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FORTY-EIGHTH
Annua{ Report
OF'IHE
BOARD OF GOVERNORS
of the Federal Reserve System
COVERING OPERATIONS FOR THE YEAR
19 61
ANNUAL REPORT OF BOARD OF GOVERNORS
DIGEST OF PRINCIPAL FEDERAL RESERVE POLICY
ACTIONS, 1961
Period
January
FebruaryAugust
SeptemberDecember
December
Action
Purpose of action
Limited net sales of U.S.
Government securities from
Federal Reserve portfolio to
about $500 million. Member
bank borrowing at Reserve
Banks averaged only $50
million.
Bought substantial amounts
of U.S. Government securities with maturities over 1
year, following February 20
announcement that System
open market operations
would include securities outside the short-term area.
These purchases were partly
offset by net sales of shortterm securities. Total System
holdings of Governments increased about $700 million.
Member bank borrowings
averaged $75 million.
To encourage bank credit
and monetary expansion by
absorbing only part of seasonal inflow of reserve funds
not otherwise offset by a
large gold outflow.
Bought or sold at different
times varying amounts of
U.S. Government securities,
including securities with
longer maturities. Total System holdings of Government
securities increased about
$1.6 billion. Mmnber bank
borrowings at Reserve Banks
remained generally low.
Raised, effective Jan. 1,1962,
maximum interest rates payable by member banks on
any savings deposit from 3 to
3~ per cent, and to 4 per
cent on those left in the bank
for 1 year or more; also
raised maximum rates on
time deposits with a maturity
of 6 months to I year from 3
to 3~ per cent, and to 4 per
cent on those deposits with a
maturity of a year or longer.
4
To encourage bank credit
and monetary expansion
while avoiding direct downward pressure on short-term
interest rates, thereby moderating pressures on the U.S.
balance of payments from
outflow of short-term capital
attracted by higher interest
rates abroad.
To continue to encourage
bank credit and monetary
expansion while allowing for
changing reserve needs due
to seasonal and other factors,
including a large gold outflow, and while continuing to
give consideration to the
balance of payments problem.
To enable banks to compete
more effectively for savings
and other time deposits, including foreign time deposits, thus moderating pressures on the U.S. balance of
payments, and, over the long
run, to offer additional incentive for the accumulation of
savings required for financing future economic growth.
ANNUAL REPORT OF BOARD OF GOVERNORS
Votes for this action: Messrs. Hayes, Balderston, Irons,
King, Mills, Shepardson, Swan, and Wayne. Votes against
this action: Messrs. Allen and Robertson.
The Committee in renewing this special authorization, first
granted on February 7, 1961, and amended on March 28 to
permit operations in U. S. Government securities of all maturi
ties, concluded that further operations outside the short-term
market in pursuing the objectives set forth in the directive would
be desirable. Messrs. Allen and Robertson dissented for the
same reasons they had stated previously.
June 6, 1961
1. Authority to effect transactions in System Account.
At this meeting, the Federal Open Market Committee, in
directing that open market operations be with a view "to en
couraging expansion of bank credit and the money supply so as
to contribute to strengthening of the forces of recovery, while
giving consideration to international factors," modified the word
ing of the preceding policy directive by deleting the phrase "that
appear to be developing in the economy," qualifying words that
had followed "the forces of recovery" in the directive that had
been in effect since April 18, 1961.
Votes for this action: Messrs. Martin, Hayes, Allen,
Balderston, Irons, King, Mills, Robertson, Shepardson,
Swan, and Wayne. Votes against this action: none.
From data presented by the Committee members and the
staff, it was apparent that the turning point of the recession had
been reached quite some time earlier and that recovery had
begun, although there was still doubt about the rate and prob
able duration of the business expansion. The few measures of
economic activity available for May suggested that the pace of
recovery had been maintained. Fragmentary data suggested that
the Board's index of industrial production for May would be up
2 points from the preceding month, that retail trade figures
would show a level well above first-quarter activity, and that
employment measures would improve about seasonally for that
FEDERAL RESERVE SYSTEM
month. In the area of prices, broad measures of wholesale quo
tations had shown little change as scattered reductions offset
increases in sensitive materials, and the consumer price index
was unchanged from March to April, with the further likelihood
that there would be little or no change from April to May.
