor leading to the record supply of new issues was
the explosive growth in industrial revenue bonds—aggregating
more than twice the already large volume of 1966. Such borrowing was accelerated in large part by expectations that the taxexempt feature of these issues might be eliminated.
Perhaps the most important cause of rising credit demands by
State and local governments was the declining adequacy of current revenues for financing their usual share of capital outlays.
Cutbacks in Federal spending in 1967 sharply reduced the
growth of grants-in-aid to State and local governments—such aid
had been a source of increasing revenue to these units in recent
years. Meanwhile these governments found that the costs of their
operations were continuing to rise faster than their tax revenues.
As a result, a significant portion of capital outlays normally
financed from revenues had to be financed with borrowed funds.
This shortfall of revenue, along with rising costs of borrowed
funds and greater interest on the part of commercial banks in
liquid assets, also contributed to a very large expansion in shortterm borrowing by States and their political subdivisions.
State and local governments in recent years have supplied a
significant volume of funds to credit markets through purchases
of securities by their employee pension funds. Continuing the
earlier trends to maximize income, most of the asset growth of
such pension funds in 1967 took the form of higher-yielding corporate bonds. For the second consecutive year purchases of such
bonds by State and local governments were larger than those by
the previously dominant private insurance and pension fund
sector.
Consumers. With incomes rising at a relatively rapid rate and
expenditures for housing and durable goods moderate, consumers increased their acquisitions of financial assets rapidly in
1967. In the first half of the year they liquidated market securities at a fast pace—shifting funds to the more liquid and relatively more attractive deposit-type instruments offered by financial institutions. With the renewed rise in market yields, how54
FEDERAL RESERVE SYSTEM
ever, claims on financial institutions became somewhat less
attractive in the final months of 1967. Consequently, consumers
reduced their rate of acquisitions of such claims as they shifted
to market securities.
Despite the increased availability of credit, consumers reduced
their rate of net borrowing in credit markets for the third straight
CONSUMERS accelerate their acquisitions of financial assetsespecially deposits-and borrow less
BILLIONS OF DOLLARS
INCREASE IN FINANCIAL ASSETS
PER CENT
RATfO TO DISPOSABLE INCOME
DEPOSIT TYPE CLAIMS
OTHER
FINANCIAL ASSETS
40
DEPOSIT-TYPE CLAIMS
20
RATIO TO CAPITAL OUTLAYS
33
INCREASE IN DEBT
27
30
1965
1966
1967
1965
1966
1967
Flow of funds data. Consumer sector includes nonprofit institutions. Increase in financial
assets excludes investment in noncorporate business and is less net security credit. Deposittype claims are demand deposits and currency and interest-bearing, deposit-type claims on
commercial banks and other financial institutions. Ratios to disposable income are based on
acquisitions of financial assets and changes in deposit-type claims. Borrowing/capital outlays
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 are based on quarterly totals at
seasonally adjusted annual rates. Data for fourth quarter of 1967 are preliminary.
55
ANNUAL REPORT OF BOARD OF GOVERNORS
year. This reduced borrowing reflected, to a large extent, the
continued slower rate of growth in mortgage credit, particularly
in the early part of 1967 when housing completions and starts
were still unusually low and when turnover of existing homes
had only just begun to regain momentum. However, nonmortgage borrowing by consumers also expanded at a relatively slow
pace.
Consumer purchases of durable goods other than housing
expanded in 1967, but the share of such purchases financed on
credit was smaller than in earlier years. Indeed, while extensions
of instalment credit rose rapidly after the spring, repayments
also accelerated, and as a result the increase in instalment debt
was the smallest in 3 years. Repayments on instalment debt in
1967 appear to have been buoyed by prepayments as consumers
found their financial positions improved. Partly because an increasing share of their saving was used tcrrepay debt, consumer
acquisitions of financial assets—while large—did not rise so
fast relative to income as they had in 1965 when both borrowing
and acquisitions of financial assets by consumers were particularly large.
Rest of the world. Financial flows between the United States
and the rest of the world increased sharply in 1967, although the
net outflow did not change much.
Net outflows of U.S. private and U.S. Government loans and
investments increased, as noted in the discussion of the balance
of payments on pages 37-45 above. There was an increase
also in the inflow of foreign private investments, partly to acquire
outstanding U.S. equity securities, and partly to buy securities
issued by U.S. companies to finance investments in their affiliates
abroad. On the other hand, the U.K. authorities liquidated in
1967 a considerable amount of U.S. securities other than Treasury issues. Foreign purchases of more than $1 billion of gold
were largely offset by a $1 billion increase in Federal Reserve
and Treasury liquid claims in convertible currencies. Offsetting
56
FEDERAL RESERVE SYSTEM
an increase from 1966 to 1967 in the net outflow balance of all
the foregoing categories of capital, as well as an increase in unidentified outflows, additions to foreign holdings of liquid and
near-liquid assets in the United States were about $3 billion
greater in 1967 than in 1966.
Additions to the foreign holdings of such assets were about
$5 billion, compared with about $2 billion the year before.
Among the principal components of the 1967 inflow were an
increase of more than $1 billion in U.S. banks' demand and time
liabilities to foreign central banks and governments, an increase
of $1.3 billion in their balances due to commercial banks abroad,
and an increase of $0.4 billion in their deposit liabilities to other
private persons abroad. Foreign net acquisitions of U.S. Government securities, including special issues, exceeded $2 billion.
These purchases were made mainly by central banks and governments and were especially large in the fourth quarter.
FINANCIAL INTERMEDIATION
During 1967 financial institutions as a group supplied about
80 per cent of the total funds raised in financial markets—reversing the unusually sharp decline in 1966 when institutions' share
of total lending fell as the public shifted funds away from financial institutions to direct investment in market securities. In 1967
the increase in the relative attractiveness of claims on intermediaries, the public's preference for liquid assets, and the higher
rate of consumer saving increased net inflows of funds to all types
of financial institutions. As a group, however, these institutions
allocated a large share of these inflows first to rebuilding liquidity
depleted in 1966 and then—for both liquidity and yield considerations—to market securities other than mortgages.
Toward the year-end, rising yields on market securities tended
to reduce the pace of inflows to financial institutions. But with
short-term yields still below those of 1966, inflows of funds to
these institutions as a whole remained considerably larger than
during the more difficult periods of the previous year.
57
ANNUAL REPORT OF BOARD OF GOVERNORS
FINANCIAL INSTITUTIONS supply larger share of total credit flows
in '67, but . . .
PER CENT
FINANCIAL INSTITUTIONS
100
1
COMMERC AL BANK
NONBANK DEPOSITARY
i OTHER
1
1
80
60
III
|jL
j
20
in second half, direct acquisitions by pu blic increase
MARKET SECURITIES
I
20
20
1961-6E
1966
1967
Flow of funds data. Nonbank depositary institutions are savings and loan associations, mutual
savings banks, and credit unions. Other nonbank financial institutions are made up mainly
of life and other insurance companies and pension funds but also include finance companies,
open-end investment companies, and miscellaneous institutions. Funds supplied directly by
the public reflect acquisitions of market securities (less security credit) by domestic consumers, nonfinancial businesses, and State and local governments. Not shown are funds
supplied by the F.R. System, other parts of the U.S. Govt., and foreigners. Data for half
years are at seasonally adjusted annual rates and for second half of 1967 are preliminary.
Commercial banks. After relatively modest growth in 1966,
loans and investments at commercial banks expanded in 1967
at a postwar record pace of 11 per cent. Credit extended by
banks accounted for more than 40 per cent of total credit flows—
their largest share in over a decade. The growth reflected not
only the stance of monetary policy but also the increased attractiveness of bank deposits relative to alternative financial assets,
and the efforts of the nonfinancial sectors to rebuild liquidity.
58
FEDERAL RESERVE SYSTEM
Time deposits. With the decline in money market yields in
late 1966, time deposits at banks again became relatively attractive instruments, and inflows of such deposits accelerated to
a rate of almost 16 per cent for the full year, about twice that of
1966. All forms of interest-bearing deposits—passbook savings
accounts, negotiable CD's, and other time deposits—shared in
the expansion.
The most rapid increase in time deposits occurred early in the
year, when banks aggressively sought to recover the funds they
had lost by attrition of CD's in the late summer and fall of 1966.
By maintaining relatively attractive offering rates, banks increased their outstanding negotiable CD's to a new record in
the first quarter of 1967. In the spring, however, with loan demands modest, other deposit inflows strong, and substantial
improvement in bank liquidity, offering rates on CD's were reduced to relatively low levels at the same time that corporate
liquidity was being drawn down in order to meet accelerated tax
payments. Consequently, outstanding CD's showed no growth
in the second quarter. Over the first half some banks also took
steps—including reductions in rates—to moderate their inflows
of other forms of time deposits. But in the aggregate, growth in
consumer-type time deposits remained large.
As short-term market rates of interest began to rise around
midyear, some banks raised their offering rates on consumer-type
deposits and on large negotiable CD's. Moreover, with growing
expectations of rising interest rates and heavier demands for
loans, the increase in offering rates and the aggressiveness of
banks in seeking deposits were most pronounced for CD's with
longer maturities. The volume of outstanding CD's expanded
rapidly over the summer, and at the same time large banks increased their borrowings of Euro-dollars at the relatively low
prevailing rates.
During the autumn, inflows of consumer-type deposits began
to moderate as consumers shifted some funds into increasingly
attractive market securities. Moreover, as short-term market in-
59
ANNUAL REPORT OF BOARD OF GOVERNORS
terest rates continued to rise, offering rates on CD's began to
approach their Regulation Q ceiling of 5Vi per cent.
By late autumn longer-maturity CD's paying 5Yi per cent
became increasingly noncompetitive, and the average maturity
of new CD's sold shortened considerably. After the devaluation
of sterling and the increase in the Federal Reserve discount rate
in November, offering rates of 5Vi per cent on CD's became
available throughout the maturity spectrum. At the year-end the
average maturity of outstanding CD's at weekly reporting banks
was 2.9 months, compared with 3.8 months in the spring. In
addition, in the final weeks of 1967, the very large volume of
CD's that were maturing and the increasing inability of banks
to issue CD's in any maturities except the shortest term produced
somewhat more than seasonal attrition in CD's, and inflows of
other forms of time deposits continued to slacken.
9
DEPOSITS at commercial banks grow rapidly
BILLIONS OF DOLLARS
BILLIONS OF DOLLARS
ALL COMMERCIAL BANKS
WEEKLY REPORTING BANKS
180
130
1965
1967
Total time and savings deposits are seasonally adjusted monthly averages of daily figures
and exclude domestic interbank and U.S. Govt. deposits. Effective June 6, 1966, balances
accumulated for payment of personal loans were reclassified for reserve purposes; such
deposits are excluded thereafter. Data for weekly reporting banks are as of the last
Wednesday of the month and are not seasonally adjusted.
60
FEDERAL RESERVE SYSTEM
Demand deposits. Private demand balances were also a major
source of bank funds in 1967. Such deposits had declined after
the late spring of 1966, but in 1967 they expanded at a rate of
nearly 7 per cent; during the spring and summer months their
rise was very rapid. To a large degree, this increase reflected
efforts of the public to rebuild deposits from the low levels to
which they had been reduced during the period of restrictive
monetary policy in 1966. It is also likely that corporations, particularly in the fall, were trying to build up their compensating
balances in order to insure bank credit availability in 1968. As
market yields continued to rise, however, efforts to economize on
cash contributed to a cessation of growth in demand balances in
the final weeks of the year.
U.S. Treasury balances, as usual, fluctuated widely during
1967. Larger expenditures by the Treasury, new patterns of tax
receipts, and large cash financings contributed to fluctuations in
both Government and private demand deposits. The Treasury's
balances with commercial banks were drawn down to very low
levels at midyear, in part as a result of the redemption of a large
amount of debt in late June. After midyear, these balances were
rebuilt by an unusually large volume of Treasury cash financing,
which contributed to rapid expansion of bank credit through
October. But by the end of 1967 Government deposits had again
declined to relatively low levels, and the rate of expansion of
bank credit had tapered off considerably.
Bank credit. With demands for loans small relative to deposit
inflows and with banks making efforts to improve their liquidity
positions, somewhat over half of the increase in bank assets during 1967 took the form of securities. Holdings of securities expanded at a record rate, whereas total loans grew at the slowest
pace since 1960-61.
The expansion in total loans at commercial banks over the
entire year 1967 was only a little smaller than in the previous
year. However, business loans grew considerably less than in the
period 1965 through the summer of 1966 as corporations increased their reliance on market financing and reduced the pace
61
ANNUAL REPORT OF BOARD OF GOVERNORS
of inventory investment. The most rapid increase in business
loans occurred in the first half of the year when the accelerated
schedule of income tax payments greatly expanded the needs of
corporations for funds; in the second half such loans expanded at
two-thirds of their pace in the first half of the year—with some
acceleration in December.
Other loans, on the other hand, expanded faster in the second
half of the year than in the first. Real estate loans accelerated
in the spring, and at about the same time the pace of lending to
consumers increased. Loans to finance companies, which had
declined from mid-1966 to the midsummer of 1967, also showed
a moderate growth during the late summer and fall as the cost
of market financing by these institutions began to approach the
cost of bank loans; this increase, however, was halted by the
increase in the bank prime rate late in November. Finally, with
the shift in Treasury operations—from debt redemption in the
first half to a large volume of new cash financing in the second—
banks' security loans increased quite sharply in the summer and
fall in contrast to net repayments earlier in the year.
In the securities segment of banks' portfolios, acquisitions
of Treasury issues were the largest since 1958, and purchases
of other securities were at record rates. The extent of the
growth was associated with several factors, including the relatively modest demand for bank loans at a time when deposit
inflows to banks were extremely large.
Like other financial institutions, banks had a desire to regain
portfolio liquidity, which had been depleted in 1966 by heavy
demands for loans at a time of restrictive monetary policy. It is
difficult to quantify bank liquidity precisely, but such an indicator as the loans-to-deposits ratio fell in 1967. Moreover,
banks not only increased their holdings of short-term Treasury
and municipal issues but also added to their holdings of such
liquid assets as acceptances and commercial and finance company
paper—which are included as loans in banking statistics.
The interest of banks in accumulating liquid assets, while
aimed in large part at regaining the liquidity depleted in 1966,
62
FEDERAL RESERVE SYSTEM
was also associated with growing expectations of increased demand for loans and of greater monetary restraint as the year
progressed—expectations that also strengthened banks' desires
to obtain long-term time deposits. The mildness of the business
10
BANK CREDIT accelerates in '67; securities account
for more than half of the increase
BILLIONS OF DOLLARS
TOTAL LOANS AND INVESTMENTS
40
30
20
10
U.S. GOVERNMENT SECURITIES
n
"
1
STATE AND LOCAL SECURITIES
20
r
n I
DOMESTIC BUSINESS LOANS
20
i
r1
OTHER LOANS
1964
10
+
0
20
1965
1966
1967
Flow of funds data. U.S. Govt. securities include nonguaranteed debt of the U.S. Govt. and
loan participation certificates. Business loans are to all domestic nonfinancial businesses
and include commercial paper and domestic acceptances. Half-year data are at seasonally
adjusted annual rates; those for second half of 1967 are preliminary.
pause early in 1967, the rapidity of the recovery, the large financing needs of the Federal Government, and widespread belief
that credit demands might be large in 1968, all suggested to many
banks that efforts to increase liquidity constituted a prudent
63
ANNUAL REPORT OF BOARD OF GOVERNORS
portfolio policy—particularly since they were still so conscious
of their 1966 experience. Indeed, nonprice lending policies and
terms were not relaxed much in 1967, despite the reduced demand for loans. The prime lending rate at banks had been reduced from 6 to 5Vi per cent in the early months of 1967, but
it was returned to 6 per cent after the November increase in
the discount rate and a rise in the cost of bank funds from other
sources.
Finally, bank demands for securities were augmented by very
attractive yields on these securities—particularly on municipals.
For the year as a whole, bank purchases of tax-exempt securities
were equal to more than 80 per cent of the net borrowing by
State and local governments. Banks also found the new issues of
Treasury securities very attractively priced, and in the second
half of 1967 they acquired an amount equal to more than onethird of these new issues.
Nonbank financial institutions. Financial institutions other than
commercial banks also supplied an increased volume of credit in
1967. Nevertheless, their share of total credit supplied—while
above that of 1966—remained less than it had been earlier in
the 1960's. This reflected not only the greater relative success of
commercial banks in obtaining deposits from the public but also
the fact that savings and loan associations used an unusually
large share of their increased inflows in early 1967 to repay loans
obtained from the FHLB during the 1966 period of credit
stringency.
Depositary institutions. Share accounts at savings and loan
associations rose sharply in 1967, despite the general slowing of
inflows toward the year-end. At the same time, net inflows of
deposits to mutual savings banks—which, due to earlier upward
adjustments in deposit rates, had begun to recover after mid1966—rose to new records. As in the case of the savings and
loan associations, however, rising yields on market instruments
after midyear also tended to moderate inflows to these banks.
Savings and loan associations used a large proportion of their
64
FEDERAL RESERVE SYSTEM
inflows in 1967 to rebuild their depleted liquidity. As noted
above, they made large repayments to the FHLB, especially during the first half of the year, and during the year as a whole they
repaid almost all of the funds they had borrowed since 1963.
Moreover, during the spring and summer the associations made
record acquisitions of U.S. Government securities, thereby
achieving a marked improvement in their portfolio liquidity.
As a result, acquisitions of mortgages by the savings and loan
associations increased much less rapidly than share inflows over
most of the year. This difference in rate of growth stemmed not
only from the liquidity priority of the associations but also from
11
Inflows of funds at NONBANK INSTITUTIONS accelerate in '67,
but acquisitions of mortgages lag as institutions restore liquidity
BILLIONS OF DOLLARS
MUTUAL SAVINGS BANKS
SAVINGS & LOAN ASSOCIATIONS
15
10
5
0
10
5
+
0
5
10
CORPORATE BONDS
U.S. GOVT. SECURITIES
5
0
5
1964
1965
1966
1967
BORROWING FROM FHLB
Flow of funds data. Quarterly totals
are at seasonally adjusted annual
rates. Data for fourth quarter of
1967 are preliminary.
1964
1965
1967
65
ANNUAL REPORT OF BOARD OF GOVERNORS
the inevitably long lag between commitments and acquisitions,
especially after a year such as 1966 when construction activity
had lost considerable momentum and stocks of new housing
units had been substantially reduced. But commitments began
to rise in early 1967 and by August had returned to relatively
normal levels. Indeed, with inflows higher and commitments
rising, by midyear the associations had regained their dominant
position in the mortgage market.
Mutual savings banks, even with record inflows of deposits
during most of 1967, increased their net acquisitions of mortgages relatively little from the 1966 pace. Instead they expanded
their acquisitions of corporate bonds; net purchases of these securities in the single year 1967 approached the total for the previous two decades. The interest shown by savings banks in corporate bonds was stimulated by the attractive yields on these
securities, which made them increasingly competitive with mortgage investments as the year progressed. Moreover, since the
bulk of the corporate bonds acquired were publicly traded, portfolio marketability of such banks was also enhanced by this shift.
Average rates paid on savings claims at both mutual savings
banks and insured savings and loan associations increased in the
first half of 1967 from the second half of 1966. While increases
at these institutions were smaller than those during 1966, they
raised rates to levels that were much more competitive with market yields, as reflected by the strength of net inflows during the
first half of the year.
In July, few changes were made in offering rates by FDICinsured mutual savings banks. Savings and loan associations,
however, were affected by regulatory changes on both regular
and special accounts that lowered rate ceilings by 25 basis points
in 10 States. Reflecting these rate-ceiling amendments, average
offering rates on both types of accounts at savings and loan associations decreased in July. At both types of institutions, however,
over half of the insured members in July were offering rates below regulatory ceilings on regular accounts.
66
FEDERAL RESERVE SYSTEM
During the remainder of 1967, there were no further changes
in rate ceilings and although yields on market instruments increased significantly, offering rates changed little at both types of
institutions. The special rate-control authority enacted by Congress in the fall of 1966 was extended for another year beginning
September 21, 1967.
Other institutions. While the contractual nature of inflows of
new funds to life insurance companies tends to insulate such inflows from immediate shifts in market pressures, the investment
options of these companies are relatively broad. Consequently, investment allocation at any particular time is influenced more by
considerations of comparative yield than it is at thrift institutions—particularly at savings and loan associations. Thus, in
1967 the shifting structure of yields produced further changes in
the types of assets acquired by life insurance companies; similarly,
the unexpected drain of lendable funds at these companies in
1966 had affected asset acquisitions in that year.
Flows of investment funds through life insurance companies
in 1967 resumed the more stable pattern prevailing before 1966,
although they were still being influenced by the level of market
interest rates. For example, with their cost to the borrower still
less than that on most other types of credit, loans to policy holders took about 9 per cent of the lendable funds of life insurance
companies in 1967. While this was less than the 20 per cent of
cash flows used for the same purpose in the third quarter of
1966, the share was higher than in the first half of the decade
as a whole. Moreover, with interest rates high, flows of funds
from prepayments of existing mortgage investments remained
small. Life insurance companies, like other mortgage lenders,
found not only that borrowers seemed reluctant to prepay existing mortgages but also that refinancings of existing mortgages
remained quite limited under conditions of rising interest rates;
turnover of used homes, though substantially improved, also continued to be relatively inhibited.
Still, the supply of funds available to life insurance companies
67
ANNUAL REPORT OF BOARD OF GOVERNORS
for lending was somewhat larger than in 1966, and the new
commitments of such companies for investments increased at an
accelerating pace from the low level at the beginning of the year.
However, to an even greater extent than for mutual savings
banks, life insurance companies—in their quest for higher yields
—shifted both their commitments and their acquisitions from
home mortgages to mortgages on income properties, and from
mortgages in general to corporate securities. Indeed, the largest
increase in portfolios in 1967 was in holdings of domestic corporate bonds; the dollar amount of such holdings expanded more
rapidly than mortgages for the first time in almost a decade.
Moreover, life insurance companies increased their acquisitions
of publicly offered bonds relative to privately placed issues. With
the attractive yields that prevailed on quality-rated public issues
during the year, gains in portfolio marketability were made at
yields close to those historically available on private issues, for
which quality ratings are not available.
The volume of new commitments, which had reached very low
levels in late 1966 and early 1967, surged after that and carried
outstanding commitments of life insurance companies to new
highs by late autumn. But continuing the trend that had begun
in 1966, the funds covered by more than half of the new commitments would not become available until at least 6 months after
the date of the commitment—reflecting in large part the size of
demands relative to cash flows. Even so, with the moderation
in policy loans and the gradual build-up of new commitments,
the 1967 relationship between expected cash flows and outstanding commitments was far more comfortable than it had
been from late 1965 through 1966.
Other kinds of insurance companies and private pension funds
made no large changes in portfolio allocations during 1967. Fire
and casualty insurance companies, which are subject to higher
tax rates than life insurance companies, stepped up their purchases of municipal bonds and reduced their acquisitions of corporate bonds. Pension funds used a larger proportion of their
68
FEDERAL RESERVE SYSTEM
inflows to buy equities and reduced the proportion used to buy
bonds. In view of the fact that more funds were available in the
market and at other institutions, business firms reduced their debt
to finance companies in the first half of the year. As a result
of this and of reduced borrowings by consumers, credit granted
by finance companies showed the smallest increase since 1961.
Under these circumstances, finance companies not only repaid
bank loans but also borrowed less in the open market.
69
PART II
Records, Operations, and Organization
71
ANNUAL REPORT OF BOARD OF GOVERNORS
RECORD OF POLICY ACTIONS
OF THE BOARD OF GOVERNORS
February 28, 1967
Amendment to Regulation D, Reserves of Member Banks.
The Supplement to Regulation D was amended to reduce reserve requirements from 4 per cent to 3 per cent against savings deposits, Christmas and vacation club accounts, and the first $5 million of other time
deposits at each member bank. The reduction was made in two steps:
the first, from 4 to 3V£ per cent, effective with the reserve computation
period beginning March 2, 1967; and the second, from ZVi to 3 per cent,
effective with the reserve computation period beginning March 16, 1967.
Votes for this action: Messrs. Martin, Robertson, Shepardson, Mitchell, Maisel, and Brimmer.
Votes against this action: None.
Economic and financial conditions prevailing at the time this
action was taken are described in some detail in the record of
policy actions of the Federal Open Market Committee, presented elsewhere in this ANNUAL REPORT. In brief, the economy
had been displaying weakening tendencies since prior to the turn
of the year. Production schedules were being adjusted to reduce
excessive inventories, investment in new plant facilities was falling, and consumer spending for durable goods was declining.
In these circumstances the Federal Reserve moved to a more
expansive monetary policy. Open market operations were undertaken to supply reserves generously, thereby permitting member
banks to reduce their borrowings, enabling them to begin to restore liquidity positions, and supporting a rapid expansion of bank
credit. The reduction in reserve requirements was a complementary easing action, designed to assist in meeting developing credit
needs throughout the country in a manner consistent with the
policy objective of assuring adequate credit availability to provide for orderly economic growth.
72
FEDERAL RESERVE SYSTEM
The action was so structured as to achieve a greater relative
reduction in reserve requirements at the many smaller member
banks spread throughout the banking system. Of the total amount
of reserves released by the action, approximately $500 million accrued to country member banks and the remainder—about $350
million—to reserve city banks.
March 13, 1967
Revision of Regulation M, under the title Foreign Activities of National
Banks, and amendments to Regulation K, Corporations Engaged in Foreign Banking and Financing under the Federal Reserve Act.
Effective March 15, 1967, the Board adopted a revision of Regulation
M and conforming amendments to Regulation K, principally to implement Section 12(b) of Public Law 89-485.
Votes for this action: Messrs. Martin, Robertson,
Shepardson, Mitchell, Maisel, and Brimmer. Votes
against this action: None.
The principal purpose of the revision of Regulation M was to
add two new sections covering the purchase by national banks
of stock of foreign banks and loans to such banks by the national banks, as permitted under an amendment to Section 25 of
the Federal Reserve Act contained in Public Law 89-485, approved July 1, 1966. (Under applicable law, Regulation M generally applies also to State-chartered banks that are members of
the Federal Reserve System.)
One of the new sections of the revised Regulation authorized
national banks, with the permission of the Board, to acquire the
stock of foreign banks. However, the total amount of such investments was limited to not more than 25 per cent of the capital
and surplus of the investing U.S. bank taken together with its
capital investments, if any, in so-called Edge and agreement
corporations operating pursuant to Sections 25 and 25(a) of the
Federal Reserve Act.
73
ANNUAL REPORT OF BOARD OF GOVERNORS
The other new section of the revised Regulation authorized
U.S. banks having a direct or indirect stock investment in foreign
banks to make loans or extensions of credit to such foreign banks
without regard to the provisions of Section 23A of the Federal
Reserve Act.
The revision also amended Regulation M to increase to $50,000, from $20,000, the amount of credit permitted to be extended by a foreign branch of a U.S. bank to an executive officer
of such branch for the purpose of acquiring or constructing living quarters for his use abroad.
The amendments to Regulation K were adopted in the interest of bringing about conformity between the two regulations.
April 6, 1967
Decrease in rates on discounts and advances by Federal Reserve Banks.
Effective April 7, 1967, the Board approved actions taken by the
Boards of Directors of the Federal Reserve Banks of Boston, New York,
Philadelphia, Cleveland, Richmond, Chicago, Minneapolis, Kansas City,
Dallas, and San Francisco establishing a rate of 4 per cent (a decrease
from AVi per cent) on discounts and advances to member banks under
Sections 13 and 13a of the Federal Reserve Act.
Votes for this action: Messrs. Martin, Robertson,
Shepardson, Mitchell, Daane, Maisel, and Brimmer. Votes against this action: None.
Pursuant to the policy established by this action, the Board subsequently approved the same rate for the Federal Reserve Bank of Atlanta effective April 10, 1967, and for the Federal Reserve Bank of
St. Louis effective April 14, 1967.
Effective the same dates the Board approved for the respective Federal Reserve Banks a rate of AVi per cent on advances to member banks
under Section 10(b) of the Federal Reserve Act. In addition, the Board
approved decreases at most of the Banks in rates on advances to individuals, partnerships, and corporations other than member banks under
the last paragraph of Section 13 of the Act.
(In accordance with provisions of the Federal Reserve Act, the Federal
74
FEDERAL RESERVE SYSTEM
Reserve Banks are required to establish rates on discounts for and advances to member banks at least every 14 days and submit such rates to
the Board for review and determination. Prior to this date no changes
had been made in such rates since those referred to on pages 63-70 of
the Board's ANNUAL REPORT for 1965. Certain proposed rate changes
were disapproved by the Board in 1966, as described on pages 94-97 of
the Board's ANNUAL REPORT for 1966.)
The implementation, through open market operations and a
reduction of reserve requirements, of a policy of monetary ease
during the early months of 1967 enabled banks to achieve more
comfortable reserve positions. This was accompanied by a
marked decline in interest rates, particularly in the short-term
area. Over the first 3 months of the year the 3-month Treasury
bill rate dropped from around 4.80 per cent to nearly 4 per cent,
while the Federal funds rate declined from around 5.50 per cent
to about 4 per cent.
The action to decrease the discount rate by Vi percentage point
to a level of 4 per cent was taken in order to move that rate into
closer alignment with the reduced level of money market rates.
Moreover, in a period of hesitation in economic expansion such
a reduction in the discount rate was in keeping with the general
Federal Reserve policy objective of assuring adequate credit
availability to provide for orderly economic growth.
April 20, 1967
Amendment to Regulation F, Securities of Member State Banks.
Effective April 20, 1967, Regulation F was amended to permit the use
of a new form designed to simplify registration requirements under certain circumstances.
Votes for this action: Messrs. Martin, Shepardson,
Daane, and Maisel. Votes against this action: None.
The purpose of this amendment was to authorize use of a
simplified form for registration of additional classes of securities
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ANNUAL REPORT OF BOARD OF GOVERNORS
of a member State bank in cases where most of the information
necessary for the protection of investors in securities of the bank
was already publicly available.
May 15, 1967
Amendment to Regulation O, Loans to Executive Officers of Member
Banks.
Effective July 1, 1967, Regulation O was amended to exclude from
its coverage certain types of indebtedness of executive officers arising
from the use of charge accounts and credit-card or check-credit plans.
Votes for this action: Messrs. Martin, Robertson,
Mitchell, Daane, Maisel, Brimmer, and Sherrill.
Votes against this action: None.
The purpose of the amendment was to exclude from the coverage of Section 22(g) of the Federal Reserve Act and of Regulation O certain indebtedness of an executive officer to a bank,
other than his own bank, arising out of the use of charge accounts
and credit-card or check-credit plans. The amendment also excluded an executive officer's indebtedness to his own bank arising from such transactions (except in the case of a particular
indebtedness that would involve prior individual clearance or
approval by his bank going beyond routine confirmation of the
right to incur such indebtedness required of all participants in the
general plan), but in no event to the extent that the aggregate
amount of his indebtedness exceeded $1,000.
Because of its impersonal nature, indebtedness of the type
covered by the new exclusion was not regarded as falling within
the general intent of Section 22(g) of the Federal Reserve Act.
However, in order to guard against possible abuse or evasion of
the basic purposes of the law, certain limitations were prescribed
76
FEDERAL RESERVE SYSTEM
in the case of indebtedness of an executive officer to his own
bank.
July 20, 1967
Revision of Regulation J, under the title Collection of Checks and Other
Items by Federal Reserve Banks, and revocation of Regulation G, Collection of Noncash Items.
Effective September 1, 1967, the Board adopted a revision of Regulation J and revoked Regulation G.
Votes for this action: Messrs. Robertson, Mitchell, Maisel, Brimmer, and Sherrill. Votes against this
action: None.
The new Regulation J replaced the previous Regulations G
and J, which related, respectively, to the collection of noncash
items and the collection of checks and other cash items. This
combination had the advantage of avoiding repetition while at
the same time insuring a precise interlock between the provisions
relating to cash items and those relating to noncash items.
In general, the revision of Regulation J brought the regulatory
provisions into closer conformity with the check collection provisions of the Uniform Commercial Code and with developments
in banking practices. It also clarified and described in more precise language the terms and conditions under which checks and
other items would be received and handled for collection by the
Federal Reserve Banks.
In connection with the adoption of the new Regulation, the
Federal Reserve Banks revised their operating circulars governing the details of collection operations, also effective September
1, 1967.
77
ANNUAL REPORT OF BOARD OF GOVERNORS
November 13, 1967
Revision of foreign credit restraint program guidelines.
Effective November 16, 1967, the Board issued revised guidelines for
banks and nonbank financial institutions cooperating with the President's
program of voluntary foreign credit restraint to improve the nation's
balance of payments.
Votes for this action: Messrs. Robertson, Daane,
Maisel, Brimmer, and Sherrill. Votes against this
action: None.
During 1967 the financial community had continued to cooperate effectively with the President's voluntary foreign credit
restraint program. Foreign credits of commercial banks increased
far less in the first three quarters of the year than would have
been permitted by the program guidelines; on September 30 the
banks were $783 million below the end-of-1967 target ceiling.
Foreign claims of nonbank financial institutions subject to the
guidelines for such institutions declined by $76 million (3.9 per
cent) during the first 6 months of 1967, and at the end of June
those institutions were $57 million below the target ceiling.
Nevertheless, since the U.S. balance of payments position had
not improved during 1967, it was considered necessary to continue the voluntary effort to reduce the outflow of private capital.
Accordingly, the Board issued revised guidelines for financial
institutions.
The changes in the commercial bank guidelines were designed
to tighten somewhat the over-all restraint on the flow of bank
capital abroad, restrict further growth in nonexport credits to
developed countries of continental Western Europe, provide
more equitable treatment for banks that had small bases on December 31, 1964, and give further stimulus to export financing.
The program for nonbank financial institutions remained
substantially the same as that for 1967. However, the target ceiling applicable to assets covered by the guidelines was increased
somewhat for 1968, and reporting requirements were modified to
reduce the number of reporting institutions.
78
FEDERAL RESERVE SYSTEM
November 18, 1967
Increase in rates on discounts and advances by Federal Reserve Banks.
Effective November 20, 1967, the Board approved actions taken by
the Boards of Directors of the Federal Reserve Banks of Boston, New
York, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, Kansas
City, Dallas, and San Francisco establishing a rate of AV2 per cent (an
increase from 4 per cent) on discounts and advances to member banks
under Sections 13 and 13a of the Federal Reserve Act.
Votes for this action: Messrs. Martin, Robertson,
Mitchell, Daane, Maisel, Brimmer, and Sherrill.
Votes against this action: None.
Pursuant to the policy established by this action, the Board subsequently approved the same rate for the Federal Reserve Bank of Philadelphia effective November 21, 1967, and for the Federal Reserve Bank of
St. Louis effective November 27, 1967.
Effective the same dates the Board approved for the respective Federal Reserve Banks a rate of 5 per cent (an increase from AV2 per cent)
on advances to member banks under Section 10(b) of the Federal Reserve Act. In addition, the Board approved increases at all of the Banks
in rates on advances to individuals, partnerships, and corporations other
than member banks under the last paragraph of Section 13 of the Act.
(In accordance with provisions of the Federal Reserve Act, the
Federal Reserve Banks are required to establish rates on discounts for and
advances to member banks at least every 14 days and submit such rates to
the Board for review and determination. Prior to this date the most recent rate changes were made in April 1967, as described on pages 74 and
15 of this ANNUAL REPORT.)
On November 18 the British Government announced a reduction in the par value of the pound sterling from $2.80 to
$2.40. Later that day—against the background of growing inflationary pressures in the United States, but more specifically
as a modest precautionary move in a situation of grave international uncertainties—the Board approved an increase of Vi percentage point in the discount rate to a level of 4Vi per cent, effective November 20, for all Federal Reserve Banks whose directors
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ANNUAL REPORT OF BOARD OF GOVERNORS
had acted not later than November 19 to establish the higher rate.
By the afternoon of November 19 the directors of 10 Reserve
Banks had fixed the AVi per cent rate, and the announcement
made by the Board so indicated.
The action on the discount rate was undertaken, in combination with appropriate open market operations, to help assure
the continued orderly functioning of U.S. financial markets and
to maintain the availability of reserves to the banking system on
terms and conditions that would foster sustainable economic
growth at home and a sound international position for the dollar. At the same time the Board expressed its confidence in the
basic economic and financial strength of the United States and
pledged to do its full share in maintaining the soundness of the
dollar both domestically and internationally. In addition, the
Board affirmed that borrowing by member banks for purposes of
making adjustments to market pressures was an appropriate use
of the discount mechanism.
In the course of this action, the Board of Directors of the Federal Reserve Bank of New York at first established a rate of 5 pet
cent on discounts and advances under Sections 13 and 13 a.
However, that rate was disapproved by the Board of Governors,
on the ground that a more moderate response to the existing
situation was appropriate. The New York Board then acted to
fix the Bank's rate at AV2 per cent, and that rate was approved
by the Board of Governors.
November 29, 1967
Amendments to Regulation F, Securities of Member State Banks.
Effective December 31, 1967, Regulation F was amended to add a
definition of "beneficial ownership" and a provision relating to inclusion
of minority stockholder proposals in a bank's proxy soliciting material.
Votes for this action: Messrs. Robertson, Maisel,
Brimmer, and Sherrill. Votes against this action:
None.
80
FEDERAL RESERVE SYSTEM
Diversity had been noted in the reporting of ownership of bank
stock held by members of families of directors, officers, and principal stockholders of banks subject to Regulation F. This had
occurred not only in stock-ownership reports required to be filed
by such persons pursuant to Section 16(a) of the Securities Exchange Act but also in registration statements and proxy statements required to be filed by banks pursuant to Sections 12 and
14 of the Act. In the interest of uniform disclosure, the Board
incorporated a definition of the term "beneficial ownership" in
Regulation F.
In the light of experience gained since Regulation F was
adopted in 1964, the Board also determined that it would be in
the public interest to adopt requirements relating to presentation
of stockholder proposals in a bank's proxy soliciting material. The
new provisions were designed to promote corporate democracy
and at the same time to provide reasonable rules covering relationships between bank management and minority stockholders.
December 27, 1967
Amendment to Regulation D, Reserves of Member Banks.
The Supplement to Regulation D was amended to increase reserve requirements against demand deposits in excess of $5 million at any one
bank from 1 6 ^ per cent to 17 per cent for reserve city banks, effective
with the reserve computation period beginning January 11, 1968, and
from 12 per cent to HV2 per cent for other member banks, effective with
the reserve computation period beginning January 18, 1968.
Votes for this action: Messrs. Martin, Robertson, Daane, Maisel, Brimmer, and Sherrill. Votes
against this action: None.
In the closing months of 1967, with inflationary pressures increasing following the termination of strikes in the auto and
other industries, and with pressure on the international position
of the dollar intensifying after the devaluation of the pound ster-
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ANNUAL REPORT OF BOARD OF GOVERNORS
ling, monetary policy was shifted toward a less expansive stance.
Overt Federal Reserve action initially took the form of an increase of Vi percentage point in the discount rate in November.
In December, as prices continued to advance rapidly, as losses
from the U.S. gold stock mounted, and as the U.S. international
trade balance diminished, Federal Reserve open market operations were adjusted in support of the less expansionary monetary
policy.
The December 27 action to increase member bank reserve
requirements was an additional coordinated step in furtherance
of the Federal Reserve's general policy objective, namely, the
fostering of financial conditions conducive to the resistance of
inflationary pressures and progress toward reasonable equilibrium in the U.S. balance of international payments. The action
was designed to affect primarily the larger member banks—about
2,000 in number—doing the great bulk of the nation's banking
business. The resulting increase in required reserves was estimated to total approximately $360 million at reserve city banks
and $190 million at other member banks, bringing about a corresponding decrease in funds that might otherwise have been
used for loans and investments. The effective dates for the increase in percentage requirements were selected to coincide with
a period when needs for reserves would normally be declining
from their pre-Christmas peak.
December 29, 1967
Revision of foreign credit restraint program guidelines.
Effective January 1, 1968, the Board adopted revised guidelines for
1968 for the use of banks and nonbank financial institutions in limiting
foreign credits as part of the President's new balance of payments program.
Votes for this action: Messrs. Martin, Robertson,
Daane, Maisel, Brimmer, and Sherrill. Votes against
this action: None.
82
FEDERAL RESERVE SYSTEM
The revised guidelines were a part of and were announced
simultaneously (on January 1, 1968) with the President's new
program to strengthen the U.S. balance of payments. The guidelines, substantially more restrictive than those issued on November 16, 1967, were designed to achieve a net inflow of capital
of at least $500 million during 1968. The intent was to focus
the major effect of the reduction in outstanding credits on the developed countries of continental Western Europe without adverse
effects on credits necessary to finance U.S. exports or on credits
to developing countries.
For banks whose 1968 ceilings had previously been set at 109
per cent of the amount of foreign credits they had outstanding
on December 31, 1964, the ceiling for 1968 would now be 103
per cent. For other banks with smaller bases, whose ceilings had
been set at 2 per cent of their total assets on December 31, 1966,
the 1968 ceiling would now be an amount equal to their 1967
ceiling plus one-third of the addition to that ceiling envisaged in
the original 1968 guidelines.
Banks were also asked to reduce outstanding loans with
maturities of 1 year or more to developed countries of continental Western Europe by not renewing such loans at maturity,
and by not relending the repayments of such loans to residents
of those countries. The guidelines requested also that short-term
loans to developed countries of continental Western Europe be
reduced during 1968 by 40 per cent of the amount outstanding
on December 31, 1967, at a rate of not less than 10 percentage
points in each quarter. The ceilings of the individual banks involved would be further reduced during 1968 by the amount of
repayments received on term loans to developed countries of
continental Western Europe, plus an amount equal to 40 per
cent of the short-term credits to such countries outstanding on
December 31, 1967.
The revised guidelines for nonbank financial institutions requested that holdings of foreign assets covered by the program
be reduced during 1968 by 5 per cent or more compared with
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ANNUAL REPORT OF BOARD OF GOVERNORS
the amount of such assets held on December 31, 1967. It was
expected that holdings of deposits and money market instruments abroad would be reduced to zero, or to the minimum
working balance required to conduct foreign business activities,
even if that entailed a reduction of covered foreign assets by
more than 5 per cent. Nonbank financial institutions were requested to refrain from making any new loans or investments in
developed countries of continental Western Europe other than
those judged essential for the financing of U.S. exports.
84
FEDERAL RESERVE SYSTEM
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 1967, including the
votes on the policy decisions made at those meetings as well as a
resume of the basis for the decisions. The summary descriptions
of economic and financial conditions are based on the information that was available to the Committee at the time of the meetings, rather than on data as they may have been revised later.
It will be noted from the record of policy actions that in some
cases the decisions were by unanimous vote and that in other
cases dissents were recorded. The fact that a decision in favor of
a general policy was by a large majority, or even that it was by
unanimous vote, does not necessarily mean that all members of
the Committee were equally agreed as to the reasons for the particular decision or as to the precise operations in the open market
that were called for to implement the general policy.
As noted on page 341, the Federal Open Market Committee
adopted a revision of its Rules relating to the availability of information to the public, effective July 4, 1967. Under the revised
rules, the policy record for each meeting is released approximately 90 days following the date of the meeting and is subse-
85
ANNUAL REPORT OF BOARD OF GOVERNORS
quently published in the Federal Reserve Bulletin as well as in
the Board's ANNUAL REPORT.
Policy directives of the Federal Open Market Committee are
issued to the Federal Reserve Bank of New York as the Bank
selected by the Committee to execute transactions for the System
Open Market Account. In the area of domestic open market activities the Federal Reserve Bank of New York operates under
two separate directives from the Open Market Committee—a
continuing authority directive and a current economic policy directive. In the foreign currency area it operates under an authorization for System foreign currency operations and a foreign
currency directive. These four instruments are shown below in the
form in which they were in effect at the beginning of 1967. Subsequent revisions in the current economic policy directive are
shown in the records for each meeting held during the year. A
revision in the continuing authority directive is shown in the
policy record for the meeting of March 7, 1967, and revisions
in the authorization for System foreign currency operations are
shown in the records for the meetings of May 23, July 18, November 14, November 27, and December 12.
CONTINUING AUTHORITY DIRECTIVE WITH RESPECT TO
DOMESTIC OPEN MARKET OPERATIONS
(in effect January 1, 1967)
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
86
FEDERAL RESERVE SYSTEM
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, obligations that are direct
obligations of, or fully guaranteed as to principal and interest by, any
agency of the United States, and prime bankers' acceptances with
maturities of 6 months or less at the time of purchase, from nonbank
dealers for the account of the Federal Reserve Bank of New York
under agreements for repurchase of such securities, obligations, or
acceptances in 15 calendar days or less, at rates not less than (1)
the discount rate of the Federal Reserve Bank of New York at the
time such agreement is entered into, or (2) the average issuing rate on
the most recent issue of 3-month Treasury bills, whichever is the
lower; provided that in the event Government securities or agency
issues covered by any such agreement are not repurchased by the
dealer pursuant to the agreement or a renewal thereof, they shall be
sold in the market or transferred to the System Open Market Account;
and provided further that in the event bankers' acceptances covered
by any such agreement are not repurchased by the seller, they shall
continue to be held by the Federal Reserve Bank or shall be sold in
the open market.
2. The Federal Open Market Committee authorizes and directs the
Federal Reserve Bank of New York to purchase directly from the
Treasury for the account of the Federal Reserve Bank of New York (with
discretion, in cases where it seems desirable, to issue participations to one
or more Federal Reserve Banks) such amounts of special short-term
certificates of indebtedness as may be necessary from time to time for
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ANNUAL REPORT OF BOARD OF GOVERNORS
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.
CURRENT ECONOMIC POLICY DIRECTIVE
(in effect January 1, 1967)
The economic and financial developments reviewed at this meeting
indicate that over-all domestic economic activity is continuing to expand,
with 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.
AUTHORIZATION FOR SYSTEM FOREIGN CURRENCY OPERATIONS
(in effect January 1, 1967)
1. The Federal Open Market Committee authorizes and directs the
Federal Reserve Bank of New York, for System Open Market Account,
to the extent necessary to carry out the Committee's foreign currency
directive:
A. To purchase and sell the following foreign currencies in the form of
cable transfers through spot or forward transactions on the open market
at home and abroad, including transactions with the U.S. Stabilization
Fund established by Section 10 of the Gold Reserve Act of 1934, with
foreign monetary authorities, and with the Bank for International
Settlements:
FEDERAL RESERVE SYSTEM
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 United States 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
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
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ANNUAL REPORT OF 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
System drawings in authorized European
currencies other than Swiss francs
100
150
500
Maximum
period of
arrangement
(months)
100
400
600
450
150
100
200
12
12
12
12
3
6
12
12
3
12
6
200
6
200
6
1,350
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
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
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FEDERAL RESERVE SYSTEM
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.
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.
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ANNUAL REPORT OF BOARD OF GOVERNORS
FOREIGN CURRENCY DIRECTIVE
(in effect January 1, 1967)
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) 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.
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FEDERAL RESERVE SYSTEM
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.
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ANNUAL REPORT OF BOARD OF GOVERNORS
JANUARY 10, 1967
Authority to effect transactions in System Account.
Expansionary forces in the economy were moderating as 1966
ended, and business inventory/sales ratios had risen substantially.
With inventory accumulation expected to slow, a reduced rate of
over-all economic growth appeared likely in the first quarter of
the new year.
Gross national product was estimated to have increased substantially in the fourth quarter of 1966, but much of the advance
appeared to reflect the sharp rise in inventory accumulation.
Growth slackened in consumer spending for goods, in business
capital outlays, and, apparently, in Federal defense expenditures.
The downtrend in residential construction activity that had begun
in the spring of 1966 continued in the fourth quarter, although
in November housing starts recovered most of their sharp October decline. Industrial production was little changed during the
quarter at about the level reached in August, as output curtailments in such industries as steel, construction materials, automobiles, and some household appliances offset continued gains in
certain other industries. There had been some rise recently in
claims for unemployment compensation, but labor market conditions generally remained strong in the closing months of 1966.
With respect to the outlook for the first quarter of 1967, prospective business efforts to hold down the pace of inventory
accumulation appeared likely to lead to a marked slowing of the
growth rate in GNP, to some decline in industrial production,
and to a moderate increase in the unemployment rate from the
level of around 3.8 per cent that had prevailed recently. Defense
outlays were expected to remain an expansive influence, although
the evidence available at the time of this meeting suggested some
further slackening in the growth of such spending as well as in
business capital outlays. On the other hand, the extended decline
in residential construction was expected to level out in the first
quarter as a result of improvement in mortgage markets. Yields
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FEDERAL RESERVE SYSTEM
on home mortgages touched a record high in November, the
latest month for which data were available, but net inflows of
funds to savings and loan associations and other major mortgage
lenders had recovered recently, and there were indications of
some actual or prospective easing in the supply of mortgage
funds.
The pace of advance of broad price measures had slowed
recently; indeed, the wholesale price index declined in November
for the second successive month, to a level 2.3 per cent above a
year earlier, as a further reduction in prices of foodstuffs more
than offset a small increase in prices of industrial commodities.
The earlier succession of substantial increases in consumer prices
was broken in November, when retail food prices declined somewhat and the total index rose by only one-tenth of 1 per cent.
However, unit labor costs in manufacturing had risen further in
recent months, as a result both of more rapid increases in average hourly earnings and of smaller gains in productivity.
Tentative estimates indicated some deterioration in the U.S.
balance of payments in the fourth quarter of 1966, as an apparent improvement in the merchandise trade surplus was more
than offset by an indicated worsening on capital account. While
full information was not yet available on fourth-quarter developments, it appeared that the deficit on the "liquidity" basis of calculation had increased despite substantial special receipts from
Germany at the year-end, and that the balance on the "official
reserve transactions" basis had reverted to deficit even though
there had been large net inflows of liquid funds through foreign
branches of U.S. banks during the quarter.1 Abroad, the German
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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ANNUAL REPORT OF BOARD OF GOVERNORS
Federal Bank announced a reduction in its discount rate, from
5 per cent to 4Vi per cent, effective January 6, 1967.
System open market operations since the preceding meeting
had been directed at achieving somewhat easier conditions in the
money market against a background of year-end seasonal churning. Net borrowed reserves of member banks fluctuated widely
over the four statement weeks ending January 4, but on the average they were somewhat smaller than in the preceding 4 weeks—
about $170 million, as compared with $215 million. The market
yield on 3-month Treasury bills declined more than 20 basis
points to 4.80 per cent in the third week of December and subsequently remained near that level. Other money market rates declined less, partly for seasonal reasons and partly because large
financing needs of Government security dealers added to demands for short-term funds.
A buoyant atmosphere pervaded bond markets in recent
weeks, as signs of moderating tendencies in the economy continued to appear and as it became increasingly evident to market
participants that monetary policy had shifted toward less restraint—a view reinforced by the System's action on December
27, 1966, rescinding the letter of September 1 to member banks
regarding lending to business and discount window administration.2 Despite large recent and prospective offerings of corporate
and municipal securities and a recent public sale of $600 million
of participation certificates by the Federal National Mortgage
Association, yields on Treasury, corporate, and municipal bonds
all declined, with yields on long-term Treasury bonds returning
to about their levels at the end of 1965, following the increase
in the discount rate. Near the end of January the Treasury was
expected to announce the terms on which it would refund securities maturing in mid-February, of which about $3.8 billion were
held by the public.
2
For the text of the September 1 letter, see the Federal Reserve BULLETIN
for September 1966, pp. 1338-39; for the text of the December 27 announcement, see the BULLETIN for January 1967, p. 83.
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FEDERAL RESERVE SYSTEM
The recent declines in security yields were accompanied by
resumed expansion in commercial bank credit and private deposits. Bank credit, which had declined on balance since August,
increased substantially between the last Wednesdays of November and December. The increase was attributable primarily to
expansion in holdings of Government securities and in short-term
loans to security dealers and brokers, as banks acted to rebuild
their sharply reduced liquidity positions. Business loans did not
rise, apparently because of both a continuation of restrictive lending policies and some further weakening in demands for such
loans.
Time and savings deposits expanded relatively fast in December following slow growth since August, when banks began to
experience sizable runoffs of negotiable certificates of deposit
(CD's). Although a record volume of CD's matured in December, banks were able to increase the net volume outstanding
somewhat as declines in market yields on competitive instruments, particularly Treasury bills, enhanced the relative attractiveness of CD's to investors. Expansion in the money supply
(private demand deposits plus currency outside of banks), which
had resumed in mid-November after a period of irregular decline
beginning in July, continued in December, reflecting in large
part a reduction in Government deposits at commercial banks.
In 1966 as a whole the money supply increased by a little less
than 2 per cent, compared with a 4.7 per cent rise in 1965.
Staff projections at the time of the Committee's preceding
meeting had suggested that there would be relatively little increase from November to December in daily-average deposits
of member banks—the "bank credit proxy" 3—if the then-exist3
Since mid-1966 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. Because they can be compiled on a daily basis with a very short
lag, the deposit figures are more nearly current than available bank loan and
investment data. Moreover, average deposit figures for a calendar month are
much less subject to the influence of single-date fluctuations than are the avail-
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ANNUAL REPORT OF BOARD OF GOVERNORS
ing money market conditions were maintained. But with easier
conditions prevailing in the latter part of the month, these deposits increased at an annual rate of 3.4 per cent in December as
a whole.
Current staff projections suggested that member bank deposit
expansion would increase temporarily to an annual rate in the
7 to 9 per cent range on the average during January (largely as
a result of expansion that had occurred around the turn of the
year), and to a somewhat more rapid rate in that month if there
were some further easing of money market conditions. All of
the projected increase in January was in time and savings deposits and Government deposits; private demand deposits were expected to decline somewhat, resulting in little or no growth in
the money supply.
In the Committee's discussion it was noted that appropriate
monetary policy over coming months would depend importantly
on the nature of Federal fiscal policies. For the immediate future,
however, in light of the continued slackening of various expansionary forces in the economy and the prospect for slower overall growth in early 1967, the Committee decided that it would be
desirable to relax monetary restraint somewhat further. The
members agreed that the renewed expansion in bank credit and
the money supply in December was appropriate; and a majority,
taking note of the staff projections for the money supply and for
member bank deposits, thought that somewhat easier money
market conditions should be sought unless bank credit appeared
to be expanding significantly faster than expected.
able month-end data on total bank credit, which represent estimates of loans
and investments at all commercial banks on one day—the last Wednesday—
of each month. For statistics on daily-average member bank deposits, see the
Federal Reserve BULLETIN for October 1966, p. 1478, and subsequent months.
Some brief comments on the relation between the member bank deposit series
and the bank credit statistics are given in the note on p. 1460 of the October
1966 BULLETIN.
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FEDERAL RESERVE SYSTEM
The Committee agreed that the forthcoming Treasury financing should be taken into account in the conduct of open market
operations, although it was expected that the financing would be
a routine one and that requirements for maintaining an "even
keel" in the money market would not come into play until late in
the month. Some sentiment was expressed for extending System
reserve-supplying security purchases in intermediate- and longerterm Treasury securities, both to stimulate flows of funds into
longer-term markets, including mortgage markets, and—for balance of payments reasons—to avoid depressing short-term interest rates unduly.
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 further moderation in various expansionary forces and sharply increased inventory accumulation. The pace of advance of broad price
measures has slowed, although upward price and cost pressures persist
for many finished goods and services. Partly reflecting the recent modification of monetary policy, financial market conditions have become less
taut than earlier and bank credit expansion has resumed. With respect to
the balance of payments, trends in international transactions indicate a
continuing 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, and taking account of forthcoming Treasury
financing, 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 expanding significantly faster than currently anticipated.
Votes for this action: Messrs. Martin, Brimmer,
Clay, Daane, Hickman, Maisel, Mitchell, Robertson,
and Wayne. Votes against this action: Messrs. Irons,
Shepardson, and Treiber.
The members dissenting from this action thought that it would
be preferable not to relax monetary restraint further at this time.
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ANNUAL REPORT OF BOARD OF GOVERNORS
Among the considerations they advanced were the continuing
balance of payments problem and the desirability of awaiting
further information on prospective Federal taxes and expenditures before changing monetary policy further. Individual dissenting members also expressed the judgments that, despite present indications of slower economic growth early in 1967, the
longer-run prospects for the economy were not weak; and that
the rate at which member bank deposits were expected to grow
in January, given no change in money market conditions, was
appropriate.
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FEDERAL RESERVE SYSTEM
FEBRUARY 7, 1967
Authority to effect transactions in System Account.
The pace of economic expansion continued to moderate in
early 1967, according to reports at this meeting. Tentative estimates indicated that industrial production had declined somewhat in January and that, with sales of new automobiles falling
further, total retail sales had failed to increase. Layoffs and short
workweeks continued to be reported in the automobile industry
and in some consumer appliance industries, but the labor market
as a whole apparently remained strong.
Staff projections suggested that expansion in GNP would be
at a sharply slower pace in the first half of 1967 than in 1966.
Inventory accumulation was expected to decline markedly from
its recent advanced rate, slower growth was anticipated in defense spending and business capital outlays, and only a small
increase was expected in real takings of goods by consumers.
On the other hand, it appeared likely that the substantial decline
in residential construction would end and that State and local
government outlays would continue to expand.
Projections by the Council of Economic Advisers, contained
in its recent annual report, also indicated slowing of the economic advance in the first half of 1967. The Council expected
expansion to accelerate in the second half of the year, when it
anticipated a strong rise in residential construction, an end to
the decline in the rate of inventory investment, and a rise in
transfer payments (primarily as a result of a proposed increase
at midyear in social security benefits). The Council foresaw a
sizable stimulus from fiscal policy in the first half of the year,
but the administration's budget recommendations provided for
a shift in the direction of fiscal restraint at midyear in the form
of a 6 per cent surcharge on income tax liabilities of individuals
and corporations.
In December the wholesale price index was stable and the
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ANNUAL REPORT OF BOARD OF GOVERNORS
consumer price index again rose by only one-tenth of 1 per cent.
Effective February 1, the minimum wage was increased and its
coverage extended under the terms of legislation enacted in 1966.
Unit labor costs in manufacturing were estimated to have been
2.7 per cent above their year-earlier level in the fourth quarter
of 1966, and it appeared likely that such costs would continue
to rise.
The deficit in the U.S. balance of payments on the "liquidity"
basis of calculation was estimated to have been at an annual rate
of about $2 billion in the fourth quarter of 1966, despite larger
dollar receipts from various official transactions. For the full
year the deficit on this basis was estimated at $1.4 billion. On
the "official reserve transactions" basis there was a small deficit
in the fourth quarter but a surplus of $175 million for the year.
Partial data for January indicated a continued sizable deficit on
both bases of calculation. Liabilities of U.S. banks to their foreign branches declined in late December and early January, but
remained well above their level in the spring of 1966.
Abroad, interest rates had declined substantially from their
recent peaks in the Euro-dollar market and in various national
markets. The Bank of England reduced its discount rate from
7 to 6x/i per cent on January 26, and subsequently the central
banks of Canada, Belgium, and Sweden reduced their discount
rates by varying amounts.
Open market operations since the last meeting of the Committee had been directed at attaining somewhat easier conditions in
the money market. Net borrowed reserves averaged about $60
million in January and member bank borrowings about $475
million, compared with $190 million and $530 million, respectively, in December. Rates on Federal funds moved generally
lower, and they fell sharply in the last week of January when
float rose temporarily in the wake of a severe snowstorm in the
midwest. The yield on 3-month Treasury bills declined further,
from 4.80 per cent 4 weeks earlier to less than 4.50 per cent,
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FEDERAL RESERVE SYSTEM
although by the time of this meeting it had backed up slightly.
Rates on other short-term instruments also moved significantly
lower. A major New York City bank reduced its prime lending
rate from 6 to 5Vi per cent on January 26, and subsequently
many other banks lowered their prime rates, but generally to
53A per cent.
Long-term security yields also had declined sharply further in
recent weeks. Yields on new corporate bonds reached their lowest levels since April 1966, and those on Treasury and municipal
bonds fell to levels prevailing prior to the increase in the discount
rate in December 1965. Although the market atmosphere became cautious at times, mainly because of reports of a growing
calendar of corporate and municipal offerings, sentiment was
buoyed by various developments. These included the evidences
of further easing of monetary policy; the President's statement—
in his State of the Union message of January 10—that he was
proposing a surcharge on income taxes and would strive to lower
interest rates; and the reductions in discount rates by foreign
central banks and in prime rates by domestic commercial banks.
Activity in the stock market was extremely heavy, and prices of
common stocks advanced virtually without interruption after the
first of the year.
On January 25 the Treasury announced that it would refund
securities maturing in mid-February with a cash offering of two
new securities, a 15-month note and a 5-year note, both bearing
4% per cent coupons and priced to yield 4.85 and 4.84 per cent,
respectively. With market yields declining, the new issues were
heavily oversubscribed. The Treasury was expected to announce
in late February or early March an offering of tax-anticipation
bills due in June, and a large volume of Federal agency securities and participation certificates was expected to be marketed
before midyear.
Net inflows of savings funds to depositary-type institutions increased considerably in late 1966 and early 1967, and conditions
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ANNUAL REPORT OF BOARD OF GOVERNORS
in markets for home mortgages appeared to have eased further
recently. The rate of new mortgage commitments still appeared
to be lagging, however, as many institutions used a large part of
the inflows to improve their liquidity positions. Housing starts
declined less than seasonally in December, but the annual rate
remained relatively low.
The rate of increase in total bank credit between late December and late January was the highest since mid-1966. Banks substantially increased their holdings of municipal and Federal
agency securities and their loans to businesses and security dealers. The sharp rise in business loans, following 5 months of
slow net growth, was in part a reflection of a temporary concentration of corporate needs for funds to make accelerated tax
payments.
Growth in time and savings deposits, which had resumed in
December, accelerated in January. The increase was centered in
large-denomination negotiable CD's, which became increasingly
attractive to investors as yields on competitive market instruments declined. The net increase in such CD's outstanding at
weekly reporting banks was at a record high in January, and in
the 6 weeks after mid-December such banks recovered more
than two-thirds of the runoff they had experienced in the preceding 4 months. The average maturity of new issues of CD's
was lengthened significantly in January for the first time since
mid-1966, and recently many banks had reduced their offering
rates on CD's.
As a result of the marked increase in time deposits—together
with a substantial rise in Government deposits, which was offset
in part by a decline in private demand deposits—the bank credit
proxy (daily-average member bank deposits) rose more from
December to January than had been expected, even in the light
of the easing of money market conditions that had occurred. New
staff projections suggested that, if money market conditions remained unchanged, bank credit as measured by the proxy series
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FEDERAL RESERVE SYSTEM
would rise at an annual rate of about 9 to 11 per cent from January to February. The projections allowed for continued rapid
growth in time deposits, resumed growth in private demand deposits, and some decline in Government deposits.
The Committee decided that it would be appropriate at this
time to maintain the easier money market conditions achieved
under the policies adopted at the three preceding meetings, unless bank credit appeared to be deviating significantly from its
expected course. Various reasons were advanced by individual
members against a further deliberate relaxation of monetary policy at present. These included the recent and projected growth
rates of bank credit, which some members considered to be at
about the upper end of a desirable range in the current circumstances; the likelihood that much of the impact on the economy
of the policy actions already taken was still to come; the risk
that unduly rapid easing might necessitate a sharp reversal of
policy later in the year; the possibility that speculative excesses
would be encouraged by continued increases in prices of fixed
income securities; and concern about the implications of rising
labor costs for the foreign trade balance and of declining domestic interest rates for international capital flows. The current
Treasury financing also was mentioned, although "even keel"
considerations were considered less important than usual in view
of the market reception of the new securities.
At the same time, in light of the short-run economic outlook
there was considerable sentiment for "leaning toward ease" in
open market operations. In particular, the Committee agreed
that efforts should be made to resist any sharp rises in interest
rates but that rates should be permitted to decline if market
forces worked in that direction. It was noted in this connection
that the recent declines in interest rates had reflected expectational factors to an important extent, and that long-term rates
were particularly vulnerable at present to a change in expectations.
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ANNUAL REPORT OF BOARD OF GOVERNORS
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 further moderation in various expansionary forces, with continued
large inventory accumulation. The pace of advance of broad price measures has slowed, although upward price and cost pressures persist for
many goods and services. Interest rates have declined markedly, financial
conditions generally are considerably easier, and bank credit expansion
recently has been vigorous. While interest rates abroad have also declined,
trends in international transactions indicate a continuing serious balance
of payments problem. In this situation, it is the Federal Open Market
Committee's policy to foster money and credit conditions, including bank
credit growth, conducive to noninflationary economic expansion 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 the prevailing
conditions of ease in the money market, but operations shall be modified
as necessary to moderate any apparently significant deviations of bank
credit from current expectations.
Votes for this action: Messrs. Martin, Hayes, Brimmer, Clay, Daane, Hickman, Irons, Maisel, Robertson,
Shepardson, and Wayne. Vote against this action: Mr.
Mitchell.
Mr. Mitchell dissented from this action because he favored
moving somewhat further toward ease. He was inclined to give
more credence to the present expectations for a weaker economic performance in the first half of the year than to those for
a stronger performance in the second half, and he thought that
the major economic risk for the immediate future was that a
downturn in over-all economic activity might be precipitated by
the expected inventory adjustment.
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FEDERAL RESERVE SYSTEM
MARCH 7, 1967
1. Authority to effect transactions in System Account.
Evidences of marked slowing in the pace of economic expansion were reported at this meeting. In February, according to
tentative estimates, industrial production fell for the second consecutive month, sales of new automobiles decreased sharply further, and total retail sales declined from their reduced DecemberJanuary level. Although the unemployment rate remained at
3.7 per cent in January, signs of easing demands for labor were
beginning to appear in such sensitive indicators as the length of
the workweek in manufacturing, claims for unemployment insurance, and indexes of "help wanted" advertisements. On the other
hand, residential construction activity turned up in January,
after 10 months of decline, as conditions in mortgage markets
continued to ease.
Staff projections of GNP for the first half of 1967, which
earlier had suggested a sharply reduced rate of growth, had been
lowered somewhat further and now implied only moderate increases in dollar GNP and little rise in real output of goods and
services. A large reduction in the rate of business inventory
accumulation was still expected, although there was little evidence as yet to suggest that the adjustment had begun; in January, with retail sales sluggish, inventories of manufacturers rose
sharply further despite cutbacks in production, and manufacturers' stock/sales ratios advanced to the highest levels since
1961. Defense spending was expected to continue increasing,
although at a slower rate; and residential construction outlays
were expected to be about the same in the first quarter as a whole
as in the fourth quarter of 1966, and to rise in the second quarter. However, continuing lack of strength in consumer demands
for durable goods was suggested by a Census Bureau survey
taken in mid-January, which found that smaller proportions of
consumers were planning to buy new cars and household durable
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ANNUAL REPORT OF BOARD OF GOVERNORS
goods than was the case a year earlier. It was indicated that a
Department of Commerce-Securities and Exchange Commission
survey, taken in February, would show that businesses planned
to make outlays on new plant and equipment in the first half of
1967 at a rate no higher than that actually recorded in the fourth
quarter of 1966.
The consumer price index was unchanged in January, but
average wholesale prices of both industrial commodities and
foodstuffs rose. Advance estimates for February suggested that
average prices of industrial commodities had remained stable in
that month and that prices of foodstuffs had declined somewhat.
Unit labor costs in manufacturing rose sharply further in January.
With respect to balance of payments developments, capital
outflows from the United States had increased relatively little
recently despite the easing of domestic monetary conditions. On
the other hand, revised data indicated that the surplus on U.S.
merchandise trade had not improved in the fourth quarter of
1966, as had been reported earlier. Growth in imports, which
previously appeared to have leveled off in late 1966, was now
shown to have continued at a reduced rate through January
1967, and estimates of growth in exports in the fourth quarter
had been revised downward. Prospects still favored improvement
in the trade surplus over coming months, when slowing inventory accumulation was expected to reduce the demand for imports.
Abroad, economic activity had been slackening for several
months in a number of industrial countries, including the United
Kingdom and Germany, and monetary and fiscal policies were
being relaxed somewhat. The German Federal Bank, which along
with the Bank of England and a number of other central banks
had reduced its discount rate earlier in the year, announced a
further reduction, from AV2 to 4 per cent, on February 17. Reserve requirements of German commercial banks were lowered
effective March 1.
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FEDERAL RESERVE SYSTEM
Conditions in domestic financial markets had passed through
two distinct phases since the preceding meeting of the Committee, with a period of firmer money markets, congested bond
markets, and rising long- and short-term interest rates followed
by a period of easier financial conditions and declining rates.
Shifts in expectations of market participants contributed importantly to these developments.
Early in the period concern developed about the viability of
the levels to which interest rates had fallen, in view of a steady
stream of additions to an already large calendar of corporate and
municipal security issues, large inventories of securities held by
underwriters, and rumors of renewed sales of FNMA participation certificates. Moreover, market participants began to reappraise the prospects for monetary policy, partly because of
congressional testimony by various officials suggesting a strengthening of economic forces in the second half of the year. A belief
that the trend of monetary policy toward greater ease had been
halted, and perhaps reversed, was strengthened by the development of firmer conditions in the money market, as reflected by
increases in rates on Treasury bills and Federal funds and advances in lending rates to Government securities dealers posted
by major New York City banks. The System injected a large
volume of reserves through open market operations in an effort
to cope with these firming tendencies, but operations were complicated by persistent shortfalls of reserve availability from
initial projections.
Subsequently, money market conditions again turned easier,
earlier expectations regarding monetary policy were gradually
restored, and long-term interest rates—particularly on Treasury
securities—declined somewhat. These developments were initially stimulated by large-scale official purchases of Treasury
securities on February 24 in conjunction with arrangements undertaken to avoid a rise in the Federal debt above the legal ceiling, and by concurrent purchases of bills for System Account
to supply reserves. The view that monetary policy was still trend-
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ANNUAL REPORT OF BOARD OF GOVERNORS
ing toward ease was reinforced on February 28 when the Board
of Governors announced a reduction in member bank reserve
requirements for the purpose of meeting developing credit needs
throughout the country. Reserve requirements against savings
deposits and the first $5 million of other time deposits at each
member bank were reduced in two successive steps: from 4 to
?>V2 per cent, and then to 3 per cent, effective with the reserve
computation periods beginning March 2, 1967, and March 16,
1967, respectively.
By the day before this meeting the yield on 3-month Treasury
bills had fallen to about 4.35 per cent, roughly 20 basis points
below its level at the time of the preceding meeting, and other
money market conditions in general were about as easy as they
had been 4 weeks earlier. In February as a whole, member bank
borrowings averaged about $365 million, compared with $475
million in January; and excess reserves exceeded borrowings by
about $35 million, in contrast with a net borrowed reserve position of about $65 million in the preceding month.
Following congressional approval of legislation raising the
temporary debt ceiling on March 1, the Treasury announced
that $2.7 billion of tax-anticipation bills due in June would be
auctioned on March 7, the day of this meeting. Treasury cash
balances were expected to reach relatively low levels before the
March 13 payment date for these bills, and it was possible that
the Treasury would need to borrow directly from the Federal
Reserve for short periods.
Bank credit expanded further between the last Wednesdays
of January and February, although apparently at a rate below
that of the two preceding months. Banks used the additions to
their reserves mainly to improve their liquidity positions; acquisitions of securities continued heavy, but business loans increased
relatively little and total loans declined. Time and savings deposits grew sharply further on the average from January to February, although the rate of expansion moderated considerably over
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FEDERAL RESERVE SYSTEM
the course of the latter month as large money market banks became less aggressive sellers of negotiable CD's. Private demand
deposits and the total money supply rose, after declining in January, and Government deposits at commercial banks were about
unchanged.
Daily-average member bank deposits—the bank credit proxy
—increased at an annual rate of about 15 per cent from January
to February, more than had been expected. Most of the rise
occurred early in February, when time deposits were growing
rapidly. New staff projections for March suggested that growth
in the proxy would be at an annual rate of about 6 to 8 per cent
if money market conditions were unchanged, and somewhat
larger if money market conditions were eased somewhat further.
It appeared unlikely that banks would resume aggressive selling
of negotiable CD's in the near future, in view of their large CD
sales in recent months and the uncertain outlook for loan demands following the March and April dividend and tax dates.
Accordingly, time deposits were projected to expand considerably
less on the average in March than in February. The projections
also allowed for a substantially higher average level of private
demand deposits, reflecting sharp increases late in February, and
some decline in the average level of Government deposits.
The Committee agreed that somewhat easier money market
conditions were desirable at present to combat the effects of
weakening tendencies in the economy, and that still easier conditions should be sought if bank credit appeared to be expanding
significantly less than expected. Individual members mentioned
various intermediate objectives, including those of encouraging
sustained growth in the money supply and further declines in
long-term interest rates, of stimulating banks to relax their lending policies more rapidly than they had to date, and of confirming
market interpretations that the current reduction in reserve requirements was intended to be an easing action rather than
simply an alternative to open market operations as a means of
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ANNUAL REPORT OF BOARD OF GOVERNORS
meeting seasonal reserve needs. Some members stressed the desirability of avoiding sharp shifts in expectations regarding the
near-term course of monetary policy, such as had occurred in
February. Others, while sharing this position, placed equal
weight on the need to avoid generating expectations that monetary policy was moving more rapidly toward ease than in fact
was the case. In the course of the discussion several members
expressed the view that a reduction in the discount rate might
well be considered soon, although none indicated that he would
favor such action immediately.
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 some decline in industrial production and a marked slowing of expansion in over-all economic activity. Lack of growth in retail sales may be
retarding adjustment of inventory accumulation from its recent excessive
rate. Average commodity prices have changed little recently, but unit
labor costs in manufacturing have risen further. Bank credit expansion
has been vigorous and, after a period of rising interest rates and congested bond markets, financial conditions have again turned easier. Recent
data suggest little improvement in the foreign trade surplus but also little
increase in the outflow of U.S. capital. In several important countries
abroad, economic activity has been softening for several months and
monetary and fiscal policies have eased somewhat. In this situation, it is
the Federal Open Market Committee's policy to foster money and credit
conditions, including bank credit growth, conducive to combatting the
effects of weakening tendencies in the economy, while recognizing the
need for progress toward reasonable equilibrium in the country's balance
of payments.
