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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, January 8, 1963, at 9:30 a.m.


Martin, Chairman
Treiber, Alternate for Mr. Hayes

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, re:,pectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Noyes, Economist
Messrs. Brandt, Brill. Garvy, Hickman, Holland,
Koch, and Parsons, Associate Economists
Mr. Stone, Manager, System Open Market Account
Mr. Coombs, Special Manager, System Open Market
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. Hersey, Adviser, Division of International
Finance, Board of Governors
Mr. Yager, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors

Messrs. Eastburn, Black, Baughman, Jones,
Tow, and Green, Vice Presidents of the
Federal Reserve Banks of Philadelphia,
Richmond, Chicago, St. Louis, Kansas
City, and Dallas, respectively
Mr. Lynn, Assistant Vice President, Federal
Reserve Bank of San Francisco
Mr. Sternlight, Manager, Securities Department,
Federal Reserve Bank of New York
Upon motion duly made and seconded, and
by unanimous vote, the minutes of the meeting
of the Federal Open Market Committee held on
December 4, 1962, were approved.
Before this meeting there had been distributed to the members
of the Committee a report on open market operations in United States
Government securities covering the period December 18, 1962, through
January 2, 1963, and a supplementary report covering the period
January 3 through January 7, 1963.

Copies of both reports have been

placed in the files of the Committee.
Mr. Stone commented in supplementation of the written reports
as follows:
The past three weeks have been particularly eventful one;,
and it may be worth while to report on developments in a little
more detail than I ordinarily do. The essential problem con
fronting the Desk during the period was to move to the policy
of slightly less ease adopted by the Committee at the last
meeting, and to make this move in such a way and in such time
that the market would have an opportunity to digest the change
before today's auction of $250 million Treasury bonds. The
move to the new policy was made rather difficult by erratic
swings in reserve statistics, and rather delicate by a building
up of dealer positions in Government securities to record levels.
At the time of the last meeting, which took place immediately
after the December tax date, dealer positions were in the neighbor
hood of $4.2 billion, up from around $3.7 billion earlier in the
month. Dealers' use of credit had also expanded and, following

the shift in policy at the last meeting, we permitted the
reserve pressures associated with the tax date to be felt
slightly more forcefully than if that shift had not been
made. Dealer loan rates thus moved up and dealers found
themselves paying 3-1/4 - 3-1/2 per cent to finance Treasury
bills that they had acquired at rates of 2.80 - 2.90 per cent.
Despite these heavy financing costs, dealers bid very
aggressively in the auction held on December 21, and were
awarded a total of $907 million bills in the auction--an all
time high. After that auction, dealer positions reached
nearly $5 billion--also, in all likelihood, an all-time highand on the following Thursday, when payment for the new bills
had to be made, dealers' new financing requirements for that
day amounted to $1.4 billion--which may well be another record.
The reaction of short-term rates to these developments,
and to the publication each week of somewhat lower free reserve
Indeed, three-month bills, which
figures, was relatively mild.
had closed at 2.87 per cent on the day of the last meeting, moved
to a maximum of 2.93 per cent on Decenber 28, the day after a
free reserve figure of $286 million was published, and after
that $1.4 billion of financing had to be found. Short rates
subsequertly declined under the force of heavy demand, and
reached 2.86 per cent last Thursday. The publication of a
$236 million free reserve figure last Thursday afternoon, to
gether with some lessening of demand on Wednesday and Thursday
after the heavy demand of the two preceding days--dealers sold
a total cf $800 million bills over those two days--led to a rise
in the three-month rate to around 2.90 per cent. Yesterday the
rate closed at 2.91 per cent--only 4 basis points above the rate
at the beginning of the period. Deale, positions, meantime,
had come down to about $3.6 billion.
This rise of 4 basis points is an unusually small rate
change indeed under circumstances in which policy has changed
and in which dealer positions, and the cost of carrying these
positions, have been particularly burdensome. The major reason
why the rise in short rates has been so limited is of course
the force and vigor of the downward rate pressure anticipated
by the Committee at the last meeting. An additional reason is
that the expectational reaction that typically flows from a change
in policy was on this occasion substantially muted. Since free
reserves had moved rather widely during the several weeks preced
ing the last meeting, and since such figures tend to swing
erratically around the year-end period in any event, the market

has moved cautiously in attaching policy significance to the
lower figures that have been published. By now, the market
consensus that policy has undergone a slight shift is pretty
fully developed, and the absence of any marked rate increase
over the past two days suggests that such expectational reac
tion as may have occurred is probably already spent.
Meanwhile, the Treasury bond market has shown some
reaction, also moderate, to the market view that System policy
has shifted slightly in the past few weeks.
For the first few
days of the period since the last meeting, bond prices were
working higher on the basis of a moderate investment demand
and dealer efforts to cover short positions and prepare for
expected reinvestment demand after the turn of the year.
Indeed, by Christmas Eve a number of Treasury bond issues had
reached new high price levels for the year. After Christmas,
a more cautious atmosphere set in--partly a technical reaction
to the preceding sharp increases, but also reflecting the
cumulative impact of lower reserve figures, a firmer money
market, and continued indications of concern with the balance
of payments. By yesterday's close most intermediate issues
were down about 1/4 point since December 17, and some of the
longest issues were down 5/8 to 3/4 pcint. Yesterday, after small
early mar.downs, prices moved slightly higher.
The approach of today's long-term bond auction may have
exerted an additional cautionary influence on the long market,
over the past week or two, but there was no strong effect from
this source as it has been expected that this $250 million
offering would be rather quickly distributed--provided it is
priced realistically. Over the past week or two, market cis
cussion of possible reoffering rates on the new bonds has ranged
between about 4.00 and 4.10 per cent, but sentiment now seems
to be gravitating toward the lower end of that range, particularly
after yesterday's aggressive bidding for $70 million Aaa-rated
New York Telephone bonds, which seemed to be getting off to a
fairly good start despite the relatively low reoffering yield
of 4.21 per cent. We may learn the results of today's Treasury
bond auction later this morning.
Tomorrow, the Treasury is auctioning $2.5 billion of one
year bills, rolling over the issue that matures January 15 and
raising $500 million new cash. Current rate discussion for the

one-year bills is in the 3.02-3.05 per cent area.

Taken together,

this week's auctions of bonds and bills will raise $750 million
of the Treasury's estimated $3 billion cash needs in the first
quarter of 1963. Another $200 million was raised by enlarging
the first two weekly bill auctions of the year.
For the remainder



of its first quarter cash needs the Treasury is currently
thinking in terms of selling about $2 billion of June tax

anticipation bills, probably in two instalments--one in early
February and the other in early March. Additions to the
regular weekly bill offerings, which have been made almost
constantly for the past year, are now to be halted until the
end of March, at which time the Treasury is planning to round
out its $2.1 billion weekly cycle by adding $100 million to
the offerings starting with the auction on March 25 and con
tinuing for seven more weeks. Aside from these cash borrow
ings, the Treasury will of course have to refund $9.5 billion
of February 15 maturities.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the open
market transactions in Government securities
during the period December 18, 1962, through
January 7, 1963, 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 18
1962, through January 2, 1963, together with a supplementary report
covering the period January 3 through January 7, 1963.

Copies of these

reports have been placed in the files of the Committee.
In his comments supplementing the written reports, Mr. Coombs
first discussed recent developments in the London gold market, which in
general had been encouraging.

In this connection he cited the results

of recent operations of the gold pool and a decision on the part of the
U. S. Treasury to reallocate its share of a gold distribution from the



pool to certain European central banks having low ratios of gold in
relation to dollar reserves.

Mr. Coombs also noted that the U. S. gold

stock probably would remain unchanged this week for the tenth successive
week, after which he summarized anticipated demands for gold that might
be made in the next few months by several foreign central banks.
This led to comments by Mr. Coombs on the possible magnitude of
gold orders that might be received from the Bank of England as the British
came into the normal seasonal period of trade surplus, which would run
through May.

There had been an informal estimate that the surplus durin

the first half of this year might run to at least $400 million.

If this

were all converted into gold, such purchases--combined with the other
prospective demands for gold that he had mentioned--might reduce the U.
gold stock by $600 to $700 million during the first half of the year.


the circumstances, it had been suggested to a representative of the Bank
of England that a program along somewhat the following lines might be
considered to deal with a British surplus in the range of $400 million.
First, the Bank of England might take -old in sizable amount; this would
make it clear that the gold was available when wanted.

Second, a swap

arrangement between the Bank of England and the Federal Reserve in the
amount of $250 million might be negotiated.

(Several months ago a swap

of such magnitude had been given some consideration, but it was not con
summated at the time.)

Third, there might be an increase in the dollar



balances of the Bank of England from around $300 million to around $350

Mr. Coombs was of the opinion that a swap arrangement in the

amount mentioned would have the support of the Bank of England, and he
hoped that it might be possible to execute such a swap in due course.
It might be necessary, however, to act in two steps:

first, a drawing

of $50 million under the existing swap arrangement, followed by discus
sion of an enlarged swap agreement, with pay-off of drawings thereunder
anticipated in the second half of the year when the British would
normally be moving into a seasonal deficit.
Mr. Coombs then referred to the prospective $50 million swap
agreement with the Bank of Sweden, the negotiation of which was
authorized by the Open Market Committee at its meeting on December 4,
1962, and explained why it had not been possible thus far to find a
satisfactory investment outlet for the krona balances that the Federal
Reserve would acquire in the event of a drawing under the swap facility.
Mr. Mills raised at this point certain questions relating
generally to the attitude that would be appropriate for U. S. authorities
in dealing with matters such as had been mentioned by Mr. Coombs, includ
ing reallocation of distributions from the gold pool and the consummation
of the swap arrangement with the Bank of Sweden.

In the latter connec

tion, he noted that the difficulty encountered in working out the

proposed swap arrangement apparently was attributable in part to existing



U. S. legislation, which led him to inquire whether the appropriate
course might not be to discontinue the negotiations for a swap arrange
ment unless there should be some change in the existing legislation.
In respect to the first part of the question, Mr. Coombs out
lined considerations that he understood the Treasury to have had in mind
in connection with the gold pool reallocation.

His recital of these

considerations, which he considered valid, led to a general discussion

with regard to the range of gold ratios of the principal European central
banks and the extent to which some improvement of the lower ratios might
tend toward conditions of stability.


was emphasized during this dis

cussion that the subject involved responsibilities of the Treasury rather
than the Federal Reserve.
With regard to the question concerning the negotiations with
the Bank of Sweden regarding a swap arrangement, Mr. Coombs commented
that a problem of concern to him was the possibility of winding up with
essentially a one-sided relationship, in which the Bank of Sweden would
be prepared to make krona balances available to the Federal Reserve but
could not effectively take advantage of the reciprocal features that were
essential to swap arrangements.

He then spoke of factors that led him to

feel that it would be desirable for the Federal Reserve to try to complete

its network of swap arrangements.

It was his hope that before long the

network of such arrangements could be described as nearly complete and
constituting an effective network of mutual support.

In reply to a question as to what he would have in mind, beyond
the Swedish swap, for completion of the network for swap arrangements,
Mr. Coombs referred to the possibility of a swap arrangement with the
Bank of Japan and cited several factors that might weigh for or against
the consideration of such an arrangement.

Balancing those factors, it

was his present inclination to wait a while.
Thereupon, upon motion duly made
and seconded, and by unanimous vote, the
System Open Market Account transactions
in foreign currencies during the period
December 18, 1962, through January 7, 1963,
were approved, ratified, and confirmed.
Mr. Ccombs then presented several recommendations for the
consideration of the Open Market Committee.
First, he recommended that the Committee authorize renewal for
three months of the current swap arrangements with the Bank of Italy,
the Swiss National Bank, and the Bank for International Settlements in
the amounts of $150 million, $100 million, and $100 million, respectively,
all of which would mature January 18, 1963:

He also recommended renewal

of drawings of $35 million under the swap arrangement with the Bank for
International Settlements and $50 million under the swap arrangement
with the Swiss National Bank, which drawings would mature January 18, 1963.
Thereupon, extension for three months
each of the swap agreements with the Bank
of Italy, the Bank for International Settle
ments, and the Swiss National Bank, as recom
mended by Mr. Coombs, was authorized, with the
understanding that the drawings to which he had
referred under the swap arrangements with the
Bank for International Settlements and the
Swiss National Bank would also be renewed.


Second, Mr. Coombs recommended repayment of the $50 million

drawing under the swap arrangement with the Austrian National Bank,
which would mature January 24, 1963, and renewal of the swap facility
in the form of a standby arrangement in the amount of $50 million for
three months.
The repayment of the $50 million draw
ing under the current swap arrangement with
the Austrian National Bank was noted without
objection and renewal of the swap arrangement
with the Austrian National Bank on a standby
basis for three months, as recommended by
Mr. Coombs, was authorized.
Mr. Ccombs then referred to the gereral discussion several months
ago with the Bank of England, pursuant to Committee authorization, regard
ing the possibility of an enlarged swap facility, with $250 million
having been cited at the time as a rather rough figure.

He recommended

that authorization now be given for further negotiations with the Bank
of England in terms of a $250 million swap.

As he had indicated previously

during this meeting, this would be in anticipation of a reversal of the
British surplus position in the first ,alf of the year to a deficit in
the second half.

In response to a question, he noted that the British

would have the option of requesting gold in reflection of their surplus

Negotiations with respect to a possible swap arrangement might

be in terms of whether, on the basis of international cooperation, the
British would be interested in such an arrangement as an alternative to
the taking of gold.


In further discussion, Chairman Martin referred to the fact

that, as mentioned by Mr. Coombs, negotiations had been under way some
time ago with a view to the possibility of a swap of the magnitude now

The formulation of the so-called Maudling Plan, which was

presented at the Fund and Bank meetings in the fall,

constituted a

However, the prospect of such plan being put into operation.

at least in the near future,

now seemed rather unlikely, and in the

circumstances the British might be more inclined to reconsider the swap

As Mr. Coombs had indicated, this should be thought of

essentially in terms of providing a bridge between the first half and
the second half of this year.
Asked for an opinion on whether the $400 million British surplus
that had been mentioned earlier as a possibility for the first half of
the year seemed to represent a reasonable estimate, Mr. Coombs responded
that in the light of various developments, some of which he enumerated,
the surplus could develop to be either larger or smaller than the


In view of this range of possibilities, it was his judgment

that a swap in the magnitude of $250 million could prove useful to both

parties to the agreement.
After further discussion of various
elements of the prospective situation,
further negotiations with the Bank of
England looking toward the execution of
a swap arrangement in the amount of as
much as $250 million were authorized.


Mr. Coombs next suggested the desirability of negotiating with

the German Federal Bank for an increase of the current $50 million swap
arrangement to $150 million, which would be in line with the increase
that had been effected recently in the swap facility with the Bank of
Italy and generally in line with the proposed enlargement of the swap
arrangement with the Bank of England.
After discussion, negotiations looking
toward an increase from $50 million to $150
million in the swap arrangement with the
German Federal Bank, as recommended by Mr.
Coombs, were authorized.
It was pointed out that the continuing authority directive to
the Federal Reserve Bank of New York on System foreign currency opera
tions, last amended October 2, 1962, contained a provision that total
foreign currencies held at any one time should not exceed $1 billion.
In light of the authorizations that had been given at this meeting, it
was suggested that the limitation might appropriately be raised to
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the Federal
Reserve Bank of New York was authorized and
directed, until otherwise directed by the
Federal Open Market Committee, to execute
transactions in the System Open Market Account
in accordance with the following continuing
authority directive on System foreign currency
The Federal Reserve Bank of New York is authorized and
directed to purchase and sell through spot transactions any
or all of the following currencies in accordance with the




Guidelines on System Foreign Currency Operations issued by
the Federal Open Market Committee on February 13, 1962, and
amended November 13:
Pounds sterling
French frarcs
German marks
Italian lire
Netherlands guilders
Swiss francs
Belgian francs
Canadian dollars
Austrian schillings
Total foreign currencies held at any one time shall not

exceed $1.3 billion.

Deming referred to a suggestion that had been made by Mr.

Mitchell at a recent Committee meeting relating to the preparation of
a paper outlin:ng for the Committee's consideration criteria that might

be helpful in determining the magnitude of swap facilities with the
foreign central banks of various foreign countries.

He inquired whether

progress was being made in the preparation of such a document.
It was noted, on this point, that the staff had recently been
distributing memoranda regularly with respect to the economic and
financial situation of foreign countries where swap arrangements, or
renewal or enlargement thereof, were in possible prospect.

It was

indicated that work would proceed in an effort to develop a document
of the character contemplated by the suggestion to which Mr. Deming had

This concluded the Committee's consideration of System foreign
currency operations and related matters.



Accordingly, the Chairman called for the usual staff reports on
economic, financial, and balance of payments developments.
Mr. Brill presented the following statement with respect to
economic developments:
As far as available evidence goes, it looks as though
December was more of the same--some types of economic
activity up slightly, some down slightly, and not much change
over all. Preliminary estimates incicate that the unem
ployment rate in December edged down slightly, but only to
a level well within the range prevailing throughout 1962.
There is nothing to suggest that our measure of total
industrial output for December will be significantly dif
ferent from November, or for that matter from what it has
been since last midyear.
As for consumer demands, a late rush of Christmas
buying pushed up retail sales for the month, with strong
buying of nondurable goods apparently offsetting a further
and sizeable cutback in automobile sales. Adverse weather
and strikes in some areas undoubtedly held down the sales
figures, and possibly some of the employment statistics for
the month,but disentangling basic economic forces from the
influence of transient ones such as weather and strikes is
difficult. By and large, there seems to have been little
change in the balance between expansionary and contractive
forces at year-end.
Looking back over the year, 1962 didn't contribute much
more in the way of expansion after the sharp cyclical run-up in
1961. From year-end to year-end, deflated gross national
product per capita rose by only 1 per cent, well below the
almost 8 per cent annual rate in the first phase of recovery
and somewhat below the average for the past decade.
In terms of cyclical behavior, however, 1962 was not
unusual. In the two preceding cycles, initial periods of
rapid recovery were also followed by periods of relatively
slow expansion which lasted for some time before the cyclical
peak was reached. This past upswing differed somewhat from
its predecessors in that the period of rapid recovery was
shorter, but the rate of rise in this phase was somewhat
faster. The current level of real GNP, therefore, is up from
the cyclical trough of early 1961 by just about the same
amount--roughly 1/10--as it was after similar time periods
following the 1958 and 1954 troughs.



A pattern of rapid upswing from cyclical troughs followed
by a period of much slower expansion seems perfectly naturalin terms of inventory behavior if nothing else. What is
disturbing is that the slowing up of the expansion in the past
two cycles occurred when our productive potential was sub

stantially underutilized, and occurred at successively higher
rates of unemployment. Even at the height of the hectic steel
inventory buildup in the spring of 1959, there was still some
12-13 per cent of manufacturing plant idle and about 5 per cent
of the civilian labor force unemployed. This past year, expan
sion again slowed when plant capacity was unutilized by 13-14
per cent and over 5-1/2 per cent of the labor force was still
seeking work. The critical problem in recent years seems to
have been not so much what starts a recovery or ends a boom,
as what causes the economic slowdown in the expansion phase
at less than full use of our resources.
It is an increasingly widespread conviction among
economists, businessmen, labor leaders--and some Congressmenthat the size and structure of the Federal tax take is the
Given the announced intent of the Administration
to do something about it, in the weeks ahead we are likely to
be barraged with visions of the economic paradise to follow
enactment of this or

that tax reduction program.

We still don't know the specifics of what the Administra
tion will propose re taxes, and to say the least we are not in
any position to judge what will emerge after Congressional
deliberation. As economists, however, we have some basis for
maintaining at least a modicum of skepticism as to whether
any likely tax cut will be as efficacious as is contended.
By now, we should all be sufficiently impressed with the
complexity of economic interrelationships to doubt any single
cause or any single remedy for persistent economic ills.
In earlier cyclical upswings, for example, the developm nt
of unsustainable price and cost

relationships was assigned

much of the blame for curtailing expansions. But these have
played little part in the recent leveling off. Industrial
prices as a whole were little changed throughout 1961 or 1962
and, for that matter, have been stable since early 1959.
Labor costs per unit of manufacturing output edged down again

last year, continuing the downtrend evident since 1958.
Another symptom often misconstrued as the basic cause
is an inadequate rate of new business investment, which over
the past 5 years has not kept pace with the growth in total
activity. In fact, it is only in recent months that business
capital outlays have finally re-achieved the earlier peaks of
1957, while total output (GNP in constant dollars) is now some
15 per cent higher than it was 5 years ago.



But business decisions on investment are not autonomous,
and must reflect assessments of other economic variables such
as prcfits and markets. Declining profit margins have
undoubtedly weakened incentives for plant expansion in recent
years. This, in turn, must have reflected at least in part
the underlying failure of the economy to make adequate use of
additions to capacity. Even at the height of the rapid expan
sion phase of the last two cycles, capacity utilization rates
in manufacturing were well below those that touched off the
investment boom of 1955-57. We seem much less able than
earlier in the postwar period to validate the optimistic plans
made by businessmen in the initial phases of recovery.
Total consumption expenditures have continued to rise,
but only in close conformance to the rise in income. The
spending rate has stayed between 92 and 94 per cent of disposable
income for the better part of a decade. Moreover, there has
been a substantial shift in the composition of spending. The
portion of income devoted to goods has been declining and the
part devoted to services rising substantially. In upswings,
spending for goods has tended to slow up in the second or
decelerating phases of recoveries, while spending for services
has ma ntained its early recovery pace.
Assuming that on the whole a rise in service expenditures
exerts a smaller draft on productive capacity than a comparable
rise in consumer outlays for goods, one might advance this
compositional shift as part of the explanation of our failure
to lift manufacturing capacity utilization to former peaks,
and also perhaps in part as an explanation of the persistent
decline in manufacturing employment. One must also wonder,
however, about the kind of tax reduction needed to arrest or
reverse such trends in consumer preferences.
I would hope that this analysis, incomplete as it may be,
is not construed as an argument against a significantly large
fiscal action at this time. Some stimulus seems needed if the
economy is to achieve a more satisfactory growth rate, and tax
reduction appears to be the most generally acceptable type of
stimulus. Even if the structure of private demands can't be
modified, a rise in the total may still provide enough incentive
to invigorate business investment plans. It would seem prudent,
however, to restrain optimism about economic prospects in the
months ahead, not only until the shape of the tax reduction
program becomes clearer but until we can get a better reading
on the economy's likely response.
Mr. Holland presented the following statement with respect to
financial developments:



