The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.
A meeting of the Federal Open Market Committee was held in the
offices of the Board of Governors of the Federal Reserve System in
Washington on Tuesday, September 13, 1960, at 10:00 a.m.
PRESENT:
Mr. Martin, Chairman
Mr. Hayes, Vice Chairman
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Balderston
Bopp
Bryan
Fulton
King
Leedy
Mills
Robertson
Shepardson
Mr. Szymczak
Messrs. Leach, Allen, Irons, and Mangels, Alternate
Members of the Federal Open Market Committee
Messrs. Erickson, Johns, and Deming, Presidents of
the Federal Reserve Banks of Boston, St. Louis,
and Minneapolis,
respectively
Mr. Young, Secretary
Mr. Sherman, Assistant Secretary
Mr. Kenyon, Assistant Secretary
Mr. Hackley, General Counsel
Mr. Thomas, Economist
Messrs. Brandt, Eastburn, Hostetler, Marget, Noyes,
and Tow, Associate Economists
Mr. Rouse, Manager, System Open Market Account
Mr. Koch, Adviser, Division of Research and
Statistics, Board of Governors
Mr. Knipe, Consultant to the Chairman,
Board of Governors
Mr. Keir, Chief, Government Finance Section,
Division of Research and Statistics, Board
of Governors
Messrs. Ellis, Ratchford, Mitchell, Jones, and Rice,
Vice Presidents of the Federal Reserve Banks of
Boston, Richmond, Chicago, St. Louis, and
Dallas, respectively
-2
9/13/60
Mr. Garvy, Adviser, Federal Reserve Bank of
New York
Mr. Parsons, Director of Research, Federal
Reserve Bank of Minneapolis
Mr. Lynn, Assistant Vice President, Federal
Reserve Bank of San Francisco
Mr. Holmes, Manager, Securities Department,
Federal Reserve Bank of New York
Upon motion duly made and seconded,
and by unanimous vote, the minutes of the
meeting of the Federal Open Market Com
mittee held on August 16, 1960, were
approved.
Before this meeting there had been distributed to the members of
the Committee a report of open market operations covering the period
August 16 through September 7, 1960, and a supplementary report covering
the period September 8 through September 12, 1960.
Copies of both reports
have been placed in the files of the Committee.
In supplementation of the written reports, Mr. Rouse made the
following comments:
Open market operations in the period since the Committee
last met were complicated, as we had expected, by the changes in
Regulation D affecting vault cash at all member banks and reserve
requirements in the central reserve cities. Some part of the
vault cash released appears to have become lodged unused in
country banks, and, as a result, the higher statistical level of
free reserves that has prevailed since August 25 may be mis
leading as a measure of reserve availability in the banking
system. Under these circumstances, we have had to rely to a
very considerable extent on the condition and feel of the
Here matters were complicated by the fact that
money market.
the very heavy inventories of the Government securities dealers
were a significant influence making for somewhat tighter
It did not appear appropriate
conditions in the money market.
to flood the market with funds mainly to accomodate dealer
financing needs, but the Account Management had to be alert
to prevent the pressure from this source from becoming too
Consequently, reserves were supplied to the market in
great.
some volume from time to time by means of repurchase agreements,
9/13/60
-3
With dealer inventories of Treasury bills at a high level,
with the failure of any broad demand for bills to develop during
the period, and with the beginning of corporate liquidation of
bills to meet September dividend and tax needs, which are
expected to be greater this year than normal because of the
absence of a September tax anticipation bill, bill rates have
moved higher during the period. In yesterday's auction, for
example, the average rate on the three-month bill was established
at 2.65 per cent, 37 basis points higher than the rate established
in the auction just prior to the last meeting of the Committee.
The average rate on the six-month bills, at 2.916 per cent, was
up 29 basis points from the earlier period.
The period immediately ahead does not appear too much
easier as far as the conduct of open market operations is
concerned. The Treasury advance refunding, of course, suggests
an even keel as an appropriate policy, but with the statistics
of free reserves still an uncertain measure of reserve availa
bility, there are bound to be problems.
I should also like
to point to the fact that estimates of the bulge in free
reserves anticipated earlier for the next two statement weeks
have been considerably reduced since the last meeting. This
has been due in part to the accelerated gold outflow. Between
now and September 20, $120 million in gold purchases have
already been arranged for foreign accounts, and this is
absorbing a corresponding amount of bank reserves.
The Treasury bond market has been preoccupied for some time
with the possibility that the Treasury would undertake an advance
refunding of the wartime "tap" issues. With the Treasury's
announcement on Friday, this possibility became a reality, and
the market yesterday was seeking to digest and evaluate the
terms of the offering. As you know, the Treasury is offering
three issues of 3-1/2 per cent bonds in a non-taxable par-for
par exchange for the four earliest dated "tap" bonds. The
details of the exchange are familiar to you, and I think that
it is obvious that the aims of the operation--to gain a
significant extension of debt maturity and to enable the
Treasury to hold on to its customers for long-term securitiesare of prime importance for the System. The Treasury has done
a great deal of advance preparation for this admittedly complex
operation--particularly in the way of preparing explanatory
material for public consumption--and it can only be hoped that
this will pay off in terms of a significant public response.
As part of this effort, as you know, Undersecretary Baird and
his associates will preside at three public meetings--to which
investors, Government securities dealers, and the press have
been invited--scheduled for tomorrow in New York, Chicago, and
-4
9/13/60
San Francisco.
With the books open until September 20, it
will
be some time before any judgment concerning public response can
be made.
The market was busy yesterday trying to establish
trading levels for the issues concerned, and although there was
virtually no activity reported, the price adjustments were
about as expected.
The longer-term issues adjusted downward in
price by as much as one point in the case of the 3-1/2's of
1990, the key issue, and upward in the 2-1/2 per cent "tap"
issues involved by about 1/4 to 1/2 point.
As a result, the
new issues were trading at prices very close to those of the
2-1/2 per cent "rights." The general reaction seemed to be
favorable.
The System Account holds approximately $650 million of the
"tap" bonds that are eligible for the advance refunding.
not recommend that the System participate in the advance
refunding.
Mr.
Balderston inquired of Mr.
Rouse what in the latter's
I do
judgment
had happened to the reserves introduced into the country banks by the
recent vault cash action,
to which the latter
apparently were just not using them.
that there must be free reserves in
The figures indicated fairly clearly
the country banks, but there was no
evidence that the reserves were filtering
major way.
replied that the banks
back to the money market in any
The result had been free reserves averaging $300 million
during the period since the last
Committee meeting, with the figure a good
deal higher at times.
Mr. Erickson inquired whether the lag appeared to be greater than
when vault cash was released previously, to which Mr.
he did not think so.
Rouse replied that
He recalled that last year quite a long period of
adjustment was involved.
Thereupon, upon motion duly made and
seconded, the open market transactions
during the period August 16 through September
21, 1960, were approved, ratified, and con
firmed.
9/13/60
-5
Mr. Noyes presented the following statement with regard to the
economic situation:
There is a good chance that the most surprising bit of
economic news to appear this week will be the announcement on
Friday that the Board's index of industrial production for
August was 109. Those who read beyond the headlines will
discover that there was still a one point decline from July
to August, because the index for the former month has been
revised upward from 109 to 110. Taken altogether, however,
this news constitutes a much more favorable picture of
industrial activity for July and August than has generally
been assumed.
If the week is typical of its predecessors in September,
most of the news will be much less favorable. In fact, one
of the most encouraging things that can be said about the
economic situation is that markets generally, and the stock
market in particular, have not been stampeded by the bearish
news and sentiment that has been so prevalent in the past few
weeks.
The most disturbing aspect of recent developments is that
we are beginning to see, really for the first time, some signs
that the rising trend of consumption expenditures, which has
maintained gross national product thus far in 1960, may be
coming to an end. Both the immediate and secondary repercus
sions of such a shift could be serious in the light of the
apparent absence of strength in other sectors of the economy.
Certainly, if final demand by consumers is not strong, we can
independent strength in investment expenditures
expect little
in the remainder of the year.
In fact, only Governmental
expenditures now appear to offer a reasonably certain prospect
of increase in the period immediately ahead, although one may
hope that net exports will increase moderately.
Such a situation would almost certainly have some cumu
lative effects--that is to say, a softening in the vigor of
final demand would cast doubt on the inventory position in
many lines and probably lead to further downward revision of
plant and equipment spending plans.
Doubts as to whether the uptrend in final demand will be
sustained are enhanced by the less than seasonal improvement in
employment reported for August and by a cut-back in overtime
In Canada, where economic events seem
work at premium rates.
ahead of those in the United
to have been running a little
States, the increase in unemployment to a post-war high of
7 per cent casts a foreboding shadow.
9/13/60
-6
Leading business cycle indicators appear to have continued
their downward trend in August and, whereas six of the nine
major coincident indicators were rising in May, six were falling
in July; and the prospects are that when the data for August are
all in the proportion declining will increase further.
One interesting element in the recent behavior of our
statistical data is that series denominated in dollars have
generally declined more than series measured in physical terms.
This suggests that the prices at which transactions are actually
being consummated are lower, even though the official indexes
have been stable, or up in some cases. If this is true, it
would add support to the thesis, which is gaining acceptance,
that the economy has already made a number of the important
adjustments that are ordinarily associated with a moderate
recession in business activity, and that with the benefit of
hindsight we may find 1960 was a year of moderate recession,
and that 1961 will be one of recovery. The substantial inventory
adjustment which has already occurred, the absence of any boom in
plant and equipment expenditures, and the almost incredible fact
that, despite all the upward biases associated with wages, hourly
earnings of production workers actually declined from January to
August, are all cited in defense of this analysis.
Its proponents
also find comfort in the atypical behavior of many of the financial
series, especially business loans at city banks.
To these observations I might add one of my own. In our
frequent review of current and prospective economic developments,
I think we sometimes wear out some important observations before we
have felt their full effect. I believe the huge shift in the
economic impact of the Government's fiscal operations is a good
example.
In the fourth quarter of calendar 1959 we had a cash
deficit of about $4-1/2 billion, and in the second quarter of
1960 we had a cash surplus of about the same amount. The fact
that some of this shift was seasonal does not prevent the impact
on the economy from being very real. While it may over-dramatize
the matter to put it in these terms, when we relate this shift to
GNP magnitudes, which are expressed in annual rates, the Federal
Government was spending more than it was taking in, in the fourth
quarter of 1959, at an annual rate of $18 billion, and taking in
more than it was spending at an annual rate of $18 billion in the
second quarter of 1960. Thus, the shift can be expressed as a
magnitude in the neighborhood of $36 billion at annual rates and,
indeed, suggests that the economy may have already made a more
massive adjustment than is generally appreciated.
9/13/60
-7
Perhaps this line of thinking proves only that Americans are
incurable optimists, but there is some historical precedent for
"sidewise movements" that were fully recognized as "recessions"
only in retrospect.
In summary, the relative merits of the somewhat conflicting
viewpoints I have discussed seem to be of minor importance for
monetary policy at this juncture.
Whether we are well into and
perhaps on the way out of a mild recession, or on the verge of a
more serious one--a credit policy designed to give every reasonable
encouragement to business and consumer expenditures in the period
immediately ahead would seem appropriate.
Mr. Koch presented substantially the following statement with
respect to financial and credit developments:
On balance, data becoming available on financial markets in
recent weeks have been as bearish as those on economic developments.
Both bank credit and monetary expansion, which gave us cause for
hope and cheer in July, were disappointing in August.
The pace of
new security financing has moderated, and common stock prices are
back down to their summer low.
The rise in consumer credit had
slowed markedly in July.
Taking a closer look at commercial banking developments, the
loan demand, particularly on the part of business concerns, has
slackened further, and business loans are generally quite a good
Seasonal borrowing by
indicator of broader business trends.
commodity dealers, food processors, and trade concerns, which usually
begins in late July or early August, has been slow in developing this
year. Moreover, concerns like public utilities and consumer finance
companies have been repaying bank debt with the proceeds of longer
term financing.
One encouraging note, however, is that in August commercial
banks held on to the new Treasury securities they acquired in July
in greater volume than they have done after other recent financings.
Another encouraging banking development over the past month or so is
that the effects of an easier monetary policy are apparently begin
ning to take hold at the smaller banks, a development about which we
were having some concern earlier in the spring and summer.
Turning to the reserve position of the banking system, of the
$700 million or so of reserves supplied to member banks by the
Federal Reserve over the past few weeks through reserve requirement
actions, about $300 million were absorbed through market forces and
approximately another $300 million through offsetting open market
9/13/60
-8
operations, leaving about $100 million to be reflected in a some
what higher free reserve balance.
Despite higher free reserves,
however, the bank reserve positions of the city banks were under
somewhat more pressure since the last
meeting of this Committee
than earlier.
This is suggested by rising money market rates, a somewhat
higher level of member bank borrowing from the Federal funds market
and the Reserve Banks, the hovering of the Federal funds rate at the
discount rate, and the general need of Government security dealers
to scurry around for needed financing. This situation of somewhat
more pressure with higher free reserves is explained by the fact
that the more than $300 million of reserves made available to country
banks in late August through the release of vault cash permeated
through the banking system quite slowly, a fact highlighted by the
virtual absence of the usual flow of excess country bank reserves to
the money centers last
week at the end of the country bank reserve
computation period.
Recent money supply developments have been as disheartening as
those in bank credit. The daily average money supply outstanding in
August, our new series and a more meaningful one than the last
Wednesday-of-the -month, single day series, was only about $300
million above the recent low reached in June, indicating that part
month. The last
of this summer's earlier increase was offset last
Wednesday-of-the-month series showed a small further increase in
August.
In contrast to the recent course of the money supply and
demand deposits, time and savings deposits at commercial banks
held by domestic holders throughout the country as well as by
foreigners have grown this summer at an exceptionally rapid
rate. This rise no doubt has reflected the relatively more
favorable rates currently being paid on time deposits than on
alternative investment outlets.
Most types of interest rates have shown comparatively
change in recent weeks, although short-term Treasury
little
On the
rates have risen almost one-half a percentage point.
surface, this is surprising in view of the numerous credit
It no doubt
easing actions of the System during this period.
reflects the fact that business corporations, and other private
investors as well, are not as interested in Treasury bills at
current rates and because they have other pressing cash needs.
liquid enough
does not feel itself
The banking system also still
to absorb substantial additional amounts of Government debt with
a still uncertain seasonal borrowing demand in the weeks ahead.
Turning to the reserve projections for the next few weeks,
let me point out again the change that was made in the reserve
time and which has been continued in a
pattern table last
9/13/60
-9
somewhat modified form this time.
You will notice that in the
two columns on the right of the table alternative projections
are set forth.
The second column from the right projects the
level of outstanding free reserves on the same basis as we have
in the past, namely, assuming no further System open market
operations and only taking into account seasonal market forces,
including an allowance for seasonal changes in the money supply
but no growth.
The second alternative, in the column on the
extreme right, shows a projection of outstanding total
reserves
assuming System open market operations will take care of all
seasonal market needs, thus maintaining the current level of
free reserves.
The volume of System operations that would be
required in the future to achieve this second alternative is
shown in the third column from the right.
The purpose of the addition of this total
reserves alterna
tive to the pattern table is to give both the Committee and the
Manager of the Account a broader statistical
base upon which to
formulate policy and action.
It is not meant as a substitute for,
but rather a supplement to, the other information that is
supplied.
I tend to agree with what I read to be the views of
Mr. Noyes as expressed at your last
meeting, namely, that if a
single measure is to be selected as the most appropriate indicator
of the effectiveness of current monetary policy, it might rather
be the money supply itself
than the reserve base underlying it.
In my view, too many factors like the volume of Government and
interbank deposits which have little
relationship to economic
affairs affect total
reserves, whereas the privately-held money
supply is more relevant to the course of spending.
I also retain the belief that the free reserve concept can
be a useful indicator to the Manager of the Account in helping
him achieve the monetary policy objectives of the Committee, if,
but only if,
the effect of changes in reserve availability on
such more fundamental financial measures as bank credit expansion,
the money supply, and interest rates are under constant watch.
Today's pattern table shows that the average level of free
reserves in the week ending tomorrow will approximate $435
million. Next week, assuming no offsetting System action, it
In the following two
would likely average around $750 million.
weeks the estimates of the Board's staff
drop to $470 and $5
of the New York Bank are
million, while those of the staff
approximately $300 million higher in each of the two weeks due
to differing estimates of the decline in the midmonth float and
Regardless of one's views as to
the change in required reserves.
the likely course of free reserves in the coming weeks, I should
like to suggest for the Committee's consideration that it instruct
meeting, as I understand it did
the Manager of the Account at this
9/3/60
-10
at the last meeting, that not too much emphasis be placed on the
level of free reserves and more be placed on the feel and tone of
the market.
This is a period when seasonal demands for liquidity are
normally very high, for example, corporate cash needs for dividend
disbursements and tax payments. Moreover, the sharp rise in
reserve availability will be due mainly to a temporary midmonth
bulge in float, the effects of which, if I remember the record
correctly, the Committee has felt should not be offset, at least
fully, by open market operations. Finally, our reserve projections
are particularly tenuous now since we have to estimate the amount
of vault cash allowable as reserves.
Therefore, I conclude that there is much to be said,
particularly in view of the uncertain economic situation and the
recently announced Treasury refunding program, for permitting the
level of free reserves over the next two weeks to remain above
recent levels. Indeed, if the economic situation shows a seasonally
adjusted downward drift in the coming weeks, as the accumulating
evidence suggests it might very well do, it would be the part
of wisdom to be thinking of further gradual credit-easing actions.
Mr. Marget commented as follows with respect to the United States
balance of payments:
The gold outflow continues.
of this Committee,
As I reported at the last meeting
in July the gold outflow amounted to over $175
million, as against only $125 million for the whole of the first
six months of this year. In August, the figure was $140 million.
Thus far in September, the figure for actual gold purchases by
foreigners has been only $15 million; but, as Mr. Rouse reported,
we have received notice of additional purchases of $121 million
to take place within the next ten days, so that, even if we
receive no further orders in September, net gold purchases by
foreigners in the current month will be about as large as in
August.
Unfortunately, another thing that is continuing is the giving
of wrong explanations for the gold outflow. As recently as
August 24, for example, the Financial Times of London solemnly
declared that what "is at the root of the recent resumption of the
gold outflow" is "the growing mistrust of the dollar in official
circles outside America." If this were true, then, in view of the
more than $9.5 billion of official foreign dollar balances (to say
nothing of the more than $7.5 billion of private foreign dollar
balances) outstanding, our position would be a very serious one
9/13/60
-11
indeed. We should in fact be confronted by the kind of immediate
policy dilemma which might very well not only deprive us of all
flexibility in meeting the requirements of the current domestic
situation, but also force the adoption of policies exactly
contrary to those required by the domestic situation.
No one can say with absolute certainty that such a situation
will never arise.
What one can say with certainty, however, is
that the evidence up to date is categorically against the interpre
tation of our recent gold outflow which I have quoted from the
Financial Times. As I suggested at the last meeting of this
Committee, the place to look for evidence is in the total of
foreign dollar balances.
If these dollar balances were to decrease,
say, in an amount equal to the amount of gold outflow, one could
regard this as prima facie evidence of a conversion by foreigners
of existing dollar balances into gold; and it might not be unreason
able, under such circumstances, to speak of evidence of "growing
mistrust of the dollar in official circles outside America." But
it is certainly unreasonable to draw this conclusion, if, instead
of foreign-owned dollar balances decreasing, they increase. As
I reminded the Committee at its last meeting, this is exactly what
happened during the whole period of gold outflow from 1958 through
June of this year. At the last meeting, I could not make a categorical
statement as to what had happened since June because the figures were
not then available. They are available now for July; and they show
that during that month foreign-owned dollar balances, instead of
decreasing in proportion to the $175 million of gold outflow,
actually increased by around $325 million. We do not yet have the
complete figures for August; but if the figures for foreign holdings
at the Federal Reserve Bank of New York can be taken as an indication
(they show a rise of around $350 million), we may expect a com
parable increase for the month of August also. In the light of
these figures, it simply makes no sense to suggest that the recent
gold outflow is to be taken as evidence of "growing mistrust of
the dollar in official circles outside America."
But it would also not be sensible to suggest that these
figures I have just given can be accepted with complacency.
Gratifying as it is to see the evidence of continued confidence
in the dollar which is represented by these large increases in
foreign dollar holdings, it is also true that we should all
be feeling more comfortable if these foreign dollar holdings
hadn't increased so much. Indeed, given the sizeable gold out
flow that began in July, we should have been quite happy if
they hadn't increased at all. For what we must keep reminding
ourselves of is that the figure for gold outflow plus the
9/13/60
-12
increase in foreign-owned dollar balances is a rough measure
of the size of the over-all deficit in our balance of payments.
For July, that total figure was as much as $500 million; the
figure for August will also probably turn out to be quite
large; the result, therefore, will inevitably be that the
published figure for the over-all deficit in our balance of
payments for the third quarter of this year, instead of
showing the improvement which had generally been expected,
will show what will look like a deterioration.
What, in fact, has been happening?
It is of the first
importance, I am convinced, to under
stand that what has not been happening, so far as our evidence
goes, is a deterioration in our trade position. On the contrary,
the latest figures we have (for July) show that while our imports
have remained at about the same level (around $15 billion, annual
rate), our exports, which had been averaging a rate of about
$19-1/2 billion during the second quarter, moved up sharply above
$20-1/2 billion. One should never put too much weight on the
performance in a single month. But much more is involved here
than the performance of a single month.
It will be remembered
that in the spring of 1959 our trade surplus was around zero.
It will be remembered, also, that it was this very serious
deterioration in our trade position which gave rise to wide
spread concern as to our ability to maintain a competitive
position in world markets. A rise in our trade surplus from
over a year ago to its present position
around zero a little
of a surplus of around $5 billion is a development that goes
far beyond the expectations of most of those who have been
concerned with forecasting the course of our balance of pay
ments; and considering that it is the field of trade which
reflects directly the concerns of those who have been most
troubled about our balance-of-payments prospects ("Have we
priced ourselves out of the market?", "Is our wage-level too
high?", "Have we slipped in terms of innovations of technique?"),
this trade performance, taken by itself, is anything but
discouraging.
But, of course, in speaking of the balance of payments,
we cannot take the trade performance "by itself." We can say,
with assurance, that what will generally be referred to as
the "deterioration" of our balance of payments which set in in
July was certainly not the result of a deterioration in our
trade position. But this means that we must look further for
the explanation, and we must look particularly into the field
Fortunately, we now have some figures
of capital movements.
on these movements for the month of July, and can offer some
general observations which were not possible as recently as a
week or so ago.
9/13/60
-13
The first of these observations is that we now have
evidence of a substantial outflow of funds reported by United
States banks, either for their own account or for that of their
customers. The evidence is contained in the item "claims on
foreigners" as reported by banks in the United States.
In July,
this item, which had increased by only $220 million in the whole
first half of 1960, rose in July alone by $305 million.
The second observation is that the data not only provide
no real evidence of a "flight from the dollar" by Americans,
but also provide no real evidence of net movements of United
States funds for "speculative" reasons.
(For example, there
was no increase in claims on those countries most often cited
as havens for speculative funds--namely, Germany and Switzerland;
and it is worth noting, also, that in spite of the reported
movements of Belgian funds into Switzerland as a result of the
Congo troubles, the fact that Belgian private dollar holdings
rose in July by $40 million would suggest that the United States
also may have been regarded as a haven for funds previously
invested in the Congo.)
The outward movement of United States
bank funds in July is to be explained not as a speculative
movement but either by reference to special transactions with
which we are familiar (for example, about a third of the total
rise in claims--$110 million--represented the extension of
credits to Venezuela) or by the operation of normal market
processes.
Of these "normal market processes," the one that interests
us most is of course the shifting of funds in response to
interest rate differentials.
The fact that of the two-thirds
of the outflow that did not go to Venezuela, one-half (that is,
another third of the total)
went to Canada and the United Kingdom,
and the other half went to Japan and a few other countries for
export financing by bankers' acceptances, would suggest that
interest-rate differentials played a major role in these move
ments.
This, surely, was to be expected as part of the normal
functioning of the international monetary mechanism.
It is
equally to be expected that this part of the movement of funds
will reverse itself
whenever the international structure of
interest rates changes in a direction and a degree sufficient
to make such a reverse flow profitable. (Since I mentioned
Canada as a country to which a considerable amount of funds
seems to have moved in July, it is worth noting that since late
August there has been a slight covered-interest-differential
in favor of shifting funds from Canada to the United States.)
It is clear, I hope, that all this is very far from
amounting to a suggestion that our balance-of-payments troubles
For one thing, gratifying as our trade performance
are over.
9/13/60
-14
has been, it could be nullified by the assumption by the United
States of new foreign aid commitments of an extent and character
that would condemn us to a race in which the improvement in the
trade picture would always fall short of what is required to
balance our international accounts.
But the hope, surely, must
be that in this field, as in others affecting our balance of
payments, our actions will be of a degree of responsibility
sufficient to convince both the foreign holders of dollar
balances and the American financial community itself that our
policies are such as to deserve a fair trial while we are
working our difficulties out, instead of being such as to deprive
us of all flexibility in our efforts to cope with these dif
ficulties.
Mr. Hayes presented the following statement of his views on the
business outlook and credit policy:
The sideways movement of the economy continues, characterized
by a high level of activity, very little growth, substantial
unused resources, and considerable price stability. The chance
of a break-out on the up side is growing increasingly remote.
On the other hand, normal seasonal factors, including production
of the new automobile models, will provide some expansionary
influence in the next few months; and this should help counter
any tendency toward recession for the remainder of the year.
Discouraging elements in the outlook include the latest
SEC-Commerce survey which indicates a leveling off of plant
and equipment expenditures in the third and fourth quarters,
doubtless due in good part to the current squeeze on profit
margins; the accumulating evidence that residential construc
tion is suffering from a basic weakening of demand; the recent
sluggish showing of consumer spending, especially in the area
of consumer durables; and the latest data on unemployment.
The significance of inventory developments in the last
few months is not wholly clear. Although businessmen have
succeeded in holding down inventories of purchased materials,
lagging sales have brought an increase in manufacturers'
inventories of finished goods and goods in process--as well
as total manufacturers' inventories and the ratio of such
Statistics for July, however, show the
inventories to sales.
first drop in manufacturers' inventories in many months,
whereas in the preceding months they had merely increased at
Perhaps the drag which the economy has been
a reduced rate.
experiencing from a decline in the rate of inventory accumulation
is drawing to an end.
9/13/60
-15
The stagnation of industrial production since the
beginning of the year seems attributable perhaps to declining
inventory demand, the increasing proportion of consumer
expenditures absorbed by services, a somewhat higher propor
tion of savings in relation to personal income, and the
virtually unchanged level of Federal expenditures.
While it
is too early to attempt to forecast the direction of the next
major move of the economy, we should perhaps be making a start
toward considering possible courses of action in the event
move
this
that
should be downward.
