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FORTY-SEVENTH
Annua{ Report
OF THE
BOARD OF GOVERNORS
of the Federal Reserve System
COVERING OPERATIONS FOR THE YEAR
FEDERAL RESERVE SYSTEM
ANNUAL REPORT OF BOARD OF GOVERNORS
DIGEST OF PRINCIPAL FEDERAL REsERVE. POLICY ACTIONS,
DIGEST OF PRINCIPAL FEDERAL REsERVE POLICY
ACTIONS, 1960-Cont.
1960
Period
Period
JanuaryMarch
Action
Action
AugustSeptember
Reduced discount rates from
3'11 to 3 per cent at all
Reserve Banks.
To reduce further the cost of
borrowing from the Reserve
Banks and reduce the differential between the discount
rate and market rates of
interest.
AugustNovember
Bought or sold at different
times varying amounts of
Government securities with a
net increase in System holdings of about $1 billion,
including securities held under repurchase agreement
and issues with short maturities other than Treasury
bills. Member bank borrowing declined further to average below $150 million in
October and November.
To encourage bank credit
and monetary expansion by
meeting changing reserve
needs and offsetting the impact of a large gold outfiow
without exerting undue
downward pressure on shortterm Treasury bill rates that
might stimulate further outflow of funds.
Late
NovemberDecember
Authorized member banks
to count all their vault cash
in meeting their reserve requirements and increased
reserve requirements against
net demand deposits for
country banks from 11 to 12
per cent. The net effect of
these two actions, effective
November 24, was to make
available about $1,050
million of reserves.
Reduced System holdings of
U.S. Government securities
by about $1.6 billion. Member bank borrowings at the
Federal Reserve Banks
dropped from an average of
$900 million in December to
$635 million in March.
To offset the seasonal inflow
of reserve funds, mainly from
the post-holiday return of
currency from circulation,
while permitting some reduction in borrowed reserves.
Late MarchJuly
Increased System holdings of
Government securities by
nearly $1.4 billion. Member
bank borrowings at Reserve
Banks declined to an average
of less than $400 million in
July.
To promote further reduction in the net borrowed reserve positions of member
banks and, beginning in May,
to provide reserves needed
for moderate bank credit and
monetary expansion.
June
Reduced discount rates from
4 to 3'11 per cent at all
Reserve Banks.
To reduce the cost of borrowed reserves for member
banks and to bring the discount rate closer to market
interest rates.
July
August
Purpose of action
Purpose of action
Reduced margin requirements on loans for purchasing or carrying listed securities from 90 to 70 per cent of
market value of securities.
Authorized member banks to
count about $500 million of
their vault cash as required
reserves, effective for country
banks August 25 and for
central reserve and reserve
city banks September 1.
Reduced reserve requirements against net demand
deposits at central reserve
city banks from 18 to lTYz
per cent, effective September
1, thereby releasing about
$125 million of reserves.
4
To lower margin requirements from the high level in
effect since October 1958 in
recognition of decline in volume of stock market credit
outstanding and lessened
danger of excessive speculative activity in the market.
To provide maiIlly for seasonal needs for reserve funds,
and to implement 1959 legislation directed in part toward
equalization of reserve requirements of central reserve
and reserve city banks.
Reduced reserve requirements against net demand
deposits at central reserve
city banks from 17~ to 16'11
per cent, effective December
1, thereby releasing about
$250 million of reserves.
Sold U.S. Government securities except for seasonal
purchases in last week of
December. Member bank
borrowings at the Reserve
Banks averaged less than $90
million in December.
5
To provide, on a liberal basis,
for seasonal reserve needs, to
complete implementation of
legislation directed in part
toward equalization of reserve requirements of central
reserve and reserve city
banks, and to offset the
effect of continued gold outflow, while avoiding direct
impact on short-term rates
that might stimulate further
outflow of funds.
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
interest rates and an unusually heavy seasonal loan demand,
money conditions eased notably in January. Interest rates de
clined, and bank loans were reduced, about as much as they had
increased in December. Stock prices, after rising close to the
1959 high at the end of December, declined sharply thereafter
and presently were near the low of the past 12 months. In con
trast, bonds had risen in price since the first of the year, and
yields on long-term U.S. Government bonds were back to
November levels. Yields on intermediate-term Government
securities had declined to around the lowest levels of October
1959, while yields on Treasury bills had fallen to the lowest
levels since late August.
Together, figures for money supply and turnover of bank de
posits indicated a rate of growth in total monetary transactions
of nearly 4 per cent a year since mid-1957, but the money sup
ply, which appeared to have declined slightly in January, was
only about one-half of 1 per cent larger than the year-ago level.
