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FORTY-EIGHTH
Annua{ Report
OF'IHE
BOARD OF GOVERNORS
of the Federal Reserve System
COVERING OPERATIONS FOR THE YEAR
19 61
ANNUAL REPORT OF BOARD OF GOVERNORS
DIGEST OF PRINCIPAL FEDERAL RESERVE POLICY
ACTIONS, 1961
Period
January
FebruaryAugust
SeptemberDecember
December
Action
Purpose of action
Limited net sales of U.S.
Government securities from
Federal Reserve portfolio to
about $500 million. Member
bank borrowing at Reserve
Banks averaged only $50
million.
Bought substantial amounts
of U.S. Government securities with maturities over 1
year, following February 20
announcement that System
open market operations
would include securities outside the short-term area.
These purchases were partly
offset by net sales of shortterm securities. Total System
holdings of Governments increased about $700 million.
Member bank borrowings
averaged $75 million.
To encourage bank credit
and monetary expansion by
absorbing only part of seasonal inflow of reserve funds
not otherwise offset by a
large gold outflow.
Bought or sold at different
times varying amounts of
U.S. Government securities,
including securities with
longer maturities. Total System holdings of Government
securities increased about
$1.6 billion. Mmnber bank
borrowings at Reserve Banks
remained generally low.
Raised, effective Jan. 1,1962,
maximum interest rates payable by member banks on
any savings deposit from 3 to
3~ per cent, and to 4 per
cent on those left in the bank
for 1 year or more; also
raised maximum rates on
time deposits with a maturity
of 6 months to I year from 3
to 3~ per cent, and to 4 per
cent on those deposits with a
maturity of a year or longer.
4
To encourage bank credit
and monetary expansion
while avoiding direct downward pressure on short-term
interest rates, thereby moderating pressures on the U.S.
balance of payments from
outflow of short-term capital
attracted by higher interest
rates abroad.
To continue to encourage
bank credit and monetary
expansion while allowing for
changing reserve needs due
to seasonal and other factors,
including a large gold outflow, and while continuing to
give consideration to the
balance of payments problem.
To enable banks to compete
more effectively for savings
and other time deposits, including foreign time deposits, thus moderating pressures on the U.S. balance of
payments, and, over the long
run, to offer additional incentive for the accumulation of
savings required for financing future economic growth.
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
System Open Market Account. The directive that was in effect
at the beginning of 1961 instructed the New York Bank:
The downward drift that had characterized economic develop
ments since the summer of 1960 continued in December. While
there were no signs of accelerating downward momentum, neither
was there evidence of a revival near at hand, and a further con
traction of modest proportions seemed to be the most likely
(1) To make such purchases, sales, or exchanges (including replacement
of maturing securities, and allowing maturities to run off without replace
ment) for the System Open Market Account in the open market or, in
the case of maturing securities, by direct exchange with the Treasury,
as may be necessary in the light of current and prospective economic
conditions and the general credit situation of the country, with a view
(a) to relating the supply of funds in the market to the needs of com
merce and business, (b) to encouraging monetary expansion for the
purpose of fostering sustainable growth in economic activity and em
ployment, while taking into consideration current international develop
ments, and (c) to the practical administration of the Account; provided
that the aggregate amount of securities held in the System Account (in
cluding commitments for the purchase or sale of securities for the Ac
count) at the close of this date, other than special short-term certificates
of indebtedness purchased from time to time for the temporary accommo
dation of the Treasury, shall not be increased or decreased by more
than $1 billion;
(2) To purchase direct from the Treasury for the account of the
Federal Reserve Bank of New York (with discretion, in cases where it
seems desirable, to issue participations to one or more Federal Reserve
Banks) such amounts of special short-term certificates of indebtedness as
may be necessary from time to time for the temporary accommodation
of the Treasury; provided that the total amount of such certificates held
at any one time by the Federal Reserve Banks shall not exceed in the
aggregate $500 million.
January 10, 1961
Authority to effect transactions inSystem Account.
The Federal Open Market Committee continued without
change the directive to the Federal Reserve Bank of New York,
most recently renewed at the meeting on December 13, 1960,
calling for operations with a view to encouraging monetary
expansion for the purpose of fostering sustainable growth in
economic activity and employment, while taking into considera
tion current international developments.
Votes for this action: Messrs. Martin, Balderston, Bopp,
Bryan, Fulton, King, Leedy, Mills, Robertson, Shepardson,
Szymczak, and Treiber. Votes against this action: none.
prospect for the near future. Preliminary estimates indicated
that gross national product had held about even in the fourth
quarter of 1960, but that industrial production was off 1 or 2
points in December from the November level, bringing the de
cline from July to around 6 per cent. Unemployment rose, with
indications that further increases were likely, while prices of
sensitive materials continued to decline and the average of all
wholesale prices also drifted down a little. Total retail sales,
seasonally adjusted, had also fallen off in December, reflecting
primarily a softening of automobile sales. However, the down
drift that the economy had been experiencing was milder than
during comparable recession phases of other postwar cycles, and
it appeared possible that manufacturers of most products had
about completed their inventory adjustments, particularly as to
raw materials and goods in process.
There was continuous ease in the money market during the
4 weeks preceding this meeting, as evidenced by a Federal funds
rate averaging substantially below the discount rate and a further
decline in borrowing at the Federal Reserve Banks. Bank credit
in December showed a strong rise, with much of the strength
attributable to borrowing by financial institutions and business
concerns around the mid-December tax and dividend payment
dates. The money supply, defined to include currency in circu
lation and privately held demand deposits, showed a modest
increase in December; most of the deposit increase recently had
been in the time category. Prospects were that the sizable
amounts of reserves released in late December and early January
by seasonal decreases in required reserves and currency in circu
lation would be partly offset by declines in float and a continued
gold outflow. During the first week in January, gold outflow was
at the rate of $130 million.
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
Although available reports suggested that the U. S. balance of
trade was showing some improvement, the over-all balance of
payments continued to pose a serious problem for the inter
national strength of the dollar.
Taking all of these factors into consideration, it was the con
sensus of the Committee that in view of the state of the domestic
economy the System should seek to maintain approximately the
same amount of ease in the market as it had since the preceding
meeting, at the same time paying close attention to developments
in the international area. There was a minority view favoring
greater ease in order to do what was possible to reverse the
trend of the economy in this country. There were, on the other
hand, some who believed that the System should "mop up" more
of the ease that had prevailed, it being argued that the System
had injected sufficient credit into the market and should concern
itself more at this point with endeavoring to assure a short-term
interest rate level conducive to checking the outflow of funds
and possibly reversing it.
starts during December, had also contributed to the decline.
However, some encouraging developments were beginning to
appear in the economic picture, including a continued large
export surplus, signs of greater availability of mortgage money,
though this had not yet led to noticeably lower interest charges
or to expansion in residential construction, and slight signs of
pick-up in steel production and orders.
There was ample evidence of continuing money market ease.
However, after taking into account the usual seasonal patterns,
bank credit developments during the first part of January were
somewhat mixed. Bank loan-deposit ratios, while still relatively
high by historic standards, had declined somewhat. Also, while
there had been only a modest gain in the money supply proper
during the second half of 1960, total nonbank liquid assets had
risen at a rate almost equal to the average for the last 10 years.
A delicate situation existed in international financial markets,
stemming mainly from the continued U. S. balance of payments
deficit, and this created something of a dilemma for monetary
policy. The problem was one of providing sufficient reserves to
the banking system to encourage growth of the domestic econ
omy, which was operating at a relatively low level, while en
deavoring to prevent short-term rates from declining to levels
that might aggravate the already sizable payments deficit of the
United States. The consensus as to policy for the period immedi
ately ahead was that there should be no change in the existing
degree of monetary ease and that in operating the Open Market
Account the Management should continue to give close attention
to the level of short-term rates in view of the current inter
national financial situation. However, at least one member of
the Committee (Mr. Robertson) favored a moderately greater
degree of ease, in view of the level of domestic economic activity.
January 24, 1961
Authority to effect transactions in System Account.
The Federal Open Market Committee directed the Federal
Reserve Bank of New York to continue to conduct open market
operations with a view toward encouragement of monetary ex
pansion for the purpose of fostering sustainable growth in eco
nomic activity and employment, while taking into consideration
current international developments.
Votes for this action: Messrs. Martin, Hayes, Balderston,
Bopp, Bryan, Fulton, King, Leedy, Mills, Robertson, Shep
ardson, and Szymczak. Votes against this action: none.
The decline in economic activity was continuing, with no
discernible signs of a bottom having been reached. There was
evidence of a continued rise in seasonally adjusted unemploy
ment figures, and declines in employment and in industrial pro
duction were rather general. A further weakening in personal
income and retail sales, along with a sharp drop in housing
February 7, 1961
1. Authority to effect transactions in System Account.
The Committee's directive to the Federal Reserve Bank of
New York, calling for the encouragement of monetary expan-
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