As for credit developments, business loans of weekly
reporting banks in August continued the below-normal trend of
July, as did total
loans.
While investments did not rise as
rapidly as in July, the gain was still
sufficient to bring a
change in total
bank credit about in line with the seasonal
pattern. The money supply rose only very moderately in August,
but our policy of ease appears to have brought results with
respect to bank reserves.
Total reserves, nonborrowed reserves,
and required reserves each averaged higher in August than in
July on a seasonally adjusted basis.
Nonborrowed reserves
should soon approach the all-time 1958 peak.
The System has taken a number of steps in the direction
of monetary ease to meet current economic conditions. Probably
effects of some of these measures have not yet been
the full
felt.
In view of this, plus the fact that the economic
situation appears to be essentially unchanged since the last
Committee meeting, a further easing of credit policy would not
This would be true wholly apart
time.
be appropriate at this
from the obvious need to preserve an "even keel" during the
In my opinion the
current Treasury advance refunding.
directive and the discount rate should not be changed.
As for open market operations, I think that present policy
should be continued, with doubts being resolved on the side of
ease. It seems to me that statistics on free reserves will be
an even less reliable guide than usual in the coming weeks,
since it is quite uncertain to what extent released vault
September will be
cash will actually affect bank behavior.
marked by the seasonal pressures associated with the tax date
and especially by the prospect that pressure on the dealers,
already considerable, will increase as the dealers are called
on to play their usual role of taking Governments off the
corporations' hands to provide funds for taxes, dividend pay
portfolios already
With their
ments, or other seasonal needs.
so heavy, the dealers are not in nearly as favorable a position
In this context
to perform this function as we might desire.
I believe, be given more than usual leeway
the Manager should,
to adjust to the feel of the market; and he might wish to give
9/13/60
-6
special attention to the relationship between bill
rates and the
discount rate as a measure of market pressure.
It may well
prove to be unnecessary to offset fully the market factors
expected to bring a sharp bulge in free reserves in the next
two weeks, particularly as additional reserves will be required
in any case a little
later in the year.
I am sorry to say that the most recent figures do not
indicate any over-all improvement in the balance-of-payments
situation.
In fact, the acceleration of foreign central bank
purchases of gold from the Treasury--which we have already
begun to see--may well become an increasingly significant
factor affecting member bank reserves over the remainder of
the year. With gold selling in London and Switzerland at
about $35.25 an ounce yesterday, it is no longer attractive
for central banks to buy gold abroad.
If this price situ
ation continues, foreign central bank purchases of gold will
tend to be concentrated on the United States gold stock.
If, as seems to be the case, the economy is in a more
or less neutral and uncertain area between expansion and
recession, I would think that the Board might wish to con
sider a further reduction of margin requirements in the not
too distant future, perhaps to what has come to be considered
a "normal" level, i.e., 50 per cent.
We need not try to reach any conclusions now as to what
our policy should be if the economy continues to stagnate
over a prolonged period or begins to show a recessionary
trend. But I think it quite possible that, if such tendencies
develop, we should seriously consider to what extent fiscal
policy should be called upon to share with monetary policy
the burden of encouraging greater business activity.
Mr.
Johns said that in view of the clear and forthright appraisal
of business and monetary developments that had already been given, he
would be brief in his own comments.
Four weeks ago, he recalled, he
had expressed some gratification at the appearance of a turnaround
in the total reserve situation, and hopefully in the money supply.
However,
subsequent developments had been disappointing.
Although in
the two weeks ended September 7 free reserves averaged $337 million,
the highest level of the year, at the same time there was a smaller
9/13/60
-17
amount of effective reserves and also a smaller money supply than at
the beginning of the year when, instead of free reserves, there were
net borrowed reserves of around $300 million.
In his opinion straight
forward action was needed to bring about the expansion of bank credit
that had been the objective of the Open Market Committee, as expressed
in its
directive,
since May.
Accordingly, he suggested that the
Committee, as expeditiously as possible, bring total reserves up to
about $18.8 billion, which on a seasonally adjusted basis would mean
an increase of perhaps 3 per cent.
Thereafter, he felt that the
Committee should be thinking in terms of an annual rate of increase of
some 4 or 5 per cent.
He did not believe, in view of economic develop
ments, that the System could defend a failure to take such steps as
might be needed to bring about expansion of the money supply.
Mr. Bryan said it
seemed to him quite clear that the economic
situation was deteriorating currently.
While a variety of hypotheses
could be made to the effect that there had been a recessionary period
from which the country would come out sharply on the upside, the
probabilities were not in that direction.
In the circumstances, he
disagreed with the view of Mr. Hayes that no further monetary ease was
required or would be appropriate.
As he saw it,
inadequate.
If
Mr. Bryan said, Committee policy had been decidedly
one looked at August of last year and adjusted total
reserves to allow for the change in reserve requirements, he would come
-18
9/13/60
out
with a daily average of $18,486 million, or approximately that
figure.
This August,
when the Committee presumably was trying to ease,
one would come out with a daily average adjusted for the change in
reserve requirements of $18,374 million.
Thus far in September the
daily average of total reserves was $18,398 million, whereas in
September last
year, adjusted for the change in reserve requirements,
the figure was $18,466 million, so that again the figure was lower.
Accordingly,
in
a period when, according to the directive,
the Committee
was trying to provide a basis for credit expansion, the total ability
of the banking system to support an expanded money supply was less than
last
year when the System was trying to bring about exactly the opposite
results.
Mr. Bopp said that Third District business activity continued
at a fairly good rate, but with no indication of further increase.
While consumer demand remained reasonably high, manufacturing and
construction activity had declined.
Unemployment in major areas of the
District declined on balance in July, thus narrowing somewhat the
unfavorable
gap between the District and the country as a whole.
despite reductions in unemployment in Philadelphia, the Lehigh
However,
Valley, and several anthracite areas, the average rate was still
6.4
per cent.
Mr. Bopp vent on to say that in the period since the most recent
Committee meeting there had been no significant movement in
the earning
-19
9/13/60
assets of District banks.
However, there had been a significant
relaxation of pressure on reserve positions.
Although there was still
some borrowing in the form of Federal funds, it was substantially less
than it
had been.
The reserve city banks had not been borrowing from
the Federal Reserve Bank.
With reference to Mr. Rouse's comment on the failure of reserves
made available to country banks by the recent vault cash action to come
back to the money centers, Mr. Bopp said a study of country bank borrowing
at the Philadelphia Reserve Bank showed that thus far this year 183 banks
had borrowed,
and that 107 of those banks borrowed at times when their
excess reserves were greater than the amount of the borrowing.
In some
cases particular banks borrowed for as much as ten periods, and in seven
cases those banks would not have had to borrow.
The Reserve Bank had now
distributed a worksheet to country banks which would enable them, if
they followed it,
to check on their reserve position and thus make more
efficient use of their funds.
After commenting on the unusual volume of remittance float in
the Third District occasioned by the Pennsylvania Railroad strike, now
settled, Mr. Bopp said that he would not favor a change in the directive
or in the discount rate at this time.
In view of Treasury refunding he
would maintain an even keel, with as much assurance as possible that no
tightness would develop.
Mr. Fulton reported continued deterioration in the economy of
the Fourth District.
While the consumer was continuing to buy, and
9/13/60
20
department store sales were 2 per cent above last year, auto sales were
down considerably and in practically every other category activity was
lower than it had been.
Unemployment was up contraseasonally.
In the
heavy machinery industry backlogs were disappearing and new orders were
just not coming in.
There was an increase in steel orders in August
as compared to July, but in September orders again receded and the
industry was now living on expectations.
The operating rate was low,
having declined about 11 per cent in the past couple of weeks.
It was
hoped that the automotive industry would come in with orders incident
to stocking dealers with new cars, but in view of the backlog of unsold
cars the extent to which inventories of new cars would be created was
problematical.
While the industry reportedly was anticipating a good
year in 1961, compact cars were expected to comprise about 40 per cent
of all units manufactured and they take about 20 per cent less steel
than full-sized cars.
Accordingly, even if production were about the
same as this year, that is,
around 6.5 million cars, the requirements
for steel would be less.
Mr. Fulton said that in many areas there had been cutbacks in
plant and equipment expenditures.
Moreover, in many cases the programs
that were going ahead had tags attached to them in the form of items
that could be eliminated if the economy seemed to be continuing at the
same level, with no uptrend.
Currently, operating rates were low and
capacity was available to supply almost anything on short order.
With
9/13/60
-21
wage increases inevitable because of existing contracts, the existing
squeeze on profits, already affecting all segments of industry, seemed
likely to become more acute.
Mr. Fulton said he was pleased that the Desk had not stuck too
closely to the free reserve figure and had given recognition to the fact
that excess reserves were concentrated in the country banks.
He saw the
situation as a counterpart of the situation in 1954 when there was a
considerable time lag before reserves in the country banks came into use.
It was his opinion that the Desk should give minimum significance to the
free reserve figure and pay attention principally to the feel of the
market and the action of short-term rates, including the rate on Federal
funds, which had been close to the discount rate most of the time.
While
there had been free reserves in the Fourth District, they had been
lodged in the country banks; the reserve city banks had been under
pressure constantly, with negative free reserves.
