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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 2, 1968, at 9:30 a.m.

Martin, Chairman
Hayes, Vice Chairman

Messrs. Bopp, Clay, Coldwell, and Scanlon,
Alternate Members of the Federal Open
Market Committee
Messrs. Heflin, Francis, and Swan, Presidents
of the Federal Reserve Banks of Richmond,
St. Louis, and San Francisco, 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. Axilrod, Hersey, Kareken, Mann,
Partee, Reynolds, Solomon, and Taylor,
Associate Economists
Mr. Holmes, Manager, System Open Market
Mr. Coombs, Special Manager, System Open
Market Account

Messrs. Cardon and Fauver, Assistants to
the Board of Governors
Mr. Williams, Adviser, Division of Research
and Statistics, Board of Governors
Mr. Wernick, Associate Adviser, Division of
Research and Statistics, Board of Governors
Mr. Keir, Assistant Adviser, Division of Research
and Statistics, Board of Governors
Mr. Bernard, Special Assistant, Office of the
Secretary, Board of Governors
Miss Eaton, General Assistant, Office of the
Secretary, Board of Governors
Miss McWhirter, Analyst, Office of the
Secretary, Board of Governors
Messrs. Eisenmenger, Eastburn, Baughman,
Andersen, Tow, Green, and Craven, Vice
Presidents of the Federal Reserve Banks
of Boston, Philadelphia, Chicago, St. Louis,
Kansas City, Dallas, and San Francisco,
Mr. Wallace, Assistant Vice President,
Federal Reserve Bank of Richmond
Mr. Garvy, Economic Adviser, Federal Reserve
Bank of New York
Mr. Geng, Assistant Vice President,
Federal Reserve Bank of New York
By unanimous vote, the minutes of
actions taken at the meeting of the Federal
Open Market Committee held on March 5, 1968,
were approved.
The memorandum of discussion for the
meeting of the Federal Open Market Committee
held on March 5, 1968, was accepted.
By unanimous vote, the actions taken by
members of the Federal Open Market Committee
on March 16 and 17, 1968, authorizing the
Special Manager to undertake negotiations
looking toward increases in System swap
arrangements with (1) the German Federal
Bank, from $750 million to $1,000 million
equivalent, and (2) the Bank of England,
from $1,500 million to $2,000 million equiv
alent, to become effective, along with

corresponding amendments to paragraph 2
of the authorization for System foreign

currency operations, upon determinations
by Chairman Martin that such increases
were in the national interest, were
By unanimous vote, the action taken
on March 6, 1968, under paragraph 3 of
the authorization for System foreign
currency operations, by the Subcommittee
designated in paragraph.6 of the authori
zation, approving a purchase from the Swiss
National Bank of $50 million equivalent
of Swiss francs at a rate other than the
prevailing market rate, was ratified.
In connection with the preceding item, Chairman Martin
noted that a memorandum from the Special Manager, entitled "Recent
purchase of Swiss francs at rate other than market rate," had been
distributed to the Committee under date of March 27, 1968.1 /
By unanimous vote, the action taken
by members of the Committee on March 19,
1968, approving revised procedures with
respect to allocations of securities in
the System Open Market Account, effective
March 21, 1968, was ratified. The revised
procedures were as follows:
1. Securities in the System Open Market Account shall
be reallocated on the last business day of each month by
means of adjustments proportionate to the adjustments that
would have been required to equalize approximately the
average ratios of gold holdings to note liabilities of the
12 Federal Reserve Banks based on the ratios of gold to
notes for the most recent five business days.

1/ A copy of this memorandum has been placed in the files of
the Committee.

2. Until the next reallocation the Account shall
be apportioned on the basis of the ratios determined in
paragraph 1.
3. Profits and losses on the sale of securities
from the Account shall be allocated on the day of
delivery of the securities sold on the basis of each
Bank's current holdings at the opening of business on
that day.
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 5 through March 27, 1968, and a
supplemental report covering the period March 28 through April 1,

Copies of these reports have been placed in the files of

the Committee.
In supplementation of the written reports, Mr. Coombs
said the Treasury gold stock would remain unchanged this week.
After taking account of orders in process, the Stabilization
Fund had roughly $175 million on hand.
Mr. Coombs reported that nearly final figures were now
available on the cost of the gold pool operation from Saturday,
November 18, the date of the sterling devaluation, through
Thursday, March 17, the day before the London gold market was

During that four-month period, the pool sold $3 billion

of gold in the London market.

Of that total, the U.S. share



amounted to $2.2 billion; both Italy and Belgium had replenished
their share of pool losses during March by buying gold from the
U.S. Treasury.

The gold rush also sparked a number of gold

purchase orders by small central banks around the world, including
former members of the sterling area.

However, as fears of a change

in the U.S. official price or of a gold embargo had at least
temporarily subsided, new orders to buy gold had fallen off
abruptly during the past week or so.
The breakdown of the gold pool was, of course, a major
defeat for the central banks and governments involved, Mr. Coombs

He thought it fair to say that the system was now

considerably more vulnerable than before.

The so-called two-tier

gold price system and related measures introduced after the gold
pool meeting in Washington a little over two weeks ago (March 16
and 17) was a damage-control operation of still uncertain effective
ness but more likely to be effective in the short than in the long

He thought the major increases in the swap lines negotiated

at the Frankfurt meeting in November and again in Washington a few
weeks ago had helped to reassure the market that the central banks
were prepared to deal with abnormally heavy flows of hot money
across the exchanges.

The recent further increase in central bank

credit facilities available to the Bank of England had had a further
stabilizing effect.

Even more important, however, had been the



reaffirmation at the Washington meeting, against the background of
worldwide fears that the United States was about to impose a gold
embargo, that this country would continue to buy and sell gold at
the official price of $35 per ounce in transactions with monetary

While the credibility of that assurance might again

come under speculative attack, for the moment at least the markets
seemed satisfied that the pledge was valid and so another breathing
space had been gained.

A very important technical factor in the gold

and foreign exchange markets at the moment was the huge overhang of
gold bought for short-run speculative purposes.

That overhang had

held the free market price within the $37 to $40 range and had
greatly reduced the speculative effects of the discontinuance of
pool operations.
Mr. Coombs commented that the technical advantage now
enjoyed in the gold market might for brief periods bring the price
down close to the $35 parity, especially if South Africa or Russia
resumed sizable sales in the free market.

Unfortunately, he

thought the technical advantage would dissipate in due course,
although opinions would probably differ widely as to how long it
might take for the gold now held for speculative purposes to move
on into firm holdings of the investment type.

He personally was

inclined to think that there might not be more than a few months'
time before uncertainties connected with the U.S. election would



bring new speculative pressure on the free market price of gold.
With London now reopened as the major market center, the free
market price would become a highly visible and widely accepted
barometer of confidence in the dollar and in the international
monetary system generally.

If, as he thought quite possible, the

London price should move up to the $50 range by late summer, there
could be a serious problem not only in the form of central bank
gold purchases but more generally in the form of speculation
against the present parity network, with heavy movements of funds
from the weaker to the stronger currencies.
As clearly the weakest of the major currencies, Mr. Coombs
continued, sterling would be particularly vulnerable.

Before the

sterling devaluation, he had mentioned several times to the Commit
tee that sterling and the gold market could be compared to two time
bombs, with every likelihood that the explosion of one would set off
the other.

The sterling devaluation had immediately ignited massive

speculation in the gold market; now he thought the risk was of the
reverse situation, in which a sharply rising London gold price
would tend to excite new speculative pressures against sterling.
Despite the major effort made by the British government to produce
a strong budget, the market remained suspicious of the viability of
the new $2.40 parity for sterling.

And it was virtually convinced

that if the United States were to increase the official gold price
or to declare a gold embargo, there would be a realignment of the



present currency parities with sterling depreciating against the


British financial officials now talked quite openly at

international meetings of the alleged drag imposed on the recovery
of sterling as a result of the uncertainty with respect to the
outlook in the gold area.

Whatever might be the reason, sterling

remained more or less on dead center with few signs as yet of
the long-awaited return flow of funds.

In light of the volume

of Britain's debt, that was a dangerous situation.
In March the Bank of England again suffered heavy reserve
losses, Mr. Coombs noted.

Those losses, which partly reflected

speculative pressures associated with the gold rush as well as
continuing attrition on forward contracts, had been largely covered
by central bank credits totaling $1,140 million.

The System had

contributed only $50 million to that total; during the course of
the month he had encouraged the Bank of England to borrow from
other creditors.

He was hopeful that in April the British would

draw the full amount of their $1.4 billion standby facility with the
International Monetary Fund and use the bulk of the proceeds to
repay their debt to the System.

That would be in accordance with

the "first-in-first-out" principle, since the Federal Reserve credits
had been outstanding considerably longer than the credits from
continental central banks.

Most of the latter had been extended

after the devaluation, whereas in another month or so the bulk of
the Federal Reserve credits would be beyond the six-month mark.

By unanimous vote, the System
open market transactions in foreign
currencies during the period March 5
through April 1, 1968, were approved,
ratified, and confirmed.
Mr. Coombs then noted that at the meeting of the Committee
on June 7, 1966, he had reported on what had come to be known
as the "sterling balance credit package," involving credits of
roughly $1 billion, of which the U.S. share was $310 million.
The U.S. contribution to the package did not involve new money.
Rather, it represented an earmarking of part of the facilities
already existing in the form of the System's swap line with the
Bank of England and System and Treasury guaranteed sterling

The British had since utilized the full facilities

provided under the package by the continental central banks and
practically all of the facilities earmarked by the System and
the Treasury.
At the time the agreement was negotiated, Mr. Coombs said,
the continental creditors had insisted that as a backstop the
British agree to make a negative pledge of $750 million of their
drawing rights in the IMF as a direct means of funding debts under
the credit package, with the U.S. monetary authorities having a pro
rata share of the $750 million.

At the time of the negotiations

the U.S. representatives thought such a pledge was unnecessary.
Indeed, they considered it undesirable because it tended to give
priority to refinancing through the Fund of debts incurred under



the sterling balance credit package.

In view of the importance

of a successful conclusion to the negotiations, however,
the arrangement was accepted with the hope that the continental
central banks subsequently would agree to dropping the negative
pledge requirement.

That, in fact, had happened; at the March

Basle meeting the Europeans had indicated their willingness to
do away with the pledge.

When he had reported on the matter to

the Committee in June 1966, no objection had been made to the
terms of the credit package.

He hoped that there would be no

objection now to dropping the negative pledge.
Dropping Britain's "negative pledge"
of $750 million of its drawing rights in
the International Monetary Fund for backing
to the sterling balance credit package was
noted without objection.
Mr. Coombs then recalled that at the meeting of the Committee
on January 9, 1968 he had expressed the view that the System was coming
to the end of the line with respect to its technical forward lire
commitments, and had suggested that if those commitments did not
prove reversible soon the Treasury be asked to take them over.
It had been agreed that he should discuss the matter with the
Treasury, and on doing so he had been advised that the Treasury
was prepared to have the commitments transferred.


if the Committee had no objection he would arrange for the transfer
to the Treasury of the System's forward lire commitments within
the next few days.
The transfer to the Treasury of
the System's forward lire commitments
was noted without objection.


The transfer to the Treasury of
the System's forward lire commitments
was noted without objection.
Mr. Coombs then said.he would recommend renewal of a

number of drawings under the System's swap lines, both drawings
by the System and by other central banks, as well as certain System
forward market commitments that would mature soon.

He was disturbed

by the fact that most of the drawings and some of the forward
commitments would involve second renewals.

On the other hand, the

international monetary system had just come through a major
emergency which perhaps justified a more flexible approach than
might otherwise be desirable.

As he saw it, the main hope for repay

ment of some of the drawings that had been outstanding for more than
six months lay in a British drawing on its $1.4 billion standby
facility with the Fund.

Such a Fund drawing should not only permit

the Bank of England to repay its swap debt to the System, but also
might permit the System to purchase some of the foreign currencies
the British drew from the Fund to repay swap debts of its own.
Specifically, Mr. Coombs first recommended renewal for
further periods of three months of four System drawings.


were a $2 million drawing on the Belgian National Bank, maturing
April 16, 1968; a $25 million drawing on the Bank of Italy, maturing
April 17; a $100 million drawing on the Bank of Italy, maturing
May 2; and a $5 million drawing on the Netherlands Bank, maturing
May 9. All four would be second renewals.



Renewal of the System's drawings
on the Belgian National Bank, the Bank
of Italy, and the Netherlands Bank was
noted without objection.
Mr. Coombs then recommended renewal, if requested by the
other central bank involved, of four drawings on the System for
further periods of three months.

These were a $250 million

drawing by the Bank of Canada that would mature for the first
time on April 30, and three drawings by the Bank of England, each
of which had already matured once.

The latter included drawings of

$50 million and $100 million that would mature April 16, and a
drawing of $50 million that would mature May 8.
Renewal of the drawings on the
System by the Bank of Canada and the
Bank of England was noted without
Finally, with respect to forward market commitments,
Mr. Coombs recommended second renewals of two such commitments in
Swiss francs, of $5 million, maturing April 19, and $1.5 million,
maturing April 22; and first renewals of a $15 million Swiss franc
commitment maturing April 22, and of a $12.84 million Dutch guilder
commitment maturing April 17.
Renewal of the forward market
commitments in Swiss francs and Dutch
guilders was noted without objection.
Chairman Martin then asked Mr. Solomon to report on the
significant international financial developments that had occurred
since the preceding meeting of the Committee.


-13Mr. Solomon presented the following statement:

During the recent weeks of turmoil in the inter
national monetary system, two meetings of major
importance have been held: the Washington meeting of
the active gold pool members and last week's Stockholm
meeting of the Group of Ten. Taken together these two
meetings may turn out to have marked a turning point
in world monetary history. What I shall try to do this
morning is to place these meetings in perspective and
sketch out for the Committee two alternative scenarios
for the period ahead. One scenario involves a return
to international monetary stability based on returning
confidence that the existing price of gold will be
maintained; the other scenario involves a recurrence
of instability based on a failure to correct the U.S.
balance of payments problem.
The Washington meeting of two weeks ago was called
in a crisis atmosphere in which the policy of keeping
the London price of gold at $35 per ounce had become
untenable. The gold pool policy had earlier been
adopted and had been continued through the upheaval
set off by the devaluation of sterling for one reason
and one reason only: to maintain confidence in the
official price of gold. It was thought that a
substantial increase in the free market price of gold
would undermine the credibility of the official price
and would lead central banks to cash in their dollars
for gold. In other words, the gold pool supplied gold
to private speculators in order to forestall a run on
the dollar by official holders of dollars. But the
gold pool policy--designed to maintain credibility in
the official price of gold--itself lost credibility,
for the market came to doubt that the pool would
continue in the face of heavy losses. And thus pool
losses fed on themselves.
The Washington meeting terminated this policy and
established the two-tier system--which was described
in the paper circulated to the Committee last week.1/

1/ A copy of this paper, entitled "The Two-Market System for
Gold" and dated March 28, 1968, has been placed in the files of
the Committee.



