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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 on Tuesday, December 18, 1962, at 9:30 a.m.

Martin, Chairman
Hayes, Vice Chairman
Mr. Bryan





King 1/

Mr. Shepardson
Messrs. Bopp, Scanlon, Clay, and Irons, Alternate
Members of the Federal Open Market Committee
Messrs. Wayne, Shuford, and Swan, Presidents of
the Federal Reserve Banks of Richmond, St.
Louis, and San Francisco, respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Noyes, Economist
Messrs. Brandt, Brill, Furth, Garvy, Hickman,
Holland, Koch, and Parsons, Associate
Mr. Stone, Manager, System Open Market Account
Mr. Molony, Assistant to the Board of Governors

Mr. Cardon, Legislative Counsel, Board of
Mr. Williams, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Yager, Chief, Government Finance Section,
Division of Research and Statistics, Board

of Governors


Entered at point indicated in minutes.


Mr. Rouse, Vice President and Senior Adviser,

Federal Reserve Bank of New York
Messrs. Sanford, Eastburn, Ratchford, Baughman,
Jones, Tow, and Green, Vice Presidents of
the Federal Reserve Banks of New York,
Philadelphia, Richmond, Chicago, St. Louis,
Kansas City, and Dallas, respectively
Mr. Eisenmenger, Acting Director of Research,
Federal Reserve Bank of Boston
Mr. Cooper, Manager, Securities Department,
Federal Reserve Bank of New York
Mr. Runyon, Economist, Federal Reserve Bank of
San Francisco
There had been distributed to the Committee preliminary and
revised drafts of minutes of the meeting held on November 13, 1962.
With reference to the revised draft, Chairman Martin stated that a
suggestion had been made for amendment of a paragraph of the minutes
(page 7 of the revised draft) covering the report on foreign exchange
market developments by the Special Manager of the System Open Market

Chairman Martin then described the change that had been

suggested, and it was agreed that the change would be appropriate.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the minutes
of the meeting of the Federal Open Market
Committee held on November 13, 1962, were

Before this meeting there had been distributed to the members
of the Committee a report from the Manager of the System Open Market
Account on open market operations in United States Government securities
during the period December 4 through December 17, 1962.

report has been placed in the files of the Committee.

A copy of this

Mr. Stone commented as follows in supplementation of the written
The money market has come through the usual December period
of liquidity needs without any serious strain emerging. Such
pressures as did develop converged on the dealers, who had to
take back a large volume of securities on maturing repurchase
agreements. The refinancing of these securities was easily
accomplished, however, with only a slight increase in dealers'
borrowing costs and with relatively moderate bank borrowing from
the Reserve Banks. Indeed, through most of the past two weeks,
the market tended to be a little easier than it was just before
the last meeting of the Committee, with money market banks
making only modest net purchases of Federal funds, mainly at
rates of 2-3/4 and 2-7/8 per cent. On the final two days of the
period a firmer atmosphere developed and the effective rate for
Federal funds moved to 3 per cent, but the market regarded this
as merely a temporary churning around the tax date. There was
no spill-over of this firmer feeling even into the Treasury
bill market, not to mention the intermediate and longer term
markets, which ended the period with prices moving upward.
The last several weeks' experience provided a particularly
good illustration of the disparity that frequently develops
between reserve statistics on the one hand and market conditions
on the other. In the three weeks ended November 28, free
reserves averaged about $465 million with the money market
leaning to the firm side of its recent range of variation.
Federal funds traded at 3 per cent during much of the time and
member bank borrowings averaged about $110 million. In con
trast, free reserves averaged about $300 million in the two
weeks ended December 12, but with these lower reserve figures
Federal funds were at or below 2-7/8 per cent most of the time.
Moreover, borrowings from the Reserve Banks averaged slightly

less during those two weeks than during the preceding three
week period. In the current week we are veering back to the
earlier situation, with the liquidity needs associated with
the tax date producing a firmer money market despite an appar
ent sharp increase in reserve availability.
Treasury bill rates have moved in a narrow range during
the past two weeks--edging down for the first few days when
some investment demand was augmented by System purchases, and
then inching higher as dealers' financing needs were swollen
by large awards in the December 10 auction and by the termina
tion of maturing repurchase contracts on both the dividend and



tax dates.

However, there remains an expectation in the market

that rates may again tend lower now that the tax date is passed,
for evidence still suggests a continuing high degree of

corporate liquidity.
Meanwhile, the entire capital market has been strengthened
by the opposition that has been expressed by some in Congress
to a quick tax cut and by the breakup of a log jam in new
corporate and tax exempt issues as investors responded to

slightly higher yields and moved to put accumulated funds to
work. Prices of Treasury issues have risen almost steadily
since December 6, and yields for most long-term issues are well

below 4 per cent and are back near the relatively low levels
they reached in early November.
In a discussion following Mr. Stone's comments, Mr. Mills inquired
whether there was not in effect a conflict in managing the System Open

Market Account between the part of the Committee's directive that called
for attention to maintaining the color, tone, and feel of the market and

the part that provided for encouraging a moderate expansion of bank credit.
Mr. Stone replied that under some conditions it was entirely possible that

there could be a conflict.

However, such conditions had not prevailed

during the past three weeks, or in his recollection for the past several
weeks, perhaps months.

In operating the Account according to the color,

tone, and feel of the market, he explained, the Manager looked not only
at interest rates but also at the reserve figures, watching, for
example, the behavior of free reserves and the trend of total reserves
as measured against the so-called growth guideline.

During the past

five weeks there had been a major shift in the distribution of free


During November they were concentrated heavily in the country

banks, and this was reflected in a relatively firm tone in the market to

which the Account Management responded by letting free reserves move

If he had attempted to maintain free reserves at around

$400-$425 million, the money market would have been substantially
tighter than he understood the Committee intended.

During the past

two weeks, on the other hand, there had been a redistribution of re
serves in favor of the banks in the money centers.

In those

circumstances, if free reserves had been maintained at $400-$425 million
there would have been substantial downward pressure on short-term
interest rates, more pressure than the Committee would have been willing
to see.

There was a choice, under conditions such as he had outlined,

between maintaining relatively stable money market conditions and
letting free reserves fall where they would as a residual factor, within
the broad range that had developed over the past several months, or
attempting to maintain a narrower range of free reserves and letting
the money market move from extremes of tightness to ease.

It had been

the Manager's choice to be guided by market conditions.
Mr. Mills commented that he gathered the corporate dividend
distribution date found money market banks holding large amounts of
deposits, while the checks drawn against those deposits in the payment
of dividends were not going to come back and be charged out of those
accounts until about today's date.

This might account, he suggested,

for the rather distinct tightness that was experienced yesterday in the
form of heavy dealer requirements.

There could be a lag between the

ease that money market banks experienced and the kick-back of tightness
they would feel when the dividend checks were cleared.

If the Account

Management was too engrossed with the tone and feel of the market, he
would be fearful that there could be a subsequent rather unsatisfactory

Mr. Stone replied that he thought the lags tended to be

relatively short.

Even if they were longer and would result in the kind

of kick-back to which Mr. Mills referred, in operating according to
market conditions the Account Manager would respond to any undue
tightening that emerged by providing more reserves irrespective of the
free reserve figure.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the open
market transactions in Government securi
ties during the period December 4 through
December 17, 1962, were approved, ratified,
and confirmed.
Before this meeting there had been distributed to 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 December 4
through December 12, 1962, together with a supplementary report covering
the period December 13 through December 17, 1962.

Copies of these

reports have been placed in the files of the Committee.
In comments supplementing the written reports, Mr. Sanford noted
that it should be possible to reach the end of the current calendar year



without a further reduction in the U. S. gold stock.

There was no

assurance, however, that gold losses would not recur in the first
quarter of next year unless there should be a marked change in the
balance of payments situation.
Mr. Sanford then discussed recent developments in the London
gold market, which had been relatively quiet recently, and went on to
say that interest in the foreign exchange markets had tended to center
in the Swiss franc and the German mark, in part due to year-end
window-dressing operations by Swiss and German banks together with the
approach of a December 20 tax date in Germany.

These operations

involved repatriations of funds through the exchanges, but had not, in
his belief, included any significant volume of swap transactions.


matter of refraining from such swap transactions had been the subject
of a cable to foreign central banks from the Federal Reserve Bank of
New York, and subsequent requests from the foreign central banks to
their commercial banks importantly engaged in international business.
Nevertheless, the price of the German mark had advanced and was
approaching the point at which the New York Reserve Bank would operate
for the German Federal Bank's account to restrain the rise.

The Federal

Reserve had not intervened for its own account since the third of
December, and after the turn of the year it was expected that the current
movement would reverse itself.

The firmness of the Swiss franc was

influenced by the activities of German, Italian, and French banks, which



reportedly had been selling U. S. dollars in Switzerland in order to
meet Swiss franc commitments arising from earlier undertakings in the
Euro-Swiss franc market that were now falling due.

The Netherlands

guilder had advanced slightly during the past two weeks, while the
Italian lira and the French franc had at one time eased very slightly
from their ceiling levels.

The pound sterling had tended on the whole

to rise a bit, and the Canadian dollar was generally firm.

A relatively

small amount of short-term U. S. funds reportedly had flowed into hire
purchase in London and into commercial and finance company paper in
Mr. Sanford noted that transactions for the System Open Market
Account consummated during the past two weeks included the delivery of
$17 million German marks sold in the previous period and renewal for
another three months of the $50 million swap agreement with the
Netherlands Bank, under which the System had an outstanding drawing of
$10 million equivalent of guilders due on January 2, 1963.

Also, the

standby swap agreement with the Bank of Italy was increased from $50
million to $150 million.

The Bank of Sweden had not yet taken steps

to enter into the swap arrangement that the Open Market Committee
authorized to be negotiated at its December 4 meeting.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the System
Open Market Account transactions in foreign
currencies during the period December 4-17,
1962, were approved, ratified, and confirmed.

Mr. Sanford then presented several recommendations for the
consideration of the Open Market Committee.
First, he recommended that the $50 million swap arrangement
with the National Bank of Belgium, which would mature December 20,
1962, be renewed for a further six-month period.

He noted that

drawings under the swap arrangement had been used on three different
occasions to absorb

dollars in the hands of the Belgians and that

four times the National Bank had sold francs to the Federal Reserve
to obtain dollars, the most recent occasion having been only yesterday.
As a result of those operations, the System now held $35 million
equivalent of Belgian francs.

In reply to a question raised as a

matter of information, Mr. Sanford said there had been a slight
profit on the foreign currency operations undertaken thus far in
Belgian francs.
Thereupon, extension for six months
of the $50 million swap agreement with
the National Bank of Belgium, as recom
mended by Mr. Sanford, was authorized,
with the understanding that the $50 mil
lion drawing thereunder also would be
Mr. Sanford then recommended that the drawing of $10 million
equivalent of guilders under the swap arrangement with the Netherlands
Bank, which drawing would mature January 2, 1963, be renewed.

The renewal of the $10 million draw
ing, as recommended by Mr. Sanford, was
noted without objection.



Mr. Sanford referred next to the $250 million swap arrangement
with the Bank of Canada that would mature December 26, 1962, and
recommended that it be renewed for a three-month period.

He indicated

that it appeared likely that the Bank of Canada would pay off on the
December 26 maturity date the $75 million drawing that remained
outstanding under the swap agreement.

In the event, however, that

this drawing was not paid off, he would recommend renewal for a three
month period.
Question was raised by Mr. Mitchell whether it would not be
advantageous from the standpoint of the U. S. balance of payments if
the Bank of Canada renewed the $75 million drawing, on the theory
that this might be an alternative to further Canadian borrowing in
the U. S. capital market.
Mr. Sanford replied that in January the Canadians were going
to receive half of the proceeds of a $250 million Government of
Canada issue that had been floated some time ago.

He anticipated that

the Bank of Canada would repay the $75 million drawing unless Canada
was subject to unexpected heavy reserve losses this week.

It was true

that the Canadians had tapped the U. S. capital market heavily in the
past; with a free and open capital market in this country, it might be
expected that this would continue.
Mr. Hayes expressed the opinion that the Bank of Canada would
not want to continue very long to hold reserves on a short-term



borrowed basis.

Instead, they would want to borrow long in a sub

stantial amount to offset their current account deficit to this

They regarded that as a perfectly legitimate operation.

Since the Canadians ran a larger current account deficit with this
country than the offsetting capital borrowings, he saw no valid
basis on which resistance could be indicated to their borrowing long
term funds in this market.
Mr. Mitchell noted that this country had substantial balance
of payments problems and expressed the view that first consideration
should be given to those problems.

The swap arrangement was originally

entered into with the Canadians principally as an accommodation to

They had made good use of it; since the date of the agreement,

their reserves had increased substantially.

At the moment, certainly,

the U. S. position was somewhat precarious, and he wondered whether
there might not be some advantage in suggesting to the Bank of Canada
that repayment of the $75 million drawing be deferred for at least
two or three months.
In further discussion of this point, Mr. Hayes commented that
the paying off of the drawing would not, per se, have any effect on
the balance of payments.

Long-term Canadian borrowing in the U. S.

market did affect the balance of payments, but he did not believe that
such borrowing would be affected by the repayment of the drawing.



Mr. Young noted that the repayment of the drawing, if it occurred
this year, would result in the whole operation becoming a wash
transaction, since it would have been entered into and paid off
during the same year.

Mr. Balderston referred to the fact that the

Committee, when it originally authorized entering into the program
of foreign currency operations, had indicated that such operations
should be undertaken to moderate short-term variations and not to
paper over long-term difficulties.

Mr. Hayes suggested that a paying

off of the drawing would be of advantage in the sense of maintaining
the principle of liquidity in swap operations, to which Mr. Mitchell
replied that this would seem to him to be a secondary consideration.
Mr. Robertson commented that it seemed to him the fundamental issue
here was whether the Canadians could be persuaded to defer entry in
the U. S. market for the purpose of long-term borrowing, and he did
not think that that question was going to be affected by whatever was
done in respect to the $75 million drawing.

Chairman Martin indicated

that he agreed with this comment.
After further discussion along these
lines, renewal for three months of the
$250 million swap arrangement with the
Bank of Canada was authorized, along with
extension of the $75 million drawing
thereunder if such drawing was not paid
off on or before the present maturity date
of the swap arrangement.
Mr. Sanford then referred to the distribution to the Committee
under date of December 14, 1962, of a draft of proposed agreement on



swap arrangements between the Federal Reserve System and the Swiss
National Bank.

This grew out of a recent understanding between the

Swiss National Bank and International Monetary Fund under which the
Swiss undertook to supply supplementary resources similar to those
provided for in the International Monetary Fund agreement of January
5, 1962.

With this in mind, the Swiss had proposed a formalization

of existing swap arrangements between that bank and the Federal
Reserve, plus certain other arrangements relating to monetary
cooperation, substantially according to the distributed draft
Mr. Sanford recommended that the Committee approve the draft
agreement in principle as a basis for future negotiation.

He described

it, in summary, as a recapitulation of the swap arrangements that had
been entered into heretofore with the Swiss National Bank.


the agreement would place no limit on the amount of short-term swaps
that might be concluded now or in the future.

It also provided,

under certain conditions, for up to $200 million equivalent of medium
term swaps, if and when the International Monetary Fund standby
arrangement of January 5, 1962, should come into use.

It would also

include other arrangements of a general nature relating to monetary
cooperation between the Swiss National Bank and the Federal Reserve

Mr. Sanford also called attention to, and explained, a minor
change in the draft agreement that was thought to be appropriate.




added that the Swiss National Bank would be pleased to obtain some
indication of agreement in principle with a draft agreement of this
type before proceeding with certain steps, including legislation,
that apparently would be necessary in Switzerland.
Chairman Martin noted that the draft agreement was being put
forward as a basis for negotiation, not as a final document, and that
the Committee would have a further opportunity to review the matter
before any final action was taken.