By and large, financial markets can be said to have accepted
the recent change in monetary policy with considerable aplomb.
Awareness of the policy change seemed to develop more or less
gradually, and its influence on attitudes blended in with a
variety of other expectational factors that at least partly
balanced each other out.
It can be noted that this policy
change occurred during a period of record build-up in dealer
inventories and sharp expansion in bank credit demands--the
ingredients that often have giver rise to sharp reactions to
policy changes in the past. The fact that no such marked
reaction occurred on this occasion reflected a variety of
factors; I might cite the smoothness of Desk operations, the
mildness of the actual policy change, the relatively narrow
bounds within which many observers believe monetary policy can
be changed in any case in the current circumstances, and
probably also some deep-seated market convictions that some of
the recent credit expansion was temporary, and that the under
lying flows of investible funds will continue large relative
to expected borrower demands.
Bank credit expansion and reserve utilization accelerated
during December. In fact, deposit inc-eases appeared to grow
larger as free reserves dropped; but this is not so confounding
when one realizes that much of the decline in free reserves
resulted from successively stronger than projected increases
in required reserves.
In some respects the recent experience is reminiscent of
last year, when a temporary year-end burst of credit expansion
distorted the reserve figures for several weeks. Closer
examination points up at least three differences, however.
This year's expansion stretched over a somewhat longer period;
there was even more miscalculation of pressures by banks in
the climactic year-end week; and, thus far, there appears to
be a less rapid reversal of the bulge ;n the early days of the
new year.
A major influence in the December bank credit rise, as
Mr. Stone has pointed out, was the larger than usual bank
borrowing by Government securities dealers to carry their
enlarged ill inventories. The dealers seemed sufficiently
confident of a strong bill market after the turn of the year
to willingly incur a negative carry in a goodly portion of their
short-term portfolio during the days of peak tightness, and
indeed this attitude appears to have been vindicated in good
part by the subsequent rapid rate of market absorption of bills
by investors.
Some other categories of bank credit also showed strength
Certain categories of business loans were
in recent weeks.



strong--particularly utility credits--not so much over the
conventional tax and dividend dates as at other times when
the borrowing often appeared related to a conscious choice
of bank borrowing in preference to open market financing.
Bank real estate, consumer, and agricultural loans all
continued the fairly steady pace of advance characteristic
of other recent months.
This performance topped out a year of record increases
in bank credit and deposits. Banks extended their full share
of a cyclical increase in consumer credit, somewhat more than
their share of a substantial increase in mortgage debt and
external business debt, and the dominant portion of credit
extended to State and local governments. The only major
borrowing sector that did not draw upon the commercial banks
during 1962 was the Federal Government; while month-to-month
changes were sizable, no part of the 1962 Federal deficit was
financed by the commercial banking system on a net basis.
The bank loan increase during 1962 was financed, of course,
essentially by the expansion of time deposits, which grew more
than twice as fast as over-all public liquid assets, which
themselves increased about twice as fast as the year-to-year
advance in GNP. Demand deposit expansion has come along more
rapidly beginning this fall, however. During December, the
bank credit expansion was mirrored in the sharpest monthly
increase in the average money supply in four and one-half yearsthis despite a smaller than usual decline in Government deposits
and a continuation of the enhanced rate of growth in time
deposits characteristic of the fourth quarter.
Broadly viewed, however, the money and capital markets
evidenced relatively moderate reactions, both to these outsize
bank credit flows and to the slowly apprehended change in System
policy. The modest interest rate movements may be the market's
own signal that the big credit movements of the last few weeks
are largely transitory. They also suggest that markets are in
a relatively well-balanced position to meet the tests immediately
ahead. Testing of the long-term market will come from the post
holiday rebound of new offerings this week, highlighted by the
Treasury's $250 million offering to underwriters today. In the
short market, the acid test will be the degree of persistence
If nonbank demand continues strong, it
in nonbank bill demand.
could give rise to something of a dilemma for monetary policy,
contracting bank credit and deposits and, at the same time,
depressing bill rates relative to other rates more sensitive
to bank reserve and portfolio positions.
The imminence of these tests, and the turbid nature of
recent financial flows, all seem to invite a "wait and see"



attitude with respect to any policy adaptations. The Treasury
financing schedule also is an influence in this direction.
Presumably, an "even keel" policy will be appropriate for the
next few days to allow for digestion of the $250 million bond
issue, and an "even keel" would again be appropriate around
the date of the next meeting of the Committee, as the Treasury
will probably be announcing its February 15 refunding offering
in that week. In between, the Treasury will also be marketing
a $2.5 billion one-year bill issue on January 9 and perhaps a
$1 billion June tax bill either late in this month or early
next month; but it should be remarked that these bill issues
are easily merchandised offerings and are partly intended to
create some market pressure, and therefore their inhibition of
System actions need not be great.
Whatever the policy prescription may be today, let me
conclude with the point that the current combination of reserve
and money market statistics is not likely to be a very viable
base from which to judge either "change" or "no change" in the
weeks ahead. For one thing, the current week has an extra
ingredient of ease from the unwinding of cumulative country
bank excess reserve positions built up prior to the year-end.
For another, the year-end upthrust of credit demands gave many
banks a justification for temporary borrowing from the Federal
Reserve that undoubtedly cushioned the restrictive effect thereof.
With such justification fading as time passes, and with the
January flows of funds typically redistributing reserves in
ways which tend to delay their full effectiveness, it could
well take a somewhat higher range of free reserves than the
$250 million average of the past two weeks to maintain something
like the same degree of marginal bank credit availability.
In a discussion based on the foregoing staff presentations,
Mr. Mills brought out that while no part of the 1962 Federal deficit
had been financed by the commercial banking system on a net basis, at
the same time there had been a vast shift in the composition of portfolios
as the commercial banks acquired State and municipal obligations in

preference to Federal obligations.

Thus, another area of Governmental

deficit had been financed by the commercial banking system.


there was the satisfaction, from the standpoint of inflationary impact,



of noting that this financing had been accomplished out of increased
time and savings deposits.
There followed several questions by Mr. Balderston for the
purpose of clarifying figures contained in, the staff briefing for this
meeting, particularly with regard to the

change in GNP during the past

year in relationship to the increase that had occurred during the past
several months in required reserves against demand deposits.

Asked for

comment with regard to the appropriateness. of Federal Reserve policy in
light of the recent increase in required reserves, Mr. Holland noted that
a substantial pickup in demands for bank credit began to be evidert about
the end of the summer.

Until December, when monetary policy and market

conditions began to apply some restraint, the effect of System policy had
been to permit the accommodation of those demands without any substantial
restraining influence.

Thinking of System operations in light of the

actual bank credit demands that had developed, he felt it could be said
that such operations had not been inappropriate.

Generally speaking,

bank funds had been used in ways that did no damage to the economy; on
the contrary, they had contributed to growh in some sectors that had
provided the strongest support to expansion of domestic economic activity.
Mr. Hersey presented the following statement with respect to the
U. S. balance of payments:
My remarks will cover three topics, the balance of payments
outcome for the fourth quarter and the year 1962, shifts in



private capital flows in 1962, and the means by which the 1962
payments deficit was financed.
1. Very preliminary figures indicate that the published
balance of payments deficit will be under $1/2 billion for the
fourth quarter and under $2 billion for the year 1962. A
recomputation of the deficit, as the sum not only of the decline
in U. S. gold reserves and convertible currency holdings and the
rise in U. S. "liquid liabilities," but adding in also foreign
prepayments of long-term debt to the United States and the rise
in U. S. Government "nonliquid liabilities," gives an estimate
for the fourth quarter not far from $1 billion and for the year
as a whole about $3-1/4 billion. On a similar basis, the 1961
deficit was $3.2 billion.
As to the difference between the two measures of the
deficit for the year 1962--one under $2 billion and the other
over $3 billion--debt prepayments account for $666 million of
the difference. The remainder represents Treasury borrowings
for periods over 1 year with nonnegotiable instruments from
Switzerland and Italy, increases in foreign funds committed for
military purchases in the United States, and increases in funds
held by the International Development Association and the Inter
American Development Bank as reserves in non-interest-bearing
nonmarketable securities.
If we take a look at private capital movements, broadly
defined without regard to how they are placed in the balance of
payments accounts (above or below the line at which the deficit
is measured), we find two really major changes in the flows
between 1961 and 1962.
First, the outflow of U. S. bank loans and acceptance
credits dropped from $900 million in 1961 to what looks like
Second, the inflow of
being less than $1/4 billion in 1962.
foreign commercial banks' funds into liquid assets in the United
States fe'l off from $600 million in 1961 and became for the
year 1962 as a whole an outflow--i.e., a reduction in their
holdings--which may have reached 2 or 3 hundred million by the

end of the year.
Neither of these two major changes in private capital
movements were basically determined by interest rate developments
here or abroad. Of the shrinkage in U. S. bank credit outflow,
approximately $1/2 billion was in the flow to Japan, which was
over $600 million in 1961 but far less than that in 1962.
last March, in fact, Japanese short-term indebtedness to the
U. S. has not grown any further, and last autumn it began to be
reduced a little. The governing factor, I believe, has been the
attitude of the Japanese authorities, who were unwilling to see



a further buildup of what is now a very large aggregate of
short-term debt, including what is owed to Europe. They were
able to get along without further large inflows when the drop

in Japanese imports and rise in Japanese exports began to
relieve the balance of payments difficulties that had been so

acute for Japan in the latter part of 1961.
The cessation of the 1961 buildup in foreign commercial
bank liquid assets in the United States is probably best thought
of as related to the functioning of the Euro-dollar market, and
also in connection with the ending of Germany's previous large
surpluses in international payments. In 1961 one of the majcr
sources of dollar funds to the Euro-dollar market was the German
central bank, which supplied dollars to German commercial banks
with exchange risks covered, on relatively attractive terms.
With the turn in Germany's payments position, and after the
experience at the end of 1961 of some really huge window
dressing operations, in which the German banks repatriated a
large amount of the liquid assets they had been holding abroad
and then put an even larger amount out again in January 1962,
the Bundesbank took various actions to discourage such large
movements in and out in the future. In doing this it brought
German domestic money market rates up from the 2 per cent level,
abnormally low in relation to German interest rates in general,
to which it had reduced those rates in 1961. From the end of
January to the end of November, the German banks' liquid assets
outside Germany were run down by $600 million, and this movement,
I believe, was undoubtedly the main factor accounting for the
fact that over the same period total foreign commercial bank
holdings of dollars in the United States dropped by $600 million.
I mention these .two major changes in capital flows only in
order to remind you of what I am sure you are already aware of:
that the purposes served by keeping U. S. money market rates
from falling did not, in 1962, include having any significant
effect in altering the flows of private capital, even though
the line of action may have had very important effects in holding
a dam against an increase in the net outflow of private investment
and loan funds.
3. Finally, I shall recapitulate the various sources from
which the 1962 payments deficit was financed, and compare them
with the financing of the 1961 deficit. In both years the gold
drain was about $0.9 billion. Net of the increase in our foreign
convertible currency holdings, the drain was about $0.9 billion
in 1962 and $0.75 billion in 1961. In both years foreign
governments prepaid long-term debts in an aggregate amount of



about $0.7 billion. In both years private foreigners other
than banks increased their liquid holdings in the United States
by about $0.1 billion. In 1962 international development
lending agencies increased their holdings, liquid and nonliquid,
by about $0.3 billion, a somewhat smaller amount than in 1961.
So far, this accounts for about $2 billion in each year.
The remaining three sources were increases in our
liabilities to the International Monetary Fund, increases in
foreign commercial bank dollar holdings in the United States,
and increases in central bank and government holdings of U. S.
liabilities. First, as to the IMF:
in 1962 foreign central
banks held down their reserve gains by making $600 million of
net repayments in dollars to the Fund, thereby increasing U. S.
liabilities to the Fund, whereas in 1961 the Fund had paid out
on balance a small amount of dollars tc foreign countries.
Second, foreign commercial bank holdings, as I have already
mentioned, went down by a few hundred million in 1962, whereas
these had increased by $600 million in 1961.
The rest of the financing of our deficit, in the neighbor
hood of three quarters of a billion dollars each year, was
provided by increases in foreign central bank and government
holdings of liquid and nonliquid assets due from the United States.
But in 1962 most of this was accounted for by Canada. Other
countries, in the aggregate, had increased their holdings by
half a bilion in 1961, and increased them very little in 1962,
and that all in nonliquid forms.
Looking ahead into 1963, it is hard, at this moment, to
visualize very substantial amounts in any of the three items
which together provided in each of the last two years a net
increases in U. S. liabilities to the
amount over $1 billion:
IMF, to foreign commercial banks, and to foreign central banks
and goverrments.
Chairman Martin called attention at this point to the discussion
at the meeting on December 18, 1962, with regard to the formulation of
the current economic policy directive.

