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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
outflows internationally. This policy takes into account, on the one hand,
the gradualness of recent advance in economic activity and the availa
bility of resources to permit further advance in activity. On the other
hand, it gives recognition to the bank credit expansion over the past year
and to the role of capital flows in the country's adverse balance of
ing, based partly on preliminary estimates, indicated that indus
trial production and retail sales had leveled off in August. Also,
the seasonally adjusted unemployment rate had risen to 5.8 per
cent, although this was reportedly due in part to special or tech
nical influences. Surveys of consumer buying intentions and of
business plans for inventory restocking and capital outlays sug
gested little change or only moderate gains in spending over the
coming months.
After contracting in July, bank credit expanded markedly in
August and grew slightly further in early September. Neverthe
less, private demand deposits declined substantially in August.
Treasury balances remained unusually high, and time and sav
ings deposits at commercial banks continued to grow but at
their recently reduced pace. The conventionally defined private
money supply was at a level about 1 per cent below that at the
end of 1961, after allowance for usual seasonal variations.
Long-term security yields were steady in early September,
after declining during much of August. An advance refunding
operation undertaken by the Treasury was still in progress at the
time of the meeting, with early indications that it was being well
received.
The international economic scene was reported to have
changed little in recent weeks, with the deficit in the U.S. bal
ance of payments about the same in August as in July (after
allowing for the sizable foreign debt prepayments in July). Pre
liminary figures for late August and early September suggested
some improvement, but it was too early to tell whether they indi
cated a trend.
A majority of the Committee concluded that, in view of con
tinued evidence of adequate domestic liquidity and continuing
indications of unsatisfactory progress with respect to the balance
of payments, monetary policy should remain unchanged for the
next 3 weeks. It was recognized that maintenance of the same
general atmosphere of credit availability might require somewhat
larger amounts of bank reserves than earlier, because of the
concentration of money market pressures arising from large
payments.
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 moderately firm tone in money markets.
Votes for this action: Messrs. Martin, Balderston, Bryan,
Deming, Fulton, King, Mills, Shepardson, and Treiber. Votes
against this action: Messrs. Mitchell and Bopp.
Messrs. Mitchell and Bopp dissented because they would have
preferred a directive indicating a greater willingness to encour
age monetary expansion, substantially like that adopted at the
meeting of May 29, 1962. They thought that monetary policy
could make a greater contribution to economic expansion with
out risking significantly adverse effects on the balance of pay
ments. In their opinion, the virtual elimination of any prospect
for a Federal tax cut in 1962 increased the importance of adopt
ing a more stimulative monetary policy. Mr. Mitchell also ex
pressed concern about the lack of growth in the money supply
since November 1961 which, he felt, had interfered with eco
nomic expansion. In his view there had been no monetary
expansion since late 1961. The rise in time deposits and total
bank assets that had taken place thus far in 1962 was due to the
growth of banks as savings institutions or financial intermediaries
and not to monetary creation brought about by Federal Reserve
policy. Recent policy, therefore, implicitly denied the need for
the money supply to grow with an expanding economy.
September 11, 1962
Authority to effect transactions in System Account.
It appeared that the improved performance of the economy in
July was not continuing. Reports to the Committee at this meet-
ANNUAL REPORT OF BOARD OF GOVERNORS
FEDERAL RESERVE SYSTEM
dealer financing requirements connected with the Treasury re
funding superimposed upon seasonal needs for funds associated
the field of public liquidity, he observed there was a clear need
for renewed growth in the money supply. Although there had
been times this year when the effects of a lagging money supply
might have been cushioned by accelerated growth in time de
posits and other liquid assets, such growth had since slowed.
Furthermore, the channeling of private saving into financial
claims, especially short-term Treasury securities, meant that the
funds of businesses and consumers were being funneled into
something less than the most stimulating channels, and Mr.
Robertson felt that the prevailing interest-rate structure-fostered
by existing monetary policy-must bear some of the responsi
bility for such a deflationary orientation of savings flows. He be
lieved that greater monetary stimulation at this time-when
there were unutilized human and material resources and when
the gold stock was ample to protect against rumor-spawned
speculative raids on the dollar-would contribute to a pros
perous and more rapidly growing economy that would command
renewed and more deeply rooted respect for both this country's
economic system and its currency.
with corporate tax and dividend payments. Because of these
developments, it was agreed that the Account Manager would
have to give particular emphasis to the tone and feel of the
market in managing the System Account. The current policy
directive issued to the Federal Reserve Bank of New York was
as follows:
It is the current policy of the Federal Open Market Committee to per
mit the supply of bank credit and money to increase further, but at the
same time to avoid redundant bank reserves that would encourage capital
outflows internationally. This policy takes into account, on the one hand,
the gradualness of recent advance in economic activity and the availability
of resources to permit further advance in activity. On the other hand, it
gives recognition tothe bank credit expansion over the past year and to
the role of capital flows in the country's adverse balance of payments.
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 moderately firm tone in money markets.
Votes for this action: Messrs. Martin, Hayes, Balderston,
Bryan, Deming, Ellis, Fulton, King, and Shepardson. Votes
against this action: Messrs. Mills, Mitchell, and Robertson.
In explaining his dissent, Mr. Mills said that he considered the
forestalling of further declines in the money supply to be an
overriding necessity. In his view, therefore, a higher level of free
reserves should be an objective of System policy. Mr. Mitchell
dissented for reasons similar to those he had expressed at recent
meetings. Mr. Robertson felt that greater monetary ease at this
juncture could stimulate additional employment of resources
domestically without prejudicing the international position of the
dollar. In the credit field, he believed there was room for more
aggressive loan competition among banks, at lower rates of in
terest. In his view, the ability of the economy to accommodate
such additional credit stimulus was demonstrated, in part, by the
relative absence of the kinds of credit abuses that could be en
gendered or remedied by changes in general credit controls. In
October 2, 1962
1. Authority to effect transactions in System Account.
Hesitation in the economy, apparent at the preceding meeting
of the Committee, became clearer as final reports of August de
velopments were examined, and the limited information available
for September suggested little or no improvement in that month.
The economy appeared rather delicately balanced between forces
making for mild contraction and those making for further modest
expansion. Unemployment, which rose in August to 5.8 per cent
of the labor force, continued at that higher rate in September.
Business psychology was appraised as not being optimistic; there
was renewed weakness of stock market prices, and business fixed
capital investment was indicated as lacking in vigor.
Consumer buying also was showing little significant change,
with preliminary estimates suggesting a slight decline in total
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