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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 28, 1961,
PRESENT:

Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.

at 10:00 a.m.

Martin, Chairman
Hayes, Vice Chairman
Allen
Balderston
Irons
King
Mills
Robertson
Shepardson
Swan
Szymczak
Wayne

Messrs. Ellis, Johns, and Deming, Alternate Members
of the Federal Open Market Committee
Messrs. Bryan and Clay, Presidents of the Federal
Reserve Banks of Atlanta and Kansas City,
respectively
Mr. Young,

Secretary

Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Thomas, Economist
Messrs. Einzig, Garvy, Mitchell, Noyes, Ratchford,
and Walker, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr.

Molony, Assistant to the Board of Governors

Mr. Koch, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Knipe, Consultant to the Chairman, Board of
Governors
Mr. Petersen, Special Assistant, Office of the
Secretary, Board of Governors

Mr. Hilkert, First Vice President, Federal Reserve
Bank of Philadelphia

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3/28/61

Messrs. Eastburn, Hostetler, Jones, Parsons,

Mr.

and Tow, Vice Presidents of the Federal
Reserve Banks of Philadelphia, Cleveland,
St. Louis, Minneapolis, and Kansas City,
respectively
Eisenmenger, Acting Director of Research,

Federal Reserve Bank of Boston
Mr.

Brandt, Assistant Cashier, Federal Reserve
Bank of Atlanta
Mr. Stone, Manager, Securities Department,
Federal Reserve Bank of New York
The System Account Manager had submitted the following memorandum
to the Committee under date of March 21, 1961, recommending participation
by the Account in the Treasury's then impending advance refunding offering:
The System Account holds the following amounts of the
issues eligible for exchange into the new 3-3/8's of 1966 and
3-5/8's of 1967 in the current Treasury advance refunding:
Amounts in
thousands
2-1/4% Treasury bonds maturing June 15, 1959-62
$ 319,849

2-1/4% Treasury bonds maturing Dec. 15, 1959-62
2-5/8% Treasury notes maturing Feb. 15, 1963
2-1/2% Treasury bonds maturing Aug. 15, 1963

693,765
34,000
11,500

Total
$l,059,114
Among the advantages of exchanging some portion of these
holdings is that it would be regarded by the market, the
Congress, and the Treasury as helpful to the Treasury in
achieving a better balanced debt structure and would reduce
the Treasury's burden ofrefunding the outstanding issues at
maturity. From the System's standpoint, there appears to be
some advantage in acquiring some holdings of each of the short

and intermediate issues to achieve a balanced portfolio.

At

present the Account holds only $170 million of fixed maturity
issues maturing in 1965 or beyond.
Among the disadvantages is that an exchange would involve
some reduction in liquidity of the System Open Market Account,
but this is not a serious drawback since the Account will
still
have very large short-term holdings, $17.9 billion
excluding Treasury bills, maturing before the end of 1962.

The System should not acquire too large a portion of the new
issue through exchange but should limit the exchange to a
moderate amount.

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3/28/61

Since there appears to be some advantage and no
material disadvantage in exchanging some part of the
System's holdings of the issues in question, a partial
exchange appears appropriate.
The holdings of 2-5/8%
notes of 1963 and 2-1/2% bonds of 1963 are too small to
be significant in the exchange and might be of some future
use in their present form. The System's holdings of the
2-1/4's of June 1959-62 are only 6% of that issue but the
holdings of the December 2-1/4's are 20% of that issue.
Exchange of about one-half of the December issue would
leave the holdings of June and December issues about equal.
The Manager of the Account, therefore, recommends the
exchange of $350 million of the December 2-1/4's of 1959
62 into 3-5/8's of November 1967. This amount represents
about 33% of the $1,059 million total System holdings
eligible for the exchange.
This memorandum was supplied to members of the Committee then
located in Washington, to Mr.
telegram to Messrs.

Trieber, alternate for Mr. Hayes, and by

Allen, Irons,

Swan, and Wayne,

respectively, asking

for their comment on and their approval or disapproval of the Manager's
recommendation.
The recommendation of the Manager of
the System Account that $350 million of
System Account holdings of 2-1/4 per cent
Treasury bonds maturing December 15, 1959-62,
be exchanged into 3-5/8 per cent bonds to
mature November 15, 1967, as offered in the
Votes for
Treasury refunding, was approved.
this action: Messrs. Martin, Allen, Balderston,
King, Mills, Robertson, Shepardson, Swan, Wayne,
and Treiber, alternate for Mr. Hayes.
Vote
against this action: Mr. Irons.
In voting against the System Account Manager's recommendation,
Mr.

Irons expressed the belief in a telegram to the Secretary of the

Committee that an informed market and the Treasury would recognize that
there would be no appreciable improvement in the balance of the debt

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structure nor a lessening of the refunding burden as a result of a System
exchange of a portion of its holdings.

Also, in his opinion, the residual

holders of exchangeable securities after the completion of the advance
refunding would be largely seekers of liquidity, and, consequently, the
ultimate refunding for such holders at maturity might be expected to
include relatively short-term securities into which the System would roll

over without consequence or without creating a problem for the Treasury,
especially in view of the relatively small System holdings of exchangeable
issues.
Mr. Irons' telegram also expressed the judgment that it was not
important that the System build up its holdings of intermediate-term
securities.

Actually, there was a more significant need to build up

holdings of very short-term securities, those in the 90-day to 6-month
area, since, except in the case of future swaps, which should be negligible,
the System had no probable need for intermediate-term securities.

Also,

he believed that a central bank's portfolio should be in very liquid
securities and no deliberate attempt should be made to lengthen the

maturity composition without good and compelling reasons.
Mr. Irons felt that System participation in the advance refunding
would imply positive and continuing acceptance by it of the recent experi
mental policy of dealing in other than short-term securities, and this was
beyond the position he would want to confirm at this stage.

To the extent

that the System must acquire intermediate-term securities, he would prefer

that it be done through market purchases at an appropriate time, seeking

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particular rate effects, rather than through an exchange under advance
refunding where there was no significant advantage to be gained.
Mr. Irons considered it

unimportant that the System hold significant

amounts of intermediate-term securities because it

was unlikely (except to

the extent of occasional swaps) the System would be a seller of these
issues and, in effect, put downward pressure on prices of Government
securities.

It would seem more likely System operations would be on the

buying side, as they had been in the current experiment in the intermediate
and longer-term areas.
Upon motion duly made and seconded,
the action of the members of the Federal
Open Market Committee on March 22, 1961,
in approving, with Mr. Irons dissenting,
the recommendation of the Manager of the
System Account that $350 million of System
Account holdings of 2-1/4 per cent Treasury
bonds maturing December 15, 1959-62, be
exchanged into 3-5/8 per cent bonds to
mature November 15, 1967, as offered in
current Treasury refunding, was ratified,
approved, and confirmed.
Before this meeting there had been distributed to the members
of the Committee a report of open market operations covering the period
March 7 through March 22, 1961, and a supplemental report covering the
period March 23 through March 27, 1961.

Copies of both reports have

been placed in the files of the Committee.
Supplementing the written reports, Mr.

Rouse commented as follows:

With the money market generally easy during most of the
in the
period since the last meeting of the Committee, little
way of open market operations has been required to maintain

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an even keel, and the System has been able to stay out of the
market while the Treasury's advance refunding was under way.
Early in the period, a moderate volume of reserves was sup
plied through outright purchases of Government securities
and through repurchase agreements.
Later on, some massive
shifts of balances among foreign central banks resulted in
substantial net acquisitions of Government securities by
foreign accounts, part of which were supplied by sales from
System Account in order to mitigate the impact on already
rates. The large activity in foreign
declining Treasury bill
central bank balances, reflecting movements of funds through
the foreign exchange markets following the revaluation of
the Deutsche mark and the Dutch guilder, proved more trouble
some to the Management of the Account than has been the case
in some time, and it appears possible that the activity in
these accounts will continue to complicate our operations.
Short-term interest rates moved lower through much of
rate at 2-1/4 per
the period, with the three-month bill
cent bid last Wednesday, compared with 2.45 per cent at the
Money market pressures were
time the Committee last met.
remarkably light over the March 15 tax period, while demand
for Treasury bills arose from the redemption of tax antici
pation bills on March 22 as well as from market switching into
shorter-term issues and the foreign account activity mentioned
above. Bill rates rose somewhat over the past two days, after
the Treasury announcement that it would raise $1.5 billion in
cash through an auction of September tax anticipation bills
that will take place this afternoon, and an additional $300
million through additions to the regular weekly auctions.
Long-term rates moved down somewhat earlier in the periodpartly in response to System operations--but the Treasury's
advance refunding reversed these price movements, with the
net result that long-term rates are not far different now
from the levels prevailing before the System's special
It was of course obvious that
operations were undertaken.
the advance refunding would have this impact on intermediate
and long-term rates, but the Treasury felt, and rightly so,
that this was a reasonable price to pay to achieve a better
distribution of the public debt, particularly from the stand
point of convincing foreigners that the Government meant
what it said about putting our fiscal affairs in order.

The $6.2 billion in debt extension that the Treasury was able
to effect generally exceeded what the market had expected.
The success of the advance refunding, in market conditions

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-7

that were somewhat less than perfect, has solidly established

this technique as the Treasury's main weapon in bringing about
a better debt distribution.
As to our own operations in longer-term securities, the
market generally has come to take a more balanced view of our
activity, although the extensive public discussion of our ob
jectives--and the various interpretations placed upon these
objectives--has continued to hamper our operations.
The

market has not yet become fully accustomed to normal System
activity in the intermediate area. Last Thursday, for example,
we found that our attempts to acquire a moderate amount of such
securities on a go-around basis met with only $54 million of
offerings, and led to a significant withdrawal of offers and
bids that were in the market prior to our operations, as
potential buyers and sellers moved to the sidelines to see
what the result of our activity would be. We have found that
the go-around, and the publicity that goes with it, tends to
change a negotiated market into an auction market where the
appearance of a potentially large buyer tends to dry up other

bids and offerings. As a result, the go-around has not been
generally successful, as the reports of these special operations,
A major
which have been circulated to you, have pointed out.
difficulty is that it is well-nigh impossible to prevent word
of our go-arounds from spreading widely and rapidly throughout
the investment commnity. The consequence is that potential
sellers tend to withdraw from the market in hopes of getting
higher prices and potential buyers to withdraw because they
are reluctant to follow any upward price movement that might
The second major diffi
develop in the wake of our operation.
culty is that dealers normally carry only modest positions in
the area in which we are now working, and in the time interval
within which go-arounds must be conducted, they rarely could
develop the offers or bids that are desired even if there were
no knowledge of our activity available to the investing public.
Confronted with these difficulties, we have from time to time
acquired intermediate securities on voluntary offerings to the
Desk, or by purchasing from a limited number of dealers at any
one time. In general, these methods have proved more effective
and far less disturbing to the market.
Now that the Treasury advance refunding is out of the way,
it should be feasible from a market standpoint for the System to
continue to acquire longer-term securities in order to supply
reserves as they are called for, or to acquire them against off
setting sales of short-term securities to the extent that rate
Growing
considerations make such transactions desirable.

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3/28/61

expectations of an upturn in business conditions appear to be
resulting in an increasing reluctance of long-term investors to
extend their commitments, and this may facilitate purchases for
our account and for Treasury accounts.
Returning to the international situation for a moment, our
bill rate, even at 2-1/4 per cent, has been competitive with the
British bill
rate on a covered basis. While the relationship
between British and U. S. short-term rates is not an immediate

problem, the dollar nevertheless is under considerable pressure
in the foreign exchanges, and we cannot afford to relax for a
moment, for the present situation could change overnight.
On request by Chairman Martin for any questions concerning the
System Account Manager's report, Mr. Robertson said he felt this to be an
excellent presentation which he hoped would be recorded in full in the
minutes of this meeting.

