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FORTY-EIGHTH
Annua{ Report
OF'IHE
BOARD OF GOVERNORS
of the Federal Reserve System
COVERING OPERATIONS FOR THE YEAR
19 61
ANNUAL REPORT OF BOARD OF GOVERNORS
DIGEST OF PRINCIPAL FEDERAL RESERVE POLICY
ACTIONS, 1961
Period
January
FebruaryAugust
SeptemberDecember
December
Action
Purpose of action
Limited net sales of U.S.
Government securities from
Federal Reserve portfolio to
about $500 million. Member
bank borrowing at Reserve
Banks averaged only $50
million.
Bought substantial amounts
of U.S. Government securities with maturities over 1
year, following February 20
announcement that System
open market operations
would include securities outside the short-term area.
These purchases were partly
offset by net sales of shortterm securities. Total System
holdings of Governments increased about $700 million.
Member bank borrowings
averaged $75 million.
To encourage bank credit
and monetary expansion by
absorbing only part of seasonal inflow of reserve funds
not otherwise offset by a
large gold outflow.
Bought or sold at different
times varying amounts of
U.S. Government securities,
including securities with
longer maturities. Total System holdings of Government
securities increased about
$1.6 billion. Mmnber bank
borrowings at Reserve Banks
remained generally low.
Raised, effective Jan. 1,1962,
maximum interest rates payable by member banks on
any savings deposit from 3 to
3~ per cent, and to 4 per
cent on those left in the bank
for 1 year or more; also
raised maximum rates on
time deposits with a maturity
of 6 months to I year from 3
to 3~ per cent, and to 4 per
cent on those deposits with a
maturity of a year or longer.
4
To encourage bank credit
and monetary expansion
while avoiding direct downward pressure on short-term
interest rates, thereby moderating pressures on the U.S.
balance of payments from
outflow of short-term capital
attracted by higher interest
rates abroad.
To continue to encourage
bank credit and monetary
expansion while allowing for
changing reserve needs due
to seasonal and other factors,
including a large gold outflow, and while continuing to
give consideration to the
balance of payments problem.
To enable banks to compete
more effectively for savings
and other time deposits, including foreign time deposits, thus moderating pressures on the U.S. balance of
payments, and, over the long
run, to offer additional incentive for the accumulation of
savings required for financing future economic growth.
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
continue to supply reserves only in the amounts that had been
available in recent weeks would not be adequate to encourage
or support credit and monetary expansion conducive to an early
return to fuller utilization of human and material resources. He
believed the risk that additional reserves might cause a decline
in short-term rates and encourage a movement of funds from
this country, with an accompanying loss of gold, was likely to be
much less than it had been in the past.
strengthening of the forces of recovery that appeared to be
developing in the economy, while giving consideration to inter
national factors.
Votes for this action: Messrs. Hayes, Allen, Balderston,
Irons, King, Mills, Robertson, Shepardson, Swan, and
Wayne. Votes against this action: none.
2. Authority to effect transactions in intermediate- and longer-term securi
ties.
The Federal Reserve Bank of New York was authorized, be
tween this date and the next meeting of the Committee, within
the terms and limitations of the directive issued at this meeting,
to acquire intermediate- and/or longer-term U. S. Government
securities of any maturity, or to change the holdings of such
securities, in an amount not to exceed $500 million.
Votes for this action: Messrs. Hayes, Balderston, Irons,
King, Mills, Shepardson, Swan, and Wayne. Votes against
this action: Messrs. Allen and Robertson.
Renewal of this special authorization, first granted on Feb
ruary 7, 1961, and amended on March 28 to permit operations
in U. S. Government securities of all maturities, reflected the
conclusion of the Committee that further operations outside the
short-term market in pursuance of the objectives stated when the
authorization was granted would be desirable. Messrs. Allen
and Robertson dissented for reasons they had previously ex
pressed.
May 9, 1961
1. Authority to effect transactions in System Account.
The Federal Open Market Committee made no change at this
meeting in its policy directive providing that open market opera
tions should be conducted with a view to encouraging expansion
of bank credit and the money supply so as to contribute to
From data presented at this meeting, economic recovery
appeared to be proceeding more rapidly than had generally been
anticipated, and at least as fast as the more optimistic forecasts
had predicted it would. All available evidence pointed toward
an increase in gross national product during the second quarter
of the year. Preliminary data indicated that the Board's indus
trial production index for April would be up 3 points from the
first quarter low of 102. In addition, schedules for steel and
automobile production seemed virtually to assure some further
rise in the index during May-perhaps enough to erase at least
half of the 8-point decline from 110 in July 1960. Retail sales
during April had been demonstrating strength, including sales of
domestically produced automobiles, which had risen sharply in
March from the depressed midwinter level. Dealer stocks of
automobiles, which had been brought down somewhat in March
from the relatively high levels that prevailed during the past
year, had fallen further, and used car stocks were down sharply
from a year earlier. Latest information regarding plant and
equipment expenditure plans for 1961 indicated a decline of
only 1 per cent from 1960, an improvement over indications of
similar surveys made earlier in this year and in the fall of 1960.
In the price area, consumer and wholesale prices generally had
been stable, while sensitive commodities had moved up. On the
other hand, in spite of the apparently growing strength of the
economy, seasonally adjusted unemployment in April remained
at about the midwinter high.
In the financial area, short-term interest rates declined some
what in April and early May, while intermediate- and long-term
rates showed marked declines except in the corporate market,
where there had been an unusually large volume of new financ-
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
ing. Credit expansion continued during April and early May,
but at only a moderate pace. The privately held money supply
defined as demand deposits and currency-increased moderately,
the expansion seemingly stemming from an exceptionally large
decrease in Treasury deposits. Owing to special factors, reserves
were available to banks in somewhat larger volume during April
than in March, despite a sizable reduction in the System port
folio, resulting in a somewhat easier tone in the money market
than had been contemplated at the April 18 meeting of the
Committee. Early in May, market factors absorbed some of
these reserves.
The outflow of gold from the United States had virtually
ceased during the past 2 1/2
months, but private short-term capital
movements outward had continued high during the first quarter
of the year, and there was still an over-all deficit in the balance
of payments, as conventionally measured, of about $1.5 billion
(annual rate). The outflow of short-term capital continued despite
a reduction in the differential between short-term rates in the
United States and the higher rates available in most other im
portant money markets.
In considering what policy should be followed until its next
meeting, the Committee noted that, as mentioned previously, the
tone of the money market during most of the period since the
April 18 meeting was somewhat easier than had been contem
plated at that meeting, largely because of unusual factors that
included a high level of float. There was general recognition of
the appropriateness of a policy of ease, but a majority felt that
the ease had gone further than was desirable. As to interest
rates, it was the majority view that it would be undesirable for
the short-term rate to go lower, because of international con
siderations. Thus, the Committee renewed the existing directive
without change, and the consensus was that operations for the
System Account should be directed toward maintaining the same
degree of ease that had prevailed in recent weeks, apart from
the unusual ease that had developed during a portion of the
period since the April 18 meeting.
Although all members voted to approve the Committee's direc
tive without change, Messrs. Robertson and Swan dissented from
the decision to implement the directive with operations aimed at
the same degree of ease that had existed prior to the April 18
meeting rather than the greater degree of ease that had existed
during most of the period since that date.
In dissenting, Mr. Robertson stated that it was his belief that
the recent ease had promoted a turnaround in the money supply
and brought about an increase in bank credit without unduly
depressing yields on Government securities. The downswing in
yields that had occurred was attributable more to the West
German discount rate reduction and comments by persons out
side the Federal Reserve System than to System open market
operations. With the gold outflow apparently halted for the time
being, and with inflationary pressures seemingly less dangerous
just now than at any time in recent years, he believed that in
order for the System to do its full part in stimulating recovery
to more nearly satisfactory levels of production and employment,
the degree of ease achieved during the past 3 weeks should not
be diminished (and if anything, should be increased slightly)
during the 4 weeks until the next meeting of the Committee.