However, the Swiss National Bank

did not want to proceed with further steps in Switzerland in the
absence of some indication that the draft agreement was regarded by
the Federal Reserve as an appropriate basis of negotiation.
There followed discussion of the possible need for editorial
clarification of one part of the draft agreement, during the course
of which the Committee's General Counsel advised that he had reviewed
the draft agreement and had discussed it with the legal staff of the
Federal Reserve Bank of New York.
In reply to a question, Mr. Young commented that Switzerland
was not a member of the International Monetary Fund but had been a
participant in the negotiations that led to the arrangement to provide
broadened Fund standby resources.

It had been the hope that at some

point the Swiss could be brought into the picture, and the draft
agreement reflected a means of implementing that hope.

In view of



the fact that any drawings under the special Fund arrangement could have
a maturity up to five years, the Swiss had incorporated an equivalent
arrangement in the draft agreement.
Mr. Mitchell inquired whether it seemed desirable to continue
to limit Federal Reserve swap arrangements with other central banks to
three-month or six-month periods.
Mr. Sanford replied that, as Mr. Young had indicated, the draft
agreement provided a way for Switzerland, which was not a member of the
International Monetary Fund, to extend intermediate-term financial

The other principal countries were providing such intermediate

term help through the contribution of funds in connection with their
membership in the International Monetary Fund.
Mr. Mitchell then inquired why, if the other System standby swap
arrangements were on a short-term basis, subject to renewal,

the agreement

with the Swiss National Bank should not also be subject to renewal on a
similar basis.
Mr. Young replied that it was always possible to convert a swap

into a drawing from the Monetary Fund if circumstances should necessitate.
The provisions of the draft agreement with the Swiss National Bank had

been set up with a view to providing an alternative to Swiss membership
in the Monetary Fund.

In particular circumstances, it was conceivable

that something might be worked out with other countries that would
involve provisions similar to the Swiss arrangement.


Mr. Hayes commented that it was his understanding that this

arrangement was sui generis.

It was not likely to be a precedent for

similar arrangements with other countries.

It was an effort to accommodate

the peculiar set of circumstances whereby Switzerland was not a member
of the Monetary Fund, yet would like to enter into arrangements that
gave it an opportunity to offer assistance along the same general lines
as the pattern within which the Fund program would operate.
Mr. Mitchell indicated that the purpose of his questions was
primarily to inquire whether surplus countries might not be persuaded
to lend to the United States on an intermediate or long basis, and Mr.
Young noted that certain efforts along those lines were being undertaken
by the Treasury.
After further discussion, it was under
stood that the Committee would be agreeable
to indicating to the Swiss National Bank
that the draft agreement distributed under
date of December 14, 1962, would be a satis
factory basis for further negotiations.
Mr. Sanford commented that in a day or two the New York Reserve
Bank would send a telegram to all Federal Reserve Banks concerning the
year-end valuation of Federal Reserve foreign currency accounts and a
procedure whereby distribution of profits and losses hereafter would be
made on a quarterly basis.

Provision would also be made for quarterly

distribution of commissions earned on bankers acceptances, commitment
charges on foreign loan arrangements, and Foreign Department expenses.



These procedures had been the subject of study by the Federal Reserve
Bank and the Board's staff in recent months.
Mr. King joined the meeting during the foregoing discussion of
foreign currency operations.
The Chairman then inquired whether there were further questions
or comments on Federal Reserve foreign currency operations.


being none, he called for the staff reports on economic and financial
Mr. Koch presented the following statement on economic

Although only two weeks have passed since the Com
mittee's previous meeting, some new information on recent
domestic economic developments has become available in the
interim. In a word, this information continues to be of
mixed significance for an evaluation of the likely future
course of economic activity. Although the feeling of
greater optimism regarding business prospects persists,
this optimism still is based more on expectations than on
tangible economic evidence.
On the favorable side of the economic news, one would
include higher retail sales, particularly of autos; larger
steel output; an increase in the average workweek in
manufacturing; and the mildly better performance of the
leading business indicators considered as a group.
Preliminary indications are that orders for nonelectrical
machinery rose further in November.
Sales of new domestically produced autos in November
were at a seasonally adjusted annual rate of 7.5 million
units, as compared with 8.1 million in October. In the first
10 days of December, auto sales were down somewhat, but they
were still a record for the period. Stocks of new cars have
risen little, and on December 10 were only about 790,000
units. Christmas buying early in December was disappoint
ing, but it is still too early to predict retail sales for
the month as a whole.



A further increase in the gross national product of
perhaps $7 billion is indicated for the current quarter.


would bring it to a level around $562-$563 billion, about
4-1/2 per cent above that of the fourth quarter a year ago
and 11 per cent above the preceding cyclical peak 2-1/2 years
ago. Most of the recent increase has come from increased
spending by consumers on autos and services. Government
spending is also up. Business inventory accumulation is ex
pected to be up a little, reflecting an end to the liquidation
of steel stocks, but accumulation is still likely to be at a

low rate.
On the unfavorable side of the news is the rise in the
seasonally adjusted unemployment rate back to the August

September rate of 5.8 per cent of the labor force, the lack of
increase in the November industrial production index, the
somewhat disappointing recent surveys of anticipated business
capital spending, and the greater recognition of the probable
obstacles to an early tax cut.
I interpret the higher November unemployment rate and
the stable production index as continuing evidences of the
lack of vigor and dynamism in the current economic expansion.
Indeed, the labor force, the level of employment, and the
number of the unemployed were all at about the same levels
last month as at midyear. The industrial production index has
now shown no real change, either up or down, for four months.
The record recent demand for autos has not been reflected in
the production index because auto assemblies have been at
virtual capacity.
Prices also continue to show little change, with the
wholesale index of industrial commodities at about the year
ago level, and with the combined wholesale index remaining at
essentially the same level that has prevailed since early 1958.
Productivity in manufacturing is also apparently continuing to
increase faster than wages, including fringe benefits. Labor
costs per unit of output are still tending downward, although
not as much as during the early stages of recovery when
output was increasing rapidly.
As for business spending, current indications are that
this area of the economy is not likely to contribute
significantly to a sharp upswing in the near future. Inventory/
sales ratios of business enterprises have been quite stable

over the past year and are low by historical standards.


are not so low, however, when one takes into account the
longer run downward trend in the ratio that has been developing
over the past decade. Purchasing agents claim that inventories



are conservative but adequate in view not only of the volume of
business they are currently experiencing, but also the volume
they expect in the foreseeable future.
Business spending on fixed capital for the year 1962 as a
whole is now estimated at about $37-1/2 billion, 9 per cent
higher than last year and 1 per cent more than the previous
record in 1957. The latest McGraw-Hill survey indicates only a
modest increase, if any, for 1963 over the current level. The
more recent Commerce-SEC survey indicates a small decline in
spending in the first quarter of next year.
Estimates for 1963 spending are, of course, based on
preliminary plans and are subject to revision. I suspect they
do not yet adequately take into account the effects of recent
changes in allowable depreciation rates and in the new invest
ment tax credit. Nevertheless, it seems quite clear that at
least no great upswing is likely to occur in business capital
spending in the months immediately ahead.
In conclusion, swings in business sentiment strike me as
having been much larger over the past year than were warranted
by the unfolding economic facts. Last summer and early fall's
talk of recession proved to be wrong. One hears much less of
it now. The evidence we have on hand today, it seems to me,
remains most consistent with the view that economic conditions
are likely to continue to improve early next year, but still
at quite a plodding and unsatisfactory pace. Whatever happens
eventually to the tax proposals, the first half of 1963 still
poses many uncertainties.
Mr. Holland presented the following statement on financial develop
Our financial system now stands almost precisely at the
crest of its seasonal pressures. We must wait for one or more
additional reporting dates to see the full dimension of the
seasonal movements in our statistics, but already we can judge
that the fall credit expansion has been substantial. Our first
figures from city banks suggested some slowing of increases in
bank loans to nonfinancial borrowers in November and prior to
the tax date in December, but nonfinancial loan expansion in
country banks appears to be continuing fairly strong. Meanwhile,
bank financial loans, after declining in November, turned up
strongly as the December pressures moved Government securities
dealers and others into the banks. In addition, banks added to
their holdings of both Government and non-Government securities.
Reflecting these bank asset increases, bank deposits
continued to grow more than seasonally. Required reserves
behind private deposits have mounted to over $100 million above
the standard set down in the staff memorandum. The money supply



was up an estimated $300 million further in the first half of
December, showing an annual growth rate of almost 6 per cent
from its trough in August. Furthermore, this added money
supply appears to have been relatively well utilized by the
economy, with demand deposit turnover advancing during the fall
to an October-November rate 9 per cent above a year ago. Time
deposits have continued to grow and, along with other deposit
type savings outlets, are completing a year of record increases.
This took place in an environment in which free reserves
worked down to the lowest average in two years. These low free
reserve figures were of relatively short duration, but they did
not appear to have any tightening influence in the central
money markets. Funds were flowing in and short-term interest

rates held more or less stable during the period since the last
meeting. Member bank borrowing, however, continued at close to
or above the $100 million level that it had moved up to in
November, suggesting some combination of either slightly greater
reserve tension, greater bank credit demand, and/or some differ
ing distribution of reserves around the country.
Money and capital markets during December were active, as
investors and dealers adjusted their holdings to changing

expectations as to the outlook and a tax cut.

Attention to

underlying seasonal influences also was in transition as mid
December tax and dividend dates passed without strain and the
months of seasonal downward pressure on rates approached.
In particular, seasonal influences are converging upon the
3-month Treasury bill rate. Data for past years indicate that
the bill rate ordinarily reaches its seasonal peak in the week
before Christmas. Seasonal influences, taken by themselves,
then tend to soften rates in the final week of December and the
first week of January, and for some five months thereafter,
with the softness ordinarily concentrated in the weeks around
the turn of each month. These seasonal influences can be
overridden by cyclical influences, as often happened in the
1950's, or they can be "ironed out" by official action, as

occurred in 1961 and 1962.

One key contributor to seasonal

strength in the bill market, however--nonbank buying--seems
likely to enter the market this year with more vigor than in
the previous two years, since investible cash flow appears

larger and the supplies of alternative money market instruments,

such as commercial and finance company paper and negotiable

time certificates of deposit, are likely to increase more slowly.
(Banks, on the other hand, are likely to be much smaller short
term buyers than in 1961--perhaps no more than in 1962.)
Dealers may help to slow any rate declines this year by unloading
their current near-record holdings of bills, but the fact that

they have been prepared to build up their inventories so far
indicates their expectation of a strong bill market ahead.



The biggest influence countering any bill rate decline
for the next month or so will undoubtedly be the Treasury's
intended marketing of additional bills. The planned total
involves a $200 million increase in 6-month bills on January 3
and January 10, a $500 million increase in one-year bills in
mid-January, and $2 billion June tax bills, in perhaps one or

two separate offerings in later January or early February. The
market weight of these Treasury bill offerings, however, could
develop too late to offset some immediate post-Christmas down
ward pressure on bill rates. Market attention will be attracted
by the imminent succession of announcements concerning the
Treasury's $250 million bond offering to underwriters, currently
expected to begin this Thursday, but the extent to which such
an influence will pervade the various maturity sectors of the
market is problematical.
It should also be noted that any need for sizable System
open market sales purely to absorb reserves is probably two to
three weeks off. The reserve effects of changes in float,
currency, and required reserves seem likely to about balance
out until after the next meeting of the Committee.
Absent any special System actions or unforeseen market
influences, the near-term prospects appear to be for some down
ward rate pressures to materialize in the intervals between
Treasury financings and other official selling operations.
Judgments will vary as to the concern to attach to this develop
In point of fact, the financial environment of the moment
appears to suggest a rather narrow range within which policy
could be flexed. The growth of bank credit and money, even with
the recent somewhat higher borrowing and reduced free reserve
figures, hints at the possibility that the banking system does
not need quite as much nurture in the way of reserve availability
as it did earlier in the year in order to keep growing. On the
other hand, the low covered bill yield spread and reported lack
of substantial short-term fund flows between New York and Londonthe only other major money market of the world--suggests that a
rate might not trigger much in
slight seasonal easing of bill
the way of net additional short-term outflows.
A third factor, the prospective Treasury financing schedule,

covers much of the time from this Thursday almost to the end of
January during which, other things being equal, an "even keel"

policy would presumably be desirable.

It seems to me conceivable that a gradual drift of free
reserves back down in the direction of the first-half December
level might still sustain some monetary expansion, might moderate
money market rate declines somewhat, and yet might not do violence



to the "even keel" concept, provided that the free reserve

downdrift were tempered as necessary to offset any spurts of
market pressures that might otherwise tend to push short-term
interest rates back above their early December levels. Within
this operating framework, market forces themselves could be
left to do the rest of the job of balancing reserve availa
bility and money market trends.
Mr. Furth presented the following statement on the U. S. balance
of payments and related matters:
Preliminary figures for November confirm the tentative
estimate of the U. S. balance of payments position reported
at the last meeting. According to the officially adjusted
figures, net transfers of gold, foreign currencies, and dollars
were negligible; if the recent statistical adjustments are
disregarded, there has been a net transfer to foreigners of
$200 million.
Tentative figures for the first two weeks of December
indicate a small surplus according to the official calculation,
and a small deficit if recent statistical adjustments are
As the second half of December tends to be seasonally
favorable, especially if a repetition of last year's large
window-dressing operations is avoided, the U. S. payments
deficit for the year may not be very different from that for
the first 11 months of the year.
In this case, it would be
about $2-1/4 billion according to the official statistics, or
nearly $3-1/2 billion if debt prepayments are deducted from
U. S. receipts and the recent statistical adjustments are
disregarded. According to the official calculation, the
deficit would be slightly smaller than last year (although
much larger than forecast by the Treasury last summer), but
on the basis of the conventional calculation it would be
slightly larger than last year.
Economic conditions abroad have not changed much, except
that optimism about further economic growth in Europe seems
to have risen further. If this optimism proves justified,
our exports next year may well surpass this year's total.
The Department of Commerce has prepared a tentative and
confidential projection of next year's deficit which, assuming

no further debt prepayments or statistical adjustments,
envisages a deficit of nearly $3-1/4 billion, hardly smaller
than this year's deficit. The projection is based on a
decline of $900 million in commercial exports (exports not
financed by Government funds) and an increase in imports of



goods and services of $800 million, offset by an increase in
investment income of $200 million and a decline in the net
outflow of long-term capital of $600 million and of short-term
capital of $300 million, as well as a decline in net untied
Government expenditures (disregarding prepayments and
statistical adjustments) of $600 million.
The most disturbing part of that projection is the expected
decline in commercial exports. The projection assumes that
U. S. exports, especially those to other industrial countries,
are determined more by trends in foreign investment than by
changes in foreign national income, because U. S. nonagricultural
exports consist mainly of capital goods rather than of consumer
goods. Thus, if investment in Europe did not increase, U. S.
exports would tend to decline even if national income in
Europe continued to rise. Although this assumption is derived
from statistical correlations, its validity seems doubtful.
Moreover, if present optimistic expectations about economic
conditions in Europe were fulfilled, investment as well as
consumption might continue to rise, and U. S. exports of capital
goods could be expected to increase or at least not to decline
even if the alleged statistical correlations were valid.
Past experience has shown that the net outflow of invest
ment capital from the U. S. tends to change in the same
direction as our trade surplus. Thus, if the projections of
our trade surplus proved too low, the projections of our capital
outflow also might have to be raised--unless our economy gen
erated meanwhile a substantially greater demand for domestic

investment funds.
If, however, an increase in our exports coincided with a
revival in our domestic economy, and if the projections of a

decline in our net Government expenditures abroad proved
correct, our payments position might well change for the better
next year. But even under these optimistic assumptions it
would still be far from equilibrium.
At this point Chairman Martin noted that Mr. Young had just
returned from a meeting in Paris of Working Party 3 of the Organization
for Economic Cooperation and Development.

In the circumstances, he

felt that it would be helpful if Mr. Young were to comment on the meeting,

He mentioned, in this connection, that under yesterday's date Mr. Young
had distributed to the Committee certain documentation with respect to
the meeting.