The report brought out the difficulties involved

in the System's functioning in the longer-term Government securities market,
and he wished to study it further.
Thereupon, upon motion duly made
and seconded, the open market transactions
during the period March 7 through March 27,
1961, were approved, ratified, and confirmed.
Mr. Noyes presented the following statement with regard to
economic developments:
In introducing our round-up on the economic situation to
the Board yesterday, Mr. Williams pointed out that while con

siderable factual information on economic developments in
February had become available since the meeting three weeks
ago, these facts generally confirm the early estimates presented
at that time. Hence, most of what the staff reported then, and
what I shall say today, will have a familiar ring. It is too
soon to say much about March, except that changes in either
direction from February are likely to be moderate.
We are
still
estimating that GNP will be around $500 billion for the
first
quarter.

-9

3/28/61

To cite a few specific developments on which data have

become available in recent weeks: industrial production
leveled out at 102 per cent of the 1957 average in February;
housing starts were up to a seasonally adjusted annual rate
of a little

over 1,150,000--a considerable improvement from

the December low; February auto sales continued at the
depressed January rate, but March will almost certainly
show some pick-up; with auto production held to very low levels
through March, there should be a contra-seasonal reduction in
inventories, which will bring dealer stocks well below year
ago levels; used car prices turned up last month after an
extended decline; retail sales were up 1 per cent; consumer
credit outstanding declined further--probably by a little

more than in January; and new orders for durable goods
increased 2 per cent. The composite index of leading indi
cators moved up again.
As reported at the last meeting, the seasonally adjusted
unemployment rate was up slightly in February, as the actual
number unemployed hit a postwar peak of 5.7 million. Seasonal
factors should reduce the actual number unemployed for some
months now. For example, a normal seasonal movement would

cause a decline of about 300,000 from February to March.
Thus, if unemployment in fact declines by less than that
amount, as may well be the case, we will see some further
rise in the seasonally adjusted rate in March.
The extension of unemployment benefits to longer-term
unemployed workers, which was authorized last week, will
both relieve the severe hardship suffered by workers in
this category and add about $400,000,000 to consumer income
in the second quarter.
Without minimizing in any way the unemployment problem,
Therefore,
it is important to keep the data in perspective.
it should be pointed out that employment is as high as--in
In other
fact, slightly higher than--it was a year ago.
words, the increase of 1.8 million in the number unemployed
is less than the 2 million added to the labor force in the
same period. This contrasts to the substantial decline in

employment which occurred from mid-1957 to mid-1958.
Taking all of the new information that has become
available since the last meeting into account, there seems
to be no reason to modify the earlier observation that we
shall see some improvement in the economic situation in the

second quarter.

If any modification is called for, it is with

respect to our assessment of the possible vigor of the upward
More and more careful and generally conservative
movement.

analysts in business and in Government are quietly edging up
their estimates of GNP and industrial production for the last

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3/28/61

two quarters, as the year progresses.

To the extent that

these forecasts have some influence on businessmen's decisions

on inventory policy and other expenditures, they may be self
supporting. Any appraisal of the prospects must take into
account the impact of this
spreading optimism regarding the
outlook, as well as the changes in output and employment
which have actually occurred.
Nevertheless, it still
seems
most unlikely that activity will approach critical
levels,
in terms of sustainability, in the foreseeable future.
It is interesting, in this
connection, that one recent
survey showed that businessmen's expectations with respect
own
to the likelihood of increases in the price of their
products were near the lowest point for the postwar period.
Wholesale prices have remained fairly
steady, despite growing
optimism as to the outlook, and sensitive materials prices,
below the
while they have shown some improvement, are still
price index has been moving
The consumer
1953-54 average.
in a very narrow range, reflecting largely seasonal influences-

down one-tenth of 1 per cent in January; up the same amount in
February; and expected by BLS officials to be down again in
March. So far there seems to be no evidence of either
inflationary pressures in fact or a strong expectation of
inflation in the near-term future.
Mr.

Thomas presented the following statement on the credit

situation:
Since much of the discussion of Federal Reserve
policies recently has been focused on interest rate
effects, developments with respect to rates are of
Contrary to trends in February
particular interest.
when short-term rates rose and long-term rates declined,
in accordance with views as to System objectives, opposite
For an explanation
trends have been observed in March.
of this
perversity, it is necessary to look to market
developments and expectations, rather than Federal Reserve
Whether the System should or could have brought
operations.
about different results is at least questionable.
Factors causing the declining tendency in short-term
rates include the somewhat smaller volume of business cash
needs than is customary during March; the redemption of
which reduced the available supply
outstanding tax bills,
and created a reinvestment demand; some
of short bills
from foreign accounts; actual
exceptional demands for bills
and prospective acquisition of short-term securities by the
American Telephone and Telegraph Company; lessened selling

3/28/61

-11

pressure by dealers following sharp reductions in their
portfolios during late February and early March; and the
pressures and the uncertainties in the longer-term markets
which induced investors to prefer short-term securities.
Finally, reserves were available in moderate amounts and
the money market was easy during the period when it is
ordinarily tight.
Increases in medium- and long-term rates reflected
principally the growing view that economic activity may
turn up soon, bringing increased credit demands; the
congested state of the municipal bond market, where
dealers held large inventories of unsold issues with
more in prospect; and the anticipatory effect of large
Treasury borrowing demands during the remainder of the
year. The American Telephone and Telegraph offering of
new stock to its shareholders may have directly or
indirectly been absorbing some funds that might have
been invested in other long-term securities. The
Treasury advance refunding operation confirmed views
that some of the Treasury borrowing would be done in
the longer-term sectors either directly or through such
an advance operation.
While the bulk of the exchanges
of $6 billion are believed to represent holdings that
would not otherwise have been disturbed, some of them
might have some future effect on long-term markets.
Bank credit demands during the first
three weeks of
March, using partial figures for the past week, appear to
have been somewhat smaller than usual in that period.
Total
loans and investments at city banks declined on balance.
Business loans increased about as much as usual, but loans
to finance companies showed a contra-seasonal decline.
Reflecting a reduction in dealers' inventories, loans to
dealers in Government securities also declined by a
sizable amount, as did city bank holdings of Treasury
bills and also of Government securities maturing after
one year. Holdings of other securities increased.
Money supply, seasonally adjusted, which increased
sharply in January, has shown little
further growth since
the beginning of February. The average for the first
half
of March was only slightly larger than a year ago.
The
situation in the third week of March is uncertain owing to
lack of complete data and the difficulty of appraising the
effects of the timing of tax payments.
Figures for the
single date of March 15 and partial data for city banks
for March 22 (just before the tax payments are drawn and
certainly before they are paid) indicate that private demand
deposits were relatively large on those dates. Time deposits
at commercial banks continued to increase during February and
the first
half of March and are more than 10 per cent larger
than a year ago. Shares in savings and loan associations

3/28/61

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have increased in the past year by nearly 15 per cent, with the

expansion continuing during the first two months of this year.
Reserves have been available to member banks during the
past month in amounts adequate to support seasonal changes in
deposits, but not enough to provide for further growth unless
banks reduced their excess reserves. Free reserves, in fact,
have declined somewhat since the latter part of February and
have been much less than in December and January. It is esti
mated that during the latest week--that ending March 22--a
sizable portion of the available reserves were being held
against temporarily large United States Government deposits.
As these deposits are drawn down, as they are scheduled to be
in the course of the next four weeks, funds become available
for bank credit reduction or private deposit expansion. An
over-all contraction is to be expected this week and next,
but the required reserves released will be absorbed by a
decline in float and by Easter currency demands.
Unless some additional reserves are supplied to allow
for monetary expansion or unless a gold outflow is resumed
(neither of which is assumed in the projections presented),
no sustained additions to Federal Reserve credit will be
needed until July. On the basis of recent experience,
however, it is questionable whether free reserves of $500
million or less provide an adequate stimulus to bank credit
expansion. Therefore, to foster monetary growth, System
operations in the course of the next two weeks may require
net purchases of nearly $300 million of securities, which
may be followed by sales of around $500 million in the third
week of April, and then fluctuate back and forth from then on
through June.
From a longer-run standpoint, the Committee will need to
give some thought to the course of policy in case the expected
In view of many long
economic recovery is actually beginning.
run and structural weaknesses in the economy, the recovery may
not be particularly robust or threatening of speculative
It is more likely to require recuperative therapy,
excesses.

rather than restraint. The fostering of some bank credit
expansion and greater than seasonal monetary growth will no
doubt be appropriate for the remainder of this year.
With respect to interest rates, there is a popular view
that any economic recovery will bring about a rise in both
long-term and short-term rates. This view is based in part

on expectations as to credit demands and in part on beliefs
as to shifts in monetary policies. This may not be a
necessary conclusion. Although pressure for further declines

3/28/61

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in short-term rates might come to an end, it is not certain
that a marked rise in interest rates will accompany the
earlier stages of recovery.
In the first
place, interest rates are now much higher
than they have been in any other postwar recession period
and are not unlike those of the recession periods in the
1920's. Hence a sharp reversal such as occurred in 1958
seems unlikely. Secondly, various estimates or projections
made by the Board's staff and by others indicate that, with
a moderate pace of economic recovery--which may be all that
should be expected--over-all credit demands are not likely to
be particularly heavy this year. The total of private demands
is indicated to be less than in any other year since 1957 or
perhaps earlier, and when Federal Government borrowing is
included, the total is about the same as in 1960--much less
than the high level of 1959 and also well below 1958 and 1955.
Demands are expected to be quite light in the short-term credit
area and moderate in the long-term sector.
Financial savings available for investment, moreover,
have expanded in recent years and are expected to continue
in large volume during 1961. Most of these funds are availa
Estimates of the cash flows
ble for long-term investment.
and liquidity needs of nonfinancial corporations indicate
that not only will their credit demands be moderate, but
also that they will probably have funds for the purchase
of securities. It appears that funds from these and other
sources will be adequate to meet credit demands without
requiring direct investment by individuals of the magnitudes
Consumers may want to add to their holdings
of recent years.
of cash, as well as to those of other fixed value redeemable
claims such as savings deposits and shares.
These various factors point to the absence of strong

pressures toward rising interest rates during the months
ahead, unless economic recovery exceeds expectations and
Major influences
strong speculative tendencies develop.
that might determine the course of interest rates will be
the borrowing demands and debt-management policies of the
Federal Government and the availability of bank credit.
The latest budget estimates just presented by the Adminis
tration, though differing in many details, seem to confirm,
rather than alter, the estimates of the Board's staff as to
the Government's financing needs for this calendar year, when
allowance is made for portions in the Administration's estimates
as yet incomplete or uncertain.

3/28/61

-14-

Net cash borrowing for this calendar year is now pro
jected at less than $5 billion (around $4.5 billion), but
the total of all new borrowing, not including that to refund
maturing issues other than tax bills,
may exceed $15 billion.

