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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, March 27, 1962, at 10:00 a.m.

Mr. Martin, Chairman
Mr. Balderston
Mr. Bryan
Mr. Ellis



Mr. Mitchell
Mr. Robertson

Mr. Clay, Alternate for Mr. Deming
Mr. Scanlon, Alternate for Mr. Fulton
Mr. Treiber, Alternate for Mr.


Messrs. Bopp and Irons, Alternate Members of the
Federal Open Market Committee
Messrs. Wayne and Swan, Presidents of the Federal
Reserve Banks of Richmond and San Francisco,
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. ackley, General Counsel
r. Thomas, Economist
Messrs. Brandt, Furth, Garvy, Hostetler, Noyes,
Parsons, and Willis, Associate Economists
Mr. Coombs, Special Manager for foreign
currency operations, System Open Market
Mr. Molony, Assistant to the Board of Governors
Mr. Cardon, Legislative Counsel, Board of Governors
Messrs. Holland, Koch, and Williams, Advisers,
Division of Research and Statistics, Board of
Mr. Knipe, Consultant to the Chairman, Board of
Mr. Yager, Chief, Government Finance Section,
Division of Research and Statistics, Board of



Messrs. Francis and Hemmings, First Vice
Presidents of the Federal Reserve Banks of
St. Louis and San Francisco, respectively
Messrs. Eastburn, Ratchford, Baughman, Jones,
Tow, and Coldwell, Vice Presidents of the
Federal Reserve Banks of Philadelphia,
Richmond, Chicago, St. Louis, Kansas City,
and Dallas, respectively
Mr. Stone, Assistant Vice President, Federal
Reserve Bank of New York
Mr. Sternlight, Manager, Securities Department,
Federal Reserve Bank of New York
Upon motion duly made and seconded,
the minutes of the meeting of the Federal.
Open Market Committee held on February 13,
1962, were approved.
Before this meeting there had been distributed to the members
of the Committee a report on open market operations in U. S. Government
securities covering the period March 6 through March 21, 1962, and a
supplementary report covering the period March 22 through March 26, 1962.
Copies of both reports have been placed in the files of the Committee.
In supplementation of the written reports, Mr. Stone commented
as follows:
The money market has been generally comfortable since
the last meeting. Federal funds have moved between 2-1/2
and 3 per cent, with the effective rate typically at 2-3/4
or 3 per cent. The mid-March tax and dividend dates passed
without difficulty. As customarily happens, several hundred
million dollars of dealer financing was shifted from corpo
rations to banks around the tax date, but the banks were
readily able to meet this financing need. Indeed, Federal
funds were below the discount rate on March 15, when the
bulk of the shift occurred, and Treasury bill
rates, after
having remained unchanged during the morning, moved lower later
in the day.

In recent days we have begun to see some of the effects
of the stockpiling of bills in Chicago in advance of the
April 1 Cook County tax date, and that situation will con
tinue to be a factor of some importance over the next week
or two.
The entire Government securities market has continued
to show a good deal of strength, and it may be worthwhile to
cite a few comparisons to emphasize the extent of this strength.
Rates on three-month Treasury bills, for example, are about
where they were in early February despite the fact that since
that time the Treasury has added a total of $800 million to
Rates on
the supply of three-month bills in weekly auctions.
six-month bills are somewhat lower than in early February,
and indeed are lower than they were three weeks ago, just
before the Treasury announced the auction of $1.8 billion
September tax bills--which are virtually equivalent to new
six-month bills since they mature at about the same time as
the six-month issue auctioned last week. I should add that
the strength of the short-term market has been evident
Hence it cannot be explained wholly
throughout the period.
in terms of reinvestment demand out of the March tax bills
that matured last week, or in terms of expectations of that
Intermediate- and longer-term Treasury issues have under
gone yield declines ranging to more than 20 basis points since
the last meeting and to more than 40 basis points since early
Yields on most long-term issues are at 4 per cent
or slightly under, while 10-year issues yield about 3.80 per
cent. To cite another benchmark, the 4 per cent notes issued
in the recent Treasury refunding are now bid to yield 3.55
Corporate and municipal obligations have also under
per cent.
gone sharp changes in yield, although in the past week or two
investors--perhaps viewing the recent buildup in the calendar
of new issues--have shown resistance to some new offerings on
which the underwriters put a rather high price.
Thereupon, upon motion duly made and
seconded, the open market transactions in
Government securities during the period
March 6 through March 26, 1962, were
approved, ratified, and confirmed.
Mr. Noyes presented the following statement with respect to
economic developments:



The three weeks since the last meeting have produced
quite an array of data for February, and a little inconclusive
evidence with respect to the current month. Even with only a
few clues for March, however, technicians in and outside the
Government are firming up estimates of first quarter GNP at
figures a little
below $550 billion--$548 seems to be the
most popular figure at the moment.
I do not mean to suggest by this that the most recent
information is all bearish. In fact, most indicators picked
up considerably from January to February, and department
store and automobile sales appear to have improved further in
recent weeks.
Rather than run through the levels and changes revealed
by the latest data, it seemed to me that it might be more
useful today to try to place the current rate of expansion
in perspective.
At the moment the perplexing question seems
to be not so much the direction in which the economy is moving,
or its rate of progress, but rather whether or not that rate
of progress is sufficient.
So far as I am aware, no one con
tends that the current rate is excessive, and few that there
is any likelihood of over-rapid expansion in the period just
A lag or sluggishness appears, of course, in relation to
most goals or projections for 1962 performance, made in the
late fall and early winter.
As one would expect, the most
widely used yardstick for evaluating our progress has been
the $570 billion annual GNP mentioned in the President's
Budget Message and Economic Report.
This involved a year-to
year increase of almost 10 per cent, and a fourth quarter to
fourth quarter rise of about 7-1/2 per cent. It was argued
that these rates, which were admittedly high for the second
year after an upturn, were not unrealistic because of the
substantial volume of idle human and physical resources, the
absence of inflationary pressures, and the generally unsatu
rated market conditions that prevailed.
Against this back
ground, first quarter performance has been disappointing at
It should be noted at this point that if an important
part of the shortfall could reasonably be attributed to a
lesser rate of inventory accumulation than was anticipated,
there would be less cause for concern, but this does not
appear to be the case.
The current reduced estimates of
quarter GNP provide for about the same amount of
inventory accumulation as the original projections. Hence

the entire difference is associated with a lesser rate of
final takings of goods and services, particularly of housing,
consumer durable goods, and fixed capital.
It may be properly pointed out, however, that the $570
billion goal for 1962, if not unrealistic, was at least
highly optimistic and that some shortfall should not be
regarded as a cause for alarm.
How might one go about setting
a minimum limit for adequate performance? Perhaps we can
approach this by looking first at the amount of growth in GNP
in current dollars it would take simply to hold real per capita
GNP constant. A conservative estimate is $4 billion annual
rate per quarter. Thus, starting from 542 in the fourth
quarter of 1961, an average for 1962 of about 552, and a
fourth quarter of 558 or so, would be necessary to maintain
real per capita GNP at the same level.
A very modest allowance
for growth necessary to maintain momentum would carry the
average to around $560 billion.
The complex interrelationships that enter into the
performance of the American economy can never be satisfactorily
summarized in a single figure, but this crude analysis does
suggest that one should search for the lower limit of acceptable
economic performance in 1962 somewhere above a $560 billion
annual average GNP, based on his judgment of what constitutes
a tolerable rate of unemployment, an adequate level of profits,
an acceptable volume of new investment, and other considerations.
The first quarter level of GNP may well have been depressed
by special nonrecurring factors, and natural forces may lead to
a more rapid rate of expansion as spring progresses. The fact
remains, however, that in this quarter we have been running very
close to the lower limit of sustainable expansion and that if
some improvement does not come in the next month or so, attention
must be focused on ways and means of maintaining expansion through
public policies of one kind or another.

Furth presented the following statement with respect to the

U. S. balance of payments and related matters:
The U. S. balance of payments for the current quarter will
show the smallest deficit since the first quarter of 1961, but
will still
be far from equilibrium.
According to the data for January and February ana pre
liminary data for the first three weeks of March, the deficit
for the quarter may be estimated at $400 million, only slightly
more tnan in the first
quarter of 1961 and less than one-third
of the deficit for the last quarter of 1961.



This development is particularly interesting because
our trade balance seems to have deteriorated rather than
If the trade figures for January (the only ones
as yet available) are taken as an indication for the entire
quarter, our seasonally adjusted trade surplus was about
$200 million less than in the last quarter of 1961 and more
than $600 million less than in the first quarter of 1961,
when our imports were at a cyclical low.
The greatest improvement apparently occurred in the
outflow of short-term capital, including unrecorded trans
actions. Part of this improvement represented merely a
technical reversal of flows associated with year-end window
dressing. But it is encouraging to note that the bulk of
the recorded short-term capital outflow in the current
quarter apparently reflected only a further expansion of
bank and trade credits to countries that regularly depend
upon the financial resources of the New York market.
It is less encouraging to note there has been quite
recently a considerable shift from foreign private to
foreign official dollar holdings, probably connected in
part with the shift of funds from continental European
currencies or Euro-dollars into sterling.
Commercial banks
in the United Kingdom, in conformity to official advice,
transfer dollar accretions to the Bank of England.
means an increased danger of drains on the U. S. gold stock.
Our net gold drain during the quarter amounted to $300
million, including two sales to be executed later this week;
half of this amount, however, may be considered to be offset
by the increase in our holdings of foreign convertible
currencies. If the accumulation of foreign official dollar
holdings continues, it will lead to further gold drains,
unless the Treasury prefers the humiliation of begging our
friends not to convert their dollar holdings into gold in
order to uphold the prestige of the dollar.
The recent capital flow to London can only partly, if
at all, be explained by interest-rate differentials between
New York and London.
On a covered basis, the interest-rate
differential between these places, as measured by the
difference in Treasury bill
rates minus the forward discount
of the pound sterling, has been in favor of New York for
quite some time. Recently the differential has reached
three-eightns of one per cent, which might be thought
sufficient to cause some flows to New York.
Actually, however, comparison based on Treasury bill
rates can be misleading because the London money market
offers higher rates on certain investments that are, rightly