To implement this policy against the background of the current reductions in reserve requirements, 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, and to attaining still
easier conditions if bank credit appears to be expanding significantly less
than currently anticipated.
Votes for this action: Messrs. Martin, Hayes, Brimmer, Daane, Francis, Maisel, Mitchell, Robertson,
Scanlon, Shepardson, Swan, and Wayne. Votes against
this action: None.
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FEDERAL RESERVE SYSTEM
2. Amendment of continuing authority directive.
On recommendation of the System Account Manager, Section l ( b ) of the continuing authority directive to the Federal
Reserve Bank of New York regarding domestic open market
operations was amended to clarify the language describing the
two limits specified on aggregate holdings of bankers' acceptances by the Federal Reserve Bank of New York, in accordance
with the manner in which that language had always been interpreted. Specifically, the phrase "whichever is the lower" was
added at the end of the paragraph, following the description of
the two limits. With this change, Section l ( b ) read as follows:
To buy or sell prime bankers' acceptances of the kinds designated in
the Regulation of the Federal Open Market Committee in the open market, from or to acceptance dealers and foreign accounts maintained at
the Federal Reserve Bank of New York, on a cash, regular or deferred
delivery basis, for the account of the Federal Reserve Bank of New York
at market discount rates; provided that the aggregate amount of bankers'
acceptances held at any one time shall not exceed (1) $125 million or
(2) 10 per cent of the total of bankers' acceptances outstanding as shown
in the most recent acceptance survey conducted by the Federal Reserve
Bank of New York, whichever is the lower.
After reviewing various amendments to the continuing authority directive that had been made during the past year, the Committee renewed the directive in its existing form (as set forth in
the preface to this record of Federal Open Market Committee
policy actions), except for the change resulting from this
amendment.
Votes for this action: Messrs. Martin, Hayes, Brimmer, Daane, Francis, Maisel, Mitchell, Robertson,
Scanlon, Shepardson, Swan, and Wayne. Votes against
this action: None.
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
113
ANNUAL REPORT OF BOARD OF GOVERNORS
Reserve Banks to serve for the year beginning March 1, 1967,
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 for System foreign
currency operations and its foreign currency directive, in the
forms in which both were outstanding at the beginning of the
year 1967, as set forth in the preface to this record of policy
actions.
Votes for these actions: Messrs. Martin, Hayes,
Brimmer, Daane, Francis, Maisel, Mitchell, Robertson, Scanlon, Shepardson, Swan, and Wayne. Votes
against these actions: None.
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FEDERAL RESERVE SYSTEM
APRIL 4, 1967
Authority to effect transactions in System Account.
Recent information supported earlier indications of a marked
slowing in the pace of economic expansion and suggested that
the anticipated curtailment in the rate of business inventory accumulation was under way. The latest staff projections for the
first half of 1967, like those of 4 weeks earlier, implied only
moderate increases in dollar GNP and little rise in real output.
Both retail sales and industrial production declined in February, as tentative estimates had suggested. In March sales of new
automobiles remained close to their reduced February level, and
it appeared from weekly data for most of the month that total
sales continued sluggish. The production decline in February
brought the capacity utilization rate in manufacturing down to
87 per cent from the 91 per cent level that had prevailed during
most of 1966, and was associated with sharp reductions at factories in employment, in length of the average workweek, and in
payrolls. Total nonfarm employment continued to rise, however,
and the unemployment rate remained at the January level of
3.7 per cent.
With respect to inventories, accumulation by manufacturers
slowed markedly in February from its earlier rapid pace. Stocks
of wholesalers and retailers had not grown in January; as a result,
there was a substantial reduction in that month in the over-all
rate of inventory growth.
The staff projections of GNP allowed for large reductions in
the rate of inventory accumulation in both the first and second
quarters of 1967. Although Federal spending for defense and
nondefense purposes apparently was rising somewhat more rapidly than had been expected, near-term prospects for most other
broad categories of final demand did not appear strong. Growth
in incomes was expected to slow in the second quarter—implying continued weakness in consumer spending for goods. Longer-
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ANNUAL REPORT OF BOARD OF GOVERNORS
term prospects for residential construction remained favorable,
but declines in building permits and housing starts in February
suggested that a strong expansion in that sector was not in immediate prospect. The results of the recent Commerce-SEC survey of business plans for plant and equipment expenditures
indicated a decrease in such spending (from the fourth-quarter
rate) in the first half of 1967, followed by a moderate rise in
the second half. For the year as a whole, if reported plans were
realized, fixed capital outlays would be 3.9 per cent above those
of 1966, in contrast to increases of more than 15 per cent in
each of the past 3 years. While the survey was made before the
President proposed legislation to restore the tax incentives for
investment that had been suspended in October 1966, it appeared unlikely that enactment of such legislation would have a
significant effect on outlays until after midyear.
The consumer price index rose slightly in February; since
October 1966 it had advanced at an annual rate of 1 per cent,
compared with a 4 per cent rate earlier in 1966. Average wholesale prices declined in February, and according to advance estimates, they were unchanged in March at a level slightly below
their peak of the preceding September. Unit labor costs continued
to rise in February, and for the first quarter it appeared likely
that they would average more than 4 per cent above a year
earlier.
Tentative estimates of the U.S. balance of payments in the
first quarter suggested that, despite some improvement in the
merchandise trade surplus, the deficit was larger than in the
preceding quarter on both the "liquidity" and "official reserve
transactions" bases of calculation. However, it appeared that all
of the increase in the liquidity deficit and part of that in the
official settlements deficit was accounted for by differential effects
in the two quarters of various types of special transactions. Much
of the rise in the official settlements deficit reflected repayments
by U.S. banks during the early weeks of the year of funds borrowed abroad through their foreign branches.
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FEDERAL RESERVE SYSTEM
The widespread slowdown in economic activity in Western
Europe, which had begun around mid-1966, apparently continued in the first few months of 1967 although in the United
Kingdom there were indications that the decline in activity might
be leveling out. Since the beginning of the year monetary and
fiscal policy actions had been taken in a number of countries to
stimulate activity, including numerous reductions in central bank
discount rates. On March 16 the Bank of England reduced its
discount rate for the second time in 1967, from (ML to 6 per
cent. Discount rate reductions also were made in March by the
central banks of Sweden and the Netherlands.
System open market operations since the preceding meeting
of the Committee had been directed at fostering somewhat easier
conditions in the money market. Growth in total and nonborrowed reserves of member banks was rapid in March, as it had
been in the first 2 months of the year. Free reserves rose to an
average of $165 million from about $35 million in February,
member bank borrowings declined to about $200 million from
$365 million, and rates on Federal funds and on bank loans to
Government securities dealers moved into lower ranges. Interest
rates on short-term market securities fell considerably further as
a result of System operations and of other factors, including further reports of weakness in economic indicators, reductions in
foreign discount rates, and widespread expectations of an early
cut in the Federal Reserve discount rate. The market yield on
3-month Treasury bills declined by about 35 basis points, to
slightly less than 4 per cent. On March 22 a large New York
City bank lowered its prime lending rate from S3A per cent to
SVi per cent, and subsequently many other banks took similar
action.
Long-term interest rates had also moved down somewhat in
recent weeks, but they remained above the 1967 lows, which
had been reached in late January and early February. The declines were limited by extremely large flotations of bonds in
March, including a record volume of corporate offerings, con-
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ANNUAL REPORT OF BOARD OF GOVERNORS
tinued heavy sales of new municipal securities, and a sizable
issue of FNMA participation certificates. The volume of offerings appeared likely to remain large in April, although not so
large as in March.
The Treasury was expected to announce near the end of April
the terms on which it would refund securities maturing in midMay, of which $2.9 billion were held by the public. On Friday,
March 10, the Treasury temporarily replenished its cash balances by selling a special certificate of indebtedness in the amount
of $149 million to the Federal Reserve. The certificate was redeemed 3 days later.
Inflows of funds to savings and loan associations and mutual
savings banks were exceptionally large in February, and growth
appeared to continue in March. With supplies of mortgage funds
exceeding demands, conditions in mortgage markets eased further. Depositary-type institutions used a large part of their increased inflows to repay indebtedness and to acquire marketable
securities.
Commercial banks also continued to experience substantial
inflows of time and savings deposits in March. Expansion in such
deposits over the last 4 months—December through March—
had been at an annual rate of 16 per cent, nearly twice the rate
for the full year 1966. Growth in large-denomination CD's had
moderated considerably since early in 1967, but passbook savings deposits began to rise sharply in mid-February after almost
a year of continuous decline. Demand deposits and the money
supply also expanded sharply in March. The annual rate of
growth in the money supply over the December-March period
was 6 per cent, compared with a rise of slightly less than 2 per
cent in 1966.
Commercial banks made further sizable additions to their
holdings of securities in March, and in contrast with February
also expanded their loan volume substantially. A large increase
in business loans was associated, in part, with the needs of
businesses to finance their payments of income taxes and with118
FEDERAL RESERVE SYSTEM
held individual and social security taxes. From February to
March the bank credit proxy—daily-average member bank
deposits—rose at an annual rate of 15 per cent, the same as
from January to February and more than had been expected.
Staff projections for April suggested that the bank credit
proxy would expand at an annual rate in the 10 to 13 per cent
range if monetary policy remained unchanged, and somewhat
more rapidly if easier money market conditions were sought.
The demand for business loans was expected to be enlarged
temporarily because of an unusually sharp rise in April in the
volume of accelerated tax payments. The projections allowed
for some slackening in growth of time and savings deposits
from the exceptionally rapid pace of recent months, for a large
increase in Government deposits, and for a small decline in
private demand deposits. With currency holdings expected to
continue rising, the money supply was projected to remain
about unchanged.
There was broad agreement at this meeting that it would be
desirable shortly to reduce the Federal Reserve discount rate,
which had been maintained at 4Vi per cent since December
1965, in order to bring it into better alignment with market
interest rates. It was noted that lack of such action might result
in a reversal of the recent downward trends in interest rates,
which reflected in part anticipations of a reduction in the discount rate. Individual members of the Committee suggested that
a lower discount rate would also help to encourage further
declines in yields on long-term securities and mortgage loans;
in rates paid by depositary-type institutions, which had been
relatively sticky in the recent period of declining yields; and in
discount rates of foreign central banks.
As to what degree of reduction in the discount rate would
be most desirable, one possibility discussed was a cut of VA of
a percentage point, with a second V\ point reduction to be
made later if it appeared warranted by unfolding developments.
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ANNUAL REPORT OF BOARD OF GOVERNORS
However, most of the members favored a reduction of the discount rate by Vi of a percentage point, for various reasons. A
smaller reduction, they thought, was likely to be interpreted by
financial market participants as a cautionary signal regarding
System policy intentions, and thus might lead to a back-up in
market interest rates that would be difficult to offset without
very large injections of reserves. Also, a reduction of V\ point
would create uncertainties regarding the possibility of further
discount rate action—an effect deemed undesirable in a period
preceding a Treasury refunding operation. Moreover, a Vi point
cut was viewed as likely to have significantly stronger effects
than the more modest action in encouraging reductions in other
interest rates domestically and abroad.
With respect to open market operations, a number of members
expressed the view that recent growth rates in member bank
reserves, bank credit, and the money supply—while appropriate
temporarily in light of the slowing of the business expansion—
were too high to be sustained for an extended period. In particular, they questioned the desirability of any policy course
that might tend to accelerate growth in these financial aggregates, given the lagged effects of monetary policy and the possibility that business activity would be expanding more vigorously
later in the year. These members suggested that operations might
be directed toward maintaining the prevailing state of net
reserve availability, or of money market conditions in general,
with such modifications as might be necessary to moderate
apparently significant deviations of bank credit growth in either
direction from current expectations.
Other members favored open market operations consistent
with the somewhat easier money market conditions that they
expected would follow the anticipated reduction in the discount
rate, or operations directed at attaining somewhat greater reserve
availability. In general, these members thought that continued
expansion in financial aggregates at rates in the neighborhood of
120
FEDERAL RESERVE SYSTEM
those recently prevailing would be appropriate in the present
economic and financial environment.
At the conclusion of the discussion the Committee agreed
that open market operations should be directed at attaining
somewhat easier conditions in the money market by supporting
the easing expected to result from the anticipated discount rate
action, but not at achieving further easing independently of that
action unless bank credit appeared to be expanding significantly
less than currently anticipated. With this understanding, the
Committee voted to issue the following current economic policy
directive to the Federal Reserve Bank of New York:
The economic and financial developments reviewed at this meeting
support earlier indications of a marked slowing of expansion in over-all
economic activity. Retail sales have continued sluggish and curtailment
in the rate of business inventory accumulation is in process. Average
commodity prices have changed little recently, but unit labor costs in
manufacturing have risen further. Bank credit expansion has remained
vigorous, short-term interest rates have declined markedly further, and
long-term rates have moved down somewhat despite very heavy securities
market flotations. The balance of payments deficit increased in the first
quarter despite some improvement in the foreign trade surplus. In several
important countries abroad, monetary and fiscal policies have eased further in response to slackened economic activity. In this situation, it is the
Federal Open Market Committee's policy to foster money and credit
conditions, including bank credit growth, conducive to combatting the
effects of weakening tendencies in the economy, while recognizing the
need for 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, and to attaining still
easier conditions if bank credit appears to be expanding significantly less
than currently anticipated.
Votes for this action: Messrs. Martin, Hayes, Brimmer, Daane, Francis, Maisel, Mitchell, Robertson,
Scanlon, Shepardson, Swan, and Wayne. Votes against
this action: None.
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ANNUAL REPORT OF BOARD OF GOVERNORS
MAY 2, 1967
Authority to effect transactions in System Account.
Prospects for renewed economic expansion had improved recently, according to reports at this meeting, and business confidence in the outlook had strengthened markedly. Department
of Commerce figures for GNP in the first quarter confirmed
earlier staff estimates that there had been no growth in real output of goods and services in that quarter. However, the official
estimates—which were based in part on preliminary information
for February and March—indicated that consumer expenditures
had been considerably larger than anticipated, and the reduction
in the rate of inventory accumulation correspondingly greater.
Government outlays also appeared to have risen more than
expected.
The inventory adjustments now under way were associated
with both rising retail sales and a reduced level of industrial
production. The retail sales estimate for February had been
revised upward nearly to the January level, and the advance
estimate for March showed a surprisingly large increase in that
month. Although the advance estimate may have overstated the
actual gain in March, weekly sales figures for the first part of
April were relatively strong. Industrial output was somewhat
lower in the first quarter than in the fourth quarter of 1966,
and it was tentatively estimated to have fallen slightly in April.
Employment in manufacturing industries declined again in
March, and total nonfarm employment rose little. The unemployment rate was about unchanged in both March and April, but
recent substantial increases in claims for unemployment insurance suggested weakness in some labor markets.
Continuing inventory adjustments—with a further large reduction in the accumulation rate in the second quarter and perhaps some net liquidation in the third—appeared to be in prospect. For the near term some further declines in industrial pro-
122
FEDERAL RESERVE SYSTEM
duction and manufacturing employment seemed likely, and
growth in over-all economic activity was expected to be well
below the economy's potential. Nevertheless, the staff's projection for GNP in the second quarter had been revised upward
moderately, in large part because of the apparent strengthening
in consumer spending, and an initial projection for the third
quarter suggested that activity then would be expanding at a
more rapid rate. With housing starts increasing contra-seasonally
in the first quarter, prospects for residential construction activity
had improved. The projections assumed that total fixed investment by business would remain relatively stable at about the
high first-quarter rate, that defense expenditures would continue
to exceed earlier expectations, and that State and local government outlays would maintain their strong upward momentum.
The rise in the consumer price index in March was somewhat
larger than the small average increase of the preceding 4 months.
Contrary to earlier indications, average wholesale prices declined
in March, and according to advance estimates they fell further in
April. The declines in both months reflected reductions in prices
of farm products and processed foods; average prices of industrial commodities were stable despite renewed weakness in prices
of basic industrial materials. However, industrial prices were
expected to continue under pressure from rising unit labor costs.
Unit labor costs in manufacturing advanced slightly further in
March, and for the first quarter as a whole they were now estimated to have been 4.7 per cent above a year earlier—the
largest increase in nearly a decade.
The balance of payments deficit in the first quarter was now
estimated to have been about the same as in the fourth quarter of
1966 on the "liquidity" basis of calculation, but of near record
magnitude on the "official reserve transactions" basis. The liquidity deficit continued to be held down in the first quarter by
various types of special transactions. First-quarter payments
were affected favorably by a substantial rise in the surplus on
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ANNUAL REPORT OF BOARD OF GOVERNORS
merchandise trade; the nature of the factors offsetting this favorable development could not be determined as yet from the available data.
The Board of Governors approved a reduction in the Federal
Reserve discount rate from AV2 to 4 per cent on April 6, and
the Bank of Canada reduced its discount rate on the same day.
On April 13 the German Federal Bank lowered its discount rate
for the third time in 1967—to 3Vi per cent—and 2 weeks later
it announced its second reduction of the year in reserve requirements. Meanwhile, market interest rates in a number of major
industrial countries abroad continued to decline.
Recent System open market operations had been directed
at maintaining the easier money market conditions that developed after the announcement of the Federal Reserve discount
rate action on April 6. That announcement had been followed
promptly by reductions in rates on Federal funds, on bank loans
to Government securities dealers, and on negotiable CD's and
other short-term market instruments. The market rate on 3month Treasury bills declined more than 20 basis points, and
was 3.75 per cent on the day before this meeting. Large demands
by private investors, as well as System purchases, contributed
to the declines in bill yields.
Total and nonborrowed reserves of member banks continued
to grow in April, but at a rate sharply lower than in the first
quarter. Free reserves, which fluctuated widely from week to
week, averaged about $210 million, compared with $170 million in March; and average member bank borrowings declined
to $150 million from $200 million.
In contrast to developments in short-term markets, long-term
interest rates had risen considerably since the preceding meeting
of the Committee, reaching levels well above the highs of late
February. These rate advances reflected both the continued
heavy volume of new security flotations and the shift to more
optimistic appraisals of the economic outlook by market partici-
124
FEDERAL RESERVE SYSTEM
pants. The volume of new corporate issues offered publicly in
April, while less than the March total, was a record for the
month, and the calendar of offerings scheduled for May and
June was already large. Municipal bond flotations continued
heavy, and another sizable issue of FNMA participation certificates was expected before midyear. Market attitudes also were
influenced by the prospect that the Federal Government would
have substantial needs for cash in the second half of the year.
On April 26 the Treasury announced a refunding of securities
maturing in May and a prerefunding of issues maturing in June
and August, with settlement scheduled for May 15. In exchange
for these securities, of which about $9 billion were held by the
public, the Treasury offered two new issues: a 15-month, AlA
per cent note and a 5-year, 4% per cent note. The 5-year note,
priced at par, was offered to holders of any of the maturing
issues; the 15-month note, priced to yield 4.29 per cent, was
offered to holders of securities maturing in May and June.
The seasonally adjusted rate of increase in mortgage debt
outstanding rose somewhat in the first quarter after three successive quarters of decline, but it remained relatively low. Downward pressure on mortgage yields was maintained in March by
continuing large inflows of funds to depositary-type institutions.
These institutions were continuing to use a large part of their
inflows to rebuild liquidity through repayment of debt and the
acquisition of marketable securities, partly because the supply
of mortgages available for immediate acquisition remained limited. However, the possibility of a further increase in flows of
funds into mortgage markets in coming months was suggested
by an expanding volume of mortgage commitments.
Data for city banks indicated that loan demands had been
moderate in the first half of April despite large corporate tax
payments. Corporations apparently used part of the proceeds
of recent capital market flotations and some of their CD holdings
to help finance their tax payments. Beginning in late March,
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ANNUAL REPORT OF BOARD OF GOVERNORS
banks sharply reduced the interest rates offered on large-denomination CD's, and the volume of such CD's outstanding declined
over the tax period by more than had been contemplated in staff
projections. However, growth in consumer-type time deposits
accelerated in April and total time and savings deposits of commercial banks continued to expand rapidly—although not so
rapidly as earlier in the year. Government deposits rose substantially as a result of receipts of taxes, and private demand deposits and the money supply declined. Daily-average member bank
deposits—the bank credit proxy—rose at an annual rate of 13.5
per cent from March to April, about in line with expectations
and somewhat less than the rate earlier in the year.
Net business demands for bank loans were expected to be
quite moderate in May; the corporate tax period was past, needs
for inventory financing appeared likely to be small, and—with
the continuing large volume of capital market flotations—a rise
in the rate of repayments of bank loans was possible. Growth
in the bank credit proxy was projected to slow considerably in
May—to an annual rate in the 1 to 4 per cent range—if money
market conditions were unchanged. Staff projections for the
month suggested a sharp decline in Government deposits, offset
only in part by a rise in private demand deposits, and a sizable
increase in the money supply. Growth in time and savings deposits was expected to moderate somewhat further.
The Committee concluded that it would be appropriate at this
time to maintain the prevailing conditions in the money market.
While the emphasis of individual members varied, both the general economic situation and outlook and the desirability of maintaining an "even keel" in the money market during the current
Treasury financing were advanced as grounds for such a policy
course. 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
suggest that prospects for renewed economic expansion have improved.
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FEDERAL RESERVE SYSTEM
The adjustment of excessive inventories is proceeding, as a result of the
reduced level of industrial output and with consumer buying strengthening.
Average wholesale prices have declined recently, reflecting reductions in
farm and food prices and stability in prices of industrial commodities;
but unit labor costs in manufacturing have risen further. Bank credit
expansion has moderated in recent weeks from its earlier rapid rate.
Long-term interest rates have risen considerably under the influence of
heavy securities market financing and more optimistic market appraisals
of the business outlook, but short-term yields have declined further following the recent reduction in Reserve Bank discount rates. Interest rates
abroad have continued to decline and some further reductions have been
made in foreign central bank discount rates. The balance of payments
deficit has remained substantial despite some improvement in the foreign
trade surplus. In this situation, it is the Federal Open Market Committee's policy to foster money and credit conditions, including bank credit
growth, conducive to renewed economic expansion, while recognizing
the need for progress toward reasonable equilibrium in the country's
balance of payments.
To implement this policy, while taking account of the current Treasury
financing, System open market operations until the next meeting of the
Committee shall be conducted with a view to maintaining the prevailing
conditions in the money market.
Votes for this action: Messrs. Martin, Brimmer,
Daane, Francis, Maisel, Mitchell, Robertson, Scanlon,
Sherrill, Swan, Ellis, and Treiber. Votes against this
action: None.
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ANNUAL REPORT OF BOARD OF GOVERNORS
MEETING HELD ON MAY 23, 1967
1. Authority to effect transactions in System Account.
The latest reports on recent economic developments were
somewhat less favorable than earlier. Nevertheless, staff projections continued to suggest some rise in real GNP in the second
quarter and a more rapid advance in the third.
Retail sales data for February had been revised downward, and
figures for March revealed that the expansion in sales then had
been smaller than had been indicated by the earlier advance
estimate. The Commerce Department's estimate of GNP for the
first quarter had been reduced somewhat, as a downward revision
in consumer expenditures on nondurable goods was only partly
offset by upward revisions in defense outlays and net exports.
The new estimates indicated that real GNP had declined slightly
in the first quarter rather than remaining stable.
In April total retail sales were about unchanged, according to
the advance estimate, although sales of new automobiles rose
moderately. Industrial production declined slightly, and employment in manufacturing fell further. On the other hand, housing
starts in April—while moderately below the first-quarter average
—were sufficiently high to suggest that the large rise in starts
usual in the spring season was likely to occur this year.
The rate of business inventory accumulation, which had declined sharply in February, fell slightly further in March and for
the first quarter as a whole it was only one-third the extraordinarily high rate of the fourth quarter of 1966. Staff projections
now suggested the possibility of small net inventory liquidation
in the second quarter and some further decumulation in the third.
While inventory adjustments were retarding industrial activity
currently, by the third quarter their depressant influence was
expected to be considerably reduced.
Final sales had expanded substantially in the first quarter, with
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FEDERAL RESERVE SYSTEM
increases in outlays by Federal, State, and local governments
accounting for an unusually high proportion—about half—of the
rise in the total. It appeared likely that expansion in final sales
would remain substantial in the second and third quarters, with
defense expenditures continuing to exceed earlier estimates, State
and local government outlays expanding sharply further, and
consumer expenditures rising somewhat faster than earlier in the
year. Prospects continued to favor expansion in residential construction but little change in fixed capital outlays by business.
Despite upward pressures on unit labor costs in manufacturing,
average industrial prices had been stable since early in the year.
Recent sharp reductions in prices of farm products and foods had
resulted in a decline in the total wholesale price index and an
appreciable slowing in the rate of increase in average consumer
prices. The earlier marked expansion in output of livestock
products had begun to taper off, however, and by summer or
autumn supplies of many livestock products were expected to
return to about their levels of a year earlier. As a result, it seemed
likely that average wholesale prices of farm products and foods
would stabilize or rise soon, and that retail food prices would
advance more than seasonally by summer.
The deficit in the U.S. balance of payments in the first quarter
was officially estimated at $540 million on the "liquidity" basis,
compared with $450 million in the fourth quarter of 1966. A
substantial increase in the merchandise trade surplus was more
than offset by the combination of an unusually large rise in outflows of private U.S. capital into foreign securities and the
absence of official debt prepayments in the first quarter. Tentative
estimates suggested that the rate of deficit increased in April.
The deficit on the "official reserve transactions" basis had been
enlarged in recent months as a result of repayments by U.S.
banks of earlier borrowings through their foreign branches. In
the first quarter the official settlements deficit was estimated at a
record $1.8 billion, compared with a level close to zero in the
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ANNUAL REPORT OF BOARD OF GOVERNORS
fourth quarter of 1966, and it apparently continued very large
in April. These high deficits had a substantial counterpart in the
improved position of sterling.
On May 4 the Bank of England reduced its discount rate for
the third time in 1967, to 5Vi per cent, and on May 11 the
German Federal Bank made the fourth such reduction, to 3 per
cent. The National Bank of Belgium also had recently lowered
its discount rate further.
In the recently completed Treasury refunding, $3.4 billion of
publicly held securities maturing in May and June and $1.3
billion of securities maturing in August were exchanged for $2.0
billion and $2.7 billion, respectively, of the new 15-month and
5-year notes. The redemptions of May and June maturities for
cash were somewhat larger than had been generally expected,
but the volume of August maturities exchanged for the 5-year
note also was greater than anticipated.
System open market operations since the preceding meeting
of the Committee had been directed at maintaining an "even
keel" in the money market during the Treasury financing. At
member banks average free reserves were somewhat larger in
the first 3 weeks of May than in April, and borrowings were
moderately smaller. Federal funds traded in a narrow range
around the 4 per cent discount rate, about the same as in April,
while interest rates on most types of short-term market instruments moved lower. Demands for Treasury bills remained strong
and the rate on 3-month bills declined 25 basis points further, to
3.50 per cent. On the other hand, major banks raised their offering rates on large-denomination CD's, particularly on those of
longer maturity.
Yields on long-term securities continued to rise, under the
influence of heavy current and prospective offerings of new issues
and—despite some dampening of the earlier marked optimism—
investor confidence that economic expansion would become more
vigorous later in the year. Treasury, corporate, and municipal
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FEDERAL RESERVE SYSTEM
bond yields reached new highs for 1967, and some long-term
rates were approaching the peaks recorded in the summer of
1966.
The decline in mortgage yields slowed in April despite continuing large inflows of funds to depositary-type institutions, and
in early May there were scattered reports of slight rises in
secondary-market yields on Federally underwritten mortgages on
homes. Although interest rates on mortgages had fallen considerably since turning down in November 1966, they were still
high relative to the level from which their advance had started
in the summer of 1965.
At commercial banks growth in business loans had slowed
markedly since the mid-April tax date. The volume of largedenomination CD's outstanding declined over the same period.
As a result of further growth in other types of time and savings
deposits, however, the total of such deposits was continuing to
expand rapidly; new staff projections suggested that from April
to May time and savings deposits would rise almost as fast as
they had from March to April. As before, the projections for
May allowed for a sharp decline in Government deposits and
sizable increases in private demand deposits and the money
supply. For total member bank deposits—the bank credit proxy
—the range of expected growth in May had been narrowed somewhat, to an annual rate between 3 and 4 per cent. In June the
proxy was projected to rise at an annual rate in the 4 to 7 per
cent range if money market conditions were unchanged. Growth
in time and savings deposits was expected to be maintained at
its recent pace. Further sharp declines in Government deposits
and sharp increases in private demand deposits and the money
supply were anticipated.
In the course of the Committee's discussion it was noted that,
while prospects favored resumption of economic expansion later
in the year, the current situation was characterized by various
cross currents and uncertainties. The Committee concluded that
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ANNUAL REPORT OF BOARD OF GOVERNORS
under these circumstances it would be desirable to maintain
prevailing conditions in the money market.
A considerable amount of concern was expressed in the discussion about the recent marked increases in long-term interest
rates. Some members noted that further rises might result in
slowing the expected economic upturn, especially in the housing
sector. The Committee concluded, although some reservations
on the matter were voiced, that a constructive influence might
be exercised by more extensive resort to purchases of longer-term
Government securities in meeting part of the needs for bank
reserves that were expected to arise in the next several weeks. In
particular, it was believed that some purchases of coupon issues,
if and when feasible in the course of reserve-supplying operations
in the coming period, could serve to lighten somewhat the market
supplies of Government securities in the maturity ranges in which
such supplies were the heaviest. It was also noted that this
substitution of purchases of coupon issues for bill purchases
could be important for balance of payments reasons, as a means
of reducing downward pressures on bill rates. The Committee
members made clear that such purchases of coupon issues should
not be directed at maintaining any particular level or maturity
pattern of interest rates.
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
suggest that renewed economic expansion later in the year is in prospect.
Output is still being retarded by adjustments of excessive inventories, but
growth in final demands, particularly Government, continues strong.
Average wholesale prices have declined recently, but unit labor costs in
manufacturing have risen further. Bank credit expansion has slowed in
recent weeks from its earlier rapid rate. Long-term interest rates have
continued to rise under the influence of heavy securities market financing,
but short-term yields have declined further. Some further reductions have
been made in foreign central bank discount rates. The balance of payments deficit has remained substantial despite some improvement in the
foreign trade surplus. In this situation, it is the Federal Open Market
132
FEDERAL RESERVE SYSTEM
Committee's policy to foster money and credit conditions, including bank
credit growth, conducive to renewed economic expansion, while recognizing the need for progress toward reasonable equilibrium in the country's
balance of payments.
To implement this policy, System open market operations until the
next meeting of the Committee shall be conducted with a view to maintaining the prevailing conditions in the money market, while utilizing
operations in coupon issues in supplying part of reserve needs.
Votes for this action: Messrs. Martin, Brimmer,
Daane, Maisel, Mitchell, Robertson, Scanlon, Sherrill,
Swan, Wayne, and Treiber. Vote against this action:
Mr. Francis.
In dissenting from this action, Mr. Francis expressed the view
that monetary policy had been highly stimulative thus far in
1967, that fiscal policy was providing an increasing stimulus,
and that the economy was responding relatively quickly. On the
grounds that a marked increase in demands for goods and
services was likely later in the year and that monetary policy
actions had their main effects after some time lag, he thought
some firming in the money market should be sought now to guard
against the development later of excessive demands and associated
inflationary pressures.
2. Ratification of amendments to authorization for System foreign
currency operations.
At this meeting the Committee ratified actions taken by the
members on May 12, 1967, amending paragraphs 1A and 2 of
the authorization for System foreign currency operations, effective May 17, 1967. The first of these paragraphs was amended
to add Danish kroner, Norwegian kroner, and Mexican pesos to
the list of foreign currencies in which System operations were
authorized. The second paragraph was amended to expand the
list of foreign banks with which reciprocal currency (swap)
arrangements were authorized to include the National Bank of
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ANNUAL REPORT OF BOARD OF GOVERNORS
Denmark and the Bank of Norway, with each of which standby
arrangements of $100 million equivalent were authorized, and
the Bank of Mexico, with which a standby arrangement of $130
million equivalent was authorized. Maximum periods of 12
months were specified for all three new swap arrangements. With
these amendments, the affected paragraphs read as follows:
1A. To purchase and sell the following foreign currencies in the form
of cable transfers through spot or forward transactions on the open market
at home and abroad, including transactions with the U.S. Stabilization
Fund established by Section 10 of the Gold Reserve Act of 1934, with
foreign monetary authorities, and with the Bank for International Settlements:
Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks
Italian lire
Japanese yen
Mexican pesos
Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs
2. The Federal Open Market Committee directs the Federal Reserve
Bank of New York to maintain reciprocal currency arrangements ("swap"
arrangements) for System Open Market Account 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:
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FEDERAL RESERVE SYSTEM
Foreign bank
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements:
System drawings in Swiss francs
System drawings in authorized
European currencies other than
Swiss francs
Amount of
arrangement
(millions of
dollars equivalent)
Maximum
period of
arrangement
(months)
100
150
500
100
100
400
600
450
130
150
100
100
200
12
12
12
12
12
3
6
12
12
12
3
12
12
6
200
6
200
6
1,350
Votes for ratification of these actions: Messrs.
Martin, Brimmer, Daane, Francis, Maisel, Mitchell,
Robertson, Scanlon, Sherrill, Swan, Wayne, and
Treiber. Votes against ratification of these actions:
None.
The Committee had considered the possibility of expanding
the System's network of swap arrangements to include the central
banks of Denmark, Norway, and Mexico at a number of recent
meetings, and it had authorized the Special Manager of the
System Open Market Account to hold discussions with officials
of those central banks looking toward the negotiation of arrangements between their banks and the Federal Reserve. Committee
members had approved the amendments to the authorization
indicated above following receipt of advice from the Special
Manager that the discussions had been satisfactorily completed.
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ANNUAL REPORT OF BOARD OF GOVERNORS
MEETING HELD ON JUNE 20, 1967
Authority to effect transaction in System Account.
Over-all economic activity was expanding at a modest pace, according to reports at this meeting, and prospects for growth later
in the year had strengthened. Staff projections suggested that the
current advance in real GNP, though moderate, would turn out
to be higher than earlier estimates for the second quarter, and that
the rate of growth would accelerate in the third quarter. The projections reflected an expectation that final sales would continue
to expand rapidly in the second and third quarters, and that the
effect on over-all activity of inventory adjustments—which had
resulted in a slight decline in real GNP in the first quarter—would
diminish progressively.
The rate of business inventory accumulation declined further
in April to a low level. It appeared likely that there would be
little, if any, net accumulation of inventories in the second quarter as a whole and that there would be a moderate amount of
liquidation in the third quarter. Industrial production fell slightly
further in May to a level about 2 per cent below the high of
December 1966. Manufacturing employment declined again in
May, but the reduction was less than in other recent months. The
unemployment rate, at 3.8 per cent, was little changed from the
April level.
Government spending remained an important source of economic stimulus, with Federal defense outlays continuing to exceed earlier estimates and State and local government expenditures rising steadily. The staff projections suggested, however,
that the rate of growth in defense outlays would moderate in the
second and third quarters, and that private sales would account
for a larger proportion of growth in total final sales than they
had in the first quarter.
Both consumer expenditures for goods and the volume of resi-
136
FEDERAL RESERVE SYSTEM
dential construction activity appeared to have gamed some momentum recently. Retail sales were now reported to have increased in April, contrary to the earlier indication that they had
not changed in that month, and the advance estimate for May
showed a further rise. Housing starts increased substantially in
May, and various factors—including the further rise in building
permits issued and the substantial increases in mortgage commitments by major groups of lenders—pointed toward higher expenditures on new housing in the months ahead.
A Commerce-SEC survey of business plans, taken in late April
and May, suggested that capital spending would rise moderately
in the second half of the year. The survey implied a slightly smaller rise in business outlays on plant and equipment in 1967 as a
whole than had the survey taken 3 months earlier—2.9 rather
than 3.9 per cent. The downward adjustment, however, was attributable mainly to a larger decline in actual outlays in the first
quarter than had been implied by the plans reported earlier; for
the last three quarters of the year changes in planned outlays
were similar to those that had been indicated in the preceding
survey.
Average wholesale prices of industrial commodities remained
stable in May. Nevertheless, the over-all wholesale price index
rose as prices of farm products and foods increased sharply following 7 months of nearly continuous decline. In April the consumer price index increased somewhat more than it had on the
average during the winter and early spring.
With respect to the U.S. balance of payments, the surplus on
merchandise trade continued to increase in April and net repayments of borrowings abroad by U.S. banks, which had enlarged
the deficit on the "official reserve transactions" basis in the first
4 months of the year, were small in May. However, the available
data on changes in U.S. reserves and liabilities in recent months
suggested that the underlying payments deficit remained large.
Abroad, bond yields had stabilized or risen recently in a num-
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ANNUAL REPORT OF BOARD OF GOVERNORS
ber of industrial countries, interrupting the downward trend of
interest rates that had been under way since late in 1966. Conditions in some foreign exchange markets had been unsettled as a
result of the Middle-East hostilities in early June.
System open market operations since the preceding meeting of
the Committee had been directed toward maintaining prevailing
conditions in the money market. The System supplied reserves
early in the interval and again near its close, partly through purchases of coupon-bearing Treasury securities. In the intervening
period the System sold bills to offset part of the large volume of
reserves supplied by declines in Treasury balances at Federal
Reserve Banks. On June 15 the Treasury temporarily added to its
balances by selling a special certificate of indebtedness in the
amount of $87 million to the Federal Reserve. The certificate
was redeemed the following day.
Growth in nonborrowed reserves of member banks had moderated further in May, and total reserves had declined slightly. In
June aggregate bank reserves were rising relatively slowly. In the
3 weeks through mid-June free reserves averaged about $290
million, little changed from the average of $270 million for all
of May and somewhat above the April level (revised) of $200
million. Member bank borrowings declined further to an average of about $75 million in the latest 3 weeks, from $95 million
in May as a whole and $150 million in April. The Federal funds
rate remained close to 4 per cent and rates on bank loans to Government securities dealers were generally stable.
Interest rates on most types of market securities had risen on
balance since the preceding meeting of the Committee, with yields
on Treasury securities fluctuating widely. In short-term markets
yields advanced on finance company paper, bankers' acceptances,
Federal agency securities, and negotiable CD's. In late May and
early June the market rate on 3-month Treasury bills extended
its earlier persistent decline and on June 5 it reached a low for
the year of 3.37 per cent. Subsequently the rate moved up and
138
FEDERAL RESERVE SYSTEM
was about 3.60 per cent on the day before this meeting. Yields
on intermediate- and long-term Treasury bonds, which had risen
to 1967 highs around mid-May, receded late in that month but
then advanced sharply in the first half of June to levels above the
May peaks. Corporate bond yields had drifted up further after
stabilizing for a time in early June.
The recent increases in short-term interest rates appeared to
have been related in part to pressures associated with the midJune tax and dividend dates. Conditions in financial markets generally, however, were influenced by the continuing heavy volume
of flotations of corporate and municipal securities, and by prospects for a very large volume of Federal debt financing in the
second half of the year. Public offerings of new corporate bonds
in June appeared likely to be about one-fourth larger than the
previous monthly record set in March, and an unusually large
volume of offerings was already scheduled for the third quarter.
It appeared that the Treasury would need to raise a substantial
amount of new cash later in the year, although the magnitude of
the Federal deficit in the second half of 1967 would depend in
large part on the course of defense spending and on the size and
effective date of any increase in income taxes, all of which were
uncertain at this time. The Treasury was expected to undertake
a short-term cash financing in July, but the size, terms, and date
of the offering had not been determined as of the date of this
meeting.
In May contract interest rates on conventional mortgages on
new homes advanced slightly following six consecutive months of
decline, and secondary-market yields on Federally underwritten
home mortgages rose fairly sharply. Inflows of funds to depositary-type institutions remained large, but the share of these funds
used to expand mortgage holdings continued low. Thrift institutions reportedly were still rebuilding liquidity primarily because
of a relative scarcity of mortgages available for immediate acquisition.
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ANNUAL REPORT OF BOARD OF GOVERNORS
At commercial banks business loans outstanding declined in
May, but holdings of Treasury and municipal securities increased
markedly. With offering rates on negotiable CD's rising, large city
banks recovered much of the CD run-off they had experienced in
April. Inflows of other time and savings deposits continued large
at banks generally, and total time and savings deposits expanded
almost as rapidly from April to May as they had earlier in the
year. Private demand deposits and the money supply, which had
declined from March to April, rose substantially in May. As a
result of sharp declines in Government deposits at banks, however, daily-average member bank deposits—the bank credit proxy
—increased at an annual rate of only 2 per cent.
In general, the deposit trends of May—rapid increases in time
and savings and private demand deposits and sharp declines in
Government deposits—appeared to be persisting in June. On
balance, however, the bank credit proxy was expected to increase
from May to June at an annual rate in the 7 to 8 per cent range.
This was faster than from April to May, but considerably slower
than in the first 3 months of the year. The probable growth rate
of member bank deposits from June to July depended in large
measure on the size and timing of the expected Treasury financing. On the assumption that the Treasury would sell, primarily
to the banking system, about $4 billion of new securities shortly
after mid-July, the bank credit proxy was projected to rise at an
annual rate in the 10 to 12 per cent range if money market conditions were unchanged. Continued rapid growth was projected
in private demand deposits, as were some slackening in inflows of
time and savings deposits and little change in Government
deposits.
The Committee decided that it would be appropriate at this
time to maintain about the same conditions in the money market
as had prevailed since the preceding meeting, partly because of
the expected Treasury financing. Various other reasons were ad-
140
FEDERAL RESERVE SYSTEM
vanced by individual members against seeking firmer money market conditions at present. Among these were the current pressures in capital markets, the prospect—which some members
thought had been enhanced recently—that action to raise Federal
income taxes might be taken soon, and the absence to date of
firm evidence that the widely expected upsurge in economic activity had already begun.
While none of the members advocated seeking easier money
market conditions, a number expressed concern about the continued uptrend in long-term interest rates, particularly in light of
the risk that higher rates might slow the recovery in the housing
industry and in the economy generally. Partly for this reason, the
Committee agreed that purchases of coupon issues should continue to be utilized in meeting a portion of the needs for reserves
that were expected to develop in coming weeks, although some
reservations were again expressed concerning the possible adverse
effects in the longer run of such purchases on the functioning of
the market for coupon issues. Some members favored purchases
of coupon issues on other grounds. These included considerations
relating to the balance of payments, currently limited market supplies of Treasury bills, and the composition of the System's portfolio of Government securities.
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
suggest that economic activity is rising modestly, and that prospects for
economic expansion later in the year have strengthened. Output is still
being retarded by adjustments of excessive inventories, but growth in final
demands continues strong, reflecting substantial further increases in Government expenditures and also some strengthening of consumer buying.
Prices of farm products have turned up recently, but average prices of
industrial commodities have remained stable. The pace of bank credit
expansion has increased in recent weeks, but is still well below the rapid
rate of earlier in the year. Most long-term interest rates have tended
to rise further under the influence of heavy securities market financing,
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ANNUAL REPORT OF BOARD OF GOVERNORS
and most short-term yields have also increased. The balance of payments
deficit has remained substantial despite some improvement in the foreign
trade surplus. In this situation, it is the Federal Open Market Committee's
policy to foster money and credit conditions, including bank credit growth,
conducive to renewed economic expansion, while recognizing the need for
progress toward reasonable equilibrium in the country's balance of payments.
To implement this policy, while taking account of expected Treasury
financing activity, the timing and quantity of which are still uncertain,
System open market operations until the next meeting of the Committee
shall be conducted with a view to maintaining about the same conditions
in the money market as have prevailed since the preceding meeting of the
Committee, while continuing to utilize operations in coupon issues in
supplying part of reserve needs.
Votes for this action: Messrs. Martin, Hayes, Brimmer, Maisel, Mitchell, Robertson, Scanlon, Sherrill,
Swan, Wayne, and Patterson. Votes against this action:
None.
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FEDERAL RESERVE SYSTEM
MEETING HELD ON JULY 18, 1967
1. Authority to effect transactions in System Account.
Real GNP rose modestly in the second quarter, according to
preliminary Department of Commerce figures. Final expenditures expanded substantially further and the downdrag from
inventory adjustments was considerably reduced. Staff projections continued to suggest that real GNP would grow at a faster
rate in the third quarter, when it was expected that final sales
would rise somewhat more rapidly and that the depressant influence of inventory adjustments would be reduced still more.
The private sector accounted for a much larger proportion of
the expansion in final sales in the second quarter than in the
first. Consumer spending contributed substantially to the expansion, with sales of automobiles especially strong. Residential
construction activity increased significantly further but business
outlays for fixed capital declined slightly. The rise in defense
outlays was much smaller than in the first quarter, but State and
local government purchases maintained their steady expansion.
Businesses accumulated inventories at a low rate in the second
quarter, according to Commerce Department estimates, and the
prospect appeared to be for some net liquidation in the third
quarter. Industrial production again edged down in June. However, manufacturing employment advanced somewhat following
4 months of decline, and total nonfarm employment rose
strongly. The unemployment rate increased to 4.0 per cent from
3.8 per cent in May, mainly because of an exceptionally large
expansion in the labor force.
Prospects appeared favorable for another large increase in
consumer spending in the third quarter, when rising employment
was expected to result in a more rapid advance in wage incomes
than in the spring quarter. Further gains in residential construction activity were suggested by a rise in building permits and a
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ANNUAL REPORT OF BOARD OF GOVERNORS
significant increase in lender mortgage commitments through
May. Prospects for a modest advance in business spending for
fixed capital were supported not only by the latest CommerceSEC survey but also by recent increases in new orders for machinery and equipment. Little new information was available
on prospective defense spending but the staff projection assumed
that such spending would rise in the third quarter by about as
much as it had in the second quarter.
The wholesale price index in June was officially estimated to
have risen for the second consecutive month—reflecting a further increase in prices of farm products and foods. The average
of industrial prices continued stable. In May the consumer price
index rose again and was 2.7 per cent above a year earlier.
Benefits provided in recently negotiated wage contracts suggested further upward pressure on unit labor costs in manufacturing in the months ahead.
Tentative estimates indicated that the balance of payments
deficit on the "liquidity" basis of calculation was about as large
in the second quarter as in the first, despite an increase in official
foreign acquisitions of long-term deposits. An improvement in
the trade surplus apparently was more than offset by a turn from
inflow to outflow of U.S. short-term bank credit. The deficit on
the "official reserve transactions" basis was much smaller in the
second quarter than in the first, as repayments of borrowings by
U.S. banks from their foreign branches tapered off. Abroad,
economic activity remained sluggish in most industrial countries,
but expansion continued in Italy and Japan.
System open market operations since the last meeting of the
Committee had been directed toward maintaining about the
same conditions in the money market as had prevailed during
the preceding 4 weeks. A large volume of reserves was provided
to meet seasonal needs, mainly through purchases of bills but
partly through acquisitions of coupon securities.
Growth in nonborrowed reserves of member banks slowed
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FEDERAL RESERVE SYSTEM
further in June but total reserves increased moderately following
the slight decline of May. Free reserves and member bank borrowings fluctuated over a wide range in the 4 weeks ending July
12, reflecting in large part seasonal patterns that regularly
develop around the midyear bank statement date and the July 4
holiday. Free reserves averaged $295 million, little changed
from the $285 million average of the preceding 4 weeks, and
borrowings averaged about $165 million compared with about
$70 million in the prior period. The Federal funds rate remained
close to 4 per cent, and rates on bank loans to Government
securities dealers also changed little.
Treasury bill rates rose sharply from late June to early July,
and interest rates on other short-term market instruments also
moved up generally, but less than did bill rates. The market
rate on 3-month Treasury bills had reached a low for the year
of 3.33 per cent on June 23; by July 5, the rate had advanced to
a peak of 4.29 per cent. Subsequently the rate receded somewhat, but on the day before this meeting it was 4.17 per cent,
almost 60 basis points higher than 4 weeks earlier. To some
extent the rise reflected seasonal influences, but for the most
part it was related to the large recent and prospective Treasury
cash borrowing in the bill area.
Following an announcement on June 28, the Treasury auctioned $4 billion of March and April 1968 tax-anticipation bills
on July 5 at average issuing rates of 4.86 and 4.90 per cent,
respectively, for payment July 11. The Treasury also indicated
that it would raise an additional $2.2 billion of new money by
adding $100 million to each of its regular weekly and monthly
bill auctions. Virtually all of the tax-anticipation bills, which
carried 100 per cent tax-and-loan-account privileges, were
acquired by commercial banks, and bank sales of the bills following the auction were relatively light. The Treasury was
expected to announce in late July the terms on which it would
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ANNUAL REPORT OF BOARD OF GOVERNORS
refund coupon-bearing securities maturing in mid-August, of
which the public held $3.6 billion.
A record volume of publicly offered corporate bonds and a
continuing large volume of municipal bonds were issued in June,
and the calendar of offerings for July and August was heavy.
Yields on long-term securities generally rose further in the
second half of June and early July and then declined. Before
turning down, yields on intermediate- and long-term Treasury
bonds had reached new highs for the year, while those on new
corporate issues in some cases had exceeded their highs of
August 1966. Yields on municipal issues also reached new 1967
highs and then tended to level off in the first half of July. To
some extent the recent improvement in the tone of longer-term
securities markets reflected both enhanced expectations of a tax
increase and diminished expectations of a large further build-up
of troops in Vietnam. Yields on Treasury bonds apparently also
were influenced by the low volume of dealer inventories and by
System purchases of coupon issues. In markets for common
stocks, trading was heavy and there appeared to have been an
increase in speculative activity.
In June contract rates on conventional first mortgages on
homes edged up for the second consecutive month, and secondary market yields on Federally underwritten home mortgages
rose further. The inflow of savings to nonbank depositary-type
institutions was maintained in record volume.
At commercial banks, credit demands were heavy during the
tax and dividend period in June, and business loans increased
sharply during the month. Banks liquidated sizable amounts of
Treasury securities and increased their holdings of municipal
securities at a less rapid rate than in other recent months.
Bank offering rates on negotiable CD's rose further in June
and the outstanding volume of these deposits increased moderately. Inflows of other time and savings deposits continued large
and total time and savings deposits increased about as fast as in
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FEDERAL RESERVE SYSTEM
earlier months of the year. The money supply rose at a 13 per
cent annual rate, almost as sharply as it had in May. Government deposits at banks declined somewhat less than in May, and
daily-average member bank deposits—the bank credit proxy—
increased at an annual rate of almost 9 per cent. In the 6 months
through June, time deposits had risen at an annual rate of 17
per cent; the money supply, almost 7 per cent; and the bank
credit proxy, 12 per cent.
Banks were expected to reduce their holdings of the new tax
bills in July, and repayments of business loans appeared likely to
result in liquidation of some private deposits. Nevertheless, the
latest staff projections suggested that total bank credit, as measured by the proxy series, would rise from June to July at an
annual rate in the 13 to 15 per cent range and the money supply
at a rate in the 5 to 7 per cent range if money market conditions
were unchanged. Government deposits were expected to increase
following the declines of May and June, and time and savings
deposits were projected to grow nearly as rapidly as they had
in June.
In August, business loans of banks were expected to increase
relatively little on balance, as a result of repayment of the taxrelated borrowings of late June and early July and continued
small needs for financing inventories. On the assumption that
the Treasury would not raise new cash until early September, the
rate of bank credit expansion was expected to be considerably
slower in August than in July. For the 2 months together, the
bank credit proxy was projected to grow at an annual rate in
the 10 to 12 per cent range.
In the course of the Committee's discussion considerable concern was expressed about the recent high rates of growth of bank
credit and the money supply, particularly in view of the prospects for more rapid economic expansion later in the year. It
was generally agreed, however, that the Treasury's forthcoming
financing militated against seeking a change in money market
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ANNUAL REPORT OF BOARD OF GOVERNORS
conditions at present. Moreover, even apart from the Treasury
financing, most members felt that it would be premature to seek
firmer money market conditions at a time when resumption of
expansion in over-all economic activity was in a fairly early
stage; and some also referred in this connection to the growing
expectations that the administration would press for measures of
fiscal restraint. In addition, some members expressed concern
about the possibility that any significant further increases in market interest rates might reduce the flows of funds into mortgages
and slow the recovery under way in residential construction
activity.
The Committee concluded that it would be appropriate at
present to maintain about the prevailing conditions in the money
market, although the members agreed that operations should be
modified, insofar as permitted by "even keel" considerations
associated with the Treasury financing, if there was a tendency
for bank credit and the money supply to expand more than
currently expected. It was noted that the growth rates in bank
credit and money currently expected rested on particular assumptions regarding the pattern of forthcoming Treasury financing activity and were subject to revision if the actual pattern
differed from that assumed.
Prior to the vote on the full text of the current economic policy
directive to be issued at this meeting, a preliminary vote was
taken on the question of whether a reference to operations in
coupon issues for supplying part of reserve needs, such as had
appeared in the second paragraph of the directives issued on
May 23 and June 20, 1967, should be included in today's directive.
Votes for including such a reference: Messrs. Brimmer, Maisel, and Mitchell. Votes against: Messrs.
Hayes, Robertson, Scanlon, Sherrill, Swan, Wayne,
and Patterson.
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FEDERAL RESERVE SYSTEM
The majority favored omitting the reference in question for
a number of reasons, including the imminent Treasury refunding,
the small volume of net reserve needs projected for the interval
up to the next meeting of the Committee, the substantial decrease
in the market availability of coupon issues, and the recently more
settled conditions in longer-term securities markets. It was
stressed by members of the majority that operations in coupon
issues from time to time were a normal part of open market
operations, and that omission of the reference to them from the
directive did not preclude such operations under appropriate
circumstances.
Members of the minority noted that the heavy calendar of
prospective corporate issues could result in renewed upward
pressures on long-term yields, with possibly adverse effects on
mortgage markets. They expressed the view that recent operations in coupon issues had had some moderating effect on longterm rates by affecting both market supplies and expectations of
market participants, and that such operations could continue to
serve a constructive purpose in dealing selectively with capital
market pressures. Mr. Maisel thought that there remained a
broad demand for liquidity in the economy, and that helping to
meet that demand by purchases of coupon issues represented an
appropriate System portfolio policy.
Mr. Brimmer observed that appropriate circumstances for
coupon operations might not arise in the coming period, and
along with Messrs. Maisel and Mitchell he agreed that omission
of the reference from the directive would not preclude them if
the need arose. Nevertheless, these members felt that the reference should be retained in the present directive to clarify the
Committee's intent.
The Committee then voted to issue the following current economic policy directive to the Federal Reserve Bank of New
York:
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ANNUAL REPORT OF BOARD OF GOVERNORS
The economic and financial developments reviewed at this meeting
indicate that economic activity has been rising modestly and that prospects are for further expansion. Output is still being retarded by adjustments of excessive inventories, but growth in final demands continues
strong, reflecting some strengthening in consumer expenditures for durable goods and housing, and also further increases in Government outlays.
The over-all indexes of both wholesale and retail prices have risen
further, although wholesale prices of industrial commodities have remained stable. Bank credit expansion has been large in recent weeks.
Most short- and long-term interest rates, after reaching advanced levels
under the influence of heavy public and private securities market financing, have declined somewhat recently. The balance of payments deficit
has remained substantial despite some improvement in the foreign trade
surplus. In this situation, it is the Federal Open Market Committee's
policy to foster money and credit conditions, including bank credit
growth, conducive to continuing economic expansion, while recognizing
the need for reasonable price stability for both domestic and balance of
payments purposes.
To implement this policy, while taking account of forthcoming Treasury financing activity, System open market operations until the next
meeting of the Committee shall be conducted with a view to maintaining
about the prevailing conditions in the money market; but operations shall
be modified insofar as the Treasury financing permits to moderate any
apparent tendency for bank credit and money to expand more than
currently expected.
Votes for this action: Messrs. Hayes, Brimmer,
Maisel, Mitchell, Robertson, Scanlon, Sherrill, Swan,
Wayne, and Patterson. Votes against this action:
None.
2. Amendments to authorization for System foreign currency
operations.
At this meeting the Committee ratified an action taken by
members on June 29, 1967, effective June 30, 1967, amending
paragraph 2 of the Committee's authorization for System foreign
currency operations to change the maximum period authorized
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FEDERAL RESERVE SYSTEM
for the reciprocal currency (swap) arrangement with the Netherlands Bank from 3 to 6 months.
Votes for ratification of this action: Messrs. Hayes,
Brimmer, Maisel, Mitchell, Robertson, Scanlon, Sherrill, Swan, Wayne, and Patterson. Votes against ratification of this action: None.
Subsequently in the course of the meeting the Committee
amended paragraph 2 of the authorization in certain other respects. In the text of the paragraph the phrase "for periods up to
a maximum of 12 months" was added following the direction to
the Federal Reserve Bank of New York to maintain swap arrangements with indicated foreign banks; and the column in the
table contained in the paragraph that specified a maximum maturity for each of the existing arrangements—12 months in 10
cases and 3 or 6 months in the others—was deleted. These
changes, which were in line with the Committee's interest in
moving toward 12-month maturities for swap arrangements
where agreeable with the foreign bank concerned, eliminated
the necessity for amending the authorization each time the maturity of an arrangement was changed.
In addition, the paragraph was amended to reflect approval
of increases (a) from $200 million to $250 million in the swap
arrangement with the Swiss National Bank, (b) from $200 million to $250 million in the arrangement with the Bank for International Settlements covering System drawings in Swiss francs,
and (c) from $200 million to $300 million in the arrangement
with the Bank for International Settlements covering System
drawings in authorized European currencies other than Swiss
francs. These increases were considered desirable to provide
broader margins of safety to deal wth unforeseeable contingencies.
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ANNUAL REPORT OF BOARD OF GOVERNORS
Votes for these actions: Messrs. Hayes, Brimmer,
Maisel, Mitchell, Robertson, Scanlon, Sherrill, Swan,
Wayne, and Patterson. Votes against these actions:
None.
Reflecting these amendments, paragraph 2 of the authorization for System foreign currency operations read as follows:
The Federal Open Market Committee directs the Federal Reserve Bank
of New York to maintain reciprocal currency arrangements ("swap"
arrangements) for System Open Market Account for periods up to a
maximum of 12 months with the following foreign banks, which are
among those designated by the Board of Governors of the Federal
Reserve System under Section 214.5 of Regulation N, Relations with
Foreign Banks and Bankers, and with the approval of the Committee to
renew such arrangements on maturity:
Foreign bank
Amount of
arrangement
(millions of
dollars equivalent)
Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements:
System drawings in Swiss francs
System drawings in authorized European
currencies other than Swiss francs
152
100
150
500
100
1,350
100
400
600
450
130
150
100
100
250
250
300
FEDERAL RESERVE SYSTEM
MEETING HELD ON AUGUST 15, 1967
Authority to effect transactions in System Account.
Economic activity had been expanding more rapidly in recent
weeks, according to reports at this meeting. The latest business
developments lent support to the expectation that the rate of
growth in real GNP would accelerate in the third quarter, when
it was anticipated that final sales would continue to increase
rapidly and that the depressant influence of inventory adjustments would wane.
In July industrial production turned up after declining irregularly over the first half of the year, nonfarm employment rose
further, and the unemployment rate edged down to 3.9 per
cent from 4.0 per cent in June. According to the advance
estimate, retail sales increased in July from a June level that had
been revised upward substantially. Housing starts declined somewhat in June after rising sharply in May, but they remained
above their reduced year-earlier level. Following the sharp contraction in the rate of accumulation earlier in the year, business
inventories declined substantially in June, and in many industries stocks were moving into better relation with sales.
In a message to Congress on August 3 the President proposed
a new fiscal program, the main element of which was a 10 per
cent surcharge on Federal income taxes, to be effective October
1, 1967, for individuals, and to be retroactive to July 1, 1967,
for corporations. A staff projection suggested that, even if the
President's fiscal program was enacted promptly in the form
recommended, the growth rate in real GNP in the fourth quarter
would be slightly higher than that expected in the third. It was
anticipated that the tax increases, if enacted, would moderate
the pace of expansion in final spending—particularly by consumers. However, it was thought likely that this effect would
be about offset in terms of the rise in total GNP by a shift from
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ANNUAL REPORT OF BOARD OF GOVERNORS
small decumulation of inventories in the third quarter to moderate accumulation in the fourth. Among the uncertainties
affecting the projections for the second half of the year was
the possibility of a strike in the automobile industry in early
September when existing wage contracts would expire.
The rise in the wholesale price index slowed in July, according
to the advance estimate, as prices of farm products and foods
increased only moderately further. However, average industrial
prices apparently edged up after 4 months of stability, and
increases for a, number of industrial commodities had been
announced following the mid-July date to which the index
applied. In June, as in May, the consumer price index rose at
a faster rate than in the first quarter. Unit labor costs in manufacturing advanced further in June, and for the second quarter
as a whole they were estimated—after upward revisions in the
data for some months—to be 5.5 per cent higher than a year
earlier.
Recent data on the U.S. balance of payments supported
earlier estimates indicating that the deficit on the "liquidity" basis
of calculation was about as large in the second quarter as in
the first and that it was considerably above the 1966 rate.
Although the merchandise trade surplus increased somewhat
in the second quarter as a whole, there was no improvement
after April, partly because industrial activity continued sluggish
in important industrial countries abroad. The liquidity deficit
apparently remained large in July, and there seemed to be
little reason to expect it to decline substantially during the second
half of the year.
The deficit on the "official reserve transactions" basis was
quite large in the second quarter, although only about half the
record high of the first quarter. The balance on this basis had
fluctuated widely over the past year as a result of marked swings
in the indebtedness of U.S. banks to their foreign branches.
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FEDERAL RESERVE SYSTEM
Banks had borrowed heavily through their branches abroad
from about the middle of 1966 until late in the year, had
repaid a large amount of this debt over the ensuing period until
mid-May 1967, and then had resumed such borrowing at a
substantial rate.
The President's tax message was followed by a rally in the
Government securities market, but this response was short-lived.
Subsequently, yields on most coupon-bearing Treasury issues
advanced to levels about equal to their previous 1967 highs, as
market participants focused on the uncertainties of the congressional reaction to the President's recommendations and on the
volume of Federal financing in prospect for the rest of the
calendar year even if the tax program was enacted in the form
recommended. Yields on municipal securities moved lower, however—mainly because the volume of new offerings had abated
somewhat recently, but apparently also because the proposed
tax increase enhanced the attractiveness of tax-exempt issues
to investors. Markets for corporate bonds continued to be dominated by the heavy flow of new issues, and yields remained
close to the highs reached in late June. The volume of new
corporate bonds offered publicly in July was more than four
times that of a year earlier and was at a new record level; and
the calendar for August was large, although not so large as
in July.
With a Treasury refunding under way in August, System open
market operations since the preceding meeting of the Committee
had been directed toward maintaining steady conditions in the
money market. The market operations needed for this purpose
proved to be relatively limited and were reflected in a small rise
in System holdings of Treasury bills. Free reserves of member
banks averaged about $265 million in the 4 weeks ending August
9, compared with $285 million in the preceding 4 weeks, and
member bank borrowings continued light. Interest rates on Fed-
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ANNUAL REPORT OF BOARD OF GOVERNORS
eral funds and on bank loans to Government securities dealers
had remained relatively stable since the preceding meeting of the
Committee, and the market rate on 3-month Treasury bills was
about unchanged on balance. However, rates on a variety of
short-term market instruments, including 9- and 12-month
Treasury bills, had risen somewhat further.
In its refunding operation the Treasury redeemed securities
maturing in mid-August with the proceeds of a sale of a 5VA
per cent, 15-month note (priced to yield 5.30 per cent), and it
also raised $300 million of new cash. The Treasury was expected
to raise an additional $2 billion to $2.5 billion of new cash
later in August by the sale of another new issue, but the specific
terms had not yet been decided upon.
Secondary-market yields on Federally underwritten home
mortgages, which had turned up in May, apparently rose little
further in July, when inflows of funds to savings and loan associations and mutual savings banks were unusually large for
that time of the year. The pace of mortgage lending by such
institutions had accelerated in June—bringing the net increase
in outstanding mortgages on homes in the second quarter as a
whole to the highest rate since early 1966.
Commercial bank credit expanded markedly in July, partly
because of bank acquisitions of tax-anticipation bills auctioned
by the Treasury. Also, business loans at banks, which had risen
seasonally in June in connection with midmonth corporate
income tax payments, failed to show their usual decline in July;
as compared with the pattern in other recent years, loan repayments tended to lag, not appearing in volume until late July
and early August. This development, which probably was related
to the acceleration in the schedule on which businesses pay to
the Treasury the taxes they withhold on individual incomes,
resulted in a sharp rise in business loans after seasonal adjustment on the basis of past patterns. Daily-average member bank
156
FEDERAL RESERVE SYSTEM
deposits—the bank credit proxy—increased at an annual rate of
about 15 per cent from June to July, reflecting a marked expanson in private demand deposits and the money supply, a rise
in U.S. Government deposits, and continued rapid growth in
time and savings deposits. The volume of negotiable CD's outstanding continued to increase as banks raised their offering
rates on these deposits somewhat further.
With business loan repayments becoming large, it appeared
likely that growth in bank credit and money would slow over the
course of August. For July and August together, however, the
bank credit proxy was now projected to rise at an annual rate
in the range of 14 to 16 per cent. This was somewhat higher
than the range previously expected, partly because of differences
between the emerging pattern of Treasury financing and the
pattern that had been anticipated earlier.
Staff projections suggested a slower rate of increase in the
bank credit proxy from August to September—in the range of
7 to 9 per cent, annual rate—if money market conditions were
unchanged. The money supply, which appeared likely to increase
much less in August than in July, was projected to decline
somewhat in September as Government deposits rose, and
growth in time and savings deposits was expected to be somewhat slower. It was recognized that a strike in the automobile
industry in September, should one develop, could alter the outlook for bank credit and for demand and time deposits, since
it would affect corporate cash flows, personal income, and credit
demands.
In the course of the Committee's discussion the members
agreed that the fiscal program recommended by the President
would, if enacted, make a substantial contribution to balanced
economic growth. They also agreed that the continuing substantial deficit in the U.S. balance of payments represented a
serious national problem, and some members suggested that a
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ANNUAL REPORT OF BOARD OF GOVERNORS
strengthening of elements of the voluntary programs for limiting
capital outflows might be desirable.
A number of members expressed the judgment that both
the impending Treasury financing and uncertainties about the
outcome with respect to the fiscal program now under active
consideration by Congress militated against a change in monetary policy at present. At the same time, most members were
of the view that recent rates of growth in bank credit were higher
than should be sustained in light of the current economic outlook. The Committee concluded that open market operations
should be directed at maintaining about the prevailing conditions in the money market, but that operations should be modified, insofar as the Treasury financing permitted, to moderate
any apparent tendency for bank credit to expand more than currently expected.
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 economic activity has been expanding more rapidly in recent
weeks. With strengthening of private demands for final products and
further curtailment of inventory investment, a better balance between
inventories and sales is emerging. Upward pressures on costs persist and
the over-all indexes of both wholesale and consumer prices have risen
further. The balance of payments deficit has remained substantial and
is a serious national problem. Bank credit expansion has continued
large, while most short- and long-term interest rates have fluctuated
close to their highs of the year, under the combined pressure of heavy
private security market financing and of current and prospective Federal
financing. A new fiscal program has been proposed by the President,
including a sizable increase in income taxes, which would make a
substantial contribution to balanced economic growth. In this situation,
it is the policy of the Federal Open Market Committee to foster financial
conditions, including bank credit growth, conducive to continuing eco-
158
FEDERAL RESERVE SYSTEM
nomic expansion, while recognizing the need for reasonable price stability
for both domestic and balance of payments purposes.
To implement this policy, while taking account of expected Treasury
financing activity, System open market operations until the next meeting
of the Committee shall be conducted with a view to maintaining about the
prevailing conditions in the money market; but operations shall be
modified, insofar as Treasury financing permits, to moderate any apparent
tendency for bank credit to expand more than currently expected.
Votes for this action: Messrs. Robertson, Brimmer,
Daane, Maisel, Mitchell, Scanlon, Sherrill, Swan, Ellis,
Patterson, and Treiber. Votes against this action:
None.
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ANNUAL REPORT OF BOARD OF GOVERNORS
MEETING HELD ON SEPTEMBER 12, 1967
Authority to effect transactions in System Account.
Economic activity had strengthened recently and the prospect
was for more rapid growth in coming months. It appeared that
industrial production had advanced in August at about the July
rate and since June had recovered much of the decline experienced earlier in the year. Nonfarm employment also rose further
in August, and the unemployment rate again edged down—to
3.8 per cent from 3.9 per cent in July. Housing starts, which had
fallen slightly in June, rebounded in July. Real GNP was expected to rise at a substantial rate in the third quarter as a
whole, despite a strike that began in early September at a major
automobile producer.
It appeared likely that growth in real GNP would accelerate
further in the fourth quarter to a rate that would reinforce existing upward pressures on costs and prices. This expectation was
premised on the assumptions—which were necessarily uncertain
—that work stoppages in the automobile industry would be of
relatively short duration and limited extent, and that a surcharge
on Federal income taxes, which was now under consideration
by Congress, would not go into effect before the end of the year.
With growth in personal incomes accelerating as a result of more
rapid increases in both employment and wage rates, consumer
spending was expected to rise substantially, accounting for about
half of the large advance in GNP foreseen for the fourth quarter.
Also anticipated were continued sizable increases in Federal and
State and local government spending, a moderate further rise in
residential construction outlays, and some net growth in business
inventories following the small decline expected for the third
quarter. A Commerce-SEC survey taken in August indicated
that businesses planned slightly smaller expenditures on plant
and equipment during 1967 than had been reported in April and
160
FEDERAL RESERVE SYSTEM
May, but the latest survey still suggested that such outlays would
be slightly higher in the second half of the year than in the first
half.
Prices of industrial commodities increased appreciably from
mid-July to mid-August, according to preliminary estimates, although the total wholesale price index declined because of a
downturn in prices of farm products and foods following 3
months of advance. Price increases were being announced for a
wide variety of industrial materials and products as producers
sought to pass on, at a time of strengthening demands, the increases in costs they had incurred earlier. The rise in industrial
prices from July to August represented a departure from the
pattern of stability that had prevailed over the preceding 5
months, when a downdrift in prices of materials had offset
moderate advances in prices of industrial products. The consumer price index rose substantially further in July, partly because of seasonal increases in food prices.
With respect to the balance of payments, U.S. banks borrowed
heavily through foreign branches during July and August, a
period in which rates on Euro-dollar deposits were unusually low
relative to rates offered by U.S. banks on domestic CD's. As a
result, a substantial surplus developed after midyear in the payments balance on the "official reserve transactions" basis of
calculation.
Tentative data suggested that the payments deficit on the
"liquidity" basis was at a somewhat lower rate in July and August than in the first half of 1967, but that it was still undesirably
large. The surplus on merchandise trade was about unchanged
in July at a level below the average for the first 5 months of the
year. Thus far in 1967 imports had remained unexpectedly high
and exports had shown no tendency to grow, in part because of
continued stagnation of business activity in most industrial countries abroad. Moderately stimulative monetary and fiscal measures had been taken in some countries; the most recent of these
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ANNUAL REPORT OF BOARD OF GOVERNORS
measures was a further reducton in Germany of minimum reserve
requirements of commercial banks, effective September 1. However, the use of expansionary public policies had been restrained
in many countries by concern over actual or prospective inflationary pressures or, as in the United Kingdom, by balance of
payments problems.
On August 17, shortly after completing its mid-August refunding, the Treasury announced an offering of a 3Vi year,
5% per cent note (priced to yield 5.40 per cent), to raise $2.5
billion of new money. The payment date for the note, which carried full tax-and-loan-account privileges, was August 30. It was
reported that the Treasury was tentatively planning to obtain part
of the new cash it would require in the fourth quarter by auctioning about $4.5 billion of tax-anticipation bills in early October.
On Friday, September 8, the Treasury replenished its balances
by selling a special certificate of indebtedness in the amount of
$153 million to the Federal Reserve. The certificate was redeemed 3 days later.
Recent System open market operations had been directed at
maintaining generally steady conditions in the money market
while the Treasury's note financing was under way. In the 4
weeks ending September 6 free reserves of member banks averaged about $285 million and member bank borrowings about
$75 million, both little changed from the averages of the previous
4 weeks. In the latter part of August the interest rate on Federal
funds fell to a level generally below the 4 per cent discount rate,
and rates on bank loans to Government securities dealers also
frequently dropped below the discount rate. In early September,
however, rates of both types moved back to 4 per cent and above.
Market rates on Treasury bills had fluctuated rather widely since
the preceding meeting of the Committee, with the rate on 3month bills rising 18 basis points on balance to 4.34 per cent on
the day before this meeting. Yields on most other types of shortterm securities fluctuated near their highs for the year.
162
FEDERAL RESERVE SYSTEM
Capital markets remained under pressure in the latter part
of August as a result of continued heavy corporate bond flotations and Treasury financing activity, and longer-term yields advanced to levels near or above the peaks reached earlier in the
summer. The atmosphere in markets for U.S. Government notes
and bonds and corporate securities subsequently improved, however, as the volume of publicly offered corporate bonds appeared
to be moderating. In contrast, pressures persisted in markets for
municipal securities, where the volume of new offerings in
prospect for September was considerably above the reduced
August level.
Business loans outstanding at commercial banks, which had
risen sharply in July, declined by nearly as much in August.