In the circumstances in which pool sales were terminatedwith a multilateral reaffirmation of the official price
of gold and a heavy overhang of private speculative gold
holdings--the free market price rose relatively little.
The principles enunciated in the Washington communique,
if adhered to, should maintain downward pressure on the
market price.
But the Washington meeting did much more than
terminate pool sales. In my view, the most important
sentence in the Washington communique is the one that
says: "Moreover, as the existing stock of monetary
gold is sufficient in view of the prospective estab
lishment of the facility for Special Drawing Rights,
[the Governors] no longer feel it necessary to buy
gold from the market."
That pronouncement, together with the Stockholm
agreement on Special Drawing Rights, can be interpreted
as constituting a demonetization of gold at the margin.
In other words, what is being said is that the monetary
authorities of the world--taken as a group--are not
dependent on an increasing stock of gold. Their need
for growing reserves in the future can be satisfied
mainly by Special Drawing Rights.
Thus as far as monetary reserve needs are concerned,
the present official price of gold need not be questioned.
And neither private parties nor central banks need
speculate on, nor protect themselves against, an increase
in the official price of gold.
Both the Washington and the Stockholm communiques
reaffirmed the existing price of gold. But the actions
of the Stockholm meeting spoke much louder than its
words. At that meeting, the Common Market countries
openly and courageously broke with France and by doing
so turned their backs on the gold standard prescription
being offered by France.
France could not go along with the SDR plan because
it had become clear that although France had won the

battle of semantics at London last August, she had lost
the battle of substance. Despite the terminology, SDR's
would be, it had become evident, a form of international
money that could substitute for gold at the margin.
If along with the results of these two meetings,
one takes account of the U.K. budget and its wage restraint
policy and of the improvement in the outlook for the
Canadian dollar, and if one could assume an improving



U.S. balance of payments, one could picture a very
favorable scenario. In this scenario, the world would
be seen to have adjusted to the U.K. devaluation and to
the U.S. balance of payments program. The countries of
continental Europe, experiencing more rapid expansion
than in 1966-67, would stand still for decreasing
surpluses and in some cases over-all deficits. And
doubts about the stability of the system would disappear
and we would witness the evolution of a multilaterally
managed international monetary system in which the role
of gold would diminish steadily.
The alternative and much less happy scenario assumes
that inflation continues in the United States and that the
benefits from the January 1 balance of payments program
are offset by a deterioration in the trade balance.
This worsening of the trade balance has already
occurred: the trade surplus fell from an average annual
rate of $4.3 billion in the first 9 months of 1967 to
$1 or $1.5 billion in recent months. Some part of this
worsening is explainable by special factors such as the
copper strike and the precautionary build up of steel
stocks. But even apart from these special factors,
imports have surged in recent months. Unless the import
surge can be dampened, the outlook for the balance of
payments is very bleak.
In this unhappy scenario, the world begins to
believe that the U.S. balance of payments deficit
cannot be reduced without drastic measures involving
either a change in the relationship between the dollar
and gold or a change in the relationship between the
dollar and European currencies, or both. And, with a
continuing large U.S. deficit, the world begins to doubt
that the SDR scheme will be activated. Thus for one
reason or another doubts about the official price of
gold reappear and foreign central banks convert dollars
into gold--not only existing official dollar balances
but new dollar balances accruing to European central
banks as a result of currency speculation against the
Where this chain of events would ultimately lead
is not easy to say. An increase in the price of gold
would be no solution to this problem--which is a balance

of payments and not a liquidity problem. Yet a change
in the U.S. exchange rate without an increase in the
price of gold is extremely difficult to engineer.



What would be most likely is a suspension of gold
payments by the United States and, as the most hopeful
outcome, an agreed appreciation of European currencies.
But whether this could be brought about without monetary
chaos and severe disruption in world trade is not at all
The moral of the story is clear. To prevent mone
tary chaos and to assure the more favorable evolution
sketched out in the first scenario, the United States
must improve its trade balance. Fortunately, the
policies necessary for this result are called for on
domestic grounds in any event. We are not facing
conflicting domestic and international objectives.
From both points of view a decisive move toward fiscal
restraint is needed. But if this is not forthcoming,
both domestic and international considerations call
for restrictive monetary policy. Insofar as monetary
policy can substitute for fiscal policy in restraining
domestic demand, it will have roughly similar effects
on the trade balance. But restrictive monetary policy
brings an added benefit, albeit of short term, to the
balance of payments: it does more than fiscal policy
to swing capital flows--including Euro-dollar flows
from branches to head offices--in favor of the United
Chairman Martin said he would add a few observations to
Mr. Solomon's excellent summary.

The last three or four weeks had

witnessed exciting developments in the monetary area, beginning
with the Basle meeting in the early part of March that he had
attended along with Messrs. Solomon and Coombs.

He had left the

United States on March 7, and on the following day there had been
a serious run on the London gold market.

The pool had lost over

$180 million of gold that day and the atmosphere in Basle was one
of heavy gloom.

During the meetings on the following two days

the participants arrived at the view that it would be desirable



to try to continue the operations of the gold pool.


by Thursday of the following week (March 14) the pool was
virtually out of business.

The Committee held its telephone

conference meeting on that day, and effective the next day the
Federal Reserve discount rate was raised from 4-1/2 to 5 per

On Saturday and Sunday, March 16 and 17, the governors

of the central banks participating in the pool had met in
Washington with results reflected in the communique and
discussed in the staff paper to which Mr. Solomon had referred.
That meeting had been called on the preceding Thursday, and the
Board's staff had performed quite well in arranging for the
necessary facilities on very short notice.
The subsequent Stockholm meeting might well prove to
have been a historic one, Chairman Martin continued.

He thought

Secretary Fowler had performed splendidly as the leader of the
U.S. delegation.

It was a traumatic experience for the other

Common Market countries to break away from the French.

They had

expected to be able to cajole the French into joining the agree
ment and were rather shaken by France's refusal to do so.

In his

judgment Secretary Fowler had been wise in deciding to go the last
mile with the Common Market countries in their attempt to give
France every opportunity to join.

It was significant that the

French had not walked out of the meeting and had left the door



open for their possible later participation.

He thought the

Committee members would want to read the statement made at the
meeting by Mr. Debre, the French Finance Minister, and he asked
the staff to distribute copies of that statement and of the
communique issued by the Group of Ten.1 /
Basically, the Chairman said, the French appeared to be
trying to keep their own options open while reaffirming their
conviction that the United States was headed in the direction
the British had recently traveled.

They expected the two-tier

price system for gold to collapse because of an unwillingness of
the United States to put its balance of payments situation in

It was up to this country to prove them wrong, and the

agreement at Stockholm provided the time to make the necessary

The French had been defeated at Stockholm in the

sense that the other participants reached agreement.

At the same

time, they had scored a success in focusing the question on
whether the United States was capable of handling its own affairs.
On the whole, Chairman Martin concluded, the Stockholm
meeting was dramatic and significant.

It was one of the most

interesting meetings he had ever attended, partly because of the
obvious undercurrents of feeling that the end of an era was at

These documents were distributed on April 3, 1968 and
copies have beenplaced in the Committee's files.



hand, and that it would now be seen whether it was possible to
demonetize gold at the margin and to make it a supplementary
rather than a central element in the system of international
The Chairman then noted that Mr. Daane had also attended
the Stockholm meeting and invited him to comment further.
Mr. Daane said he would comment briefly on some of the
remaining technical issues discussed at the Stockholm meeting,
relating both to special drawing rights and to proposals for
reform of the IMF.

By the time of the meeting those issues had

become inextricably interrelated in the negotiations.


speaking, there were six issues remaining in each category.
Three issues on IMF reform were so highly technical as to be
considered inappropriate for discussion by the Ministers and
Governors, and they were referred back to the Executive Directors
of the Fund for resolution.

Other reform issues included

proposals to raise from 80 to 85 per cent the voting majorities
required for approving changes in IMF quotas, uniform changes in
par values, and waiver of the maintenence of value of IMF assets.
Affirmative decisions were reached on those proposals, although
IMF member countries outside the Group of Ten had taken a strong
position against the first, and had proposed linking such action
to the initial activation of SDR's.

At the Stockholm meeting

the United States originally had supported the position of the



non-10 countries, but it finally conceded on the matter in the
interest of arriving at an outcome that would be acceptable to
the Common Market countries.

Another reform issue, relating to

procedures for interpretation of the Fund's Articles of Agreement,
was resolved satisfactorily with a proviso that kept the final
decision-process within the voting framework of the Fund.
The most important technical question relating to SDR's,
Mr. Daane said, concerned a possible provision for a country's
"opting out"; that is, permittinga country participating in the
scheme to reserve the right to refuse to join in and accept the
new assets when they were first activated by an 85 per cent
majority decision, and subsequently, with majority approval, to
opt back in again.

Again, in an effort to arrive at a package

acceptable to all countries, the United States went along with
the Common Market countries--a number of which also had strong
reservations about the desirability of permitting opting outin accepting such a provision, in the hope that doing so would
enable the French to come in.

All countries finally agreed on

the opting out provision.
In the interest of time, Mr. Daane observed, he would
not comment on the remaining technical issues regarding SDR's
that were considered in Stockholm.

He would note, however, that

in agreeing on the conditions for activation of the SDR's the
Group went back to the Hague communique of July 1966, which in



part referred in general terms to special considerations with
regard to the attainment of better equilibrium in the balance
of payments of participating countries.
Mr. Brimmer asked whether those attending the meeting
in Stockholm had gained any impression of the Europeans' attitude
about the proper role of the Federal Reserve in putting the
nation's house in order.

He gathered that the Europeans thought

the key issue concerned the U.S. balance of payments, and he
would agree with that judgment.

But it was not clear to him how

the Europeans felt about monetary policy.

It was his personal

impression that they did not appreciate the full extent of the
shift toward monetary restraint since last fall.

For example,

a foreign visitor had commented to him that the recent half-point
increase in the discount rate represented a half-use of monetary
Chairman Martin said he thought the views of Europeans
on the question varied widely.

In his judgment, however, most

of the Europeans at the meeting did have an appreciation of the
extent to which the System had moved toward tighter monetary
conditions, and they were not anxious to see much more tightening.
They realized that the heart of that problem lay in the adjustment
process; that by some means the United States had to make an
adjustment in its large and persistent deficit in relation to



their large and persistent surpluses.

Differences in views on

how the adjustment process would work would be the subject of
continuous study and discussion over the next several years.
They questioned whether U.S. monetary policy alone could do the
necessary job, although they believed it had a part to play.
They were aware of this country's problem of inflation.
whole, they were a highly sophisticated group.

On the

With respect to

the question of whether the half-point increase in the discount
rate was adequate, one found the same differences of judgment
among the Europeans as existed within the Federal Reserve.


was a perfectly normal and proper situation.
The Chairman then asked whether Mr. Daane or Mr. Solomon
had anything to add on the subject.
Mr. Daane said he might comment with respect to the
attitude of the Europeans as reflected at the meeting a few
weeks ago of the Economic Policy Committee of the OECD, where U.S.
stabilization policies were subjected to a specific examination.
He thought it was fair to say that there had been an incomplete
awareness of what the System had done, and in particular of the
rapidity with which it had shifted the stance of its open market

Partly as a result of comments by the U.S. representatives

at that meeting, however, he thought a much better understanding
had emerged of what the System had accomplished.


With respect to future U.S. stabilization policies,

Mr. Daane continued, the European attitudes at that meeting were
somewhat ambivalent.

The U.S. representatives had indicated

that if fiscal restraint was not forthcoming monetary policy
could and would do the job, although with an eye on the possible
effects on the domestic financial structure and on international
rate relationships.

But when the question arose as to what

should be said in the report of the chairman of the EPC, there
was quite a bit of questioning on the part of the Europeans of
the desirability of trying to substitute monetary for fiscal

He thought the Europeans would like to see the United

States get its house in order by use of fiscal policy, and in
the absence of fiscal restraint they leaned toward the use of
monetary policy; but they were somewhat concerned about the
potential impact on their countries of further marked tightening
of U.S. monetary policy.
Mr. Solomon concurred in the comments of Chairman Martin
and Mr. Daane.

There was no doubt that the Europeans were

ambivalent on the subject.

For years they had said that U.S.

interest rates should be much higher than they were.

In the

early 1960's that notion had been resisted in this country because
of the need then to encourage expansion of the domestic economy.
Now that there was no longer any conflict between domestic needs



and those of the balance of payments, the Europeans were trying
to encourage expansion of their own economies and were no longer
sure they wanted to see U.S. interest rates rise.

That was

It was his feeling that although they would not

be happy about it they would accept further firming of U.S.
monetary policy without reacting in kind.
Chairman Martin added that the Europeans in question
were quite aware of the political problems involved and did not
want to be in the position of trying to tell the United States
how to run its affairs.

They had heard about complaints by some

members of Congress that European bankers were trying to influence
U.S. affairs, and he understood that in the EPC meetings--which
he did not attend but which Mr. Daane did attend--they were
leaning over backward to avoid giving such an impression.
Personally, he thought the give-and-take discussion at those
meetings had been beneficial to everyone in broadening under
standing of each country's problems.

Unfortunately, the line

between political and economic decisions had been almost
obliterated, and that was causing a great deal of trouble in
the general application of policy on a world-wide basis.
Mr. Mitchell remarked that Mr. Solomon had implied in
his prepared statement that it would be desirable to attract
Euro-dollars to the United States through foreign branches of



U.S. banks; and in his later comments he had expressed the view
that the Europeans would accept an increase in U.S. interest
rates without reacting.

By appropriate decisions on monetary

policy and on Regulation Q, the System could provide the
incentives for U.S. banks to make substantial demands on the
Euro-dollar market.

He asked whether Mr. Solomon thought it

would be wise for the System to attempt to induce an inflow
from the Euro-dollar market of, say, $2 billion over a period
of three months.
Mr. Solomon replied that an inflow at so high a rate
would have a serious impact on European financial markets, and
would probably lead the European monetary authorities to take
actions that the United States would not like to see them take.
In his judgment the Europeans would accept a steady, moderate
inflow of Euro-dollars to the United States that was a natural
byproduct of a firmer monetary policy in this country, but would
react to a surge such as had occurred in the summer of 1966.
In response to another question by Mr. Mitchell,
Mr. Solomon agreed that an inflow of around $200 million per
month might be tolerated by the Europeans.
Mr. Swan asked about the time schedule that was visualized
for the activation of SDR's.


Mr. Daane replied that the Executive Directors of the

Fund were now putting the amendment to the Articles of Agreement
in final form, and probably would complete that work within a
short time, perhaps one or two weeks.

Together with a report,

the amendment would then be transmitted to the IMF governors
for approval.

That was done by mail in some cases, and under

normal procedures might require up to a month's time.


amendment would then be submitted for ratification to the
parliaments and legislatures of the various member countries,
including the United States.

Once ratified by three-fifths of

the member countries having 80 per cent of the votes in the Fund,
it would be in place as a piece of machinery but it could be
activated only under an agreed procedure requiring favorable
votes of countries having 85 per cent of the votes of all
participating countries.

One could only guess how long the

process of ratification would take.

In that connection, the

U.S. Treasury had indicated yesterday that the proposal would
definitely be submitted to Congress at this session.

On the

most optimistic appraisal, one might look for the machinery to
be in place in early 1969.

The date of subsequent activation

would depend on the needs for the new assets and the willingness
of the participants to move ahead in creating them.
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 domestic open market operations for
the period March 5 through 27, 1968, and a supplemental report
covering March 28 through April 1, 1968.

Copies of both reports

have been placed in the files of the Committee.
In supplementation of the written reports, Mr. Holmes
commented as follows:
Open market operations since the Committee met
on March 5 were conducted in an atmosphere of market
uncertainty generated by gold losses and concern
about the international financial system, by con
fusion about the prospects of a more realistic
fiscal policy, and by both market expectations of
a tighter monetary policy and the actual progressive
development of distinctly firmer conditions in the
money market. A new set of factors was introduced
by President Johnson's week-end message--with the
initial market reaction strongly on the plus side.
By March 14--at the height of the disorder in
the gold markets--domestic financial markets were
also in a state of considerable disarray.
rates had adjusted sharply higher, with the 3-month
bill rate reaching 5.45 per cent--up nearly 1/2
per cent from the rate prevailing at the time of the
March 5 meeting--while longer-term rates were also
sharply higher. Expectations of an increase in the
discount rate were widespread, and indeed, the
market appeared to have pretty well discounted a
full 1 point increase in that rate. With an actual
discount rate increase of 1/2 point announced that
evening, the decision to close the London gold
market, and the decision to hold an international
conference in Washington over the week-end, the
markets breathed a sigh of relief. Subsequent
international developments were viewed as moderately
encouraging, at least for the short run, but continued
concern over the future course of monetary policy and
Congressional indecision on fiscal policy tended to
produce an air of caution in long-term markets, with
irregular price changes developing as sentiment about
fiscal policy and about Vietnam waxed and waned.



After March 14, Treasury bill rates moved sharply
lower in response to strong seasonal demand and supply
pressures and to the demand for liquidity that arose
with growing uncertainty in the capital markets. Over
the period as a whole, the 3-month bill rate rose by
about 17 basis points to close Friday night at 5.17
per cent. In yesterday's auction, average rates of
5.15 per cent and 5.27 per cent were set on 3- and
6-month bills, respectively, up 15 and 10 basis points
from the auction held the day before the Committee's
March 5 meeting.
Intermediate- and long-term Government bonds and
notes closed on Friday with yields 1/8 to 1/4 per cent
above those prevailing at the time of the early March
meeting, while both corporate and municipal bond yields
moved into new high ground.. The municipal market has,
of course, been considerably disturbed by uncertainty
over the future of tax-exempt industrial revenue bonds
in the light of Treasury suspension of the exemption
privilege and conflicting action within Congress on
the exemption status of such issues. Over the period
investor response to new corporate and municipal issues

was generally lackluster despite higher yields.


the other hand, the new Federal National Mortgage
Association participation certificates--bearing rates
of 6.45 per cent on both the 5- and 20-year maturitywere very well received and, indeed, raised the spectre
of disintermediation at thrift institutions. Yesterday,
of course, prices of long-term securities moved sharply
higher on the President's message, and it is obvious
that the market will need some time to evaluate the new
Open market operations were directed towards
achieving firmer conditions in the money market, and
then, after the Committee adopted a new directive at
the March 14 telephone meeting, towards confirming
the still tighter policy position that was signaled
by the increase in the discount rate. Operations
had to take into account the abnormal drain on
reserves that came from the $1.4 billion decline in
the gold stock, a very large volume of foreign
operations, and the unusual reserve impact of a
large merger transaction. If at times operations
appeared a bit on the schizophrenic side, this was

a reflection of the over-all atmosphere--including
a high degree of uncertainty about the reserve outlook--



in which operations had to be conducted. In spite of
the need to supply a substantial volume of reserves,
market purchases of Treasury bills were undertaken
on only two occasions; early on March 14, when bill
rates were in the process of adjusting upward by 25
basis points and the market for Government securities
was generally unsettled, and again on March 27, after
the Federal funds rate had touched as high as 6-3/8
per cent. Sales in the market and redemption of
bills at maturity actually exceeded market purchases,
and, together with our purchases of about $220 million
of coupon issues and the use of repurchase agreements
late in the period, provided some resistance to the
strong downward pressure on the Treasury bill rate.
As the blue book 1/ notes, the bank credit proxy
in March grew at only a 4 per cent annual rate--below
the 5 - 7 per cent rate projected at the time of the
March 5 meeting, although with a set of money market
conditions less firm than actually achieved. It
should be noted that at the very outset of the period
it appeared that the proxy might be exceeding expecta
tions, and this was a marginal factor in producing the
very sharp change in net borrowed reserves and money
market conditions that developed early in the period.
It would be comforting to think that the shortfall in
the March proxy from projections and the absence of
growth in the April projections reflected a quick
response of the banking System to the firmer System
policy. Perhaps this is partly so, but I fear that
some good ludk may be involved, including the absence
of strong private loan demand and of Treasury borrowing.
The eagerness of Government security dealers to reduce
their inventories--and hence their bank borrowing--can,
however, be directly attributed to their fulfilled
expectations of tighter money.
Predicting the future course of interest rates
and credit demands is certainly no easier now than it
ever is, and I have little to add to the blue book
discussion. Certainly the impact of the limitation
of bombing in Vietnam, the reaction in Congress to the

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



President's speech of Sunday night with respect to
fiscal policy, and international financial consider
ations generally are all highly uncertain and of the
utmost importance to financial markets. I suspect
that the seasonal downward pressure on Treasury bill
rates--barring unexpected developments--will be quite
strong this month, and that this will tend to avoid
extreme pressure on the CD position of banks. But as
the blue book notes the margin is small, and the
Regulation Q ceiling may become a matter of increasing
As far as even keel is concerned, the Treasury
will be meeting with its IBA and ABA committees at the
time of the next FOMC meeting, and will announce the
terms of its May refunding the day after the Committee
meets. In addition, the Treasury will have to raise
cash before mid-June and could do so as part of the
May refunding operations, although it may also raise
some cash before that time. One possibility would be
to add to the six-month bill cycle--an operation that
would not invoke even keel considerations.
There are two housekeeping matters that I would
like to mention. As you know, on March 18, the
President signed legislation removing the 25 per cent
gold reserve cover, and as a result we have shifted
to the method of allocating the System Open Market
Account that was noted at the last meeting and approved
by the Committee by wire on March 19. The bill was
signed none too soon, for the System reserve ratio had
fallen by the time the bill was signed to 25.0084 per
cent, and there was only $3.5 million in free gold left.
The second matter is of somewhat greater importance,
involving the interest rate on repurchase agreements.
As you may recall, during the tight money period of 1966
several members of the Committee expressed a concernwhich we at the Trading Desk shared--about the fact that
the repurchase agreement rate had gotten badly out of
line with money market rates. Despite this joint concern,
expectational and other factors always seemed to work in
such a way as to prevent our moving to a repurchase
agreement rate above the discount rate. With Federal
funds now trading about 1/2 per cent above the discount
rate and New York dealer loan rates higher than that, our
5 per cent repurchase agreement rate is already getting



out of line--and the disparity could increase under
the pressure of future Treasury financing, or if the
Committee decides to push further towards restraint.
In my view, it would be desirable to break away from
our tradition of a repurchase agreement rate no
higher than the discount rate now, rather than wait
ing until pressures increase. Expectational responses
will admittedly be hard to avoid, but they should
be minimal at this time. No change is required in
the continuing authority directive to introduce a
greater degree of flexibility in setting the
repurchase agreement rate on the upward side, but
in due course the Committee might want to provide
for greater flexibility on the down side as well.
I have no rigid formula to propose and do not believe
it would be desirable to adopt one. But, unless the
Committee feels differently, I would propose to
experiment with a repurchase agreement rate that
would be more closely related to market rates on
Treasury bills and the Federal funds rate. The
period immediately ahead is well suited to such an
experiment since there is a large temporary reserve
need in the next statement week and RP's would be a
natural choice of operating instrument.
Mr. Daane asked whether experimentation with a higher rate
on RP's at this time would be likely to reinforce market expectations
of another increase in the discount rate.
Mr. Holmes replied that he did not think it would, particularly
if the RP rate was set only modestly above the discount rate--say, by
one-eighth of a point.

He added that such a step now would reduce the

likelihood of a repetition in coming months of the 1966 experience,
when the RP rate was so far out of line that the Desk had hesitated to
use RP's at all.



Mr. Daane then asked whether many people in the market now
appeared to expect another discount rate increase.
Mr. Holmes responded that very little attention of any
sort was now being paid to the discount rate because of the market's
preoccupation with other developments.
Mr. Brimmer asked whether the Manager would simply post an
RP rate at one-eighth of a point above the discount rate for the
time being, or whether he would plan on adjusting the RP rate from
day to day.
Mr. Holmes replied that he would propose to introduce
flexibility in the RP rate, adjusting it in light of market

Under certain circumstances the RP rate might well

be one-fourth of a point or more above the discount rate.

For a

time in 1966, he noted, the Federal funds rate had been 1-1/2 points
above the discount rate, and the dealer loan rate had been higher
Mr. Brimmer said he was disturbed by the suggestion that
the level of the RP rate should be left to the discretion of the

If that were done the market might mistakenly begin to

interpret changes in the RP rate as conveying messages about
System views on appropriate rate levels in general.

The risk of

such mistaken interpretations would be reduced if the RP rate



were tied to some market rate, so that changes in it would be
purely mechanical.

He thought the Committee should weigh the

matter carefully before approving the proposal.
Mr. Mitchell commented that the discussion in the blue
book seemed to suggest that adoption of alternative B for the
directive1 / probably would lead to sufficiently large changes
in the monetary environment as to make an increase in Regulation
Q ceilings necessary.

He asked whether the Manager thought

adoption of alternative B would make action on the Q ceiling
Mr. Holmes replied that the matter was hard to judge.
Seasonal forces normally would be putting downward pressure on
short-term interest rates between now and the end of the month,
but it was not clear whether the usual seasonal pressures would
develop this year.

He agreed that there was likely to be some

surge in loan demands at banks around the middle of the month.
On the whole, he did not disagree with the blue book assessment.
Mr. Mitchell then remarked that a policy course between
those implied by alternatives A and B for the directive would
reduce the likelihood that a change in Regulation Q would be
necessary, and Mr. Holmes concurred.
1/ The alternative draft directives submitted by the staff for
Committee consideration are appended to this memorandum as Attachment A.


Mr. Ellis referred to the Manager's comment regarding even

keel constraints, and asked what the prospects for such constraints
were with respect to the month of June.
Mr. Holmes replied that after the May refunding the
Treasury would probably engage in a large cash financing in June.
More generally, he thought even keel considerations would be
important in the whole period from the end of April through the
end of the calendar year, although there probably would be
intervals within that period in which they were absent.
Mr. Hickman noted that the Committee had not developed a
consensus on the Manager's proposal regarding the RP rate, and
proposed that the subject be pursued.
Mr. Hayes said he saw a great deal of force in the
Manager's suggestion that there would be real advantages in a
mild increase in the RP rate at this time.

Because similar

action was not taken early enough in 1966, the spread between
the RP rate and money market rates grew so large that the former
could not be increased to restore a desirable relation without
attracting a good deal of attention and affecting expectations.
Under those circumstances the Committee had been reluctant to
have the RP rate raised, even though it was clear that Federal
Reserve credit was being provided through repurchase agreements


at much too low an interest rate.

He favored the Manager's

proposal for cautious experimentation with a higher RP rate.


doubted that it would be feasible to link the rate mechanically
to some market rate.
Messrs. Daane and Hickman said they also favored giving
the Manager flexibility with respect to the RP rate, on the
understanding that he would use it in a cautious manner.
Mr. Brimmer remarked that the discount rate was accepted
as the basic rate at which Federal Reserve credit was provided.
If some different rate were to be established on RP's he thought
it should be set in a systematic and predictable manner.

He did

not favor leaving decisions on the RP rate to the discretion of
the Manager.
Chairman Martin said he thought it was desirable to
experiment occasionally with operating techniques.

Although the

Committee had discouraged the Manager from setting an RP rate
above the discount rate when the possibility was considered in
1966, he did not think any harm would be done by an experimental
operation of that type now.

Circumstances under which a higher

RP rate would be considered were relatively infrequent; if they
were more common, he would be inclined to agree with Mr. Brimmer.



Mr. Maisel said he also favored proceeding as the Manager
had suggested, on an experimental basis.

At the same time, he

shared the view that there would be advantages in relating the RP
rate to some other rate, and he thought the possibilities for
doing so should be pursued.
Mr. Holmes noted that the average bill rate set in
Monday's auction was close to 5-1/8 per cent and an RP rate
initially set at that level could be related to that auction

It was not certain, however, that the auction average

would continue to be appropriate as the basis for determining
the RP rate.
Mr. Mitchell said there was a disadvantage in leaving
the RP rate to the Manager's discretion in that it would expose
him to the criticism that he was acting in an arbitrary fashion.
A link with some market rate would obviate such mistaken criticism.
The real solution to the present problem, however, would be to move
the discount rate into line with market rates.
Mr. Brimmer remarked that if the Reserve Banks and the
Board became convinced that the discount rate was out of line
they should proceed to change it.

In his judgment the RP rate

should not be used as a proxy for the discount rate.
Mr. Hayes commented that there was no necessary connection
between the rate the Federal Reserve Banks charged member banks



borrowing at the discount window and the rate charged nonbank
dealers on RP's.

Under certain circumstances it might well be

considered unwise to extend credit to nonbank dealers at the
same rate at which credit was granted to banks.
Mr. Sherrill agreed that the RP rate need not necessarily
be the.same as the discount rate, and that flexibility in the
latter would be useful.

If possible, however, he would favor an

effort to develop some criteria for determining the RP rate,
perhaps involving a number of market rates.
Mr. Hayes suggested that if the Committee agreed on
experimentation with a higher RP rate it might also ask the
Manager to study the possibility of developing some objective
criteria in terms of other market rates.
Mr. Robertson believed that Mr. Brimmer's concern was
well founded.

On the other hand, he (Mr. Robertson) thought it

would prove necessary to experiment in order to develop appro
priate objective criteria for the RP rate.

He favored some mild

Chairman Martin said it would be highly desirable, if
the Committee approved the Manager's suggestion, to ask the
latter to undertake the study Mr. Hayes had suggested and report
on it at the next meeting.

He thought it would be a mistake for

the Committee to press ahead without such a study.



Chairman Martin then proposed that the Manager be
authorized to experiment in a mild way with a higher RP rate,
and that the Committee plan on following developments in that
area closely.