or wrongly, considered by some investors the equivalent of
prime investments in New York, especially deposits with local
authorities and with finance companies. On a covered basis,
these rates still show an advantage of nearly one per cent
over investments in the New York money market. Euro-dollar
rates in London also are still quoted at 3-1/2 per cent, at
least 1/2 per cent higher than returns on prime money market
paper in New York.
This latter relationship can hardly be changed by move
ments in the New York money market rates. According to oral
information, some London financial institutions are willing
to operate in the Euro-dollar market with a margin of only
1/16 of 1 per cent, and therefore will always be able to
out-compete New York banks for international deposits.
As a result of the reduction in the U. K. bank rate,
the deposit rates offered by British local authorities and
financial companies may be significantly reduced in the
near future. But it remains to be seen whether funds
hitherto attracted into these deposits will flow to New York
or rather seek investment in Euro-dollars or continental
European currencies. The second probability seems high,
since most of the funds apparently have come from the Euro
dollar market or directly from continental European holders.
Gold and exchange markets have not shown surprising
developments recently. The London gold price was yesterday
A small price
at exactly the same level as three weeks ago.
increase in the middle of March, apparently caused by gold
purchases by a small central bank that does not participate
in the widely publicized gold pool, was immediately reversed
when these purchases ceased.
The recent decline in the sterling rate was decisively
influenced by the latest decline in U. K. bank rate.
improved position of the dollar in London should therefore
not be attributed to developments in the United States.
fact, the dollar lost some ground in the two countries in
which it was strong three weeks ago, Germany and the Netherlands.
Allegedly, this change, too, had more to do with domestic events
in those countries than with the international position of the
United States. Both Germany and the Netherlands have been
experiencing temporarily tightened monetary conditions, and
the banks seem to have converted some of their foreign exchange
holdings into local currency to meet domestic demands.
The dollar improved somewhat in Zurich. Although the
decline in the Swiss franc rate has given rise to much comment,
the Swiss franc is still
quoted well above parity against the


To sum up:
we must be grateful for the reversal of the
deterioration in our balance of payments, which started in
mid-1961. But we have at best reached a half-way station
between the critical position in which we found ourselves
three months ago and a position which would represent imminent
prospects of sustainable equilibrium.
Mr. Thomas presented the following statement with respect to
credit developments:
Credit markets have reflected the lull in the pace of
economic expansion. Bond prices have risen and some interest
rates have tended to decline in a period when the money market
was relatively tight because of seasonal credit and liquidity
needs. Bank loan expansion has been large but not exceptionally
so for the March tax period. Banks also increased their holdings
of "other" securities, but showed unusually large reductions in
holdings of Government securities. As a consequence, total bank
credit expansion was relatively small for this period. Time
deposits at banks continued to increase, but demand deposits may
have declined some after adjustment for usual seasonal variations.
Reserve availability did not increase, and free reserves on the
average were relatively lower than in February.
Rising prices of Treasury bonds brought average yields on
long-term issues down to below 4 per cent for the first time
since November. Average yields on 3- to 5-year issues declined
below 3-1/2 per cent--the lowest since last May. Treasury bill
yields also declined from mid-February levels but remained close
to or above the highest levels for 1961, reached at the end of
the year. Rates on Federal funds and on bank loans to dealers
have remained at or only slightly below 3 per cent.
Strength in Government securities has occurred despite
reductions in holdings by the banking system and an increase in
bill offerings by the Treasury, and at a time when corporations
might be expected to reduce holdings. Holdings for foreign
accounts at the Federal Reserve have increased moderately, and
it is reported that some of the proceeds of recent new issues
of securities in capital markets are being invested in Govern
ment securities. Of most importance, there have been very large
increases in the positions of dealers in Government securities
in recent weeks. Dealers' positions in bills are comparable to

high levels reached at times last fall, and holdings of coupon
issues maturing in less than a year are relatively large for a
period not including a Treasury financing operation in this area.
Holdings of longer-term issues continue to comprise only a minor
portion of dealers' positions.



Corporate and State and local government securities, which
for some time had shown more strength than U. S. Treasury issues,
have continued strong, with small further declines in yields.
Public offerings of securities to obtain new capital have been
in lighter volume during March than in February, and dealers
have been able to reduce inventories of unsold issues.
for new issues, however, are again building up, and April offer
ings may be somewhat larger. Prices of common stocks have shown
little change in recent weeks, with trading activity tending to
Banking statistics are difficult to interpret at this time,
because a difference of one day can cause very large shifts in
liquid assets and current liabilities of businesses and hence in
bank loans, investments, and deposits. On the basis of partial
figures for city banks for March 21, expansion in loans to busi
nesses and to finance companies over the tax period appears to
be within the range of normal variations for the past seven years.
This increase has been offset to a considerable extent, however,
by unusually large decreases in bank loans on securities and in
As a consequence, although
holdings of Government securities.
holdings of other securities increased by a substantial amount,
the increase in total credit supplied by city banks over the
tax period was relatively small. Data for the first half of
change in total credit at nonreporting
March indicate little
banks, compared with an increase in the same period last year.
Time deposits continued to increase at city banks in the
three weeks of March at a faster pace than in other years,
but the rate of increase slowed down somewhat compared with
January and February.
Data available for other savings institu
tions show a continued substantial inflow of net savings during
February. Available data indicate the likelihood of a decrease
in demand deposits, after adjustment for seasonal variations,
three weeks of March. Demand deposits adjusted
during the first
at all commercial banks are about 2 per cent larger than a year
ago, while time deposits are close to 15 per cent larger.
deposits increased by about 7 per
Recent weeks seem to have been another period, such as have
occurred at times during the past year, when restraint on supply
rates has been
ing reserves in order to prevent a decline in bill
accompanied by absence of expansion in the money supply. Reflect
ing the increase in time deposits, required reserves have been
slightly larger than in February, and member banks have found it
necessary to borrow somewhat more often to maintain their reserve




Again this raises the question as to how much time deposits
might substitute for demand deposits in supporting an expanding
economy. Won' t some expansion in demand deposits be essential?
A collateral question is whether saving in general is being unduly
encouraged in view of the continued slack in the utilization of
available resources in the economy.
For those who believe that the function of monetary policy
is to regulate aggregate demand--consumption and investment--or
for those who would use monetary policy to stimulate investment
in times of slack, the present situation would clearly call for
a somewhat more expansionary policy. This approach, however,
would be questioned by those who suspect that the slowness of
economic advance that has been characteristic of this country
during recent years is due to structural problems that cannot
be remedied--or might even be worsened, particularly in view of
our international situation--by easy credit or injections of
fiscal stimulants. With respect to the possible contribution
of monetary policy, this Committee will have to continue to seek
an appropriate stance between these two extremes.
Mr. Treiber presented the following statement of his views on the
business outlook and credit policy:
Business activity is expanding less rapidly than was
expected a few months ago, and less rapidly than in the
comparable stages of the two previous business cycles.
Although it is possible that the current slowdown in the
advance may portend a downturn in general business activity
sometime later in the year, it appears more likely that the
chief issue over the rest of the year will be the pace of the
advance rather than the problem of recession.
Employment has risen less rapidly in the current business
expansion than in either of the two previous expansions. The
lag probably reflects not only the less rapid advance in
economic activity but also a greater increase in productivity
in the current period. The momentum of economic expansion is
especially important because of the continuing high rate of
unemployment and the possibility that the labor force may
expand almost as rapidly as employment increases during the
rest of the year.
While personal income has been rising, consumers have
been conservative in their spending. While business outlays
for plant and equipment have been rising, the rise has not
been rapid.
The housing picture is not strong.
The inventory
outlook is heavily dependent upon shifting expectations with



regard to the outcome of the present wage negotiations in
the steel industry. It is hard to see what factor may spark
an upsurge in economic activity. Yet the cumulative effect
of greater activity in several areas could be substantial.
Prices continue to be stable. There are no signs of
inflationary pressures on the demand side. On the cost side,
the terms of settlement of the wage negotiations in the
steel industry will be very important.
Bank credit has expanded satisfactorily in recent weeks,
due more to increased loans than to increased investments;
investment maturities have been extended to improve earnings.
Time deposits continue to show substantial gains, but not as
large as in January.
New offerings of securities by business concerns and by
State and local governments have been substantial this year;
Further large
in most cases they have been well received.
security offerings appear to be in prospect, stimulated to
some extent by comparatively low long-term market rates and
other conditions favorable to the sale of securities.
The ability of business concerns and State and local
governments to borrow readily in the capital market, the
relatively good liquidity position of the commercial banks
and their consequent ability to make loans, and the liquidity
and potential purchasing power of consumers all indicate no
need for any increase in credit ease for domestic purposes.
Looking at the international situation, our adverse
balance of payments continues to be a severe problem. While
the figures for the first
quarter of 1962 are much better,
largely for seasonal reasons, than the figures for the last
quarter of 1961, estimates for February and the first
weeks in March appear to indicate that the over-all first
quarter deficit will not be much different than that for the
The outflow of gold has increased
quarter of 1961.
recently, and more gold losses are likely.
While the recent action of the Bank of England in reducing
the bank rate should be helpful to the dollar, there are still
rate advantages in foreign financial markets.
As for appropriate monetary policy, it seems to me that
we should continue about the same policy we have been pursuing
This would mean having the three-month Treasury
in recent weeks.
bill rate at or about 2-3/4 per cent, with the rate on Federal
funds at or not far from the discount rate at most times.
order to avoid downward pressure on the bill rate it may be
desirable to buy longer term securities against the sale of



Treasury bills or other short-term securities. There is plenty
of evidence, including the strength throughout the market for
fixed income securities, that an abundant supply of credit is
Therefore, I think that the free reserve figure may
properly be de-emphasized as a policy criterion, and a somewhat
lower level of free reserves may be permitted to develop if such
a level is needed to achieve the rate objective.
I see no need for any substantial change in the current
economic policy directive. Nor would I favor any change in the
discount rate at this time, unless it were part of a "package"
or group of actions to be taken by our Government on several
fronts to focus attention on, and help solve, our balance-of
payments problem.
Mr. Ellis reported that business activity in New England showed
mixed patterns, without apparent vigor.
up, for example, in business spending.