In his view, there
fore, an increase in the money supply was of paramount importance and
further relaxation by way of open market operations would be quite
appropriate.
He would not favor changing the directive or the discount
rate at the present time.
Mr. King indicated that he shared the concern of those who had
spoken about the money supply and the failure of the general reserve
picture to show more improvement.
However, the purchase of Government
securities by so many people and the increase in time and savings
9/13/60
-22
deposits at banks were factors affecting the money supply that should
be recognized in order to view the situation in true perspective.
As
he had said, he was concerned, but not to the point of feeling that
drastic action should be taken, for he did not believe that the things
affecting the economy today were going to be cured by easing the reserve
position of the banks unnecessarily.
Instead of producing the results
that were desired, such action would be more likely to have repercus
sions affecting the balance-of-payments problem that was of so much
importance at the present time.
Mr. King said he would not favor changing the present directive.
He had voted against amending the directive at the August 16 meeting
because he felt that the consensus did not contemplate open market
operations consistent with the change in clause (b) that had been
proposed.
However, he was not disposed at this time to recommend going
back to the previous directive, and he would vote to continue the out
standing directive on that basis.
discount rate at this time.
must leave it
He would favor no change in the
Like Mr. Fulton, be believed the Committee
to the Desk to manage the Account largely according to
the feel of the market.
Since such an expression leaves the Desk
without too much guidance, he would say that the feel of the market
he had in mind was one of relative ease.
Mr. Shepardson said the appraisals of economic activity that
had already been given were in line with his own appraisal.
Certainly
-23
9/13/60
no vigorous upturn appeared to be imminent.
In view of his long-run
concern for growth in the money supply, and the fact that such growth
had not been achieved,
he felt the Committee should use this opportunity
to do more toward trying to provide for some of that growth.
Accordingly,
although he would not want to create an unduly easy position, he would
provide needed reserves freely at this time and make allowance for the
lag in effectiveness of the action on vault cash.
He would not be too
much concerned about float bulges; his objective would be to maintain
a position of relative ease that would encourage and be conducive to
growth in the money supply.
Mr. Shepardson commented that the present directive indicated,
in essence, what the Committee has been aiming at for several months.
Accordingly, he saw no reason for a change.
Committee had not been as effective as it
the objectives indicated by the directive,
In his opinion the
might have been in achieving
and he would favor moving
further in that direction.
Mr. Robertson said that in view of the state of the economy he
had sympathy with the views expressed by Messrs. Johns and Bryan.
However, he did not see that anything could be done at this particular
juncture.
In view of the Treasury refunding, all that could be done
for the present was to maintain an even keel and instruct the Manager
to see that no tightness existed.
After the financing period, when
the opportunity presented itself, he felt that the Committee should
-24
9/13/60
move toward further ease in order to give strength and impetus to the
directive that had been adopted.
move as quickly as it
In other words, the Committee should
could toward an easier position, but this could
not be done during the period of Treasury financing.
Mr.
Mills said that as he sized up the economic situation the
development of monetary and credit policy would increasingly have to
contend with intangible factors with which the System had not been
accustomed to deal.
Public disappointment in business prospects had
created psychological attitudes that,
in their impact on the financial
and economic factors customarily taken into account in policy making,
were producing a condition that was forcing out of the reach of monetary
and credit policy the elements that the System ordinarily seeks to control.
He would be happy if
he could persuade himself that the failure of the
released vault cash to permeate into the reserve supplies of the com
mercial banking system in
a manner that would stimulate expansion was
the real reason why the Committee had not seen the improvement in the
money supply or the type of credit expansion that it
had sought to foster.
On the contrary, however, he was fearful that contractive financial
factors were taking a hold on the economy, that they were tending to
feed upon themselves,
and that in doing so the contractive factors
were putting the economy out of reach of the influence of monetary and
credit policy by outpacing the supply of reserves that the System was
making available.
9/13/60
-25
Therefore, Mr. Mills said, he was one of those who believed that
if the System were to make reserves freely available it was problematical
whether those reserves would flower out into credit expansion.
He felt
that the country might be coming into a situation that would have to
run its own course before monetary and credit policy resumed its status
as a constructive and stimulating economic influence.
Along that line
there was the strong possibility that the System would be charged
increasingly with the fact that interest rates, particularly at the
long end, were at a higher level than many observers would consider
conducive to the type of economic situation to which the System should
contribute, that is, one calculated to induce capital expansion.
However, if the premonitions he held were realized and the country was
truly in a seriously declining stage of the business cycle (as pointed
out, consumption seemed to be faltering and capital expansion had already
faltered), the prospect was that at some future point an impairment
would be seen in the credit standing of important corporations that
would tarnish the ratings of their securities.
As a consequence, a
relatively high yield on corporate securities--and possibly in the
more distant future on public securities--would be the result of a
reduced credit standing rather than a reflection of the influence of
monetary and credit policy.
Mr. Leach reported that economic activity in the Fifth District
was still beset by divergent trends.
On the one hand, both manufacturing
-26
9/13/60
employment and total employment were at or near record levels; on the
other hand, production, shipments, and sales in several major industries
showed moderate declines.
Many textile companies had reduced their work
week from six days to five, and a few from five to four.
For the
remainder of the year textile activity would be fairly high, but con
siderably below earlier expectations.
In recent weeks furniture
production and shipments had been well below the high levels reached
earlier this year, but retail sales had increased somewhat.
A few
industries, such as chemicals and paper and printing, showed activity
above a year ago.
Residential housing contruction was at a level
substantially below last year, but total construction contracts in a
few recent months had been well above last year because of a few large
awards.
According to present indications,
cash receipts from flue-cured
tobacco, the District's biggest cash crop, would be about 10 per cent
above last year.
Loan demand seemed to continue relatively stronger in the District
than in the country as a whole, Mr. Leach said.
During the four weeks
ended August 31, total loans at District reporting banks rose by 0.7
per cent contrasted with a decline of 1.1 per cent for all reporting
banks in the United States.
With respect to policy, Mr. Leach said it was his belief that the
state of the economy and the situation in the money market called for
slightly more actual ease than had existed during the past three weeks.
9/13/60
-27
He doubted whether this objective could be expressed satisfactorily in
terms of statistics.
The recently prevailing over-all average of $300
million of free reserves might prove adequate,
to provide more reserves.
He realized,
or it
of course,
might be necessary
that the current
Treasury financing called for an even keel policy at the moment, but
he would certainly be sure that all doubts were resolved on the side
of ease.
He would not favor changing the discount rate or the directive.
Mr. Leedy said there was nothing particularly new to report from
the Tenth District.
There were few plus signs in the District, and as
he understood it there were few in the national picture, as far as the
economy was concerned.
fairly
At the August 16 meeting
he had felt
there was
general agreement that the Committee should be moving in the
direction of providing more encouragement for the expansion of credit.
While the figure on free reserves had shown some increase,
in
short-term rates,
the movement
including the Federal funds rate, disturbed him.
He had the feeling that in this period, and perhaps in the period ahead,
the free reserve yardstick was a particularly unreliable one due to the
availability of additional vault cash which,
at the country banks
particularly, may not have been taken into account.
For the period
ahead he believed that the Comittee should aggressively inject some
additional reserves,
lost in
since it
seemed to him there was nothing to be
such a program and everything to be gained.
Instead of
watching the free reserve figure too closely, attention should be
9/13/60
-28
centered more on the level of the money supply,
the Federal funds rate.
on bill
rates, and on
In the Tenth District, he was told that many
banks bad been employing funds in the Federal funds market rather than
in the bill market due to the attractiveness of the Federal funds rate.
Despite all
of these comments,
Mr.
Leedy said, he would not favor
going overboard and flooding the reserve position of the banks.
However,
he did feel that the Committee should be moving noticeably in the
direction of providing more ease.
He recognized that on account of the
Treasury financing the System would not be entirely free for a time to
make any really overt move.
As he understood it,
however, the books on
the advance refunding would remain open only until September 20, and there
was not likely to be any other Treasury financing until after the middle
of October.
It
appeared,
therefore,
that there would be a period before
the next Committee meeting in which some move of the kind he had
suggested could be made.
Even in the period immediately ahead, it
seemed to him that the Desk should be most cautious,
in
the light of
the movement of short-term interest rates, not to permit any tightening
of reserve positions to occur.
Mr.
Allen said that business news of the past month seemed to
be generally regarded as being on the pessimistic side.
His own view
was that, although developments had not been such as to induce enthusiasm,
the current mood could properly be termed one of caution rather than
widespread pessimism.
While estimates of capital expenditures for 1960
-29
9/13/60
were now less than they had been in March, it should be noted that even
on the basis of the lower estimates virtually all major industries
would spend more in 1960 than in 1959.
With reference to Seventh District developments, Mr. Allen said
that although the steel operating rate for the entire country was around
52 per cent, it was 60 per cent in the Chicago area and 70 per cent in
Detroit.
The employment situation is less vigorous than in the nation
as a whole.
However, total employment in Seventh District States was
almost exactly the same as a year ago, and Wisconsin was doing better
because of strength in industrial equipment industries and Rambler
automobiles.
