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FORTY-EIGHTH

Annua{ Report
OF'IHE

BOARD OF GOVERNORS
of the Federal Reserve System

COVERING OPERATIONS FOR THE YEAR

19 61

ANNUAL REPORT OF BOARD OF GOVERNORS
DIGEST OF PRINCIPAL FEDERAL RESERVE POLICY
ACTIONS, 1961

Period
January

FebruaryAugust

SeptemberDecember

December

Action

Purpose of action

Limited net sales of U.S.
Government securities from
Federal Reserve portfolio to
about $500 million. Member
bank borrowing at Reserve
Banks averaged only $50
million.
Bought substantial amounts
of U.S. Government securities with maturities over 1
year, following February 20
announcement that System
open market operations
would include securities outside the short-term area.
These purchases were partly
offset by net sales of shortterm securities. Total System
holdings of Governments increased about $700 million.
Member bank borrowings
averaged $75 million.

To encourage bank credit
and monetary expansion by
absorbing only part of seasonal inflow of reserve funds
not otherwise offset by a
large gold outflow.

Bought or sold at different
times varying amounts of
U.S. Government securities,
including securities with
longer maturities. Total System holdings of Government
securities increased about
$1.6 billion. Mmnber bank
borrowings at Reserve Banks
remained generally low.
Raised, effective Jan. 1,1962,
maximum interest rates payable by member banks on
any savings deposit from 3 to
3~ per cent, and to 4 per
cent on those left in the bank
for 1 year or more; also
raised maximum rates on
time deposits with a maturity
of 6 months to I year from 3
to 3~ per cent, and to 4 per
cent on those deposits with a
maturity of a year or longer.

4

To encourage bank credit
and monetary expansion
while avoiding direct downward pressure on short-term
interest rates, thereby moderating pressures on the U.S.
balance of payments from
outflow of short-term capital
attracted by higher interest
rates abroad.

To continue to encourage
bank credit and monetary
expansion while allowing for
changing reserve needs due
to seasonal and other factors,
including a large gold outflow, and while continuing to
give consideration to the
balance of payments problem.
To enable banks to compete
more effectively for savings
and other time deposits, including foreign time deposits, thus moderating pressures on the U.S. balance of
payments, and, over the long
run, to offer additional incentive for the accumulation of
savings required for financing future economic growth.

ANNUAL REPORT OF BOARD OF GOVERNORS

FEDERAL RESERVE SYSTEM

The Federal Open Market Committee further authorizes the Fed
eral Reserve Bank of New York to enter into repurchase agreements
with nonbank dealers in bankers' acceptances covering prime bankers'
acceptances of the kinds designated in the regulations of the Federal
Open Market Committee, subject to the same conditions on which the
Federal Reserve Bank of New York is now or may hereafter be author
ized from time to time by the Federal Open Market Committee to enter
into repurchase agreements covering U.S. Government securities, except
that the maturities of such bankers' acceptances at the time of entering
into such repurchase agreements shall not exceed 6 months, and except
that in the event of the failure of the seller to repurchase, such accept
ances shall continue to be held by the Federal Reserve Bank or shall be
sold in the open market. Such repurchase agreements shall be at the

March 28, 1961

same rate as that applicable, at the time of entering into such agreements,

to repurchase agreements covering U.S. Government securities.
Votes for this action: Messrs. Martin, Hayes, Allen,
Balderston, Irons, King, Mills, Shepardson, Swan, Szymczak,
and Wayne. Vote against this action: Mr. Robertson.
In voting against the continuation of the authority, Mr. Robert
son stated that he felt the Federal Reserve System should encour
age the utmost freedom of market forces and therefore should
withdraw from active participation in the acceptance market in
the absence of clear indication that such participation would
yield specific public interest benefits. He was not aware of evi
dence that such benefits had been realized since the authoriza
tion was given to the Federal Reserve Bank of New York in
1955. He opposed the use of repurchase agreements covering
bankers' acceptances not only for these reasons but also for the
reasons he had expressed in opposing the use of repurchase
agreements covering Government securities.
In support of the majority position favoring reaffirmation of
the authorization, it was stated that the Federal Reserve System
had taken an active interest in promoting and assisting the

acceptance market since the inception of that market, that the
System had a legitimate interest in doing its part to make that
market as broad and as sound as possible, and that acceptances
were inherently a desirable medium for operations by a central
bank.

