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FORTY-NINTH
Annua{ Report
OF THE
BOARD OF GOVERNORS
of the Federal Reserve System
COVERING OPERATrONS FOR THE YEAR
Period
Action
Purpose of action
Reduced System holdings of U. S. Government
securities by about $500 million through net
sales and redemptions. Member bank borrowings from the Reserve Banks averaged
less than $100 million.
Authorized open market transactions in foreign
currencies.
Increased System holdings of U. S. Government securities by about $1.3 billion, of
which half represented purchases of securities with maturities of more than 1 year.
Member bank borrowings from Reserve Banks
continued to average less than $100 million.
To permit further bank credit and monetary expansion by
absorbing only part of seasonal inflow of reserve funds,
mainly from post-holiday return of currency from circulation, while minimizing downward pressures on short-term
interest rates.
To moderate and offset short-term pressures on the dollar in
the foreign exchange market.
To promote further bank credit and monetary expansion while
avoiding sustained downward pressures on short-term
interest rates.
Mid-J uneIncreased System holdings of U. S. Governlate October ment securities by about $200 million with
net sales and redemptions of Treasury bills
of about $700 million being more than offset
by purchases of coupon issues, of which twothirds were issues maturing in more than 1
year. Member bank borrowings from Reserve
Banks averaged less than $100 million.
July
Reduced margin requirements on loans for
purchasing or carrying listed securities from
70 to 50 per cent of market value of
securities.
To permit moderate increase in bank credit and money supply while avoiding redundant bank reserves that would
encourage capital outflows, taking into account gradual improvement in domestic economy and possibilities for further advance, while recognizing the bank credit growth of
past year and continuing adverse balance of payments.
October
To help meet seasonal needs for reserves, while minimizing
downward pressures on short-term interest rates, and to
provide for the longer-term growth in bank deposits needed
to facilitate the expansion in economic activity and trade.
JanuaryFebruary
February
Marchmid-June
Reduced reserve requirements against time deposits from 5 to 4 per cent, effective
October 25 for reserve city banks and November 1 for other member banks, thereby
releasing about $780 million of reserves.
Late October- Increased System holdings of U. S. GovernDecember
ment securities by about $1.0 billion, with
more than half of the net increase in issues
maturing in more than 1 year. Member
bank. borrowing from the Reserve Banks
rose gradually over period, but only to an
average of about $200 million.
6
To take into account the recent sharp reduction in stock
market credit and the abatement in speCUlative psychology
in the stock market.
To help further in meeting seasonal needs for reserve funds
while encouraging moderate further increase in bank credit
and the money supply and avoiding money market conditions unduly favorable to capital outflows internationally.
In mid-December open market operations were modified to
provide a somewhat firmer tone in money markets and to
offset the anticipated seasonal easing in Treasury bill rates.
7
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
at the outset of the Federal Reserve program of foreign currency
operations.
As amended, the continuing authority directive read as follows:
contacted the monetary authorities of major industrial countries
by the time of the meeting, and those authorities stood prepared
to coordinate such intervention in foreign exchange markets as
might become necessary to cushion the impact of any unusual
flows of funds that might develop internationally.
The Committee discussion reflected grave concern about pos
sible consequences of the Cuban crisis, but until further informa
tion became available no change in monetary policy seemed
called for on that account. Economic and financial tendencies,
as they had been developing prior to the President's statement,
had led to some comment in business and financial quarters
about a possible early cyclical turndown in activity. While the
general view was that information available to date did not sup
port such a conclusion, at the same time it was clear that the
economy at best had been moving sideways in recent weeks. The
margin of unutilized manpower and industrial capacity con
tinued large.
In financial markets the impact of the recently announced re
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 issued by the Federal Open Market Committee on Febru
ary 13, 1962:
Pounds sterling
French francs
German marks
Italian lire
Netherlands guilders
Swiss francs
Belgian francs
Canadian dollars
Austrian schillings
Total foreign currencies held at any one time shall not exceed $1
billion.
Votes for this action: Messrs. Martin, Hayes, Balderston,
Bryan, Deming, Ellis, Fulton, Mills, Mitchell, and Shepard
son. Votes against this action: None.