These changes probably were related in large part to delays in
loan repayments relative to the usual seasonal pattern, because
of the need in July of this year to finance accelerated payments
to the Treasury of taxes withheld on individual incomes. Despite
the contraction in business loans, total bank credit expanded
rapidly in August, as it had in July. Banks again acquired a substantial volume of newly issued Treasury securities and they increased their loans to Government securities dealers considerably
further. According to preliminary estimates the bank credit
proxy—daily-average deposits of member banks—rose at an annual rate of 17 per cent from July to August, slightly more than
had been anticipated. Most of this increase in the proxy series
occurred in late July and early August; growth slackened markedly in the last 3 weeks of August.
Among deposit categories, total time and savings deposits
continued to grow rapidly from July to August as the volume of
outstanding negotiable CD's increased sharply further and inflows
of other time and savings deposits remained large. Private demand deposits—and the money supply—again rose substantially
on average, although growth ceased in the latter part of August
when credit demands abated. U.S. Government deposits increased somewhat.
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ANNUAL REPORT OF BOARD OF GOVERNORS
Staff projections now suggested that the bank credit proxy
would rise at an annual rate in the range of 9 to 12 per cent from
August to September if money market conditions were unchanged. Loan demands appeared likely to be relatively moderate in September, and with U.S. Government deposits expected to
rise slightly on average, it was anticipated that there would be
little or no growth in private demand deposits and in the money
supply. The rate of expansion in total time and savings deposits
was expected to slacken considerably, primarily because banks
were expected to become less aggressive in issuing negotiable
CD's.
Considerable concern was expressed in the course of the Committee's discussion about the evidences of developing inflationary
pressures in the economy and the prospects for overly rapid
growth in aggregate demands later in the year. The members
agreed that congressional enactment of the surcharge on income
taxes recommended by the President would make a needed contribution to balanced economic growth.
Many members also indicated that they were disturbed by the
rapid rates of increase in bank credit and the money supply in
recent months. The Committee was divided, however, with regard to the appropriate course for monetary policy under current
circumstances. The majority concluded that open market operations should be directed at maintaining prevailing conditions in
the money market, with the proviso that operations should be
modified as necessary to moderate any apparent tendency for
bank credit to expand significantly more than currently expected.
Members of the majority advanced various reasons in support
of this course, including the desirability of waiting for firmer
indications of the likely nature of action by Congress with regard
to the President's tax proposals. Other considerations cited were
the risks that under present conditions in financial markets even
a modest move toward greater monetary restraint at this time
might have an exaggerated impact on market expectations and
result in sharp further increases in interest rates, with attendant
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FEDERAL RESERVE SYSTEM
adverse effects on depositary-type financial intermediaries and on
the position of sterling in foreign exchange markets. Also noted
were existing uncertainties with respect to the extent, duration,
and ultimate economic effects of the strike in the automobile
industry.
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 economic activity has strengthened and, despite the strike
in the automobile industry, that prospects favor more rapid growth
later in the year. Upward pressures on costs persist and average prices
of industrial commodities have turned up following several months of
stability. While there recently have been large inflows of liquid funds
from abroad, the balance of payments continues to reflect a substantial
underlying deficit. Bank credit expansion has continued large, while
most short- and long-term interest rates have fluctuated close to their
highs of the year, under the combined pressure of heavy private security market financing and of recent and prospective Federal financing.
The President's new fiscal program calling for a sizable increase in
income taxes, which would make a substantial contribution to balanced
economic growth, is now before Congress. In this situation, it is the
policy of the Federal Open Market Committee to foster financial conditions, including bank credit growth, conducive to sustainable economic expansion, recognizing the need for reasonable price stability
for both domestic and balance of payments purposes.
To implement this policy, System open market operations until the
next meeting of the Committee shall be conducted with a view to
maintaining about the prevailing conditions in the money market; but
operations shall be modified as necessary to moderate any apparent
tendency for bank credit to expand significantly more than currently
expected.
Votes for this action: Messrs. Martin, Brimmer,
Daane, Maisel, Mitchell, Robertson, Sherrill, Swan,
and Wayne. Votes against this action: Messrs. Hayes,
Francis, and Scanlon.
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ANNUAL REPORT OF BOARD OF GOVERNORS
Messrs. Hayes, Francis, and Scanlon dissented from this action
because they thought that greater monetary restraint was required
in light of recent rates of growth in bank credit, present and prospective inflationary pressures, and the unsatisfactory balance of
payments situation. They considered it particularly important to
modify monetary policy at this time because they felt that Treasury financing operations would limit the opportunities for such
action later in the year. The dissenting members differed, however, with respect to the degree of restraint they thought was appropriate under present circumstances.
Mr. Francis favored seeking significantly firmer money market
conditions, and firming still further if growth in bank credit did
not moderate substantially. In his judgment, both monetary
policy and fiscal policy were characterized by excessive ease at
present, the lagged effects of which would magnify the pressures
on the economy expected in the months ahead. He observed that
fiscal policy was likely to remain extraordinarily stimulative even
if the President's tax proposals were enacted in the form recommended. He expressed the view that the limitation by appropriate
monetary action of excessive demand, inflation, speculation, and
further deterioration in the U.S. balance of payments appeared
to be more crucial than any temporary hardships on the Treasury, financial intermediaries, and long-term borrowers resulting
from higher interest rates.
Messrs. Hayes and Scanlon, on the other hand, agreed with
members of the majority that there were risks in moving toward
firmer money market conditions at present. In their judgment,
however, those risks argued not for maintaining prevailing
money market conditions but for exercising caution in probing
toward moderately less easy conditions.
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FEDERAL RESERVE SYSTEM
MEETING HELD ON OCTOBER 3f 1967
Authority to effect transactions in System Account.
Reports at this meeting indicated that underlying economic conditions had strengthened and that prospects were for more rapid
growth later in the year, apart from the effects of the strike at a
major automobile producer that was now in its fourth week. More
complete data confirmed earlier indications that industrial production had increased further in August, and while output had probably declined in September, it appeared likely that growth would
resume when the automobile industry returned to full production.
Retail sales had continued to rise rapidly in August, according
to the advance estimate, and housing starts had edged up. Price
increases for industrial commodities continued to be widespread.
The latest information tended to support earlier expectations
of a substantial increase in real GNP in the third quarter. Also,
an acceleration in growth still appeared in prospect for the fourth
quarter, when it was expected that final sales would rise considerably further and that business inventories would increase modestly. As before, the expectations for the fourth quarter were
based on the assumptions that work stoppages in the automobile
industry would be of relatively short duration and limited extent,
and that a surcharge on Federal income taxes—which was still
pending before Congress—would not go into effect before the
end of the year.
Average prices of industrial commodities again increased appreciably from mid-August to mid-September, according to preliminary estimates, and the number of announced increases that
were to become effective after the latter date suggested that the
average would advance further in the following month. The consumer price index, which since March had been rising more
rapidly than earlier, increased at a sizable rate in August. Unit
labor costs in manufacturing were expected to remain under up-
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ANNUAL REPORT OF BOARD OF GOVERNORS
ward pressure in coming months, when it appeared likely that
wage increases would more than offset gains in productivity.
The large deficit in the U.S. balance of payments on the "official reserve transactions" basis in the second quarter was followed by a large surplus in the third quarter as a result of heavy
inflows of liquid funds, particularly in July and August, through
foreign branches of U.S. banks. The deficit on the "liquidity"
basis was estimated to have increased somewhat in the third
quarter, although a decline would have been recorded had it not
been for certain types of official transactions that had held down
the second-quarter deficit. The merchandise trade surplus increased in August as a result of a reduction in imports. Prospects
for renewed strength in exports had been enhanced by recent
signs of industrial recovery in Germany and Britain, but imports
also were expected to rise with expansion in U.S. business activity.
In Britain the improvement in exports and in the basic payments balance that had been hoped for in 1967 had not materialized thus far, in part because of the slowdown in economic activity on the continent and the balance of payments costs of the
Middle East crisis, and sterling remained under pressure in
foreign exchange markets. The Bank of Canada had raised its
discount rate from AVi to 5 per cent on September 27. This action was generally interpreted as a technical adjustment to the
sharp increases in market interest rates that had occurred in
Canada over the preceding 6 months.
On September 22 the U.S. Treasury announced that it would
auction $4.5 billion of April and June tax-anticipation bills on
October 3, the date of this meeting, for payment on October 9.
The Treasury also indicated that it would add $100 million to
each of its weekly bill offerings for 13 weeks beginning with the
auction of October 9. Since early July the Treasury had raised
about $10 billion of new cash through sales of bills—including
today's offering of tax-anticipation bills—and nearly $3 billion
through sales of coupon-bearing securities, and it appeared that
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FEDERAL RESERVE SYSTEM
the Treasury would need to raise substantial further amounts of
cash in the remaining months of 1967. An announcement was
expected in late October of the terms for refunding U.S. Government securities maturing in mid-November, of which $2.6 billion
were held by the public.
System open market operations since the preceding meeting
of the Committee had been directed at maintaining steady conditions in the money market. In the 3 weeks ending September 27
free reserves of member banks had averaged about $270 million
and member bank borrowings about $85 million, both within the
ranges prevailing recently, and the Federal funds rate had averaged about 4 per cent, slightly higher than in July and August.
After the preceding meeting of the Committee the market rate on
3-month Treasury bills had risen sharply—reaching 4.60 per
cent on September 22—chiefly as a result of market anticipations
of additional Treasury bill financing. The bill rate had subsequently declined, however, and on the day before this meeting it
was 4.40 per cent, only 6 basis points above its level 3 weeks
earlier. Rates on other short-term market instruments increased
further or remained at advanced levels.
In capital markets the volume of new securities offered to the
public had moderated recently. Although flotations by State and
local governments in September and those in prospect for October were considerably above their reduced August level, the
presently estimated volume of new corporate offerings in September and October was only about half the extraordinarily large
volume of July and August. Nevertheless, bond yields were subject to renewed upward pressures, with yields on long-term
Treasury bonds rising to levels above their 1966 highs. In part,
the pressures in capital markets reflected apprehension over the
large cash needs of the Treasury in prospect for the near term.
They also reflected concern about developing inflationary pressures, growing doubts about the prospects for congressional enactment of the proposed income tax surcharge, and accompany-
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ANNUAL REPORT OF BOARD OF GOVERNORS
ing uncertainties concerning the course of monetary policy.
In August interest rates on conventional mortgages on new
homes edged up, and secondary-market yields on Federally underwritten mortgages increased. Inflows of funds to nonbank depositary-type institutions remained large—although not quite so
large in August, after seasonal adjustment, as in the spring and
early summer.
Demands for business loans at commercial banks were relatively light in early September but they appeared to have picked
up around the midmonth tax-payment period. Growth in total
time and savings deposits moderated considerably, mainly because of a sizable reduction in the volume of negotiable CD's
outstanding. Private demand deposits and the money supply
changed little, but U.S. Government demand deposits increased
further from their June low. According to preliminary estimates,
daily-average member bank deposits—the bank credit proxy—
rose at an annual rate of 9.5 per cent from August to September,
well below the rate of more than 15 per cent earlier in the summer.
Staff projections suggested that if money market conditions
remained unchanged the bank credit proxy would rise at an annual rate in the 10 to 13 per cent range from September to October. About half of the expansion was expected to be in U.S.
Government deposits, as a result of heavy borrowing by the
Treasury during October. Growth in time and savings deposits
appeared likely to be at a somewhat more rapid rate than in the
preceding month, but less rapid than the average rate earlier in
the year. Private demand deposits—and the money supply—
were expected to rise only slightly.
Many members of the Committee thought that current and
prospective inflationary pressures and the rapid rate of bank
credit growth in recent months offered strong grounds for seeking somewhat greater monetary restraint at this time. Some members also pointed to the unsatisfactory balance of payments situ-
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FEDERAL RESERVE SYSTEM
ation as arguing for a firming of monetary policy. The majority
believed, however, that these considerations were outweighed by
others militating against a change in policy at present. The latter
included the desirability of awaiting firmer indications of the
probable actions by Congress with respect to Federal taxes and
expenditures; the uncertainties regarding the extent and duration
of the automobile industry strike; and the risk that under present
financial market conditions any firming action at this time would
lead to sharply higher interest rates, with possible undesired effects on financial intermediaries domestically and on the position
of sterling in foreign exchange markets. The Treasury's current
bill financing and, more importantly, the November refunding
soon to follow also were cited as considerations arguing against
a change in monetary policy at this juncture.
The Committee concluded that open market operations should
be directed at maintaining about the prevailing conditions in the
money market, but that operations should be modified, to the
extent permitted by Treasury financing, to moderate any apparent tendency for bank credit to expand more than currently expected. 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, apart from the effects of the strike in the automobile industry,
underlying economic conditions have strengthened and prospects favor
more rapid growth later in the year. Upward pressures on costs persist,
average prices of industrial commodities have risen further, and the rate
of increase in consumer prices remains high. While there recently have
been large inflows of liquid funds from abroad through foreign branches
of U.S. banks, the balance of payments continues to reflect a substantial
underlying deficit. Bank credit expansion has continued large, although
there was some moderation in September from the rapid July-August
rate. The volume of corporate bond flotations has slackened, but Federal
and State and local government financing demands remain large and most
interest rates have on balance moved up somewhat further. The President's new fiscal program is still pending before Congress. In this situa-
171
ANNUAL REPORT OF BOARD OF GOVERNORS
tion, it is the policy of the Federal Open Market Committee to foster
financial conditions, including bank credit growth, conducive to sustainable economic expansion, recognizing the need for reasonable price stability for both domestic and balance of payments purposes.
To implement this policy, System open market operations until the next
meeting of the Committee shall be conducted with a view to maintaining
about the prevailing conditions in the money market; but operations shall
be modified, to the extent permitted by Treasury financing, to moderate
any apparent tendency for bank credit to expand significantly more than
currently expected.
Votes for this action: Messrs. Hayes, Brimmer, Daane,
Maisel, Mitchell, Robertson, Sherrill, Swan, and Wayne. Votes
against this action: Messrs. Francis and Scanlon.
Messrs. Francis and Scanlon dissented from this action because
they assessed the balance of considerations at issue differently
from the majority and favored seeking greater monetary restraint.
In their judgment, in view of the prospects for further price inflation the risks in not acting at this time to moderate the rapid
growth of bank credit outweighed the various considerations seen
as militating against a firmer monetary policy.
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FEDERAL RESERVE SYSTEM
MEETING HELD ON OCTOBER 24, 1967
Authority to effect transactions in System Account.
Underlying economic conditions continued strong despite recent
weakness in some key measures of activity resulting from strikes
in the automobile and other industries. In the third quarter,
according to preliminary Commerce Department figures, real
GNP rose substantially and average prices—as measured by the
GNP "deflator"—increased more rapidly than they had earlier
in the year. It appeared likely that the rate of growth in real
output would step up in the fourth quarter if major work stoppages were limited in duration and extent and that inflationary
pressures would continue. Expectations had diminished that a
surcharge on Federal income taxes, as recommended by the
President, would be enacted before the year-end.
Both nonfarm employment and industrial production declined
in September, largely as a result of strikes. The unemployment
rate rose to 4.1 per cent from 3.8 per cent in August, mainly
because of an unusually large increase in the number of women
in the labor force. However, continued tightness in over-all
labor market conditions was indicated by other evidence, including a decline in the unemployment rate for adult men to an extremely low level and a rise in the index of help-wanted advertising. Against the background of tight labor markets and recent
rapid increases in consumer prices, it appeared likely that settlements in current wage negotiations would be of a nature to maintain upward pressures on costs.
In the fourth quarter business inventories were expected to
increase modestly—as they had in the third quarter—and further
advances were anticipated in most major categories of final demand. Growth in consumer expenditures had been smaller than
expected in the third quarter; estimates of retail sales for July
and August, particularly at nondurable goods stores, had been
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ANNUAL REPORT OF BOARD OF GOVERNORS
revised downward sharply, and the advance estimate for September showed little improvement. However, it appeared likely that
consumer spending would increase considerably in the fourth
quarter, when the rate of growth in disposable income was expected to rise further unless retarded by extended major strikes
or restrained by enactment of a tax increase. Further advances
also seemed to be in prospect for residential construction, which
had risen substantially in the third quarter, and for business fixed
investment, which had turned up after declining moderately in
the first half of the year. Growth in defense spending had slowed
markedly after midyear, but a sharp rise in total Federal outlays
was anticipated in the final quarter largely because of expected
increases in civilian and military pay.
With respect to the U.S. balance of payments, substantial deficits had been recorded in each of the first three quarters of 1967
on the "liquidity" basis of calculation, and another such deficit
appeared likely in the fourth quarter. The balance on the "official
reserve transactions" basis had swung widely in recent quarters
as a result of wide fluctuations in liabilities of U.S. banks to their
foreign branches, but for the first three quarters of 1967 as a
whole there had been a sizable deficit on this basis also. Sterling
continued under pressure in foreign exchange markets, and on
October 19 the Bank of England raised its discount rate from
5V2 to 6 per cent.
On October 3 the Treasury auctioned $1.5 billion of tax-anticipation bills maturing in April and $3.0 billion maturing in June
at average issuing rates of 4.93 and 5.11 per cent, respectively.
Commercial banks initially absorbed almost all of the new issues,
which carried 75 per cent tax-and-loan-account privileges. Bids
for the June tax bills exceeded the amount offered by an unusually small margin. An announcement was anticipated on the
day following this meeting of the terms on which the Treasury
would refund securities maturing in mid-November, of which
174
FEDERAL RESERVE SYSTEM
$2.6 billion were held by the public. The Treasury was expected
to raise some new cash in connection with that refunding.
System open market operations since the preceding meeting
of the Committee had continued to be directed at maintaining
steady conditions in the money market. Free reserves of member
banks fluctuated widely in the 3 weeks ending October 18, but
their average of about $265 million was little changed from that
of the preceding 3 weeks. Both excess reserves and borrowings
of member banks increased; borrowings averaged about $170
million, compared with $85 million in the preceding period. Rates
on Federal funds and on bank loans to Government securities
dealers rose somewhat in the first half of October, but after that
they moved down again.
Interest rates on most short-term market instruments had advanced further since the preceding meeting of the Committee.
The market rate on 3-month Treasury bills, at 4.58 per cent
on the day before this meeting, was 18 basis points higher than
3 weeks earlier. In part this increase reflected the shift in the
maturity dates of 3-month bills to January from the December
dates that are attractive to many investors. It also reflected the
increased bill supplies resulting from the Treasury's tax-anticipation bill offering in early October and the continued $100
million additions to the weekly bill offerings.
Bond yields had risen significantly further in recent weeks;
yields on municipal bonds had advanced to their highest levels
since the early 1930's, and those on corporate and long-term
Treasury bonds to levels not reached since the early 1920's.
These developments reflected diminishing confidence in financial
markets that a tax increase would be enacted and a related
heightening of expectations that monetary policy would become
firmer. In this atmosphere investors were becoming more reluctant to acquire long-term securities and borrowers were increasingly tending to anticipate later needs. The volume of new corporate securities offered publicly in October was now expected
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ANNUAL REPORT OF BOARD OF GOVERNORS
to be considerably larger than the reduced offerings of September, and the November calendar was growing rapidly. Flotations
of municipal securities were expected to decline in October—
partly because a number of issues had been postponed or reduced
in size—but it appeared likely that the volume of such issues
would increase again in November.
Interest rates on conventional mortgages on new homes remained at their advanced August level in September, and secondary-market yields on Federally underwritten mortgages rose
for the fifth consecutive month. Although inflows of funds to
nonbank depositary institutions continued large, in the third
quarter as a whole they were below the record volume of the
second quarter, after allowance for seasonal influences.
At commercial banks, loans on securities and loans to nonbank financial institutions increased markedly in September and
apparently also in early October. Growth in business loans appeared to have stepped up somewhat in recent weeks from its
earlier slow pace, but to a large extent the increased demands
for such loans probably reflected needs to finance payments to
the Treasury of corporate income taxes in September and of
withheld taxes in early October. As to total bank credit, estimates
of recent and current growth rates had been revised upward
somewhat since the preceding meeting of the Committee. The
bank credit proxy—daily-average member bank deposits—now
was estimated to have risen at about a lOVi per cent annual
rate from August to September and was projected to rise at a
rate in the range of 12 to 15 per cent from September to October.
The money supply, which earlier had been expected to grow
relatively little in October, was now projected to rise in that
month at an annual rate in the 7 to 9 per cent range.
Growth in both the bank credit proxy and the money supply
was expected to moderate somewhat in November—to annual
rates in the ranges of 7 to 10 per cent and 4 to 6 per cent, respectively—if money market conditions were unchanged. Al-
176
FEDERAL RESERVE SYSTEM
though the outlook for business loan demands was particularly
uncertain at present, on balance such demands appeared likely
to remain moderate in both November and December.
The Committee decided that the forthcoming Treasury financing precluded any change in monetary policy at this time. Some
members favored no policy change on other grounds also, including the continuing uncertainties regarding the probable outcome
of the current congressional debate on fiscal policy measures.
Also cited in this connection was the judgment that a considerable
degree of restraint was already being imposed on potential borrowing and spending by the high levels to which long-term interest rates had risen. In addition, it was noted that further increases
in market interest rates at this time might well have undesired
effects on flows of funds to financial intermediaries and on the
position of sterling in foreign exchange markets.
Other members indicated that in the absence of Treasury
financing activity they would have been inclined to advocate
some firming of monetary policy in an effort to slow the rapid
growth of bank credit and the money supply. In their judgment,
current and prospective inflationary pressures and the continued
large deficits in the balance of payments argued strongly for
such a course.
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, apart from the effects of strikes in the automobile and other
industries, underlying economic conditions continue strong and prospects
favor more rapid growth in the months ahead. Upward pressures on costs
persist, average prices of industrial commodities have risen further, and
the rate of increase in consumer prices remains high. While there recently
have been large inflows of liquid funds from abroad through foreign
branches of U.S. banks, the balance of payments continues to reflect a
substantial underlying deficit. Bank credit expansion has continued large.
The volume of new security issues is expanding again and interest rates
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ANNUAL REPORT OF BOARD OF GOVERNORS
have risen further, reflecting in part increased uncertainties in financial
markets concerning enactment of the President's fiscal program. In this
situation, it is the policy of the Federal Open Market Committee to foster
financial conditions, including bank credit growth, conducive to sustainable
economic expansion, recognizing the need for reasonable price stability
for both domestic and balance of payments purposes.
To implement this policy, while taking account of forthcoming Treasury
financing activity, System open market operations until the next meeting
of the Committee shall be conducted with a view to maintaining about the
prevailing conditions in the money market; but operations shall be modified, to the extent permitted by Treasury financing, to moderate any
apparent tendency for bank credit to expand significantly more than
currently expected.
Votes for this action: Messrs. Martin, Brimmer,
Maisel, Mitchell, Robertson, Scanlon, Sherrill, Swan,
Wayne, and Treiber. Vote against this action: Mr.
Francis.
Mr. Francis dissented from this action because he favored
seeking whatever degree of firming in money market conditions
would be required to moderate substantially the growth in bank
credit and the money supply by the end of the year. He agreed
that Treasury financing operations would have to be taken into
account to some extent in implementing such a policy. Nevertheless, he thought that the national interest called for greater
monetary restraint now to curb inflationary pressures and to
protect the foreign trade component of the U.S. balance of payments.
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FEDERAL RESERVE SYSTEM
MEETING HELD ON NOVEMBER 14, 1967
1. Authority to effect transactions in System Account.
Although strikes recently had been retarding activity in some
areas of the economy, real GNP was expected to increase more
rapidly in the current quarter than it had in the third quarter.
A still higher rate of economic growth and continued upward
pressures on prices and costs appeared to be in prospect for
early 1968, particularly if an income tax surcharge as proposed
by the President were not enacted.
Recent weakness in various broad measures of business activity was largely a consequence, directly or indirectly, of work
stoppages in the automobile industry and in some other industries. Industrial production was estimated to have declined
slightly further in October. Retail sales decreased appreciably,
according to the advance estimate, mainly because of a sharp
reduction in automobile sales attributable to the limited availability of new cars. Total nonfarm employment rose relatively
little; the net increase in manufacturing employment was held
down by strikes, and Federal Government employment declined
slightly because of a curb on hiring. With the labor force increasing more rapidly than usual, the unemployment rate rose
further, to 4.3 per cent from 4.1 per cent in September. Residential construction activity, however, continued to rise strongly
in October.
It appeared likely that final sales to both the private and Government sectors of the economy would increase more rapidly in
the fourth quarter than in the third, but that the rate of business
inventory accumulation would remain low. Growth in output,
employment, and incomes was expected to be quickened in the
early months of 1968 by business efforts to rebuild inventories
depleted by strikes and by efforts of steel users to accumulate
stocks as a hedge against a possible steel strike in the summer.
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ANNUAL REPORT OF BOARD OF GOVERNORS
Moreover, it appeared that consumer spending would be stimulated in early 1968 by liberalization of social security benefits
and by a Federal employee pay raise, as well as by continued
sizable advances in industrial wage rates—including increases
resulting from the rise in minimum wage rates on February 1,
1968, as provided by existing legislation.
Wholesale prices of industrial commodities increased further
from mid-September to mid-October, according to preliminary
estimates, but prices of farm products and foods declined, and
the total wholesale price index edged down. The consumer price
index rose somewhat less in September than it had in other recent months as food prices declined.
Further information confirmed earlier estimates that the deficit
in the U.S. balance of payments on the "liquidity" basis of calculation was at a rate somewhat higher in the third quarter
than in the first half of the year, and another large deficit appeared to be in prospect for the fourth quarter. The merchandise
trade surplus declined in September from the high August rate,
as imports increased while exports fell; in the third quarter as
a whole the trade surplus was about the same as in the second
quarter. On the "official reserve transactions" basis, a sizable
surplus was recorded in the third quarter following substantial
deficits in the first half of the year. This surplus was due primarily
to large inflows of liquid funds to U.S. banks through their foreign branches. Net inflows of such funds continued after the end
of September. Sterling was under heavy pressure in foreign exchange markets and on November 9, for the second time in 3
weeks, the Bank of England raised its discount rate by Vi of a
percentage point, to 6V2 per cent.
In its November financing—for which subscription books were
open October 30—the Treasury refunded securities maturing
November 15, including $2.6 billion held by the public, and
raised $2.2 billion of new money. Two issues were offered—a
15-month, 5% per cent note, and a 7-year, 5% per cent note—
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FEDERAL RESERVE SYSTEM
of which private investors were allotted $3.2 billion and $1.6
billion, respectively. While the two notes were well-received initially—with the longer maturity, in particular, heavily oversubscribed—selling pressures developed soon after the books had
closed and on the day before this meeting prices of both were
quoted at discounts. It was announced on November 10 that
$650 million of participation certificates of the Federal National
Mortgage Association would be offered to the public on November 28. Apart from the continuing addition of $100 million to
each weekly and monthly bill auction, this was expected to be
the Government's last new cash financing in the calendar year
1967.
Open market operations since the preceding meeting of the
Committee had continued to be directed at maintaining steady
conditions in the money market. Net free reserves of member
banks averaged about $200 million during the 3 weeks ending
November 8, compared with a revised figure of about $240
million for the preceding 3 weeks. Excess reserves of member
banks declined, particularly at country banks; borrowings also
declined, to an average of $90 million from about $170 million
in the preceding period. Average rates on Federal funds and
on bank loans to Government securities dealers were a little
lower than in September and the early weeks of October. Interest
rates on short-term market instruments remained generally unchanged or rose slightly from their levels at the time of the preceding meeting of the Committee. The market rate on 3-month
Treasury bills was 4.62 per cent on the day before this meeting,
up 4 basis points from its level 3 weeks earlier.
After a brief interruption in late October, bond yields resumed their advance in all sectors of the capital market. Yields
on long-term Government bonds at the time of this meeting were
significantly above both the levels prevailing 3 weeks earlier and
the highs reached in 1966, and those on intermediate-term Government issues were up sharply. Yields on new corporate and
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ANNUAL REPORT OF BOARD OF GOVERNORS
municipal issues also advanced, the former to levels exceeding
the previous peaks reached in mid-October. The renewal of upward pressures on bond yields reflected in part a heavy prospective volume of new offerings of corporate and municipal securities in November and anticipations of the large FNMA offering. Also contributing to the pressures were prospects of
inflationary developments and growing expectations in financial
markets that a tax increase would not be enacted this year and
that monetary policy would become firmer. On the day before
this meeting, a major corporate bond offering was postponed
as a result of congestion and uncertainties in the capital market.
The incomplete data available suggested that secondary-market
yields on Federally underwritten mortgages rose further in October—approaching the record level reached toward the end of
1966. It appeared that net inflows of funds to nonbank depositary
institutions continued to moderate in October on a seasonally
adjusted basis. By the end of September outstanding mortgage
commitments of private lenders were virtually back to the postwar high of January 1966, but in recent weeks some individual
lenders were reported to have reduced their new commitments.
Commercial bank holdings of Treasury and other securities
rose considerably in October. Security loans and loans to nonbank financial institutions also increased relatively fast, but the
advance in business loans was again quite moderate. The bank
credit proxy—daily-average member bank deposits—increased
at an annual rate of 12 per cent, a little faster than in the preceding month. Time and savings deposits expanded at an annual
rate of 13 per cent in October, slightly above the September rate
but well below the average rate of more than 17 per cent for
the first 8 months of the year. The money supply, which had
been virtually unchanged in September, increased at an annual
rate of about 6.5 per cent in October.
The rate of expansion in bank credit was expected to slow
in the last 2 months of the year if prevailing money market con-
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FEDERAL RESERVE SYSTEM
ditions were maintained. It appeared likely that demands for
business loans would remain moderate in view of prospects that
changes in business spending on inventories and fixed capital
would be small. The bank credit proxy was still projected to rise
at an annual rate in the 7 to 10 per cent range in November, and
a somewhat lower growth rate was anticipated for December.
In November the money supply was expected to increase at an
annual rate in the range of 6 to 8 per cent and time and savings
deposits in the range of 9 to 11 per cent.
At this meeting the Committee heard reports on negotiations
relating to international credit assistance to the United Kingdom
in addition to reviewing conditions and prospects with respect
to the domestic economy, the U.S. balance of payments, and the
foreign exchange markets. After discussion the Committee agreed
that no change should be made in monetary policy at this time,
in view of the sensitive state of conditions in foreign exchange
markets and of the international negotiations now under way.
The following current economic policy directive was issued to
the Federal Reserve Bank of New York:
The information reviewed at this meeting indicates that, while the direct and indirect effects of strikes have been retarding activity in some
areas of the economy, prospects still favor more rapid economic growth
in the months ahead. Although prices of farm products and foods have
declined recently, upward pressures persist on industrial prices and costs.
While there recently have been further inflows of liquid funds from
abroad through foreign branches of U.S. banks, the balance of payments
continues to reflect a substantial underlying deficit. Bank credit expansion
has continued large. The volume of new private security issues has expanded further and interest rates remain under upward pressure, reflecting
in part increased doubts in financial markets concerning enactment of the
President's fiscal program. In this situation, it is the policy of the Federal
Open Market Committee to foster financial conditions, including bank
credit growth, conducive to sustainable economic expansion, recognizing
the need for reasonable price stability for both domestic and balance of
payments purposes.
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ANNUAL REPORT OF BOARD OF GOVERNORS
To implement this policy, System open market operations until the
next meeting of the Committee shall be conducted with a view to maintaining about the prevailing conditions in the money market, but operations shall be modified as necessary to moderate any apparent tendency
for bank credit to expand significantly more than currently expected.
Votes for this action: Messrs. Martin, Hayes,
Brimmer, Daane, Francis, Maisel, Mitchell, Robertson, Scanlon, Sherrill, Swan, and Wayne. Votes
against this action: None.
2. Amendment to authorization for System foreign currency
operations.
The Committee amended paragraphs IB(3) and 1C(1) of the
authorization for System foreign currency operations, in each
case effective as of the date of a determination by Chairman
Martin that such action was in accordance with the position of
the United States in the current international negotiations concerning credit assistance to the United Kingdom. In the amendment to paragraph 1B(3) the limit on authorized System Account holdings of sterling purchased on a covered or guaranteed
basis was increased from $200 million to $300 million equivalent. In the amendment to paragraph 1C(1) the limit on outstanding forward commitments to deliver foreign currencies
to the Stabilization Fund was increased from $200 million to
$350 million equivalent, and language restricting the foreign currencies covered by the paragraph to currencies "in which the
U.S. Treasury has outstanding indebtedness" was deleted.
Chairman Martin made the indicated determination on November 21, 1967, for the amendment to paragraph 1B(3) and
onNovember 22, 1967, for the amendment to paragraph 1C(1).
Accordingly, the respective amendments became effective on
those dates. With these two amendments, the first paragraph of
the authorization read as follows:
The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, for System Open Market Account,
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FEDERAL RESERVE SYSTEM
to the extent necessary to carry out the Committee's foreign currency
directive:
A. To purchase and sell the following foreign currencies in the form
of cable transfers through spot or forward transactions on the open market at home and abroad, including transactions with the U.S. Stabilization
Fund established by Section 10 of the Gold Reserve Act of 1934, with
foreign monetary authorities, and with the Bank for International Settlements:
Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks
Italian lire
Japanese yen
Mexican pesos
Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs
B. To hold foreign currencies listed in paragraph A above, up to the
following limits:
(1) Currencies held spot or purchased forward, up to the amounts
necessary to fulfill outstanding forward commitments;
(2) Additional currencies held spot or purchased forward, up to the
amount necessary for System operations to exert a market influence but
not exceeding $150 million equivalent; and
(3) Sterling purchased on a covered or guaranteed basis in terms of
the dollar, under agreement with the Bank of England, up to $300 million
equivalent.
C. To have outstanding forward commitments undertaken under paragraph A above to deliver foreign currencies, up to the following limits:
(1) Commitments to deliver foreign currencies to the Stabilization
Fund, up to $350 million equivalent;
(2) Commitments to deliver Italian lire, under special arrangements
with the Bank of Italy, up to $500 million equivalent; and
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ANNUAL REPORT OF BOARD OF GOVERNORS
(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.
Votes for this action: Messsr. Martin, Hayes,
Brimmer, Daane, Francis, Maisel, Mitchell, Robertson, Scanlon, Sherrill, Swan, and Wayne. Votes
against this action: None.
In his report on the negotiations now in process concerning
international credit assistance to the United Kingdom, the Special
Manager for foreign currency operations noted that one possible
form of U.S. participation in such assistance was an undertaking
by U.S. monetary authorities to acquire additional sterling. The
previous authority to acquire sterling, including the authorization
to acquire up to $200 million for System Account, had proved
useful at times in the past in market operations undertaken by
the Special Manager for purposes specified in the Committee's
foreign currency directive. The Special Manager indicated that
in his judgment an increase of $100 million in the limit on such
holdings by the System was justified in light of possible future
needs for similar market operations. Accordingly, he recommended that if in the current negotiations the United States were
to undertake to acquire additional sterling, $100 million should
be acquired for System account and the remainder for Stabilization Fund account.
The Special Manager also indicated that if the arrangements
were concluded on the basis he had suggested the resources of
the Stabilization Fund might be inadequate to meet all demands
upon them from time to time in the future. Accordingly, he recommended the amendments to paragraph 1C(1) of the authori-
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FEDERAL RESERVE SYSTEM
zation described above to enable the System Account to "warehouse" part of the Treasury's holdings of sterling if that should
prove desirable. Past operations undertaken under the terms of
paragraph 1C(1) had been limited to the purpose of facilitating
repayment by the Treasury of maturing bonded debt denominated in foreign currencies.
After discussion, the Committee concurred in the recommendations of the Special Manager and took the actions indicated.
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ANNUAL REPORT OF BOARD OF GOVERNORS
MEETING HELD ON NOVEMBER 27, 1967
1. Authority to effect transactions in System Account.
On Saturday, November 18, 1967, the par value of the pound
sterling was reduced by 14.3 per cent, from $2.80 to $2.40. The
British authorities simultaneously announced a broad series of
measures designed to reduce domestic demands and in general
to facilitate the economic adjustments required to achieve a substantial improvement in the balance of payments of the United
Kingdom. These measures included an increase in the discount
rate of the Bank of England from 6V^ to 8 per cent, its highest
level in 53 years. On November 19 the Federal Reserve announced an increase in its discount rate from 4 to AVi per cent,
effective the next day. Today's meeting had been called for the
purposes of reviewing the latest developments and making such
revisions in the Open Market Committee's policy instruments
as were needed in the light of recent events.
Following the British devaluation, all of the other major industrial countries comprising the "Group of Ten" announced
promptly that the par values of their currencies would not be
changed. The announcement for the United States took the form
of a statement on November 18 by President Johnson, unequivocally reaffirming the U.S. commitment to the existing price of
$35 per ounce for gold. Some countries did devalue after the
British action, but together they accounted in 1966 for only
about 6 per cent of world trade, less than Britain alone. Among
the countries devaluing, Spain, Ireland, and Israel reduced the
par values of their currencies by the same percentage as Britain
had; New Zealand by more; and Denmark and Hong Kong by
less.
Conditions in markets for foreign exchange and gold had been
turbulent since the Committee's preceding meeting on November
14. Pressures on sterling had increased after publication that day
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FEDERAL RESERVE SYSTEM
of British foreign trade figures for October, which indicated that
a deficit of record proportions had been incurred. The pressures
eased over most of the next 2 days, when there were rumors
regarding negotiations for foreign central bank credit assistance
to the United Kingdom, but they resumed late on Thursday,
November 16. On Friday there were press reports that a devaluation of the pound was imminent, and the markets were flooded
by offers of sterling. Demands for gold in the London market and
other foreign centers increased substantially, and some central
banks in continental Europe acquired sizable amounts of dollar
reserves as a result of shifts by market participants from sterling
into continental European currencies.
The British authorities declared a bank holiday for the Monday following devaluation. When foreign exchange trading resumed in London on Tuesday, November 21, spot sterling was
quoted at its new ceiling rate of $2.42, where it remained for the
rest of the week. Market demands for gold continued to mount,
however, and reached unprecedented levels during the week.
Continental central banks experienced only small changes in their
dollar reserves during most of the week, but made sizable acquisitions on Friday.
On Sunday, November 26, the following statement was issued
in Washington:
The Secretary of the Treasury and the Chairman of the Federal Reserve
Board made available a communique issued in Frankfurt, Germany, today
which reads as follows:
The Governors of the Central Banks of Belgium, Germany, Italy,
Netherlands, Switzerland, United Kingdom and the United States convened in Frankfurt on November 26, 1967.
They noted that the President of the United States has stated:
"I reaffirm unequivocally the commitment of the United States to
buy and sell gold at the existing price of $35 per ounce."
They took decisions on specific measures to ensure by coordinated
action orderly conditions in the exchange markets and to support the
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ANNUAL REPORT OF BOARD OF GOVERNORS
present pattern of exchange rates based on the fixed price of $35 per
ounce of gold.
They concluded that the volume of gold and foreign exchange reserves at their disposal guarantees the success of these actions; at the
same time they indicated that they would welcome the participation
of other central banks.
On the following day—the day of this Committee meeting—the
market demand for gold was considerably below its levels during
the preceding week.
In domestic financial markets both short- and long-term
interest rates had fluctuated widely since the Committee's November 14 meeting. Yields initially declined, following the postponement of a large bond issue by a major U.S. corporation and the
reports concerning negotiations for credit assistance to Britain.
They advanced on Friday, November 17, however, in the wake
of the mounting pressures on sterling and rumors of imminent
devaluation. On Monday, November 20, both short- and longterm interest rates rose sharply in the initial reaction to the events
of the preceding weekend. A large commercial bank increased its
prime lending rate from 5% to 6 per cent that day, and various
other banks followed shortly.
The securities markets began to rally on Monday afternoon,
and they strengthened further on the following 2 days. Factors
underlying the rally included large-scale purchases of Government securities by the System, the postponement of a number of
corporate and municipal bond issues, and an announcement that
the House Ways and Means Committee would reopen hearings
shortly on the administration's proposals for increased fiscal
restraint.
Market interest rates rose sharply again on Friday, November
24, however, when uncertainties were increasing in foreign exchange and gold markets. Yields on municipal and seasoned
corporate bonds advanced to new record levels, but yields on
intermediate- and long-term Government securities did not re-
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FEDERAL RESERVE SYSTEM
attain the highs they had reached on the day before the Committee's preceding meeting. Most short-term yields had increased
considerably, on balance, since that time; the market rate on
3-month Treasury bills, at about 4.90 per cent, was up approximately 30 basis points over the period. Major banks raised their
offering rates on large-denomination CD's, and rates on CD's
maturing in 3 months or more were now generally at the 5Vi
per cent ceiling established by Regulation Q.
The System conducted large-scale open market operations on
the Monday after the devaluation of sterling and the announcement of the increase in Federal Reserve discount rates, with a
view to facilitating orderly adjustments to the new circumstances
brought about by these events. Early in the day the System placed
bids with Government securities dealers for a substantial volume
of securities maturing in more than 1 year. After purchasing $186
million of such securities it also bought $427 million of Treasury
bills. These operations absorbed some of the overhanging supply
of securities that might otherwise have been pressed onto an unreceptive market; and as sentiment improved, market conditions
quickly became relatively normal. No further System operations
were carried out in the market during the rest of the week,
although on Friday $191 million of Treasury bills were purchased directly from foreign accounts.
Free reserves of member banks were at the relatively low level
of about $90 million in the statement week ending November
22, despite the large volume of reserves provided by both the
System's security purchases on Monday and by various international transactions. Interest rates on Federal funds and on
bank loans to Government securities dealers, like other market
rates, had fluctuated widely in recent weeks. By the Friday before
this meeting, however, money market rates had moved into
closer alignment with the new level of the discount rate; the
effective rate on Federal funds that day, at AVi per cent, was
equal to the discount rate, and dealer loan rates also had risen.
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ANNUAL REPORT OF BOARD OF GOVERNORS
In considering the domestic open market policy to be followed
in the period until its next meeting, the Committee took note of
the various crosscurrents that were likely to be at work as a
consequence of the increase in Federal Reserve discount rates
and of recent events abroad, and of the continuing uncertainties
with respect to international developments and their possible
impact on domestic financial markets. At the conclusion of the
discussion the following current economic policy directive was
issued to the Federal Reserve Bank of New York:
System open market operations until the next meeting of the Committee
shall be conducted with a view to facilitating orderly market adjustments
to the increase in Federal Reserve discount rates; but operations may be
modified as needed to moderate any unusual pressures stemming from international financial uncertainties.
Votes for this action: Messrs. Martin, Brimmer,
Francis, Maisel, Mitchell, Robertson, Scanlon, Sherrill, Swan, and Ellis. Votes against this action: None.
2. Amendments to authorization for System foreign currency
operations.
At this meeting the Committee amended its authorization for
System foreign currency operations in a number of respects,
against the background of the discussions by the central bank
governors at their meeting in Frankfurt. The amendments included an increase in the limit, specified in paragraph 1C(3) of
the authorization, on forward commitments by the System
Account to deliver foreign currencies; and enlargements of the
swap arrangements, specified in paragraph 2, with a number of
central banks and the Bank for International Settlements. In a
further action, related to the change approved in the size of the
swap arrangement with the Bank of England, the limit on
authorized System Account holdings of sterling purchased on a
covered or guaranteed basis, specified in paragraph I B ( 3 ) , was
reduced to the level prevailing prior to the amendment to that
paragraph that was approved on November 14, 1967.
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FEDERAL RESERVE SYSTEM
With respect to the first of these actions, one of the agreements
reached at the Frankfurt meeting was that the foreign central
banks represented there, in collaboration with U.S. monetary
authorities, would undertake coordinated operations in forward
markets. In these operations the central banks would sell their
own currencies forward against dollars, to discourage further
large accruals of dollar reserves such as had occurred on the
Fridays before and after the sterling devaluation and, if possible,
to encourage some reflows from European currencies to the Eurodollar market. The U.S. Treasury had agreed to cooperate in this
program, and forward operations in certain currencies had
already begun, with the System Account participating on the
basis of the authority contained in paragraph 1C(3) of the
authorization for System foreign currency operations. It was
noted that the existing authority to undertake forward commitments up to $275 million equivalent might well prove adequate
to the System's needs in this connection. However, the Committee
concurred in the recommendation of the Account Management
that the limit contained in paragraph 1C(3) be doubled, to $550
million equivalent, to provide against the possibility of larger
needs.
The increases in a number of System swap arrangements,
which were for the purpose of providing a broader margin of
safety for the stability of the international monetary system,
were approved on the understanding that enlargements of certain
additional swap arrangements might be proposed subsequently.
Paragraph 2 of the authorization was amended to change the size
of the reciprocal currency arrangements with (1) the National
Bank of Belgium, from $150 million to $225 million equivalent;
(2) the Bank of Italy, from $600 million to $750 million equivalent; (3) the Netherlands Bank, from $150 million to $225
million equivalent; (4) the Bank of Sweden, from $100 million
to $200 million equivalent; (5) the Bank for International
Settlements (the arrangement providing for System drawings in
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ANNUAL REPORT OF BOARD OF GOVERNORS
authorized European currencies other than Swiss francs), from
$300 million to $600 million equivalent; (6) the Bank of
England, from $1,350 million to $1,500 million equivalent; (7)
the Bank of Japan, from $450 million to $750 million equivalent;
and (8) the German Federal Bank, from $400 million to $750
million equivalent. On advice that negotiations looking toward
the indicated increases had already been conducted with the first
five foreign banks listed above, the corresponding changes in the
authorization were approved effective immediately. The changes
relating to the swap arrangements with the central banks of
England, Japan, and Germany were approved on the basis that
they would become effective upon a determination by Chairman
Martin that preliminary negotiations had been satisfactorily completed. The Chairman made such a determination with regard
to the swap arrangements with the central banks of England and
Japan on November 28, and with regard to the arrangement with
the German Federal Bank on November 30.
With respect to the amendment to paragraph IB(3), an increase in the limit specified there on System holdings of sterling
had been approved at the preceding meeting of the Committee,
at a time when it appeared that the United Kingdom might find
it possible to maintain the par value of the pound at $2.80. In
light of the subsequent devaluation, the Committee concluded
that any expansion of credit facilities between the Federal
Reserve and the Bank of England would more appropriately take
the form of an increase in the size of the swap arrangement
between the two central banks. Accordingly, the language of the
affected paragraph was restored to the form in effect before the
November 14 action.
Votes for these actions: Messrs. Martin, Brimmer,
Francis, Maisel, Mitchell, Robertson, Scanlon, Sherrill,
Swan, and Wayne. Votes against these actions: None.
Subsequent to this meeting, on November 30, the Special
Manager recommended that paragraph 2 of the authorization for
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FEDERAL RESERVE SYSTEM
System foreign currency operations be further amended to change
the size of the swap arrangement with the Bank of Canada from
$500 million to $750 million equivalent. This recommendation
was unanimously approved by available members of the Committee, namely, Messrs. Martin, Hayes, Brimmer, Maisel,
Mitchell, Robertson, Scanlon, Sherrill, Swan, and Wayne.
As a result of these several actions, the first two paragraphs of
the authorization for System foreign currency operations read as
follows:
1. The Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York, for System Open Market Account, to the
extent necessary to carry out the Committee's foreign currency directive:
A. To purchase and sell the following foreign currencies in the form of
cable transfers through spot or forward transactions on the open market
at home and abroad, including transactions with the U.S. Stabilization
Fund established by Section 10 of the Gold Reserve Act of 1934, with foreign monetary authorities, and with the Bank for International Settlements:
Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks
Italian lire
Japanese yen
Mexican pesos
Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs
B. To hold foreign currencies listed in paragraph A above, up to the
following limits:
(1) Currencies held spot or purchased forward, up to the amounts
necessary to fulfill outstanding forward commitments;
(2) Additional currencies held spot or purchased forward, up to the
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ANNUAL REPORT OF BOARD OF GOVERNORS
amount necessary for System operations to exert a market influence but
not exceeding $150 million equivalent; and
(3) Sterling purchased on a covered or guaranteed basis in terms of the
dollar, under agreement with the Bank of England, up to $200 million
equivalent.
C. To have outstanding forward commitments undertaken under paragraph A above to deliver foreign currencies, up to the following limits:
(1) Commitments to deliver foreign currencies to the Stabilization
Fund, up to $350 million equivalent;
(2) Commitments to deliver Italian lire, under special arrangements
with the Bank of Italy, up to $500 million equivalent; and
(3) Other forward commitments to deliver foreign currencies, up to
$550 million equivalent.
D. To draw foreign currencies and to permit foreign banks to draw
dollars under the reciprocal currency arrangements listed in paragraph 2
below, provided that drawings by either party to any such arrangement
shall be fully liquidated within 12 months after any amount outstanding
at that time was first drawn, unless the Committee, because of exceptional
circumstances, specifically authorizes a delay.
2. The Federal Open Market Committee directs the Federal Reserve
Bank of New York to maintain reciprocal currency arrangements ("swap"
arrangements) for System Open Market Account for periods up to a
maximum of 12 months with the following foreign banks, which are
among those designated by the Board of Governors of the Federal Reserve
System under Section 214.5 of Regulation N, Relations with Foreign Banks
and Bankers, and with the approval of the Committee to renew such arrangements on maturity:
Amount of
arrangement
Foreign bank
(millions of
dollars equivalent)
Austrian National Bank
100
National Bank of Belgium
225
Bank of Canada
750
National Bank of Denmark
100
Bank of England
1,500
Bank of France
100
German Federal Bank
750
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FEDERAL RESERVE SYSTEM
Foreign bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements:
System drawings in Swiss francs
System drawings in authorized European
currencies other than Swiss francs
Amount of
arrangement
(millions of
dollars equivalent)
750
750
130
225
100
200
250
250
600
At this meeting the Committee also reviewed certain transactions in sterling that had been made during the preceding week
by the Federal Reserve Bank of New York with a number of
U.S. commercial banks. Specifically, the New York Bank had
sold sterling from System Account holdings to the U.S. commercial banks, for delivery on Tuesday, November 21, and had
concurrently repurchased forward an equivalent amount of sterling from each bank for delivery on Friday, November 24.
Similar transactions were conducted for Treasury account, with
sales for delivery on Wednesday and repurchases for delivery on
Friday.
These transactions were carried out to enable the U.S. commercial banks to make deliveries of sterling on Tuesday and
Wednesday, under contracts they had made on Friday, November
17. The commercial banks involved had originally entered into
those contracts in order to balance their positions in sterling, in
accordance with their customary practice, after accommodating
commercial customers and correspondent banks that had desired
to sell sterling forward. At the time they made the spot contracts,
the commercial banks had expected to acquire the necessary ster-
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ANNUAL REPORT OF BOARD OF GOVERNORS
ling in the market on Monday, November 20, but were unable
to do so because the British authorities had declared that day to
be a bank holiday.
The New York Bank took measures to insure that such transactions did not provide relief to any commercial bank to the
extent that it was short sterling as a result of operations on its own
initiative. In cases where the banks had over-all short positions
in sterling as of Friday, November 17, an amount equal to that
short position was deducted from the amount made available by
the New York Bank, except where the short position could be
explicitly justified by the bank in question.
The broad purpose of these transactions, from the System's
point of view, was to avoid the disorder in the foreign exchange
market that might have resulted from widespread defaults on
foreign exchange contracts. The transactions were carried out
with the concurrence of a majority of the Subcommittee authorized, under the terms of paragraph 6 of the authorization for
System foreign currency operations, to act on behalf of the
Federal Open Market Committee when necessary to enable the
New York Bank to engage in foreign currency operations before
the Committee could be consulted. After discussion at this meeting, the Committee unanimously approved, ratified, and confirmed these transactions, along with other System transactions in
foreign currencies since the previous meeting.
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FEDERAL RESERVE SYSTEM
MEETING HELD ON DECEMBER 12, 1967
1. Authority to effect transactions in System Account.
Evidence was accumulating of a resurgence in economic activity
following settlement of strikes in the automobile industry and in
other industries. It now appeared highly probable that growth
in over-all activity would accelerate in early 1968 and that upward pressures on prices would persist as the effects of higher
costs were reinforced by those of rapidly expanding demands.
Preliminary indications were that industrial output had rebounded in November, that employment had risen sharply in both
manufacturing and other areas, and that the unemployment rate
had declined to less than 4 per cent from 4.3 per cent in October.
Retail sales had increased significantly, according to the advance
estimate, and residential construction activity had continued to
expand. Average prices of industrial commodities had advanced
further from mid-October to mid-November, and numerous increases were announced in subsequent weeks. A sizable rise in
the consumer price index in October brought its increase since
March to an annual rate of over 3.5 per cent.
The business outlook for early 1968 appeared strong despite
an anticipated slowing of the advance in Federal expenditures,
including defense outlays. Consumer spending was expected to
rise in pace with rapidly growing incomes. Although the latest
Commerce-SEC survey of business capital spending plans indicated a slightly lower level of outlays in the second half of
1967 than that shown by earlier surveys, it suggested that plant
and equipment expenditures would rise considerably in the first
half of 1968. The rate of business inventory accumulation also
was expected to increase substantially after the turn of the year,
both because of the heightened pace of over-all activity and
because of efforts to rebuild strike-depleted stocks of autos and to
accumulate steel against the possibility of a strike in that industry.
Outlays for residential construction appeared likely to continue
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ANNUAL REPORT OF BOARD OF GOVERNORS
upward for a time, although the pace and duration of the advance was in doubt because of uncertainties regarding prospective
supplies and costs of mortgage funds.
With respect to the U.S. balance of payments, available data
for October and November suggested that in the fourth quarter
the deficit on the "liquidity" basis of calculation would be larger
than in the third quarter and that the balance on the "official
reserve transactions" basis would revert to deficit from the surplus
recorded in the third quarter. Part of the deterioration reflected
the conversion in October and November of official British holdings of U.S. securities to assets of more liquid form. Part, however, reflected other factors, including a further weakening of the
U.S. merchandise trade surplus in October. Continued large
deficits seemed to be in prospect for early 1968.
Gold holdings of the U.S. Treasury were reduced by $475
million in the week ending December 6, mainly to settle the U.S.
share of sales made by the gold pool in London during the first
2 weeks after the devaluation of sterling on November 18 and to
cover U.S. sales to foreign central banks. Foreign demand for
gold subsequently dropped sharply, but it turned up again on
the day before this meeting following press reports that possible
measures to restrict access to the London gold market were under
discussion.
In foreign exchange markets spot sterling remained at its new
ceiling rate of $2.42 until early December, when the rate
weakened following a labor dispute involving British railway
workers. Subsequently the sterling exchange rate fluctuated below
the ceiling. Forward operations by some continental central
banks, undertaken in cooperation with U.S. monetary authorities,
had helped to minimize speculative movements into continental
currencies and to stimulate short-term investment outflows from
them.
System open market operations since the preceding meeting of
the Committee had been directed at facilitating continuing
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FEDERAL RESERVE SYSTEM
orderly adjustments to the increase in Federal Reserve discount
rates, against the background of the massive international flows
of funds that followed the devaluation of sterling. Operations
were complicated by the need to offset the effects on member
bank reserves of those flows and of the large reduction in the
Treasury's gold stock. Money market conditions remained relatively stable, however, with the Federal funds rate fluctuating
around the AV2 per cent discount rate. In the 2 weeks ending
December 6 free reserves averaged about $240 million and member bank borrowings about $105 million, compared with averages of $210 million and $125 million, respectively, in the
preceding 4 weeks.
Interest rates on most types of market securities had risen after
the increase in Federal Reserve discount rates and the devaluation
of sterling. Most recently, many rates had advanced further as
the waning likelihood that a tax increase would be enacted this
year strengthened market expectations of greater monetary
restraint. Since the preceding meeting of the Committee interest
rates had increased on such short-term instruments as bankers'
acceptances, finance company paper, and CD's; some banks were
now offering the SVi per cent ceiling rate on CD's of relatively
short maturity. In early December the market rate on 3-month
Treasury bills reached 5.01 per cent—its highest level in 1967—
but it subsequently declined and on the day before this meeting
was 4.90 per cent, about the same as 2 weeks earlier.
In the capital markets yields on intermediate- and long-term
Treasury securities had moved irregularly lower in recent weeks,
but those on municipal and corporate bonds, particularly the
former, had risen further. The rise in corporate bond yields was
moderated by postponements and cutbacks of scheduled new
issues, which reduced the November volume of public offerings
to little more than half the total expected earlier. Upward interest
rate pressures appeared to be persisting on home mortgages.
Commercial bank credit increased less rapidly in November
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ANNUAL REPORT OF BOARD OF GOVERNORS
than in other recent months, with bank acquisitions of municipal
and Federal agency issues accounting for much of the rise. Holdings of Treasury securities and loans on securities both declined,
and growth in business loans, while somewhat faster than in the
two preceding months, was still moderate. The bank credit proxy
—daily-average member bank deposits—increased at an annual
rate of about 8.5 per cent in November, compared with average
annual rates of 11 per cent in September and October together
and 13.5 per cent in the first 8 months of the year. Growth in
total time and savings deposits was maintained in November at
the 12 per cent average annual rate of the two preceding months
by substantial bank sales of short-maturity CD's; expansion in
other time and savings deposits moderated further. The pace of
growth in private demand deposits and the money supply increased somewhat—the latter to an annual rate of about 7.5 per
cent—as Government deposits declined.
With continued expansion in over-all economic activity in
prospect, demands for business loans were expected to strengthen
in December and January. However, growth in total bank credit
was expected to slow further in December; it was anticipated that
the funds available to banks would be limited by run-offs of
CD's, a large volume of which matured around the midmonth
tax date. The bank credit proxy was projected to rise at an annual
rate in the range of 2 to 5 per cent in December if prevailing
money market conditions were maintained. Faster growth appeared likely in January, when it was anticipated that banks
would be the initial purchasers of a large proportion of the taxanticipation bills the Treasury was expected to issue then. It was
thought likely that a slight firming of money market conditions
would have relatively little effect on bank credit growth in
December, but that it would reduce the growth rate in January
from what would otherwise be expected, in part by causing some
further attrition in outstanding CD's.
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FEDERAL RESERVE SYSTEM
The Committee decided that open market operations in the
period until its next meeting should be directed at moving slightly
beyond the firmer conditions that had developed in the money
market partly as a result of the increase in Federal Reserve discount rates. The Committee also agreed that operations should
be modified if necessary to moderate any significant deviation of
bank credit from current expectations, particularly in an upward
direction, or any unusual liquidity pressures that might develop
in financial markets.
It was noted in the discussion that events of recent weeks
had shifted the balance of conflicting considerations in favor of a
firming of monetary policy. Efforts to achieve a measure of
fiscal restraint through enactment of a surcharge on income taxes
had proved unavailing in the 1967 session of Congress. Prospects
for accelerated growth in economic activity and for the continuation of inflationary pressures had heightened following the settlement of major strikes. The balance of payments situation had
deteriorated further and pressures on the U.S. gold stock had
increased. At the same time, the constraint on monetary policy
resulting from the pressures on sterling in foreign exchange markets had been relaxed, although not completely removed, by
the devaluation of the pound; and the constraint imposed from
time to time by Treasury financing activity was absent for the
time being.
It was for these reasons that the Committee decided to seek
firmer money market conditions at present. The decisions to
move toward only slightly firmer conditions—and to provide for
modification of operations in the event that unusual liquidity
pressures developed—reflected in part continuing concerns about
possible adverse effects of higher interest rates on financial intermediaries, especially around the year-end dividend- and interestcrediting periods when such institutions were particularly exposed
to withdrawals of funds. Various other considerations were cited
as grounds for caution in increasing monetary restraint at this
203
ANNUAL REPORT OF BOARD OF GOVERNORS
time. These included the fact that the growth rate of bank credit
had moderated in November and was expected to decline further
in December; the judgment that the current high levels of interest
rates were already imposing a considerable degree of restraint
on borrowing and spending; and the fact that pressures on sterling had not completely dissipated following the devaluation.
In the course of the Committee's discussion a number of members expressed the view that serious consideration should be given
to an increase at an early date in member bank reserve requirements against demand deposits, as a further step in a gradual
and orderly firming of monetary policy. At the conclusion of the
discussion the following current economic policy directive was
issued to the Federal Reserve Bank of New York:
The information reviewed at this meeting indicates that industrial output and employment have rebounded following strike settlements in the
automobile and other industries, and that prospects have heightened for
more rapid expansion of over-all economic activity in the months ahead.
Both industrial and consumer prices have continued to rise at a substantial
rate. The imbalance in U.S. international transactions has worsened, partly
because of weakening in the export surplus since midyear. Foreign purchases of gold have been large following the devaluation of the pound
sterling. Bank credit expansion has lessened, with diminished bank buying
of Government securities and continued moderate loan growth. Most interest rates have risen further in reaction to the British devaluation and
Bank rate increase, the rise in Federal Reserve discount rates, and waning
expectations of enactment of the President's fiscal program. In this situation, it is the policy of the Federal Open Market Committee to foster
financial conditions conducive to resistance of inflationary pressures and
progress toward reasonable equilibrium in the country's balance of payments.
To implement this policy, System open market operations until the next
meeting of the Committee shall be conducted with a view to moving
slightly beyond the firmer conditions that have developed in money markets partly as a result of the increase in Federal Reserve discount rates;
provided, however, that operations shall be modified as needed to moderate any apparently significant deviations of bank credit from current
expectations or any unusual liquidity pressures.
204
FEDERAL RESERVE SYSTEM
Votes for this action: Messrs. Martin, Hayes,
Brimmer, Francis, Mitchell, Robertson, Scanlon,
Sherrill, Swan, and Wayne. Vote against this action:
Mr. Maisel.
Mr. Maisel dissented from this action in part because he
thought the directive was susceptible to an interpretation under
which growth in member bank reserves and bank deposits would
be slowed too abruptly, and perhaps succeeded by contraction.
He favored seeking growth rates in reserves, deposits, and bank
credit considerably below the average rates thus far in 1967,
but still high enough to facilitate expansion in GNP at a somewhat faster rate than had prevailed on average in the first three
quarters of the year. He noted that whether or not interest rates
would rise further under the course he advocated would depend
upon the strength of market demands for funds in relation to the
supplies that would be available under such a Committee policy.
Mr. Maisel also thought that the statement of the Committee's
general policy stance contained in today's directive had far too
narrow a focus; in particular, he objected to the omission of
reference to the basic policy goal of facilitating sustainable
economic expansion. This omission resulted from the substitution of language stating that it was the Committee's policy "to
foster financial conditions conducive to resistance of inflationary
pressures and progress toward reasonable equilibrium in the
country's balance of payments" for the language of other recent
directives stating that it was the Committee's policy "to foster
financial conditions, including bank credit growth, conducive to
sustainable economic expansion, recognizing the need for reasonable price stability for both domestic and balance of payments
purposes."
2. Amendments to authorization for System foreign currency
operations.
At this meeting the Committee ratified the action taken by mem-
205
ANNUAL REPORT OF BOARD OF GOVERNORS
bers on November 30, amending paragraph 2 of the authorization for System foreign currency operations to change the size of
the swap arrangement with the Bank of Canada from $500
million to $750 million equivalent.
Votes for ratification of this action: Messrs. Martin, Hayes, Brimmer, Francis, Maisel, Mitchell,
Robertson, Scanlon, Swan, and Wayne. Votes against
ratification of this action: None.
Subsequent to this meeting, on December 14, 1967, the Special
Manager recommended that paragraph 2 of the authorization be
further amended to change (1) the size of the swap arrangement
with the Bank for International Settlements providing for System
drawings in Swiss francs, and (2) the size of the arrangement
with the Swiss National Bank, each from $250 million to $400
million equivalent, effective immediately, to supplement the
enlargements of the System's swap network that had been
approved on November 27 and November 30. The recommendation was unanimously approved by available members of the
Committee, namely, Messrs. Martin, Hayes, Brimmer, Daane,
Francis, Maisel, Mitchell, Robertson, Scanlon, Swan, and Wayne.
(This action was ratified by the Committee at its following meeting, on January 9, 1968.)
206
FEDERAL RESERVE SYSTEM
OPERATIONS OF THE SYSTEM OPEN MARKET ACCOUNT
The following two reports describe the actions taken during 1967
to carry out the policy directives of the Federal Open Market
Committee.
The report on operations in domestic securities was prepared
by Alan R. Holmes, Manager of the System Open Market Account, who supervises these operations. It is written from the
vantage point of the Trading Desk at the Federal Reserve Bank
of New York, where operations in these securities are effected to
carry out the policy directives of the Federal Open Market Committee. The report outlines the factors that the Manager takes
into account in the day-to-day provision of bank reserves.
The report on foreign currency operations was prepared by
Charles A. Coombs, Special Manager of the System Open Market
Account, who supervises the Federal Reserve's operations in such
currencies. The Federal Reserve has been buying and selling
foreign currencies since early 1962 as part of the efforts to defend the dollar and strengthen the world payments system. All
of these operations for the System Account are carried out,
under the authorization of the Federal Open Market Committee, by the Federal Reserve Bank of New York, which also
handles foreign currency transactions for the U.S. Treasury.
The report on operations in foreign currencies begins on
page 276.
207
ANNUAL REPORT OF BOARD OF GOVERNORS
REVIEW OF OPEN MARKET OPERATIONS IN DOMESTIC
SECURITIES IN 1967
Open market operations in domestic securities during 1967
were aimed at implementing three consecutive phases of monetary policy:
—a step-up of monetary stimulation during the opening
months of the year when the over-all business situation
was weakening;
—the maintenance of generally steady conditions in the
money market from spring until late fall, while the
economy gradually strengthened, liquidity continued to
be rebuilt, and interest rates in the capital markets rose
sharply; and finally
—a moderate move toward monetary restraint in the final
weeks of the year to resist growing inflationary pressures
and protect the dollar internationally.
The first phase covered the period from the beginning of
the year through May 1. Open market operations, a reduction in
member bank reserve requirements, and a cut in the Federal
Reserve discount rate all were used hand in hand during this
interval to ease money market conditions. This easing, and the
accompanying growth in bank credit, helped to combat the effects of weakening tendencies present in the economy. There
were, of course, various shadings around this general stance.
Indeed, during the final month of the interval open market operations were directed more at ratifying the easier conditions
that came to the money market with a cut in the discount rate
announced on April 6 than at independently inducing still further ease.
For purposes of exposition, the second policy phase is divided into two parts or subperiods: one covering the period
May 2 through September 11, and the other September 12
through November 13. About the same money market condi-
208
FEDERAL RESERVE SYSTEM
tions were maintained through the two subperiods. In the first
subperiod these conditions were accompanied by increasing
signs of renewed economic expansion, very heavy demands for
funds in the capital markets as corporations and others continued to rebuild depleted liquidity positions, and a rapid expansion of bank credit. As this subperiod wore on, price increases became more numerous.
By early September, when the second subperiod began, there
was considerable sentiment in the Federal Open Market Committee that the weight of economic evidence called for some
move toward monetary restraint. For a variety of reasons, however, policy was unchanged for a while longer. These reasons
included the uncertainties associated with the strike in the automobile industry and congressional deliberations over the administration's proposed tax surcharge, as well as the threats to financial intermediaries and to the weakening position of the pound
sterling posed by the already high rates of interest prevailing
in the open market. Even-keel considerations associated with
Treasury financing operations in early and late October contributed to the no-change posture.
The final phase covers the interval November 14 through
December 31. The beginning of this period marked roughly the
onset of the tremendously increased pressures and uncertainties
that beset the foreign exchange and gold markets late in the
year. Within a week, over the November 18-19 weekend, sterling had been devalued, and the Federal Reserve had increased
the discount rate in defense of the dollar. Open market operations sought to facilitate orderly market adjustments to the new
discount rate through the first 4 weeks of the period, and then
sought somewhat firmer conditions in the market after the December 12 meeting of the Committee. A few weeks later the
Federal Reserve took still further steps to resist inflationary
pressures and defend the dollar by raising reserve requirements
of member banks. Then on January 1, 1968, the President announced an extensive balance of payments program, including
209
ANNUAL REPORT OF BOARD OF GOVERNORS
a tightening of the System's guidelines for voluntary restraints
on international financial flows.
Viewed as a whole, open market operations during 1967 were
conducted in a somewhat less strained domestic financial environment than in 1966. The former year had been marked by
major shifts of funds among financial sectors and by strains in
financial markets as interest rates reached levels not seen in a
generation. Long-term interest rates rose even higher in 1967;
but over-all, the markets performed very well in handling a
record demand for capital funds. As in 1966, the nervousness
that continued to exist was related mostly to insufficient fiscal
restraint—with bond prices tending to rise or fall as prospects
for the tax surcharge waxed or waned. Short-term interest rates
rose sharply in the second half of the year, and at the year-end
they were at levels that raised questions about banks' ability to
compete for funds under existing Regulation Q ceilings.
Although the general financial environment was less strained
in 1967 than in 1966, a wide variety of domestic and international developments over the year had profound effects on market expectations and psychology. These developments in turn
affected contingency planning in the Federal Reserve System
and actual day-to-day operations in the market. During the year
the markets were affected not only by recurrent shifts in sentiment regarding the likelihood of congressional action on the
tax bill but also by uncertainties over congressional action on
the Treasury debt ceiling.
Treasury debt management operations were also important.
Such operations involved not only the four regular quarterly refundings but also four operations to raise new cash, several
increases in the amounts of regular weekly and monthly bill
auctions, and wide swings in Treasury balances at the Reserve
Banks. Government trust accounts also engaged in quite extensive market transactions. Finally, there were the operations for
foreign accounts. Foreign transactions had major effects on domestic reserve availability, the Treasury's cash position, and the
210
FEDERAL RESERVE SYSTEM
U.S. securities markets. Coordination of the System's operations
with these transactions in the period following the devaluation of
sterling required especially close cooperation among the Open
Market Account and the foreign account operations of the New
York Reserve Bank and the operations of the debt management
and foreign divisions of the Treasury Department.
January 1-May 1:
Monetary Policy Eases to Combat Emerging Weakness in the Economy
Federal Reserve policy during the first 4 months of 1967 was
directed at combating the effects of weakening tendencies in the
economy. The pace of business expansion was already moderating when the year began, though in view of prospects for a sharp
increase in fiscal stimulus in the months ahead, most forecasts
looked for renewed economic vigor by midyear. In anticipation of such a strengthening, the President in his State of the
Union Message on January 10 proposed enactment of a 6 per
cent income tax surcharge for individuals and corporations to
become effective on July 1. But meanwhile, what had appeared
at first to be only slowdowns in many business indicators turned
into actual declines as the first quarter progressed, reflecting
for the most part the effects of a sharp drop in the rate of inventory accumulation.
To counter the effects of economic weakening, the Federal
Reserve quickly stepped up monetary stimulation through a combination of actions that brought a rapid extension of the easing
of System policy that had begun in late 1966. To be sure, there
was a pause for a generally even-keel posture for a time in
February while the Treasury's quarterly financing operation was
under way, and another financing was in process as the period
closed. In addition, some unexpected shortfalls in nationwide
net reserve availability around mid-February and mid-March
temporarily generated some unintended firmness in money market conditions.
But over the first 4 months as a whole, open market opera-
211
ANNUAL REPORT OF BOARD OF GOVERNORS
1
JANUARY 3 - MAY 1F 1967
RESERVES AND BORROWINGS
800
z! 400
o
a
u_
o
oo
NET FREE RESERVES
Is
NET BORROWED RESERVES
400
i 11111111111111111 ii i !111 i! ii 111111 i i ii ! ii
MONEY MARKET RATES
6.00
FINANCE COMPANY
PAPER
5.00-
M.00
FEDERAL FUNDS
3.00
2.00
JANUARY
FEBRUARY
MARCH
APRIL
Finance company paper, 90-day, offering rate. Treasury bills, 3-month issues,
daily bid rate. Federal funds, effective rate. New corporate issues, Aaa
tions provided about $1.4 billion (net) of reserves to the banking system, more than offsetting reserve drains caused by movements in various factors. In addition, on February 28, the Board
of Governors announced a forthcoming reduction in reserve
requirements against savings deposits and certain types of time
deposits. This action released about $850 million of reserves
to the banking system in two steps in March. Then on April 6,
212
FEDERAL RESERVE SYSTEM
BANK CREDIT PROXY
26.0 °
- 25.0
i 24.0
LONG-TERM BOND YIELDS
6.00
NEW CORPORATE
5.00 <
U.S. GOVT.
_
^
— * —
* -
-4.00
TAX-EXEMPT
—--—
•
\
! i ii
28 4
_
^^
1 ! 1 1 1 ! i ! 1 1 M ! 1 11 i i i
1 1
11
18
JANUARY
25
1
i 111 M ! f 11! 111
8
15
FEBRUARY
21
1
I n n !11 1 1 1 1 1 1 1 1 nil
1
!
8
nil 11111
12
MARCH
II
i i Ml l !
i
19
APRIL
26
1!
3.00
3
MAY
basis. CD's, 3-month, secondary market rate. Tax-exempt bonds, rate on
20-year issues.
after short-term interest rates in the open market had fallen substantially, 10 of the Federal Reserve Banks announced reductions
in their discount rates from AVi to 4 per cent. (The other two
Federal Reserve Banks took similar action shortly thereafter.)
During the period the administration also requested action by the
Congress to restore two special inducements to business investment—one, the 7 per cent investment tax credit and two, permis-
213
ANNUAL REPORT OF BOARD OF GOVERNORS
sion to use accelerated depreciation schedules—that had been
suspended in late 1966.
Under the stimulative thrust of the open market operations,
nationwide net reserve availability in the banking system expanded from net borrowed reserves averaging $165 million in
December 1966 to about zero in the first 2 months of 1967 and
then to free reserves averaging in the $100 million to $300 million range by early May. (See top left-hand panel of Chart 1.)
While the distribution of these added reserves within the banking system was somewhat uneven, a ready flow of funds through
the Federal funds market quickly rechanneled the reserves to
banks that needed them and at generally declining rates. Major
money market banks thus had increasingly less difficulty in
covering their deep basic reserve deficits that persisted throughout the period, partly because of heavy lending to securities
dealers. The Federal funds rate dropped, with a few interruptions, from around 5Vi per cent in late 1966 to AV2 per cent
toward the end of March, and then to 4 per cent following the
reduction of the discount rate in early April. Member bank borrowing from the Reserve Banks fell fairly steadily over the period, from an average of about $560 million in December 1966
to around $100 million by early May.
