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FIFTIETH
Annua{ Report
OF THE
BOARD OF GOVERNORS
of the Federal Reserve System
COVERING OPERATIONS FOR THE YEAR
Period
Description
Purpose
lanuarymid-May
Reduced System holdings of U.S. Government securities and then increased them in line with seasonal
and moderate growth needs of the economy. Total
holdings rose about $470 million on balance, owing
mainly to net purchases of issues maturing in more
than 1 year. Member bank borrowing rose slightly to
a level of about $150 million in the first half of May.
To offset seasonal downward pressures on short-term interest rates
early in the period and to provide for growth in bank credit and
the money supply at a rate consistent with minimizing capital outflows in accordance with the policy of slightly reduced reserve
availability adopted at the December 18, 1962, meeting of the
Federal Open Market Committee.
Mid-Maylate-July
Reduced the degree of reserve availability slightly further. System holdings of U.S. Government securities
increased nearly $1.2 billion, about one-fifth representing net purchases of issues maturing in more
than 1 year. Member bank borrowing increased further, averaging $275 million over the period.
To achieve a slightly greater degree of firmness in the money market in order to minimize the outflow of capital while continuing
to provide reserves for moderate monetary and credit growth.
Mid-July
Raised the discount rate from 3 to 31h per cent.
Raised maximum interest rates payable by member
banks on time deposits (other than savings) and
certificates of deposit with maturities of 90 days to
6 months from 2Y2 to 4 per cent and with maturities
of 6 months to 1 year from 3V2 to 4 per cent.
To help reduce short-term capital outflows by firming U.S. short-term
money market rates and permitting member banks to compete more
effectively for foreign and domestic funds.
Reduced a little further the degree of reserve availLate-Julyability. System holdings of U.S. Government securiDecember
ties increased about $1.1 billion, of which more than
one-half represented purchases of securities with
maturities of more than 1 year. Member bank borrowing averaged about $325 million over the period.
To attain slightly more firmness in the money market, in the context
of a higher discount rate, with a view to minimizing the outflow
of funds abroad while offsetting seasonal reserve drains and providing for growth needs of the domestic economy.
Raised margin requirements on loans for purchasing
or carrying listed securities from 50 to 70 per cent
of market value of securities. Also increased retention requirements on proceeds of sales from undermargined accounts from 50 to 70 per cent.
To help prevent excessive use of stock market credit, which had increased sharply since July 1962, when margin requirements were
lowered from 70 to 50 per cent.
November
8
9
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
of monetary ease, a somewhat larger number concluded that the
domestic economy had already strengthened sufficiently to permit
a move to slightly less ease in order to place greater emphasis
on this country's balance of payments problem.
The majority decision, therefore, was to move toward a posi
tion of slightly less ease beginning about the middle of May,
when current Treasury financing operations would be out of the
way; and the Committee's directive was modified to reflect this
change in policy and to be more descriptive of the current situa
tion. Accordingly, the following directive was issued to the Fed
eral Reserve Bank of New York:
able data indicated that expansion in activity had continued.
Although higher prices were posted for certain products, prices
remained little changed on the average.
Industrial production in April rose by almost 2 percentage
points to a new high, with about one-third of the total rise
accounted for by higher steel production. The April index, at
122, was 4 per cent above a year earlier. Housing starts also
advanced in April. Nonfarm employment continued to rise, with
manufacturing accounting for much of the increase. Rapid growth
in the labor force, however, left the unemployment rate about
unchanged despite the gain in employment.
Retail sales in April and early May appeared to have changed
little. Sales by automobile dealers maintained a high level, and
recent surveys of consumer buying intentions for autos, other
durable goods, and houses suggested that spending plans were
continuing to show strength. New orders, sales, and unfilled
orders received by producers of durable goods rose appreciably
in April. Although much of the rise reflected heavy buying of
steel, new orders rose moderately in nearly all industries,
including machinery.
