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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
Total bank credit expanded significantly in September and in
the third quarter as a whole, the conventionally defined money
supply showed in September the first substantial increase in
several months, and time deposits at commercial banks continued
their rapid growth. These developments were aided by substan
tial new cash offerings of Treasury securities, which had been
acquired in large part by the banks. Treasury bills had been
relatively firm, with 3-month bill rates moving generally within
the 2.25 - 2.35 per cent range in which they had fluctuated since
late August. Within about a week, the Treasury was expected to
announce the terms of a large November refunding.
In the third quarter, transfers to foreigners of gold, convertible
foreign currencies, and dollars were at a seasonally adjusted an
nual rate of more than $3 billion, as compared with an annual
rate of less than $2 billion in the second quarter, after eliminat
ing the influence of special debt repayments. Within the third
quarter, moreover, September appeared to have been the weakest
month, and such October figures as were available suggested
little, if any, improvement. Whereas in the second quarter basic
U. S. payments were approximately in balance, the third-quarter
figures reflected a deficit. The main reasons for the deterioration
were that imports had increased faster than expected and the
net capital outflow had failed to diminish.
Consideration of these diverse factors resulted in a consensus
that a continuation of the monetary policy the Committee had
been following would be appropriate from the standpoint of
domestic conditions, though with a tendency to resolve any
doubts arising in the conduct of open market operations on the
side of less ease. It was agreed that the System should meet
seasonal needs for reserves and also that it should endeavor, in
accordance with its practice of long standing, to maintain steady
money market conditions in view of the Treasury's refinancing
program. Because of international factors, however, the con
sensus favored giving more than usual attention to short-term
rates.
Mr. Mills dissented from the implementation of policy in the
manner indicated by the consensus because, as he had indicated
at the October 3 meeting, he felt that Federal Reserve policy
aimed at encouraging the expansion of bank credit had resulted
in an increase in banking, industrial, and commercial liquidity
that was approaching an inflationary status and had already
tended to damage the fabric of the money market. In the cir
cumstances, including the ramifications of the international situa
tion, he believed that a start should be made toward implement
ing a moderately restraining monetary and credit policy.
2. Authority to effect transactions in intermediate- and longer-term securi
ties.
The Committee authorized the Federal Reserve Bank of New
York, between this date and the next meeting of the Committee,
within the terms and limitations of the directive issued at this
meeting, to acquire intermediate- and/or longer-term 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, Mitchell, Shepardson, Swan, and Ellis. Votes
against this action: Messrs. Allen and Robertson.
No changes were indicated in previously expressed positions of
members of the Committee concerning the authorization and
operations thereunder.
November 14, 1961
1. Authority to effect transactions in System Account.
The Committee renewed without change the directive to the
Federal Reserve Bank of New York providing for open market
operations with a view to encouraging credit expansion so as to
promote fuller utilization of resources, while giving consideration
to international factors.
Votes for this action: Messrs. Martin, Hayes, Allen, Irons,
King, Mills, Mitchell, Robertson, Swan, and Wayne. Votes
against this action: none.
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
On the basis of preliminary data, the Board's industrial pro
duction index appeared to have recovered in October the 1-point
September decline, and possibly to have exceeded the August
high. With the model changeover completed and the strike
settled, automobile production had increased sharply in October,
with a further substantial rise in November indicated by industry
schedules. New orders for machinery were up in October, along
with heavy engineering contracts, employment showed moderate
improvement, and total retail sales had broken out of the narrow
range within which they had fluctuated since midyear. The un
employment rate continued, however, at approximately the level
that had persisted for almost a year. Some decline was noted in
a few sensitive commodity prices, and third-quarter corporate
profits were below earlier expectations. A recent private survey
of business plans for spending on new plant and equipment in
1962 suggested only a modest rise above the level of expenditures
for the current year. On the other hand, consumer spending
showed signs of considerably improved strength in October.
Despite the October showing with regard to increased con
sumer spending, questions still remained concerning the under
lying strength of consumer demand. For example, consumer
savings and liquid asset holdings were still continuing at a high
level, and consumers were not yet resorting actively to the use
of their available borrowing power. The latest samplings of buy
ing intentions for durable goods, moreover, afforded little evi
dence that consumer demand might become a strong inde
pendent factor in furthering economic expansion in the months
immediately ahead.
In the financial area there had been a further sizable expansion
in the money supply, accompanied by only a moderate increase
in bank loans. The short-term Treasury bill rate had risen re
cently, following a downdrift in interest rates, particularly in
the long-term sector. System open market operations during
this period were large, but insufficient to meet the drain on re
serves from market factors, and free reserves had declined some
what, with modest tightening in the money market. While this
tightening had resulted from the play of market forces, circum
stances such as the lower average free reserve figure for one of
the statement weeks and the concurrent upward movement of
Treasury bill rates had led to speculation regarding a shift in
Federal Reserve policy.
