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F E D E R A L R E S E R V E BA N K O F NEW YORK rCircular No. 5 8 6 5 1 L September 1, 1966 j Statement on Discount Administration in Current Economic Environment T o A ll M em ber B anks, and O thers Concerned, in the Second F ederal Reserve D is tr ict: The following Federal Eeserve System statement was issued today: It is the view of the Federal Reserve System that orderly bank credit expansion is appropriate in tod a y ’s economy. However, that expansion should be moderate enough to help insure that spending— and particularly that financed by bank credit— does not exceed the bounds that can be accommodated by the N ation ’s growing physical resources. A n excessive expansion o f bank credits would aggravate inflationary pressures that are already visible. W hile the growth of total bank credit and total bank lending has moderated somewhat as compared with last year, total bank loans plus investments have grown at an annual rate o f over 8 per cent during the first eight months of this year, and total bank loans at a rate o f over 12 per cent. Meanwhile, bank lending to business has increased at an annual rate of about 20 per cent. It is recognized that business demands fo r bank credit have been particularly intense. W hile such credit requests often appear justifiable when looked at individually, the aggregate total of credit-financed business spending has tended towards unsustainable levels and has added appreciably to current inflationary pressures. Furthermore, such exceedingly rapid business loan expansion is being financed in part by liqui dation of other banking assets and by curtailment o f other lending in ways that could contribute to dis orderly conditions in other credit markets. The System believes that the national economic interest would be better served by a slower rate of expansion of bank loans to business within the context of moderate overall money and credit growth. F u r ther substantial adjustments through bank liquidation o f municipal securities or other investments would add to pressures on financial markets. Hence, the System believes that a greater share of member bank adjustments should take the form o f moderation in the rate o f expansion of loans, and particularly business loans. A ccordingly, this objective will be kept in mind by the Federal Reserve Banks in their extensions of credit to member banks through the discount window. Member banks will be expected to cooperate in the System ’s efforts to hold down the rate o f business loan expansion— apart from normal seasonal needs— and to use the discount facilities of the Reserve Banks in a manner consistent with these efforts. It is recognized that banks adjusting their positions through loan curtailment may at times need a longer period of discount accommodation than would be required for the disposition of securities. This program is in conform ity with the provision in section 201.0, paragraph (e ), o f the B o a rd ’s Regu lation A governing lending to member banks: “ In considering a request for credit accommodation, each Federal Reserve Bank gives due regard to the purpose of the credit and to its probable effects upon the maintenance o f sound credit condi tions, both as to the individual institution and the economy generally. . . . ” Federal Reserve credit assistance to member banks to meet appropriate seasonal or emergency needs, including those resulting from shrinkages o f deposits or of other sources o f funds, will continue to be available as in the past. A slower rate o f business loan expansion is in the interest of the entire banking system and o f the economy as a whole. A ll banks should be aware o f this consideration, whether or not they need to borrow from the Federal Reserve. Management o f bank resources in accordance with the principles outlined above can make a constructive contribution to sustained economic prosperity, and the Federal Reserve System is confident that the banks will give their whole-hearted support to this effort. Additional copies of this circular w ill be furnished upon request. ♦ A lfred H ayes, President.
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