The mixture of trends showed
Nonresidential building contract

awards in February were weak in comparison with preceding months, while
the results of a survey of manufacturers' intentions indicated a
cent rise in capital expenditures over 1961.
showing mixed patterns.



Consumer spending also was

After adjustment for the different dates of

Easter, department store sales were

4 per cent ahead of 1961, but in

February new car financing by New England banks showed a sharp decline
of one-third from January.

As to production, the New England index

contained seasonal factors that called for a gain from January to February
of about 3 per cent, but preliminary estimates indicated that the index
was falling short of the normal pattern.

Insured unemployment showed

little change in February, but two labor market areas were

added to the

Group E classification, making a total of four, whereas there
in that classification last fall.




Mr. Ellis said that New England banks had experienced about the
normal tax borrowing increase.

Demand deposits leveled off in March

and loan-deposit ratios were rising, thus continuing the trend character

of the first


A reduction in holdings of Government

securities was continuing.
Turning to policy, Mr. Ellis said the lack of vigor of demand
suggested that the hesitation in the pace of business activity was

In the present circumstances, it seemed appropriate to

continue the current policy of stimulating credit expansion.

On the one

hand, there was no real evidence to indicate that present policy was too
stimulating; on the other hand, there was no sound reason to believe that
present policy was retarding economic expansion.

Recent free reserve

figures below $400 million seemed to have been accepted as an aberration,
and they had not reflected themselves in a strengthening of short-term

In fact, the tendency had been for short-term rates to decline.

Dealers seemed able to finance their positions satisfactorily even with
holdings at peak levels, indicating that there was plenty of money
In summary, Mr. Ellis felt it desirable to maintain the present
course of monetary policy.

If the Committee wanted to recognize the

continued hesitation in the pace of business activity, an indicative
change could be made in the first paragraph of the current economic
policy directive,. It would not seem appropriate to change the discount
rate at this time.

Mr. Irons reported that the most recent statistics on Eleventh
District conditions were favorable.

While the pace of activity may not

have been completely up to earlier expectations, nevertheless there had
been improvement.

Retail trade statistics showed an advance from a year

ago, employment was generally satisfactory in the major labor market
areas, and the District industrial production index showed an increase
of about one percentage point in the latest period.


activity was very good, especially in major cities such as Houston and
Dallas, and the agricultural situation was favorable.
On the financial side, Mr. Irons said that District banks were
in a comfortable position.

Borrowing from the Reserve Bank was running

consistently under $1 million a day.
there had been some increase in

During the past three-week period

loans and in deposits,

including a strong

increase in time deposits.
The attitude of businessmen and others in the District was
generally good; they apparently were satisfied with the way conditions
were developing.

There seemed to be no real problems at the moment

except in the oil industry, where the problem was not cyclical in nature.

Irons indicated that he was not too disturbed about the rate

of economic growth nationally.

In his opinion, credit had been sufficiently

easy to make it possible to meet any valid requirements.

Therefore, he

would favor a continuation of the policy of the past three weeks,
recognizing that there were some gyrations during that period.




would envisage a bill rate around 2-3/4 per cent, with Federal funds
in the area of 2-3/4 to 3 per cent. While he would not be too much
concerned about the level of free reserves, he would contemplate a level
somewhere around $350 to $400 million.

Altogether, this would represent

continuation of a policy of adequate ease, at the same time giving
consideration to the rate problem in the light of international factors.
Mr. Swan reported that the situation was rather favorable in
Twelfth District.


On a seasonally adjusted basis, the unemployment rate

in the Pacific Coast States remained at 5.6 per cent in February despite
some lay-offs because of heavy rains that especially affected construction
employment and also housing starts.

Department store sales for the four

weeks ended March 17 showed a gain of 5 per cent, in

sharp contrast to

the 2 per cent decline for the country as a whole.
The rather substantial time deposit growth at Twelfth District
banks was continuing,
loan associations in

and there had been announcements by savings and
southern California of a dividend rate increase from

4.6 to 4.75 per cent, effective the first of April. How long associations
in northern California would hold the line at
of conjecture.


per cent was a matter

At the same time, the desire of banks and savings

institutions for mortgage loans appeared to have had the effect of easing
both mortgage rates and terms somewhat.

Real estate loans showed the

largest increase of any loan category at weekly reporting banks for the
three weeks ended March 14,

just as they did in the first three weeks of



Commercial and industrial loans showed only a modest increase

through March 14, and at that time the banks were not anticipating any
heavy borrowing over the tax date.

Banks had been in a fairly comfortable

reserve position over the past several weeks and had been net sellers
of Federal funds, which was a reversal of the situation that prevailed
in the latter part of 1961.

Borrowing from the Reserve Bank was nominal.

It seemed fairly clear, Mr. Swan said, that there was no great
vigor in the domestic situation at this time.

Certainly there were no

significant price pressures, and there was still unutilized capacity in
terms of both men and machines.

Also, it appeared that developments in

the international situation were at least temporarily in a more favorable

This seemed, therefore, to be a time when a little less

weight could be given to international considerations in relation to

Further, there were no inflationary winds to lean against at
Accordingly, he would favor continuation of a policy of monetary

While he would be satisfied with the current policy directive as

it stood, he did not feel that the recent reduction in free reserve
levels, with some increase in total borrowings of member banks, was
entirely consistent with the economic situation or with the directive.
He would prefer to see free reserves around $450 million, and if the
bill rate shaded a little below 2-3/4 per cent he would not be particularly

He would not change the discount rate at this time.

Mr. Scanlon reported that economic information in the Seventh
District showed a mixed picture.

However, a number of points could be


made with some certainty.

First, it was now clear that some of the

weakness early in the year was a reflection of bad weather conditions.
Second, despite some revival from January, the rate of business improvement
in the Midwest was slow.

Third, there had been a pronounced rise in

business loan demand since the end of January, although it was as yet
too early to determine whether this was more than a temporary development.
It now appeared, Mr. Scanlon said, that the steel operating
rate, nationally, would be slightly lower in March than in February.
In the Chicago area, however, the figures would be about even, while in
the Detroit area there might be a slight increase.

One producer had

indicated that present order trends indicate that steel output will
decline appreciably in April.

There had been no rush of orders following

the break in wage negotiations, and users of steel were achieving a
satisfactory inventory position faster than sales representatives had

Midwest firms seemed to be handling more defense work, as

reflected in contract awards, the gain having been much larger than for
the nation as a whole.

Department store sales in

the latest week were

relatively strong, particularly when allowance was made for the date of
As late as last Friday, Mr.

Scanlon said, he had been prepared

to say at this meeting that the outlook for automobile sales for the
calendar year was rather clearly around 6.5 million, including imports,
rather than the 7 million total still

being quoted publicly.




figures for the second ten days of March showed a sales rate of 22,500
cars per selling day, ten per cent higher than any mid-March period

since 1955.
District banks were complaining of a slack business loan demand,
but outstanding loans at weekly reporting banks in

the District were

about $130 million higher than a year earlier, this increase being
somewhat larger than for the twelve months following the 1958 trough of

Business loan demand appeared to have been quite strong

recently, although analysis was complicated by the distortions caused
by the forthcoming Cook County personal property tax date.
Mr. Scanlon noted that in view of the relatively slow growth of
business activity thus far in 1962,


appeared that projections for

the calendar year should be revised downward moderately.

If any change

in System policy was in order--and he rather doubted it--he would feel
that the change should be in the direction of a slightly greater degree
of ease rather than the reverse.

As far as free reserves were concerned,

he would be inclined to favor slightly higher levels than in the past
few weeks.

He saw no need for a

change in the current policy directive

or in the discount rate.

Clay commented that the data on the recent performance of

the domestic economy understandably had met with mixed reactions.
improvement over January's results was encouraging.


On the other hand,

the current performance of the economy generally did not appear to be



very vigorous.

Whether substantial expansion of economic activity,

such as would be necessary for satisfactory employment and output, was
to take place in the months ahead seemed to depend primarily on two

One was consumer spending,

other was business capital outlays.

notably on durable goods.


Consumer spending would need to

improve very materially in the weeks ahead if


was to make a major

contribution, and it was commonly recognized that the increase of 8 per
cent in the projected level of business capital outlays for 1962 fell
short of what was needed from that area.
be seen,

The actual results remained to

but there was reason to question whether actual outlays would

exceed projected outlays in the current state of the economy nearly so
readily as in the earlier business upswings following World War II, when
demands for goods were strong and capacity was more limited.
These reflections took on added importance when recognition was
given to the fact that the present unemployment ratio was derived on the
basis of a civilian labor force that had not grown over the past year.
That situation was not likely to continue.

Rather, it should be

expected that there would be substantial additions to the labor force
that would need to be absorbed.
The justification of a monetary policy designed to stimulate
economic expansion was readily apparent, Mr. Clay said.

Money and

capital markets already had responded to business and financial news by
adjusting interest rates downward.

This easing in the cost of credit


and the implied improvement in


availability afforded the Committee

an opportunity to await further developments before deciding whether a
significant shift of policy was required.

The weeks immediately ahead

should clarify the performance of the economy, particularly that of the

The Committee would then be in

a better position to judge, on

the basis of the pattern of economic activity and the performance of the
money and capital markets, whether any modification should be made in
the policy it had been pursuing.
Mr. Clay commented that the Committee would want to maintain an

appropriate relationship between the Treasury bill rate and comparable
interest rates abroad.

This presumably would fall within the range

previously determined by the Committee.

At present, it would not appear

necessary to push the Treasury bill rate to the upper limits of that
range, however.