No disagreement with the Chairman's proposal was

By unanimous vote, the open
market transactions in Government
securities, agency obligations, and
bankers' acceptances during the
period March 5 through April 1, 1968,
were approved, ratified, and confirmed.
Chairman Martin then called 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
Submerged in the more dramatic news announced by
the President Sunday night was the firmest indication
we've had yet of the extent to which Vietnam spending
may exceed the amounts budgeted just two months ago.
Unless the de-escalation promptly produces.favorable
results, defense outlays in the first half of this
year will be much higher than indicated earlier, and
the increase for fiscal year 1969 will be closer to
$6 billion than to the $4-1/2 billion projected in
the January budget.
Some of this boost in defense outlays will
undoubtedly be offset by reductions in other
Federal spending, and perhaps the whole impact
will be more than offset by a tax increase,
chances for which seem to have turned a bit more



auspicious. But the fate of fiscal restraint is
still obscure, and it would be premature to
establish monetary policy today on the so-often
dashed hope of fiscal restraint in the future.
Certainly, the current and immediately
prospective economic picture doesn't provide a
basis for letting up on monetary restraint. Not
only is Government spending rising faster than
projected, but consumer incomes are rising
enough to permit sharp increases in spending
while saving is still at historically high
levels. Wage contracts are escalating, with
very large first-year increases, and rising
costs are being passed through--with substantial
mark-up--at all levels of the price structure.
For those who insist on categorizing economic
developments, one can safely say that at the
moment we are suffering from both cost-push
and demand-pull inflation.
To be sure, some of the income increases in
the first quarter were in the nature of one-shot
adjustments to the income stream: the rise in
minimum wages, the increase in social security
benefits, and the effects of wage contracts signed
last fall. But we are anticipating continued
large increases in income. The full effect of
higher social security benefits, which contributed
to only one month of first-quarter incomes, will
be more fully reflected in the rise in incomes in
the second quarter. Also, strikes in several
industries, which had some hampering effects on
wage incomes in recent months, have ended or are
in process of ending. Arid with retail sales
rising rapidly while industrial production has
been on a plateau, output should be picking up
as producers begin to replenish distributors'
inventories of consumer goods. Impetus to
increasing output and inventories could also
come from the acceleration in industrial
commodity prices, which have been rising at a
4-1/2 per cent annual rate. Thus, even with
a leveling off in business investment and
residential construction outlays, we would
expect another very large increase in GNP in
the current quarter, which would continue to
exert pressure on resources and on prices.



The question is whether Government stabilization
policies already set in train have done enough to
begin curbing inflationary pressures. I am sure that no
one here feels that fiscal policy has done enough, even
though the Federal deficit on income and product account
has declined substantially, from close to a $15 billion
rate last spring to an estimated $9 billion rate in the
first quarter. This reduction in the deficit, however,
is largely a reflection of, and not a curb on, inflation.
Soaring profits and personal incomes--the results of
inflationary wage settlements passed through in sharply
rising prices--are swelling the tax base and resulting
in a flow of tax receipts rising even more sharply than
But this sort of fiscal "drag" is proving
a weak tool for cooling off an over-heated economy.
It's equally important to insure that we are not
deluded by the available figures reflecting the impact
to date of monetary stabilization efforts. Not that
anyone would expect a policy of gradual intensification
of monetary restraint, instituted less than four months
ago, to be reflected so soon in a significant slowing in
GNP. But there is the danger of our taking too much
comfort from the fact that policy actions since November
seem to be showing up rapidly and significantly in the
volume of financial flows.
As the table in the blue book1/ indicates, a number
of monetary quantities have recorded marked declines
since the initial step toward restraint last fall. Our

1/ The table showed the following annual growth rates, with
dates inclusive:
May '67 - Nov. '67
Total reserves
Nonborrowed reserves
Bank credit proxy
Money supply
Time and savings
deposits at banks
Savings accounts at
thrift institutions

Dec. '67 - March '68






5.5 (Dec. '67
Feb. '68)



public relations image is improved, no doubt, by having
succeeded in reducing the pace of bank credit expansion
and the money supply to less than half the rates
prevailing in the spring and summer of 1967. But the
economics involved makes it a less convincing demonstra
tion of monetary restraint.
The sharp reduction in bank credit growth with so
little impact on credit costs has reflected both a
reduction in total credit demands and a rise in the
nonbank public's investible funds. While Treasury
borrowing has continued high, corporate financing in
capital markets has tapered off--a result of the jump
in profits, the reduced pinch from tax acceleration, and
a waning desire to improve liquidity by funding into
longer-term debt. With the flow of private savings high
and new-security issue volume significantly lower, banks
have been able to let their holdings of Governments run
down without putting much strain on markets.
Moreover, they've been able to sustain a faster loan
expansion without much strain on their investment portfolios.
Business loan growth has been at an 11 per cent rate in
the December-March period--almost twice as rapid as in the
May-November period--and consumer credit and mortgage
lending have also accelerated. But banks have been able
to continue adding to their holdings of municipals at a
substantial pace, although somewhat slower than in the
earlier period. While I'd hesitate to characterize the
banking system's position as comfortable, it doesn't seem
to me to have been very uncomfortable, and this has been
reflected in some apathy or at least lack of aggressionup until recently--in soliciting CD funds.
We should not, therefore, take too much comfort from
the decline in financing at banks and in the capital
markets since our policy shift last November. The critical
question is whether the borrowing costs and conditions
that have developed recently are stringent enough to begin
curtailing the rise in private expenditures, or whether
monetary pressures have to be intensified even before an
upsurge in financing demands develops.
Given the state of the art, this is a delicately
balanced decision to make.
I'm not sure it can be
made in the context of the staff projection presented



at the March 5 meeting, which suggested a complex of
financial conditions and fund flows that would havein our estimation at that time--achieved a gradual
and steadily increasing constraint on spending. Some
of these conditions have already been met, at least
in the area of long-term interest rates, and some of
the conditions have been exceeded. Bank credit
expansion so far seems to be below the projected rate
for the first half-year--although I must hasten to
emphasize that we still don't know enough about
monthly variations to determine whether any one
month's showing is on or off a longer-range target.
But the basic problem we are trying to tackle
has become greater than it appeared in late February.
Our international payments position is more precarious,
and inflation is proceeding more rapidly than we had
estimated even just a month ago. In February, we
projected the deflator for the first quarter at a 3-1/2
per cent annual rate; now we've had to raise our
estimate to 4 per cent. And as was noted earlier, con
sumers appear to be spending a bit more freely than
projected earlier, Government spending is rising faster,
business inventories are leaner, and profits are
substantially higher than in the March 1 projectionall of which could easily lead to a faster-than
projected rise in business spending.
It seems to me, therefore, that we would be
warranted in changing our sights on what is required
of monetary policy. Considering also that we will
be locked in at the next meeting by even keel
considerations--and possibly also at the meeting
after that--there seems to be a sufficiently strong
economic argument for turning the monetary screw a
bit more at this time.
There are deterrents, though. Prospects for a
reduction in hostilities have improved, and should be
even clearer in a few weeks. Moreover, the next turn
of the screw will mean a painful confrontation with
the issue of Regulation Q and thrift institution
ceiling rates. Prudence might therefore dictate a
willingness to "wait and see" for several weeks
longer, while maintaining as much pressure as
possible on financial markets to keep market rates
at but not beyond the disintermediation threshold.
Perhaps this is more timidity than prudence; my
colleagues call this the posture of a "chicken" hawk.


-43Mr. Axilrod made the following statement regarding financial

The added pressures on financial markets resulting
from the rise in the Federal Reserve discount rate and
the firming of open market operations have led to
interest rate increases all along the maturity spectrum
and in all market sectors--although I hasten to add that
Sunday's Presidential address has inserted a new element
into the picture and caused interest rates yesterday to
back off from their recent highs. Even so, interest
rates in the three-month maturity area and out are back
relatively near to, and in some cases above, where they
were around year-end, when interest rate levels reflected
anticipations of tight credit conditions, fears of
disintermediation, and uncertainties with respect to
international exchange and Euro-dollar markets.
There are some interesting differences among interest
rates when levels currently in force are compared with
thosearound year-end, and these differences seem to me
to point to a.state of expectations that is, for one
reason or another--and rightly or wrongly--less fearful
than earlier. Probably the principal evidence for this
is that it has taken a $450 million swing toward net
borrowed reserves and a rise of about 75 to 100 basis
points in the interest cost of day-to-day money in
Federal funds and dealer loans to achieve a 10 - 15
basis point rise in the three-month bill rate. And
longer-term bill rates have risen not at all since
year-end, in fact declining around 25 - 30 basis points
on balance. Of course, there have been strong downward
seasonal pressures on bill rates--as you have been
hearing for some time now--but the narrower spread in
yield of longer-term over shorter-term bills indicates
some calming in upward interest rate expectations. Or
to put it another way, it indicates that the actual
restraining posture of monetary policy has moved
relatively closer to market expectations. But it also
reflects less fear about gold and international exchange
markets and about escalation in Vietnam.



Yields in long-term markets on new high-grade
corporate issues, on outstanding Treasury issues, and
on outstanding municipal issues have moved back to,
and in some cases above, year-end levels, as monetary
policy has continued to tighten. But only in the case
of municipals are they above levels just prior to the
mid-November devaluation of the pound. The behavior
of these yields, too, seems to me to indicate that, in
the main, monetary policy has about caught up with
market expectations--with the direct restraint of policy
showing up most clearly in the municipal market, in
which banks have made somewhat smaller net purchases
during the past four months in view of the slower growth
in bank reserves.
By stressing the extent to which policy has caught
up with the market, I do not at all mean to be implying
stability in interest rates over the next few months.
Yesterday's experience abundantly illustrates the
tenuousness of any market equilibrium in these rather
Fiscal policy will clearly influence
surprising times.
rates in the future, as will the response to the
President's offer of peace negotiations in Vietnam.
Moreover, we are now in the spring quarterly re-investment
period affecting individuals' time and savings accounts at
banks and nonbank financial institutions. Unlike December,
the institutions are not in deep gloom in anticipation;
but at the moment it does not look as if their actual
experience could be much, if any, better than at year-end.
Thus it would appear that mortgage yields and terms are
likely to stiffen somewhat further.
Another uncertainty overhanging the interest rate
structure is the extent of business loan demands on banks.
There were signs of some pick-up in such demands in March,
but even so--and even with the rise in short-term interest
rates making it more difficult for banks to roll-over
maturing CD's--banks did not come to feel themselves under
In fact, a few major banks found
much additional pressure.
that they had over-prepared for loan demand and were more
liquid than they preferred after mid-March.
In an effort to obtain some information on loan
commitments at banks and on whether banks feel they are or
are not in a position to cope with existing commitments,
the System Research Advisory Committee has undertaken an



exploratory survey of such commitments.

A preliminary

pass at the responses indicates that the great bulk of
banks feel that their loan commitments (in late February
to mid-March) were about, or only somewhat above, normal
for that time of year, and that they anticipated little
trouble in accommodating the unused portion of these
commitments. It is not clear what banks were assuming
about Regulation Q ceilings, but one or two banks did
indicate that in their evaluation they were assuming
no disintermediation.
While the loan commitments indicated in our
exploratory survey may indicate somewhat less potential
loan pressure than might have been expected, the survey
also indicates somewhat more complacency on the part of
banks than appears judicious. The recent policy moves
have brought banks and nonbank savings institutions to
the threshold of disintermediation. And the current
equilibrium in short- and long-term credit markets is
a precarious one, particularly since prospective Treasury
cash financings later in spring and in early summer are
likely to exert fairly substantial upward interest rate
pressures. In this situation, any further move toward
monetary restraint, given existing Regulation Q ceilings,
would need to be quite cautious if it is to avoid
springing loose sharp cumulative upward interest rate
pressures that could be generated as market participants
lose confidence in their current appraisal of the market
In fact, I would tend to advance the view that the
Committee at this meeting might undertake to go little
further than maintaining over-all pressure on short-term
markets, but interpreting that to include making reasonable
efforts to keep upward pressure on the three-month bill
rate. Adding considerably to short-term market pressures
poses the danger of too strong a reaction on long-term
markets and on the housing industry, so long as current
ceiling rates on time and savings accounts at banks and
nonbank savings institutions are maintained; and existing
tightness in mortgage markets already presages a cut in
residential construction by summer. But it clearly seems
desirable to keep pressure on bank lending terms to
consumers and businesses and on interest costs of finance
company and commercial paper, and thereby help to moderate,
at the margin, prospective consumer spending and the rate
of business inventory accumulation.



It might be argued, though, that even more monetary
restraint will be required sooner or later, and that the
Treasury financing schedule will be an impediment to
further monetary moves later. Perhaps that will be so,
but a good part of the Treasury's cash need this spring
could conceivably, and desirably, be accomplished in the
bill area, which would serve to complement monetary
policy by sustaining, or adding to, pressures in short
term markets.
Mr. Hickman noted that Mr. Axilrod had recommended maintaining
upward pressure on the bill rate but had also referred to the danger
of disintermediation.

What would he suggest as an appropriate upper

limit on the bill rate?
Mr. Axilrod replied that the bill rate might rise to about
5.35 per cent without triggering extensive disintermediation.


such judgment was subject to modification, however, depending on the
kind of market atmosphere and attitudes that developed.

He added

that a bill rate of 5.35 per cent might require a Federal funds rate
above the 5-3/8 - 5-1/2 per cent range that the blue book suggested
was consistent with alternative A for the directive.
In reply to a question by Mr. Mitchell, Mr. Axilrod said his
policy prescription was intermediate to those implied by alternatives
A and B for the directive.
Chairman Martin then called for the go-around of comments
and views on economic conditions and monetary policy, beginning
with Mr. Hayes, who made the following statement:



Although we have lived through a major international
financial crisis since our last regular meeting, and some
new elements have been introduced by President Johnson's
message of Sunday night, the basic factors that should
determine monetary policy have changed relatively little
in that period. The crisis did, however, point up in a
most dramatic fashion the perilous position of the dollar,
reflecting the acute current problems of inflation, lack
of fiscal responsibility, and payments imbalance, coming
on top of a 10-year record of excessive payments deficits.
Possibly we shall see some respite for the dollar's woes
as a result of the heavy technical position of private
gold holdings, while the Washington and Stockholm meetings
have provided a further helpful reaffirmation of interna
tional financial cooperation. But we cannot avoid the
conclusion that another international crisis of the utmost
severity could confront us at any time within the coming
As I have indicated, the underlying situation has
.not greatly changed since a month ago. The economy
remains very strong and appears to be experiencing the
excessive rate of expansion that earlier forecasts had
indicated, with nearly half of the GNP gains representing
higher prices. So far there has been no evidence that the
gold crisis has had serious adverse effects on business and
consumer psychology. Underlying labor market conditions
remain as tight as ever, despite the rapid recent increase
in the civilian labor force. It is interesting to observe
that corporate profits for the fourth quarter of .1967
showed the first sizable quarterly gain in two years.
Turning to the balance of payments, our international
transactions appear to have worsened considerably in March.
Tentatively it seems that the underlying deficit for the
first quarter may be in the $4 to $5 billion range at a
seasonally adjusted annual rate, which would approximate or
exceed the level recorded for the full year 1967. As has
been mentioned in our meetings earlier this year, the most
disturbing development has been the sharp deterioration in
the trade surplus, which is now perhaps showing a deficit
after deduction of exports financed by the U.S. Government.
Prospective gains from the President's program may be
largely wiped out by the poor performance of the merchandise



