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FORTY-NINTH
Annua{ Report
OF THE
BOARD OF GOVERNORS
of the Federal Reserve System
COVERING OPERATrONS FOR THE YEAR
Period
Action
Purpose of action
Reduced System holdings of U. S. Government
securities by about $500 million through net
sales and redemptions. Member bank borrowings from the Reserve Banks averaged
less than $100 million.
Authorized open market transactions in foreign
currencies.
Increased System holdings of U. S. Government securities by about $1.3 billion, of
which half represented purchases of securities with maturities of more than 1 year.
Member bank borrowings from Reserve Banks
continued to average less than $100 million.
To permit further bank credit and monetary expansion by
absorbing only part of seasonal inflow of reserve funds,
mainly from post-holiday return of currency from circulation, while minimizing downward pressures on short-term
interest rates.
To moderate and offset short-term pressures on the dollar in
the foreign exchange market.
To promote further bank credit and monetary expansion while
avoiding sustained downward pressures on short-term
interest rates.
Mid-J uneIncreased System holdings of U. S. Governlate October ment securities by about $200 million with
net sales and redemptions of Treasury bills
of about $700 million being more than offset
by purchases of coupon issues, of which twothirds were issues maturing in more than 1
year. Member bank borrowings from Reserve
Banks averaged less than $100 million.
July
Reduced margin requirements on loans for
purchasing or carrying listed securities from
70 to 50 per cent of market value of
securities.
To permit moderate increase in bank credit and money supply while avoiding redundant bank reserves that would
encourage capital outflows, taking into account gradual improvement in domestic economy and possibilities for further advance, while recognizing the bank credit growth of
past year and continuing adverse balance of payments.
October
To help meet seasonal needs for reserves, while minimizing
downward pressures on short-term interest rates, and to
provide for the longer-term growth in bank deposits needed
to facilitate the expansion in economic activity and trade.
JanuaryFebruary
February
Marchmid-June
Reduced reserve requirements against time deposits from 5 to 4 per cent, effective
October 25 for reserve city banks and November 1 for other member banks, thereby
releasing about $780 million of reserves.
Late October- Increased System holdings of U. S. GovernDecember
ment securities by about $1.0 billion, with
more than half of the net increase in issues
maturing in more than 1 year. Member
bank. borrowing from the Reserve Banks
rose gradually over period, but only to an
average of about $200 million.
6
To take into account the recent sharp reduction in stock
market credit and the abatement in speCUlative psychology
in the stock market.
To help further in meeting seasonal needs for reserve funds
while encouraging moderate further increase in bank credit
and the money supply and avoiding money market conditions unduly favorable to capital outflows internationally.
In mid-December open market operations were modified to
provide a somewhat firmer tone in money markets and to
offset the anticipated seasonal easing in Treasury bill rates.
7
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
January data (the latest available), was running below both the
fourth quarter and the first quarter of 1961.
The outflow of gold approximated $300 million in the current
quarter, although some part of that amount might be viewed as
offset by an increase in U.S. holdings of foreign convertible cur
rencies. Reductions in the United Kingdom bank rate suggested
a decrease in British interest-rate levels, but it was not clear
whether or to what extent funds hitherto attracted to the United
Kingdom would flow to New York.
Differences among Committee members with respect to the
type of policy called for by these developments were generally
small. Most members felt that the balance of payments situation
continued to call for a domestic interest-rate structure that would
not encourage outflows of funds, and thus were concerned about
the declining tendency in interest rates. This tendency, it was
noted, might well be accentuated by continuing to provide re
serve availability to facilitate expansion in bank credit domesti
cally, which most members also regarded as desirable. Some of
the members, having in mind the modest nature of the expansion
in domestic activity, were inclined to ease slightly. A few mem
bers, in fact, would have preferred taking more decisive easing
action, but one member recommended a policy of less ease. The
majority, however, concluded that on balance no significant
change in policy should be made. The two changes made in the
wording of the current economic policy directive were intended
to make clear that the general policy in effect in the preceding
period and now being continued was designed to effect slightly
more expansion in reserve availability than had actually devel
To implement this policy, operations for the System Open Market
Account during the next 3 weeks shall be conducted with a view to main
taining a supply of reserves adequate for further credit and monetary
expansion, taking account of the desirability of avoiding sustained down
ward pressures on short-term interest rates.
oped. The policy directive issued to the Federal Reserve Bank of
New York read as follows:
In view of the modest nature of recent advances in the pace of eco
nomic activity and the continued underutilization of resources, it remains
the current policy of the Federal Open Market Committee to promote
further expansion of bank credit and the money supply, while giving
recognition to the country's adverse balance of payments and the need to
maintain a viable international payments system.