He referred to the necessity for

continuing to work in an effort to formulate the directive in a manner

that would be satisfactory for operating purposes and conducive to
public explanation of Committee policy.

It was his suggestion that during

the go-around at today's meeting this problem be borne in mind.




speaking might endeavor to be clear as to whether they were specifically
recommending a continuation of current policy or a change in the direction
of more

ease or less ease, in the thought that this might tend to focus

the Committee's thinking.

The Chairman also noted that Mr. Young had

suggested that at the conclusion of the go-around the Committee might
want him (Mr. Young) to present a summarization of economic data,


the thought that this might be helpful to the Committee in setting a
background for formulation and adoption of the policy directive.


was simply a suggestion for the Committee's consideration.
Mr. Treiber then presented the following statement of his views
on the economic situation and credit policy:
As we enter the new year, it is appropriate for us to look
back over the old year and see how successful we have been as
a nation in attaining our broad national economic goals of (i)
maximum sustainable growth, (ii) reasorable price stability,
(iii) maximum practicable employment, and (iv) equilibrium in
international payments.
We have done pretty well on the goal of reasonable price
stability. Wholesale prices have been remarkably stable,
while consumer prices have moved up a relatively small amountabout 1-1/2 points, due primarily to the increased cost of
Business seems to be doing pretty well in absolute terms,
but we are not making reasonably full use of our resources of
either men or machines. Our economic growth has been good,
but not as good as we had hoped and expected this time last
Unemployment is too high. Throughout the year it has
been in the 5-1/2-6 per cent range.

Our poorest showing in our national goals is the attain
ment of equilibrium in international payments.
have a severe balance of payments problem.

We continue to



Looking now at the present scene, the business situation
has changed very little since the last meeting of the Committee.
Business sentiment continues to be clearly better than a few
months ago. Economic activity in the fourth quarter as a whole
will apparently be appreciably above the third quarter performancechiefly as a consequence of higher consumer purchases.
Preliminary balance of payments statistics for December
show a large surplus, resulting entirely from extraordinary
receipts from foreign governments which, in turn, represent for
the most part advance payments for military purchases and the
repayment of debt. The latter, of course, represents a liquida
tion of some of our official foreign assets. As a result of
these special transactions, the 1962 deficit is likely to have
fallen below the psychologically important $2 billion mark.
But, excluding these and other special- transactions, our balance
of payments for 1962 as a whole does not appear to show any
improvement from 1961.
Bank credit has been expanding while bank liquidity has
continued to be adequate. At this time, it seems to me that
easier credit is unlikely to be effective in promoting growth
and employment. But easier credit and a reduction in interest
rates could bring about capital outflows and aggravate our
balance of payments problem.
As we enter a period in which traditionally the banking
system gains reserves and consequently the Federal Reserve seeks
to absorb reserves, we find that dealers' inventories of U. S.
Government securities are still quite large. But the corporate
demand for such securities is very strong. A firmer tone in the
money market in recent weeks has helped to offset the easing in
Treasury bill rates that customarily occurs at this time of the
year. Most elements in the market have concluded that Federal
Reserve policy has moved toward slightly less ease and is directed
particularly toward avoiding a decline in short-term rates.
In the coming weeks there will be several Presidential
messages and proposals for legislation. When the nature of the
proposals and the Congressional reaction to them becomes known,
there should be some clarification of the fiscal outlook. Until
that clarification, it is especially hard to take a longer run
look at monetary policy. Indeed, the frequent Treasury financings
now scheduled over the coming weeks counsel an even-keel policy
over the next several weeks.

I suggest a continuation of present open market policy,
which calls for a continuation of open market operations to
maintain the somewhat firmer tone that has existed in the
money market in recent weeks in order to avoid a decline in



short-term rates.
I would not suggest any change in the
discount rate. While some minor technical changes in the
directive may be appropriate, I would not want to see any
change of substance.
Mr. Ellis stated that the consumer sector was the brightest spot
in the New England economic picture.

Christmas season sales at District

stores were 5 per cent above the year-ago level, this being


consistent with the pattern of personal income in the region, which had
shown an increase of more than 6 per cent during 1962.

However, this

growth pattern did not show up in other economic indicators.

Flows of

orders to manufacturers stabilized last fall, as did aggregate manufactur
ing output.

Member banks continued to experience a rapid influx of

deposits, particularly in the time category.

Loan extensions tapered off

during December, so the banks added to their portfolios of Government
securities, particularly short-term maturities, and they had swung to a
position of net sellers of Federal funds as the year ended.

At the end

of November, deposits of regularly reporting mutual savings banks were
substantially above the year-ago level.
Mr. Ellis expressed the view that open market operations during
the past three weeks had been quite appropriate.

He noted that the

expansion of loan demand had continued, along with expansion of the money
supply, and required reserves against private demand deposits were above
the so-called growth guideline.

At the same time there had been a

strengthening of short-term rates, consistent with the objective of



maintaining a firmer tone in the money market during a period when there
was a seasonal tendency for short-term rates to weaken.

The recent

reduction of the Bank rate in England, which followed a reduction of the
Belgian discount rate, should be helpful in

connection with the problem

of short-term rates and capital outflow.
Mr. Ellis noted that today's auction of Treasury long-term
securities suggested the desirability of maintaining an even keel in
System policy; in his opinion that financing should not be complicated
by a shift in policy.

As he saw it, a further expansion of required

reserves against private demand deposits at an annual rate of about 3
per cent could be accommodated within a policy posture that involved a
target of around $300 million for free reserves, a Federal funds rate
usually at

3 per cent, and a short-term rate usually between 2.80 and

2.90 per cent.

Within such a pattern, it would seem likely that the

Committee's objective of preventing an excessive flow of funds abroad
also would be erhanced.
Mr. Ellis felt that this kind of program could be accomplished
during the next three weeks within the context of the present policy

However, the Committee would have to rely on a special

interpretation of the clause "if necessary, through maintaining a firmer
tone in money markets".

As he recalled, that phrase had been included

in the directive in the sense of referring to money market conditions



that had prevailed during the weeks preceding the December 18, 1962,

If the phrase were retained, that would infer that the Committee

desired a still firmer money market tone.

Accordingly, he would suggest

substituting "if necessary, through maintaining the firmer tone in money
Mr. Ellis indicated that he saw no reason to change the discount
rate at this time.
Mr. Irons said that in the Eleventh District there had been
some signs of moderate improvement during the past three weeks.


speaking, however, there had not been much change; the District continued
to operate at a high level of activity, but without much further advance.
The index of industrial production was up slightly; crude oil production
was unchanged; and the agricultural situation was generally satisfactory,
with cash receipts from farm marketings running about the same as a
year earlier.

Construction activity continued very favorable.


kept inching up, but unemployment rose from 4.6 to 5 per cent during the
latest month for which figures were available.

Consumer buying was

strong, with Christmas sales up about 4 or 5 per cent.
Loans and investments of Eleventh District banks were up, along
with deposits, with the measurement of increase depending somewhat on
whether one used December 28 (condition report date) or December 31

Demand deposits were up slightly, while time deposits were up

rather substantially.

District banks continued to be net purchasers of



Federal funds.



borrowing showed some gyrations at year

end but otherwise remained at a modest level, with the borrowing mostly

by a few country banks.
Turning to policy, Mr, Irons said that in view of Treasury

financing operations, and also from the economic standpoint, he would
recommend continuing the degree of firmness--or less ease--in money
markets that had prevailed during the past three weeks.

would have to absorb
three weeks,

The System

a substantial amount of reserves during the next

but that would not call for a deviation from the policy

that the Committee had been following, which he would describe as a
drift toward a little firmer money market situation.
Mr. Irons concluded by saying that he would not change the

He was not disturbed by the point mentioned by Mr. Ellis,

since he would be willing to drift toward a little firmer market situation.
He would not change the discount rate at this time.
Mr. Swan said that fairly complete, November figures and scattered
December figures indicated some moderate further improvement in the Twelfth

District by the end of the year 1962.

Department store sales set a new

record for the month of December, while auto sales were extremely high
in November and were well maintained in early December.
after declining

in November,

and ran ahead of production.
to a



than seasonally.

Lumber orders,

increased more than seasonally in December

Steel production rose in December in contrast

Oil refining alo increased, although no more


-30Turning to District banking developuents, Mr. Swan said that the

major banks had been rather substantial net purchasers of Federal funds
recently and expected again to be net buyers in the current week.


appeared that the loan increase in December turned out to be somewhat
larger than had been anticipated at the beginning of the month.


increase to 4.8 per cent in the dividend rate on share accounts at
savings and loan associations had become practically universal in

In view of this, the institutions previously at 4.8 per cent

were emphasizing certain other features, and one had increased its rate
to 4.85 per cent.

Other associations were advertising that dividends

would be cumulated monthly instead of quarterly or announcing that they
would credit dividends

from the date of deposit, or even from the first

day of the month in which a deposit was made by the 20th.

He mentioned

these developments simply to suggest the intense degree of competition
within the savings and loan industry.
As to policy, Mr. Swan noted that there appeared to have been no
fundamental change in the business situation.

Accordingly, and in view

of the Treasury financing program, he saw no basis for any particular

change in policy over the next three weeks.
suggest the maintenance of an even keel.

In other words, he would

However, he had some question

about the meaning of "no change in policy" at this particular point.


he understood it, forces operating in the past few weeks were such that



the relationships in that period between free reserves, total reserves,
the bill rate, and so forth were rather unusual and were not likely to

In particular, he strongly doubted whether, with free reserves

a little over $200 million, another period of average member bank borrow
ings high as $700 million to support an increase in total reserves could
be expected.

In his opinion, a somewhat higher level of free reserves

would probably be necessary to maintain the same tone in the market.
Mr. Swan commented that he was not too concerned about the fact
that the bill rate had gone up a few points.

Nevertheless, he hoped

that the offsetting of any seasonal easing in bill rates would not
necessarily mean a continuing upward push.

The December 18 directive

called for operations with a view to offsetting the anticipated seasonal
easing of Treasury bill rates, if necessary through maintaining a firmer
tone in money markets.

He had the impression that perhaps this had been

reversed, that operations had been conducted more with a view to main
taining a firmer tone in money markets than to offset any seasonal
easing in the bill rate.

He would favor a bill rate around 2.85 per cent

and did not see much reason for going significantly above 2.90 per cent.
Mr. Swan commented that he would not change the discount rate at
this time.

As to the policy directive, he agreed with Mr. Ellis that it

should not call for a still firmer tone in money markets.

Also, he had

some question about the "anticipated" seasonal easing of Treasury bill
rates and would suggest changing "anticipated" to "any."