The slowdown in the growth of bank credit in March
is encouraging, together with the prospect of further
slowing in April. Although the growth of the money
supply and of time deposits accelerated last month as
Treasury balances were drawn down, the January-February
growth rates were unusually low, and over the first
quarter as a whole monetary growth was much slower than
in the preceding half-year. But, of course, the 1967
gains in credit and money were so clearly excessive
that we must seek to assure no more than a modest growth
over the coming months. Deposit flows to the nonbank
thrift institutions picked up in February and seemed to
be holding up well in March. Disintermediation diffi
culties may become more visible in connection with the
first-quarter interest-crediting period and with April
CD runoffs. So far, however, this problem has not been
We have, of course, seen an unusually rapid
tightening of monetary policy through open market
operations during the past couple of months. This fact,
together with the possibility that we have not yet seen
all the lagged effects of this tightening, might argue
for a policy of no change for .a few weeks while we
assess further the results of our past action and allow
some time for a further evaluation of developments over
the past week-end. On the other hand, the vitally
needed Federal fiscal program of higher taxes and
reduced expenditures still hangs in the balance, and
the time is very late, with faith in the dollar at such
a low ebb. I think we should also have in mind that
the period from now until late April may constitute our
last opportunity for some time to take policy actions
without the restraint of even keel considerations.
At the very least I think we should maintain the
substantially firmer money market conditions achieved
during the past month or two, and we should avoid not
only the reality, but also the appearance, of any
weakening in this posture. I have in mind the fact
that special seasonal and liquidity factors may put
downward pressure on Treasury bill rates in the coming
weeks and thus, as happened some weeks ago, create an
erroneous impression of greater ease than we would
intend. I think my preference with respect to open
market policy would be to move very gradually toward



even further restraint, with a target range of perhaps
$350 to $450 million of net borrowed reserves, discount
window borrowings of roughly $700 million, and Federal
funds rates fluctuating around 5-3/4 per cent. We
might go beyond this degree of restraint if for any
reason bank credit begins to demonstrate significantly
greater strength than is now expected.
I hope too,
that within the constraint of over-all policy the Desk
will do whatever it can--including the purchase of
coupon issues when feasible--to help counter any
downward tendency in Treasury bill rates.
The proposed policy might well lead to a modest
firming of some market interest rates and to expecta
tions of another discount rate rise. As a matter of
fact, I should think that we should be contemplating
the possibility of another 1/2 point increase in the
discount rate sometime before the end of April, when
even keel restraints will commence, so as to make
crystal clear the System's determination to do what
it reasonably can do to uphold the dollar's interna
tional standing. Such an overt move might be necessary
to offset any misinterpretation of System policy if
short-term interest rates should be forced lower by
market pressures. The appropriateness and timing of an
additional discount rate increase must be importantly
influenced by the progress or lack of it with respect
to Vietnam and on the fiscal front, as well as the
occurrence of critical developments in the interna
I would not advocate any
tional financial areas.
discount rate action as early as this week.
As for Regulation Q, I think it may well become
necessary to raise the ceiling on large CD's if market
rates continue to rise, but I would urge that such a
move be delayed until pressure on the commercial banks
has become rather more intense than it is now.
Alternative B of the directive seems to me a bit
better than A, although I would be inclined to say
"slightly firmer conditions" rather than "somewhat
firmer conditions" just to emphasize that we are
moving very cautiously while still preserving some
forward momentum. I would use the one-way proviso
of alternative A in preference to the two-way proviso
of alternative B. I would reverse the order of two
sentences in the first paragraph dealing with



international matters to stress our continuing serious
concern in that area, revising the sentence that would
then come second to read, "The foreign trade surplus,
however, has remained at a sharply reduced level in
recent months and the imbalance in U.S. international
payments continues to be a matter of serious concern."
Mr. Francis commented that growth in demands for goods and
services continued to be excessive compared to productive capacity,
and prices were rising at about a 4 per cent annual rate.


the obvious desirability for fiscal restraint for both domestic
and international purposes, little real progress had been made in
either cutting expenditures or raising taxes.

Hence, he felt that

movement towards greater monetary restraint was still needed.


of the recent slowdown in growth of bank credit had merely been a
disintermediation because of Regulation Q, and it did not represent
an equivalent reduction in the rate of total credit expansion.
Although the annual growth rate in money had slowed from 7 per cent
during most of last year to about 4 per cent in the past three
months, that was still relatively large compared with the 2.6 per
cent trend rate of the past decade.
Mr. Francis recalled that many members of the Committee had
expressed much concern about the viability of the housing market and
financial intermediaries in a period of monetary restraint.

As a

result, the Committee had at times been hesitant in moving toward a
less expansive policy because of a fear that most of the impact



might focus on that one sector, causing undue harm.

Because of that,

the staff of the St. Louis Bank had been investigating the impact of
monetary restraint on the construction of housing.
Mr. Francis remarked that the need for restraint arose when
total demands for goods and services exceeded the ability of the
economy to supply them at relatively steady prices.

Hence, some

demands had to be eliminated or reduced if the objectives of policy
were to be achieved.

The Bank's preliminary investigations indicated

that housing outlays were affected by monetary conditions, but so
were most other types of outlays.
Mr. Francis went on to say that inflation, which was an
alternative to monetary restraint, also affected the housing
industry, since it resulted in higher nominal rates of interest and
higher prices of all inputs.

According to data published by the

U.S. Department of Housing and Urban Development for twenty major
pricing areas of the country, the labor and materials costs of
constructing a selected sample of brick and frame houses rose at a
4.1 per cent annual rate from 1963 to 1967 and at a 6 per cent rate
from 1966 to 1967.

By comparison, the over-all price index had

increased at a 2.7 per cent annual rate since 1963.

Interest rates

on mortgages had risen about 1-1/4 percentage points since 1963,
causing monthly payments on a 25-year mortgage to be 12.5 per cent


By comparison, the inflation of building costs since 1963

had increased monthly payments 17 per cent.

Interest rates were

apt to come back down after the excessive demands were controlled,
but the higher costs of housing to the original buyer as a result
of inflation were not very likely to be reduced.

In short, a home

mortgage could be refinanced at a lower rate of interest, but a
home could not without compromise be repurchased at a lower price.
It did not appear to Mr. Francis, at this stage of the
investigation, that monetary restraint affected the housing market
any more severely than the economy in general.

Most of the problems

in the industry that were blamed on monetary restraint resulted from
Governmental interferences in the market place for funds.


laws, Regulation Q, and rate regulation on other financial interme
diaries were prime examples of practices that discriminated against
housing in periods of high interest rates.

Other practices included

pressures on the Federal Home Loan Bank to restrain its borrowing
and lending and the rigidity of rates on FHA and VA loans, with the
accompanying insidious "point" system of financing.
Repeal or liberalization of such laws, regulations, and
practices, Mr. Francis continued, would contribute to a more viable
housing situation, but even with those market imperfections it did
not appear that monetary restraint had a concentrated effect on the


housing market.

The St. Louis Bank staff had prepared a chart,1/

which he would ask be included in the record, showing expenditures
on housing as a per cent of GNP since early 1952 and the rates of
change in the money stock during the same period.

From the chart,

it appeared that when the rate of expansion in money slowed,
housing might be affected more than other activities (in terms of
declines as a per cent of GNP) for a few months.

However, following

that brief period, housing generally was less affected than over-all
activity (rises relative to GNP) while monetary restraint continued.
Housing then boomed in the initial period of the following monetary
expansion but usually declined relative to other activities after a
year or two of rapid expansion in money.
In short, Mr. Francis said, housing seemed to be adversely
affected in periods when monetary growth became excessive and caused
inflation and relatively high interest rates.

Housing continued to

be depressed in the first few months after monetary growth was

On the other hand, housing was less affected than other

sectors by monetary restraint after the first few months, when
excessive demands were weakened and upward pressure on prices and
interest rates moderated.

Housing thrived best in the initial

stages of a renewal of monetary expansion after excessive total

1/ Appended to this memorandum as Attachment B.


demands were eliminated.

From the point of view of housing alone,

it appeared that a sustainable rate of monetary growth was more
desirable than continued rapid monetary expansion.
Because of the excessive total demands for goods and
services and the strong inflationary pressures, Mr. Francis
suggested another move toward monetary restraint.

If and when

action was taken to reduce Federal spending or increase taxes,
monetary conditions could quickly be relaxed.

In the near future,

he would prefer that the money supply rise at a 2 or 3 per cent
annual rate, somewhat slower than the 4 per cent rate since

Conditions in the money market during April which

might be consistent with a more moderate growth in monetary
aggregates included a three-month bill rate of about 5.50 per cent,
Federal funds rates at or above 5.50 per cent most of the time, and
net borrowed reserves of about $400 to $500 million.
Mr. Francis preferred alternative B of the draft directives.
Mr. Kimbrel remarked that if there was anything encouraging
to be found in the latest economic and financial moves, it was that
the System had apparently achieved a move toward further restraint
without creating disorderly or panic conditions.
followed the intention of the Committee.

That, he believed,

The Committee had hoped

that in applying the breakes it could slow down the rate of
expansion in the credit base without bringing about a complete stop


or reversal.

It had hoped that, in the process, the very necessary

restraints would be more evenly distributed among the different
sectors of the economy than during the last period when it became
necessary to adopt a restrictive policy.

Nevertheless, the nation

was still faced with the same basic economic and monetary problems,
as the President had pointed out in his address Sunday evening.
There still were rising prices, a balance of payments deficit, and
prospects for a large budget deficit.

Thus, the Committee now

faced the question as to whether this slowing-down policy could do
the job.
Mr. Kimbrel recalled that he had indicated at the March 5
meeting of the Committee that bankers in the Sixth District did
not seem to be feeling much effect of the System's move toward a
less expansive policy.

In the last week or two, however, evidence

seemed to be accumulating that at least the large banks of the
District were coming under more pressure.

Their demand deposits

had declined and they had lost some funds through failure to
replace maturing CD's.

Thus, in order to increase their loans

they had to draw down their correspondent balances, increase their
borrowings from the Federal Reserve Bank, make more extensive use
of Federal funds, and liquidate some of their short-term Government
security holdings.

Sixth District reserve city banks had now been



in a net borrowed reserve position for six weeks, in contrast
with the free reserve position they enjoyed during most of 1967
and early 1968.
Mr. Kimbrel remarked that the Committee was meeting at an
awkward time to assess the degree of disintermediation over the
dividend date.

Inquiries made by members of the Atlanta Bank's

staff to leading savings and loan associations and some commercial
banks suggested that the amount of switching from the savings

institutions might be somewhat less than it had been feared

Savers apparently were becoming more interested in

preserving liquidity and in achieving immediate availability than
in a one-half point or so interest rate differential that might be
achieved by tying up their funds.

The rash of newspaper advertise

ments that characterized the end of the last quarter of 1967 was
absent at the present time.
With rates on large denomination CD's at the ceiling and
rates on short-term securities tempting holders of consumer-type
savings certificates, Mr. Kimbrel said, some banks would undoubtedly
have some difficulties in retaining and attracting time deposits.
That might be a desirable development as part of the package of a
move toward more restraint.

The case for an increase in the

Regulation Q ceiling, therefore, was not completely convincing to
him at the moment.



Mr. Kimbrel believed that at present the Committee should
keep about the same policy posture it had achieved, while avoiding
giving the impression that there had been any relaxation.

At this

time the Committee could not accurately assess the financial
developments that might stem from the decision of President Johnson
not to seek another term of office.

Nor could the Committee predict

with any degree of confidence the financial changes that might
follow the quarter-end dividend date and the April 15 tax payment
date, international developments, and possible action on taxes or
Government expenditures.

Therefore, a considerable amount of

discretion probably should be allowed the Manager in carrying out
the instructions.

Under those circumstances, he favored alternative

A for the directive, possibly with a slight shading to firmer
conditions than those associated with that alternative.

He had no

objection to a flexible but cautious experiment with higher RP
rates such as Mr. Holmes had suggested.
Mr. Bopp observed that progress continued to be made in
slowing down rates of growth of bank credit and the money supply.
That was all to the good.

For both economic and psychological

reasons, however, he thought that some further move toward
tightening was appropriate.



In terms of economics, Mr. Bopp said, prices were rising at
a rapid rate.

Defense spending was increasing faster than estimated

in the January budget.

The deficit in the balance of payments was

extremely high, and the deterioration in the trade surplus was
In terms of psychology, Mr. Bopp continued, further tightening
would confirm that the Committee meant business, and that was necessary
for both international and domestic reasons.
precarious state of gold and the dollar.

Most important was the

The gold crisis of three

weeks ago had been met, but the current arrangements could only be
regarded as interim ones, the success of which depended on continuing
confidence that the United States was moving steadily toward solving
its balance of payments problem.

In addition, both consumers and

businesses needed to be reassured that steps were being taken to
restrain demand.

Otherwise they might be inclined to make spending

decisions that would further complicate the tasks of monetary
The question today was the best way to meet those dual
requirements of economics and psychology, Mr. Bopp remarked.


most delicate instrument the System had was, of course, open market
operations and, given the many uncertainties present at the moment,
that characteristic had much to recommend it.

A modest restrictive



move with that tool would be least likely to precipitate
disintermediation and least likely to discourage what appeared
to be more promising efforts on the fiscal front.

Also, because

further effects of the recent discount rate change might be felt,
the flexibility of open market operations was desirable.


balance, therefore, he would be inclined to use open market
operations to bring about somewhat tighter monetary conditions.
Mr. Bopp had also been thinking, however, about the
possibilities of other actions which would give a clearer signal
of the System's intent to use its monetary instruments as
vigorously as necessary to protect the dollar.

The present

moment might not be the best time for such a signal, but it
would be well to consider the use of it on short notice.
Mr. Bopp thought another increase in the discount rate
would not be particularly appropriate or effective because it would
raise the question of whether the initial increase should have been

But one action that the Board might consider was a modest,

graduated increase in reserve requirements of the type employed
last December.

An advantage of that would be that, coming on the

heels of the recent increase in the discount rate, it would
probably be read as part of a program to correct the balance of

It might, of course, precipitate disintermediation,



and hence raise the question about the ceiling rate on negotiable
certificates of deposit.

Even if no sizable disintermediation

was now occurring, which seemed to be true in the Third District
at least, the threat was likely to persist for many months to

It might prove better strategy to raise the ceiling rates

in advance of a crisis or in order to forestall one.

In addition,

a package of simultaneous increases in reserve requirements and
in the ceiling rate on large CD's might achieve the benefits of
the announcement effect while minimizing the possibility of a
Mr. Bopp noted that an increase in reserve requirements
some time in the next few weeks would be less likely to conflict
with even keel considerations than would be true later on.


the other hand, it would be more feasible to use open market
operations to tighten further during those even keel periods.
Mr. Bopp's recommendation was that the Desk be instructed
to make a modest move to further tightening.

That would be

consistent with alternative B for the directive.

Should the

Board decide that an increase in reserve requirements was
appropriate, open market operations should be adjusted accordingly.
Mr. Hickman commented that GNP and prices continued to
advance at excessive rates.

In that environment of too rapid



expansion of real output and price inflation, the present
restrictive stance of monetary policy was clearly appropriate.
On the whole, the March estimates for bank reserves, credit, and
money, and the projections for April were compatible with sustain
able real rates of growth in the economy.