The current figure was a little more than $5 billion larger than
the peak of mid-1957, representing an average annual rate of
increase of less than 2 per cent.
clause (b), upon the fostering of sustainable growth in economic
activity and employment rather than upon restraint of infla
tionary credit expansion. In support of such a modification it
was pointed out, among other things, that business and financial
attitudes and trends were less exuberant than in May 1959, when
the existing policy directive was first adopted. The consensus,
however, did not favor a change at this time, on the grounds that
it would indicate a basic shift in open market policy and that
such a shift was not called for at present.
Therefore, the action taken was to renew the directive, which
called for restraining inflationary credit expansion in order to
foster sustainable economic growth and expanding employment
In appraising open market policy at this juncture, the Com
mittee took into account all of the aforementioned elements,
along with the fact that the easier money situation had resulted
from market forces rather than any change in monetary policy.
There was unanimity of opinion that any tightening in the degree
of restraint should be avoided. On the contrary, while a majority
favored watchful waiting during the period immediately ahead,
there were several within that group who leaned toward slightly
less restraint, and the views of some members of the Committee
were more positively in that direction. It was felt rather gen
erally that a moderate increase in the money supply would be
desirable.
In the light of the current situation, consideration was given
to the possibility of a modification of the policy directive to the
Federal Reserve Bank of New York so as to place emphasis, in
opportunities.
Votes for this action: Messrs. Martin, Hayes, Allen, Balder
ston, Erickson, Johns, King, Robertson, Shepardson, Szymczak,
and Leedy. Vote against this action: Mr. Mills.
Mr. Mills continued to favor a change in the directive along
the lines he had suggested at the past several meetings, which
would provide for fostering sustainable economic growth and
expanding employment opportunities while guarding against in
flationary credit expansion.
March 1, 1960
1. Authority to effect transactions in System Account.
Clause (b) of the first paragraph of the Committee's policy
directive was revised at this meeting so as to provide that open
market operations should be conducted with a view "to fostering
sustainable growth in economic activity and employment while
guarding against excessive credit expansion." This replaced the
clause of the directive that had been in effect since May 26,
1959, calling for operations with a view "to restraining infla
tionary credit expansion in order to foster sustainable economic
growth and expanding employment opportunities."
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
Votes for this action: Messrs. Martin, Hayes, Balderston,
Bopp, Bryan, Fulton, King, Leedy, Mills, Robertson, Shepard
son, and Szymczak. Votes against this action: none.
ness loans particularly large. In order to meet loan demands,
banks continued to reduce their holdings of U.S. Government
securities. However, demand deposits adjusted at city banks de
clined by a larger amount during February than in the same
month of any other recent year except 1956, and country bank
figures for the first half of the month failed to show the increase
that occurred in the corresponding period of 1959. It appeared
that the seasonally adjusted money supply may have declined
further in February to a level below that of a year earlier.
System open market operations during the period since the
National and regional reports at this meeting indicated con
tinuance of underlying economic strength, with evidence lacking
to suggest that 1960 would be other than a prosperous year. It
appeared, however, that some of the earlier exuberant expecta
tions were not being fully realized and that excesses in commit
ments and in credit extensions were not developing. The rapid
inventory accumulation that occurred in January and which ap
peared to have continued in February, combined with a slight
decline in new orders in January, suggested to some observers
that the spurt of activity attributable to the resumption of pro
duction upon conclusion of the steel strike might be nearing an
end before any other expansive factor had emerged to take its
place. Also, while retail trade remained at a high level, there
had been an edging-off from December to January in total retail
sales, other than sales of automobiles, and data for the first three
weeks in February suggested that department store sales, season
ally adjusted, had slipped slightly. It appeared that industrial
production would show no further increase in February. In the
stock market, prices were fluctuating erratically at levels slightly
above the low reached early in February.
Abroad, near-boom conditions appeared to be developing in
many countries. Interest rates in industrialized countries had
been tending to rise in response to increased economic activity
and speculative developments, and official policies were moving
further in the direction of restraint. Following a substantial in
crease in U.S. exports in December, preliminary figures for Janu
ary indicated a level which, if anything, was higher than Decem
ber, along with a considerable drop in imports. However, a
substantial over-all deficit in the balance of payments still was
indicated.
