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FORTY-SEVENTH
Annua{ Report
OF THE
BOARD OF GOVERNORS
of the Federal Reserve System
COVERING OPERATIONS FOR THE YEAR
FEDERAL RESERVE SYSTEM
ANNUAL REPORT OF BOARD OF GOVERNORS
DIGEST OF PRINCIPAL FEDERAL REsERVE. POLICY ACTIONS,
Period
JanuaryMarch
Action
To offset the seasonal inflow
of reserve funds, mainly from
the post-holiday return of
currency from circulation,
while permitting some reduction in borrowed reserves.
Late MarchJuly
Increased System holdings of
Government securities by
nearly $1.4 billion. Member
bank borrowings at Reserve
Banks declined to an average
of less than $400 million in
July.
To promote further reduction in the net borrowed reserve positions of member
banks and, beginning in May,
to provide reserves needed
for moderate bank credit and
monetary expansion.
June
Reduced discount rates from
4 to 3'11 per cent at all
Reserve Banks.
To reduce the cost of borrowed reserves for member
banks and to bring the discount rate closer to market
interest rates.
August
Period
Action
AugustSeptember
Reduced discount rates from
3'11 to 3 per cent at all
Reserve Banks.
To reduce further the cost of
borrowing from the Reserve
Banks and reduce the differential between the discount
rate and market rates of
interest.
AugustNovember
Bought or sold at different
times varying amounts of
Government securities with a
net increase in System holdings of about $1 billion,
including securities held under repurchase agreement
and issues with short maturities other than Treasury
bills. Member bank borrowing declined further to average below $150 million in
October and November.
To encourage bank credit
and monetary expansion by
meeting changing reserve
needs and offsetting the impact of a large gold outfiow
without exerting undue
downward pressure on shortterm Treasury bill rates that
might stimulate further outflow of funds.
Late
NovemberDecember
Authorized member banks
to count all their vault cash
in meeting their reserve requirements and increased
reserve requirements against
net demand deposits for
country banks from 11 to 12
per cent. The net effect of
these two actions, effective
November 24, was to make
available about $1,050
million of reserves.
Purpose of action
Purpose of action
Reduced System holdings of
U.S. Government securities
by about $1.6 billion. Member bank borrowings at the
Federal Reserve Banks
dropped from an average of
$900 million in December to
$635 million in March.
July
DIGEST OF PRINCIPAL FEDERAL REsERVE POLICY
ACTIONS, 1960-Cont.
1960
Reduced margin requirements on loans for purchasing or carrying listed securities from 90 to 70 per cent of
market value of securities.
Authorized member banks to
count about $500 million of
their vault cash as required
reserves, effective for country
banks August 25 and for
central reserve and reserve
city banks September 1.
Reduced reserve requirements against net demand
deposits at central reserve
city banks from 18 to lTYz
per cent, effective September
1, thereby releasing about
$125 million of reserves.
4
To lower margin requirements from the high level in
effect since October 1958 in
recognition of decline in volume of stock market credit
outstanding and lessened
danger of excessive speculative activity in the market.
To provide maiIlly for seasonal needs for reserve funds,
and to implement 1959 legislation directed in part toward
equalization of reserve requirements of central reserve
and reserve city banks.
Reduced reserve requirements against net demand
deposits at central reserve
city banks from 17~ to 16'11
per cent, effective December
1, thereby releasing about
$250 million of reserves.
Sold U.S. Government securities except for seasonal
purchases in last week of
December. Member bank
borrowings at the Reserve
Banks averaged less than $90
million in December.
5
To provide, on a liberal basis,
for seasonal reserve needs, to
complete implementation of
legislation directed in part
toward equalization of reserve requirements of central
reserve and reserve city
banks, and to offset the
effect of continued gold outflow, while avoiding direct
impact on short-term rates
that might stimulate further
outflow of funds.
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
justified by the possible benefits to be derived therefrom by the
Treasury. In his opinion, such an arrangement would inject an
Business attitudes, however, were characterized by lack of exu
berance and, although continued dominance of expansive forces
seemed probable, current economic developments pointed to a
moderate rather than a boom pace of expansion. The infla
tionary psychology that had been prevalent last year and earlier
this year seemed definitely to have diminished.
The lack of exuberance in the business picture was evident
also in the financial area, and interest rates had resumed a down
ward trend. Stock market prices, after a relatively brief thrust
toward higher levels in late March and early April, had fallen
back close to the lows of the first quarter of the year. Private
demands for credit, although not as heavy as had been antici
pated by some observers at the turn of the year, were generally
quite strong, but banks were said to be less willing lenders be
cause the trend of their liquidity positions had carried to a point
regarded by many of them as undesirable.
It was the consensus of the Committee that current conditions
justified moving modestly in the direction of increasing the sup
ply of reserves available to the banking system. The Committee
concluded that this further relaxation of restraint could be ac
complished within the scope of the existing policy directive,
which called for fostering sustainable growth in economic ac
tivity and employment while guarding against excessive credit
expansion. Accordingly, although some question was raised with
regard to the appropriateness of the last part of that statement,
the directive was renewed without change.
additional element of uncertainty into the Government securities
market which might have the effect of providing a disincentive
for dealers to take positions in issues that the System might be
likely to buy or sell for purposes other than providing or absorb
ing reserves. In addition, he felt that this would appear to be a
first step toward more general interference with market forces in
all areas of the Government securities market and might lead
ultimately to relatively frequent operations for purposes other
than providing or absorbing reserves. At least, it might lead to
a fear thereof, which in itself would be disruptive to a freely
functioning market. It was his belief that, with institutional rela
tionships like those prevailing within the Federal Reserve System
and between the System and the Treasury, it was desirable to
keep the lines of precedent as clear and clean as possible and to
avoid muddying them by moves that might subsequently be used
as levers for compromising basic monetary policy objectives,
especially when the potential benefits of such moves appeared to
be so limited.
May 3, 1960
1. Authority to effect transactions in System Account.
Available data suggested either fair strength or improvement
in general economic indicators during the month of April, par
ticularly in the area of consumer spending. With the advent of
more favorable weather conditions, department store sales, sea
sonally adjusted, approached the peak level of July 1959, and
automobile sales likewise strengthened. Thus, despite further
cutbacks in steel output, it appeared that the Board's index of
industrial production may have held at the March level or
dropped only slightly. In summary, while the extent of unem
ployment continued to be a matter of concern in a number of
areas, economic activity was generally at a relatively high level.
Votes for this action: Messrs. Martin, Balderston, Bopp,
Bryan, Fulton, King, Leedy, Robertson, Shepardson, Szymczak,
and Treiber. Votes against this action: none.
2. Authority to acquire Treasury bills through "swap" transactions.
On April 12, 1960, the Committee had authorized the acqui
sition, in the period between that date and the next meeting of
the Committee, of up to $150 million of 1-year Treasury bills
maturing July 15, 1960, either by outright purchase or by swap
ping other bills. Following discussion of a report on acquisitions
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
of the July bills pursuant to that action, the previous authoriza
tion was renewed, effective until the date of the next Committee'
meeting.
ability of lendable funds at the commercial banks. Interest rates
continued below the peak levels reached several months earlier
but tended to fluctuate widely in reflection of actual or antici
pated variations in supply or demand conditions. The most sig
nificant point of contrast between the credit situation this year
and a year ago was the shift in the fiscal position of the Federal
Government to one of debt reduction, and other credit demands
had not increased sufficiently to offset the decline in Government
borrowing. Although bank reserve positions, over-all, were
under somewhat less pressure at this time than during the latter
half of 1959, total member bank borrowing, including Federal
Reserve advances, resort to the Federal funds market, interbank
loans, and reverse repurchase agreements with nonbank sources,
continued to be substantial. The volume of borrowing, together
with the margin between the Reserve Bank discount rate and
short-term market rates, was partly responsible for wide fluctua
tions in Treasury bill rates in response to variations in market
forces.
International developments had been highlighted by the break
down during the past week of the so-called Summit Conference,
a meeting of the chiefs of state of principal nations in Paris.
However, it was not yet possible to appraise the extent, or even
the direction, of the impact of this occurrence upon the U.S.
economy.
The consensus resulting from evaluation of the current situa
tion favored a further supplying of reserves through open market
operations with a view to permitting a moderate expansion of
bank credit and encouraging an increase in the money supply,
which thus far had failed to respond to the easing steps taken by
monetary policy. In line with this consensus, and since the pros
pect of undue credit expansion in the near-term future seemed to
have become remote, the Committee changed clause (b) of the
directive so as to emphasize that the providing of reserves needed
for moderate expansion of bank credit constituted an objective
of policy at this stage.
Votes for this action: Messrs. Martin, Balderston, Bopp,
Bryan, Fulton, King, Leedy, Shepardson, Szymczak, and
Treiber. Vote against this action: Mr. Robertson.
Mr. Robertson's negative vote reflected the views he had stated
at the meeting on April 12, 1960, with respect to "swap" trans
actions.
May 24, 1960
1. Authority to effect transactions in System Account.
Clause (b) of the first paragraph of the Committee's policy
directive was changed at this meeting to provide that open mar
ket operations should be conducted with a view "to fostering
sustainable growth in economic activity and employment by pro
viding reserves needed for moderate bank credit expansion." The
preceding directive, in effect since March 1, 1960, had called for
operations with a view "to fostering sustainable growth in eco
nomic activity and employment while guarding against excessive
credit expansion."
Votes for this action: Messrs. Martin, Hayes, Balderston,
Bopp, Fulton, King, Leedy, Mills, Robertson, Shepardson,
and Irons. Votes against this action: none.
Preliminary information for the first part of May suggested
that the rates of gain, in sectors of the economy where gains were
recorded from March to April, may not have continued. In addi
tion, the improvement during April was not shared by certain
basic industries; new orders in durable goods manufacturing
were off somewhat further in that month. Steel output continued
to decline through April and the first weeks of May as new orders
ran considerably below current production.
Recent credit developments indicated that neither borrowers
nor lenders had responded with alacrity to the increased avail-
@FedFRASER