That being the case,

the present degree of restraint appeared adequate, and he would
favor a change only if the credit proxy increased at a rate of
more than 6 per cent.

He would leave Regulation Q ceilings

alone for the moment; the longer the Board delayed in changing
them, the more likely it was that bankers would be more selective
in their lending and investing policies.

He would be concerned,

however, if the 91-day bill rate moved above the 5-3/8 per cent
level mentioned in the blue book, since that could lead to
serious disintermediation and an undesirable degree of credit
In short, Mr. Hickman said, he would be happy to see
money and credit conditions remain about as they were, and would
support alternative A for the directive.

Needless to say, he

would be prepared to move promptly in either direction if a move
was indicated by fiscal policy actions or international develop



Mr. Sherrill commented that he was in the "chicken hawk"
camp today; he favored the policy called for by alternative A of
the directive, perhaps with some shading toward firmness.

In his

judgment the money market conditions likely to result under
alternative B would lead into the thicket of disintermediation and
might possibly represent an effort to accomplish more with monetary
policy than was feasible at this time.

He also was persuaded in

the direction of alternative A by the various existing uncertainties.
There had been so many recent developments and so little time to
evaluate their significance that he thought it best to maintain
about the existing posture of policy at present.

He would be

reluctant to see any lessening of restraint in the coming period.
He thought it would be feasible to attain the conditions outlined
by Mr. Axilrod, including a three-month bill rate ranging up to
5-3/8 per cent, and to maintain firm conditions during the next
few months despite expected Treasury financings.
Mr. Brimmer said he favored a policy course between those
associated with alternatives A and B.

He thought the Committee

should take advantage of the present opportunity to attain a
little more restraint since it was likely to be operating under
serious even keel constraints after the end of April unless it
chose to depart from past practice in periods of Treasury



Mr. Brimmer remarked that the Committee should not lose
sight of the implications of the decision to firm policy it had
taken at its meeting on March 5.

In view of the prevailing

inflationary pressures and the expectation of substantial
increases in aggregate demands, it was necessary to look toward
some moderation of outlays on residential construction as one
means of effecting restraint.

That would imply moderation in

the inflow of funds to financial intermediaries.

Thus, while

he certainly would not want to see disintermediation get out of
hand, he thought the Committee should not work on the assumption
that it could be avoided entirely.
Mr. Brimmer indicated that he would not be willing to
support an increase in the Regulation Q ceilings at this time.
The kind of probing toward greater firmness that he advocated
might lead to the need for an adjustment of the ceiling rate on
large CD's at a later point, but he did not presently contemplate
an adjustment in the ceilings on consumer-type CD's or on savings
Turning to the drafts of the directive, Mr. Brimmer
expressed the view that it would be desirable to take note of
the fact that a renewed effort was being made in Congress to
reduce Federal expenditures and to enact a tax increase.


Committee had taken account of the possibility of fiscal action



in earlier directives but had dropped the reference after it began
to appear that the prospects for Congressional action were poor.
At present, however, the prospects for action by the Senate were
far more promising than in some time.

Accordingly, he would

suggest adding a sentence to the first paragraph, immediately
before the statement of the Committee's general policy stance,
reading "While renewed efforts are being made in the Congress to
bring about a reduction in Government expenditures and to enact
an increase in taxes, the outcome of these moves remains in

He had no strong feelings with respect to the rest of

the directive, but was inclined to favor the two-way proviso
clause shown under alternative B.
Mr. Maisel commented that the Committee was clearly in a
period of surprise and major change.

At times such as this, it

was particularly desirable for the System to demonstrate its
responsiveness and responsibility.

That meant that the System

must continue to recognize that it was concerned with the
medium-term outlook because of the lags in monetary policy.
Mr. Maisel did not think the Committee was at a point at
which it should shift its goals, certainly not without careful
consideration of all that was involved.

The growth rate projected

for the second half of the year was one-half of normal.




would be gained or lost by attempting to hold to that reduced rate?
In his judgment, the System should furnish reserves and allow credit
to expand at the minimal rates outlined at the March 5 meeting to
meet that goal.
be large.

The amount of tightening that would entail would

How large, if the Committee rejected the basic reserve

and credit data, could only be estimated by each member in a
subjective manner.

It would, he believed, be a serious error to

make such subjective evaluations the basis of policy.


it should be recognized that, as the Manager had pointed out, the
markets might fluctuate widely in the short run--particularly under
the impact of the types of news filling the headlines.


fluctuations resulted partly from rapidly changing expectations,
but they also reflected variations in demand and supply for both
credit and output.
Nothwithstanding the current news, Mr. Maisel felt it would
be wrong for the Committee at this time to assume that there would
be a major shift in fiscal policy and, therefore, to change its

On the other hand, it would be just as erroneous to adopt

a policy that could not be accommodated to actual changes in the
fiscal situation.
Mr. Maisel thought this would be a particularly apt time
to reverse the substance of the clauses in the second paragraph


of the directive.

Since what was meant by "firm markets" would be

extremely hard to judge if expectations continued to shift dras
tically or if real fiscal changes were made, it would be far better
to state the Committee's goals in terms of money and credit growth
levels rather than in terms of interest rates and free reserves.
Thus, Mr. Maisel said, he would like to see the directive
instruct the Manager to allow reserves to grow sufficiently to
take care of seasonal requirements.

As long as the annual rate of

bank credit growth remained within the range of plus 2 to minus 2
per cent projected in the blue book, the Manager should maintain
prevailing money market conditions.

If the projections moved

outside that range, he should be instructed to alter conditions
in the direction which would lead bank credit growth back within
the desired range.
As the Committee members all recognized, Mr. Maisel
continued, the rate of growth in bank credit had been going down

Using the blue book projection for April, both the

six-month and three-month rates of growth in bank credit through
that month were considerably below the growth rates for both the
first and second half of the year which the tight monetary policy
model, presented at the Committee's March 5 meeting, showed as
necessary to move toward a desirable equilibrium.

The growth



rate in the recent period was lower than the projection, even
recognizing that there had been no Treasury financing in March,
since there had been such financing earlier in the period.


the form of the second paragraph of the directive were shifted,
the Committee could hold to it even in periods of even keel;
the Committee would not be locked in.
Mr. Maisel commented that the Committee did not really
know how sharp a change it had caused in the rates of growth.
Its actions had not yet worked their way through the monetary

The increased tightness had led to rapidly deepening

negative free reserves which, however, had been partially offset
in the bill market by unusually heavy demand.

The likelihood of

disintermediation was reported as high by both commercial bankers
and other financial institutions.

That threat plus a lack of basic

knowledge as to events between now and the next meeting were his
reasons for desiring a new form for the directive.
If the Committee could not agree upon a shift in the
directive, Mr. Maisel would support alternative A.

However, he

would include a two-way proviso, reading "provided, however, that
operations shall be modified as needed to moderate any apparently
significant deviations of bank credit from current expectations."
All of the factors arguing for a change in the form of the directive
applied equally to the desirability of a two-way proviso.



Mr. Maisel thought that failure to shift the form of the
directive, or at a minimum to include a two-way proviso, at a
meeting such as this, when such a potentially dynamic future was
faced, would mean adopting a very myopic view of where the
Committee wanted, and was likely, to go in the immediate future.
Mr. Daane commented that the rapidly deteriorating
position of the balance of payments, with the ominous signs
apparent in the trade sector, and the inflationary developments
in the domestic economy pointed clearly to further restraining
actions by the Federal Reserve.

To him the questions were

confined to those of the desirable degree of restraint, the
choice of instruments, and the timing of actions.

Perhaps he

had been too much involved with the international monetary area,
where conditions had been in turmoil recently, but he thought
greater monetary restraint in the United States was necessary to
support the decisions at the recent meetings in Washington and

Accordingly, he would prefer alternative B for the


He did not regard that as particularly hawk-like,

in light of current international developments and the efforts
under way to strengthen the international monetary system.
Along the same lines, Mr. Daane said, he would be quite
amenable to another increase in the discount rate and he would



favor such action sooner rather than later.

In reference to

Mr. Bopp's suggestion that the Board consider raising reserve
requirements, he would say an increase in discount rates in the
United States in general was more clearly perceived as signaling
a change in System policy than was an increase in reserve
requirements or a modification of targets for open market

Thus, he saw an important psychological advantage

in a further change in the discount rate.

He was concerned about

the possibility that the United States might show undue timidity
in its use of stabilization measures.

While the Committee was

generally agreed that fiscal action was needed, the System had
to meet its responsibilities in connection with monetary policy.
Mr. Mitchell remarked that the outcome of the debate on
fiscal measures now under way in the Senate had a major bearing
on the appropriate course for monetary policy.

Indeed, a case

could be made for adjourning today's meeting of the Committee
pending the vote in the Senate.
Mr. Mitchell agreed with those who favored the policy
called for by alternative A of the drafts of the directive with
a possible shading toward firmness.

His reason, however, was

simply that the possibility of fiscal action now seemed suffi
ciently strong to warrant avoiding a full-scale change in policy,



such as was implied by alternative B.

He would be prepared to

take the alternative B route, and to employ other monetary
policy tools as well, if the Senate failed to take affirmative
action on fiscal policy.

In that event, he thought the

Committee should hold another meeting in the near future to
reconsider its policy.

At the moment, however, he would favor

money market conditions along the lines implied by Mr. Axilrod's
policy prescription.

He understood that such conditions would

include net borrowed reserves of about $400 million; a Treasury
bill rate of up to 5-3/8 per cent; a Federal funds rate in the
5-1/2 to 5-5/8 per cent range; and dealer loan rates of 5-3/4
per cent and above.

Such conditions might be associated with a

change in the bank credit proxy in April at an annual rate in
the range from plus 1 to minus 3 per cent.
Mr. Heflin reported that all of the latest data on
Fifth District business suggested an accelerating pace of
activity, with a further buildup of pressures on prices and

Respondents in the Richmond Bank's most recent survey

reported further improvement in retail sales generally and in
automobile sales particularly, with manufacturers indicating
further increases in new orders, backlogs, shipments, and




While general business sentiment remained cautiously

optimistic, both businessmen and bankers expressed increasing
concern over rising prices and costs.
So far as the Committee's policy deliberations today were
concerned, Mr. Heflin said, the single overriding issue continued
to be the position of the dollar in the international exchanges
and the current grave threat to the international monetary order.
He could not feel that the urgency of the U.S. balance of payments
problem had been diminished by any recent international agreement.
The encouraging degree of cooperation now being received from
abroad was perhaps a necessary condition to a satisfactory
resolution of the current problem.

He believed it would be a

serious mistake, however, to view it as a sufficient condition.
Rather, as he saw the problem, the basic ingredient of any
permanent solution could be found only in the fiscal and credit
policies of this country.
The analyses of both domestic and balance of payments
prospects presented in the latest green book 1/made very gloomy
reading indeed., Mr. Heflin remarked.

Current inflationary trends

clearly had to be arrested if a major crisis was to be avoided.
It seemed to him that any other course was like playing Russian
roulette not only with the domestic economy but also with the
1/ The report, "Current Economic and Financial Conditions,"
prepared for the Committee by the Board's staff.



economic base of the nation's entire foreign policy posture.
It was his conviction that the time remaining for an appropriate
adjustment of policies in this country was short indeed, and that
the Committee no longer had time to await action on the fiscal

The System's recent tightening moves had taken it in the

right direction but, in his judgment, not far enough.


realized that further tightening involved serious risks of
dislocations in the credit markets and in important sectors of
the economy.

But, in view of the urgency of the situation the

country was facing, he was prepared to run those risks.


believed that over the next four weeks the Committee should work
towards some further firmness in the market and should even be
prepared to accept actual reductions in the rates of reserve and
bank credit expansion.

Net borrowed reserves of the order of

$450 to $500 million would not seem inappropriate and he would
not be troubled by Federal funds rates in the neighborhood of
5-3/4 to 6 per cent.

For the present he would favor alternative

B for the directive.

Also, in the absence of a dramatic improve

ment in the prospects for fiscal action he would be prepared to
consider further discount rate action during the month of April.
Mr. Clay commented that evidence pointed increasingly
to an aggregate demand for goods and services in excess of the



real productive capacity of the economy.

The impact was not

uniform upon the various sectors of the economy and that fact
was reflected in the variations in price movements and utiliza
tion of productive capacity.

The convergence of civilian and

military demands continue to make for a tight labor market and
to encourage advancing wage rates.

The over-all demands on

the economy also continued to produce an accelerating rate of
price inflation.

The seriousness of those resource pressures

and the accompanying price inflation was underscored by the
large deficit in the U.S. international balance of payments,
including the discouraging developments in the balance of
It was evident to Mr. Clay that the national economy
required added measures of economic restraint.

The need for

fiscal action and the uncertainties surrounding that possibility
were an old story, but the need mounted rather than diminished.
There also was something seriously wrong with respect to the
determination of wage rates and the commodity pricing that
accompanied it that had become an integral part of the price
inflation spiral.

The demand for labor was a significant

underlying factor, but the functioning of the institutional
arrangements for setting the pattern of wages was an important
part of the price inflation problem.


-74Mr. Clay noted that monetary policy had become distinctly

more restrictive recently.

The impact of that action on the credit

markets was not fully known as yet.

If there were no constraints

imposed by Treasury financing, it would be desirable to allow the
present degree of monetary restraint to work itself out and to make
future changes in the light of the developing situation.

It had to

be recognized, however, that Treasury financing in May, June, and
July might limit the scope of policy actions during that period.
Thus there might not be another opportunity to make a further overt
move for a considerable time.
Under the circumstances, Mr. Clay said, it became particu
larly difficult to determine whether monetary policy should be held
in its present degree of restrictiveness or should be tightened
further at this time.

On balance, a slight further tightening of

policy appeared to be the preferable course.
The forthcoming Treasury financing activities underscored
to Mr. Clay the importance of not relaxing monetary policy.


also made quite secondary the possible lack of bank credit growth
in April, as the succeeding months of Treasury financing could be
expected to result in a significant degree of credit expansion.
In fact, such successive periods of Treasury financing usually
led to credit growth beyond the needs of the national economy.