In his comments, Mr. Young said that at the meeting of the

Working Party the U. S. participants were exposed to searching and
critical questioning about U. S. debt management and monetary policies,
with particular reference to adaptations that might be expected in the
light of the Administration's proposed tax cut.

The questioning was

probably motivated in part by a feeling that the OECD Economic Policy
Committee, in responding favorably to a U. S. solicitation of endorsement
of the Administration's proposed tax reduction, may have given a blank
check in the form of assurance of European cooperation in financing any
enlarged U. S. balance of payments deficit that might result from
stimulation of the economy.

In other words, the Europeans may have felt

that they had failed, through inadvertence, to exact a compensating U. S.
commitment that its monetary policy would now begin to carry a larger
burden in combating the persisting balance of payments deficit.
In any event, however, the confrontation reflected sincere and
honest doubts as to whether U. S. monetary policy was properly geared to

the balance of payments problem.

From this standpoint, the probing

perhaps reflected the elements out of which that intangible thing called

confidence is compounded.
The first step in the meeting, Mr. Young said, was an extended
review of debt management.

At European request, the Treasury presented

its debt management chart show, especially adapted to this particular
purpose and audience.

The visual charts prompted many and varied ques

tions, but the ones that stood out as recurrent related to the growth of



the Treasury's short-term or unfunded debt, to the apparently chronic
indisposition of the Treasury to tap directly both the longer side of
the intermediate market and the longer term market, and to the handicaps

to debt management of the interest ceiling.

Behind these questions was

a larger one that from time to time made its presence felt:


whether it would not be a good idea for the Treasury to finance its
prospectively larger deficit by longer term offerings in order to put
long-term rates under upward pressure and thus help to make the U. S.

market a less attractive one to foreign borrowers.
The second step in the Working Party's discussion was a review
of U. S. monetary policy, based on a Secretariat paper circulated just a
few days before the meeting.

The purport of the paper was merely to set

European and U. S. viewpoints in a juxtaposition that would activate

But the authors also seemed to entertain a hope of eliciting

a confession that Federal Reserve monetary policy had been too easy and
had made worse the balance of payments deficit, and further a profession
of desire to mend our ways to help correct the deficit, at least now that
tax reduction and a more stimulative fiscal policy were in sight.


Secretariat paper obviously called for a rejoinder that would endeavor
to persuade the Europeans that the U. S. monetary authorities were aware
of both the internal and external aspects of their monetary problem, had
been pursuing a policy geared to both objectives, and would make
adaptations in the light of both objectives in the future.

At the same

time, it had to avoid advance commitment as to the precise nature or



timing of such adaptations.

There had been mimeographed for the

Committee's information, Mr. Young noted, both the Secretariat's paper
and his rejoinder.
The details of the discussion on U. S. monetary policy would
take unduly long to recite, Mr. Young said.

Suffice it to report that

after two and a half hours of debate there seemed to be a consensus that
present System policy, giving special weight to domestic factors, was

not inappropriate for the time being, but that if and when tax reduction
was enacted and took effect the Federal Reserve would face another

problem. While this was the consensus, there remained a skeptical

These representatives expressed themselves as believing that

the balance of payments deficit was so urgent that monetary policy

could no longer compromise between internal and external considerations,
but had now to give the greater weight to the external.
Mr. Young concluded by saying that further Working Party
consideration of U. S. debt management and monetary policies was not

foreclosed by this particular discussion.

In fact, the Chairman in

expressing the meeting's consensus stated that in his view there were
additional aspects of these policies in need of Working Party examination
and that he was therefore placing U. S. financial policy on the agenda
for the next meeting to be held late in January.

In a discussion based on Mr. Young's comments, Mr. Mills asked
Mr. Young if he would develop briefly the reasoning of those Europeans



who would prefer a tighter U. S. monetary policy and higher interest
rates irrespective of the fact that the economic impact of that sort
of development might be adverse to encouraging growth in the economy
and the kind of strength that would provide a better U. S. market for
foreign goods.
Mr. Young replied that this point of view reflected the empha
sis they placed on capital outflow as a disequilibrating factor in the
U. S. balance of payments, and the effects of such outflow on the U. S.
reserve situation and on general confidence, as they saw it, in the

This point of view was set forth in the memorandum of the

Working Party Secretariat that had been distributed to the Committee.
In fact, it was set out so strongly that he had felt it necessary to
make a rather detailed rebuttal, in which he pointed out that U. S.
interest rates had been at levels believed to be consistent with
this country's economic position and that this country was experienc
ing capital outflows particularly because of a lack of other markets
to which foreigners could turn at this time, even for short-term

This situation placed a special burden on the U. S. balance

of payments that could only be alleviated gradually over a period of
Mr. Mitchell inquired whether it appeared that in the back
ground of the European judgments represented in the Working Party
there was the interest of foreign lenders who did not like to see
their potential customers coming into the U. S. market.


Mr. Young replied that he could not say whether this was the


However, the Europeans were protectionist minded in terms of the

restrictions placed on foreign borrowing in their capital markets.

The U. S. participants had been pressing in the Working Party discussions
for a more enlightened and far-sighted view of this problem and the
need to remove obstacles to foreign financing of capital requirements,
particularly from the standpoint of longer run developments.
Mr. Robertson commented that the European view to which Mr. Young
had referred in his remarks apparently would call for a U. S. monetary
policy that would increase interest rates across the board rather than
simply in the short-term area.

However, the capital outflow, such as

it was, existed principally in the longer term area.
Mr. Young agreed that this had been true this year.

He added

that the Europeans had urged at times a harness of capital controls.


the U. S. was unwilling, they felt that the only recourse was to take

monetary actions that would permit interest rates to move higher across
the board.
There followed a brief discussion of the role of U. S. military
aid in the U. S. balance of payments during which Mr. Young commented
that U. S. participants in the OECD and in Working Party 3 had been
attempting without a great deal of success to broaden the range of
discussion to give more attention to the subject.
The Chairman then called for the usual go-around of views and
comments on economic developments and monetary policy.


-29Accordingly, Mr. Hayes began the go-around by presenting the

following statement:
The improvement in the business situation continues to
be more a matter of atmosphere and expectations than of solid
achievement. Such figures as have become available recently
do not throw much additional light on the outlook. Basically,
both the current situation and the outlook remain unchanged,
i.e., the evidence points merely to continuation of a
relatively slow advance.
Optimistic business sentiment has been dampened a bit in
the past week by second thoughts on the difficulties of getting
early and effective tax legislation through Congress. While
there is undoubtedly a strong ground swell of sentiment for
tax reduction, both as a long-needed basic reform and as a
means of attacking the immediate problem of inadequate use of
resources, the uncertainties with respect to the trend of
Federal spending have caused some doubt as to the extent to
which tax reduction may be feasible and desirable. From the
System's point of view, it seems to me of the utmost importance
that these doubts be resolved and that appropriate tax action
be taken both for its own sake and because of its effect in
lessening the burden of monetary policy's responsibility for
domestic economic conditions.
I believe we can take a great deal of encouragement in this
respect from President Kennedy's address to the Economic Club
in New York last Friday. His forthright statement that easy
money has gone about as far as it can go without causing a
hemorrhage in our balance of payments clearly shifts the main
burden of stimulating economic activity to fiscal policy, while
his emphasis on the need to restrain Federal expenditures out
side the defense-related areas should provide assurance to those
who have been deeply concerned, as I have been, with the problem
of controlling the rise in Government spending. We should also
be gratified by his expression of confidence in Chairman Martin
and by his reliance on the Federal Reserve to use its monetary
tools wisely. The tax bill still has a long hard road to
travel, and it would be naive to expect perfection, as the
President clearly recognized. I believe, however, that the
speech cleared up a great many misapprehensions about the
Administration0s philosophy in advocating a tax cut at the
present time when a substantial deficit is already in prospect,
and put in good perspective the need for fiscal policy to share
the burden of growth stimulation with monetary policy, and the
role of monetary policy in defending the balance of payments. I



might add that the President's presentation--particularly in the

question and answer period--was most impressive and that the
response from the business and financial leaders present was
quite positive in character.
The balance of payments continues as discouraging as ever,
despite the sharp drop in the over-all deficit from October
to November. Much of the drop reflected a reversal of October
window-dressing operations, and the November total was helped
by special Government transactions in the amount of more than
$100 million. Furthermore, the average deficit for the last
three months--$416 million--was above the already high level

for the same period a year earlier and the results for the full
year 1962 are bound to cause much disappointment both here and
abroad. The sharp export decline in October, explainable only
in part in terms of anticipation of the longshoremen's strike,
is disturbing in view of widespread hopes that an improving trade
surplus may be one of the principal keys to ultimate equilibrium
in our international payments. In contrast with these disturbing
considerations with respect to the basic balance of payments,
the gold and exchange markets remain generally calm, and we have
been able to avoid a drop in the monetary gold stock for a good
many weeks. While this is reassuring as evidence of lessened
political tension, of effective international financial
cooperation, and of a considerable degree of confidence in the
dollar, there is always danger that the surface evidence may
be mistaken for the reality and that this momentary calm may
cause undue complacency on the whole balance of payments
Bank credit continued to expand vigorously in November,
with business loans increasing more than seasonally, although
less rapidly than in the previous three months. Liquidity
positions at New York City banks, which had declined sharply at
the time of the refunding, have improved appreciably since then.
The money supply has risen substantially for the second month
in a row, and time deposits have continued their sharp advance.
Whereas seasonal factors have for some weeks been helping our
efforts to maintain a firm short-term interest rate structure,

we are now at the time of year when these seasonal factors may
soon be expected to work in the other direction.
It seems to me that the continuing uncertainties in the
domestic outlook, together with the absence of any dramatic
evidence of crisis in the international financial area, preclude
at this time a decisive or overt move with respect to monetary


On the other hand, in view of the improvement in business

sentiment and the continuing abundance of liquidity, I think we

can afford to focus more attention on our objective of maintaining



a firm short-term rate structure, with particular concern for
the 90-day bill rate. In view of the seasonal factors now in
prospect, maintenance of the bill rate around its current
level will probably require some lessening in the degree of

ease in the money market, as measured by such factors as the
Federal funds rate, the level of bank borrowing, and the level
of free reserves. I am quite prepared to advocate such a
moderate lessening of ease with a view to maintaining a firm
bill rate structure. A modest move of this kind would put the
System in the posture of defending a range of short-term rates
that has existed for some time. It would be less obtrusive
than an effort to push rates upward at a time when seasonal
factors were also working in that direction or were neutral.
Our balance of payments position still needs vigorous defending,
as the President pointed out last Friday, and this modest
action appears the least that the System can do to help at this
particular time. I would contemplate that the Federal funds
rate would be more or less regularly at 3 per cent. Borrowing
at the Federal Reserve Banks would probably be somewhat higher
than it has been, and free reserves would probably have to be
lower--perhaps in the $200-$400 million range rather than the
$300-$500 million range we have seen now for many months.
Incidentally, I doubt that even keel considerations will
be with us until the end of January, when we shall have to
look ahead to the Treasury's February refunding. Any move
toward somewhat less ease now would be fully digested by the
time of the Treasury's bond offering, which is expected some
time in the first part of January.
There would seem to be no reason to consider a discount
rate change at this time, as I feel that any clearly overt
action on our part should wait further clarification of the
business and tax outlook as well as the appearance of more
obvious balance of payments danger signals.
It would seem appropriate to modify the directive to some
extent to take account of the modest change in policy I am
suggesting. As I have looked over the directives for the past
several months, I have been struck by the fact that, whereas
we made a change in June, in the direction of a slightly firmer
policy, the language embodying this change was abandoned for
good reasons at the time of the Cuban crisis; but it has never
been reinstated adequately, so that in effect our present
directive is, in my judgment, a good bit weaker than the one
adopted in June. I would suggest the directive might read
approximately as follows:
It is the current policy of the Federal Open

Market Committee to accommodate moderate further


increases in bank credit and the money supply, while
aiming at money market conditions that would minimize
capital outflows internationally. This policy takes
into account the lack of any significant improvement
in the United States balance of payments and the recent
substantial increase in bank credit, but at the same
time recognizes the unsatisfactory level of domestic
activity, the continuing underutilization of resources,
and the absence of inflationary pressures.
To implement this policy, operations for the
System Open Market Account during the next three weeks
shall be conducted with a view to offsetting the
anticipated seasonal easing of Treasury bill rates,
if necessary through maintaining a firmer tone in

money markets.
Mr. Shuford said he had been impressed by the remarks on the
international balance of payments situation at today's meeting.


earlier uncertainties about the appropriate course of monetary policy
probably had been increased somewhat.

However, as long as the Committee

was watching closely both the domestic and the international situation,
he was not yet ready to make any drastic change in his basic position on

Turning to the Eighth District, Mr. Shuford said the data that
had become available in the past couple of weeks reflected no significant

All recent data tended to confirm the earlier belief that

District activity continued in November at about the levels established

during the second and third quarters of the year.
Reverting to policy considerations, Mr. Shuford commented that
he was aware that the Committee's decisions must recognize both the
balance of payments problem and the domestic situation.

As long as the



balance of payments was so adverse, clearly that matter must be given
much weight.

At the same time, as long as the domestic economy continued

static, as it had since the middle of the year, the Committee must be
mindful of the need for doing what it could by way of encouragement.


the light of these two necessities, it seemed to him that the Committee
had steered quite a good middle course.

Now, with a period approaching

when short-term rates normally might be expected to decline, there was
some question whether it would be possible to maintain the level of
those rates and at the same time continue to have some expansion of
seasonally adjusted bank reserves and the money supply.

It seemed to

him that it would be desirable to avoid a stagnation of monetary reserves
and the money supply such as occurred in the first part of 1962.


would suggest, therefore, that three means be considered, so far as they
were practical and effective, to assure a continued expansion of bank
reserves and the money supply, in a manner that would be compatible
with short-term interest rate necessities.

First, for the near-term

future, the System might give more emphasis to increasing somewhat its
holdings of longer-term securities.

Second, again for the near-term

future, Treasury debt management might continue to help maintain short
term rates, thereby permitting increased flexibility of System operations.
Third, to the extent compatible with balance of payments necessities,
short-term rates might be permitted to reflect some normal seasonal
decline without the Committee becoming too disturbed.


His position, Mr. Shuford noted, was somewhat different from

that advocated by Mr. Hayes.

Nevertheless, in listening to the policy

directive suggested by Mr. Hayes, he did not find himself differing too
much with that formulation.

His inclination would be to accept that

directive, even though there might be a small deviation between his
thinking and that of Mr. Hayes.

In his opinion, the Committee could

also work within the present directive, though it might not be stated
too well in the light of existing circumstances.

He would not change

the discount rate at this time.
Mr. Bryan spoke of the record low temperatures that had prevailed
in the Sixth District recently and went on to say that although the frost
had done some damage, estimates of the eventual economic effect were not
yet available.

Obviously, a good deal of the early vegetable crop in

Florida had been destroyed, but there was a question as to whether the
trees in the citrus groves had been injured seriously.

Otherwise, the

District economy had shown about the same movements as the national

Retail sales apparently had been doing a little better than

the national average and automobile sales were relatively stronger, but

the District index of steel production was weaker.
Looking at the national picture, Mr. Bryan observed that
certainly no robust expansion was occurring.

He would be inclined to

go along with the idea of no change in monetary policy.

On the basis

of the staff figures, the results of current policy seemed to have about



met the target projection, which was based on a 3 per cent growth rate
of required reserves behind private deposits.

By the same token, he

felt that the Account Manager--within a general directive of no change
in policy--must be given considerable latitude to adapt to conditions
in the money market.
Mr. Bryan also commented that the long period of time that had
elapsed since a change last was made in the discount rate had occasioned
some discussion recently by the Atlanta Bank's directors.

However, he

saw no basis for changing the discount rate at this time.

On the

matter of seasonal decline in short-term interest rates, he noted that
the problem involved comparisons between seasonal fluctuations in this

country and in other principal countries to which short-term funds
might flow.