Of this total, some $2.7 billion has been completed or already
announced. If the May refunding is so handled as to avoid
attrition, further borrowing might be unnecessary until July.
In the last half of this year, net borrowing will
approach

$10 billion and gross borrowing may exceed $12.5 billion.
These needs are comparable with those of similar periods in
1958 and 1959, although the calendar and fiscal year total
will
be less than in those years. Also, as previously
explained, total public and private credit demands in
the last half of this year are not expected to be as
great as in the corresponding periods of 1958 and 1959.
The effect of Treasury borrowings on the structure of
interest rates will
depend to some extent upon the maturity
distribution of the securities offered to raise new cash and
to refund maturing issues.
Some debt extension would be
desirable to mitigate financing problems in the next few
years. In view of the prospects for savings and for moderate
private demands for long-term credit, limited extension of

the Federal debt might be possible without undue upward
pressure on long-term rates. Corporate funds should be
available to absorb some of the short-term borrowing. The
bulk of the Treasury borrowing, however, could appropriately

come from the banking system.
Even though savings are expected to be rather large and
credit demands only moderately large, all these demands cannot
be met without fairly sizable expansion of bank credit. In the
absence of bank credit growth, interest rates would have to rise
sufficiently to bring forth more saving or additional nonbank
investment in Government securities. Any such rates might unduly
retard the developing recovery.
In view of the moderate growth
in the money supply during the past two years, an increase of at

least 3 per cent, or $4 billion, would seem to be essential this
year. Time deposits at commercial banks might be expected to
increase by as much as $5 billion.
The total of commercial bank and Federal Reserve credit
expansion in 1961 may well exceed $10 billion--concentrated
in the last half of the year. Bank loan demands are expected
to be moderate throughout this year. The banking system should
be in a position, therefore, to supply a substantial portion of
the Federal Government's borrowing needs during the remainder of
this year, without undue credit expansion or monetary creation.
Perhaps as much as $8 billion of the $10 billion net expansion

3/28/61

-15

in Government debt in the last half of the year might be
supplied through commercial bank and Federal Reserve credit.
Some $2 billion of Federal Reserve credit will be needed
during the remainder of the year to cover seasonal monetary
and currency demands and to allow for some growth. At least
half of this increase will not be needed until the last few
weeks of the year, but additions averaging around $100 million
a month would be appropriate between now and November.
It should be possible to provide reserves for such an
increase in bank credit without keeping interest rates at
too low a level, given moderate economic recovery. In fact,
that amount of bank credit may be necessary in order to avoid
too sharp a rise in interest rates that would retard the
recovery. Reserves may be supplied through purchases of
short-, medium-, or long-term securities, depending upon
the nature of market pressures at the time of the trans
actions and with due regard to proper administration of
the Account.
In reply to a question from Mr. Allen concerning the extent to
which the Treasury might be in the market between now and the May refunding,
Mr. Thomas said that the Treasury would not be in the market except for the
refunding of the April 15 bill and the auction of tax anticipation bills
that was to be held today. There was also the small increase in the amount
of weekly bill offerings that recently had been announced.
Mr. Hayes presented the following statement of his views on the
business outlook, credit policy, and related matters:
For a good many months now the Committee has been forced
to keep a careful eye on both the need for resisting domestic
recessionary tendencies and the need to avoid aggravating a
sharply adverse balance-of-payments situation by allowing
short-term interest rates to fall to excessively low levels.
On the whole, I feel that we have been rather successful in
coping with this dual problem. But on neither front has the
battle yet been won, and I think it would be a dangerous
error to assume that it has. I was somewhat concerned at the

3/28/61

-16

last meeting by the impression I gained that some members
were inclined to let up on the objective of keeping short
term rates up--say around the 2-1/2 per cent level--presumably
on the ground that the difficulties of the dollar are largely
behind us. I shall try to demonstrate a little
later why I
do not share such a view.
Of our two major problems, I am inclined to the opinion
that the domestic recession may prove to be the more tractable.

While the prevailing tone of growing business optimism may be
somewhat premature, there have been further indications in
the last three weeks that we are at or close to a bottoming
out of the recession. A number of key series that had been
falling for some time have either leveled out or turned up
ward. I am thinking of such items as new orders for durable
goods, manufacturers' sales of durables, industrial production,
and retail sales--and the smallness of the expected decline

in business plant and equipment spending is also encouraging.
On the other hand there has been no significant change in the
housing or inventory situation, and in general there are as
Furthermore,
yet no signs of emerging strong private demands.
unemployment seems likely to stay disturbingly high even through
many months of recovery.
In the field of bank credit, the February statistics for
all commercial banks generally confirm earlier indications of
considerable gains in total bank credit, total loans, and
business loans--and early March data point in the same
direction, with tax borrowing rather heavier than had been
expected. Figures on the public's liquidity and on bank
liquidity suggest that our policy of credit ease is con
tinuing to produce desired results. On the other hand, the
slower recovery of bank liquidity in this than in previous
recessions will make it less necessary for the System to
absorb excess liquidity during the coming expansion.
As far as the domestic economy is concerned, it seems
to me clear that, at least until the probable configuration
of the recovery shapes up fairly clearly, we should maintain
credit ease and should continue our attempts to nudge long
term rates lower or, at the very least, to exercise some
"braking" influence on any rise in such rates if expectations
of business recovery induce considerable selling of longer
(Fortunately the volume of weak holdings
term securities.
of longer-term securities overhanging the market appears to
At the same time there is nothing
be much less than in 1958.)
to suggest a need for lower short-term
in the domestic picture
Downward pressure on such rates may develop in any case
rates.

3/28/61

-17

if sellers of long-term securities temporarily invest at the
short end to wait out the transition to a new equilibrium;
but there is no reason why we should try to push down the

short rate, and no harm should result to the domestic
economy if, because of international considerations, we
try to hold short rates where they are or even try to

press them higher.
Turning to the international situation, I would like

to point out a number of reasons why we cannot afford to be
complacent:
(1) Although the over-all balance of payments improved
sharply in January, with indications of a $100 million surplus
for that month, this was followed by an indicated deficit of
some $200 million in February, and there is some evidence
that this adverse trend has continued in March as a result
of the backwash from the mark revaluation. On balance, the
first
quarter figure will show an appreciable improvement
over the last two quarters of 1960, but not nearly enough
to quiet foreign anxieties.
(2) The recent minor increases in the gold stock
reflect special circumstances rather than any strong under
lying trend toward restoration of confidence in the dollar.
Confidence in the stability of exchange parities
(3)
in general has been sadly disrupted by the recent mark and
guilder revaluations. Net transfers of funds across the
week after these events
European exchanges during the first
probably approached $1 billion. The exchange markets remain
in a state of acute anxiety, with rumors continually circu
For
lating of further exchange rate moves to be expected.
example, there is a widespread belief that if a renewed
heavy flow of funds to Switzerland should occur--and any
number of political or economic events could touch it
off--the Swiss might be forced into a revaluation, perhaps
The dollar has been con
followed by other currencies.
spicuously weak on the European exchanges, especially in
Fortunately the speculative capital movements
Frankfurt.
have so far beer largely confined to transfers by foreigners.
But a much more serious situation, comparable with that of
last fall, could develop if United States residents should
jump into the game.
(4) To some extent we have been benefiting from the
weakness of the British position rather than from a basic
improvement in our own. While we have seen some return
flow of foreign funds to the New York stock market, there
have been no significant indications of renewed foreign
interest in either short- or long-term U. S. Government
obligations.

-18

3/28/61

(5)
The delicate political and military international
situation makes it all the more important that we do all we
can to strengthen the position of the dollar.
The level of our bill
rate has a very important effect
on foreign market psychology, quite aside from the arithmetic
relationship of our rate to market rates abroad. I believe
that the rate of 2-1/2 per cent reached a few weeks ago
conveyed an encouraging impression of our determination
to halt further outflows.
In the judgment of some foreign
central banks, a bill
rate in the 2-3/4-3 per cent range
would be of very real psychological value.
All of this suggests to me that we would be fully
justified in giving primary consideration to the bill
rate over the next three weeks, of course within the
same general framework of credit ease in which we have
been operating. I think it would be highly desirable to
see the rate rise appreciably above the present level.
If, as seems likely, open market purchases are required
to maintain free reserves somewhere around the $400-500
million level in the next week or two, I would hope that
the Manager would be able to use longer-term securities
for the bulk of this operation, having in mind also the
added advantage of exercising some influence on longer
term rates. And incidentally, it seems to me that we have
now been operating outside of the short-term area for a
sufficient period so that we might now appropriately
authorize the Manager to use his discretion in choice of
maturities, without being confined necessarily to a maximum
maturity of 10 years.
I can see no reason to consider a change either in the
discount rate or in the directive.
Mr. Ellis said that although some First District figures showed
continued weakness,

spending seemed to be holding up, or even gaining.

Even after adjusting for Easter dates, department store sales looked good,
and it

appeared that Easter sales might come close to last year's record

high.

Automobile dealers had experienced a pickup in

sales, and a recent

survey of capital expenditure plans indicated that there was a good chance
that expenditures for the current year might equal 1960.

The strength in

3/28/61

-19

these expenditure figures was traceable to electronics and aircraft.

Bank

debits were up 3 per cent from a year ago. Average weekly hours in manu
facturing were above the national average in all District States and were
up since the first of the year, while average weekly earnings were up
from January to February.

On the other hand, the drop in employment in

February, while a little less than last year, was still significant, and
unemployment was continuing to rise.

Although there were no New England

cities classified as having more than 12 per cent unemployment, unemploy

ment was some 50 per cent above a year ago.

There was no evidence of

expansion of output even though corporate loan demand was high.

Business

loans rose sharply over the March tax date, and for the year to date the
increase

matched the 1960 gain, which was a record for the District.

Deposits had risen a little more slowly, so the average loan-deposit ratio
stood .4 per cent above the year-ago level.
had not been restored.

Thus, in that sense liquidity

District banks were net buyers of Federal funds

during the past few weeks, reflecting particularly the seasonal situation
as to demand deposits, but borrowing from the Reserve Bank was at a low

level.

Two Boston savings banks reported a lowering of the average mortgage

rate in February, but one bank outside the city raised its average rate by
1/4 per cent.
As to policy, Mr. Ellis said he viewed credit conditions in the past
three weeks with considerable satisfaction.

Free reserves had been above

$500 million on average, and the bill rate had averaged closer to 2-1/4

-20

3/28/61

than 2-1/2 per cent, which was in sympathy with the position he had expressed
three weeks ago.
British bill

The covered spread between the U. S. bill rate and the

rate had been narrowed to such an extent that the incentive

to move short-term capital was substantially reduced.

Therefore, although

the Boston Bank was not as close to the foreign credit situation as the
New York Bank,

in the absence of a gold outflow he would lean in the

direction of feeling that a bill

rate of around 2-1/4 per cent would be

preferable to a level of 2-1/2 per cent.

Perhaps the hazard of a further

gold outflow was small enough to permit providing a little

more ease and

increasing the level of free reserves, thus continuing some of the thrust
of monetary policy toward stimulating credit expansion domestically.

As

stated in the report of Mr. Noyes, there seemed to be no evidence or
expectation of inflationary pressure and no sharp credit expansion
seemed imminent.

From that standpoint, therefore, the hazards of pro

viding more reserves did not seem to be too great.
In his opinion, Mr. Ellis said, any change in the discount rate
at this time would be ill-advised.

As to the directive, his reading of the

comments submitted to the Ad Hoc Subcommittee seemed to indicate a rather
general approach toward separating the directive into two parts, and rather
general agreement on rephrasing one part of the directive more frequently
to reflect changes in economic conditions that should be met by appropriate
changes in open market policy.

He had a feeling that the general thinking

had been to postpone changing the current directive looking toward the time

-21

3/28/61

when a fundamental change in the form of the directive might be made.
However, if the Committee did not get to a decision on major issues, he
would suggest that some consideration be given to a change in the current
directive so that it

would provide for fostering recovery rather than

sustainable growth.
Mr.