-75Mr. Clay said alternative B of the draft directives would

be in line with his policy prescription.
Mr. Scanlon said he would summarize the statement he had
prepared and submit the full statement for inclusion in the

He then summarized the following statement:

Probably the most significant development of recent
weeks has been the stronger tone of retail sales, which
calls into question the view that consumer caution would
take the edge from inflationary pressures in 1968.
We see no abatement of the uptrend in prices of
goods and services. The resistance of purchasing agents
to increases in prices of broad classes of both durable
and nondurable goods, evident a year ago, has given way
to an acceptance of the "inevitable."
In each month
from November through February more than 70 per cent of
Chicago purchasing agents have been reporting higher
prices paid. For a precedent to this experience it is
necessary to go back to the early Korean War period.
Businessmen and bankers in the Seventh District are
increasingly concerned that wage, price, and possibly
qualitative credit .controls will be imposed in the near
future. This view may be playing a significant role in
current trends in prices and wages. Some are concerned
that they would be "frozen in" at relatively low levels.
Labor markets continue tight, although possibly not
quite as tight as a year or two years ago, if insured
unemployment totals and help wanted ad volume can be
taken as useful indicators. However, surveys of
employers' intentions suggest increased hirings, even
in nonseasonal activities, in the spring. The recent
wage settlement in the farm implement industry is
believed to be more generous than the auto settlementamounting to 6.6 per cent per year in total compensation,
assuming that maximum upward cost-of-living adjustments
are required.
District employers, at least the large firms, appear
to be making a real effort to hire hard-core unemployed,
even when this means scrapping normal minimum requirements



with regard to training, language, mechanical skills,
and police records. Efforts to hire and train these
hard-core unemployed, while encountering great
difficulties, are meeting with some success.
Strike hedge demand for steel is not quite as
strong as had been expected. Nevertheless, Chicago
area steel producers are operating at effective
capacity. Order backlogs for steel are as large
relative to shipments now as at a comparable stage
of the 1965 buildup, but are appreciably smaller
when compared to capacity.
Auto firms are keeping their May-June output
schedules flexible depending upon sales trends in
the next few weeks. Tentative schedules call for
output of 2.3 million cars in the second quarter,
about the same as in the first quarter, and 7 per
cent more than in the comparable period of 1967.
However, this volume would be smaller than in the
comparable periods of 1965 or 1966. Demand for
used cars remains strong. But the auto industry
is increasingly worried about imports. About
900,000 imports are projected for 1968--up from
760,000 in 1967--and amounting to 10 per cent of
the domestic market, equaling the all-time high
proportion reached in 1959.
Permits for new apartment buildings and single
family homes have been very large in the District in
recent months, especially in centers of 250,000
population or more. Share accounts at savings and
loan associations held up fairly well in February.
Nevertheless, the possibility of a sharp turn to
disintermediation has not been ruled out. In fact,
spokesmen for the S&L's insist that the residential
housing activity in the remainder of the year may
yet be substantially curtailed by credit stringencies.
Life insurance companies have not resumed their
interest in mortgages, other than large apartment
projects and industrial mortgages. Some life
insurance companies insist on a 1-1/2 per cent
spread on mortgages over yields on bonds. Today
this would mean rates of almost 8 per cent,
forbidden by usury laws in a number of States.



Farmers are expected to cut total planted acreage
by 4 per cent in 1968. Corn acreage is expected to be
off 8 per cent, to the smallest total seeded since the
turn of the century. Soybean plantings will be larger
than last year. Smaller agricultural plantings doubt
less will moderate demand for farm equipment and also
demands for credit by country banks.
The banks show evidence of some renewed vigor in
business loan demand and reduced liquidity. The
expansion of business loans in March, though less than
in 1967, was above comparable periods of most other
recent years despite a smaller carry-over of prior-year
corporate tax liabilities. Increases were quite widely
distributed among industry groups. Metals manufacturing
firms were the heaviest borrowers, but there is no
indication that a large amount of bank credit is being
used in stockpiling steel. Other loans remain moderate.
Preliminary impressions from our exploratory loan
commitment survey suggest that a good many banks are
anxious to see a larger part of their commitments
turned into loans and show no serious concern about
their ability to accommodate this. There were a few,
however, that added qualifications with respect to
monetary policy and Regulation Q adjustments. Several
banks urged raising the ceilings on all types of time
and savings deposits. CD's have been declining, but
so far at a moderate rate.
Major Chicago banks are now consistently showing
a basic deficit position for the first time since last
summer. This may reflect in part the usual preparations
for the April 1 Cook County tax assessment, but there
has been substantial borrowing also by reserve city
banks in District States other than Illinois in the past
The significant slowing in the rates of expansion
in reserves and bank credit in March and in the money
supply in the last two months is consistent with both
the intent of recent directives and current and pro
jected developments in economic activity. It appears
appropriate to maintain these reduced rates of
expansion at least until the next meeting of the
Committee. At the same time, I would not be averse



to some additional reductions in the rates of growth,
although not to negative values, in anticipation of
accelerated rates that may be expected when the
Treasury re-enters the market later.
I feel that we would have attained current
slower rates of monetary and credit expansion
sooner if we had placed primary emphasis on
aggregate measures of reserves, money, or credit
in the directive. I again urge that we do so.
Mr. Scanlon added that he favored alternative B for the
directive with the word "somewhat" changed to "slightly" before
"firmer conditions in the money market."

Such a course, he felt,

would maintain the desirable degree of pressure in financial

He believed that the two-way proviso clause included in

alternative B would give the Manager latitude to achieve some
further firming, but yet permit him to back away if unusual
liquidity pressures should develop.
Mr. Galusha said he also would summarize his prepared
statement, and submit the full statement for the record.

He then

summarized the following statement:
The Ninth District economy continues, as it were,
on course. There have been no unusual or portentous
developments. I shall therefore spare you a recitation
of District statistics. I did, however, want to note
briefly a few of the findings of our most recent survey
of farm credit conditions. There appears to have been
an increase in farm loan rates, but most of our rural
bankers see farm loan demand as about normal and few
anticipate any difficulties in meeting loan demand
over the next few months. Presently, then, there is
little if any concern about a "credit squeeze" among



our rural bankers, possibly because, as many have
reported, farmers are being very cautious in their
capital purchases.
By all accounts, the outlook
is for no increase in sales of farm equipment.
Let me turn now to monetary policy. Interest
rates, short-term and long, increased in March; and,
to quote the blue book, "The rate of bank credit
expansion moderated further."
Has the System done
enough, though, at least for the time being? Or
should monetary policy be made still more restric
Last Sunday morning I had no difficulty
saying yes; and I likely will return to that point
of clarity before the month is out. But this
morning I find myself in favor of delaying until
we have had a chance to see what effect, if any,
the President's speech is going to have.
Had the President not made his speech, I
would have urged greater monetary restraint this
morning, and in particular an increase in
Regulation Q rate ceilings. Now, however, I would
wait, although only briefly, to see what happens.
I do not know whether Congress will heed the
President's appeal for fiscal action, nor whether
the North Vietnamese will respond to the President's
overtures in that area. But it is hard to believe
that the de-escalation of the bombing was not
prompted by a rationally determined conviction that
it would accomplish something. There is a hope,
however slim, that the fiscal outlook will change
for the better.
There is risk in waiting. This Committee may
find itself wanting to adopt a more restrictive
policy, but be unable to because the Treasury is
in the market. It ought to be able, however, even
with the Treasury in the market more or less
continuously, to find a time to increase monetary
restraint, should it again become quite clear that
Congress is going to increase spending but not tax
rates. There is always the possibility of an
appropriately scheduled special meeting of this
Committee, perhaps in two weeks.
In present circumstances, I would favor having
the Manager concentrate on maintaining short-term
rates about where they were on average last week.



This is not a time for maintaining some given level of
net borrowed reserves.
The attitudes of member banks
and the administration of the discount windows are still
going through the process of accommodation to the
changed market levels. Expectations could change
considerably, even from day to day. And we should not
want to see either a dramatic decrease in rates or an
increase, which without a change in Regulation Q
ceiling rates would sharply cut the supplies of bank
and mortgage loans.
I am for alternative A of the staff drafts of
the directive; but to repeat what I said before, I
would favor having the Manager keep his eye on short
term rates, and particularly the 3-month bill rate.
I should like to offer my congratulations to
those of you who participated in the Washington and
Stockholm meetings.
If I may presume to judge, you
have served us all very well indeed, and are deserving
of our thanks.
Mr. Swan said he would not comment on economic conditions
in the Twelfth District except to report the results of a check
the San Francisco Reserve Bank had made late yesterday with five
of the District's larger savings and loan associations.


associations had been asked about their withdrawal experience
during the last three business days of March and the first day
of April.

He recognized, of course, that the sample was far from

adequate, with respect both to its size and to the time period

For what it was worth, the five associations together

had experienced withdrawals of about $22 million over the four
business days in question, compared to $4.5 million in the



comparable period of 1967.

As Mr. Brimmer had observed, however,

the Committee had to expect some pressure on thrift institutions
if the necessary degree of restraint were to be maintained on the
economy as a whole.
As to policy, Mr. Swan thought the Committee should
continue to tighten, despite the various existing uncertainties.
He reached that conclusion because of the increased urgency of
the problems with respect to the U.S. balance of payments and
the general international situation, the fact that after April
the Treasury would be engaged in frequent financings, and the
lack of action thus far with respect to fiscal policy.

In his

judgment fiscal action could not be counted on, but if that
situation changed, the Committee certainly could hold an interim
meeting to reconsider its policy.
and cautious firming.

He favored a rather gradual

There should be no question, however, but

that monetary policy was moving toward greater firmness even
though somewhat slowly.
Mr. Swan remarked that he would be reluctant to see the
Regulation Q ceilings raised at this point.

He agreed with the

implication of Mr. Hayes' comments that there was room under
present ceilings for some additional pressure on banks.




might be helpful in that connection to advise those member banks
losing substantial volumes of CD's and coming to the discount
window that their needs would be accommodated somewhat more
readily and for longer periods than earlier.
Mr. Swan said he supported Mr. Maisel's proposal for
reformulating the second paragraph of the directive, although
at this point he would favor a lower target range for bank credit
than Mr. Maisel had suggested.

However, he did not expect a

reformulated directive to be adopted today, and so would note
that alternative B of the second paragraph was acceptable to him
as drafted.

As to the first paragraph, he observed that it was

proposed to continue using the statement of the Committee's
general policy stance that had been employed for some time,
reading as follows:

"In this situation, it is the policy of the

Federal Open Market Committee to foster financial conditions
conducive to resistance of inflationary pressures and progress
toward reasonable equilibrium in the country's balance of

In his judgment, the final clause of that statement

was now too weak, in view of the much greater urgency of the
balance of payments problem.

He proposed replacing it with a

clause reading ". . . and attainment of reasonable equilibrium

in the country's balance of payments."



Mr. Coldwell commented that while recent economic develop
ments in the Eleventh District were not dramatic they did point
toward further expansion in virtually all areas, including
production, employment, construction, and retail sales.

Even the

agricultural outlook had improved.

He would mention only one

development in the financial area.

In a recent meeting the

presidents of some of the large banks in the District reported
growth in term loan commitments which were designed to provide
insurance against the possibility of specific controls by the
Federal Reserve.

The commitments, for which a rate of 1/4 per

cent was charged on the unused balance, provided for renewal at
three-month internals for a period of three years, at the end
of which the amount of take-downs could be converted to a term
loan for an additional period of five years, making a total of
eight years in all.

It was surprising to him that banks were

willing to make such commitments.
Mr. Coldwell said he had nothing to add to the discussion
of national conditions.

As to policy, he would have preferred to

wait for a time to evaluate the impact of the firming actions
already taken and to see whether fiscal action was likely.


it was clear that the economy was presently in an inflationary
spiral, and he was concerned about the need to dampen inflationary

Accordingly, he favored some further monetary



restraint, the resolution of doubts on the side of restraint, and
minimal growth in bank credit.

He would not want to make a more

overt move at the moment, but he thought further monetary firming
would be in order if it became clear that fiscal action was not
likely to be taken.
Mr. Ellis said he would submit for the record the remarks
he had prepared on economic conditions in New England.


were as follows:
February data made it clear that the advance of
the New England economy which resumed in mid-1967 is
continuing. Available data for March indicate a
further advance. Initial unemployment claims are
down, department store sales are showing well
considering the late date for Easter this year, and
manufacturers' new orders are continuing at a high
level with some indications that further inventory
building is in progress.
In spite of a relatively modest (5 per cent)
sales increase expected for the year, and continued
operation at about 85 per cent capacity, New England
manufacturing firms reporting in our capital expen
ditures survey plan their third year of capital
investment at $1.1 billion, roughly a no-change
position from 1967.
In the financial arena, our ten largest life
insurance companies have been somewhat surprised by
a partially estimated 44 per cent increase in policy
loans between the fourth quarter of last year and the
first quarter of this year.
Our eight largest banks have continued to expand
their willingness to rely on interest-sensitive
borrowed funds. With their short-term liquid asset
ratios now below their previous August 1966 lows,
they have increased their reliance on negotiable
CD's, Federal funds, and Federal Reserve borrowing



from their average level of 162 per cent of required
reserves in August of 1966 to a current ratio of 192
per cent. For comparison, I note that the New York
City 8-bank average ratio dropped from 194 per cent
in August 1966 to about 150 per cent now.
As a group, our weekly reporting banks have
experienced strong business loan demand and continue
to expand their commitments without substantial
concern. During our exploratory survey of loan
commitments, the question "Are your unused commit
ments larger than you prefer?" brought a confusing
response. They wanted to answer "Yes", meaning
they would like to reduce the "unused" portion by
putting on more loans.
Mr. Ellis then turned to the subject of monetary policy.
Starting from the assurance by the President that the Federal
sector would be expanding its outlays, financed in part by a $20
billion--or perhaps only a $12 billion--deficit, he said, it was
relatively easy to conclude that monetary policy should be playing
a restraining role.

It was clear that monetary policy had been

shifting to a posture of restraint.

Reserve requirements had been

raised, member banks had been forced to borrow more of their
reserves, and the cost of borrowing funds, both from the Federal
Reserve and in other reserve adjustment markets, had risen.


central issue of policy today, therefore, was whether the
Committee had made enough of a shift--had it applied enough
restraint for now?

He believed it had not quite done so.

Mr. Ellis went on to say that Mr. Brill's remarks today
provided a number of arguments in support of that conclusion.




would emphasize Mr. Brill's statement that the job to be done was
greater now than it had appeared when the Committee met on March 5.
On the subject of scenarios, he thought the present course could
best be described as falling under "scenario chaos."

The balance

of payments situation had worsened, especially in the trade sector
which was affected by faster price rises.

There was greater

recognition that the success or failure of the balance of payments
effort held the key to the whole future.

In addition, the demand

pull aspect of the inflationary trend had increased.

The growth

in Federal demands was obvious, and as Mr. Brill had suggested,
consumers were likely to contribute more to total demand pressures.
Mr. Ellis remarked that the table in the blue book comparing
recent and earlier rates of growth in monetary aggregates indicated
the accomplishments of the System during the past four months, but
it might also contribute to delusion.

The latest four months

included two months in which there had been no Treasury financing,
and that was hardly typical of the previous six months or of the
coming nine months.

With demands strengthening, the Committee's

existing policy posture would turn out to be relatively less

Finally, it would be desirable for the Committee to

act in advance of the long period of Treasury financing activity
ahead, in which it would be necessary to maintain an even keel.



In the fortunate but unlikely event of fiscal restraint, monetary
policy could be modified; certainly there was enough flexibility
in monetary policy to make that possible.
Mr. Ellis said he would favor alternative B for the
directive, with the amendments Mr. Hayes and Mr. Swan had suggested.
He would interpret such a directive as calling for probing toward
greater firmness, with sensitivity to the possible liquidity pressures
referred to in the proviso clause.