The Committee observed that thus far the stimulus to the
economy this year had come almost entirely from the reversal of
inventory liquidation, the rise in Government expenditures, and
the well maintained growth of consumption expenditures on
nondurable goods and services. Neither trade reports nor sur
veys of buying intentions yet showed much evidence of a strong
resurgence of demand for consumer durable goods or for hous
ing, which had played such important roles in other postwar
recoveries-a factor that caused misgivings in some quarters as
to whether this recovery would carry forward after the initial
stimulus of the inventory reversal disappeared.
Total loans and investments of banks increased substantially
more than usual in May, reflecting largely bank participation in
new Treasury financing. This bank credit expansion did not
result in an increase in the seasonally adjusted private money
supply, defined as demand deposits and currency outside of
banks; but there were large increases in time deposits and U. S.
Treasury deposits. Interest rates, which early in May had de
clined to the lowest levels since 1958, had since risen close to,
and in some cases above, the highs that had been reached at
times during the past 10 months. Short-term rates in particular
had been influenced lately by a less marked degree of ease than
prevailed shortly before the May 9 meeting, by prospective
Treasury financing in the short-term area, and by the approach
of the mid-June tax date, which date generally is preceded by
reduced nonbank demand for Treasury bills. In addition, the
demand on capital markets had been large and seemed likely to
continue fairly heavy.
While the U. S. balance of payments position had shown con
siderable improvement compared with the fourth quarter of
1960, the current close balance in U. S. accounts was considered
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
by no means secure as short-term funds continued to flow out.
Accordingly, the Committee felt that there continued to be a
need to pay close attention to developments in international
markets.
In view of impending U. S. Treasury financing, the usual
midyear demand for funds, and a desire to encourage the expan
sion of bank credit and the money supply, the Committee con
cluded that in the period until the next meeting it would be de
sirable to maintain approximately the same degree of ease as
had prevailed recently, resolving any doubts on the side of ease
and clearly avoiding any lessening of the availability of reserves.
At the same time, the Committee decided to change the word
ing of the policy directive to make clear that there was no doubt
that forces of recovery were developing; thus, it deleted the
words that indicated such forces only "appeared" to be develop
ing. This modification did not indicate a change in the policy
of ease that had been pursued for some months; as noted earlier,
it was the consensus that any doubts as to the availability of
reserves should be resolved on the side of ease and that there
should be no tightening in the market.
of the Government securities market. It was the consensus, how
ever, that such operations should continue to be authorized in
terms of the objectives of current policy, with decisions as to
actual operations left to the discretion of the Manager of the
System Open Market Account.
Mr. Allen, in dissenting from the continuation of the special
authorization, said that at its inception he felt the operation was
ill-advised and misguided and that the operations had, as he saw
it, confirmed that judgment. Mr. Robertson, also dissenting,
said that in his view this would be a good time to terminate the
operation.
2. Authority to effect transactions in intermediate- and longer-term secur
The Federal Reserve Bank of New York was authorized, be
tween this date and the next meeting of the Committee, within
the terms and limitations of the directive issued at this meeting,
to acquire intermediate- and/or longer-term U. S. Government
securities of any maturity, or to change the holdings of such
securities, in an amount not to exceed $500 million.
Votes for this action: Messrs. Martin, Hayes, Balderston,
Irons, King, Mills, Shepardson, Swan, and Wayne. Votes
against this action: Messrs. Allen and Robertson.
Before renewing this authorization, the Committee gave con
sideration to the question of the possible desirability of with
drawing from operations in intermediate- and longer-term
securities as rapidly as feasible without impairing the structure
June 20, 1961
1. Authority to effect transactions in System Account.
The Federal Open Market Committee directed the Federal
Reserve Bank of New York to continue to conduct open market
operations with a view to encouraging expansion of bank credit
and the money supply so as to contribute to strengthening of the
forces of recovery, while giving consideration to international
factors.
Votes for this action: Messrs. Martin, Allen, Balderston,
Mills, Robertson, Shepardson, Swan, Wayne, Johns, and
Treiber. Votes against this action: none.
Data that had become available in the 2-week interval since
the preceding meeting of the Committee indicated that economic
recovery was continuing in a satisfactory manner. During May
industrial production was at 108 per cent of the 1957 average,
up 6 points from the February low, and a further rise seemed
likely in June. On the basis of these figures and other pre
liminary data it was estimated that in the second quarter of the
year gross national product would be at an annual rate of at
least $512 billion, about $12 billion above the first-quarter rate.
However, there still remained questions as to the future strength
and pattern of the upswing. Although inventory liquidation had
apparently terminated, no significant accumulation was as yet
evident. Further, approximately 5 million persons were still un-
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