There were also extensive flows of savings into financial institutions during the period. Time and savings deposits at commercial and mutual savings banks and shareholdings at savings
and loan associations increased by nearly $15.1 billion over the
first 4 months of the year. The increase included a net rise of
$2.9 billion in negotiable certificates of deposit at reporting commercial banks; this brought outstanding CD's back to the peak
reached in mid-August 1966.
These and other flows had quick and pervasive effects throughout the financial system. In particular, they facilitated (and reflected) a massive rebuilding of liquidity in all sectors of the
economy from the depleted levels reached during the monetary
squeeze of 1966. Savings and loan associations, for example,
214
FEDERAL RESERVE SYSTEM
used a good part of the increase in their savings capital to repay nearly $2.2 billion (net) of borrowings from the Federal
home loan banks, and they also replenished their holdings of
cash and Treasury bills.
The ready availability of funds for investment in large denomination CD's led commercial banks to reduce steadily their offering rates on new CD's and also to make large repayments of
funds that had been borrowed in the Euro-dollar market during
the second half of 1966 when the 5Vi per cent Regulation Q
ceiling had made it difficult for banks to compete for domestic
funds. By early May offering rates on CD's were well down from
the SVi per cent ceiling available on all maturities at the beginning of the year to a range of 4 to AV2 per cent. Meanwhile,
aggregate balances due to foreign branches of the major banks
fell by almost $1.2 billion from the level on the last Wednesday of 1966.
There was also a rapid expansion of credit during the period,
especially at commercial banks. Loans and investments at all
commercial banks rose by $13 billion (seasonally adjusted)
during the first 4 months of the year. The pace of bank credit
expansion rose to an annual rate of nearly 15 per cent in the
first quarter before abating in April. More than half of this expansion represented purchases by banks of Government and
other securities, which helped to rebuild their liquidity. Furthermore, the banks maintained very sizable portfolios of short-term
loans to Government securities dealers. Loans to nonfinancial
businesses increased somewhat over the period, partly under the
impetus of the continuing acceleration of payment schedules
for corporate income and social security taxes. But the really
heavy borrowing by businesses during this period—and throughout the year—was through the capital markets. Indeed, many
corporations used the funds they obtained in the market to repay
bank loans.
Finally, along with the already mentioned decline in rates on
CD's, there was a fairly steady and mutually reinforcing down-
215
ANNUAL REPORT OF BOARD OF GOVERNORS
trend in all short-term interest rates during the period; the only
major hesitation occurred in February. Rates posted by the major
New York City banks on call loans to U.S. Government securities dealers dropped very sharply, from a range of 6-6% per cent
in early January to 4-4% per cent at the end of the period. Rates
on finance company and commercial paper and bankers' acceptances fell, in steps, by a total of about 1V4 percentage points.
During the second half of March expectations of further declines
in Treasury bill rates were so strong that a downward-sloping
yield curve emerged in the bill market, and rates on 6- and 12month bills fell by as much as 9 and 17 basis points below the
rate on 3-month maturities.
Along with these declines in market rates, and in light of
the not-overly exuberant demand for bank loans, major banks
across the country lowered the rate on "prime" business loans
from 6 to 5Vi per cent during the period. One large bank moved
to the lower rate on January 26, in the wake of the initial steps
toward monetary ease in the opening weeks of the year. Most
others, however, moved first to 5% per cent and did not reduce their rates to 5Vz per cent until around March 22, after
the easing in Federal Reserve policy had proceeded further.
Only in the longer-term markets were the effects of the easing of monetary policy outweighed by other forces. In these
markets yields had already fallen considerably during the final
months of 1966, and this trend was extended for a time during
the early weeks of the new year. But with demands for capital,
both current and in prospect, mounting sharply, upward yield
pressures soon returned. By the end of the period yields on corporate and municipal bonds were up about 8 to 25 basis points
from their late-January lows, and in some cases they were even
a little higher than those prevailing at the start of the year.
Open market operations. Implementing the easing in System
policy involved extensive open market operations during the
January 1-May 1 interval. Operations sought in general to inject reserves into the banking system a little ahead of expected
216
FEDERAL RESERVE SYSTEM
needs. They were often complicated, however, by shortfalls of
reserves below projected levels—frequently because the rapid
expansion of bank credit persistently caused member bank required reserves to rise faster than expected; in addition, float
occasionally fell to unusually low levels.
Reserve shortfalls were particularly marked on the first several
days of the year, again in mid-February and mid-March, and
in the statement weeks ending April 12 and 26. On each of these
occasions the System repeatedly used repurchase agreements to
counter the unintended firmness developing in the money market. In fact, repurchase agreements were arranged on 41 of the
83 business days of the interval under review, and on several
days they were arranged twice when the reserve injection from
the first round proved to be insufficient to relax conditions in
the money market. The System also made sizable outright purchases of Treasury bills, and in March and April it bought Treasury coupon-bearing issues. Purchases of Treasury bills toward
the middle and the end of April helped to preserve comfortable
conditions in the money market and eased some of the nervousness that emerged in the securities markets during the period.
Reserve bulges resulting from swings in float and from other
factors had to be absorbed at regular intervals, but most of these
absorptions were accomplished without substantial sales of securities by the System. The scheduled maturity of outstanding
repurchase agreements provided an automatic means of absorbing reserves when needs had run their course, and in a number
of regular Treasury bill auctions the System arranged in advance
for some reserve absorption a few days later through the redemption of part of its holdings of maturing bills.
Cash transactions to absorb reserves were undertaken on only
five occasions during the period. Two of these involved the use
of matched sale-purchase transactions—a technique initiated
during 1966 to absorb reserves temporarily—and two others
involved sales of a moderate amount of Treasury bills to foreign
accounts. The only outright sale of bills by the System in the
217
ANNUAL REPORT OF BOARD OF GOVERNORS
open market occurred on April 11, when a bulge in reserves
was causing particularly easy conditions in the money market.
In total, the System purchased $10.8 billion of Treasury and
Federal agency securities under repurchase agreements during
the period, and $11.2 billion of such agreements were terminated, as shown in the table. Repurchase agreements against
SYSTEM OPERATIONS IN GOVERNMENT SECURITIES DURING
1967
(In millions of dollars)
Jan. 1May 1
May 2 Sept. 11
Sept. 12Nov. 13
13,624
607
218
149
12,795
1,022
611
240
11,674
270
139
Outright sales:
Treasury bills:
To market
To foreign accounts
Coupon issues
i 701
161
i 1 775
'648
i 270
26
Redemptions:
Treasury bills
Special certificates of indebtedness
1 864
149
1,129
240
329
416
3,738
389
10,362
10 699
3,090
3,380
2,097
1 901
1,243
1,307
16,792
17,287
466
493
80
87
89
84
79
46
714
710
+ 1,359
+579
+ 1,659
+ 1,237
+4,834
495
495
635
635
170
170
Type of operation
Outright purchases:
Treasury bills:
From market
From foreign accounts
Special certificates of indebtedness
Repurchase agreements:
Government securities:
Purchases
Sales
Federal agency obligations:
Sales
Net change
Matched sale-purchase transactions:
Sales
Purchases
Nov. 14Dec. 31
601
897
186
Total
18,694
2,796
1,154
389
i 2 746
835
1,300
1,300
i See "Memorandum" item at bottom of table for amounts of matched sale-and-purchase transactions included in this total.
NOTE.—All figures are as of date of delivery.
bankers' acceptances were often a helpful supplement to these
operations, and nearly $1 billion of such agreements were arranged and terminated over the period as a whole. On an outright basis the System purchased more than $4.2 billion of Treasury bills over the period, including about $600 million directly
from foreign accounts, while sales and redemptions of maturing
218
FEDERAL RESERVE SYSTEM
bills totaled $2.7 billion. Included in these total outright transactions in Treasury bills were $495 million of matched salepurchase transactions.
Finally, the four operations in Treasury coupon issues during
the period resulted in total purchases of $218 million of such
securities, of which $79 million were issues maturing after 5
years. These operations marked the beginning of a somewhat
more active role played by the System in the coupon sector
during the year, following the reduced activity in 1966. In addition to providing a portion of the reserve needs of the banking
system, these purchases of coupon issues helped investors switch
into corporate or municipal securities, or mortgages, and thus
facilitated the large flows of funds that were needed to meet
the heavy demands placed on the capital markets during the year.
The pattern of prompt, and at times rather extensive, reserve
injections to offset reserve shortfalls and counter persisting tautness in the money market was established in the first few days
of the year. Inventories of Government securities dealers had
climbed to more than $5 billion, and heavy borrowing by dealers
to finance these positions was adding to pressures on reserve positions of major money market banks. Rates on loans to dealers
at banks in New York City rose as high as 6% per cent, and
many major banks were bidding aggressively for Federal funds
to cover their needs. When the flow of Federal funds proved
somewhat limited, even at rates of 5 Vi to 5% per cent, banks
turned to the Federal Reserve discount window and borrowed
there in large volume.
In combating this tautness in the money market, the System
injected a total of $1.5 billion of reserves on the first four business days of the year, January 3-6. The operations involved
mostly the use of repurchase agreements, with a total of $991
million of Treasury and Federal agency securities and $135 million of bankers' acceptances purchased under such agreements.
Open market operations were more limited during the rest of
January. Nationwide net reserve availability expanded as cur-
219
ANNUAL REPORT OF BOARD OF GOVERNORS
rency outside banks and member banks' required reserves
dropped following their year-end bulges, and Federal funds were
generally in good supply at rates of about 5 per cent. Even lower
rates emerged toward the end of the month, when float and free
reserves bulged in the wake of a blizzard in the Chicago area
that closed a number of banks and interrupted the normal schedule of check collections. Securities dealers maintained sizable
positions, but they had little difficulty in securing credit from
banks, and member bank borrowings from the Federal Reserve
averaged somewhat less than in earlier weeks.
Termination of most of the repurchase agreements outstanding on January 9 and 10 absorbed part of the early influx of
reserves. Additional absorptions during the month were accomplished by redemptions of $439 million of maturing Treasury
bills, by two operations involving matched sale-purchase transactions, and by outright sales of some bills to foreign accounts.
Interspersed among these absorptions were a few temporary injections of reserves through repurchase agreements, and also
some outright purchases of bills, to relieve occasional stresses
that emerged in the money market. One of these occurred on
January 18 when a large money market bank with a sizable
reserve deficiency asked securities dealers that had loans on its
books to seek financing elsewhere. On that day the System arranged $2&9 million of overnight repurchase agreements to facilitate the relocation of financing, and the dealers eventually
met the rest of their needs at other money market banks.
Operations became more extensive again in February, as the
System often found it necessary to counter unintended firmness
in the money market arising out of renewed shortfalls of reserves
below expectations. Adding to the complications affecting its
operations was the persistently uneven distribution of reserves
within the banking system and the interruptions to normal flows
and bank behavior in the money market around the time of the
February holidays. The major money market banks were still
in deep basic reserve deficit, as they continued their extensive
220
FEDERAL RESERVE SYSTEM
lending to Government securities dealers and also built up their
investment portfolios. Banks outside the money centers, on the
other hand, were in fairly comfortable reserve positions, but they
tended to be cautious in managing their reserves and in the statement weeks ended February 15 and 22 held large amounts of
excess reserves.
The needed injections of reserves proceeded fairly smoothly
in the opening days of February as the System made some outright purchases of Treasury bills and then arranged some repurchase agreements on February 6 and 7. A bulge in float
caused by a severe snowstorm in the Northeast also added to
reserve availability. By its operations the System preserved a
generally even keel in the money market while the Treasury's
refunding was in process. Rates on Federal funds did rise as high
as SVi per cent on February 6 and 7 and borrowings from the
Reserve Banks expanded, but the Federal funds market eased
over the next several days, with trading mostly at 5 per cent.
The System arranged further repurchase agreements on February 10 to run over the ensuing partial holiday weekend. This
raised estimated free reserves for that statement week to a seemingly satisfactory level. The Federal funds market tightened after
the long weekend, however, as reserves fell short of expected
levels, and Federal funds traded as high as 5% per cent. To
head off further firming in the money market, the System moved
early on Wednesday, February 15, to purchase $550 million of
Treasury and Federal agency issues under overnight repurchase
agreements. But firmness in the money market persisted, and later
that morning the System made additional repurchase agreements
totaling $241 million.
Further, though somewhat less massive, injections of reserves
through repurchase agreements and through some outright purchases were made on each of the next six business days, as Federal funds trading consistently opened at a 5% per cent rate.
After each of these operations, projections pointed to relatively
high levels of free reserves, and conditions in the Federal funds
221
ANNUAL REPORT OF BOARD OF GOVERNORS
market tended to ease for a time. Actual reserve availability
fell persistently short of the projections, however, and as each
day wore on, the money market generally firmed again, and at
the end of the day member banks turned to Federal Reserve
discount windows to borrow large amounts of reserves.
The shortfalls in reserves from estimated levels during this
period were generally quite large, ranging to more than $700
million on 2 days. In addition to continuing strength in required
reserves, these shortfalls reflected considerably lower than normal levels of float, which tended to follow a somewhat erratic
pattern around the February holidays. Predicting the level of
float became even more hazardous for a short time after the
change on February 20 in check-clearing procedures—a change
that reduced float on Mondays to levels more than $1 billion
below previously normal amounts.
In total, over the February 15-24 period, the System bought
nearly $2.8 billion of Treasury and Federal agency securities and
bankers' acceptances under repurchase agreements, while terminations of such contracts amounted to only about $2.3 billion.
Toward the end of this interval, outright purchases of Treasury
bills from foreign accounts and in the market about offset redemptions of maturing bills. Despite these operations, the persistently firm conditions prevailing in the money market led
some participants to fear that the trend toward further monetary
ease had run its course. These fears were dispelled later in the
month, however, when the System made no effort to counter
the relatively easy conditions that finally emerged in the money
market.
By that time, dealers' financing needs had declined sharply
in the wake of extensive sales of securities to the System and
other official accounts, and pressures on reserve positions of
banks in the money centers had eased. Meanwhile, excess reserves accumulated by country banks spilled into the money market, and Federal funds traded at progressively lower rates. The
announcement by the Board of Governors on February 28 about
222
FEDERAL RESERVE SYSTEM
the reduction in reserve requirements against savings deposits
and the first $5 million of time deposits at member banks reinforced the view that monetary policy was likely to maintain a
relatively easy posture.
Open market operations during March were also fairly frequent and sizable. In seeking to maintain generally comfortable
conditions in the money market, the System injected reserves
either through repurchase agreements or outright purchases, or
both, on 13 of the 16 business days in the March 2-23 period.
On three occasions during this interval it arranged repurchase
agreements twice on the same day. Over-all, these injections provided $786 million (net) of reserves during this interval.
A sharp decline in the Treasury's balances at the Reserve
Banks around mid-March also supplied a large amount of reserves to the banking system during this period. Uncertainties
surrounding the projections of the Treasury's balance tended to
complicate somewhat the conduct of System operations, but the
use of repurchase agreements to make temporary injections of
reserves provided the flexibility needed to deal with the situation. On Friday, March 10, the System facilitated management
of the Government's cash balances through a seasonal low by
purchasing directly from the Treasury a special certificate of indebtedness in the amount of $149 million. The certificate was
redeemed 3 days later on Monday, March 13. System purchases
of $101 million of Treasury coupon issues on March 3 and 22
also provided reserves during this period.
Free reserves expanded to an average of about $235 million
in March, and member banks reduced their borrowings from the
Reserve Banks to a daily average of about $200 million. The
general increase in net reserve availability and the timeliness
of System actions enabled the money market to accommodate
without difficulty the heavy demands placed upon it during
March. These included the churning that occurs around the corporate dividend and tax payment dates, the settlement on March
13 of a cash offering of $2.7 billion of Treasury tax-anticipation
223
ANNUAL REPORT OF BOARD OF GOVERNORS
bills, and settlements throughout the month on a large volume of
corporate and municipal offerings. Federal funds traded generally at 41/2 to 4% per cent during March, and call loans at banks
in New York City were usually available to Government securities dealers at rates of 5 to 5Vi per cent. Meanwhile, other
short-term interest rates were generally declining. Treasury bill
rates, for example, fell by about 45 to 70 basis points from the
previous month's highs—on February 23—to the end of March.
Open market operations were reduced in scale for a brief
period in the latter part of March, when a spillover of previously
accumulated excess reserves eased conditions in the money market. But another round of reserve injections occurred over the
March 30-April 5 interval. These injections, which involved
both outright purchases and short-term repurchase agreements,
offset the end-of-month decline in float and helped to preserve
comfortable conditions in the money market amid the churning
around the quarterly statement publishing date and the April 1
property tax date in Cook County, Illinois. Included in these injections were further purchases, in two operations, of $117
million of Treasury coupon issues, which were the last System
purchases in the coupon sector until after the Treasury had completed its May refunding.
Following the reduction in the discount rate announced on
April 6, trading in Federal funds immediately adjusted to a 4
per cent rate and remained there—or occasionally below—
over the rest of the interval under review here. Dealer loan rates
posted by the New York City banks declined to a range of 4—
43A per cent, and other short-term rates also continued to decline
during April.
Open market operations in the weeks immediately following
the cut in the discount rate sought to promote conditions in the
money market that would validate the new structure of interest
rates. The first several days after the rate reduction saw a few
quick reversals of direction in operations. Some temporary reserve needs were met on Friday, April 7, through the use of re224
FEDERAL RESERVE SYSTEM
purchase agreements that would mature after the weekend.
When money market conditions threatened to become easier than
desired on April 10 and 11, however, the System allowed these
and other outstanding repurchase agreements to mature without
replacement, and on the latter day it sold $206 million of Treasury bills in the market. As it turned out, reserves fell short of
expectations, and on Wednesday, April 12, the Account Manager
injected $289 million of reserves through overnight repurchase
agreements.
Operations over the remainder of the period provided a net
of $756 million of reserves, with needs met generally as they
arose. Outright purchases of $697 million of Treasury bills on
3 days around mid-April not only helped to preserve a comfortable tone in the money market but also helped to stem some
nervousness that had arisen in the securities market in the wake
of the continued heavy calendar of new issues.
In the final weeks of the interval, operations were affected
by even-keel considerations as market participants turned their
attention to the Treasury's May refunding, the terms of which
were announced on April 26. Repurchase agreements arranged
that day countered the firmness in the money market that had
arisen in the wake of another shortfall of reserves. Further repurchase agreements and some outright purchases of Treasury
bills on the final 3 days of the interval preserved this comfortable tone in the money market and helped to allay some of the
nervousness in the securities markets. Part of the repurchase
agreements arranged on May 1 were against "rights" issues involved in the Treasury refunding—contributing to a reasonable
availability of financing for such issues taken by the nonbank
dealers until the issues were exchanged on May 15.
Securities markets. As noted earlier, developments in the securities markets followed divergent patterns during the period,
with short-term interest rates generally declining by a percentage
point or more while long-term yields were under upward pressure after the end of January. Sharp swings in expectations and
225
ANNUAL REPORT OF BOARD OF GOVERNORS
general market psychology—developments that were to assume
increasing significance as the year wore on—accentuated movements in prices and yields within the period. The more basic
factors shaping the general trends, however, were the very heavy
demands for funds that were pressed on the longer-term markets
and the sizable flows of some of these and other funds into shortterm investments. While motives for such developments varied
among borrowers and investors, the outcome represented a considerable rebuilding of liquidity throughout the financial system.
Flotations of new issues by corporations and by State and local
governments in the capital market totaled nearly $12.7 billion
during the January-April period, 18 per cent more than the
record volume in the corresponding months of 1966. A good
part of these funds were absorbed rather quickly in meeting current needs. Corporations, for example, had to make particularly
heavy payments for taxes as well as for dividends and plant and
equipment. However, by borrowing in the capital market, corporations were able to make these payments without further depleting their liquidity, and many of them had sufficient funds
left over to repay bank loans and to rebuild holdings of liquid
assets. Similarly, State and local governments invested—at least
temporarily—a sizable portion of their tax receipts and the
proceeds from their capital issues in Treasury bills and other
short-term instruments.
Financing activities of the Federal Government also had differential effects on the demands and supplies in the long- and
short-term sectors of the market. During the January-April period
Federal agencies sold to the public a total of $3.4 billion of new
issues with maturities of more than a year; of this amount nearly
$2.3 billion represented participation certificates sold by the
Federal National Mortgage Association and the Export-Import
Bank. Meanwhile, the supply of short-term Federal agency paper
was being reduced, as savings and loan associations repaid their
borrowings from the Federal home loan banks and these banks
in turn redeemed, without replacement, about $1.8 billion of
226
FEDERAL RESERVE SYSTEM
maturing notes. Finally, redemptions of maturing Treasury taxanticipation bills in March and April more than offset increases
in other bill issues; hence the supply of outstanding Treasury
bills decreased by $600 million over the period.
The combination of heavy demand for Treasury bills—including buying by the System, banks, corporations, and public funds
—and the eventual shrinkage in the supply of bills produced
a good tone in the bill market through most of the period. The
general downtrend in bill rates was interrupted for a time in
February, when firmer money market conditions and worries
about the course of Federal Reserve policy prompted some aggressive professional selling. Demand expanded as rates moved
higher, however, and as easier money market conditions reappeared toward the end of the month, bill rates resumed their
earlier downtrend. Banks bid aggressively for the $2.7 billion of
June tax-anticipation bills auctioned on March 7, and they held
a considerable portion of their awards well beyond the March
13 payment date. Dealers too were aggressive bidders in most
of the regular weekly and monthly auctions during March and
April as they sought to replenish their positions in the face of
the continuing demand.
By early April the rate on 3 -month bills had fallen below 4
per cent, or more than Vi percentage point below the then current discount rate. Following the April 7 cut in the discount
rate, bill rates initially moved down by another 10 to 25 basis
points. Emerging nervousness in the longer-term markets spread
temporarily to the bill sector around mid-April, but a better
tone was soon restored following a general increase in demand,
including sizable purchases by the System to meet reserve needs.
At the end of the period, 3-month bills were auctioned at an
average rate of 3.777 per cent, 105 basis points lower than in the
last weekly auction of 1966. The average issuing rate on new
6-month bills, at 3.907 per cent, was also a full percentage point
less than that in the final auction of 1966.
In the capital markets, yields generally declined in January,
227
ANNUAL REPORT OF BOARD OF GOVERNORS
rose in February, and then edged a little lower in March before
climbing toward new highs in April. The buoyancy prevailing
in these markets at the beginning of the year reflected a number
of factors. Initially, the most important element was the evident
trend toward an easier monetary policy. The Board of Governors'
announcement on December 27, 1966, rescinding its letter of
September 1 regarding accommodation at the discount window
was taken as confirmation of this trend. To this was added an
optimistic response to the President's State of the Union Message
on January 10, with its proposal for a 6 per cent surcharge on
corporate and individual income taxes. Market sentiment was
further strengthened on January 26 in the wake of a reduction
in the discount rate of the Bank of England from 7 to 6V2 per
cent and a cut in the prime lending rate of major U.S. banks.
Under these various influences, prices of securities rose and
their yields declined sharply during most of January. An exceptionally large volume of new corporate, municipal, and Federal
agency issues came to market during the month—setting the
trend that was to follow over the months ahead—but most of
the offerings were enthusiastically received by investors at generally declining yields. Included in the Federal agency issues sold
to the public were three issues, totaling $600 million, of participation certificates offered by the FNMA on January 5. (An
additional $500 million of these issues were sold to Government trust accounts.) These were the first such certificates to be
issued since June 1966, and the offering marked the end of the
administration's temporary suspension 'of such sales in effect
since the period of monetary pressure in August 1966. Each of
the three issues, maturing in 5, 10, and 15 years, respectively,
was well received at a yield of 5.20 per cent.
At the end of January the Treasury successfully refunded $7.5
billion of coupon issues maturing on February 15. It offered for
cash $5.5 billion of 15-month notes and $2.0 billion of 5-year
notes, both priced to yield about 4.85 per cent. The buoyancy
prevailing in the markets after the cuts in the British discount
228
FEDERAL RESERVE SYSTEM
rate and the prime rate of U.S. banks carried through the opening
of the books for the Treasury financing on January 30, and the
offerings were heavily oversubscribed. Large subscriptions for
the short notes received only 10 per cent allotments, and allotments for the longer issue amounted to only 7 per cent, the lowest
allotment ratios in a Treasury financing in some time.
Market sentiment changed rather sharply over the next several
days, as fears arose that yields had fallen about as far as they
would, in view of the heavy financing calendar of prospective
corporate, municipal, and Federal agency issues and predictions
of a pick-up in economic activity later in the year. The unintended firmness that emerged in the money market around this
time despite the System's aggressive injections of reserves added
to these worries. An offering of $500 million of participation
certificates by the Export-Import Bank on February 7 showed
the effects of the general deterioration. Interest in both the 4and 15-year maturities of these certificates was restrained, and
prices of the issues soon declined.
In this atmosphere a number of corporate and municipal borrowers rushed to add their issues to the calendar of offerings before yields rose much further. This, along with some outright selling of outstanding issues, added to upward pressures on yields,
and the markets became congested for a time. Inventories of corporate and municipal bond dealers expanded, with the Blue List
of advertised tax-exempt issues rising to more than $650 million
by mid-February. In the Government sector dealers became
fairly aggressive sellers in order to pare inventories that had just
been swelled by awards of the Treasury's new notes. By midFebruary dealers' positions in Treasury notes and bonds had
declined to about $1 billion, roughly the same as the level prevailing before the refunding.
The atmosphere in the securities markets improved around
the end of February, with the return of easier money market
conditions—later augmented by the reduction in reserve requirements against savings deposits and certain time deposits,
229
ANNUAL REPORT OF BOARD OF GOVERNORS
announced on February 28. In the meantime, there had been
a sharp improvement in the technical position of the market
following extensive Treasury operations on February 24 in
connection with efforts to keep the Federal debt from exceeding its legal ceiling. These operations, which were undertaken
while legislation to raise the statutory debt ceiling was moving
slowly through the Congress, involved switching the investments
of several Government trust funds and a Federal agency out of
special Treasury issues and into outstanding marketable Treasury
securities. The special issues were then redeemed by drawing
down the Treasury's cash balances—thus lowering the total national debt subject to the debt ceiling. The market purchases
that were executed through the System's Trading Desk involved
the buying of nearly $500 million of bills and coupon issues;
additional amounts of bills were purchased directly by one of
the Federal agencies.
The more buoyant atmosphere in the capital markets was
sustained throughout March by a succession of developments,
most of which led market participants to expect further easing in
credit conditions. These included further reductions in the Dutch
and British discount rates; the cut from 53A to 5Vi per cent
in the prime rate of most commercial banks—matching the rate
established by one major bank in January; higher levels of free
reserves; generally comfortable money market conditions; widespread declines in short-term interest rates; and reports of further weakness in many economic indicators.
In this environment record amounts of new corporate and
tax-exempt public offerings—together with large offerings of
the International Bank for Reconstruction and Development and
of FNMA participation certificates—were generally well received in March. The participation certificates (of which $750
million were offered to the public and $150 million issued to
Government trust funds) were sold on March 22 at yields that
were 10 to 20 basis points below those in the January offering.
Yields on Treasury issues and tax-exempt bonds declined over
230
FEDERAL RESERVE SYSTEM
the course of the month, although investors' resistance increased
as municipal yields declined. Indeed, the Blue List of advertised
tax-exempt offerings climbed by more than $150 million during
March to nearly $800 million. In the corporate market bond
yields showed little tendency to change during March, despite
the record volume of new public offerings. Part of the absorption of this volume reflected takedowns of the new issues by
dealers in the hopes of being able to sell them at higher prices
later. Thus, as in the municipal market, there were fairly large
inventories of corporate bonds on dealers' shelves as March drew
to a close.
The reduction in the Federal Reserve discount rate in early
April was greeted enthusiastically in the capital markets. Immediately following that action, underwriters of both corporate
and tax-exempt bonds made good progress in distributing the
unsold balances of recent offerings. The demand was not sustained, however, and the markets became heavy again for a time
around mid-April. As the calendar of new offerings continued
to mount and signs of renewed strength in economic activity
multiplied, market participants again began to think that monetary policy was not likely to ease much further. Investors were
selective, and many new corporate and municipal offerings encountered resistance. In the market for Federal agency issues,
on the other hand, an excellent reception was accorded the offering on April 19 of $400 million of Export-Import Bank participation certificates. This offering consisted of a 3-year issue
yielding 4.80 per cent and a 7-year issue yielding 5Vs per cent.
Toward the end of April prices of Government securities began to adjust downward in expectation that the Treasury's operation to refund the May maturities might involve a pre-refunding
of other issues as well. In that refunding, the terms of which
were announced on April 26, holders of issues maturing in May
and June were offered the opportunity to exchange into either
15-month notes yielding 4.29 per cent or 5-year notes yielding
4.75 per cent, and holders of August maturities were permitted
231
ANNUAL REPORT OF BOARD OF GOVERNORS
to exchange only into the longer notes. The announcement of
the refunding terms was followed by a sharp, further downward
adjustment of prices, but a generally improved tone had emerged
by the time the subscription books opened on May 1.
The upward pressure on capital market yields in the closing
weeks of the period brought the level of such yields well above
the lows reached around the end of January, and in many cases
to levels even above those prevailing at the end of 1966. Thus
the average yield on long-term Treasury bonds on May 1 was
4.66 per cent, 32 basis points above the year's low in the second
half of January. New Aa-rated utility bond issues with 5 years of
call protection were trading to yield 5.70 per cent after release
from syndicate pricing restrictions at the beginning of May; this
compared with a yield of 5.54 per cent offered on a similar issue
when it was sold in early January and 5.05 per cent on one sold
near the end of January. And finally, the Bond Buyer's index of
yields on 20 tax-exempt bonds was up to 3.79 per cent in the
first week of May; this compares with the January-February low
of 3.40 per cent and 3.77 per cent at the end of December 1966.
May 2-November 13:
Steady Conditions Maintained in the Money Market While
Economic Expansion Resumes and Interest Rates Rise Sharply
Stimulated by both monetary and fiscal policies, prospects for
renewed business expansion seemed to be improving toward the
end of April. Against this background, open market operations,
in carrying out Federal Reserve policy, did not seek any further
easing of money market conditions. Rather, generally steady
money market conditions were maintained throughout the succeeding 6V2 months, a period in which large demands for credit
were reflected in rising interest rates. For purposes of exposition,
this period is broken down into two subperiods.
ECONOMIC RECOVERY (May 2-September 11)
Signs that the economy was expanding more rapidly multiplied
over the summer months, and by late July price increases were
becoming more numerous. The U.S. balance of payments re232
FEDERAL RESERVE SYSTEM
mained in substantial deficit, and the pound sterling came under
renewed pressure following the outbreak of hostilities in the
Middle East on June 5. In domestic financial markets corporations and State and local governments continued their unprecedented rush for capital funds, with consequent further upward
pressures on long-term interest rates. At midyear, short-term
interest rates moved up very sharply as the Treasury's net redemption of maturing debt came to an end and the Treasury
began to borrow large amounts of funds to finance the Federal
deficit.
As the summer wore on, there was growing evidence of the
need for a tax increase to restrain inflationary pressures, reduce
the Treasury's need to borrow, and prevent the recurrence of
money market pressures like those in the summer of 1966. On
August 3 an administration message to the Congress formally
requested enactment of a 10 per cent tax surcharge effective
October 1 for individuals and retroactive to July 1 for corporations. The proposed tax increase, which exceeded the 6 per cent
surcharge called for in the State of the Union Message in January, was favorably received throughout the financial community.
Buoyancy in the securities markets was cut short, however, by
the reappearance of concern about the size of the Treasury's cash
needs—even with the surcharge—and by growing uncertainties
about congressional passage of the bill. Hearings on the proposed
tax began in mid-August, but action on the tax bill remained uncertain through the rest of the period.
Conditions in the money market were generally steady and
comfortable during the May to mid-September period. Federal
funds traded generally in a narrow band around the 4 per cent
discount rate—though more often below that rate than above
it. Member bank borrowings from the Reserve Banks were
nominal on most days and for the period averaged about $100
million. Free reserves averaged around $280 million daily over
the interval. But there was considerable variation in the week-toweek averages of free reserves after mid-June as shown in top left
panel of Chart 2—reflecting unusually wide swings in country
233
ANNUAL REPORT OF BOARD OF GOVERNORS
2 1 MAY 2 - SEPTEMBER 11,
1967
RESERVES AND BORROWINGS
800"
NET FREE RESERVES
zJ 4 0 0 -
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MONEY MARKET RATES
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For notes see pp. 212-13.
bank holdings of excess reserves. Over the 12 weeks from midJune through early September, free reserves averaged about $375
million in the first half of each biweekly reserve-settlement period
for country banks and about $185 million in the second half of
those periods. Money center banks generally remained in deep
basic reserve deficits through midyear, but their reserve positions
eased considerably in succeeding months as deposit growth and a
renewed build-up of Euro-dollar balances outstripped growth in
bank credit.
234
FEDERAL RESERVE SYSTEM
BANK CREDIT PROXY
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! I I I III I II i I I ! MI I I M I I IMI II I II
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I I M I I I I I I i 1 I I I 11 I I i l l
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SEPT.
The steady conditions in the money market helped to facilitate
a continued substantial flow of credit and deposits through financial intermediaries and credit markets during the period,
though not without rising interest rates in the face of the heavy
demand for funds. Further efforts to rebuild liquidity continued
to motivate, and to lay claim to a part of, these flows.
While the very heavy flow of corporate bond issues met the
bulk of business borrowing needs over the period, demand for
bank loans did pick up for a while around mid-June. Moreover,
235
ANNUAL REPORT OF BOARD OF GOVERNORS
such loans remained outstanding somewhat longer into July
than in past years—reflecting largely the further acceleration of
payment schedules for corporate income taxes. Meanwhile, banks
continued to build up their holdings of attractive-yielding taxexempt bonds, and after midyear they played a major role in
underwriting new Treasury offerings. Holdings of Government
securities by all commercial banks rose by $4.9 billion during
July and August combined. These acquisitions, along with the
delay in loan repayments mentioned above, pushed the expansion in total bank credit to a seasonally adjusted annual rate of
more than 20 per cent during the 2-month period. This was considerably above the moderate pace prevailing during the spring.
Partly in anticipation of the demands for credit around midJune, banks began to bid a little more aggressively for CD's at
the very start of the period under review here and then increased
their rates on CD's sharply further amid the general upward
pressures on short-term rates after mid-June. By mid-September
major banks were reportedly paying 5% per cent or more on
longer-term deposits. Outstanding CD's rose by more than $2
billion from early May through the end of August, before a
sizable net run-off occurred in early September. Major money
center banks also began bidding more aggressively for Eurodollar balances after mid-June, and total liabilities due by head
offices of U.S. banks to their foreign branches rose by more than
$1 billion from mid-June to late August before falling off slightly
in early September.
Operating considerations. Open market operations were considerably more limited in volume in the May to mid-September
period than they had been earlier in the year and were especially
light after the middle of July. Complications arising out of unexpected shortfalls of reserves occurred less often than in preceding
months, and fluctuations in the various factors affecting the
supply of and demand for bank reserves seldom caused any
marked disturbance in the over-all balance of forces already prevailing in the money market. Day-to-day operations tended to
236
FEDERAL RESERVE SYSTEM
focus on keeping the Federal funds rate around 4 per cent and
borrowing from the Reserve Banks at nominal levels. After midJune free reserves were allowed to fluctuate in a wide range from
week to week to accommodate the sharply increased fluctuations
in excess reserves.
While conditions in the money market were the immediate
focus of day-to-day operations, two somewhat broader considerations also influenced operations. One consideration was related
to the heavy atmosphere often prevailing in the securities markets. On several occasions when the market was particularly unsettled, operations were tailored so as to avoid adding to existing
pressures on securities prices and interest rates. In addition, purchases of coupon-bearing issues were made to meet part of the
emerging needs for reserves, in line with instructions included in
the Open Market Committee's policy directives issued on May
23 and June 20.
These purchases—in addition to supplying reserves—helped
to relieve persistent upward pressures on long-term interest rates,
which it was feared might slow the economic upturn, especially
in the housing sector. In carrying out such operations, no effort
was made to establish any particular pattern of yields. In all,
$611 million of Treasury coupon-bearing issues were purchased
during the interval. Of this amount $180 million represented
issues due in 5 to 10 years; and $85 million, issues maturing in
more than 10 years. However, there were no purchases of
coupon issues for fairly extended periods when the need to supply reserves was temporarily absent, when the availability of
such issues diminished, or when a financing by the Treasury was
in process.
The other broader consideration influencing open market
operations involved concern within the Open Market Committee
over the acceleration in the growth of bank credit and the money
supply around midyear following the relatively moderate expansion in the spring. While even-keel considerations were predominant at the time, the Committee voted at its July 18 meeting to
237
ANNUAL REPORT OF BOARD OF GOVERNORS
restore a "proviso" clause to the current policy directive, instructing the Account Manager to modify open market operations—
insofar as Treasury financing activities would permit—to moderate any apparent tendency for bank credit and money to expand more than expected.
Proviso clauses, of varying form, had been included in each
current policy directive voted by the Committee from the spring
of 1966 through the first four Committee meetings of 1967. They
had proved very helpful in facilitating a prompt easing in System
policy late in 1966 amid the first signs of the slowing in economic
activity. When the Committee voted at its meeting on May 2,
1967, to adopt a generally steady policy stance, the proviso was
dropped and was not introduced again until July. As it turned
out, deviations from the expectations subsumed in subsequent
proviso clauses were generally not of a magnitude to call for implementing the clauses. Even so, the presence of the proviso
clause provided a useful focal point for assessing credit developments as they unfolded.
Open market operations. Over the period as a whole, System
operations supplied $579 million of reserves, net, to meet additional needs for required reserves and to offset the modest net
drains of reserves stemming from movements in other factors.
Outright purchases of marketable Treasury issues totaled more
than $4.4 billion, including $611 million of coupon-bearing securities, while sales and redemptions of Treasury bills were nearly
$3.6 billion. Matched sale-purchase transactions accounted for
$635 million of the outright sales and purchases during the
period Some $3.2 billion of repurchase agreements against
Treasury and Federal agency securities were made, and $3.5
billion of these and other contracts matured or were terminated
during the period. In June and September the System again purchased special certificates of indebtedness from the Treasury—
for overnight or over a weekend—to facilitate management of
the Treasury's cash balances at their seasonal low.
238
FEDERAL RESERVE SYSTEM
The period under review here began while the Treasury's May
refinancing was in progress. Open market operations during the
first 2 weeks of May were conditioned by the weakness in the
markets for coupon securities as the Treasury's new issues were
being subscribed for and then absorbed. Against this background,
operations sought to counter quickly the firming tendencies in
the money market at the beginning and again around the middle
of May, with a cautious absorption of a redundancy of reserves
in the easy money market that emerged in between. Most of the
reserve injections involved use of repurchase agreements to
counter pressures caused by increases in financing needs of Government securities dealers; two rounds of such agreements were
arranged on May 3 when firmness in their money market persisted. Outright operations to absorb the redundancy of reserves
were limited to sales of $107 million of Treasury bills, mostly to
foreign accounts; in addition, some maturing bills were redeemed,
and some outstanding repurchase agreements matured.
After the injections on May 15 and 16, most of the immediate
reserve needs of the banking system were satisfied, and money
market conditions began to ease. Projections pointed to further
needs over the period ahead, however, and the System began a
series of outright operations that ultimately supplied a net of
$604 million of reserves over the following 3 weeks—through
June 7. Four operations in coupon issues provided a little more
than half of the over-all net reserve injection during this period.
Operations on June 5, the day hostilities broke out in the Middle
East, helped to moderate price declines in the nervous atmosphere prevailing in the securities markets.
The System made intermittent purchases of Treasury bills in
the market and from foreign accounts, and at the end of May
it bought some Government securities under short-term repurchase agreements to meet temporary needs around the Memorial
Day holiday. Money market conditions remained quite steady,
with Federal funds consistently trading in a narrow range around
239
ANNUAL REPORT OF BOARD OF GOVERNORS
4 per cent; and member bank borrowings from the Federal Reserve Banks were nominal on every day except the day after
the holiday.
The operations in coupon-bearing issues following the May
23 Committee meeting took place in somewhat unsettled markets. There was some speculation in the press, following this
meeting, that the System would be seeking to buy a substantial
amount of coupon securities in the weeks immediately ahead,
possibly with some kind of rate objective in view. But as purchases of bills and coupon issues proceeded roughly hand in
hand, market participants gradually came to realize that the
operations were designed primarily to meet seasonal reserve
needs, with purchases of various maturities coincidentally reducing the overhang of intermediate- and longer-term Government issues in the market, and thus facilitating flows of funds in
the capital markets.
For the period under review here operations were largest between mid-June and mid-July, when the System first provided
for seasonal reserve needs and subsequently absorbed a reflux
of reserves after the July 4 holiday. This period also marked the
beginning of the sharply increased variations in demands for
excess reserves by country banks. The complications for operations stemming from these shifts were at times accentuated by
unexpected shortfalls or bulges in nationwide reserve availability
and by the interruptions in normal reserve flows around the quarterly statement date, June 30, and the Independence Day holiday. Accumulations of reserve needs did lead to some pressures
in the money market and to heavy borrowings from the Reserve
Banks on June 29 (the day before the statement date) and on July
3 (before the holiday), but a comfortable atmosphere prevailed
over most of the remainder of this time period.
The major reserve-supplying operations during the interval
began on Friday, June 16, when the System conducted goarounds of the market to purchase sizable amounts of bills and
coupon issues. Reserves fell below expectations, however, and by
240
FEDERAL RESERVE SYSTEM
the end of the statement week some firmness was threatening to
emerge in the money market. A redeposit by the Treasury of $1
billion into tax and loan accounts of its large depositaries, or "C"
banks, on Wednesday, June 21, and System purchases of $472
million of Government securities under 1- and 2-day repurchase
agreements met a good part of the accumulated reserve needs,
but even so, member bank borrowings from the Reserve Banks
rose that night to $411 million.
Three operations in coupon issues and large purchases of bills
in the market and from foreign accounts supplied $1.4 billion
of reserves, net, over the June 22-July 7 period. These injections
were supplemented on occasion by use of repurchase agreements
against Government securities and bankers' acceptances. The
large amounts of bills available from foreign accounts were particularly helpful in meeting these substantial reserve needs at a
time when dealers' positions were becoming depleted. On July
5, when dealers' inventories were very low, the Account Manager
sought to broaden the avenues of reserve injection by offering
to arrange repurchase agreements against any Government securities that dealers either already had in position or might acquire
under repurchase agreements with investors. Buying by the
System during this period helped to moderate pressures in the
Treasury bill market as bill rates shot upward in anticipation of
heavy Treasury borrowing in the weeks ahead.
This wave of reserve injections was completed by Friday,
July 7, and after an unexpected bulge in nationwide reserve
availability over the ensuing weekend, the System reversed direction and on July 10 began to absorb the emerging redundancy
of reserves in a gradually easing money market. Bill rates had
stopped rising by that time, but some nervousness persisted in the
securities markets. At first, therefore, the System confined its
operations to sales of a small amount of bills to foreign accounts.
Then, as the bill market remained steady and reserve excesses
became evident, the System sold $590 million of bills outright
in the market on July 12 and 14, and on the following Monday
241
ANNUAL REPORT OF BOARD OF GOVERNORS
it sold $295 million of bills under matched sale-purchase transactions. Even though average free reserves declined in the July
19 statement week, Federal funds traded at progressively lower
rates, as previously accumulated excess reserves at country banks
spilled into the money centers.
Operations were extremely limited over the rest of the period.
The System supplied some reserves through outright purchases
of Treasury bills during the period July 18-24, but over the
following month its only actions involved two reserve injections
—through repurchase agreements—and periodic reserve absorptions through redemptions of maturing Treasury bills totaling
$450 million. Conditions in the money market remained fairly
steady through this period. Federal funds traded generally at 3 %
or 4 per cent, and borrowings from the Reserve Banks were
nominal, while average free reserves continued to fluctuate from
week to week in line with shifts in country banks' excess reserves.
The money market did show somewhat more than usual ease
in the final weeks of August as the basic reserve positions of
money center banks improved and nationwide reserve availability
bulged beyond expectations. Some of the redundant reserves
were absorbed through use of matched sale-purchase transactions on August 25 and 29 and sales of maturing bills on the
latter date. But in view of the considerable nervousness that prevailed in the securities markets while new Treasury notes issued
in the August refunding and in a cash financing in late August
were still being digested, no further actions were undertaken.
Federal funds traded at rates as low as 2 per cent during the final
week of August, but most trading was at higher rates.
Seasonal reserve needs immediately surrounding the Labor
Day weekend were met initially through outright purchases of
Treasury bills and coupon issues; these were supplemented a few
days later by use of repurchase agreements. Then, as currency
flowed back into banks after the holiday and float bulged, the
System allowed the outstanding repurchase agreements to mature
and also sold $353 million of Treasury bills in the market and to
242
FEDERAL RESERVE SYSTEM
foreign accounts on the final 3 days of the period. The money
market had taken on a somewhat firmer tone following the undue
ease at the end of August, but Federal funds traded in good volume at rates around 4 per cent and member bank borrowings
from the Reserve Banks remained nominal.
Capital markets. Interest rates moved substantially higher on
balance over the May 2-September 11 period. Short-term rates
showed the sharpest net increases—reflecting the large volume of
Treasury borrowing in the short-term area after midyear, following sizable redemptions of Treasury debt in preceding months.
In the long-term markets yields rose by 30 to 50 basis points net
over the interval, with the dominant force being an unprecedented demand for funds by corporations in the summer. Under
this pressure yields on new Aa-rated utilities with 5 years of call
protection rose from 5.70 per cent at the beginning of May to a
peak of 6.20 per cent at the end of August, before edging a few
basis points lower in early September. Borrowings by State and
local governments were also quite heavy over the period, and the
Bond Buyer's index of yields on 20 tax-exempt bonds rose from
3.79 to 4.07 per cent. Yields on long-term Government bonds
rose from 4.66 to 4.96 per cent.
The effects of the heavy volume of new offerings in the capital
markets were compounded by the steady stream of announcements of forthcoming new issues that were being added to an
already heavy calendar. In all, $13.3 billion of new corporate
and tax-exempt bond issues were floated during the AV2 months
under review here, compared with the previous record volume of
$9 billion for the similar period in 1966. Offerings of new corporate bonds averaged more than $2.2 billion a month over the
summer, with public offerings accounting for more than half of
the total. Offerings of new tax-exempt issues slackened a little in
July and August, but still totaled $4.7 billion for the interval as
a whole.
Included in the tax-exempt total were more than $250 million
of industrial revenue bonds, as more and more municipalities
243
ANNUAL REPORT OF BOARD OF GOVERNORS
used this type of financing to attract new industry. During 1967
as a whole more than $1.3 billion of industrial revenue bonds
were sold, compared with only $500 million of such issues in
1966. This type of financing accounted for almost 10 per cent of
all tax-exempt offerings during the year, compared with less than
5 per cent a year earlier. The relative impact on long-term taxexempt financing was even greater because the industrial revenue
issues were largely of a long-term character.
In the face of the continuously heavy calendar, most of the
new corporate and tax-exempt offerings met with mediocre or
poor initial response on the part of investors. Even as yields rose,
investors generally saw little reason to hurry to commit funds.
Meanwhile, underwriters were under some pressure to keep their
inventories cleared out so as to be prepared for the next wave of
new issues. Hence underwriting syndicates were often terminated
quickly, and price and yield adjustments were often quite large.
On some issues they ranged up to 40 basis points.
Because of this readiness to adjust prices flexibly, markets
never became really congested with huge amounts of unsold inventories on dealers' shelves. Indeed, the Blue List of advertised
tax-exempt issues declined rather steadily over the period, from
the year's high of more than $800 million at the end of April to
around $600 million during June and only $400 million during
August and early September. The corporate market reportedly
showed a similar trend, but comparable data on dealer inventories are not available.
There were, of course, some temporary respites from the general upward pressure on yields during the period. One such
breather occurred around the end of May, when investor demand
was sparked by speculation, as noted earlier, that the System was
about to embark on extensive operations to buy Treasury coupon
issues with a view to twisting the yield curve. Strong demand
reappeared in July, amid rumors that the administration was
about to propose a tax increase and that any further build-up of
troops in Vietnam might be smaller than had been expected. The
244
FEDERAL RESERVE SYSTEM
actual proposal of the tax surcharge on August 3, also noted
earlier, sparked a brief rally in the markets, but it was short lived.
Finally, there was some improvement in the markets around the
end of August, amid discussion of possible peace feelers following the election in Vietnam and a reassessment of the economic
outlook in view of a possible strike in the automobile industry.
For the most part, however, these improvements in the markets tended to reflect somewhat exaggerated reactions to each of
the successive sparks. When the initial fire died, market participants returned to their previous worries about the course of the
war in Vietnam and its implications for the economy and for
Treasury borrowing needs, along with the discouraging uncertainties about prospects for fiscal restraint even after the formal
proposal of the tax surcharge. Tensions in the Middle East in
early June were another source of worry for a while.
Most long-term yields by the end of June were either close
to or above their peaks of August 1966. After a brief decline in
early July, yields on corporate bonds moved to successive new
highs throughout August, and Treasury bond yields gradually
returned to their peaks. Yields on tax-exempt issues declined
from early July through early August as the new-issue calendar
lightened somewhat; they then rose only gradually amid the general pressures in August—reflecting in part an increased relative
attractiveness of tax-exempt bonds in the wake of the administration's proposal for a tax surcharge. At the end of the period
yields throughout the long-term markets were generally 10 to 15
basis points higher than at their peaks in August 1966.
Treasury finance. The turnaround in Treasury debt operations after midyear was quite sharp. In the first 6 months of 1967
the Treasury had retired nearly $7.4 billion, net, of marketable
debt; its last action during that period was to redeem $5.5 billion
of maturing tax-anticipation bills in June. Then over the next 2Vi
months, through the end of the period reviewed here, the Treasury borrowed more than $7.7 billion of new money; two-thirds of
this total matured in 15 months or less. (Additional borrowing
245
ANNUAL REPORT OF BOARD OF GOVERNORS
within the calendar year totaled $8.6 billion of direct Treasury
debt, plus the sale to the public of $650 million of participation
certificates by the FNMA).
Before the onset of this heavy borrowing program, a continuing demand for Treasury bills from a wide variety of investors
who were rebuilding liquidity or seeking a temporary haven for
their funds, combined with increasing scarcities of bills, had
pushed rates on short-term bills down fairly sharply. Bill rates
moved up somewhat in early June, as corporations sold bills to
meet their quarterly dividend and tax payments. But the decline
soon resumed under the weight of sizable reinvestment demand
from holders redeeming the maturing tax bills and from commercial banks preparing for their midyear statements. By June 23
the rate on 3-month bills was down to 3.33 per cent bid, its low
for the year. Meanwhile, rates on longer-term bills had already
begun to rise in expectation of future pressure. On June 23 there
was a spread of 50 basis points between rates on 3- and 6-month
bills. This was the widest spread since September 1966.
Bill rates shot upward in the days that followed as heavy
dealer offerings were pressed on the market in anticipation of an
imminent financing announcement. By June 28, when the Treasury announced the first step in its borrowing program, the rate
on 3-month bills had already risen 43 basis points from its low
point, and it rose another 60 basis points through the morning of
July 5 when the actual financing began. Rates on longer bills
also increased—by about a percentage point—over this 10-day
interval.
The Treasury announcement outlined plans to raise $6.2 billion of new money in the bill market over a period of time. The
program included sale of $4 billion of new tax-anticipation bills
on July 5, along with additions of $100 million to each regular
weekly auction of 3-month bills and to the monthly auctions of
1-year bills. The higher rate levels reached by the time of the
tax-anticipation bill auction proved attractive, and the bidding
for these bills and for bills in several succeeding weekly auctions
was fairly strong.
246
FEDERAL RESERVE SYSTEM
Bill rates fluctuated around their higher levels for a while, rose
further in August amid a heavy atmosphere in the coupon sector,
and after a brief decline around the first of September were moving upward again at the close of the period. In the auction on
September 11, 3-month bills were sold at an average rate of
4.360 per cent, 59 basis points higher than at the beginning of
the interval and more than a full percentage point above the low
reached in late June. The rate on 6-month bills was up to 4.951
per cent on September 11, more than a percentage point higher
than at the start of the period.
The Treasury conducted three coupon financing operations
during the period, and Federal agencies sold to the public $1.7
billion of issues maturing in more than a year, including $650
million of new participation certificates by the Federal National
Mortgage Association. While each of the Treasury's issues and
the FNMA certificates were fairly well subscribed for, they all
weakened in secondary markets, amid a general deterioration in
over-all market sentiment.
In the May financing, for example, which was in process as
the period under review here began, public subscriptions totaled
more than $4.7 billion, including $2.7 billion for the 5-year,
4% per cent notes. The large amount of August maturities
turned in by the public was taken as an encouraging sign, because the operation reduced the size of that month's refinancing
to more manageable proportions.
But conditions in the market soon began to deteriorate as
apprehensions grew over anticipated Treasury financing needs,
especially in the light of reports of the possibility of further escalation of the Vietnam war. Dealers became restive with their
enlarged holdings, and as they pressed offerings on the market,
prices of new and outstanding issues fell. Purchases of coupon
issues by Government investment accounts on May 8 and 9, and
by the System on May 17 in the course of meeting banks' seasonal needs for reserves, absorbed some of the heavy supply of
securities overhanging the market, but prices continued to decline through May 23.
247
ANNUAL REPORT OF BOARD OF GOVERNORS
One of the factors contributing to the nervousness in the
coupon sector around this time was the Treasury's request at
hearings on the Federal debt limit on May 15 for two revisions in
the legislation affecting the 4V4 per cent interest rate ceiling on
long-term Treasury issues. Specifically, the Treasury requested
(1) a redefinition of Treasury notes—to which the interest ceiling
does not apply—extending their maximum maturity from 5 to
10 years and (2) authority to sell up to $2 billion of bonds without regard to the interest ceiling.
As was the case with the debt limit legislation enacted in
February, debate on the new debt limit and interest ceiling bill
extended almost until the last minute before the expiration of the
existing debt limit on June 30. Passage of the new debt ceiling
saved financial markets from severe dislocations that might have
ensued had the Treasury been required to reduce its outstanding
debt by paying off maturing issues in cash as they came due. As
finally approved, the legislation set the maximum maturity of
notes at 7 (rather than 10) years, but it included no provision for
sales of bonds outside the interest ceiling.
The FNMA offering of participation certificates on June 15
consisted of $350 million of 5V4 per cent, 27-month certificates
and $300 million of 5Vi per cent, 5-year certificates, both priced
at par. (Treasury trust accounts took an additional $250 million
of the two issues.) The yields—in both cases 50 basis points
higher than those offered on certificates in March—seemed initially to have attracted a fairly good interest on the part of investors. When the certificates were released from syndicate pricing restrictions on June 20, however, their prices dropped sharply
below par. In fact, the 5-year certificates immediately began to
trade at a discount to yield 5.70 per cent.
In its August refunding the Treasury offered for cash $9.6
billion of new 15-month, 5Vx per cent notes discounted to yield
5.30 per cent. (Through over-allotments, the Treasury actually
acquired $300 million of new money in this operation as well
as the amount needed to redeem maturing issues.) The offering
attracted a routine interest, and larger public subscriptions re248
FEDERAL RESERVE SYSTEM
ceived 35 per cent allotments, about in line with market expectations. The new issue traded briefly at its original offering price
during the period of short-lived buoyancy in the markets following the President's tax message on August 3, but by the payment
date, August 15, it was trading at a discount of %± from the
offering price.
The final Treasury borrowing during the interval, announced
on August 17, was a cash offering of $2.5 billion of new 5%
per cent, 3Vi-year notes discounted to yield 5.40 per cent. Subscription books were open on August 22, and payment was made
on August 30. Commercial banks were permitted to pay for the
issue by credits to Treasury tax and loan accounts. Many market
participants had hoped that the Treasury would offer a higheryielding note in the 5- to 7-year area. As in the refunding earlier
in the month, interest proved routine, and larger public subscriptions received 38 per cent allotments. Prices of outstanding intermediate-term issues had adjusted lower immediately after the
terms of the new offering were announced, and they continued
to drift somewhat lower over the next week in a generally dull
market environment. By payment date the new issue was trading
at a discount of 5{;4 from the offering price.
MOUNTING INFLATIONARY PRESSURES (September 12-November 13)
In some ways the autumn was a time of transition both for
the economy and for views on monetary policy. Whereas a number of business indicators showed weakness during September
and October as a result of strikes in the automobile industry and
elsewhere, underlying economic conditions apart from the strikes
strengthened. The heavy demand for credit resulted in a sharp
further rise in interest rates during the period, as the securities
markets responded to evidence of mounting inflationary pressures
and the seemingly dim prospects for early enactment of the
proposed income tax surcharge. Credit expansion slowed from
the rapid pace of the summer, but it was still large. Meanwhile,
the underlying U.S. balance of payments situation worsened.
Federal Reserve policy continued to be aimed at maintaining
249
ANNUAL REPORT OF BOARD OF GOVERNORS
generally steady conditions in the money market over this period.
There was growing concern in the Open Market Committee over
evidences of inflationary pressures, the recent rapid rates of
growth in money and credit, and continued large deficits in the
U.S. balance of payments. However, the uncertain effects and
duration of the strikes, continuing hope for action on the tax
proposal, and concern about the effects of rising interest rates
on domestic financial intermediaries and on the position of sterling in foreign exchange markets were seen as arguing against a
policy shift. "Even keel" considerations came into play for a
time in early October, when the Treasury auctioned $4.5 billion
of tax-anticipation bills, and then again in the final weeks of the
interval, when the Treasury carried on a sizable cash financing
to refund securities maturing on November 15 and to raise additional new money.
Day-to-day conditions in the money market continued to fluctuate during this period in the same general range as during the
summer. The variations reflected largely shifts in the distribution
of reserves between money center banks and those in outlying
areas. The effects of these shifts were accentuated somewhat during October by unexpected shortfalls, and also bulges, in nationwide net reserve availability. Federal funds traded generally
around 4 per cent during the period. The funds rate was a little
above this level in early October when reserve availability repeatedly fell short of expectations, but it was somewhat lower
later in the month when accumulated excess reserves spilled into
the money centers. Member bank borrowings from the Reserve
Banks averaged about $125 million over the period, well within
the range of earlier variation, while the average level of free reserves declined a little, reflecting a somewhat more efficient use of
reserves by the banking system (upper left panel of Chart 3).
As in the preceding several months, developments in the securities markets during the period were in sharp contrast with
these generally comfortable conditions in the money market.
Long-term yields rose with little interruption from their already
250
FEDERAL RESERVE SYSTEM
3 I SEPTEMBER 12 - NOVEMBER 13, 1967
BANK CREDIT PROXY
RESERVES AND BORROWINGS
28.0
800
-27.0
3
400
NET FREE RESERVES
-26.0°
BORROWINGS
-25.0
400
11 I I
MONEY MARKET RATES
I ! 11 I i t 11 11I I 11 I I 11 I I 11! I ! 1 1 I 11 11 I I I I 11 11 11 I
24.0
LONG-TERM BOND YIELDS
7.00
6.00
FINANCE COMPANY
PAPER
NEW CORPORATE
6.00
5.00 «
-4.00
3.00 -
2.00
6
1111111111111111
13
20
27
111111 l i i i i 1111 i d 11 I i n ! n 11
111 i l l i n 1111111
4
11 18
25
1
8
15 6
13
20
27
SEPTEMBER
OCTOBER
NOVEMBER
SEPTEMBER
i t I i i n l 1 1 1 ! M I 111 i i m t h i n 3 . 0 0
4
11 18
25
1 8
15
OCTOBER
NOVEMBER
For notes see pp. 212-13.
high level by a total of more than V2 of a percentage point—in
some cases to the highest levels in about a century. Short-term
interest rates increased by Ys to % of a percentage point. By
mid-November rates for CD's due in 9 months or longer had
reached the 5Yi per cent ceiling, as banks sought to maintain
their outstanding CD's in the face of heavy maturities. Banks
also added to their borrowings of Euro-dollars following losses
of such funds in late August and early September. By mid-
251
ANNUAL REPORT OF BOARD OF GOVERNORS
November, balances due to foreign branches of the major banks
had risen to a new record of $4.6 billion, about $600 million
above the August peak.
The bidding for CD's and Euro-dollars was related more to
expectations of future .developments than to a need to meet a
heavy current demand for bank credit. Indeed, loan demand at
banks over the September dividend and tax payment dates was
a little weaker than bankers had expected. In fact, demand remained on a generally moderate level over the rest of the period
under review here as corporations continued to tap the capital
markets for a good part of their financing needs. Against this
background, banks tended to hold for a somewhat longer period
than usual the large amounts of tax bills won in the auction in
early October, and they also built up their holdings of other
securities. Thus, even though expansion of total bank credit
slowed to about half of the very rapid pace experienced during
the summer, the annual rate of growth was more than 8.5 per
cent over the September-November period.
Open market operations. The day-to-day implementation of
open market policy proceeded fairly smoothly over the period.
As it turned out, the Committee's instructions to the Manager
to moderate any tendency for bank credit to expand significantly
faster than expected did not require any change in the general
stance of maintaining steady money market conditions, because
the pace of credit expansion proceeded about as expected. The
only large-scale operations came around mid-October, when the
System again made extensive use of repurchase agreements to
counter the effects of repeated shortfalls of reserves below expectations. Outright purchases of Treasury bills in the market
and from foreign accounts around the end of October met
the month-end reserve needs of banks and helped to moderate
heavy pressures that had suddenly reappeared in the securities
markets after the close of subscription books for the Treasury's
November refunding.
In its efforts to accommodate biweekly variations in demands
252
FEDERAL RESERVE SYSTEM
for excess reserves by country banks, the System continued to
permit fairly wide week-to-week fluctuations in average free
reserves. During the interval free reserves of these banks tended,
on the average, to drop by about $160 million from the first to
the second week of a reserve settlement period for country banks,
before rising again in the first week of the next settlement period.
The absorption of reserves from the first to the second week of
these periods was often accomplished by timely movements in
market factors; hence the System's actions over this interval too
were weighted mostly on the purchase side of the ledger.
Over the period as a whole, the Federal Reserve injected
nearly $1.7 billion of reserves, net, into the banking system. This
amount roughly met the reserve need stemming from increased
required reserves and offset the reserve drains caused by increases
in currency in circulation, gold outflow, and the restoration of
Treasury balances at the Reserve Banks from a seasonal low to
more normal levels. The injections proceeded in essentially three
waves: in late September; temporarily around mid-October; and
from late October through the end of the period.
Operations were fairly limited during the first week and a half
of the interval, as the money market readily accommodated on
its own the churning that occurred around the corporate dividend
and tax payment dates. Some reserves were absorbed in the temporarily easy money market at the very start of the period
through sales of maturing Treasury bills and the use of matched
sale-purchase transactions, but no further operations were necessary for a week. Pressures on reserve positions of money center
banks were less than many had expected, despite the banks' losses
of CD's and some expansion of bank credit. The moderate
deficits that developed were easily covered in the Federal funds
market at rates around 4 per cent.
In the last third of September the Account Manager proceeded
in fairly routine fashion to provide reserves through outright purchases of Treasury bills and coupon issues along with repurchase
agreements against bankers' acceptances. These injections, which
253
ANNUAL REPORT OF BOARD OF GOVERNORS
totaled more than $1 billion over the September 21-29 interval,
offset the drains in reserves caused by a rise in Treasury balances
at the Reserve Banks after the September tax payment date.
Money market conditions remained generally steady through the
month-end.
The money market firmed somewhat on subsequent days,
however, following a reserve shortfall over the last weekend in
September. No undue strains were apparent initially, in part because major banks in New York City had already stockpiled
enough reserves to cover most of their moderate needs for the
statement week. Interest in the Treasury's auction of $4.5 billion
of tax-anticipation bills on October 3, moreover, seemed generally satisfactory, although as it turned out, bidding for the
bills maturing in June 1968 was more restrained than had been
expected.
But by Wednesday, October 4, retention of excess reserves
by country banks, combined with the cumulative effects of earlier
reserve shortfalls, threatened to produce additional firmness in
the money market. To head off this pressure, the Treasury permitted its balances with the Reserve Banks to decline, and the
System injected more than $400 million of reserves through outright purchases of Treasury bills and through purchases of bankers' acceptances under repurchase agreements.
Further injections of reserves through repurchase agreements
against Government securities and bankers' acceptances were
undertaken on six of the following seven business days in an
effort to counter the persisting firmness in the money market.
This firmness, and a general rise in interest rates in domestic
short-term markets, was accompanied by a little more aggressive
bidding for funds in the Euro-dollar market by some major U.S.
banks, with consequent repercussions on the already weakening
position of the pound sterling. By mid-October, balances due
to foreign branches of U.S. banks had risen by more than $200
million from their end-of-September level. (The British discount
rate was raised from 5Vi to 6 per cent on October 19 and then
254
FEDERAL RESERVE SYSTEM
to 62/i per cent on November 9.) In all, operations to counter
this money market firmness involved the purchase of more than
$1.5 billion of obligations under repurchase agreements over the
October 5-16 interval. But reserves repeatedly fell short of expectations, and trading in Federal funds generally remained at
rates around 4Ys per cent.
The accumulated effects of the earlier reserve injections and
of the heavy borrowings from the Reserve Banks finally began
to cause an easing in the Federal funds market by Tuesday, October 17, and over the next week the funds rate was persistently
below 4 per cent. In view of the earlier firmness in the money
market and of the nervousness in the securities markets as the
Treasury's November refunding drew near, the System took no
overt action to head off the easing. Instead, the System sold a
few Treasury bills to foreign accounts, terminated maturing repurchase agreements without replacement, and redeemed some
maturing Treasury bills.
Meanwhile, with country banks' excess reserves falling sharply,
average free reserves dropped to the lower end of the range of
recent fluctuation, but conditions in the Federal funds market remained quite comfortable. Short-term interest rates declined a
little during this period, and banks began to acquire domestic
funds through CD's—thus easing a little of the pressure in the
Euro-dollar market. The more comfortable money market environment also helped to dispel fears that had arisen among
some market participants that a change in Federal Reserve policy
was already under way and contributed to the better atmosphere
that was also emerging in the securities markets.
Needs for additional reserves reappeared around the end of
October. Meanwhile, a weak atmosphere had developed throughout the securities markets on October 31. This considerably undermined interest in the Treasury financing, for which the subscription books had been opened on the previous day. To meet
banks' needs for reserves and to moderate the heavy pressures in
the securities markets, the System bought about $110 million of
255
ANNUAL REPORT OF BOARD OF GOVERNORS
Treasury bills from foreign accounts over the October 3 0 November 2 interval, and it purchased $491 million of bills in
go-arounds of the market.
Further injections of reserves from November 2 through the
end of the period involved the purchase of $703 million of
Government securities under short-term repurchase agreements.
While unexpected shortfalls of reserves on several days reduced
nationwide net reserve availability to levels a little below those
initially anticipated, the money market remained generally comfortable, and most of the trading in Federal funds was at rates
around 4 per cent.
Securities markets. A weak atmosphere pervaded the securities markets during almost all of the period under review here.
This reflected largely the increasing discouragement among
market participants about prospects for any significant fiscal
action to restrain inflationary pressures and to reduce Treasury
borrowing needs. Early in the period more and more market
participants began to think that the Federal deficit would probably be large even if the proposed tax surcharge were enacted
by the Congress. By the end of the period, most remaining hopes
for the proposal itself had been undercut by two developments—
one, the announcement of the House Ways and Means Committee on October 3 that it was setting aside further deliberations
on the tax surcharge until some agreement could be reached on
reductions in expenditures; and two, reports over the final weekend in October that the Congress would soon adjourn without
passing the tax surcharge.
Given the dimming prospects for fiscal restraint, market participants came increasingly to believe that monetary policy would
begin to tighten soon. Discouragement over the lack of any signs
of peace in Vietnam contributed to the weak market atmosphere,
and as the period wore on, there was also growing concern about
the worsening position of the pound sterling.
Against this background, borrowers tended to accelerate
their financing schedules, and investors tended to wait to buy
256
FEDERAL RESERVE SYSTEM
new issues in the secondary market until initial offering prices
had been cut and yields raised. Yields on longer-term issues
ratchetted upward at a rate of about 5 to 10 basis points a week
during the period. The only major interruption to this general
trend occurred for a time near the end of October when yields
finally reached a level that did attract some investment demand.
Although renewed deterioration in the markets had occurred by
October 31 and had continued into November, some signs of
hope emerged late on November 13, the final day of the period,
following rumors of a possible brightening of prospects for peace
and the cancellation of a large corporate issue scheduled for the
following day.
Government financing activities during the period contributed
to, and were affected by, the heavy market atmosphere. Rates
on bills maturing within 3 months moved up by about 15 to 25
basis points over the first week and a half of the interval—reflecting in part the growing apprehension over the possibility of a
very large offering of new tax-anticipation bills in the near
future. On Friday, September 22, the Treasury announced an
offering of $4.5 billion of such bills in early October and also
indicated that it would continue to add $100 million to the
weekly bill auctions for another 13 weeks. As a result, the size
of each weekly auction rose to $1.5 billion for 3-month bills, but
for 6-month bills remained at $1 billion. Bill rates rose further
on the following Monday in reaction to the announcements, but
little selling pressure was apparent. And as demand expanded
toward the end of the month—in part from banks that were preparing to publish their quarterly statements and in part from the
System Open Market Account—rates declined toward the levels
prevailing at the start of the period.
In the auction of the new tax-anticipation bills on October 3,
bidding was fairly strong for the $1.5 billion issue due in April
1968 as banks sought to capture tax and loan credits that they
could use to pay for their purchases. On the other hand, bidders
showed much less interest in the $3 billion issue due in June
257
ANNUAL REPORT OF BOARD OF GOVERNORS
1968, and tenders for it totaled only $3.3 billion, one of the
narrowest "covers" in an auction in some time. The average
issuing rate on the June issue, at 5.108 per cent, was somewhat
above expectations in the market, and some tenders were accepted at rates as much as 10 basis points higher to cover the
issue.
Despite the weak interest in the auction, rates on outstanding
bills remained fairly steady for a time before moving higher
around mid-October when several short-term issues of Federal
agencies were poorly received and some selling of bills appeared.
By October 16 the weekly auction rates for 3- and 6-month bills
had reached 4.676 and 5.165 per cent, respectively. Rates fluctuated a little below these levels over the next several weeks,
but by the end of the period they had risen again. In the auction
of November 13, 3- and 6-month bills were sold at average issuing rates of 4.648 and 5.155 per cent, about 29 and 20 basis
points, respectively, above the rates prevailing at the end of the
preceding period.
Almost $3.4 billion of new Federal agency issues came to
market during the period at generally rising yields. Within a few
days after these issues had been sold, most of them—even those
accorded fairly good initial receptions—were being traded at discounts from their original offering prices. Two Federal land bank
issues—one maturing in 27 months and the other in 5 years—
had particularly poor secondary market performances. The issues
were priced on October 10 to yield 5.75 and 5.88 per cent, respectively, 11 basis points above yields available on similar
maturities in the secondary market the day before.
By the time the issues came to market a day later, even these
yields were considered relatively unattractive. Initial trading in
both issues in the secondary market took place at discounts of %
of a point below original offering prices. This in turn reinforced
the poor market sentiment, and in particular it discouraged investor interest in two other short-term issues offered by the Federal home loan banks 2 days later. In early November the FNMA
258
FEDERAL RESERVE SYSTEM
revealed plans for a public offering of $650 million of new participation certificates later in the month (with an additional $350
million to be sold to Government trust accounts). While this addition to an already heavy calendar of offerings caused some
apprehension in the markets, the announcement was fairly well
received for two reasons—one, that it was accompanied by an
indication that this would be the last Government financing of
the year; and two, that the public portion of the offering was
smaller than many market participants had expected.
The one period of major relief in the capital markets during
the interval occurred just before and during the early stages of
the Treasury's November refunding operation. The increasing
caution and lack of demand that was apparent before this improvement set in had led some market participants to worry
about the capacity of the markets to accept anything but a shortterm obligation in the financing. As demand for capital market
issues finally did emerge, however, and the general atmosphere
improved, the Treasury took the opportunity—in addition to refunding its November maturities—to raise $2 billion of new cash
and also to seek some significant extension in debt maturity. The
terms of the financing, announced on October 25, offered for
cash about $10.7 billion of 55/s per cent notes due in 15 months
and about $1.5 billion of 53A per cent notes due in 7 years. The
7-year issue was the first to be offered under the more liberal
definition of notes contained in legislation that had been passed
by the Congress in late June.
The long note attracted real enthusiasm among market participants and was heavily oversubscribed when the books were
opened on October 30. Larger subscriptions received allotments
of only 7.5 per cent. Interest in the 15-month notes was routine,
and large subscriptions were allotted at a 36 per cent rate. In
these circumstances most participants expected that both notes
would be traded at slight premiums in the secondary market.
As it turned out, conditions in the market deteriorated rather
abruptly the day after the books for the refunding had closed.
259
ANNUAL REPORT OF BOARD OF GOVERNORS
There were several reasons for this. On October 30, while the
books for the new Treasury notes were still open, a major steel
company had announced plans to sell a large bond issue in the
near future, and similar announcements by other would-be borrowers followed quickly. Meanwhile, participants became increasingly discouraged about prospects for enactment of the
proposed tax surcharge following reports that Congress might
adjourn soon. The Treasury's two new issues did begin to trade
at small premiums when the market opened on October 31, but
later in the day investors and dealers who had subscribed for
the long-term notes just the day before began to sell these notes
in large amounts. As this selling pressure persisted, the price
of the new 7-year notes eventually fell to a discount of more
than half a point on November 13, raising its yield to 5.85 per
cent.
