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FORTY-NINTH
Annua{ Report
OF THE
BOARD OF GOVERNORS
of the Federal Reserve System
COVERING OPERATrONS FOR THE YEAR
Period
Action
Purpose of action
Reduced System holdings of U. S. Government
securities by about $500 million through net
sales and redemptions. Member bank borrowings from the Reserve Banks averaged
less than $100 million.
Authorized open market transactions in foreign
currencies.
Increased System holdings of U. S. Government securities by about $1.3 billion, of
which half represented purchases of securities with maturities of more than 1 year.
Member bank borrowings from Reserve Banks
continued to average less than $100 million.
To permit further bank credit and monetary expansion by
absorbing only part of seasonal inflow of reserve funds,
mainly from post-holiday return of currency from circulation, while minimizing downward pressures on short-term
interest rates.
To moderate and offset short-term pressures on the dollar in
the foreign exchange market.
To promote further bank credit and monetary expansion while
avoiding sustained downward pressures on short-term
interest rates.
Mid-J uneIncreased System holdings of U. S. Governlate October ment securities by about $200 million with
net sales and redemptions of Treasury bills
of about $700 million being more than offset
by purchases of coupon issues, of which twothirds were issues maturing in more than 1
year. Member bank borrowings from Reserve
Banks averaged less than $100 million.
July
Reduced margin requirements on loans for
purchasing or carrying listed securities from
70 to 50 per cent of market value of
securities.
To permit moderate increase in bank credit and money supply while avoiding redundant bank reserves that would
encourage capital outflows, taking into account gradual improvement in domestic economy and possibilities for further advance, while recognizing the bank credit growth of
past year and continuing adverse balance of payments.
October
To help meet seasonal needs for reserves, while minimizing
downward pressures on short-term interest rates, and to
provide for the longer-term growth in bank deposits needed
to facilitate the expansion in economic activity and trade.
JanuaryFebruary
February
Marchmid-June
Reduced reserve requirements against time deposits from 5 to 4 per cent, effective
October 25 for reserve city banks and November 1 for other member banks, thereby
releasing about $780 million of reserves.
Late October- Increased System holdings of U. S. GovernDecember
ment securities by about $1.0 billion, with
more than half of the net increase in issues
maturing in more than 1 year. Member
bank. borrowing from the Reserve Banks
rose gradually over period, but only to an
average of about $200 million.
6
To take into account the recent sharp reduction in stock
market credit and the abatement in speCUlative psychology
in the stock market.
To help further in meeting seasonal needs for reserve funds
while encouraging moderate further increase in bank credit
and the money supply and avoiding money market conditions unduly favorable to capital outflows internationally.
In mid-December open market operations were modified to
provide a somewhat firmer tone in money markets and to
offset the anticipated seasonal easing in Treasury bill rates.
7
ANNUAL REPORT OF BOARD OF GOVERNORS
Mr. Robertson, who dissented for the same reasons he had
expressed at the June 19 meeting, stated that he was in full
agreement with Mr. Mitchell's position. He felt that the eco
nomic information presented to the Committee indicated that
the date of such meeting was precisely the wrong time for
adopting a less easy monetary policy and that the move should
now be reversed.
2. Authority to purchase and sell foreign currencies.
The continuing authority directive to the Federal Reserve
Bank of New York with respect to System foreign currency
operations, as adopted by the Federal Open Market Committee
on February 13, 1962, and most recently amended by the Com
mittee on June 21, 1962, was further amended at this meeting,
effective immediately, to increase from $500 million to $750
million the maximum amount of foreign currencies authorized to
be held at any one time. By this date, reciprocal currency (swap)
agreements totaling $450 million had been entered into by the
Federal Reserve System with five foreign central banks-the
Bank of France, the Bank of England, the Netherlands Bank,
the National Bank of Belgium, and the Bank of Canada; and
there was in prospect the execution of similar agreements with
the Bank for International Settlements, the Swiss National Bank,
and the German Federal Bank that would, if executed, raise the
total U.S. dollar equivalent of foreign currencies involved in such
agreements to $700 million. In addition, the System held some
$33.5 million equivalent of foreign currencies acquired from
the Treasury Stabilization Fund at the outset of the Federal Re
serve program of foreign currency operations.
As amended, the continuing authority directive read as
follows:
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 Cur
rency Operations issued by the Federal Open Market Committee on
February 13, 1962:
FEDERAL RESERVE SYSTEM
Pounds sterling
French francs
German marks
Italian lire
Netherlands guilders
Swiss francs
Belgian francs
Canadian dollars
Total foreign currencies held at any one time shall not exceed $750
million.
Votes for this action: Messrs. Martin, Balderston, Bryan,
Deming, Ellis, Fulton, King, Mills, Mitchell, Robertson,
Shepardson, and Treiber. Votes against this action: None.
July 31, 1962
Authority to effect transactions in System Account.
Incomplete and scattered data for July suggested mild im
provement in the economy, following indications of a slackened
pace of expansion in June. The unemployment rate was down
slightly, auto and department store sales recovered to about the
May levels, and early clues as to the course of industrial produc
tion offered hope of some increase. On the other hand, manu
facturers' appropriations for fixed capital purposes were indi
cated to have declined in the second quarter.
In credit and money markets the atmosphere was one of con
siderable uncertainty. Bank credit, seasonally adjusted, declined
substantially in July, partly because Treasury cash financing was
much smaller than usual for that month. Security loans for all
purposes were sharply lower. Business loan demand showed little
change, while bank holdings of real estate loans and of securities
other than U.S. Governments continued to increase substantially.
The private money supply, although aided by shifts from Gov
ernment to private deposits, remained at roughly the level that
had been maintained since late 1961. Time and savings deposits
(not included in the money supply, as conventionally defined)
apparently continued to grow in July, but at a slower pace than
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
earlier in the year. Because of smaller demand deposit growth,
reserves required to support private deposits, after moving up
during the first 3 weeks of July, turned down again in the latest
week. Free reserves had shown large week-to-week fluctuations
since the preceding meeting of the Committee but had averaged
about $450 million. Money market conditions, however, had
been slightly less easy than might have been expected with that
average level of free reserves; Federal funds traded mostly in the
2 3/4-3 per cent range, while short-term Treasury bills fluctuated
within the 2 7/8 per cent range.
-3
The over-all balance of payments deficit for the second quarter
turned out to have been larger than estimated earlier. Much of
the improvement from the first quarter reflected a temporary
capital inflow stemming from deterioration of confidence in the
newly established rate for the Canadian dollar. The outlook for
the third quarter appeared to be for little or no improvement in
the U.S. payments position, partly because it would be adversely
affected by the reflow to Canada that was beginning to set in
following the provision of special credits to Canada by the Inter
national Monetary Fund, the United States, and the United
Kingdom. The London market for gold was unusually active,
and official support to the market was heavy throughout much
of the 3-week period preceding this meeting. On July 23 the
President, in the course of a news conference that was telecast
to Europe, reaffirmed the intent of the United States not to de
value its dollar. Thereafter, gold and foreign exchange markets
were less active, and the position of the U.S. dollar in European
centers improved.
A minority of the Committee favored a policy of greater
monetary ease as a means of stimulating domestic economic ex
pansion or of helping to stave off possible setback in the econ
omy. However, the majority, after weighing such considerations
as the continued evidence of adequate domestic liquidity on one
side and the unsatisfactory prospects for the balance of payments
on the other, and noting that a Treasury financing was currently
in progress, concluded that an "even keel" policy was appropriate
for the forthcoming period. Accordingly, the current policy direc
tive issued to the Federal Reserve Bank of New York was in the
same form as the directive issued at the meeting on July 10, 1962.
Votes for this action: Messrs. Martin, Hayes, Balderston,
Bryan, Deming, Ellis, Fulton, King, Mills, and Shepardson.
Votes against this action: Messrs. Mitchell and Robertson.
In dissenting, Mr. Robertson expressed the view that greater
recognition should be given to the possibility of deteriorating
domestic economic activity, and that in present circumstances
monetary policy could and should be providing additional stim
ulus. The accumulation of evidence suggested to him that the
recent shift in policy toward less monetary ease was generating
contractive reserve pressures. He regarded this as incurring real
risks in pursuit of illusory benefits; he had seen no evidence of
beneficial effects of higher U.S. money rates upon international
gold and dollar flows that would justify the domestic economic
hazards entailed, in his view, by such a policy. It seemed to him
that a more liberal policy of encouraging further expansion in
bank reserves, credit, and money, even if accompanied by easier
money market conditions, would better serve the long-run objec
tive of a growing, prosperous, and internationally competitive
U.S. economy.