Votes for this action: Messrs. Martin, Balderston, Bryan,
Ellis, Mitchell, Robertson, Shepardson, Clay, Scanlon, and
Treiber. Vote against this action: Mr. Mills.
Mr. Mills dissented on the ground that the long maintained
high level of free reserves had forced excessive liquidity into the
economy and thereby had laid the foundation for future infla
tionary difficulties. Moreover, he felt that monetary policy by
its declared purpose of holding interest rates on Treasury bills
at a level intended to deter transfer of funds abroad had set a
floor under bill rates and, in his opinion, had encouraged specula
tive operations in all maturities of U.S. Government securities.
Mr. Mills felt that these and other difficulties could have been
avoided by policy objectives geared solely to providing adequate
credit availability-an amount that would have resulted in a
somewhat firmer interest-rate structure but which still would
have permitted sufficient bank credit expansion. He believed that
the assumption that there must be close coordination between
growth in the money supply and growth in gross national product
was erroneous, and monetary policy should pay close attention to
encouraging constructive commercial bank lending and investing
practices.
April 17, 1962
Authority to effect transactions in System Account.
Information regarding developments in the domestic economy
that had become available in the period since the preceding
meeting of the Committee provided some definite signs of im
provement. However, uncertainties remained about the course
of developments in a number of strategic areas, such as resi-
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
dential and other construction, consumer durable goods other
than autos, and business investment in new plant and equipment.
For residential building, March statistics on the number of hous
ing units started had not yet become available, but starts in
February had shown a further decline to a relatively low level.
The Board's industrial production index was reported to have
risen 1 point further in March to a new high of 116 per cent of
the 1957 average. Nonagricultural employment and the length
of the factory workweek also increased in March, and the rate
of unemployment edged down from 5.6 per cent to 5.5 per cent
of the civilian labor force. The labor force, however, was no
higher than a year earlier, and resumption of normal growth in
the labor force in the near future might limit declines in un
employment even under conditions of expanding employment.
Sales of new autos had picked up considerably in March and
early April, and sales at department stores also had risen.
Commodity prices had continued to show little change in the
weeks immediately preceding this meeting. Announcement of the
recision of the rise in steel prices served to reduce whatever ex
pectations there might otherwise have been of imminent upward
general price changes, but the view was expressed that this ac
tion might have added to uncertainties of a different sort. Stock
market prices had declined in early April, while markets for
fixed-income securities had continued strong.
Bank reserves available as backing for private deposit expan
sion and total bank credit had both increased more than season
ally since the March 27 Committee meeting. Free reserves in the
past 3 weeks had averaged moderately higher than in the pre
ceding period, while total reserves and required reserves had
increased substantially after a sluggish performance in February
and March. Time deposits at banks continued to increase sharply,
and available information indicated that savings in other financial
institutions had also continued to increase. Demand deposits had
moved upward, following several weeks of little change, and the
seasonally adjusted money supply was indicated to have risen in
the first half of April.
Yields on 3-month Treasury bills continued to fluctuate in a
narrow range as increased demands in credit markets and addi
tions to weekly bill offerings counteracted a steady investor
demand for short-term securities. Federal funds remained in the
2 3/4to 3 per cent range. Yields on longer-term Treasury issues
declined further. Despite a large volume of new financing in
March and a prospectively larger volume in April, yields on cor
porate and municipal bonds continued at the low levels reached
earlier or declined further. Mortgage rates also drifted down
further.
The balance of payments situation in March, and fragmentary
indications for early April, suggested little or no improvement.
