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A meeting of the Federal Open Market Committee was held
in the offices of the Board of Governors of the Federal Reserve
System in Washington, D. C.,

on Tuesday, April 12, 1966, at

9:30 a.m.


Martin, Chairman
Hayes, Vice Chairman

Messrs. Scanlon, Francis, and Swan, Alternate
Members of the Federal Open Market Committee
Messrs. Ellis, Patterson, and Galusha, Presidents
of the Federal Reserve Banks of Boston,
Atlanta, and Minneapolis, respectively
Mr. Holland, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Broida, Assistant Secretary
Mr. Molony, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Brill, Economist
Messrs. Eastburn, Green, Koch, Mann, Partee,
Solomon, Tow, and Young, Associate
Mr. Holmes, Manager, System Open Market Account
Mr. Coombs, Special Manager, System Open Market
Mr. Fauver, Assistant to the Board, Board of
Mr. Williams, Adviser, Division of Research
and Statistics, Board of Governors
Mr. Reynolds, Adviser, Division of International
Finance, Board of Governors


Mr. Axilrod, Associate Adviser, Division of
Research and Statistics, Board of Governors
Miss Eaton, General Assistant, Office of the
Secretary, Board of Governors
Mr. Forrestal, Senior Attorney, Legal Division,
Board of Governors
Mr. Heflin, First Vice President, Federal
Reserve Bank of Richmond
Messrs. Eisenmenger, Link, Black, Brandt,
Baughman, Jones, and Craven, Vice Presidents
of the Federal Reserve Banks of Boston,
New York, Richmond, Atlanta, Chicago,
St. Louis, and San Francisco, respectively
Messrs. Deming and Meek, Managers, Securities
Department, Federal Reserve Bank of New York
Mr. Kareken, Consultant, Federal Reserve Bank
of Minneapolis
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Com
mittee held on March 22, 1966, were
Before this meeting there had been distributed to the

members of the Committee a report from the Special Manager of the
System Open Market Account on foreign exchange market conditions
and on Open Market Account and Treasury operations in foreign
currencies for the period March 22 through April 6, 1966, and a
supplemental report for April 7 through 11, 1966.

Copies of these

reports have been placed in the files of the Committee.
In comments supplementing the written reports, Mr. Coombs
said that the Treasury gold stock would remain unchanged this week.
The Stabilization Fund had about $100 million of gold currently
on hand, but the French would probably be making a purchase of



nearly $70 million before the end of the month.

So a further

sizable reduction in the gold stock would be required within
the next few weeks unless sizable sales of gold were made by
the Russians or by other central banks.

The gold market continued

to expect such Russian sales, and that--in combination with a
heavier flow of new gold from South Africa and sales of $30 or
$35 million by a still unidentified central bank--had managed
to keep the London gold market in rough balance.
Sterling still remained a problem, Mr. Coombs reported.
During March the Bank of England experienced reserve drains of
$225 million, of which $150 million represented debt repayments
to the Bank of Italy and the Bank for International Settlements,1/

At the month-end the U.S. Treasury
provided a $150 million overnight swap, enabling the British to
show a reserve reduction of only $75 million.

For the month of

April the British again faced the discouraging prospect of starting
the month with an immediate deficit reflecting the $150 million
repayment to the U.S. Treasury; and, mainly owing to money market
pressures, they had subsequently lost another $50 million.


was hopeful that with the end of the Easter holidays sterling
would show renewed strength this week as money market pressures
reversed themselves.

Also, there might be some sizable purchases

1/ Part of a sentence has been deleted at this point for one of
the reasons cited in the preface. The deleted material referred to
other operations by the Bank of England.



of sterling for oil company account which might significantly
reduce the April deficit as the month progressed.
On balance, however, the position of sterling remained
vulnerable, Mr. Coombs said.

The problem was particularly

worrisome because the present was a period in which sterling
ordinarily was seasonally strong.

In effect, the British elec

tions had cut off the recovery of sterling that had been underway,
and the question was how to get that recovery going again.
new British budget probably would have a decisive effect.


question of whether or not it would be restrictive enough to
turn the market situation was important to the U.S. as well as
to the U.K.

It seemed clear to him that if the British allowed

the present combination of overheating of the economy and a
wage-price spiral to continue, sooner or later the sterling
parity would be seriously undermined.
Mr. Ellis said he had thought the earlier strength of
sterling had been due to a reversal of speculation against the
pound, which was a one-time development.

Was Mr. Coombs suggest

ing that the short positions still to be covered were large enough
to be capitalized on?
Mr. Coombs replied that if the British had not held an
election the return flow that developed in the period from
September through January probably would have continued for



another two or three months, although possibly at a diminishing
rate; there was a good deal of pressure tending to push the
sterling rate up.

In addition, January through June normally

was the time when British foreign exchange earnings were sea
sonally high.

Finally, the U.K. had been making some progress

in terms of more basic improvement in their balance of paymentsexports rose about 7 per cent in 1965, while imports were up only
1 per cent.

There had been a certain loss of momentum, and that

was dangerous in a situation in which confidence was so vital a

New and more forceful measures were needed to recapture

the earlier momentum.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the System open market transactions
in foreign currencies during the period
March 22 through April 11, 1966, were
approved, ratified, and confirmed.
Mr. Coombs then recommended renewal for a further period
of three months of the $100 million standby swap line with the
Bank of France, which would come to the end of its three-month
term on May 10.
Renewal of the standby swap arrange
ment with the Bank of France, as recommended
by Mr. Coombs, was approved.
In connection with a second recommendation, Mr. Coombs
noted that the Account Management was authorized (under the



Committee's continuing authority directive for foreign currency
operations) to buy, and to sell forward to the U.S. Treasury,
up to $100 million of foreign currencies in which the Treasury
had outstanding indebtedness.

Such transactions were for the

purpose of assisting the Treasury in financing payment of
maturing bonds denominated in foreign currencies.

As the Com

mittee would recall, in late 1963 and early 1964 the Account
had accumulated a total of nearly $100 million in Italian lire
and had sold the lire forward to the Treasury which used them
to pay off maturing bonds.

In recent weeks, the Account had

purchased $46 million of Swiss francs which the Treasury would
use in the same way.

At present there was an opportunity to

acquire German marks, a currency in which the Treasury had about
$450 million of indebtedness.

After the Swiss franc purchases,

the leeway remaining under the $100 million limit was $54 million,
but it appeared likely that a larger sum could be usefully devoted
to mark purchases.

Accordingly, he recommended some increase in

the limit, perhaps to $150 million.

There was no risk to the

System in operations of the type in question, and facilitating
Treasury repayment of its foreign indebtedness was, of course,
highly desirable.
In the ensuing discussion some members suggested that the
limit might be removed entirely, or set at a level considerably



higher than Mr. Coombs proposed, since the operations under
discussion were riskless and helpful to the Treasury.


members agreed that a limit of more than $150 million would be

They saw some virtue, however, in keeping the figure

within the range likely to prove necessary in the foreseeable
future, noting that the Committee could raise it further at a
later time if there were grounds for doing so.

In this connec

tion action to raise the limit to $200 million was proposed as
a reasonable course.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the third paragraph of the continuing
authority directive for System trans
actions in foreign currencies was
amended to read as follows:
The Federal Reserve Bank of New York is also author
ized and directed to make purchases through spot
transactions, including purchases from the U.S. Stabilization
Fund, and concurrent sales through forward transactions
to the U.S. Stabilization Fund, of any of the foregoing
currencies in which the U.S. Treasury has outstanding
indebtedness, in accordance with the Guidelines and up
to a total of $200 million equivalent. Purchases may be
at rates above par, and both purchases and sales are to be
made at the same rates

Chairman Martin then referred to the Secretariat's memorandum
transmitted on February 21, 1966, proposing a reorganization in the
Committee's instruments governing foreign currecny operations; and
to a memorandum by Mr. Baker of the Board's staff, entitled "Federal
Reserve Operations in Foreign Currencies 1962-1965," that had been



distributed on March 21, 1966.

He also noted that Mr. Coombs

today had distributed a memorandum dated April 8, 1966, commenting
on Mr. Baker's paper.1/

The Chairman suggested that the Committee

hold a preliminary discussion of these materials today and plan
on pursuing the subject further at a later meeting, since the
members had not yet had time to study Mr. Coombs' comments.
Mr. Heflin noted that language calling for certain reports
by the Special Manager, contained in Section IX of the existing
Authorization for foreign currency operations, had been deleted
in the new Authorization proposed by the Secretariat.


recognized that no modification of present practice with respect
to reporting was intended; rather, the language had been deleted
to achieve consistency with the corresponding domestic instruments,
in which the Committee did not consider it necessary to spell out
the nature of reports to be made by the Account Management.


his judgment, however, the System's foreign currency operations
were of a somewhat different character from its domestic operations;
in particular, the Special Manager was given broader authority to
act than was the domestic Manager.

For that reason he thought

there was some merit in having the record show that the Committee
required reports from the Special Manager.

Language as detailed

1/ A copy of Mr. Coombs' commentary, as well as copies of the
other memorandums mentioned, have been placed in the Committee's



as that in the present Authorization did not seem necessary, but
there might be a simple statement to the effect that the Special
Manager was responsible for keeping the Committee informed on
market conditions and on his operations, and for making such reports
as the Committee might specify.
Secondly, Mr. Heflin said, it was not clear to him whether
the language at two points in the proposed new foreign currency
directive--paragraphs 1(D) and 2(B)--was intended to involve changes
from present practice.
Mr. Young commented that a statement regarding reporting
requirements could be included in the proposed new Authorization
if the Committee thought that would be desirable.

On the second

point, he indicated that no departures from present practice were
meant to be implied by the language of the directive paragraphs
to which Mr. Heflin had referred.
Chairman Martin suggested that the staff might review the
two directive paragraphs in question, and that Messrs. Young and
Heflin might get together after today's meeting to draft language
on reporting requirements for the Committee's consideration.
Mr. Young then remarked that he would recommend two changes
in the proposed new instruments.

The first affected the opening

sentence of paragraph 3 of the proposed Authorization.


the words "All transactions in foreign currencies undertaken under



paragraph 1(A) above shall be at prevailing market rates" would
be added, "and no attempt shall be made to establish rates that
appear to be out of line with underlying market forces."


language was included in the Section 2 of the existing Guidelines,
and it seemed desirable to retain it in the new instruments.
The second amendment, Mr. Young continued, related to
paragraph 1(E) of the proposed new directive, which specified
that one of the basic purposes of System operations in foreign
currencies was "To facilitate growth in international liquidity
in accordance with the needs of an expanding world economy, by
providing for reciprocal holdings of currencies."

It had been

suggested that the final clause, following the comma, should be

A similar coupling of reciprocal currency holdings with

needs for international liquidity was made in the statement of
the specific aims of operations in the existing Authorization,
but when that language was written outright market transactions
were expected to play a more important role than had proved to
be the case.

The fact that the great bulk of System operations

involved swap drawings made the clause seem inappropriate.
Mr. Coombs commented that he

thought it would be wise

to delete the clause in question because it might be misinterpreted
to imply that the System intended the swap network to be used for
the purpose of inflating the foreign currency holdings of both
parties to the arrangements.


Mr. Hayes observed that the proposed new instruments

seemed to be a clear improvement over the existing ones.


that the Committee had postponed action on them earlier, he
asked whether the kinds of questions that had been raised were
sufficiently important to warrant again holding them over to a
later meeting.
Chairman Martin remarked that no problem would be raised
by delaying action; operations could be conducted under the
existing instruments until some conclusion was reached on the
proposed new ones.

Mr. Coombs had distributed a new memorandum

today, and it might be desirable for the Committee to consider
the Secretariat's memorandum, as well as those by Mr. Baker and
Mr. Coombs, at one time.
Mr. Hayes then said that he would make one observation on
Mr. Baker's memorandum at this time.

As the memorandum itself

indicated, it tended to stress certain alleged limitations and
shortcoming of System operations.

Personally, he would have

preferred a somewhat more balanced presentation.

In his judgment

the System's accomplishments in the foreign currency area had been
great, and he hoped the members would not overlook those accomplish
ments in reviewing the memorandum.

On the whole, he thought, the

operations had been extremely useful.