This performance added to the factors that were weighing on
the market, and prices of most Treasury issues fell sharply and
rather steadily over the rest of the period. By the close of the
markets on November 13, yields on 3- to 5-year Government
securities averaged 5.89 per cent—49 basis points higher than
at the start of the period—and the average yield on long-term
Treasury bonds had risen by 59 basis points to 5.55 per cent.
In the corporate bond market about $3.7 billion of new issues
(including private placements) were offered during the midSeptember to mid-November period. While this was a third less
than the extremely large volume of new offerings during the
summer, it was still heavy by any other standard. The calendar
was kept full, for new offerings were added to the schedule as
fast as already scheduled offerings actually came onto the market. The upward ratcheting of corporate yields during the period
is illustrated in the experience of several new Aa-rated utility
issues, all with 5 years of special call protection. At the beginning of the period, an issue of this type came to market yielding
6.10 per cent. By early October an issue yielding 6.20 per cent
260
FEDERAL RESERVE SYSTEM
was accorded only a fair reception, and 2 weeks later an issue
yielding 6.375 per cent was accorded an even poorer reception.
Demand finally emerged for an issue yielding 6.44 per cent,
which was sold on October 18. As the whole market improved
over the next several weeks, yields declined somewhat and unsold balances in older accounts were pared. By the end of the
period, however, after the market atmosphere had deteriorated
again, new Aa-rated electric utility issues were being offered at
yields around 6.55 per cent. By way of comparison, at the peak
of interest rates during the credit squeeze of 1966, such issues
were offered at yields no higher than 6.05 per cent.
The market for convertible corporate bonds was affected during the period by the Board of Governors' announcement on
October 20 of a number of proposals governing the use of credit
in securities transactions, including the extension of margin requirements to loans for purchasing convertible bonds. Offerings
of such bonds had become very sizable in recent months. In
fact, they amounted to 27 per cent of total corporate debt offerings in the third quarter compared with only 12 per cent for all
of 1966.
In the wake of the Board's announcement, many scheduled
offerings of convertible issues were postponed, some were reduced in size, and prices of some bonds already outstanding
dropped as much as 13 points in secondary market trading.
Other markets were not affected particularly by the announcement, and by the end of the period many of the convertible issues postponed earlier had come to market or were back on the
calendar, albeit under somewhat more generous terms than would
have been given earlier.
Offerings of tax-exempt bonds totaled a little more than $2
billion over the period. This pace of financing was a little higher
than that in the late summer. Initial receptions were generally
poor, and subsequent adjustments in yields tended to be quite
sharp. On the whole, however, the adjustments were sufficient
to attract buyers, for dealers' inventories remained moderate
261
ANNUAL REPORT OF BOARD OF GOVERNORS
throughout the period. By the end of the interval the Bond
Buyer's index of yields on 20 tax-exempt bonds was up to 4.31
per cent, 24 basis points higher than in mid-September and 7
basis points above the 1966 high.
November 14-December 31:
Monetary Policy Firms to Defend the Dollar
and Resist Inflationary Pressures
Connections among financial markets at home and abroad
came into sharp focus in the final 6 weeks of 1967 as sterling,
gold, and the dollar alternately felt waves of pressure that generated considerable nervousness in domestic securities markets.
Tremendous uncertainties pervaded all markets on the days immediately surrounding the devaluation of sterling and related
British actions on November 18 and the increase in the Federal
Reserve discount rate from 4 to 4% per cent announced the
following day. Extensive open market operations in Government
securities early on Monday morning, November 20, helped to
preserve the orderly functioning of the domestic securities markets that day. New uncertainties over succeeding days were handled by the markets without unusual difficulty.
Around mid-December open market operations were aimed at
moving slightly beyond the firmer money market conditions
that had developed following the increase in the discount rate.
Then on December 27 the Board of Governors announced an
increase in reserve requirements against certain demand deposits
to become effective around the middle of January 1968. These
steps were taken to resist the resurgence of inflationary pressures
and contribute toward achievement of reasonable equilibrium
in the country's balance of payments. In the meantime, Congress
adjourned without enacting the proposed tax surcharge, and
business activity was picking up following settlement of strikes
that had affected output earlier in the fall. Prices were rising at
a substantial rate. Deterioration in the U.S. export surplus since
262
FEDERAL RESERVE SYSTEM
4 1 NOVEMBER 14 - DECEMBER 29, 1967
RESERVES AND BORROWINGS
BANK CREDIT PROXY
28.0
PROJECTED
800
t
ACTUAL
SEASONAL
=| 400
-27.0
NET FREE RESERVES
-26.0°
a
o
= o
CO
-25.0
400
MIlllMlhu!
! M ! I I I! M M M I M I
I
M O N E Y M A R K E T RATES
Illllliil Illl!
1 f I I I i I I I I 11 11 I ! 11
LONG-TERM BOND YIELDS
6.00
7.00
5.00
6.00
o 4.00 -
5.00
TAX-EXEMPT
3.00 -
11 I i I I 1 M i11 I I
8
NOVEMBER29
11i 11 1 11 I [ 11 I 11 I I 11 I
' DECEMBER "
3
8
4.00
M I 111 I I I I 1 I I I
NOVEMBER**
6
o
I 11 I I !] I I i I I 11 11 11 I t
DECEMBER "
For notes see pp. 212-13.
midyear had contributed to a considerable worsening of the balance of payments situation.
Federal funds traded in good volume around the 4 per cent
discount rate during the first 4 days of the interval, and mostly
at AV2 per cent or below for a time thereafter. Member bank
borrowings from the Reserve Banks averaged around $100 million, about the same as in preceding weeks, while average free
263
ANNUAL REPORT OF BOARD OF GOVERNORS
reserves continued to fluctuate in a range of $100 million to
$300 million. In the final 2 weeks of the year, however, rates on
Federal funds were more often around 4% per cent, and member bank borrowings averaged around $200 million. Free reserves dropped to about $100 million on the average (upper left
panel of Chart 4).
The remarkable performance of the domestic securities markets over the period, in the face of all the unsettlements from
international and domestic events, was a strong testimony to
their underlying vitality. In addition to the nervousness stemming from pressures in the exchange markets, from the rise in
the discount rate, and from the moderate tightening in open
market policy, participants in the markets faced the fact that
prospects for early enactment of the proposed tax surcharge
and for general fiscal restraint had become increasingly dim.
Meanwhile, the volume of new security issues remained substantial until a seasonal lull began in mid-December, and additional
large financings by the Treasury were expected after the end of
the year.
Even though there were some fairly sharp gyrations in securities prices on individual days, markets as a whole remained quite
orderly. Short-term interest rates showed a net increase for the
pjeriod, but most of the rise occurred immediately after the increase in the discount rate. Many long-term yields, on the other
hand, declined on balance over the period. Indeed, as the period
wore on, considerable sentiment began to develop that the
heaviest pressures on the markets had passed, and investors began to put more of their funds into issues with longer maturities
to obtain the high yields available on such issues.
The rise in short-term market yields during the period reduced
further the ability of banks to compete for funds under the 5l/i
per cent interest rate ceiling for time and savings deposits. Moreover, market rates appeared to be moving into critical areas in
relation to ceiling rates on savings accounts. Inflows of funds
to savings and loan associations and mutual savings banks were
264
FEDERAL RESERVE SYSTEM
at a reduced pace in the final weeks of the year, but these institutions did not lose funds net.
Commercial banks raised their offering rates on new CD's
soon after the increase in the discount rate, and as the period
progressed, the 5Vi per cent ceiling became available on CD's
of any maturity. At the higher rates banks were able to build
up their outstanding CD's during the latter part of November,
but during the corporate dividend and tax payment period in
mid-December they experienced heavy net runoffs. Over the
period as a whole, outstanding CD's were about unchanged.
Banks also built up their Euro-dollar balances early in the
period under review here to a new peak of more than $4.8 billion
on November 22. As rates in the Euro-dollar market reached
higher levels, however, the banks withdrew from bidding for
longer maturities, and by the last Wednesday of the year their
total outstanding balances due to foreign branches were down
to $4.2 billion.
On Monday, November 20, in the wake of the increase in the
discount rate, a large commercial bank in Chicago raised its
lending rate to prime business borrowers from 5Vi to 6 per cent,
and most other banks soon followed. Loan demand at the banks
was fairly heavy around mid-December as corporations borrowed
to finance their dividend and tax payments, but banks met most
of these demands by selling Government securities. As a result,
total bank credit remained largely unchanged over the period.
Even so, the expansion over the year as a whole amounted to $35
billion, or 11 per cent, almost double the rate in 1966.
Days around the devaluation. Rumors that a large credit
package was being arranged to assist the British in their continued defense of the pound had considerable calming effect on
domestic and international markets on the opening days of the
period under review here. Indeed, these rumors, along with postponement of a large issue of industrial bonds scheduled for offering on November 14 and renewed hopes for peace negotiations
in Vietnam, generated one of the sharpest rallies of the year in
265
ANNUAL REPORT OF BOARD OF GOVERNORS
prices of long-term securities during the first 3 days of the interval. Most unsold corporate issues still in syndicate were
quickly taken up, a large volume of tax-exempt offerings was
quickly distributed, and dealers' inventories of Treasury issues
maturing in more than a year were sharply reduced. Prices of
some Treasury issues rose by nearly 2 points over the first 3 days
of the period—that is, through Thursday, November 16—and
Treasury bill rates moved down by as much as 10 basis points.
This atmosphere evaporated on Friday, November 17, however,
when pressures on sterling increased sharply amid talk of possible devaluation over the weekend. Prices of some U.S. Treasury bonds fell by more than 5/s of a point that day, prices of
corporate and tax-exempt bonds also eased, and rates on Treasury bills rose by as much as 7 basis points.
With generally comfortable conditions prevailing in the money
market during this period, open market operations were limited.
The System did purchase $225 million of Treasury and Federal
agency securities under repurchase agreements on Thursday,
November 16, when large demands by dealers for financing
exerted pressure on reserve positions of major money center
banks. But this did little more than offset terminations of outstanding agreements over the 4 days November 14-17.
Following the devaluation of sterling, the Board of Governors
announced on Sunday, November 19, an increase in the Federal
Reserve discount rate. The announcement indicated that the System "had taken actions to assure the continued orderly functioning of U.S. financial markets and to maintain the availability of
reserves to the banking system on terms and conditions that will
foster sustainable economic growth at home and a sound international position for the dollar."
The Account Manager and some of his associates met that
same afternoon—November 19—to work out detailed operating
plans to forestall the emergence of disorderly conditions in the
Government securities markets that might develop if offerings of
dealers and investors inundated the market when trading resumed
266
FEDERAL RESERVE SYSTEM
the following morning. Prior to this time broad contingency plans
to deal with situations of this type had been discussed among
Treasury and Federal Reserve officials. Operations followed the
general outline of plans presented earlier to the Federal Open
Market Committee.
Dealers' aggregate positions were not unduly large at the time,
although a number of dealers still held notes acquired in the
Treasury's November financing. It was recognized that dealers
with net long positions would probably try to preserve their capital by withdrawing from the "buy" side of the market and that
they might well push their own inventories on the market before
prices fell too far—thereby aggravating the price decline and
adding to the potential disruption of the market. Government
securities dealers were contacted during that afternoon and were
read the full text of the Board of Governors' announcement of
the increase in the discount rate.
Open market operations began early on Monday morning,
November 20. In line with the plans that had been worked out,
the System at 9:15 a.m. placed bids with Government securities dealers for a sizable part of their coupon issues due in more
than a year at prices that were somewhat below the average of
dealers' bid prices at the close of the market the preceding Friday.
Most of the bids were accepted, and the System purchased $121
million of issues due in 1 to 5 years and $65 million of issues due
in more than 5 years.
After this operation had been completed, the System initiated
a regular go-around asking dealers for offerings of all Treasury
bills. In this operation the dealers offered about $1.2 billion of
bills to the System at rates ranging generally from 20 to 30 basis
points above those prevailing at Friday's close. The System's
purchases totaled $427 million, mostly in issues due in more
than 3 months. The bills were purchased for delivery on Tuesday, November 21, and delivery of the coupon issues was
scheduled for the following day in order to minimize the immediate impact of the operations on member bank reserves.
267
ANNUAL REPORT OF BOARD OF GOVERNORS
Prices of Treasury coupon issues did drop sharply when the
market officially opened, and by 11 a.m. some intermediateterm Treasury issues were down by as much as % of a point
from the close on the preceding Friday. Some longer-term issues
were off by as much as 1% points. Meanwhile, a number of
corporate and municipal issues scheduled for offering over the
next several days were postponed. A recently offered Aa-rated
corporate issue was released from pricing restrictions and its
price dropped more than 3 points, raising its yield from 6.55
to 6.83 per cent.
The Dow-Jones index of industrial stock prices fell by 14.96
points on heavy volume in the first half hour of trading, and
around 11:30 a.m. a major bank raised its prime lending
rate from 5Vi to 6 per cent. In short-term markets, in addition
to the upward adjustments that were made in Treasury bill rates,
dealers in bankers' acceptances raised their rates by generally
l
A percentage point during the morning, and some major banks
reportedly paid 5Vi per cent on new CD's maturing just beyond
the year-end.
Most of these price declines and rate increases were defensive, however, for trading was light, except in the stock market.
Dealers in Treasury issues, with their positions pared by the
System's operations, were able and willing to absorb the moderate amount of securities offered by other customers. In this
generally constructive atmosphere, prices began to stabilize late
in the morning and during the afternoon moved well up from
their lows. The postponement of $300 million of scheduled
corporate and tax-exempt offerings contributed to the turnaround in prices of Government securities. Prices of some longterm Treasury bonds recovered about 3A of a point in this rally,
and. coupon issues generally recouped about half of their early
morning losses. The markets for corporate and tax-exempt bonds
and the stock market also rallied from their lows.
In the bill market, the quick stabilizing of bill rates paved
the way for a very good interest in the regular weekly auction
268
FEDERAL RESERVE SYSTEM
of 3- and 6-month bills held that afternoon. Average issuing rates
on these issues were set at 4.989 and 5.517 per cent, respectively,
up 34 and 36 basis points from those set in the auction the
preceding week but within the range of offering rates on similar
bills in the System's go-around conducted early in the morning.
After trading activity in the market had become generally
routine, with prices well up from their lows, reports reached
the market late on that Monday afternoon that the House Ways
and Means Committee would soon reopen hearings on the administration's proposed tax surcharge. In this environment, and
with the markets in a strong technical position, prices rallied
sharply on the next 2 days. Some long-term Treasury issues
recorded gains of as much as 2 points, and by the close on
Wednesday, November 22, a few were at their highest levels
since the end of October. The yield on the Aa-rated corporate issue, referred to above, declined from its peak of 6.83 per cent
to 6.61 per cent. Meanwhile, in some cases, rates on Treasury
bills fell by more than 20 basis points from their Monday highs.
In view of the quick and orderly adjustment of the markets
to the changed circumstances brought by devaluation and the
rise in the Federal Reserve discount rate, and then of the rally
amid the renewed hopes for a tax increase, the System took no
further action for several days after its two operations early on
Monday. With the reserve injections stemming from those operations, and with the effects on reserves of sizable foreign transactions, money market conditions were generally comfortable, and
Federal funds traded at progressively lower rates.
Sharply increased pressures in the gold markets on the Friday
after Thanksgiving Day brought renewed caution in the U.S.
securities markets. Prices of Treasury coupon issues fell again,
by as much as \VA points, and bill rates rose by as much as 15
basis points. Meanwhile money market conditions were generally
comfortable, with Federal funds trading in a good volume at
rates around Al/i per cent. But estimates of reserve availability
269
ANNUAL REPORT OF BOARD OF GOVERNORS
were very uncertain in view of potentially large swings in transactions by foreign accounts as a result of their activity in the
foreign exchange and gold markets. As the morning wore on,
orders from foreign accounts to sell Treasury bills accumulated
to a total of $191 million. Rather than press these bills on an
unreceptive market, the Manager purchased them directly for
the System Account.
The Federal Open Market Committee met on the following
Monday, November 27. After reviewing developments over the
preceding 2 weeks, the Committee directed that open market
operations "be conducted with a view to facilitating orderly
market adjustments to the increase in Federal Reserve discount
rates; but operations may be modified as needed to moderate any
unusual pressures stemming from international financial uncertainties." Operations over succeeding days continued to be complicated by considerable uncertainty surrounding the magnitude,
timing, and direction of transactions in gold, foreign exchange,
and securities accompanying massive international flows of funds.
Many of these transactions had sizable effects on Treasury cash
balances and domestic reserve availability. As it turned out, however, pursuit of the Committee's objective proved consistent with
maintenance of net reserve availability and member bank borrowings in the range of recent experience.
Repurchase agreements against Government securities were
used twice in late November to inject reserves to counter special
pressures in the money market. In addition, in view of the continuing nervous state of the Treasury bill market, the System
bought $502 million of bills being sold by foreign accounts in
the period from November 27 through December 5. The System
then withdrew for a time, and the money market remained comfortable.
An outflow of $475 million of gold on December 5 and the
effects of various other foreign transactions drained reserves in
volume around this time, but these were offset by a rise in float
and a decline in Treasury balances at the Reserve Banks. In
270
FEDERAL RESERVE SYSTEM
the case of the Treasury balances, however, the decline was not
so large as in other periods prior to the receipt of corporate tax
payments, since a part of the continuing flow of dollars to foreign
central banks was placed in special Treasury issues. By November 29, Treasury obligations held at the Federal Reserve Bank
of New York in custody for foreign accounts had risen to $9.4
billion, up $1.4 billion from the level in mid-November. Federal funds trading during this period was mostly at rates of AVi
per cent or less, and member bank borrowings from the Reserve
Banks were minimal on most days. Free reserves in the 2 weeks
ended December 13 averaged $208 million.
In the securities markets, worries about international developments gradually faded after the pressure in the gold markets
on November 24 subsided. Hopes for a tax increase were buoyed
further on Monday, November 27, in the wake of an administration proposal to cut expenditures, but they were dashed soon
afterward when the Chairman of the House Ways and Means
Committee indicated that a tax increase would not be passed
during 1967. Meanwhile, rumors of a possible further rise in
the Federal Reserve discount rate to reduce the differential between U.S. and foreign rates added to nervousness in short-term
markets around the first of December.
Against this background, the rate on 3-month Treasury bills
reached 5.01 per cent on December 1, then edged lower through
December 8 in the face of broad demand and dwindling market
supplies. A strong technical position in the longer-term area
of the Treasury market and the large volume of "tax-swapping"
activity tended to overshadow psychological developments, and
prices of coupon issues moved up fairly steadily after the nervousness that developed on November 24 had died down. Meanwhile,
an excellent reception was accorded the public offering on November 28 of $650 million of participation certificates by the
FNMA. Both the 26-month issue yielding 6.35 per cent and the
20-year issue yielding 6.40 per cent sold out quickly and moved
to premium prices. The corporate and tax-exempt markets also
271
ANNUAL REPORT OF BOARD OF GOVERNORS
experienced a gradual improvement in tone as the holiday lull
drew near, though yields in both markets continued to edge
higher, in contrast to developments in the Treasury coupon
market.
Operations to implement firmer policy. Open market operations over the last 3 weeks of December sought to bring about
slightly firmer conditions in the money market as directed by
the Federal Open Market Committee at its meeting on December
12. In the process of offsetting seasonal drains and of avoiding
undue strains in the money market, the System provided reserves
somewhat sparingly, and its injections did not meet fully the increase in seasonal demand for excess reserves. Free reserves
were permitted to contract to an average of around $100 million
in the final weeks of the year. Partly reflecting year-end churning, member bank borrowings from the Reserve Banks rose to
an average of about $340 million. Rates on Federal funds moved
up from around AV2 per cent in the first half of December to
around A5/s per cent after December 21.
No further open market operations were undertaken until
December 20. An outflow of currency from the banks and a
rise in required reserves in the wake of the credit demands
around the dividend and tax payment dates drained reserves.
Meanwhile major banks continued to lose CD's, and they also
experienced a decline in their Euro-dollar balances. Nevertheless, the money market remained fairly comfortable as the reserves that were available tended to be concentrated at money
center banks.
Beginning on December 20, the System undertook a series
of operations that injected $541 million of reserves, net, into
the banking system during the remainder of the year. It purchased
some Treasury bills from foreign accounts, and on December 26
it bought bills in the market. It supplemented these injections by
gross purchases of $588 million of Government and Federal
agency securities under repurchase agreements on 3 days of the
interval to relieve temporary deficiencies amid typical year-end
272
FEDERAL RESERVE SYSTEM
churning. Some $90 million of reserves were also injected
through repurchase agreements with dealers in bankers' acceptances.
Additional reserves were provided for a while in the week
between the Christmas and New Year holidays by permitting
the Treasury's balances at the Reserve Banks to decline to a
low level. These various reserve injections, however, offset only
part of the further reserve drains during the period, including
the effect of a $450 million gold loss on December 28, when the
United States made settlement for its share of net sales by the
London Gold Pool in December.
Money center banks moved into a deeper basic reserve deficit
during this period, as they normally do, and the continuing lower
level of nationwide net reserve availability imparted the additional degree of firmness sought in the money market. The money
market became quite firm on Thursday, December 28. Federal
funds were traded that day at rates as high as 5 per cent, and
borrowings from the Reserve Banks rose to $1.8 billion as many
banks sought to acquire in advance the reserves they expected
to need over the year-end statement publishing date in order to
eliminate or minimize the need to show "bills payable" on their
statements. The following day, however, which was the final business day of the year, the money market was more comfortable in
somewhat curtailed activity, and member bank borrowings
dropped back to about $140 million.
Securities markets at year-end. Short-term interest rates fluctuated in a fairly narrow range over the final weeks of the year.
Treasury bill rates moved upward around the middle of December when some concern reemerged over international developments, but rates then declined for a while amid strong year-end
demand from banks, corporations, and foreign accounts. Evidence of tightening in System policy and the prospect of the
sale by the Treasury of a large amount of tax-anticipation bills
in early January resulted in a somewhat cautious atmosphere in
the bill market on the closing days of the year.
273
ANNUAL REPORT OF BOARD OF GOVERNORS
Rates on outstanding bills showed little change, but the caution did affect bidding in the final auction of the year, which
had been advanced to Friday, December 29, because the following Monday was the New Year holiday. Bills with 3- and 6month maturities were sold in that auction at average rates of
5.103 and 5.593 per cent, respectively. These rates were a little
below the highs reached in mid-December but were 11 and 8
basis points above the rates in the auction immediately after
the devaluation of sterling. Over the year as a whole, the 3- and
6-month bill rates showed increases of 28 and 68 basis points,
respectively.
In the capital markets the shift in investor sentiment that seemed
to be emerging in the early weeks of December developed further
as the year drew to a close. There was an increased willingness to
commit funds at high current interest rates rather than wait out
the numerous domestic and international uncertainties that had
weighed on the market in earlier months. Indeed, concern over
the international position of the dollar, the absence of congressional tax action, and increasing evidence of a shift in monetary
policy tended to be relegated to the background. The pick-up in
activity in the Treasury market reflected in part year-end switching operations for tax purposes—much of which extended maturities—and a fair amount of outright demand. In the corporate
and tax-exempt markets the seasonally light calendar contributed
to the better tone, but reports of sizable direct placements with
life insurance companies suggested that a more basic desire to
buy at current yields was also at work.
In this general atmosphere, prices of Treasury notes and bonds
continued to move upward in the final weeks of the year. At the
year-end yields on 3- to 5-year issues and on long-term Treasury
bonds were down to 5.80 and 5.36 per cent, respectively. These
were about 10 and 20 basis points below their levels in midNovember, but still were 95 and 87 basis points above the levels
at the end of 1966. Meanwhile the 20-year issue of FNMA
participation certificates that had been sold on November 28 at
274
FEDERAL RESERVE SYSTEM
a yield of 6.40 per cent advanced to a premium bid of 2 points
by the end of the year—reducing its yield to 6.23 per cent.
In the corporate and municipal markets, new-issue activity
was very light, and prices of outstanding issues rose in line with
the improvement in the Treasury sector. After the turn of the
year, an issue of Aa-rated utility bonds with 5 years of call protection sold out immediately at a yield of 6.50 per cent, in comparison with the 6.80 per cent yield available on two smaller
issues in early December. This was 96 basis points higher than
had been offered on such issues in early January 1967. The Bond
Buyer's index of yields on 20 tax-exempt bonds closed the year
at 4.44 per cent, a little below its early December high, but still
up 67 basis points from the level prevailing at the beginning of
the year.
275
ANNUAL REPORT OF BOARD OF GOVERNORS
REVIEW OF OPEN MARKET OPERATIONS IN
FOREIGN CURRENCIES
The foreign exchange and gold markets were subjected to
unprecedented stresses in 1967. The crisis in the Middle East
beginning in late spring, the persistent weakness of sterling that
culminated in the devaluation of the British pound on November
18, the subsequent speculative rush into gold through the London market, and the worsening of the deficit in the U.S. balance
of payments generated massive movements of funds across the
exchanges and in the Euro-dollar market. These disturbances
posed a serious threat to the stability of the international monetary system, and they were contained only through sustained and
concerted cooperation among the major world monetary authorities.
To help meet these pressures, the Federal Reserve and the
U.S. Treasury expanded their foreign exchange operations and
related transactions. Operations were undertaken with the Bank
for International Settlements (BIS) to ease pressures in the
Euro-dollar market through placement of official funds during
the crisis in the Middle East, and again later in the year. At the
height of the Middle East crisis, the Federal Reserve also operated to ease pressures in the sterling market and made substantial
use of its swap facilities to deal with the large precautionary flows
of funds into Switzerland and other continental centers.
Following the devaluation of the pound sterling in November,
the focus of speculation shifted toward gold and against the
dollar. Speculation took the form of record buying of gold in
London and shifts of funds into continental currencies. The
United States unequivocally reaffirmed its commitment to maintain the official price of gold at $35 an ounce, and acting jointly
with other members of the Gold Pool, it continued to stabilize the
market price through sales of gold in the London market. At the
same time, to deal with speculative demand for continental cur276
FEDERAL RESERVE SYSTEM
reticles, a number of continental central banks offered their currencies forward—for their own account or on behalf of U.S.
authorities—to reinforce confidence in existing parities.
Despite the shock to the international financial system caused
by Britain's decision to devalue, the repercussions were lessened
by the readiness of other countries to support the new sterling
parity and to continue to cooperate in the gold and exchange
markets. No other major industrial nation devalued its currency.
Moreover, more than $1.5 billion of new international credits
were made available to the United Kingdom in addition to the
$1.4 billion standby that Britain had obtained from the International Monetary Fund (IMF), as that country embarked on a
new austerity program to strengthen its basic international position. The U.S. Treasury and the Federal Reserve participated in
these new credits, just as they had provided support for the pound
prior to devaluation.
A number of important steps were taken in 1967 to strengthen
the ability of the international monetary system to deal with
speculative shifts of funds and flows generated by swings in
countries' international payments. In May the Federal Reserve
negotiated new reciprocal currency arrangements with the central
banks of Denmark, Mexico, and Norway. In July, against the
background of the Middle East conflict, the System increased its
existing Swiss franc swap facilities with the Swiss National Bank
and with the BIS and also increased its facility with the BIS
under which resources have been provided for BIS operations in
the Euro-dollar market.
At the end of November, after the devaluation of sterling had
touched off heavy speculation, the Federal Reserve announced
an increase of $1.75 billion in its swap lines with eight central
banks and the BIS, and before the year ended it had arranged a
further increase totaling $300 million in its Swiss franc swap
facilities with the Swiss National Bank and the BIS. This broadening and enlargement of the reciprocal currency arrangements
brought the total swap network to $7.08 billion, an increase of
277
ANNUAL REPORT OF BOARD OF GOVERNORS
TABLE 1
FEDERAL RESERVE RECIPROCAL CURRENCY ARRANGEMENTS
Amount of facility
(in millions of dollars
equivalent)
Other party to arrangement
Dec. 31,
1966
Austrian National Bank
National Bank of Belgium...
Bank of Canada
National Bank of Denmark.
Bank of England
Bank of France
German Federal Bank.
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International Settlements:
Dollars/Swiss francs
Dollars /authorized European currencies other than
Swiss francs
Total.
Dec. 31,
1967
100
150
500
100
225
750
100
1,500
1,350
150
100
750
750
750
130
225
100
200
100
200
400
200
400
200
600
4,500
7,080
100
400
600
450
more than $2.5 billion during the year. In addition to this
strengthening by central banks of short-run defenses against disequilibrating capital movements, the basis was laid for the
longer-term provision of liquidity when the members of the IMF
at their annual meeting agreed in principle on a plan for creating
Special Drawing Rights (SDR's) in the Fund.
Early in 1967 the dominant feature in the foreign exchange
markets was the strong recovery of the pound. Aside from favorable seasonal influences, the strengthening reflected underlying
improvement in the U.K. balance of payments. The recovery was
further bolstered by inflows into sterling from the Euro-dollar
market following a substantial easing of U.S. monetary policy.
278
FEDERAL RESERVE SYSTEM
Moreover, with economic activity somewhat sluggish in most
major continental European countries with payments surpluses—
notably in Germany—monetary authorities in those countries
eased their policies considerably to provide domestic liquidity
conditions favorable to renewed business expansion. In the process they stimulated further short-term outflows of funds. These
outflows from the Continent not only reinforced the move into
sterling but also helped to limit the increase in official dollar holdings that might otherwise have resulted from the large deficit in
the U.S. balance of payments.
Early in the year the Federal Reserve acquired sufficient
foreign exchange in the market, from central banks, and through
third-currency swaps to repay fully the $280 million equivalent
of swap drawings outstanding at the end of 1966 in Dutch
guilders, German marks, Italian lire, and Swiss francs. Thus by
February all of the Federal Reserve's credit lines under the swap
facilities reverted fully to a standby basis. The Bank of England
also reduced its commitments under the Federal Reserve swap
line and liquidated other sizable special credits from the Federal
Reserve and the U.S. Treasury, as well as credits from other
central banks. By early March it had repaid the last of its swap
drawings from the Federal Reserve.
During May, however, the market for sterling began to weaken
as the U.K. trade position deteriorated. The subsequent outbreak
of hostilities in the Middle East brought sterling under heavy
pressure. Precautionary withdrawals from the Euro-dollar market added to the strains normally associated with midyear
window-dressing by continental commercial banks. These dual
pressures were immediately countered by coordinated action by
central banks. In early June the U.S. authorities, in consultation
with the Bank of England, initiated purchases of spot sterling in
New York on a short-term swap basis—buying pounds spot
against forward sales. By June 5 they had purchased a total of
$113 million. In addition, by June 7 the BIS had drawn a total
of $143 million from the Federal Reserve to place in the Eurodollar market, thereby relieving pressures in that sector.
279
ANNUAL REPORT OF BOARD OF GOVERNORS
Nevertheless, the jolt to confidence from the Middle East
crisis and the adverse impact on the U.K. balance of payments of
the closing of the Suez Canal left the pound in a seriously
weakened position. A succession of progressively larger trade
deficits—reaching extreme levels by October as a result of a
strike on the British docks—had a demoralizing effect on the
market, and confidence in the pound deteriorated. With discounts on forward sterling widening, the pull of interest rates in
the Euro-dollar market added to the drain on U.K. reserves. In
June and during the remainder of the year the Bank of England
relied heavily on international credit facilities—including those
with the Federal Reserve and the U.S. Treasury, the Basle group
of central banks, and the BIS—to bolster its reserve position prior
to the devaluation, and then subsequently to reinforce the new
exchange parity.
The continuing U.S. payments deficit and sizable transfers of
funds among countries as a result of international tensions
and of the backwash of intensifying pressure on sterling led the
Federal Reserve to reactivate some of its central bank credit
facilities beginning in May. It initiated drawings in Belgian francs
that month and drew further amounts subsequently as inflows
into Belgium continued intermittently through November. In
June and July the System made large drawings in Swiss francs
in order to absorb $390 million that poured into the Swiss National Bank during May and June during the Middle East crisis.
The swap line with the Netherlands Bank was reactivated in
July with a small Federal Reserve drawing. During the autumn
the System made additional drawings on the Netherlands Bank
and also drawings on the central banks of Germany, Italy, and
Switzerland to cover dollars that moved into their reserves during
the sterling crisis and during the period of speculation against
the dollar that followed in the wake of devaluation.
By December 27 Federal Reserve commitments under the
swap lines had risen to $1.8 billion equivalent. Although some
280
FEDERAL RESERVE SYSTEM
progress was made in reacquiring foreign exchange near the end
of the year, when the earlier, heavy speculative flows into Germany and Belgium were partially reversed, commitments at the
year-end still exceeded $1.7 billion. In addition, the U.S. Treasury at the end of the year had a sizable commitment in guilders
under special swaps arranged with the Netherlands Bank in
November.
During the year the U.S. Treasury also increased its total
indebtedness in securities denominated in Swiss francs and Belgian francs. In addition, its liabilities in the form of foreigncurrency-denominated securities were increased substantially by
the issuance in July and October of the first two of four quarterly
instalments of $125 million equivalent each of special nonliquid
securities scheduled to be sold to the German Federal Bank in
conjunction with the German Federal Government agreement
to offset part of the costs of stationing U.S. troops in Germany.
Apart from those obligations, U.S. authorities by the end of
the year had accumulated forward commitments to the market in
Swiss francs, Netherlands guilders, and Belgian francs totaling
$ 115 million as a result of operations conducted on their behalf
through the central banks concerned. These forward obligations
were incurred as part of coordinated central bank operations during November and December, when speculative pressures were
acute. At the same time, the German Federal Bank sold a very
large amount of dollars on the basis of market swaps with its
commercial banks in late November and December—thus helping to ease pressures in the Euro-dollar market. The BIS reinforced this operation at the end of November by placing in the
Euro-dollar market $38 million drawn from the Federal Reserve;
this raised total placements in November to $106 million. In December the BIS drew an additional $240 million from the Federal Reserve for placement in the Euro-dollar market. As a result, dislocations and pressures in the Euro-dollar market were
held to a minimum during this period of unusual stress and uncertainty.
281
TABLE 2
FOREIGN CURRENCY TRANSACTIONS OF THE FEDERAL RESERVE,
K
to
00
1967
(In millions of dollars equivalent)
Transactions under swap lines
Other transactions
Third-currency
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
German mark (by
BIS)
Total
1
Drawings
211.2
Repayments
105.4
Acquisitions
With U.S.
of funds for
DisTreasury
repaying swaps
bursements
of swap- From
Puracquired U.S. From chases Sales
balances Treas- others and re- and re- Puracqui- pay- chases Sales
ury
sitions ments
211.2
60.4
45.0
350.0
500.0
170.0
830.0
140.0
15.0
35.0
270.0
307.3
500.0
170.0
830.0
37.3
107.3
13.4
34.8
195.4
2,061.2
565.4
2,018.5
97.7
395.9
1,650.0
37.3
37.3
74.6
74.6
36.1
1,641.0
2
Includes forward as well as spot transactions; excludes Italian lira forward operations.
2 Used to repay swap drawing.
Purchases
50.0
Sales
o
o
10.0
147.1
20.1
36.1
691.0
2,487.0
37.3
950.0
837.0
37.3
With others 1
21.9
195.6
o
o
18.8
32.8
50.0
177.2
269.1
§
FEDERAL RESERVE SYSTEM
The remainder of this report gives a detailed review of Federal
Reserve operations in sterling, German marks, Italian lire, Swiss
francs, Netherlands guilders, and Belgian francs.
Sterling. During the first quarter of 1967 there was a relatively
strong demand for sterling. Confidence improved as a result of
some underlying improvement in the U.K. balance of payments.
Seasonal factors were favorable, and for the first time in a year
there was a significant covered incentive in favor of U.K. local
authority sterling deposits over comparable investments in the
Euro-dollar market. The reversal of year-end repatriations of
funds to the Continent and progressive relaxation of monetary
policy in the United States, Germany, and other countries produced reflows of funds into sterling from the Euro-dollar market
where interest rates on short-term funds had been reduced
sharply.
With inflationary pressures on the British economy considerably reduced, and with interest rates declining in major international markets, the Bank of England reduced its discount rate
on January 26 from 7 per cent to 6V2 per cent, in line with
objectives expressed jointly by Treasury officials of major industrial nations at a meeting the previous weekend. Nevertheless,
with the discount on forward sterling well under 1 per cent per
annum, British interest rates remained relatively attractive to
short-term investment funds on a covered basis. Under these
circumstances, pounds were being bought in very substantial
volume, and the spot rate rose to $2.7960 by February 1, its
highest level since mid-March 1966.
As confidence in sterling improved and the sizable adverse
payments leads and lags that had built up in 1966 began to
unwind, the Bank of England gained a very large amount of
dollars. It used the bulk of these dollars to repay short-term
indebtedness to central banks; by early March it had liquidated
all its commitments under swap drawings on the Federal Reserve
and had repaid other special credits from the U.S. Treasury and
the Federal Reserve. At their peak in August 1966 these credits
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ANNUAL REPORT OF BOARD OF GOVERNORS
had totaled $750 million, but by the end of 1966 they had been
reduced to $510 million, of which $350 million was outstanding
under the Federal Reserve swap line. Announcement in early
March that these credits had been repaid, and also of substantial
repayments of short-term credits to other central banks, confirmed to the market the degree of recovery that had already
taken place and triggered further buying of pounds that persisted through the end of the month.
During March, official word of renewal of the credit lines with
nine central banks and the BIS contributed to a surge of short
covering that was reinforced by unexpectedly good fourth-quarter
figures on the balance of payments, a cut in the Bank of England's
discount rate from 6V2 per cent to 6 per cent, and the British
Government's decision to continue to restrain price and wage
increases for another year after the lapse of the wage freeze in
June. As an exceptional amount of dollars flowed in, the Bank of
England continued its practice of using such receipts to repay
debt to other central banks, and by the end of March it had
liquidated all of its short-term debts except for a small amount
of credits linked to changes in overseas sterling balances. In
early April the U.K. authorities reported that after such repayments Britain's official reserves had increased by $90 million in
March, to $3,259 million. For the first time in several months
the market responded positively to a reserve announcement, and
the Bank of England continued to gain substantial amounts of
dollars.
By April 11 sterling had moved up to $2.7990, following the
discount rate reductions in the United States and Canada and a
further decline in yields on dollar investments. Moreover, the
absence of tax concessions in the British Government's budget
reduced market fears that that Government was moving toward
a more expansionary economic policy. The market was also
impressed by Chancellor Callaghan's reiteration that Britain
would repay its $818 million debt to the IMF due at the end of
the year under the 1964 drawing, and also $80 million owed to
284
FEDERAL RESERVE SYSTEM
Switzerland as a result of credit extended that same year. The
continuing demand for pounds boosted the spot rate above par
for the first time in over a year, and the Bank of England was
able to announce a reserve increase of $146 million in April.
As early as April, however, renewed concern had begun to be
felt in some quarters over the trend in the U.K. foreign trade
position. Moreover, by early May the covered interest rate incentive began to turn against short-term sterling investments. Shortly
after the May 4 announcement by the Bank of England of the
third cut of V2 percentage point in its discount rate, to 5V2 per
cent, Euro-dollar rates began to firm—despite cuts in discount
rates in Belgium and Germany and an easier monetary policy in
France. On May 11 it was anounced that Britain's seasonally adjusted trade deficit had increased to $115 million equivalent in
April, as exports showed signs of leveling while imports remained
relatively high. This imbalance followed a trade deficit of $36 million equivalent in March, after virtual balance the month before. A few days later the market was confronted by President
de Gaulle's sharply negative, press conference remarks regarding Britain's application to join the Common Market. The riots
in Hong Kong were also disturbing to the market.
The cumulative effect of these events produced the first significant net selling of sterling in 1967—requiring sizable support by
the Bank of England as spot sterling declined to less than
$2.7960 near the end of May. Nevertheless, the British authorities proceeded with their plans to prepay $405 million to the IMF
on May 25 and to repay fully the Swiss debt incurred in 1964.
On June 1 market expectations of an imminent outbreak of
hostilities in the Middle East sparked a burst of selling of pounds.
Apprehension of war affected the pound both directly and
through the Euro-dollar market, where precautionary withdrawals of funds and the usual pressures that are associated with
midyear window-dressing created a sudden squeeze and a sharp
rise in interest rates. These dual pressures were immediately met
by coordinated central bank actions in both the foreign exchange
285
ANNUAL REPORT OF BOARD OF GOVERNORS
and Euro-currency markets. On June 1 the U.S. authorities purchased a total of $92.9 million equivalent of pounds in the New
York market on a swap basis (buying spot against forward sales),
with purchases distributed evenly between System and Treasury
accounts. That same day the BIS began to place in the Eurodollar market funds drawn under its swap arrangement with the
Federal Reserve.
Pressures on sterling stepped up sharply in early June with the
outbreak of fighting between Israel and Egypt, the closing of the
Suez Canal, and the Arab countries' interruption of the flow of
oil to Britain and the United States. The Bank of England provided substantial support in the forward market to avoid the
tendency toward wider forward discounts and to forestall spot
sales, thereby limiting spot exchange losses. Moreover, in New
York on June 5 the U.S. authorities again bid for sterling on a 1month swap basis and purchased an additional $20 million
equivalent.
At the same time interest rates in the Euro-dollar market began to rise sharply—by as much as Vi percentage point per annum in less than a week. The BIS met these pressures through
continued placements of funds drawn under the swap line with
the Federal Reserve. By June 7, when a cease-fire resolution by
the United Nations served to reduce tensions somewhat, the BIS
had placed a total of $143 million of funds drawn from the System, together with funds received from other central banks.
These operations produced a definite easing in Euro-dollar rates,
and with the cessation of actual hostilities, market covering of
short positions in sterling boosted the spot rate for sterling by
some 30 points to $2.7932, and the Bank of England recouped
its losses of the preceding few days.
As June progressed, however, market anxieties were revived by
rumors of major withdrawals from sterling by Arab countries,
and by midmonth the pound had declined to $2.7912. Moreover, the market became concerned over the probable adverse
consequences of the Middle East crisis for the U.K. balance of
286
FEDERAL RESERVE SYSTEM
payments. Reports of additional shifts of Arab-held sterling balances to Paris triggered heavy selling, and the Bank of England
extended substantial support in holding the rate at just under
$2.7900 in the latter part of June.
The early July announcement by the Bank of England of a
$120.4 million decline in reserves in June, to $2,834 million, met
with some disappointment in the market. The decline would have
been larger if the Bank of England had not reactivated its swap
line with the Federal Reserve by drawing $225 million. As the
summer wore on, market doubts about the future of sterling increased and there were bursts of heavy selling. The Bank of England sustained very large losses of reserves around mid-July, following the announcement of a large increase in the trade deficit
for June, and by the end of July spot sterling had declined to
$2.7858.
A favorable reaction to the report in mid-August of a sharp
swing in the U.K. trade balance in July—to a small surplus from
the large deficit in June—provided a brief respite from the continuing pressures on the pound. Moreover, market tensions associated with discussions of proposals to increase international
liquidity were relaxed somewhat after it was announced on
August 26 that an agreement along general lines had been reached
by the Group of Ten and that a plan to strengthen the international monetary system was ready for submission to the IMF at
its annual meeting in September. Nevertheless, the U.K. reserve
position underwent further erosion during August as a result of
market support operations early in the month, and again at the
end of the month when the market reacted adversely to reflationary measures announced by the Government.
News that Arab leaders had agreed to allow the resumption
of oil shipments to the West provided a more favorable background for the announcement in early September that the reserve
loss in August had been small. The announcement was well received by the market. Nevertheless, there was some further selling of sterling, and the continuing pull of interest rates in the
287
ANNUAL REPORT OF BOARD OF GOVERNORS
Euro-dollar market drew funds out of sterling investments. To
cushion the reserve impact of these losses, the Bank of England
drew further on the Federal Reserve during the third quarter—
bringing its commitments under the swap line to $650 million.
It also made use of its credit arrangements with other central
banks.
There was a sharp escalation in the pressure on sterling in
October as market confidence deteriorated further, particularly
after doubts about the viability of the $2.80 parity were expressed in a report by the European Economic Community
(EEC) on the British application to join the Common Market.
Moreover, market sentiment was not bolstered by the announcement of a $103 million equivalent Swiss franc loan extended to
the U.K. Government by several Swiss commercial banks.
As a result the pound was vulnerable to the news that Britain's
trade balance had deteriorated sharply in September; the seasonally adjusted deficit of $146 million was the largest in 15
months. As expected, the closing of the Suez Canal had raised
the cost of imports of fuel oil, and exports had been hurt by the
dock strike in Britain in the latter part of September. But the
figures appeared to confirm a weakening trend in exports. In the
heavy selling of sterling that ensued, the Bank of England sustained very large losses, in both the spot and forward markets, in
defending the spot rate, which by October 12 had dropped to
$2.7824.
Faced with mounting speculative pressures in the market and
a sizable covered incentive in favor of Euro-dollars, the Bank of
England raised its discount rate by Vi percentage point to 6 per
cent on October 19. In a coordinated move to prevent a rise in
Euro-dollar rates from offsetting the increase in British interest
rates, the BIS, after consultation with the Federal Reserve,
made modest placements in the Euro-dollar market of funds
drawn under its swap facility. However, the increase in the discount rate disappointed many observers, who had been expecting
288
FEDERAL RESERVE SYSTEM
an increase of a full percentage point, and heavy sales of sterling
in the market resumed—requiring very substantial support by the
Bank of England in both spot and forward markets.
In an effort to stabilize quotations for spot sterling in New
York, the U.S. Treasury initiated purchases of sterling on October
19 at rates just under $2.7830 and continued to buy through
Monday, October 23. In these operations it bought a total of
$47.1 million equivalent of pounds. The evidence of strong official support calmed the market, and the spot rate firmed during
the last week of October. Nevertheless, an undercurrent of uneasiness remained, and there was a fairly steady flow of offerings
of forward pounds, which the Bank of England met.
The announcement on November 2 of a $75.6 million equivalent reserve gain in October, after the $103 million equivalent
Swiss loan had been taken into the reserves, had little additional
impact on a market in which funds had begun to move out of
sterling. The next day rumors of an impending devaluation of
sterling dramatically increased the selling pressure in pre-weekend trading. A very gloomy atmosphere continued after the
weekend, and with growing pressures in the forward market, on
November 9 the Bank of England, for the second time in 3 weeks,
raised its discount rate by Vi percentage point—to 6V2 per cent.
Again the BIS backed up the move with operations in the Eurodollar market by making additional drawings on the Federal Reserve swap line. But the market was unimpressed and sales of
sterling continued large, with many sectors increasingly ready
to believe the rumors of an impending devaluation of the pound.
The announcement on November 14 that the trade deficit in
October had amounted to $300 million equivalent, the largest
ever recorded, further undermined the pound and indicated, indirectly, how difficult it would be to strengthen the pound from
its then-current level. In this highly charged atmosphere the market reacted favorably to rumors that negotiations were in progress for a new $1 billion loan from central banks to tide the
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United Kingdom over its difficulties. Traders anticipated confirmation of the rumors, and on November 16 their short covering
pushed the sterling rate up to $2.7848.
That afternoon, however, Chancellor Callaghan refused in
Parliament to confirm or deny that negotiations were in progress.
Thereupon, the market immediately began to suspect that the
rumored negotiations were not progressing smoothly and that
new credit would not be forthcoming. By the next day financial
markets throughout the world had concluded that devaluation
was not only inevitable but also imminent, and the market was
inundated as holders of sterling rushed to sell before the weekend.
On Saturday, November 18, Chancellor Callaghan announced
the British Government's decision to devalue the pound by 14.3
per cent to $2.40. The next day, in an address to the nation
Prime Minister Wilson explained his government's decision as
a move designed to permit the United Kingdom to solve its basic
balance of payments problem without unnecessarily constricting
domestic economic growth. He stressed that:
It would have been possible to ride out this
present tide of foreign speculation against the
pound by borrowing from central banks and governments abroad—banks and governments to
whom I pay tribute for their help and cooperation
over these past years.
In our view it would have been irresponsible to
go on dealing with these successive waves of speculation by borrowing for short periods at a time,
without attacking the root cause of the speculation.
In order to stiffen the defense of the new parity, the Bank of
England raised its discount rate to 8 per cent per annum (the
highest level in 53 years) and redirected bank credit toward exports, while the government announced curbs on consumer instalment credit and programmed cuts in government spending and
an increase in the corporation tax. Prime Minister Wilson set as
the target of his government's policy a very significant improve290
FEDERAL RESERVE SYSTEM
ment in the country's balance of payments designed to bring the
external accounts into substantial surplus by the second half of
1968. A $1.4 billion standby drawing on the IMF was formally
requested. In addition, the U.K. Government reported that negotiations for an additional $1.5 billion of credit facilities with
foreign monetary authorities were in progress.
When markets in London reopened on Tuesday, after a special
bank holiday, trading was hectic as banks and commercial interests scrambled to purchase or borrow sterling to meet immediate
and near-term requirements, including maturing forward sales
undertaken earlier. The demand for pounds held sterling firmly
against its new upper limit ($2.4200), and the Bank of England
made large dollar gains. The severe market stresses reflecting
demand to meet cash commitments soon faded, however, and
activity began to reflect a more normal pattern of dealing. The
Bank of England continued to purchase dollars, although on a
more moderate scale.
As in earlier periods of reserve recovery the Bank of England
used its gains to reduce its short-term debts. After a repayment of
$300 million to the Federal Reserve, its commitments under the
$1,350 million swap line, which had been fully utilized to help
meet pressures prior to devaluation, were reduced to $1,050
million. On November 30 the Federal Reserve increased to $1.5
billion its reciprocal currency arrangement with the Bank of
England, along with the other increases in its swap network.
Market atmosphere changed abruptly iix early December—in
view of a British railway labor dispute and higher U.S. interest
rates—and the spot rate for sterling declined sharply. The market
took no special notice of the announcement of a $127.2 million
reserve gain during November, achieved after incorporation of
the $490 million remainder of the U.K. dollar portfolio. The
authorities also announced that the last $250 million outstanding
on Britain's 1964 drawing from the IMF had been repaid; the
impact of this payment on reserves was offset by a new credit
from foreign central banks and the U.S. Treasury.
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ANNUAL REPORT OF BOARD OF GOVERNORS
Despite subsequent mediation of the railway difficulties, the
market remained uneasy, and by December 7 the spot rate for
sterling had moved below $2.4100. Before Christmas, however,
the market quieted and sterling firmed. After the Christmas holiday, reports that the British Government was planning massive
cuts in welfare and defense spending programs to backstop its
devaluation package—with details scheduled for release in midJanuary 1968—triggered short covering and the spot rate
advanced to $2.4070, to close the year on a firm note.
At the end of December the United Kingdom paid $220 million of principal and interest on postwar debts to the United
States and Canada. After these transactions, British reserves
totaled $2,695 million, $240 million less than on November 30
and $400 million less than at the end of 1966.
To bolster its reserves during the last quarter of 1967, the Bank
of England had made net drawings of $400 million on the Federal Reserve swap, bringing the amount outstanding to $1,050
million, and had also made use of other credit facilities during the
quarter. On the other hand, Britain's repayments to the IMF during 1967 and drawings of sterling from the Fund by other Fund
members had increased Britain's unused drawing rights on the
Fund to $1.4 billion, and this amount was available to the United
Kingdom at the year-end under a standby arrangement. And in
case of need, substantial additional amounts of credit were available through credit facilities of central banks.
German mark. The reduced pace of economic activity in Germany during most of 1967 increased the German trade surplus,
as imports declined and exports advanced. The trade surplus expanded very sharply during the first half and remained large
during the second; for the full year it exceeded $4 billion (compared with $1.9 billion in 1966) while the current-account surplus reached $2.4 billion. Primarily to stimulate the flagging
domestic economy, the German authorities during the first 5
months of 1967 reduced the central bank discount rate on four
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FEDERAL RESERVE SYSTEM
occasions, by Vi percentage point each; by May 11 the rate was
3 per cent.
In addition, the authorities substantially lowered commercial
banks' reserve requirements during the first half of the year. This
considerable easing of monetary policy permitted German banks
to invest heavily in short-term foreign assets. Consequently, the
trade surplus was not reflected in official reserve gains and did not
cause strains in international money markets or in the foreign
exchanges.
At the beginning of the year there was the usual seasonal outflow of funds from Germany, and the German Federal Bank re^
plenished the losses it had sustained in market support operations
by purchasing $45 million from the Federal Reserve. In addition, the Federal Reserve purchased $35.7 million equivalent of
marks in New York and took delivery of $17.5 million that had
been purchased forward in market swaps during December 1966.
By mid-February it had used these marks, together with $25.1
million equivalent acquired in a special transaction and marks
held in balances, to repay the entire $140 million drawn on the
swap line with the German Federal Bank in December 1966.
Because of the underlying strength in the German balance of
payments, the ntark generally held close to its upper limit during
the winter and early spring of 1967, although the authorities did
not add significantly to their reserves. By mid-May, however, the
cumulative effects of the easing of monetary policy were inducing
heavy outflows of commercial bank funds to the Euro-dollar
market, while German commercial firms began to repay sizable
amounts of credits previously obtained abroad. Consequently, the
spot rate for marks began to decline.
To encourage retention in Germany of newly released bank
liquidity, the German Federal Bank altered its pattern of exchange market activity during the summer. For several months
the bank had been concerned that its active easing of monetary
policy had been more successful in stimulating outflows of funds
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ANNUAL REPORT OF BOARD OF GOVERNORS
from Germany than in lowering domestic interest rates. By widening the spread between its announced buying and selling rates and
permitting a rapid fall in the spot rate, the central bank sought to
increase the degree of uncertainty about future rate movements,
particularly for those who were investing abroad at very shortterm on an uncovered basis. When the spot rate dropped sharply
in early July to just below par, investors immediately began to
purchase forward cover to avoid the risk of a future rise in the
rate. The cost of such cover back into marks jumped from about
% per cent per annum for 3-month maturity, for example, to
more than 13A per cent and remained close to Wi per cent
through August.
There was some refinancing in German marks of maturing
Euro-dollar credits during the early fall, but the principal result
of the easier monetary conditions in Germany continued to be
further placements of funds abroad by commercial banks. The
spot mark therefore traded narrowly on either side of $0.2498
through October. With the mark below par, the Federal Reserve
took advantage of occasional offerings of spot marks in New
York to build up its balances in anticipation of possible future requirements. During the period from August through early November it purchased a total of $20.1 million equivalent of marks.
On November 3 the growing uneasiness in the market for sterling suddenly resulted in a sharp strengthening in spot quotations
for marks as German interests repatriated funds from sterling and
began to prepare for their year-end needs. A tightening in the
German money market contributed to the incentive to move
funds into Germany. Upward pressure on the mark intensified
on November 7 as growing speculation in the gold and foreign
exchange markets spawned wide-ranging rumors of changes in
currency parities, including an imminent upward revaluation of
the mark.
In the ensuing heavy buying of marks the German Federal
Bank purchased a total of $57 million while permitting the spot
rate to advance to $0.2512V^ in order to discourage further in294
FEDERAL RESERVE SYSTEM
flows. A flat denial of revaluation plans by the German authorities led some speculators to cover their positions, and by November 8 the spot mark had eased slightly. Speculation lingered in
the forward market, however, and the premium on 3-month forward marks remained about 1.60 per cent per annum.
Very heavy buying of German marks developed in the massive
speculation against sterling on November 17 and again on November 24 when the focus of speculative interest shifted against
the dollar; on those 2 days the German Federal Bank purchased
nearly $300 million. The demand for marks let up abruptly, however, with the temporary calm that followed the November 26
meeting of the active members of the Gold Pool in Frankfurt and
the subsequent official communique pledging concerted support
of the existing parities based on the $35 gold price.
As the exchange markets settled down to more normal dealings, the German Federal Bank took action (1) to prevent the
earlier heavy withdrawals of funds from the Euro-dollar market
from producing unwanted stringency in that market and (2) to
cut the incentive for moving additional funds out of dollars that
stemmed from the wide premium being quoted on the forward
mark (nearly 3 per cent per annum for 3-month maturity, by
November 24). To accomplish these purposes, the German authorities began to induce the return of dollars to the Euro-dollar
market on a swap basis, selling them spot to German commercial banks for repurchase at a later date at rates representing premiums on the forward mark of 13A per cent per annum; these
rates provided an incentive of close to 1 per cent per annum to
switch funds into Euro-dollar investments. By November 30
about $600 million had been swapped at premiums on the mark
ranging up to 2V\ per cent. Euro-dollar rates responded immediately by moving sharply lower. The Federal Reserve subsequently
participated in this operation by drawing $300 million equivalent of German marks on its swap line with the German Federal
Bank—to that extent providing cover for a part of the dollars
purchased forward by that bank.
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ANNUAL REPORT OF BOARD OF GOVERNORS
Meanwhile, at the end of November the Federal Reserve had
drawn $50 million equivalent of marks under the swap line and
was holding the marks for possible intervention related to market
uncertainties and expected year-end pressures. (On November
30, as part of a general strengthening of the swap network, the
swap facility with the German Federal Bank was increased by
$350 million to $750 million.) These pressures began to assert
themselves strongly on December 13, when the German Federal
Bank gained dollars on a substantial scale, and the spot mark
strengthened to $ 0 . 2 5 1 3 ^ . The German Federal Bank bought a
particularly large amount of dollars on Friday, December 15, in
the backwash of the week's extremely heavy speculative activity
in the gold markets, and in New York the Federal Reserve sold
a total of $7.3 million equivalent of marks for its own account.
The heavy inflows into marks resulting from market uncertainties provided considerably more mark liquidity than necessary to meet German commercial banks' usual year-end needs, in
good part because the German Federal Bank had assisted the
banks in arranging for mark liquidity in advance by selling them
a large amount of money market paper scheduled to mature in
mid-December. By December 21, with the German money market quite liquid and a more normal atmosphere being restored in
foreign exchange markets, funds began to flow back into Eurodollar investments.
As German commercial banks bid strongly for dollars on a
covered basis, the German Federal Bank sold an additional $250
million on a swap basis, before raising the swap rates it offered
to the banks to the equivalent of premiums on the forward mark
of up to 3Vi per cent per annum (an increase of Vi percentage
point). In addition, to moderate the pressure, the German
authorities permitted the spot rate for the mark to move lower
rather quickly. By the end of the year, outflows from Germany had
offset the German Federal Bank's intake earlier in December.
The spot rate had slipped still lower in the last few trading
days of the year, and with the market ready to sell marks, the
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FEDERAL RESERVE SYSTEM
Federal Reserve made a start toward covering its swap commitments in German marks.
Early in 1967 there were discussions between Germany and
the United States, together with the United Kingdom, concerning military forces in NATO and the balance of payments consequences of deployment of U.S. and U.K. troops in Germany.
In early May the U.S. authorities released an exchange of letters
growing out of these discussions between the President of the
German Federal Bank, Karl Blessing, and the Chairman of the
Board of Governors of the Federal Reserve System, William
McChesney Martin, Jr., in which the former indicated that the
Federal Bank intended to continue its practice of not converting
dollars into gold as part of a policy of international monetary
cooperation. This statement was made with the agreement of the
German Federal Government, which at the same time took note
of the Federal Bank's intention to purchase $500 million equivalent of U.S. Government medium-term securities denominated in
marks, in four equal quarterly instalments beginning in July. The
first $125 million equivalent security was issued on July 3, and
the second on October 2.
Italian lira. The deficit that had emerged in Italy's balance of
payments in late 1966 continued during the first 2 months of
1967, reflecting seasonal factors and intensified import demand
associated with an expanding economy. In addition, there were
sizable exports of capital, partly in anticipation of changes in the
Italian tax laws. Early in 1967 the Federal Reserve paid off the
final $ 15 million of lira commitments that had been outstanding
at the end of 1966 under the reciprocal currency arrangement
with the Bank of Italy.
In March Italy's balance of payments began to strengthen,
although the re-emerging surplus was considerably less than that
for the comparable period a year earlier, as import demand expanded further and exports of capital continued. As economic
expansion generated mounting financial requirements on the part
of Italian residents for both foreign exchange and local currency,
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ANNUAL REPORT OF BOARD OF GOVERNORS
Italian banks reduced their net claims on foreigners by nearly
$275 million during the first 6 months of the year. During the
same period Italian official reserves, including Italy's position in
the IMF, increased by $50 million.
About midyear the Italian payments position moved into the
period of seasonal strength and the demand for lire intensified.
The Italian authorities began to acquire substantial amounts of
dollars. It appeared at first that the reserve gains were developing
on a smaller scale than in former years. But demand for lire
strengthened considerably during the summer, and counter to the
seasonal expectation the payments surplus persisted into October
and early November; as a result Italian reserve gains during the
second half of the year came to about $500 million.
Underlying the unusual strength in Italy's external accounts
during most of the latter part of 1967 was a better performance
on trade than was anticipated in view of the strong internal demand in Italy and of the earlier slowdown of economic activity in
Italy's major trading partners. Moreover, Italian investments in
the Euro-dollar and Euro-bond markets fell to more normal proportions following the heavy outflows during the first half of the
year. Added to these factors was the growing uneasiness in the
sterling market, which stimulated sizable repatriations of funds
from sterling.
In order to absorb the Italian authorities' large dollar gains,
the Federal Reserve reactivated its swap line with the Bank of
Italy, and between September 19 and November 30 it drew a
total of $500 million on that bank. (With the $600 million facility almost fully utilized, the System and the Bank of Italy agreed
in late November to increase their swap arrangement by $150
million, to $750 million.) After the British devaluation, the lira
softened noticeably and was generally weak through the end of
the year as the normal seasonal deterioration in the Italian balance of payments set in; nevertheless, the System was not able to
repay any of its commitments in lire. In December Italy purchased $85 million in gold from the United States.
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FEDERAL RESERVE SYSTEM
Federal Reserve and U.S. Treasury technical forward commitments in Italian lire were rolled over periodically during 1967,
and during the year the Treasury added to its technical forward
obligations. The Treasury's longer-term indebtedness in Italian
lire remained unchanged during the year at $125 million equivalent—all in the form of medium-term instruments issued to the
Bank of Italy.
Swiss franc. During the first half of 1967 interest rates in Switzerland declined less rapidly than rates outside Switzerland. Indeed, during much of this period the Swiss credit market remained relatively tight, and there was more incentive for foreigners to pay off their borrowings in Swiss francs than for Swiss
residents to place new funds abroad. Even in the early months of
the year, the reflux to foreign markets of funds repatriated by
Swiss residents at the year-end was less than might have been expected in terms of the usual seasonal pattern. As a result, the
Federal Reserve was able to acquire only enough francs to pay
off the $15 million of drawings outstanding under its swap line
with the Swiss National Bank; and a total of $75 million was
still due to the BIS.
To liquidate this residual obligation in Swiss francs, the U.S.
authorities in February used $75 million equivalent of sterling
balances to acquire Swiss francs from the BIS on a temporary
swap basis. Subsequently, when the Swiss National Bank released
to Swiss commercial banks part of the deposits of those banks
that had been blocked since 1961, the banks bought Swiss francdenominated promissory notes from the BIS in the amount of
$60.2 million equivalent. The BIS placed these francs at the disposal of the U.S. Treasury, which in exchange issued certificates
of indebtedness denominated in Swiss francs. The Swiss francs
thus obtained were used in April to pay off the System's commitment of $37.3 million under the sterling/Swiss franc swap and
in May to reduce the Treasury's commitment to $14.3 million
equivalent.
Meanwhile, in order to forestall a rapid rise in the Swiss franc
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ANNUAL REPORT OF BOARD OF GOVERNORS
rate during March, when Swiss banks were repatriating funds to
meet domestic liquidity requirements, the Swiss National Bank
announced early in the month that it would provide Swiss francs
against dollars for end-of-quarter needs through short-term market swaps. This was the first time that the Swiss authorities had
offered this facility other than at midyear and at the year-end.
During the final weeks of March the central bank took in $221
million on this basis and immediately reinvested the funds in the
Euro-dollar market—thus helping to moderate pressures in that
market.
After the first quarter, short-term interest rates outside of
Switzerland continued to decline, while the unwinding of the
Swiss National Bank swaps with its commercial banks tended to
tighten the Swiss market again. Foreigners, particularly Italians,
began to bid for Swiss francs to repay Swiss franc indebtedness
and started to shift their borrowing into currencies that were
being lent more cheaply, notably German marks. As a result, the
spot rate for the franc moved up from $0.2307^ at the beginning of April to the effective ceiling of $0.2311V2 by April 26,
at which point the Swiss National Bank began buying dollars.
With credit conditions remaining tight and with some nervousness developing about sterling and the prospects of a clash in the
Middle East, the rate for the franc held at or close to the effective
ceiling through most of May, and the Swiss National Bank added
some $180 million to its reserves through market operations. In
addition prepayment by the Bank of England in May of the $80
million equivalent Swiss franc credit extended to it in December
1964 resulted in an equivalent dollar gain by the Swiss National
Bank.
During the first days of June the rumor, and then the actual
outbreak, of hostilities in the Middle East precipitated a heavy
flow of funds into Switzerland. The dollar holdings of the Swiss
National Bank, already swollen by the inflows in May, jumped
by $212 million in the first week of June. In order to absorb these
dollar flows, on June 2 and June 8 the Federal Reserve drew a
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FEDERAL RESERVE SYSTEM
total of $370 million equivalent of Swiss francs in equal amounts
under its swap arrangements with the Swiss National Bank and
the BIS; in addition, the Swiss National Bank purchased $30
million of gold from the U.S. Treasury.
Although only a part of the funds shifted to Switzerland during
this period represented transfers directly out of sterling, the Swiss
authorities and the Swiss commercial banks were prepared to cooperate with the Bank of England in countering the effects of
such shifts. One byproduct of this cooperation was the acquisition by the Federal Reserve of $28 million equivalent of Swiss
francs that were used on June 16 to repay an equivalent amount
of drawings on the Swiss National Bank.
Following the cease-fire in the Middle East, the demand for
francs abated, only to pick up again on a moderate scale just
before midyear. Once again, the Federal Reserve drew on its
swap arrangements to absorb these inflows; it added $33 million
to its drawings on the Swiss central bank and $15 million to its
drawings on the BIS; this brought the total Swiss franc drawings
outstanding on July 3 to the equivalent of $390 million, out of
credit lines then totaling $400 million. The drawing on the Swiss
National Bank was reduced on July 28 from $190 million to
$180 million, when the Swiss National Bank purchased $10 million from the Federal Reserve against Swiss francs to meet Swiss
official requirements. In view of continuing uncertainties in financial markets and the unsettled conditions in the Middle East during the summer, it was agreed in mid-July that the Federal Reserve swap facilities in Swiss francs with the Swiss National Bank
and the BIS should be expanded by $50 million each, to a new
combined total of $500 million.
The capital inflows in May and June led to increased liquidity
in Switzerland and eliminated the need for any special measures,
such as short-term swaps, to meet midyear needs; in fact, there
was some easing in Swiss interest rates. In order to reinforce this
trend, the Swiss National Bank on July 10 reduced its discount
rate from ZVi per cent to 3 per cent—explaining that the move
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ANNUAL REPORT OF BOARD OF GOVERNORS
was "likely to facilitate the reestablishment of interest rate differences existing normally between Switzerland and foreign countries and thus also the reflux abroad of the excess liquidity registered in the past two months." Following this move, some shifting of funds out of Switzerland into the Euro-dollar market began
to develop, and by late August the exchange rate for the franc
had eased considerably.
Outflows of short-term funds from Switzerland to the Eurodollar market continued through early November and kept the
spot rate for the Swiss franc close to the low for the year
($0.2301 Vi ) reached on September 12. Nevertheless, there were
no sizable dollar losses by the Swiss National Bank. The Federal
Reserve was able to make some progress in liquidating its Swiss
franc swap commitments, however, as Swiss official agencies required a substantial amount of dollars during the autumn. To replenish dollar balances sold to the Swiss Government, the National Bank purchased a total of $57.0 million from the System.
The Federal Reserve used the franc proceeds to reduce its outstanding swap commitment to the Swiss National Bank to $123
million equivalent in November.
The growing pressures on sterling in early November were reflected in an increase in the rate for spot francs. In addition, the
Swiss money market was tightened by the payment of the 450
million Swiss franc loan granted to the U.K. Government by three
large Swiss commercial banks. With continuing international uncertainties and the approach of the year-end, the franc rate advanced further. Despite the turbulence in the exchanges in connection with the devaluation of the pound on November 18, the
Swiss National Bank purchased only a small amount of dollars in
market intervention during the remainder of the month. As a
consequence of the unrest in the exchange market, however, the
premium on the forward Swiss franc grew wider. Following the
Frankfurt meeting of the active Gold Pool members, the Swiss
National Bank, as part of the general cooperative effort agreed
to at that meeting, indicated to the market its willingness to sell
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FEDERAL RESERVE SYSTEM
forward francs. This action helped to restore a calmer atmosphere. The forward premium on 3-month Swiss francs dropped
substantially below 2 per cent per annum, the premium prevailing just before the Swiss National Bank's action.
Although these uncertainties precluded any further acquisition of Swiss francs in the market by the Federal Reserve, the
System purchased from the Bank of England $80.1 million
equivalent of the Swiss franc proceeds of the 1-year loan from
Swiss commercial banks. (The U.S. Treasury also purchased
$14.3 million equivalent of the loan proceeds and used the francs
to pay off the remainder of its outstanding sterling/Swiss franc
swap with the BIS.) These francs, together with a small amount
in balances and $4 million equivalent purchased from the National Bank in connection with Swiss Government dollar needs,
were used to reduce Federal Reserve Swiss franc credits drawn
from the BIS to $115 million by November 30. At that time total
Federal Reserve commitments under its Swiss franc swap lines
thus were reduced to $238 million.
Heavy inflows of dollars into Switzerland resumed on December 1, and the Swiss National Bank purchased very substantial
amounts as the Swiss financial community prepared for its yearend liquidity needs. In past years these inflows had been accommodated on a swap basis by the National Bank, but in view of the
tense international monetary situation, the banks were not willing
to enter into swap transactions at this time. Hence, the spot franc
was in demand, and the premium on the forward franc again
widened, especially during the flare-up in the gold market.
To deal with this pressure, on December 14 the Swiss National
Bank initiated forward sales of Swiss francs jointly for Federal
Reserve and Treasury accounts. A total of $65.5 million equivalent of forward francs had been sold by December 19, before the
market responded to this evidence of official reassurance and the
demand for both spot and forward francs eased. Thereafter a
more normal trading pattern emerged, and Swiss commercial
banks—instead of resuming spot sales of dollars—began to make
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ANNUAL REPORT OF BOARD OF GOVERNORS
use of the usual year-end swap facilities offered by the Swiss
National Bank to obtain needed Swiss franc liquidity.
In order to increase its capacity to deal with the heavy inflows
into the Swiss National Bank, the Federal Reserve, after discussions with the Swiss National Bank and the BIS, increased each
of its Swiss franc swap facilities by $150 million equivalent on
December 15, bringing each credit line up to $400 million. The
Federal Reserve subsequently drew $127 million on the Swiss
National Bank; this raised its Swiss franc commitments to that
institution to $250 million equivalent. Also, during the third
week of December it drew $285 million on the BIS, thus utilizing the full $400 million Swiss franc credit line with BIS.
Netherlands guilder. Early in 1967 seasonal weakness in the
Netherlands balance of payments, a flow of funds into sterling,
and the conversion into dollars of the guilder portion of a multicurrency drawing from the IMF by Spain enabled the Federal
Reserve to repay in full the $35 million equivalent in guilders that
was still outstanding at the end of 1966.
Economic activity in the Netherlands—as in most of Europe—
showed some signs of slowing during the first quarter of 1967, and
with interest rates declining abroad, the Dutch authorities acted
to ease the tight domestic monetary policy that had been in force
during 1966 to restrain an overheated economy. On March 14
the Netherlands Bank announced a reduction in its discount rate
to AV2 per cent per annum, from the 5 per cent in effect since
May 1966, and it also removed the penalty-deposit-requirements
for banks that exceeded the credit ceilings in effect.
Despite the easing in monetary policy, however, the Dutch
money market remained tighter than markets abroad, and during
the spring Dutch banks repatriated funds from overseas. By the
end of April the spot guilder began to strengthen quite noticeably,
and early in May it reached $0.2774%. Under the circumstances
the Dutch authorities relied increasingly on swap transactions
with the foreign exchange market as a regular method of relieving
money market pressures. As banks repatriated funds from abroad,
the Netherlands Bank bought dollars on a swap basis (that is,
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FEDERAL RESERVE SYSTEM
spot purchase against forward sale) in order to supply domestic
liquidity on a temporary basis and, correspondingly, to avoid a
build-up in its uncovered dollar holdings. These operations became fairly substantial in May and rose to a peak of $150 million in early June.
The backwash of the hostilities in the Middle East and renewed pressures on sterling subsequently produced further demand for guilders. As funds flowed into the Netherlands, the spot
rate for the guilder rose sharply and the Netherlands Bank took in
dollars both outright and on a swap basis. The Federal Reserve
reactivated its swap facility with the Netherlands Bank in July
and drew $20 million equivalent of guilders in order to absorb
some of that bank's dollar gains.
Inflows into guilders continued intermittently through the autumn—reflecting firmness in the Amsterdam money market, an
improvement in the Dutch balance of payments, and repatriations
of funds in view of uncertainties about sterling. The Federal Reserve drew further on its swap facility and by November 13 had
used the full $ 150 million.
The exchange market turbulence associated with the flight
from sterling and the subsequent speculation against the dollar
produced further heavy inflows of funds into guilders. These
speculative influences began to be reflected in widening quotations for forward guilders, which moved to a premium of nearly
2 per cent per annum for 3-month maturity. In order to dampen
these pressures, the Netherlands Bank on November 23 initiated
forward sales of guilders, jointly for the Federal Reserve and the
U.S. Treasury, as part of a concerted central bank effort to exert a
calming influence in the exchanges. Most of the forward sales
were part of swap transactions designed to return dollars to the
market and at the same time limit the tendency for the wide forward premium on guilders to pull further funds out of dollars.