Mr. Deming reported that the Ninth District closed out 1962

in fairly good fashion.

Department store sales apparently set a new

record in December, member bank demand deposits were slightly ahead of
a year earlier, and time deposits were up 25 per cent.

At city banks,

time deposits were 51 per cent larger than at the close of 1961.
Employment was down seasonally, perhaps a shade more than seasonally,
but continued about 2 per cent above a year earlier, and unemployment,
except on the iron ranges, was significantly improved.

November persoral

income ran 9 per cent ahead of year-earlier figures, and it was estimated
that full year 1962 personal income was 7 per cent higher than that of
1961, a better gain than was registered nationally.

Industrial power

consumption in 1962 ran 9 per cent ahead of the preceding year.


Ninth District economy, therefore, began 1963 in a relatively favorable
Turning to the national economy, Mr. Deming said he saw 1962 as
a pretty good year, registering the best gain over the previous year
since 1959 and significantly better in performance than either 1960 or

In point of fact, American performance in terms of national

product and industrial output in 1962 relative to 1961 seemed to compare
favorably with Western European performance, and in terms of price
stability was far better.

The blemishes on the American record were

partly illusory, in that results fell short of hopes--but partly real,



in that gains over the previous year narrowed as the year advanced,
resources continued to be underutilized, and so little progress was
made toward solving the balance of payments problem.
The 1963 forecasts seemed to point to a continuation of this
slower rate of gain, which implied continued underutilization of resources,
both men and machines.

There might be some consolation in the 1962

balance of payment figures when they were published, but it seemed to
him there was little reason to view this problem with any optimism.
So, as he saw it, 1963 was beginning with about the same set of problems
that had caused concern in 1962.
Actually, in Mr. Deming's view, the System had dealt fairly well
with these problems in 1962.

It seemed to him that the course of credit

policy was correct, the results reasonably satisfactory, and the contri
bution to growth with stability a real one.

Therefore, he saw no good

reason to make any significant change in the course of policy until and
unless the problem mix changed significantly.

By this, he meant that

policy should continue to be basically easy but cautiously so because
of potential capital outflows.

At the same time, preoccupation with

potential short-term capital outflows should be avoided if the inter
national payments problem moved more, as it seemed to be moving, toward
a current account problem with the additional overtones of long-term

capital outflows.


With respect to current policy, Mr. Deming said that he found

himself in a somewhat awkward position.

argued against a change in policy.

The Treasury financing alone

But even abstracting from this, he

must say that despite having voted against the directive at the
December 18 meeting, he was reasonably well satisfied with the handling

of the Account during the past three weeks, complicated as the situation
was by year-end movements.

He would have preferred to see less borrowin:

from the Reserve Banks, but this seemed to have reflected commercial
bank errors about as much as anything.

Yet he thought it would be well

to watch member bank borrowing; the errors of the banks in estimating
their needs might indicate that the banking system was somewhat less
liquid than the conventional statistics made it appear.

On balance,

however, he found it difficult to quarrel with policy implementation
over the past three weeks.

If this was all that the policy shift implied,

he would not oppose it this time as a matter of principle, aside from
the even keel aspects of the situation.

But he would not like to see a

further movement toward less ease under present circumstances, and he
would not like to see a regularly higher level of member bank borrowing.
Mr. Deming concluded by commenting that he would be satisfied
to keep the directive as it stood, and he would not change the discount

He would recommend, in brief, no change in policy at this time.
Mr. Scanlon said the general attitude of Seventh District

businessmen was that the trend of business in the first half of the



current year would be, at best, only moderately upward.

Any projection

of a pronounced rise in the economy in the second half of 1963 was
predicated on a sizable tax cut of the "right" kind.
Labor markets continued sluggish.

Department store sales were

7 per cent above the preceding year in the five weeks ended December 29,
a somewhat better showing than for the nation.

Savings at commercial

banks and savings and loan associations continued to rise in November
and December, although not quite so rapidly as in August and September.
Now that holiday influences had passed, it appeared that steel production
had started to rise again.

For 1963 as a whole, industry sources in the

area believed that steel output would exceed 1962 output slightly.
Auto sales and production decline
were at high levels.

somewhat in December but still

Inventories at year end were slightly over 800,000,

about the same as a year earlier.
said to call for 696,000 cars.

Production schedules for January were

It now appeared that the sales-production

mix would be measured to provide a million unit inventory for the spring
selling season.
Construction contracts were very large in November.

The Midwest

enjoyed a gain over November 1961 of 12 per cent, compared with a 6 per
cent rise for the nation.

It should be remembered, however, that for the

first eleven months of the year contracts in the Midwest were up only 3
per cent compared with a rise of 11 per cent for the nation.


Banks in the Seventh District reported a strong loan growth in

December, with all loan categories sharing in the gain.

Both business

and consumer loans rose more than in 1961., contrary to the experience
of the United States as a whole.
holdings of Treasury bills.

District banks also increased their

Chicago banks did not feel the reserve

pressure that was apparent in New York prior to the year end, although
they covered a larger part of their deficit position at the discount
window than at any time in recent months

or at the same time a year ago.

Mr. Scanlon noted that while year-end strains made interpretation
of current trends difficult, there appeared to be fairly strong credit
demands from both the business and consumer sectors, and substantial
monetary expansion.

At the same time, with the recent reduction in

British Bank rate and with the U. S. bill rate at current levels, there
would seem to him to be no immediate need to press for a further increase
in short-term rates.

The market appeared to be convinced that the System

had moved to a less easy policy.

It evidently had been expecting somewhat

lower long-term rates on the assumption of a continuing ease in policy,
and the interpretation of current policy might have important psychological
effect in this sector of the market as well as on the usual seasonal
movement in the short-term sector.

Since the Committee chose to adopt

a policy of less ease during the past three weeks and the present position
had now been arrived at, he would be hesitant to make a change at this

Like Mr. Deming, he would prefer to stay on even keel.


Mr. Scanlon believed the current policy directive was appropriate

for the next three weeks, and he indicated that he would not change the
discount race at this time.
Mr. Clay commented that the Committee continued to be faced with
the dual problems of an unsatisfactory performance by the domestic economy
and the persistence of an adverse position in this country's international
balance of payments.

The domestic economy showed very little expansionary

In fact, the only sector of the private economy that had shown

any marked increase in recent months was the automobile industry, and
further expansion in that sector in the months ahead did not appear highly

Government outlays constituted the principal area in which

expansion could be expected.

For most other parts of the domestic economy

there appeared to be an inclination to hope that improved sentiment would
facilitate an upward movement, and that for business capital outlays improved
sentiment plus the tax credit and accelerated depreciation allowances would
avert a projected downturn.
Under these circumstances, i:

was rather difficult for Mr. Clay

to perceive how any appreciable lessening of monetary ease would fail to
have an adverse impact upon the domestic economy.

The more marked changes

in some measures of monetary expansion in the later months of 1962 should
be viewed, he felt, as results that were appropriate to the existing
economic situation and presumably should be sought by monetary policy.
the performance of the economy continued unsatisfactory, it could not be




assumed that the role of monetary policy could now be lessened, as though
its job somehow had been accomplished.
The adverse international balance of payments problem persisted,

The Committee had a responsibility to do what it reasonably

could to be of assistance toward keeping the problem manageable, bur
again it must be recognized that the Committee also was faced with very
real limitations as to what it could contribute to the solution of the
Mr. Clay went on to suggest that a shift in policy of the degree
decided upon at the previous meeting of the Committee could not be
to be of great


significance in itself for the welfare of the domestic

Neither could it be said to be of great significance to the

condition of the international balance of payments.

It was when one

viewed the step as a possible move toward a basic change in monetary
policy that its importance had to be carefully weighed, particularly
since there was still a question as to whether the domestic economy
might not need the stimulus of added ease instead.
For the period until the next meeting of the Committee, Mr. Clay
felt that the dominant short-run consideration was the downward seasonal
pressure on short-term interest rates.

In his opinion, the Manager of

the Account should be authorized to deal with these seasonal pressures
in the same manner as had been indicated at the December 18 meeting.



Viewing this short-run posture as a step toward a more basic shift in
monetary policy was quite another matter, however, and this would need
to be considered on its own merits.
Under the circumstances, and considering Treasury financing, Mr.
Clay concluded that for the next three weeks there should be essentially
no change in the degree of ease.
Reserve Bank discount rate.

Also, there should be no change in the

In the directive he would modify, as Mr.

Ellis had suggested, the clause "maintaining a firmer tone in the money
Mr. Wayne reported that Fifth District business began the New
Year at about the same pace that characterized the final months of 1962.
However, sentiment among respondents to the Reserve Bank's survey shifted
significantly in the past three weeks.

Businessmen had lost some of their

pre-Christmas optimism, while the consensus of bankers had moved all the
way from strong optimism to slight pessimism.
tion for the change.

There was some justifica

Seasonally adjusted textile man-hours declined in

November for the sixth consecutive month, and textile respondents in the
Bank's latest survey reported further recent reductions in new orders,
employment, and hours.

Contrary to most published reports, textile

respondents indicated a slight softening of prices, which might be
seasonal in nature or might reflect only limited segments of the broad



textile market.

Lumber producers in the survey also reported declines.

(Factory orders other than textiles were reported unchanged or slightly
lower following a period of gradual improvement.)

Thus a few manufactur

ing areas, and mining, remained sources of uncertainty.

Furniture makers,

however, indicated a continuation of activity at record levels.


loans at District weekly reporting banks staged a strong December rise,
exceeding all recent years except 1961.
On the national front, it seemed to Mr. Wayne that there had been
no significant change in the pace of business activity in the past month.
During the last ten days before Christmas there was apparently an upward
surge in retail sales which may have carried them slightly above the
previous high for the season, but it appeared now that the increase was
little, if any, greater than the increase in population during the year.
Elsewhere, it seemed that for the last quarter of 1962 most major
indicators would show the smallest quarterly increases since the upswing
began almost two years ago.

Thus the substantial psychological boost

afforded by the Cuban incident had not as yet been reflected in the data
on economic activity.

As the economy headed into the New Year, there

was little statistical evidence of any significant changes one way or the
other, so the best prospect would seem to be a continuation for some weeks
at the present rather high level of business activity.
Mr. Wayne went on to say that the principal new element introduced
into the policy equation since the previous Committee meeting was clearly



the reduction last week in the British Bank rate.

Considering the

present high degree of liquidity in the economy, he saw no domestic
benefit in allowing U. S. bill rates to follow the Bank rate downward.
Indeed, such a course might well involve some hazard in view of the
unsatisfactory state of the U. S. payments position and the continuing
sizable yield spread in favor of Canada.

He was increasingly convinced

that it might be desirable, at this stage, to seize opportunities for
allowing covered yield spreads in favor of this country to develop rather
than to be content with remaining on the defensive as regards capital

For his part, he would like to see bill rates maintained in

the 2.85-2.95 range, irrespective of likely yield reductions abroad.
He believed this range was consistent with the latest directive and with
even keel considerations.

In view of the strong seasonal factor ahead,

the probability of further liquidation of dealer inventories, and other
influences, he doubted that free reserves would be a reliable indicator
in the next three weeks.

He would prefer to trust the Desk's "feel"

of the market in maintaining about the same tone prevailing since the
last meeting.

He would favor renewing the directive and leaving the

discount rate unchanged.

In summary, he would recommend no change in the

degree of firmaess that had prevailed during the past three weeks.
Mr. Mills said he would admit to being confused as to how an
effective and constructive monetary and credit policy could be developed
at this particular time.

He put the blame for his confusion on past

policy actions that had tended to peg the interest rate structure and



create an artificial money market situat.on.