October 23, 1962
duction by the Board of Governors of 1 percentage point in re
serve requirements on time and savings deposits at member
banks, to become effective shortly, remained to be seen, and the
Cuban crisis rendered appraisal of the situation particularly dif
ficult. Sluggishness in the economy, however, appeared to be
generating an increasing volume of business and consumer
liquidity without a corresponding change in private credit de
Authority to effect transactions in System Account
During the evening preceding this meeting of the Committee,
the President had announced emergency actions to deal with the
crisis that had developed due to the build-up of offensive military
weapons in Cuba. The crisis had become apparent suddenly, but
in the short time available to receive reports it appeared that the
reaction in markets was cautious, though nervous, with the result
that no waves of selling or buying had developed. In the corpo
rate security market one large financing proceeded as scheduled
the morning of the meeting. The Special Manager of the Sys
tem Open Market Account for foreign currency operations had
mands. As a consequence, both short- and long-term interest
rates had continued to ease prior to the Cuban crisis.
The U.S. balance of payments position deteriorated in the
third quarter and even more so in the first half of October. The
net capital outflow on private account continued large, especially
to Canada. Exports had declined in August contrary to expecta
tions, and the export surplus was the smallest in many years.
Increasing concern was reported about prospects for a continua
tion of economic expansion in Europe; if the European boom
should be topping out, U.S. exports would be adversely affected.
In view of the uncertainties presented by the international
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
crisis and the imminence of a Treasury refunding, there was
unanimous agreement that no change should be made in policy
indications included a high rate of auto sales in October follow
ing the introduction of new models; preliminary reports from
the October survey of consumer buying plans showing increased
strength in plans to purchase new cars and household durable
goods; and the results of a recent survey of business plans for
new plant and equipment outlays for 1963, showing a modest
rise over the estimated 1962 total.
In most domestic financial areas a somewhat more stimulative
tone had developed in October and early November. Bank credit
had again expanded at a rapid rate in October. Business loan
expansion continued larger than seasonal, following a strong
showing in August and September. The money supply had risen
appreciably in October, and there was a further rapid rise in time
and savings deposits. Member bank borrowing from Reserve
Banks continued moderate, and free reserves averaged above the
$400 million level. The large consumer financial savings and
corporate cash flows were sources of downward pressure on inter
est rates. Treasury, corporate, and municipal bond yields had
receded during October to around the lows reached in the spring
of the year. However, large Treasury financing operations and
Federal Reserve open market operations had contributed by early
November to raising short-term rates above the low levels of late
October.
Preliminary information on the October balance of payments
position of the United States was unfavorable, indicating an
over-all deficit of $900 million or more. This was the largest for
any month on record and more than double the third-quarter
monthly average deficit, owing in part to extraordinary transac
tions including large transfers to Canada, a large royalty pay
ment to Venezuela, and probably some outflow of U.S. funds
caused by the Cuban crisis. Some improvement in the balance
of payments was indicated for the first week of November.
Despite the sharp deterioration in the October payments posi
tion, the dollar remained relatively steady in foreign exchange
markets and no serious pressure developed in the London gold
market, reflecting in part the increasingly close cooperation
at this meeting, although the Committee should be prepared to
deal promptly with whatever problems might arise. While, as in
dicated, the policy decision was to maintain the status quo at this
time, the wording of the current economic policy directive was
changed to reflect awareness of the Cuban emergency situation
and to take account of the forthcoming Treasury financing. As
changed, the directive issued to the Federal Reserve Bank of
New York read as follows:
It is the current policy of the Federal Open Market Committee to
encourage moderate further increase in bank credit and the money supply,
while avoiding money market conditions unduly favorable to capital out
flows internationally. It is also the Committee's policy to cushion such
unsettlement in money markets as may stem from international develop
ments of an emergency or near emergency character. This policy takes
into account the potential financial effects of the Government's quarantine
on armament imports into Cuba, the imminence of a large Treasury
refinancing, and the recent stability of economic activity, with a margin
of underutilized resources and an absence of inflationary pressures.
To implement this policy, operations for the System Open Market
Account during the next 3 weeks shall be conducted with a view to pro
viding moderate reserve expansion in the banking system and to fostering
a steady tone in money markets.
Votes for this action: Messrs. Martin, Hayes, Balderston,
Deming, Ellis, Fulton, King, Mills, Mitchell, Shepardson, and
Irons. Votes against this action: None.
November 13, 1962
1. Authority to effect transactions in System Account.
The Cuban crisis, although far from settled, had eased ap
preciably by the time of this meeting. While the performance of
the domestic economy was still unsatisfactory in terms of utiliza
tion of manpower and other resources, the economic atmosphere
appeared to have improved. The more encouraging domestic
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