Irons reported a generally satisfactory level of economic

activity in the Eleventh District, with activity in some areas increasing.
Department store trade was good and construction was up from the preceding
two or three months.
on in

There was a lot of substantial construction going

some parts of the District, the situation in

outstanding.

In view of the more open weather ahead, the prospect was for

further improvement.

Agricultural conditions appeared promising, with good

agricultural weather prevailing.
unemployment,

Houston being particularly

There had been some further increase in

although employment was running above a year ago.

Crude oil

production was up in the past month, but probably would be off this month,
production having been dropped back to a nine-day allowable basis.

Stocks

could get out of hand quickly, and there would be further cutbacks if that
were to happen.
As to banking, loans and demand deposits were up while investments
were down during the past three weeks.
but they were in

The banks were not highly liquid,

a reasonably liquid position.

District banks were net

sellers of Federal funds during the past three-week period, and there
had been virtually no borrowing at the Reserve Bank for most of the period.

-22

3/28/61

On the whole, Mr. Irons said, the District situation was not too

different from the situation that appeared to be developing nationally.
As to attitudes, he believed a general feeling had developed that 1960
was not too bad a year--better than people had thought.

There seemed to

be a cautious optimism with regard to 1961.
Mr. Irons expressed the view that during the past three weeks the
Desk had done a good job in trying to accomplish the twin objectives of
policy, that is,

to keep reserves adequately available and to avoid too

much downward movement in the short-term rate structure.

Although he had

advocated a short-term rate of around 2-3/8 or 2-1/2 per cent, he was not
too sorry to see the bill rate move down a bit, for this would indicate
that the System had not been deliberately trying to peg the rate.

As long

as the rate was within a range consistent with the international picture
and the economic situation, he would favor letting it move with the market
to some extent.
In summary, Mr. Irons said, he viewed the situation with reasonable
satisfaction.

He would like to see a continuation of about the same degree

of availability of reserves, recognizing at the same time that the short
term rate was an important factor and should be watched closely.

As to

the level of free reserves, he would think in terms of $400-$500 million
rather than $600-$700 million, but he would not be too concerned about
the precise figure because he did not consider it too meaningful.

He would

not favor any change in the discount rate, and he did not feel too strongly

3/28/61

-23

about a minor change in the directive.
prefer to leave it
Mr.

alone.

Swan stated that Twelfth District economic behavior, over all,

was much the same as nationally.
improvement,

On balance, however, he would

There were some additional indications of

not so much actual as potential, in various areas, but these

were coupled with continuation of a far from satisfactory unemployment
picture.

Although February saw the first gain in aircraft employment since

January 1959, this was a small gain and was related to a particular concern.
Generally speaking, the unemployment picture was a little
in February than in January.

less satisfactory

On the other hand, steel production had con

tinued to pick up; the increase in February, and apparently in the first
part of March, was considerably greater than for the country as a whole.
Perhaps the major source of optimism in the past three weeks was the
strengthening that occurred in lumber and plywood.

There had been a

considerable increase in new orders, although from a very low level, and
the increase was followed rather quickly by a firming of prices, also from
a low level.

It was not known exactly what this upturn in orders reflected,

other than some restocking of low inventories by distributors and industrial
users; the basis for a sustained increase in demand was not in the picture
as yet.

Nonresidential construction bad been well sustained, but there were

few indications of changes in builders' plans that would portend a sustained
increase in home building in the months immediately ahead, this despite
some further indications of increasing availability and lower cost of

-24

3/28/61
mortgage funds.

Mortgage brokers reported a considerable increase not only

in the availability of funds but in the interest displayed by Eastern investor
in Western mortgages.
Mr. Swan said that major District banks had been in a fairly easy
position during the last few weeks.

They were net sellers of Federal funds

by a small margin during the past week, and there was an indication that
sales would be considerably larger relative to purchases in the current
week.

Borrowing from the Reserve Bank was minimal.

Savings deposits

continued to rise rather steadily, and somewhat more substantially than
would have been guessed several months ago.

The favorable experience

of the two smaller banks that pioneered in the crediting of interest on
a daily basis, along with the spread of this practice to some country

banks, had now led all major banks on the West Coast to announce that
they would be on a daily interest basis as of the first of April.
Mr. Swan said that he would not argue for any overt change in policy
at this time.

He thought that developments had reflected about what was

indicated at the meeting three weeks ago.
agreement with Mr. Ellis in hoping that, if
just a little

However, he was substantially in
anything, conditions might be

easier and that additional reserves would be supplied to the

extent possible without putting too much pressure on the bill

rate.

He would

not be concerned if free reserves got back toward, or to, the $600 million
level, or if

the bill

rate reverted to around 2-1/4 per cent.

It

seemed to

him that in view of the auction yesterday and the indication of further

-25

3/28/61

Treasury borrowing in the short-term area, the System might be in a position
to increase the availability of reserves somewhat without so much downward
pressure being exerted as to push the bill rate below about 2-1/4 per cent
in the period ahead.
this time.

He would not favor a change in the discount rate at

Although he did not feel too strongly about the directive, he

would have been happier if

it

had been amended earlier to provide for

fostering recovery rather than sustainable growth.
it

might be too late to make such a change.

Soon, he suggested,

Therefore, while he did not

feel strongly on the matter, on balance he would favor making that change.
Mr. Deming commented that between May 1960 and February 1961 non
agricultural employment in the Ninth District, seasonally adjusted, declined
less than in the nation, an occurrence similar to that during the period
from August 1957 to April 1958.

In large part this more favorable trend

was due to the greater stability of District manufacturing employment than
in the nation as a whole.

The other side of the coin, however, showed that

employment expansion in recovery was slower in the District than in the
nation, and this same pattern was expected to hold this time.

The Minnesota

employment people did not expect the State's nonagricultural employment to
top year-earlier levels until very late this fall, and not until the spring
of 1962 was more than a seasonal gain expected.

A significant part of the

current employment was structural in character and reflected depressed
activity in the Iron Range and in the copper country of Montana and upper

-26

3/28/61
Michigan.

Not only mining employment, but employment in closely associated

lines, particularly transportation, was affected.
The Minnesota Poll, to which he had referred on other occasions,

had just published its findings on consumer buying plans from a survey
taken between mid-January and early February.

In general, the findings

agreed more closely with the findings of the FRB-Census January survey than
with those of the Survey Research Center.

Plans for new car buying indicated

a sales volume equal to 1959 but down from 1960, while used car buying
apparently would be weaker than in either of the two previous years.

In

contrast, purchases of new houses should equal 1960 but be off somewhat
from 1959.

More than half of the consumers questioned indicated they

would be buying one or more of 18 household appliance or furniture items.
Unfortunately, there were no comparable data for previous years.
The snows in the District came late this year and had depressed
retail sales in recent weeks.

Buying had picked up, however, and in

the most recent week for which data were available (the week ended
March 18) District department store sales were up, relative to a year ago,
more strongly than national sales.
Agriculture continued to be favorable.

Cash receipts from sales

in January were 18 per cent ahead of last January, in contrast to a 14
per cent gain nationally.

As against the five-year average, however,

the District's 13 per cent increase in January fell short of the nation's
16 per cent gain.

Planting intentions in the District were not significantly

3/28/61

-27

different, relative to last year, than in the nation.

There had been some

moisture recently, which helped the outlook.
In banking, an earlier than usual levelling off of the seasonal
deposit outflow at both city and country banks appeared likely.

The

loan picture was about the same as it was last year, and some bankers
expressed surprise that loan demand had been or was becoming so strong.
Bank liquidity had improved, but it was still far from previous recession
troughs.

One interesting, and perhaps frightening, development in recent

years was the failure of agricultural loans outstanding to decline in
the fall and winter.

Thus, the spring build-up started from the high

plateau of the previous fall.

This probably reflected the pressure of

rising costs on declining income, and it might pose problems for farm
area bank liquidity in the future.
Turning to the national economic picture, Mr. Deming noted that
the spring season had brought with it widely quoted statements of economic
upturn which appeared to be based on solid statictical evidence.

It was

difficult, however, to characterize the upturn prospects fo far as much
better than "sluggish," or to see any signs of significantly lower levels
of unemployment.
Mr. Deming expressed the view that credit policy should continue
pretty much on an "as is" basis, with a slight leaning toward more ease.
It should be possible to accomplish this successfully, he felt, even with
the Treasury in the market with tax bills, an increase in the amount of
regular bills, and refunding of annual bills.

He saw no great danger in

-28

3/28/61

a slightly easier policy, not even much danger that short rates would

weaken, and he did not believe the System would be pressing so much
liquidity upon the banking system as to cause trouble in the future.
In fact, as mentioned earlier, bank liquidity at present seemed to him
to be short rather than ample.

In more precise terms, he would be

inclined now to return to bank reserves as a primary policy guide,
obviously tempering policy if short rates showed signs of weakening
significantly.

He would try to keep free reserves between $500-$600

million and total reserves about in keeping with the needs indicated by
the Board staff table.

He saw no need to change the discount rate or the

directive at this time.
Mr. Allen reported that in the Seventh District there was growing
confidence, based on a number of factors, that a low point had been reached
and that a gradual upturn could be expected.

Unemployment,

although heavy,

did not seem to be rising further; the strongest labor markets were in those
cities producing farm machinery or otherwise oriented toward the farm economy,
while the weakest were those influenced by automotive production.

The recent

improvement in sales and production of farm machinery was expected to con
tinue.

Sales of automobiles had also improved, but they were still

below last year.

well

While production schedules were being increased, production

would doubtless continue to run well below last year.
Detroit were that production for the first

Current estimates from

quarter would approximate 1,184,000

units, and that second quarter production would be 1,370,000 units, or 24 per
cent below the 1,807,000 produced in the second quarter of last year.

-29

3/28/61

Steel production was holding steady at the moderately improved
level of late February. Although steel producers in the area had
experienced no vigorous pickup in orders, they were pleased with the
order trend, which showed some improvement in orders from most types of
customers,

and they felt that the decline in auto industry orders would

be reversed in the second quarter.

Also, in recent weeks trucking lines

and railroads had found their "miscellaneous" (general merchandise) loadings
rising, indicating to their analysts that some firms which had been cutting
inventories were beginning to order additional supplies.
modest, but it

The trend was

appeared significant because it was quite general.

Depart

ment store sales in the four weeks ending March 18 were 6 per cent above
last year in the District.

The earlier Easter was undoubtedly a factor,

but it did not entirely account for the improvement.
Judging from data supplied by weekly reporting District banks,
This

business demand for credit had strengthened in the past few weeks.

could be ascribed in part to the failure of dealers and processors of
farm products to pay down borrowing seasonally.

Special conditions in

the markets for cotton and soybeans had led to some speculative buying,
as well as higher prices, and had boosted financing requirements.

There

fore, although it might be premature to assume that the cyclical low in
demand for credit had been passed, it

seemed clear that a pattern of

heavy liquidation such as obtained from October through January no
longer was being followed.

3/28/61

-30
The large Chicago banks had been acquiring Treasury bills, as

usual, in anticipation of the April 1 tax date.

Although their acquisi

tions this year were larger than usual, their indebtedness was smaller
than in other years.

They had been buying Federal funds but had not used

the discount window for several periods.

It was anticipated that they

would do so this week and next.
Mr. Allen said it

seemed important that the Federal Reserve, as

a professed practitioner of a flexible monetary policy, give timely
evidence in

its operations of its

sense of the business situation.