In any case, the rate should not be maintained at a

level higher than necessary for international flow-of-funds considerations.
In keeping with the views he had expressed, Mr. Clay recommended
no change in the Reserve Bank discount rate.

He went on to say that the

possibility of needing to do more toward encouraging economic expansion,
rather than less, underscored the dilemna of the System relative to the
needs of the domestic economy and the international balance-of-payments


Further action to stimulate domestic activity inevitably would

involve a downward movement in the level of interest rates, and such
developments might accentuate the problem of dealing with the international


flow of funds.

This potentially difficult and awkward situation placed

a high priority on efforts to comprehend fully and to solve the basic
issues that were involved in the international balance-of-payments


was to be hoped that every reasonable effort to deal with

these basic issues was being made by those authorities who were in a
position to do so.


would be interesting and helpful, he suggested,

the Open Market Committee could be given a comprehensive briefing,

beyond the scope of a public statement, as to what was being done to
deal with this problem.
Mr. Wayne reported that Fifth District business had continued to
show only slight improvement, as had been the case for several months.

This trend was evident in the statistics for February, when seasonally
adjusted bank debits, nonfarm employment, and manufacturing man-hours

Manufacturers responding to the Reserve Bank's recent survey

reported new orders, shipments, employment,
or rising.

and hours generally stable

Retailers said that trade remained strong except when

adversely affected by the weather.
seemed the dominant sentiment.

Thus, restrained optimism still

A recent storm had caused extensive

damage to property along the coast, and this was expected to give some

additional impetus to employment in the affected areas.
Business loans at District weekly reporting banks continued

considerably weaker than for the nation as a whole.

These loans had

declined more so far this year than in any other recent year.




estate loans, however,

had been a little

stronger than usual, and all

other loans had conformed quite closely to the normal pattern.


banks were net sellers of Federal funds.
Turning to policy considerations, Mr. Wayne said he believed it
must be recognised, as a major consideration,
expansion since the first

that the rate of business

of the year had been less than satisfactory.

While some major indicators had moved up recently, others had moved

sideways or downward.

There was a possibility that activity generally

might top out uncomfortably near the present level and produce an
abortive or incomplete upswing.

While he would not favor any attempt

to force-feed the economy with excessive amounts of credit, it

was just

as important not to take any steps that might impede further expansion.
There might now be a little

more leeway in shaping policy to meet the

needs of the domestic economy since international pressures seemed to
have abated somewhat, at least for the present.

As a long-range goal,

he would suggest continuing the formula that allowed for a
growth in

4 per cent

total reserves against private deposits, seasonally adjusted.

As an immediate goal, he would favor keeping free reserves between $400

and $450 million rather than below that range.
the three-month bill

rate any higher than it

He would not like to see

had been recently; if


should decline by ten or fifteen basis point, he would not be concerned.
He believed this goal could be accomplished under the current economic
policy directive and therefore would like to see that directive renewed.

He would not favor any change in the discount rate.


-23Mr. Mills said that in

reviewing money market and other financial

developments for many months past, he concluded that Federal Reserve
System credit policy, by moving in a rut, had fallen into a trap, to
which the attention of the Committee must be directed.

For this purpose,

he presented the following statement:
In following a policy that has produced a high level of
free reserves over a long period of time, the Federal Open
Market Committee committed a serious blunder that is now show

ing up in a series of problems that will be difficult to solve
and could have been avoided if

the objectives of policy had

been confined to a fundamental responsibility of assuring
adequate credit availability. In oversupplying reserves, and
in that process forcing excessive liquidity into the economy,
the foundation has been laid for the development of future

inflationary difficulties whose correction can demand a
reversal of current monetary policy to one involving an undesir
able degree of credit restraint.
However, the most unfortunate aspect of current monetary
policy is that the declared purpose of holding the interest yield
on U. S. Treasury bills at a level intended to deter the transfer
of United States funds abroad has resulted in pegging Treasury
rates at a set floor. As should have been learned from past
experience, a pegging operation in due course gives market
operators confidence in the permanence of an artificially
anchored and maintained interest rate structure that encourages

their relatively riskless speculation in U. S. Government
securities by "playing" a flattening interest rate curve extend
ing from the longer maturities back down to the pegged Treasury
sector of the list.
Evidence of this kind of development

can be seen in the recent rapid rise and latterly abrupt fall
in the prices of U. S. Government securities and the speculative
growth in the positions of U. S. Government securities dealers.
To the extent that dealer positions become vulnerable, the
market will be exposed to a subsequent sharp break that would
be harmful both to the interests of the Federal Reserve System
and of the Treasury. The successive reductions in the discount
rate of the Bank of England have aggravated the situation still
more, in that corrective Federal Reserve System actions taken
now to absorb superfluous reserves would give the appearance of
a radical policy change toward credit restraint at a time when
the closer alignment of U. S. Treasury and United Kingdom



Treasury bill
yields that has occurred suggests less need for
a defensive level of U. S. Treasury bill rates.
The embarrassing policy predicaments that have been
brought on by fostering a continuously high level of free
reserves which, in turn, developed into artificially pegging
U. S. Treasury bill rates, could have been avoided by policy
objectives geared solely to providing adequate credit avail
ability, in which everta somewhat firmer interest rate
structure would have automatically held U. S. Treasury bill
rates in a defensive balance-of-payments posture and any
assumed need of a pegging operation would have been obviated,
while at the same time sufficient scope for the expansion of
bank credit would have been permitted.
A goal setting a predetermined volume of reserves as a
measure for increasing the money supply in accordance with
growth in the gross national product may be partly to blame for
the present difficulties. This policy not only shares
responsibility for injecting excessive liquidity into the
economy, but has been conducted on the erroneous premise that
there must be close coordination between the rate of growth in
the money supply and that in the gross national product.
As a
matter of fact, the character of commercial bank loans and
investments, rather than their arithmetical total, is the
determinant of the influence of bank credit on the gross
national product. Where bank loans and investments are heavily
concentrated in long maturities, their influence in support of
the gross national product gradually wears out after their
initial impact, which is not true of short-term self
liquidating bank loans which, in the rapidity of their turnover,
give a constant and renewing dynamic support to the gross
national product.
A Federal Reserve System policy that pays
closer attention to encouraging more constructive commercial
bank lending and investing practices and less attention to the
purely arithmetical relationship between the money supply and
the gross national product is called for.
Irrespective of superficial inconsistency with previously
proclaimed Federal Reserve System policy objectives, solution of
the problems now existing requires that the level of free re
serves be set at a point that will foster a level of interest
rates that will serve to check the seemingly speculative move
In view of
ments in the prices of U. S. Government securities.
the liquidity positions of the commercial banks and their

consequent ability to shift from investments to loans, that
policy can be conducted without reducing the capacity of the

banks to extend loan credit or exerting any undue restraint
over the total expansion of bank credit. Such a policy will
also eliminate any assumed justification for pegging U. S.
Treasury bill


Mr. Robertson expressed the view that although open market

operations during the past three weeks may have been in

accord with the

second paragraph of the current policy directive issued on March 6,
1962, they had been inconsistent with the first paragraph.
opinion, they exemplified almost a "bill

In his

rate only" policy, with

emphasis placed on the clause in the second paragraph of the directive
that called for taking account of the desirability of avoiding undue
downward pressures on short-term interest rates.

As a result, there

had been what he would consider a tight money market.

Also, there had

been a lack of expansion of the money supply, although the first
paragraph of the directive stated that one of the aims of the Committee
was to promote further expansion of the money supply.

There had been

some expansion of bank credit, but not enough to encourage the economy
to push upward.
In further explanation of his views, Mr. Robertson presented the

following statement:
The accumulation of economic evidence makes it clear that
we have experienced a distinct slowing in our rate of business
How serious this development may prove to be cannot
be judged by simple comparison with past experience, for never
before in the postwar period have we had a business expansion
which proceeded so far without being fueled by inflationary
The fact is undeniable, however, that substantial
amounts of unutilized resources persist in our economy. With the

statistics on unused capacity and the absence of price pressures
both underlining the ability of the economy to produce additional
goods at prevailing prices, if demanded, I think we should con
sider some easing of our policy in the interest of counteracting

any possible further loss of economic momentum.



The chief argument against any easing of policy at pre
vious meetings of the Committee has run in terms of holding
interest rates high in the hope of obtaining some marginal
alleviation of the short-term capital flows that were
The data since
aggravating our balance-of-payments deficit.
of the year indicate that if such a need ever
existed, it certainly has been rendered less urgent.
general balance-of-payments position appears improved, short
term capital movements appear to be shifting to a pattern more
favorable to our longer run interest, and interest rates abroad
have declined, exemplified most notably by the two successive
The circumstances, I believe,
cuts in the British Bank rate.
call for a reassessment of the balance of considerations in the
determination of monetary policy, with greater weight being
given to domestic as against international factors.
Banking figures indicate a continued increase in bank
credit after allowance for seasonal influences, but this in
crease has been facilitated almost entirely by an expansion of
time deposits. Money supply has shown no net gain for four
months. Statistics on other financial institutions and the
securities markets suggest a substantial amount of shifting
about in publicly-held liquid assets, and one cannot overlook
the possibility that some of these shifts may be masking an
underlying increase in private desires for saving and liquidity
relative to spending. I believe our operations should be con
ducted in a way which allows such shifts to take place with a
minimum of drag on economic activity. In particular, I do not
like to see all increase in the money supply sacrificed because
of the advance in time deposits and other near-monies.
Accordingly, I recommend that monetary policy during the
next three weeks be aimed at supplying sufficient reserves to
accommodate some increase in the money supply over and above the

reserves needed to support the growth in time deposits.