Moreover, all of Mr. Baker's

criticisms were answered effectively in Mr. Coombs' memorandum.


Mr. Daane agreed that the operations had been highly


He added that they were so viewed not only within the

System but at the Treasury and abroad as well.
Chairman Martin then suggested that the Committee plan
on considering further the several memorandums on foreign
currency operations at its next meeting.
Before this meeting there had been distributed to the
members of the Committee a report from the Manager of the System
Open Market Account covering open market operations in U.S.
Government securities and bankers' acceptances for the period
March 22 through April 6, 1966, and a supplemental report for
April 7 through 11, 1966.

Copies of both reports have been

placed in the files of the Committee.
In supplementation of the written reports, Mr. Holmes
commented as follows:
System open market operations over the interval
since the Committee last met kept bank reserve
positions under pressure, and last week Federal
funds traded for the first time at 4-7/8 per cent.
On balance, outright holdings of Government securities
rose by $526 million, including $56 million of coupon
issues bought early in the period when Treasury bills
were in scarce supply. Repurchase agreements against
Governments were used to meet temporary reserve needs
in the week ended April 6, but none were outstanding
at the close of business last night. While net bor
rowed reserves were not much changed from earlier weeks,
the money market came under increased pressure over the
past week or so, reflecting continued strength in credit
demands, particularly increased financing needs of



Government securities dealers. Market participants
realize that the System is applying a fair degree
of pressure and seem to believe that it is appropriate.
Despite money market pressures and higher CD
and finance company paper rates, the Treasury bill
market was experiencing a life of its own until the
very end of the period. Three weeks ago dealer
inventories were unusually low. There was widespread
demand for bills, including System buying and buying
by public funds which are entering into a period of
seasonal demand. For a time, indeed, the 3-month
bill rate dipped below the discount rate. Moreover,
there were anticipations of growing seasonal demands
for Treasury bills, while the reflux of bills into
the market following the quarterly bank statement and
Cook County tax dates was only moderate. In this
environment dealers were anxious to rebuild their
inventories and received heavy awards in the April 4
auction. By this time other short-term money rates
were more attractive relative to Treasury bill rates,
and sharply increased dealer financing needs could
be financed only at higher bank lending rates.
this environment, bill rates tended to back up.
yesterday's auction, bidding was cautious and scaled
over a fairly wide range as dealers sought to protect
themselves against further upward pressure on rates.
Averaging issuing rates were set at 4.62 per cent
and 4.76 per cent on the three- and six-month issues.
The three-month rate was thus 4 basis points above
the rate set in the auction just preceding the last
meeting of the Committee and 8 basis points above a
week ago.
Looking to the period immediately ahead, it
appears that the banks have made careful preparation
for the April tax date pressures and should have no
special problems with CD maturities. Finance companies
are expecting sizable maturities of their paper over
the tax date, and may be forced to borrow from banks.
Given the likely short-run credit demands on banks,
dealer financing costs are apt to remain at the higher
levels reached last week. Consequently, for the moment
at least, the Treasury bill rate is probably more
sensitive to pressures on bank reserve positions than
it has been for some time. The Treasury bill, of course,
is no longer the main instrument for bank reserve



adjustments and the re-emergence of strong nonbank
demand over the next few weeks could again isolate
the bill rate from general money market pressures.
In the capital markets, the improved sentiment
that was in evidence at the time of the last meeting
of the Committee continued over much of the period,
although there were fairly wide price fluctuations
on a day-to-day basis. The Government market reacted
strongly to the President's statement near the end of
March that implied that tax action would be forth
coming if prices continued to rise. The corporate
and municipal markets were also generally buoyant
during most of the period. The large AT&T issue
offered on March 29 sold out quickly, and yields on
municipal bonds continued the decline that started
in early March. By the close of the period, however,
there were some signs that the pendulum had again
swung too far. An A-rated corporate issue priced to
yield investors only 5 per cent, compared with 5.35
per cent on a comparable issue in mid-March, was
moving slowly. Prices of intermediate- and long
term Governments edged lower since last Wednesday,
and a general note of caution appears to be coming
back into the capital markets. While the forward
calendar of offerings is not so heavy as in early
March, a good volume of issues is scheduled for the
current week and over-all capital demands are expected
to continue strong. The markets remain sensitive and
will be carefully assessing the prospects for a tax
increase, while watching closely business response
to the President's plea for moderation of capital
The Treasury is currently going through a period
of cash stringency, with its balance in the Reserve
Banks falling as low as $46 million last Friday. The
low level of Treasury balances has not been disturbing
to System open market operations, and so far, at least,
the Treasury has not had to use its temporary borrowing
facilities. But it will be touch and go for the next
While the Treasury is not planning any cash bor
rowing for the rest of the fiscal year, various
Government agencies will be raising sizable amounts of
new money this month--aggregating perhaps $1 billionin order to finance their own activities. In addition



there is a possibility of further asset sales over
the next month or so. These agency offerings will
be applying continuing pressure to financial markets
throughout the month.
The Treasury will be meeting with its borrowing
committees on April 26 and 27 to set the terms on its
May 15 refunding of $9.3 billion outstanding bonds
and notes, of which only $2-1/2 billion are held by
the public. Last February's prerefunding by the
Treasury has reduced the operation to routine propor
tions, and the market is generally expecting that
the Treasury will come out with a short-term issue
maturing in about 18 months. While no particular
problems appear to be presented by the refunding at
the moment, it will come in the midst of substantial
agency financing and even keel considerations will
be of some importance late this month.
Mr. Daane asked the Manager how he would expect the market
to react if net borrowed reserves were deepened somewhat further.
Mr. Holmes said that such judgments were hard to make
because other developments were likely to be affecting market
attitudes at the same time.

On the whole, however, he did not

think that some further deepening of net borrowed reserves would
be particularly disturbing to the market.
Mr. Ellis noted the Manager had said even keel considera
tions would be of "some" importance late in the month.

How much

attention did he feel would have to be paid to such considerations?
Mr. Holmes replied that the point he meant to emphasize
was that the Treasury operation would be fairly routine, and that
there would be less need than in connection with many other
financings to insure that the markets were kept in good shape



while it was underway.

On the other hand, the financing would

come at a time when a fair volume of agency issues was being
sold, and it was hard to judge what pressures those sales would
put on the markets.

As to the timing of even keel considerations,

the Treasury announcement probably would be made on April 27,
the last day of a statement week and one day before reserve
figures for that week were made available.

Thus, some con

sideration might have to be given to the financing in that
statement week.
Mr. Hickman noted that the blue book1 /

indicated that

in the latter part of April there normally was a shift of funds
toward money centers as well as seasonal demands for bills.


asked whether that suggested some downward pressures on bill
rates after the tax date.
Mr. Holmes agreed that downward bill rate pressures
might be expected under ordinary circumstances.

Because of the

agency issues in prospect, however, it was not clear that they
would occur this year.

On the whole, however, he did not think

that even keel considerations would pose much of a problem.
Mr. Swan referred to Mr. Holmes' comment that banks
should have no special problems with CD maturities over the
tax date.

Did he expect any problems as a result of borrowings

for tax purposes?

1/ The report, "Money Market and Reserve Relationships," prepared
for the Committee by the Board's staff.


Mr. Holmes replied that there was likely to be a significant

volume of tax borrowing by corporations, as well as borrowing by
finance companies with paper maturing on the tax date, as a result
of which banks might well encounter some problems.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the open
market transactions in Government securities
and bankers' acceptances during the period
March 22 through April 11, 1966, were
approved, ratified, and confirmed.
Chairman Martin called at this point for the staff economic
and financial reports, supplementing the written reports that had
been distributed prior to the meeting, copies of which have been
placed in the files of the Committee.
Mr. Brill made the following statement on economic conditions:
I haven't found a more succinct description of
economic conditions and problems than the lead paragraph
in the latest survey put out by the National Association
of Purchasing Agents. The paragraph reads: "Prices are
up; quality is down. Costs are up; profits are down.
Lead time is long; labor is short. But business is very
About all I can add are the statistics that confirm
the statement. Business is certainly very good. Our
production index for March, just off the computer, shows
another one-and-a-half point gain, not bad for an economy
pressing on capacity in many areas. The March rise brings
the first-quarter average for the production index to a
13 per cent annual rate of gain over the fourth quarter.
And this output is not staying on the shelves very
long. Retail sales are booming, a natural consequence
of the acceleration in wage and salary disbursements.
February sales figures were revised upward significantly,
and the March preliminaries show a healthy rise on top of
that, bringing first-quarter sales to a 13-1/2 per cent
annual rate of gain.



This pace of advance in the economy is pressing
on both plant capacity and the labor supply, with
order backlogs rising in important durable goods
Utilization of plant capacity in manufac
turing is up to a rate of between 92 and 93 per cent,
with the rise limited in many key lines, such as
machinery and other metal-using industries, by the
shortage of skilled labor. We seem to have hit the
bottom of the barrel some time ago for adult workers.
The unemployment rate for this group is below 3 per
cent, close to the low during the Korean war. And
we have stretched the workweek pretty far. It was
already at a postwar high in February, with hours in
the machinery industries nearly back to World War II
Further gains in output will increasingly depend
on our ability to absorb and upgrade more of the young
and the inexperienced in the labor force. But this
has its consequences for productivity and costs.
productivity squeeze is already showing up in unit
labor costs and prices.
The rise in unit labor costs
in January could be explained largely on the basis of
the increase in social security taxes. But the rise
in February, and there was probably another rise in
March, is a much clearer reflection of labor hoarding,
costs of training inexperienced labor, and the expenses
of substantial overtime.
In this situation of strong demands, these rising
costs are being carried through to industrial commodity
prices, which advanced again in March. So far this year,
the rise in industrial prices has been at about a 2-3/4
per cent annual rate, compared to the 1 to 1-1/2 per
cent rate that prevailed over most of last year. And
increases are becoming more pervasive through the list.
In February, the latest date for which detail is available,
almost three-fifths of the sub-groups in the index rose,
as compared with less than half in the closing months of
Putting these output, sales, and price developments
into aggregate terms, we are estimating gross national
product in the first quarter at a rate of $712 billion,
up $15 billion or 8-1/2 per cent from the fourth quarter
in current dollars, and a little over 6 per cent in real
As best as we can see, the pace this current
The driving
quarter is likely to be almost as fast.



forces, defense spending and business capital outlays,
are not slackening. Although defense outlays in the
first quarter were a little below Budget estimates,
the President has indicated that the shortfall is
expected to be made up this quarter. Business capital
outlays, which may have exceeded earlier expectations
in the first quarter, are also likely to stay strong,
at a minimum to keep to the track marked out in the
February anticipations survey. It is probably too
early to expect to see any effects in this area of
either monetary restraint or Presidential exhortations.
Most other areas--except housing--are continuing strong,
and a second-quarter rise in GNP at an annual rate of
about 8 per cent, with prices accounting for about
2-1/2 percentage points of the rise, still seems likely.
There is general agreement that this is too fast a
pace of advance to sustain, that increasingly more of
the rise in GNP may reflect a larger price and a smaller
real component unless something is done to retard it.
But there is less agreement about what should be done,
with controversy focusing around the need for a tax
increase. To end any suspense, I will put myself
forthrightly among the waverers. Over the past month
I have argued myself all around the issue, but more
often--and today--I come out on the side of favoring
a tax increase.
My hesitancy in reaching this position rests first
on the feeling that the restraint job that has to be
done is relatively moderate, at least if it is done
soon. It doesn't seem to me that very much has to be
shaved off spending demands, as we now see them, to
bring total outlays into better balance with growing
resource availability. Second, I have faith in the
efficacy of monetary restraint, and increasingly expect
that the effect of the restraint imposed to date will
be reflected in a moderation of spending. Third, I
wouldn't be alarmed at the possible discriminatory
effect of tighter monetary restraint, particularly if
it whacked housing a little harder at a time when
business and defense construction needs were rising.
And finally, I don't think we have exhausted the
potential of policy, not with borrowings from the
Fed still fluctuating around only about half a billion
dollars, and interest rates still well down from month
ago peaks.



