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Minutes for
To:
Members of the Board
From:
Office of the Secretary
September 17, 1963.
Attached is a copy of the minutes of the
Board of Governors of the Federal Reserve System on
the above date. 1/
It is not proposed to include a statement
with respect to any of the entries in this set of
minutes in the record of policy actions required to
be maintained pursuant to section 10 of the Federal
Reserve Act.
Should you have any question with regard to
the minutes, it will be appreciated if you will advise
the Secretary's Office. Otherwise, please initial
below. If you were present at the meeting, your
initials will indicate approval of the minutes. If
you were not present, your initials will indicate
only that you have seen the minutes.
Chm. Martin
Gov. Mills
Gov. Robertson
Gov. