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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 6, 1962, at 10:00 a.m.
PRESENT:

Mr.
Mr.
Mr.
Mr.

Martin, Chairman
Hayes, Vice Chairman
Balderston
Bryan

Mr. Deming
Mr. Ellis
Mr. Fulton
Mr. King

Mr. Mitchell
Mr. Robertson
Mr. Shepardson
Messrs. Bopp, Scanlon, and Clay, Alternate Members
of the Federal Open Market Committee
Messrs. Wayne and Swan, Presidents of the Federal
Reserve Banks of Richmond and San Francisco,
respectively
Mr.

Young, Secretary

Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel

Mr. Thomas, Economist
Messrs. Brandt, Furth, Garvy, Parsons, and Willis,
Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Coombs, Special Manager for foreign currency
operations, System Open Market Account
Mr. Molony, Assistant to the Board of Governors
Mr. Cardon, Legislative Counsel, Board of Governors
Messrs. Holland and Koch, Advisers, Division of
Research and Statistics, Board of Governors
Mr. Knipe, Consultant to the Chairman, Board of
Governors

Mr. Yager, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Mr. Broida, Economist, Government Finance Section,
Division of Research and Statistics, Board of
Governors

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Messrs. Francis and Shuford, First Vice Presidents
of the Federal Reserve Banks of St. Louis and
Dallas, respectively
Mr. Hickman, Senior Vice President, Federal Reserve
Bank of Cleveland
Messrs. Eastburn, Ratchford, Baughman, Jones, Tow,
Coldwell, and Einzig, Vice Presidents of the
Federal Reserve Banks of Philadelphia, Richmond
Chicago, St. Louis, Kansas City, Dallas, and
San Francisco, respectively
Mr. Stone, Assistant Vice President, Federal Reserve
Bank of New York
In the agenda for this meeting, the Secretary reported that advice

had been received of the election by the Federal Reserve Banks of members
and alternate members of the Federal Open Market Committee for the term
of one year commencing March 1, 1962,

and that it

appeared the persons

would be legally qualified to serve after they had executed their oaths
of office.
Chairman Martin noted that each newly elected member and alternate
member except Mr. Irons had executed the required oath of office prior to
this meeting.

A copy of the oath of office was being sent to Mr. Irons

and would be placed in the files of the Committee after being executed by
him.
The elected members and alternate members were as follows:
George H. Ellis, President of the Federal Reserve Bank
of Boston, with Karl R. Bopp, President of the Federal
Reserve Bank of Philadelphia, as alternate member;
Alfred Hayes, President of the Federal Reserve Bank of
New York, with William F. Treiber, First Vice President
of the Federal Reserve Bank of New York as alternate member;
Wilbur D. Fulton, President of the Federal Reserve Bank of
Cleveland, with Charles J. Scanlon, President of the
Federal Reserve Bank of Chicago, as alternate member;

3/6/62
Malcolm Bryan, President of the Federal Reserve Bank of
Atlanta, with Watrous H. Irons, President of the Federal
Reserve Bank of Dallas, as alternate member;
Frederick L. Deming, President of the Federal Reserve Bank
of Minneapolis, with George H. Clay, President of the Federal
Reserve Bank of Kansas City, as alternate member.
Upon motion duly made and seconded,
and by unanimous vote, the following offi
cers of the Federal Open Market Committee
were elected to serve until the election of
their successors at the first meeting of the
Committee after February 28, 1963, with the
understanding that in the event of the dis
continuance of their official connection with
the Board of Governors or with a Federal Re
serve Bank, as the case might be, they would
cease to have any official connection with the
Federal Open Market Committee:
Wm. McC. Martin, Jr.
Alfred Hayes
Ralph A. Young
Merritt Sherman
Kenneth A. Kenyon
Howard H. Hackley
David B. Hexter
Woodlief Thomas
Harry Brandt, J. Herbert Furth,
George Garvy, L. Merle Hostetler,
Guy E. Noyes, Franklin L. Parsons,
and Parker B. Willis

Chairman
Vice Chairman
Secretary
Assistant Secretary
Assistant Secretary
General Counsel
Assistant General Counsel
Economist
Associate Economists

Upon motion duly made and seconded,
and by unanimous vote, the Federal Reserve
Bank of New York was selected to execute
transactions for the System Open Market
Account until the adjournment of the first
meeting of the Committee after February 28,

1963.
At the February 13, 1962, meeting of the Federal Open Market
Committee, reference had been made to the provisions of the Committee's

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By-Laws and Rules of Organization regarding selection of the Manager
of the System Open Market Account.

The Committee's authorization of

February 13 pertaining to operations in foreign currencies provided
that the Special Manager of the System Account for such operations
should be selected in accordance with the established procedure for the
selection of the Manager.

In a memorandum dated February 23, 1962,

from Chairman Martin to the Federal Open Market Committee,

it

was noted

that since the Committee had authorized the new position of Special
Manager, the By-Laws and the Rules of Organization should be amended
to provide for the Special Manager as well as the Manager.

It was

suggested that the Committee might also wish to consider a change in the
method of selection of the Manager and the Special Manager, and a possible
amendment to section
consideration,

5 of Article II of the By-Laws was submitted for

According to the amended section, the Committee would

select a Manager of the System Open Market Account and a Special Manager
for foreign currency operations for such Account,

both of whom would be

satisfactory to the Federal Reserve Bank selected to execute transactions

for the System Open Market Account.
Chairman Martin stated that it had been planned that Chairman
Reed of the Federal Reserve Bank of New York would come to Washington
today to discuss this subject with the members of the Committee.

However,

he had been unable to make the trip due to adverse weather conditions.
If

agreeable to the Committee,

Chairman Martin said, Chairman Reed would

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plan to present his views to the Committee on April 17, 1962,

Meantime,

he (Chairman Martin) would suggest that the Committee proceed with the
approval of the Manager and Special Manager in

accordance with the

existing procedure.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the selection
by the Board of Directors of the Federal Re
serve Bank of New York of (a) Robert G. Rouse
as Manager of the System Open Market Account
and (b) Charles A. Coombs as Special Manager
for foreign currency operations of the System
Open Market Account was approved, it being
understood that they would serve for the period
until the adjournment of the meeting at which the
suggested change in By-Laws of the Committee, as
referred to by Chairman Martin was discussed, such
meeting now being scheduled for April 17, 1962.
Consideration then was given to the continuing authorizations of
the Committee, according to the customary practice of reviewing such
matters at the first meeting in March of each year, and the actions set
forth hereinafter were taken.
The first item to be considered was the continuing authority
directive to the Federal Reserve Bank of New York,

adopted by the Committee

on December 19, 1961, with respect to transactions for the System Open
Market Account in

U. S.

Government securities and transactions for the

account of the Federal Reserve Bank of New York in bankers'

acceptances.

A revised draft of directive had been distributed with the agenda for
this meeting,
in such form it

primarily with the thought that if

the directive were adopted

would be unnecessary to renew four separate continuing

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authorizations, relating respectively to: (a) the authority of the
Account Manager to engage in transactions on a cash as well as a regular
delivery basis; (b) the authority of the Federal Reserve Bank of New
York to enter into repurchase agreements covering Government securities;
(c) the authority of the Federal Reserve Bank of New York to buy and sell
bankers' acceptances and to enter into repurchase agreements therefor;
and (d) the rate authorized to be charged on special certificates of
indebtedness purchased direct from the Treasury.
There was also included in the draft of revised directive, for the
Committee's consideration, an additional paragraph that would authorize
the Federal Reserve Bank of New York to deviate temporarily from the degree
of reserve availability called for by the current economic policy directive
if such deviation was considered by the Bank to be necessary in order to
moderate untoward market pressures.

This paragraph had been suggested by

the Secretariat in the thought that its inclusion might help to deal with
situations such as occurred when the New York Bank found that strict
adherence to the total reserve concept included in the current policy
directive issued by the Committee on December 19, 1961, would have con
tributed to market conditions not contemplated by the Committee.
Comments by members of the Committee regarding the possible addi
tional paragraph were to the effect that the Account Management was

expected to act in a responsible manner, which under certain circumstances
might involve temporary deviations from the directive, and that a specific

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authorization was therefore unnecessary.

It was also suggested that the

proposed exception was based on a concept so vague as to permit deviations
without adequate justification and that it might be difficult, in fact,
to determine when deviations had occurred.

It was further suggested that,

if necessary in the light of developments, the Account Manager could get
in touch with the Committee by telephone to obtain instructions.
Mr. Rouse expressed concurrence in the view that the paragraph,
if

included, should preferably be worded in t erms of t emporary deviation

from the current policy directive rather than from the degree of reserve
availability called for by such directive.

However, he doubted the need

for any authorization of this kind.
Accordingly, it was agreed unanimously that the suggested paragraph
should not be included in the continuing authority directive.
Mr. Rouse then stated reasons why he felt that minor changes in
wording at other places in the draft of revised continuing authority
directive would be desirable, and his suggested changes were accepted by
the Committee.

Mr. Rouse also stated, with respect to the part of the

directive dealing with the buying of bankers' acceptances under repurchase
agreements, that it would not seem necessary to specify acceptances with
maturities of six months or less at the time of purchase because such a
limitation was contained in the Board of Governors' Regulation B, Open

Market Purchases of Bills of Exchange, Trade Acceptances, Bankers'
Acceptances.

However, Mr. Rouse added that the inclusion of the proposed

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phraseology would do no harm, and in the circumstances it

was agreed by

the Committee to retain the language.
Thereupon, upon motion duly made and
seconded, the Federal Reserve Bank of New
York was authorized and directed, until
otherwise directed by the Committee, to
execute transactions in the System Open
Market Account in accordance with the fol
lowing continuing authority directive:
1. The Federal Open Market Committee authorizes and
directs the Federal Reserve Bank of New York, to the extent
necessary to carry out the current economic policy directive
adopted at the most recent meeting of the Committee:
(a) To buy or sell United States Government
securities in the open market, from or to Government
securities dealers and foreign and international ac
counts maintained at the Federal Reserve Bank of New
York, on a cash, regular, or deferred delivery basis,
for the System Open Market Account at market prices
and, for such Account, to exchange maturing United

States Government securities with the Treasury or
allow them to mature without replacement; provided

that the aggregate amount of such securities held in
such Account (including forward commitments, but not
including such special short-term certificates of
indebtedness as may be purchased from the Treasury
under paragraph 2 hereof) shall not be increased or
decreased by more than $1 billion during any period

between meetings of the Committee;
(b) To buy or sell prime bankers' acceptances
of the kind designated in the Regulation of the
Federal Open Market Committee in the open market,
from or to acceptance dealers and foreign accounts
maintained at the Federal Reserve Bank of New York,
on a cash, regular, or deferred delivery basis, for
the account of the Federal Reserve Bank of New York
at market discount rates; provided that the aggregate

amount of bankers' acceptances held at any one time
shall not exceed $75 million or 10 per cent of the
total of bankers' acceptances outstanding as shown
in the most recent acceptance survey conducted by
the Federal Reserve Bank of New York;

3/6/62

-9(c) To buy United States Government securities
with maturities of 24 months or less at the time of
purchase, and prime bankers' acceptances with maturities
of 6 months or less at the time of purchase, from non
bank dealers for the account of the Federal Reserve
Bank of New York under agreements for repurchase of
such securities or acceptances in 15 calendar days
or less, at rates not less than (a) the discount rate of
the Federal Reserve Bank of New York at the time such
agreement is entered into, or (b) the average issuing rate
on the most recent issue of 3-month Treasury bills,
whichever is the lower; provided that in the event
Government securities covered by any such agreement
are not repurchased by the dealer pursuant to the agree
ment or a renewal thereof, they shall be sold in the
market or transferred to the System Open Market Account;
and provided further that in t he event bankers' accept
ances covered by any such agreement are not repurchased
by the seller, they shall continue to b e held by the
Federal Reserve Bank or shall be sold in the open market.

The Federal Open Market Committee authorizes and directs
2.
the Federal Reserve Bank of New York to purchase directly 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 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 rate charged on such certificates
shall be a rate 1/4 of 1 per cent below the discount rate of the
Federal Reserve Bank of New York at the time of such purchases;
and provided further that the total amount of such certificates
held at any one time by the Federal Reserve Banks shall not
exceed $500 million.
Votes for this action: Messrs. Martin,
Hayes, Balderston, Bryan, Deming, Ellis, Fulton,
Vote against
King, Mitchell, and Shepardson.
this action: Mr. Robertson.
Mr. Robertson dissented from the foregoing action for the same
reasons that he dissented on December 19, 1961, from the adoption of

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the continuing authority directive in its original form.

In his opinion

it was an inadequate directive, without sufficient restrictions.
In view of the approval by the Com
mittee of the foregoing revised continuing
authority directive, the following separate
authorizations, each of which had been re
newed most recently at the meeting on
March 7, 1961, were terminated:
Authorization to the Manager of the System Open Market
Account to engage in transactions on a cash as well as a
regular delivery basis.
Authorization to the Federal Reserve Bank of New York to
enter into repurchase agreements on Government securities.
Authorization to the Federal Reserve Bank of New York to
purchase bankers' acceptances, and to enter into repurchase
agreements therefor.
Authorization providing that the rate charged on special
short-term certificates of indebtedness purchased direct from
the Treasury be fixed at a rate 1/4 of 1 per cent below the
discount rate of the Federal Reserve Bank of New York at the
time of such purchase.
Upon motion duly made and seconded,
and by unanimous vote, the following authori
zation regarding open market transactions in
foreign currencies, originally adopted by the
Committee on February 13, 1962, was reaffirmed:
Pursuant to Section 12A of the Federal Reserve Act and in
accordance with Section 214.5 of Regulation N (as amended) of
the Board of Governors of the Federal Reserve System, the Federal
Open Market Committee takes the following action governing open
market operations incident to the opening and maintenance by
the Federal Reserve Bank of New York (hereafter sometimes
referred to as the New York Bank) of accounts with foreign
central banks.

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I.

Role of Federal Reserve Bank of New York

The New York Bank shall execute all transactions pursuant to
this authorization (hereafter sometimes referred to as transactions
in foreign currencies) for the System Open Market Account, as defined
in the Regulation of the Federal Open Market Committee.
II.

Basic Purposes of Operations

The basic purposes of System operations in and holdings of
foreign currencies are:
(1)

To help safeguard the value of the dollar in
international exchange markets;

(2)

To aid in making the existing system of international
payments more efficient and in avoiding disorderly
conditions in exchange markets;

(3)

To further monetary cooperation with central banks
of other countries maintaining convertible currencies,
with the International Monetary Fund, and with other
international payments institutions;

(4)

Together with these banks and institutions, to help
moderate temporary imbalances in international
payments that may adversely affect monetary reserve
positions; and

(5)

In the long run, to make possible growth in the
liquid assets available to international money markets
in accordance with the needs of an expanding world
economy.
III.

Specific Aims of Operations

Within the basic purposes set forth in Section II, the
transactions shall be conducted with a view to the following
specific aims:
(1)

To offset or compensate, when appropriate, the
effects on U. S. gold reserves or dollar liabilities
of those fluctuations in the international flow of
payments to or from the United States that are
deemed to reflect temporary disequilibrating forces
or transitional market unsettlement;

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(2)

To temper and smooth out abrupt changes in spot
exchange rates and moderate forward premiums and
discounts judged to be disequilibrating;

(3)

To supplement international exchange arrangements
such as those made through the International Monetary
Fund; and

(4) In the long run, to provide a means whereby reciprocal
holdings of foreign currencies may contribute to
meeting needs for international liquidity as required
in terms of an expanding world economy
IV.

Arrangements with Foreign Central Banks

In making operating arrangements with foreign central banks
on System holdings of foreign currencies, the New York Bank shall
to maintain any specific balance, unless
not commit itself
authorized by the Federal Open Market Committee.
The Bank shall instruct foreign central banks regarding the
investment of such holdings in excess of minimum working balances
in accordance with Section 14 (e) of the Federal Reserve Act.
The Bank shall consult with foreign central banks on coordina
tion of exchange operations.
Any agreements or understandings concerning the administration
of the accounts maintained by the New York Bank with the central
banks designated by the Board of Governors under Section 214.5 of
Regulation N (as amended) are to be referred for review and
approval to the Committee, subject to the provision of Section
VIII., paragraph 1, below.
V.

Authorized Currencies

The New York Bank is authorized to conduct transactions for
System Account in the currencies and within the limits that the
Federal Open Market Committee may from time to time specify.
VI.

Methods of Acquiring and Selling Foreign Currencies

The New York Bank is authorized to purchase and sell foreign
currencies in the form of cable transfers through spot or forward
transactions on the open market at home and abroad, including

3/6/62

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transactions with the Stabilization Fund of the Secretary of the
Treasury established by Section 10 of the Gold Reserve Act of 1934
and with foreign monetary authorities.
Unless the Bank is otherwise authorized, all transactions
shall be at prevailing market rates.
VII.

Participation of Federal Reserve Banks

All Federal Reserve Banks shall participate in the foreign
currency operations for System Account in accordance with para
graph 3 G (1) of the Board of Governors' Statement of Procedure
with Respect to Foreign Relationships of Federal Reserve Banks
dated January 1, 1944.
VIII.

Administrative Procedure

The Federal Open Market Committee authorizes a Subcommittee
consisting of the Chairman and the Vice Chairman of the Committee
and the Vice Chairman of the Board of Governors (or in the absence
of the Chairman or of the Vice Chairman of the Board of Governors
the members of the Board designated by the Chairman as alternates,
and in the absence of the Vice Chairman of the Committee his
alternate) to give instructions to the Special Manager, within the
guidelines issued by the Committee, in cases in which it is neces
sary to reach a decision on operations before the Committee can be
consulted.
All actions authorized under the preceding paragraph shall
be promptly reported to the Committee.
The Committee authorizes the Chairman, and in his absence
the Vice Chairman of the Committee, and in the absence of both,
the Vice Chairman of the Board of Governors:
(1) With the approval of the Committee, to enter into any
needed agreement or understanding with the Secretary
of the Treasury about the division of responsibility
for foreign currency operations between the System and
the Secretary;
(2) To keep the Secretary of the Treasury fully advised
concerning System foreign currency operations, and
to consult with the Secretary on such policy matters
as may relate to the Secretary's responsibilities;
(3)

From time to time, to transmit appropriate reports
and information to the National Advisory Council on
International Monetary and Financial Problems.

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IX.

Special Manager of System Open Market Account

A Special Manager of the Open Market Account for foreign cur
rency operations shall be selected in accordance with the established
procedures of the Federal Open Market Committee for the selection
of the Manager of the System Open Market Account.

The Special Manager shall direct that all transactions in
foreign currencies and the amounts of all holdings in each author
ized foreign currency be reported daily to designated staff
officials of the Committee, and shall regularly consult with the
designated staff officials of the Committee on current tendencies
in the flow of international payments and on current developments
in foreign exchange markets.
The Special Manager and the designated staff officials of
the Committee shall arrange for the prompt transmittal to the
Committee of all statistical and other information relating to the
transactions in and the amounts of holdings of foreign currencies
for review by the Committee as to conformity with its instructions.
The Special Manager shall include in his reportsto the
Committee a statement of bank balances and investments payable
in foreign currencies, a statement of net profit or loss on
transactions to date, and a summary of outstanding unmatured
contracts in foreign currencies.
X.

Transmittal of Information to Treasury Department

The staff officials of the Federal Open Market Committee
shall transmit all pertinent information on System foreign
currency transactions to designated officials of the Treasury

Department.
XI.

Amendment of Authorization

The Federal Open Market Committee may at any time amend or
rescind this authorization.
Upon motion duly made and seconded, and
by unanimous vote, the following continuing
authority directive to the Federal Reserve

Bank of New York with respect to System foreign
currency operations, originally adopted by the
Committee on February 13, 1962, was reaffirmed:

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3/6/62

The Federal Reserve Bank of New York is authorized and
directed to purchase and sell through spot transactions any or
all of the following currencies in accordance with the Guide
lines on System Foreign Currency Operations issued by the

Federal Open Market Committee on February 13, 1962:
Pounds sterling
French francs
German marks
Italian lire
Netherlands guilders
Swiss francs
Total foreign currencies held at any one time shall not
exceed $500 million.

The next continuing authorization to be reviewed was a resolution
adopted by the Federal Open Market Committee on November 20, 1936, follow
ing consideration by the Board of Governors and the Federal Reserve Bank
of New York of the question of the overlapping jurisdictions of the Board
and the Federal Open Market Committee with respect to foreign transactions
of the Federal Reserve Banks.

On November 18,

1936,

the Conference of

Presidents of the Federal Reserve Banks had expressed agreement with a
suggestion by President Harrison of the Federal Reserve Bank of New York
that a desirable arrangement would be one under which the Federal Open
Market Committee would grant blanket authority to the Federal Reserve
Banks to purchase and sell cable transfers, and bills of exchange and
bankers' acceptances payable in foreign currencies, in connection with
accounts of Federal Reserve Banks established in foreign countries with
the approval of the Board of Governors pursuant to the provisions of
section

14 of the Federal Reserve Act; it being understood that all such

-16

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transactions in such accounts were subject to special supervision by the
Board of Governors of the Federal Reserve System.

Accordingly, the Open

Market Committee had adopted the following resolution:
RESOLVED that, unless and until the Federal Open Market
Committee hereafter directs otherwise, each Federal Reserve
Bank, subject to the provisions of Section 14 of the Federal
Reserve Act as amended and the regulations, conditions, and
limitations of the Board of Governors prescribed thereunder,
may without further directions or authorization of the Com
mittee purchase and sell, at home or abroad, cable transfers,
and bills of exchange and bankers acceptances payable in
foreign currencies, to the extent that such purchases and
sales may be deemed to be necessary or advisable in connection
with the establishment, maintenance, operation, increase,
reduction or discontinuance of accounts of Federal Reserve
Banks in foreign countries.
At the request of the Chairman, Mr.

Hackley made a brief statement

on the matter which he concluded by expressing the opinion that the actions
taken by the Federal Open Market Committee in respect to the current
program of operations in foreign currencies seemed clearly to have super
seded the 1936 resolution and probably introduced an element of conflict.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the reso
lution adopted on November 20, 1936, was
repealed.
On September 1, 1953, there became effective a procedure for
allocation among the Federal Reserve Banks of securities in the System
Open Market Account that had subsequently been reaffirmed by the Committee
at the first

meeting in March of each succeeding year,

subject to amend

ments approved at the meetings on March 1, 1960, and March 7, 1961.

One

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of the principal objectives of the present allocation formula, based
on total assets, had been to avoid the frequent adjustments due to low
reserve ratios that had proved troublesome under an earlier formula,
which was based on estimated expense and dividend requirements.

The

formula served this purpose satisfactorily for a number of years, as
the reserve ratios were generally above 40 per cent when the formula
was adopted and had declined only gradually as the System Open Market
Account grew.

No adjustments were called for until the annual re

allocations of April 1, 1960, and April 1, 1961, but subsequent to the
latter date two interim adjustments had been necessary.

With a current

reserve ratio of about 35.6 for the System as a whole, a reappraisal of
the formula had seemed appropriate.

As the result of such reappraisal,

a revised procedure for the allocation of securities was suggested in
a memorandum dated February 28, 1962, from the Manager of the System
Open Market Account and the Director of the Board's Division of Bank
Operations.

This plan was designed to minimize the likelihood of adjust

ments and, if adjustments should be necessary,

to simplify the calcula

tions and reduce the inequities caused by the inflexibility of existing
procedures.

(There had also been distributed a memorandum from the

same persons dated February 20, 1962, discussing the recent experience
under the present procedure for allocation of securities and submitting
a pro forma reallocation of securities as of February 1, 1962, in anticipa
tion of possible renewal of the existing procedure and the reallocation
that in such event would be made on April 1, 1962.)

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At the Chairman's request, Mr. Rouse made an explanatory statement

concerning the objectives and operation of the proposed revised procedure,
under which reallocations would be made on the first business day of
February, May, August,

and November of each year.

There followed questions concerning the proposal,
Mr.

Rouse replied,

to which

and one editorial change in the statement of procedure

was suggested.
Thereupon, upon motion duly made and
seconded, and by unanimous vote, the follow
ing revised procedure for allocation of
securities in the System Open Market Account
was adopted, effective immediately:
1.
Securities in the System Open Market Account shall be
reallocated on the first
business day of February, May, August
and November of each year by means of adjustments proportionate
to the adjustments that would have been required to equalize the
average reserve ratios of the 12 Reserve Banks over the first
85 days of the preceding three calendar months.
2. If a Bank's reserve ratio should be reduced below 30 per
cent as a result of the reallocation, or should fall below 30 per
cent on the next to the last business day (as observed by the
Agent Bank) of a statement week or month, its holdings as of the
close of business that day shall be adjusted the following day by
an amount sufficient to raise its reserve ratio to the average
reserve ratio of the 12 Banks combined on the preceding day.
Such securities shall be allocated to the Bank in a position to
absorb the largest additional amount without reducing its reserve
ratio below the ratio of the 12 Banks combined. If that Bank is
unable to take the entire amount, the excess shall be allocated
to the Bank which can absorb the next largest amount without re
ducing its
reserve ratio below the average for the System.
Any such adjustment will be reversed on the first succeed

ing Thursday (before the next quarterly reallocation) when it
can be accomplished without reducing the Bank's reserve ratio
below 30 per cent, except that if the Thursday is a holiday or

-19-

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the last business day of a month the reversal will be made the
following business day. A reversal will restore individual Bank
holdings to their established participation percentages before
the adjustment occurred, except to the extent that a Bank may
have been involved in another adjustment in the interim.
3. If a Bank's reserve ratio should fall below 30 per cent
on any other day, or if a Bank anticipates that its reserve ratio
will fall below that figure, it may arrange with the Manager of
the System Open Market Account for an adjustment similar to those
provided for in Paragraph 2 so as to increase the Bank's reserve
ratio to the average of the 12 Banks combined.
4. The Account shall be apportioned during the succeeding
quarter on the basis of the ratios determined in Paragraph 1,
after allowing for any adjustments as provided for in Paragraphs
2 and 3.
5. Profits and losses on the sale of securities from the
Account shall be allocated on the day of delivery of the securi
ties sold on the basis of each Bank's current holdings at the
opening of business on that day.
The authorization for distribution of
periodic reports prepared by the Federal Re
serve Bank of New York for the Federal Open
Market Committee, as renewed March 7, 1961,
and amended December 5, 1961, was continued
by unanimous agreement. This authorization
provided for the following distribution:
1.
2.
3.

*4.
5.
*6.
*7.
8.
9.

The Members of the Board of Governors.
The Presidents of the twelve Federal Reserve Banks.
Officers of the Federal Open Market Committee.
The Secretary of the Treasury.
The Under Secretary of the Treasury for Monetary Affairs
and the Deputy Under Secretary for Monetary Affairs.
The Assistant to the Secretary of the Treasury working on
debt management problems.
The Fiscal Assistant Secretary of the Treasury.
The Director of the Division of Bank Operations of the
Board of Governors.
The officer in charge of research at each of the Federal
Reserve Banks not represented by its President on the
Federal Open Market Committee.

* Weekly reports of open market operations only.

3/6/62

-20

10.

The alternate member of the Federal Open Market Committee
from the Federal Reserve Bank of New York; the Assistant
Vice Presidents of t he Federal Reserve Bank of New York
working under the Manager of the System Account; the
Managers of the Securities Department of the New York
Bank; the officer in charge and Assistant Vice President
of the Research Department of the New York Bank; and the
confidential files of the New York Bank as the Bank
selected to execute transactions for the Federal Open
Market Committee.

11.

With the approval of a member of the Federal Open Market
Committee or any other President of a Federal Reserve
Bank, with notice to the Secretary, any other employee
of the Board of Governors or of a Federal Reserve Bank.
The Committee reaffirmed by unanimous
vote the authorization, first given on
March 1, 1951, for the Chairman to appoint
a Federal Reserve Bank to operate the System
Open Market Account temporarily in case the
Federal Reserve Bank of New York is unable
to function.
The following resolution to provide for
the continued operation of the Federal Open
Market Committee during an emergency was re
affirmed by unanimous vote:

In the event of war or defense emergency, if the Secretary
or Assistant Secretary of the Federal Open Market Committee (or
in the event of the unavailability of both of them, the Secretary
or Acting Secretary of the Board of Governors of the Federal Re
serve System) certifies that as a result of the emergency the

available number of regular members and regular alternates of the
Federal Open Market Committee is less than seven, all powers and
functions of the said Committee shall be performed and exercised
by, and authority to exercise such powers and functions is hereby
delegated to, an Interim Committee, subject to the following terms
and conditions.

Such Interim Committee shall consist of seven members, com
prising each regular member and regular alternate of the Federal

Open Market Committee then available, together with an additional

3/6/62

-21

number, sufficient to make a total of seven, which shall be made
up in the following order of priority from those available: (1)
each alternate at large (as defined below);(2) each President of
a Federal Reserve Bank not then either a regular member or an
alternate; (3) each First Vice President of a Federal Reserve
Bank; provided that (a) within each of the groups referred to in
clauses (1), (2), and (3) priority of selection shall be in
numerical order according to the numbers of the Federal Reserve
Districts, (b) the President and the First Vice President of the
same Federal Reserve Bank shall not serve at the same time as
members of the Interim Committee, and (c) whenever a regular
member or regular alternate of the Federal Open Market Committee
or a person having a higher priority as indicated in clauses (1),
(2), and (3) becomes available he shall become a member of the
Interim Committee in the place of the person then on the Interim
Committee having the lowest priority. The Interim Committee is
hereby authorized to take action by majority vote of those present
whenever one or more members thereof are present, provided that an
affirmative vote for the action taken is cast by at least one
regular member, regular alternate, or President of a Federal Re
serve Bank. The delegation of authority and other procedures set
forth above shall be effective only during such period or periods
as there are available less than a total of seven regular members
and regular alternates of the Federal Open Market Committee.
As used herein the term "regular member" refers to a member
of the Federal Open Market Committee duly appointed or elected in
accordance with existing law; the term "regular alternate" refers
to an alternate of the Committee duly elected in accordance with
existing law and serving inthe absence of the regular member for
whom he was elected; and the term "alternate at large" refers to
any other duly elected alternate of the Committee at a time when
the member in whose absence he was elected to serve is available.
The following resolution authorizing
certain actions by the Federal Reserve Banks
during an emergency also was reaffirmed by
unanimous vote:
The Federal Open Market Committee hereby authorizes each
Federal Reserve Bank to take any or all of the actions set forth
below during war or defense emergency when such Federal Reserve
Bank finds itself unable after reasonable efforts to be in commu
nication with the Federal Open Market Committee (or with the
Interim Committee acting in lieu of the Federal Open Market

3/6/62

-22

Committee) or when the Federal Open Market Committee (or such
Interim Committee) is unable to function.
(1) Whenever it deems it necessary in the light of

economic conditions and the general credit situation then
prevailing (after taking into account the possibility of
providing necessary credit through advances secured by direct
obligations of the United States under the last paragraph of
section 13 of the Federal Reserve Act), such Federal Reserve
Bank may purchase and sell obligations of the United States
for its own account, either outright or under repurchase

agreement, from and to banks, dealers,
such obligations.
(2)

or other holders of

In case any prospective seller of obligations of the

United States to a Federal Reserve Bank is unable to tender the
actual securities representing such obligations because of con
ditions resulting from the emergency, such Federal Reserve Bank
may, in its discretion and subject to such safeguards as it
deems necessary, accept from such seller, in lieu of the actual
securities, a "due bill" executed by the seller in form accept
able to such Federal Reserve Bank stating in substantial effect
that the seller is the owner of the obligations which are the
subject of the purchase, that ownership of such obligations is
thereby transferred to the Federal Reserve Bank, and that the
obligations themselves will be delivered to the Federal Reserve
Bank as soon as possible.
Such Federal Reserve Bank may in its discretion
(3)
purchase special certificates of indebtedness directly from
the United States in such amounts as may be needed to cover
overdrafts in the general account of the Treasurer of the
United States on the books of such Bank or for the temporary

accommodation of the Treasury, but such Bank shall take all
steps practicable at the time to insure as far as possible that
the amount of obligations acquired directly from the United
States and held by it, together with the amount of such obliga
tions so acquired and held by all other Federal Reserve Banks,
does not exceed $5 billion at any one time.
Authority to take the actions above set forth shall be effec
tive only until such time as the Federal Reserve Bank is able again
to establish communications with the Federal Open Market Committee
(or the Interim Committee), and such Committee is then functioning.

-23

3/6/62

By unanimous vote, the Committee re
affirmed the authorization, first
given at
the meeting on December 16, 1958, providing
for System personnel assigned to the Office
of Civil and Defense Mobilization Classified
Location (High Point) on a rotating basis to
have access to the resolutions (1) providing
for continued operation of the Committee dur
ing an emergency and (2) authorizing certain

actions by the Federal Reserve Banks during
an emergency.
There was unanimous agreement that no
action should be taken to change the exist
ing procedure, as called for by resolution
adopted June 21, 1939, requesting the Board
of Governors to cause its examining force to
furnish the Secretary of the Federal Open

Market Committee a report of each examination
of the System Open Market Account.
Chairman Martin then referred to a memorandum distributed with
the agenda under date of February 27, 1962, relating to the procedure
authorized at the meeting of March 2, 1955, whereby, in addition to
members and officers of the Committee and Reserve Bank Presidents not
currently members of the Committee, minutes and other records could be
made available to any other employee of the Board of Governors or of a

Federal Reserve Bank with the approval of a member of the Committee or
other Reserve Bank President, with notice to the Secretary.

The most

recent list of persons so authorized (exclusive of secretaries and
records and duplicating personnel), as shown by the Secretary's records,
was attached to the February 27 memorandum.
It was agreed unanimously that no
action should be taken at this time to
amend the procedure authorized on March

2, 1955.

3/6/62

-24Before this meeting there had been distributed to the members

of the Committee a report of open market operations in U. S. Government
securities covering the period February 13 through February 28, 1962,
and a supplemental report covering the period March 1 through March 5,
1962.

Copies of both reports have been place in the files of the

Committee.
In supplementation of the written reports, Mr.

Rouse commented

as follows:
The money market has been generally comfortable since
Federal funds have moved
the last meeting of the Committee.
between effective rates of 1-3/4 per cent and 2-3/4 per

cent, a range which has given rise to a moderate but generally
well sustained demand for Treasury bills on the part of the
banks.
This demand was superimposed on buying from nonbank
sources, which was augmented by the investment of the proceeds
of new capital issues. Under these circumstances, bill rates

moved from the 2.85 per cent level reached shortly after the
Since then
last meeting to about 2.65 per cent a week ago.
rates have edged up slightly, but despite the addition of a
total of $500 million 91-day bills to the weekly auctions
over the past six weeks, the rate through yesterday remained
at close to 2.70 per cent. We have found it particularly

difficult this week to keep the reserve statistics up without
pushing short-term rates back down toward the 2-5/8 per cent
level. It was only yesterday afternoon that we began to get
the signs of firmness in the money market that normally would
be associated with the somewhat lower reserve statistics that
were developing.
Yesterday we arranged to put about $170 mil
lion of reserves in the market, but despite this the reserve

statistics this week may turn out to be somewhat low.

We are

hopeful, however, that the slight firming that has developed
in the money market will reduce the downward pressures on the
bill
rate and possibly cause the rate to move a bit higher.
Dealer awards of over $600 million bills in yesterday's auction

may be helpful in this respect.
The longer-term market has been greatly influenced by the
emergence of a less optimistic view of the business situation--

3/6/62
a view emphasized in discussion in the press and in market
letters. This factor, together with a continuation of
maturity extension programs by banks seeking higher earnings
to meet increased payments of interest on time and savings
deposits, has encouraged additional bank buying of intermediate
term Treasury securities, tax-exempt issues, and mortgages.
Other investing institutions have shown increased interest in
all sectors of the capital market, and yields have undergone
significant declines. Yields on intermediate-term Treasury
issues, for example, are down by as much as 25 basis points
since the last meeting, while reoffering yields on new corporate
utility issues are lower by about 12 basis points. In this
favorable atmosphere, the Treasury's advance refunding went
over well, with public subscriptions totaling more than $4
billion, $2.4 billion of which were for the new 4s of 1971
and about $1.2 billion for the 3-1/2s of 1990 and 1998.
Smaller and medium-sized banks apparently took the opportunity
to extend their maturities in this way but the largest banks
did not participate extensively. The 4s of 1980 did not attract
many conversions.
According to the latest estimates, the Treasury will have
to come to the market for more new money for payment on March
23 to redeem such maturing tax anticipation bills as are not
used to pay taxes. The Treasury is thinking of selling about
$1.5 to $2 billion of September tax anticipation bills through
an auction on March 20, without tax and loan credit, to be
announced March 13.
This, together with a continued offering
of $100 million additional 91-day bills each week, should take
care of the new money needs up to about the end of April, with
more new money needed the first
part of May.
Alternatively,
the Treasury may raise the next several weekly bill offerings
by $200 million and borrow correspondingly less through the
tax anticipation bills. In either case, this will leave only
short gaps between the Treasury financing operations to be
conducted between now and the May refunding. There will be
about ten days between now and the March 20 auction, about
ten days to two weeks between that and the refunding of the
April 15 bills and another ten days until it becomes necessary
to borrow cash for payment early in May.
I should like to inform the Committee that Blyth & Company
has indicated to me that they expect to begin operations as a
dealer in Government securities. The firm has been thinking of
this move for some time, and has been deterred in part because
they did not feel they had found the man whom they wished to
I have been informed that they have
head up the operation.
now hired James Wilson, who resigned last Friday as Executive

-26

3/6/62

Vice President of Second District Securities Company.
The President of Second District Securities, Morris Shapiro,
informs me that that firm intends to continue as a dealer
in Treasury issues.

Thereupon, upon motion duly made and
seconded, the open market transactions in
U. S. Government securities during the
period February 13 through March 5, 1962,
were approved, ratified, and confirmed.
Mr. Koch presented the following statement with respect to
economic developments:
Our view of the economic landscape seems more obscure
than usual today.
Although little
information on February
is yet available, most of the weekly data suggest a further
pause in activity. The data are still consistent, however,
with the hypothesis that we are witnessing mainly a beginning
of-year period of hesitation such as sometimes happens even
though the underlying movement is still expansive. But as the
evidence accumulates, the question becomes more gnawing as to
whether the slowdown reflects, in part at least, more lasting
forces.
As for the over-all economic indicators, we have no
adequate basis as yet upon which to estimate the February
level of our industrial production index. Its man-hour
components may well have gone up, since the January figures
were depressed to some extent by bad weather. On the other
hand, two of its actual physical output components, autos and
steel ingots, went down. Our present rough guess is that the
index is more likely to recover the point lost in January than
show no change. Even this relatively favorable outcome would
leave us with no net increase in the index over the past 3
months and only a 2 point rise since last August.
Gross national product may do well if it reaches an an
nual rate of $550 billion this quarter, up some $7 or $8 billion
from the fourth quarter, but the smallest increase since recovery
got under way a year ago. A $550 billion GNP would represent a
shortfall of $3 to $4 billion from projections made late last
year.
Construction activity was down a little in February, and
from a January level that has also been revised downward.
Private housing starts in January, the latest data available,
slipped down a little
further after two months of fairly sharp
decline.

3/6/62

-27

The National Bureau leading indicator data now available
for January show more numerous declines than in the preceding
The new order series for manufactured durable
two months.
goods is the only leading series showing a steady rise over
the three-month period ending in January.
Indeed, new orders for durable goods have recently been
the major evidence suggesting that further expansion is still
ahead. These orders increased 2 per cent in January to a new
high level, and continued appreciably above sales. As a re
sult, unfilled orders rose again. Although defense ordering
has been partly responsible for the recent rise in new orders
for durable goods, increases were quite widespread among major
industries.
Personal income is another area that offers some encourage
ment. It did decline in January, but from an exceptionally
high December level. It has risen 6.7 per cent from its February
1961 cyclical low--a somewhat larger rise than in the comparable
period in 1958-59, and a considerably larger one than in 1954-55.
Consumers still
have the wherewithal to buy.
Turning back to industry, steel output leveled off in early
February and then declined in the second half of the month. New
orders in this bellwether industry declined as the opinion grew
that a strike was unlikely, and thus that there was a less press
ing need to build up stocks.
Were the break-off in bargaining talks announced last week
end to continue for long, it would no doubt lead to renewed
precautionary stockpiling. Current indications, however, point
to a resumption of negotiations within the next few weeks. A
settlement without a strike still seems likely, although
negotiations may be more prolonged than was indicated earlier.
In autos, February sales of domestically produced cars
are now estimated at a seasonally adjusted annual rate of between
5.8 and 6.0 million units--down from the 6.3 volume in January.
Auto output also declined further but, despite the decline, auto
stocks rose to about a million cars on February 20. These recent
auto figures illustrate the danger, at a time like this, in
relying too heavily on comparisons of current data with those
a year ago. The newspapers have been playing up how good
automobile sales look today compared with a year ago, without
suggesting now poor automobile sales were early last year.
Manufacturing inventories as a whole rose $450 million on
a seasonally adjusted basis in January. This was the largest
increase since August, and compares with an average monthly
increase of $250 million in the final quarter of last year.
With sales down, the inventory/sales ratio for manufacturing

3/6/62

-28

as a whole rose in January, after having fallen steadily
throughout 1961. The ratio still looks fairly moderate,
however, by recent historical standards.
Except for autos, the only retail sales data available
for February cover department stores. For what these figures
are worth, such sales were little changed from January. They
were fairly strong early in the month, but dropped off later.
A favorable development for February is a small improve
ment in unemployment and in total employment. The unemployment
rate declined somewhat to 5.6 per cent from 5.8 in January.
Indications are that construction and service employment showed
better than seasonal gains. Manufacturing employment, however,
probably showed little change. If so, the period of unusual
stability in manufacturing employment has continued for still
Reductions in hours worked
another month of this recovery.
per week in both December and January, the latest data available,
have also brought this leading economic indicator down to its
level of last July.
As for prices, the wholesale index declined slightly in
February after a small rise in January. This index has con
The consumer
changed now for over four years.
tinued little
price index was unchanged in January. Further small price
increases for food and services were offset by reductions for
The rise in the
apparel, house furnishings, and used cars.
consumer price index over the past year has been the smallest
in the last six years.
To sum up, most of my colleagues and I still feel that
the recent economic lull is likely to prove temporary reflecting
in part unusually adverse seasonal influences, and, for the rest,
a type of interruption that sometimes happens in a recovery
movement.
Paraphrasing a recent editorial in The Washington
Post, developments to date this year seem to have cut down by
a small amount the optimistic total economic gains foreseen by
some observers for 1962 as a whole. The irregularities that
last August and
we have witnessed in the current upswing, first
September and now since the beginning of the year, are not signs
of strength. They do not yet, however, basically alter the
favorable direction we see for economic developments this year.
Nevertheless, it would be difficult to find in domestic
developments justification for a materially less easy monetary
and credit policy. Indeed, they suggest rather some preliminary
thinking as to the most appropriate posture of monetary policy
were the economic slowdown to persist.

3/6/62

-29Mr. Furth presented the following statement with respect to the

U. S. balance of payments and related matters:
In the first two months of 1962, our international
payments situation improved greatly. In January, net
transfers to foreigners of gold, convertible foreign curren
cies, and dollars, as reported by U. S. banks and the U. S.
Treasury, were practically nil. In February, fragmentary
preliminary data indicate transfers in the neighborhood of
$150 million, as compared to a monthly rate of about $450
million during the last quarter of 1961.
The January figure was distorted by the year-end window
dressing operations of foreign banks. Nevertheless, the
improvement is encouraging. Some basic data for these months
are still lacking, including trade figures; any attempt at
explanation must therefore be in part based on guesses. We
know that the recent outflow of recorded short-term capital
was reversed in January. We also know that more than half of
the reported February deficit reflected the transfer to the
International Bank of the proceeds of its New York bond issue.
But we still do not know whether we succeeded in increasing
our current surplus, the prerequisite of a lasting solution
of our international payments problem.
The situation on foreign exchange and gold markets
continued on the whole satisfactory. The dollar rate improved
in relation to the Swiss franc; for a few days, it climbed
above par in relation to the German mark; and it stayed close
to par against the Netherlands guilder. The dollar remained
weak, however, in relation to the French franc and the Italian
lira, as well as against the pound sterling.
This pattern of exchange rates suggests the influence of
movements of funds from Switzerland, Germany, and the Netherlands
to London. Such movements largely involve trilateral exhange
transactions through the U. S. dollar; accordingly, they tend to
support the dollar rate in the countries of origin and depress
the dollar rate in London. There are no signs of a significant
direct flow of short-term funds from New York to London.
The Canadian dollar rate appears recently to have been
stabilized at slightly better than 95 U. S. cents. In January,
the intervention of the Canadian authorities in support of the
Canadian dollar helped to improve our international payments
position.
The continued weakness of the dollar against the French
franc and the Italian lira may hurt our pride, but these

3/6/62

-30-

currencies do not play as important a role in international
exchange and capital markets as the German mark, the Swiss
franc, or the Netherlands guilder, not to speak of the pound
sterling.
If unusual movements of funds should occur that
might make intervention advisable to take the dollar off the
floor against these currencies, the credit granted by Italy to

the U. S. Treasury and the recent System transaction with the
Bank of France would provide the United States with the needed
foreign exchange.
More important is the dollar-sterling rate.
However, the
strength shown by sterling in the face of a continuing high
trade deficit of the United Kingdom is, in fact, an advantage
for the dollar.
No banker or investor in the world believes
that the pound sterling would be revalued against the dollar.
Therefore, confidence in sterling is, a fortiori, confidence in
the dollar.
No foreigner who fears that the dollar might be
devalued in the foreseeable future would think of investing in

sterling, without forward cover.

Since funds recently moved

from the Continent to London have apparently been so invested,
the financial community finally seems to have become convinced
that the recurrent rumors of an impending devaluation of the
dollar, which would also mean a devaluation of sterling, are
nonsense.
This interpretation is supported by the recent quiet
and stability in the London gold market.
Thus, the threat of a capital flight from the dollar be
cause of lack of confidence in the stability of our currency
seems to have subsided, at least for the time being.
However,
we do not yet know whether similar progress has been made in
the more important fight against the continuing deficit in the
so-called basic elements of our international payments.
Mr. Thomas presented the following statement with respect to credit
developments:
Financial markets in February absorbed a large volume
of new issues of securities by corporations and State and
local governments and also took care of various Treasury
financing operations. Bank credit in the aggregate appears
to have declined less than usual for the month.
Time deposits
continued to increase, while demand deposits declined by close
to customary seasonal amounts.
Reserves have been available in
amounts adequate to meet seasonal needs and to avoid pressures
toward either rising or falling interest rates.
Though showing
some short-time fluctuations and significant structural changes,

3/6/62

-31-

interest rates generally continued closer to the top than
to the bottom of the relatively narrow range that has pre
vailed during the past year and a half.
In brief, credit
has been available in amounts adequate for the demands of

the lagging recovery that has been occurring, but little,

if

any, more.
New issues by State and local governments, aggregating
$1 billion in February, were in exceptionally large volume
for that month. Corporate issues, enlarged by the $300 million
A.T.& T. offering, were large but not a record. In contrast to
January, when underwriters were able to distribute new issues
promptly, considerable investor resistance to the lower yields
offered was encountered in February.
The volume of unsold
issues increased. Later, however, following conclusion of the
Treasury refunding operations, and perhaps in view of the
lighter calendar of offerings in prospect for March, distribu
tion of the new issues improved.
Taking the first
quarter as
a whole, the total volume of new issues offered and scheduled
to be offered is not exceptional.
Yields on high-grade corporate and on long-term Government
bonds showed little change during February, continuing close to
recent highs. Yields on long-term municipal bonds, after
declining sharply during January and the first
half of February,
rose slightly in the third week of February and have since been
firm at close to record low levels relative to yields on other
types of securities.
Yields on medium-term Treasury securities,
in contrast to the steadiness in long-term issues, declined
notably in the latter part of February; the difference presumably
reflected the Treasury advance refunding, which has the effect
of shifting a volume of maturities from the medium- to the long
term area.
This decline in medium-term yields should enable the
Treasury to borrow some of its needed funds within that maturity
range at lower rates than might otherwise have been possible.
In addition to the advance refunding operation, which came
in the latter part of February and which succeeded in extending
the maturities of some $5 billion of securities, the Treasury
also effected during February a successful refunding of maturing
issues, with a low percentage of cash redemptions. Following
cash financing of $1.5 billion in January, $500 million of cash
has been obtained through additions of $100 million to regular
weekly bill offerings; some additional cash will need to be
raised in March and a substantial amount in April or early May,
followed by a quarterly refunding operation in May. Operating
surpluses in May and June should be adequate to cover retirement of
tax bills maturing in June with no additional borrowing until July.

3/6/62

-32-

Borrowing by the Treasury in January and February was
effected without any net addition to bank holdings of Govern

ment securities.

In fact, such holdings declined considerably

in the first
half of February, Dealers' positions in Government
securities also declined substantially in January and early
February.
They have subsequently increased moderately, but
continue smaller than during most of last year. Dealers'
positions in medium-term issues increased somewhat in early
February, in connection with the regular refunding operation,

but have subsequently been reduced to a minimal amount.

Their

holdings of long-term issues, in turn, increased during the
latter part of February in connection with the advance refund
ing operation and are now larger than at any time in over a
year. Holdings of bills and other short-term issues, which
nearly always comprise the bulk of dealers' portfolios, are
moderately light at present. The relatively light dealers'
positions provide a comparatively strong underlying element
in the Government securities market.

Bank credit, after increasing sharply in December, then
declining correspondingly in January and continuing the down
ward tendency into February, appears, on the basis of partial
data for city banks, to have increased sizably in the last week
Largely as a result, the month as a whole probably
of February.
showed a greater than seasonal increase in total loans and
investments--at least at banks in leading cities. Much of the
increase was in loans to dealers in securities--both on Governments
Loans to business and to sales finance
and on other securities.
companies and loans on real estate also increased in February by
close to, or in excess of, customary seasonal amounts. In addition,
there was a further sizable increase in the banks' holdings of
other securities, while holdings of U. S. securities were reduced.
Changes by types of borrowers in business loans at banks

have been somewhat mixed, but on the whole demands for loans
seem to have been moderate, with no great differences from

customary seasonal patterns. Repayments have been fairly large
in some lines--such as chemicals and public utilities, probably
reflecting the use of proceeds of new securities issues.
Time deposits at commercial banks have continued to expand
at a rapid pace, although probably somewhat slower than in
January. Time certificates and open accounts, including de
posits of State and local governments, have accounted for the

largest increases, but the growth of savings deposits has also
been substantial.
Data available for January indicate that only a small
portion of the large growth in

savings and time deposits at

3/6/62

-33-

commercial banks can be attributed to shifts of funds from
other savings institutions. Although withdrawals from
savings and loan association shares increased, and the net
increase in such shares, seasonally adjusted, declined
somewhat in January, the net growth was still
quite large.
Mutual savings banks continued to gain deposits, although
the situation was mixed among the different sections of the
country.
Demand deposits at banks, which decreased more than
seasonally in January, increased on a seasonally adjusted
basis during the first half of February. The situation in
the second half of the month is still uncertain; there was a
decline in the third week, but partial data available for
February 28 and for early March indicate an upturn that may
have been sufficient to show a net gain since January.
As a net result of the varying rates and directions of
change as between demand and time deposits, total deposits
have increased considerably since the first
of the year,
while the seasonally-adjusted money supply has probably
declined on balance. As a consequence, member bank required
reserves, with adjustment for usual seasonal changes and
elimination of the effect of variations in U. S. Government
deposits, have changed little on the average since mid
December. This means that there has been no net expansion
in required reserves in that period. Although compared with
earlier periods the rate of growth may be considered satis
factory and partial data indicate the possibility of a
sizable increase in the current week.
These differences with respect to increases in demand
and time deposits raise difficult questions of judgment as
to the determination of Federal Reserve policy.
Total bank
credit and total deposits, after adjustment for customary
seasonal variations, have increased in recent months. These
increases in aggregate figures are the result of the exceptional
growth in time deposits, which reflects either increased saving
or the diversion of saving from other uses, and the investment

of such funds by banks.

To a small degree, the funds have

come directly or indirectly out of demand deposits at banks.
To the extent that they were balances that would otherwise
have been held idle, the basis for expanding the active money
supply is enlarged, because of reserves released by the
differentials in reserve requirements, assuming that these
released reserves are not absorbed by System operations.
If,
however, the funds shifted would otherwise have been used for
spending and the reserves released are absorbed, then the

3/6/62

-34-

potential for economic expansion is reduced by the shift
from demand to time deposits.
The net result is probably somewhere between these
two extreme possibilities.
To avoid contractionary effects,
the System should as a minimum refrain from absorbing all
the reserves released by any shift of funds from demand to
time deposits.
Probably some demand deposit expansion should
be permitted, though the amount could be moderated in considera
tion of the rate of growth in time deposits.
Judgment as to the needfor additional reserves and credit
expansion has to be based on an appraisal of current develop
ments.
The current domestic situation appears to call for no
severe restraints and possibly for some stimulants.
The
balance of payments problem, however, continues to call for
caution in applying stimulants.
Usual seasonal patterns, together with a moderate allowance
for further total bank credit expansion, indicate the need for
only moderate System operations during the coming month.
Some
purchases and sales will be needed to adjust to intra-month
variations among factors affecting the supply of reserves.
In
April and May, moderate net increases in System holdings will

be needed.
Mr. Hayes presented the following statement of his views on the
business outlook and credit policy:
There has been a pause in business expansion. In recent
weeks business expansion has fallen short of the expansion
experienced in corresponding periods of earlier recoveries.
While some indicators are moving up, many are moving down.
It is too early to say whether the pause has been caused by
the usual winter slump, unusually bad weather, or something
more fundamental.
Prices continue generally stable, and there are few, if
any, signs of inflationary pressures.
In previous post-war
recovery periods there has been some stimulus based on
inflationary expectations. In a noninflationary recovery it
may well be that we should expect some hesitation from time
to time. Further developments during the current month may
help us to resolve the question to what extent the forward
movement of the economy has been impaired. In the meantime,
I remain impressed by the elements of underlying strength in
the economy.

3/6/62

-35-

There has not been much change in credit conditions.
In
early February bank loans seem to have advanced in roughly sea
sonal proportions, with business loans giving a good account of

themselves.
The seasonally adjusted money supply declined in January;
this was the first decline in five months.
On the other hand,
time deposits rose substantially, undoubtedly because of the
higher interest rates paid on such deposits pursuant to the
liberalized Regulation Q. Judging from data for the weekly
reporting member banks, this strong rise in time deposits has
continued into the first
half of February.
The money supply

also rose during the first half of February.
There would seem to be plenty of built-up spending power
on the part of consumers and businessmen.
The liquidity of
the banks and of the nonbank public is quite comfortable.
Current levels of liquidity should not deter consumers and
businessmen from increasing their spending.
Our adverse bal
quarter
plagues us. While the first
ance of payments still
of 1962 will probably produce better statistics than the last
Data
quarter of 1961, there is no real cause for optimism.

for the first quarter of 1961 also appeared reassuring; we sus
pect that a faulty seasonal correction may favor the first
quarter picture. The drain on our gold stock has continued
in the first quarter of 1962. It could rise appreciably in
the next few months in view of the heavy deficit we have been
running and the increased dollar holdings of foreign central

banks which, in some cases, may feel that their credits to us
represented by their dollar holdings are now excessive.

Last week the subscription books on the Treasury's latest
advance refunding were closed for individuals. The subscrip
tion books for financial institutions and business concerns
had been closed a week earlier. Next week the Treasury will
probably announce its plan to borrow $1-1/2 to $2 billion by

the sale of tax anticipation bills in competitive bidding.
Thus there is a relatively short period within which the
Federal Reserve could undertake a shift in policy, if such
a shift seems desirable, without interfering with the bidding
for the new bills.
Because of the continuing threat to our gold stock arising
from the accumulation of unusually heavy dollar balances by
foreign central banks, and because of the continuing general
balance of payments problem, I think that we should make a
moderate move towards a policy of somewhat less ease. I believe
that our underlying domestic business situation has enough

-36

3/6/62

momentum to withstand the effects of such a step, which would
be taken solely because of balance of payments considerations.
Although the time within which we can move in this way is
limited by the Treasury's financing plans, I think we could
move now toward a three-month Treasury bill
rate between 2-3/4
per cent and 3 per cent, with the rate on Federal funds at or
close to the discount rate at most times.
This would probably
involve some moderate reduction in free reserves.
For the time being an increase in the discount rate would
seem to be inappropriate.
Unless the business picture improves
appreciably, I would doubt whether a higher discount rate should
be considered in the near future except as part of a "package"
or set of forceful actions to be taken by our Government on
several fronts to focus attention on our balance of payments
problem and our determination to find lasting solutions.
Mr. Bryan reported that the situation in the Sixth District was
similar to the national picture.

However, two indicators--construction

contracts awarded and average hours worked--showed rather sharp declines.
Turning to the national situation, Mr. Bryan said it
that there was a lull

in

economic activity.

seemed clear

He saw no way, however,

of

predicting conclusively whether this lull heralded a continuing decline
or was simply a period of hesitation such as occurred in September 1961.
Therefore,

it

tially in its

seemed to him that monetary policy should continue essen
present posture, certainly with no restriction and with

some allowance for growth in the reserve supply, until there was a
better degree of visibility.

Except, perhaps, for the responsibility

that attached to the international situation, the Committee seemed in
a good position to continue the supplying of reserves,

at least on a

seasonal basis plus a small growth factor, because in this recovery
there was no conflict between employment and price goals.

The growth

3/6/62

-37

factor, he thought, should be moderate--at an annual rate in the range

of 3 or 4 per cent.
Mr. Bopp said that business had not improved this year in the
Third District, although the District was much better off than a year
ago, with production, retail sales, and construction all higher.

However,

since the beginning of the year most indicators were off more than
seasonally.

There was one major exception:

preliminary figures on

electric power consumption showed an increase, both on an adjusted and
unadjusted basis.

At the end of last November, half of the District's

labor market areas had rates of unemployment below the national average,
while at present only three were below the national average.
Mr. Bopp questioned whether it was desirable over a period of
time to have references to Treasury financing in the current economic
policy directive continually.

It might be advisable, he suggested, to

delete such references from the directive that would be issued today even
though the interval before the next financing operation was not very great.
With that exception, he would favor no change in the directive. Neither
would he favor any change in

the tone of the money market or the discount

rate.
Mr. Fulton said the subdued tones of recent economic reports in
the Fourth District had done nothing to mitigate the uneasiness that

resulted from the January slippage.
state of flux.

The steel situation was still in a

He had reported a couple of meetings ago that the union

-38

3/6/62

would probably present a large package, that this would be rejected by

the steel companies,

and that a settlement encouraged by the Administra

tion might be the final result.
developing.

This seemed to be the pattern that was

The union leadership could hardly afford to agree readily

to a settlement that was inferior to the settlement effected in the auto
industry, and that type of settlement would necessitate a substantial

increase in steel prices if the earnings of the companies were to be
maintained at a reasonable level.

However,

the union leadership might

accept more gracefully a settlement substantially along lines suggested
by the Administration.
Continuing, Mr.

Fulton reported that construction in the District

declined more than usual in January.

Information for Cleveland and

Cincinnati showed a disproportionately large volume of publicly financed
projects, with relatively little industrial investment on the boards.
Sales of new cars remained moderately brisk during the first three weeks
in February, and the auto companies were still projecting sales of about
6.7 million cars for the year, including some 350,000 foreign cars.
However, data for December, January, and the first two 10-day periods in
February suggested that sales might be at an annual rate of about 6.4
million, again including 350,000 foreign cars.

Department store sales

were down from their previous high levels.
Bank credit had continued to decline, Mr.

Fulton said, and bankers

seemed somewhat resigned to the thought that in the immediate future there

-39

3/6/62

probably would be no strong demand for commercial credit.

Savings de

posits had risen substantially in those banks that had increased their
rates of interest to the ceiling.

A recent study in

the District showed

that banks had gained substantially vis-a-vis savings and loan associa
tions; the latter had gained a considerably smaller portion of the
savings dollar than in previous periods.

It appeared that new savings

were now going into the banks, rather than the savings and loan associa
tions, to a greater extent than previously.
Mr.
policy.

Fulton said he could see no reason to change current monetary

He hoped the Desk would continue to maintain about the present

posture, with the bill rate around 2-3/4 per cent and Federal funds near
the discount rate.

He would not like to see any restriction of credit,

feeling that credit should be amply available.

The view that the

directive could be left unchanged, except for elimination of the refer
ences to Treasury financing, met with his concurrence,

and he would not

favor changing the discount rate.
Mr. Mitchell said it seemed to him that the business upthrust was
about at the stage where the momentum provided by the inventory turnaround
had been lost.

This meant that something else was needed to furnish the

stimulus for continued economic growth.

One would ordinarily expect this

stimulus to come from consumer spending.

However, the available evidence

on consumer spending indicated a seasonally-adjusted decline from November
through January,

and it

did not seem likely that February would show a

-40

3/6/62

higher level of sales than January.

Information on automobile and depart

ment store sales and on the use of consumer credit suggested that the
consumer was not responding effectively enough to keep the trend of
business moving upward.

Another possible stimulant was business spending

on plant and equipment.

The results of the latest Commerce-SEC survey,

which would be available shortly, should provide the basis for a better
judgment as to whether the economy was likely to get a renewed thrust
from that source.
Mr. Mitchell said he was inclined to agree with the staff that the
economy was going to come out of the current pause satisfactorily.

On the

other hand, he could not help but feel that there was a fairly substantial
possibility that the economy might falter.

If

this were to happen, there

would be in prospect a substantial budget deficit in an attempt to pull
the economy back to a rising trend.

Rather than to run the risk of such

a development, he would prefer to see monetary policy somewhat more
aggressively easy than at present.

The difficulty was that this might

have an adverse psychological impact; people would say that if the Federal
Reserve was worried, things must be getting bad.
contribute to such a psychological attitude.
would favor no change in policy at this time.

The System should not

On balance, therefore,

he

As to the directive, he

would eliminate the references to Treasury financing.
Mr.

King said he thought it

would be possible for the Committee

to respond in a modest way to the slowdown in economic activity without

3/6/62

-41

creating an adverse psychological effect.
significantly easier policy.
he would think it

He would not advocate any

In terms of the level of free reserves,

appropriate if

they continued in the same general

pattern as had prevailed recently.

He believed, however,

less emphasis could be placed on maintenance of the bill
present level.

that a little
rate at its

In his opinion, any strong effort to hold the bill rate

at that level, particularly in view of the decline in intermediate-term
Treasury yields, could not help but produce unfortunate results.
Therefore,

in the sentence of the current economic policy directive

that called for open market operations to be conducted with a view to
maintaining a supply of reserves adequate for further credit expansion,
he would eliminate the words "while minimizing downward pressures on
short-term interest rates."

At the present time, he did not believe that

short-term rates were going to decline to an extent that would seriously
aggravate the international situation.

Accordingly,

this seemed an

opportune time to place somewhat less emphasis on the bill rate in the
formulation of monetary policy.

This did not mean that he would not

again attach considerable importance to the bill
should warrant.

rate if

developments

However, he thought this was the point in the cycle

where a modest contribution might exert a significant effect.
Mr. Shepardson expressed the view that the economic situation
was basically sound.

Even though at the moment there seemed to be a

pause, he did not see that this had been brought about by any lack of

-42

3/6/62
availability of credit.

The continued growth in total deposits in

dicated that funds were available.
reflect, on the part of consumers,

The increase in
a little

see what adjustments might be made.
might be some hesitance in

uncertainty and a desire to

As to business investment,

there

order to see what developed from certain propos

als now before the Congress.
looked a little

savings might

As to the balance of payments,

the situation

better on the surface, but the fundamental problem

apparently had not changed very much.
Mr. Shepardson said, with respect to policy, that he did not
believe anything would be gained by increasing the degree of ease.

In

fact, while he would agree that the System should continue to supply
reserves for some credit expansion, he would personally lean toward a
somewhat lower growth rate than had prevailed.

He would prefer to run

4 per cent.

Further, there was the

a little

closer to 3 per cent than

possibility of a relatively easy transfer of time and savings deposits
into the active money supply.

In the circumstances,

he would continue

about the degree of ease that had prevailed, with possibly a slightly
lower provision for reserve growth.
in

There would seem to be no purpose

changing the discount rate at this time.

concerned,

As far as free reserves were

they probably should be maintained at approximately the level

of recent weeks.

At the same time, attention should continue to be

given to the bill rate, which in his opinion should preferably be above
2-3/4 per cent rather than below,

As to the current economic policy

3/6/62

-43

directive, he would concur in the suggestion for elimination of the
references to Treasury financing.

Mr. Robertson said it appeared to him that the differences
Practically every

between those who had spoken were relatively minor.

one wanted to "stay about where we are," not becoming too much easier or
tighter.

This was also his thinking.

This was no time for tightening.

Rather, it was a time for continuing a ready availability of reserves in
order to stimulate the economy and offset as much as possible the current
pause in business activity.

While he thought there was likely to be

continued economic growth, and that it might be rapid after a month or
two, for the moment he would concur in what he sensed to be the majority

view among those who had spoken, namely, that the System should maintain
just about the same degree of ease as at present.

He would prefer more

ease to less ease, but he would not advocate either.

As to the current

policy directive, he would agree with the suggestion that the references
to Treasury financing be deleted.

He would also eliminate the part of the

directive that called for minimizing downward pressures on short-term
interest rates.
Mr. Wayne reported that recent developments had not significantly
changed the general course of Fifth District business.

Broad statistical

indicators extended through January the patterns of fluctuation at or near
record levels that began last fall.

The following points stood out in the

Reserve Bank's opinion survey of a fairly representative group of businesses

3/6/62

-44

covering the first three weeks in February: significant gains in new orders
and shipments,
ing a little

not limited to durable goods; considerable stability, lean

toward the up-side,

in

employment,

hours, wages,

and prices;

and a slightly more optimistic view of the outlook for profits.
As to policy, Mr. Wayne said that he would concur in

the appraisal

that seemed to be quite general and that he would favor continuing about
the same policy that had been followed for the past six weeks.
not favor any change in

the discount rate at this time.

He would

On the directive,

he would eliminate the reference to Treasury financing but would retain
the language with respect to minimizing downward pressures on short-term

interest rates.
Mr. Clay said it

was apparent that economic developments thus far

in 1962 had been less than satisfactory.
beyond normal,

Adverse weather developments

and beyond seasonal adjustments in

statistical series, may

have been a significant factor; but these sluggish developments could not
be explained away solely by the weather.

This did not necessarily mean

that the underpinnings of the business expansion were unsound or that
events of the weeks ahead might not be more favorable.

Whatever the cause,

however, it did mean that any movement toward monetary restraint or any
trending toward less monetary ease would be distinctly inappropriate under

present circumstances.
The Committee would be looking for clarification of economic
developments in

the weeks immediately ahead, Mr.

Clay noted.

That

-45

3/6/62

clarification probably would be needed not so much to determine whether
credit should shortly be tightened as to learn whether the System would
be faced with the much more difficult and awkward problem of doing more
toward encouraging economic expansion rather than less.

In the meantime,

the Committee could not afford to be sympathetic with any tightening of
credit,

either in

expansion or in

terms of the rate of seasonally adjusted bank credit

terms of an upcreep in

the level of interest rates.

With

reference to the international flow-of-funds problem, the Committee should
not lift the range of the Treasury bill rate at this time above its pre
vious goal.

So far as he could judge, it

did not appear to be necessary

to do so at this time for purposes of the international flow-of-funds
situation.

Moreover, the needs of the domestic economy dictated that such

credit tightening be avoided if

at all possible.

In keeping with the monetary policy he recommended, Mr. Clay ex
pressed the view that no change should be made in
discount rate.

the Federal Reserve Bank

Mention had been made from time to time of the positive

contribution to this country's international financial situation to be
derived from a discount rate increase as a signal of the soundness of

monetary policy.

An increase in the discount rate would be a signal to

the domestic economy too--as to the System's policy toward facilitating
economic expansion--and under present circumstances the signal would be
inappropriate.
Mr. Scanlon said conditions in

the Seventh District appeared quite

-46

3/6/62

similar to those reported by others who had spoken thus far.

Despite the

trend of some indicators, businessmen remained confident that developments
would be favorable for the year as a whole.

In the auto industry produc

tion was still falling, but manufacturers remained optimistic about sales
for the year.

In general, cutbacks in industry had been accomplished

mostly by means of shortening the workweek rather than reducing employment.
Electric power statistics indicated a decline in industrial consumption
of 11 per cent in the Detroit area from December to January, along with
a 4 point decline in the Indianapolis area.

Although business loans had

increased since January, total bank credit had continued to decline.

The

position of banks generally remained easy.
The trend of bank credit, coupled with business developments thus
far in 1962, suggested to Mr. Scanlon that no change in monetary policy
was called for at this time.

He would favor elimination of the refer

ences to Treasury financing in the current policy directive.

He would not

change the discount rate at this time.
Mr. Deming commented that, as had been noted in this room before,
it was quite fashionable to blame or credit the weather with rather
pronounced effects on economic trends.
or credit was overweighted.

In general, he thought such blame

This year in the Ninth District, however, the

weather almost certainly had affected some lines of endeavor quite
adversely.

The District had experienced a very severe winter, with quite

low temperatures and a lot of snow.

These conditions were believed

-47

3/6/62

to account almost entirely for the slowdown in retail sales in the area.
Department store sales were barely even with a year ago in January, and
in February were 4 per cent below those of February 1961.

The weather

also had hampered construction, logging, and other outside work.
Other District economic indicators presented a brighter picture.
In January, personal income held at the December level.

Total District

nonfarm employment, seasonally adjusted, rose significantly in January
despite the winter weather that held down outdoor work.
had grown slowly last fall and paused in December.)

(Such employment

No District figures

for February were as yet available, but in Minnesota nonfarm employment
in February fell substantially less than it did last year.

The nonfarm

employment gains reflected mainly rising manufacturing employment,
the rise rather broadly based.

Employment people in

with

the Twin Cities,

basing their estimates on employer statements, expected manufacturing
employment to rise about seasonally for the next three months.

For the

first time in some time they noted the possibility of shortages in some
skilled jobs--machinery and ordnance particularly.

As a footnote ob

servation on employment that might indicate one way in which future
employment gains would come,

the total gain in manufacturing employment

in Minnesota over the past five years was smaller than the gain registered
in the electronics industry.
Ninth District banks are subject to rather pronounced seasonal
changes in loans and deposits, Mr. Deming noted.

Thus, in all of the

-48

3/6/62

postwar years total deposits at city banks had dropped from 5 to 10 per
cent in the first quarter, and those at country banks had declined from
2 to 5 per cent.

For December, January, and February combined, roughly

the same picture prevailed although in two such three-month periods
(1950-51 and 1960-61) deposits at city banks registered small gainsless than 1 per cent.

At country banks the December-January-February

declines ran a bit smaller than first quarter declines, but every post
war year had witnessed a decline in those three months.

The recent

December-January-February pattern had been in the same direction as in
former years,

but had been significantly smaller.

The difference seemed

to lie entirely in time deposits, which were up far more than usual in
both classes of banks, but with the gains very large at city banks.

At

the close of February such deposits were 33 per cent larger than a year
earlier at city banks and 9 per cent larger at country banks.
deposits in both classes of banks were 3 to

Demand

4 per cent ahead of year-ago

levels.
Loan changes did not show quite such a neat pattern at District
banks, but in general (in 10 of the past

14 years) the December-January

February loan change at city banks had been minus whereas the change at
country banks in 12 of the past 14 years had been plus.

This year the

change at city banks had been plus, the first such plus change since
1956-7.

At country banks the three-month change this year was a small

minus, probably reflecting both last summer's drouth and the severe winter.

-49

3/6/62

In short, both loans and deposits at District banks were showing
rather pronounced strength for this time of year.

The banks,

however,

remained quite liquid, at least by standards of recent years; borrowings
from the Reserve Bank had been quite small and the city banks had been
on the selling side of Federal funds transactions for some time, although
their net sales had tended to shrink in recent weeks.
Thus the District picture looked somewhat different from the
national picture, Mr. Deming pointed out.

While he would not assert

that it could foreshadow resumed growth nationally, he did not see any
more basic strength in the District than in the nation.

He saw no per

suasive reason to believe that the current expansion nationally was top
ping out and, in

fact, he would rather expect that it

would accelerate

again in the near future.
Mr. Deming said he still

believed, then, that the posture of policy

over the next several months was more likely to trend toward less ease
than more ease.

Therefore, he believed it

would be a mistake to shift

to more ease now, despite the current record of the economy.

On the

other hand, he saw no reason to renew the trend toward less ease now.
Accordingly, he came out with the feeling that the System should stay
just where it was in terms of reserve availability.

He hoped that this

would be done without short rates declining significantly further.

Per

haps they even could work back up a bit if the Treasury made some more
additions to its weekly bill offerings.

He saw no need to change the

-50

3/6/62
discount rate.

The directive, he believed, might be renewed with only

the references to Treasury financing stricken from it.
Mr.

King withdrew from the meeting at this point.

Mr.

Swan said there did not appear to have been any appreciable

change in the business picture in the Twelfth District.
adjusted basis, the rate of unemployment in

On a seasonally

the Pacific Coast States

fell in January to 5.6 per cent, this being the first month since January
1960 when the rate was below 6 per cent.

Manufacturing employment rose,

principally because of further gains in defense-related industries.

On

the banking side, loans of weekly reporting member banks rose modestly
in the first three weeks of February, but the category showing the largest
increase was real estate rather than business loans.

A number of bankers

had recently been expressing keen disappointment about their inability
to find indications of any substantial increase ahead in business loan
demand.
It

seemed to him, Mr. Swan said, that the domestic situation

called for no less than a continuation of the degree of ease that had
prevailed in recent weeks.
say that in

In fact, he would go a little further and

his opinion the current pause had lasted long enough to

suggest that a slight intensification of the degree of ease would be in
order.

He did not argue that this should be appreciable; if it had not

gone out of fashion recently, he would use the phrase "resolving doubts
on the side of ease."

Both required reserves and total reserves available

-51

3/6/62
fell

a little

short of the so-called standard by the end of February and

the money supply, which declined rather sharply in
likely to show little

change in February.

the continuing growth in

time deposits,

it

January, appeared

Therefore,

even allowing for

did not seem to him that the

reserve pattern was entirely consistent with recent business developments.
It was, of course, necessary to look at international factors with caution,
but this was a point at which it appeared possible to give a little more
weight to domestic relative to international considerations, particularly
in view of reports that neither gold nor dollar transfers to foreigners
were substantial in January and that in both January and February they
apparently were well below the level of the fourth

quarter of 1961.

In summarizing, Mr. Swan said he would suggest a move, though
only very slight, in the direction of more ease.

This would mean provid

ing a little more than seasonal reserve needs in the weeks immediately
ahead, with no appreciable change in free reserves but a leaning toward
the $450-$500 million level rather than the $450-$400 million level.

He

would not expect any significant change in the bill rate, but if the rate
was around 2-5/8 per cent rather than 2-3/4 per cent he would not be
particularly concerned.

As his comments suggested, he would not favor a

change in the discount rate.

As to the directive, the references to

Treasury financing should be deleted.

Also, he would like to see the

reference to minimizing downward pressures on short-term interest rates
eliminated.

-52

3/6/62

Mr. Ellis said that New England business conditions seemed to be
stronger than the national pattern.

Indirect evidence suggested that

consumer spending was remaining strong.

Sales tax receipts were above

year-earlier levels and rising, while auto contracts extended by the
larger banks were running well ahead of a year earlier through January.
Poor weather had affected department store sales recently, but they were
strong for the year as a whole.

Business spending seemed to remain strong.

In his opinion, incidentally, the economy might still get some lift
inventory accumulation, particularly in durables.

from

The responses to a

current Reserve Bank survey of a large part of New England manufacturing
were now being tabulated, and preliminary results suggested a substantial
gain in capital outlays in 1962 from 1961, with substantial sales gains
also expected.

Corporate income tax collections in the seven months

through January were up from the previous year.

Production reached a new

peak in January, according to the New England index of manufacturing,
with most of the thrust coming from durable goods industries, along with
electronics.
Continuing, Mr. Ellis noted that weekly reporting member banks
experienced less than the normal seasonal decline in deposits in January
and February and showed a substantial gain in time deposits.

There was

an appreciable rise in business loans in February, though they were below
banker expectations,

and the banks still anticipated an increase in loan

demand this spring.
Mr.

Ellis

said he would judge that the pattern in New England was

-53

3/6/62

stronger than that for the nation as a whole.

Yet the evidence provided

by the staff seemed to him to indicate that the economic lull was of the
same character as occurred last August and September.
believed that the underlying trend still
pansion.

On balance, he

was one of strength and ex

Policywise, he agreed that it would not be appropriate to

tighten at a time when the economy was hesitating and that this was no
time for discount rate action.

However, he did feel some concern about

the fact that short-term interest rates had dropped since the February
13 meeting.

Looking at the staff projections on the

need for reserves,

he felt it might be appropriate to supply those reserves, to the extent
feasible, through purchases of longer-term securities in an effort to
support the bill

rate at a level above 2-3/4 per cent.

As to the current

policy directive, he would strike the references to Treasury financing.
He had come to the meeting prepared to suggest strengthening the first
paragraph, but he gathered from the comments around the table that this
was not the sense of the meeting.
first

paragraph,

however,

it

If

the Committee wanted to change the

might consider including a reference to the

adverse balance of payments and the desirability of maintaining a viable

international exhange system. He would favor continuing to include the
language that related to minimizing downward pressures on short-term

interest rates.
Mr.

Francis reported that the pace of business activity in the

Eighth District had slowed down since December.

Employment had leveled

3/6/62

-54

off, and department store sales were down from November through February.
Output of manufacturing firms, as indicated by electric power consumption
statistics, rose in December but was down in January in most of the major
cities in the District.

Bank deposits were down in five major metropolitan

areas in December, but rose in January.

In the first three weeks of

February, deposits of weekly reporting banks rose.

Time deposits in

creased sharply at banks in major cities, the increase being principally
in time certificates rather than savings accounts, and demand deposits
were about unchanged.

Bank loans increased in the three-week period,

but the increase was centered almost entirely in Memphis banks.

In

general, economic activity in the District was exhibiting a sideways
movement, with little evidence of rising tendencies since the turn of
the year.
Mr.

Shuford said he would forego a detailed statement on the

Eleventh District and make only the observation that there had been no
significant changes since the Committee meeting three weeks ago.
Mr.

Balderston said there were certain aspects of the current

situation that particularly impressed him.
on the international situation.
the domestic scene.

First, there were the data

Second, there were the data regarding

Third, the change in maximum permissible interest

rates on time and savings deposits was evidently causing a churning
action that had had some by-products.

In January, the seasonally

adjusted rate of turnover of demand deposits at banks outside New York

-55

3/6/62

City and other financial centers rose to a new post-war high of 27.4.
Also, while the money supply, narrowly defined, had remained level during
the past 2-1/2 months, there had been an added supply of almost $4 bil
lion of near money.

He mentioned these last two facts because they

might induce some caution in the use of the indicators or guides that
the Committee had been following for a number of months.

They suggested

that the Committee may have countered sufficiently the current economic
pause, at least until the impact of the churning subsided and the Committee
could get a somewhat clearer view.

At the February 13 meeting, he had

remarked that the Committee was faced with a choice between the current
international problem and the pause in

economic expansion and that, faced

with such a choice, he would take a chance on a somewhat lower level of
free reserves in order to assist in firming the bill rate, especially
because he looked forward to some gold withdrawals in the weeks ahead.
As to the current policy directive, Mr.

Balderston said he would omit the

references to Treasury financing but would not omit the passage with re
gard to minimizing downward pressures on the short-term interest rates.
Chairman Martin commented that the members of the Committee did
not seem to be very far apart this morning in any sense of the word.
Continuing, the Chairman said it seemed to him the Treasury had
been helping out the Federal Reserve, in that its financing operations
were complementary to System policy.
reasonably successful, with

The advance refunding had been

$4 billion of debt lengthened, and this

-56

3/6/62

would have some effect on the market.

Further, the Treasury was pro

posing in the next few weeks to issue more bills, which would assist in
stabilizing the bill rate.
The Chairman went on to say that "steady in the boat" seemed to
him to be the watchword at the moment.

In terms of monetary policy,

this would involve maintaining the status quo.
As to the balance of payments problem, Chairman Martin noted that
everyone had his own views.

He found himself more and more convinced

that this problem was a vital factor in the unemployment situation.
Foreign capital was finding the United States less and less attractive,
there were pressures for movement of capital abroad, and this was having
a deleterious effect on employment in this country.

It

was also causing

uncertainty with regard to capital investment for modernization and im
provement of plant and equipment, which investment was vital to an ex
Therefore,

panding business picture.

the balance of payments problem

was not separable from the over-all problem.