But the arguments for fiscal restraint are more
persuasive. Even as hardhearted a free market economist
as I can't shrug off the plight of banks' competitors
in the housing finance industry. And monetary restraint,
short of a dramatic rise in the discount rate, is not
likely to have as strong or as immediate effect in
damping any emerging inflationary psychology as would
the announcement of a request for a tax increase.
Moreover, the possibility of a step-up in defense
spending carries with it the danger of a real consumer
and business buying spree. If for no other reason, we
need the insurance of a prompt, moderate, but reversible
tax increase.
This is not the Committee's decision to make, how
ever; monetary policymakers have to live with whatever
the Administration decides. And they have to live with
the fact that even if the Administration does opt for a
tax increase, there are weeks and probably months ahead
before it would actually begin to absorb spendable
incomes. In the interim, the only tools of restraint
available are persuasion and monetary policy. The
situation calls for the use of both. Now that
financial markets have had a chance to catch their
breath, after the hectic pace at which interest rates
rose from December to February, it would seem appropriate
to me to restore and maintain the pressure on financial
markets in the near term, to restrict reserve availability
further and, hopefully, to see these pressures transmitted
through to long-term interest rates.
Mr. Holland made the following statement concerning financial
The weeks since mid-March have been one of those
confounding periods in which our measures of marginal
reserve availability have proved remarkably stable
around a new high plateau for this expansion, while
other financial indicators have been charging off in
all directions. We have had a major run-down in bill
and bond rates, although the last few days suggest
some turn-around of that move is in process. There
has been an unexpectedly strong accretion of liquid
funds to the money market banks, particularly the
New York City banks. And there has developed a sharp

bulge in bank loans and the money supply all around
the country, although there are grounds for believing
that some of that increase will prove temporary.
The reasons for all of this appear to be a blend
of changing market expectations, shifting loan and
investment policies of the larger banks, and heavy
business cash needs over the March-April tax periods.
These factors and their interrelationships have been
amply described in the materials submitted for this
meeting and in the comments of the Account Manager
this morning, and I shall not belabor them.
The experience does emphasize again how accom
modative of changes a net borrowed reserve target
can be. It also has some implications for the proper
stance of monetary policy in the weeks ahead. While
there are good reasons for looking forward to some
partial redress of the recent interest rate declines
and bank credit increases, it seems to me that a
question remains whether such market readjustments
will themselves carry far enough to achieve the
results desired, given our current policy stance.
Let me point particularly to the position of the
banking system. The biggest banks--in New York City,
especially--by dint of hard and costly efforts have
managed to acquire some cushion of liquid funds in
anticipation of expected strong credit demands just
ahead. One result of these efforts is that the
reserve pressures generated by System operations now
bear most heavily upon other and smaller reserve
city and country banks--banks that, by and large,
are slower to undertake adjustments. In addition,
the ways in which the pressures are now reaching
these banks--poorer time deposit performance, and
strong tax-associated credit demands in March and
April--can easily be viewed by them as the kind of
unexpected and temporary drains for which assistance
can appropriately be sought under Regulation A.
Consequently, we may be in a period when a given
dollar of borrowed reserves will not represent quite
as much restraint as before; or, to put it another
way, when it would be in the spirit of current policy
to let net borrowed reserves slide a bit deeper, with
banks having to borrow a slightly larger fraction of
the reserves needed to meet the remainder of the
expected bulge in bank credit demand suggested in the



green 1/ and blue books.
In the process, an extra
degree of insurance will have been taken against any
backsliding in the more restrictive lending policies
being adopted by banks around the country. In other
words, I would advocate a little further prudent
tightening of reserve availability, to use the "phrase
of art" employed in alternative B of the draft direc
Speaking of directives, the staff has been doing
a good deal of study of directive language in the three
weeks since the last meeting, reviewing minutes of the
last few years in the process.
It is striking how much
corollary meaning can be drawn from the Committee's
own comments to interpret its key operational phrases
of art--two of them in particular. One, money market
conditions, can now be fairly construed, I think, to
imply more or less coordinate attention to free reserves,
the 3-month bill rate, and the combination of cost and
quantity of Federal funds transactions, cost and quantity
of dealer financing, and the borrowing component of free
reserves. A second phrase of art that has served the
Committee well recently has been reserve availability.
Comments at the last few meetings seem to be infusing
this phrase with corollary meaning about as follows:
primary attention to free reserves and borrowing,
secondary consideration to the cost and availability
of reserves in the Federal funds market, and probably
also some modest allowance for changes in over-all
reserve use, e.g., a willingness to let net borrowed
reserves slip a little deeper if required reserve or
bank credit expansion should prove unduly strong. At
the very last meeting, the Committee may have started
to create a third operational phrase of art--pressure
on bank reserve positions--and that phrase is preserved
in alternative A of the directives drafted for your
consideration this morning.
Mindful of the occasional criticism both from
within and from outside the System that more explicit
directive language is needed, the staff experimented


The report, "Current Economic & Financial Developments,"
prepared for the Committee by the Board's staff.


Two alternative draft directives are appended to these
minutes as Attachment A.



with being a little more specific this time; but the
best we could come up with on this score was a combina
tion target variable expressed as "maintaining about
the same range of net reserve availability and related
money market conditions as has prevailed since the
last meeting of the Committee."
We felt constrained
by, among other things, the performance outlined in
Mr. Bernard's memorandum 1/ distributed last week,
showing that the staff projections of money market
conditions as a group have proved reasonably accurate
from one Committee meeting to the next, but up to now
our ability to project broader financial aggregates has
been distinctly mediocre. And, frankly, we felt that
even this kind of language was a little more specific
than the majority of the Committee would prefer.
In the absence of different directions from you,
the staff would propose to push along resolutely in
its current four-way approach to the directive:
namely, continuing to serve up draft directives that
speak essentially in the usual phrases of art; second,
depending heavily upon comments at Committee meetings
to interpret the shadings of those phrases, for purposes
both of guiding operations and of phrasing the pertinent
policy record entry; third, trying, in the contents of
the green book, the blue book, and staff presentations,
to go as far as practicable in suggesting the relevant
measures and their interrelationships; and, finally,
pushing research efforts to identify better the kinds
of linkages that make up the monetary process and that
might best be exploited in the conduct of System opera
tions. A prime example of a subject for intensive
study is the reserve target proposal put forth by
Governor Robertson; it is planned that one or more
memoranda on that proposal will be forwarded to the
Committee before long by the Account Manager and perhaps
othersof the Committee staff.
It should be recognized that all current efforts
at any more explicit definition of Committee goals and
instructions may soon be rendered obsolete; for both
the Government securities market study and the discount

1/ A copy of this memorandum, dated March 31, 1966 and entitled
"Staff quantification of FOMC directives since August 1964," has
been placed in the Committee's files.



study may lead to changes that could entail substantial
revisions in System operating guides and procedures.
But the subject of communicating the Committee's inten
tions may appear too important to wait until these basic
studies are finished. Accordingly, the staff stands
ready to proceed as noted, subject to all the guidance
in this matter that the Committee members individually
or collectively are moved to provide.
Mr. Ellis commented that he would urge the staff, instead
of attempting to prejudge how far the Committee was prepared to
go in accepting more explicit directive language, to advance any
suggestions it had and let the Committee judge whether or not it
was prepared to accept them.
Mr. Mitchell thought that the eloquence with which Mr. Holland
described the present approach to the directive did the Committee
an injustice.

In his

basically inadequate.

(Mr. Mitchell's) opinion the directives were
He had become discouraged about the possi

bilities of improving them, although he thought the staff should
continue to work on the problem of developing more explicit language.
In his judgment, Mr. Mitchell continued, operations since
the last meeting were unsatisfactory because the Committee had not
given the Manager sufficiently good instructions; ground had been
lost when it should have been gained.

The Committee could not rely

on fiscal policy, since no one could say whether a tax increase
would be enacted.

But one thing the Committee could do was to avoid

letting up on monetary restraint at this time.

Alternative A of the



draft directives included a phrase about "continuing to exert
pressure on bank reserve positions."

Unless strong pressure

of that kind was maintained it seemed to him that the Committee's
whole program of monetary restraint would fail.
Chairman Martin said it was not clear to him that the
Committee had lost ground since the preceding meeting.

He asked

Mr. Mitchell what measure he had used in reaching that conclusion.
Mr. Mitchell said he had based his judgment on the recent
performance of the capital markets and the change in trend of long
term interest rates.
Mr. Hayes said it was his impression that some of the ground
which Mr. Mitchell thought had been lost in capital markets actually
was a natural reaction to the earlier excessive adjustment in
interest rates.

The market often displayed a pendulum-like pattern,

with rates moving too far in one direction and then coming back part

From his observations he concluded that banks still felt they

were under considerable pressure.

He hoped that was true, and he

shared the view that it was desirable to maintain the pressure.
Mr. Mitchell agreed that bankers felt under pressure.


concern was with recent capital market developments, which he thought
had not been desirable.

He did not know whether monetary policy

could have stemmed the decline in interest rates, but an attempt
should have been made to do so.


Mr. Holmes commented that the market had indeed acted

like a pendulum.

The earlier rise in long-term rates probably

would have occurred even if the System had moved toward greater

Subsequently there was a backwash, reflecting a basic change

in expectations with regard to the likelihood of a tax increase.
It was possible that the pendulum would now swing back the other
In reply to Mr. Mitchell's question as to whether a deepening
of net borrowed reserves of perhaps $100 million would have stopped
the recent decline in long rates, Mr. Holmes said it might have
slowed the decline but he did not think it would have stopped it.
Mr. Maisel said he shared Mr. Mitchell's position.

He would

stress that during the recent period the System supplied too large a
volume of reserves, permitting bank credit to grow at a much more
rapid rate than earlier.

He agreed that expectational factors affected

the trend of long-term interest rates, but the movement in the variable
the Committee could control--bank reserves--had been inconsistent with
what he thought had been intended.

It was clear from that experience

that the Committee's directive was formulated improperly.

The out

come would have been better if the Committee, rather than relying on
a marginal reserve target, had given the Manager instructions along
the lines Mr. Robertson had proposed at several recent meetings.
Mr. Holmes observed that there often were large swings in
required reserves of a temporary nature that were hard to distinguish



in the short run from more basic changes.

For that reason it was

extremely difficult to make operating decisions from week to week
in terms of the broader reserve measures in which the Committee was
Mr. Daane commented that while he sympathized with the view
that the Committee did not want to lose ground, he thought it was
necessary to gauge the degree of pressure that was being exerted
in broader terms than the movements in reserves and bank credit.
Chairman Martin then asked Mr. Holmes if he thought the
Committee had lost ground recently.

Mr. Holmes replied he did not

think so, in terms either of market developments or the views of
market participants regarding the posture of policy.

To use a

phrase the Committee had employed in the past, the Desk recently
had been "resolving doubts on the side of tightness."

For example,

last Wednesday, April 6, dealers had large financing needs and were
inquiring about repurchase agreements.

The Desk had responded

negatively, and the dealers were forced into the banks.

Nor, in

his judgment, had ground been lost in terms of bank loan policies.
The banks had tried to get more liquid and to put themselves in a
position to meet some of the loan demands they saw ahead.


they were in pretty good shape to meet those demands, that did not
mean that they were not turning down some customers, particularly
new ones.

In general, it had become harder for banks to get funds.


-28Mr. Hayes noted that one of the banks in the New York City

area had begun to compile figures on loans that it was turning
down, and found that the total already was quite large.
Chairman Martin commented that the question of whether
ground had been lost obviously was a matter of judgment.