System was widely credited with having done that a year ago when it
to a posture of ease.

The
moved

In his judgment the System should reduce the degree

of ease in some degree when it

believed that an upturn has begun, among

other reasons lest substance be given to the claim that monetary policy
under the System's direction had an inflationary bias.

Hindsight might

in the future indicate that as of the present date the economy was definitely
in a period of recovery.

However,

in the light of unemployment and the

fact that any upturn, even if the Committee did not sense it,

had surely

been quite modest, and also in view of current and forthcoming Treasury
operations, he would favor continuing for the next three weeks the same
degree of ease, the same discount rate, and the same directive, unless
it

should be decided later in the meeting to alter the form of the

directive.
Mr. Clay commented that the moderateness of the national recession
had been apparent in the minimal nature of the Tenth District adjustment.

-31

3/28/61

Cyclical adjustments in District general business tend to be comparatively
mild, and the developments of 1960-61 provided additional confirmation of
that experience.

The contrast in cyclical experience in the District

relative to the nation was largely explained by the lesser concentration
of hard goods industries and by the stabilizing influence of agriculture.
Currently, the trend of nonfarm employment was displaying evidence
of renewed strength in several District States.

However, business cycle

developments were nearly submerged in some local areas by the adjustments
resulting from the shifting composition of national defense spending.

The

reclassification of Wichita and Tulsa into the substantial labor surplus

category last week was a case in point.

At the same time, other areas in

the District were experiencing expanding military production activity.
Except for some local areas, 1960 was a good year for farm income
in the District--granting that individual farmers felt the impact of the
structural readjustment through which agriculture was moving.

Cash

receipts from last year's crops, favorable cattle prices, abundant feed
supplies, generally favorable moisture conditions, and excellent wheat
crop prospects had combined to get 1961 off to a good start in Tenth
District agriculture.
On the national scene, Mr. Clay noted that there was further
evidence that a turnaround in economic activity might be in the making.
suggested that in furtherance of that development,

continue to be directed toward ease.

monetary policy should

This stage of the cyclical movement

He

3/28/61

-32

appeared to call for such a policy in any case, but the need was under
scored by the amount of unemployed resources that would have to be
absorbed in the course of recovery.

In implementing this policy, the

System's open market operations should be conducted with a view to their
possible downward pressure on the rates of the longer maturities.

While

these rates had declined appreciably from the peak of early 1960, they
still

remained unusually high, as pointed up by the fact that the long-term

rate on Treasury securities was now substantially above the low of the
1958 recession and slightly above the peak levels of the 1957 boom.

The

difficulties encountered in attaining lover long rates under present
circumetances should not deter the Committee from pushing its

operations

in that direction, recognizing that the main effect might be to prevent a
premature tightening of the longer end of the market.

Some encouragement

could be derived from reports of lower residential mortgage rates, portfolio
lengthening of some institutional investors, and a strong flow of funds to
savings institutions.

Mr. Clay considered it

action designed to move the Treasury bill
that the bill

unnecessary to take any

rate up again.

He hoped, however,

rate would go no lower than 2-1/4 per cent.

Mr. Wayne stated that business activity in the Fifth District was
marked by the diverse trends that usually indicate a turning point in the
business cycle.

Scattered figures for March showed a distinct and slightly

greater than seasonal improvement over the mixed and slightly weaker con
ditions revealed by the more comprehensive data for February.

As in the

3/28/61

-33

Minneapolis District, a substantial portion of the unemployment was structural
and would continue for some time.

A small sample of the larger banks in the

District showed that they were planning for a consistent rise in loan demand
as the year progressed; they had shortened their investment position in
recent months so that they were now in a reasonably good position to meet
that increased demand.

There had been encouraging increases in new orders

in several fields such as furniture, lumber,

steel, and textiles.

This,

coupled with the fact that prices were holding firm, made most manu
facturers moderately optimistic for the near future.

Department store

sales were quite good; after allowance for unusual seasonal factors,

it

was possible that the March index of department store sales for the
District might equal or exceed the previous high record.
For the country as a whole, Mr. Wayne said, recent information
strengthened his belief, expressed three weeks ago, that the decline had
ended.

Almost all of the information on March activity showed improvement

over the February level, and thus far there had been no news of unfavorable
developments in any major sector of the economy.

The most significant

improvements were the sharply higher sales by department stores, increased
automobile sales, plans for expanded production by automobile producers,
and reduced claims for unemployment compensation.
The position of banks in the Fifth District was comfortable but
somewhat less easy than earlier this year.

Holdings of short-term Govern

ments had risen considerably, and time deposits continued to rise.

-34

3/28/61

Mr. Wayne expressed the opinion that in view of the mounting evidence
that the recession had reached bottom, and in view of the easy conditions
in the money market, it would not be appropriate to move toward more ease at
this time.

On the other hand, it would certainly not seem wise to tighten

credit just as the first signs of a possible recovery had begun to appear.
As he saw it,

therefore, the logical course to pursue was to continue the

present open market policy and to keep discount rates unchanged, at the
same time keeping a close eye on the 90-day bill rate.
Mr. Mills said that it
redirect its

seemed desirable for the Committee to

thinking from time to time.

At this time he would suggest

turning away from some of the more extraneous factors that properly
entered into policy deliberations such as the marked improvement in
business confidence and the devoted consideration in
status of the money supply.
to turn its

some quarters to the

What the Committee might preferably do was

thinking back to its

fundamental responsibility for determining

that there was a credit availability within the commercial banking system
sufficient to nourish the economy in its present stage.
the Committee should devote its

In other words,

efforts to providing a credit base that

would accommodate the existing and prospective needs for credit through
out the economy.

In his opinion, the reserve climate that existed in the

past three weeks was appropriate to that objective and also the additional
objective of fostering a short-term interest rate consistent with short
term rates in the international sphere of finance.

He agreed with Mr.

-35

3/28/61

Hayes that it would be a grave mistake for the System to lower its
at the present time and to feel that

guard

the international situation had

become stabilized to a degree that eliminated the responsibility for
providing a domestic scene that would be regarded by foreigners as
conservative and responsible.
To set up the money supply as a factor that deserved the complete
attention of the System in

its

policy-making, Mr.

Mills said,

could pre

sumably lead to questioning abroad because, as he understood its proponents,
acceptance of such a policy would require exerting determined efforts to
increase the money supply as a means of fostering credit expansion.

It

would seem to him more logical to regard the money supply, and its growth,
as an accompaniment of growing demand for bank credit than an element that
should be stimulated in the hope that an expanded money supply would of
itself

permit the growth of credit.

At the present time,

when there was

international foreknowledge that the Federal budget was coming into a
deficit and that there would be deficit financing on the part of the
Government,

there would be good reason for developing a monetary and credit

policy that in

a sense would act as a counterweight to the expectation that

the deficit financing might lay a seed bed for future inflation.

In his

opinion the policy of the past three weeks had accommodated credit needs
and at the same time had permitted stability in the international interest
rate structure, both of which were desirable in view of the prospect that
the Treasury would be coming to the market for new cash at intervals over

-36

3/28/61
the months ahead.

There would be adequate opportunities on those occasions

to permit at least some part of that financing to be accomplished through
the banking system, and in that member give the support that would be
desirable for fostering a growth in the money supply which would come
from a credit demand associated with the needs of the Government and not
from a policy that would just aim at pumping up the money supply as and
of itself.

Mr. Mills said in conclusion that he saw no reason to change the
directive or the discount rate at this time.
Mr.

Robertson commented that, as the Committee was aware, it

been his view for

had

any months that the Committee had not permitted mone

tary policy to make the fullest contribution it
the trend of economic events.
not done a good job.

could toward changing

This did not mean that the System had

It had moderated the recession, but he thought it

could have done much more than it did.

One of the reasons for the

failure to act in the manner that he considered proper was the undue
emphasis on the bill rate.

Even in the past three weeks, he felt there

had been undue concentration on the bill rate, at the expense of inject
ing enough reserves to permit the money supply to be augmented.

There

was at least a possibility that the System might be faced within the
next few months with an entirely different picture, one in which a
posture of restraint would become necessary because of the speed of

3/28/61

-37

recovery, and it would be difficult to follow a policy of augmenting the
money supply at that time.
acting now and that it

Therefore, he felt that the System should be

should be aiming toward an easier position than at

present.
With regard to the current experimentation in longer-term securi
ties, Mr. Robertson said he supposed everyone had been endeavoring to
appraise the effect of that experimentation and that everyone might have
a different view.

Personally, he could not see that much had been gained

from the experimentation.

He doubted that many would feel that the

experiment had gone on long enough to judge whether or not it was possible
to tinker successfully with interest rates to the advantage of the economy.
However, he saw a possibility that the System might be subjecting itself
to a charge in the future that it had entered upon this experiment for show
purposes only and had not attempted to make it work.

It might be contended,

on the other hand, that the System should experiment gingerly to be sure it
was not making a mistake, but in his opinion if the System was really going
to experiment,

it

should experiment on a sufficiently large and broad basis

to provide proof one way or the other concerning the efficacy and desirability
of the operation.
With respect to the coments that had been made this morning about
the foreign situation, Mr. Robertson said he felt that this factor had been
permitted to dominate the direction of System policy for too long.

A comment

had been made by Mr. Hayes to the effect that recently there was little

3/28/61

-38

indication of foreign interest in the Government securities market, long or
short, but that there had been increased interest in the stock market.

This

might mean that people did not like to play a game if they did not know
what rules were being followed.

This was one of the difficulties involved

in going into the longer-term area.
Mr. Robertson concluded by repeating that in his opinion the Committee
ought to be aiming at an easier position.

This should not be interpreted,

however, to mean that he advocated flooding the market with reserves.

To

indicate the type of ease of which he was speaking, he would move up free
reserves by about $150 million over the next three weeks, irrespective of
what that did to the bill

rate.

He would not amend the directive at this

time unless the form of the directive was to be changed.
Mr.
tion it

Shepardson said that from the standpoint of the domestic situa

seemed to him this was a time for cautious optimism.

There were

some indications that in the not too distant future conditions might
improve, but he questioned how fast that improvement might be.

The

foreign situation was in his opinion still a significant factor.

In the

light of both situations--domestic and international--it appeared to him
that the System would do well to continue about "as is."

To judge by the

availability of Federal funds, there had been adequate ease.

Also, there

had been an increase of savings funds that might be characterized as
funds held temporarily in abeyance due to uncertainties.

He questioned

3/28/61

-39

whether they were long-term savings funds and felt that they could easily
become part of the money supply if and when people gained more confidence.
However,

in view of the domestic situation, the prospective deficit in the

Federal budget, and the very uneasy and uncertain international situation,
he thought it

likely that there was going to be a continued accumulation

of these so-called savings funds held temporarily out of the spending
stream.

In summary, he believed that the degree of ease at the moment

was adequate and would favor continuing at about the same level.

Mr. King referred to Mr. Shepardson's comment about cautious
optimism and said his own state of mind might be characterized as one of
cautious pessimism.

With regard to the question whether the degree of

monetary ease had been sufficient, he said it

was difficult for him to
could be sug

see how, if monetary policy had been too restrictive, it
gested that it

might contribute to a very rapid recovery.

If

monetary

policy had been too restrictive, he would think that the recovery was more
likely to be dull.

The current posture of the System seemed to him

reasonable; in his opinion, it

was about as helpful and as good for the

general economy as any policy that could be developed.

Actually, the

System had been pursuing quite an easy policy for some time, the only
indication of restraint having been that associated with the maintenance

of the bill rate.