I should

judge that this would require aiming at a free reserve target
close to, or even above, the $450 million average of the three
weeks before our last meeting, in contrast to the $390 million
I would not be surprised if such
average of the latest period.
in the average
a policy were accompanied by some downward drift
and Federal funds, and in fact I think
rates on Treasury bills
a moderate rate movement of this kind might be judged to be in
keeping with our policy aims at the moment rather than something
to be resisted.
Monetary policy must be prepared to adjust flexibly to the
changing tide of circumstances, always recognizing that sub
sequent readjustments may be a possibility as events change or



the effects of the change in policy begin to work through the
economy. I believe this is one of those occasions that calls
for a moderate but definite easing of policy.
Mr. Shepardson noted that, although a strong upswing was not
occurring, the staff report and the District reports made thus far
indicated that there was some continued economic expansion.


expansion was not as fast as projected or as fast as many people would

Perhaps, however, it was occurring on a more healthy basis than

at many times in the past.

As mentioned by others at this meeting,

there were factors both in the international situation and in the
domestic situation that lay outside the province of monetary policy.
More and more people evidently were beginning to be aware of those
factors, which afforded some hope and encouragement.

He saw no evidence

that a lack of availability of credit was retarding the expansion or
that a greater availability of credit would accelerate the expansion.
Instead, it appeared to him that the pace of expansion would depend on
the resolving of factors that had not been faced in a number of years
but were in the foreground at the present time.
Mr. Shepardson expressed the opinion that recent open market
policy has been sound and adequate.

As he had indicated, he did not

feel that a policy of greater ease or an attempt to go further in building
up the active money supply was going to have any significant effect on
the inclination of persons at the present time to put their funds into
time rather than demand deposits.


other things would influence



Accordingly, he would favor continuation of the policy

that decision.

that had been followed during the past three weeks.
Mr. Mitchell said it
The first

two questions.

seemed to him the Committee was faced with

question was what monetary policy should do

in the current environment,

which was one of lagging expansion.


second question was what monetary policy could do to cause the economy
to perform more satisfactorily.

On the first

question, he thought it

was important for the Committee to take expansive action if
make such action effective.



Should the economy continue for very long

to perform as sluggishly as at present, there were going to be fiscal
policy actions that would be more drastic, and perhaps more disturbing
to the economy, than some more modest timely changes in monetary policy.
There could be public works spending, tax cuts, and a large deficit in
the public accounts.

The President even now was proposing a special

public works spending program and in his transmittal message noted that
the economy had not performed satisfactorily during the past two months.
In the circumstances,
do anything,

it appeared that the Federal Reserve, if it could

should be prepared to do it.

Turning to his second question, Mr. Mitchell commented that the
posture of the System for a long time had been one of confidence in
economic growth.

Monetary policy had been steady, rather than vacillating,

and he did not feel that the Committee should get far away from this
particular stance.

However, it might be possible to affect public



psychology somewhat at this point by giving the impression that there
might be a period--perhaps not of too long a duration--in which long
term rates were going to be quite favorable.

In this manner, some people

might be encouraged to go ahead and make investment decisions.


accomplish this effect, free reserves might be allowed to rise rather
markedly and short-term rates might be permitted to sag.

Also, if some

reserves, as needed, were supplied by purchases in the longer term area,
this would add desirably to the pressure on long-term rates.

While he

was not sure that all this could be accomplished, he felt that the policy
goal at this juncture should be to try to condition users of capital
funds to seize this particular opportunity to go ahead with their

Personally, he would prefer to encourage rather than force

people to make investment decisions; it

was important to use every

available means of achieving satisfactory levels of growth and expansion
without starting an overhaul of the American economy.

On that basis,

he would suggest that the Committee change its stance ever so slightly
in order to give the impression that this was a good time for people on
the verge of investment to go ahead, that the opportunity might not last
too long, and that it might not be repeated soon.

Mr. Bopp reported that business was improving gradually in the
Third District, although in

behind the national average.

some categories it seemed to be falling

Unemployment was still declining slightly.

Production measures looked bad in February, but preliminary clues pointed


to a good showing in March.

Department store sales were fairly good,

especially considering the later date of Easter this year.
hand, some indicators,
lagging in

On the other

after good starts in 1961, were now progressively

comparison with their national counterparts.

situation was quiet on the whole.

The banking

There had been a rather sharp increase

in business loans, which almost made up the decline earlier this year.
Mr. Bopp said that he would favor leaving monetary policy
essentially unchanged.

The mediocre progress of business argued against

any tightening at this time.

In his opinion, the bill rate and the

Federal funds rate might be somewhat lower than recently, with other
rates at about present levels, and free reserves might be in about the
same volume as in recent months, abstracting the recent inadvertent

He would not recommend changing the discount rate or the

current policy directive.

In short, he would associate himself closely

with the views expressed by Messrs. Swan, Scanlon, and Wayne.
Mr. Bryan said there did not seem to have been any recent
developments of particular significance in the Sixth District.


weather in other parts of the country had had a favorable effect on
vacation business in Florida.

Although there were complaints that

visitors were not spending too freely, nevertheless facilities were
fully occupied.

Like the nation, the District had been experiencing a

slowdown in the pace of economic expansion.

The economy was still

expanding, but at a much slower rate than earlier.



Mr. Bryan said he found himself puzzled as to what was happening
in the American economy.

He had a suspicion that some basic factors

were operative at this point, involving fundamental shifts in the labor
market and in demands,

including the demand for housing, that were

going to have to work themselves out in millions of private decisions.
The question was what the Federal Reserve could do in such a situation.
It seemed to him that any attempt to stimulate the economy by means of
monetary policy would require large injections of reserves.
be danger, he thought,

There would

from the standpoint of the country's international

position and, to some extent, danger to the domestic economy in trying
to place upon monetary policy tasks that it
without creating inflationary expectations.

could not really perform
Thus, it seemed to him that

about all the System could do was essentially what it had been doing.
As to the supplying of reserves, he would like to take care of seasonal
factors and in addition make allowance for a modest growth factor.


recent meetings he had suggested that the growth factor be at an annual
rate nearer 3 per cent than

4 per cent, but he would be perfectly willing,

in view of the recent slowdown of business, to accept a 4 per cent growth
factor at this time.

He did not believe that this was a time to change

the discount rate.
Mr. Bryan said that he would like to associate himself with the
view expressed by Mr. Mills regarding the danger of pegging the low end
of the interest rate curve.

In his opinion, grave difficulties could



be involved in

such a procedure.

He had been experiencing difficulty

in his own mind with respect to the apparently increasing emphasis on
interest rates within the Committee.

While he was not so much concerned

about that at this particular moment, he was concerned that at some
point the Committee might find itself

absorbing reserves released by

the economy in an effort to keep interest rates up when in fact rates
were easing because the economy was deteriorating.
Mr. Francis reported that the situation in the Eighth District
was much along the lines suggested by the reports from other districts.
The pattern was mixed, with some indicators up and others down.
the District, some sections were moving in
the opposite direction.
business activity in

one direction and others in

In general, however,


might be said that

the District continued to show little

Balderston said he shared with Mr.

something fundamental was happening in



Bryan a feeling that

the economy.

This made it

difficult for the Committee to know what actions to take and how the
economy would respond to them.

Personal income was at an all-time record

high, 6.5 per cent above the peak reached in 1960.
trade continued to be below hopes and expectations.
must be an increasing propensity to save.

Nevertheless, retail
Clearly, then, there

In the face of the rapid build

up of savings and time deposits at commercial banks and mutual savings
banks, preliminary February data for savings and loan associations
indicated a net savings inflow some 3 per cent above a year ago.




rapid increase in time and savings deposits at commercial banks, while
it undoubtedly had affected the build-up of funds in

other types of

financial institutions, had nevertheless been accompanied by increases
at both mutual savings banks and savings and loan associations.

Balderston said he suspected that the structural changes

referred to by some persons during the discussion today would plague
the System for a long time,

in the sense that the economy would not

respond in the same way that it
When one thought in

did in previous postwar recovery periods.

terms of stimulating aggregate demand,

a question as to what form that stimulation might take.

this raised

Should there be

continued attempts to induce people to buy more appliances and durables,
when they already had a great many, or should the stimulation take the
form of inducements to fixed business investment of a kind that would
make more jobs?

There was a need, certainly, to make this country's

plants more efficient by the replacement of outdated equipment by new
and better machines.

Also, there was a need to meet in

some manner the

coming build-up in the labor force by providing more job opportunities.
His conclusion at the moment, Mr.

Balderston said, was that the

economy was faltering to the point that the Committee ought to return
to the 5 per cent total reserve growth line that it had followed through
the better part of 1961.

That would mean some increase in the level of

free reserves and a possible decline in
domestic situation became more clear.

the Treasury bill

rate until the

In short, he felt that a slight

increase in credit availability was indicated.



Chairman Martin noted that the Committee had been hovering
between "slightly easier" and "slightly tighter" for several months.
His own thinking was that a policy of remaining steady in the boat
was about as good as could be found at the moment.

He would not be

against a slightly easier position, but felt that any such change
ought to be very slight.

In his opinion, an indication of apprehension

about the economy and an attempt to do something through monetary
policy would be self-defeating at this juncture, for a psychological
factor was involved.

It was possible, of course, that at some time

this country might face a confidence crisis.

This could occur because

of the balance-of-payments problem or, to put it more accurately, a
combination of a balance-of-payments problem and domestic economic
considerations, because in his opinion the two problems were completely

Problems of employment, economic growth, and the balance

of payments were all tied together.

As evidence, there was occurring

an outflow of capital from this country in the belief that opportunities
for investment in the European Common Market and in Australia offered
a better potential return than investments in the United States.
Putting the question in terms of what the System could do, in his
opinion the best thing it could do at the moment was to avoid giving
any impression of apprehension.

Actually, he felt that the Committee

probably was inclined to be a little too pessimistic this morning.
The Easter business was still going to be quite good, in his opinion,



with some pickup in trade.

Further, he doubted that monetary policy

could be administered effectively by small and indecisive moves.
The Chairman noted that the Administration had already taken
one move by proposing a public works program.