It had

been useful, he thought, to hear the views on that subject around
the table.
Mr. Reynolds then presented the following statement on the
balance of payments:
Recent balance of payments figures are in some ways
The first-quarter deficit on the liquidity
basis now appears to have been below the $1-1/2 billion
annual rate given in the green book. And the deficit
on the basis of official reserve transactions was apparently
very small indeed, less than $1/2 billion at a seasonally
adjusted annual rate, in marked contrast to the very large
deficit on this basis in the fourth quarter. In the latest
quarter, U.S. banks succeeded in attracting large Euro
dollar deposits through their foreign branches, aided by
the renewed weakness of sterling and by the fact that
Italian commercial banks placed abroad again the funds
they had pulled back late last year. This second measure
of the deficit has fluctuated very widely from quarter to
quarter, and should for most analytical purposes be averaged
over a longer period, as I shall do presently.
So far, we know of four other large changes in interna
tional transactions between the fourth quarter of 1965 and
the first quarter of this year. On the favorable side, the
reflow of bank credit swelled from an already large $1
billion annual rate in the fourth quarter to a rate of
nearly $2 billion in January-February. A second change,
also favorable, was that there was no U.K. debt service
payment to be waived in the latest quarter. On the adverse
side, the merchandise trade surplus shrank from its earlier
annual rate of $5 billion to only $4 billion in January
February. And there was a sharp increase in the rate of



capital outflow into foreign securities, as new Canadian
issues earlier postponed came to market.
These four changes by themselves would have increased
the liquidity deficit. But apparently their net adverse
effect was more than offset by favorable changes in other
transactions not yet identified or measured.
These recent developments do not seem to call for
any broad revision of earlier projections for the year
1966 as a whole. It still seems likely that with good
management, by which I mean adequate restraint of domestic
inflationary pressures, the liquidity deficit may be held
close to last year's rate despite the larger balance of
payments costs of Vietnam, and the deficit on the basis
of official reserve transactions may be a little smaller.
However, no substantial improvement over last year seems
likely and there would almost certainly be a deterioration
if domestic inflation and anticipations thereof should
become more intense.
This morning I should like to comment on some longer
term trends in the balance of payments. It seems to me
that the over-all figures for the latest three quarters,
since mid-1965, give a good indication of the trend-level
of the payments deficit. For this 3-quarter period, the
deficit was at an annual rate of $1.6 billion on the
liquidity basis and $1.4 billion on the official reserve
transactions basis, i.e., about $1-1/2 billion on either
basis of calculation. The deficit was held down by a
number of special factors, including debt prepayments,
military prepayments, and the voluntary restraint programs.
On the other hand, there were also a number of special
factors tending to increase the deficit in this period,
including the U.K. debt waiver already mentioned, lique
fication by the U.K. Treasury of its security portfolio,
and a strike-related bulge in U.S. imports of steel.
These two sets of special factors may be very roughly
regarded as cancelling each other out. So also may the
twin payments influences of our domestic boom, which
has made credit unusually tight but import demand
unusually strong. Obviously any quantitative weighing
of all these factors must be exceedingly rough. But
after allowance for them, it seems reasonable to think
of the recent size of our payments problem as about
$1-1/2 billion a year.
This represents a significant improvement from a
trend rate of deficit of about $3-1/2 billion in



1959-60--a little higher on the liquidity basis, a little
lower on official settlements.
The fact that our progress
has not been exactly breathtaking should not be allowed
to obscure the fact that it has been substantial--substantial
even after one discounts that part of it that can be attrib
uted to the voluntary programs.
A key element has been the improvement in the relative
price-cost position of this country. Appropriate indicators
are hard to come by, but consumer price indexes give some
rough ideas of magnitudes. From the year 1960 to the year
1965, the U.S. consumer price index rose by only 7 per cent.
In the same period, similar indexes for Britain, France,
Germany, and the Netherlands rose by about 20 per cent, and
the increases were even larger in Italy and Japan.
Thus, inflation abroad has permitted us to achieve
an important degree of international adjustment merely by
avoiding inflation at home. But there is nothing automatic
about such an adjustment--nothing inherent in the system
that guarantees its continuation. If therefore we wish it
to continue, at a time when other leading countries are
experiencing price advances of 3 or 4 per cent a year but
are attempting to slow them down, it is crucial that we
not acquiesce in domestic price advances of similar
Against this setting, how should prospective payments
developments in 1966 be viewed? In particular, if there
should be little change in the liquidity deficit in 1966
as compared with 1965, and only a modest reduction in the
official settlements deficit, would that mean that the
slow-working, favorable underlying trends of the past five
years has ceased to operate? I do not think so.
military expenditures abroad in connection with hostilities
in Vietnam were to increase by more than $1/2 billion this
year, as seems probable, while the deficit on all other
transactions were to diminish by more than $1/2 billion,
it seems to me that this outcome could reasonably be
interpreted as further progress towards equilibrium.
Whether the market, or European central bankers,
would so interpret it would depend partly on the clarity
and candor of the official explanations, and even more, I
should think, on U.S. economic developments other than
those directly reflected in the balance of payments
What would profoundly justify a new round of pessimism
about the U.S. payments position would be a clear acceleration



of price-cost advances in this country. If that should
be allowed to happen, it seems to me that pessimism
would be justified even if the adverse payments effects
of inflationary developments were to be offset for a
time by ad hoc programs or controls aimed at restrain
ing particular types of international transactions.
Inflation here would close one of the main avenues of
adjustment that has been open to us in a world of fixed
exchange rates.
In short, the balance of payments outlook--both
short-run and long-run continues to indicate to me that
the paramount economic policy objective now must be to
moderate domestic inflationary pressures, rather than
to operate ad hoc on particular international flows.
Chairman Martin then called for the go-around of comments
and view on economic conditions and monetary policy, beginning
with Mr. Hayes.
Mr. Hayes said he would first like to commend the three
members of the staff on the high quality of their presentations

His own analysis of the business situation followed

Mr. Brill's quite closely.

And, with Mr. Reynolds he would

emphasize the great importance of avoiding an acceleration of
price-cost advances.
Mr. Hayes then made the following statement:
The economy's current performance and the economic
outlook are both extremely strong. Unemployment has
been dropping very rapidly at a time when a relatively
moderate rate of absorption of the remaining unemployed
would be preferable; and the capacity utilization rate
in manufacturing is higher than at any time since late
1955. These conditions are resulting in undue upward
pressure on costs and prices. There is an undertone of
inflationary expectations, even though there has been
no outbreak of inflationary fever. Recently there has



been some leveling tendency in the farm and food price
area. But industrial wholesale prices rose again in
March, bringing the rate of increase thus far this year
to about double that experienced in 1965. Price rises
have been increasingly pervasive in the last few months.
While it is encouraging to note that the recent appeals
of the Administration for restraint constitute recogni
tion of this inflationary threat, the effectiveness of
this method of combatting cost and price pressures may
be open to doubt. Among businessmen in our District,
there seems to be a good deal of skepticism as to the
effect of the President's appeal in restraining plant
equipment expenditures, though some businessmen concede
that it might have some modest influence.
After several months of relatively favorable per
formance, the balance of payments is becoming again a
cause for serious concern. The annual rate of deficit
in the first quarter, after seasonal adjustment, seems
about in line with that of 1965 as a whole. But we
face a very real danger of further deterioration,
primarily because imports are likely to rise steeply
under present boom conditions.
The demand for exports
is decidedly favorable but our export performance over
the next few months may well depend largely on the
extent to which domestic demand pre-empts available
output. Thus an improvement in the trade balance in
1966, which had seemed likely a few months ago, now
appears doubtful. Our tighter monetary policy is
proving helpful on the side of capital flows.
the projected reduction in direct investment abroad
may turn out to be overoptimistic in view of growing
difficulties in placing offshore issues in Europe.
With imports and military and tourist outlays burgeoning,
it seems very probable that the Administration's solemn
assurances of near-equilibrium in our 1966 balance of
payments will not be fulfilled in the absence of inten
sified policy measures. And, in my judgment, our
failure to come close to this goal could bring a renewal
throughout the world of the serious doubts concerning
the dollar that haunted us until a year or so ago.
The latest credit data are hard to evaluate, as
usual, but there does seem to be some basis for con
cluding that a more restrictive monetary policy has
brought some significant slowdown in bank credit
Business loan demand
expansion relative to last year.



continues very strong, but selective lending policies
appear to be growing in importance as a limiting factor
in loan expansion. There may be some transfer of demand
to the bond market in view of the sharp increase in the
cost to prime borrowers of bank borrowing as compared
with the sale of new bond issues. However, for the time
being, there seems to be a considerably calmer tone in
the capital markets than prevailed through much of
March, Apparently part of the recent improvement in
the tone of the financial markets has resulted from
rising expectations of a tax increase to stem infla
tionary developments.
On both domestic and international counts, this
would seem to be a time when general Government policies
must work together in the direction of restraint. As
far as international considerations are concerned, we
are no longer in the situation of the last five years
when we were trying to stem a payments deficit while
stimulating the domestic economy. On the contrary, our
prospective payments deficit may be regarded in some
degree as of the "classical" type attributable to
excessive demand in the economy. There seems to be
persuasive evidence that the monetary and fiscal
measures taken to date are insufficient to prevent
excessive growth of aggregate demand. The most recent
revisions to our measures of fiscal stimulus indicate
that in the absence of a tax increase the Federal budget
will continue to provide substantial economic push in
the second half of this calendar year, despite an
assumed slowdown in the growth of Federal spending.
The needed degree of additional restraint is such that
a tax increase is clearly warranted. In business
circles there seems to be considerable reluctance to
accept this necessity, largely because of a belief that
the Government has not yet shown sufficient restraint
on the expenditure side and might well dissipate much
of a tax rise through further growth of expenditures.
My own view is that since there is no likelihood that
the necessary degree of restraint will be forthcoming
from a reduction in expenditures, we must inevitably
look to a tax increase, and the announcement thereof,
to dampen current inflationary psychology. Furthermore,
a decision must be reached very soon if the fiscal
restraint is to be effected when it is needed, i.e.,
during the coming six months or so.



If monetary policy is left to carry the burden
alone, without fiscal support, I think we shall have
to face some very unpleasant decisions later this year.
Even with fiscal support, it seems quite possible that
our policies will have to become somewhat more restric
tive. Nevertheless, I would not suggest any appreciable
change in policy at this time, mainly because such a
move might be taken by the public as a signal that a
tax increase is not likely to be forthcoming, and also
it might even contribute to the fulfillment of that
expectation. For the time being, I think the Committee
should maintain about the present stance of policy,
i.e., we should maintain a considerable degree of
pressure on bank reserve positions in order to carry
through with the slowdown in bank credit expansion
which--subject to temporary deviations--may already
be under way. We might well aim at maintaining net
borrowed reserves in a $200 to $250 million range,
with swings outside of this range on both sides, with
borrowings ranging perhaps close to $600 million and
with the Federal funds rate consistently at a premium
over the discount rate. Until we have had a little
more time to evaluate the results of our policy to
date and to reach a more accurate judgment on the
probabilities of a fiscal policy move, I believe we
should avoid any further dramatic action such as a
discount rate increase. We might well bear in mind
that in any case even keel considerations will
probably prevent any policy move during the first
three weeks of May.
With respect to the directive, I think that
alternative A is quite satisfactory.
Mr. Ellis reported that business appeared to be running at
just about full throttle in New England.

Consumers were setting

the pace with March department store sales substantially above
year-ago levels and auto registrations in the most recent data also
above 1965 levels.

Manufacturers noted still expanding flows of

new orders in March, and in February they boosted output to a



12-month rise of 11 per cent in the Reserve Bank's region-wide

Manufacturing employment, in turn, showed a 6 per cent

year-to-year gain, leading total nonfarm employment to successive
new peaks and unemployment to a low of 3.6 per cent.

At that

level the outstanding characteristic of the labor market was a
quite general shortage of trained or mature workers and greater
willingness of workers to shop for better jobs, adding to so
called "frictional" unemployment.
In that atmosphere, Mr. Ellis said, District bankers
had aggressively pursued one another into increasingly tighter,
less liquid positions.

Competition for deposits was intense and

the commercial banks were more than holding their own.


weekly reporting member banks had increased their savings deposits
by 12.6 per cent in 12 months, while their "all other time deposits"
had expanded 33.7 per cent.

Deposit balances at the regularly

reporting mutual savings banks showed a 6.4 per cent year-to-year
growth in the February reports.

Compared with a year ago, new

deposits were up 17 per cent but withdrawals were up 29 per cent.
Even with substantial rates of deposit growth--both demand
and time--commercial banks had shown no evidence of satisfying
the demands for bank credit, Mr. Ellis continued.

With business

loans standing 20 per cent higher, with loans to other financial
institutions (chiefly finance companies) standing 28 per cent



higher, and with real estate loans standing 15 per cent higher
than year-ago levels, the Boston banks had loan-deposit ratios
that averaged 81 per cent in March.