Mr. Mitchell dissented largely on the grounds set forth at the
meeting on July 10. The economy was continuing to drift along
in lacklustre fashion, and in his view the odds were long and
lengthening against a vigorous advance in the last half of the
year. He believed that a significant obstacle to further expansion
in the domestic economy was a protracted imbalance in the
money and capital markets created by the continuing effort to
use monetary policy to deal with the balance of payments situa
tion. According to his analysis, debt management and monetary
policy had created a highly artificial situation in the money and
capital markets by holding up the short-term money rate. This
had created expectations that long-term rates would rise, despite
a preponderance of historical and analytical evidence that they
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
had passed their sustainable peak. He saw a serious threat to the
domestic economy, which he felt should be recognized by sup
plying reserves somewhat more freely, by making it clear that
there was no possibility of a discount rate increase under current
conditions, and by being prepared to see the short-term rate de
cline by as much as half of a percentage point.
heightened investor interest was apparent in all instruments from
Treasury bills to long-term corporate bonds. One reason for the
previous advance in yields had been the widespread belief that
an early tax cut and a consequent substantial expansion of Fed
eral debt were distinct possibilities. Correspondingly, a major
factor in the decline in yields was the fading of this prospect,
particularly after the President's statement on tax policy a week
before the meeting. The Treasury was reported to be considering
undertaking an advance refunding shortly after Labor Day, in
view of the currently favorable market circumstances.
August 21, 1962
Authority to effect transactions in System Account.
Domestic economic developments in July, as reviewed by the
Committee at this meeting, were more favorable than those in
the immediately preceding months, and somewhat more favor
able than had been suggested by evidence available at the pre
ceding meeting of the Committee. Available data indicated wide
spread, if moderate, gains in activity. The industrial production
index rose nearly a full point; new orders received by durable
goods manufacturers rebounded sharply; and personal income,
retail trade, and other important measures showed increases.
Scattered figures for early August suggested that the July gains
in production and sales were being maintained. On the less favor
able side, housing starts failed to reverse the drop of June, and
final figures for manufacturers' capital appropriations confirmed
the sharp second-quarter curtailment that had been reported
earlier. Also, while the seasonally adjusted rate of unemploy
ment dropped slightly further in July to 5.3 per cent of the
civilian labor force, the lack of growth in the labor force itself
was viewed as a cause for concern.
Business loans at banks had apparently expanded somewhat
in recent weeks, but the over-all private demand for bank credit
continued to be relatively moderate. Required reserves and the
money supply both declined in the first half of August, and
there was a marked slowdown in growth of time deposits other
than savings accounts. Yields on intermediate- and longer-term
Treasury securities, which had risen in late June and early July,
had declined substantially in the period since the end of July, and
International payments of the United States in July were af
fected favorably by advance debt repayments on the part of
France and Italy, and in July and early August were affected
unfavorably by the reflux of funds to Canada. After allowance
for these extraordinary factors, it appeared that the deficit in the
payments balance was running at a rate smaller than in the third
quarter of 1961 but larger than had been expected for the third
quarter of 1962. It appeared to be at least as high as the ad
justed second-quarter deficit, which also had been in excess of
advance estimates. However, the position of the dollar in foreign
exchange markets appeared to have improved somewhat, and
private demand for gold in the London market evidently had
declined.
In sum, recent domestic developments appeared moderately
encouraging while those with respect to the balance of payments
were disappointing; there continued to be substantial room for
improvement on both fronts. A majority of the Committee con
cluded that, on balance, circumstances warranted a continuation
of recent monetary policy. Accordingly, the following current
policy directive, which reflected no change from the previous
directive except to eliminate references to unsettled behavior in
financial markets in view of the steadier performance of those
markets, was issued to the Federal Reserve Bank of New York:
It is the current policy of the Federal Open Market Committee to per
mit the supply of bank credit and money to increase further, but at the
same time to avoid redundant bank reserves that would encourage capital
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