1. Authority to effect transactions in System Account.

The Federal Open Market Committee directed the Federal
Reserve Bank of New York to continue to conduct open market
operations with a view to encouraging monetary expansion for
the purpose of fostering sustainable growth in economic activity
and employment, while taking into consideration current inter
national developments.
Votes for this action: Messrs. Martin, Hayes, Allen,
Balderston, Irons, King, Mills, Robertson, Shepardson, Swan,
Szymczak, and Wayne. Votes against this action: none.
Additional information on economic developments in Feb
ruary that had become available since the previous Committee
meeting tended generally to confirm the estimates presented at
that time. While the prevailing tone of growing business opti
mism might be considered somewhat premature, nevertheless
there were further indications that the economy was at least close
to a bottoming out of the recession. Several key economic series
that previously had been falling for some time had now either
leveled off or turned upward. These included such items as new
orders for durable goods, manufacturers' sales of durable goods,
industrial production, and retail sales. In addition, the relatively
small prospective decline from 1960 in business plant and equip
ment expenditures was encouraging; and housing starts, at a
seasonally adjusted annual rate, had risen from the December
low, although they still remained below the year-earlier level.
While employment had risen in February to a level above a year
earlier, the rate of unemployment increased slightly and the
actual number of unemployed attained a postwar peak.
The money market had been generally easy in the past 3
weeks, a period when more tightness might ordinarily have been
expected in view of the midmonth tax date. Total loans and
investments at city banks declined during the first part of March.
Although business loans increased about as much as usual, loans
to finance companies showed a contraseasonal decline, and loans

ANNUAL REPORT OF BOARD OF GOVERNORS

FEDERAL RESERVE SYSTEM

to dealers in Government securities also declined by a sizable
amount. City bank holdings of Treasury bills and of Government
securities maturing after 1 year fell, while holdings of other
securities increased. The money supply, which increased sharply
in January, had shown little further growth since the early part
of February, and the daily average for the first half of March
was only slightly larger than a year earlier.
Data now available indicated that, whereas an improvement
in the over-all balance of payments occurred in January, with a
$100 million surplus for that month, in February there may have
been a deficit of some $200 million. There was also some evi
dence that this adverse trend had continued in March, in part as
a result of repercussions from the German currency revaluation.
Therefore, since the atmosphere in international financial mar
kets remained delicate, the short-term interest rate continued to
be an important factor in the formulation of System open market
policy.
After consideration of the range of economic and financial
information that had been accumulated, it was the consensus,
from which Messrs. Balderston, Robertson, and Swan dissented,
that until the next meeting of the Committee the policy directive
should be implemented by open market operations seeking to
maintain about the existing degree of ease.
Mr. Balderston dissented because he felt that with the gold
outflow stopped, at least for the moment, the Committee should
experiment with an increased availability of reserves until the
money supply responded more vigorously. The extent to which
additional reserves would be needed for that purpose could be
determined only by probing operations, which in his view should
be started. While this probing was under way, he recognized that
the short-term rate might decline despite the support available
from factors such as the increased supply of bills being offered
by the Treasury. Since he did not wish to see the bill rate decline
significantly in view of the continuing balance of payments
problem, he felt that the Committee should continue to employ
whatever devices were available to avoid undue pressure on that