Those same banks had a growing

uneasiness about their long-standing commitments to loan--when
asked--to their customer savings banks.
Looking ahead, Mr. Ellis said, the virtually universal
expectation in New England was for continued and even expanding
loan requests.

Contract awards during the past three months had

averaged 17 per cent above year-ago levels, paced by unusually
high nonresidential building awards.

The Boston Bank's spring

survey of manufacturers' capital expenditure plans for 1966 kept
indicating higher and higher goals as more reports were tabulated.
In response to Mr. Holland's query,1/ the Boston Reserve Bank
surveyed eight of the largest respondents who accounted for a
fifth of manufacturing employment in the region.
any recent revisions.

None had made

Three indicated they might review their

plans later in the year.

Since some 10 per cent of this year's

planned expenditures were carryovers of 1965 plans that could

1/ On April 4, pursuant to a suggestion by the Board of
Governors, Mr. Holland had sent the following telegram to
the Presidents of all Reserve Banks: "In connection with
your presentation at Open Market meeting on April 12, it
will be appreciated if you will report such information as
may come to your attention regarding changes (particularly
downward revisions) since the end of March in business plans
for plant and equipment expenditures, and reasons for such



not be accomplished because of delayed deliveries and so forth,
there was some expectation that, if some companies did cut back
on expenditures, that would simply enable others to fulfill their
At the national level also Mr. Ellis would describe the
economy as "cruising at full throttle."

He said "cruising"

because he believed--and hoped--it was not running out of control;
"full throttle" because virtually all labor and capital resources
were in production.

The critical question for monetary policy was

whether that condition had been achieved or was being maintained
through a credit creation process that was itself appropriate and

In retrospect, on the negative side, Mr. Ellis would

suggest that as of early December, when the Federal Reserve raised
the discount rate, it was not expecting or seeking acceleration to
an 8 per cent rate of growth in total reserves (on average) in the
succeeding four months.

It remained true, however, that the present

economy included that financial event in its recent history.
On the positive side, Mr. Ellis continued, it was equally
true that the rate of increase in total reserves had fallen each
month since December to an estimated March annual rate of 2.6 per

It was also true that by gradual tightening of reserve

availability the Committee had even more dramatically reduced the
rate of providing nonborrowed reserves.

Unhappily, however,



experience suggested that that time span was too short and the
numbers too tentative to support a full-blown conclusion that
the bite of policy had been fully realized and that the Committee
could rest on its oars.

The staff projection for April suggested

a reversal; that the proxy variable for bank credit (total member
bank deposits) would expand sharply and that total reserves would
again increase at a 7 or 8 per cent annual rate.

The first para

graph of both the present and proposed directives set out the
objective of "moderating the growth in the reserve base," an
objective which he favored.
Mr. Ellis' own inclination, looking ahead to the next four
weeks, was to continue the policy of gradual tightening commenced
on February 8.

He found it impossible to accept the philosophy

that the Committee should not use monetary policy for fear that
such a course would reduce the chances of a tax increase, because
he feared that any tax increase would come too late.

To be specific,

he urged the Manager to accept a target of net borrowed reserves
centered at $250 million.

Borrowings probably would range near

$600 million, bill rates would be expected to rise slightly from
their present levels near 4.58 per cent, and Federal funds would
usually trade at premiums of 1/4 per cent or more.

He found

alternative B of the directive drafts more closely expressed that



policy choice, but he would have liked to have had an opportunity
to study the other language Mr. Holland had mentioned.
Mr. Irons commented that business conditions in the Eleventh
District paralleled those in the nation.

Industrial production

was quite strong; manufacturers' output was 11 per cent above a
year ago, with strength in both durable and nondurable goods
sectors, and petroleum production was very high.

The employment

situation continued to tighten--unemployment was negligible and
there was a real scarcity of skilled workers.

District retail

sales, as measured by data for department stores, were rising
about in line with national sales.
continuing to run at high levels.

Automobile registrations were
The agricultural outlook was

quite promising; the indications were that this year would be better
than last, which in itself was not a bad year.
Turning to financial developments, Mr. Irons noted that
there had been little change in the positions of banks, which
remained tight.

There was no appreciable borrowing from the Reserve

Bank but purchases of Federal funds remained heavy.
continued to expand moderately.

Bank loans

Bankers still reported very strong

loan demands, and they saw no relaxation of pressures in the months

In recent weeks several bankers had noted in the course of

informal conversations that they were making loan decisions in a
manner that approached rationing.

They said they were reducing



anticipatory borrowing to a minimum, cutting back excessive
loan requests of firms that overstated their needs in an effort
to "play it safe," and denying loans to firms with banking con
nections in other parts of the country that were now seeking
funds in the west.

Also, they were requiring substantial

compensating balances.

In general, they felt that credit avail

ability had to be lessened in view of existing economic conditions,
and that it was necessary to take actions of a type they did not
like and ordinarily would not take.
With respect to Mr. Holland's question concerning cutbacks
in business plans for capital spending, Mr. Irons had little of a
definite nature to report that could not be found in the press,
such as the announcements that had been made by some large national
companies with operations in the District.

There were indications

of a re-examination of plans by several companies.

As one firm

had put it, they were looking at their planned capital expenditures
from the standpoints of essentiality, desirability, and deferrability.
They hoped to cut back some expenditures that fell in the desirable
but deferrable category, even though that meant taking a less
economic approach in the strict sense.

But those indications were

highly indefinite and they applied only to a few of the large concerns.
It was the opinion of many bankers and businessmen in the District
that companies considering cutbacks in their plans were primarily



concerned about rising wage rates and costs of operations, and
were beginning to think about the consequences if the volume of
activity should slip.

At the same time, he had not heard any

significant criticism of the System or of the Government; the
causes of the current situation were simply being accepted as

Insofar as there was any criticism, it was directed to

fiscal policy, and reflected the position that if it was proper
for private industry to re-examine its expenditures it was proper
for the Federal Government to do so also.
As to national economic conditions, Mr. Irons said it
was unnecessary to repeat what was said so well in the green

It was clear that the economy was operating at full strength.
On policy, Mr. Irons aligned himself with those who would

not seek any appreciable further firming at the moment.

He favored

net borrowed reserves in the $200-$250 million range, about where
they had been recently, and he noted that the difference between
such a target and one of around $250 million was fairly small.
He hoped member bank borrowings would run around $600 million,
and he would expect Federal funds to trade at 4-3/4 or 4-7/8 per

The bill rate might run somewhat above the discount rate

and perhaps up to the 4.70 per cent area.
Mr. Irons favored alternative A for the directive.


he thought the Committee's objective with respect to growth in the



reserve base, bank credit, and the money supply was accurately
described by the word "restricting."

Accordingly, in the final

sentence of the first paragraph he would suggest using that word
rather than "moderating," which struck him as having a weaker

He did not feel strongly about the matter, and could

accept the directive as drafted.
Mr. Swan reported that the Twelfth District continued to
share in the national expansion despite the lack of strength still
apparent in residential construction and retail sales, particularly

Year-to-year comparisons in consumer expenditures

were considerably less favorable for the District than for the U.S.
as a whole.

As he had noted at the previous meeting, District banks

as a group were not under particularly severe reserve pressure and
had not been for some weeks, despite their concern over the strength
of loan demands.

They had been substantial sellers of Federal funds

for some time now and had been supplying funds to Government securities
dealers, although the totals were influenced substantially by the
operations of one bank that had worked itself into a more liquid

Borrowings at the Reserve Bank had remained low through

the week ended April 6, and the increase in loans at weekly reporting
banks in the three-week period through March 30 was well under the
increase in the comparable period of 1965.



At the same time, Mr. Swan said, District banks had
intensified their efforts to attract savings funds.


certificates were now being offered to individuals at a 5 per
cent rate by most of the banks in California, compared with a
4-3/4 per cent rate three weeks ago.

Moreover, for the first

time one or two large banks outside of Los Angeles and San
Francisco had joined the few small banks that were offering a
5-1/2 per cent savings certificate.

It was difficult to assess

the impact of the higher rates partly because interest earnings
were credited to savings accounts in the period since the rate
increases began.

However, there appeared to have been a sub

stantial shift at banks from passbook savings to savings
certificates, although total time deposits also rose rather
substantially in the three weeks ending March 30.
Most of the savings and loan associations reacted by
offering 6-month savings certificates at 5 per cent, Mr. Swan
remarked, although a number of them had now raised their regular
savings rate to 5 per cent.

No figures were yet available to

indicate what the consequences of the rate changes were for the
distribution of the flow of funds between savings and loan
associations and banks.

Officials of the Federal Home Loan Bank

recently had said their impression was that there had been a



considerable outflow of funds from the savings and loan associations
starting in late March.

It was a little difficult to understand,

however, why 5 per cent on savings certificates at banks should
result in a substantial outflow from regular accounts in savings
and loan associations paying 4.85 per cent.
On the question of business plans for plant and equipment
investment, Mr. Swan continued, the information that had come to
the attention of the Reserve Bank could be fairly summarized by
the statement that it included no reports of revisions in plans.
While no direct inquiries had been made of companies in defense
related industries, it was quite unlikely that they would make
any cutbacks.

The attitude of some of the utilities perhaps was

represented by the comment of an officer of one such firm that
their investment plans were based on their estimates of the
needs of their customers and they saw no basis in those estimates
for cutbacks.

The reaction of another major company was somewhat

similar to one cited by Mr. Irons.

Their treasurer indicated

they were taking a long look at their planned capital expenditures,
but intimated that the examination was pretty much in terms of
profitability and had been prompted more by questions concerning
the cost and availability of funds than by any other recent

Again, that company had no downward revisions to

report at this point.


Mr. Swan agreed with the comments already made about

national economic conditions.

It seemed to him that, with the

tax date and the Treasury financing ahead and with due regard to
recent developments, the Committee should maintain about the same
degree of pressure that it had, perhaps with some very gradual
further tightening--and he would emphasize the word "gradual."
He would go along with a net borrowed reserve target in the
$250 million range.

However, he did think it was increasingly

important to look behind the net borrowed reserve figures to the
extent possible, to consider what was happening to required
reserves and also to time deposits.

He noticed there had been a

substantial increase in the rate of time deposit growth in the
past few weeks, and if that should continue it obviously meant
a greater expansion potential with respect to the reserve base.
However, time deposit growth might slacken after the April tax
Mr. Swan said he could accept either alternative for the
directive but, on balance, would prefer alternative A.

He would

encourage the staff to attempt to develop somewhat more specific
language in its draft directives; the present situation was an
ideal illustration of the need for more specific language.


had one other comment on the directive, relating to the statement
in the first paragraph that "our international payments continue



in deficit."

As the green book indicated, there was a surplus in

March and approximate balance in January-February before seasonal

In the interest of accuracy, it might be better to

the statement to refer to the over-all payments position

in the first quarter.
Mr. Galusha commented he did not as yet have any "hard"
information on how the Ninth District economy performed during
March, but suspected that it did very well.

All the statistical

series indicated that January and February were exceptionally
prosperous months, that the historically high growth rate estab
lished in the fourth quarter of last year was maintained in the
first two months of 1966.

And in the Bank's most recent round

of conversations with District businessmen there was no hint of
a slowdown in the pace of economic advance.
On short notice, Mr. Galusha said, he had not been able
to determine for sure whether there had been any trend of down
ward revision of investment plans by District firms.

His suspicion,

for what it might be worth, was that a few already had and that
quite a few more would be soon.

The Reserve Bank had been getting

reports, not only of the difficulties of borrowing money, but of
shortages of engineering personnel and construction labor and of
rapidly rising construction costs.

One of the largest manufacturers

had reported recently that they had asked a dozen construction firms



to bid on a proposed plant and got only three submissions, all
of which were, to quote the manufacturer, "ridiculously high."
On the basis of informed gossip he had heard, he thought the odds
favored no upward revision in plant and equipment spending
estimates later this year.
Mr. Galusha went on to say that Reserve Bank's most recent
agricultural credit survey, completed only last week, indicated
that even though country bankers did not see themselves as short
of funds they nevertheless had increased their loan rates.


respondents reported having to turn down loan applications because
of a shortage of funds, or being no longer interested in new loan

But the vast majority reported higher short-term and

long-term loan rates.
With farm prices so much in the news, Mr. Galusha said,
the Reserve Bank had lately given some thought to the outlook for
the agricultural sector.