By November 29 a total of $37.5 million equivalent of forward
guilders had been sold before speculative pressure eased sufficiently for operations to be discontinued.
Meanwhile, in order to absorb the heavy inflows into the Neth
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ANNUAL REPORT OF BOARD OF GOVERNORS
erlands Bank during November, the Federal Reserve Bank of
New York, acting for the account of the U.S. Treasury, undertook
swaps with the Netherlands Bank similar to those concluded for
the Federal Reserve. By the end of November Treasury commitments under those ad hoc arrangements stood at $126 million.
On November 30, as part of the more general increase in the
Federal Reserve reciprocal currency arrangements, the System's
facility with the Netherlands Bank was increased by $75 million
to $225 million.
Buying of guilders was small and sporadic during early December, but a tightening of the money market in Amsterdam in the
latter part of the month produced a larger inflow. Just before the
year-end, commercial demand for guilders boosted the spot rate
to $0.2782^, and the Netherlands Bank purchased a further sizable amount of dollars. The Federal Reserve drew on its expanded credit line with the Netherlands Bank to absorb these
inflows and thereby raised its obligations in guilders under that
credit line to $170 million equivalent at the year-end.
Belgian franc. The Belgian franc moved above par in January
as a slower pace of economic activity in Belgium contributed to a
more than seasonal drop in imports and the current account
shifted from deficit to surplus during the winter. Most of the demand for francs was met in the exchange market, however, so
official holdings of gold and foreign exchange were little changed
through the first quarter.
In April the franc began to strengthen further as the current
account continued in surplus, and from May on it held at or near
its upper intervention point. The Belgian central bank eased its
monetary policy somewhat, cutting its discount rate three time
during the first half of the year. But an inflow of short-term capital took place nevertheless. In order to absorb the inflow,
the Federal Reserve reactivated its swap line with the Belgian
National Bank in May, and by early June it had made a series of
drawings that totaled $37.5 million.
Shortly afterward, however, the Belgian National Bank pur306
FEDERAL RESERVE SYSTEM
chased dollars from the Federal Reserve in order to meet current
needs, and the System used the francs to reduce commitments
under the swap line to $27.5 million equivalent. (In an unrelated
transaction, the U.S. Treasury during May repaid two maturing
Belgian-franc-denominated bonds totaling $30.2 million that had
been originally issued in 1963; it used francs it had acquired for
this purpose in late 1966 when the dollar was in demand in Belgium. The Treasury's bond indebtedness denominated in Belgian
francs was thereby fully liquidated.)
Demand for francs intensified in July and August, partly as a
consequence of the continuing Middle East crisis and the growing
pressure on sterling. In order to absorb dollars purchased by the
National Bank through early September, the Federal Reserve
drew a further $97.5 million equivalent of francs under its swap
facility; this brought its commitments in Belgian francs to $125
million equivalent. Later the Belgian National Bank purchased
dollars for government needs, thus enabling the Federal Reserve
to reduce its swap commitments in Belgian francs to $115 million equivalent by the end of the month.
The Belgian balance of payments strengthened on current account in October. In addition the money market tightened, following the flotation of a large government bond issue. The resulting demand for francs pushed the spot rate to the ceiling, and
the National Bank purchased more dollars. The surplus on current payments persisted in November as the Belgian economy remained sluggish. During these 2 months the Federal Reserve
continued to use its swap facility with the Belgian National Bank
and by November 13 the entire $150 million line had been
utilized.
During the period immediately preceding the British devaluation and in the period of heavy speculative activity afterward, the
Belgian authorities took in further substantial amounts of dollars.
Belgian Government requirements for dollars absorbed some of
those inflows. With the Federal Reserve swap line fully employed,
the U.S. Treasury on November 24 issued a $60.4 million equiva-
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ANNUAL REPORT OF BOARD OF GOVERNORS
lent 24-month Treasury note denominated in Belgian francs. The
Federal Reserve purchased these francs and used them to repay
$60 million of outstanding Federal Reserve swap drawings. Then
at the month-end the System absorbed $41.2 million of the Belgian National Bank's dollar gains by drawing once again on the
swap line. Thus, Federal Reserve commitments in Belgian francs
under the credit line with the Belgian National Bank stood at
$130.8 million equivalent at the end of November. (On November 30, as part of a general strengthening in the swap network,
total credits available under that swap line were raised by $75
million to $225 million equivalent.)
In addition to meeting pressures in the spot market, the Belgian National Bank, in cooperation with U.S. authorities, took
action to keep the forward market calm. On December 4 it initiated forward sales of Belgian francs—divided equally between
System and Treasury accounts—to reduce the large premium on
forward francs and discourage further shifts of funds from dollars. Pressures subsided almost immediately, and few additional
forward sales were necessary through the end of December. These
operations were the first conducted in forward Belgian francs and
involved a modest commitment of $11.8 million equivalent in
forward franc sales.
The spot Belgian franc eased somewhat below its ceiling during December, and the Belgian National Bank lost a moderate
amount of dollars in market support operations as the Belgian
economy showed signs of reviving and import demand picked up.
The Federal Reserve therefore was able to acquire Belgian francs
as the Belgian authorities required dollar balances to meet market
needs; the System also obtained some francs from conversion of
part of the proceeds of a drawing by an IMF member. These
francs were used to reduce Federal Reserve commitments under
the swap line with the Belgian National Bank to $105.8 million
equivalent by the year-end.
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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 status of each of the four studies under way is described below.
Reappraisal of the Federal Reserve discount mechanism. The
fundamental reappraisal of the Federal Reserve discount mechanism, announced in the Board's ANNUAL REPORT for 1965, is
approaching a conclusion. Most of the numerous research projects commissioned as part of the study have been completed, and
the results have undergone extensive analysis and evaluation. A
concrete proposal for redesign of the discount window is emerging from these efforts, and it is expected that—after further discussion, analysis, and refinement within the System—documents
embodying this proposal will be made available to the public.
U.S. Government securities market study. Meetings of the Joint
Treasury-Federal Reserve Steering Committee were held during
the year to consider the various policy aspects of evidence from
staff studies, from the earlier consultations with U.S. Government securities dealers, and from the answers to questionnaires
sent to major market participants. The completed staff studies
are in the process of being reviewed for publication, and the final
report of the Committee is in preparation.
Foreign operations of member banks. Work on the study of the
foreign operations of member banks, which was undertaken to
provide additional knowledge and perspective on the expanded
international operations of U.S. commercial banks, continued in
1967. The study involves a broad-scale examination of the evolution and nature of the international lending and other credit activities at banking offices in this country, operations at foreign
branches, and the affiliations that have been established with
foreign banks and other financial institutions. The marked
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changes in each of these three interrelated areas of activity, as
they bear on the monetary and supervisory responsibilities of the
Federal Reserve, form the principal focus of the study. A report
containing the study's findings was nearing completion at the
year-end.
Effects of monetary policy on economic activity. Much progress
was made during 1967 on the large econometric project involving
economists on the Board's staff and a group of university economists led jointly by Professor Modigliani of the Massachusetts
Institute of Technology and Professor Ando of the University of
Pennsylvania. A preliminary version of the model was completed
and was tested against recent data. This preliminary version
was discussed at the annual meetings of the American Economic Association and the American Statistical Association. A
description of it was published in the Federal Reserve Bulletin
for January 1968.
The results of the preliminary version suggest that both monetary and fiscal policies have powerful effects on the economy,
though the time lag between a policy change and its economic
effects is longer for monetary policy than for fiscal policy. The
response of money income to changes in both monetary and fiscal
policies is stronger in this model than in a number of earlier ones.
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FEDERAL RESERVE SYSTEM
INTERNATIONAL LIQUIDITY
In 1967 a major event in international monetary evolution
occurred when agreement was reached on a plan for the creation of a supplement to existing international reserve assets. Prepared by the Deputies of the Group of Ten major trading countries and the Executive Directors of the International Monetary
Fund, the plan, after acceptance by the Finance Ministers and Central Bank Governors of the Group of Ten, was agreed upon by the
Board of Governors of the International Monetary Fund at its annual meeting, held in Rio de Janeiro in September. The decision to
proceed to establish, within the Fund, machinery for the creation of
what will be known as Special Drawing Rights (SDR's) marks
the culmination of 4 years of work on the problem—2 years of
thorough study, followed by 2 years of intensive negotiations—
in which the Federal Reserve participated with the Treasury
Department.
In recent years the need for a means by which existing international reserve assets could be supplemented regularly, through
the periodic creation of international liquidity of a kind that
nations would accept as reserves and could use in international
settlements, has become increasingly evident. But in view of two
developments since last September, the agreement reached at
Rio de Janeiro was particularly timely. First, since the beginning
of this year the United States has intensified its efforts to improve
the U.S. balance of payments position. To the extent that these
efforts are successful, the growth of world reserves via increases
in reserve-currency holdings will be further slowed. Second, on
March 17, 1968, the central-bank Governors of the then-existing Gold Pool countries concluded that the stock of monetary
gold is sufficient in view of the prospective establishment of the
facility for SDR's; they no longer felt it necessary therefore to
buy gold from the market. A large number of other countries
subsequently announced their intentions to cooperate with the
policies decided upon on March 17 by the central-bank Gov-
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ANNUAL REPORT OF BOARD OF GOVERNORS
ernors of the Gold Pool group. These decisions regarding gold,
which were based in part upon the prospective establishment of
the SDR facility, obviously reinforce the need for its establishment.
Implementation of the Rio agreement will assure that the international monetary system can be provided with an adequate
growth of reserves at the existing price of gold.
The Outline Plan (as the plan agreed upon at Rio de Janeiro
is called) is a statement of the principles that will govern the
creation, distribution, and use of SDR's. Since September 1967
the Executive Directors of the Fund, in accordance with a Resolution adopted by the Governors of the Fund at the Rio de
Janeiro meeting, have prepared the draft amendment of the
Fund Articles of Agreement and By-Laws that will be needed
in order to give effect to the Outline Plan. After approval by
that Board, and submission by the Fund to member countries,
the amendment will come into force when three-fifths of the
members, having four-fifths of the total voting power, have
accepted it.
The Resolution referred to above also requested the Executive
Directors to submit a report proposing such amendments to the
Fund Articles and By-Laws as would be required to give effect
to possible improvements in the present rules and practices of
the Fund. Some proposals for changes in these rules and practices had been made, particularly by the member countries of
the European Economic Community; and the Fund's Board of
Governors decided that work should go forward on this subject,
as well as on the SDR plan.
The texts of both the Resolution which has been referred to
and the Outline Plan for SDR's were reproduced in the Federal
Reserve Bulletin for November 1967 (pages 1877-82).
The following observations and comments on the SDR plan
are intended to summarize the main features of the plan and
some of its underlying principles.
Rational control of reserve-asset supply. Adoption of the SDR
plan means that there exists for the first time an international
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FEDERAL RESERVE SYSTEM
agreement that the world supply of international reserve assets can,
should, and will be subjected to deliberate international regulation. This means that the supply of international reserve assets
is likely to grow in the future at a controlled rate reasonably
related to the need for reserves, rather than at a rate determined
primarily, as in the past, either by the vagaries of gold production and of gold flows into or out of monetary use, or by the
rate of increase in foreign official holdings of reserve currencies.
Universalist approach. The Outline Plan is based upon an approach that may best be described as universalist, because all
member countries of the IMF will be on the same footing with
respect to the distribution of SDR's. The universalist approach
shows up in several ways. First, any country that is a member
of the IMF may participate in the reserve-creating system if it
wishes to do so. Second, all participating countries will receive
the same kind of created reserves: SDR's. Third, the amounts of
SDR's created periodically will be distributed among all participating countries in proportion to their quotas in the Fund. Acceptance of the universalist approach was not assured from the
beginning. Under some proposals put forward in the early stages
of the negotiations, there would have been differentiation among
countries in respect of one, two, or all three of the aspects just
listed.
Nature of the facility: absence of currency "backing." Unlike the
existing IMF, which holds a pool of currencies provided out of
quota-subscription payments by member countries, the SDR system will entail no holding of currencies by the Fund. As member countries use SDR's, they will transfer them directly to other
members in exchange for currency. The role of the Fund itself,
aside from the function of keeping the central record of holdings
of and transactions in SDR's (and aside from its acceptance
and use of SDR's in transactions), has been likened to that of
a traffic policeman, guiding the flow of SDR's among members
according to principles to be noted presently.
Each participating country's initial holdings of SDR's will be
acquired through allocation by the Fund, and each country's
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ANNUAL REPORT OF BOARD OF GOVERNORS
holdings will be strengthened by periodic allocations. Countries
will be entitled to use SDR's to finance balance of payments
deficits, and SDR's will thus shift back and forth among countries
as their payments positions fluctuate.
The "backing" of SDR's—the feature that assures their acceptability—is the obligation of each participant to receive
SDR's from other members up to the point where its holdings
are equal to three times its cumulative allocations, inclusive of
those allocations.
Attractiveness of SDR's. The attractiveness of SDR's to the
monetary authorities of participating countries will be enhanced
by a gold-value guaranty and an interest yield. It is expected that
the rate of interest paid to SDR holders (such payments to be financed by payments to the Fund by each country on its cumulative
allocations) will be significantly below the rate obtainable on reserve-currency holdings. Switching from reserve-currency holdings to SDR's will be further discouraged by a provision in
the Outline Plan that a participant will be expected not to use
SDR's "for the sole purpose of changing the composition of its
reserves."
Creation of SDR's. Allocations of new SDR's will be proposed
as and when they are deemed necessary in view of aggregate
world reserve needs and availabilities. They will not be proposed
with a view to the balance of payments positions of individual
participating countries. The United States supported this principle from the beginning. As Secretary Fowler said to the Subcommittee on International Exchange and Payments of the Joint
Economic Committee on September 14, 1967: "Throughout
the course of these negotiations I have done my best to make
it very clear—as I note the subcommittee report did 2 years ago
—that the United States was fixing its eyes on the global needs
for reserves and did not expect that the plan for reserve creation
would solve the United States balance of payments problem.
That is a matter which I associate with the general subject of
the adjustment process. At an early date in the negotiations
there was a complete and full understanding that negotiations
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FEDERAL RESERVE SYSTEM
with regard to a supplementary reserve were to deal with global
needs and not with the problems of the balance of payments
of individual countries."
Another aspect of the allocation procedure should be mentioned, if only because it was one of the main issues in the negotiations during 1967. This is the provision that for any decision
on the basic period for, timing of, amount, and rate of allocation
of SDR's, an 85 per cent majority of the voting power of participants will be required. The effect of this provision is to give a veto
over such decisions to the United States, and also to the group of
countries in the European Economic Community—as well as, of
course, to any other group of countries controlling more than 15
per cent of the total voting power of participants.
Use of SDR's. Principles governing the use of SDR's are:
1. Automaticity. The use of SDR's by participating countries
will not be subject to prior challenge. However, the Fund may
make representations to any participant that, in the Fund's judgment, has failed to observe the understanding as to appropriate
use, and it may direct drawings to such participant to the extent
of such failure. (Regarding "directed" or guided drawings, see
4 below.)
2. The "needs" test. Each participating country will normally
be expected to use SDR's "only for balance of payments needs
or in the light of developments in its total reserves," and not, as
already noted above, for the sole purpose of changing the composition of its reserves.
3. Use of SDR's to redeem own currency. Normally countries
using SDR's will wish to receive convertible currencies that they
can use on their exchange markets. A participant may also use
SDR's to purchase balances of its currency held by another
participant. It may do so if (a) it meets the "needs" test for
use of SDR's (see 2 above), and (b) the other participant agrees
to the transaction. Obviously this provision is of special interest
to the United States, as a reserve-currency country.
4. Principles of guidance. The Fund's selection of participants
from whom currencies may be drawn in exchange for SDR's
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ANNUAL REPORT OF BOARD OF GOVERNORS
will normally be based upon the following principles (plus any
others the Fund may adopt):
(a) "Normally, currencies will be acquired from participants
that have a sufficiently strong balance of payments and reserve
position, but this will not preclude the possibility that currency
will be acquired from participants with strong reserve positions
even though they have moderate balance of payments deficits."
(b) As stated in the Outline Plan, "The Fund's primary criterion will be to seek to approach over time equality, among the
participants indicated from time to time by the criteria in (a)
above, in the ratios of their holdings of special drawing rights,
or such holdings in excess of net cumulative allocations thereof,
to total reserves." It was subsequently decided—and the draft
amendment of the Fund Articles of Agreement so provides—
that the guidance principle during the first basic period will be
that of equality, over time, in the ratios of SDR holdings in excess of net cumulative allocations to official holdings of gold and
foreign exchange. Because initially these ratios will be zero for
all participants, the amendment also provides that guidance will
be in proportion to official holdings of gold and foreign exchange
when the ratios of excess holdings of SDR's are equal.
5. Reconstitution. Reconstitution of SDR holdings by participating countries was one of the main issues of the negotiations
during 1967, which it proved possible to settle only in the
final stages of the negotiations leading up to Group of Ten
acceptance of the Outline Plan. The compromise agreed
upon for the first 5-year period after the SDR system has
been activated is that a participating country's average net
utilization of SDR's during the period as a whole must not exceed
70 per cent of its average net cumulative allocation during the
period. This does not mean that average net utilization may
not exceed 70 per cent during part of the period; it means only
that if there is such an excess, reconstitution, to the extent necessary, must take place before the end of the period. It should also
be noted that the "average net use" phraseology means that the
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FEDERAL RESERVE SYSTEM
duration of use during the period, as well as the amount used,
is relevant to whether reconstitution is or is not necessary. Moreover, the language of the reconstitution section of the Outline
Plan indicates specifically that the calculation of average net
use shall take account of any holdings of SDR's above net
cumulative allocations during the period, as well as of use of
SDR's below such allocations.
Activation. Ratification of the SDR amendment to the Fund
Articles, while essential, will not by itself bring the plan into
operation. In order to bring it into operation, an allocation must
be made; and this can be done only after a decision by the
Fund's Board of Governors, on the basis of a proposal by the
Managing Director concurred in by the Executive Directors.
Before formulating a proposal, the Managing Director must satisfy himself that certain conditions have been met and must
"conduct such consultations as will enable him to ascertain that
there is broad support among participants for the allocation of
special drawing rights . . . "
The foregoing summary of the main features of the SDR plan,
and of some of its underlying principles, indicates the general
principles that have been devised to govern the creation, distribution, holding, and use of SDR's. It is reasonable to assume that
the SDR system, like most economic and financial systems, will
evolve over time. While it is possible, of course, that unanticipated
problems will arise that will require the formulation of additional
principles and understandings, it seems likely that the evolution of
the system will be mainly in the direction of greater flexibility, as
familiarity with and confidence in the new asset grows. Meanwhile,
the Outline Plan agreed upon at Rio provides the essential basis
for a workable system of international reserve-asset creation.
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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. In most States joint examinations are made in cooperation witn the State banking authorities, while in others alternate
318
FEDERAL RESERVE SYSTEM
independent examinations are made. All but 33 of the 1,313
State member banks were examined during 1967.
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, and (6) invest in bank premises
an amount in excess of 100 per cent of a bank's capital stock.
By Act of Congress approved September 12, 1964 (Public
Law 88-593), insured banks are required to inform the appropriate Federal banking agency of any changes in control of management of such banks and of any loans by them secured by 25
per cent or more of the voting stock of any insured bank. In 1967,
30 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, reports
of 18 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 appro-
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ANNUAL REPORT OF BOARD OF GOVERNORS
priate 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.
By Act of Congress approved July 3, 1967 (Public Law 9044), each member bank of the Federal Reserve System is required
to include with (but not as part of) each report of condition and
copy thereof a report of all loans to its executive officers since
the date of submission of its previous report of condition. Since
enactment of this legislation, member banks have submitted two
condition reports, dated October 4, 1967, and December 30,
1967, respectively. With the report for October 4, 1967, member
banks reported 9,095 loans to their executive officers during the
approximate 3-month period covered since June 30, 1967, the
date of the last condition report submitted before enactment of
the new law. These loans aggregated $14,203,372 and were
made at rates ranging from 2 per cent to 18 per cent.1 Compilation of similar information with respect to the call report for
December 30, 1967, has not been completed.
Federal Reserve membership. As of December 31, 1967, member banks accounted for 44 per cent of the number of all commercial banks in the United States and for 63 per cent of all
commercial banking offices, and they held approximately 84 per
cent of the total deposits in such banks. State member banks acx
The rate of 18 per cent reflects the inclusion of rates of \Vi per cent per
month charged on credit-card and check-credit plans.
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FEDERAL RESERVE SYSTEM
counted for 14 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 6,071 banks that were members of the Federal Reserve
System at the end of 1967, 4,758 were national banks and 1,313
were State banks. During the year there were net declines of 41
national and 38 State member banks. The decline in the number
of national banks reflected 53 conversions to branches incident to
mergers and absorptions and 5 conversions to nonmember banks,
which was partly offset by the organization of 18 new national
banks and the conversion of 7 nonmember banks to national
banks. The decrease in State member banks reflected mainly 12
conversions to branches incident to mergers and absorptions and
21 withdrawals from membership.
At the end of 1967 member banks were operating 13,649
branches, 749 more than at the close of 1966; this included 708
de novo establishments.
Detailed figures on changes in the banking structure during
1967 are shown in Table 19, pages 370 and 371.
Bank mergers. Under Section 18(c) of the Federal Deposit In
surance Act (12 U.S.C. 1828(c)), the prior written consent of
the Board of Governors of the Federal Reserve System must be
obtained before a bank may merge, consolidate, or acquire the
assets and assume the liabilities of another bank if the acquiring,
assuming, or resulting bank is to be a State member bank.
In deciding whether to approve an application, the Board is
required by Section 18(c) to consider the impact of the proposed
transaction on competition, the financial and managerial resources and prospects of the existing and proposed institution, and
the convenience and needs of the community to be served. The
Board is precluded from approving "any proposed merger transaction which would result in a monopoly, or which would be in
furtherance of any combination or conspiracy to monopolize or
to attempt to monopolize the business of banking in any part of
the United States." A proposed transaction "whose effect in any
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ANNUAL REPORT OF BOARD OF GOVERNORS
section of the country may be substantially to lessen competition,
or to tend to create a monopoly, or which in any other manner
would be in restraint of trade," may be approved only if the
Board is able to find that the anticompetitive effects of the transaction would be clearly outweighed in the public interest by the
probable effect of the transaction in meeting the convenience and
needs of the community to be served.
Before acting on each application the Board must request reports from the Attorney General, the Comptroller of the Currency, and the Federal Deposit Insurance Corporation on the
competitive factors involved in each transaction. The Board in
turn responds to requests by the Comptroller or the Corporation
for reports on competitive factors involved when the acquiring,
assuming, or resulting bank is to be a national bank or an insured nonmember State bank.
During 1967 the Board disapproved 2 and approved 13 applications, and it submitted 76 reports on competitive factors to
the Comptroller of the Currency and 48 to the Federal Deposit
Insurance Corporation. As required by Section 18(c) of the
Federal Deposit Insurance Act, a description of each of the 13
applications acted on and approved by the Board, together with
other pertinent information, is shown in Table 21 on pages 374
through 393.
Statements and orders of the Board with respect to all bank
merger applications, whether approved or disapproved, are released immediately to the press and the public and are published
in the Federal Reserve Bulletin. These statements and orders
set forth the factors considered, the conclusions reached, and the
vote of each Board member present.
Bank holding companies. During 1967, pursuant to Section 3
(a)(l) of the Act, the Board approved 10 applications for prior
approval to become a bank holding company and denied one application. Pursuant to Section 3 ( a ) ( 3 ) of the Act, the Board approved applications by 11 bank holding companies, involving acquisition of shares in 16 banks, and denied two applications. Two
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FEDERAL RESERVE SYSTEM
of the approved acquisitions involved two affiliated bank holding
companies, both of which were required to file applications. To
provide necessary current information, annual reports for 1966
were obtained from all registered bank holding companies pursuant to the provisions of Section 5(c) of the Act.
Statements and orders of the Board with respect to applications to form or to expand bank holding companies, whether approved or disapproved, are released immediately to the press and
the public and are published in the Federal Reserve Bulletin.
These statements and orders set forth the factors considered, the
conclusions reached, and the vote of each Board member present.
Foreign branches of member banks. At the end of 1967, 15
member banks had in active operation a total of 295 branches
in 54 foreign countries and overseas areas of the United States;
eight national banks were operating 280 of these branches, and
seven State member banks were operating 15 such branches. The
number and location of these foreign branches were as shown in
the accompanying tabulation.
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 1967 approved
62 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: one branch in Cordoba, Flores, and Rosario,
Argentina; La Paz, Bolivia; Melipilla and Vina del Mar, Chile;
Guayaquil, Ecuador; San Pedro Sula, Honduras; Managua, Nicaragua; La Chorrera and Panama City, Panama; Lima, Peru;
Port of Spain, Trinidad; St. Thomas and St. Croix, Virgin Islands;
Birmingham, England; Marseilles and Paris, France; Munich,
Germany; Piraeus, Greece; Rome, Italy; Zurich, Switzerland;
Port Harcourt, Nigeria; and Lahore, Pakistan; two branches in
Bogota, Colombia; David, Panama; Asuncion, Paraguay; Brussels, Belgium; London, England; and Hong Kong; three branches
323
ANNUAL REPORT OF BOARD OF GOVERNORS
in Valparaiso, Chile; and Seoul, Korea; four branches in Santiago, Chile; and five branches in Buenos Aires, Argentina.
Latin America
Argentina
Bahamas
_ t. .
Bolivia
133 England
25 Ireland
3 A, .
. Africa
2
r -u •
Liberia
1 N
:::::::::: "
^
Colombia
8 Afeflr Eayf
Dominican Republic
5
Dubai
Ecuador
4
Lebanon
El Salvador
1
Saudi Arabia
Guatemala
2
FarEarf
Gu ana
!
y
Hong Kong
Honduras
2
India
Jamaica
1
Japan
Mexico
5
Korea
Nicara ua
2
§
Malaysia
Panama
19
Okinawa
Para ua
4
§ y
Pakistan
Peru
5
Philippines
1
Singapore
2
Taiwan
Venezuela
4
Thailand
Virgin Islands (British) 2
Vietnam
Continental Europe
34 U.S. Overseas Areas and
Austria
1 Trust Territories
Belgium
8
Canal Zone
Germany
9
Guam
France
6
Puerto Rico
Greece
2
Truk Islands
Italy
2
Virgin Islands
Netherlands
3
Switzerland
3
Total
324
24
1
Q
3
1
1
6
1
3
2
63
10
8
12
3
5
2
4
5
8
2
2
2
31
2
2
16
1
10
295
FEDERAL RESERVE SYSTEM
Acceptance powers of member banks. During the year the Board
approved the applications of four member banks, pursuant to the
provisions of Section 13 of the Federal Reserve Act, for increased
acceptance powers. Two 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. The other
two banks were granted permission to accept commercial drafts
or bills up to 100 per cent of paid-up and unimpaired capital
stock and surplus.
Foreign banking and financing corporations. At the end of 1967
there were five corporations operating under agreements with the
Board pursuant to Section 25 of the Federal Reserve Act relating
to investment by member banks in the stock of corporations engaged principally in international or foreign banking. Three of
these "agreement" corporations have head offices in New York,
and one has its head office in Miami, Florida. The four corporations were examined during the year by examiners for the Board
of Governors. The fifth "agreement" corporation is a national
bank in the Virgin Islands and is owned by a State member bank
in Philadelphia.
During 1967, under the provisions of Section 25 (a) of the
Federal Reserve Act, the Board issued final permits to five corporations to engage in international or foreign banking or other
international or foreign financial operations. Four of these corporations commenced operations in 1967. At the end of the year
there were 46 corporations in active operation under Section
25 ( a ) : 28 have home offices in New York City, three in Boston,
four in Philadelphia, one in Pittsburgh, one in Winston-Salem,
one in Atlanta, two in Chicago, two in Detroit, two in San
Francisco, one in Los Angeles, and one in Seattle. The corporation in Seattle has five active branches in Hong Kong, and one
of the corporations in Philadelphia operates a branch in London.
Examiners for the Board of Governors examined 43 of these
corporations during 1967.
325
ANNUAL REPORT OF BOARD OF GOVERNORS
Bank Examination Schools and other training activities. In 1967
the Bank Examination School conducted four 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 was established in 1952 by the
three Federal bank supervisory agencies, and since 1962 has been
conducted jointly by the Federal Reserve System and the Federal Deposit Insurance Corporation.
Since the establishment of this program, 3,385 persons have
attended the various sessions. This number includes representatives of the Federal bank supervisory agencies; the State Banking
Departments of California, Connecticut, Idaho, Indiana, Kentucky, Louisiana, Maine, Michigan, Mississippi, Montana, Nebraska, New Hampshire, New Jersey, New Mexico, New York,
North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Tennessee, Vermont, Virginia, Washington, and Wyoming; the Treasury Department of the Commonwealth of Puerto Rico; and 16 foreign countries.
Another school, the Discount Collateral Evaluation Training
School, was set up in 1967 for the purpose of training System
personnel responsible for the discount function in the application
of suitable standards for the evaluation of collateral presented
by member banks for discount purposes. Two sessions of the
school were held during the year with a total of 40 System personnel in attendance.
326
FEDERAL RESERVE SYSTEM
LEGISLATION ENACTED
Real estate loans by national banks. An Act of Congress ap-
proved May 25, 1967 (Public Law 90-19), amended the provision of Section 24 of the Federal Reserve Act, exempting certain
industrial loans from the restrictions or limitations upon real
estate loans, by substituting the Secretary of Housing and Urban
Development for the Housing and Home Finance Administrator.
Loans to executive officers. An Act of Congress approved July
3, 1967 (Public Law 90-44), amended Section 22(g) of the Federal Reserve Act so as to liberalize the restrictions on loans by
member banks of the Federal Reserve System to their executive
officers.
Antitrust exemptions for voluntary agreements or programs. An
Act of Congress approved August 9, 1967 (Public Law 90-62),
extended to June 30, 1969, the standby authority for providing
procedures for obtaining exemptions from the antitrust laws
to assist in safeguarding the balance of payments position of the
United States. As stated in the report of January 1, 1968, which
the Attorney General is required to make to the Congress, the
exemptions provided by the standby legislation have not been
put into effect.
Interest on deposits; reserves of member banks; open market oper-
ations. An Act of Congress approved September 21, 1967 (Public Law 90-87), amended Sections 19 and 14(b) of the Federal
Reserve Act by extending for 1 year the temporary authority
of the Board (1) to exercise more flexibility in regulating the
maximum rates of interest payable by member banks on deposits,
(2) to fix higher reserve requirements on time deposits of member banks, and (3) to permit open market operations by Federal
Reserve Banks in direct obligations of, or those fully guaranteed
by, any agency of the United States. The additional powers
granted by this law expire September 21, 1968.
Acquisition of stock of small business investment companies. An
Act of Congress approved October 11, 1967 (Public Law 90-
327
ANNUAL REPORT OF BOARD OF GOVERNORS
104), increased the aggregate amount that a bank may invest in
the stock of small business investment companies from 2 to 5 per
cent of the bank's capital and surplus, but limited such investment in any one company to 50 per cent of any class of its
equity securities having actual or potential voting rights.
Lottery ticket sales by State member banks. An Act of Congress
approved December 15, 1967 (Public Law 90-203), added
Section 9A to the Federal Reserve Act, effective April 1, 1968,
to prohibit State member banks from fostering or participating
in gambling activities, and particularly the sale of lottery tickets.
Salaries of members of Federal Reserve Board. An Act of Con-
gress approved December 16, 1967 (Public Law 90-206), contained a provision which, in effect, amended Section 10 of the
Federal Reserve Act by increasing the salaries of the members of
the Board, other than the Chairman, from $28,500 to $29,500
per annum. The salary of the Chairman remains $30,000.
Tax status of bank holding company distributions. An Act of Con-
gress approved December 27, 1967 (Public Law 90-225), added
a new subsection (e) to Section 1102 of the Internal Revenue
Code of 1954 relating to special rules for income tax treatment
of distributions resulting from the 1966 amendments to the Bank
Holding Company Act of 1956.
328
FEDERAL RESERVE SYSTEM
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
short-term promissory notes of the member bank's customers)
that meets statutory "eligibility" requirements, it must pay interest at a rate not less than one-half of 1 per cent higher than the
Reserve Bank's basic discount rate. For several years the Board
of Governors has urged legislation that would permit a member
bank, in appropriate circumstances, to borrow on any security
satisfactory to its Reserve Bank without the necessity of paying
a higher rate of interest simply because the security was "ineligible" for the basic rate.
The Board's recommendation is embodied in S. 966, 90th
Congress, which passed the U.S. Senate on April 14, 1967.
The need for enactment of such legislation has increased as
member banks have reduced their holdings of U.S. Government
securities and broadened the scope of their lending in order
to meet the expanding credit demands of their customers. Many
of these loans cannot qualify as security for Federal Reserve
advances except at the "penalty" rate of interest, although their
quality may be equal to that of presently "eligible" paper.
To enable the Federal Reserve System always to be in a position to carry out promptly and efficiently one 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 urges
enactment of S. 966, which would enable member banks to
borrow from a Federal Reserve Bank, at the basic discount rate,
on their notes secured to the satisfaction of the Reserve Bank.
"Par clearance." Most banks pay the face amount of all checks
presented to them for payment; this practice is frequently described as "par clearance." In a few areas of the country, how-
329
ANNUAL REPORT OF BOARD OF GOVERNORS
ever, many small banks deduct a so-called "exchange charge"
from the face amount of checks presented by mail and remit
only the balance. In such circumstances the drawee bank shifts
all or a portion of the expense incurred by it in connection with
the collection process to the payee of the check or to an indorsee.
In the Board's view there is no justification for the increased
costs, delays, and inefficiencies that result when banks do not
pay all checks at their face amount.
The trend of legislation in this area at the State level has been
toward requiring banks to pay the face amount of checks drawn
upon them. Florida, Minnesota, and South Dakota have recently
enacted legislation along these lines. At the Federal level, several
bills have been introduced into the 90th Congress to require "par
clearance" by all insured banks. Despite the progress in this direction that has been made at the State level, the Board favors enactment of such a requirement as it is embodied in S. 1737. Such
a bill would defer the effective date of the requirement for 1 year
from the date of enactment to give nonpar banks a sufficient time
to adjust their practices.
Reserve requirements. In its ANNUAL REPORTS for 1964, 1965,
and 1966, the Board of Governors favored legislation that would
(1) authorize it to fix required reserve percentages on a graduated basis according to the amount of a bank's deposits and
(2) make such requirements applicable to all Federally insured
banks (rather than to member banks only). Legislation proposed
by the Board to accomplish these purposes is embodied in S.
1298, 90th Congress.
The reasons for the proposed changes in the structure of bank
reserve requirements have become stronger with the passage of
time. Thus, in the Board's judgment, the differences between
reserve city and "country" banks, in both size and functions, have
decreased substantially and the division of member banks into
such categories has become arbitrary to the point where such division is a major obstacle to the development of a more equitable
system of reserve requirements. Since deposits in nonmember
330
FEDERAL RESERVE SYSTEM
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.
Although the Board was given increased flexibility in fixing
reserve requirements by legislation enacted in 1966 and extended
in 1967 to September 20, 1968, 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. Enactment of S. 1298 would provide a rational and
equitable basis for reserve requirements. All Federally insured
banks of the same size, in terms of demand deposits, would carry
equal reserves against such deposits. In connection with making
reserve requirements applicable to nonmember insured banks, S.
1298 would grant such banks access to Federal Reserve discount
facilities.
The Board urges enactment of S. 1298.
Margin requirements for securities transactions. For decades, the
Board's Regulation T has limited the credit that brokers and
dealers may extend on securities that are registered on exchanges,
and its Regulation U has limited the credit that banks may extend for the purpose of purchasing or carrying securities so registered. Recently the Board promulgated Regulation G to bring
lenders other than brokers, dealers, or banks within the scope of
margin requirements in connection with transactions involving
registered securities.
Insofar as securities traded over the counter are concerned, the
law, generally speaking, forbids brokers and dealers to extend
any credit whatever, while permitting banks and other lenders to
extend credit unlimited by any governmentally imposed margin
requirements. The Board considers that its inability to extend the
coverage of margin requirements to credit extended by banks and
other lenders for the purpose of purchasing and carrying overthe-counter securities represents a serious gap in the effectiveness
of its regulations in preventing excessive use of credit in the securities market.
331
ANNUAL REPORT OF BOARD OF GOVERNORS
Accordingly, the Board renews the recommendation submitted in previous ANNUAL REPORTS that the Congress enact legislation modifying Section 7 of the Securities Exchange Act of
1934 to eliminate the difference in status, for credit purposes, of
securities that are registered on a national securities exchange
and securities that are traded only over the counter. A proposal
to bring over-the-counter securities within the coverage of margin regulations was made by the Securities and Exchange Commission's 1963 Special Study of Securities Markets. The continuing growth of the over-the-counter securities market has given
this problem increased importance.
S. 1299 and H.R. 7696 would modify the law in the form
favored by the Board, and the Board recommends enactment of
such legislation.
Purchase of obligations of foreign governments by Federal Reserve
Banks. Under present law, balances that the Reserve Banks acquire in foreign central banks in connection with the System's
foreign currency operations may be invested in prescribed kinds
of bills of exchange and acceptances. On occasion these investment media have not been conveniently available. S. 965, which
was passed by the Senate on April 14, 1967, would facilitate
economic use of such balances by permitting them to be invested
in any obligations of foreign governments or monetary authorities that will mature within 12 months and that are payable in a
convertible currency. For several years the Board has favored
the authorization of such investments; accordingly, it recommends enactment of S. 965.
Loans to bank examiners. The Criminal Code prohibits loans to
a bank examiner by any bank that the examiner is authorized to
examine. For several years the Board has favored modification
of this prohibition to permit, under appropriate safeguards, a
Federally insured bank to make a home mortgage loan to a bank
examiner in an amount not exceeding $30,000. This modification
is embodied in H.R. 7451, which the Board recommends be enacted.
332
FEDERAL RESERVE SYSTEM
LITIGATION
Investment Company Institute et al. v. Camp. The Investment
Company Institute, representing open-end investment companies,
investment advisers, and principal underwriters, 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 a national bank
to invest funds collectively that had been tendered to the bank
as managing agent solely for investment.
Pursuant to statutory authority to regulate the fiduciary activities of national banks (12 U.S.C. 92a), the Comptroller
promulgated a revised fiduciary regulation (Regulation 9, 12
CFR 9) which purported to authorize, in addition to the types
of collective investment funds already permitted, collective investment accounts for funds held by a national bank in the
capacity of managing agent and to authorize the Comptroller
to approve the collective investment of such funds in manners
other than those expressly provided.
On May 10, 1965, the Comptroller approved a plan submitted
by First National City Bank of New York for the establishment
and operation of a collective investment fund called the Commingled Investment Account. After registering the Account with
the Securities and Exchange Commission, pursuant to the Investment Company Act of 1940 (15 U.S.C. 80), and filing a registration statement pursuant to the Securities Act of 1933 (15 U.S.C.
77a), the bank sold participating interests to the public. The
plan contemplated operation of the Account by a committee of
five persons, initially appointed by the bank and thereafter to
be elected annually by the participants in the Account. At least
40 per cent of the members of the committee were required to
be persons not affiliated with the bank, but the majority of the
members were expected to be officers in the bank's trust and
investment division. The committee was authorized to enter into
a management agreement with the bank, subject to approval by
333
ANNUAL REPORT OF BOARD OF GOVERNORS
the Comptroller and by participants having a majority of the
units of participation; pursuant to such an agreement, the bank
served as investment adviser and custodian for the Account at
a stated fee.
The Institute attacked the Comptroller's revised regulation as
unauthorized under the provisions of 12 U.S.C. 92a and in
violation of certain provisions of the Federal banking laws (12
U.S.C. 24, 78, 377, and 378). The Court concluded, with respect
to certain procedural questions raised, that (1) the plaintiffs
had a right to complain of the competition that was being condoned under the Comptroller's regulation, that is, that the
plaintiffs had legal standing to challenge the Comptroller's Regulation 9; and (2) a justiciable controversy existed between the
parties on the basis of the impact upon the plaintiffs of the authority claimed by the Comptroller in promulgating the regulation at which the suit was directed. On the substantive merits of
the suit, the Court held that the commingling of managing
agency accounts is not a "fiduciary" activity within the meaning
of 12 U.S.C. 92a, that such commingling is not authorized under
Federal laws or those of the State of New York, and that the
Comptroller therefore did not have statutory authority to empower the bank to create, organize, and manage the Account.
The Court further concluded that the Account was in fact an
investment fund and that the banking laws make it illegal for a
national bank to establish, operate, or be affiliated with such an
investment fund (12 U.S.C. 24, 78, 377, 378).
An interpretation by the Board (Federal Reserve Bulletin,
October 1965, p. 1410) to the effect that interlocking personnel
relationships between the bank and the Account were not prohibited by Section 32 of the Banking Act of 1933 (12 U.S.C. 78)
—based on a finding that the Account was in effect a department
of the bank—was rejected by the Court on the ground that the
Account and the bank were contractually affiliated and that one
may not be considered a department of the other.
334
FEDERAL RESERVE SYSTEM
Baker Watts & Co. et al. \. Saxon. In a suit instituted by a
group of investment bankers, the court rejected an interpretation by the Comptroller of the Currency purporting to authorize
national banks to underwrite and deal in governmental securities known as "revenue bonds." (See ANNUAL REPORT for 1966,
page 314.) The court's decision is under review in the U.S.
Court of Appeals for the District of Columbia, on an appeal by
the Port of New York Authority.
Detroit Bank & Trust Co. et al. v. Saxon and Board of Governors of Federal Reserve System. A suit was instituted in
November 1966 to prevent consummation of a proposed acquisition by Michigan National Bank, Detroit, Michigan, of voting
stock of Michigan National Bank N.A., Detroit. (See ANNUAL
REPORT for 1966, page 316.) On June 5, 1967, a stipulation
for dismissal of the suit, joined in by all parties, was filed in the
U.S. District Court for the District of Columbia. An order of
dismissal was thereafter entered by the Court.
335
ANNUAL REPORT OF BOARD OF GOVERNORS
RESERVE BANK OPERATIONS
Earnings and expenses. The accompanying table summarizes
the earnings, expenses, and distribution of net earnings of the
Federal Reserve Banks for 1967 and 1966.
EARNINGS, EXPENSES, AND DISTRIBUTION OF NET EARNINGS
OF FEDERAL RESERVE BANKS, 1967 AND 1966
(In thousands of dollars)
Item
Current earnings
Current expenses
Current net earnings
Net addition to current net earnings
Net earnings before payments to U.S. Treasury
Dividends paid
Payments to U.S. Treasury (interest on F.R. notes).
Transferred to surplus
1967
1966
2,190,404
220,121
1,908,500
207,401
1,970,283
1,701,099
2,094
996
1,972,377
1,702,095
35,028
1,907,498
33,696
1,649,455
29,851
18,944
Current earnings of $2,190 million in 1967 were 15 per cent
higher than in 1966, reflecting increases of $301 million on U.S.
Government securities and $3 million on foreign currencies,
and a decrease of $21 million on discounts and advances.
Current expenses were $13 million more than in 1966, or
6 per cent. Statutory dividends to member banks amounted to
$35 million, an increase of $1 million from 1966. 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 $1,907 million for the year, compared with $1,649
million in 1966. This amount consists of all net earnings after
dividends and the amount necessary to bring surplus to the level
of paid-in capital.
336
FEDERAL RESERVE SYSTEM
Expenses of the Federal Reserve Banks include costs of
$847.71 for nine regional meetings incident to the Treasury Department savings bond program.
A detailed statement of earnings and expenses of each Federal Reserve Bank during 1967 is shown in Table 7 on pages 358
and 359 and a condensed historical statement in Table 8 on
pages 360 and 361.
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 1967
amounted to $46,417 million—an increase of $3,805 million
over 1966. Holdings of U.S. Government securities increased
$4,289 million, whereas there were decreases of $471 million
in discounts and advances and $13 million in acceptances.
RESERVE BANK EARNINGS ON LOANS AND SECURITIES,
Item and year
Total
Discounts
and
advances
Acceptances
1965-67
U.S.
Govt.
securities
In millions of dollars
Average daily holdings:
1965
1966
1967
Earnings:
1965
1966
1967
39,230
42,612
46,417
492
649
178
77
117
104
38,661
41,846
46,135
1,545.0
1,885.8
2,164.6
19.8
29.2
3.2
5.8
4.8
1,522.0
1,850.8
2,152.1
7.7
In per cent
Average rate of interest:
1965
1966
1967
1
Based on holdings at opening of business.
337
ANNUAL REPORT OF BOARD OF GOVERNORS
The average rates of interest on holdings increased from
4.42 per cent to 4.66 per cent on U.S. Government obligations
and decreased from 4.50 per cent to 4.33 per cent on discounts
and advances and from 4.96 per cent to 4.62 per cent on acceptances.
Volume of operations. Table 10 on page 362 shows the volume
of operations in the principal departments of the Federal Reserve
Banks for 1964-67.
Discounts and advances sharply reversed the rising trend of
recent years in both number and dollar amount, and the number
of banks borrowing dropped to 1,104 from 1,658 in 1966.
Volume was again higher than in the previous year in most
of the other operations, particularly in coin received and counted,
in food stamps redeemed, and in transfers of funds.
Fiscal agency function: Premature disclosure of information. On
August 17, 1967, the Federal Reserve Bank of New York informed the Treasury that reports in the securities market gave
reason to believe that terms of the Treasury offering that day had
been "leaked" before the official release time. Investigation by
the Treasury revealed that a middle-grade employee of the Federal Reserve Bank of Philadelphia had prematurely disclosed the
terms to an employee of a securities firm. The Reserve Bank
employee was immediately relieved of all duties and died of a
heart attack a few days later. Investigating agents found no evidence that he had received any remuneration. The findings were
turned over to the Department of Justice for further review to
determine whether there had been a violation of criminal law,
and new procedures were developed by the Treasury and Federal
Reserve to prevent the possibility of a recurrence.
Loan guarantees for defense production. Under the Defense Pro-
duction Act of 1950, the Departments of the Army, Navy, and
Air Force, the Defense Supply Agency of the Department of
Defense, the Departments of Commerce, Interior, and Agriculture, the General Services Administration, the National Aeronautics and Space Administration, and the Atomic Energy Com338
FEDERAL RESERVE SYSTEM
mission 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 1967 the guaranteeing agencies authorized the issuance of eight guarantee agreements covering loans totaling $106
million. Loan authorizations outstanding on December 31, 1967,
totaled $52 million, of which $45 million represented outstanding loans and $8 million additional credit available to borrowers.
Of total loans outstanding, 70 per cent on the average was
guaranteed. During the year approximately $205 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 15 (page 365) shows guarantee fees and maximum
interest rates applicable to Regulation V loans.
Foreign and international accounts. Assets held for foreign ac-
count at the Federal Reserve Banks increased $2,371 million in
1967. At the end of the year they amounted to $21,211 million:
$10,661 million of earmarked gold; $9,223 million of U.S.
Government securities (including securities payable in foreign
currencies); $135 million in dollar deposits; $156 million of
bankers' acceptances purchased through Federal Reserve Banks;
and $1,036 million of miscellaneous assets. The latter item
includes mainly dollar bonds issued by foreign countries and
international organizations. Assets held for international organizations, including IMF gold deposit, decreased $79 million to
$9,438 million.
In 1967 new accounts were opened in the names of the
Central Bank of Algeria, Central Bank of the West African
States, Central Bank of Kenya, Foreign Exchange Bank of
Korea, and Bank of Uganda.
New gold collateral loan arrangements—including a standby
commitment—amounted to $50 million in 1967. All drawings
339
ANNUAL REPORT OF BOARD OF GOVERNORS
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 1967, with the approval of the Board,
properties adjacent to the Federal Reserve Bank of Cleveland
and to the Buffalo and Omaha Branches were acquired for future expansion, and a site was obtained for a new building for the
Memphis Branch.
Table 6 on page 357 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.
340
FEDERAL RESERVE SYSTEM
PUBLIC INFORMATION, ORGANIZATION, AND
PROCEDURE
During 1967 a number of changes were made in Rules of both
the Board of Governors and the Federal Open Market Committee
regarding public information, organization, and procedures. The
revised Rules are summarized below.
Public information. An Act of Congress, approved June 5, 1967
(Public Law 90-23), amended section 552 of title 5, United
States Code, to codify the provisions of Public Law 89-487,
effective July 4, 1967, which had revised the Public Information
Section of the former Administrative Procedure Act. Accordingly, the Board of Governors and Federal Open Market Committee adopted, effective July 4, 1967, revisions of their respective Rules relating to the availability of information to the public.
Under the new Rules, unpublished records of the Board and of
the Committee are made available upon request unless the particular records fall within stated exemptions contained in the law.
For conforming purposes, the Board and Federal Open Market
Committee also amended their Rules of Organization and Rules
of Procedure. (These revisions in Rules were published in full
in the Federal Reserve Bulletin for July 1967, pages 1153-62.)
Delegation of authority. Effective July 1, 1967, the Board of
Governors adopted a new regulation, "Rules Regarding Delegation of Authority," pursuant to and in accordance with the
provisions of section 11 (k) of the Federal Reserve Act (12
U.S.C. 248(k)), which became effective November 5, 1966.
The new Rules are designed to provide a more expeditious means
for performance of certain of the Board's supervisory functions
and to improve its over-all efficiency in fulfilling its statutory responsibilities. (This Regulation was published in full in the Federal Reserve Bulletin for June 1967, pages 965-67.
Formal hearings. Effective August 1, 1967, the Board revised
its "Rules of Practice for Formal Hearings." This revision resulted principally from the Financial Institutions Supervisory Act
of 1966, which among other things authorized the Board to act
341
ANNUAL REPORT OF BOARD OF GOVERNORS
to prevent unsafe or unsound banking practices and violation of
law, rules, or regulations by State-chartered banks of the Federal
Reserve System, through the issuance of an order requiring such
a bank to "cease and desist" from engaging in the unlawful
activity. (The revised Rules were published in full in the Federal
Reserve Bulletin for August 1967, pages 1342-54.)
Organization and procedure. Effective August 9, 1967, the Board
of Governors revised its Rules of Organization pursuant to the
requirement of section 552 of title 5 of the United States Code
that each agency publish in the Federal Register a description
of its central and field organization.
342
FEDERAL RESERVE SYSTEM
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
1967 were audited by the public accounting firm of Lybrand,
Ross Bros. & Montgomery.
ACCOUNTANTS' OPINION
Board of Governors of the
Federal Reserve System:
We have examined the balance sheet of the Board of Governors of the
Federal Reserve System as of December 31, 1967, and the related statement of assessments and expenses for the year then ended. Our examination was made in accordance with generally accepted auditing standards,
and accordingly included such tests of the accounting records and such
other auditing procedures as we considered necessary in the circumstances.
In our opinion, the balance sheet and related statement of assessments
and expenses present fairly the financial position of the Board of Governors of the Federal Reserve System at December 31, 1967 and the results
of its operations for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the
preceding year.
Lybrand, Ross Bros. & Montgomery
Washington, D.C.
January 25, 1968
343
ANNUAL REPORT OF BOARD OF GOVERNORS
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
BALANCE SHEET
DECEMBER 31, 1967
ASSETS
OPERATING FUND:
Cash
Miscellaneous receivables and travel advances
Stockroom and cafeteria inventories at first-in, first-out cost
Total operating fund
$ 1,181,729
5,185
28,962
1,215,876
PROPERTY FUND:
Land and improvements
Building and building construction
Furniture and equipment
792,852
4,443,307
1,048,879
Total property fund
6,285,038
$ 7,500,914
LIABILITIES AND FUND BALANCES
OPERATING FUND:
Current liabilities:
Accounts payable and accrued expenses
Income taxes withheld
Accrued payroll
Fund balance:
Balance, January 1, 1967
Excess of assessments and extraordinary item
over expenses for the year ended December 31,
1967...
$ 714,619
331,543
325,582
$ 1,371,744
(220,731)
64,863
(155,868)
Total operating fund
1,215,876
PROPERTY FUND:
Fund balance:
Balance, January 1, 1967
Additions
Property adjustments and disposals
Total property fund
6,471,292
252,503
(438,757)
6,285,038
$ 7,500,914
The accompanying notes are an integral part of the financial statements.
[See page 346 for notes.]
344
FEDERAL RESERVE SYSTEM
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
STATEMENT OF ASSESSMENTS AND EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1967
ASSESSMENTS LEVIED ON FEDERAL RESERVE BANKS:
For Board expenses and additions to property
For expenditures made on behalf of the Federal Reserve Banks
Total assessments
$10,769,600
17,334,358
28,103,958
EXPENSES:
Expenditures for printing, issue and redemption of Federal Reserve
Notes, paid on behalf ofthe Federal Reserve Banks
For the Board:
Salaries
$6,852,515
Retirement and insurance contributions
1,374,737
Travel expenses
363,461
Legal, consultant and audit fees
52,677
Contractual services
442,808
Printing and binding—net
454,608
Equipment and other rentals
516,554
Telephone and telegraph
174,434
Postage and expressage
129,745
Stationery, office and other supplies
88,209
Heat, light and power
56,533
Operation of cafeteria—net
69,038
Repairs, maintenance and alterations
48,105
Books and subscriptions
29,210
System membership, Center for Latin American
Monetary Studies
27,000
Miscellaneous—net
47,600
17,334,358
10,727,234
252,503
For property additions
Total expenses
28,314,095
EXCESS OF EXPENSES OVER ASSESSMENTS BEFORE EXTRAORDINARY ITEM .
EXTRAORDINARY ITEM
(210,137)
275,000
EXCESS OF ASSESSMENTS AND EXTRAORDINARY ITEM OVER
EXPENSES
$
64,863
The accompanying notes are an integral part of the financial statements.
[See page 346 for notes.]
345
ANNUAL REPORT OF BOARD OF GOVERNORS
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
NOTES TO FINANCIAL STATEMENTS
Accounting methods
The Board has consistently followed the practice of not providing for depreciation on fixed assets. Acquisitions are charged to expense and proceeds from sales of
fixed assets are recorded as income. The property accounts are increased or reduced
at full cost, with corresponding increases or decreases in the property fund balance
when property is acquired or sold.
Assessments and expenditures made on behalf of the Federal Reserve Banks for
the printing, issuance and redemption of Federal Reserve notes are recorded on the
cash basis and produces results which are not materially different from those which
would have been produced on the accrual basis of accounting.
Extraordinary item
During 1967, $275,000 was received by the Board from a federal government
department for the sale of computer equipment purchased in 1964 for $422,589.
Long-term leases
The Board leases outside office space at an annual rental of $269,225 under a
lease expiring in 1972. This lease may be terminated with six months notice after 1969.
346
Tables
1. DETAILED STATEMENT OF CONDITION OF ALL FEDERAL RESERVE BANKS
COMBINED, DECEMBER 31, 1967
(In thousands of dollars)
ASSETS
Gold certificates on hand
Gold certificates due from U.S. Treasury:
Interdistrict settlement fund
F.R. Agents' fund
1,278
2,885,525
6,663,000
Redemption fund for F.R. notes
Total gold certificate reserves
F.R. notes of other F.R. Banks
Other cash:
United States notes
Silver certificates
National bank notes and F.R. Bank notes
Coin
11,480,435
727,538
5 ,606
2 ,351
47
351 ,259
Total other cash
Discounts and advances secured by U.S. Govt. obligations:
Discounted for member banks
Discounted for others
Other discounts and advances:
Discounted for member banks
Foreign loans on gold
359,263
131,008
12,288
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
37,800
15,975,333
26,918,382
6,086,502
48,980,217
132,200
Total U.S. Govt. securities
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
49,112,417
49,457,710
10,514,634
282,267
245,579
123,120
62,566
Total buildings
185,686
Less depreciation allowances
105,003
Total bank premises
Other assets:
Claims account closed banks
Denominated in foreign currencies
Gold due from U.S. Treasury for account International Monetary Fund
Reimbursable expenses and other items receivable
Interest accrued
Premium on securities
Deferred charges
Real estate acquired for banking-house purposes
Suspense account
All other
348
12,288
74,873
89,324
Total bought outright
Total other assets
131,008
143,296
Held under repurchase agreement
Total assets
9,549,803
1,930,632
11,042,480
30,134
80,683
110,817
237
1,604,458
233,090
3,719
295,185
1,282
2,502
3,002
6,298
3,012
2,152,785
75,331,028
1. DETAILED STATEMENT OF CONDITION OF ALL FEDERAL RESERVE BANKS
COMBINED, DECEMBER 31, 1967—Continued
(In thousands of dollars)
LIABILITIES
F.R. notes:
Outstanding (issued to F.R. Banks)
Less: Held by issuing F.R. Banks
Forwarded for redemption
44,310,612
1,838,545
101,843
1,940,388
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
42,370,224
21,000,240
1,122,722
135,436
48,419
12,433
43,120
322,908
234,860
Total other deposits
661,740
Total deposits
Deferred availability cash items
22,920,138
8,549,631
Other liabilities:
Accrued dividends unpaid
Unearned discount
Discount on securities
Sundry items payable
Suspense account
All other
615
283,529
6,753
618
38
Total other liabilities
291,553
Total liabilities
74,131,546
CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts *
Total liabilities and capital accounts
Contingent liability on acceptances purchased for foreign correspondents
599,741
599,741
75,331,028
155,875
1
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. 358 and 359.
NOTE.—Amounts in boldface type indicate items shown in the Board's weekly statement of condition
of the F.R. Banks.
349
2. STATEMENT OF CONDITION OF EACH FEDERAL RESERVE BANK, DECEMBER 31, 1967 AND 1966
(In millions of dollars unless otherwise indicated)
Total
Item
Boston
1967
1966
9,550
1,931
10,836
1,838
588
110
New York
1966
1967
Philadelphia
1967
Cleveland
Richmond
1967
1966
674
102
2,320
472
2,048
444
560
102
699
96
766
155
831
155
835
173
1,044
157
1966
1967
1966
1966
1967
ASSETS
Gold certificate account
Redemption fund for F.R. notes
11,481
12,674
698
776
2,792
2,492
662
795
921
986
1,008
1,201
F.R. notes of other Banks
Other cash
727
360
857
298
71
23
58
9
173
43
189
31
49
9
48
6
65
48
98
50
53
21
87
16
Discounts and advances:
Secured by U.S. Govt. securities
Other
129
12
74
99
2
41
7
7
25
1
1
2
4
Acceptances:
Bought outright
Held under repurchase agreements
75
89
69
124
75
89
69
124
Federal agency obligations held under repurchase
agreements
38
34
38
34
48,980
132
43,655
627
2,512
2,326
12,318
132
10,899
627
2,526
2,289
3,743
3,562
3,607
3,163
49,455
44,682
2,514
2,327
12,700
11,785
2,527
2,290
3,743
3,562
3,609
3,167
11,042
112
10,281
107
1,994
9
740
5
723
5
887
7
811
6
144
79
83
45
17
229
211
86
47
18
418
233
80
631
2
83
542
3
875
211
332
615
3
42
2,083
10
1,604
233
316
695
3
77
16
17
26
27
25
22
75,330
70,317
4,099
3,847
18,532
17,026
3,979
3,748
5,692
5,530
5,693
5,355
Total gold certificate reserves
U.S. Govt. securities:
Bought o u t r i g h t . . . .
Held under repurchase agreements
.
Total loans and securities
Cash items in process of collection
Bank oremises
Other assets:
Denominated in foreign currencies
IMF gold deposited *.
..
All other
Total assets
.
...
LIABILITIES
42,369
Total deDosits
Deferred availability cash items
.
Other liabilities and accrued dividends
•.
Total liabilities
2,496
2,388
9,854
9,238
2,444
2,306
3,404
3,316
3,882
3,680
19,779
416
174
870
83
7
844
*
8
5,994
233
31
5,278
271
56
853
77
7
896
*
9
1,449
66
13
1,458
1
14
941
78
7
962
1
8
233
430
U S Treasurer General account
foreign
Other:
IiMF gold, deposits ^
All other
40,196
20,999
1,123
135
F.R. notes
Deposits:
211
377
9
9
233
232
211
185
26
9
13
13
19
14
22,920
8,549
296
20,957
7,786
238
969
561
15
861
532
12
6,723
1,570
77
6,001
1,418
73
963
493
15
914
457
11
1,541
617
22
1,486
608
18
1,045
682
22
985
615
15
74,134
69,177
4,041
3,793
18,224
16,730
3,915
3,688
5,584
5,428
5,631
5,295
598
598
570
570
29
29
27
27
154
154
148
148
32
32
30
30
54
54
51
51
31
31
75,330
70,317
4,099
3,847
18,532
17,026
3,979
3,748
5,692
5,530
5,693
5,355
27.1
31.5
28.0
32.5
28.3
27.0
27.1
34.5
27.1
29.7
26.0
32.6
156
191
8
9
40
49
8
10
14
17
8
10
44,311
42,218
2,601
2,494
10,321
9,687
2,507
2,359
3,644
3,577
4,005
3,803
1,942
2,022
105
106
467
449
63
53
240
261
123
123
42,369
40,196
2,496
2,388
9,854
9,238
2,444
2,306
3,404
3,316
3,882
3,680
6,663
6,505
2
36,956
450
500
1,000
1,000
525
600
640
795
2,176
2,016
9,400
8,900
2,100
483
*
2,000
600
38,606
3,100
3,050
3,395
3,045
45,269
43,463
2,626
2,516
10,400
9,900
2,625
2,483
3,700
3,650
4,035
3,840
CAPITAL ACCOUNTS
Surplus .
Other capital accounts
Total liabilities and capital accounts
Ratio of gold certificate reserves to F.R. note liability
(per cent)
Contingent liability on acceptances purchased for
foreign c o r r e s p o n d e n t s . . . . . . .
...
30
3a
F.R. NOTE STATEMENT
F.R. notes:
Issued to F.R. Bank by F.R. Agent and outLess 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 Daoer
U.S. Govt. securities
Total collateral
For notes see end of table.
2. STATEMENT OF CONDITION OF EACH FEDERAL RESERVE BANK, DECEMBER 31, 1967 AND 1966— Continued
(In millions of dollars unless otherwise indicated)
to
Atlanta
Item
1967
Chicago
1966
St. Louis
Minneapolis
1967
1966
1,827
331
370
67
470
64
1967
1966
1967
Kansas City
1966
1967
Dallas
1966
1967
San Francisco
1966
1967
1966
1,353
220
1,573
ASSETS
Gold certificate account
Redemption fund for F.R. notes
Total gold certificate reserves
F.R. notes of other Banks
Other cash
. . .
552
107
621
103
659
724
1,679
328
2,007
2,158
437
64
42
76
37
54
67
86
46
34
34
14
31
9
20
2,725
2,470
7,817
2,725
2,515
913
20
871
20
99
18
4,540
Discounts and advances:
Secured by U S. Govt securities
Other
213
32
245
323
72
534
163
32
195
318
70
655
62
395
401
72
473
388
717
1,076
243
1,319
30
31
17
4
23
8
35
18
34
14
31
14
41
18
81
37
87
32
1
2
2
3
*
6
1
7
*
2
4
*
63
15
43
7,322
1,768
1,491
952
897
1,972
1,661
2,047
1,592
6,993
5,983
7,826
7,342
1,769
1,899
18
1,742
20
501
9
1,493
954
900
1,979
1,668
2,053
1,592
7,056
6,041
480
8
336
3
290
3
733
17
667
11
626
9
540
10
998
9
1,006
9
52
233
125
19
48
54
56
31
38
21
71
38
93
51
209
115
11
11
6
8
12
13
13
12
43
4,314
12,152
11,573
46
2,851
2,618
1,553
1,498
3,260
2,918
3,227
2,981
9,752
8,909
•
Acceptances:
Bought outright
Held under repurchase agreements
Federal agency obligations held under repurchase agreements
U.S. Govt. securities:
Bought outright
Held under repurchase agreements
Total loans and securities
Cash items in process of collection
Bank premises
Other assets:
Denominated in foreign currencies
IMF gold deposited 1
All other
. . . .
Total assets.
LIABILITIES
F R notes
Deposits:
Member bank reserves
U.S. Treasurer—-General account
Foreign
Other:
IMF gold deposit * . .
All other
2,432
2,327
7,408
7,293
1,569
1,471
717
706
1,575
1,511
1,433
1,278
5,155
4,682
1,165
83
9
1,187
2,918
107
21
2,754
#
23
754
71
5
727
1
6
507
48
3
482
957
97
6
877
1
7
1,150
61
8
1,065
137
9
3,441
119
18
3,249
2
21
11
10
31
29
7
6
5
3
9
7
10
7
58
85
Total deposits
Deferred availability cash items
Other liabilities and accrued dividends
1,268
1,207
563
238
7
490
270
4
3 357
551
13
892
456
9
3,636
38
740
360
7
1,218
47
837
394
11
1,229
697
13
2,806
1,270
1,069
749
15
3,077
1,446
485
12
411
8
763
40
692
30
4,464
4,244
11,978
11,407
2,811
2,578
1,525
1,470
3,208
2,868
3,159
2,915
9,594
8,761
38
35
87
83
20
20
14
14
26
25
34
33
79
74
38
35
87
83
20
20
14
14
26
25
34
33
79
74
4,540
4,314
12,152
11,573
2,851
2,618
1,553
1,498
3,260
2,918
3,227
2,981
9,752
8,909
27.1
31.1
27.1
29.6
27.9
36.3
27.2
34.7
25.1
31.3
27.1
56.1
25.6
33.6
10
12
23
27
5
7
4
5
7
9
9
11
20
25
2,549
2,459
7,692
7,653
1,636
1,538
747
743
1,647
1,579
1,539
1,373
5,423
4,953
117
132
284
360
67
67
30
37
72
68
106
95
268
271
2,432
2,327
7,408
7,293
1,569
1,471
717
706
1,575
1,511
1,433
1,278
5,155
4,682
Total liabilities
9
4
CAPITAL ACCOUNTS
Capital paid in
Surplus
Other capital accounts
..
Total liabilities and capital accounts.
Ratio of gold certificate reserves to F.R. note
liability (per cent)
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
Elifiible oaoer
U.S. Govt. securities
Total collateral
450
450
1,400
1,100
331
127
225
225
180
180
735
735
2,050
6,450
6,700
1,370
310
2
1,310
127
2,150
635
655
1,450
1,400
1,380
1,230
5,000
4,600
2,600
2,500
7,850
7,800
1,701
1,622
762
782
1,675
1,625
1,560
1,410
5,735
5,335
* Less than $500,000.
1
Gold deposited by the IMF to mitigate the impact on the U.S. gold stock of purchases by foreign countries for gold subscriptions on increased IMF quotas. The United
States has a corresponding gold liability to the IMF.
2 Includes F.R. notes held by U.S. Treasury and by F.R. Banks other than the
issuing bank.
3. FEDERAL RESERVE HOLDINGS OF U.S. GOVERNMENT SECURITIES,
DECEMBER 31, 1965-67
(In thousands of dollars)
Type of issue
and date
Rate of
interest
(per cent)
1967
Treasury bonds:
1962-67
1963-68
1964-69 June
1964-69 Dec
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
1995 Feb
1998 Nov
Total
Treasury notes:
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...
May 15, 1968—B...
Aug. 15, 1968—C...
Nov. 15, 1968—D...
Feb. 15, 1969—A...
Nov. 15, 1970—A...
Feb. 15, 1971—C...
May 15, 1971—A...
Nov. 15, 1971— B . . .
Feb. 15, 1972—A...
Apr. 1, 1972—EA..
May 15, 1972—B...
Nov. 15, 1974—A...
Total
354
Increase or decrease (—)
during—
December 31
1966
169,085
307,840
358,199
573,540
145,007
107,560
169,085
306,740
335,199
573,540
144,007
54,566
46,552
" "9*5,858
304,315
348,200
104,900
1,135,100
217,550
86,150
142,300
170,400
213,900
151,650
114,150
168,450
268,950
94,300
213,950
46,700
73,590
6,250
42,650
30,400
24,800
217,200
23,500
36,200
72,450
2,100
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
1965
1967
107,560
169,085
306,740
335,199
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
-107,560
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
127,100
13,500
21,400
61,450
1966
1,100
23,000
1,000
-252,200
-36,550
-232,100
2,500
-595,450
13,250
33,000
7,400
17,300
23,600
21,400
12,100
9,800
10,450
13,650
11,250
50,800
90,950
19,600
66,200
9,550
5,500
3,000
7,850
7,000
1,000
82,100
10,000
11,800
11,000
900
12,965
20,200
22,000
6,500
10,800
14,900
14,400
500
5,000
5,000
4,200
12,000
8,500
14,950
2,000
1,000
3,000
8,000
'3,666'
2,100
25,750
14,250
14,250
11,500
6,086,502
6,198,762
6,549,797
-112,260
839,366
3,313,432
4,378,582
5,975,165
7,353,993
1,065,500
33,100
1,533,300
45,800
55,500
1,800
2,282,860
40,050
26,918,382
342,900
2,951,032
6,374,082
338,850
1,245,000
6,694,993
340,000
1,892,950
6,387,293
5,791,865
545,100
251,000
2,939,132
6,358,732
321,650
837,100
1,017,000
1,500,000
1,000
21,301,957
24,827,722
-342,900
-2,951,032
-6,374,082
-338,850
-1,245,000
-6,694,993
2,200
3,313,432
4,378,582
5,975,165
7,353,993
48,500
33,100
33,300
44,800
55,500
1,800
2,282,860
40,050
-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 ,'500,666'
*
1,000
5,616,425 -3,525,765
3. FEDERAL RESERVE HOLDINGS OF U.S. GOVERNMENT SECURITIES,
DECEMBER 31, 1965-67—Continued
(In thousands of dollars)
Type of issue
and date
Rate of
interest
(per cent)
Increase or decrease (—)
during—
December 31
1967
1966
1965
4,351,015
Total
1966
-4,351,015
4,351,015
4,351,015
Certificates:
Aug. 15, 1967
1967
-4,351,015
4,351,015
Treasury bills:
Tax anticipation
Other due—
Within 3 mos
3 6 mos
After 6 mos
278,000
541,200
484,600
-263,200
56,600
9,245,160
4,497,150
1,955,023
6,432,194
3,440,750
1,389,514
4,723,263
2,624,726
1,268,080
2,812,966
1,056,400
565,509
1,708,931
816,024
121,434
Total
15,975,333
11,803,658
9,100,669
4,171,675
2,702,989
132,200
626,800
289,900
-494,600
336,900
Total holdings
49,112,417
44,282,192
40,768,088
4,830,225
3,514,104
Maturing—
Within 90 days
91 days to 1 year
Over 1 year to 5 years.
Over 5 yrs. to 10 yrs..
Over 10 years
9,878,080
21,662,432
16,184,615
832,400
554,890
10,549,826
24,881,514
7,458,186
990,626
402,040
7,338,213
-671,746
3,211,613
17,530,414 -3,219,082
7,351,100
14,065,888
8,726,429 -6,607,702
1,448,533
-158,226
-457,907
385,040
152,850
17,000
Repurchase agreements.
4. FEDERAL RESERVE BANK HOLDINGS OF SPECIAL SHORT-TERM TREASURY
CERTIFICATES PURCHASED DIRECTLY FROM THE UNITED STATES, 1953-67
(In millions of dollars)
Amount
Date
1953
Mar. 18
19
20
21
22*
23
24
25
26
June
5
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
Amount
1953
June 15
16
17
18
19
20
21*
22
23
24
1954
Jan. 14
15
16
17*
18
19
20
999
1,172
823
364
992
992
992
908
608
296
22
169
169
169
323
424
323
Date
Amount
1954
Jan. 21
306
283
283
283
203
3
134
190
22
23
24*
25
26
Mar. 15
16
1955
1956
1957
1
!• none
j
1958
Mar. 17
143
207
18
1959
1960
1
> none
Date
1961
1962
1963
1964
1965
1966
Dec. 9
10
11*
1967
Mar. 10
11
12
June 15
Sept. 8
9
10
Amount
)
\ none
I
169
169
169
149
149
149*
87
153
153
153*
* 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 V per cent through Dec. 3, 1957, and lA per cent below prevailing discount rate of
4
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.
355
5. O P E N MARKET TRANSACTIONS OF T H E FEDERAL RESERVE SYSTEM DURING 1967
(In millions of dollars)
Outright transactions in U.S. Govt. securities by maturity
Total
Other within 1 year
Treasury bills
Month
Gross
purchases
January
February....
March
April
May
June
July
August
September...
October
November...
December...
Total, . ,
Redemptions
Gross
sales
904
812
1,395
859
936
1,332
1,221
591
919
700
1,200
622
656
3,738
3,581
Gross
sales
439
305
704
415
412
223
94
400
127
200
168
250
904
656
812
1,496
975 ' " ' 2 0 6 '
1,146
107
1,681
567
1,221
956
591
440
1,110
623
700
27
1,386
622
12,643
11,490
1-5 years
Gross
purchases
Januarv
February . . .
March
April
May
June
July
August
September
October
November...
December...
Total
Gross
sales
80
50
107
185
Exch.
or
maturity
shifts
Gross
purchases
3,581
-2,457
-2,879
2,879
55
-1,227
169
50
PI
45
663
8,064
287
Gross
sales
Net
change
in U.S.
Govt.
securities
1,693
3,253
3,399
1,727
1,438
753
286
450
453
1,427
1,369
545
2,320
3,253
3,253
1,529
1,459
992
370
450
453
1,427
1,046
736
-818
507
938
552
606
652
87
-249
361
474
1,541
182
16,793
17,287
4,830
Over 10 years
Gross
purchases
Gross
sales
Exch.
or
maturity
shifts
8
25
42
39
-55
27
1,227
-73
-7,618
— 138
14
32
62
109
121
-1,225
24
Exch.
or
maturity
shifts
Gross
sales
Exch.,
maturity
shifts,
or
redemp.