New security financing by corporations and State and local
governments in the preceding weeks had been moderate, and the
calendar through June indicated that offerings would be fairly
light in the corporate area, although more substantial for State
and local issues. Retail distributions of new issues were reported
as slow, however, and dealers' inventories quite large. Bond yields
declined somewhat through mid-May but moved up thereafter,
while downward pressure on mortgage rates continued. Common
stock prices held at a level a little below the late 1961 peak, and
the volume of stock market credit reached a new high.
Treasury bill rates were steady in early May but moved higher
after midmonth, partly in response to a somewhat lower margin
of free reserves available to member banks; the 3-month rate
advanced from about 2.90 per cent to 2.97 per cent. Treasury
bond yields fluctuated in a narrow range after early May, with
It is the Committee's current policy to accommodate moderate growth
in bank credit, while putting increased emphasis on money market condi
tions that would contribute to an improvement in the capital account of
the U.S. balance of payments. This policy takes into consideration the
continuing adverse balance of payments position and its cumulative effects
and the improved domestic business outlook, as well as the increases in
bank credit, money supply, and the reserve base in recent months. At the
same time, however, it recognizes the continuing underutilization of
resources.
To implement this policy, System open market operations following
the conclusion of the Treasury refunding operation shall be conducted
with a view to achieving a slightly greater degree of firmness in the money
market than has prevailed in recent weeks, while accommodating moder
ate reserve expansion.
Votes for this action: Messrs. Martin, Hayes, Bald
erston, Irons, King, and Shepardson. Votes against this
action: Messrs. Bopp, Clay, Mitchell, Robertson, and
Scanlon.
May 28, 1963
1. Authority to effect transactions in System Account.
Domestic economic activity in April had generally advanced
further, with advances widespread among principal industrial
sectors. While information for May was quite incomplete, avail-
ANNUAL
REPORT OF BOARD OF GOVERNORS
substantial purchases of coupon issues by the Treasury for its
investment accounts a steadying factor.
The seasonally adjusted money supply rose moderately further
in the first half of May to a level 2.4 per cent above a year earlier.
In the April-early May period time deposits at commercial banks
increased considerably less rapidly than earlier in 1963.
Reflecting, in part, action of the System Account pursuant to
the directive issued at the preceding Committee meeting, free
reserves moved lower after mid-May. Borrowings from the Fed
eral Reserve Banks rose to an average of $281 million in the
week ending May 22, up from an average of $134 million dur
ing the preceding 3 weeks.
The balance of payments deficit for April, while somewhat
smaller than had been indicated by the earlier preliminary figures,
was substantial. Moreover, tentative and fragmentary figures for
the first 3 weeks of May indicated continued sizable net transfers
to foreigners, and foreign borrowing in U.S. markets continued
on a large scale. In these circumstances the dollar remained weak
against the major continental European currencies. Trading on
the London gold market was quite active, although the price
changed little.
Discussion at this meeting centered on reviewing economic
and market developments in the light of the slight shift in mone
tary policy toward less ease that had been adopted at the May 7
meeting of the Committee. This review found quite general agree
ment that a moderate further strengthening of domestic economic
activity had occurred. Business sentiment, although perhaps a bit
more cautious than earlier, apparently remained optimistic. The
performance of the economy, however, was still below capabili
ties, with unemployment persisting at unsatisfactory levels and
with other indications of continuing inadequate resource utiliza
tion. The balance of payments problem continued to be serious,
and the position of the dollar in foreign exchange markets had
weakened.
Most members of the Committee felt that the lessened credit
FEDERAL RESERVE SYSTEM
ease accomplished since the preceding meeting was constructive
and that the existing market tone and degree of reserve avail
ability should be continued for the next 3 weeks. Some members,
in fact, would have been inclined, if anything, to favor action to
lessen credit ease further. Others, however, continued to question
the desirability of the restraint already imposed, although only
one member urged a return at this time to the degree of ease
prevailing at the time of the previous meeting.