Its current guess was that the general

level of agricultural commodity prices would remain pretty much
unchanged over the next few months and then would decline somewhat
over the second half of the year.

He was therefore apparently

in agreement with the authors of the green book and the Secretary
of Agriculture.

But he was not sure what the implications of that

prospective decline were.

Possibly the decline, if it materialized,

would moderate future money wage demands, but that seemed rank


But why the Secretary of Agriculture should have seemed

so joyous when he announced his bearish outlook for agricultural
prices was rather hard to understand, Mr. Galusha observed.


one could now be more confident than a while back about a decline
in agricultural commodity prices would not seem to have altered
the demands the economy was making on economic policy-makers or,
more particularly, on the Committee.

In determining open market

policy, the Committee should focus not on the outlook for agricul
tural prices nor even on the outlook for the prices of basic raw
materials, which incidentally affected the developed trading
countries pretty much alike.

The Committee should focus, at

least in the first instance, on the outlook for other prices and
especially on the prices of those manufactured products which
bulked importantly in the export total.

And that outlook was not

at all reassuring.
That, briefly, was why Mr. Galusha would favor a modest
increase in monetary restraint at this time, with a slight
increase--to somewhere around $300 million--in net borrowed reserves.
The only misgiving he had about greater monetary restraint at present
was its likely effect on nonbank financial institutions and--although
their problem seemed less severe--on smaller commercial banks.
Lately he had been hearing reports, not only from Ninth District
institutions but from others around the country as well, of savings



and loan associations and savings banks being in what was
described as a "bad way."

One must of course discount those

reports somewhat, but it would be foolish, it seemed to him,
to treat them as nothing more than expressions of grasping self

The Committee could, however, keep a careful watch

on the situation and, at the same time, move toward slightly
greater monetary restraint.
However, Mr. Galusha added, instead of consideration of
a higher target for net borrowed reserves, he would prefer a
change in reserve requirements--an increase in the average require
ment and, more importantly, a reform of the structure which would
give advantage to the smallest member banks.

He continued to be

concerned about the situation of those banks and, equally to the
point, how they felt about System membership.

There were sharp

indications of a deterioration in the relationship.

The implica

tions were hardly precise but in a world ruled by emotion--not
reason--that was hardly a comforting change in the environment in
which the Federal Reserve System had to operate.
Mr. Scanlon reported that no abatement of the pressures of
demand on available resources was evident in the Seventh District.
Labor shortages had intensified, and price increases in the
industrial sector had been increasingly frequent.

He thought the

passage Mr. Brill had quoted from the Purchasing Agents' report



would also serve pretty well as a summary of basic economic
conditions in the District so he would not comment further on
that subject.
As to changes in business plans for plant and equipment
spending, Mr. Scanlon had no evidence of "voluntary" cutbacks in
the District, although admittedly the Reserve Bank's inquiries
had not been extensive.

If anything, sights had been raised

A factory-locating service headquartered in Chicago

reported an acceleration during the past month in an already
high volume of proposed work.

Some construction projects, both

business and municipal, had been postponed or scaled down because
of unexpectedly high bids, inability to obtain firm bids, diffi
culties in arranging financing, delays in architectural and
engineering work, and delays in deliveries.

He knew of no private

projects postponed primarily because of the President's statement
on capital expenditures.
Bank loans in the Seventh District gave no indication of
any slowing in credit demands, Mr. Scanlon said.

Business loans

expanded in March somewhat less rapidly than last year but still
much faster than usual.

Outstandings to finance companies

remained at a relatively high level.

District weekly reporting

banks continued to add to their holdings of real estate loans
and municipal securities.

In his judgment, the reserve positions



of the weekly reporting banks in the District had not shown
evidence of severe pressure.

The large Chicago banks appeared

to have weathered the April 1 personal property assessment date
with less difficulty than usual.

To some extent, however, the

relatively light reserve pressure reflected their continued sales
of CD's at high rates.

Loan increases at smaller District banks

also appeared quite strong through the mid-March period and their
borrowings at the discount window remained relatively high.
As to policy, Mr. Scanlon agreed with those who favored
continued gradual firming, with due consideration, of course, for
the Treasury financing.

He favored alternative B for the directive.

Mr. Clay reported that telephone calls were made to the
heads of three large national industrial corporations with head
quarters in the Tenth District in order to develop some indication
of revisions in business capital outlay plans since the end of

All three indicated that their firms were reviewing their

capital outlay plans, although none had completed the review.


was confident that his company would be able to make some downward
revisions whose implementation would begin to show in four months
or so after the review was completed.

The second said that his

firm's review could not produce any capital outlays cutback for
at least a year.

While his company had a large capital program,

there was no practical way of cutting back on the projects under



The only possibility for capital outlay reductions involved

programs that were still in the planning stage.
The head of the third company also indicated that it would
not be economically feasible to cut back projects already under
way, Mr. Clay continued.

In that connection, the company head

mentioned a $36 million project scheduled for completion in
February 1967 and for which all needed materials had been provided.
On the other hand, he referred to a $40 million project that he
thought would be deferred.

While the deferral would coincide

with President Johnson's cutback drive, he indicated that it actually
would be because of shortages of materials.

In that case, a sub

stantial amount of fabricated materials and electrical machinery
were required in which copper was a component, and it was particularly
that type of material that would cause the deferral.
Looking toward the formulation of monetary policy, Mr. Clay
said the Federal Reserve was faced with an economy in which the
pressures on resources did not appear to be lessening.

While news

stories over the week end underscored the favorable showing in the
latest monthly wholesale price index release, it actually did not
involve any significant change or improvement in the forces at work
in the nonagricultural sector of the economy.

The impact of the

Administration's appeal to businessmen for cutbacks in capital
outlays was difficult to judge.

There was reason to wonder whether



the principal cutbacks would not be in projects only in the
planning stage and whether any significant impact on the economy
might not be many months away.

It still was to be hoped that

fiscal policy action would be taken.
Mr. Clay thought that monetary policy should continue to
apply pressure on the financial sector of the economy, and that
the Committee should avoid any retrogression in the progress
toward monetary restraint achieved since the discount rate increase
late last year.

Recognizing that Treasury bill yield movements

had differed from other short-term rates in recent weeks, money
market conditions in the period ahead should be maintained
generally in line with those in the interval since the last meeting
of the Committee.

Presumably the Federal funds rate would be

mostly at 4-3/4 per cent.

Upward movements in Treasury bill yields

from recent levels need not be a matter of concern unless they
threatened to make the present discount rate untenable.


reduction in reserve availability should continue to be the
Committee's aim, with the net borrowed reserve target set at $250

Open market operations would need to be adapted to the

varying conditions that might prevail in the money markets during
and following the April tax payment period.

The draft economic

policy directive with alternative B as the second paragraph was
satisfactory to him.


Mr. Heflin commented that whether one found himself

agreeing with Mr. Mitchell that the Committee had lost ground
or with Mr. Hayes that capital markets recently had acted like
a pendulum, it was apparent from the situation in the Fifth
District that the task of moderating--or, as Mr. Irons would say,
restricting--the expansion would not be easy.

The Richmond Bank's

latest business survey suggested that business activity in the
District was expanding at the fastest pace in the past four years.
There were no reports of declines in wages, prices, or hours
worked except in textiles, where one of eight respondents reported
small declines.

New orders and shipments were strong in all manu

facturing industries, but especially so among producers of durable

Additional evidence could be found in several recent

developments in the textile business, the furniture industry, and
bituminous coal mining, and in the growing pressures on banks.
Almost no evidence of any significant reduction or postpone
ment in plans for capital spending had been found in the District,
Mr. Heflin said, until Friday afternoon when one such report was
received from North Carolina, and yesterday when another case was
reported from southwest Virginia.

In Virginia 97 new plants and

expansions were announced in the first quarter, compared with 60
in the first quarter of 1965.

Informal interviews with a few

leaders in the textile, metals, electrical equipment, and furniture



industries yielded remarkably uniform replies.

The respondents,

as Mr. Clay had reported was the case in his District, contended
that their programs were too far advanced to permit any significant
reductions this year.

They said they urgently needed additional

capacity, and that they had no assurance that their competitors
would practice restraint.

With respect to plans for the more

distant future, several of the respondents said that they were
reviewing their long-range plans in the light of one or more of
three possible restraints.
capital funds.

The first was the higher cost of

The second, and possibly more important, was the

lack of certainty that funds would be available at any cost.


final limiting factor in some cases was the availability of
equipment within any reasonable time.

Incidentally, one manu

facturer called attention to another problem created by inflation
and tight money.

He would have to raise several million dollars

of additional working capital because many of his customers were
short of funds and were not taking the cash discount.
In the national economy, Mr. Heflin said, there seemed to
be growing signs of stress.

The report on employment for March

was especially significant in that respect, showing a larger than
seasonal increase in employment and a further rise in the already
high figure for weekly overtime in manufacturing.

As employers

dug deeper into the ranks of the less qualified and less experienced



workers there was likely to be a fall in productivity and an
increase in unit labor costs.

Despite the appeal of the President,

it was unlikely that there would be any reduction in capital
spending large enough to be significant in the next few months.
In the same way, it was doubtful that any change in fiscal policy
could be expected which would be effective in the immediate future.
Each new report, and especially each revision of preliminary data,
showed that inventories and unfilled orders continued to mount,
probably reflecting rising speculative expectations.
Such conditions would normally be accompanied by a distinct
upward trend in prices, Mr. Heflin continued.

The large number of

price increases publicly announced and the very small number of
price reductions, as well as reports from manufacturers, purchasing
agents, and others all indicated that such a trend now existed.
At the moment the country might be experiencing a pause in the
upward movement, with a shift from price increases caused by
demand-pull and scarcities of farm products and metals to increases
caused by cost-push as producers passed on higher labor and materials
In that situation, it seemed advisable to Mr. Heflin that
the Committee step up its effort to reduce reserve availability in
the hope of slowing down the rate of expansion in bank credit and
the money supply.

He found himself aligned with those who favored



alternative B for the directive; if the Committee was going to
make progress, it would have to apply more pressure.
Mr. Shepardson commented that there was no need to
elaborate on the reports that had already been given indicating
generally strong economic activity.

Whether the apparent relaxa

tion in security markets in recent weeks was an actual relaxation
or simply a swing of the pendulum, the indications as noted by
the staff were for further rapid expansion in the weeks ahead in
both bank credit and the money supply.

That pointed to the need

for further restraint at this time.
Mr. Shepardson then said that he would like to make one
point with respect to the interpretation of recent changes in
agricultural prices.

Earlier, when prices of farm products and

foods were rising rather rapidly, it had been observed repeatedly
that the effect on the total wholesale price index should be
discounted because agricultural prices were not subject to the
same forces as other prices and because adjustments would occur
as increased supplies, particularly of meat, came onto the market.
Now publicity was being given to the decreases that had occurred
and could be anticipated, which would have effects on both the
wholesale and consumer price indexes.

But if it was proper to

discount the effects when farm and food prices were rising, by
the same token too much should not be made of declines.

In any



case, nonagricultural prices, which monetary policy could
influence more than farm and food prices, were continuing to
As he had indicated, Mr. Shepardson said, he thought that
the Committee should exert greater pressure.

In his judgment

that should be reflected in a net borrowed reserve target ranging
from $250 million upward rather than from that level downward.
He would expect some increase in bill rates, and a Federal funds
rate in the present neighborhood or possibly somewhat higher.
The policy he favored was indicated by alternative B of the draft

which called for some further gradual reduction in

reserve availability.
Mr. Mitchell remarked that he favored as much firming as
possible within the confines of the existing discount rate and
Regulation Q ceilings.
would be.

He was not sure just how restrictive that

However, it was at least as restrictive as called for

by alternative B of the draft directives, for which he would opt.
It seemed to Mr. Mitchell that everyone who had spoken
thus far agreed that the staff reports today accurately described
the existing situation, and that the Committee had to be as aggres
sively inclined against inflation as possible now.

Short of a

discount rate increase, for which he was not prepared at present,
he thought the Committee ought to be putting more pressure on the


banking system.

Several of the Reserve Bank Presidents had

reported that banks in their District were in a reasonably com
fortable position.