10
3,738
2 595
1,338
44
Gross
purchases
Total
439
305
704
415
412
223
94
400
127
200
168
250
206
107
567
956
440
623
27
Gross
sales
Gross
purchases
5-10 years
Repurchase
agreements
(U.S. Govt. securities)
January
February
March
April
May
June
July
August
September...
October
November...
December...
Redemptions
Gross
purchases
-113
-44
19
20
-96
-446
153
Federal
agency
Bankers' acceptances
obligations
(net repurchase
agreeNet reNet
ments)
outright
purchases
-34
13
-3
-10
1
-1
4
3
TT
2
21
-13
-14
-12
23
15
5
16
4
6
-124
37
4
57
-98
45
-45
104
-104
89"
-35
Net
changei
-972
546
948
606
499
719
28
-263
453
370
1,570
302
4,805
1
Net change in U.S. Govt. securities, Federal agency obligations, and bankers' acceptance^.
NOTE.—Sales, redemptions, and negative figures reduce System holdings; all other figures increase
such holdings.
356
6. BANK PREMISES OF FEDERAL RESERVE BANKS AND BRANCHES
DECEMBER 31, 1967
(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
2,672,524
New Y o r k . . . .
Annex
Buffalo
5,215,656
592,679
406,069
15,602,981
1,451,569
2,555,197
4,940,523
673,458
1,565,400
25,759,160
2,717,706
4,526,666
6,641,501
518,012
2,521,236
Philadelphia..,
1,884,357
4,839,506
2,154,452
8,878,315
2,433,366
Cleveland
Cincinnati
Pittsburgh
1,295,490
400,891
1,667,994
6,645,142
1,171,259
3,021,358
3,571,958
1,587,495
2,525,243
11,512,590
3,159,645
7,214,595
1,025,764
502,460
3,271,192
469,944
146,875
83,410
250,487
347,071
4,164,663
256,000
2,438,326
2,009,381
1,069,026
2,497,936
7,132,543
402,875
2,521,736
3,328,313
2,041,218
1,663,173
328,208
2,521,736
1,396,245
1,162,259
Atlanta
Birmingham. . ,
Jacksonville
Annex
Nashville
New Orleans...
1,082,493
410,775
164,004
107,925
592,342
1,268,878
5,962,082
2,000,619
1,706,794
76,236
1,474,678
4,528,386
3,558,580
1,019,618
772,071
15,842
1,098,924
10,603,155
3,431,012
2,642,869
200,003
3,165,944
5,797,264
8,346,934
2,096,279
1,410,526
188,863
1,977,796
5,797,264
Chicago
Detroit
6,275,490
1,147,734
17,656,166
2,868,647
9,871,580
1,448,556
33,803,236
5,464,937
15,772,540
2,629,155
St. Louis
Little Rock
Louisville
Memphis
1,675,780
800,104
700,075
128,542
3,171,719
1,963,152
2,859,819
294,763
2,285,317
962,372
1,041,202
218,883
7,132,816
3,725,628
4,601,096
642,188
1,568,195
3,679,369
3,092,793
173,992
Minneapolis
Helena
600,521
15,709
4,744,540
126,401
2,688,921
62,977
8,033,982
205,087
2,834,069
55,831
Kansas City...
Denver
Oklahoma City
Omaha
1,251,213
2,828,465
592,435
445,663
8,483,518
3,682,612
1,511,600
1,491,117
1,343,277
91,693
834,845
731,925
11,078,008
6,602,770
2,938,880
2,668,705
6,583,333
6,093,872
2,250,739
1,610,331
Dallas
El Paso
Houston
San Antonio. . .
713,302
262,477
695,615
278,180
4,826,831
787,728
1,408,574
1,400,390
3,570,804
393,301
714,187
570,847
9,110,937
1,443,506
2,818,376
2,249,417
4,912,358
892,660
1,861,868
1,370,485
San Francisco..
Annex
Los Angeles. . .
Portland
Salt Lake City.
Seattle
473,235
247,201
777,614
207,380
480,222
274,772
3,783,530
124,000
4,103,844
1,678,512
1,878,238
1,890,966
1,458,028
30,000
1,608,576
649,432
707,575
1,049,264
5,714,793
401,201
6,490,034
2,535,324
3,066,035
3,215,002
626,506
348,881
2,856,306
1,326,388
2,091,135
1,710,831
Total. . .
38,887,201
137,639,039
Richmond
Annex 1
Annex 2 . . . .
Baltimore
Charlotte
1,068,445
625,121
62,951,807 239,478,047 110,816,975
OTHER REAL ESTATE ACQUIRED FOR BANKING-HOUSE PURPOSES
Buffalo
Cleveland
Cincinnati
Richmond
Memphis
Omaha
San Antonio
...
Total
1
267,007
395,875
341,293
290,836
605,122
186,262
170,416
2,256,811
381,000
412,500
100,000
793,500
100,000
267,007
776,875
853,793
290,836
605,122
186,262
170,416
267,007
745,125
737,484
290,836
605,122
186,262
170,416
3,150,311
3,002,252
Includes expenditures for construction at some offices pending allocation to appropriate accounts.
357
7. EARNINGS AND EXPENSES OF FEDERAL RESERVE BANKS DURING 1967
(In dollars)
Item
Total
Boston
New
York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas
City
Dallas
San
Francisc
CURRENT EARNINGS
Discounts and advances
Acceptances
U.S. Govt. securities
Foreign currencies
All other
349,208 2,214,250
102,823
264,049
178,939
298,382 2,260,392
261,826
7,660,606
130,987
474,792
175,641
949,3
4,823,360
4,823,360
2,152,111,878 112,844,042 542,513,633 110,223,546 166,696,766 155,868,200 118,743,935 356,248,931 75,854,161 43,123,987 83,877,193 88,410,349 291,101,
1,315,034 2,272,627
1,212,088 6,567,329
1,312,094 1,563,628 3,659,496
25,251,438
883,800
606,034
1,111,062 1,464,582 3,283,6
21,996
18,544
23,314
556,468
101,393
36,963
89,113
58,451
59,448
62,2
24,567
25,174
35,223
Total.
2,190,403,750 114,423,882 556,219,965 111,663,399 169,185,295 157,467,657 120,664,396 362,257,932 77,024,354 43,886,182 85,522,495 90,085,795 302,002,3
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.
9,123,382
110,081,297
19,354,646
973,729
2,703,459
27,146,216
2,231,983
9,773,257
343,274
5,805,437
4,956,564
2,163,112
1,447,791
138,006
1,710,594
507,341
6,979,573 26,707,291
1,279,549 4,396,264
111,504
179,416
167,073
410,355
1,746,293 3,282,549
103,525
490,850
665,449
1,780,118
22,645
37,595
584,797
1,035,033
135,316
444,284
138,671
310,774
72,247
308,873
23,814
7,032
608,671
5,128,504
959,297
53,430
100,161
1,134,495
90,915
506,831
14,889
179,904
76,596
92,297
57,617
7,475
634,317
8,099,897
1,455,958
104,649
191,044
2,308,455
152,322
753,568
38,938
506,159
278,811
247,861
71,537
26,571
800,555
7,531,930
1,342,633
53,761
201,866
3,039,882
169,897
765,871
31,377
216,416
167,307
169,976
48,072
10,257
3,981,034
8,650,932
3,605,731
144,485
1,273,855
537,694
891,778
153,057
822,200
73,608 -1,031,147
177,403
281,060
141,206
72,138
192,893
632,179
457,327
132,694
255,817
885,219
141,133
-1,650
212,479,845 13,446,641 43,057,714
18,790,084
1,259,347 2,819,743
10,769,596
242,039,525
516,000
2,801,300
15,221,988 48,678,757
689,768
934,641
7,543,091 16,059,950
1,334,852 2,634,342
59,424
82,058
248,242
325,980
2,538,909 3,532,972
253,404
258,437
1,470,146
900,936
37,574
21,558
1,043,614
442,774
787,142
1,379,375
313,748
199,548
179,523
169,961
51,996
144
714,293
6,401,374
1,122,815
60,154
174,870
1,635,567
119,439
684,729
30,861
238,617
274,550
150,143
87,914
1,581
519,763
3,708,820
674,217
49,929
179,143
1,055,879
87,224
266,926
8,779
359,517
75,145
96,822
79,356
1,393
626,305
6,178,850
1,135,833
46,951
159,113
2,091,325
142,870
716,243
18,246
327,633
274,541
161,730
168,817
4,492
335,390
1,714,087
661,532
215,613
407,235
603,270
185,088
54,971
108,402
354,306
154,298
38,846
302,546
703,536
207,706
67,511
394,550
489,677
199,625
97,700
9,682,889 16,285,180 15,830,319 16,398,972 31,203,311 12,947,471
1,016,563 1,383,601 1,733,620 1,799,664 3,267,778
788,628
567,000
965,400
559,500
11,266,452 18,634,181 18,123,439
1,562,600
372,700
18,864,436 36,033,689
14,108,799
665,800
7,818,765 13,334,248
522,653
927,245
256,100
479,500
615,814
761,3
4,936,779 10,805,2
924,085 2,094,8
45,150
127,3
159,148
386,4
1,553,626 3,226,2
147,750
215,3
441,803
820,6
22,448
58,3
312,864
558,1
632,988
430,f
129,337
152,2
68,775
135,C
1,665
128,731
678,899
309,554
88,478
259/3
879,2
173,C
191,2
11,197,894 21,276,4
1,061,765 2,209,4
625,596
1,398,1
8,597,518 14,740,993 12,885,255 24,884,(
Less reimbursement for certain
fiscal agency and other expenses
21,918,681
1,208,718
4,286,972
940,730
2,299,407
1,168,716
1,503,785
4,003,943
1,240,487
220,120,844 14,013,270 44,391,785 10,325,722 16,334,774 16,954,723 17,360,651 32,029,746 12,868,312
Net expenses
661,356
1,488,603
909,405
2,206,5
7,936,162 13,252,390 11,975,850 22,677,4
PROFIT AND LOSS
1,970,282,907 100,410,612 511,828,181 101,337,676 152,850,520 140,512,935 103,303,746 330,228,186 64,156,042 35,950,020 72,270,105 78,109,945 279,324,9
Current net earnings
Additions to current net
earnings:
Profits on sales of U.S. Govt.
securities
Profits on foreign exchange
transactions
All other
761,553
39,336
189,510
39,600
59,194
55,331
42,770
126,148
27,269
15,390
29,395
30,855
106,7
1,431,110
168,012
68,693
12,169
372,088
9,278
74,418
3,081
128,800
13,288
74,418
3,444
88,729
2,080
207,511
35,987
50,089
9,622
34,347
1,307
62,969
19,280
83,004
122
186,0'
58,3
Total additions
2,360,675
120,198
570,876
117,099
201,282
133,193
133,579
369,646
86,980
51,044
111,644
113,981
351,1
266,798
13,064
3,267
1,638
685
77,560
116,730
2,896
30,605
624
4,615
5,424
9,6(
2,093,873
107,134
567,609
115,461
200,597
55,632
16,849
366,749
56,375
50,419
107,029
108,557
341,4'
from
current
net
Deduction:
earnings
Net addition to or deduction
from (—) current net earnings..
Net earnings before payments to
U.S. Treasury
1,972,376,782 100,517,745 512,395,791 101,453,137 153,051,118 140,568,567 103,320,595 330,594,936 64,212,417 36,000,439 72,377,133 78,218,502 279,666,4i
Dividends paid
Payments to U.S. Treasury (interest on F.R. notes)
1,907,498,270 97,023,799 497,336,952 97,702,876 147,164,761 137,245,979 98,568,763 320,748,038 62,402,253 34,637,041 69,703,204 74,941,628 270,022,9
35,027,312
1,680,897
9,092,988
1,853,711
3,130,507
1,823,438
2,195,732
1,208,564
833,048
1,563,480
2,027,224
Transferred to surplus.
Surplus, January 1 . . . .
530,350 1,110,450 1,249,650 5,129,9i
29,851,200 1,813,050 5,965,850 1,896,550 2,755,850 1,499,150 2,556,100 4,742,700
601,600
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 74,054,6<
Surplus, December 31 .
599,741,400 29,116,650 154,313,500 31,825,650 53,884,600 31,074,850 37,627,900 87,359,800 20,350,300 14,085,300 26,454,700 34,463,650 79,184,5i
NOTE.—Details may not add to totals because of rounding.
EARNINGS AND EXPENSES OF FEDERAL RESERVE BANKS, 1914-67
(In dollars)
O
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. Treasury1
Dividends
paid
Payments to U.S. Treasury
Franchise tax
Under
Sec. 13b
Interest on
F.R. notes
Transferred
to surplus
(Sec. 13b)
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
2,750^98
9,582,067
52,716,310
78,367,504
217,463
1,742,774
6,804,186
5,540,684
5,011,832
2,703,894
1,134,234
48,334,341
70,651,778
1920
1921
1922
1923
1924
181,296,711
122,865,866
50,498,699
50,708,566
38,340,449
28,258,030
34,463,845
29,559,049
29,764,173
28,431,126
149,294,774
82,087,225
16,497,736
12,711,286
3,718,180
5,654,018
6,119,673
6,307,035
6,552,717
6,682,496
60,724,742
59,974,466
10,850,605
3,613,056
113,646
82,916,014
15,993,086
-659,904
2,545,513
-3,077,962
1925
1926
1927
1928
1929
41,800,706
47,599,595
43,024,484
64,052,860
70,955,496
27,528,163
27,350,182
27,518,443
26,904,810
29,691,113
9,449,066
16,611,745
13,048,249
32,122,021
36,402,741
6,915,958
7,329,169
7,754,539
8,458,463
9,583,911
59,300
818,150
249,591
2,584,659
4,283,231
2,473,808
8,464,426
5,044,119
21,078,899
22,535,597
1930.
1931
1932.
1933
1934
36,424,044
29,701,279
50,018,817
49,487,318
48,902,813
28,342,726
27,040,664
26,291,381
29,222,837
29,241,396
7,988,182
2,972,066
22,314,244
7,957,407
15,231,409
10,268,598
10,029,760
9,282,244
8,874,262
8,781,661
17,308
2,011,418
-60,323
-2,297,724
-7,057,694
11,020,582
-916,855
6,510,071
1935
1936.
1937
1938
1939
42,751,959
37,900,639
41,233,135
36,261,428
38,500,665
31,577,443
29,874,023
28,800,614
28,911,608
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
43,545,564
49,175,921
25,860,025
9,137,581
12,470,451
49,528,433
58,437,788
8,214,971
8,429,936
8,669,076
8,911,342
9,500,126
82,152
141,465
197,672
244,726
326,717
-54,456
-4,333
49,602
135,003
201,150
17,617,358
570,513
3,554,101
40,237,362
48,409,795
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
1,13*4,234
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
14,68 L788
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
1967
1,559,484,027
1,908,499,896
2,190,403,752
204,290,186
207,401,126
220,120,846
1,356,215,455
1,702,095,000
1,972,376,782
32,351,602
33,696,336
35,027,312
1,296,810,053
1,649,455,164
1,907,498,270
27,053,800
18,943,500
29,851,200
3,789,717,502 15,697,852,557
690,904,721
149,138,300
2,188,893
14,127,210,699
-3,657
728,413,599
Total 1914-67....
19,423,690,381
Aggregate for each
F.R. Bank, 1914-67:
Boston
N e w York
Philadelphia
Cleveland
Richmond
Atlanta
1,082,345,242
4,923,962,585
1,130,973,540
1,652,481,034
1,253,643,258
1,041,570,918
258,845,939
814,669,249
229,215,156
333,466,668
262,767,151
238,971,025
828,944,880
4,129,960,280
909,644,606
1,323,047,963
995,153,757
804,674,866
39,750,701
211,993,941
49,500,492
66,176,000
31,212,869
31,674,272
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
742,455,053
3,658,454,301
807,416,275
1,184,838,099
920,685,062
721,070,837
135,411
-433,413
290,661
-9,906
-71,517
5,491
39,211,475
191,570,071
46,155,872
67,118,393
36,954,658
42,894,440
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
3,182,116,996
795,066,633
457,448,773
830,803,818
783,795,505
2,289,482,079
538,481,388
207,844,866
131,838,295
206,429,999
181,893,608
385,294,158
2,648,753,982
588,160,228
328,168,368
626,467,804
604,337,182
1,910,538,641
89,666,336
23,754,006
16,156,783
26,557,233
32,057,165
72,404,923
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
2,430,922,840
536,199,715
288,725,687
562,321,283
532,821,418
1,741,300,129
11,682
-26,515
64,874
-8,674
55,337
-17,089
102,688,554
25,469,928
17,962,513
30,594,650
38,741,128
89,051,917
3,789,717,502 15,697,852,557
690,904,721
149,138,300
2,188,893
14,127,210,699
-3,657
2 728,413,599
Total
1
19,423,690,381
Current earnings less current expenses, plus or minus adjustment for profit and
loss items.
2 The $728,413,599 transferred to surplus was reduced by direct charges of $500,000
for charge-off on bank premises I(1927), $139,299,557 for contributions to capital of the
~
- • s
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 $599,741,400 on Dec. 31, 1967.
NOTE.—Details may not add to totals because of rounding.
9. NUMBER AND SALARIES OF OFFICERS AND EMPLOYEES OF
FEDERAL RESERVE BANKS, DECEMBER 31, 1967
Federal Reserve
Bank (including
branches)
President
Other officers
1
Total
Number
Annual
salaries
Annual
salary
Number
$ 40,000
75,000
45,000
25
76
31
Cleveland
Richmond
Atlanta
45,000
45,000
35,000
31
41
37
566,000
745,500
614,500
1,296
1,386
1,402
7,826.559
7,624,715
7,365,344
1,328
1,428
1,440
8,437,559
8,415,215
8,014,844
Chicago
St. Louis
Minneapolis
60,000
35,000
42,500
49
39
26
891,500
697,000
441,000
2,801
1,131
627
15,787,867
6,229,916
3,656,707
2,851
1,171
654
16,739,367
6,961,916
4,140,207
Kansas City
Dallas
San Francisco....
42,500
45,000
46,000
38
37
43
619,850
579,600
693,800
1,135
950
1,802
5,901,932 1,174
4,995,257
988
10,261,742 18,996
6,564,282
5,619,857
11,001,542
$556,000
473
$8,588,250
Boston
New York
Philadelphia
Total
1
Annual
salary
Employees
$
453,000
1,708,000
578,500
Number
Annual
salaries
1,191 $ 7,027,919
26,971,807
3,935
5,056,102
855
1,217 $ 7,520,919
28,754,807
4,012
5,679,602
887
18,511 $108,705,867 18,996 $117,850,117
Includes 1,012 part-time employees.
10. VOLUME OF OPERATIONS IN PRINCIPAL DEPARTMENTS OF FEDERAL
RESERVE BANKS, 1964-67
(Number in thousands; amounts in thousands of dollars)
Operation
1967
1966
1965
6
5,338,781
10,958,606
16
5,232,806
9,304,120
11
5,144,345
5,855,884
10
5,026,311
4,561,704
540,065
205,343
5,419,583
504,049
217,473
5,021,454
491,848
223,337
'4,606,907
467,288
234,094
'4,318,703
14,355
25,203
14,305
26,712
14,087
26,820
15,042
27,271
246,289
5,444
273,983
235,555
4,832
166,615
222,477
4,389
81,885
212,267
4,010
50,481
30,968,332
38,410,969
1,184,616
90,667,647
37,001,390
957,282
75,684,394
36,075,114
496,582
46,551,402
34,548,507
559,588
175,068,179
4,860,925
2,043,772,112
160,014,331
4,626,573
1,893,974,522
134,806,438
4,507,801
'1,633,863,858
134,585,725
4,578,853
'1,462,383,319
6,693,383
15,299,519
5,916,485
12,624,804
5,380,748
10,723,571
5,371,153
7,851,274
820,283,379
6,565,594,328
368,569
793,261,958
5,555,075,862
226,508
763,248,392
4,496,230,723
116,498
738,062,697
3,953,186,948
73,182
1964
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 2
Collection items handled:
U.S. Govt. coupons paid
All other
Issues, redemptions, and exchanges
of U.S. Govt. securities
Transfers of funds
Food stamps redeemed
AMOUNTS HANDLED
Discounts and advances
Currency received and counted....
Coin received and counted
Checks handled:
U.S. Govt. checks
Postal money orders
All other 2
Collection items handled:
U.S. Govt. coupons paid
All other
Issues, redemptions, and exchanges
of U.S. Govt. securities
Transfers of funds
Food stamps redeemed
r
1
2
Revised.
Packaged items handled as a single item are counted as one piece.
Exclusive of checks drawn on the F.R. Banks.
362
11. MAXIMUM INTEREST RATES PAYABLE ON TIME AND SAVINGS DEPOSITS
(Per cent per annum)
Beginning July 20, 1966
Nov. 1, 1933—July 19, 1966
Effective date
Effective date
Type of deposit
Type of deposit
Nov. 1,
1933
Savings deposits:
12 months or more . . . .
Less than 12 months. . . f
Postal savings deposits:
12 months or m o r e . . . .
Less than 12 months. . . f
Other time deposits: x
12 months or m o r e . . . .
6 months to 12 months. f
90 days to 6 months. . .
Less than 90 days
(30-89 days)
Feb. 1,
1935
Jan. 1,
1936
2i/ 2
21/2
3
3
2i/ 2
21/2
Jan. 1,
1962
Jan. 1,
1957
3
3
I4
I4
I4
1
3
3
21/2
21/2
1
3
2
1
&
July 20,
1966
Dec. 6,
1965
Savings deposits
\
31/2
4
31/2
31/2
21/2
Nov. 24,
1964
4
3i/2
1
3
July 17,
1963
3i/2
}
4
4
4
4
5
4
5
4
51/2
51/2
51/2
4
Postal savings deposits:
12 months or m o r e . . .
Less than 12 months..
'
4
4
J
I:
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
Sept. 26,
1966
41/2
4
1
J
5i/2
}
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..
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)
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
July
5,
1945
Jan.
21,
1946
75
75
100
100
75
75
75
100
75
Feb.
1947
Mar.
30,
1949
Jan.
17,
1951
Feb.
20,
1953
Jan.
4,
1955
Apr.
23,
1955
Jan.
16,
1958
50
50
75
75
50
50
60
60
70
70
50
75
50
60
70
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
a
loan value, which is a specified percentage
. security by prescribing themaximumextension; margin requirements are the difof its market value at
time of
Aug.
1958
Oct.
16,
1958
July
28,
1960
July
10,
1962
Nov.
6,
1963
50
50
70
70
90
90
70
70
50
50
70
70
50
70
90
70
50
70
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, 1967
(Per cent per annum)
Discounts for and advances to member banks
Federal Reserve
Bank
Advances to all others
under last par. Sec. 13 3
Advances and
discounts under
Sees. 13 and 13a i
Advances under
Sec. 10(b)2
Boston
New York
Philadelphia
41/2
4i/i
41/2
5
5
5
51/2
6
5i/2
Cleveland
Richmond
Atlanta
SB
5
5
5
61/2
5
5
5
IB
5
5
5
51/2
Chicago
St. Louis
Minneapolis
41/2
41/2
41/2
4i/2
Kansas City
Dallas
San Francisco
41/2
41/2
4!/i
6
5J/2
51/2
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. MEMBER
BANK RESERVE REQUIREMENTS
(Per cent of deposits)
Through July 13, 1966
Net demand deposits
Effective date 1
1917—June
1936—Aug.
1937—Mar.
May
1938—Apr.
1941—Nov.
1942—Aug.
Sept.
Oct.
1948—Feb.
June
Sept.
1949—May
June
Aug
Aug.
Aug.
Aug.
Sept.
1951—Jan.
Jan.
1953—July
1954 June
July
1958_Feb.
Mar.
Apr.
Apr.
1960—Sept.
Nov
Dec.
1962—July
Oct.
Central reserve
city banks 3
21
16
1
1
16
1
20
14
3
27
11
24, 16 ,
5,1
30 Julv 1
1 ..
11, 16
18
25
1
11, 16
25, Feb. 1. .
9,1
24, 16
29, Aug. 1 . .
27, Mar. 1.
20, Apr. 1.
17
24
1
24
1
28
25, Nov. 1.
For notes see end of table.
364
13
191/2
2234
26
2234
26
24
22
20
22
24
26
24
Reserve city
banks
23
24
22
21
20
8*
I81/2
18
171/2
I6I/2
(3)
Time deposits
Country
banks
Central reserve and
reserve city banks 3
Country
banks
£*
%A
22
21
20
I8I/2
18
19
20
19
18
171/2
17
7
IOI/2
1214
14
12
14
k
3
41/2
51/4
6
5
6
16
15
14
13
12
71/2
71/2
6
6
5
5
13
14
13
6
6
5
10
15
231/2
23
g*
2
5
(3)
4
4
6
5
6
12
!!*
I6I/2
12
14. MEMBER BANK RESERVE REQUIREMENTS—Continued
(Per cent of deposits)
Beginning July 14, 1966
Net demand deposits
Effective date i
1966—July
Sept
Mar.
Mar.
1967
Reserve city
banks
14,21
8 15
2
16
5 161/2
2
Country
banks
5 12
Time deposits (all classes of banks)
Savings
deposits
Other time deposits
Up to
$5 million
54
4
In excess of
$5 million
5
6
54
31/2
In effect Dec. 31, 1967...
I6V2
12
3
3
6
Present legal
requirements:
Minimum
Maximum
10
22
7
14
3
10
3
10
3
10
1
When two dates are shown, the first applies to the change at central reserve or reserve city banks
and the second to the change at country banks.
2
Demand deposits subject to reserve requirements, which, beginning with Aug. 23, 1935, have been
total demand deposits minus cash items in process of collection and demand balances due from domestic
banks (also minus war loan and Series E bond accounts during the period Apr. 13, 1943—June 30,
1947).
3 Authority of the Board of Governors to classify or reclassify cities as central reserve cities was
terminated effective July 28, 1962.
4
Effective Jan. 5, 1967, time deposits such as Christmas and vacation club accounts became subject
to same requirements as savings deposits.
5 See preceding columns for earliest effective date of this rate.
NOTE.—All required reserves were held on deposit with F.R. Banks, June 21, 1917, until late 1959.
Since then, member banks have also been allowed to count vault cash as reserves, as follows: country
banks—in excess of 4 and 2Vz 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.
15. FEES AND RATES UNDER REGULATION V ON LOANS
GUARANTEED PURSUANT TO DEFENSE PRODUCTION ACT OF 1950,
DECEMBER 31, 1967
Fees Payable to Guaranteeing Agency by Financing Institution on Guaranteed Portion of Loan
Percentage of loan guaranteed
70 or less
75
80
85
90
^. . .
95
Over 95
^
-,,-.
Guarantee fee
(percentage of
interest payable
by borrower)
Percentage of
any commitment
fee charged
borrower
10
15
20
25
30
35
40-50
10
15
20
25
30
35
40-50
Maximum Rates Financing Institution May Charge Borrower
Interest rate
Commitment rate.
ll/i per cent per annum
l
/i per 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.
365
16. MEMBER BANK RESERVES, FEDERAL RESERVE BANK CREDIT, AND RELATED ITEMS—END OF YEAR 1918-67 AND END OF MONTH 1967
(In millions of dollars)
Factors supplying reserve funds
Factors absorbing reserve funds
F.R. Bank credit outstanding
Period
U.S. Govt. securities
Total
Bought
outright
Repurchase
agreements
Discounts
and
advances
Float
Gold
stock 2
All
other i
Total
Treasury
currency
outstanding 3
Currency
in
circulation
Treasury
cash
holdings 4
Deposits
other than member
bank reserves,
with F.R. Banks
Treas- Forury
eign
Member bank reserves
Other
F.R.
accounts 5
Other
With
F.R.
Banks
Currency
and
coin 6
Required
7
Excess 7
1918
1919
239
300
239
300
1,766
2,215
199
201
294
575
2,498
3,292
2,873
2,707
1,795
1,707
4,951
5,091
288
385
51
31
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
99
54
4
2,687
1,144
618
723
320
1,884
2,161
14
59
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
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
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
2,184
2,254
6,189
11,543
18,846
2,184
2,254
6,189
11,543
18,846
3
3
6
5
80
80
94
All
681
815
8
10
14
10
4
2,274
2,361
6,679
12,239
19,745
21,995
22,737
22,726
21,938
20,619
3,087
3,247
3,648
4,094
4,131
8,732
11,160
15,410
20,449
25,307
2,213
2,215
2,193
2,303
2,375
368
867
799
579
440
1,133
774
793
1,360
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
1925
1926
1927,
1928
1929
1930
1931
1932
1933
1934
1935
1936
1937.
1938
1939
1940
1941
1942
1943
1944
...
,..
...
249
163
85
223
78
578
580
535
541
534
2
1
1
1
2
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
>287
2,272
1,336
1,325
1,312
977
393
870
1,123
821
862
508
392
642
767
446
314
569
547
750
495
607
563
590
706
15,915
16,139
17,899
20,479
16,568
14,457
15,577
16,400
19,277
15,550
1,458
562
1,499
1,202
1,018
53
196
663
598
44
67
19
156
28
143
1,368
1,184
967
935
808
3
5
4
2
1
22,216
25,009
25,825
26,880
25,885
22,706
22,695
23,187
22,030
21,713
4,636
4,709
4,812
4,894
4,985
27,741
29,206
30,433
30,781
30,509
1,293
1,270
1,270
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
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
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
27,384
28,881
30,820
33,593
37,044
40,768
44,316
26,984
28,722
30,478
33,582
36,506
40,478
43,655
400
159
342
11
538
290
661
33
130
38
63
186
137
173
1,847
2,300
2,903
2,600
2,606
2,248
2,495
74
51
110
162
94
187
193
29,338
31,362
33,871
36,418
39,930
43,340
47,177
17,767
16,889
15,978
15,513
15,388
13,733
13,159
5,398
5,585
5,567
5,578
5,405
5,575
6,317
32,869
33,918
35,338
37,692
39,619
42,056
44,663
377
422
380
361
612
760
1,176
485
465
597
880
820
668
416
217
279
247
171
229
150
174
533
320
393
291
321
355
588
941
1,044
1,007
1,065
1.036
211
-147
17,081
17,387
17,454
17,049
18,086
18,447
19,779
2,544
2,823
3,262
4,099
4,151
4,163
4,310
18,988
20,114
20,071
20,677
21,663
22,848
24,321
637
96
645
471
574
-238
-232
43,464
43,971
44,921
45,470
46,066
46,719
46,804
46,555
46,916
47,390
48,954
49,150
43,464
43,971
44,762
45,116
45,743
46,634
46,804
46,555
46,916
47,390
48,608
48,980
71
165
42
54
415
68
41
36
74
120
76
141
1,994
1,550
1,434
,574
1,248
1,345
677
,707
1,714
1,309
1,780
2,483
73
113
110
166
70
136
78
65
156
54
59
164
45,602
45,799
46,507
47,264
47,799
48,268
47,600
48,363
48,860
48,873
50,869
51,938
13,158
13,107
13,109
13,109
13,109
13,110
13,108
13,008
13,007
12,905
12,907
11,982
6,360
6,416
6,489
6,565
6,605
6,612
6,633
6,698
6,741
6,765
6,775
6,784
43,363
43,585
43,583
43,730
44,443
44,713
44,866
45,071
45,031
45,421
46,463
47,226
1,227
813
1,238
386
1,315
828
1,366 1,360
1,356
574
1,472 1,311
1,449 1,340
1,476 1,051
1,463
778
1,451
697
1,408 1,581
1,344 1,123
148
145
131
123
193
147
117
144
117
135
168
135
437
432
454
457
443
511
476
449
491
441
440
653
357
619
646
492
870
330
214
88
38
-208
-161
-773
18,773
18,916
19,148
19,410
19,634
19,505
18,877
19,789
20,686
20,604
20,648
21,092
4,447
4,479
4,432
3,650
4,395
4,565
3,990
4,812
3,853
4,632
5,148
4,631
23,660
23,047
23,023
23,118
22,632
23,506
23,535
23,445
24,231
24,317
24,416
25,905
-440
348
557
-58
1,395
564
-668
1,156
308
919
1,380
-182
1945...
1946.. .
1947. . .
1948.. .
1949. . .
24,262
23,350
22,559
23,333
18,885
24,262
23,350
22,559
23,333
18,885
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.. .
1966.. .
.
.
.
.
.
1967—
Jan...
Feb..
Mar..
Apr. .
May..
June..
July..
Aug..
Sept..
Oct...
Nov..
Dec.
159
354
323
85
346
170
1
Principally acceptances and industrial loans; authority for industrial loans expired
ug. 2 21,1959.
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 r
primar
c,;ui~ o.u^^ bullion ~+ moneta
subs
standard silver dollars,
sponsible—silver w,,ii;~~ at ™~~~*~~,a i vu ae i uaen da n d standard silver dollarssubsidiar
v
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).
Banks as well as that in circulation.
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
ON
00
17. PRINCIPAL ASSETS AND LIABILITIES, AND NUMBER OF COMMERCIAL AND MUTUAL SAVINGS BANKS, BY CLASS OF BANK,
DECEMBER 30, 1967, AND DECEMBER 31, 1966
(In millions of dollars)
Commercial banks
Item
All
banks
Mutual savings banks
Member banks
Nonmember banks
Total
Total
Total
National
State
Total
Insured
Insured
Noninsured
Noninsured
December 30, 1967
Loans and investments, total
Loans
Investments
U.S. Govt. securities
Other securities
Cash assets
425,417
288,826
136,591
66,752
69 839
78,924
361,186
237,237
123,950
62,473
61 477
77,928
294,098
197,827
96 271
46,956
49 315
68,946
208,971
139,315
69,656
34,308
35,348
46,634
85,127
58,513
26,615
12,649
13,966
22,312
67,087
39,409
27,678
15,516
12,162
8,983
64,449
37,675
26,775
15,146
11 629
8,403
2,638
1,735
903
370
533
579
64,232
51,590
12 642
4,280
8 362
996
55,936
45,489
10,447
3,111
7 336
881
8,295
6,100
2,195
1,169
1 026
115
Deposits total
Interbank
Other demand
...
Other time
Total capital accounts
456 784
21,889
190 817
244,077
39,371
396,291
21,888
190,362
184,041
34,384
327,011
20,880
157 508
148,624
28,098
231,374
13,963
109,632
107,779
19,730
95,637
6,916
47,876
40,845
8,368
69,279
1,009
32,854
35,417
6,286
67,107
831
31,630
34,645
5,830
2,172
177
1,224
52,910
1
435
52,475
4,237
7,584
457
60,494
1
456
60,038
4,987
14,223
13,722
6,071
4,758
1,313
7,651
7,440
211
501
331
170
Number of banks
772
21
7,563
749
December 31, 1966
Loans
Investments
U S Govt securities
Other securities
Cash assets
382,907
267,246
115,662
60,916
54,745
70,085
323,885
218,949
104,936
56,163
48,772
69,119
264,627
183,743
80,884
41,924
38,960
60,738
187,251
129,182
58,068
30,355
27,713
41,690
77,377
54,560
22,816
11,569
11,247
19,049
59,257
35,206
24,051
14,239
9,812
8,381
56,857
33,636
23,221
13,873
9,349
7,777
2,400
1,570
830
367
463
604
59,023
48,297
10,726
4 753
5,973
966
51,267
42,591
8,676
3,324
5,352
847
7,756
5,705
2,050
1 429
621
119
Deposits total
Interbank
Other demand
Other time
Total capital accounts
408,860
19,635
174,050
215,175
36,926
353,510
19,634
173,643
160,234
32,054
292,004
18,692
143,398
129,913
26,278
206,456
12,595
100,144
93,718
18,459
85,547
6,097
43,254
36,196
7,819
61,506
942
30,245
30,320
5,776
59,434
755
29,049
29,630
5,342
2,073
187
1,196
690
434
55,350
1
407
54,942
4,871
48,254
1
387
47,865
4,140
7,096
14,271
13,767
6,150
4,799
1,351
7,617
7,384
233
504
330
174
Number of banks
NOTE.—All banks in the United States.
20
7,076
732
18. MEMBER BANK INCOME, EXPENSES, AND DIVIDENDS, BY CLASS
OF BANK, 1967 AND 1966
Reserve city banks
Total
New York
City
Item
1967
1966
1967
1966
Country
banks
City of
Chicago
1967
Other
1966
1967
1966
1967
1966
In millions of dollars
Revenue
On U.S. Govt.
securities
On other securities... .
On loans
All other
17,859 16,072 3,080 2,775
763
689 6,673 6,036 7,344 6,571
1,934 1,702
245
1,561 1,265
232
12,128 11,086 2,159
444
2,236 2,018
175
210
1,986
405
69
60
527
106
58
519 1,009
611
950
52
446
578
691
556
479 4,598 4,285 4,843 4,337
100
786
885
800
728
Expenses
Salaries and wages. . . .
Interest on deposits. ..
All other
13,507
3,648
6,091
3,767
11,941 2,189 1,985
3,290
481
555
5,213 1,037
949
3,438
555
597
558
126
274
158
479 5,092 4,500 5,667 4,977
109 1,366 1,238 1,602 1,462
231 2,331 1,992 2,449 2,042
139 1,396 1,270 1,616 1,473
209 1,580 1,537 1,676 1,594
Net current earnings
before income taxes. . .
Recoveries and profits *..
Losses and charge-offs 2 .
Net increase (or decrease,
+ ) in valuation
reserves
Net income before
related taxes
Taxes on net income
Net income
Cash dividends declared 3.
891
790
205
398
807
263
1,127
36
109
25
229
21
25
327
182
98
59
11
3,616 3,084
1,007
876
2,609 2,209
1,248 1,145
721
237
484
284
528
145
383
259
189
58
131
52
4,353 4,130
163
315
96
443
179
358
130
395
96
11
60
25
122
99
161 1,332 1,165 1,375 1,231
51
362
351
352
328
110
970
813 1,024
902
49
420
453
493
383
In per cent
Ratios:
Net current earnings
before income taxes
Average total capital
accounts
Average total assets. .
Net income to—
Average total capital
accounts
Average total assets..
Average return on—
U.S. Govt. securities
Loans
16.3
1.33
18.0
1.44
16.2
1.22
16.6
1.28
15.7
1.21
15.9
1.26
87
.
.1
7
7.4 10.4
.62
.85
95
.
.5
7
99
.
.5
7
88
.
.8
6
96
.
.74
9.0
.71
4.59
5.81
3.59
5.68
3.60
5.62
4.56
6.45
3.94
6.33
4.41
6.69
4.20
6.53
16.0
1.24
16.1
1.28
16.1
1.31
96
.
.74
86
.
.8
6
4.48
6.39
4.02
6.24
15.2
1.27
4.41
5.88
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 1967 are preliminary; final figures will be published in the May 1968 F.R. Bulletin.
369
19. CHANGES IN NUMBER OF BANKING OFFICES IN THE
UNITED STATES DURING 19671
Commercial banks (incl. stock savings
banks and nondeposit trust companies)
Type of office
and change
All
banks
Member
Total
National i
Total
Number of banks,
Dec. 31, 1966
Changes during 1967
New banks 3
Suspensions
Consolidations and absorptions :
Banks converted into
branches
Other
Voluntary liquidations 4
Ceased banking operations
Other
Interclass changes:
Nonmember to:
National
State member
State member to:
National
Nonmember
National to:
State member
Mutual
savings
banks
Nonmember
State 2
Noninsured 2
Insured
Noninsured
Insured
14,274 13,770
6,150
4,799
1,351
7,385
235
102
4
102
4
21
2
18
3
74
2
7
-117
-19
-6
-114
-19
-6
-65
-15
-53
-11
-12
-4
-49
_2
-4
-1
-2
_5
-3
j
—5
-3
330
174
-1
-2
_3
7
4
— 21
c
-7
-1
7
-4
-21
5
21
5
Noninsured to insured
-20
2
-2
-49
-79
-41
-38
54
-24
1
-4
Number of banks,
Dec. 31, 1967
14,222 13,721
6,071
4,758
1,313
7,439
211
331
170
Number of branches and
additional offices,
Dec. 31,1966
17,405 16,648 12,900
9,407
3,493
3,686
62
614
143
501
74
-49
-1
3
-1
207
14
-20
311
26
-11
1
55
15
2
Net change
Changes during 1967
De novo
Banks converted
Discontinued
Reclassified as facilities.
Reclassified as branches
Other
Interclass changes:
Nonmember to:
National
State member
State member to:
National
Nonmember
National to:
State member
Nonmember
Noninsured to insured
Net change
Number of branches and
additional offices,
Dec. 31, 1967
20
-52
1,090
117
-81
-1
7
-18
708
88
-69
7
37
4
-17
4
-37
-4
33
-33
-17
17
-6
37
4
6
— 17
~j
n
7
749
584
165
309
-16
55
17
18,519 17,690 13,649
9,991
3,658
3,995
46
669
160
1,114
For notes see end of table.
370
1,020
114
-80
-1
7
-18
1,042
19. CHANGES IN NUMBER OF BANKING OFFICES IN THE
UNITED STATES DURING 19671—Continued
Commercial banks (incl. stock savings
banks and nondeposit trust companies)
Type of office
and change
All
banks
Member
Total
National i
Total
Number of banking facilities, Dec. 31,19665
Changes during 1967
Fstablished
Discontinued
Number of banking facilities, Dec. 31,1967.
State 2
260
260
229
204
25
8
-24
8
-24
7
-23
7
-17
1
-22
-22
-12
238
207
192
15
Insured
Noninsured
-10
238
Noninsured 2
1
-22
Insured
-6
1
Reclassified as facilities
Net change
Nonmember
Mutual
savings
banks
31
31
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.
* 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.
371
20. NUMBER OF PAR AND NONPAR BANKING OFFICES,
DECEMBER 31, 1967
Par
F.R. district,
State, or
other area
Nonpar
(nonmember)
Total
Total
Member
Nonmember
Banks Branches Banks Branches Banks Branches Banks Branches Banks Branches
& offices
& offices
& offices
& offices
& offices
DISTRICT
1,325
2,969
1,217
1,648
384
Boston
New York
499
501
Philadelphia...
826
Cleveland
802
Richmond
1,570
Atlanta
Chicago
2,545
1,506
St. Louis
Minneapolis.., 1,356
Kansas City.. 1,924
1,290
Dallas
438
San Francisco
Total
3,641
,378
1,108
1,893
706
227
227
258
4,124
384
499
501
826
732
1,123
2,545
1,291
780
1,924
1,224
437
18,080 12,266
1,325
2,969
1,217
1,648
2,307
1,002
1,893
636
164
227
247
4,124
247
384
370
492
392
528
987
478
493
836
667
197
17,759 6,071
1,011
2,624
912
1,396
1,510
763
1,265
404
103
145
150
3,598
137
115
131
334
340
595
,558
813
287
,088
557
240
13,881 6,195
314
345
305
252
797
239
628
232
61
82
97
526
70
447
71
106
215
576
70
63
11
3,878 1,375
321
STATE
Alabama
Alaska
Arizona
Arkansas.
California.
Colorado
Connecticut..
Delaware....
District of
Columbia..
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Louisiana
Maine
266
12
17
248
172
217
65
19
211
54
265
130
2,685
7
357
74
200
11
17
162
172
217
65
19
199
54
265
107
2,685
7
357
74
110
5
5
83
92
135
36
7
167
46
207
91
2,432
5
288
35
90
6
12
79
80
82
29
12
14
445
96
21
14
416
96
21
12
208
90
13
2
208
197
227
122
7
141
26
17 1,064
542
416
260
673
58
601
268
346
305
124
191
41
211
122
141
17
542
260
58
268
258
191
73
2
16
520
202
159
211
94
57
27
173
43
127
16
355
62
35
166
181
134
124
5
10
544
214
514
390
252
67
14
38
79
14
1
187
198
23
102
77
57
122
158
341
333
85
626
132
434
9
442
648
1,049
8
208
77
55
106
209
223
42
177
90
139
6
269
516
867
6
123
39
5
19
66
67
52
132
110
43
449
42
295
3
173
132
182
2
85
38
426
7
26
1,064
416
673
601
346
226
41
32
8
58
16
253
2
69
39
12
86
"23
29
Maryland....
Massachusetts
Michigan....
Minnesota.. .
Mississippi...
Missouri
Montana....
Nebraska....
Nevada
New Hampshire
122
158
341
722
188
661
132
434
9
75
37
75
37
53
31
225
64
325
757
109
2,131
225
64
325
757
109
2,131
184
41
264
667
67
2,029
41
23
61
856
82
788
29
413
53
375
168
531
421
49
517
14
64
1,069
46
285
1,421
149
75
531
421
49
517
14
28
1,069
46
285
1,421
149
46
348
244
14
37:
13
921
39
233
1,115
85
29
183
177
35
145
9
148
7
52
306
64
102
47
389
103
35
1
73
90
42
U02
123
16
22
New Jersey...
New Mexico.
New Y o r k . . .
North
Carolina...
North
Dakota
Ohio
Oklahoma. ..
Oregon
Pennsylvania.
Rhode Island.
229
442
648
1,049
9
281
77
5
33
75
For notes see end of table.
372
33
75
68
36
20. NUMBER OF PAR AND NONPAR BANKING OFFICES
DECEMBER 31, 1967—Continued
Par
F.R. district,
State, or
other area
Total
Member
Total
Nonmember
Nonpar
(nonmember)
Banks Branches Banks Branches Banks Branches Banks Branches Banks Branches
& offices
& offices
& offices
& offices
& offices
STATE—
Cont.
South
Carolina
South Dakota.
Tennessee
Texas
Utah
Vermont
Virginia
Washington...
West Virginia.
Wisconsin....
Wyoming
125
166
298
1,147
55
45
250
95
194
598
69
96
328
72
87
242
404
59 1,125
55
112
45
67
250
656
95
452
194
598
172
69
1
325
61
388
59
112
67
656
452
172
1
107
9
114
32
25
29
136
44
39
1
64
13
155
515
33
18
89
59
80
430
16
16
32
59
87
610
22
27
161
36
114
168
53
13
140
12
5
218
52
274
27
87
38
520
408
29
94
56
22
3
26
16
133
OTHER
AREA
Puerto Rico 2 ..
Virgin
Islands 2 . . . .
13
156
13
156
6
12
6
12
1
1 Includes 7 N.Y.C. branches of 2 insured nonmember Puerto Rican banks.
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.
2
NOTE.—Comprises all commercial banking offices on which checks are drawn, including 238 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.
373
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967
CONTENTS
APPLICANT BANK
OTHER BANK OR BANKS
Detroit Bank and Trust Company,
Detroit, Mich.
Commercial State Bank of Roseville,
Roseville, Mich.
386
Exchange State Bank, Lanark, 111.
National Bank of Lanark, Lanark,
111.
389
First Trust Company of Albany,
Albany, N.Y.
North Creek National Bank, North
Creek, N.Y.
384
Franklin County Trust Company,
Greenfield, Mass.
Orange National Bank, Orange, Mass.
Manufacturers and Traders Trust
Company, Buffalo, N.Y.
Bank of Perry, Perry, N.Y.
Quincy Trust Company, Quincy,
Mass.
Dedham Trust Company, Dedham,
Mass, (and change title to Hancock
Bank and Trust Company, Quincy,
Mass.)
391
Savings & Trust Company of Indiana,
Indiana, Pa.
First National Bank of Saltsburg,
Saltsburg, Pa.
376
Seattle Trust and Savings Bank,
Seattle, Wash.
Olympia State Bank and Trust Cornpany, Olympia, Wash.
385
Security Bank and Trust Co., Lincoln
Park, Mich.
First National Bank of Allen Park,
Allen Park, Mich.
375
State Bank of Albany, Albany, N.Y.
Emerson National Bank of Warrensburg, Warrensburg, N.Y.
379
Traverse City State Bank, Traverse
City, Mich.
State Bank of Elk Rapids, Elk Rapids,
Mich.
388
Union County Trust Company, Elizabeth, N.J.
Hillside State Bank, Hillside, N.J.
Wachovia Bank and Trust Company,
Winston-Salem, N.C.
First National Bank of Morganton,
Morganton, N.C.
374
Page
390
382
381
377
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967 1
Name of bank, and type of transaction 2
(in chronological order of determination)
No. 1—Security Bank and Trust
Co., Lincoln Park, Mich.
to merge with
First National Bank of
Allen Park, Allen Park,
Mich.
Banking offices
Resources
(in millions
of dollars)
In
operation
187.8
16
8.7
1
To be
operated
17
SUMMARY REPORT BY ATTORNEY GENERAL (1-9-67)
Security Bank and Trust Company (Security Bank), the largest bank
headquartered in the Allen Park-Lincoln Park area, having total assets of
about $187.8 million, proposes to merge First National Bank of Allen Park
(First National Bank), with assets of about $8.6 million.
Allen Park and Lincoln Park are adjoining communities, located about
10 miles southwest of Detroit. In addition to the merging banks, 5 other
banks are headquartered in Security Bank's service area. However, the
merging banks are the only banks with offices in Allen Park.
Since Security Bank's main office is only 2 miles from First National
Bank's only office, it would appear that there is existing competition between these banks which would be eliminated by the proposed merger.
Approval of this merger would leave Security Bank as the only bank
with offices in Allen Park and would enhance Security Bank's position as
the largest bank headquartered in the general area.
Applicant notes that First National Bank's doubtful loans exceed its
capital accounts and reserves. If these loans prove to be largely uncollectible, First National Bank's capital and hence its ability to continue making
loans will be seriously impaired.
In view of the probable anticompetitive effects of the proposed merger,
noted above, careful consideration should be given to the possibility of
alternative solutions to First National Bank's problems.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (1-12-67)
Lincoln Park (population 54,000) and Allen Park (population 37,000)
are contiguous, residential communities located about 9 miles southwest
of Detroit. Security Bank operates 5 offices in Lincoln Park, 3 in Allen
Park, and 8 in surrounding communities; First National Bank's sole office
is in Allen Park. No other bank operates an office in Allen Park and, under
State law, no bank other than the merging banks can establish a branch
in Allen Park, either de novo or through merger. The area served by First
National Bank lies wholly within the area served by Security Bank.
First National Bank is confronted with a serious capital problem for
which there seems to be no feasible solution other than merger. Its
loans in the "doubtful" and "loss" categories together almost equal the
aggregate of its capital funds and reserves. Thus, its capital structure is
grossly inadequate for continuing operations and unless corrective action
is taken, it is likely that the condition of the bank will continue to deteriorate.
For notes see p. 393.
375
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)
Resources
(in millions
of dollars)
Banking offices
In
operation
To be
operated
BASIS FOR APPROVAL BY BOARD OF GOVERNORS—Cont.
The merger would eliminate an alternative source of banking services
from the Allen Park community, and its effect on competition would be
substantially adverse. However, the merger would provide an orderly
solution to the serious capital problem of First National Bank and would
assure that the Allen Park community will not suffer the adverse impact
that would result from continued deterioration in the bank's condition.
Thus, the anticompetitive consequences would be clearly outweighed in
the public interest by the effect of the transaction in avoiding the consequences likely to result if the serious capital problem of First National
Bank is not resolved.
No. 2—The Savings & Trust
Company of Indiana,
Indiana, Pa.
to acquire the assets and
assume deposit liabilities oj
The First National Bank of
Saltsburg, Saltsburg, Pa.
22.6
3.1
SUMMARY REPORT BY ATTORNEY GENERAL (12-16-66)
The Savings & Trust Company of Indiana, Pennsylvania, with total assets
of $25.6 million, proposes to acquire by purchase The First National Bank
of Saltsburg, which has total assets of $3.1 million, and to operate the
acquired bank as a branch office.
Although the participating banks are located 20 miles apart, they appear
to compete with one another to a limited extent. The instant transaction
will eliminate such competition between the banks involved. However,
the acquisition would not appear to affect significantly the structure of
commercial banking in the service area of either bank.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (1-26-67)
The single office of Indiana Bank is in Indiana (population about
13,000), which is the seat of Indiana County and its largest municipality.
Saltsburg (population about 1,000), the site of the sole office of Saltsburg
Bank, is 22 miles southwest of Indiana. There is no significant competition
between the 2 banks. Fourteen persons, including an officer and several
directors of Indiana Bank, who own about 15 per cent of Indiana Bank's
capital stock also own about 46 per cent of the capital stock of Saltsburg
Bank. Even if this close relationship were terminated, the potential for
the development of competition between the 2 banks is limited by the
distance and mountainous terrain separating their offices.
For notes see p. 393.
376
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)
Banking offices
Resources
(in millions
of dollars)
In
operation
To be
operated
BASIS FOR APPROVAL BY BOARD OF GOVERNORS—Cont.
The proposed acquisition would not materially affect banking competition in the area presently served by either bank. The principal effect of
the transaction on banking needs and convenience would be in Saltsburg
where Saltsburg Bank, in large part because of its small size, has been
unable to meet local credit needs. The conversion of Saltsburg Bank
into an office of Indiana Bank would provide for the Saltsburg community
more convenient access to broader credit accommodations and to a
generally wider range of banking services.
No. 3—Wachovia Bank and Trust
Company, Winston-Salem,
N.C.
to merge with
First National Bank of
Morganton, Morganton, N.C.
1,172.1
101
105
16.7
SUMMARY REPORT BY ATTORNEY GENERAL (12-14-66)
Wachovia Bank is the largest commercial bank in North Carolina and
the 39th largest in the United States. It presently operates a statewide
banking system composed of 95 offices in 34 North Carolina communities.
Since 1960 Wachovia Bank has acquired 6 banks, which operated a total
of 30 offices. As of June 30, 1966, Wachovia Bank had total assets of
$1,172.1 million, total deposits of $979.5 million, net loans of $715.6
million, and capital accounts of $110.7 million.
First National Bank operates its home office and 3 branches in Burke
County, which is in the western arm of North Carolina, approximately 50
miles from Wachovia Bank's nearest branch office. First National Bank has
no merger history. As of June 30, 1966, it had total assets of $16.7 million,
total deposits of $14.6 million, net loans of $8.2 million, and capital
accounts of $1.9 million.
During the first 7 months of 1966, Wachovia Bank obtained $1.6 million
in deposits and over $2 million in loans from Burke County. Wachovia
Bank also competes for trust account business in First National Bank's
service area. It presently has 32 trust accounts valued at $11.3 million
from that area.
The proposed merger would eliminate the existing competition between
Wachovia Bank and First National Bank and would eliminate potential
competition between the 2 banks. North Carolina statutory law (N.C.
Gen. Stat. § 53-62) permits any bank, with the prior approval of the
State Banking Commissioner, to branch de novo into any area of the
State. Wachovia Bank has demonstrated in the past its ability to branch
de novo, and it presently has pending applications for permission to establish 4 de novo branches. It would therefore appear to be one of the most
likely entrants into Burke County, where commercial banking is presently
concentrated in only 2 banks.
For notes see p. 393.
377
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967 i—Continued
Banking offices
Name of bank, and type of transaction 2
(in chronological order of determination)
Resources
(in millions
of dollars)
In
operation
To be
operated
SUMMARY REPORT BY ATTORNEY GENERAL—Cont.
Finally, the proposed merger would continue a significant trend of
acquisitions and mergers by the largest commercial banks in North Carolina. Since 1956, the number of North Carolina banks has decreased from
215 to 141, while combined deposits of all commercial banks in the State
have increased from $2.23 billion to $4.49 billion. Wachovia Bank, the
largest bank in North Carolina, has led this trend, having acquired 9
commercial banks since 1956. This acquisition trend has doubtless reduced
significantly the establishment of de novo branches by the largest banks,
thereby inhibiting the development of a more competitive banking structure within the State.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (3-16-67)
The head office of First National Bank is in Morganton (population
about 9,200), which is nearly 100 miles west of Winston-Salem and the
largest community in Burke County (population about 53,000). The bank
operates a branch in Morganton and 2 other branches in Burke County.
The State's fifth largest bank (The Northwestern Bank, North Wilkesboro),
operates 2 branches in Morganton and 1 branch each in Valdese and
Drexel, each of the latter communities being about 7 miles east of Morganton. There are no other banking offices in Burke County; however, The
Northwestern Bank and 6 other banks, including the third, fourth, and
ninth largest in the State, operate a total of 20 offices located 16 to 24
miles from Morganton in portions of 3 of the 7 counties that are contiguous
to Burke County.
The merger would not eliminate any meaningful competition between
Wachovia Bank and First National Bank. The nearest offices of Wachovia
Bank to the offices of First National Bank are its branches in Asheville,
some 54 miles west of Morganton. While Wachovia Bank derives a sizable
dollar amount of business from Burke County, for the most part this
business is beyond the capabilities of First National Bank; the remainder
is of a type for which the bank puts forth little or no competitive effort.
Wachovia Bank, with about 22 per cent of the total commercial bank
deposits in the State, is the largest bank in North Carolina. The acquisition
of First National Bank would increase Wachovia Bank's share of the
State's total commercial bank deposits by about .3 of 1 per cent. The 5
largest banks in North Carolina hold about 66 per cent of the State's
commercial bank deposits. Viewed in terms of these statewide aggregates,
the existing concentration of banking resources in North Carolina must be
regarded as considerable. However, the proposed merger would enable
Wachovia Bank to effect a market extension by establishing offices in a
county that is located practically in the center of a group of 21 contiguous
counties in which it presently has no offices.
For notes see p. 393.
378
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)
Banking offices
Resources
(in millions
of dollars)
In
operation
To be
operated
BASIS FOR APPROVAL BY BOARD OF GOVERNORS—Cont.
The merger would have a significant effect on the banking convenience
and needs in Burke County, an industrialized area which contains more
than 800 business establisments, including over 100 manufacturers, but
offices of only 2 banks. One of these 2 banks, First National Bank, has not
been aggressive in making real estate loans and consumer instalment loans;
it does not endeavor to offer certain services, such as construction loans
and dealer floor plan loans, and, in general—albeit due in part to its size
and low lending limit—makes available only a limited range of services
relative to the needs of the communities it serves. While the replacement
of First National Bank by offices of Wachovia Bank might afford some
added convenience for the larger Burke County concerns, most of them
have ready access to banking markets outside the area. The principal
benefit of the merger would be the addition of a convenient alternative
source of banking services for individuals, small local businesses, and
intermediate-sized businesses on a scale commensurate with their needs.
The proposed merger would not result in any significantly adverse consequences for banking competition and would benefit the banking convenience and needs of the Burke County area.
No. 4—State Bank of Albany,
Albany, N.Y.
to merge with
The Emerson National Bank
of Warrensburg, Warrensburg,
N.Y.
647.8
28
11.2
2
30
SUMMARY REPORT BY ATTORNEY GENERAL (12-12-66)
The State Bank of Albany, New York, with branches located in 11 of
the 15 counties comprising New York State's Fourth Banking District,
proposes to merge with Emerson National Bank of Warrensburg, New
York. As of December 31, 1965, State Bank had total deposits of $585.4
million, and Emerson Bank had total deposits of $10.1 million. The
nearest office of State Bank to Emerson Bank is at Saratoga Springs,
Saratoga County, 21 miles southwest of Emerson Bank's 1 branch office
at Lake Luzerne, Warren County.
The merger, if consummated, would result in the elimination of some
competition that exists between the merging banks. Moreover, although
it is precluded from de novo branching into Warrensburg because of New
York State banking law, which provides for "home office protection,"
State Bank could enter the Warren County market by opening a de novo
branch in other communities where no home office is located. The merger
would eliminate this potential competition between the merging banks.
For notes see p. 393.
379
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)
Banking offices
Resources
(in millions
of dollars)
In
operation
To be
operated
SUMMARY REPORT BY ATTORNEY GENERAL—Cont.
It should be noted that State Bank has acquired 8 banks in the Fourth
Banking District since 1955, with deposits totaling $103.4 million. State
Bank's 2 largest competitors (National Commercial Bank and Trust Company of Albany, and First Trust Company of Albany) have between them
absorbed 19 banks in the district. This very pronounced merger trend,
which has led to increasing concentration in the district, will be enhanced
further by consummation of the instant merger.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (4-3-67)
Emerson National Bank, located in Warrensburg (population 2,300) in
Warren County (population 44,000), operates its sole branch at Lake
Luzerne, about 18 miles south of Warrensburg. State Bank of Albany is
located 70 miles south of Warrensburg, and its nearest office to Emerson
National Bank is its branch in Saratoga County (adjacent to Warren
County at Saratoga Springs), about 21 miles south of Lake Luzerne.
Warren County is served by 20 banking offices operated by 5 locally
headquartered banks of which Emerson National Bank is the third largest.
State Bank has no branches in Warren County, and there is no meaningful
competition between State Bank and Emerson National Bank. State Bank
operates offices in 23 communities situated in 11 of the 15 counties that
comprise the Fourth Banking District of New3 York. With 25 per cent of
the total deposits and 20 per cent of the IPC deposits, State Bank ranks
second in size among the 41 commercial banks headquartered in the district. Emerson National Bank holds about 1 per cent of both the total and
IPC 3 deposits in the district.
The area served by Emerson National Bank, which includes several
Warren County communities but consists principally of Warrensburg,
Lake Luzerne, and Lake George, depends primarily upon the resort
activities, both summer and winter. Growth of the area is enhanced by
the high level of residential construction—mainly year-round vacation
homes—and the recent completion of a new interstate highway providing
improved access to the area. Because of its low lending limit and lack
of loanable funds, Emerson National Bank is unable to meet the credit
needs of the area it serves. The bank's loans equal more than 70 per cent
of its deposits, and a sizable portion of its loan portfolio represents loans
which it originated but, because of the amount, it found necessary to share
with other banks. The ability of Emerson National Bank to meet local
credit needs is also impaired to some degree by the heavy dependence of
the area it serves on resort activity; the bank recognizes that there is a
limit to the amount of credit dependent on a single kind of local business
that it can prudently concentrate in its loan portfolio.
The replacement of Emerson National Bank by offices of State Bank,
with its larger lending limit, would provide an adequate and convenient
source of credit for the area now served by Emerson National Bank and
For notes see p. 393.
380
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)
Resources
(in millions
of dollars)
Banking offices
In
operation
To be
operated
BASIS FOR APPROVAL BY BOARD OF GOVERNORS—Cont.
would probably enhance the development of the local economy. In making
loan funds available, State Bank would not be dependent on the volume
of deposits derived from the local area, and its more diversified loan
portfolio would enable the bank to cope readily with area credit needs
despite the predominance of resort activity. In addition, State Bank would
offer a broad range of other banking services, many of which are not now
conveniently available to the customers of Emerson National Bank. This
would be accomplished without any significantly adverse consequences
for banking competition.
No. 5—Union County Trust
Company, Elizabeth, N J .
to merge with
Hillside State Bank,
Hillside, N J .
175.2
12
6.7
1
13
SUMMARY REPORT BY ATTORNEY GENERAL (11-30-66)
Union County Trust Company has assets of $175.2 million and deposits
of $157.6 million. It operates 10 offices in Elizabeth and adjacent New
Jersey communities.
Hillside State Bank has assets of $6.7 million and deposits of $5.8 million. Its single office is located in Hillside, New Jersey, a town of 23,150,
adjacent to Elizabeth.
There is some actual competition between the merging banks. Moreover,
because of their proximity and because de novo branching within the
county is permitted under State law, there is a likelihood of increased
competition between the 2 banks in the future.
Union County Trust Company holds approximately 27 per cent of the
total IPC 3 deposits of the 8 banks with offices in the combined service
area of the merging banks, and Hillside State Bank has just under 1 per
cent of such deposits.
We conclude that the proposed merger would eliminate some actual as
well as potential competition between the 2 institutions, and increase somewhat the concentration of banking resources in Union County.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (4-10-67)
Elizabeth (population 117,000) and Hillside (population 23,000) are
adjoining communities in Union County, New Jersey. The main offices of
the 2 banks are about 4 miles apart. Union Trust Company operates a
branch system over a sizable portion of Union County, and it has an office
For notes see p. 393.
381
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)
Banking offices
Resources
(in millions
of dollars)
In
operation
To be
operated
BASIS FOR APPPROVAL BY BOARD OF GOVERNORS—Cont.
about 3.5 miles from Hillside Bank with no intervening offices. There are,
however, 2 branches of the county's largest bank in Hillside, and branches
of large Newark banks are within a 2-mile radius of Hillside and compete
for business in that community.
Hillside Bank has had operational problems since its opening in November 1962. It sustained substantial operating losses in the first 2 years of its
operation. Since that time, its capital position has continued to deteriorate.
Efforts to raise additional capital have been unsuccessful, and in view of
the heavy loan losses experienced by the bank in 1966, it appears that it
would be extremely difficult at this time to attract new capital. Hillside
Bank has also experienced serious management problems; it has had 3
presidents in its relatively brief existence and, although the present president is believed to be capable, additional executive personnel are necessary
if Hillside Bank is to continue as an independent bank. In view of the
bank's formidable internal problems, it is believed that it would be difficult
to attract qualified officers.
It would appear that the area served by Hillside Bank is within the
area served by Union Trust Company and some actual and potential
competition would be eliminated by the merger. However, due to the
difference in the size of the 2 banks and certain internal problems of Hillside Bank, it is the Board's opinion that no significant existing competition
between the 2 institutions would be eliminated by the merger proposal and,
further, that the proposed merger would not eliminate any significant
potential competition, because it appears unlikely that Hillside Bank will
develop into a viable competitor. Consummation of the proposal would not
result in any significantly adverse consequences for banking competition
and would provide a reasonable solution to Hillside Bank's internal
problems.
No. 6—Manufacturers and
Traders Trust Company,
Buffalo, N.Y.
to merge with
The Bank of Perry,
Perry, N.Y.
792.5
66
67
12.0
SUMMARY REPORT BY ATTORNEY GENERAL (2-27-67)
This is an application by the second largest bank in Buffalo, New York,
to merge with a small, independent bank located 54 miles east of Buffalo.
The Bank of Perry's (the Merging Bank) service area is characterized by
a relatively large number of small independent banks. The 2 banks do not
compete with each other at present, and none of the other large Buffalo
banks compete in the Perry area.
For notes see p. 393.
382
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)
Resources
(in millions
of dollars)
Banking offices
In
operation
To be
operated
SUMMARY REPORT BY ATTORNEY GENERAL—Cont.
The proposed merger would convert the Merging Bank into a branch of
Manufacturers and Traders Trust Company (the Charter Bank), whose
deposits would total nearly $692 million. Conceivably, further merger
activity in the county involving other large Buffalo banks might be stimulated; otherwise, no competitive issues would appear to be raised by the
proposed merger, either in the city of Buffalo or in Wyoming County.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (5-1-67)
Manufacturers and Traders Trust Company (hereafter referred to as
M&T), headquartered in Buffalo, operates about 90 per cent of its total
of 66 offices in the Buffalo Metropolitan Area. The sole office of Perry
Bank is about 55 miles southeast of Buffalo at Perry (population about
5,000), the largest community in Wyoming County (population about
35,000).
M&T has no offices in Wyoming County; its nearest office to Perry is
about 23 miles to the north in Batavia. Because of the distance separating
the banks, and the presence of other banking offices in the intervening
area, there is little competition existing between them. Nor does it appear
that meaningful competition would develop between M&T and Perry Bank
if they did not merge, although New York law permits a bank, subject to
a home-office-protection feature, to branch de novo into Wyoming County.
Because of Perry Bank's relatively small size, it does not appear probable
that it would establish a branch near an office of M&T. The home-officeprotection restriction, as well as the small size of the communities that
might otherwise be available, would preclude M&T from establishing a
new branch in or near Perry.
M&T, with 26 per cent of the deposits, is the second largest of the 37
commercial banks in the Ninth Banking District; Perry Bank, with less
than one-half of 1 per cent of the deposits, ranks 14th. While the concentration of banking resources is high in the Buffalo Metropolitan Area,
the relevant geographical market in this case consists of the area from
which Perry Bank draws its business and in which concentration is not a
factor.
Perry Bank derives most of its business from the Perry community and
from the surrounding area within a radius of about 5 miles. There is
evidence that Perry Bank has found it necessary to share with other banks
some of the loans that it has originated. Further, Perry Bank has either
refused or terminated several commercial and agricultural loans, most of
which would have been provided by M&T. In addition, M&T would offer
several services not offered by Perry Bank, including fiduciary and advisory
services, consumer and small business revolving loans, and other specialized loans. In general, M&T would offer a broad range of banking services,
many of which are now available to the customers of Perry Bank only
through a branch of another bank 9 miles from Perry.
In summary, the proposed merger would not result in any significant
adverse consequences for banking competition and would benefit the banking convenience and needs of the area served by Perry Bank.
For notes see p. 393.
383
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)
No. 7—First Trust Company of
Albany, Albany, N.Y.
to merge with
The North Creek National
Bank, North Creek, N.Y.
Resources
(in millions
of dollars)
Banking offices
In
operation
141.8
12
6.2
3
To be
operated
15
SUMMARY REPORT BY ATTORNEY GENERAL (2-17-67)
This is a proposal to merge First Trust Company, the third largest of
Albany's 5 commercial banks and an affiliate of BT New York Corporation, a bank holding company, and North Creek Bank, a small institution
in a resort area some 85 miles north of Albany.
Competition between the merging banks does not appear to be substantial, owing to the distance between them. Nor would the acquisition of
the small North Creek Bank materially alter the competitive position of
First Trust Company in the areas in which it competes. However, the
proposed merger may stimulate additional merger activity by small banks
in the region of the North Creek Bank. Moreover, in view of the favorable
growth prospects of the North Creek area, First Trust Company might be
expected to increase its competitive efforts there through de novo branching, and the proposed merger would foreclose the prospect of this potential
competition.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (6-19-67)
North Creek Bank is located in Warren County (population 44,000) at
North Creek (population 2,250), approximately 85 miles north of Albany.
It operates a branch at Indian Lake in Hamilton County and at Newcomb
in Essex County, about 27 and 17 miles northwest and west, respectively,
of North Creek. The nearest offices of another bank to the main office of
North Creek are about 15 miles away; the nearest such offices to either
of its branches are about 24 miles distant. First Trust Company's nearest
office to an office of North Creek Bank is about 60 miles from North
Creek. Neither bank derives more than a negligible amount of business
from the areas served by the other.
While New York law permits a bank, subject to a home-office-protection
feature, to branch de novo into the area served by North Creek Bank, it
does not appear that meaningful competition would develop in the future
between First Trust Company and North Creek Bank. Because of North
Creek Bank's small size, it seems unlikely that it would establish a branch
near an office of First Trust Company, and the home-office-protection
restriction, as well as the small size of the communities that might otherwise be available, would preclude First Trust Company from establishing
a new branch near an office of North Creek Bank. North Creek Bank is
the only bank headquartered in North Creek, and its merger with First
Trust Company would open the community to de novo branching.
For notes see p. 393.
384
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)
Banking offices
Resources
(in millions
of dollars)
In
operation
To be
operated
BASIS FOR APPROVAL BY BOARD OF GOVERNORS—Cont.
The proposed merger would not have an adverse effect on banking
competition and would result in the replacement of North Creek Bank
by offices of First Trust Company, which would provide more convenient
access to broader credit accommodations and a generally wider range of
banking services for the North Creek, Indian Lake, and Newcomb communities.
No. 8—Seattle Trust and
104.6
14
Sayings Bank, Seattle,
Wash.
to merge with
Olympia State Bank and
Trust Company, Olympia
19.7
17
Wash.
SUMMARY REPORT BY ATTORNEY GENERAL (5-23-67)
The proposed merger would combine the sixth largest commercial bank
(out of 12) in the Seattle area with the smallest of 3 commercial banks
in the Olympia area. The applicant banks serve 2 different geographic
areas, approximately 60 miles apart. Therefore, we believe that the proposed merger would not eliminate any direct competition between the 2
banks, nor significantly increase concentration in the separate markets
involved. Moreover, because of State law restrictions on de novo branching, neither bank could enter the market of the other; thus, with independent entry barred by statute, there is no loss of potential competition
from the proposed merger.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (6-26-67)
Olympia Bank's main office is situated in Olympia (population about
18,000), the capital of the State of Washington; the bank's 2 branches are
in Tumwater and Lacey, both of which are in surrounding Thurston
County. Seattle Bank, located 62 miles northeast, operates all its branches
in the county surrounding Seattle. Neither bank has an office in the area
served by the other, and no office of Seattle Bank is closer than 46 miles
to an office of Olympia Bank. Pierce County, including the major city of
Tacoma, separates the service areas of the 2 banks and contains numerous
banking offices. The home-office-protection restriction of State law would
prevent either bank from expanding into the area served by the other
except through the acquisition of an existing bank.
For notes see p. 393.
385
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)
Banking offices
Resources
(in millions
of dollars)
In
operation
To be
operated
BASIS FOR APPROVAL BY BOARD OF GOVERNORS—Cont.
The principal effect of the transaction would be on the banking needs
and convenience in Olympia. The conversion of the 3 offices of Olympia
Bank into branches of Seattle Bank would provide for the inhabitants of
Thurston County convenient access to an alternative source of broader
credit accommodations and a generally wider range of banking services
without adversely affecting banking competition.
No. 9—The Detroit Bank and
Trust Company, Detroit,
Mich.
1,650.0
73
76
to consolidate with
Commercial State Bank of Roseville,
Roseville, Mich.
27.8
SUMMARY REPORT BY ATTORNEY GENERAL (4-5-67)
Detroit Bank and Trust Company (Detroit Bank) is the second largest
bank in the Detroit Metropolitan Area, with total deposits of $1,509
million; Commercial State Bank of Roseville (Commercial Bank), with
deposits of $26 million, is the only bank in the suburban community of
Roseville and the 20th largest bank in the Detroit Metropolitan Area.
Detroit Bank has 4 offices within 5 miles (by road) of 1 of Commercial Bank's 4 offices; and it no doubt constitutes a banking alternative for
persons in suburban Roseville who work in downtown Detroit. It also
appears to constitute an alternative source of commercial and industrial
loans to medium and small businesses located in Roseville. (Detroit Bank
has a somewhat higher proportion of its loan portfolio devoted to this type
of loan.) The proposed merger would eliminate such competition.