Unless the situation in other countries was known, it

seemed difficult to tell whether or not some seasonal decline in U. S.
rates could safely be permitted.

He assumed, Mr. Bryan added, that

flows of funds were not merely a response to interest rates, but a

response to total opportunities for capital investment.

If the

international situation had shifted against the United States, in that
opportunities for capital investment were better in some other countries,
this meant that the Open Market Committee's responsibility was probably
much more complicated than it otherwise would be.
Mr. Bopp noted that the Philadelphia directors, like the Atlanta
directors, had had some serious discussions of the discount rate recently,



particularly in light of the long time that had elapsed since a change
last was made.

He went on to say that recent weeks had produced just

enough evidence to encourage either optimistic or pessimistic views,
depending on the extent to which one glossed over those facts that did
not suit his hypothesis.

Recent labor force information indicated no

further worsening of employment status; output and construction awards
appeared to be holding previous levels; and store sales were following
a pattern not much different from comparable previous years.


manufacturing employment appeared to have peaked out about on schedule,
following declines in manufacturing hours.

Combined with the leveling

off of employment and output totals, this could hardly be interpreted
as signifying satisfactory progress.
Bank credit increased at reporting banks in the Third District
in the past two weeks, Mr. Bopp said, this expansion being generally in

line with a trend that began early in the year.
had increased over the period.

Both loans and investments

There had been little change in pressure

on bank reserves.
Mr. Bopp saw no reason to change policy significantly at the
present time.

As he had pointed out two weeks previously, the recent

pickup did not change the basic fact that the major domestic problem

was one of underemployment, which called for a continuation of monetary

On the other hand, this did not seem the appropriate time for a

shift toward more ease.

Nor did it seem necessary to him, for balance



of payments reasons, to move toward less ease.

In short, he would continue

present policy and retain the directive without change.
Mr. Fulton commented that in the past two weeks the Fourth District

had been beset by a newspaper strike and a substantial accumulation of
The latter occurrence had upset the trend of many business



According to reports, numerous industries in northern Ohio

had been operating recently at around 30 to 40 per cent of usual levels,
with those employing substantial female labor being particularly hard

Thus, the statistics on hours worked would be depressed temporarily,

with manufacturing production made up later as opportunities afforded.

Turning to the steel industry, Mr. Fulton reported a gradual trend
upward in production, with orders thus far in December moderately better

than in November.

The present outlook was for a somewhat higher rate of

production in the first quarter of 1963, but for possibly a diminishing
rate in

the second half of the year.

Some steel men expected production

to total about 94 to 98 million tons next year, which would represent no
real improvement from the current year.

A slight drop in

automobiles produced also was expected.


the number of

as to the number of

domestic cars sold next year ranged around 6.2 million, or around 200
thousand higher if there should be a tax cut.

At present, sales in the

District were down substantially due to weather conditions.
Insured unemployment had increased less than seasonally up through
the first few days of December; after seasonal adjustment the figure was



5 per cent lower than for the preceding two weeks.
had been badly affected by weather conditions.

Department store sales

For the year to date they

were up one per cent from last year, but for the four weeks ended December

8 they were down 5 per cent.
Loan demand in the District was strong and interest rates were


Both business and real estate loans had increased substantially.

The daily average of bank debits was up 5 per cent from a month ago.
Turning to policy, Mr. Fulton expressed agreement with the position

advocated by Mr. Hayes.

He felt that the contribution to the domestic

economy already made by monetary policy had been substantial,
seemed desirable to him that a

firmer tone now prevail in

and it

the market.


the System was to be able to influence short-term interest rates to a
degree after the turn of the year,


this was the time to start laying the

The seasonal return flow of currency doubtless would be large,

and softening rates could encourage the flow of funds abroad.

the Committee should take cognizance of the situation and

maintaining a little

In the

firmer posture.

Fulton said he would subscribe to the policy directive sug

gested by Mr. Hayes.

He would not change the discount rate at this time.

Mr. Mitchell said he believed, as he had for some time, that the
domestic economy was fundamentally in

an equilibrium situation.


question was how the economy was going to break out of its high-level
stagnation; that is,

whether up or down.


probably would take some



significant change in
up side.

public policy for this to occur,

at least on the

Nevertheless, while he recognized that what had been happening

during the past couple of months reflected primarily a matter of psychology,
he did not feel that the matter of psychology should be dismissed too


Exogenous factors might start in motion a series of real actions

that would cause the economy to improve.
taking place was relatively small,

the possibility entirely.
possibility, it

The likelihood of such actions

but he would not be disposed to dismiss

On the other hand, in the absence of that

seemed to be up to the Federal Reserve to do whatever

could be done, both domestically and from the standpoint of the balance
of payments.

Therefore, he had been thinking in terms of a policy based

almost entirely on short-run considerations, considerations that would
extend perhaps over only the next three weeks.

Here it

seemed to him

that the System ought to have basically a policy of no change.


particular, he hoped that whatever the Open Market Committee did, it

would not prevent the money supply from continuing to rise.


he did not attach too much importance to what happened to the money
supply, but many people did attach importance to it and the Federal Reserve
could not be unmindful of its public relations posture.

Mr. Mitchell went on to say that the reasons for the rise in the
money supply in the past few months seemed to represent a well-kept

Thus far, at least, he had not received satisfactory explanations.

His own view was that something had happened to the economy, and he thought



it was the change in psychology that had occurred.

This was, of course,

a kind of offhand comment, but it was as good an explanation as he had
heard to date.

The balance of payments situation, Mr. Mitchell continued, was
one that must be kept in mind, when thinking in terms of the next three

weeks, because of the anticipated seasonal trend of short-term rates.
However, such evidence as had been presented seemed to indicate
uncertainty regarding seasonal trends.

There had been differences from

year to year, and it could be that not much of any trend would develop.
Treasury participation in the market would, of course, tend in the
direction of firming the level of short-term rates.

Therefore, he felt

that the System should not go into this period prepared to take strong
actions to bolster the bill rate at some pre-ordained level.

The primary

criterion should be the covered differential in bill rates between New
York and London, which in a sense would seem to measure the exposure of

this country to outward flows of funds at this particular time.

As long

as the differential did not exceed one-half point, the situation would

not seem too disturbing.
not be too concerned.

If the bill rate eased to that point, he would

At the same time, he felt

that some switching

operations supporting the level of short-term rates would be appropriate

in this period.

In summary, Mr. Mitchell thought it would be desirable

for the Federal Reserve to exhibit an attitude of confidence and not show
alarm if there should be some changes in short rates.



Mr. Mitchell concluded by saying that he saw no need to change
the present policy directive.
Mr. King noted that over the period of the past three Committee
meetings he had experienced a steady growth in his feeling of confidence
concerning the domestic economy.

He had become more and more convinced

that efforts aimed directly at developing confidence in the dollar abroad

were missing the point, that confidence at home was the key to confidence

In fact, if confidence was developed sufficiently at home, he

felt that the question of confidence abroad would tend to become moot.
The Committee must face the fact that some seasonal decline in short-term

interest rates probably was ahead.

This decline might be less than

seasonal, but he thought it would be wise, in anticipation of the probable

decline, to take up some of the slack in bank reserves, even though some
drop in short-term rates of purely seasonal proportions might not be
entirely inappropriate.
Mr. King expressed the view that the policy directive should be

In his opinion the directive should make a minimum play on

international considerations, reflecting his belief that the key to the
problem was the domestic situation.

Continued dwelling on the interna

tional situation, beyond necessities, would amount to protesting too
much, and it did little toward building confidence at home.

As he had

said, it was his view that if there was no confidence at home, none would
be built abroad.


Mr. King then suggested the following directive:
In view of the steady though slow economic advance of the

past year, it is

the current policy of the Federal Open Market

Committee to permit only a slight increase in bank credit and
the money supply, while avoiding money market conditions unduly
favorable to capital flows internationally.


It is

also the Committee's policy to cushion such unsettlement in
money markets as may stem from international developments of
an emergency or nonemergency character.)
To implement this policy, operations for the System Open
Market Account during the next three weeks shall be conducted
with a view to reducing free reserves on balance over the next
three weeks and to sustaining a firm tone in money markets.
In commenting on the proposed directive, Mr. King said it was his

thought that the direction of open market policy should be altered
slightly, within the general framework of even keel and without affecting
the broad course of policy to any substantial degree.

In his opinion,

free reserves should trend toward the $250 million range, with steady
progress made toward that goal prior to the next meeting of the Committee.
This was with the reservation, however,

that if at any time the bill


should advance to approximately the 3 per cent level, that would
constitute a relief valve and stop temporarily the plan to work toward
the range of free reserves that he had mentioned.

He understood that

his general prescription for policy was similar to that which some people,
both here and abroad, had been urging for some time.

However, this was

the first time it had appeared to him that the situation was such as to
make such a policy feasible.
Later during the meeting, Mr. King supplemented his earlier
comments by saying that he thought this was a good opportunity for the



Open Market Committee to give a hint, by which he referred to a slightly
reduced reserve position and possibly a slight temporary rise in the bill
rate preceding a likely seasonal decline.

He had in mind that this was

the last scheduled meeting of the Open Market Committee this year.
Therefore, this was the last opportunity for an indication of the
Committee's policy position to appear in the policy record that would
be included in the Board's Annual Report.

Assuming no change in the

Committee's present procedure for reporting its policy actions, he would
be inclined to take the opportunity not only to give a hint currently of
a slightly less easy policy but to confirm it through the publication of
the policy record in the Annual Report.
Mr. Shepardson said it

did not seem necessary for him to comment

on the data, economic and financial,

that had been placed before the

General views as to the import of that data seemed to be

fairly well accepted.

There were continuing problems of underemployment

and underutilization of resources, but he continued to believe that these
problems would have to be solved by means other than monetary policy.
There was no evidence of any lack of availability of funds for growth or

In view of the inextricable intertwining of domestic and

international problems,

it seemed necessary for the Committee to give

considerable attention to the balance of payments problem, which certainly

had not improved, if anything seemed to have worsened somewhat.

For that

reason, it appeared to him that it would be entirely appropriate to move



along the lines suggested by Mr. Hayes.

In view of anticipated seasonal

developments after the turn of the year, this would be an opportunity to
get in a little better position.

He would concur in Mr. Hayes' suggested

targets and in his suggested directive.
Mr. Robertson presented the following statement:
The information available to the Committee today suggests
to me that the pace of business activity is still undesirably

slow, and that it could continue to benefit from a generally
stimulative credit climate. Accordingly, I am glad to see that
the rate of monetary expansion has held up in December, and
that by and large no seasonal tightness was allowed to develop
in the money market.

I might say I was somewhat surprised to

see this maintained with as low a level of free reserves as we
had in the past two weeks--and I would be even more surprised
if we could continue to have such salutary results if that low

level of free reserves was maintained for very long. I
appreciate, however, that there were some peculiar influences
at work these past two weeks.
It is my judgment that we should strive to maintain a
free reserve level high enough to sustain a gradual monetary
expansion, so long as our domestic and international situations
are as they are, even if this should result in a lower bill

rate. I think it would be a mistake to reduce reserve avail
ability simply in order to hold a particular level of the bill

Whatever the need for shoring up our short-term interest

rate structure when interest-arbitrage funds are moving abroad
in size (which need, as the Committee knows, I believe to have
been overemphasized in the past year), the facts at the present
are that the covered yield differentials are moderate, and very
little in the way of covered money market funds is said to be
flowing out.
Consequently, it seems to me that the Committee should
continue a policy designed to provide for moderate net bank
reserve expansion, over and above seasonal movements. I
would hope that in no event would the Manager of the Account
seek to develop a firmer tone in money markets between now and
the next meeting of the Committee--especially in view of the
imminent Treasury financing program.
In a concluding comment, Mr. Robertson said he would not concur
in the change in the policy directive suggested by Mr. Hayes.

In his



opinion, it would be appropriate for the directive to be continued in
its present form.
Mr. Mills said that after listening to the discussion around the
table and after having read the written reports on economic and financial
developments that had been made available to the Committee, he found no
reason to change the position he had submitted to the Committee on
previous occasions, or the philosophy underlying that position; namely,
that domestic considerations should have a first call on the Committee's
policy actions.

Much had been said about the balance of payments problem.

However, as he looked at that problem over a period of time it seemed to
him that it was an international financial rather than an economic
problem, and that it should be treated as such.

If the situation should

deteriorate seriously, the treatment should take the form of appropriate
financial measures and financial disciplines.

In no event, however,

would he feel that the Committee should refrain from giving precedence
to domestic considerations and exerting such influence as it could bring
to bear toward encouraging economic expansion through the adequate
availability of reserves.

He was pleased to associate himself with

Mr. Robertson's statement, with which he fully concurred.
There was one factor that had not been brought out completely,
Mr. Mills continued, by those who argued for a considerable reduction in
the level of free reserves.

This was the psychological reaction that

might be expected to that sort of development in financial markets and
throughout the commercial banking system.

It had been said, at least by



the New York Reserve Bank, that the lower level of free reserves two
weeks ago, and again in the following statement week, was attributable
to unusual circumstances and did not reflect a change in the direction

of System policy.

If there should now be a very evident reduction in the

level of free reserves, however, it would seem inevitable that the
financial community would interpret this as a change in policy.


a time of year was at hand when banks and industries and commercial
concerns were laying their plans for 1963.

If there should appear to be

a change in policy, reflected in a tightening of money market conditions
or an apparent desire that the level of borrowings at Federal Reserve
Banks should increase, he was fearful of the impact on the thinking of
the financial community.

Therefore, such a development could run contrary

to the System objective of encouraging and fostering strong economic

Fortunately, over the period until the next meeting of the

Committee, a considerable eddying in the movement of funds would not be
apt to cause any great concern, whatever form System policy actions
might take.

He hoped they would not be in the direction of a restrictive

change in the direction of policy, but fortunately he did not think much
harm could be done even if that should be the case.
In conclusion, Mr. Mills said that he would make no change at
this time in the policy directive or in the discount rate.
Mr. Wayne reported that the generally strong and steady pace of
Fifth District business had not changed significantly during the past two


The textile industry was still the biggest question mark as mill

operators continued to report slight declines in orders, shipments, hours,
and employment, and nominally higher inventories.

Forward buying of

cotton goods had been unusually light for several months, which had to a
considerable extent deprived manufacturers of their customary guidelines
for scheduling production.

As a result, shortages of some fabrics and

excess stocks of others had developed as buyers sought goods on short
notice to meet changing current needs.

This unusually cautious ordering

of cotton goods was attributed to the belief that lower prices might soon
result from Government action to eliminate the cotton price differential
in favor of foreign buyers caused by subsidizing cotton exports.


manufacturing industries had maintained high levels of activity.


makers, busy all year but particularly since the fall market, reported a
further increase in orders.

Both gross farm receipts and farm expenses

were up from 1961, so that net farm income would be about the same as
Next year was shaping up as an uncertain one for tobacco

last year.

The Department of Agriculture had reduced acreage allotments

5 per cent for flue-cured varieties and had indicated that it would take
action through price support discounts in 1963 to force diversification
of types planted and to discourage the use of the sucker control chemical
MH-30, which increases yield but to some extent apparently at the expense

of quality.
As he saw it,

Mr. Wayne said, the national economy in the past

two weeks had continued in the pattern set in November, with business



sentiment reflecting somewhat more optimism than business developments.
On balance, current business activity showed little net change and there
was nothing on the horizon suggesting an early upsurge.

At the same time,

the hope for an early and substantial tax cut, one of the major factors
sustaining business optimism, was encountering increasing controversy
and uncertainty.

Should the hope for tax reduction be postponed or fade

away, there was likely to be a substantial lessening in business optimism,
which could unsettle the present precarious balance.

While there was a

distinct chance of such unfavorable developments, there was little that
monetary policy could do to guard against them other than to maintain a
ready availability of reserves, as the System had been doing for many
In the policy area, Mr. Wayne noted that recent operations seemed
to have been appropriate despite some unusual movements in the level of
free reserves.