There had not been much comment on the money

supply thus far in the discussion but its recent growth rate was
high for a period of restraint.
Mr. Mitchell observed that if there was to be additional
fiscal restraint it would not occur before mid-year, and its main
effects would not be felt until another half-year had passed.
The Committee did not have much time left in which to operate
against an expansion rate that all agreed was unsustainable; given
the lags in monetary policy, major effects on spending of monetary
actions taken in the second quarter probably would not be felt until
at least the third quarter.

He believed, therefore, that the

Committee should adopt a policy at least as restrictive as that
indicated by alternative B.
Mr. Daane said that the strength of the boom clearly called
for dampening aggregate demands by the methods within the power of
the Committee.

With Mr. Mitchell he felt that, whether the Com

mittee liked it or not, monetary policy had to carry the burden
for the foreseeable future.

The Committee could hardly look for

much help from fiscal policy for the balance of the year even if
a tax increase were enacted.

Certainly the Committee should not

let up on the degree of monetary restraint.



The real question, Mr. Daane continued, was when and how
to apply more pressure.

He would be a little reluctant to press

too hard at this particular juncture.

He thought Mr. Mitchell had

put the matter well when he called for maximum firming within the
confines of the existing discount rate and Regulation Q ceilings.
For the moment, taking into consideration the Treasury financing
and the fact that a bite of undetermined proportions was being
achieved with the existing degree of restraint, he would align
himself with those who favored a net borrowed reserve target of
$250 million, ranging upward.

He would remind the Committee that

for the past three weeks net borrowed reserves had averaged about
$230 million; an increase of a few million from that level could
hardly be considered a very significant change.
Mr. Daane said he had no firm convictions as to which of
the draft directives should be adopted.

If, in the language of

alternative A, operations were conducted with a view to "maintaining
firm conditions in the money market and continuing to exert pressure
on bank reserve positions," the results probably would be about the
same as under alternative B.
Mr. Maisel observed that, as had been made clear in previous
discussion, there were two questions which the Committee had to
answer in determining a proper policy for the next period.


had there been a sufficient change in the underlying economic



situation to call for a current change in monetary policy?
Secondly, what was the relationship between the recent movements
in the monetary aggregates and the Committee's existing policy

In that respect, he recognized the difficulty of inter

preting short-run movements, and also that there seemed to be
some differences around the table in the interpretation of the
It seemed to Mr. Maisel that there was insufficient
evidence of any change in the underlying situation to require
currently an alteration in monetary policy.

Demand was still

Current projections showed a fine balance between demand

and supply.

There remained considerable probabilities that demand

could be met only with further increases in the prices of industrial

He concluded that a proper monetary policy for the

System still was to attempt to restrict the growth of bank credit
and total credit to a level at least one-third less than the rate
of expansion of last year.

On the other hand, he believed it

important that the Committee no longer delay in adjusting reserves
to a reduced expansion level which was consistent with a policy
aiming at lowering real investment.

Because of the lags in the

system any further delays in reducing the reserve expansion rate
increased the danger that the real policy shift might have been
delayed too long and that it would become effective in a contra
productive period.


When the actual results of current monetary policy were

examined, Mr. Maisel continued, a major divergence between the
record for the past six weeks and the prior six weeks was noted.
While the marginal reserve measures showed a sharp increase in net
borrowed reserves as well as in borrowings, the changes at the
margin had not succeeded in restraining the aggregates to a
desirable rate of advance.
In fact, Mr. Maisel pointed out, even as net borrowed
reserves had increased, total reserves, the money supply, and the
bank credit proxy all had exhibited an accelerated rate of expansion.
At the same time, as had been noted, a sharp fall occurred in interest

While the Committee might believe it had brought about a

changed monetary policy--and clearly the atmosphere and some rates
had changed--if one considered either the entire period since
December 1 or the past six weeks, one found that the basic policy
indicators (with the exception of the money market) showed an
expansionary rate of increase over the period prior to December 1.
It seemed to Mr. Maisel, therefore--consistent with his
views at the past several meetings--that the Committee ought to put
less stress on the marginal measures.

He agreed with the Secretary's

interpretation of the directive, but felt that it was not a proper
policy directive.

In place of what was primarily a money market

instruction, the Committee should make certain that its directive



was interpreted in terms of a desirable rate of expansion in
total reserves and in bank credit.

Between now and the Committee's

next meeting, an attempt should be made to restrict the rate of
expansion in total reserves even if that required a somewhat larger
increase in the level of net borrowed reserves.

He would support

alternative B for the directive.
In contrast to the purely net borrowed reserve criterion,
Mr. Maisel would interpret "reduction in reserve availability" to
mean that the rate of increase in reserves and bank credit should
be cut back from the recent five-week expansion at an annual rate
of nearly 16 per cent to an annual rate of 5 per cent or less.
The amount of net borrowed reserves and money market rates should
be allowed to move considerably higher if necessary to bring about
that slower rate of expansion in total reserves.

However, during

that time, it would be useful to continue to make it clear that
changes in the discount rate and Regulation Q would be avoided if
at all possible.
Mr. Brimmer commented that staff reports in the course of
recent Board briefings indicated that corporations were likely to
be back in the market for funds, substantially increasing either
their bank loan requests or their capital market flotations.


prospect suggested the need to move toward some further tightening
at this time.

It appeared that at the end of the first quarter



corporate liquidity was much lower than had been anticipated,
which in itself might result in more security floations.


also might insure that the recent sharp bulge in bank credit,
which the blue book described as apparently largely temporary,
might turn out to be somewhat less temporary than expected.


again pointed to the need for some further tightening.
Mr. Brimmer thought that the Committee should not rely on
an expected tax increase to achieve the necessary degree of

According to estimates by the Board's staff a tax

increase on the order of $5 billion--the magnitude suggested by
recent press stories--put into effect at mid-year would cut only
about $3 billion from GNP in the third quarter (in terms of annual
rates) and about $7 billion in the fourth quarter.

In the interim,

monetary policy would still have quite a bit of work to do.


felt that alternative B of the second paragraph of the draft directives
was a reasonably accurate summary of what the Committee's objective
should be at this time, and accordingly he subscribed to that alterna
Mr. Hickman said that the marked rise in nonfarm employment
in March and further increases in orders, backlogs, inventories,
and overtime pay were disquieting developments against the background
of an extremely tight labor market and bottlenecks in materials,
equipment, and plant capacity.

The most recent monthly reports on



unit labor costs in manufacturing now showed clearly the shift
towards increased costs that had been feared for so long.
Prices were, of course, the most bothersome element in
the situation so far, and would remain so until demand leveled off,
Mr. Hickman continued.

The wholesale price index was stable in

March, as a rise in industrial prices was offset by declines in
farm and food prices.

He remained concerned about the unrelenting

rise in industrial prices caused by the pressure of output on
available resources.
As to the possible moderation of capital spending by
business firms, Mr. Hickman said, it was still much too early to
evaluate the effects of monetary policy, resource bottlenecks,
and the President's latest exhortations.

As he had reported at

the last meeting, some firms in the Fourth District had taken a
second look at capital spending plans, because of tighter money,
higher costs of materials, and limited supply of labor.


President's request was unlikely to interrupt spending plans
already under way, but might deter some corporations from starting
planned projects.
A number of firms reported to the Cleveland Reserve Bank
that they were re-evaluating their capital spending plans.


reasons unknown to Mr. Hickman, many of those companies were
centered in the Pittsburgh area--for example, Westinghouse, Alcoa,



Pittsburgh Plate Glass, Koppers, and Heinz.

In the case of Koppers,

it was known that a substantial cutback was already in process

before the President's request.

He had also just been informed,

on a confidential basis, by executives of Goodyear Tire & Rubber
and Armco Steel, that, although they would be unable to cut projects
already under way, they would take a hard look at projects not yet
started because of short supplies of money, materials, and labor,
plus the President's exhortations.
Unlike typical experience during business expansions,
Mr. Hickman observed, actual capital spending in 1966 might not
exceed by much, and perhaps might even fall short of, spending
anticipated in early surveys.

Monetary policy had to be given

credit for at least a marginal influence in moderating capital
spending, but he was not able to quantify the effects and to dis
entangle them from others.

Since only starts would be affected,

there would be a lagged delay which, while desirable today, could
cumulate into unwanted slack tomorrow.
Fiscal policy remained the main hope for alleviating the
present difficulties, Mr. Hickman said, but he was rapidly losing
confidence that it would be used at the right time and in the right

The Administration was vacillating on taxes, and Congress

seemed determined to outspend the Administration, as evidenced by
the new G.I. Bill, the House bill for higher Civil Service salaries,
and the upgrading of other popular programs.


-67Monetary policy in the past three weeks had followed the

last directive as he interpreted it, Mr. Hickman continued, but
the money and capital markets had had a slightly easier tone than
he now thought desirable, given today's inflationary political and
economic environment.

In the absence of a decision about taxes,

and with Federal spending pointing higher than original budget
estimates, he believed the Committee should continue to tighten
cautiously and gradually.

With credit demands still strong, he

favored letting net borrowed reserves rise slowly against that
demand, from the present target of about $200 million to $250 million,
or perhaps even to $300 million if market conditions eased towards
the latter part of April, as the staff suggested in the blue book.
He assumed that that target could be achieved without the 91-day
bill rate piercing the 4.75 per cent level, which he believed would
trigger discount rate action.
this time.

He would not favor the latter at

For the reasons indicated, he supported alternative B

of the staff's draft directives.
Mr. Bopp remarked that almost every sector and every
indicator at which he had looked in the past three weeks confirmed
the pressure on the economy and provided little suggestion that a
letup might be in sight.

Of course, capital spending remained a

pivotal sector of economic activity, and from the Reserve Bank's
sounding of business attitudes in the Third District, the President's



recent call for a re-examination of capital outlays bore little
promise for a timely amelioration of pressures.

Capital spending

plans had been discussed with top executives from 37 large firms
whose business ranged from textiles and apparel to paper, chemicals,
primary and fabricated metals, machinery, transportation equipment,
and instruments.

Of those 37 firms, only 3 had so far re-examined

plans, and they had done so in the ordinary course of business and
had decided to increase not decrease spending.

When asked if

spending plans would be re-examined in the very near future, 11 of
the firms replied affirmatively, and 8 of those mentioned as one
of the reasons a desire to cooperate with the President.


it was also pointed out that any decisions which might be made to
reduce spending would not be felt in the economy for many months
because of firm commitments over the near term.
Turning to policy, Mr. Bopp said that while he would not
let up on existing pressure, he would be reluctant to move toward
further restraint at this time for three reasons.

First of all,

the full impact of earlier actions still had not been fully trans
mitted either to financial markets or to markets for goods and

He would be reluctant to impose additional restraint

until the results of past actions were known with greater certainty.
Second, Mr. Bopp continued, the degree of restraint associ
ated with any given level of borrowing and net borrowed reserves was



probably greater now than in the 1950's.

That point was made

at the last meeting of the Committee and was supported by evidence
from the most recent survey of Federal funds activity in the Third

At the present time, almost half of the country banks

in the District were active in the Federal funds market, compared
with a little over one-third last year at this time.


of the banks currently active in the market, almost 90 per cent
had entered after 1960.
Corresponding with the rapid increase in country bank
participation in the Federal funds market, Mr. Bopp noted, had
been a sharp reduction in borrowing at the discount window by
District banks.

The District's share of total borrowing at the

discount window dropped from an average of about 5 per cent in
1959 to around 2.5 per cent last year.

Although the development

of the Federal funds market might have proceeded more rapidly in
the Third District than in some other areas of the nation, it was
reasonable to believe that a relatively heavier reliance on the
Federal funds market was typical of other sections of the country
as well.

If that was so, a given level of borrowing and net

borrowed reserves might be associated with greater restraint today
than in the 1950's.
The third reason for which Mr. Bopp would hesitate to
impose additional monetary restraint at this time was simply that,



at present high levels of rates and given the heavy loan commitments
of financial institutions and the potential problems inherent in
rolling over CD's, significant further tightening could be partic
ularly unsettling to financial markets.