A smoke screen had been

thrown up to obscure monetary vision and the ability to develop policy
out of observable facts.

With the New Year and the opportunity for making

good resolutions, he hoped the Open Market Committee would get back to
fundamental, and shape its policy decisions on judgments of credit
availability developed out of free market principles.
Mr. Mills thought, as he looked back through the mist of the
recent past, that there had been excessive credit availability in the
second half of November and through December.

He felt that possibly the

situation needed correction and was susceptible of correction in the
first month of the New Year, when it was customary and necessary to
withdraw reserves.

It was easier, in his opinion at least, to adjust

mechanically the sought-after degree of credit availability by with
drawing reserves than on those occasions when that objective is sought
after by supplying reserves.

Therefore, assuming that reserves would

be withdrawn to a reasonable extent in the next three weeks, the question
came up as to what degree of credit availability would develop out of
those withdrawals.

Broadly speaking, the sought-after credit availability

would be gauged by the observable legitimate demand for bank credit.
Whether that demand would produce a level of free reserves of $300 million
or less, he would not venture to say, and he did not see how anyone else
could make a prediction along that line.


He was fearful, Mr. Mills said, that the Committee might allow

itself to be deluded into making excessive efforts toward producing
some desired interest rate level out of balance of payments considerations.
Not to criticize the Account Manager, because his actions were consistent
with the policy directive, but where $94 million of reserves were withdrawn
as against a projected level of free reserves for the current week of $385
million, he would assume that interest rate considerations were the
predominant element in the Manager's decision rather than credit availability.
Mr. Mills said that he would not favor changing the discount rate
at this time.

He believed the Committee would be better served if the

policy directive were revised to eliminate the second paragraph completely.
In his opinion the first paragraph was consistent with the kind of policy
favored by the discussants thus far around the table this morning, and
everything needed was contained in that paragraph.
Mr. Robertson presented the following statement:
It seems to me that we are moving into a period in which
we will have an expanded area of maneuver for monetary policy,
and I think we ought to be prepared to take advantage of it.
I do not see any basis for reduced concern over domestic
economic prospects. Business activity continues to lag well
behind our potential, and there are no signs of incipient
inflationary developments which would justify our going slower
in efforts to stimulate a more vigorous business pace.
In the international arena, however, there have been a
succession of developments which seem to me encouraging. The
balance of payments data for November and December look better,
and interest rates in some competing foreign markets have moved
down, partly as a result of official actions.
I am struck by a similarity in the predicament faced by
the monetary authorities in each of the three major countries



among which we ordinarily see large flows of money market funds.
Canada, Great Britain, and the United States are all trying to
stimulate domestic economic growth but feel inhibited in their
monetary policies by the possibility of sizable capital flows.
One could see this in the British Bank rate cut of last
Thursday, and the statements that accompanied it (which suggested
the lower rate was aimed more at domestic credit conditionswhile reserving to the Bank of England the right to charge a
higher rate to discount houses to encourage a higher level of
bill rates for international purposes).
If our money markets should now become sufficiently
attractive to draw some funds away from Britain, we would gain
a few dollars' improvement in our balance of payments position
at the expense of a serious risk to the other key currency.
On the other hand, if we were now prepared to follow up the
British and Canadian initiative with more easing action of our
own, all three economies might be able to move in step toward
more stimulative monetary policies with a minimum risk of
setting off adverse capital flows.
I recognize that the Treasury financing schedule is such
as to require that, having tightened up on policy at our last
meeting, the Committee should not again change direction for
another week or so, at least. However, the sharp bank credit
expansion that occurred in late December should not be accepted
as an argument against an easing of policy at the appropriate
time. I suspect much of that expansion was temporary, and I
think we should watch the reserve statistics closely to guard
against an overrapid contraction during January. During the
next three weeks, the Manager of the Account should take partic
ular care to avoid settling into a "bill-rate-only" policy.
Actions should not be taken to tighten marginal reserve positions
simply in order to resist bill rate declines. Such actions would
risk an acceleration of monetary contraction at home as well as
a prejudicial effect upon the reserves of our foreign friends
abroad--a risk that is not warranted in the light of the present
size of capital outflows and the current laggard pace of our own
Mr. Shepardson said it seemed to him that the action of the
Committee at the December 18 meeting had been implemented in line with
the anticipations of those who voted for the policy directive.

In his

opinion the operations had been constructive, and he saw no reason for



a change in policy at this time, particularly in view of the Treasury
financing program.

If anything, however, he would tend to drift in the

direction of slightly less ease.

He saw no reason to change the policy

Mr. King recommended trying to continue the course that had been
set during the past three weeks.
Mr. Fulton said that the sudden advent of winter weather in the
Fourth District had played havoc with the reliability of normal seasonal
adjustments, which were attuned to more gradual changes.

If liberal

allowance was made on this account, District business activity seemed to
have held up well in December.
Companies making components for autos, trucks, and off-highway
equipment reported a continuation of a high level of production, as did
auto assembly plants.

Auto manufacturers maintained that 1963 would be

as good a year as 1962, though informed opinion of others than the
manufacturers projected domestic production at 6.2 to 6.4 million cars.
Auto sales in the District eased moderately in December, due in part to
bad weather, but they were still quite brisk for the season.

It was

stated that one large manufacturer of compact autos would change its
method of manufacture with the 1964 models.

Instead of a body and frame

of galvanized sheet, welded together, it was planned to use separate
frame and body construction of plain sheet, but of heavier gauge.




estimate was available of the difference in tonnage of steel that might
be involved in this change.
Steel production was due to pick up in the first quarter of this

Shipments in December were low due to bad weather and the reluctance

of users to take any steel into inventory over the year end.

Steel buying

was on a hand-to-mouth basis, with users maintaining minimum invenrories.
There was an expectation of some inventory building, however, especially
if the wage agreement was reopened and talks were protracted.
foreign steel were still quite a factor in some products.
France had been accused of dumping, and if

Imports of

Both Japan ard

such charges were proved tariff

increases would be made on pipe and wire to equalize the price at


steel was sold domestically by the foreign company and the price charged
to U. S. customers.
Orders for metal-forming tools showed strength, but the order and
backlog situation was disappointing for metal-cutting tools.
orders had been declining since May.


There was some indication, however,

that the new depreciation schedules might encourage the buying of equipment
for modernization.

This had begun to show up in orders for electric welders;

November orders from farm equipment manufacturers and auto makers were very
As to construction, there had been a sharp fourth quarter recovery,

on a seasonally adjusted basis, in both residential and nonresidential con
tracts, but the year-to-year percentage change was below that for the
country as a whole.

Bad weather had resulted in a sharp rise in insured



unemployment in December, cancelling out the less-than-seasonal increase
in the preceding two weeks.
would reverse itself.

It was believed however, that this situatior

Department store sales recovered quickly when the

worst of the bad weather passed and Christmas approached.

For the week

ended December 29, sales were up 33 per cent; for the year 1962, sales
were 4 per cent over 1961.
The increase in bank loans at Fourth District weekly reporting
banks during the fourth quarter of 1962 was the largest in the past four
years, and total investments also expanded.

The banks were actively seeking

loans, although construction loans were being scrutinized carefully due to
the number of new and unsold houses on the market.
Mr. Fulton expressed the view that the Desk had done a good job
in interpreting policy during the past three weeks.

He felt that free

reserves in the $300-$350 million range were appropriate to achieve a
desired market tone, but he would not object to a somewhat lower level
of free reserves depending on the tone of the market.

He had been

concerned about the decline in long-term rates, and it was his feeling
that a trend toward higher long-term rates
trend could discourage funds

would be desirable.

Such a

from going abroad, slow down foreign borrow

ing in the United States, and encourage domestic corporations to put into
effect plans to borrow for plant and equipment.

In all, he concluded that

it would be beneficial both to the balance of payments and the domestic


-48After commenting that he would recommend no change in the

discount rate, Mr. Fulton said that in view of the general optimis. of
businessmen and investors and the undeniably high, though stable, level
of business activity, he felt that the reference in the first paragraph
of the policy directive to the "unsatisfactory level" of domestic activity
was inappropriate.

Therefore, he would substitute a reference to the

"modest progress of the domestic economy during 1962."

In the second

paragraph he would eliminate the reference to the "anticipated" seasonal
easing of Treasury bill rates, and he would call for the maintenance of
a "firm" rather than a


tone in

money markets.

Mr. Bopp said that, looking back on 1962, it was clear that a
mild decline in economic activity had been under way in the Third District
since the middle of the year.

The first evidences of the drop were

declines in the demand for labor.

In the autumn output leveled off,

employment began to decrease, and unemployment rates crept up a bit.
These declines took place earlier than, or coincidential with, national

With this

in the foreground of the economic picture, against

the background of a relatively sluggish national economy, he had favored
as much monetary ease as possible in the light of the external problem.
Moreover, banking data for the Third District indicated that ease
could have considerable effect.

Loans and deposits expanded considerably

during the year, and in recent weeks had increased substantially further


In Mr. Bopp's view, the domestic economy continued to call for


He recognized that the current Treasury financing ruled out a

return to the conditions of ease prevailing before the December 18 meeting;
otherwise, he would like to see such a step taken at an early opportunity.
Looking ahead for the next few weeks, it was possible that the reduction
in the Bank of England rate -might make it less necessary to hold U. S.
short-term rates at present levels.

Should optimism in business sentiment

wear off in February's gloom, he would favor reversion to a somewhat easier
policy at a strategic moment between Treasury financings.

For the time

being, however, he would make no change in the discount rate, in open
market operations, or in the directive, except for the changes suggested
by Mr. Ellis and Mr. Swan.
Mr. Bryan said the Sixth District seemed to have ended the year
rather strong.

He could not prove that statement statistically, but it

reflected conversations with various people in the District.

Most of the

available statistics were of stale dates, but there had been some increase
in manufacturing employment.

Also, bank debit figures were up sharply.

The District, however, did not seem to be behaving in significantly
different fashion from the national situation, which appeared to be one
of very slow growth.

The economy had ended the year on a somewhat

optimistic note, occasioned chiefly in his opinion by the negative
consideration that the economy had not fallen through the floor in
the manner that so many people expected at mid-year after the stock



market break.

A second factor that caused him to be rather optimistic

at the end of the year was the behavior of financial series, especially
since August.
At the moment, Mr. Bryan said, he was not sure what policy rec
ommendations would be most appropriate.

The 3 per cent growth guideline

in required reserves against private demand deposits was being exceeded.
The year had ended with required reserves up and, although he was told that
they would retreat, he was not quite so certain.

He did not know how to

arrive at any quantitative direction at the moment, so he would not attempt
to express any direction in quantitative terms.

More generally speaking,

he would come out with the conclusion that the System ought to provide or
offset reserves for seasonal movements, insofar as they could be determined,
and perhaps provide for some additional slow growth in reserves.

He would

not debate whether that should be 2 per cent or 3 per cent on an annual basis.
In a concluding observation, Mr. Bryan referred to the comments
that were heard repeatedly'about the underutilization of manpower and
plant capacity.

It should be borne it mind, he thought, that an element

of national policy involved the deliberate
of the market.

pricing of unskilled labor out

In this country, by means of unemployment insurance and

relief payments, the unemployed could actually live better than employed
workers in other countries of the world.

As long as this national policy

continued, he believed that unemployment rates were destined to remain,
for long periods of time, much higher than the 4 per cent level.


Mr. Shuford observed that economic developments at the national

level had been covered quite fully.
as one of no significant change.
in the Eighth District.

