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FORTY-EIGHTH
Annua{ Report
OF'IHE
BOARD OF GOVERNORS
of the Federal Reserve System
COVERING OPERATIONS FOR THE YEAR
19 61
ANNUAL REPORT OF BOARD OF GOVERNORS
DIGEST OF PRINCIPAL FEDERAL RESERVE POLICY
ACTIONS, 1961
Period
January
FebruaryAugust
SeptemberDecember
December
Action
Purpose of action
Limited net sales of U.S.
Government securities from
Federal Reserve portfolio to
about $500 million. Member
bank borrowing at Reserve
Banks averaged only $50
million.
Bought substantial amounts
of U.S. Government securities with maturities over 1
year, following February 20
announcement that System
open market operations
would include securities outside the short-term area.
These purchases were partly
offset by net sales of shortterm securities. Total System
holdings of Governments increased about $700 million.
Member bank borrowings
averaged $75 million.
To encourage bank credit
and monetary expansion by
absorbing only part of seasonal inflow of reserve funds
not otherwise offset by a
large gold outflow.
Bought or sold at different
times varying amounts of
U.S. Government securities,
including securities with
longer maturities. Total System holdings of Government
securities increased about
$1.6 billion. Mmnber bank
borrowings at Reserve Banks
remained generally low.
Raised, effective Jan. 1,1962,
maximum interest rates payable by member banks on
any savings deposit from 3 to
3~ per cent, and to 4 per
cent on those left in the bank
for 1 year or more; also
raised maximum rates on
time deposits with a maturity
of 6 months to I year from 3
to 3~ per cent, and to 4 per
cent on those deposits with a
maturity of a year or longer.
4
To encourage bank credit
and monetary expansion
while avoiding direct downward pressure on short-term
interest rates, thereby moderating pressures on the U.S.
balance of payments from
outflow of short-term capital
attracted by higher interest
rates abroad.
To continue to encourage
bank credit and monetary
expansion while allowing for
changing reserve needs due
to seasonal and other factors,
including a large gold outflow, and while continuing to
give consideration to the
balance of payments problem.
To enable banks to compete
more effectively for savings
and other time deposits, including foreign time deposits, thus moderating pressures on the U.S. balance of
payments, and, over the long
run, to offer additional incentive for the accumulation of
savings required for financing future economic growth.
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
mercial banking system by way of creating additional near
money substitutes.
August 1, 1961
2. Authority to effect transactions in intermediate- and longer-term securi
ties.
The Committee authorized the Federal Reserve Bank of New
York, between this date and the next meeting of the Committee,
within the terms and limitations of the directive issued at this
meeting, to acquire intermediate- and/or longer-term U. S. Gov
ernment securities of any maturity, or to change the holdings of
such securities, in an amount not to exceed $500 million.
Votes for this action: Messrs. Martin, Hayes, Balderston,
King, Mills, Shepardson, Swan, Wayne, and Johns. Votes
against this action: Messrs. Allen and Robertson.
After extensive discussion of the pattern of operations in
intermediate- and longer-term securities since this authorization
was first given by the Committee on February 7, 1961, it was the
consensus that the original criteria for such operations, as indi
cated in the policy record entry of that date, should not be
broadened at this time, considering among other things the in
conclusiveness of the evidence concerning the effect of the opera
tions. On the other hand, it was felt by the majority that an
interpretation that the System was disengaging from operations
in the intermediate- and longer-term areas should be avoided.
One member of the Committee, Mr. Mills, voted for renewal
of the authorization subject to the qualification that for the
present the Management of the Open Market Account should
abstain from operations outside the bill market. Messrs. Allen
and Robertson voted against renewal of the authorization for the
reasons that they had expressed on previous occasions. In addi
tion, Mr. Robertson felt a diminution of private participation in
market pricing and distribution was beginning to be apparent
and could become worse if the trend of official purchases of
intermediate- and long-term Government securities were con
tinued.
1. Authority to effect transactions in System Account.
The Committee renewed the directive to the Federal Reserve
Bank of New York calling for open market operations with a
view to encouraging expansion of bank credit and the money
supply so as to contribute to strengthening of the forces of
recovery, while giving consideration to international factors.
Votes for this action: Messrs. Martin, Allen, Balderston,
King, Mills, Shepardson, Swan, Wayne, Johns, and Treiber.
Votes against this action: none.