Department store sales for the four weeks ended September 3
were just equal to last year in the District, as against 2 per cent above
last year for the country.
Sears, Roebuck, whose results are usually
fairly representative of the total for all retail trade, reported for
August a 4 per cent increase in
sales over last year.
As to the automobile situation, Mr. Allen commented that the
year's low in production apparently came in the week ended August 27,
and future schedules seemed high in the light of current sales and
inventories.
On August 31 new car inventories were 880,000, of which
90,000 were estimated to be 1961 models.
Sales of 1960 cars in
September were forecast at 350,000, which would mean inventories on
October 1 of 450,000 1960's plus 500,000 1961's.
would be a high figure for this time of year.
The total--950,000-
9/13/60
-30
Demand for bank credit, relatively speaking, had remained weak.
For the last
three weeks of August,
showed a drop of $50 million in
of more than $90 million last
total
the country, but the situation was due in
reserve position.
by one large bank that had been
The basic position of central reserve
city banks had improved steadily.
the discount window in
District banks had continued to
as against net additions by all
large part to heavy sales of bills
adjusting its
loans compared with an increase
year.
liquidate Government securities,
weekly reporting banks in
Seventh District reporting banks
These banks borrowed nothing at
two of the three weeks ended September 7,
they had been net sellers of Federal funds for several days.
and
Reserve
city and country banks had increased their borrowing in recent weeks,
but the borrowing was concentrated at fewer banks.
Most of the reserve
city bank borrowing was in Detroit and resulted from seasonal deposit
reductions by the large motor manufacturers.
Mr. Allen said it
seemed to him strong factors were at work
that would tend to support business activity and doubtless would eventually
mean an upward trend in
inventory reduction in
the economy.
These included completion of
a variety of industries,
vigorous economic activity abroad,
rising Government spending on defense
and other activities, and easier credit.
he felt
a continuance of
As at the August 16 meeting,
that the Committee had gone far enough in the easier credit
area, and he would "stay where we are" for the present.
Although he was
9/13/60
-31
not critical of what had been done--in fact had supported it--he was
concerned that the adjustments which must take place for the economy's
long-term benefit were so slow in coming, although he knew that it
be a slow process.
would
Therefore, he would not change the directive, the
discount rate, or the degree of ease in money and credit.
Mr. Allen added that the comments he had made were prepared on
Saturday and Sunday.
He would stand on them, he said, although he was
impressed by the views expressed at this meeting by those who differed
with him and particularly by Mr.
to which he (Mr.
Noyes'
suggestion that the adjustments
Allen) had referred might be occurring more rapidly
than he had thought.
Mr. Deming said there was little
economic picture in the Ninth District.
new to report concerning the
As in the nation, the movement
was sideways at a high level, with economic plus and minus factors about
canceling out.
The major plus was the better farm picture, while the
major minuses were labor requirement forecasts and reduced residential
construction.
The Minneapolls employment people expected a less than
seasonal decline in unemployment during the balance of this year.
Mr. Deming then summarized a recent poll of Minnesotans on their
expectations with regard to general business conditions and their own
financial outlook over the next 12 months.
concerning business conditions,
In response to a question
21 per cent expected them to improve,
63 per cent expected them to hold about the same, and 10 per cent thought
9/13/60
-32
they would worsen, while 6 per cent had no opinion.
These figures were
quite close to those obtained in August 1956, with one exception that
perhaps was important.
Although only one in ten expected conditions
to worsen, this was twice as many as felt that way four years ago.
In
response to a question on personal financial conditions, one-fourth of
the respondents thought they would be better off in the forthcoming year,
and another two-thirds thought they would be as well off as at present,
these proportions being virtually the same as in 1956.
Turning to the national scene, Mr. Deming expressed concurrence
in the tone of the staff report.
He felt that conditions were no better
and might be deteriorating a bit.
Of particular concern were the August
unemployment figures and the guesses about GNP for the third quarter.
On the financial side,
situation.
he felt
that the System was caught in
The impressive list
of easing actions that had been taken by
the Federal Reserve had resulted in
in part this might reflect
over the Labor Day weekend.
a difficult
a lessening of total
only a temporary rise in
In
part, however,
it
reserves,
although
currency circulation
reflected gold outflow
which might well result from easing actions that had led to lower interest
rates.
own tail
Thus, the System might be in the position of the dog chasing his
in
its
attempt to pump up total
reserves.
Nevertheless,
he felt
that the System should pursue this goal more vigorously, and he believed
this could be done without any strong danger of depressing rates unduly.
In
fact, it
seemed to him that the market had been unduly heavy during
recent weeks despite a higher level of free reserves.
9/13/60
-33
Mr. Deming said he would not favor changing the discount rate or
the directive at this time.
He recognized the necessity of maintaining
an even keel during the Treasury financing, but he believed further
action could be taken prior to the next Committee meeting without
abandoning the even-keel policy.
Within whatever bounds it
was thought
necessary to observe this policy with respect to the advance refunding,
he would be inclined to let
money market factors be more fully reflected
in their actions adding to reserves within the next week or weeks
(depending on whether the staff estimates of the Board or the New York
Bank proved to be more accurate).
To the degree necessary,
he would
supplement these effects by direct open market operations so as to let
total reserves grow and so as to provide a somewhat easier money market
climate.
He would not be too concerned about what this policy might do
to the free reserve figure.
Mr.
Mangels said rough figures indicated that of the 144 country
banks in the Twelfth District, 40 got no benefit from the recent action
on vault cash.
Eighty-three benefited less than $50,000,
from $50,000 to $100,000,
$200,000.
13 benefited
and eight benefited from $100,000 up to
The reserve city banks gained some $70 million, but more
than half of this was at one bank.
Evidently the amounts released at
country banks were not going to flow into the market very quickly because
there was not enough at any one bank to make any particular difference.
-34
9/13/60
Mr. Mangels then referred to a wire he had received regarding
the meeting of the Seattle Branch directors last Friday which indicated
that the meeting had a pessimistic tone and that each director expressed
concern regarding conditions in his particular area.
No improvement was
expected in the lumber or plywood business, the salmon pack was poor,
Spokane business activity was moving sideways with little
improvement
expected, the apple pack in Washington was threatened by strike, and
the number of overdrafts on the books of banks was reported to be large.
Mr. Mangels expressed agreement with those who had suggested
that although it
would be necessary to maintain an even keel for a few
days, as soon as possible it
would be desirable to ease quite materially.
As a measure of the degree of easing he would contemplate, he mentioned
free reserves as high as $500 million or perhaps even a little
higher.
He would not favor a change in the directive or the discount rate at
this time.
Mr. Irons said that his views on the over-all economic situation
were quite similar as to those expressed by Mr. Allen.
During the
past summer economic activity had been on a rather flat level, with
pluses and minuses underneath the total, and some progress had been
made in accomplishing rather significant adjustments.
The psychological
attitude that he detected was not one of pessimism but rather one of
caution, with perhaps less anticipation of a strong rise in the fourth
quarter than there had been earlier but, on the other hand, no
9/13/60
-35
anticipation of a sharp decline.
To some extent current appraisals
contrasted with earlier estimates with respect to plant and equipment
expenditures.
While these estimates were not being realized, actual
expenditures for the year promise to be well above a year ago.
Mr. Irons said that Eleventh District conditions were quite
similar in broad outline to national conditions, although the specifics
were somewhat different.
In general, there had been a rather flat side
ways movement with crosscurrents underneath.
There was nothing to
indicate the likelihood of a strong upward surge, but the same thing
was true on the other side also.
Without question, banking positions
in the District were easier than prior to the shift in monetary policy
about three months ago.
Borrowing from the Reserve Bank consisted
almost entirely of borrowing by country banks for seasonal purposes, with
the total running rather consistently at around $10 to $11 million,
compared with $25 or $30 million some two or three months ago.
None of
the city banks were borrowing from the Reserve Bank, and only one city
bank was a substantial user of Federal funds.
In the past three weeks
District banks were net sellers of Federal funds.
In summary, the situation in the District was uncertain, Mr.
Irons said, and he could not put his finger on things developing strongly
in areas that had pushed the District up in the past.
For example, no
one was anticipating a great surge in petroleum or in defense spending
in the District.
On the other hand, no further decline in the petroleum
industry was expected.
9/13/60
-36
Mr.
Irons said he had been quite satisfied with the operation
of the Account during the past three weeks.
Developments had worked
along perhaps more favorably than might have been anticipated.
He was
not unhappy about the trend of the bill rate; he had been fearful that
it might move down and get quite low but, whatever the reason, that
unfortunate development had not occurred.
He felt that the situation
called for an easier availability of reserves for seasonal purposes and
for some moderate expansion, but he did not feel that it called for a
policy of pumping reserves into the banking system aggressively because
he doubted whether that was the answer to the present situation.
Of
course, the Treasury refunding period was going to require an even keel
for the time being.
Mr. Irons expressed the hope that the short-term rate structure
would not move downward so sharply as to complicate the picture further.
The problem was one of trying to walk a tightrope between international
and domestic problems, and this was difficult.