Despite sharp declines in free reserves since November 21,

the average rate on Federal funds had declined only slightly, bill rates
had been fluctuating within a range of only a few basis points, loans

and discounts of city banks had been showing healthy increases, and the
money supply continued to rise moderately.

No doubt these apparent

inconsistencies had resulted in large part from a shift in the distribution
of free reserves which largely offset the swings in their totals, but
they illustrated the difficulties of undue reliance on free reserves as
a policy guide.

All available evidence indicated that sufficient reserves



had been provided to meet and even to exceed the seasonal needs of the
economy, and the Manager had maintained a steady tone in the money market,
as instructed by the Committee in its most recent directive.

Since there

had been no significant change in economic developments during the past
two weeks, Mr. Wayne saw no reason why the Committee should not renew
its current directive.

He would not recommend changing the discount rate

at this time.
Mr. Clay expressed the view that a continuation of current monetary
policy until the next meeting of the Committee would appear to be in order,
Any tightening of policy would not be in keeping with domestic economic
needs, which probably would be better served by moving toward further ease.
On the other hand, it was difficult for him to see how the international
balance of payments problem would be aided by a slight firming of monetary

Recent economic developments supported the view that there had

been no basic change in the domestic economy in recent weeks.


improved sentiment and pluses in some economic indicators, the recent
record in employment, industrial production, construction, and business
capital outlays did not produce a picture of an economy showing significant
advancement and progress toward fuller utilization of resources.
Mr. Clay noted that the above-seasonal expansion in business
loans at weekly reporting banks in recent months had attracted considerable

This interest had been heightened by the fact that the business

loan expansion occurred during a period when the level of economic



activity had shown little improvement.
was not readily apparent.

The appropriate interpretation

One possible view was that the expansion

constituted evidence that credit was generally available at banks and
that banks were actively promoting the use of credit.

If this view was

valid, then it was precisely the kind of improvement in credit availability
that monetary policy should hope to promote under current conditions.


second view might be that the growth of business loans reflected shifts
of financing from other sources and not a growth of total credit.


would seem that this possibility also would be regarded as favorable in
terms of monetary policy, since nonbank funds would press for investment
and improve interest rates and availability for borrowers in other areas
of the credit and capital markets.
Pursuit of the monetary policy suggested by Mr. Clay for the next
three weeks would have as targets a 90-day Treasury bill rate of 2.80 to
2.85 per cent, a Federal funds rate of 2-3/4 to 3 per cent, and continued
expansion of member bank reserves on a seasonally adjusted basis.


tions would be conducted in longer maturities to the extent necessary to
avoid undue pressure on the Treasury bill rate.
In Mr. Clay's opinion, no change should be made in the Reserve Bank
discount rate.

Apart from a possible change in the general form of the

directive, he felt that the wording of the directive could be left
Mr. Scanlon reported that economic trends in the Seventh District
continued to be largely seasonal, with no clear-cut evidence of rise or



Despite the absence of material changes in statistics, reports

from businessmen continued to reflect a modest strengthening of optimism,

or at least less inclination toward a decline.

A representative of one

of the major auto manufacturers, while noting that new car sales were
declining in December, interpreted recent developments, over all, as
providing reassurance that sales of 1963 model autos and trucks would
both continue strong.

He noted that used car prices had held up surprisingly

well, that cash customers were relatively numerous even after allowing for
seasonal effects, that the proportion of more expensive cars had risen,
and that inventories were at favorable levels.
Demand for business loans at weekly reporting banks in the Seventh
District, after showing considerable strength in the past two months,
appeared to have leveled off somewhat in the past two or three weeks.
Consumer loans had shown a marked rise, but the increase in District banks'
acquisitions of real estate loans and securities other than U. S. Govern
ments had slowed.
As to policy, it seemed to Mr. Scanlon that the directive as
presently stated was still appropriate.

However, it was doubtful that

the moderately less easy reserve position of the past two weeks would
sustain a rise in reserves and money supply unless credit demands strength
ened further, and he saw no clear evidence of this happening.

He believed

that a reversal of long-term rates to higher levels would be premature if
it reflected more than seasonal pressures.



Due to the uncertainties in the money market and usual difficulties
of reserve projections in the period until the next meeting, it seemed

to Mr. Scanlon that it would be appropriate to make every effort to
maintain an even keel in the market.

He recognized that maintaining an

even keel during this period might present problems to the Account Manager,
and he felt the Manager should be given ample latitude in which to operate,
but he would not object to a slight decline in the bill rate.

He proposed

no change in the directive or the discount rate.
Mr. Deming reported that there had been no recent developments of
such significance in the Ninth District as to change the trends already
in existence.

The Reserve Bank's most recent sounding of sentiment-

primarily business sentiment--in mid-December showed no particular change
in the level of optimism.

He had rather thought that the degree of

optimism might have improved somewhat, but the survey showed no change
from six months ago.
As to monetary policy, Mr. Deming said he would advocate basically
a policy of no change.
now written.

He would favor renewing the policy directive as

From Mr. Young's comments, and others he had heard, he

thought he detected a feeling that the problem with respect to capital
flows and interest rates involved more a question of confidence than a
question of real movements of funds.

There did not seem to be much that

the Federal Reserve could do at the moment to change the basic balance of
payments picture, or even the capital flows part of the picture.

He did



think, however, in light of some of the comments that had been made, that

it might be of more importance than he had thought two weeks ago to
insure that the short-term rate did not drop appreciably. Therefore,
within the context of the directive, he would have the Account Manager
pay somewhat more attention to the short-term rate during the next three
weeks than to the level of free reserves.
Mr. Swan reported that in the Twelfth District there was no change
in November from the seasonally adjusted rate of unemployment in October.
However, it was encouraging to note that initial claims for unemployment
benefits on an average weekly basis dropped materially in November after
small increases in each of the preceding two months.

Construction and

retail sales apparently continued strong, with some slight further
improvement in November.

Estimates of cotton production as of the first

of December indicated record yields in California, which should provide
strong support for farm income through the year end.

The cancellation

of the Skybolt missile program was viewed with some concern in southern
California because of the impact on the operations of one of the large
aircraft firms in that area.
The major District banks, after having been rather consistent net
buyers of Federal funds through the first week of December, were about in
balance last week, and if anything expected to be net sellers in the
current week. They did not expect, as of last Thursday, to be faced with
any large volume of midmonth borrowing for tax purposes.

Many savings



and loan associations in California had announced an increase from 4.75
to 4.8 per cent in the dividend rate on share accounts, thus meeting the
competition of a few aggressive associations that had offered the higher
rate since the first of this year.
Turning to policy, Mr. Swan said he saw nothing in recent
developments affecting either the domestic or international situation
that provided a reason to change policy for the next three weeks.
Therefore, he would like to see present policy continued.

He had been

rather surprised to see free reserves drop as much as they did with so

little effect on the bill rate, the Federal funds rate, or member bank

No doubt this was related to the distribution of reserves as

between country and city banks, and much of the decline in free reserves
was associated with a decline in float.

Next week there would presumably

be a rise in float, possibly with some reflux of reserves to country

Thus, a considerably higher level of free reserves than $275-$300

million would have to be maintained if the same monetary policy was

In his view a continuance of the same policy would also mean

a continuance of the underlying growth trend in nonborrowed reserves.
Presumably it would mean also that member bank borrowing would not run
significantly above a daily average of $100 million or thereabouts, with
the Federal funds rate at 2-3/4 to 3 per cent, perhaps most often at

2-7/8 per cent.

He did not anticipate a great shift in the bill rate.

As Mr. Mitchell had said, if there was some decline, that might not be too



meaningful unless it was associated with a significant widening of the
covered spread between the bill rate in this country and those in Britain
and Canada.
Mr. Swan concluded by saying that he would continue the policy
directive in its present form and that he would not advocate a change in
the discount rate at this time.
Mr. Irons reported that there had been no significant developments
in the Eleventh District. Therefore, he would not take time to spell out
the slight plus and minus movements that had been recorded around a high
level of activity.
As to policy, Mr, Irons said that he did not see any need for a
significant change, particularly during the next three weeks.

He found

himself getting into such fine shadings that perhaps they became almost

Certainly, he would not advocate any overt action or

pressure in one direction or the other.

If market conditions should tend

to record a bit more firmness, he would not undertake to offset it.


would he deliberately undertake to add to the degree of ease in the market,
for he felt that the current degree of ease was adequate and the position
of the banking system was adequately liquid.

Consideration should be

given to the level of short-term interest rates, but he would not be too
much interested in maintaining any specific level.

The objective of the

Desk should be to minimize to the extent practicable the movement of funds
abroad; therefore, such influencing of short-term rates as may be required



to achieve that objective would represent the proper approach.

He would

not be too much concerned about where free reserves happened to fall in
the next three weeks; there undoubtedly would be large fluctuations in
float as seasonal influences began to take hold.

In these circumstances,

free reserves could swing considerably one way or the other in a
nonpredictable way.

The Account Manager would have to give close

attention to the tone and feel of the market, trying to maintain
conditions that would be appropriate to the Committee's basic objectives
from the standpoint of both short-term rates and the adequacy of reserves.
Mr. Irons indicated that he would not favor changing the policy

directive; what he advocated for the next three weeks could be accomplished
within the framework of the present directive.

He would not recommend

changing the discount rate at this time.
Mr. Ellis noted that reports from downtown Boston department stores
had been showing sales running behind year-ago levels by some 6 per cent.
However, improvement was noted beginning last week.

If it were to

continue, the stores might come out even with last year, with the District
as a whole up about 2 per cent on Christmas sales.

In general, District

data that had become available during the past two weeks seemed to indicate
that business sentiment was stronger than the statistics.

It also seemed

that the demand for bank credit was stronger than the economy from which
it emerged. While New England manufacturing output had declined for two



months, seasonally adjusted figures for commercial and industrial loans

were up 4 per cent on an annual rate.
In reviewing policy considerations, Mr. Ellis noted a lack of
evidence that the economy was surging ahead.

There continued to be a

serious underutilization of resources and there was no present evidence
of inflationary pressures.

The burden of proof seemed to rest on those

who advocated any change in the present policy of substantial monetary


At recent meetings, and again today, Mr. Hayes had urged a greater

recognition of the balance of payments and flow of funds problems as the

basis for some slight lessening in the degree of monetary ease.

Mr. Ellis

was inclined to agree, although he tended to feel that in present
circumstances the Committee should be glad to settle for not losing
ground in short-term rates in the face of the pressure that he thought
would be forthcoming in the first part of next year.

He was, however,

prepared to suggest some slight movement in the direction of less ease
for the following reasons also. The System had been able to maintain a
substantial position of ease through 1962, with free reserves in excess
of $400 million on average, largely because credit demands had been
satisfied through available funds.

But if the seasonal adjustments

could be accepted, one must conclude that the underlying situation had
changed after midsummer.

Since August commercial and industrial loans

had expanded at a 7 per cent annual rate, which impressed him as evidence
of a strong underlying demand and an unsustainable longer-run rate of


Similarly, required reserves had increased at an 8.5 per cent

annual rate and the money supply at a 6 per cent rate, or 10 per cent
if time deposits were included.

The earlier shortfall from the growth

guideline for required reserves against private deposits had been

Each person must apply his own conclusions to these data,

but his conclusion was that business and industry were taking more
initiative in expanding the use of credit.

If the same degree of

monetary ease that had prevailed were continued, he felt that the sharp
expansion of reserves would carry above a sustainable rate of growth.
Therefore, he believed that the Committee should make a small move toward
less ease.

He would suggest $300 million as a free reserve target, with

Federal funds usually at 3 per cent and the bill rate around the recent
level of 2.8 per cent.

Mr. Ellis said he would not recommend changing the discount rate
at this time.

As to the directive, he felt that the suggestion of

Mr. Hayes--with perhaps an addition to the second paragraph--would be an

appropriate reflection of the thinking of those who wanted to move toward
slightly less ease.

It seemed to him that Mr. Hayes' draft emphasized

support of the bill rate.

He (Mr. Ellis) felt that basically the

situation continued to call for providing a moderate expansion of reserves
in the banking system.

paragraph the phrase:

Therefore, he would suggest adding to the second

while continuing to provide moderate reserve

expansion in the banking system.



Mr. Balderston said that he found himself allied with the position
taken initially by Mr. Hayes and supported later by certain other members
of the Committee.

He recalled having observed at the two preceding

meetings that he was a little disturbed about the posture of the System
in the event an international payments crisis should develop.


he felt it appropriate today to set forth the outline of a policy that
might provide a better posture.
Mr. Balderston noted that Chairman Martin had observed many times
that this country's domestic and international problems should be considered

As Mr. Balderston saw it, these twin problems challenged

monetary policy at two levels, fundamental and transitional, and the
System's policy response must be structured accordingly.

Domestic costs

should be kept under control, in order gradually to restore the world-wide

competitiveness of U. S. industries and forestall domestic inflation,
while at the same time avoiding deflationary pressures.

In this respect,

he was heartened by the relative stability of unit labor costs and the
price of goods during a period when the unit costs of this country's chief
competitors were beginning to rise substantially. With five successive
years of relative stability of U. S. prices and unit costs,
success in this area seemed to be within grasp, but it

might take several

years more for the fundamental correction to be accomplished.
interim, policy faced another challenge,


In the

that of helping to guard this



country's gold reserves and the soundness of its credit against
disequilibrating flows of funds.

The point might be approaching where

some further outflow would develop if

bill rates were not sufficiently high.

r. Balderston said that in view of the liquidity

already made available to the domestic economy since the trough of
recession, he would now suggest lowering free reserves experimentally
to the point where commercial banks ceased to add to their investments
but did not sell Governments in order to make loans.

He would supply

just enough reserves to take care of loan demand without adding to or

subtracting from the liquidity of the commercial banks.
represent a policy of moderately less ease.
how much less ease?
two storm signals.

This would

The question was, however:

As a guide for the time being, he suggested watching
On the one side, the most convenient guide might be

reports of the transfer of hedged short-term funds.

On the other side,

the guide might be the trend of seasonally adjusted private deposits or
an upward creep of loan-deposit ratios suggesting action by the banking
system to accommodate loan demands by divesting investments.

A policy

such as he had sketched would keep Federal funds at the maximum rate and
would keep the volume of member bank borrowing from the Federal Reserve
Banks near the top of the range of discounting that had existed for about
two years.

For testing purposes, he would suggest a level of free reserves

of $250-$300 million in the hope that this change would offset the seasonal



downward pull on the bill rate.

Feeling as he did about the fundamental

policy position, he would favor a change in the directive such as
Mr. Hayes had proposed.
Chairman Martin stated that he would cast his lot with those who
favored slightly less monetary ease.

In this connection, he added the

comment that he did not consider the use of the word "tight" applicable
at the present time.

In his view it was not a case of the domestic

economy suffering at the expense of increased attention to the balance
of payments.

As he had said many times, he believed the problems were

inseparable, and he also believed that the domestic economy had been
gotten into a sufficiently liquid position.

For the past few months

he had done his best to try to convince himself that additional monetary
ease would alleviate unemployment and abet economic growth, but it was
his conviction that additional ease would do just the reverse.

In his

judgment the balance of payments situation was the biggest single shadow
over the domestic business picture.

If it could be alleviated, he believed

there would be a stronger and more confident domestic business outlook.
For a number of months, he noted, attention had centered on the domestic
situation almost to the exclusion of the balance of payments problem,
but over the next several weeks there was likely to be a marked increase
in the discussion of the balance of payments in view of the figures that
would shortly be released.

He could not believe that a slightly less

easy monetary policy would in any sense collapse the domestic economy.



In fact, such a change in emphasis might lead to a strengthening of
confidence and an improved attitude on the part of businesses and

business investors.
The Chairman went on to say that if the Committee was going to
shift in the direction of slightly less ease, the policy directive
probably ought to be changed.

At the two preceding Committee meetings,

he recalled, the majority decision had been to make no change in policy.
In the light of today's discussion, however, he proposed to poll the
Committee on the basis of slightly less ease, after which the policy
directive could be discussed.

In this connection, the Chairman again

referred--as he had at recent meetings--to the problem involved in the
use of phrases such as "slightly less ease" or "moderately less ease."
He was not sure how this problem might best be approached.

He had

found through experience that words had different meanings to different
persons, according to each person's concept of what was involved.


discussion scheduled for this afternoon with regard to the formulation
of the current economic policy directive might shed some light on how to
deal better with this problem.
Accordingly, the Committee members were polled on the question of
a shift in policy toward slightly, or moderately, less ease.


Martin and Messrs. Hayes, Balderston, Ellis, Fulton, King, and Shepardson
indicated that they would favor such a shift while Messrs. Bryan, Deming,
Mills, Mitchell, and Robertson indicated that they would not.


In connection with the foregoing poll, Mr. Mills commented that

if the level of free reserves were brought down to $250 million and there
was a normal reaction to that level of free reserves, he felt that this
would represent an important rather than a modest tightening.


Martin noted that this again went into the area of interpretation,
pointing up the problem he had mentioned in his earlier remarks.
Mr. Hayes noted that he had suggested a range of free reserves from $200
million to $400 million, in the thought that considerable leeway would
be desirable.
The discussion then turned to the policy directive, and it was
suggested that there be put to the Committee for purposes of a vote the
directive suggested by Mr. Hayes, as amended by the addition of a clause
such as mentioned by Mr. Ellis, which would call for continuing to provide
moderate reserve expansion in the banking system.
There ensued a discussion during which Mr. Hayes indicated that
he would be agreeable to a modification of the kind Mr. Ellis had

He had not included such a clause in his proposed directive

because of uncertainty as to the seasonal movement, but that was something
of a technical question.

If it was understood that references of this

kind were always intended to take into account seasonal adjustment, he
would see no objection to including the clause Mr. Ellis had suggested.
Mr. King expressed the view that the directive he had proposed
would accomplish basically the same purpose as the directive proposed by



Mr. Hayes.

The only question he would have with regard to the wording

of the directive suggested by Mr. Hayes was whether it might not indicate
that the Committee was acting out of a sense of trepidation by stressing
unduly the international situation.
Mr. Hayes commented that perhaps some indication of trepidation
would be prudent under present circumstances, and Chairman Martin said
he would be inclined to share that view.
There followed a reading of the directive proposed by Mr. Hayes,
as modified by the suggestion of Mr. Ellis, after which Mr. Bryan
inquired whether "continuing to provide moderate reserve expansion" was
intended to suggest that the Committee would endeavor to continue to
follow the 3 per cent growth guideline. in required reserves against
private deposits. Mr. Ellis noted that similar language was found in
recent directives, during which period staff projections had included the
3 per cent growth guideline.

Mr. Mitchell suggested that this objective

might be incompatible with the rest of the proposed policy directive, and
Mr. King pointed out that he had referred in his proposed directive to
providing for a "slight" rather than a "moderate" continued expansion of
bank reserves.

He went on to say, however, that he was not inclined to

press for such a change.

Upon request the wording of the directive proposed by Mr. King
was then read to the Committee, and after further discussion Mr. Hayes
suggested that the Account Manager be asked for his opinion as to whether



the directive that he (Mr. Hayes) had suggested would be workable if
there was included in it the phrase calling for continued moderate
reserve expansion in the banking system.
Mr. Stone said he would interpret this phrase to refer to
seasonally adjusted figures.

If that was the interpretation, he thought

the directive would be workable, and he would see no incompatibility
with the other parts of the directive.

He considered it possible to

obtain an expansion of bank credit along with firmer money market

In any event, he noted that the Committee would be meeting

again in three weeks, at which time the question could be reviewed.
Mr. Stone also stated that in his opinion the directives proposed by
Mr. Hayes and Mr. King were fairly close together.

He observed that

this was a particularly difficult time of year, due to the likelihood
of wide swings in market positions, to try to draw fine distinctions.
In further discussion of the respective proposals, Mr. Hayes
suggested that the setting of a principal target in terms of free

reserves in the present period might create difficulties.


he would be inclined to place more emphasis on the short-term rate,
letting free reserves fall where they would.
Mr. King commented, in respect to the phrase proposed by
Mr. Ellis, that he believed a close reading of the Committee's
directives over a period of time would reveal that references to bank
reserves were intended to take into account seasonal adjustments.


also noted that over the past few months there had been a substantial



monetary expansion while the Committee's directives called for a
moderately firm tone in money markets.

He was inclined to feel that

the 3 per cent growth guideline would not necessarily be incompatible
with a directive in terms such as Messrs. Hayes and Ellis had suggested.
He added that he would be agreeable to accepting such a directive,
noting, however, that in his opinion it would not go quite as far in
the direction of lesser ease as the directive that he (Mr. King) had
Thereupon, upon motion duly made
and seconded, the Federal Reserve Bank
of New York was authorized and directed,
until otherwise directed by the Committee,
to execute transactions in the System Open
Market Account in accordance with the cur
rent economic policy directive:
It is the current policy of the Federal Open Market Com
mittee to accommodate moderate further increases in bank
credit and the money supply, while aiming at money market
conditions that would minimize capital outflows internation
ally. This policy takes into account the lack of any
significant improvement in the United States balance of
payments and the recent substantial increase in bank credit,
but at the same time recognizes the unsatisfactory level of
domestic activity, the continuing underutilization of
resources, and the absence of inflationary pressures.
To implement this policy, operations for the System Open
Market Account during the next three weeks shall be conducted
with a view to offsetting the anticipated seasonal easing of
Treasury bill rates, if necessary through maintaining a firmer
tone in money markets, while continuing to provide moderate
reserve expansion in the banking system.
Votes for this action: Messrs. Martin,
Hayes, Balderston, Ellis, Fulton, King, and
Shepardson. Votes against this action:

Messrs. Bryan, Deming, Mills, Mitchell, and



In a footnote comment to the preceding discussion, Mr. Hayes
noted that several of those who spoke today had seemed to suggest
watching the covered bill rate spread almost to the exclusion of other
rate considerations.

He noted that a representative of the New York

Reserve Bank, Mr. Klopstock, had testified recently before a subcom
mittee of the Joint Economic Committee on the sensitivity of short
term capital flows to interest rate movements.

The comments of

Mr. Klopstock had been distributed to the Committee, and Mr. Hayes
felt that they would be of interest.

Covered bill rate spreads

admittedly were important, but they did not provide the whole picture.
The meeting then recessed and reconvened at 1:50 p.m. with the
same attendance except that Messrs. Rouse, Sanford, and Williams were
not present.
This afternoon's session of the Open Market Committee had as
its purpose a discussion of the current economic policy directive and
its formulation,

There had been distributed to the Committee, under

date of November 2, 1962, sample directives for several Committee
meetings in a form suggested by Mr. Knipe, former Consultant to the
Chairman of the Board of Governors, together with a memorandum from
Mr. Knipe dated October 10, 1962, entitled "Writing a Directive."


preparation for today's discussion, there had also been distributed
to the Committee for convenient reference excerpts from the minutes
of the Committee meeting on December 19, 1961, and copies of the
directives issued by the Committee since that date.


-68In introductory comments, Chairman Martin expressed the view

that regardless of what might come out of this meeting, the Committee
should undertake a review of this kind periodically.

After referring

to the material that had been distributed, he noted the practices
that had been followed during the past year in drafting the current
policy directive.

He went on to say that Mr. Knipe had given

considerable thought to the subject, particularly with a view to try
ing to develop a type of directive that would make a readable
presentation of Committee policy.

The question was whether the Com

mittee would be able to reach agreement on any formulation along lines
such as Mr. Knipe had suggested and, if so, whether that would be

The Chairman also noted that Mr. Bryan, in particular, had

over a period of time done considerable work looking toward the pos
sibility of using quantitative guides in the directive.
of using such guides admittedly had an appeal.

The thought

At the same time, on

occasions when he had visited the Trading Desk he had been impressed

by the difficulties involved in actual practice in attempting to
conform to a target such as a given level of free reserves.
problem involved the question of public interpretation.

A related


for example, it might be assumed that there had been a shift in policy
because of a change in the level of free reserves when actually there

had been no such shift.



The Chairman then suggested that there be expressions of views

around the table on the subject of the formulation of the current
economic policy directive and related matters.
Mr. Hayes, who was called upon first, noted that Mr. Knipe had
provided a stimulating paper which focused attention on a problem that
had faced the Committee for a number of years.
not share Mr. Knipe's dissatisfaction

used at the present time.

However, Mr. Hayes did

with the kind of directive being

Looking back over the directives that had

been used during the past year, Mr. Hayes found recorded in them about
the degree of emphasis intended and almost every major factor to which

the Committee had given attention in reaching its policy decisions.
Among other things the directives recorded concern about the

utilization of resources, dissatisfaction about the rate of economic
growth, recognition of the desirability of monetary and credit

expansion, concern about the short-term interest rate, and concern
about capital flows and the balance of payments.

Also, when appropriate

the directives included statements on special factors such as Treasury
financing, the stock market break, and the Cuban crisis.

On the

whole, therefore, he felt that the directives provided a fairly
intelligible record of the things looked at by the Committee and the

way the Committee felt. He would not want to say that the directive
could not be improved, but he doubted whether the type of directive
suggested by Mr. Knipe was in the right direction.

He considered the



present form of directive a major improvement over the old "clause

Furthermore, only one example of the present type of directive

had yet been published.

Unless the Committee was convinced that

there was some substantial defect in the present form of directive,

seemed to him that it

would be advisable at least to await the

reaction when the record of policy actions for 1962 was published in
the Board's Annual Report.
Turning more specifically

to the suggestions of Mr. Knipe,

Mr. Hayes said he was quite concerned about what he would regard as
too much emphasis on free reserve statistics and too little
on the tone and feel of the market.


The free reserve figures tended

to jump around in a most unpredictable way, especially at certain
times of the year, and any effort to pinpoint a free reserve target
might produce difficulties.

On the bill rate, he again felt that

Mr. Knipe tended to set up too binding a formula.

Mr. Hayes went on

to say that when the Committee suggested that the Desk be guided by
the tone, color, and feel of the market, he did not regard that as
an abdication of the Committee's responsibilities, which seemed to be
the interpretation of Mr. Knipe's memorandum.

Instead, Mr. Hayes

believed that the Committee should take advantage of the Account
Manager's judgment based on the full range of market developments each

With the broad range of indicators that were available, the

Manager could not only provide whatever general level of free reserves



the Committee regarded as appropriate but adjust up or down according
to the way the economy and the banking system were responding.


was continually reflected in the behavior of the market indicators,
and he felt the Committee's objectives were helped substantially by
permitting the Manager a degree of flexibility.

He had been impressed

over the years by the tendency of many members of the Committee to
stress the need for flexibility, and he was not sure that the kind of
directive suggested by Mr. Knipe would permit it.

Mr. Hayes pointed

out that the Manager's judgments and actions were subject to criticism
and review at Committee meetings, in addition to which any member
could raise questions on the basis of the daily telephone conference
or the written reports.

He would caution especially against using

quantitative guides or targets in the way suggested by Mr. Knipe.
Certainly the Committee wanted to give appropriate instruction, but
in the go-around at Committee meetings the Manager was given about the
kind of guidance he needed.

If numerical guides and targets were

included in the directive, the Committee would run a severe risk of

limiting the necessary flexibility.
As to Mr. Knipe's proposal to show in

the directive background

economic factors that were considered, Mr. Hayes said he was doubtful
as to the value of that device to convey the atmosphere in which the

Committee's directives were issued.

The sample directives enumerated

certain background facts but did not evaluate them or indicate how



they were related one to the other.
facts might raise questions.

Further, the omission of certain

For instance, he found no reference to

the international position of the dollar or to balance of payments

A listing of facts might help someone

to know what kinds

of statistics were available to the Committee, but it would not dis
close how much emphasis was placed upon them.
Mr. Hayes went on to say in reviewing the discussion on
December 19, 1961, he noted that several Committee members had
pointed out two problems.

The first was the problem of conveying to

the Manager an indication of what the Committee wanted in sufficiently

accurate form so that the Manager would know what the Committee
intended and could act accordingly.
of a problem, but he felt

This continued to be something

that there had been an improvement.


second problem was one of giving the Congress and others an adequate
explanation of why the Committee had done what it did.

Mr. Hayes

felt that the Committee had gone quite a long way through the use
of the first paragraph of the present form of directive in providing
a statement of the factors it

had considered.

He was not sure that

the Committee had gone far enough, however, and he would revert to
the idea that perhaps an explanation of policy might be published
quarterly in the Federal Reserve Bulletin to give more insight into
what the Committee was doing.


Mr. Ellis suggested that the problem of the directive had

three major aspects.

First, there was the procedural technique

used in creating the directive.
the directive.


there was the content of

Third, there was the question of providing a policy

record for subsequent publication.

To take up those questions in

reverse, he felt that a quarterly publication after an appropriate
time lag might serve a useful purpose in contributing to a better

understanding of monetary policy.

It would relieve the criticism

of delay in the availability of information. Further, it would not
appear to endanger the confidential character of monetary actions;
the policy record for the fourth quarter of each year was already
released after a lag of one quarter.
As to the content of the directive, it appeared to Mr. Ellis
that the concern of the Committee went largely to the degree of
exactness that should be sought in describing economic objectives
and specifying how monetary actions were to be implemented by the

The Committee's discussions in the past had revealed a

wide range of opinions on how detailed and precise the directives
should be.

Some felt that too much detail would lead to substantial

problems because the Manager would be too limited, or to criticism if
the Manager failed to come close enough to the targets specified in
the directive.

Mr. Ellis felt that the Committee had a fundamental

responsibility to provide the Manager with as clear and exact instructions



as the Committee was able to produce as the result of its
deliberative sessions.
to the Manager.

To do less would be to abdicate responsibility

The Manager must be given latitude to exercise

judgment in achieving short-run objectives, but the delegation of
authority should not extend too far.

The question was whether the

Committee was doing as good a job of communication as it
providing guidelines and instructions to the Manager.

could in

The question of

writing a good directive for purposes of explanation seemed to him of
secondary importance.
Because there was such a wide range of views about the degree
of exactness in the directive that was feasible or desirable, Mr.
Ellis found himself reconciled to the feeling that progress could be
made only in small steps.

The need, therefore, was for a procedure

that would keep progress alive throughout the year and enable

He concurred in the view of Mr. Hayes that some pro

gress had been made during the past year.

The first paragraph of the

directives covered in a timely way many of the events of the year.
However, he felt there had been a tendency to make the directive

shorter and use more general language, thus tending to get back to
the old clause (b).

This led him to make two recommendations for

modest procedural changes.

First, he felt that the Committee should

have its staff members who presented statements on economic and
financial developments extend their remarks to the point of suggesting



a level of free reserves, a bill rate, and a Federal funds rate that
would be consistent with their analysis of the effect that monetary
policy should be exerting on the economy.

This did not mean that

the Committee would necessarily accept those figures or targets, but
he believed it should have the benefit of hearing from its technicians
what their analyses suggested in

terms of immediate objectives.


that manner the Committee members would be provided with benchmarks on
which to base policy recommendations.

Also, this would introduce early

in the discussion some of the current measures for expressing policy
direction, and the members could indicate what emphasis they would
place on the various measures.

In this way, perhaps, it might be

possible to move through experimentation toward more exactness in the
The second recommendation of Mr. Ellis was that the Committee's
Secretary be charged with presenting at each meeting at least two
drafts of possible directives.

In formulating them the Secretary

could call on the Account Manager or other members of the staff to
the extent he thought desirable.

Broadly speaking, Mr. Ellin said,

the Committee always had three policy alternatives:
ease, or more ease.

no change,


The first course would be covered by the existing

directive, and the two alternatives would be covered by draft
directives that would be available at the outset of the meeting.
During the go-around any member who believed the directive should be



amended could also suggest language of his own, preferably in written
form so that it could be studied.