Given those problems,

it would be most desirable for any additional restraint to come
from the fiscal side of the monetary-fiscal policy mix.


significant shift in monetary policy now would make it all the
more unlikely that timely and appropriate fiscal measures would
be taken.
Mr. Bopp said that he favored alternative A of the draft
directives on balance, but would be prepared to go along with
alternative B if the latter was the choice of the rest of the
Mr. Patterson reported that the battle for time deposits
in Atlanta that he predicted several weeks ago had broken out in

On March 30, one large bank advertised it would offer

5 per cent on so-called investment certificates.

The next day,

the only Atlanta bank that previously had paid more than 4-1/2
per cent announced it was going to 5 per cent.

And as one might

have expected, the other two major banks quickly followed suit.
The conditions under which the various institutions were paying
that new rate varied, of course,

But two of them were paying

5 per cent on denominations as low as $100 and $25, respectively,
if held for 90 days.


The savings and loan associations had not yet changed

their rates, Mr. Patterson noted.

One was trying to hold on to

its shares by advertising that it was paying the highest rate
any Atlanta savings institution paid on equivalent passbook

Several others stressed in their ads the premium offered

on longer-term savings.

Since mortgage rates in Atlanta were

already well above 6 per cent, the savings and loan associations'
decision to stand fast seemed to reflect a weakness in housing
rather than competitive conditions.
The increase in time deposit rates of banks had been
predictable from straws in the wind, some of which were not
exclusive to the Atlanta area, Mr. Patterson continued.


loan demand in Atlanta had been very strong and unpredictably
so, since large out-of-town corporate customers had begun to
draw on credit lines for the first time in years.
CD and passbook savings growth rate had slackened.

The corporate
A regional

Federal funds market and a regional mortgage-gathering market
were slower to develop than the decline in bank liquidity seemed
to demand.

Time deposits seemed to be the only major source left

for the banks to exploit.

The fact that the one bank which moved

in that direction last year had been fairly successful in that
endeavor, at least temporarily, was undoubtedly another factor
influencing the decision.


Mr. Patterson reported that the latest available employ

ment figures for the District were not quite as bullish as they
had been.

Only a large gain in Florida's employment had made it

possible for the District to register a plus in February.

In his

estimation, those figures indicated only a slight slowing down
from very high increases.

Perhaps the same generalization could

be made for some national economic series.

However, in neither

case was the Reserve Bank's staff prepared to attribute much of
that change to higher interest rates or changed credit conditions.
Certainly, one could expect the pace of the economy to slacken
occasionally even in a period of rapid expansion.
In checking for changes in business plans for plant and
equipment spending in the District, Mr. Patterson said, no single
instance was discovered of a reduction in capital expansion plans;
nor was there found a single postponement of a commercial or indus
trial construction project in the Atlanta area.

Only in the

residential housing field could evidence of disruptive markets be

And, perhaps he should add, the District shared in some of

the cancellations and postponements of security offerings of State
and local governments.
The Committee was just beginning to realize what Mr. Patterson
believed was its present goal, namely, a slackening in the growth
rate of money and bank credit.

For that reason alone, in his opinion,



the Committee should hold to its present policy posture.


too, monetary policy although flexible was not so precise that
the Committee could adjust its actions to the slight ebb and flow
of the course of the economy.

He also believed that the Committee,

having changed policy not too long ago, needed to observe more
closely what effects its actions were having before it turned to
additional tightening.

Finally, the status quo, which he inter

preted to be a net borrowed reserve figure of around $200-$250
million, also made sense by reason of the Treasury mid-May refunding,
even if that refunding was just routine.

He favored alternative A

of the draft directives.
Mr. Francis said that the St. Louis Reserve Bank had not
learned of any recent cutbacks in capital spending plans in the
Eighth District.

From time to time they heard of a case in which

a firm had been unable to obtain financing from its customary
sources, but such firms generally succeeded in finding alternative
sources of funds.
Mr. Francis then noted that since last June and continuing
since November, monetary expansion had been at the very rapid rate
of about 6 per cent a year.

In the last half of December there had

been a great jump in the money supply, and in January a partial
elimination of the jump returned growth to the 6 per cent trend
line of the past nine months.

That rate of growth in money was



the highest for any nine-month period since World War II.


reserves and reserves available for demand deposits had followed
a similarly rapid upward trend.
The rapid increase of the money supply had continued at
the same time that the directive had called for only a moderate
rate of increase of reserves and money, Mr. Francis noted.
Apparently, the continued rapid increase of reserves and money
supply had come about because net borrowed reserves, averaging
about $150 million since last July, had not been restrictive.
In recent months, Mr. Francis said, fiscal actions of
the Government had been the most stimulative in several years.
While it would be desirable for the Government to adopt a more
restrained fiscal position, such a move of a substantial or
adequate magnitude did not appear to be forthcoming in the near

In the absence of fiscal restraint, or until evidence

of such restraint appeared, a risk might be run of further price
rises of a significant nature unless the rate of monetary expansion
was reduced considerably.

Therefore, it seemed to him, the Committee

should not be reluctant to apply the tools of monetary action at its
disposal to limit growth in total demand for goods and services to
the amount that could be accommodated without inflation.
With regard to policy, then, Mr. Francis suggested a reduction
in the rate of increase in money.

The proper rate could not be



specified with certainty, but he suggested that the rate might
properly be brought down gradually to as much as half the 6 per
cent rise of recent periods.

If the rate of increase in money

were so reduced, loan funds would become more restricted than
during the past nine months.

He would view the likely resulting

rise in interest rates as desirable from both domestic and balance
of payments points of view.

He would give major consideration to

reserves and money supply in carrying out System actions in the
immediate future.
Mr. Francis favored alternative B of the draft directives.
He liked Mr. Irons' suggested revision in the first paragraph,
replacing the word "moderating" with "restricting."
Chairman Martin commented that the differences in members'
views on policy did not seem great today.

His own thinking was

similar to Mr. Mitchell's conclusion; he would like to see the
pressure maintained as vigorously as possible without necessitating
a change in the discount rate or an overt change in policy.

As he

had observed at the previous meeting of the Committee, monetary
policy could not be formulated in terms of still pictures; the
economy always was in motion and the Committee had to maintain
pressure if it was to achieve its objectives.

Whether alternative A

or B of the suggested directives was adopted, it was clear that the
Committee did not want to reduce the degree of pressure from that



currently existing.

Alternative B seemed to be favored by the

majority, and if it was interpreted in the manner he had suggested
perhaps the Committee could agree on it.

He asked whether anyone

would question that statement.
Mr. Maisel said he thought the discussion today reflected
a basic difference in the interpretation of recent developments.
A number of members believed there had been a relaxation while
others, as well as the Manager, felt there had not.

In his judgment

it would be desirable to get some agreement on the nature of the
existing situation before deciding how to proceed.
Chairman Martin agreed that there were differences in
judgment regarding recent developments; he personally thought that,
by and large, there had not been any relaxation, although some others

He did not know quite how to resolve that sort of
Certainly there had been no intention to relax; the

developments in which members saw evidence of relaxation had come
about because of other factors.

Mr. Maisel's point was that if

net borrowed reserves had been deepened the growth in aggregate
reserves would have been less, but Mr. Holmes thought that such a
course would at most have moderated the decline in interest rates.
Mr. Holmes said he felt that somewhat deeper net borrowed
reserves certainly would not have forestalled the decline in long-term
interest rates, which was caused mainly by a change in expectations.



Chairman Martin then said that however one might assess
recent developments he thought it was clearly the Committee's
intention to continue the process of cautiously and gradually
increasing the degree of pressure over the coming period.
Mr. Shepardson noted that several members had expressed
the opinion that the rate of increase in aggregate reserves
should receive attention.

The net borrowed reserve figures

suggested that pressure was being applied, but the growth rate
of total reserves was quite high.

His own feeling was that that

growth should be slowed down.
Mr. Hayes observed that, while earlier he had expressed
a preference for alternative A, he was prepared to go along with
the majority on the policy of continued gradual firming called
for by alternative B.

It seemed to him that the Chairman's summary

of what the Committee would intend by adopting alternative B was
clear, and he did not expect much difficulty in interpretation.
Chairman Martin then asked Mr. Maisel whether he thought
his position had been taken into account adequately.
Mr. Maisel replied that to him the point Mr. Shepardson had
made was the critical one.

If there was agreement with Mr. Shepardson's

point, then the Committee was agreed on the issue that had concerned


The Chairman noted that Mr. Shepardson's comment was to

the effect that total reserves should be taken into consideration.
He did not think that anyone would disagree with that; it was
just a matter of the degree.
Mr. Hayes observed that, while the objective was clear,
there was a question arising from the problems of implementing
such an instruction, particularly within a short time period.
Mr. Hickman noted that there would be an interval of four
weeks before the Committee's next meeting.

He suggested that it

might be desirable for the Committee to hold an interim meeting,
perhaps by telephone conference, if there again was a divergence
between developments in the market and the Committee's intentions
such as he thought had occurred in the recent period.
Chairman Martin commented that it was always possible to
call a meeting of the Committee if one was required.

In general,

however, he did not favor telephone conference meetings unless
there was something of real importance to discuss.
Mr. Daane remarked that he agreed with the Manager's view
that the recent decline in long-term rates was atrributable to
developments in the market, particularly to the change in expecta
tions regarding a tax increase.

Expectations were always subject

to change and such developments could have much more significant
effects than an increase of, say, $25 or $50 million in net borrowed



Chairman Martin said that whatever change might occur
in net borrowed reserves he would not want so much pressure to
be put on the market as to force an increase in the discount rate.
Several other members indicated that they concurred in that view.
Mr. Swan, noting that the Federal funds rate recently had touched
4-7/8 per cent for the first time, expressed the opinion that on
the basis the Chairman had mentioned it might not be possible to
go much beyond the existing degree of pressure.
Chairman Martin then said he gathered that all of the
members were prepared to vote for alternative B for the directive
as it had been interpreted.

As to Mr. Irons' suggestion that the

word "moderating" be replaced by the word "restricting" in the last
sentence of the first paragraph, he personally had no strong feeling.
Mr. Daane remarked that when the directives for the calendar
year were published in the Committee's record of policy actions
some readers might interpret the substitution as reflecting a
significant change in policy when none was in fact intended.


ever, he had no real quarrel with either word.
Mr. Mitchell observed that if "restricting" was ever a proper
word to use, it was the appropriate word now.

Other members also

indicated that they favored the change.
Thereupon, upon motion duly made
and seconded, and by unanimous vote,
the Federal Reserve Bank of New York
was authorized and directed, until


-80otherwise directed by the Committee,
to execute transactions in the System
Account in accordance with the following
current economic policy directive:

The economic and financial developments reviewed at
this meeting indicate that the domestic economy is
expanding vigorously, with industrial prices continuing
to creep up and credit demands remaining strong. Our
international payments continue in deficit. In this
situation, it is the Federal Open Market Committee's
policy to resist inflationary pressures and to help
restore reasonable equilibrium in the country's balance
of payments, by restricting the growth in the reserve
base, bank credit, and the money supply.
To implement this policy, System open market opera
tions until the next meeting of the Committee shall be
conducted with a view to attaining some further gradual
reduction in reserve availability, while taking into
account the forthcoming Treasury financing.
It was agreed the next meeting of the Committee would be
held on Tuesday, May 10, 1966, at 9:30 a.m.
Thereupon the meeting adjourned.



April 11, 1966

Drafts of Current Economic Policy Directive for Consideration by the
Federal Open Market Committee at its Meeting on April 12, 1966
First paragraph
The economic and financial developments reviewed at this
meeting indicate that the domestic economy is expanding vigorously,
with industrial prices continuing to creep up and credit demands
remaining strong. Our international payments continue in deficit.
In this situation, it is the Federal Open Market Committee's policy
to resist inflationary pressures and to help restore reasonable
equilibrium in the country's balance of payments, by moderating
the growth in the reserve base, bank credit, and the money supply.
Second paragraph
Alternative A (preserving about the current degree of firmness)
To implement this policy, while taking into account the
forthcoming Treasury financing, System open market operations
until the next meeting of the Committee shall be conducted with
a view to maintaining firm conditions in the money market and
continuing to exert pressure on bank reserve positions.
Alternative B (continued gradual firming)
To implement this policy, System open market operations
until the next meeting of the Committee shall be conducted with
a view to attaining some further gradual reduction in reserve
availability, while taking into account the forthcoming Treasury