He felt, also, that this

country was going to have to be prepared to lose more gold in
of the next year or so.

the course

The improvement in the balance of payments at

the moment was probably a temporary improvement when viewed in the light
of the broad factors he had mentioned.
Basically,

however,

short of a confidence crisis, the posture

of the System ought to be one of rendering maximum assistance to the
domestic economy.

The System should

not get into a position where it

3/6/62

-57

could be accused of throttling the economy through an insufficient avail
ability of funds.

If

there were inflationary pressures,

the problem today

would be quite different, but goods and services were in adequate supply
and prices were stable.

Further, the increase in maximum interest rates

on time and savings deposits was encouraging saving, which had already
been at a reasonably high level.

In his opinion, it was not necessary

to make minor adjustments in policy in terms of the balance of payments.
The Government's endeavor to improve military procurement policies and
its continuing attack on t he balance of payments problem in other ways
constituted evidence that the problem was not being ignored.

With full

recognition of the importance of the adverse balance of payments to the
over-all economic problem, he came out in essence with the view that the
wisest course for the System to follow at this time would be the status
quo.

If and when international flows of capital should present a crit

ical problem, the System might have to react by raising the discount
rate or doing something more dramatic than effecting a modest adjustment
in

the level of reserves, but this was borrowing from the future.
Turning to the current economic policy directive, Chairman Martin

commented that Mr. Young had a suggestion that had been worked out with
Mr. Rouse and seemed to reflect the consensus of the meeting according to
the views that had been expressed.

He then read the suggested language

and the expressions of Committee members were favorable.

-58-

3/6/62

Accordingly, the Federal Reserve
Bank of New York was authorized and
directed, until otherwise directed by
the Committee, to execute transactions
in the System Open Market account in
accordance with the following current
economic policy directive:
In view of the continued underutilization of resources,
and particularly of the evidence of some hesitation in the
pace of business activity, it remains the current policy of
the Federal Open Market Committee to promote further expan
sion of bank credit and the money supply, while giving recog
nition to the country's adverse balance of payments and the
need to maintain a viable international payments system.
To implement this policy, operations for the System Open
Market Account during the next three weeks shall be conducted
with a view to maintaining a supply of reserves adequate for
further credit expansion, taking account of the desirability
of avoiding undue downward pressures on short-term interest
rates.
Votes for this action: Messrs.
Martin, Hayes, Balderston, Bryan, Deming,
Ellis, Fulton, Mitchell, Robertson, and
Shepardson. Votes against this action:
none. 1/
Messrs. Yager and Broida withdrew at this point.
There had been distributed to the Committee reports from the
Special Manager of the System Open Market Account on System and Treasury
operations in foreign currencies and on foreign exchange market conditions
for the weeks ended February 21 and February 28, 1962, along with a
supplementary report for the period March 1 to March 5, 1962.

Copies of

these reports have been placed in the files of the Federal Open Market
Committee.
King stated subsequently that if he had been present when this
1/Mr.
action was taken, he would have voted in favor of the directive.

3/6/62

-59
Among other things, the supplementary report recorded the fact

that on Thursday, March 1, the System Open Market Account had acquired
245 million French francs ($50 million equivalent) in a swap arrangement
with the Bank of France.

Under the terms of the swap, the dollar proceeds

accruing to the Bank of France were invested in a non-transferable United
States Treasury certificate of indebtedness--foreign series, at 2.70 per
cent per annum, while the franc proceeds accruing to the System were being
held in a Bank of France "money-employed" account bearing the same rate
of interest.

The swap was to mature on June 1,

1962,

but would be

renewable, and each party was protected against a revaluation of the other
party's currency.

Upon poll taken by the Secretary of the Committee, the foregoing
transaction had been approved by a majority of the Committee on February

28, 1962.

Those voting to approve the transaction included Messrs. Martin,

Balderston, Irons, Mills, Shepardson, Swan,

Fulton (alternate), Ellis

(alternate for Mr. Wayne), and Treiber (alternate for Mr. Hayes).
King and Robertson dissented, and Mr. Mitchell abstained.

Messrs.

The two dissents

and the one abstention were on the grounds that the members of the Committee
had not been afforded sufficient time or sufficient information properly
to appraise the then proposed transaction on its merits.
At the beginning of today's discussion of System foreign currency

operations, Chairman Martin emphasized the highly confidential character
of such operations.

He noted that skepticism had been expressed in some

-60

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quarters as to whether it was feasible for a group as large as the full
Open Market Committee to operate in this area.

It was particularly

important, he pointed out, for all those in attendance at this meeting
to bear in mind that in these operations the Federal Reserve was dealing
with foreign governments and central banks.
The Chairman then turned to Mr. Coombs for comments supplementing
the written reports that had been distributed.
In his comments, Mr. Coombs noted that the foreign exchange
markets had been quiet during the past three weeks, this probably having
been attributable in some measure to the recent improvement in the U. S.
balance of payments.

There had been few takings of gold, but this

reflected restraint on the part of foreign central banks that were hold
ing large amounts of dollars.

Announcement of the initiation of a Federal

Reserve foreign exchange program, in addition to the activities of the
Stabilization Fund, seemed to have contributed to the quietness of the
market.
After discussing briefly developments with respect to the positions
of certain foreign currencies, Mr. Coombs noted that System accounts nad
been opened with four foreign central banks since the last meeting of the
Committee, through the mechanism of purchasing foreign currencies from the
Stabilization Fund.

Also, there had been the $50 million swap arrange

ment with the Bank of France.

3/6/62

-61
As to possible future System operations, Mr. Coombs pointed out

that the Stabilization Fund had substantial commitments, pursuant to
forward operations, to deliver Swiss francs.

Although Swiss francs might

well become available for purchase shortly, the Treasury

had established

as a guideline a maximum of $120 million on foreign currency holdings

a

the Stabilization Fund, and present holdings were $10 million in excess
of that figure.

In

this situation,

there seemed to be an opportunity for

the Federal Reserve to acquire some additional foreign currency and at
the same time to cooperate with the Stabilization Fund.

One possibility

would be for the System to purchase a quantity of German marks from the
Stabilization Fund.

Another possibility would be for the Federal Reserve

to purchase Swiss francs and to sell them forward to the Stabilization
Fund.

The purchase of marks would involve a loss of interest because the

German Federal Bank was not authorized by statute to pay interest on
Federal Reserve holdings of German marks.

It could pay interest, howevr,

on holdings of marks by the Stabilization Fund.

Nevertheless,

as between

the two alternatives, Mr. Coombs indicated that he would favor the pur
chase of marks from the Stabilization Fund to the acquisition of Swiss

francs.
At this point Chairman Martin requested that Mr. Coombs comment
in more detail on the swap arrangement with the Bank of France, particularly
in regard to the haste that was involved in consummating the transaction.
In reply, Mr.

Coombs stated that the negotiation with the Bank of

-62

3/6/62

France was conducted by Mr. Young and himself in Paris on Thursday,
February 22, at which time agreement was reached on the general nature

of the transaction,

including the protective features.

After commenting

in those regards, he went on to say that the Bank of France was at first
somewhat inclined toward a swap arrangement of around $25 million,

whereas he and Mr. Young thought it better to go to $50 million.
the week end, however, the Bank of France agreed to go to

By

$50 million.

At the same time, the Bank urged a value date of March 1, because on that
date France was making a payment in the amount of $60 million to the
International Bank for Reconstruction and Development and the Bank wanted
to mesh the two transactions.

A telegram was received from the Bank of

France on Monday, February 26, containing terms as to which agreement
had been reached in

the negotiation in

Paris.

Subsequently,

a call was

received from the Bank of France again urging the March 1 value date.
Meantime, on Tuesday afternoon a wire--or memorandum quoting such wire-

had been sent by the Secretary of the Open Market Committee to each
member of the Committee requesting approval of the proposed transaction.

The following day word was received by the Special Manager from the
Secretary that a majority of the Committee had approved the proposed

transaction, and it went into effect as scheduled.
As to what might be done with the francs that had been acquired,
Mr. Coombs said that he would suggest sitting tight for a while.

It

would be possible to sell francs on the open market to try to push the

3/6/62

-63

dollar rate from the floor, but he would like to see signs of some
lessening of the inflow of funds into France before making any such move.
Certain technical questions regarding the transaction were then
raised, to which Mr. Coombs responded.

Among these was the question

whether the Federal Reserve could have held the dollar proceeds accruing
to the Bank of France in a "money-employed" account similar to the account
in which the franc proceeds accruing to the System were being held by the
Bank of France, and Mr.

Coombs stated that he understood the Federal

Reserve was not so authorized.

If this could be done, a transaction of

this kind would be more symmetrical.
of France could

to this.

The Bank of England and the Bank

On the other hand, the German Federal Bank

could not see its way clear at the moment under German statutes.

Thus,

the Federal Reserve had not been able to invest the $7 million equivalent
now held in the account that it had opened with the German Federal Bank.
Chairman Martin noted that there was the question of entering
into a swap arrangement with the Bank of England similar to that entered
into with the Bank of France.

The pound sterling was strong at the

moment, and the principal value of a swap arrangement at this time would
seem to lie in the area of furthering mutual cooperation between central

banks.

This involved the so-called confidence factor.

Also, such an

arrangement might have the effect of holding some gold in this country.

Mr. Coombs indicated that he regarded the confidence factor as
important.

An arrangement such as that with the Bank of France tended

-64

3/6/62
to

give the market the impression that there was agreement between the

two central banks concerned and their

parity of their currencies.

governments

In further comments,

on maintaining the
Mr.

Coombs noted that

such an arrangement with the Bank of England would provide some cushion

against a conversion by the British against what could amount to a very
sizable inflow of dollars.

If there was some kind of reciprocal credit

arrangement with the Bank of England,

possibly in

the amount of $200-$250

million, this would mean that in the event of heavy inflows into the
United Kingdom,

the Federal Reserve could run down temporarily its

pound

sterlirg balances.
Mr.

Coombs reiterated that a number of European central banks

holding large amounts of dollars had been deliberately refraining from
taking gold.

If any bank should come in for a large amount of gold, an

"every man for himself" proposition could possibly develop.

Mr.

Mitchell presented the question whether, if

a foreign country

had achieved a certain position resulting from favorable balance of pay
ments and felt that basically it
in its

reserves,

it

should have a certain proportion of gold

was not better to work toward getting the gold there

rather than to try to keep the gold from leaving the United States.
In discussion of this question, Chairman Martin said that, as he
had indicated earlier during this meeting, he felt that the United States
must face the loss of some additional amount of gold over the next year
or so.

It was of considerable importance, however, whether the gold was

3/6/62
lost gradually or in big bites.

If this country attempted to use foreign

currency operations as a substitute for curing the basic deficit in its
international payments position, it would be in serious trouble.

But that

did not mean that there should be no intervention at all to make the flows
of funds more reasonable and orderly.

He thought that already the willing

ness of this country to intervene had brought a lot of attention t o the
exchange mechanism that had been beneficial.
Mr. Mitchell commented that the worst way to lose gold would be to
lose it involuntarily.

If possible, the loss of gold should be accomplished

according to an orderly process.

However, he did not find any indication

that such a policy was being pursued.
Mr. Hayes noted that foreign countries, by taking gold, would not
be improving their liquidity; they would just be changing the form of it.
From the standpoint of total world liquidity, the situation would be worse
if foreign countries took their dollar holdings in gold.

The holding of

dollars had served to promote a degree of world liquidity that could never
have been achieved if everyone held gold.

Everyone would agree, he thought,

that the basic solution was in remedying the U. S. balance of payments.
At such time as it was demonstrated that the United States was doing that,
the desire for gold would fade away.

The reason for uncertainty was

nervousness as to where this country was headed.
Mr. Mitchell said he understood the System was engaged in an
operation that had two goals: improvement of the international exchange

-66

3/6/62

system and defense of the dollar.
that were being done,

He was in favor of many of the things

but he was not persuaded

that the gold policy was

working in the right direction.

Mr. Mitchell then commented in explanation of his attitude toward
the swap arrangement with the Bank of France.

First, in the material

that had been sent to the members of the Committee in connection with
the Secretary's poll, there was no explanation as to why the value date
could not be postponed, although subsequently that point was explained.
Second, he did not have available at the time any memorandum about the
French economic, balance of payments, and political situation, and he
would regard such a memorandum as essential to the making of an intelligent
decision.

If any similar transaction with the Bank of England or another

central bank should be in prospect, he felt that appropriate information
should be made available to the members of the Committee in advance of
their being asked to make a decision.
In reply, Mr. Young said that a memorandum on the French situation
would be distributed to the Committee within a day or two.

If a similar

transaction with another central bank should come into prospect, appro
priate memoranda would be submitted to the Committee in advance.
After further discussion of the nature and objectives of System
foreign currency operations, along with additional discussion of certain
technical aspects of the arrangement with the Bank of France, Mr. Coombs
said there was another area in which a swap arrangement might serve a

3/6/62

-67

useful purpose.

After referring to the arrangements for enlargement of

the standby resources of the International Monetary
that Switzerland was not a member of the Fund
a gap in the system of defenses.

Fund,

he pointed out

and that this constituted

In discussion of alternatives, the

Swiss authorities had suggested that the Swiss National Bank might
negotiate a reciprocal transaction with the

Federal Reserve.

This could

be a matter of considerable importance.
There
bility

of a reciprocal arrangement,

following which Mr.

addressed himself to the thrust of policy that Mr.
he thought would be advisable.

This country,

to be prepared for some further loss of gold,
but something
as possible,

and the possi

followed discussion of the Swiss situation

that might

occur.

Mr.

Balderston

Mitchell had indicated
Balderston said,

not is

something desired

The public ought to be prepared as well

so as to minimize the psychological impact if

should drop toward $15 billion.

ought

the gold stock

As to the direction of policy, it seemed

to him that for quite a while the key currency that would be viable, in
the sense of being used outside the sterling bloc, was likely to be the
dollar.

It

would be helpful if

mark and other currencies,

the dollar could be joined by the German

but that might take some time.

As long as

the dollar was acceptable to central banks of the world as a supplement
to gold for reserve purposes, then the reserves available to the Western
countries outside the sterling bloc would consist not of gold alone but
gold plus dollars.

Conversely, to the extent that central banks were not

willing to keep reserves in dollars as well as gold, the reserve base for

-68

3/6/62
the trade of the

western world would thereby be diminished.

If the

thrust of United States policy was to preserve its gold, that would be
a means of reassuring those who were willing to use dollars for
reserve purposes.

It might likewise encourage users of dollars as a

key reserve currency also to employ other sound currencies as well.

In response, Mr. Mitchell said he continued to feel that the
thing to do was to let

the uneasy holders of dollars use those dollars

to buy gold in an orderly fashion.

Otherwise,

the continuing overhang

of demand for gold could only worsen the confidence factor

result in

a

Mr.

gold

and might

withdrawal at a most awkward time.

Bryan suggested a similarity to the situation that prevails

when rumors circulate around a small town that the bank may be in
difficulty.

The question was one of how best to provide reassurance,

and he did not know the answer to that kind of problem.
several different approaches work and also fail.
problem was the U. S. balance of payments.

He had seen

The fundamental

He had heard it said at

times that the British must take austerity measures, but Europeans
might say at present that

the United States should be prepared to take

such measures.
Mr.

Mitchell inquired of Mr.

Coombs whether a purchase by the

System of marks from the Stabilization Fund might not be the kind of

operation that would leave the System open to the charge of bailing out
the Stabilization Fund.

3/6/62

-69
Mr.

Coombs replied that the Treasury had thought of $120 million

as the limit on the Stabilization Fund's holdings of hard currencies.
In the past two or three months, the Swiss situation had turned in favor
of this country.

The Stabilization

Fund was now able to buy Swiss

francs, but the currency holdings of the Fund had gone up to $130
million.
it

To meet the Stabilization Fund's need for more Swiss francs,

could wedge out room by selling marks.

Simultaneously,
Federal Bank if

Reserve could buy marks from the German

the Federal
did not want

it

to enter into a direct transaction with the Stabilization Fund.
he saw no difficulty in
Fund,

doing this business

However,

direct with the Stabilization

although the loss of interest on the holdings of marks was

a point

of some concern.
Mr.

Hayes said he felt

strongly that

inasmuch as the Federal

Reserve and the Stabilization Fund were in the same business, they must
work closely together.

He would be prepared to defend the proposed

transaction with the Stabilization Fund as a natural thing in

the course

of System operations.
Mr.

Coombs,

be cautious in
dollars.
if

in

a further comment,

noted that it

dealing with a central bank that was

was necessary

to

already loaded with

It might look rather odd to the German Federal Bank, he added,

the Federal Reserve and the Stabilization Fund found it

impossible to

deal with each other but instead had to use the Bundesbank as an
intermediary.

3/6/62

-70At this point reference was made by Mr.

that the

Federal Reserve could not purchase U.

direct from the Treasury,
Mr.

forein

from the Stablization

central

banks.

S.

Government securites

except within specified limitations.

Coombs replied that the

currencies

Thomas to the fact

Federal Reserve had acquired foreign

Fund in

opening accounts with four

That bridge had already been crossed.

Treasury was faced with the problem of

effecting a shift

in

Now the

its

portfolio, and at the same time the Federal Reserve faced the problem
of building up a portfolio.

Terefore,

the needs of the two agencies

seemed to mesh.
In response to

a question about the alternative possibility of

buying Swiss francs direct and selling them forward to the Stabilization
Fund,

Coombs said that this might well

Mr.

of action.

The Treasury needed to cover its

would like assurance as to the rate at which
francs.

The real objective,

appear to be a logical course
forward commitments,

it

and it

could acquire the Swiss

he noted, was to give the Treasury an

opportunity to bring to a successful conclusion an operation that it
been working on for eight or
Mr.

Ellis

situation (that is,

had

nine months.

inquired whether this was likely to be a recurring
a situation where the Treasury wanted to accomplish

something and the holdings of the Stabilization Fund were up against the
ceiling).

He asked whether

settled as a matter of

this was not a problem that needed to be

principle.

3/6/62

-71Mr. Coombs indicated that he found it

difficult to forecast

Much would depend on whether the Federal Reserve decided

developments.

at some future date to engage in forward operations.

The program of

the Treasury at the moment was largely dictated by forward operations
that it had undertaken.
If one wanted to consider the possibility of the System's
acquiring Swiss francs, Mr. Coombs said, the next question was whether
the Federal Reserve should immediately sell them forward to the
Treasury or whether it

should decline to do so.

From the standpoint of

friendly relations between the two agencies, it would seem reasonable
for the Federal Reserve to sell

the Swiss francs forward to the Treasury

rather than leave the matter to chance.
Mr.

Mitchell commented that over the years the Federal Reserve's

relations with the Treasury had been on the whole quite good.
however,

At times,

the Federal Reserve had been dominated by the Treasury,

so

there was always a problem of maintaining a kind of an arms-length
relationship.

On the present occasion, the objectives of the Treasury

and the Federal Reserve tended to coincide, but a different situation
could possibly develop.

Chairman Martin commented that System operations in foreign
currencies must always be for the defense of the dollar.

He added that

he was not completely sure of the actual terms of reference for operations
of the Stabilization Fund, in light of the history of such operations

3/6/62

-72

since the Gold Reserve Act of 1934.

Mr. Thomas, he noted, had prepared

a memorandum that seemed to indicate that it would probably be better
in the longer run if this country's foreign exchange operations--at
least if conducted on any sizable scale--were conducted exclusively by
the central bank.

He (Chairman Martin) questioned whether it would be

advisable at this juncture to say that there was a need for this type
of operation and the need should be met by increasing the resources of
the Stabilization Fund.

Instead, he felt that the Federal Reserve was

proceeding in the proper way.

If the Federal Reserve did a good job

and it developed tnat there was a need for foreign currency operations,
it might come to pass that the System would take over all foreign
exchange activities, with the full consent of the Treasury.

On the

otner hand, some criticism of the System's operating in this field had
already been voiced in the Congress.
The Chairman went on to say that after having thought about the
matter at length, it was his conviction that the System should not give
up this operation and turn it over to the Treasury.

He thought that was

the way the matter would have gone if the System had not undertaken its
current program.

Perhaps that was the way the matter would end up

anyhow; perhaps the Congress would decide that it did not want to have
the Federal Reserve operating in this field.

Also, this country might

be on such a solvent basis at some point in the future that no one would
care about intervening in the foreign exchange markets.

3/6/62

-73
The Chairman went on to way that he

felt

the Open Market

Committee ought to continue to have discussions of all aspects of the
operations in foreign currencies.
should have a closed mind.
matter.

There was much to learn, and no one

There were many interesting facets of the

The Committee should follow the subject as closely as it could,

calling upon Mr. Coombs to give it the benefit of his experience.
Question then was raised as to what authorizations or guidance
Mr.

Coombs would like to have the Committee give at this meeting.
Mr. Coombs replied that he would recommend an authorization to

negotiate with the Treasury for the purchase of German marks up to $25
million equivalent.

He felt that this was perhaps the most reasonable

the alternative solutions.

Also, he would like the Committee's

views on opening negotiations with the Bank of England and the Swiss
National Bank regarding the possibility of entering into swap
arrang ements.
Chairman Martin stated that the most difficult matter, in his
view, was the proposed acquisition of marks from the Stabilization Fund.
As to the other two matters, he thought it would be entirely appropriate
to start negotiations, but the question of relations with the
Stabilization Fund, as pointed out at this Committee meeting, was complex
and difficult.
The Chairman then turned to Mr.

Hackley, who said that the matter

of dealings between the Federal Reserve and the Stabilization Fund was

3/6/62

-74

one to which he had given considerable attention,
particularly the point made by Mr.

having

in

mind

Thomas that the law clearly

indicates that direct purchases of U.

S.

Government

the Treasury are not open market transactions.

securities from

As to foreign currency

operations, he had come to the conclusion, however, that in this sense
the Stabilization Fund was a part of the open market.
was the possibility

of criticism because

Although there

of the analogy to purchases

of U. S. Government securities, he did not feel that purchases of
foreign currencies by the Federal Reserve from the Stabilization Fund

would involve serious legal questions.
Mr. Robertson pointed out that the Federal Reserve had already
acquired quantities of four foreign currencies from the Stabilization
Fund, including German marks.

been crossed.

Therefore, he felt that the bridge had

As to the other matters mentioned by Mr. Coombs, he felt

that it was appropriate to authorize negotiations with the Bank of
England and the Swiss National Bank.

There should be an understanding,

however, that before the Open Market Committee was asked to approve any
transactions arising out of such negotiations, it would receive

memoranda of the type to which Mr. Mitchell had referred earlier.

On

the transaction with the Bank of France, there had not been sufficient
information presented, in his opinion, to permit making an intelligent
judgment.
Mr. Young repeated his earlier comment to the effect that the
staff was now preparing a memorandum for the Committee on the French

3/6/62

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situation.

Also, before any similar proposals reached a head,

appropriate memoranda would be distributed to the Committee.
Thereupon, upon motion duly made and
seconded, the action of a majority of the
members of the Federal Open Market Committee

on February 28, 1962, in approving the then
proposed $50 million swap arrangement with
the Bank of France was ratified.
Also, upon motion duly made and seconded,
the other foreign currency transactions for
the System Open Market Account since the
meeting of the Open Market Committee on
February 23, 1962, were approved, ratified,
and confirmed.
In further discussion, Mr. Mitchell made the suggestion that
some appropriate person be asked to give close thought to the question
of relations between the Stabilization Fund and the Federal Reserve,
in light of factors such as the Committee had been considering today.
He would have no objection to the particular transaction proposed by
Mr. Coombs, but he would not like to think of it as establishing a

precedent.
Chairman Martin agreed that the Committee should continue to
work on the matter.

A lot of work had been done already, he noted.

The documents presented to and accepted by the Committee included
guidelines for operations in foreign currencies and a memorandum on the
scope and character

of initial

System foreign currency operations.

In

considering those matters, he recalled, it had been recognized that it
was difficult to write precise rules at this stage.

3/6/62

-76
Mr.

staff

Balderston inquired whether it was the thinking of the

that forward operations should be handled exclusively by the

Stabilization Fund, and Mr. Young replied in the negative, saying that

this was a short-run compromise.

How the matter might develop over a

loner period of time was intended to be left open.
Mr. Swan commented that a critical point was whether the
currencies that the Federal Reserve purchased from the Stabilization

Fund were currencies tnat it wanted for its own purposes.
Mr.

Coombs expressed agreement,

adding that Swiss francs and

German marks were both good currencies.

Mr. Ellis inquired about the degree of urgency in purchasing
marks from the Stabilization

und, to which

Mr.

Coombs replied that the

Stabilization Fund might nave an opportunity to pick up Swiss francs
tomorrow.

As stated earlier, the noldings of hard currencies in the

Stabilization Fund amounted at present to $130 million, against the
thinking of the Treasury that the ceiling should be $120 million.
Therefore, the Stabilization Fund was strained to the utmost at this
moment.
After further discussion, it was
agreed unanimously to authorize the

purchase for the System Open Market
Account from the Treasury of German

marks up to $25 million equivalent now
held in the Stabilization Fund.
Authorization was also given for
the starting of negotiations with the

3/6/62

-77
Bank of England and the Swiss National
Bank concerning swap arrangements with
those institutions.
Chairman Martin stated for the information of the Committee that

on February 16, 1962,

he had sent to the Secretary of the Treasury,

as

Chairman of the Natonal Advisory Council on International Monetary and
Financial Problems,

a copy of the authorization, as approved by the Open

Market Committee on February 13,

1962,

for operations in

currencies for the System Open Market Account.
compliance with section 4(c)

of the Bretton

The Chairman also reported that in

This had been sent in

Woods Agreements Act.
response to the request made

by members of the Congress at the time of hearings on H.
bill

to authorize U.

S.

contributions in

foreign

R.

10162,

a

connection with expansion of

the standby resources of the International Monetary Fund, he had sent to
the Chairman of the House Committee on Banking and Currency on March 1,
1962, the following documents for inclusion in the record of the
hearings:
(1) A memorandum from the Open Market Committee's Gen
eral Counsel dated November 22, 1961, expressing the opinion
that foreign currency operations by the System were
authorized by the Federal Reserve Act;
A summary opinion rendered by the Open Market
(2)
Committee's General Counsel to the Congressional Joint Economic
Committee, upon request, under date of February 19, 1962;
(3)

A copy of the letter from the General Counsel of the

Treasury dated January 8, 1962, expressing his concurrence and
that of the Attorney General in

the opinion of the Committee's

-78

3/6/62

General Counsel and enclosing a memorandum that he had sub
mitted to the Secretary of the Treasury to the same effect;
sent by Chairman Martin on
(4)
A copy of the letter
February 16, 1962, to the Chairman of the National Advisory
Council. along with a copy of the enclosed authorization of
the Federal Open Market Committee for System foreign currency
operations; and
(5)
A copy of an action by the National Advisory Council
dated February 28, 1962, indicating that the Council was in
accord with the System's decision to undertake foreign currency
operations.
Chairman Martin pointed out that, this meant that the authorization
for foreign currency operations,

approved

February 13,

1962,

was now a

public document,
It

was agreed that the next meeting of the

Committee would be

held on Tuesday, March

27, 1962.

The neeting then adjourned.

Secretary

Federal Open

Market

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