The case for maintaining the current position, or for moving
toward a lesser degree of ease, reflected particularly the gravity
of the U.S. international financial position and some indication
of a deterioration of lending and investing standards at home.
The case for a greater degree of ease reflected a desire to provide
further stimulus to the domestic economy, along with doubt as
to the effectiveness of modest changes in monetary policy for
dealing with the balance of payments problem. One member held
that a policy of less ease was neither a necessary nor desirable
means of improving the quality of credit under present conditions
of low resource utilization. It was clear from the entire discussion,
however, that a large majority felt that policy should not be
changed again at this time, one way or the other.
The consensus therefore was to maintain, but not intensify,
the slightly lesser degree of ease established pursuant to the May
7 policy action. It was felt that the effects of that change were not
yet fully apparent and that additional time for market adjust
ments was desirable, especially in the light of the uncertainties
stemming from legislative consideration of the debt ceiling.
Accordingly, the following directive was issued to the Federal
Reserve Bank of New York:
It is the Committee's current policy to accommodate moderate growth
in bank credit, while putting increased emphasis on money market condi
tions that would contribute to an improvement in the capital account
of the U.S. balance of payments. This policy takes into considera
tion the continuing adverse balance of payments position and its cumula
tive effects and the improved domestic business outlook, as well as the
increases in bank credit, money supply, and the reserve base in recent
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
months. At the same time, however, it recognizes the continuing under
utilization of resources.
To implement this policy, System open market operations shall be con
ducted with a view to continuing the degree of firmness in the money
market that has prevailed recently, while accommodating moderate re
serve expansion.
longer-term financing for persistent U.S. balance of payments
Votes for this action: Messrs. Martin, Hayes, Bald
erston, Bopp, Clay, Irons, King, Mills, Scanlon, and
Shepardson. Vote against this action: Mr. Mitchell.
2. Authority to purchase and sell foreign currencies.
The guidelines for System foreign currency operations, as
reaffirmed on March 5, 1963, were amended as follows:
In Section 2, the following new paragraph was inserted after
paragraph 3:
Drawings made by either party under a reciprocal arrangement shall
be fully liquidated within 12 months after any amount outstanding at that
time was first drawn, unless the Committee, because of exceptional cir
cumstances, specifically authorizes a delay.
In Section 4, the following two new paragraphs were added:
The New York Bank may also, where authorized, purchase currencies
through forward transactions for the purpose of allowing greater flexi
bility in covering commitments under reciprocal currency agreements.
The New York Bank may further, where authorized, purchase and sell
currencies through forward as well as spot transactions for the purpose
of settling commitments denominated in one currency by means of utiliz
ing the Bank's holdings of another currency.
The effect of the amendment to Section 2 was to recognize,
within the context of a specific
application, the principle
embodied in the guidelines that the use of foreign currency credit
facilities available under reciprocal currency arrangements should
be geared to market swings that were expected to prove reversible
in the relatively near future. Indebtedness incurred by the System
through drawings under reciprocal arrangements was clearly
intended to be of a short-term nature, and in no sense to provide
deficits. However, the guidelines had not heretofore specified
precisely the time period implied in the reversible principle under
lying such drawings. The amendments to Section 4 were designed
to provide flexibility in settling System commitments.
The continuing authority directive to the Federal Reserve Bank
of New York on foreign currency operations, which had previ
ously been amended on March 5, 1963, to authorize the purchase
of foreign currencies through forward transactions within speci
fied limitations, was further amended at this meeting to authorize
the purchase and sale of foreign currencies through forward as
well as spot transactions for the purpose of settling commitments
denominated in one currency by means of utilizing System hold
ings of another currency. The directive was also amended to in
crease from $1.3 billion to $1.75 billion the limit on total hold
ings of foreign currencies at any one time. At this date reciprocal
currency agreements outstanding between the Federal Reserve
System and foreign banks aggregated $1.1 billion, and it was
anticipated that the reciprocal currency arrangement with the
Bank of England would shortly be raised from $50 million to
$500 million to enlarge the facilities for dealing with temporary
reversible flows of funds between the two countries and further
reinforce international liquidity by augmenting the availability of
foreign exchange in case of need.
Accordingly, the continuing directive was issued in the follow
ing form:
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 Guidelines on System Foreign Currency
Operations reaffirmed by the Federal Open Market Committee on March
5, 1963, as amended May 28, 1963:
Pounds sterling
French francs
German marks
Italian lire
Netherlands guilders
Swiss francs
ANNUAL REPORT OF BOARD OF GOVERNORS
Belgian francs
Canadian dollars
Austrian schillings
Swedish kronor
The Federal Reserve Bank of New York is also authorized and directed
to purchase, in accordance with the Guidelines and for the purpose of
allowing greater flexibility in covering commitments under reciprocal
currency agreements, any or all of the foregoing currencies through for
ward transactions, up to a combined total of $25 million equivalent.
The Federal Reserve Bank of New York is further authorized and di
rected to purchase and sell, in accordance with the Guidelines and for
the purpose of utilizing its holdings of one currency for the settlement of
commitments denominated in other currencies, any or all of the foregoing
currencies through forward as well as spot transactions, up to a combined
total of $50 million equivalent.
Total foreign currencies held at any one time shall not exceed $1.75
billion.
Votes for these actions: Messrs. Martin, Hayes,
Balderston, Bopp, Clay, Irons, King, Mills, Mitchell,
Scanlon, and Shepardson. Votes against these actions:
None.
June 18, 1963
1. Authority to effect transactions in System Account.
Expansion in domestic activity was reported to have continued
in May and early June. The industrial production index advanced
again in May, with gains widespread among industries and
products. Employment also increased and hours of work at
factories lengthened, but the unemployment rate rose as teenagers
entered the labor market. Retail sales were unchanged from the
level of the preceding 3 months, and commodity prices continued
to show only small mixed changes. Stock market prices showed
little change on balance.
Business confidence remained strong; a recent survey found
the planned rise in outlays for new plant and equipment in 1963
to be practically the same as reported earlier, but with relatively
more of the increase anticipated in the second half of the year.
FEDERAL RESERVE SYSTEM
Expectations of higher sales and inventories than had been indi
cated earlier were also reported. Stockpiling against a possible
steel strike appeared about at an end, however, and the steel
industry was expected soon to become a contractive influence on
the economy, at least temporarily, as production was brought
into closer balance with consumption.
In the financial area, market adjustments to the mid-May shift
in System policy toward slightly less monetary ease continued
moderate. Yields on Treasury securities had risen somewhat, but
a Treasury offering of a 4 per cent intermediate-term bond met
with an exceptionally strong market reception. Corporate yields
on new issues changed little, while yields on municipal securities
increased.
In May, seasonally adjusted bank credit rose substantially,
offsetting a comparable decline in April. Real estate and con
sumer loans continued to expand rapidly; the rise in business
loans was less sharp. The seasonally adjusted money supply was
unchanged in May, in part because of an unusually large increase
in Treasury deposits. Time and savings deposits rose more
rapidly than in April, but more slowly than earlier in the year.
Free reserves of member banks averaged somewhat lower after
mid-May than earlier.
The U.S. balance of payments deficit in April and May con
tinued at about the advanced level of the first quarter, with capital
outflows remaining a major factor. Gold and foreign exchange
markets were generally quiet, although the dollar was relatively
weak against most major foreign currencies.
At this meeting of the Committee, attention was focused on
the failure of the balance of payments deficit to show improve
ment; on the role of capital outflows in the continuing large
deficits; and on the contribution that monetary policy might
make, either alone or in conjunction with other Governmental
actions, toward a solution of the problem. The majority view
was that market adjustments to the mid-May shift in policy were
still in process and that no further change in open market policy
@FedFRASER