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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
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
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
wholesale price indexes remained generally steady, and sensitive
industrial prices had leveled off after a rise earlier in the recovery
period. Sales of durable goods, although rising, continued to lag
behind manufacturers' new orders. While employment had been
expanding rapidly, the level of unemployment remained near the
recession high. Total retail trade was down slightly in July,
reflecting principally lower automobile sales, this decline appar
ently being related to the earlier than usual model changeover
period. While consumer spending had increased as the recovery
progressed, it had shown less than a typical upsurge for this stage
of the business cycle, and buying intentions, according to recent
surveys, appeared to be relatively weak. Evidence suggested that
consumers had been willing thus far to devote a large part of
their increased incomes to saving, rather than increasing their
consumption of consumer goods or accumulating physical assets.
While business improvement continued to be strong and
broadly based throughout the economy, this expansion had had
little counterpart in accelerated demands upon the financial sys
tem. Loan demand at banks lacked the vigor usually associated
with the current stage of cyclical expansion, and bank asset ex
pansion had reflected chiefly purchases of Federal and municipal
securities. Net deposit expansion was continuing to represent
largely an increase in time deposits. An upward interest rate
movement appeared to reflect in the main expectations-based
on the improved economic outlook, higher defense expenditures,
and prospective higher levels of Treasury borrowing-rather than
any change in the current need for and supply of funds. The
upward rate movements were reinforced, particularly in the
short-term area, by a reduced level of free reserves of the bank
ing system in the first part of August, partly due to added re
quired reserves against deposits created by Treasury cash financ
ing and partly due to large market drains of unforeseen
dimensions.
As to the balance of payments, preliminary data on gold and
dollar transfers to foreigners for July suggested a July payments
deficit about twice the monthly rate of deficit for the second
quarter of the year. While the July situation reflected in part
temporary and seasonal influences, over-all payments tendencies
suggested deterioration of the deficit position, particularly in
terms of the trade balance.
There was general agreement within the Committee that eco
nomic and financial developments, both domestic and inter
national, should continue to be watched closely. However, for
the ensuing 3-week period the consensus favored continuing
about the same degree of ease that had prevailed, except during
the period in early August when a confluence of market factors
contrived to produce more firmness than had otherwise been the
case. The change in the language of the directive therefore did
not signify an intent to effect any immediate change in System
policy. Instead, it reflected the view of the Committee that the
amended wording was more appropriate at a time when the
domestic economy was progressing from the stage of recovery
into an expansionary phase.
Although concurring in general with the consensus, Mr. Mills
was of the opinion that natural demand forces should be relied
upon to foster an expansion of bank loans, and that forcing re
serves on the commercial banking system could only lead to
future inflationary and speculative problems as well as cause
foreign observers to question the suitability of monetary policy
in the United States as related to balance of payments and infla
tionary considerations.
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, Balderston, Irons,
King, Mills, Swan, Wayne, and Treiber. Votes against this
action: Messrs. Allen and Robertson.
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
The Committee renewed the authorization, with two dissents,
on a basis that continued to vest in the Management of the Open
Market Account discretion, within the scope of current Com
mittee policy objectives, for determining the extent to which the
authority should be utilized in the light of market developments.
One member of the Committee, Mr. King, favored continuing
the authorization in effect, but disengaging from operations under
it for the time being, while another member, Mr. Mills, voted
for continuation of the authority with the recommendation that
it be used, when practicable, for reduction of the Open Market
Account's portfolio of securities other than Treasury bills. Mr.
Robertson, one of the two members who dissented from renewal
of the authorization, cited the shrinkage in private retail buying
interest in the long-term Government securities market which
had accompanied the continuation of official purchases of such
securities, and the lack of any apparent major benefits from such
purchases. Although he believed that cessation of operations in
longer-term securities would be the wisest course, he suggested
that the Committee begin by returning to the initial standard,
which almost all economic indicators had risen above their
earlier peaks, but without evidence, however, of an attitude of
excessive exuberance on the part of the business community.
Some stimulation from additional defense expenditures appeared
to be about offset by a lower level of consumer spending than
might ordinarily be expected at the current stage of the business
cycle. Consumer credit outstanding, which declined in July,
appeared to have declined further in August. While the re
covery movement appeared to be dependent to a considerable
extent on the stimulus provided by the public sector of the
economy, there was no suggestion that the stimulus from that
sector would be withdrawn. On the other hand, while the vastly
increased liquidity of the economy, especially in the hands of
consumers, constituted a reservoir of potential spending, there
was no present evidence of a significant increase in consumer
spending.
Commercial bank loans and investments declined somewhat
in August following the large increase in July, which had been
due mainly to Treasury financing operations. Business borrow
ing from banks had thus far shown a rise of no more than usual
seasonal proportions. The money supply, narrowly defined to
include only currency and demand deposits, changed little in
August for the fifth successive month, while the rise in time and
savings deposits at commercial banks slackened slightly after
having maintained a sharp rate of increase, seasonally adjusted,
earlier in the summer.
As to the balance of payments, it appeared that the large
transfer of gold and dollars from the United States to foreigners
in July could be accounted for mainly by temporary factors, in
cluding a large outward capital movement, a reduced trade sur
plus reflecting a contraseasonal rise in imports, and a seasonal
increase in tourist expenditures. Preliminary indications sug
gested that the deficit may have been reduced in August Never
theless, even if the July deficit reflected temporary factors, the
gravity of any tendency toward deterioration of the U. S. interna
tional payments position was apparent, particularly when viewed
set on February 7, 1961, of barring operations in securities
maturing beyond 10 years. This, he felt, would lay the founda
tion for progressively further limitations later as, in the Com
mittee's view, conditions might make such action appropriate.
September 12, 1961
L Authority to effect transactions in System Account.
The Committee renewed without change the directive to the
Federal Reserve Bank of New York calling for open market
operations with a view to encouraging credit expansion so as to
promote fuller utilization of resources, while giving considera
tion to international factors.
Votes for this action: Messrs. Martin, Allen, Balderston,
Irons, King, Mitchell, Robertson, Shepardson, Swan, Wayne,
and Treiber. Votes against this action: none.
Available economic data, mostly relating to the month of
August, indicated the continuation of a recovery movement in
@FedFRASER