According to the application, some 29 commercial banks compete in the
Detroit Metropolitan Area. Banking concentration in the area is high—
the 3 largest banks hold about 70 per cent of the metropolitan area's total
deposits. Detroit Bank (which is the second largest) now holds about 18
per cent of the Detroit area's total IPC 3 demand deposits, and the proposed
merger would add about 0.3 per cent to its market share. The merger
would also, of course, eliminate from the market an apparently successful
small competitor whose rate of growth since 1962 has been outstanding.
The proposed merger would substitute a bank almost 20 times the size
of Commercial Bank as the sole bank in Roseville. The presence of such
a large bank in the community might discourage others from establishing
a new bank in Roseville and thereby raise barriers to entry in this submarket within the Detroit Metropolitan Area. This is significant because
State law prohibits other banks from establishing branches in Roseville,
but does not bar the establishment of new banks there.
For notes
p. 393.
386
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)
Resources
(in millions
of dollars)
Banking offices
In
operation
To be
operated
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (9-28-67)
Detroit Bank serves the Detroit Metropolitan Area, which is comprised
of the counties of Macomb, Oakland, and Wayne, and has a population in
excess of 4 million. Roseville Bank, the only commercial bank in Roseville (population 60,000), is located in Macomb County about 3 miles
from the northeastern boundary of Detroit. There are 40 offices of 11
banks situated within a 5-mile radius of the 3 offices of Roseville Bank,
including an office of Detroit Bank located about 3 miles from an office
of Roseville Bank and 2 others located about 4.5 miles from Roseville
Bank's main office. These 3 offices of Detroit Bank obtain less than 3
per cent of their deposits from the Roseville area. State law precludes
entry into Roseville by other banks through the establishment of de novo
branches.
Roseville Bank, established in 1951, has not been aggressive in offering
banking services and, although it enjoys exclusive branching privileges in
Roseville, it has established only 1 office for each 20,000 residents. Its net
income reached an all-time high in 1966, but its earnings were still somewhat below the average for other banks similarly situated. The capital of
the bank needs to be strengthened, and the bank lacks management depth.
In addition, there is serious disharmony among the directors of Roseville
Bank. These considerations raise doubts about the future of the banks as
an effective competitive force.
While it can be contended that there may be other feasible alternatives
to this proposal, none can be realistically presented and documented in
the framework within which this merger application is being considered.
Proposals must be considered seriatim and only as those first presented
are rejected. The anticompetitive effects of the particular proposal are not
sufficient to warrant rejection and thereby require the negotiation of a
second alternative. Meanwhile the weakening in the capacity to serve
the community arising from the lack of managerial depth and disharmony
among the directors should be remedied.
The consolidation would immediately and conclusively resolve the
managerial and related problems of Roseville Bank, and the replacement
of Detroit Bank would result in the addition of a more convenient alternative source of full-scale banking services for Roseville, without resulting
in any significantly adverse consequences for banking competition.
For notes see p. 393.
387
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)
No. 10—Traverse City State
Bank, Traverse City,
Mich.
to consolidate with
State Bank of Elk Rapids,
Elk Rapids, Mich.
Banking offices
Resources
(in millions
of dollars)
41.6
In
operation
To be
operated
4
c
2.8
1
SUMMARY REPORT BY ATTORNEY GENERAL (8-22-67)
Traverse City State Bank is the largest bank in the northwestern portion
of Michigan's Lower Peninsula around Grand Traverse Bay. It operates
1 branch in Traverse City, the trade center for this area, and 2 others
located, respectively, in Sutton's Bay and Kingsley, all in Grand Traverse
County.
State Bank of Elk Rapids is located in Antrim County, about 17 miles
northeast of Traverse City on the eastern shore of Grand Traverse Bay.
It would appear that there is now little existing competition between the
merging banks. Also, under Michigan State law, Traverse City Bank
would be unable to branch de novo into Elk Rapids.
We conclude that the merger proposed would have little, if any, effect
upon competition in the banking markets involved.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (10-12-67)
Traverse City Bank operates its main office and 1 branch in Traverse
City (population 19,200) and a branch in each of 2 communities located
13 miles to the north and south of Traverse City, respectively. The sole
office of Elk Rapids Bank is located in Elk Rapids (population 1,000),
about 17 miles northeast of Traverse City. The nearest bank to Elk Rapids
is located about 7 miles to the east. Although the areas served by each
of the 2 banks overlap slightly, there is no meaningful competition between
them. Traverse City Bank obtains some business from the Elk Rapids area
because it has the resources to accommodate borrowers who need larger
amounts of credit than are available at Elk Rapids Bank, and to provide
other services not offered by Elk Rapids Bank. State law precludes de novo
branching by either bank into communities in which the other has offices.
The chief executive officer of Elk Rapids Bank, who is also the bank's
controlling stockholder, has been incapacitated by illness. Although the
bank is presently being operated in a competent manner, the consolidation
would assure the continuance of capable management. There would be no
significant adverse effect on banking competition resulting from the consolidation, and the replacement of Elk Rapids Bank by an office of Traverse
City Bank would provide the Elk Rapids community more convenient
access to broader credit accommodations and to a generally wider range
of banking services.
For notes see p. 393.
388
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)
No. 11—Exchange State Bank,
Lanark, 111.
to acquire the assets and
assume deposit liabilities of
The National Bank of Lanark,
Lanark, 111.
Banking offices
Resources
(in millions
of dollars)
3.7
In
operation
To be
operated
1
4
2.3
1
SUMMARY REPORT BY ATTORNEY GENERAL (9-18-67)
Exchange State Bank (Exchange Bank) of Lanark, Illinois, proposes to
purchase the assets and assume the liability to pay deposits in the National
Bank of Lanark (National Bank). The 2 banks operate their sole offices
a block apart, in the small town of Lanark, Illinois.
The town of Lanark (population 1,500) is situated in Carroll County
(population 19,500), a predominantly agricultural community, in the
upper northwestern part of the State of Illinois. The markets of both
banks are said to include the broader Lanark area (population 3,000)
extending outward within a 12-mile radius of Lanark itself; 7 of Carroll
County's 9 banks are included in this area.
The proposed acquisition involves 2 small banks which apparently rank
fourth and sixth, respectively, among the 7 commercial banks competing
in this broader Lanark area. The resulting bank would rank second largest
among the remaining 6 banks; and would have a legal lending limit of
$30,000.
Exchange Bank has about 9 per cent of Carroll County's total deposits
and 10 per cent of the IPC 3 demand deposits. National Bank has 5 per
cent of the county's total deposits and 7 per cent of the IPC 3 demand
deposits.
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (10-19-67)
The single offices of Exchange Bank and National Bank are the only
banking offices in this small (population 1,500) and predominantly agricultural community. Each bank derives the preponderance of its business
from an area within a radius of about 8 miles of Lanark. Five other banks
(with deposits ranging from $1 million to $9 million), situated within 8
to 12 miles of Lanark, compete in this area.
National Bank has not been an aggressive competitor, and its loans are
equal to only about 36 per cent of its deposits. It has made no effort to
modernize its services, and its physical plant is in a serious state of disrepair. This, in addition to the size of the community it serves, makes it of
dubious attractiveness to prospective buyers, and State law prohibiting
branch banking makes acquisition of the bank unattractive for banks
located outside Lanark. If the proposed acquisition by Exchange Bank
were not approved, it seems likely that business realities would lead the
present owners of National Bank to liquidate the institution. If National
Bank were liquidated, it is probable that the vast majority of its customers
would continue to prefer the convenience of banking locally and would
For notes see p. 393.
389
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)
Resources
(in millions
of dollars)
Banking offices
In
operation
To be
operated
BASIS FOR APPROVAL BY BOARD OF GOVERNORS—Cont.
transfer their business to Exchange Bank. Thus, in terms of new business
acquired by Exchange Bank, the ultimate consequences of the proposed
acquisition would not differ materially from those that would result from
the outright liquidation of National Bank. The proposal would reduce the
alternative sources of banking services in the Lanark community from
2 to 1, but it appears that National Bank would be eliminated in any
event, and combining the operations of National Bank and Exchange Bank,
as the proposal contemplates, would probably result in a significant gain
in operating efficiency that would benefit the consumers of banking
services in the Lanark community.
No. 12—Franklin County Trust
Company, Greenfield,
Mass.
to merge with
The Orange National Bank,
21.6
4.6
Orange, Mass.
SUMMARY REPORT BY ATTORNEY GENERAL (9-29-67)
The Franklin County Trust Company (Franklin Bank) proposes to
merge The Orange National Bank (Orange Bank). Both banks are located
in Franklin County (population 54,864) in the western part of Massachusetts. Franklin Bank is located in Greenfield (population 17,690),
and Orange Bank is located in Orange (population 6,154).
There are 5 banks in Franklin County, of which Franklin Bank is the
largest and Orange Bank is the fourth largest. There is a considerable
distance between the closest offices of the 2 banks—approximately 20 miles
—and in the circumstances it seems doubtful that there is a substantial
amount of direct competition between the 2 institutions. Within Franklin
County, Franklin Bank holds about 43 per cent of the total deposits and
36 per cent of the total IPC 3 demand deposits, while Orange Bank
accounts for 10 per cent and 11 per cent, respectively, of such deposits.
Under Massachusetts law, Franklin Bank would be permitted to open
a de novo branch in the town of Orange (Mass. G.L. c. 172, § 11). It
would appear to be the most probable entrant into this market since (i) it
is the largest bank in the county and (ii) only banks headquartered in the
county would be permitted to branch de novo into Orange. Accordingly,
the proposed merger would involve some lessening of potential competition
resulting from the elimination of Franklin Bank as a potential entrant into
this market.
For notes see p. 393.
390
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)
Resources
(in millions
of dollars)
Banking offices
In
operation
To be
operated
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (11-15-67)
Franklin County Trust Company (Franklin Bank) operates its head
office and sole branch in Greenfield (population about 18,000); the sole
office of Orange Bank is about 20 miles east of Greenfield in Orange
(population about 6,000). There is no meaningful competition between
Franklin Bank and Orange Bank, and the development of competition
between the 2 banks through de novo branching seems improbable in view
of the small size of Orange Bank and of the community it serves. The
principal competition for Orange Bank is furnished by 3 offices of 2
commercial banks located within a 4-mile radius of Orange in Athol
(population about 12,000), situated in adjacent Worcester County, and it
does not appear that either of these banks would be adversely affected by
the proposed transaction. The larger credit needs of the area are not
being met by Orange Bank, due, in part, to its lending limit of $30,000.
The conversion of Orange Bank into an office of Franklin Bank would
provide for the Orange community more convenient access to broader
credit accommodations and to a generally wider range of banking services.
No. 13—Quincy Trust Company,
Quincy, Mass.
to merge with
Dedham Trust Company,
Dedham, Mass.
and change its title to
Hancock Bank and Trust Company,
Quincy, Mass.
29.8
6
17.5
6
12
SUMMARY REPORT BY ATTORNEY GENERAL (10-30-67)
Quincy Trust Company and Dedham Trust Company are both located
in Norfolk County, the fastest growing county in the Boston Standard
Metropolitan Area.
Quincy Trust Company, organized in 1915, maintains its head office in
Quincy and 7 branch offices located within a radius of 4 miles from
Quincy. Dedham Trust Company, organized in 1958, has its head office in
Dedham and 5 branches located 1 to 20 miles from Dedham.
All branches of both the merging banks are located in Norfolk County,
Massachusetts. Norfolk County is the fastest growing county in the Boston
Metropolitan Area. It had a population of 510,256 in 1960 (compared to
392,308 in 1950); and it lies generally to the south of the city of Boston.
Norfolk County is served by 10 commercial banks with the 2 largest—
Norfolk County Trust Company and South Shore National Bank—having
offices located throughout most of the county and accounting for over 70
per cent of the county's IPC 3 demand deposits. Quincy Trust and Dedham
Trust appear to be the fourth and fifth largest banks in the county.
For notes see p. 393.
391
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)
Banking offices
Resources
(in millions
of dollars)
In
operation
To be
operated
SUMMARY REPORT BY ATTORNEY GENERAL—Cont.
The closest present branches of the merging banks are in Randolph, a
town of 18,900 adjacent to Quincy. Quincy Trust's Randolph branch is in
fact within walking distance of Dedham Trust's Randolph office, and the
merging banks plan to discontinue Quincy Trust's Randolph branch if the
proposed merger is approved. In Randolph the merging banks constitute
the only banking alternatives to the 2 large countywide banks—Norfolk
County Trust Company and South Shore National Bank.
With the exception of the Randolph branches, noted above, the closest
branch offices of these merging banks would appear to be about 6 miles
apart, with some banking alternatives in between. Quincy Trust has
branches scattered throughout Quincy, Braintree, Weymouth, and Randolph. Dedham Trust has its branches in Needham, Norwood, Walpole,
and, of course, Dedham. These are fairly distinct areas to the south of
Boston.
We conclude that the proposed merger would at least involve elimination of direct competition in Randolph.
The proposed merger would cause an increase in concentration in Norfolk County. Quincy Trust now controls 7.5 per cent of total Norfolk
County IPC 3 demand deposits, and its merger with Dedham Trust would
give it a market share of 11.2 per cent.
These market shares may overstate the situation somewhat, since they
do not reflect the presence of the major Boston banks in Suffolk County,
which adjoins both Dedham and Quincy on the north. The 2 merging
banks together account for only .8 per cent of the IPC 3 demand deposits
in the Boston Standard Metropolitan Statistical Area (which is no doubt
an unrealistically large market).
BASIS FOR APPROVAL BY BOARD OF GOVERNORS (11-30-67)
Quincy (1960 population 87,000), the largest city in Norfolk County,
is located about 8 miles south of downtown Boston, which is situated in
adjoining Suffolk County. Quincy Trust Company's 6 branches are all in
Norfolk County and within a radius of 6 miles of its main office. Dedham
(1960 population 24,000) is about 9 miles west of Quincy and about 10
miles southwest of downtown Boston. All of Dedham Trust Company's
offices are also in Norfolk County. The town of Randolph (population
22,000), in which each bank operates a branch, is the only place where
the service areas of the 2 banks overlap. Each bank derives about 4 per
cent of its IPC 3 deposits from the area served by the other. If the merger
is consummated, Quincy Trust's office in Randolph, which was opened
in 1964 and has generated little business, would be closed.
For notes see p. 393.
392
21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITION
OF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY
THE BOARD OF GOVERNORS DURING 1967 i—Continued
Name of bank, and type of transaction 2
(in chronological order of determination)
Resources
(in millions
of dollars)
Banking offices
In
operation
To be
operated
BASIS FOR APPROVAL BY BOARD OF GOVERNORS—Cont.
Neither Quincy Trust nor Dedham Trust has an office in the western
rural area of Norfolk County, the only area where the development of competition between them through de novo branching would seem likely.
Norfolk County Trust Company and South Shore National Bank, the 2
largest banks in the county, have been extending their branch systems
to include towns in western Norfolk County. The bank resulting from the
proposed merger would be in a stronger position than either Quincy Trust
or Dedham Trust to establish branches in these towns and thereby offer
competition for offices of the county's largest banks.
The respective lending limits of the proponent banks are $400,000 and
$260,000. The resulting institution would be a stronger corporate enterprise with a lending limit of $700,000. This would be helpful to commercial
customers in the present service areas of Quincy Trust and Dedham Trust.
The merger would result in the elimination of Quincy Trust's branch in
Randolph, but 4 offices of 3 banks would remain, and these include 3
offices of Norfolk County's 2 largest banks. Moreover, the Randolph
branch of Quincy Trust is quite small, and, it appears, unprofitable; it is
questionable whether the branch would continue to operate if the proposed
merger were not approved. The merger would have a slightly adverse
effect on competition; and while the potential benefits for banking convenience and needs are also limited, they are sufficient to cause the Board
to conclude that the application should be approved.
1
During 1967 the Board disapproved 2 mergers, etc. However, under Section 18(c)
of the Federal Deposit Insurance Act, only those transactions approved by the Board
must be described in its ANNUAL REPORT to Congress.
2
Each transaction was proposed to be effected under the charter of the first-named
bank.
3
The abbreviation "IPC" designates deposits of individuals, partnerships, and corporations.
4
Head office of The National Bank of Lanark will be closed.
393
THE FEDERAL RESERVE
SYSTEM
BOUNDARIES OF FEDERAL RESERVE DISTRICTS AND THEIR BRANCH TERRITORIES
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, 1967)
WM. MCC. MARTIN, JR., of New York, Chairman
J. L. ROBERTSON of Nebraska, Vice Chairman
Term expires
January 31, 1970
January 31, 1978
GEORGE W. MITCHELL of Illinois
J. DEWEY DAANE of Virginia
SHERMAN J. MAISEL of California
ANDREW R BRIMMER of Pennsylvania
WILLIAM W. SHERRILL of Texas
January
January
January
January
January
DANIEL H. BRILL, 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
JAMES B. ECKERT, Assistant Adviser
MURRAY S. WERNICK, Assistant Adviser
396
31,
31,
31,
31,
31,
1976
1974
1972
1980
1968
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
JACK M. EGERTSON, Assistant Director
THOMAS A. SIDMAN, 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
JOHN H. RHINEHART, Assistant Director
397
FEDERAL OPEN MARKET COMMITTEE
(December 31, 1967)
MEMBERS
WM. MCC. MARTIN, JR., Chairman (Board of Governors)
ALFRED HAYES, Vice Chairman (Elected by Federal Reserve Bank of New York)
ANDREW F. BRIMMER (Board of Governors)
J. DEWEY DAANE (Board of Governors)
DARRYL R. FRANCIS (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)
CHARLES J. SCANLON (Elected by Federal Reserve Banks of Cleveland and
Chicago)
WILLIAM W. SHERRILL (Board of Governors)
ELIOT J. SWAN (Elected by Federal Reserve Banks of Minneapolis, Kansas City,
and San Francisco)
EDWARD A. WAYNE (Elected by Federal Reserve Banks of Boston, Philadelphia,
and Richmond)
OFFICERS
ROBERT C. HOLLAND, Secretary
MiiRRiTT SHERMAN,
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,
Economist
ERNEST T. BAUGHMAN,
Associate Economist
J. HOWARD CRAVEN,
Associate Economist
GEORGE GARVY,
Associate Economist
A. B. HERSEY,
Associate Economist
HOMER JONES,
Associate Economist
ALBERT R. KOCH,
Associate Economist
J. CHARLES PARTEE,
Associate Economist
JAMES PARTHEMOS,
Associate Economist
ROBERT SOLOMON,
Associate Economist
ALAN R. HOLMES, Manager, System Open Market Account
CHARLES A. COOMBS, Special Manager, System Open Market Account
During 1967 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. 85-206 of this Report).
398
FEDERAL ADVISORY COUNCIL
(December 31, 1967)
MEMBERS
District No. 1—John Simmen, President, Industrial National Bank of Rhode
Island, Providence, Rhode Island.
District No. 2—R. E. McNeill, Jr., Chairman of the Board, Manufacturers
Hanover Trust Company, New York, New York.
District No. 3—Harold F. Still, Jr., President, Central-Penn National Bank of
Philadelphia, Philadelphia, Pennsylvania.
District No. 4—John A. Mayer, Chairman of the Board and Chief Executive
Officer, Mellon National Bank and Trust Company, Pittsburgh, Pennsylvania.
District No. 5—J. Harvie Wilkinson, Jr., Chairman of the Board, State-Planters
Bank of Commerce and Trusts, Richmond, Virginia.
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—Frederick G. Larkin, Jr., President, Security First National
Bank, Los Angeles, California.
OFFICERS
JOHN A. MOORHEAD, President
SAM M. FLEMING, Vice President
HERBERT V. PROCHNOW, Secretary
WILLIAM J. KORSVIK, Assistant Secretary
EXECUTIVE COMMITTEE
JOHN A. MOORHEAD, ex officio
SAM M. FLEMING, ex officio
ROGER D. KNIGHT, JR.
ROBERT H. STEWART, III
JOHN A. MAYER
Meetings of the Federal Advisory Council were held on February 20-21, May
15-16, September 18-19, and November 20-21, 1967. The Board of Governors
met with the Council on February 21, May 16, September 19, and November
21. 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.
399
FEDERAL RESERVE BANKS and BRANCHES
(December 31, 1967)
CHAIRMEN AND DEPUTY CHAIRMEN OF BOARDS OF DIRECTORS
Federal Reserve
Bank of—
Chairman and
Federal Reserve Agent
Deputy Chairman
Boston
Erwin D. Canham
. Charles W. Cole
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
. Wilson H. Elkins
Atlanta
Jack Tarver
. Edwin I. Hatch
Chicago
Franklin J. Lunding
. Elvis J. Stahr
St. Louis
Frederic M. Peirce
. Smith D. Broadbent, Jr.
Minneapolis
Joyce A. Swan
. Robert F. Leach
Kansas City
Dolph Simons
. Dean A. McGee
Dallas
Carl J. Thomsen
. Max Levine
San Francisco
Frederic S. Hirschler
. S. Alfred Halgren
CONFERENCE OF CHAIRMEN
The Chairmen of the Federal Reserve Banks are organized into a Conference of Chairmen that meets from time to time to consider matters of common
interest and to consult with and advise the Board of Governors. Such a meeting, attended also by Deputy Chairmen of the Reserve Banks, was held in
Washington on November 30-December 1, 1967.
Mr. Hyde, Chairman of the Federal Reserve Bank of Richmond, who was
elected Chairman of the Conference and of the Executive Committee in December 1966, served in that capacity until the close of the 1967 meeting. Mr.
Thomsen, Chairman of the Federal Reserve Bank of Dallas, and Mr. Winn,
Chairman of the Federal Reserve Bank of Philadelphia, served with Mr. Hyde
as members of the Executive Committee; Mr. Thomsen also served as Vice
Chairman of the Conference.
On December 1, 1967, Mr. Thomsen, Chairman of the Dallas Bank, was
elected Chairman of the Conference and of the Executive Committee to serve
for the succeeding year; Mr. Peirce, Chairman of the Federal Reserve Bank of
St. Louis, was elected Vice Chairman of the Conference and a member of the
Executive Committee; and Mr. Winn, Chairman of the Philadelphia Bank, was
elected as the other member of the Executive Committee.
400
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cont.
DIRECTORS
Class A and Class B directors are elected by the member banks of the district.
Class C directors are appointed by the Board of Governors of the Federal Reserve
System.
The Class A directors are chosen as representatives of member banks and, as a
matter of practice, are active officers of member banks. The Class B directors may
not, under the law, be officers, directors, or employees of banks. At the time of their
election they must be actively engaged in their district in commerce, agriculture, or
some other industrial pursuit.
The Class C directors may not, under the law, be officers, directors, employees,
or stockholders of banks. They are appointed by the Board of Governors as representatives not of any particular group or interest, but of the public interest as a
whole.
Federal Reserve Bank branches have either five or seven directors, of whom a
majority are appointed by the Board of Directors of the parent Federal Reserve
Bank and the others are appointed by the Board of Governors of the Federal Reserve System.
DIRECTORS
District 1 — Boston
Term
expires
Dec. 31
Class A:
William I. Tucker
Chairman of the Board, Vermont National
Bank, Brattleboro, Vt
1967
Lawrence H. Martin
President, The National Shawmut Bank,
Boston, Mass
1968
Charles A. Beaujon, Jr.. .President, The Canaan National Bank, Canaan,
Conn
1969
Class B:
James R. Carter
President, Nashua Corporation, Nashua, N.H.. 1967
W. Gordon Robertson.. Chairman and Chief Executive Officer, Bangor
Punta Corporation, Bangor, Maine
1968
F. Ray Keyser, Jr
Counsel, Vermont Marble Company, Proctor,
Vt
1969
Class C:
Erwin D. Canham
Charles W. Cole
Howard W. Johnson
Editor in Chief, The Christian Science Monitor,
Boston, Mass
1967
President Emeritus, Amherst College, Amherst,
Mass
1968
President, Massachusetts Institute of Technology, Cambridge, Mass
1969
401
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cont.
DIRECTORS—Cont.
Class A:
George A. Murphy
Robert G. Cowan
Eugene H. Morrison
District 2 — New York
Term
expires
Dec. 31
Chairman of the Board, Irving Trust Company,
New York, N.Y
1967
Chairman of the Board, National Newark &
Essex Bank, Newark, N J
1968
President, Orange County Trust Company,
Middletown, N.Y
1969
Class B:
Arthur K. Watson
Chairman of the Board, IBM World Trade
Corporation, and Vice Chairman of the
Board, International Business Machines
Corporation, Armonk, N.Y
1967
Milton C. Mumford... .Chairman of the Board, Lever Brothers Company, New York, N.Y..
1968
Maurice R. Forman
President, B. Forman Co., Inc., Rochester, N.Y. 1969
Class C.James M. Hester
Kenneth H. Hannan
bverett N. Case
President, New York University, New York,
N.Y
1967
Executive Vice President, Union Carbide Corporation, New York, N.Y
1968
President, Alfred P. Sloan Foundation, New
York, N.Y
1969
Buffalo Branch
Appointed by Federal Reserve Bank:
J. Wallace Ely
President, Security Trust Company, 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
E. Perry Spink
Chairman of the Board, Liberty National
Bank and Trust Company, Buffalo, N.Y....
1967
1967
1968
1969
Appointed by Board of Governors:
Robert S. Bennett
General Manager, Lackawanna Plant, Bethlehem Steel Corporation, Buffalo, N.Y
1967
(Carl A. Day
Executive Vice President, Bausch & Lomb Inc.,
Rochester, N.Y
1968
Gerald F. Britt
President, L-Brooke Farms, Inc., Byron, N.Y... 1969
402
FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cont.
DIRECTORS—Cont.
District 3 — Philadelphia
Term
expires
Dec. 31
Class A:
Lloyd W. Kuhn
President, The Bendersville National Bank,
Bendersville, Pa
1967
Howard C. Petersen.... Chairman of the Board, The Fidelity Bank,
Philadelphia, Pa
1968
Robert C. Enders
President, Bloomsburg Bank-Columbia Trust
Company, Bloomsburg, Pa
1969
Class B:
PhilipH. Glatfelter,III. .President, P. H. Glatfelter Co., Spring Grove,
Pa
1967
Henry A. Thouron
Chairman of the Board and President, Hercules, Incorporated, Wilmington, Del
1968
Edward J. Dwyer
President, ESB Incorporated, Philadelphia, Pa. 1969
Class C.Willis J. Winn
Dean, Wharton School of Finance and Commerce, University of Pennsylvania, Philadelphia, Pa
1967
D. Robert Yarnall, Jr.. .President, Yarway Corporation, Blue Bell, Pa. 1968
Bayard L. England
Chairman of the Board, Atlantic City Electric
Company, Atlantic City, N.J
1969
District 4 — Cleveland
Class A:
Seward D. Schooler
President, Coshocton National Bank, Coshocton, Ohio
1967
Everett D. Reese
Chairman of the Board, The City National
Bank and Trust Company, Columbus, Ohio 1968
Richard R. Hollington.. President, The Ohio Bank and Savings Company, Findlay, Ohio
1969
Class B:
David A. Meeker
Walter K. Bailey
R. Stanley Laing
Chairman of the Board and Chief Executive
Officer, The Hobart Manufacturing Company, Troy, Ohio
1967
Chairman of the Board, The Warner and Swasey Company, Cleveland, Ohio
1968
President, The National Cash Register Company, Dayton, Ohio
1969
403
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cont.
DIRECTORS—Cont.
Class C:
Joseph B. Hall
Logan T. Johnston
Albert G. Clay
District 4 — Cleveland — Cont.
Term
expires
Dec. 31
Former Chairman of the Board, The Kroger
Co., Cincinnati, Ohio
1967
Chairman of the Board, Armco Steel Corporation, Middletown, Ohio
1968
President, Clay Tobacco Company, Mt. Sterling, Ky
1969
Cincinnati Branch
Appointed by Federal Reserve Bank:
Kroger Pettengill
President, The First National Bank, Cincinnati, Ohio
Jacob H. Graves
President, The Second National Bank and
Trust Company, Lexington, Ky
John W. Humphrey
President, The Philip Carey Manufacturing
Company, Cincinnati, Ohio
Robert J. Barth
President, The First National Bank, Dayton,
Ohio
1967
1968
1969
1969
Appointed by Board of Governors:
Barney A. Tucker
President, Burley Belt Fertilizer Company,
Lexington, Ky
1967
Graham E. Marx
President, The G. A. Gray Company, Cincinnati, Ohio
1968
John N. StaufTer
President, Wittenberg University, Springfield,
Ohio
1969
Pittsburgh Branch
Appointed by Federal Reserve Bank:
Edwin H. Keep
President, First National Bank, Meadville, Pa.
Robert C. Hazlett
President, Wheeling Dollar Savings & Trust
Co., Wheeling, W. Va
Charles M. Beeghly
Chairman of the Board and Chief Executive
Officer, Jones and Laughlin Steel Corporation, Pittsburgh, Pa
Thomas L. Wentling
President, First National Bank of Westmoreland, Greensburg, Pa
1967
1968
1969
1969
Appointed by Board of Governors:
Robert Dickey, III
President, Dravo Corporation, Pittsburgh, Pa. 1967
F. L. Byrom
.President, Koppers Company, Inc., Pittsburgh,
Pa
1968
Lawrence E. Walkley.. .President, Westinghouse Air Brake Company,
Pittsburgh, Pa
1969
404
FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cont.
DIRECTORS—Cont.
Class A:
George Blanton, Jr
William A. Davis
Robert C. Baker
Class B:
Robert R. Coker
Charles D. Lyon
Thaddeus Street
District 5 — Richmond
Term
expires
Dec. 31
President, First National Bank, Shelby, N.C.. 1967
President, The Peoples Bank, Mullens, W.Va.. 1968
President and Chairman of the Board, American Security and Trust Company, Washington, D.C
1969
President, Coker's Pedigreed Seed Company,
Hartsville, S.C
1967
President, The Potomac Edison Company,
Hagerstown, Md
1968
President, Carolina Shipping Company,
Charleston, S.C
1969
Class C.Edwin Hyde
President, Miller and Rhoads, Inc., Richmond,
Va
1967
Wilson H. Elkins
President, University of Maryland, College
Park, Md
1968
Robert W. Lawson, Jr... Managing Partner, Steptoe and Johnson,
Charleston, W.Va
1969
Baltimore Branch
Appointed by Federal Reserve Bank:
Martin Piribek
Executive Vice President, The First National
Bank, Morgantown, W.Va
Adrian L. McCardell. . .President, First National Bank of Maryland,
Baltimore, Md
Joseph B. Browne
President, Union Trust Company of Maryland,
Baltimore, Md
John P. Sippel
President, The Citizens National Bank, Laurel,
Md
1967
1967
1968
1969
Appointed by Board of Governors:
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
Arnold J. Kleff, Jr
Manager, Baltimore Plant, American Smelting and Refining Company, Baltimore, Md. 1969
405
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cont.
DIRECTORS—Cont.
District 5 —• Richmond — Cont.
Term
expires
Dec. 31
Charlotte Branch
Appointed by Federal Reserve Bank:
Wallace W. Brawley... .President, National Bank of Commerce, Spartanburg, S.C
C. C. Cameron
Chairman of the Board and President, First
Union National Bank of North Carolina,
Charlotte, N.C.
G. Harold Myrick
President and Trust Officer, First National
Bank, Lincolnton, N.C
J. Willis Cantey
President, The Citizens and Southern National
Bank of South Carolina, Columbia, S.C
Appointed by Board of Governors:
William B. McGuire
President, Duke Power Company, Charlotte,
N.C
John L. Fraley
Executive Vice President, Carolina Freight
Carriers Corporation, Cherryville, N.C
James A. Morris
Vice President, Division of Advanced Studies
and Research, University of South Carolina,
Columbia, S.C
1967
1967
1968
1969
1967
1968
1969
District 6 — Atlanta
Class A:
D. C. Wadsworth, Sr
John W. Gay
William B. Mills
Class B:
James H. Crow, Jr
Harry T. Vaughn
Philip J. Lee
406
President, The American National Bank,
Gadsden, Ala
1967
President, The First National Bank, Scottsboro,
Ala
1968
President, The Florida National Bank, Jacksonville, Fla
1969
Vice President, The Chemstrand Corporation,
Decatur, Ala
President, United States Sugar Corporation,
Clewiston, Fla
Vice President, Seaboard Coast Line Railroad
Company, Jacksonville, Fla
1967
1968
1969
FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cont.
DIRECTORS—Cont.
Class C.Jack Tarver
Edwin I. Hatch
John A. Hunter
District 6 — Atlanta — Cont.
Term
expires
Dec. 31
President, Atlanta Newspapers, Inc., Atlanta,
Ga
1967
President, Georgia Power Company, Atlanta,
Ga
1968
President, Louisiana State University, Baton
Rouge, La
1969
Birmingham Branch
Appointed by Federal Reserve Bank:
Rex J. Morthland
President, The Peoples Bank and Trust Company, Selma, Ala
C. Willard Nelson
President, State National Bank, Decatur, Ala..
Major W. Espy
Chairman, The Headland National Bank,
Headland, Ala
Will T. Cothran
President, Birmingham Trust National Bank,
Birmingham, Ala
1967
1967
1968
1969
Appointed by Board of Governors:
C. Caldwell Marks
Chairman of the Board, Owen-Richards Company, Inc., Birmingham, Ala
1967
Eugene C. Gwaltney, Jr. .Vice President, Russell Mills, Inc., Alexander
City, Ala
1968
Mays E. Montgomery.. .General Manager, Dixie Home Feeds Company, Athens, Ala
1969
Jacksonville Branch
Appointed by Federal Reserve Bank:
William R. Barnett
Chairman, Barnett First National Bank, Jacksonville, Fla
Dudley Cole
President, Florida First National Bank, Ocala,
Fla
Andrew P. Ireland
President, The American National Bank,
Winter Haven, Fla
L. V. Chappell
President, First National Bank, Clearwater,
Fla
1967
1967
1968
1969
Appointed by Board of Governors:
Henry Cragg
Chairman of the Board and Chief Executive
Officer, Minute Maid Company, Orlando,
Fla
1967
Castle W. Jordan
President, Associated Oil and Gas Company,
Coral Gables, Fla
1968
Henry King Stanford... President, University of Miami, Coral Gables,
Fla
1969
407
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cont.
DIRECTORS—Cont.
District 6 — Atlanta — Cont.
Term
expires
Dec. 31
Nashville Branch
Appointed by Federal Reserve Bank:
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, Crossville,
Tenn
Andrew Benedict, Jr
President, First American National Bank,
Nashville, Tenn
1967
1967
1968
1969
Appointed by Board of Governors:
Robert M. Williams... .President, ARO, Inc., Arnold Engineering
Development Center, Tullahoma, Tenn
1967
Alexander Heard
Chancellor, Vanderbilt University, Nashville,
Tenn
1968
James E. Ward
President, Baird-Ward Printing Company,
Nashville, Tenn
1969
New Orleans Branch
Appointed by Federal Reserve Bank:
Robert M. Hearin
President, First National Bank, Jackson, Miss.
W. Richard White
President, First National Bank of Jefferson
Parish, Gretna, La
Donald L. Delcambre... President, The State National Bank, New Iberia,
La
A. L. Gottsche
President, First National Bank, Biloxi, Miss...
1967
1967
1968
1969
Appointed by Board of Governors:
Kenneth R. Giddens... .President, WKRG-TV, Inc., Mobile, Ala
1967
Frank G. Smith, Jr
Vice President, Mississippi Power and Light
Company, Jackson, Miss
1968
George B. Blair
General Manager, American Rice Growers Cooperative Association, Lake Charles, L a . . . . 1969
District 7 — Chicago
Class A:
John H. Crocker
Chairman of the Board, The Citizens National
Bank, Decatur, 111
1967
Harry W. Schaller
President, The Citizens First National Bank,
Storm Lake, Iowa
1968
Kenneth V. Zwiener.... Chairman of the Board, Harris Trust and Savings Bank, Chicago, 111
1969
408
FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cont.
DIRECTORS—Cont.
District 7 — Chicago — Cont.
Term
expires
Dec. 31
Class B:
William E. Rutz
Director and Member of Executive Committee,
Giddings and Lewis Machine Tool Company,
Fond du Lac, Wis
1967
Joseph O. Waymire
Vice President and Treasurer, Eli Lilly and
Company, Indianapolis, Ind
1968
William H. Davidson.. .President, Harley-Davidson Motor Company,
Milwaukee, Wis
1969
Class C:
Franklin J. Lunding.... Chairman, Finance Committee, Jewel Companies, Inc., Chicago, 111
1967
Elvis J. Stahr
President, Indiana University, Bloomington,
Ind
1968
Emerson G. Higdon.... President, The Maytag Company, Newton,
Iowa
1969
Detroit Branch
Appointed by Federal Reserve Bank:
Raymond T. Perring
Chairman of the Board, The Detroit Bank and
Trust Company, Detroit, Mich
B. P. Sherwood, Jr
President, Security First Bank and Trust Company, Grand Haven, Mich
John H. French, Jr
President, City National Bank, Detroit, Mich.
George L. Whyel
President, Genesee Merchants Bank and Trust
Company, Flint, Mich
1967
1968
1969
1969
Appointed by Board of Governors:
James William Miller... President, Western Michigan University, Kalamazoo, Mich
1967
Guy S. Peppiatt
Chairman of the Board, Federal-Mogul Corporation, Detroit, Mich
1968
Max P. Heavenrich, Jr... President, Heavenrich Bros. & Company,
Saginaw, Mich
1969
District 8 — St. Louis
Class A:
Bradford Brett
Harry F. Harrington
Cecil W. Cupp, Jr
President, The First National Bank, Mexico,
Mo
1967
Chairman of the Board, The Boatmen's National Bank, St. Louis, Mo
1968
President, Arkansas Bank and Trust Company,
Hot Springs, Ark.
1969
409
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cont.
DIRECTORS—Cont.
Class B:
Mark Townsend
Sherwood J. Smith
Roland W. Richards
District 8 — St. Louis — Cont.
Term
expires
Dec. 31
Chairman of the Board, Townsend Lumber
Company, Inc., Stuttgart, Ark
1967
Vice President, Whirlpool Corporation, Evansville, Ind
1968
Senior Vice President, Laclede Steel Company,
St. Louis, Mo
1969
Class C:
Smith D. Broadbent, Jr.. Owner, Broadbent Hybrid Seed Co., Cadiz, Ky. 1967
Frederic M. Peirce
President, General American Life Insurance
Company, St. Louis, Mo
1968
William King Self
President, Riverside Industries, Marks, Miss... 1969
Little Rock Branch
Appointed by Federal Reserve Bank:
Ross E. Anderson
Chairman of the Board, The Commercial National Bank, Little Rock, Ark
Louis E. Hurley
President, The Exchange Bank & Trust Company, El Dorado, Ark
Ellis E. Shelton
President, The First National Bank, Fayetteville, Ark
Wayne A. Stone
President, Simmons First National Bank, Pine
Bluff, Ark
1967
1968
1969
1969
Appointed by Board of Governors:
Reeves E. Ritchie
President, Arkansas Power & Light Company,
Little Rock, Ark
1967
Carey V. Stabler
President, Little Rock University, Little Rock,
Ark
1968
Jake Hartz, Jr
President, Jacob Hartz Seed Co., Inc., Stuttgart,
Ark
1969
Louisville Branch
Appointed by Federal Reserve Bank:
J. E. Miller
Executive Vice President, Sellersburg State
Bank, Sellersburg, Ind
John H. Hardwick
Chairman and Chief Executive Officer, The
Louisville Trust Company, Louisville, Ky...
Wm. G. Deatherage... .President, Planters Bank & Trust Co., Hopkinsville, Ky
Paul Chase
President, The Bedford National Bank, Bedford, Ind
410
1967
1968
1969
1969
FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cont.
DIRECTORS—Cont.
District 8 — St. Louis — Cont.
Term
expires
Dec. 31
Louisville Branch — Cont.
Appointed by Board of Governors:
Richard T. Smith
Farmer, Madisonville, Ky
1967
C. Hunter Green
Vice President, Southern Bell Telephone and
Telegraph Company, Louisville, Ky
1968
Lisle Baker, Jr
Executive Vice President, The Courier-Journal
& Louisville Times Company, Louisville, Ky. 1969
Memphis Branch
Appointed by Federal Reserve Bank:
Leon C. Castling
President, First National Bank, Marianna, Ark.
W. W. Hollowell
President, The First National Bank, Greenville, Miss
Allen Morgan
President, The First National Bank, Memphis,
Tenn
Con T. Welch
President, Citizens Bank, Savannah, Tenn
1967
1968
1969
1969
Aopointed by Board of Governors:
James S. Williams
Assistant Vice President, American Greetings
Corporation, Osceola, Ark
1967
Sam Cooper
President, HumKo Products Division, National Dairy Products Corporation, Memphis, Tenn
1968
William L. Giles
President, Mississippi State University, State
College, Miss
1969
District 9 — Minneapolis
Class A:
John F. Nash
Curtis B. Mateer
John Bosshard
Class B:
Neil G. Simpson
John H. Toole
Leo C. Studness
President, The American National Bank, St.
Paul, Minn
1967
Executive Vice President, The Pierre National
Bank, Pierre, S. Dak
1968
Executive Vice President, First National Bank,
Bangor, Wis
1969
President, Black Hills Power and Light Company, Rapid City, S. Dak
1967
President, Toole and Easter Company, Missoula, Mont
1968
Manager, Studness Company, Devils Lake,
N. Dak
1969
411
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cont.
DIRECTORS—Cont.
Class C.Byron W. Reeve
Robert F. Leach
J oyce A. Swan
District 9 — Minneapolis — Cont.
Term
expires
Dec. 31
President, Lake Shore, Inc., Iron Mountain,
Mich
1967
Attorney, Oppenheimer, Hodgson, Brown,
Wolff and Leach, St. Paul, Minn
1968
Executive Vice President and Publisher, Minneapolis Star and Tribune, Minneapolis,
Minn
1969
Helena Branch
Appointed by Federal Reserve Bank:
B. Meyer Harris
President, The Yellowstone Bank, Laurel,
Mont
1967
Charles H. Brocksmith. .President, First Security Bank of Glasgow
N. A., Glasgow, Mont
1968
Glenn H. Larson
President, First State Bank, Thompson Falls,
Mont
1968
Appointed by Board of Governors:
Edwin G. Koch
President, Montana College of Mineral Science
and Technology, Butte, Mont
1967
C. G. McClave
President, Montana Flour Mills Company,
Great Falls, Mont
1968
District 10—Kansas City
Class A:
Kenneth H. Peters
Burton L. Lohmuller
Eugene H. Adams
Class B:
Robert A. Olson
Stanley Learned
Fred W. Gilmore
412
President, The First State Bank, Larned, Kans. 1967
Chairman of the Board, The First National
Bank, Centralia, Kans
1968
President, The First National Bank, Denver,
Colo
1969
President, Kansas City Power and Light Company, Kansas City, Mo
1967
Vice Chairman of the Board, Phillips Petroleum Company, Bartlesville, Okla
1968
President, Union Stock Yards Company,
Omaha, Nebr
1969
FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cont.
DIRECTORS—Cont.
District 10 — Kansas City — Cont.
Term
expires
Dec. 31
Class C:
Dolph Simons
Editor and President, The Lawrence Daily
Journal-World, Lawrence, Kans
1967
Dean A. McGee
Chairman of the Board, Kerr-McGee Corporation, Oklahoma City, Okla
1968
Willard D. Hosford, Jr. .Vice President and General Manager, John
Deere Company, Omaha, Nebr
1969
Denver Branch
Appointed by Federal Reserve Bank:
Armin B. Barney
Chairman of the Board, Colorado Springs
National Bank, Colorado Springs, Colo
1967
J. P. Brandenburg..... .President, The First State Bank, Taos, New
Mex
1968
Theodore D. Brown
President, The Security State Bank, Sterling,
Colo
1968
Appointed by Board of Governors:
Cris Dobbins
President, Ideal Cement Company, Denver,
Colo
1967
D. R. C. Brown
President, Aspen Skiing Corporation, Aspen,
Colo
1968
Oklahoma City Branch
Appointed by Federal Reserve Bank:
Howard J. Bozarth
President, City National Bank and Trust Company, Oklahoma City, Okla
1967
Guy L. Berry, Jr
President, The American National Bank and
Trust Company, Sapulpa, Okla
1968
C. M. Crawford
President, First National Bank, Frederick,
Okla
1968
Appointed by Board of Governors:
C. W. Flint, Jr
Chairman of the Board, Flint Steel Corporation, Tulsa, Okla
1967
F. W. Zaloudek
Manager, J. I. Case Equipment Agency, Kremlin, Okla
1968
413
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cont.
DIRECTORS—Cont.
District 10 — Kansas City — Cont.
Term
expires
Dec. 31
Omaha Branch
Appointed by Federal Reserve Bank:
Henry D. Kosman
Chairman of the Board, Scottsbluff National
Bank, Scottsbluff, Nebr
1967
John W. Hay, Jr
President, Rock Springs National Bank, Rock
Springs, Wyo
1967
W. B. Millard, Jr
Chairman of the Board, Omaha National Bank,
Omaha, Nebr
1968
Appointed by Board of Governors:
John T. Harris
Merchant and cattleman, McCook, Nebr
1967
Henry Y. Kleinkauf
President, Natkin & Company, Omaha, Nebr. 1968
District 11 —Dallas
Class A:
J. Edd McLaughlin
Ralph A. Porter
Murray Kyger
Class B:
H. B. Zachry.
J. B. Perry, Jr
C. A. Tatum, Jr
Class C.Carl J. Thomsen
Kenneth S. Pitzer
Max Levine
414
President, Security State Bank & Trust Company, Rails, Tex
1967
President, The State National Bank, Denison,
Tex
1968
Chairman of the Board, The First National
Bank, Fort Worth, Tex
1969
Chairman of the Board, H. B. Zachry Company, San Antonio, Tex
1967
Real estate development, Lufkin, Tex
1968
President, Texas Utilities Company, Dallas,
Tex
1969
Senior Vice President, Texas Instruments Incorporated, Dallas, Tex
1967
President and Professor of Chemistry, Rice
University, Houston, Tex
1968
Retired Chairman of the Board, Foley's,
Houston, Tex
1969
FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cont.
DIRECTORS—Cont.
District 11 — Dallas — Cont.
Term
expires
Dec. 31
El Paso Branch
Appointed by Federal Reserve Bank:
Robert F. Lockhart
President, The State National Bank, El Paso,
Tex
Joe B. Sisler
President, The Clovis National Bank, Clovis,
N. Mex
Robert W. Heyer
Director and Consultant, Southern Arizona
Bank & Trust Company, Tucson, Ariz
Archie B. Scott
President, The Security State Bank, Pecos, Tex.
1967
1968
1969
1969
Appointed by Board of Governors:
Gordon W. Foster
Vice President, Farah Manufacturing Company, Inc., El Paso, Tex
1967
Joseph M. Ray
President, The University of Texas, Texas
Western College, El Paso, Tex
1968
C. Robert McNally, Jr... Rancher, Roswell, N. Mex
1969
Houston Branch
Appointed by Federal Reserve Bank:
A. G. McNeese, Jr
Chairman of the Board, Bank of the Southwest
National Association, Houston, Tex
Henry B. Clay
President, First Bank and Trust, Bryan, Tex...
W. G. Thornell
President, The First National Bank, Port
Arthur, Tex
John E. Whitmore
President, Texas National Bank of Commerce,
Houston, Tex
1967
1968
1969
1969
Appointed by Board of Governors:
Edgar H. Hudgins
Ranching—Partner in J. D. Hudgins, Hungerford, Tex
1967
R. M. Buckley
President, Eastex, Incorporated, Evadale, Tex. 1968
Geo. T. Morse, Jr
President and General Manager, Peden Iron &
Steel Company, Houston, Tex
1969
San Antonio Branch
Appointed by Federal Reserve Bank:
Max A. Mandel
President, The Laredo National Bank, Laredo,
Tex
1967
James T. Denton, Jr
President, Corpus Christi Bank and Trust,
Corpus Christi, Tex
1968
415
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cont.
D[RECTORS—Cont.
District 11 — Dallas — Cont.
Term
expires
Dec. 31
San Antonio Branch — Cont.
Appointed by Federal Reserve Bank:
J. R. Thornton
Chairman of the Board and President, State
Bank and Trust Company, San Marcos, Tex. 1969
T. C. Frost, Jr
President, The Frost National Bank, San Antonio, Tex
1969
Appointed by Board of Governors:
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
W. A. Belcher
Veterinarian and rancher, Brackettville, Tex... 1969
District 12 — San Francisco
Class A:
Charles F. Frankland... Chairman of the Board and Chief Executive
Officer, The Pacific National Bank, Seattle,
Wash
1967
Ralph V. Arnold
Chairman of the Board and Chief Executive
Officer, First National Bank and Trust Company, Ontario, Calif.
1968
Carroll F. Byrd
Chairman of the Board and President, The
First National Bank, Willows, Calif.
1969
Class B:
Marron Kendrick
President, Schlage Lock Company, San Francisco, Calif.
1967
Herbert D. Armstrong. .Treasurer, Standard Oil Company of California,
San Francisco, Calif.
1968
Joseph Rosenblatt
Honorary Chairman of the Board, The Eimco
Corporation, Salt Lake City, Utah
1969
Class C.Frederic S. Hirschler
Bernard T. Rocca, Jr
S. Alfred Halgren
416
Director, The Emporium Capwell Company,
Oakland, Calif.
1967
Chairman of the Board, Pacific Vegetable Oil
Corporation, San Francisco, Calif.
1968
Vice President, Carnation Company, Los Angeles, Calif.
1969
FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cont.
DIRECTORS—Cont.
District 12 — San Francisco — Cont.
Term
expires
Dec. 31
Los Angeles Branch
Appointed by Federal Reserve Bank:
Sherman Hazeltine
Chairman of the Board and Chief Executive
Officer, First National Bank of Arizona,
Phoenix, Ariz
1967
Harry J. Volk
President, Union Bank, Los Angeles, Calif.... 1968
Carl E. Schroeder
President, The First National Bank, Orange,
Calif.
1968
Appointed by Board of Governors:
Arthur G. Coons
President Emeritus, Occidental College, Newport Beach, Calif.
1967
J. L. Atwood
Chairman of the Board and President, North
American Aviation, Inc., El Segundo, Calif. 1968
Portland Branch
Appointed by Federal Reserve Bank:
E. J. Kolar
Chairman of the Discount Committee, United
States National Bank of Oregon, Portland,
Ore
1967
E. W. Firstenburg
Chairman of the Board and President, First
Independent Bank, Vancouver, Wash
1968
Charles F. Adams
President, The Oregon Bank, Portland, Ore.. . 1968
Appointed by Board of Governors:
Graham J. Barbey
President, Barbey Packing Corporation, Astoria, Ore
1967
Robert F. Dwyer
Lumberman, Portland, Ore
1968
Salt Lake City Branch
Appointed by Federal Reserve Bank:
William E. Irvin
President, The Idaho First National Bank,
Boise, Idaho.
1967
Alan B. Blood
Executive Vice President, Barnes Banking Company, Kaysville, Utah
1968
Newell B. Dayton
Chairman of the Board, Tracy-Collins Bank
and Trust Company. Salt Lake City, Utah.. 1968
Appointed by Board of Governors:
Royden G. Derrick
President, Western Steel Company, Salt Lake
City, Utah
1967
Peter E. Marble
Rancher, Deeth, Nev
1968
417
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cant.
DIRECTORS—Cont.
District 12 — San Francisco — Cont.
Term
expires
Dec. 31
Seattle Branch
Appointed by Federal Reserve Bank:
Maxwell Carlson
President, The National Bank of Commerce,
Seattle, Wash
1967
A. E. Saunders
President, The Puget Sound National Bank,
Tacoma, Wash
1968
Philip H. Stanton
President, Washington Trust Bank, Spokane,
Wash
1968
Appointed by Board of Governors:
William McGregor
Vice President, McGregor Land and Livestock
Company, Hooper, Wash
1967
Robert D. O'Brien
Chairman of the Board and Chief Executive
Officer, Pacific Car and Foundry Company,
Renton, Wash
1968
418
FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cont.
PRESIDENTS and VICE PRESIDENTS
Federal
Reserve
Bank
or branch
President
First Vice President
Vice Presidents
Daniel Aquilino
R. W. Eisenmenger
Harry R. Mitiguy
Parker B. Willis
Boston
George H. Ellis
E. O. Latham
D. Harry Angney
Ansgar R. Berge
Luther M. Hoyle,.Jr.
G. Gordon Watts
New York
Alfred Hayes
William F. Treiber
Harold A. Bilby
William H.Braun, Jr.
John J. Clarke
Charles A. Coombs
Felix T. Davis
Edward G. Guy
Marcus A. Harris
Alan R. Holmes
Robert G. Link
Fred W. Piderit, Jr.
T. M. Timlen, Jr.
Thomas O. Waage
Angus A . Maclnnes, Jr.
Buffalo
Philadelphia... Karl R. Bopp
Robert N. Hilkert
Cleveland
Cincinnati
Pittsburgh
Richmond
Edward A. Aff
Hugh Barrie
Joseph R. Campbell Norman G. Dash
David P. Eastburri William A. James
David C. Melnicoff G. William Metz
Lawrence C. Murdoch, Jr.
Harry W. Roeder
James V. Vergari
W. Braddock Hickman George E. Booth, Jr. Paul Bridenbach
Walter H. MacDonald Roger R. Clouse
Elmer F. Fricek
WilliamH.Hendricks John J. Hoy
Harry W. Huning
Frederick S. Kelly
Maurice Mann
Clifford G. Miller
Fred O. ]Kiel
Clyde E. Harrell
Edward A. Wayne
Aubrey N. Heflin
Baltimore
Charlotte
Robert P. Black
J. G. Dickerson, Jr.
W. S. Farmer
Upton S. Martin
John L. Nosker
James Parthemos
Joseph F. Viverette
R. E. Sanders, Jr.
D. F. Hagner
E. F. MacDonald
Stuart P. Fishburne
419
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—Cant.
PRESIDENTS and VICE PRESIDENTS—Cont.
Federal
Reserve
Bank
or branch
Atlanta
President
First Vice President
Harold T. Patterson
Monroe Kimbrel
Harry Brandt
John T. Harris
J. E. McCorvey
Brown R. Rawlings
Richard A. Sanders R. M. Stephenson
Charles T. Taylor
Edward C. Rainey
]
T. C. Clark
Robert E. Moody, Jr.
Morgan L. Shaw
Charles J. Scanlon
Hugh J. Helmer
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
Gerald T. Dunne
W. W. Gilmore
Homer Jones
Stephen Koptis
John W. Menges
Howard H. Weigel
Joseph C. Wotawa Orville O. Wyrick
John F. Breen
Donald L. Henry
Eugene A. Leonard
Birmingham
Jacksonville
Nashville
New Orleans
Chicago
Detroit
St. Louis
Little Rock
Louisville
Memphis
Minneapolis....
Helena
Kansas City
Vice Presidents
Hugh D. Galusha, Jr. W. C. Bronner
F. J. Cramer
M. H. Strothman, Jr. Kyle K. Fossum
L. G. Gable
C. W. Groth
Douglas R. Hellweg
Howard L. Knous
Clement A. Van Nice
George H. Clay
John T. Boysen
Denver
OklahomaCity
Omaha
420
Wilbur T.Billington D. R. Cawthorne
Raymond J. Doll
J. R. Euans
Carl F. Griswold, Jr. M. L. Mothersead
Maurice J. Swords R. E. Thomas
Clarence W. Tow
John W. Snider
Howard W. Pritz
George C. Rankin
FEDERAL RESERVE SYSTEM
FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1967—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
San Francisco... Eliot J. Swan
A. B. Merritt
Los Angeles
Portland
Salt Lake City
Seattle
Vice Presidents
Roy E. Bohne
James L. Cauthen
Ralph T. Green
James A. Parker
T. W. Plant
W. M. Pritchett
Thomas R. Sullivan
Fredric W. Reed
J. Lee Cook
Carl H. Moore
J. L. Barbonchielli J. Howard Craven
D. M. Davenport
Irwin L. Jennings
E. J. Martens
W. F. Scott
J. B. Williams
P. W. Cavan
Gerald R. Kelly
William M. Brown
Arthur L. Price
W. R. Sandstrom
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. Swan,
President of the Federal Reserve Bank of San Francisco, and Mr. Ellis, President of the Federal Reserve Bank of Boston, were elected Chairman of the
Conference and Vice Chairman, respectively, in March 1967, and served in
those capacities during the remainder of 1967.
Mr. Donald V. Masten of the Federal Reserve Bank of San Francisco and
Mr. Philip A. Shaver of the Federal Reserve Bank of Boston were appointed
Secretary of the Conference and Assistant Secretary, respectively, in March
1967, and served during the remainder of the year.
421
Index
Page
Absorption of exchange charges on checks, legislative recommendation. . 329
Acceptance powers of member banks
325
Acceptances, bankers':
Authority to purchase and to enter into repurchase agreements. . .86-87, 113
Federal Reserve Bank holdings
337, 348, 350
Federal Reserve earnings on
337, 358
Open market transactions during 1967
356
Assets and liabilities:
Banks, by classes
368
Board of Governors
344
Federal Reserve Banks
348, 353
Balance of payments (See U.S. balance of payments)
Bank Examination Schools
326
Bank examiners, home mortgage loans to, legislative recommendation... 332
Bank holding companies:
Board actions with respect to
322
Legislation relating to tax status of distributions of
328
Bank mergers and consolidations
321, 374-93
Bank premises, Federal Reserve Banks and branches 340, 348, 350, 352, 357
Bank supervision by Federal Reserve System
318
Banking offices:
Changes in number
370
Par and nonpar offices, number
372
Board of Governors:
Audit of accounts
343
Building annex
343
Delegation of certain functions, rules on
341
Income and expenses
343-46
Legislative recommendations
329
Litigation
333
Members and officers
396
Policy actions
72-84
Regulations (See Regulations)
Rules, revisions in
85, 341
Salaries:
Legislation regarding
328
Total for 1967
345
Branch banks:
Banks, by classes, changes in number
370
Federal Reserve:
Bank premises
340, 357
Directors
401
422
INDEX
Page
Branch banks—Continued
Federal Reserve—Continued
Vice Presidents in charge
419
Foreign branches of member banks:
Foreign activities of national banks, revision of Regulation M
73
Number
323
Special study
309
Capital accounts:
Banks, by classes
368
Federal Reserve Banks
349, 351, 353
Chairmen and Deputy Chairmen of Federal Reserve Banks
400
Clearing and collection:
Par clearance, legislative recommendation
329
Revision of Regulation J and revocation of Regulation G
77
Volume of operations
362
Collateral for Federal Reserve credit, legislative recommendation
329
Commercial banks:
Assets and liabilities
368
Banking offices, changes in number
370
Foreign credit restraint program
17-21, 78, 82, 327
Number, by class of bank
368
Par clearance, legislative recommendation
329
Commingled investment account prohibited, court opinion
333
Condition statement of Federal Reserve Banks
348-53
Defense production loans
338, 365
Deposits:
Banks, by classes
,
368
Demand deposits:
Graduated reserve requirements on, legislative recommendation. . . . 330
Reserve requirements against certain demand deposits, increases. . . .
81
Federal Reserve Banks, tables
349, 351, 353, 366
Time and savings deposits:
Christmas and vacation club accounts, savings and certain time
deposits, reductions in reserve requirements
72
Maximum permissible interest rates on:
Flexible authority to set, extension of law
327
Table
363
Deputy Chairmen of Federal Reserve Banks
400
Directors, Federal Reserve Banks and branches
401
Discount rates at Federal Reserve Banks:
Decrease
74
Increase
79
Table
364
423
INDEX
Page
Discounts and advances by Federal Reserve Banks:
Collateral for Federal Reserve credit, legislative recommendation. . . .
Earnings on
337,
Special study
Volume
338, 348, 350, 352, 354, 362,
Dividends:
Federal Reserve Banks
336, 359,
Member banks
Earnings:
329
358
309
366
360
369
Federal Reserve Banks
336, 358, 360
Member banks
369
Examinations:
Federal Reserve Banks
318
Foreign banking and financing corporations
325
Member banks
318
State member banks
318
Executive officers of member banks, loans to:
Amendment of Federal Reserve Act
327
Amendment to Regulation O excluding certain indebtedness arising
from use of charge accounts and credit-card or check-credit plans. .
76
Reporting requirements
320
Expenses:
Board of Governors
343-46
Federal Reserve Banks
336, 358, 360
Member banks
369
Federal Advisory Council
399
Federal agency obligations, Federal open market operations and/or
Federal Reserve Bank holdings
87, 327, 348, 350, 356
Federal Open Market Committee:
Audit of System Account
318
Continuing authorizations
114
Foreign currency operations (See Foreign currency operations)
Meetings
85, 398
Members and officers
398
Operations in domestic securities, review
207, 208-75
Operations in foreign currencies, review
14-17, 207, 276-308
Policy actions
85-206
Rules, revisions in
85, 341
U.S. Govt. agency obligations {See Federal agency obligations)
Federal Reserve Act:
Section 9A, addition to law prohibiting gambling activities and
lottery ticket sales by State member banks
328
Section 10, amendment, salaries of members of Federal Reserve Board 328
424
INDEX
Page
Federal Reserve Act—Continued
Section 19, legislative recommendation relating to absorption of
exchange charges for clearing checks
329
Sections 19 and 14(b), amendments relating to interest on deposits,
reserves of member banks, and open market operations
327
Section 22 (g), amendment relating to loans to executive officers
of member banks
76, 327
Section 24, amendment relating to real estate loans by national banks. . 327
Federal Reserve Agents
400
Federal Reserve Banks:
Assessment for expenses of Board of Governors
345, 358
Bank premises
340, 348, 350, 352, 357
Branches {See Branch banks, Federal Reserve)
Capital accounts
349, 351, 353
Chairmen and Deputy Chairmen
400
Collection of checks and other items, revision of Regulation J
77
Condition statement
348-53
Directors
401
Discount mechanism, special study
309
Discount rates:
Decrease
74
Increase
79
Table
364
Dividends
336, 359, 360
Earnings and expenses
336, 358, 360
Examination
318
Foreign and international accounts
339
Lending authority of, legislative recommendation
329
Officers and employees, number and salaries
362
Presidents and Vice Presidents
419
Profit and loss
359
Purchase of obligations of foreign govts., legislative recommendation. . 332
U.S. Govt. securities:
Holdings
337, 348, 350, 352, 354, 366
Open market transactions during 1967
356
Special certificates purchased directly from the U.S
355
U.S. Govt. agency obligations {See Federal agency obligations)
Volume of operations
338, 362
Federal Reserve notes:
Condition statement data
348-53
Cost of printing, issue, and redemption
345
Interest paid to Treasury
336, 359, 360
Federal Reserve System:
Bank supervision by
318
425
INDEX
Page
Federal Reserve System—Continued
Foreign credit restraint program
17-21, 78, 82, 327
Foreign currency operations (See Foreign currency operations)
Map of Federal Reserve districts
395
Membership
320
Public information (See Public information)
Special studies
309
Training activities
326
Financial flows in 1967
46
Fiscal agency function, premature disclosure of information
338
Foreign activities of national banks, revision of Regulation M
73
Foreign banking and financing corporations:
Amendments to Regulation K
73
Examination and operation
325
Foreign branches of member banks:
Foreign activities of national banks, revision of Regulation M
73
Number
323
Special study
309
Foreign credit restraint program
17-21, 78, 82, 327
Foreign currency operations:
Authorization for
88, 114, 133, 150, 184, 192, 205
Federal Reserve earnings on foreign currencies
358
Foreign Currency Directive
92, 114
Legislative recommendation regarding purchase of obligations of
foreign govts. by Federal Reserve Banks
332
Review of operations
14, 207, 276-308
Gold certificate reserves of Federal Reserve Banks, tables
348, 350, 352
Govt. securities (See U.S. Govt. securities)
Guidelines for banks and nonbank financial institutions
17-21
Home mortgage loans to bank examiners, legislative recommendation . . 332
Income, expenses, and dividends, member banks
369
Information, public (See Public information)
Insured commercial banks:
Assets and liabilities
. 368
Banking offices, changes in number
370
Graduated reserve requirements on demand deposits, legislative
recommendation
330
Par clearance, legislative recommendation.
329
Interest on deposits:
Maximum rates on time and savings deposits, flexible authority for supervisory agencies to set, extension of law
327
Interest rates:
Discount rates at Federal Reserve Banks:
Decrease
74
426
INDEX
Page
Interest rates—Continued
Discount rates at Federal Reserve Banks—Continued
Increase
,
Table
Regulation V loans
Review of monetary policy, bank reserves, and interest rates
Time and savings deposits:
Maximum rates on, flexible authority for supervisory agencies to set,
extension of law
Table of maximum permissible rates
Interlocking relationships between national bank and its commingled
investment account prohibited, court opinion
International liquidity plan
Investments:
Banks, by classes
Commingled investment account by national bank prohibited, court
opinion
Federal Reserve Banks
348, 350,
Revenue bond underwriting by national banks, court decision under
review
Small business investment companies, acquisition of stock of, legislation
Legislation:
Antitrust exemptions for voluntary foreign credit restraint agreements
or programs, extension
Bank examiners, home mortgage loans to, legislative recommendation. .
Executive officers of member banks, loans to
Gambling activities and lottery ticket sales by State member banks
prohibited
Lending authority of Reserve Banks, legislative recommendation
Margin requirements for over-the-counter securities, legislative
recommendation
Par clearance, legislative recommendation
Public information, amendment of law with respect to
Purchase of obligations of foreign govts. by Federal Reserve Banks,
legislative recommendation
Rate ceilings on deposits, flexible authority for Federal supervisory
agencies to set maximum, extension
Real estate loans by national banks, amendment to Section 24 of
Federal Reserve Act
Reserve requirements:
Graduated reserve requirements on demand deposits, legislative
recommendation
Time deposits of member banks, extension
Salaries of members of Federal Reserve Board
79
364
365
3
327
363
333
311
368
333
352
335
327
327
332
327
328
329
331
329
341
332
327
327
330
327
328
427
INDEX
Page
Legislation—Continued
Small business investment companies, acquisition of stock of
327
Tax status of bank holding company distributions
328
U.S. Govt. agency obligations, open market operations in, extension. . 327
Liquidity, international monetary plan
311
Litigation:
Baker, Watts & Co. et al. v. Saxon
335
Detroit Bank & Trust Co. et al. v. Saxon and Board of Governors of
Federal Reserve System
335
Investment Company Institute et al. v. Camp
333
Loans:
Banks, by classes
368
Executive officers of member banks, loans to (See Member banks)
Federal Reserve Banks:
Collateral for Federal Reserve credit, legislative recommendation. . 329
Earnings on discounts and advances
337, 358
Special study on Federal Reserve discount mechanism
309
Volume of discounts and advances
338, 348, 350, 352, 362, 366
Home mortgage loans to bank examiners, legislative recommendation. . 332
Real estate loans by national banks, legislation
327
Regulation V loans
338, 365
Margin requirements:
Legislative recommendation relating to over-the-counter securities. . . . 331
Table
363
Member banks:
Acceptance powers
325
Assets, liabilities, and capital accounts
368
Banking offices, changes in number
370
Examination
318
Executive officers of, loans to:
Amendment of Federal Reserve Act
327
Amendment to Regulation O excluding certain indebtedness arising
from use of charge accounts and credit-card or check-credit plans
76
Reporting requirements
320
Foreign branches:
Foreign activities of national banks, revision of Regulations M. . . .
73
Number
323
Special study
309
Income, expenses, and dividends
369
Number
321, 368
Par clearance, legislative recommendation
329
Reserve requirements:
Certain demand deposits, increases in reserve requirements against. .
81
428
INDEX
Page
Member banks—Continued
Reserve requirements—Continued
Christmas and vacation club accounts, savings and certain time
deposits, reductions in reserve requirements
72
Graduated reserve requirements on demand deposits, legislative
recommendation
330
Table
364
Time deposits, extension of law permitting Board of Governors to
fix higher reserve requirements on
327
Reserves and related items
366
Membership in Federal Reserve System
320
Mergers {See Bank mergers and consolidations)
Monetary policy:
Digest of principal policy actions
22
Review of monetary policy, bank reserves, and interest rates
3
Special study of its effects on economic activity
310
Mutual savings banks
368, 370
National banks:
Assets and liabilities
368
Banking offices, changes in number
370
Commingled investment account prohibited, court opinion
333
Foreign activities of, revision of Regulation M
73
Foreign branches:
Number
323
Special study
309
Number
321, 368
Real estate loans, legislation
327
Revenue bond underwriting, court decision under review
335
Nonbank financial institutions, foreign credit restraint
program
17-21, 78, 82, 327
Nonmember banks:
Assets and liabilities
368
Banking offices, changes in number
370
Par and nonpar banking offices, number
372
Par clearance, legislative recommendation
329
Policy actions, Board of Governors:
Discount rates at Federal Reserve Banks:
Decrease
74
Increase
79
Guidelines for foreign credit restraint program
78, 82
Regulation D, Reserves of Member Banks:
Christmas and vacation club accounts, savings and certain time
deposits, reductions in reserve requirements relating to
72
Reserve requirements against certain demand deposits, increases in
81
429
INDEX
Page
Policy actions, Board of Governors—Continued
Regulation F, Securities of Member State Banks:
Amendments
75, 80
Regulation G, Collection of Noncash Items:
Revocation
77
Regulation J, Collection of Checks and Other Items by Federal Reserve
Banks:
Revision
77
Regulation K, Corporations Engaged in Foreign Banking and Financing Under the Federal Reserve Act:
Amendments
73
t
Regulation M, Foreign Activities of National Banks:
Revision
73
Regulation O, Loans to Executive Officers of Member Banks:
Amendment excluding certain indebtedness arising from use of
charge accounts and credit-card or check-credit plans
76
Policy actions, digest
22
Policy actions, Federal Open Market Committee:
Authority to effect transactions in System Account, including current
economic policy directive
85-206
Continuing authority directive on domestic operations
86, 113
Continuing authorizations
114
Foreign currency operations:
Authorization for
88, 114, 133, 150, 184, 192, 205
Foreign Currency Directive
92, 114
Presidents of Federal Reserve Banks:
Conference
421
List
419
Salaries
362
Profit and loss, Federal Reserve Banks
359
Public information:
Amendment of law with respect to, and Board and Federal Open
Market Committee revised or amended rules to conform
85, 341
Real estate loans by national banks, legislation
327
Record of policy actions {See Policy actions)
Regulations, Board of Governors:
D, Reserves of Member Banks:
Christmas and vacation club accounts, savings and certain time
desposits, reductions in reserve requirements relating to
72
Reserve requirements against certain demand deposits, increases in. .
81
Delegation of certain functions, rules on
341
F, Securities of Member State Banks:
Amendments
75, 80
430
INDEX
Page
Regulations, Board of Governors—Continued
G, Collection of Noncash Items:
Revocation
77
J, Collection of Checks and Other Items by Federal Reserve Banks:
Revision
77
K, Corporations Engaged in Foreign Banking and Financing Under the
Federal Reserve Act:
Amendments
73
M, Foreign Activities of National Banks:
Revision
73
O, Loans to Executive Officers of Member Banks:
Amendment excluding certain indebtedness arising from use of
charge accounts and credit-card or check-credit plans
76
Repurchase agreements:
Bankers' acceptances
86-87, 113, 348, 350, 356
Federal agency obligations
348, 350, 356
U.S. Govt. securities
86, 348, 350, 355, 356, 366
Reserve requirements:
Graduated reserve requirements on demand deposits, legislative recommendation
330
Member banks:
Certain demand deposits, increases in reserve requirements against
81
Christmas and vacation club accounts, savings and certain time
deposits, reductions in reserve requirements
72
Table
364
Time deposits of, extension of law permitting Board of Governors
to fix higher reserve requirements on
327
Reserves:
Federal Reserve Banks, tables
348-53
International liquidity plan
311
Member banks:
Reserve requirements {See Reserve requirements)
Reserves and related items
366
Review of monetary policy, bank reserves, and interest rates
3
Revenue bond underwriting by national banks, court decision under review 335
Salaries:
Board of Governors
328, 345
Federal Reserve Banks
362
Savings bond meetings
337
Savings deposits {See Deposits)
Securities {See also U.S. Govt. securities):
Margin requirements for over-the-counter securities, legislative recommendation
331
Member State banks, amendments to Regulation F
75, 80
431
INDEX
Page
Securities—Continued
Revenue bond underwriting by national banks, court decision under
review
335
Small business investment companies, acquisition of stock of,
legislation
327
U.S. Govt. agency obligations (See Federal agency obligations)
Special Drawing Rights
311
Special studies by Federal Reserve System
309-10
Si:ate member banks:
Assets and liabilities
368
Banking offices, changes in number
370
Changes in control of, reports on
319
Examination
318
Foreign branches, number and special study
309, 323
Gambling activities and lottery ticket sales by, prohibited
328
Mergers and consolidations
321, 374-93
Number
321, 368
Securities of, amendments to Regulation F
75, 80
Swap arrangements (See Foreign currency operations)
System Open Market Account:
Audit
318
Authority to effect transactions in
85-206
Operations in domestic securities, review
207, 208-75
Operations in foreign currencies, review
14, 207, 276-308
lime deposits (See Deposits)
Training activities
326
U.S. balance of payments:
Foreign credit restraint program
17-21, 78, 82, 327
International liquidity plan
311
Review
37
U.S. Govt. securities:
Bank holdings, by class of bank
368
Federal Reserve Bank holdings
337, 348, 350, 352, 354, 366
Federal Reserve earnings on
336, 358
Open market operations
85-206, 207, 208-75, 356
Repurchase agreements
86, 348, 350, 355, 356, 366
Special certificates purchased directly from the U.S
355
Study of market by Treasury and Federal Reserve
309
U.S. Govt. agency obligations (See Federal agency obligations)
V loans
338, 365
432
@FedFRASER