rate. However, it seemed to him that the time had arrived to risk
some decline in short-term rates in view of the importance he
attached to stimulating the growth of the money supply. If the
cyclical bottom had been reached, he pointed out, the economy
should be prepared to put additional reserves to constructive use.
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 policy
directive on the ground that it correctly specified that open mar
ket 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 Com
mittee, was not reached principally, in his opinion, because too
much emphasis had been attached to seeking to prevent a reduc
tion in the interest rate (i.e., yield) on short-term Government
bills. Consequently, in his view monetary policy had been pre
cluded from making its full contribution to a reversal of the
economic downtrend. Now that the gold outflow had abated,
Mr. Robertson believed there was even less reason than hereto
fore to gear open market action to the maintenance of a par
ticular 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 to encourage mone
tary expansion and thereby to promote economic recovery, at a
time when there was little danger of reviving inflationary pres
sures by such further ease as he sought, he deemed the proposed
policy decision inadequate to meet the needs of the time.
Mr. Swan dissented from the decision on implementation of

the directive because it did not contemplate probing toward the
higher level of reserves mentioned by Mr. Balderston. In view
of current developments, he felt that the System might be in a
position to increase the availability of reserves somewhat with-

ANNUAL REPORT OF BOARD OF GOVERNORS

FEDERAL RESERVE SYSTEM

out undue downward pressure being exerted on the short-term
rate.

Mr. Robertson had expressed at the February 7 meeting his
reasons for dissenting from the proposals to carry on open mar
ket operations in other than short-term Government securities.
He now dissented from the action to expand the original pro
posal not only on the basis of his conviction that the whole
operation was unwise-the risks being too great to be offset or
counterbalanced by the alleged potential benefits-but also be
cause this proposal represented a further delegation of authority
by the Committee to the Manager of the System Open Market
Account without any plan or program to guide him in his opera
tions. He did not believe that the Manager could be expected
to carry out the Committee's unspecified objectives-whatever
they were-solely on the basis of his own intuitions.

2. Authority to effect transactions in intermediate- and longer-term securi

ties.

The Committee authorized the Federal Reserve Bank of New
York, between this date and the next meeting of the Committee,
within the terms and limitations of the directive issued at this
meeting, to acquire intermediate- and/or longer-term U. S. Gov
ernment securities, 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. Votes against this action: Messrs. Allen and Robert
son.

This action amended the special authorization first given at
the meeting on February 7, 1961, by removing the restriction
that had limited transactions to securities with a maturity of not
more than 10 years, this removal having been recommended by
the Ad Hoc Subcommittee that had been named at the meeting
on January 10, 1961, to study and make recommendations with
respect to the Committee's operating procedures. It was felt that
the removal of the restriction on maturities would, by increasing
the flexibility of Account operations, facilitate the evaluation of
the feasibility and effect of System operations in other than the
short-term market. The Ad Hoc Subcommittee also recom
mended, and the Committee agreed, that it would be desirable
to take more time, during which the experience in operating in
all maturities could be studied, before deciding on any possible
revision of the Committee's operating policy statements.
Mr. Allen voted against continuing the special authorization
on the same basis that he had previously dissented at the March 7
meeting. However, inasmuch as the authorization to operate in
longer-term securities was being continued by majority vote, he
did not object to the removal of the restriction against operating
in maturities beyond 10 years.

April 18, 1961
1. Authority to effect transactions in System Account.

At this meeting clause (b) of the first paragraph of the Com
mittee's policy directive to the Federal Reserve Bank of New
York was changed to provide that open market operations
should be conducted with a view "to encouraging expansion of
bank credit and the money supply so as to contribute to strength
ening of the forces of recovery that appear to be developing in
the economy, while giving consideration to international fac
tors." The preceding directive, which had been in effect since
October 25, 1960, called for operations with a view to encourag
ing monetary expansion for the purpose of fostering sustainable
growth in economic activity and employment, while taking into
consideration current international developments.
Votes for this action: Messrs. Hayes, Allen, Balderston,
Irons, King, Mills, Robertson, Shepardson, Swan, and
Wayne. Votes against this action: none.

For some time open market policy had aimed at making a
contribution toward arresting recessionary influences in the do
mestic economy, at the same time giving due regard to the level
of short-term interest rates in view of problems related to the


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