As to the bill rate, it was his hope that it would con

tinue to be regarded as a significant factor in the future, at least
during the next few weeks.

He considered the present level preferable

3/28/61

40

to the level of three weeks ago, and he hoped that the bill rate could
stay in the present range, varying not too much in one direction or the
other.

As to free reserves, he felt that a level somewhere around $600

million would be appropriate.

A comment had been made earlier that

perhaps the time had came when the level of free reserves should again
be regarded as a more important policy guide, but he did not see how
that was possible as yet.

He expected that free reserves might fluctuate

rather widely within the range of $500-$700 million.

In general, however,

he would hope that the present degree of ease and the present tone of the
market might continue for some time.
Mr. King suggested that the directive might be amended at the
appropriate time simply to provide for fostering recovery rather than for
encouraging monetary expansion for the purpose of fostering sustainable
growth in economic activity and employment.

He believed that such language

would permit the System to operate flexibly and that there was some danger
of misunderstanding in the protracted use of the phrase "encouraging mone

tary expansion."

Mr. Swan, he noted, had suggested that before long it

might be too late for such a change to be appropriate.
however, it

As he saw it,

might not be reasonable to start "encouraging recovery" until

there was evidence that the recession actually had bottomed out.

In his

view, therefore, it might only now be appropriate to make a change of
that kind.

On the other hand, he did not feel strongly about the matter.

-4

3/28/61

Mr. King said he saw no occasion for a change in the discount
rate.

If

open market operations could continue to be conducted along

about the same lines as in the past three weeks and if the same general
tone could be maintained in the market, he would be well satisfied.
Mr. Hilkert reported that like the country as a whole, the Third
District seemed to be moving along the bottom of the recession.
weeks ago the indicators hinted at this.

Three

Now they had improved further,

and the signs appeared fairly consistently in the various sectors of the
economy--in production, labor markets, and consumption.

The new index of

electric power consumption by manufacturing concerns showed an increase,
seasonally adjusted. in January and again in February--the first two
month increase since early in 1960.

Furthermore, the increase was con

centrated in durable goods industries.
with carloadings.

Steel production was up, along

Unemployment claims were declining, and in February

manufacturing employment picked up in several of the District's labor
market areas.

Department store sales had increased substantially, and

only part of this was attributable to the earlier date of Easter this
year.

The banking picture had changed little since the end of January.
Although some decline is usual at this time of year, bank credit had
shown considerable strength.

Loans and investments at reporting baks

had declined since the last Committee meeting, but total deposits of all

-42

3/28/61

District banks had increased, and by a larger amount than in the comparable
period last year.
Mr. Hilkert commented that in view of current Treasury financing

operations, any significant departure from recent policies would not be
in order.
it

Even aside from considerations of Treasury financing, however,

seemed to him that it would be appropriate to continue the same degree

of ease.

The economy had only bottomed out at best, and it was still

from certain how strong and rapid the recovery might be.

far

Interest rates

already were higher for this phase of the cycle than in other postwar
recessions, and with recovery on the horizon, pressures would seem to be
on the side of still

higher rates.

For this reason, it would seem

desirable to continue to supply reserve needs mainly by purchases of
intermediate and long-term securities.

If the volume of purchases neces

sary to prevent any significant rise in intermediate and long-term rates
resulted in

some increase in free reserves, he would not be disturbed.

He would make no charge in the directive or the discount rate.
Mr. Bryan said that the situation in the Sixth District differed

only as to details from the situation reported in other districts and
nationally, and that he did not believe it was necessary to recite those
details at this time.

As to the situation nationally, he agreed with

nearly everything that had been said.

His own judgment was that the bottom

of the recession was very near, if not already at hand, thus leaving the
System with the problem of trying to determine whether there would be a

-43

3/28/61

slow recovery of the kind that had followed some recessions or a sharp
recovery of the kind that had occurred in other cases.
venture a prediction in that respect.

However,

He did not care to

on the matter of how far the

System should go in trying to nourish recovery, he brought out that at times
in the past the System had been subject to criticism--and he thought with
some cause--on the ground that it

had overstayed its

position of ease in

the recovery stage and then finally clamped down rather abruptly.
At the moment,
the reserve position.

Mr. Bryan said, he found himself quite pleased with
On the Board's seasonally adjusted series, total re

serves were almost exactly on the long-term trend line, and other figures
were in about the same shape.

Therefore, he found himself leaning toward

the position expressed by those who had suggested that the System should
move cautiously in providing any further ease.

Thus, for the next three

weeks he favored a policy of supplying or absorbing reserves in an amount
adequate to cover the usual seasonal variation, plus something to allow for
necessary growth in the economy.

Moreover, as he saw it,

the System should

move cautiously not only in that respect but in some other matters such as

short-term rates.

However, he would prefer to withhold any detailed comment

on those matters.

Mr. Johns said there was almost nothing in the Eighth District
situation that seemed to warrant specific comment at this time.

The

employment and unemployment statistics were rather perplexing, particularly

-44

3/28/61

in the St. Louis area, because of the fluctuations occasioned by inter
mittent shutdowns at automobile assemply plants.

Eliminating that factor,

the situation in the District was about in line with the national picture

in terms of employment and uneployment as well as in other respects.
Mr. Johns said he continued to believe, as he did three weeks ago,
that in the present situation the policy directive, which called for
encouragement of monetary expansion, was appropriate.

He had no strong

feeling as to whether clause (b) should provide for fostering sustainable
growth in economic activity and employment or for fostering recovery; if
the System fostered sustainable growth it would also be fostering
However, he woud like to see compliance with the directive

recovery.

insofar as it called for continued encouragement of monetary expansion.
He would hope that the Committee could gradually recover the deficiency
in actual reserves, as shown in the memorandum from the Board's staff,
and do a little better than the projections set forth in Table 2 of the
staff memorandum.

He would not favor a change in the discount rate at

this time.
Mr. Szymczak said that he would favor no change in monetary
policy.

He felt that the Desk was doing an excellent job, and he hoped

the Committee would continue to do everything possible to prevent the
short-term rate from going down.
Mr. Balderston presented the following statement:
In the second and third quarters of 1958, the three months'
moving average of annal rates of money supply growth rose to

between 3 and 5 per cent.

-45

3/28/61

With the disappearance of free reserves at the end of 1958,
the rate of money supply growth slackened, and after a lag of
seven months became negative.

When free reserves climbed between the last half of 1959
and early 1961 to over $600 million, the money supply growth
rate responded and after the middle of 1960, changed from
negative to positive.
After the first
half of this past February, however, the
money supply growth rate fell
and since February has been at a

standstill. In fact, the money supply, in absolute terms, is
currently about the same as in the last half of October.
Conclusion: With the gold outflow stopped, at least for
the moment, it seems that the Committee should experiment with
free reserves of $600 million or more until the money supply
responds. In 1953, $500 million of free reserves induced a
Now, with the
3 to 5 per cent annual rate of money growth.
counting of vault cash, the free reserve figure required to
make the money supply respond seems to be higher than in 1958.
How much higher can be determined only by probing, which in

my view should start at once.
While this probing is under way, the bill rate is likely
to decline despite significant help from the increased supply
of bills being offered by the Treasury. Although I would not
wish to see the bill rate below 2 per cent, or 1-1/2 per cent
at the very minimum, the differential rate advantage of London
has disappeared for the time being and the pound rather than
It would be a pity if a lowered
the dollar is under pressure.

bill rate were to be interpreted as an indication that this
country's balance-of-payments problem is solved, and the
Committee should continue to employ devices to avoid depressing
the rate by heavy buying of bills. However, the time seems
to have arrived to risk some decline in the bill rate and to
resume the stimulation of money supply growth. If the cyclical
bottom has been reached already, the economy should be prepared
to put additional reserves to constructive use.
Prior to the presentation of this statement, Mr. Balderston had
distributed copies of a chart portraying the relationship between the
bank reserve position and the active money supply over the period 1953-61. 1/

1/

A copy is

attached to these minutes.

-46

3/28/61

This chart, he said, had been developed for him by Mr. Eckert of the

Board's staff.

In further comments, Mr. Balderston explained that he was

seeking the answer to the question often posed by Mr. Thoaas; that is,
the level of free reserves that is
continue to rise.

necessary to cause the money supply to

He was unhappy about the fact that the money supply

had not risen since early February, and he was no longer willing to

console himself with the fact that time deposits had been rising at a
rapid rate.

There was a secular trend in time deposits that would cause

them to rise anyhow.
Chairman Martin said that in his opinion the balance-of-payments
problem was not being exaggerated.

Domestic economic recovery might be

under way, or it might not be, but in any event he was apprehensive that
the balance-of-payments problem would be increased rather than resolved
by the recovery.

It seemed to him that the wage-cost spiral had reached

the point there, if it was ignored and recovery developed, the temporary
improvement in the gold situation could reverse itself quickly.

Accord

ingly, it was his opinion that the problem was an extremely serious one.
As to the current position of the domestic economy, Chairman
Martin said he could not help but look at the situation from a longer
range point of view.

In that perspective, he wondered whether the current

period actually represented anything more than a wrinkle in the 1958-59
recovery from the preceding recession, rather than a serious business
decline or recession.

Assuming that the economy was now at the bottom

3/28/61

-47

of the current recession--and he did not want to say whether this was
actually the case--it should be noted that the decline had been moderate;
the industrial production index had fallen only from 111 to 102.

Think

ing of the events that led up to the 1957-58 recession, including the
excesses that occurred and the time bomb resulting from the end of the
war and the accompanying inflationary forces, it might well be that in
looking at the chart at a later date one would conclude that the current
recession was only a slight wrinkle in a sustained upswing.

For this

reason, he did not think it material whether one talked of "fostering
recovery" or about an adjustment process in the economy preceding an
upward movement.

It seemed to him that the System had done surprisingly

well in a period of great difficulty.

Turning to the recent operations of the Open Market Account in
longer-term securities, as authorized at the February 7 meeting,
Chairman Martin noted that one financial writer had already concluded
that these operations could be labeled a failure.

Personally, he did

not know how one could make a judgment within the space of only about

five weeks.

Mr. Robertson had pointed that up well when he said that

no one could hope to find proof one way or the other in such a short
period.

As to the view that the results of the experimentation could

be proved one way or the other by dramatic action in the market in a
given period of time, he (Chairman Martin) was afraid the problem was
not that easy.

-48

3/28/61
It

must be recognized, the Chairman said, that there might be

som fundamental changes in the Goverment securities market.

To em

phasize this, he would only reiterate his opinion that if there should
be another situation such as developed in 1958, when the 2-5/8 per cent
Treasury bonds fluctuated in price more than common stocks, one could not
expect the Government securities market to be continued in its present form.
There had been the Treasury-Federal Reserve study of the Government
securities market, started in the spring of 1959, and any different
views would be expressed on how the market ought to be organized, or
reorganized.

Thus, the matter was in a transition stage at this time.

The Chairman then commented that the Ad Hoc Subcommittee that
had been looking into the Comittee's operating procedures held another
meeting yesterday afternoon.

After discussion, the Subcommittee came to

the unanimous view that it was too early to try to decide on a revision
of the Committee's operating policies and that it would be desirable to
take more time.

Probably the Committee ought to consider in due course a

division of the directive to put it

in more orderly form, but the operat

ing policies had been in effect for a long period of time.

Recently

they were modified by the February 7 authorization to operate in longer

term securities, and public notice of this modification had been given
by the statement issued by the Manager of the Account on February 20, 1961,
at his (Chairman Martin's) direction and with the Manager's full concurrence.
Thus, with one exception, the Committee had now untied its hands completely.