In the alternative, a member

might ask the staff to draft a directive that he could endorse.
In short, Mr. Ellis felt that the Committee had not fully
utilized the drafting capabilities of its staff.

If his two recom

mendations were adopted, Mr. Ellis believed that the Committee at
least would start each meeting with a common benchmark and with
possible targets summarized.

He hoped that the Reserve Bank

Presidents might consider shortening their regional summaries and
devoting more attention to policy objectives and to their choice among
the policy alternatives.

More discussion of the directive should help

to harmonize viewpoints and help in the adoption of the directive at
the end of the meeting.

The directive, of course, should be decided

upon before the Committee adjourned.
Mr. Irons said it seemed to him there were a number of issues

First, there was the purpose of the directive:

it was being written.

for whom

The Manager of the Account or an alternate

would always be at Committee meetings and would know how the Com
mittee arrived at the directive.

Also, a directive of the kind now

used was better, in his opinion, than those that had been used in the


Considering this improvement, along with the fact that the

Manager was in attendance at the meeting, he thought in most instances
the Manager was in a position to carry out the directive about as



accurately as could be hoped.


the Manager was not clear, he could

request clarification at the meeting.
However, Mr. Irons noted that there had been other criticisms
of the directive, including criticism from members of the Congress.
Therefore, there was the question of making the directive clear to the
public, in order to help answer such criticisms.

But the more things

that were introduced in the directive, the more difficulties would be

There was the question, for instance, whether the Committee

should attempt to show how it arrived at the directive.

Some of that

thinking was found in the suggestions of Mr. Knipe, who talked about
background facts that were considered by the Committee.

The trouble

was that the Committee did not reach its conclusions simply by
examining such things as the production index, the number of unemployed,
and the price level.

The Committee members obtained from the staff of

the Board, from the Federal Reserve Bank of New York, and from others
within the System a wealth of material that was valuable, almost


This material was all read and studied by the Committee

members in reaching their conclusions.

Out of that whole package came

the comments around the table at Committee meetings as to the direction
in which policy should be moving and the means of attaining the desired

It seemed to him that it would be difficult to state

exactly how the Committee reached a conclusion without spelling out all

of the basic facts in the materials that were put together. He had



thought that something might be done by way of supplementing what was
now included in the record of policy actions, but this would not be
the same thing as supplementing the directive itself.

For example,

he would hesitate very much to say to the Manager that he was directed
to keep free reserves at any particular figure over a period of three
weeks; a severe snowstorm might invalidate such a directive immediately.

Thus, such a directive would always be subject to question if it was
not precisely achieved.

He had thought at times about being more

but he had swung back to the feeling

that a more general

directive was preferable, although the directive should be meaningful
and understandable.

He felt that the directives in their current form

did have meaning, although they could no doubt be improved somewhat.
The directive should cite the main principles the Committee had in
mind and the objectives the Committee was trying to reach.

On the

other hand, he did not think that the directive itself should attempt
to make clear to every interested reader what the Committee did and
how it used the available materials.

He was also fearful of specific

directives because he doubted whether it would be possible for a
large number of people to reach agreement.

Instead, he felt that some

explanatory statement might be published along with the directives
when they were released,

but that would be separate from the directive.

He was also fearful of trying to work with just two, three, or four

guides and saying that this was what the Comittee had agreed upon.



In summary, he would keep the directive in fairly general terms,
pointing out the objectives that the Committee was trying to reach
and instructing the Manager as to the direction in which the Com
mittee was seeking to move.
Mr. Irons said he could understand that an outsider--even
though fairly well informed, might have difficulty in getting a great
deal of meaning out of the directive.

However, he thought it should

be possible for persons in the academic world to read the directive,
use the available factual information, and understand reasonably well
how the Committee arrived at the directive it gave to the Manager.
He came back to the thought that the present form of directive was
much better than the form of directive previously used.

He would

have some qualms about a directive being drafted in advance and sub
mitted to the Committee early in the meeting as a directive that
might be applicable.

On the other hand, it would be appropriate for

any Committee member--in a personal capacity--to bring in a proposed
Chairman Martin commented at this point on certain views that

had been expressed to him from time to time by thoughtful members of
the Congress.

He referred to one member of the Senate as having felt

at one time that after each meeting the Open Market Committee should
issue a statement as to what it was doing.


this Senator

subsequently changed his thinking and reverted to the position that



perhaps it was best to follow the procedures that were established by
the Congress in the Federal Reserve Act. This Senator also made the
point, though, that there was a tendency to issue directives that were
intelligible solely to the Open Market Committee, with amplification
available only when a representative of the Federal Reserve System
appeared before a Congressional Committee.

Chairman Martin said he

thought it would be generally agreed that within the context of the
Committee discussions the directives were intelligible to the Com
mittee itself.

However, if the Annual Report included merely the

directives that had been issued at the 18 Committee meetings this
year, without further commentary, something could be said for the
criticisms that had been made by members of the Congress and acad

If on the other hand, the Annual Report included a full

review of everything that went on in Open Market Committee discussions

during the year, it would become a sizable document, considerably
changed in character from the documents that had been issued.


were all facets of the broad problem of communication.

The go-around then resumed, and Mr. Swan said he saw two
principal problems,

First, there was the general question of com

munication in terms of explaining why the Committee did what it did.
In this regard, he would favor further exploration of publishing some

kind of quarterly article, either an expanded policy record or a separate
article that would not duplicate the policy record.

He would prefer



the second alternative.
of the directive per se.


this was apart from the question

There remained the question of what the

Committee wanted to convey to the Manager and how it checked on
what was done.

He agreed with those who felt that the type of

directive issued this year was much better than the old clause (b),
although he had some question about the second paragraph of the

The first paragraph was a summary of general background,

but when it came to the implementation of policy he thought the
Committee could become more detailed and specific.

It had been said

that this was not necessary because the Manager was in attendance
at the meetings.

However, he did not think that was a complete answer,

partly because other people read the directive at some point and
partly because, as had been noted, the directive meant different
things to different people.

If so, the directive might mean something

different to the Manager than to the other people around the table.
Further, while he recognized the need for some degree of flexibility,
he rather cringed at trying to defend the phrase "tone, feel, and
color of the market" because he did not know exactly what it meant and
he did not think anyone else did.

The Manager had to translate this

phrase into some kind of quantities; and if

the Manager had to do so,

it was really the job of the Committee to do the same thing.

He said

this with full regard, as he had indicated, to the need for maintaining
some degree of flexibility, and this was where he would object to the



emphasis placed by Mr. Knipe on free reserves.

Instead, he thought

it was a matter of trying to move toward a quantification of a
number of factors, such as free reserves,
rowed reserves,

the Federal funds rate,

rates, and member bank borrowing,

total reserves, noubor

the short-term rate, other

so as to give some kind of

quantitative guidance in terms of several measures, with recognition
also of the fact that there should be some indication of priorities.
Granting the difficulties involved, he nevertheless would like to

describe the boundaries of the problem in more quantitative terms.
When the Committee issued a directive to the Manager it was supposed
to direct him along certain lines, and to provide him appropriate

Also, the directive should give an outsider the feeling

that the Committee had given the Manager reasonably clear direction.
Chairman Martin commented that he thought Mr. Knipe, if
present, would say that he had been trying to suggest exactly what
Mr. Swan was advocating.

Mr. Knipe had provided samples of possible

Committee directives, but he had recognized that the Committee might
use various kinds of specific guides.

The difficulty was in trying

to determine the things that might appropriately be quantified.


a period of time, Mr. Knipe had experimented with many different types
of directives; the samples that had been distributed constituted only
a representative group of ideas.

Mr. Deming said he thought Mr. Knipe had made a notable
contribution to the thinking on the directive.

Mention had been

made, he noted, of the difficulties of precise quantification.


to the nature of movements of free reserves, it seemed almost impos
sible to use that alone as a meaningful guide to the Manager and to
expect him to account for his actions.

Borrowing from Mr. Knipe's

classification of objectives--proximate, intermediate, and ultimateand recognizing that the Committee could not reach from the proximate
through to the intermediate, or certainly the ultimate, with any
degree of precision, one possibility would be to attempt to make the
first paragraph a statement in terms of the intermediate and ultimate
objectives and conclude it with a statement that policy, in light of
the background facts and these objectives, should be more stimulative,
less stimulative, or about the same.

That was in fact what the Com

mittee did in arriving at a consensus; it would amount to putting the
consensus into the directive.

Then, the second paragraph could cite

proximate objectives, in terms of such things as free reserves, interest
rates, and the color, tone, and feel of the market. He tended to agree,
incidentally, that there should be something more specific than just
a reference to the color, tone, and feel of the market.
Mr. Deming expressed agreement with the view that it was dif
ficult to write a directive for the general public.
to be primarily an instruction to the Manager.

The directive had

It should be phrased



precisely enough to make the Committee's position meaningful to the
Manager, and to enable some appraisal of performance. He noted that
the Committee members all went through the examination of a lot of
indicators and applied judgments to a complex economic situation.
This could not be presented in full detail in the directive.
bably the Committee could do a little

better with its



the policy record, although he had practiced writing some sample

policy record entries and did not find himself too well satisfied.
Reverting to the type of directive that he had suggested in
his comments, Mr. Deming read a form of directive that might have
been issued at the December 4 meeting in conformity with such an
outline 1/ He noted that in substitution for setting forth as a
matter of policy that the Committee wanted to encourage increases
in the money supply and bank credit, the suggested form of directive
would merely report that these were intermediate and ultimate
objectives and then proceed to a general policy statement.

He noted

that a problem had existed this morning in using terms such as a
moderately less easy or a slightly less easy policy, and he felt
that some progress could be made in resolving this problem and
enabling a meaningful determination of the consensus.

In the second

paragraph of the directive he would avoid specific figures, preferring
to say, for example,

that open market operations should continue to

1/ Appended to these minutes as Attachment A.



provide about the same degree of availability of reserves and a steady

tone in the market, with particular attention to short-term rates,
and that they should be consistent with maintaining the Federal funds
rate close to the discount rate and a nominal level of member bank

Such a directive would be specific, but it

the use of numbers, and it

would avoid

should permit the Committee to judge the

performance of the Account Management in the ensuing weeks.

It would

avoid "pious hopes" and focus attention on things the Committee actually
could do.

The first

paragraph, which would constitute principally a

recital of major objectives, would form a springboard to the

instruction to the Account Manager in terms of proximate goals.


Mr. Deming's view, the explanation of the Committee's directives had
to be carried through by the policy record entries, by quarterly
articles, or by testimony before Congressional committees.

This could

not be provided in the directive itself.
Mr. Scanlon said he had gone through much the same thinking
process as others around the table.

He had questioned the current

type of directive and had tried to write a quantitative directive,
but got into trouble.

Thus, he had ended up with a type of directive

similar to that described by Mr. Deming.

The first

thing to determine

was the purpose of the directive, whether it was to provide a clear
indication to the Manager of the wishes of the Committee or whether
an attempt should be made to write a directive to answer outside critics.



In his opinion, the latter course would be futile, for the critics
would never be satisfied.

On the other hand, if it was felt that the

general public was not getting all of the information it should have,
a type of directive such as suggested by Mr. Deming should be helpful.
Mr. Scanlon also commented that he would be in favor of considering
some type of quarterly article.
Mr. Clay said he did not think the Committee could or should
attempt to meet the criticism that the directive should be in such
form as to be understood easily by outsiders, even by readers who
were not knowledgable in the monetary field.
had to interest themselves in the subject.

To understand, people
Further, he did not

believe he could ever agree to a quantitative directive, nor did he
think that such a directive would stand the Committee in good stead
either in instructing the Manager or from the standpoint of external

The same quantities would have varying impacts in money

and financial markets according to the conditions that existed at
particular times.

This did not mean, of course, that the Committee

should not continue to strive for improvement step by step from its
present position.

.e noted that in many fields there were "words of

art" that had definite meaning to those in the particular field.
The Committee should keep trying to develop words that would best
describe the impact of the directive on financial markets.


-87In reading the directives for the current year against the

previous year's record, Mr. Clay felt that the Committee had been giving
better directions to the Desk, and that was the essential purpose of
the directive.

Further, he felt that this year's record would be

more readable to persons outside the System.

He would object strenuously

to requesting the staff to bring in alternative draft directives at the
beginning of a meeting; in his opinion this was a Committee responsibility
that should be accomplished at the meeting.

He noted that it had been

suggested last year that a period be provided within each meeting in
which the staff could draft a directive after learning the thinking of
the Committee, and he was not sure that this procedure had been experi
mented with sufficiently.

Through this method, he suggested, it might

be possible to develop "words of art" that had definite meaning in the
monetary field.
Mr. Wayne commented that he had come to this meeting with a
rather long memorandum, one that he now thought did not cover the
subject as precisely as the comments of Mr. Deming.

Therefore, he

would simply express concurrence with Mr. Deming as to the type of
directive that would come close to accomplishing what the Committee

The second paragraph of such a directive would not cite

figures, and Mr. Wayne thought it would be unwise for the Committee
to tie itself down to precise figures in the directive.
precision could be tomorrow's regret.


As soon as the Committee put



the directive in precise terms, it might find itself in an intolerable
Mr. Wayne indicated that he would not be concerned about having
the staff prepare alternative drafts of directives, for purposes of
discussion, along the lines that Mr. Deming had suggested.
there were only three alternatives:


No change, more ease, or less ease;

and he saw no reason why the staff should not suggest drafts that would
accomplish those alternatives in order to provide a basis for discussion.
Mr. Wayne said he continued to feel strongly that the Committee
should consider the publication of quarterly articles.

He would enter

tain some reservations about having such articles include the directives
and would prefer that they be directed toward longer-run objectives and
how the Committee sought to achieve them.

It might be better to reserve

the publication of the directives for the Annual Report.

Chairman Martin commented at this point that if the practice of
issuing quarterly reviews was started it could hardly be stopped, and

there might be times when the situation was not such as to lend itself
particularly well to explanation on a quarterly basis.

Further, this

method of reporting would go beyond the terms of the Federal Reserve Act,
as the Act was now drawn, and he saw certain advantages in proceeding in
accordance with the statute.

If reviews were issued, the press would

tend to look for them on particular dates, as the result of a procedure
initiated voluntarily by the Federal Reserve and not called for by statute.
The System might then be more vulnerable to suggestions for the publication



of other material, including, for example, releases after each Committee

These were all things that should be borne in mind.
Mr. Mills said he would continue to prefer going back to the

clause (b) formula, with clause (b) an abbreviation of what now comprised

one paragraph of the double-headed directive.

Then, when the record

of policy actions was published in the Annual Report, the explanation
of the economic and financial situation should be sufficient to indicate
reasons for the directives.

Today's discussion pointed up his concern

that the Committee was drifting into a position where it was giving
more attention to the wording of the directive than to the development
of policy.

It was following the history and pitfalls of religions in

which the observance of ritual became more important than devotion to
Mr. Mills said he was not attracted to the idea of issuing a
quarterly report because he believed that inevitably it would develop
into a postmortem of what had transpired in operating the Account and
a defense of what had been done, as contrasted with a clear-cut explana
tion of the policy actions themselves.

He would be opposed to the

development by the staff of alternative draft directives in advance of
a Committee meeting because he felt that sooner or later this would
result in less independent thinking on the part of members of the Committee.
Mr. Robertson commented that the directive should be drafted
with such precision as to enable the Committee and the Manager to know
what it meant.

He did not care particularly whether that was done by

using words or figures.

How the directive was seen from the outside



was also important, and he thought what was needed was the kind of
statement suggested by Mr. Deming for the first paragraph.

This type

of statement could hardly be drafted around the table at Committee

But it seemed to him that such a statement should precede

the specific directive so that the latter could be read in the light
of factors that had been considered by the Committee.

This would make

the directive more understandable.
Instead of publishing a separate quarterly article, Mr. Robertson
was inclined to feel--although he was not sure--that it might be preferable

to have a release of the policy record, perhaps augmented in some respects
to show the kinds of facts the Committee had considered, with release on
a quarterly basis after a three-month lag.