For targets, he favored net

borrowed reserves of $400-$500 million, a Federal funds rate of 5.5
per cent or above, member bank borrowings around $700 million, and
the three-month bill rate ranging up to 5-3/8 per cent.
Mr. Robertson made the following statement:
I think it is clear that the challenge facing
monetary policy is mounting. During the last month or
so we have pulled significantly harder on the reins of
monetary restraint. Most of the usual financial
indicators, both of money market pressures and aggre
gate credit flows, have reflected our tightening
Yet the stream of business information reaching
us describes an economy caught in an intensified
inflationary spiral, with nothing like the needed
degree of fiscal restraint forthcoming, and with
international developments signaling that precious
little time may remain for us to proceed in an
orderly fashion to introduce appropriate stabiliza
tion policies. Accordingly, I think the only
responsible course open to this Committee is to
proceed, carefully and gradually but determinedly,
to tighten monetary policy further.



Incidentally, we should be careful not to be
lulled into a too complacent attitude by the recent
slowing of aggregate bank credit flows.
In good part
this reflects the lull in Treasury cash financing, and
a new and powerful upward push on such flows will
develop as the big deficit financing operations get
under way a little later this year. As a matter of
fact, Treasury operations may well impel us toward an
even keel posture in most if not all of our meetings
from April 30 through August; and this represents one
other important reason for voting to firm conditions
a bit more today.
Because we have managed to move as far as we have
in recent weeks in holding down nonborrowed reserves,
pressing more banks into borrowing and raising the cost
of day-to-day money, I think we do not have to make a
sharp further tightening move today. Our basic aim,
after all, has to be thought of in terms of generating
the kind of monetary atmosphere that will, with
inevitable lags, moderate inflationary demands later
in the year. I want no slam-bang crunch right now,
and the fact that we are in the middle of the quarterly
earnings crediting period for savings intermediaries
increases our exposure to that risk at this meeting.
Nonetheless, I recognize full well that the
gradual further tightening I am advocating may well,
perhaps in a matter of weeks or less, interact with
credit demands and market expectations to move market
rates enough higher to produce considerably greater
pressure on Regulation Q ceilings, nonbank savings
institutions, and the discount rate. When and as
such pressures reach the point where they are
interfering with credit flows unduly, I would be
prepared to consider appropriate adjustments in the
rate structure, although I want to go on to say that
I think we should limit the extent and nature of any
such rate increases in the interest of minimizing the
threat of competitive rate escalation. I would not
favor lifting ceilings for the purpose of enabling
large banks to expand their CD's in order to expand
their loans and thus contradict the very purpose of re
strictive monetary policy. Furthermore, I would not favor
big changes simply for "signal" or "symbol" effects alone;



the world has become increasingly cynical concerning
such Madison Avenue tactics, and I think the Federal
Reserve image is better served by "speaking softly"
and making workmanlike use of our "big stick."
With these views I would vote in favor of
alternative B of the directive as drafted by the
staff, with the prudent inclusion of a two-way
proviso, and aimed generally at the kinds of money
market conditions outlined in the corresponding
pages of the blue book.1 /
Mr. Robertson added that he was not concerned about the
risk that the monetary policy he advocated would prove too tight
if fiscal action were taken.

The Committee's decisions had been

influenced for a long time by the possibility of action on
Federal taxes and expenditures.

He would not want that situation

to continue, particularly since the direction of monetary policy
could be reversed readily in the event of fiscal action.
Chairman Martin remarked that an affirmative vote in the
Senate would, of course, enhance the prospects for fiscal action,
but it would not necessarily mean that those prospects were highly

1/ The blue book passage referred to read as follows: "If the
Committee should wish to achieve more restrictive monetary conditions
during the coming period, it may want to consider adjusting open
market operations with a view to attaining the following ranges of
money market variables: net borrowed reserves, $400 - $500 million;
the Federal funds rate most frequently trading 5-1/2 -- 5-3/4 per
cent and occasionally higher; new dealer loan rates in New York,
5-3/4 -- 6 per cent; and member bank borrowings, $650 - $850
million. The 3-month bill rate under these conditions is likely to
move into and toward the upper end of a 5-1/4 -- 5-1/2 per cent
range, partly as expectations of a further discount rate increase
begin to take hold in markets."



In his judgment the House was likely to guard its

prerogatives with respect to initiating tax measures and develop
a bill of its own.

It was likely to be three of four weeks before

the House voted on a fiscal policy package, and the chances for
eventual enactment struck him as no better than even.
The Chairman said that while the President's speech Sunday
evening had contained surprises, it had not altered his conviction
that the Committee should move to slightly firmer money market
conditions now.

He would want to wait a few weeks before deciding

whether to take more overt action.

He agreed with Mr. Robertson

thatthe System should proceed gradually in firming, as it had been
doing over the recent period.

He thought it would be a mistake to

hasten the firming process, and a still greater mistake to permit
an easing of conditions; a delicate balance was needed under
present circumstances.

He agreed that monetary policy was

sufficiently flexible to reverse its course quickly, and knew of
no reason for not holding a meeting of the Committee in two weeks
if developments required one.

He doubted, however, that there

would be a sufficiently clear-cut change in the outlook for
fiscal restraint to require such a meeting on that account.
In his judgment, Chairman Martin continued, the System
had been pursuing a proper policy in firming over the past four



months, and it was now in a position to take more overt action if
that became necessary.
take drastic action.

It might well be necessary before long to
Mr. Daane and others had pointed up the

recent deterioration in the U.S. balance of payments.

If there

was no fiscal restraint and another gold crisis erupted, the
System might have to do everything possible through monetary
policy to deal with what would certainly be a very serious and
very difficult situation.
The Chairman noted that the members had expressed divergent
views on the second paragraph of the directive, with some indicating
a preference for a policy course intermediate to those called for by
alternatives A and B.
view were not great.

In his judgment, however, the differences of
He personally preferred alternative B for the

second paragraph, with the words "somewhat firmer conditions"
changed to "slightly firmer conditions," as Mr. Hayes had suggested.
Mr. Mitchell noted that several members had expressed the
view that the course of monetary policy could be reversed quickly
if necessary.

However, an action to increase Regulation Q ceilings

would have consequences that ramified rapidly through the financial
structure and that would be difficult to reverse.

As he had

indicated earlier, he would favor the policy called for by alterna
tive B if it appeared that fiscal restraint was not forthcoming.



However, he would not want to take such action just before fiscal
legislation was enacted, particularly since he inferred from the
blue book that the alternative B policy would lead to a degree of
disintermediation that would require action on Regulation Q.
Mr. Robertson said he did not share the staff's judgment
in that regard.
Mr. Hickman remarked that he would share Mr. Mitchell's
concern if alternative B were adopted.
Mr. Galusha asked whether there was any feeling in the
Committee that bankers had been taking undue advantage of the
discount window in the last two or three weeks.

Perhaps he had

an unusually candid relationship with bankers but some had
commented frankly that they could borrow more cheaply from the
Reserve Bank than elsewhere, and that, in their judgment, they able to borrow if they had been out of the window for
some time.

It was their impression that bankers in other

Districts were taking the same view, and he wondered whether
that was the case.
Mr. Clay said there had been a similar development in the
Tenth District.
The Chairman then noted that Mr. Brimmer had suggested
adding a sentence to the first paragraph of the directive regarding



fiscal prospects.

He (Chairman Martin) was not sure the proposed

addition was desirable; it might be considered to place too much
emphasis on the present situation in Congress.
Mr. Maisel remarked that he did not favor including the

He thought it would give readers a mistaken impression

of the basis of today's action by the Committee when the policy
record was published in 90 days.
Mr. Brimmer said he would elaborate briefly on the rationale
of his suggestion.

The Committee took note in the first paragraph

of the directive of economic developments that might have a bearing
on its future policy course.

Fiscal policy also had such a bearing,

and the Committee was meeting today at a time when a major break
in the situation in Congress might be imminent.

The Chairman had

suggested that drastic monetary action might be required if fiscal
restraint was not forthcoming, but he (Mr. Brimmer) did not believe
that monetary policy alone could do the job.

According to the

discussion earlier today, European observers thought fiscal action
was needed in this country, and many others shared that view.


the only reference to fiscal policy in the staff's draft of the
first paragraph was in a sentence explaining recent interest rate
fluctuations partly in terms of uncertainty about fiscal prospects.
He thought a specific statement of the Committee's assessment of
fiscal prospects was desirable.



Mr. Mitchell said that while he did not feel strongly on
the matter he would support Mr. Brimmer's suggestion.


prospects for fiscal action certainly were very much on his mind
Mr. Hayes said he was impressed by the Chairman's point
that any action the Senate might take at this point would not
necessarily be decisive with respect to the eventual outcome for
fiscal policy.
Mr. Daane said he had some sympathy with Mr. Brimmer's

However, he was troubled by the specific proposal because

it might mistakenly suggest to the reader that the Committee
thought the prospects for fiscal action justified making no
change in monetary policy at this time.

It would be desirable

to add a reference to fiscal prospects, but he would prefer not
to link-it so closely with the statement of the Committee's general
policy stance.
After further discussion it was agreed not to add the
proposed sentence.

The Committee then considered the revision

Mr. Swan had suggested in the final sentence of the first paragraph
and decided to incorporate it.
With respect to the second paragraph, Mr. Hayes said that
in light of the comments by various members in the go-around he



would withdraw his earlier suggestion that a one-way proviso
clause be used.

He now favored alternative B as drafted by

the staff, including the two-way proviso, but with the word
"somewhat" replaced by "slightly."
Mr. Sherrill asked how "slightly firmer conditions in
the money market" might be defined if Mr. Hayes' proposal was
Mr. Hayes said he had in mind net borrowed reserves in
a $350-$450 million range, member bank borrowings around $700
million, and the Federal funds rate moving up to around 5-3/4
per cent.

As to the three-month bill rate, he thought the prob

lem was likely to be one of having to offset downward pressures.
He would want the Desk to do what it could in that connection.
Mr. Hickman asked what course Mr. Hayes would advocate
if the bill rate in fact tended up, say to 5-1/2 per cent.
Mr. Hayes replied that he certainly would not want to
see the bill rate that high.

He would favor a bill rate not

over 5-3/8 per cent.
Chairman Martin commented that as he understood the
Committee's intent the emphasis would be placed on the word
"slightly" in the instruction to move to "slightly firmer


Mr. Daane added that he would underscore the Chairman's

earlier suggestion that the move should be a gradual one.
Mr. Sherrill remarked that the set of money market
conditions Mr. Hayes had described was acceptable to him if it
was understood that the Desk was to be alert to the desirability
of preventing a rise in the three-month bill rate above a 5-3/8
per cent level.
In response to a question by Mr. Galusha, Mr. Brill said
that for each of the money market variables discussed in the
blue book, one end of the range associated with the alternative A
policy course was the same as the other end of the range associated
with alternative B, except in one instance where the two ranges

In general, the set of conditions the Committee was

now discussing was in the neighborhood of the common boundary or
Mr. Maisel observed that for purposes of interpreting
the proviso clause the Manager would need to know the change in
bank credit in April that was expected to be associated with the
money market conditions the Committee had in view.

The bank

credit projections given in the blue book in connection with the
two alternative sets of money market conditions were, of course,
not applicable, since the Committee was discussing an intermediate
set of market conditions.



After discussion, it was agreed that for purposes of the
proviso clause the projection of the bank credit proxy in April
should be considered as falling in a range of plus 1 to minus 3
per cent, annual rate.
By unanimous vote, the Federal
Reserve Bank of New York was authorized
and directed, until otherwise directed
by the Committee, to execute transactions
in the System Account in accordance with
the following current economic policy
The information reviewed at this meeting indicates
that over-all economic activity has expanded at a very
rapid pace in early 1968, with prices rising substantially,
and that prospects are for a continuing rapid advance in
activity and persisting inflationary pressures in the
period ahead. Since late fall, growth rates of bank
credit, the money supply, and time and savings accounts
at financial institutions have moderated considerably.
Speculative activity in gold and foreign exchange
markets, which was intense in early March, abated after
the mid-month agreement on gold policy by gold pool
members and appears to have slackened further following
the Stockholm agreement regarding Special Drawing Rights.
The foreign trade surplus, however, has remained at a
sharply reduced level in recent months and the imbalance
in U.S. international payments continues to be a matter
of serious concern. Most market interest rates have
fluctuated widely, although rising on balance, in
reaction to international financial developments, the
firming of monetary policy, and uncertainties regarding
military and fiscal prospects. In this situation, it
is the policy of the Federal Open Market Committee to
foster financial conditions conducive to resistance of
inflationary pressures and attainment of reasonable
equilibrium in the country's balance of payments.



To implement this policy, System open market
operations until the next meeting of the Committee
shall be conducted with a view to attaining slightly
firmer conditions in the money market; provided,
however, that operations shall be modified if bank
credit appears to be deviating significantly from
current projections or if unusual liquidity pressures
should develop.
It was agreed that the next meeting of the Federal Open
Market Committee would be held on Tuesday, April 30, 1968, at
9:30 a.m.

Chairman Martin noted that, as discussed earlier, it

might prove desirable to call a meeting at an earlier date.
Thereupon the meeting adjourned.


April 1, 1968
Drafts of Current Economic Policy Directive for Consideration by the
Federal Open Market Committee at its Meeting on April 2, 1968
The information reviewed at this meeting indicates that
over-all economic activity has expanded at a very rapid pace in
early 1968, with prices rising substantially, and that prospects
are for a continuing rapid advance in activity and persisting
inflationary pressures in the period ahead. Since late fall,
growth rates of bank credit, the money supply, and time and savings
accounts at financial institutions have moderated considerably.
The foreign trade surplus has remained at a sharply reduced level
in recent months and the imbalance in U.S. international payments
continues serious. Speculative activity in gold and foreign
exchange markets, which was intense in early March, abated after
the mid-month agreement on gold policy by gold pool members and
appears to have slackened further following the Stockholm agree
ment regarding Special Drawing Rights. Most market interest rates
have fluctuated widely, although rising on balance, in reaction to
international financial developments, the firming of monetary
policy, and uncertainties regarding military and fiscal prospects.
In this situation, it is the policy of the Federal Open Market
Committee to foster financial conditions conducive to resistance
of inflationary pressures and progress toward reasonable equilib
rium in the country's balance of payments.
Alternative A
To implement this policy, System open market operations until
the next meeting of the Committee shall be conducted with a view to
maintaining the firmer conditions in the money market that have been
achieved recently; provided, however, that operations shall be
modified if bank credit appears to be exhibiting significantly more
strength than is currently projected.
Alternative B
To implement this policy, System open market operations until
the next meeting of the Committee shall be conducted with a view to
attaining somewhat firmer conditions in the money market; provided,
however, that operations shall be modified if bank credit appears to
be deviating significantly from current projections or if unusual
liquidity pressures should develop.

Attachment B

Outlays on Residential Structures
as a Per Cent of GNP

Per Cent


(in RealTerms -1958 Prices)



Billions of Dollars
200 l!



Billions of Dollars
S- 200


111111 Ii I










Ratio Scale

Money Stock




+3.2 %

6 O?




-3 0%















Percentages indicate rates of change for periods of relatively uniform rates of
growth. Shaded areas are periods of slow growth or decline n money stock.
Latest data plotted: Residential Structures, quarterly totals at annual rates
-4th quarter1967
Money Stock, quarterly averages of daily figures
seasonally adjusted 1st quarter 1968 estimated
Prepared by Federal Reserve Bank of St.Louis

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