3/28/61

-49

This exception was the limitation of 10 years on the maturity of securi
ties in which the Account Manager was authorized to conduct operations.
The Manager was not particularly anxious to do too much in the area beyond
10 years, but the Subcommittee felt that the Manager's hands probably

should not be tied even to that extent.
In the circumstances,

Chairman Martin suggested that it

might be

well for the Committee to consider today a renewal of the special
authorization given on February 7, and renewed on March 7, but in doing
so to give the Manager of the Account freedom to operate in all maturities.
This would give the Committee more time to look at the problem before

coming to grips with the kind of directive that it wanted to write.
Continuing, the Chairman commented that some people might feel
that the System had not made a bona fide effort in its experimentation
in operations in longer-term securities because it had not acted more
aggressively.

On the other hand, some people felt that the System had

acted too aggressively.

He had found market opinion divided, some saying

that the System's operations had dried up and undermined the market while
others said that the market already was beginning to improve.

He did not

know how to appraise those opinions, but he had talked with competent
people and had gotten conflicting views.

Chairman Martin expressed the view that to let the bill rate go
down to 1-1/2 per cent would invite disaster.

Such a move would call for

a redaction in the discount rate, and the problem with respect to foreign

3/28/61

-50

markets would be compounded.

As he saw it, the whole problem was one of

not getting too far out of line on interest rates.

Should the bill

drop substantially, the Bank of England, for example,
had to make an adjustment.

It

rate

might feel that it

must be remembered that countries abroad

were facing inflationary problems.
In his opinion, the Chairman said, the Committee should give the
Manager as much leeway as possible.
level of free reserves.

It

should not bind itself

to any fixed

He felt the System had been operating quite well

recently, and it should continue to try to keep the short-term rate from
taking a dive.

All one had to do was to look at the market to know that

it was easy; Federal funds were practically going begging periodically.
If the System was going to try to prime the pump to force the money supply
statistics up, it might only create a sloppy situation which would be
difficult to correct.
Chairman Martin said he did not know exactly how to pull together
a meeting of this kind because there appeared to be some rather broad
differences of opinion.

However, he would first put up for consideration

the unanimous recommendation of the Ad Hoc Subcommittee, which reflected a
motion made by Mr. Mills and seconded by Mr. Irons.

The recommendation

was that consideration of a revision of the Committee's three statements
of operating policies again be tabled and that, pending their later
consideration, the Committee continue to operate as at present, except
that the restriction on the special authorization for the Account Manager

-51

3/28/61

to operate in maturities only up to 10 years be eliminated.

In this con

nection, the Chairman also noted that Mr. Rouse had some question about
the use of the go-around technique when operating in longer-term securi
ties, as indicated by the latter's comments today.

There were also some

differences of opinion on that point within the Ad Hoc Subcommittee.
there, however,

it

Even

was recognized that if the Open Market Committee was

going to be able to make any appraisal at all, it

must have some experience

on the basis of which to reach judgments.
There ensued a colloquy between the Chairman and Mr. Balderston
regarding the policy envisaged by the statement that the latter had
presented, and Mr. Balderston stated that essentially his recommendation
was to probe toward a level of free reserves of $600 million or more.
While he did not want to see the bill

rate go down, if the Committee was

going to force an increase in the money supply by an increase in the
amount of free reserves, other forces in the market might be such that
the bill rate would have to go below 2 per cent.

At that point he would

be concerned, just as he was in June 1958 when the bill
1 per cent.

rate fell below

For the past several months, he noted, it had been necessary

to take time out to fight the outflow of gold.

He did not think that

the problems that had caused the gold outflow had been corrected, but
now that the outflow had stopped for the moment he felt that the System
should pay attention once more to the money supply.

As indicated by the

directive, encouragement of monetary expansion was one of the objectives

of System policy.

-52

3/28/61

The Chairman then said that apparently he had misunderstood the
nature of Mr.

Balderston's recommendation.

It

now appeared that the

difference in thinking was principally between aiming at a level of free
reserves of $400-$500 million or a level of $600-$700 million.
Turning to the policy directive, the Chairman stated that as he
understood it
Mr.

the consensus was against changing the directive at this time.
Irons observed that normally the Committee had followed the

practice of changing the wording of the directive coincident with some
basic change in policy, usually at some turning point of the business cycle.
He inquired whether a change in the wording of clause (b)

to call for

"fostering recovery," as had been suggested, would involve merely a matter
of semantics, or whether it would infer a basic change in policy.

He was

not ready for the latter.
Chairman Martin replied that this question illustrated the basic
difficulty.

The point had been made that it might soon be too late, if it

was not too late already, to adjust the directive so as to provide for
fostering recovery.

However, another Committee member had made the point

that recovery actually started only when the recession had bottomed out.
The consensus today appeared to be against any change in
policy; as Mr.

Irons had indicated, it

open market

was customary to change the wording

of the directive only when the Committee was changing policy.

Therefore,

on the basis of past practice, there would seem to be a case against
making any change in the directive at this time.
In further discussion, several members of the Committee indicated
that they did not favor a change in the directive in the current circumstances.

3/28/61

-53

Mr. Shepardson suggested that a mere change in words might be misleading,
since the consensus today was against any signficant change in open market
policy.
The Chairman inquired whether anyone felt that the consensus today
was not as stated by Mr.

Shepardson, and no comments were heard.

Accord

ingly, the Chairman said that this would be taken as the consensus.

He

next inquired whether anyone felt strongly enough about a change in the
directive to want to record a vote to such effect, and again no comments
were heard.
Thereupon, upon motion duly made and
seconded, it was voted unanimously to direct
the Federal Reserve Bank of New York until
otherwise directed by the Committee:
(1) To make such purchases, sales, or exchanges (including
replacement of maturing securities, and allowing maturities to
run off without replacement) for the System Open Market Account
in the open market or, in the case of maturing securities, by
direct exchange with the Treasury, as may be necessary in the
light of current and prospective econcmic conditions and the
general credit situation of the country, with a view (a) to
relating the supply of funds in the market to the needs of com
merce and business, (b) to encouraging monetary expansion for
the purpose of fostering sustainable growth in economic activity
and employment, while taking into consideration current inter
national developments, and (c) to the practical administration
of the Account; provided that the aggregate amount of securities
held in the System Account (including commitments for the pur
chase or sale of securities for the Account) at the close of
this date, other than special short-term certificates of
indebtedness purchased from time to time for the temporary
accommodation of the Treasury, shall not be increased or de
creased by more than $1 billion;
(2) To purchase direct from the Treasury for the account
of the Federal Reserve Bank of New York (with discretion, in
cases where it seems desirable, to issue participations to one

-54

3/28/61

or more Federal Reserve Banks) such amounts of special short
term certificates of indebtedness as may be necessary from
time to time for the temporary accommodation of the Treasury;
provided that the total amount of such certificates held at
any one time by the Federal Reserve Banks shall not exceed in

the aggregate $500 million.
Mr. Robertson inquired concerning the proposed implementation of
the directive over the next three weeks,

and Chairman Martin said he

understood that open market operations would be guided by the consensus,
which, as had previously been agreed, favored no change in existing
policy.
Mr. Robertson then said that he would like to be recorded as
dissenting from such implementation of the directive because,

although he

had voted for renewal of the directive, he did not agree that the existing
open market policy represented a proper implementation of the directive.
Secretary's Note: Mr. Robertson subse
quently submitted the following statement
for inclusion in the record of the meet
ing in explanation of his dissent:
Mr. Robertson dissented from the decision to maintain,
until the next meeting, the existing degree of ease. At the
past several meetings, as at this one, he had voted to
approve the current directive, on the ground that it
correctly specified that open market operations should be
conducted with the aim of "encouraging monetary expansion."
However, in the last few months the degree of ease which he

thought appropriate to achieve the aim of the directive, and
which he thought had been sought by the Committee, was not
reached--principally, in his opinion, because too much
emphasis had been attached to seeking to prevent a reduction
in the interest rate (i.e., yield) on short-term Government
bills. Consequently, in his view monetary policy had been
precluded from making its full contribution to a reversal
of the economic downtrend.

3/28/61

-55
Now that the gold outflow had abated, he believed there

was even less reason that heretofore to gear open market
action to the maintenance of a particular bill
rate rather
than to the provision of what he would think were sufficient
bank reserves to stimulate business activity and economic
growth, and thus contribute to the solution of the serious
economic problems that arise from failure to utilize fully
our human and material resources. Believing as he did that
the supply of bank reserves should be increased in an amount
sufficient to encourage monetary expansion and thereby to
promote economic recovery, at a time when there was little
danger of reviving inflationary pressures by such further
monetary ease as he sought, he deemed the proposed policy
decision inadequate to meet the needs of the time.
Mr. Balderston stated that he also would like to be recorded
as dissenting from the consensus as to implementation of the directive
because he felt, for the reasons indicated in the statement he had made
earlier, that it would be desirable to probe toward free reserves of
around $600-$650 million.
Mr.

Swan likewise indicated that he would dissent from the deci

sion on implementation of the directive on the ground that, as he under
stood it,

that decision would not contemplate probing toward the level

of free reserves mentioned by Mr. Balderston.
Mr.

Ellis stated that if he were a member of the Committee he

would dissent on the same basis as Mr.

Swan.

Mr. Johns indicated that if

he were a member he also would dissent because he would favor being a
little easier than envisaged by continuation of the existing policy.
Accordingly, it was understood that Messrs.

Balderston, Robertson,

and Swan dissented from the majority decision that until the next meeting

3/28/61

-56

of the Committee the policy directive, as approved by unanimous vote,
would be implemented by open market operations seeking to maintain about
the existing degree of ease in the reserve position of banks.

It was

understood that Messrs. Ellis and Johns, not at present members of the
Committee,

also dissented.

Chairman Martin then referred again to the recommendation of
the Ad Hoc Subcommittee.

This recommendation, as previously stated,

was that the special authorization for operations in longer-term
Government securities which was given by the Committee on February 7,
1961,

and renewed on March 7 be changed to remove the restriction

against operations in
years.

securities having a maturity longer than 10

The recommendation of the Subcommittee also contemplated tabling

further consideration of any change in the Committee's operating policies,
which meant that the Committee would proceed for the time being in the
light of the policy directive to the Federal Reserve Bank of New York,
as supplemented by the special authorization to engage in operations in
longer-term securities.
which it

The special authorization,

in the form in

would stand following the proposed amendment,

was as follows:

The Committee authorizes the Federal
Reserve Bank of New York, between March 28,
1961, and the next meeting of the Committee,
within the terms and limitations of the
directive issued at this meeting, to acquire
intermediate and/or longer-term U. S. Govern
ment securities, or to change the holdings
of such securities, by an amount not to
exceed $500 million.

-57

3/28/61

Mr. Alien said he regretted that the Ad Hoc Subcommittee could
not have presented a recommendation at this time for a change in the
statements of the Committee's operating policies.
difficulty and did not mean to be critical.

He understood the

The reason he regretted

the lack of a recommendation was that he did not like to have to voice
disapproval at each meeting concerning the areas of the market in which
operations for the Account were now authorized.
that matter out of the way.

He still

He would like to get

felt as he had expressed himself

at the February 7 and March 7 meetings about extending Open Market Account
operations to longer-term securities.