The situation could be summarized

The same kind of condition prevailed

If anything, the situation was perhaps not quite

so encouraging as indicated by the reports from some of the other districts.
Employment had not increased to any extent, while unemployment had increased
a bit.

Construction activity continued at about an even pace, perhaps a

little below the level at the middle of last year.

In summary, while

District activity continued at a fairly high level, it showed no signs
of significant improvement.

If anything, it appeared that developments

were slightly on the pessimistic side.
Mr. Shuford said that he tended to agree with Mr. Bryan's ob
servations about national labor policies.

Nevertheless, although policies

for which the Federal Reserve did not have responsibility might operate
in various directions, it was necessary to formulate monetary policy in
the best manner possible.

He continued to believe that the System should

be as hepful as possible in stimulating the total demand for goods and
services, at the same time bearing in mind and placing appropriate
emphasis upon the balance of payments situation.
longer range objectives, that is,

Thinking in terms of

for the period extending beyond the

next three weeks, he would favor some further increase in bank reserves
and in the money supply.

For the next three weeks, in view of Treasury

financing, it was his conclusion that there should be no change in



existing policy.

He would not want to see any steps taken specifically

to raise the short-term rate from present levels.
Mr. Shuford concluded by saying that he felt that the Committee
could operate satisfactorily in the forthcoming period under the present

He would not change the discount rate at this time.

Mr. Balderston said that in view of the Treasury financing
program he thought the policy followed during the past three weeks should
be continued for the coming three weeks.

He was glad that Mr. Bryan had

invited the Committee to look beneath the familiar statements with regard
to unused human resources.

Similarly, it was his feeling that plant

capacity, as measured in this country, included a great deal of equipment
that was inefficient and could not be regarded as competitive.

As Mr.

Bryan had pointed out, there was a heavy concentration of unemployment
among the inexperienced and the unskilled.

Relating this to monetary

policy, the Committee should not deceive itself into believing that a
saturation of reserves, if provided by the System, would necessarily
provide jobs now or in the years just ahead for the inexperienced and


Going on to another point that had been of concern to him, Mr.
Balderston suggested that the Committee should watch closely the rate of
increase in required reserves behind private demand deposits, which had
been at an annual rate of over 9 per cent during the August-December

It would be difficult for the Committee to judge exactly what



was happening during the current period until the figures settled down,
but the August-December rate of increase in required reserves was not
one that should continue indefinitely.

Consequently, at the end of the

forthcoming three-week period the Committee should be prepared to take a
realistic look at the situation.
Chairman Martin commented that maintenance of the status quo for
the forthcoming three-week period was obviously the prevailing sentiment
within the Committee.
Continuing, the Chairman said he would not take the time to
discuss again his position that the Federal Reserve had been contributing
about all it could to the furtherance of the domestic economy through
monetary policy, in circumstances where it was also necessary to keep a

close eye on the international situation.
comment briefly on current developments.

However, he would like to
Within the near future, he noted,

the Congress would receive three principal messages from the President,
including the budget message for fiscal 1964, which might include figures
that would lead to a great deal of discussion.

It was his understanding

that even without a tax cut the deficit foreseen for the fiscal year 1964
was likely to be substantial, so substantial in fact that a considerable
feeling might arise that Government spending must be watched closely.

Also, in the absence of a significant decline in business, sentiment
against a tax cut might well develop.


In all the circumstances, Chairman Martin said, he thought the

posture of the System was quite good at the moment.

It could not be said

that the Open Market Committee was currently pursuing a sufficiently less
easy policy to be collapsing the domestic economy.

In fact, if policy

were not in its present posture, it might appear that the System had
thrown caution to the winds.
There would be an opportunity, the Chairman continued, to
re-evaluate developments at the next Committee meeting.

Among other

things, it must be kept in mind that factors such as those he had mentioned
in connection with the budget would have repercussions on the thinking of
parties abroad.

Mr. Robertson had made a gcod point, he added, about

Britain and Canada having problems similar to those being encountered in
the United States.

While he (Chairman Martin) did not agree with Mr.

Robertson's policy conclusions, such factors deserved consideration.
The Chairman repeated that he thought System policy was on
essentially the right track.

He hoped the System would be able to evolve

a policy that would be clearer to the public than in the past.

This got

into the problem of the policy directive, with which the Committee must
continue to struggle.
With further reference to the problem of the directive, Chairman
Martin commented that he was not sure that the December 18 discussion had
been too satisfactory in terms of offering solutions.

He went on to say

that Mr. Young had prepared a draft of a possible directive for this



meeting for the Committee's consideration.
Young to read this draft.

Shortly, he would ask Mr.

In his (Chairman Martin's) opinion, it was

a little clearer than the present directive, though the changes were
relatively minor.

In this connection, the Chairman referred to the

difficulty involved in a procedure whereby a large group sat around the
table and endeavored to hammer out the precise wording of a document like
the directive.

The process was time-consuming and there was a tendency

for members of the group to get stuck on particular words or phrases.
The Chairman also noted that, as he had mentioned earlier, Mr.
Young had prepared certain paragraphs on the background economic situation
with a view to determining whether that might be helpful to Committee

He would ask Mr. Young, in addition to reading the draft

directive, also to explain what he had in mind with respect to the
paragraphs on the economic background.
In discussing the draft material referred to by Chairman Martin,
Mr. Young pointed out that the typical entry for the record of Committee
policy actions, as set forth in the Board's Annual Report, was comprised
of three elements.


first part consisted of a number of paragraphs

summarizing in factual form the economic situation that set the back
ground for the Committee's discussion.

The second part consisted of a

summary of the discussion itself, with an indication of differing views
and the policy consensus, while the third part included the current



economic policy directive, the votes on its adoption, and usually the
reasons for dissenting votes.

The directive, therefore, was read in

the light of the economic setting plus the discussion that had taken

It had occurred to him that it might be helpful at each meeting

of the Committee if the Secretary were to prepare in preliminary form
and present to the Committee several paragraphs comprising a factual
statement of the economic background.

These paragraphs might have to be

revised in the light of the discussion at the Committee meeting and the
preparation of the policy record entry as a whole.

However, in preliminary

form they could be read to the Committee just before the taking of action
on the policy directive in the thought that they might help to confirm
that the directive was appropriate in the light of the economic facts.
For purposes of illustration, Mr. Young then read to the
Committee the following paragraphs that were intended to outline the
economic setting in which today's meeting of the Committee was held:
The latest information available on domestic economic
developments again shows little change in production and
employment around the levels reached in mid-year, while gross
national product is estimated unofficially to have increased
moderately further in the fourth quarter. Current levels of
activity, although high in terms of most earlier periods, are
well below those needed to utilize fully existing manpower
and industrial capacity. Unemployment in December is estimated
to be little changed from the advanced November rate. Depart
ment store and new auto sales in December continued high but
below November levels. New orders for machinery and other
equipment rose again in November. Commodity prices continued

stable last month and consumer prices were unchanged in November.
In the financial area, yields on private and Government
fixed return securities showed little net change in recent weeks.
Corporate and State and local security offerings were in moderate
volume in December and were indicated to continue light in
January. Stock market prices in December maintained the advanced



levels reached following the Cuban crisis and in early
January rose further.
Seasonally adjusted commercial bank credit in December
was estimated to have increased sharply, about in line with
the growth in recent months. Bank loans continued to register
a substantial increase. Also, the private money supply rose
sharply and time and savings deposits increased substantially
further. Required reserves of member banks averaged over 3
per cent higher than in December a year ago and for the four
months including December had increased at a seasonally
adjusted annual rate exceeding 9 per cent. Excess reserves
and borrowing both moved higher as banks adjusted their year

end reserve positions, with free reserves declining considerably
and the money market continuing relatively firm. In accordance
with the directive adopted at the preceding
meeting, System
operations during the period were conducted with a view to
maintaining slightly less easy monetary conditions.
The U. S. balance of payments in the fourth quarter, apart
from special receipts, was still in serious deficit, but not on
a scale comparable with the temporarily very large deficit in
October. Imports leveled off in November, following a steady
drift-up during the year. Exports were off somewhat in the
third quarter despite acceleration of shipments in anticipaticn
of a dock strike in October. Owing to the effect of this
forward shift in depressing October exports the total for the
fourth quarter was probably off further. Gold and foreign
exchange markets in recent weeks maintained a relative calm.
Mr. Young next read for the Committee's consideration a draft of
current economic policy directive that it was thought might be appropriate
if the Committee's decision was to make no change in the basic policy
that had been adopted at the meeting on December 18, 1962.

The draft

directive read as follows:
In the light of the latest economic information reported
to the Federal Open Market Committee, it is the Committee's
current policy to accommodate further, though more moderate,
growth 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
significant improvement in the United States balance of payments



and the recent substantial increases in bank credit, demand
deposits, and the reserve base, but at the same time recognizes
the unsatisfactory level of domestic activity, the continuing
underutilization of resources, and the absence of inflationary
To implement this policy, System open market operations
during the next three weeks shall be conducted with a view to
maintaining about the same degree of firmness in the money
market that has prevailed in recent weeks and to offsetting
seasonal downward pressures on short-term interest rates, while
providing for moderate reserve expansion in the banking system.
Chairman Martin commented that, as

suggested earlier, Mr. Young's

drafts were intended to explore possible methods of improvement in the
Committee's directives and the presentation of the Committee's policy
actions in the Board's Annual Report, thus following up on the discussion
at the meeting on December 18, 1962.

He referred to the problem involved

for outside parties in reading the policy record without the benefit of
the full discussion that resulted in the adoption of a particular

The directive might be clear to members of the Committee, but

a different problem was involved in explaining it to readers of the
policy record.

The Committee 'must continue to work on methods of meeting

this problem, and Mr. Young's presentation suggested onepossible approach.
Question was raised whether it was the intent that suggestions
would be received with a view to possible revision of both the paragraphs
on the economic situation and on the policy directive itself, and it was
made clear from subsequent discussion that it was intended that the

current policy directive would be approved in final form before the
adjournment of each meeting of the Committee.

The subsequent comments



of Committee members would be with a view to making appropriate changes
in the factual statement.

It was also made clear that it would be the

intent to distribute a draft of policy record entry subsequent to each
Committee meeting for the receipt of comments and suggestions in the
customary manner.

The paragraphs read at each meeting would be regarded

as a very preliminary draft of statement on the economic situation, and
the draft subsequently distributed for the Committee's comments would
be prepared in the light of the entire discussion that had taken place
at the Committee meeting.

It was possible, for example, it would develop

from the discussion at the meeting that greater emphasis had been placed
on some aspects of the economic situation than on others, so that some
change of emphasis in the policy record draft would be required.


the Committee would have before it a statement of the basic facts and an
opportunity to formulate the policy directive in the light of having
heard those facts summarized.
Mr. Mills observed that at each meeting the Committee received
oral economic and financial reports from members of the staff.


reports contained facts on which the Committee members presumably based
their judgments.

In addition, the members gave consideration to the

regional economic reports presented during the meeting.

However, as he

understood the contemplated procedure, the Committee members would have

before them in the course of reaching a policy decision a statement such



as Mr. Young had read, in which event it was possible that their first
policy thinking might be exposed ex post facto to an altered line of
Chairman Martin commented, on this point, that such material was
not intended to supply additional information but rather to summarize
what was otherwise available.
Mr. Treiber referred favorably to the statement read by Mr. Young,
although indicating that he might have some comments or suggestions after
he had had an opportunity to examine it thoroughly.

As he understood it,

Mr. Young's suggestion would contemplate that such material would be
incorporated in the Committee's minutes, thus providing the Committee
members an opportunity to focus on the statement in reviewing the minutes
and to submit comments.