All things considered, he
would continue to follow the policy of the past few weeks,
was appropriate and satisfactory.
which he felt
This inferred a somewhat easier availa
bility of reserves, not watching any one figure particularly but watching
short-term rates, the demand for credit, the use of Federal funds, and
the rate on Federal funds.
Under such circumstances,
considerable leeway
must be given to the Manager of the Account to feel, judge, and appraise
the situation as it
moved along.
As he had said, he would not want to
pump additional funds into the banking system aggressively at this time.
9/13/60
-37
Mr. Erickson reported that business in the First District
seemed to continue its sideways movement.
All of the indices that were
ahead of last year were ahead by a slightly greater percentage than
nationally; and where minuses occurred, they were not quite as large as
nationally.
At the August 16 meeting, he had reported that the July
survey of mutual savings banks showed a deposit increase in that month
greater, when compared with a year ago, than any month since 1957.
In
August the survey showed the same percentage increase (4.5) over a year
ago.
Business loans were down, District banks were net sellers of
Federal funds in the first
half of August and buyers in the last half,
and for the month as a whole they were net buyers to a slight extent.
In
August, borrowings at the Reserve Bank were slightly higher than in the
preceding month.
They were still
running about one-third of a year ago,
with the recent increase primarily in borrowings by country banks.
Mr. Erickson said that as to the money supply he wished to
associate himself with the views expressed by Mr. King.
As to policy
for the next three weeks, he would not change the directive or the
discount rate, and he would give the Account Manager the same instruction
as at the August 16 meeting.
This would mean proceeding on the basis
of the feel of the market and supplying a few more reserves,
overdoing it
not
but supplying reserves as needed.
Mr. Szymczak suggested that business uncertainties over a period
of time, the actions on margin requirements, vault cash, reserve
9/13/60
-38
requirements,
and the discount rate, the special session of Congress,
the election campaign, the announcement of advance refunding, the pluses
and minuses in the economy, and the number of changes on the minus side
all had contrived to produce a situation that reflected itself in the
present figures on credit as well as rates.
System operations had been good.
He felt that on the whole
He felt also that, as Mr. Mills had
said, there were so many intangibles that no action on the part of the
Federal Reserve with respect to reserves and rates or anything else was
likely to change the situation.
Too frequently, he commented, there is
a tendency to become convinced that monetary policy can do the whole
job.
it
Actually the System had done the best it
could not have done much better.
could, and in his opinion
As and when possible the System
should add to the availability of reserves, but this should not be
overdone.
While there were minuses in the economy, there was also
evidence that the economy might be firming somewhat.
While it
likely to be pushed up substantially, he doubted whether it
was not
would continue
to move downward.
On balance, Mr. Szymczak said, he would continue to do exactly
what the Committee had been doing.
to develop in the market.
He would not want too much tightness
Accordingly, he would not look too much to
statistics, but rather be guided primarily by the feel of the market,
with just a little more free reserves, perhaps, than during the past few
weeks.
He would not recommend any change in the directive.
9/13/60
-39
Mr. Balderston referred to the sideways movement of the economy
on a high plateau for a substantial period and said he rather supposed
that downward forces would gradually prevail.
He had been looking for
some signs of activity in residential building and plant construction.
As to the first,
about the only information he could find of a comforting
nature was that the Veterans Administration had experienced some
increase in applications recently.
Insurance company executives told
him that the authorized rate apparently reached a peak in June, with some
slight recession and lowering of the rate since that time.
However, he
did not expect an upsurge in residential construction because of the
demand situation,
and he did not think that pumping credit into that
industry would offset the slackening demand for houses at present prices.
As to plant expenditures, he thought that when the most recent figures
were released by the National Industrial Conference Board they would show
a further slackening in budget authorizations.
He did not feel that for
some months to come companies would be increasing their plants or even
adding to labor-saving equipment at the rate that was thought probable,
and he would suppose that the economy would gradually drift lower.
That
meant having to be fully aware of the adverse balance of payments and
the views concerning that situation that were held both here and abroad.
Therefore, he was rather pleased that the bill
rate had held where it
did for the past few weeks.
Mr. Balderston said he found himself generally in sympathy with
the views of those who had spoken toward the end of the discussion this
-40
9/13/60
morning.
He felt Mr. Szymczak was correct in expressing the view that
it was not possible just to turn a valve.
What he would suggest would be
not to attempt to mop up all of the float that was likely to become
available within the next couple of weeks.
Otherwise, he would sit as
steady in the boat as possible and let what the System had attempted to
do for the economy work in for a while.
The horse that the System was
trying to make drink apparently was not very thirsty,
Chairman Martin, who had just returned from a vacation abroad,
said that he thought Federal Reserve policy had been quite good.
With
regard to the progress that the System had been making, it was his
personal feeling that one should look with some skepticism on the
statistical estimates.
When considering the money supply, one must
think in terms of what was really happening in the economy.
The
fundamental question was whether there was any real shortage at the
present time of money that would contribute to business confidence and
improvement,
sense.
and he doubted whether there was any shortage in that
Mr. Mills had put his finger on the matter when he said that
there comes a point when one cannot expect monetary and credit policy
to do the entire job.
The System must not take itself too seriously in
this field.
The Chairman said it
was his impression that the moves of the
System thus far had been received surprisingly well.
Though perhaps not
perfect, they had been timely, and they had been accepted with a minimum
9/13/60
-41
of charges about their having been political in content or motivated
by wrong reasons.
careful that it
From here on out, however, the System must be
did not make moves that would be subject to political
observations and comment.
Chairman Martin went on to say that he had returned from his
vacation without any feeling of confidence concerning the balance of
payments.
Mr. Marget, he felt, had perhaps been straining just a little
in his statements this morning and at the August 16 meeting, not with
respect to the facts but with regard to the interpretation that might be
placed on the facts.
It
seemed to him that the United States was priced
out of the market in a good many areas, while at the same time there had
been an additional accumulation of dollars by foreigners.
No one who had
not been abroad recently could appreciate the size and extent of the boom
in Western Europe,
and to some extent this was contributing to the
favorable United States trade balance because people were willing to
buy at any price in order to obtain deliveries.
Continuing, the Chairman commented that foreigners were watching
the United States carefully.
He felt that confidence in the dollar
had thus far been maintained; that the Treasury program, the budget
surplus, and Federal Reserve policy, taken together, had reestablished
confidence in the dollar on the part of most foreigners who were thinking
about the subject.
Their first worries about the dollar had come with
the lowering of the discount rate in June, the political campaigns, and
-42
9/13/60
the appearance that the country might be embarking on a cheap money
policy that would have no relationship to the business situation itself.
As of today, however,
it
seemed to be accepted generally that the steps
taken thus far were reasonable ones,
although foreigners were continuing
to watch the situation carefully to see whether panic would develop and
a cheap money policy would be instituted as a device to try to alter
the business situation.
Foreigners recognized the situation as one in
which rolling adjustments had to be made, particularly adjustments
in prices,
if market demands again were going to be established.
In
part, those adjustments were postponed by the easy money period in
1958 when in his (Chairman Martin's) judgment the System went too
far.
He did not think the System would want to repeat that course for
the sake of a few kudos from the easy money people who were not going to
be friendly in
any event.
Chairman Martin said he came out in his thinking that doubts
should be resolved on the side of ease and reserves supplied whenever
they could be supplied in an orderly way and would be used.
is not possible to make a horse drink if
it
However,
it
does not want to drink.
The Chairman then repeated that in his opinion certain adjustments
were going to have to be made in the economy.
It was rather surprising,
with adjustments going on and with shrinking profit margins, that there
had not been more of a decline in the industrial production index.
Considering that steel and automobiles had not done as well as expected,
9/13/60
-43
either as to sales or production, the showing of the index was quite
impressive.
By this he did not mean to suggest that he thought the
country was facing a business upswing of any size; indeed, he was
inclined to be somewhat pessimistic about the business picture, more so
than several months ago.
He was pessimistic, however, only in the sense
that he feared people might get panicky and try to push too hard on the
string when what was needed was just a little
steadiness in the boat and
recognition that there must be some adjustments.
Where price adjustments
had taken place, they unquestionably had been generating some demand,
but the situation, of course, was painful for those concerned.
In this
connection Chairman Martin recalled an observation he had heard abroad
that if the steel industry would get into the European market actively,
even if
it
took slight losses on some items,
it
would be doing a great
service to European industries at the present time.
Those industries
were expanding at a faster pace than could possibly be sustained and were
experiencing an amazing demand on all sides, but the United States had
priced itself out of the market on some items.
Chairman Martin again expressed the view that it
would be
advisable to remain fairly steady in the boat and that moves from here
on out should be largely in the nature of supplying reserves as needed
rather than dramatic overt actions.
He reiterated that he felt the
System had done a good job of establishing a proper posture and taking
a series of steps that were understood.
Several foreign observers to
-44
9/13/60
whom he talked informally had expressed the view that a 2 per cent bill
rate,
a 4-1/2 per cent prime rate,
be lived with, but a bill
and a 3 per cent discount rate could
rate below 2 per cent was something they
thought would have serious repercussions on thinking abroad.
In his
view, until after the elections the System should minimize overt actions
unless it
was positive that such actions were important from the stand
point of the economy,
on all
sides.