However,

since the majority of the

Committee had chosen to authorize such operations,

he was in agreement

with the recommendation of the Subcommittee that the restriction against
operations in maturities beyond 10 years be removed from the special
authorization.
Mr. Robertson said that he would want to be recorded as dissenting
from the proposal to remove the 10-year maturity limitation on securities
covered by the special authorization because the recommendation involved
continuing the authority to engage in
securities.

operations in other than short-term

For the reasons he had stated at the February 7 meeting and

reiterated on March 7, he was opposed to the granting of such authority.
In essence, his reasons were that he considered the authorization inappro
priate and that the Account Manager was given no guide for operations in
the longer-term area.

-58

3/28/61

Mr. Bryan said that if he were a member of the Committee he would
vote to approve the recommendation of the Ad Hoc Subcommittee that the
restriction against operations in maturities beyond 10 years be removed.
However,

he had sympathy with the view expressed by Mr. Robertson.

would approve the recommendation only because he felt
was going to experiment it

that if

He

the Committee

might just as well experiment boldly.

Thereupon, the Committee authorized the
Federal Reserve Bank of New York, between
March 28, 1961, and the next meeting of the
Committee, within the terms and limitations
of the directive issued at this meeting, to
acquire intermediate and/or longer-term
United States Government securities of any
maturity, or to change the holdings of such
securities, in an amount not to exceed $500
million.
Votes for this action: Messrs. Martin,
Hayes, Balderston, Irons, King, Mills, Shepardson,

Swan, Szymczak, and Wayne.
action:

Messrs.

Votes against this

Allen and Robertson.

Mr. Allen's vote was subject to the understanding that since the
authorization to operate in longer-term securities was being continued in
effect by majority vote, he would not object to removal of the restriction
against operating in maturities beyond 10 years.
Secretary's Note: Mr. Robertson subsequently
submitted the following statement for inclusion
in the record of the meeting in explanation of
his dissent:
Mr. Robertson expressed at the February 7, 1961, meeting
his reasons for dissenting from the proposal to carry on open
market operations in other than short-term Government securities.
He now dissented from action to expand the original proposal by
authorizing the Manager of the Account to buy and sell securities
having maturities exceeding ten years, not only on the basis of

-59

3/28/61

his conviction that the whole operation was unwise, the risks
being too great to be offset or counterbalanced by all the

alleged potential benefits, but also because this proposal
represented a further delegation of authority from the Com
mittee to the Manager of the Account without any plan or
program to guide him in his operations. He did not believe
the Manager could be expected to carry out the Committee's
unspecified objectives--whatever they were--solely on the
basis of his own intuition.
With regard to the earlier reference by Chairman Martin to the
possibility of changes in the Government securities market, Mr. Rouse said
he would like to comment along the same lines.

The speculation in rights

in 1958 was only a facet of a larger problem affecting the whole bond
market.

The price swings of the past 10 years, in two or three cycles,

had reached the point where, if they continued, there was not going to
be any bond market.

They were wide enough to drive people out of the

bond market and into the stock market or other forms of investment, and
they had brought a large speculative element into the Government securi
ties market.

This problem was something that deserved serious consideration

on the part of the Open Market Committee because the System plays a sig
nificant role in the market climate in which the swings in prices and
rates occur.

The swings could not continue to be as wide as they had

been if there was going to continue to be a bond market, Government,
corporate, or municipal.
Mr. Rouse then turned to the general instructions that he considered
had been given by the Committee to the Manager of the Open Market Account,
particularly with respect to the experiment--or whatever it might be

-60

3/28/61

called--in operating in longer-term securities.

In this connection,

incidentally, he hoped that the word "experiment" would not be used in
talking with outside parties for, as he had said at the February 7
meeting, the use of that word had a tendency to kill
operations.

the effect of the

As he saw it, there were two things involved.

One was the

insertion and withdrawal of reserves in an area of the market that the
System had not used for many years, in order to see whether that was a
feasible operation in

relation to the market.

secondary item, which involved rates.

Then there was the

The Committee had regarded the

short-term rate with a great deal of concern; therefore,

some of the

Desk's efforts had been devoted to keeping the short-term rate from
going below 2 per cent, and preferably keeping that rate in the area
that it

had been in for the past several weeks.

In addition, to the ex

tent that the insertion or withdrawal of reserves had had, or might have,
an effect on longer-term rates, that was a factor to be considered in
operations for the System Account.

Mr. Rouse said his interpretation of

the general instruction was that the System was not trying aggressively
to bring down longer-term rates, but that this was in passive terms.
However, if they did come down as a by-product of operating in the longer
term area, that was something the Committee would consider desirable.

The

removal from the special authorization of the restriction against opera
tions in maturities beyond 10 years did not suggest to him active partici
pation in the long-term area of the market in an aggressive sense, although

-61

3/28/6

the Desk ought to be active enough to indicate a degree of flexibility.
In this area the New York Bank had on hand orders from the Treasury for
trust funds or other funds that were endeavoring to get into higher-yielding
securities.

However, this was primarily an investment operation, rather

than an experimental operation in driving down interest rates.
Mr. Robertson asked whether the Committee had contemplated that
the experimentation in the longer-term area was to be passive,

or an active

effort to push down longer-term rates while holding up short-term rates.
Chairman Martin replied that he thought he agreed completely with
Mr. Rouse on that point.

The Committee did not intend to change monetary

policy by authorizing a change in

operating techniques, and it

intend to make interest rates the sole criterion.
stated in its

did not

The Committee had earlier

operating policies that transactions for the System Account

in the open market were to be entered into solely for the purpose of pro
viding or absorbing reserves.

However,

in providing or absorbing reserves,

the System does exert an effect on interest rates.

The techniques by which

the System deals in the market and the way in which the Treasury issues
securities have some impact on interest rates.

As pointed out in his

recent statement before the Joint Economic Committee, the Chairman said,
he did not know whether a meaningful change could be developed as a by
product of System operations in longer-term areas of the market.

In any

event, he was sure the Committee did not intend to shift the whole fulcrum

-62

3/28/61

of monetary policy from the providing and absorbing of reserves to
interest rates.

Mr. Robertson said he appreciated this point.

However, he had

thought that the comments of members of the Committee, and also certain
statements of persons connected with the Administration, had referred to
twin objectives; namely, making money available at lower cost for mortgages
and so forth, and holding up short-term rates.

Now it appeared that the

Committee wanted to be passive in operating in the longer-term area.
Mr. Hayes indicated that his thinking differed a little in degree
from that expressed by Mr. Rouse.

The Committee had as its major objective

the maintenance of a certain type of credit policy; that is,
ease.

one of moderate

Although this was hard to measure statistically, it probably involved

maintaining some reasonable kind of reserve position for the commercial
banking system.

However, he saw no reason why the Committee could not

have at the same time the aforementioned objective of monetary ease,
the objective of not permitting the short-term rate to go too low, and
also the objective of trying to exert some positive effect on longer
term rates.

In his mind, the Committee had all of those objectives.

There were limits in terms of the market in pressing too hard on any
one of these things, but the Committee could recognize all the objectives.
He did not feel that one could draw a clear line between an active and a
passive approach in the longer-term area.

3/28/61

-63
Mr. Robertson commented that this was a good illustration of how

unfair the Committee had been to the Manager of the Account.

He ques

tioned how the Manager could be expected to carry out the views of the
Committee when they appeared to be so varied.

He thought Mr. Hayes was

correct in feeling that the Committee had intended to affect the longer
term rates.

However, he did not think the Manager should be asked to

carry out the will of the Committee unless given more specific guidelines.
Mr. Mills said that, to paraphrase what the Chairman had said, he
believed that the recent change in the Committee's operating policies in
volved a matter of techniques.

The effect of the special authorization

was to permit the Manager of the Account, within the context and limita
tions of the broad outlines of monetary policy, to throw the weight of
transactions undertaken for the Account on some occasions toward the
long end of the market and on other occasions toward the short end, with
the prospect that the weight of those transactions might exert some in
fluence either on the long-term or the short-term rate.
Mr.

Shepardson commented that this, however, was without any

objective of attaining a specific rate.
Mr. Mills said he did not believe that anyone had the concept of
a fixed rate, and Mr. Hayes agreed.
Mr. Swan suggested that, although this might be stating the matter
in too elementary a fashion, the expression "active", as opposed to "passive",
seemed to be related to whether the System was or was not supplying or

-64

3/28/61

absorbing reserves at any particular time.

Chairman Martin noted that the

use of certain techniques in carrying out operations directed at an ob
jective could have by-product effects at times.
Mr. Rouse then said that in the period immediately ahead the Account
would be putting reserves into the market, and that would be done in the

manner he had described.

Then there would be a period when there probably

would be no occasion to inject reserves.

However, for the sake of con

tinuity, and having in mind continuing pressure on short-term rates, he
contemplated that there would be offsetting operations; that is,
short and buying long.

selling

To the extent that those offsetting operations

might affect longer-term rates, there would be a desirable by-product.
Mr. Hayes said that he would consider that the transactions Mr.
Rouse was depicting would constitute an active role.

Mr.

Deming commented

that the Committee had given an explicit instruction that it
the short-term rate to fall

too far.

in terms of a rather specific range.

did not want

In fact, the Committee had talked
As to the longer-term area, however,

the Committee had treated this more or less as a by-product.
be some lowering of those rates, that would be desirable.

If

there could

There was no

reason not to push down longer-term rates in the course of Account opera
tions, but operations were designed more specifically with a view to their
effect on the short-term than the long-term area.
Mr. Hayes said he had not meant to imply that the three objectives

to which he had referred earlier were necessarily of equal importance.

-65

3/28/61

Of the three, he would agree with Mr.

Deming that the objective of least

importance was the lowering of the long-term rate.
Committee were taken, he felt that probably it

If a consensus of the

would indicate a view that

the most important objective was the maintenance of a moderate degree of
ease.

At some times, however,

the short-term rate probably was regarded

by at least some of the members of the Committee as having as much
importance.
Mr.

Rouse stated his understanding that the primary objective of

the Committee in authorizing operations in the longer-term area was to
learn by experimentation over, he would say, a matter of months whether
it

was feasible for

the System to operate in the whole range of the Govern

ment securities market rather than in one limited segment of that market.
Mr. Robertson replied that he felt all of the conversation today
would indicate that the real reason for operating in the longer-term
market was to affect interest rates--whether one spoke of pegging, holding,
or reducing--rather than to provide the reserves necessary to meet the
needs of the economy.

In other words, he felt that the emphasis was on

interest rates rather than reserves.
Chairman Martin indicated that he would not agree with that state
ment.

He added that the complexity of the problem could be seen in the

words that had been used.

Words mean different things to different people,

he noted, and he doubted that a useful purpose would be served by further
discussion of this particular point at this time.

-66

3/28/61

It was agreed that the next meeting of the Federal Open Market
Comittee would be held on Tuesday, April 18, 1961.
Chairman Martin noted that Mr. Young, who had been serving as a

amber of the Treasury-Federal Reserve Steering Comittee for Study of
the Government Securities Market, had been appointed Director of the Board's
Division of International Finance, in addition to continuing as Adviser to
the Board.

In the circumstances, the Chairman suggested that Mr. Koch,

Adviser, Division of Research and Statistics, Board of Governors, be
named to succeed Mr. Young as a member of the Steering Committee.
There was unanimous agreement with this suggestion.
The meeting then adjourned.

Secretry

SUPPLY
MONEY
ACTIVE
OF
RATE
GROWTH
AND
POSITION
RESERVE
BANK
Billons

of dollars

ACTIVE MONEY
SUPPLY

>
i

-

-0.5

1

Active moNey supply--3 month moving
average of annual rates of increase
ne
free reserves--monthly average
1953

1954

1955

1956

1956

1957
1957

1958

1958

1959

1959

1960

1960

1961
1961


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102