Mr. Swan said that he dissented from the implementation of
the directive with much more reluctance than at the previous
two meetings. However, he saw no particular basis for change
in the degree of ease actually achieved during the past 3 weeks
and would continue a program of supplying reserves moderately
in excess of seasonal needs to contribute to the expansion of
bank credit and the money supply.
2. Authority to effect transactions in intermediate- and longer-term securi
ties.
The Federal Reserve Bank of New York was authorized, be
tween this date and the next meeting of the Committee, within
the terms and limitations of the directive issued at this meeting,
to acquire intermediate- and/or longer-term U. S. Government
securities of any maturity, or to change the holdings of such
securities, in an amount not to exceed $500 million.
ANNUAL REPORT OF BOARD OF GOVERNORS
Votes for this action: Messrs. Hayes, Balderston, Irons,
King, Mills, Shepardson, Swan, and Wayne. Votes against
this action: Messrs. Allen and Robertson.
The Committee in renewing this special authorization, first
granted on February 7, 1961, and amended on March 28 to
permit operations in U. S. Government securities of all maturi
ties, concluded that further operations outside the short-term
market in pursuing the objectives set forth in the directive would
be desirable. Messrs. Allen and Robertson dissented for the
same reasons they had stated previously.
June 6, 1961
1. Authority to effect transactions in System Account.
At this meeting, the Federal Open Market Committee, in
directing that open market operations be with a view "to en
couraging expansion of bank credit and the money supply so as
to contribute to strengthening of the forces of recovery, while
giving consideration to international factors," modified the word
ing of the preceding policy directive by deleting the phrase "that
appear to be developing in the economy," qualifying words that
had followed "the forces of recovery" in the directive that had
been in effect since April 18, 1961.
Votes for this action: Messrs. Martin, Hayes, Allen,
Balderston, Irons, King, Mills, Robertson, Shepardson,
Swan, and Wayne. Votes against this action: none.
From data presented by the Committee members and the
staff, it was apparent that the turning point of the recession had
been reached quite some time earlier and that recovery had
begun, although there was still doubt about the rate and prob
able duration of the business expansion. The few measures of
economic activity available for May suggested that the pace of
recovery had been maintained. Fragmentary data suggested that
the Board's index of industrial production for May would be up
2 points from the preceding month, that retail trade figures
would show a level well above first-quarter activity, and that
employment measures would improve about seasonally for that
FEDERAL RESERVE SYSTEM
month. In the area of prices, broad measures of wholesale quo
tations had shown little change as scattered reductions offset
increases in sensitive materials, and the consumer price index
was unchanged from March to April, with the further likelihood
that there would be little or no change from April to May.
The Committee observed that thus far the stimulus to the
economy this year had come almost entirely from the reversal of
inventory liquidation, the rise in Government expenditures, and
the well maintained growth of consumption expenditures on
nondurable goods and services. Neither trade reports nor sur
veys of buying intentions yet showed much evidence of a strong
resurgence of demand for consumer durable goods or for hous
ing, which had played such important roles in other postwar
recoveries-a factor that caused misgivings in some quarters as
to whether this recovery would carry forward after the initial
stimulus of the inventory reversal disappeared.
Total loans and investments of banks increased substantially
more than usual in May, reflecting largely bank participation in
new Treasury financing. This bank credit expansion did not
result in an increase in the seasonally adjusted private money
supply, defined as demand deposits and currency outside of
banks; but there were large increases in time deposits and U. S.
Treasury deposits. Interest rates, which early in May had de
clined to the lowest levels since 1958, had since risen close to,
and in some cases above, the highs that had been reached at
times during the past 10 months. Short-term rates in particular
had been influenced lately by a less marked degree of ease than
prevailed shortly before the May 9 meeting, by prospective
Treasury financing in the short-term area, and by the approach
of the mid-June tax date, which date generally is preceded by
reduced nonbank demand for Treasury bills. In addition, the
demand on capital markets had been large and seemed likely to
continue fairly heavy.
While the U. S. balance of payments position had shown con
siderable improvement compared with the fourth quarter of
1960, the current close balance in U. S. accounts was considered
@FedFRASER