He felt
for actions of that kind could easily be misunderstood
the System had been wise to move as early as it
did, and under conditions such as to give credence to those moves which,
up to this point, he did not think had been challenged seriously by
thoughtful people.
All of these things, the Chairman said, must be borne in mind
in
thinking of the money supply.
persuaded that if
it
had expanded the money supply in
That was what some critics
it
itself
be
exactly the right
basis, there would not have been any recession.
amount on a statistical
If
The System must not let
of the System had been arguing for many years.
got to that point, the only thing necessary would be to keep the
levers moving ad infinitum.
The Chairman again mentioned the fact that rolling adjustments
are painful.
losses in
At a previous meeting, he recalled, he had referred to
securities and to the difficulties involved in
of that kind.
Now
taking losses
there were shrinking profit margins in business and
the world competitive picture was tightening.
Also, the fact that
9/13/60
-45
underemployment was one of the most serious weaknesses in the economy
today tended to make for uncertain economic thinking and to put the
matter into purely a social perspective.
However, unless totalitarian
methods were going to be adopted, and if reliance was going to be
placed on market processes,
it
must be recognized that there had to be
adjustments from time to time and that employment would not be created
merely by avoiding the losses or the adjustments that were necessary.
Chairman Martin then said that the discussion at this meeting
seemed to indicate a clear consensus in favor of no change in the policy
directive.
It
also appeared to be the consensus that open market
operations should be directed generally toward maintaining an even keel
during the period of Treasury financing, but that doubts should definitely
be resolved on the side of ease and that, as at the August 16 meeting,
emphasis should be placed on giving the Manager of the Account wide
latitude to supply reserves as he saw fit according to the tone of the
market rather than the statistical movement of reserves.
The Chairman inquired whether there was any question regarding
this summarization of the general view of the meeting, and there were
no comments.
Thereupon, upon motion duly made and
seconded, it was voted unanimously to
direct the Federal Reserve Bank of New
York, until otherwise directed by the Com
mittee:
-46-
9/13/60
(1)
To make such purchases, sales, or exchanges (including
replacement of maturing securities, and allowing maturities
to run off without replacement) for the System Open Market
Account in the open market or, in the case of maturing securi
ties, by direct exchange with the Treasury, as may be necessary
in the light of current and prospective economic conditions and
the general credit situation of the country, with a view (a) to
relating the supply of funds in the market to the needs of
commerce and business, (b) to encouraging monetary expansion for
the purpose of fostering sustainable growth in economic activity
and employment, and (c) to the practical administration of the
Account; provided that the aggregate amount of securities held
in the System Account (including commitments for the purchase
or sale of securities for the Account) at the close of this
date, other than special short-term certificates of indebtedness
purchased from time to time for the temporary accommodation of
the Treasury, shall not be increased or decreased by more than
$1 billion;
(2) To purchase direct from the Treasury for the account
of the Federal Reserve Bank of New York (with discretion, in
cases where it seems desirable, to issue participations to one
or more Federal Reserve Banks) such amounts of special short
term certificates of indebtedness as may be necessary from time
to time for the temporary accommodation of the Treasury;
provided that the total amount of such certificates held at
any one time by the Federal Reserve Banks shall not exceed in
the aggregate $500 million.
It was agreed that the next meeting of the Federal Open Market
Committee would be held in Washington on Tuesday, October 4, 1960.
Chairman Martin then referred to a memorandum from the Federal
Reserve Bank of New York dated September 8, 1960, copies of which had
been distributed to the members of the Committee with a memorandum from
Mr. Young dated September 12, 1960, recommending that the Bank's Market
Statistics Department be authorized to furnish to the Securities Depart
ment quarterly statistics on the volume of individual Government
securities dealers.
The Chairman stated that he proposed to put this
-47
9/13/60
matter down for discussion at the next Committee meeting, but that
Mr.
Hayes or Mr.
Mr.
Rouse might want to make some comment at this time.
Hayes stated that the New York Bank was trying to cover in
this memorandum what seemed to have been a minor oversight in the ground
rules set up in connection with the establishment of the Market Statistics
Department.
The Bank felt
that it
would be appropriate and useful for
officers of the Securities Department to have quarterly past figures on
volume for the sake of maintaining an adequate understanding as to who
the real dealers were.
It
was important for the Securities Department to
have this yardstick since the Bank was called upon to supply the Treasury
of primary dealers for the use of national bank examiners,
with a list
and
since decisions had to be made as to whether new firms that desire to deal
with the Account are in fact dealers.
He felt
that the dealers would not
raise any serious objection.
Mr.
Young said that possibly this suggestion raised some questions
about the Committee's earlier action with regard to the recognition of
dealers.
This was to be on the basis of whether they were actually engaged
in the business,
but no criterion was established at the particular time.
This also involved the question of System transactions with particular
dealers, which were to be on the basis of price alone,
dealers presumably would be reputable parties.
except that the
Now the Committee would
be moving through that kind of approach into something else as a basis
for determining whether a person was or was not a dealer.
As to whether
-48
9/13/60
or not there would be any objection to the current proposal, some
objection had been encountered earlier to the ground rules that were
set up for the market statistics
back to the dealers.
program,
and this would involve going
In his opinion, there was a question whether it
would be advisable to go back and enter into further negotiations with
them at this
particular time.
There had been discussion of this
at one of the luncheons with the Treasury a week or so ago,
matter
and the
inclination at that time was to feel that renegotiations at this
particular time would be undesirable,
that it
would be advisable for
the statistical program to move along and to have some publications
started before raising any further questions.
From comments that had
been made at one time, it appeared that there might be at least one
dealer who would interpose an objection.
Mr. Young noted that there was contained in the New York memo
randum a statement that the Treasury had approved the current suggestion.
It
was true that the Treasury did write a letter indicating approval,
but he did not know whether the Treasury had taken any further position.
The position expressed at the luncheon to which he had made reference
was to the effect that the Treasury saw some reasons for objecting,
but did not feel that the reasons were essential in terms of their own
interests.
Mr.
Rouse commented that he had discussed the matter with Under
Secretary of the Treasury Baird when he was in Washington last
week in
-49
9/13/60
connection with conferences on the advance refunding and that as far as
the Treasury was concerned he understood there was no objection.
Mr. Shepardson noted that the Market Statistics Department had
been set up for the purpose of providing a separation of functions and
gathering needed information.
He inquired why it would not be possible
for that Department to do the job indicated in the memorandum and
thereby avoid breaking down the separation of functions.
Mr. Rouse replied that the Department would have no judgment at
all about such a matter.
It did not know the market, he said, and it
was not set up for that purpose.
Mr. Hayes said he thought it had been recognized by all concerned
that the real knowledge of the market, when it
dealers and who were making primary markets,
came to deciding who were
resided in the people
working with the dealers in market activities.
Department was not doing that; it
The Market Statistics
was collecting statistical figures
from the dealers, but had no contact with them otherwise.
In any event
the Securities Department would not have current figures on statistical
positions such as conceivably might lead to the charge that the Desk
could use that knowledge against the dealers, and that was the purpose
of the separation of functions.
The situation would not be affected
by giving the Securities Department statistics on past volume; that
would not enable the Desk to trade against the dealers today.
Mr. Shepardson inquired why the Market Statistics Department
could not give the Desk a list of people who met the criteria, without
-50
9/13/60
providing information on individual volume,
that it
to which Mr. Rouse replied
was difficult to imagine how the Department could do it.
added that it
He
was his understanding that the objections from the
standpoint of the dealers had been in
terms of giving information to
others than the officers of the New York Bank.
The objections were
directed more to the Treasury and Washington generally having access
to individual dealer figures.
The Securities Department ought to have
these figures to function effectively, and as he understood it
the only
objection to the Desk having figures both on volume and position was
made by the Lanston firm.
In
that connection,
he had heard that
officers of that firm did not share Mr. Lanston's views.
Mr.
Young commented that the matter would have to be put up
to them, for he did not know what views might be held.
In
response to a question as to why the Securities Department
could not collect the statistics
directly, Mr.
been the procedure for many years.
undertaken only on the initiative
Hayes said that this
had
The separation of functions was
of the Committee.
Chairman Martin then stated that the matter would be taken up
for further consideration at the next meeting of the Committee.
Mr.
Hayes stated that he would like to make a further comment
for purpose of clarification.
While he shared the feeling that one had
to be skeptical about the money supply and reserve figures,
in view of
some of the discussion today he wished to point out that in August there
9/13/60
-51
was an increase in total reserves and also in required reserves.
Although total reserves in August were somewhat below August 1959,
the big drop occurred between January and April.
It was about the
latter date that the Committee got serious about trying to loosen things
up, and total reserves, seasonally adjusted, had risen from the April
figure of $18,104 million to $18,450 million in August.
Likewise,
nonborrowed reserves had risen from $17,410 million in April to $18,230
million in August.
In terms of annual rates of gain, total reserves
had risen 6 per cent from April, nonborrowed reserves 14 per cent,
and required reserves 7 per cent.
One could look at the figures in
many different ways, but in his view there had been progress in
recent months.
The meeting then adjourned.
Secretary
@FedFRASER