Then, when the minutes were approved, the outline

of the policy record entry, or at least one portion thereof, would be
indicated rather clearly.
Chairman Martin responded by saying that it had been the thought
that everyone could comment on the economic summary as it appeared in the

Then, by the time the minutes were approved, progress would

have been made on the preparation of the policy record entry.
In further discussion Mr. Mills suggested that essentially the
same purpose could be accomplished through a prompt distribution of drafts
of policy record entries.

Mr. King asked if he was correct in assuming

that a principal purpose of the procedure suggested by Mr. Young was to



expedite preparation of the policy record entries, and Chairman Martin
The discussion then turned to the draft of possible policy
directive that had been read by Mr. Young, and copies thereof were
Mr. Fulton repeated his earlier suggestion that in the first
paragraph language stating that Committee policy "recognizes the modest
progress of the domestic economy-during 1962" be substituted for "recognizes
the unsatisfactory level of domestic activity".
The suggestion also was made that the introductory part of the
first sentence of the draft directive be eliminated on the grounds that
it was unnecessary and tended to become repetitious, and there was agree
ment with this suggestion.
Mr. Deming stated that his only objection went more to the form
of the draft directive than its substance.

In explanation, he pointed

out that the draft directive was worded in such a way as to indicate that
it was the current policy of the Committee to accommodate further, though
more moderate, growth in bank credit and the money supply.

It was his

thought, in line with views he had expressed at the Committee meeting on
December 18, 1962, that it would be preferable if the Committee's direc
tives were aimed at things the Committee actually could do, as in the
second paragraph of the draft directive.

In contrast, the first paragraph



of a directive might preferably be in the nature of a "whereas" clause.
For example, he would have no objection to expressing the Committee's
satisfaction or dissatisfaction with the rate of growth of the money

On the other hand, he did not like to say that it was the

Committee's policy to do certain things with regard to the money supply,
over which the Committee did not have direct control.

To put it another

way, he felt that the instruction in the directive should be confined to
specifying how open market operations were to be conducted, with reference
to factors such as free reserves, the tone and feel of the market, and
interest rates.

As the directive was drafted, he would have no objection

to the second paragraph.
There followed a review of the differences between the directive
issued on December 18 and the proposed directive, and this led to further
comments regarding the portion of the proposed directive that would state
that it was the Committee's policy to accommodate "further, though more
moderate growth" of bank credit and the money supply.

Question was raised

whether this language was intended to imply a more moderate growth than
indicated by the December 18 directive.
After some discussion of this point, question was raised whether
it would not be appropriate to adopt a directive in the same form as the
directive issued on December 18, to which Chairman Martin responded that
this reflected a tendency, into which the Committee had fallen at times,
of resorting frequently to renewing the directive without change.




understood that Mr. Young had been endeavoring to emphasize the
substantial increases that had occurred in bank credit, demand deposits,

and the reserve base,
Mr. Swan expressed the view that the language of the proposed
directive appropriately reflected a change from the preceding directive
by calling for "maintaining about the same degree of firmness in the
money market that has prevailed in recent weeks" rather than for "main
taining, if necessary, a firmer tone in money markets".

Also, the

proposed directive appropriately called for "offsetting seasonal downward
pressures on short-term interest rates" rather than for "offsetting the
anticipated seasonal easing of Treasury bill rates".
There followed a brief discussion of a possible procedural approach
to the formulation of the policy directive under which a directive would
be adopted in substance by the Committee and the Secretariat would then be
asked to work on specific wording for final Committee approval.


it was the unanimous view that a directive should be adopted in final form
prior to the adjournment of each Committee meeting.

Otherwise, it was

pointed out, there might be a question about the exact nature of the
instructions that had been issued to the Desk.
Mr. Ellis then suggested another possible procedural approach
whereby it would be ascertained in general discussion that there was
broad agreement on most parts of whatever directive was under consideration,
or on certain suggestions with respect thereto, following which a vote



would be called for to determine the consensus on any points as to which
there appeared to be a substantial difference of opinion.
Chairman Martin noted that at a certain stage the procedure of
voting on points in the directive that remained under debate might some
times be necessary to resolve such matters.

However, he continued to be

concerned about the thought of taking votes on particular words.


questioned whether the kind of problem involved was susceptible of solution
by such a procedure.
At the Chairman's request, Mr. Young then read to the Committee
the language of the directive he had suggested, as amended to reflect the
technical suggestion agreed upon earlier and the amendment suggested by
Mr. Fulton.
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 following current economic policy
It is the Committee's current policy to accommodate further,
though more moderate, growth 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 significant improvement in the United States balance
of payments and the recent substantial increases in bank credit,
demand deposits, and the reserve base, but at the same time
recognizes the modest progress of the domestic economy during
1962, the continuing underutilization of resources, and the
absence of inflationary pressures.
To implement this policy, System open market operations
during the next three weeks shall be conducted with a view to



maintaining about the same degree of firmness in the money
market that has prevailed in recent weeks and to offsetting
seasonal downward pressures on short-term interest rates,
while providing for moderate reserve expansion in the banking
sys tem.
Votes for this action: Messrs. Martin,
Balderston, Bryan, Deming, Ellis, Fulton,
King, Mills, Shepardson, and Treiber. Vote
against this action: Mr. Robertson.
Mr. Mills commented, in connection with his vote, that although
he had voted for the directive he would like to call attention to the
part of it that expressed a current Committee policy of accommodating
further, though more moderate, growth in bank credit and the money

He thought the experience of the past three or six weeks would

prove to be abnormal and that the situation could snap back to one
involving a contraction of credit.

If so, critics with the benefit of

hindsight mighr say at a later date that the Committee had deliberately
pursued a harsher policy than was actually intended.
Secretary's note: Pursuant to an intent that he
stated at this'meeting, Mr. Robertson subsequently
transmitted to the Secretary for inclusion in the
minutes the following statement in amplification
of oral comments concerning the basis for his
negative vote on the directive:

In view of the Treasury's financing program, including the
auction today of $250 million of long-term bonds, and the fact
that during the past three weeks implementation of Committee
policy has resulted in some growth in the money supply and
total reserves for the banking system, I would have been in
clined to vote today for "no change" in policy. However, in
my view the policy of this Committee for the next three weeks
should under no circumstance be more restrictive (or less
stimulative) than the policy adopted by the Committee at the



December 18, 1962 meeting. Furthermore, I believe that
primary emphasis should not be placed on the maintenance
of a Treasury bill rate, for there is inherent therein a
tendency to settle into a bill-rate-only policy; actions
should not be taken--pursuant to our policy directive--to
tighten marginal reserve positions simply in order to resist
a decline in the bill rate. Primary emphasis should be placed
on the maintenance of such a volume of reserves and money
supply as will stimulate a lagging economy. Since this
directive seems to be inconsistent with these views, I must
vote "Nay".
There ensued additional discussion regarding the directive just
adopted, and the Chairman called upon Mr. Young for further comment on
the part of the first paragraph of the directive that expressed the
Committee's current policy of accommodating further, though more moderate,
growth in bank credit and the money supply.
Mr. Young commented that for several months there had been a very
substantial increase in bank credit, demand deposits, and the reserve

If these rates of increase continued, they would result in some

kind of explosion at some point.

Therefore, in looking at the directive

issued on December 18, which stated that it was the Committee's policy
to accommodate "moderate further increases in bank credit and the money
supply," it occurred to him that a change would be desirable to emphasize
that further growth should be more moderate than had occurred.

This did

not mean, of course, that if the growth turned out to be quite moderate,
the Committee would continue to press for still more moderate growth.
Its objective would have been accomplished.


In reply to a question, Mr. Young said it was the intent to

indicate that Committee policy would be designed to accommodate a rate
of growth of bank credit more moderate than in recent months, particularly
since August, in contrast to the past year as a whole.
Mr. Wayne suggested that the

interpretation just given by Mr.

Young would flow naturally from the economic background paragraphs that
Mr. Young had read earlier.
Mr. Deming then supplemented his previous comments by expressing
the view that it would be preferable

to indicate in the first paragraph

of the directive that the Committee was continuing to pursue a moderately
stimulative program.

The second paragraph of the directive would then

specify in rather concrete terms what the Committee was instructing the
Account Manager to do in the period just ahead.

Mr. Deming brought out,

by way of illustration of his point regarding the first paragraph, that
the Committee did not know, in fact, just why the money supply had grown
at such a fast rate in recent months.

It was conceivable that a further

substantial expansion in the money supply would occur.
The Chairman then called on the Account Manager for comments, and
Mr. Stone said he would interpret the first paragraph of the Committee
directive as a statement of the Committee's general objectives, with an
indication of factors that impelled it to choose these objectives rather
than others.

He would understand that the second paragraph contained an

instruction to the Desk on implementing, within a specified time period,



the general objectives outlined in the first paragraph.

He would

interpret the directive, as just adopted by the Committee, as calling
for operations with a view to providing for moderate reserve expansion
in the banking system, as indicated in the second paragraph.
Mr. Deming then commented that, as he had previously indicated,
he had no quarrel with the second paragraph.

In the first paragraph,

however, if the Committee's general objectives were tied to bank credit
and the money supply the Committee would uncertake to deal with matters
over which it did not have direct control.

In his opinion this problem

could be met by using a phrase in the first paragraph something like:
"It is the current policy of the Federal Open Market Committee to continue
to pursue a moderately stimulative program while aiming at money market
conditions that would minimize capital outflows internationally."

Such a

generalized statement would in his view be reasonable, whereas he did not
like to cite as a policy objective something that might not be attainable
by the Committee.
Mr. Young noted that one of the problems in having two paragraphs
in the directive--one broader and one more specific--was the question of
time dimensions, which in the first paragraph were longer range and in
the second paragraph related to a specific short-run period.
Mr. Balderston expressed himself as having some sympathy with the
point made by Mr. Deming.
been made by Mr. Knipe:

It was somewhat the same as the point that had
that the supply of bank reserves was controlled



by the Federal Reserve System while the money supply was merely
influenced by the System, given sufficient time.

Mr. Balderston sug

gested along these lines that the first part of the directive adopted
today might have been somewhat simplified.

He agreed that Committee

policy was aimed at money market conditions that would minimize capital
outflows internationally; thus,

it might have been appropriate also to

say that Committee policy was "aiming" at a further moderate growth in
bank credit and the money supply.

He was not sure that at a large

meeting it was feasible to develop precise wording, but he would like
to suggest that the Secretary try his hand at something along the lines
Mr. Deming had proposed.
In further discussion, Chairman Martin observed that the Committee
would have another opportunity at its next meeting to take a look at the
form of the directive in the light of the discussion that had taken place

Through steady work on the problem, it might be possible to

achieve improvement.

This all tied into the problem of explaining System

policy to the Congress and the public, and the System must make every
effort to do the best job.
There followed additional discussion during which certain further
suggestions were made with respect to the possibility of amending the
policy directive that had previously been adopted.

One suggestion was to

characterize the progress of the domestic economy as showing slight



improvement but continuing at an unsatisfactory level.


suggestion was to specify that it was the Committee's policy to accom
modate further growth in bank credit and the money supply, although at
a more moderate rate of increase than in "recent months."

At the con

clusion of the discussion, however, it was the consensus that the direc
tive should be left in the form in which it had been adopted earlier in

the meeting.
It was agreed that the next meeting of the Open Market Committee
would be held on Tuesday, January 29, 19 6 3, and that succeeding meetings
would be scheduled tentatively for February 12 and March 5, 1963.
The meeting then adjourned.