The March deficit was estimated at $360 million, including net
gold sales of $150 million, and was higher than for January and
February combined. The trade surplus in February had been
quite large, with exports at a record annual rate of nearly
$22 billion and imports continuing at $15.75 billion. The rate of
outflow of capital remained large in March but was smaller than
in the final quarter of 1961. There was in prospect a heavy
calendar of foreign security issues in the U.S. market.
The majority of the Committee members agreed, although
with some differences of interpretation and emphasis, that no
change was indicated at this time in monetary and credit policy
or in the wording of the current directive, particularly in view
of the imminence of a substantial Treasury financing program.
As a result, the Committee issued a current economic policy
directive to the Federal Reserve Bank of New York in the same
form as the directive issued at the meeting on March 27, 1962.
Votes for this action: Messrs. Martin, Balderston, Bryan,
Deming, Ellis, Fulton, King, Mills, Mitchell, Robertson, and
Shepardson. Vote against this action: Mr. Hayes.
Mr. Hayes dissented because he felt that the degree of liquidity
of the economy, coupled with recent signs of a somewhat im
proved rate of business expansion, would warrant placing a little
more emphasis on the troublesome international aspects of the
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
country's current economic problems. He noted that the country's
ability to withstand heavy balance of payments deficits and ac
companying gold drains was not unlimited and that he had yet
to see any convincing evidence of a real turn in the tide. He ex
pressed particular concern about the volume and breadth of
foreign borrowing in the United States, both from banks and
through bond offerings. In these circumstances, he felt that the
System should edge toward a moderately less easy reserve posi
tion, thus encouraging the development of a somewhat higher
structure of interest rates, particularly short-term rates.
Another member of the Committee (Mr. Mills) continued of
the view he had expressed at previous meetings that a firming of
policy was indicated. At the moment, however, he felt that the
imminent Treasury financing precluded policy changes such as
he had advocated.
Less favorable to economic prospects were the early indica
tions of corporate profits for the first quarter. Although sub
stantially above year-earlier levels, such profits had apparently
failed to hold the rise achieved in the fourth quarter of 1961.
Also, the volume of new orders received by durable goods pro
ducers had declined somewhat further in March from the ad
vanced level reached at the beginning of the year. Stock market
prices continued to decline.
Bank reserves available to support private deposit expansion
had risen more than seasonally in April. Excess reserves had
increased, while the small amount of member bank borrowing
had been further reduced. Free reserves averaged moderately
higher than in March. Total bank loans and investments rose
again in April, with the sharpest increase in bank holdings of
securities other than U.S. Governments. Both total and business
loans had shown moderate strength.
The seasonally adjusted money supply, which increased some
what in March, rose substantially further in April. Time and
savings deposits at commercial banks had continued to rise, but
at a somewhat less rapid pace than in other recent months.
Capital market financing had accelerated in April, and new
corporate issues were substantially above the first-quarter aver
age. Municipal issues held at the relatively high first-quarter
average. Both corporate and municipal issues were expected to
be in smaller volume in May.
Money markets had been generally steady in the 3 weeks pre
ceding the meeting. Federal funds were traded in the 2 -3 per
cent range, with the bulk of the trading at 2 3/4
per cent. Yields
on U.S. Government securities had been unusually stable, while
yields on corporate and municipal bonds had continued to edge
lower.
In the first quarter of 1962, the U.S. balance of payments
position was far more favorable than in the preceding quarter
(partly reflecting seasonal factors), but less favorable than in the
first quarter of 1961. The balance of payments deficit dropped
sharply between March and April, but some of the improvement
May 8, 1962
Authority to effect transactions in System Account.
The economy had continued to register moderate gains in
over-all activity, with little change in commodity prices. One
factor of significant improvement was a sharp rise in March in
the number of new housing units started, following 4 months of
decline of much more than seasonal proportions. Another was
the expansion of business plans for fixed capital outlays, as re
ported by a recent survey. This survey indicated a prospective
rise in such outlays of 11 per cent for 1962, as compared with
a rise of 8 per cent reported by a different survey taken several
weeks earlier. Although data had not yet become available for
total retail sales and industrial production in April, incomplete
weekly and other information suggested moderate further ad
vances. There was no significant change in the rate of un
employment.
@FedFRASER