Data on the U.S. balance of payments showed that for the
third quarter of 1961 the deficit, on a seasonally adjusted basis,
was at an annual rate somewhat above $3 billion, representing
a substantial deterioration from the first half of the year. The
largest single contributory factor to the increased deficit was a
rise in imports. As to October, preliminary incomplete data
afforded little basis for belief that the deficit had been reduced
from the high September figure.
The consensus that evolved from the discussion at this meeting
favored continuation for the period just ahead of a monetary
policy calculated to produce approximately the same degree of
ease that had prevailed for some time, except for the part of the
preceding 3-week period in which a tendency toward a some
what tighter money market had developed. It was the view of a
majority of the Committee that, although economic develop
ments should be watched closely in order to determine whether a
shift in policy toward a less stimulative monetary posture would
be appropriate, at this particular juncture various factors such as
the persistence of a relatively high volume of unused resources,
the absence of inflationary pressures, and the still unresolved
question of the pace of consumer spending presented strong argu
ments against any significant lessening of monetary ease.
Two members of the Committee, Messrs. Hayes and Mills, dis
sented from the implementation of policy in the manner indi
cated by the consensus. Mr. Hayes felt that it would be desirable
for the Treasury bill rate to move into a moderately higher range,
as a contribution in a minor way toward recognition of the seri
ous U. S. international payments problem, and he was prepared
to accept a somewhat lower level of free reserves should that
prove necessary to sustain the bill rate. However, he would not
favor any noticeable shift in System policy at this time. Also,
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
if the Treasury should decide to undertake an advance refund
ing in the near future, then he would feel that no change in
existing monetary policy would be appropriate. Mr. Mills dis
sented because of his belief that implementation of policy ac
cording to the consensus would fail to take the initiative that the
Federal Reserve System should properly take at this juncture. In
his view the monetary and credit situation to which he had ad
dressed himself at the two previous meetings of the Committee
had since worsened. It continued to be imperative, in his opinion,
to restrict the supply of reserves to such extent that the expansion
of bank credit would be contained largely within the bounds of the
resources already at the banks' disposal, at the same time that a
firmer structure of interest rates would serve to discourage the
transfer of gold and dollars abroad. In combination, the effect
of these actions should, he thought, give public evidence of a
determination to follow orthodox principles in defending the
international exchange value of the dollar.
credit expansion so as to promote fuller utilization of resources,
while giving consideration to international factors, was renewed
at this meeting without change.
2. Authority to effect transactions in intermediate- and longer-term securi
ties.
The Committee authorized the Federal Reserve Bank of New
York, between this date and the next meeting of the Committee,
within the terms and limitations of the directive issued at this
meeting, to acquire intermediate- and/or longer-term U. S. Gov
ernment securities of any maturity, or to change the holdings of
such securities, in an amount not to exceed $500 million.
Votes for this action: Messrs. Martin, Hayes, Irons, King,
Mills, Mitchell, Swan, and Wayne. Votes against this action:
Messrs. Allen and Robertson.
The renewal of the authorization was without indication of
change in the views stated regarding it when the authority was
previously renewed.
December 5, 1961
1. Authority to effect transactions in System Account.
The policy directive to the Federal Reserve Bank of New York
calling for open market operations with a view to encouraging
Votes for this action: Messrs. Martin, Hayes, Balderston,
Irons, King, Mills, Mitchell, Robertson, Shepardson, Swan,
Wayne, and Fulton. Votes against this action: none.
On the basis of more complete data for October than had been
available at the preceding Committee meeting, together with
preliminary data for November, it appeared that after a period
of hesitation in August and September a strong growth trend in
the economy had resumed, although without indication of ex
cesses or undue exuberance. December production schedules,
particularly in steel and automobiles, suggested a further upward
movement in industrial production by year-end, and the tone of
business sentiment, as reflected in district reports, was generally
on the optimistic side. Additional improvement was noted in
retail sales, as well as in manufacturers' sales and orders. Also,
although there continued to be a substantial amount of unutilized
manpower, preliminary unemployment statistics for November
indicated a significant percentage reduction, for the first time in a
year. Prices continued to show general stability. Despite recent
improvement, there remained a degree of uncertainty regarding
the probable future pace of consumer outlays, and there was like
wise little evidence of an upward surge in plans for plant and
equipment expenditures.
Despite the apparently accelerated pace of economic expan
sion in November, the rate of bank credit and deposit expansion
seemed to have slackened, following the pronounced increase in
September and October. Nevertheless, money markets were
relatively firm in November until the end of the month, and
interest rates generally rose somewhat. Treasury bill yields rose
in the latter part of the month to or slightly above the peaks
reached at various times of seasonal pressure during the past 15
months.
There was no evidence of improvement in the international
@FedFRASER