He would also favor releasing

all Committee minutes after an appropriate lapse of time.
In response to a question as to how the explanatory material he
envisaged in the policy record would differ from what was now included,

Mr. Robertson indicated that he did not envisage that it would differ
too much.

The Committee simply should do the best job it could from the

standpoint of making the policy actions understandable.

Mr. Shepardson expressed agreement with those who were fearful
of using quantitative terms in the directive.

He considered this imprac

tical in view of the various factors that might be operating at any time

in a number of directions, causing results that would not seem to jibe
with the target figures.

He noted that at Committee meetings the members

talked of various quantitative levels to indicate a general result they



were interested in achieving.

But it was recognized that circumstances

might develop whereby such targets would not be compatible with the
desired result.

The figures for the past several weeks provided an
The figure that seemed of most long-term significance-

and it was not necessarily appropriate for inclusion in the directivewas the reserve growth guideline that was aimed at over a period of time,
with recognition that there would be temporary fluctuations.


targets were subject to such wide fluctuations that they would seem to
be of little use for purposes of the directive.

Mr. Shepardson felt that the kind of directive used this year
had been more meaningful than the type of directive used previously and
constituted a definite improvement.

He considered it important that the

writing of the policy record be kept on a current basis to avoid the risk
that it would become an after-the-fact review.

While improvements were

possible, he thought the present type of directive was probably about
as close as the Committee could come to what was desired,

A Committee

of this size could not operate on a day-to-day basis, any more than
directors of a business.

The directive should not be expanded indefinitely,

although perhaps it could be made a little broader.
primarily for the benefit of the Account Manager.

It should be written
However, if the inter

ested student wanted to make use of the available economic and financial
information and use it in checking against the directive, he should be

able to interpret the kind of directive that the Committee was now using
about as well as would seem feasible or desirable.



Mr. King expressed the view that use of a form of directive
such as suggested by Mr. Knipe would inevitably lead to public con
fusion, or at least to more argument.

Aside from that, he foresaw

two problems in the use of such a directive.

First, the Committee

would impose upon itself a rather mechanical approach in trying to
reduce the directive to precise numerical guides, as a result of

which he thought the Committee would actually have less control over
the Account than at present.

Second, he noted that for the past three

meetings the Committee members had had difficulty in arriving at a
consensus as to policy, with differing views expressed.


he felt a general approach in the directive was the only one that held
out hope for achieving a reasonable amount of agreement.
Mr. King went on to say that he had been attracted initially
to Mr. Deming's suggestion regarding the form of the directive,
particularly the second part, which to him appeared somewhat more
general than the directive the Committee was now using.

At the same

time, he felt that the first part of the directive described by Mr.
Deming tended to introduce material of the kind now contained in the
policy record entries.

He was not sure whether that would be desirable

or undesirable, but he was inclined to have some doubt.

There was also

the question whether it was feasible to prepare such material on the

day of each meeting or whether this task should be deferred until
later when time was not so pressing.

He was inclined to feel that



Mr. Deming's approach would, in a sense,

tend to move back somewhat

toward the clause (b) approach by adding the stress of compiling and
approving such a directive on the day of each meeting.

Mr. King said, he came back to a point made

earlier by Mr. Hayes, namely, that since the present form of directive
had been used for only one year and, except in one case, the directives
had not yet been published to determine the public reaction, it would
be wise to continue for the time being in this pattern.

As to the

question of publishing a quarterly report, he was not sure that it

would be advisable to initiate such a practice right now.

Mr. Mitchell expressed the view, in respect to communications
to the Manager, that the only point in amplifying such communications
was to remove potential inconsistencies.

He also felt that the

directive should be cast in terms of whatever changes the Committee
wanted to make from the present status of policy.

The Committee should

not use words like "steady"; instead, the directive should lead from
the present to some other point.

The factor of concentrating on

change was vitally important in the directive, for internal consumption
and otherwise.
As to the preparation of the directive, Mr. Mitchell found it
difficult to accept the idea of the staff drafting a directive before
the Committee met, but he would agree with the staff drafting a
directive following the Committee discussion.

It was extremely



difficult, he noted, for a large group to say that it agreed on
something, and this tended to result in the directive becoming
watered down, thus contributing to the difficulty of outsiders in
understanding the Committee's actions.

As an illustration of the

public relations problem, he cited directives in the spring of this

year that called for further expansion of the money supply, while
the money supply in fact was declining.
As a possible means of improving the System's public relations
posture, Mr. Mitchell said, he would suggest the issuance of an
objectively prepared digest of the Committee's minutes.

The reader

who studied the digest could then trace the connection between the
economic facts reported, the arguments made, and the policy adopted.
In conclusion, Mr. Mitchell said he did not think the Com
mittee was doing too badly with its

directives at present, although

some small changes might improve the directives considerably.
Mr. Fulton expressed agreement with the view that the present
form of directive was superior to the old clause (b),

through the use

of which the Committee had fallen into the habit of continuing the
directive indefinitely without change despite changing conditions.

One factor in the writing of directives about which he was apprehensive
was the fact that fatigue toward the end of Committee meetings might
create a tendency to employ broad language that could be used

In his view, both paragraphs of the directive should be



revised frequently.

The language that stated the reasons for the

policy that was adopted should be changed often; even if policy did

not change, the factors contributing to it were subject to change.
As to procedure, he would be inclined to reconvene after a luncheon
recess for the purpose of refining the policy decision of the morning
into a directive that would be, to a degree, along the lines Mr. Deming
had suggested, with the idea of explaining the background factors plus
the Committee's conclusion.

As he had said, he would try to avoid

renewing the same directive simply because policy had not been changed.
Mr. Fulton indicated that he continued to favor the idea of
a quarterly release after a lag of a quarter.
focus on the economic situation.

This release might

A student could then read such a

release, with the directives alongside, and observe what had happened
in terms of interest rates, free reserves, and other factors, thus
finding out the results of monetary policy.

A lag of one quarter in

the issuance of such a release would be advisable,

should explain two things:

but the document

the thrust of monetary policy and how

successful that policy had been.
Mr. Bopp agreed with the view that there had been significant
improvement in the past year in the form of the directive.

He had

always been skeptical of quantitative directives, yet that was
primarily, he thought, because of a lack of full comprehension as to
how the economic system functioned.

An all-knowing economist presumably



could write the directive in quantitative terms if
direction in which the Committee wanted to move.
a sense all-knowing,

he knew the
If a person was in

he should be able to write any directive in

quantitative terms because there was inherently an internal consistency
between appropriate rates of interest and appropriate levels of

This seemed to be the direction in which forces were moving

not only in economics but in handling complex material in other fields.

Although he was not too hopeful as to what might be achieved, even in
terms of short-run developments,


might be worth while to have some

computer technicians work on the variables and see where they came out.

Mr. Bopp went on to say that he had long felt that a quarterly
review of policy actions, issued after a lag of one quarter, would be

He had not given particular consideration to possible

objections such as Chairman Martin mentioned at this meeting.


wondered, however, if they did not contain the possible implication
of estopping any discussion of policy except in the Board's Annual
He would like to think this matter through before reaching


a conclusion.

In his view, it might also be appropriate after a

lapse of about five years to publish the complete minutes of the

or a digest that would eliminate some of the less important

Mr. Bryan said he considered Mr. Knipe's proposal an excellent

effort at a quantitative approach to the directive.

He felt, however,



that Mr. Knipe fell into a difficulty that always tended to prejudice
the problem of stating the directive in quantitative terms.

This was

when he suggested a central target for free reserves, plus or minus a
few million dollars.


was the same sort of error that he (Mr. Bryan)

had fallen into when he suggested a certain total reserve target, plus
or minus a few million dollars.

Both were inadequate to the facts of

life with which the Manager was confronted in operating the Account.
Thus, Mr. Bryan said, he was greatly interested this morning when
Mr. Hayes proposed a range of free reserves from $200 to $400 million.
Mr. Bryan believed it

should be possible to use a quantitative

directive if the Committee could agree to provide enough latitude to
accommodate the Manager, and permit his accommodation in turn to pre
vailing money market conditions.
Mr. Bryan also believed it was important for the Committee
always to consider whether any particular directive was one that the
Manager could accomplish within the means at his disposal.

There was

some tendency to include in the directive a lot of things that
related to the reasons for the Committee's actions, material that
more properly should be included in the policy record entries.


was also a tendency to include in the directive certain propositions
that the Manager could not control with the means at his disposal.
Mr. Shuford commented that the Committee had responsibilities
that were required to be performed in the public interest.




Committee also had a public relations responsibility, but the need to
focus attention on basic responsibilities, as described in the Federal
Reserve Act, made other considerations of secondary importance,


Federal Reserve Act specified the manner and timing of information
required to be published.

The requirement was for publication annually

of a record of policy actions, and the types of information to be
included were specified.

Aside from possible consequences such as had

been mentioned by Chairman Martin, it seemed to him that, without a
change in the law, there was a substantial question about publishing
more frequently than required by law types of information similar to
that which the law required.
Mr. Shuford also said that from a review of the record, he
thought the Committee had made progress with the directive since the
days of clause (b).
worked well.

In his opinion, the present form of directive had

Although he felt sure there was room for moderate
perhaps along lines suggested at this meeting, it seemed

doubtful to him whether the Committee could be a great deal more
specific in terms of the use of quantitative expressions than it
to date.


Actually, he thought this would be understood by reasonable

persons outside the System because the same factors prevailed in
other areas.

In the check clearing process, to take an example,

general policies were established and people were given the power
and authority to carry out those policies.

The same thing held true



in the enactment of laws and the making of legal decisions.


must be an exercise of judgment by the people who were entrusted
with the carrying out of policy.

Within the Committee framework, he

felt that this procedure had worked out well.
As to the preparation of the directive, Mr. Shuford expressed
the view that it would be preferable not to have directives drafted

in advance of Committee meetings.

The drafting should be done after

the fact, and he was inclined to feel that members of the staff who

had participated in the meeting were in the best position to come up
at that point with a proposed directive.

In any event, it seemed

advisable for the Committee to take as long as necessary to prepare
and adopt a directive before the adjournment of each meeting.
Mr. Balderston said the approach he took was to ask himself
what audiences the Committee was seeking to reach.

First, there was

the Desk, and he agreed with the view that communication between the
Committee and the Desk was quite satisfactory.

There were means of

correcting any misinterpretation under which the Desk might be
laboring at any given time.

Because the function of communication

with the Desk dealt with the future, it was difficult to quantify,
as many members of the Committee had concluded over the years, and
he would favor letting the communications between the Committee and

the Desk continue as at present if they remained satisfactory.
Another audience, however, was concerned with the proximate past.



That audience could not be satisfied, obviously, by providing
information as to what had transpired at a Committee meeting just
concluded, or probably even at recent meetings.

However, he would

suggest changing the nature of the report required to be provided
annually by preparing an explanation that might be entitled "The
Work of the Federal Open Market

Committee in the Year



would be somewhat like the statements that the Bank of Canada had
used occasionally in its annual reports, something like a leading
article in the Federal Reserve Bulletin, devoted exclusively to the
work of the Open Market Committee.

It would relate the work of the

Committee to the economic background that the Committee had to take
into account, and the directives could be appended as footnote items.
A third audience mentioned by Mr. Balderston comprised those
learned individuals who would like to delve more intensively into the
work of the Open Market Committee.

For that audience he would suggest

publication of the Commttee's minutes in
suitable lapse of time.

their entirety after a

Such a project might be particularly

appropriate to mark the fiftieth anniversary of the founding of the

Federal Reserve System.
As to procedure for preparing the directive, Mr. Balderston
said he would favor the preparation in advance of each meeting of two
alternative drafts, which could be studied side by side with the

directive adopted at the preceding meeting.

Theoretically, he would



suggest turning the drafting job over to a committee during a luncheon
recess, but he felt sure this would not work satisfactorily in
practice, partly because of the pressure of time.

Therefore, he would

be willing to run whatever risk was involved in having alternative
drafts prepared for the Committee in advance.
Chairman Martin commented that he felt today's discussion had
been distinctly worth while,

If parties with a sincere interest in

System affairs could have participated in the discussion and listened
to the comments, he was inclined to think that many of their criticisms
would have been answered.
get this picture across.

The difficult problem, however, was how to
He shared the view that had been expressed

by members of the Committee about the desirability of providing the
public full information, and the Committee should continue to work on

the problem of improving its communications.

In his opinion, the

System had not been doing the best job over the years in informing
the public, particularly concerning the procedures by which policy
decisions were reached.

On the occasion of meetings of the Chairmen

and Deputy Chairmen of the Federal Reserve Banks, there was brought

home to him the amount of good will, and potential for building good
will, that existed within the ranks of the System, but at the same
time the System was the subject of severe criticism from academicians,
based largely, he felt, on a lack of understanding of System procedures
and how the System really worked.

In his experience one of the best



ways of getting across to parties outside the System was to discuss
the means by which those in the System sat around the table and tried
to reach the proper policy decisions.
The Chairman went on to say that in looking through much of the
literature concerning the Federal Reserve System he was distressed by
the content.

It did not present a fair picture of what he regarded as

one of the most interesting experiments in political science, an
experiment that deserved to be fairly judged.

One possibility of

presenting the matter to the public might be the issuance of Committee
minutes, after a suitable lapse of time, or the preparation of a digest
of the minutes by two or three competent outside parties.

In any

event, however, the System must in some way communicate the picture of
how policy decisions were arrived at, including the picture of how
disagreements within the System's ranks involved honest differences of
judgment on the part of persons who all held the same ultimate objectives.
The average man with whom he talked had no conception of this situation;
many false impressions were reflected in such conversations.

This placed

a real responsibility on the System to try to explain more effectively
what it was doing, and work should be pursued on the subject continually.
Turning to the preparation of the Committee's policy directives,
Chairman Martin commented that perhaps the Committee should experiment
further with the procedure that was used for a rather brief period
earlier this year whereby the directive was drafted during a recess in



Committee meetings after the Committee had arrived at a policy consensus.
However, he felt that the Committee had already made a lot of progress
with the directive.

The very fact that today's discussion had been held

was evidence of a spirit of progress.

Possibly it was not feasible to

do certain things, but he considered it essential to continue to work
toward the achievement of a better public relations posture.

The twelve

Federal Reserve Banks were doing a lot of work along these lines, he
realized, but the job of explaining the System adequately had not yet
been resolved.

He would like to see material made available that

qualified persons could analyze in order to make knowledgeable judgments
with regard to the institutional framework of the System.

This concluded the discussion of the formulation of the current
economic policy directive and related matters.
It was agreed that the next meeting of the Open Market Committee
would be held on Tuesday, January 8, 1963, and it was understood that
subsequent meetings would be scheduled tentatively for January 29,
February 12, and March 5, 1963.
The meeting then adjourned.




Attachment A

Suggestion by Mr. Deming as to type of current
economic policy directive that might have been
issued at meeting of Open Market Committee
on December 4, 1962
The domestic economy has shown little expansionary force

recently and still is operating with a margin of underutilized
resources and an absence of inflationary pressures.

Bank credit has

grown considerably during the past several months and the total credit
supply seems to be quite adequate, with credit readily available.


liquidity level is fairly high and while the conventionally defined
money supply has expanded relatively little, time deposit growth and
that of near-money has been very strong.

The U. S. balance of pay

ments position is not satisfactory and while capital outflows have
In the light of these

been moderate they bear continued concern.

it is

the policy of the Federal Open Market Committee

to continue to pursue a moderately stimulative program, but to do so
cautiously because of the potential problem of renewed large-scale
capital outflows.
To implement this policy, operations for the System Open
Market Account during the next two weeks shall be conducted so as
to provide about the same degree of reserve availability as has pre
vailed recently and a steady tone in the money markets, with particular
attention being paid to short-term rates.

Consistent with this, member

bank borrowing should be kept nominal and the Federal funds rate should
be maintained at close to the discount rate.