Although it appeared that the rate of economic expansion in
June and July had not been as rapid as in preceding months, the
economy was still moving toward higher levels of activity. Em
ployment, income, sales, industrial production, and construction
all continued to move upward. At the same time, prices con
tinued stable. There remained a substantial underutilization of
plant capacity, along with a high level of unemployment. Total
bank credit had increased substantially further due to the acqui
sition of Government securities by banks as a result of the
Treasury's recent financing program, and the bank loan picture
was somewhat stronger in July than it had been in June. The
money market had been quite easy.
Developments since the July 11 meeting having special sig
nificance from the standpoint of the formulation of monetary
policy included a request by the President of the United States
for substantial additional defense expenditures, giving rise to the
prospect of an increased Federal deficit. The prospective stimu
lus of greater deficit spending upon the domestic economy sug
gested a need for alertness to lessen the degree of monetary ease
in case speculative or inflationary tendencies should develop.
The second significant development since the preceding meeting
was the raising of the Bank of England's bank rate (discount
rate) to 7 per cent, in line with a general governmental program
designed to limit expansion of domestic demand in order to cope
ANNUAL REPORT OF BOARD OF GOVERNORS
with an unfavorable external payments position. It was recog
nized that the resulting differential between British and U. S.
short-term interest rates and credit availability, to the extent that
it induced a flow of funds from this country to the United King
dom, would be a force working to limit further decline in short
term rates domestically and perhaps exerting some upward
pressure on them. Another possible effect would be some worsen
ing of the over-all deficit in the U. S. balance of payments, par
ticularly in view of the adverse tendencies indicated by second
quarter developments of the current year.
Balancing the considerations pertinent to the formulation of
monetary policy under current conditions, the Committee con
cluded that although alertness to developing factors, both domes
tic and international, was in order, a policy of continued ease,
while at the same time avoiding a decline in short-term interest
rates, would be appropriate for the period immediately ahead in
order to help foster domestic economic recovery at a reasonable
pace. Therefore, the consensus favored continuation of approxi
mately the same degree of ease that had been maintained
recently.
Mr. Mills was of the opinion that both domestic considerations
related to inflationary potentials inherent in too broad a reserve
base and international considerations calling for a closer align
ment between U. S. Treasury bill and foreign bill rates required
a reduction in the supply of reserves, which would serve to bring
some upward pressure on short-term interest rates.
2. Authority to effect transactions in intermediate- and longer-term securi
ties.
The Committee authorized the Federal Reserve Bank of New
York, between this date and the next meeting of the Committee,
within the terms and limitations of the directive issued at this
meeting, to acquire intermediate- and/or longer-term U. S. Gov
ernment securities of any maturity, or to change the holdings of
such securities, in an amount not to exceed $500 million.
FEDERAL RESERVE SYSTEM
Votes for this action: Messrs. Martin, Balderston, King,
Mills, Shepardson, Swan, Wayne, Johns, and Treiber. Vote
against this action: Mr. Allen.
Developments since the preceding meeting, including those
focusing attention upon the relationship of U. S. short-term rates to
rates in other countries, had resulted in substantial purchases of se
curities other than bills by the Open Market Account in order to
provide needed reserves but not contribute directly to a further
decline in Treasury bill rates. The renewal, with one dissent, of
the authorization for operations in longer-term securities was
given without restriction on the discretion of the Management of
the Open Market Account to take such actions as seemed appro
priate in the light of market developments and the effectuation
of over-all monetary policy. However, there was some opinion
within the Committee that, if feasible, a lesser volume of System
purchases of securities in the longer maturity range, or even a
reduction of Account holdings, would be advisable.
August 22, 1961
1. Authority to effect transactions in System Account.
Clause (b) of the directive to the Federal Reserve Bank of
New York was changed to provide for open market operations
with a view to encouraging credit expansion so as to promote
fuller utilization of resources, while giving consideration to inter
national factors. The previous directive, which had been in effect
since June 6, 1961, provided for operations with a view to
encouraging expansion of bank credit and the money supply so
as to contribute to strengthening of the forces of recovery, while
giving consideration to international factors.
Votes for this action: Messrs. Martin, Allen, Balderston,
Irons, King, Mills, Robertson, Swan, Wayne, and Treiber.
Votes against this action: none.
Although industrial production increased to a record rate in
July, it remained well below capacity levels. The consumer and
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