While he agreed with

Mr. Mitchell that anything the System could do to prevent the necessity
for a large-scale move in

that direction would be desirable,

he did

not think that this could be prevented by inducing a slightly greater
degree of ease in the money market, when reports from areas all around
the country indicated there was already plenty of money and credit

He could not recall a time when there had been less com

plaint about the availability of credit.
Chairman Martin suggested that Mr. Mills'
studied by the members of the Committee.
presentations of that kind.

statement be

It was helpful to have

Along this line, he felt that the

Committee should not overemphasize at any point the contribution
monetary policy could make.

In his opinion, if

the System maintained

a stable position at this time it could not be accused of restraining
the economy or of stimulating the economy too much, and that was the
best course he could suggest to meet the dilemma with which the Committee
was confronted.

Admittedly, there was a real dilemma.

If the budget

should get further out of balance as the result of a slowdown in
economic activity, Europeans would be looking on in a more skeptical
manner than heretofore.

As he had mentioned, there was already a flow



of money to Australia and to the Common Market, and it was possible
that there could be a confidence crisis at some point.

What the

System could do at that juncture, he was not prepared to say.
point was clear, however.


At such a juncture, the System would have

to take some action of a drastic nature.

In the meantime, he did not

think that it was a good thing to borrow trouble.

appeared from the discussion this morning, Chairman Martin

said, that the question was one of following a slightly easier policy
or of maintaining the status quo.
have in mind anything drastic.

Certainly, the Committee did not

In recent weeks there had occurred

an inadvertent move toward lower free reserves than prevailed previously,
but interest rates nevertheless had tended to decline.

He would ques

tion whether it was accurate to say that the money market had been
tight when interest rates were going down in the face of System efforts

to discourage downward pressures on short-time rates.
was a matter of judgment.

However, that

There were a variety of forces operating

in the money market today that had not yet congealed and formed a
Chairman Martin said he understood that the majority position
today would be to maintain the current economic policy directive in
essentially its present form.

Mr. Young, he noted, had a suggestion

for a minor change in the first paragraph of the directive in order to
recognize the modest nature of recent advances in the pace of economic

The Chairman then read this

possible change.



Mills indicated that he would like to have his dissent

recorded against the issuance of a directive in such form.
couplet" had so monotonous a rhythm that in
credit to the Committee.

his opinion it

The "poetic
did not do

His real concern, he said, was that recogni

tion was not being given to the problems that must be faced.

In his

judgment, there tended to be a lag in group perception of what needed
to be done.

When there finally was an awareness and action was taken,

a second lag ensued between the taking of action and the effectiveness
of it.

By drifting, therefore, the Committee would compound the dif

ficulties that must be faced.

Also, he felt that the Committee was tend

ing to place far too much emphasis on the efficacy of monetary policy
as an instrument for economic assistance.

He did not believe that

enough attention had been given to reading the scholars on cyclical
theory and those who had measured past cyclical movements.

There was

a real possibility, he thought, that the economy had not yet moved
to the bottom and experienced the turn in a major cycle.
Mr. Wayne raised the question whether the Committee wanted to
retain the clause in the last paragraph of the directive that called
for taking into account the desirability of avoiding undue downward
pressures on short-term interest rates, and the Chairman commented that
he thought this was a matter of judgment.

While the clause could be

stricken, the problem was one that in his view could not be ignored.


There ensued further discussion of the directive in the light

of the suggestion that had been made by Mr. Young and the question
that had been raised by Mr. Wayne, following which Mr. Robertson said
he considered the whole directive questionable on the basis that its
intent was not clear.
the meeting,

If the Account Manager was not represented at

he doubted whether the Manager could determine from the

language of the directive what he was expected to do.
earlier, he (Mr.

As indicated

Robertson) felt there was a conflict between the

first and the second paragraphs of the directive.

If current policy

was merely aimed at permitting a further expansion of bank credit,
he doubted whether the second paragraph was needed.
After Chairman Martin had commented on the difficulties in
volved in composing a directive that was meaningful and served to
draw together in a reasonably satisfactory manner the views expressed
at a Committee meeting, Mr. Robertson inquired whether a majority of
the Committee members had not expressed themselves in favor of a
slightly easier monetary policy.

The Secretary, after checking his

understanding of the views of certain members, indicated that his
record showed a close division between those who would favor a
slightly easier policy and those who would favor essentially a
maintenance of the status quo.
Chairman Martin noted that, as he had mentioned earlier,
he would have no objection to a slightly easier policy.




difficulty was that he did not know how one could measure effectively
"slightly easier" or"slightly tighter."

Swan suggested that this might be related to the conditions

that the Committee had contemplated three weeks ago.


was his im

pression that the money market had gotten a little tighter in the
intervening period.
Chairman Martin inquired whether this view was not based on
statistical measurements.

In a sense it could be said that money

market conditions had been tighter, but actually interest rates had
been lower.
Mr. Stone commented that during the past week or ten days
conditions in the money market had been influenced by the situation
in Chicago in anticipation of the April 1 personal property tax date.
Yesterday morning, for example, one bank was holding $350 million of

and carrying them largely through acquisitions of reserves

through the Federal funds market.

Other banks in

were undertaking this same kind of activity.

This accounted for a

Federal funds rate between 2-3/4 and 3 per cent,

half of the


bank borrowings

same time, there had been relatively little
market by other banks.

Chicago likewise

and approximately

were in Chicago.
selling of bills

At the
in the

They had not been so pressed for reserves

that they found it necessary to liquidate bills.

Apart from the

Chicago situation, he saw no evidence of tightness.



Mr. Thomas suggested a different analysis.

The reserve

positions of not only the Chicago banks but also the New York banks
had been tight.

Bill rates had declined only because of special

demands, largely on the part of Chicago banks.

Those banks had been

complacent borrowers during this period, but that could not be
expected to continue.

Robertson inquired of Mr. Stone whether the Desk had

aimed at free reserves of $360 million during the statement week ended
March 7.
Mr. Stone replied that the result had been inadvertent; the
Desk had thought that free reserves were going to average out over
$400 million.

In the most recent week it also had been anticipated

that they would average over $400 million. However, float did not
rise as much as anticipated and ran below the pattern of the past five

Thomas commented that the Desk did refrain, however, from

buying securities,

at times when it

because the bill

might have bought them for reserve

rate was tending downward.



lower level of free reserves was not altogether inadvertent.
Chairman Martin noted that this involved a matter of judgment.
It involved an argument that could be debated continually.
whether anyone could sit

He doubted

at the Trading Desk and make measurements in

the terms that had been suggested.



Mr. Stone said that for the past year and a half the Desk
had been faced with a problem in attempting to meet both of the
objectives of the Committee, as stated in the directive.

On most

occasions the objectives were not sharply or seriously in conflict,
but sometimes they were.

During the past three weeks there had been

a conflict because of the strength of the short-term market.


Account Management had thought that free reserves were going to
average over

$400 million in both of the statement weeks in which

the average turned out to be lower than $400 million.

There were

times when the Account Management might have bought a little


On those occasions, however, the bill rate tended to be under down
ward pressure and the Management refrained.
In further discussion, Mr. Wayne suggested that the foregoing
comments pointed up the question that he raised earlier, that is,
whether the Committee wished to retain the portion of the directive
that called for avoiding undue downward pressures on short-term
interest rates.

There was definitely a degree of conflict, and the

Desk could only resolve it one way or the other.

If the thinking

on policy was in terms of a slightly greater degree of ease, this
would suggest placing more emphasis on putting reserves into the
market at the risk of having the bill rate drift lower.
Mr. Thomas noted that he had not intended to criticize the
operations of the Desk.

He thought that perhaps the course the Desk



had followed was the only feasible one under the circumstances.

there were days when the Desk could have bought securities

but did not buy because of regard for the bill rate.
Chairman Martin commented that one could turn to four or five
different experts in

a situation of this kind and come out with four

or five different opinions.

In operating the Account, the Desk was

dealing with close judgment values.

This touched on a point that he

had been endeavoring to make earlier: if the Committee was talking
about a substantially easier policy or a substantially tighter policy,
there was something the Desk could do.

However, when the Committee

talked about becoming slightly easier or slightly tighter, that was
a different matter.

Within the framework of the current directive,

he felt that the Desk had been doing about as good a job as could be
expected under present conditions.
The Chairman said that personally he would come out with the
thought of maintaining the status quo.

In his judgment, the Account

Manager, in following today's discussion, would say that the Committee
would like errors to be resolved on the side of ease rather than

However, the Chairman added, he found it difficult to

know how to measure this in precise terms.
Mr. Mitchell then suggested making a change in the second
paragraph of the directive so as to refer to "avoiding sustained
downward pressures on short-term interest rates" rather than "avoid
ing undue downward pressures."

Another suggestion was to refer to



maintaining a supplyof reserves adequate for further "credit and
monetary expansion" rather than further "credit expansion."

there was before the Committee the revised wording of the

paragraph that Mr.

Young had suggested earlier with a view

to recognizing the modest nature of recent advances in the pace of
economic activity.
Chairman Martin inquired whether any of the Committee mem

other than Mr. Mills,

would want to dissent from a directive

embodying these suggested changes, and there were no comments to
such effect.
The Chairman then turned to Mr. Stone and inquired whether
he had any comments,

to wnich Mr.

Stone replied in

the negative.

Accordingly, 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 for the System Open
Market Account in accordance with the following
current economic policy directive:
In view of the modest nature of recent advances in the
pace of economic activity and the continued underutilization
of resources, it remains the current policy of the Federal Open
Market Committee to promote further expansion of bank credit
and the money supply, while giving recognition to the country's
adverse balance of payments and the need to maintain a viable
international payments system.
To implement this policy, operations for the System Open
Market Account during the next three weeks shall be conducted
with a view to maintaining a supply of reserves adequate for
further credit and monetary expansion, taking account of the
desirability of avoiding sustained downward pressures on short
term interest rates.

Votes for tis action: Messrs. Martin,
Balderston, Bryan, Ellis, Mitchell, Robertson,
Shepardson, Clay, Scanlon, and Treiber.

against this action:
All of those in

Mr. Mills.

attendance except the

members and alternate

members of the Open Market Committee, the Reserve Bank Presidents not
currently serving on the


Francis, Young, Sherman,

and Messrs.