During the first three weeks in February, loans of banks in
leading cities expanded substantially, with the increase in busi-
previous meeting of the Committee had continued generally to
maintain pressure on the reserve positions of banks. The mid
March tax and dividend dates were now approaching, and the
money market might be under some degree of pressure to accom
modate seasonal liquidity needs. In view of this short-run con
sideration, along with considerations relating to business and
financial developments generally, the Committee concluded that
it would be appropriate to supply reserves to the banking system
somewhat more readily. Accordingly, the consensus favored, for
the immediate future, a policy of moderately less restraint.
In the light of existing conditions, a policy directive calling for
fostering sustainable growth in economic activity and employ
ment, while guarding against excessive credit expansion, was
deemed more appropriate than a directive emphasizing restraint
on inflationary credit expansion, and the Committee unanimously
agreed to change clause (b) accordingly.
2. Repurchase agreements covering U.S. Government securities.
The Committee voted to renew the existing authorization to
the Federal Reserve Bank of New York to enter into repurchase
agreements with nonbank dealers in U.S. Government securities,
subject to the following conditions and to the understanding that
the authority would be used sparingly in entering into repurchase
agreements at rates below the discount rate:
1. Such agreements
(a) In no event shall be at a rate below whichever is the lower of
FEDERAL RESERVE SYSTEM
ANNUAL REPORT OF BOARD OF GOVERNORS
(1) the discount rate of the Federal Reserve Bank on eligible
commercial paper, or (2) the average issuing rate on the most
recent issue of 3-month Treasury bills;
(b) Shall be for periods of not to exceed 15 calendar days;
(c) Shall cover only Government securities maturing within 15
months; and
(d) Shall be used as a means of providing the money market with
sufficient Federal Reserve funds to avoid undue strain on a
day-to-day basis.
2. Reports of such transactions shall be included in the weekly report
of open market operations which is sent to the members of the
Federal Open Market Committee.
3. In the event Government securities covered by any such agreement
are not repurchased by the dealer pursuant to the agreement or a
renewal thereof, the securities thus acquired by the Federal Reserve
Bank of New York shall be sold in the market or transferred to
the System Open Market Account.
Votes for this action: Messrs. Martin, Hayes, Balderston,
Bopp, Bryan, Fulton, King, Leedy, Mills, Shepardson, and
Szymczak. Vote against this action: Mr. Robertson.
The foregoing authorization had been renewed by the Com
mittee in March of each year since it was approved unanimously
by the Committee at a meeting on August 2, 1955. At this meet
ing, Mr. Robertson expressed the view that in recent times there
had been a tendency to use repurchase agreements more fre
quently than had been contemplated at the time of the Commit
tee's action in August of 1955. He felt that the Committee
should minimize the use of such agreements and maximize cash
trading. In addition, he suggested amendment of the authoriza
tion so as to confine the rates to the discount rate at the Federal
Reserve Bank of New York, rather than to allow under some
circumstances the use of a rate lower than the discount rate. This
was because he considered it inequitable to permit nonbank
dealers to borrow from the Federal Reserve System at rates below
those prescribed for member banks.
In voting to renew the authority in its existing form, the ma
jority of the Committee took the position that the repurchase
instrument had proved to be a convenience to the Federal Re-
serve System and of great importance in carrying out monetary
policy, that its use should not be minimized, and that the author
ization should not be changed to eliminate the right to use a rate
lower than the discount rate under certain circumstances, if that
appeared desirable.
Mr. Robertson dissented from the renewal of the existing au
thorization for the reasons indicated by him.
3. Review of continuing authorities or statements of policy.
This being the first meeting of the Federal Open Market Com
mittee following the election of and assumption of duties by new
members from the Federal Reserve Banks for the year beginning
March 1, 1960, the Committee reviewed and reaffirmed all con
tinuing statements of policy and authorities for operations.
These included three statements of policy that had been renewed
by the Committee each year since 1953 regarding the objectives
of monetary and credit policy, the confining of operations for the
System Account generally to short-term securities, and the pre
clusion unless expressly authorized by the Committee of trans
actions for the purpose of altering the maturity pattern of the
System's portfolio by means of offsetting purchases and sales of
securities.
By prearrangement, extensive consideration was given to the
three statements of policy relating to these matters, but at the
conclusion of the discussion the Committee decided to review the
subject further in the light of certain suggestions that had been
made. Accordingly, the action taken was to continue these three
operating policies on a temporary basis with the understanding
that they would be brought up again at a subsequent meeting.
Votes for this action: Messrs. Martin, Hayes, Balderston,
Bopp, Bryan, Fulton, King, Leedy, Mills, Robertson, Shepard
son, and Szymczak. Votes against this action: none.
March 22, 1960
1. Authority to effect transactions in System Account.
Although underlying forces in the economy continued to re-
@FedFRASER