Thomas, Coombs, and Stone withdrew from the meeting

at this

Consideration was given at this time to System foreign

currency operations and related matters.

there had been distributed to the Open

this connection,

Market Committee a report from the Special

Manager of the System
and Treasury foreign currency

Account concerning


operations and (b)

foreign exchange market conditions

March 6- March 21,


in the

Open Market Account

along with a supplementary report for the

March 22 to March 26.

Copies of these reports have been placed

of the Committee.
in a memorandum dated March 23,

reported discussions with representatives

during the period

the Special Manager


of the

German Federal Bank

an effort to devise arrangements under which the Federal Reserve

System could earn interest on its

had not been successful in

mark balances.

These discussions

overcoming the obstacles created by the

System's inabillity to invest in

foreign Treasury bills,

the inability

of the Bundesbank to pay interest on deposit balances, and the


unavalability of bankers'
German market.


acceptances and commercial paper in the

the Bundesbank had now approached the

problem from another tack, that of voluntarily sacrificing interest
on its dollar holdings to compensate for the nonpayment of interest
on the System's mark balances.

The arrangement proposed by the

Bundesbank, as set forth in correspondence attached to the memorandum,
provided in essence for increasing the cash balance of that Bank at
the Federal Reserve Bank of New York, thereby reducing the Bundesbank's
earnings from its dollar investments by an

amount equivalent to the

interest that the System could have earned by placing its mark
balances in German Treasury bills.
In comments supplementing his written reports to the Committee,
Mr. Coombs noted that the only System foreign currency transaction
since the Committee meeting on March 6, 1962, had been the purchase
from the Stabilization Fund on March 7 (value date March 8) of $25
million equivalent in German marks, as authorized by the Open Market
Committee on March 6.
million equivalent.

This brought System holdings of marks to $32
The purchase had been made promptly following

the authorization because it had appeared possible that the dollar
might weaken as against the mark.
Turning to the subject of his memorandum of March 23, Mr.
Coombs advised that discussions at Basle with officials of the German
Federal Bank regarding the investment of mark balances had not been


a letter (dated March 1)

was subsequently



received from the Bundesbank and suggested a procedure that rep
resented a voluntary gesture on its part.

In his view, the offer

should be accepted.

Coombs added that the possibility of placing mark hold

ings of the Federal Reserve System with the Bank for International
Settlements had also been explored with the Bundesbank.
Bundesbank officials did not seem receptive,


and he doubted whether
As to the Bundesbank's

that possibility shold

be pressed further.

offer, acceptance of it

would seem to offer protection against

criticism that could arise if

the System's holdings of marks earned

no interest while dollars held by the Bundesbank were invested in
interest-bearing securities.

The Bundesbank had been maintaining a

rather small cash balance at the New York Reserve Bank, running from
a minimum of $5 million to a maximum of $15 million.

It would propose,

in effect, to increase the cash balance to the extent required to
reduce interest earnings on dollars in an amount equivalent to offset
the loss of interest on the System's holdings of marks.
In response to questions, Mr. Coombs explained that the
situation that had led to the German offer involved difficulties on
both sides.

The difficulty on the Federal Reserve side stemmed from

the fact that under the law it was not authorized to invest foreign
exchange holdings in foreign Treasury bills.

The limitation on the

German side was that under German statutes the Bundesbank was unable



to offer the System the facilities of a time deposit.
was i

possible to locate commercial paper or bankers'

the German market.
into the



acceptances in

The Bundesbank welcomed the entry of the System

area of foreign exchange operations and presumably was

anxious to do everything

possible with a view to having such

operations continued.

comments of several members of the

committee were to

the effect that this would seem to be a proposition under which the
Federal Reserve had everything to gain and nothing to lose, and.
Chairman Martin expressed the view that acceptance of the offer would
seem to make for a sounder

business arrangement from the System's


Mitche 1l injected a somewhat different note, however,

asking whether the System might not be on better ground if


did not

accept the proposal and instead went to Congress with a request for
legislation authorizing

the investment of System foreign exchange

holdings in foreign Treasury bills.
Reserve was not engaging in
Purpose of making money.

He pointed

out that the Federal

foreign currency operations for the

While the present situation was somewhat

unsatisfactory from the System's standpoint,

he would feel more

comfortable about accepting the facts as they were and taking the
position that this was an item on which the System could use legis
lation advantageously.



Asked further with regard to the origin of the proposal,

Coombs repeated that it was a voluntary suggestion on the part

of the Bundesbank.
Mr. Robertson inquired whether the System
subject to criticism, should it

might not be

build up further holdings of German

on the basis that the Bundesbank had influenced the System

by agreeing to hold an equivalent amount of dollars without invest
ing them.

The System's objective in conducting foreign currency

operations was not to obtain earnings; it
tions even if

would conduct such opera

investment opportunities were not available.

It was

his instinctive feeling that the System might be better off if it
did not accept any gift.
In response to a question about the possibility of holding
mark balances with the Bank for International Settlements, Mr. Coombs
said that officials of the German Federal Bank had been quite ex
plicit in indicating that they would not want a third party involved
in the arrangement between the Bank and the Federal Reserve.


attitude, he thought, may have reflected in part considerations of
confidentiality and in part considerations of speed.

It might take

longer to work through the Bank for International Settlements.
Mr. Ellis commented that it would not seem well to cast aside
lightly the fact that acceptance of the German offer would reduce an
interest cost to the U. S. Government.

Rather than looking with favor



on expanding the opportunity for the System to invest its balances,
the Congress might be critical
that had resulted in


of the System for operating in

a net loss of interest.

would be desirable,


a way

his opinion,

from that standpoint,

not to turn

down this proposed arrangement.
reply to a question from Mr.




reasons why he did not anticipate that acceptance


would be likely to establish a



For example,

there were

the United Kingdom, while

the Bank

and the Bank of Italy could pay interest on time deposits.

of France


pattern for relationships

with central banks of other countries.
ample investment facilities

Coombs cited


banks were so

differences between the various central

great that he doubted whether there would be the

possibility of any pattern developing.

further discussion, Mr.

Mitchell inquired whether it

seemed necessary for the matter to be settled today,
referred to the March 14 date of the letter
satisfied if


and Mr.


from the Bundesbank.

then indicated that he would have been better

the memorandum from the Special Manager had been worded

a little differently, so as to place the matter simply on the basis
that the proposed arrangement would put the Federal Rueserve on an
identical basis with the

Bundesbank and that it

would be necessary

to change the law if the Federal Reserve wanted to retain interest
on its mark balances.


At this point Chairman Martin withdrew from the meeting.
As the discussion continued,

Coombs made the observation


that he did not think one could look forward to a system that would
equalize the interest

yields on central banks'

other's currency.

arrangement with the Bank of France was a


swap arrangement; it




Parity of

not involve an

holdings of each

outright holding of

rates between the two central banks

involved would be approriate in the case of a swap.
to outright holdings,

a foreign

When it


the situation might be different.

Treiber then moved that the proposal of the German

Federal Bank be accepted,

discussion of

instinctively he felt


and this motion was seconded by Mr. Mills.
the moton, Mr.

Robertson commented that

might be inadvisable to accept the proposal.

He was not suree enough of his position to vote against the motion,

a feeling that this was not a good thing to accept.

but he had

really amounted to accepting a gift,


and he disliked the appearance

that would be created.
Mr. Treiber said that when he first

as somethin g like that of Mr.

giving further thought to the matter,

heard of the proposal his



he concluded that this

was a

part of the framework of international cooperation.

Balderston said that he had had somewhat the same feeling.

He had been attracted to the possibility of using

the Bank for



International Settlements, but that approach did not meet with favor.
Therefore, he would accept this proposal.
Thereupon, the motion to accept the
proposal of the German Federal Bank was
approved unanimously.

Mitchell commented that,

although not dissenting,


would like to reserve the right to insert a statement for the record.
Secretary's note:
Mr. Mitchell
subsequently submitted the following
There appears to be a confusion of principles in
mittee's discussion of the

the Com

German Federal Bank arrangement.


policy decisions clearly should not rest upon consideration of

to the central bank.


in the U. S.

buy or sell


This is

well recognized in the

Government securities market when decisions to

upon the need or lack of need for reserves and not

on whether

the purchase

or sale is

likely to add, to Federal Reserve


The principle involved in the agreements between the

Federal Reserve System and foreign central banks is
relationship prevail.

that a pari passu

Thus the earning of interest is immaterial so

long as both parties are similarly circumstanced.

But the artificial

arrangement suggested, which results in creating and at the same time
sterilizing reciprocal assets and liabilities,


an operation difficult

to justify in a public policy record.
Mr. Coombs then reported on discussions with representatives



of the Bank of England regarding the possibility of a swap arrange
ment between the Federal Reserve and that Bank.
was guardedly sympathetic,

The initial reception

he said, with an indication that a

spelling out of the details was wanted.

The suggestion made to the

Bank of England was generally in terms of an arrangement similar
to the recent swap arrangement with the Bank of France.

One idea

that had been mentioned was an immediate swap of $50 million, with
the possibility of later going as high as $250-$300 million.
After commenting further on the conversations with officials
of the Bank of England, Mr.

Coombs said he hoped that it would be

possible to place some definite proposition

before the Open Market

Committee for consideration in the relatively near future, perhaps
prior to the next Comiiittee meeting.
After responding to several questions,
in reply to an inquiry from Mr.

Mr. Coombs indicated,

Balderston, that the immediate

question was whether the Committee wished to authorize further
negotiations with the Bank of England with a view to shaping up a
specific proposal.

As to amount, he sugguested that the Committee

might want to have in mind a limit on swap facilities of $300 million.
It would perhaps be desirable, if

a swap arrangement could be worked

out, to put in $50 million fairly soon, as an indication that the
swap facility was available.

He would be inclined to suggest

staying at $50 million unless and until some

different situation


developed than now prevailed.

In effect, this would amount to a

line of credit of an additional $250 million.
Accordingly, Mr.

Balderston inquired whether it

was the desire

of the Committee to authorize further negotiations along the lines
that Mr. Coombs had indicated.

Robertson said he would have no objection to further


However, he would not want this to be regarded as

implying that he would necessarily vote in

favor of any proposal

that might develop out of such negotiations.
Mr . Young gave assurance that after further negotiations
the matter would be brought back to the Committee

for consideration,

and that the Committee would be kept up to date.
Thereupon, subject to the foregoing under
standing, Messrs. Young and Coombs were authorized
to proceed with negotiations looking toward the
possibility of a swap arrangement with the Bank of
On the theory of System foreign exchange operations, Mr.
Mitchell raised a question about engaging in

operations that might

contribute to supporting currencies other than the dollar.

Mills commented that he thought this had been implicit

the approval of the program.

Where the Federal Reservewas

obtaining support of the dollar through swap arrangements


3/2 /62



Wayne said

that he thought the Committe had been over

ground rather thoroughly

System foreign currency


speculative movements.

was considering a
As he recalled, it

program of
had been

two-way street and that the System would

understood that this was a
expect to participate in

when it

efforts directed toward trying to cushion

would provide assistance in

order to

enable the country affected to develop other defensive tactics.
Mr. Balderston indicated that his understanding was essentially
the same.

He thought that the System program had to be looked at as

a two-way affair.

Shepardson said it had been his understanding that the

thought was to meet temporary exchange rate fluctuations related to
speculative movements.

He also thought, however, that it was not

contemplated that System operations would be used to counteract a
fundamental change in the position of any particular currency.
Mr. Coombs agreed, saying that it was his thinking that System
operations would be in terms of providing cushioning facilities to
keep speculation from snowballing.
other measures would be required.


a situation did snowball,

The hope would be to forestall

such a snowballing.

At the instance of Mr. Mitchell, a brief discussion was
devoted to the contemplated scope of the minute record relating to
Committee discussions of System foreign exchange operations.



view expressed by


Mitchell was to the effect that despite the

highly confidential aspects of some phases of such
should be

operations there

a sufficient record and the positions of Committee members

on important

issues should be reflected adequately.

From the comments made, there appeared to be general agree
ment with the view that actions of the Committee, and the positions
of Committee

members with respect thereto, should be suitably recorded

in the minutes.

Atthe same time, the subject matter of the dis

was often likely to be such that the minutes would merit

careful scrutiny by the Committee.

With this in mind, it was

sugested that the distribution of preliminary drafts of minutes
covering those portions of Committee meetings devoted to considera
tion of foreign exchange operations might

be restricted to the members

and alternate members of the Commmittee, other Reserve Bank Presidents,
and those members of the staff participating in such discussions.
The preliminary draft could then be reviewed closely by this group
and such corrections suggested

as might seen appropriate prior to

the preparation of the revised draft.

In comparison with the possible

alternative of preparing two separate sets of minutes, one of which
would be for limited distribution, a number of advantages in the
suggested procedure were mentioned.
Mr. Balderston inquired whether an approach such as suggested
would appear

generally satisfactory to the Committee, and there were

no comments to the contrary.



The meeting then recessed and reconvened at 2:00 p.m. with the
same attendance as at the conclusion of the morning session except
that Mr. Mitchell was not present.

Coombs continued his presentation to the Committe by

commenting on discussions with officials of the Swiss National Bank,
at the time of the recent meeting of the Bank for International
Settlements in Basle, with regard to the possibility of a swap
arrangement between the Federal Reserve and the National Bank.
As preface, he pointed out that the current plan for enlarging the
standby resources of the International Monetary Fund did not include
Switzerland, which was not a member of the Fund.

In this circumstance,

the Swiss had been invited to associate themselves in some kind of
parallel arrangement,

and both they and the U. S. Treasury had come

to look with favor on a bilateral credit arrangement.

While this

might have been on a Treasury-to-Treasury basis, the Swiss had ex
pressed a preference some time ago for a swap arrangement between
the Swiss National Bank and the Federal Reserve System.



now appeared that the management of the National Bank had found


necessary to go to the Government for clarification.

Such dis

cussions were understood to be currently in process, but it seemed
possible that weeks or possibly months might elapse before negotiations
looking toward a dollar-Swiss franc swap arrangement could begin.
Even then, it

apparently would require real effort to bring about

the best possible operation.
would be worthwhile.


he felt that the effort


After further discussion, Mr. Balderston said he assumed

that Mr. Coombs would keep the Committee informed of any developments,
and Mr. Coombs responded in the affirmative.
At this point Chairman Martin and Mr. Mitchell joined the
Mr. Coombs next reported on operations of the Treasury's
Stabilization Fund during the period since the
the Open Market Committee.

March 6 meeting of

In this connection, he noted that last

week there had been a tendency for the dollar to weaken rather
sharply as against the German mark, mainly because of a tax date
in Germany.

According to German procedure, tax money was taken in

and sterilized temporarily,

and to meet liquidity needs the German

banks repatriated funds from abroad.
expected to exist only until around

This was a temporary situation,
the end of this month.

In this

a total of $7.5 million of Stabilization Fund holdings

of marks were sold by the Stabilization Fund in the market, and this
had proved effective in preventing the dollar rate from slipping further.
These operations were undertaken primarily in light of the temporary
circumstances reflecting a foreign money market situation, but in
addition the news of t he gold buying pool (discussed subsequently at
this meeting) had broken and the U. S. Treasury wanted to avoid any
indication of a deterioration of the position of the dollar.


addition, this week's statement would show a rather sizable reduction



the U. S.

gold stock.

There might,


be continuing

sales of marks by the Treasury during the remainder of this week.

Coombs then raised the question whether the Open Market

Committee would regard it

as an appropriate activity for the System

to employ its

holdings of a foreign currency to offset a temporary

weakening in

the position of the dollar under circumstances such as

he had described.

expressions by several members of the Committee

indicated that,

according to their understanding,

this was the kind

of operation that was envisaged under the System program.


Coombs aked whether the Committee would

wish to authorize him to utilize System holdings of German marks,

the course of this week


in anticipation that the weakness of the

dollar against the mark would correct itself

shortly after the end

of this month.

Swan inquired whether there appeared to be some possibil

ity of the current situation

giving rise to further speculation.

Although realizing that this innvolved a question of judgment, he
presumed Mr. Coombs felt that there might be some danger of the
situation being compounded.

Absent such a possibility, he wondered

whether the System should try to smooth out temporary, short-run
exchange rate fluctuations of this kind.



Mr. Mitchell said he would like to
He thought it

ndorse that position.

important that the System not engage in straighten

ing out various short-run moves of this kind unless there was
reason to believe that they might touch off some other development.
In reply, Mr. Coombs said that, with the exchanges in a
sensitive state, he could not predict what the reaction might be to
a significant depreciation of the dollar as against the German mark.
In view of the many existing uncertainties, including the possible
reaction to announcement of a relatively large U. S. gold loss this
week, he would be inclined to seek a little

protction in the form

of keeping the dollar from going too low as against the mark.
Mr. Wayne inquired whether, from the standpoint of Committee
procedure, this situation could not be compared to the situation in
the domestic area where the Committee gave a general instruction to
the Manager of the System Open Market Account and relied upon his
judgment of the feel of the market.
Chairman Martin expressed the view that in the current ex
perimental stage of foreign currency operations,

the Special Manager

should proceed in a situation of this kind on the basis of his best

Afterward, the operations could be evaluated, but he felt

that, at this juncture the Committee must rely substantially on the
judgment of the Special Manager.
In further discussion, Mr. Coombs indicated that he was



inclined to feel that in this particular situation the movement of
the exchange rate was of some importance.
of the British bank rate,
ships would be.

to think that it

no one knew exactly

That circumstance,

announcement of a loss in

With the recent reduction
what the new relation

combined with the prospective

gold stock, would incline him on balance
the dollar


against the

The greater the degree of uncertainty in the market,

stronger would be the case for moving in


to check any weakening of

the dollar.
Chairman Martin again expressed the view that this was the
kind of decision that the Committee ought to leave to the discretion
of the Special Manager at this juncture of the System foreign exchange
Thereupon, the Special Manager was
authorized to proceed, in the light of
market developments, to make such sales
of System holdings of German marks as in
his judgment might seem appropriate.
There had been distributed to the Committee copies of a
translation of an article titled "A New American Proposal:

A Pool

for Gold Purchases in London" that a appeared in the Journal de Geneve
of March 8, 1962.

The article noted that in

the latter part of

1961 a pool of banks of issue was created with the aim of supply
ing the London market gold and that the pool's operations were
suspended after it had proven its effectiveness in stabilizing the




According to the article, the American authorities had

now proposed to other central banks the establishment of a pool
for the purchase of gold in



Coombs commented on these

articles and related matters.
In a discussion based on the information reported by Mr.


Bryan referred to a suggestion made at this morning's

session by Mr.
ful if

Clay, which was to the effect that it

would seem

the Open Market Committee could have as much information as

possible on various steps being undertaken by the United States
Government to cope with the balance-of-payments problem.
Chairman Martin commented that perhaps something of that
kind could be obtained from the Treasury.

He doubted, however,

whether there was too much to report beyond what had been carried
in the press.

The nature of the various undertakings had been

fairly well spelled out in

the press; the question was how effective

they would be.

After further general discussion relating to the balance of

the meeting of the Open Market Committee recessed and

there ensued a meeting of the Board of Governors with the Presidents
of the Federal Reserve Banks.
At the conclusion of that meeting,

Chairman Martin noted that

some consideration had been given recently by the Board of Governors
to the possible desirability of publishing verbatim the minutes of



the Open Market Committee for a period beginning around 1950 and
continuing until some

fairly recent date.

He indicated some of the

reasons that had caused the question to be brought up for discussion
and stated that the subject would be placed on the agenda for con
sideration at the next meeting of the Open Market Committee.
It was agreed that the next meeting of the Federal Open
Market Committee would be held on Tuesday, April 17, 1962.
The meeting then adjourned.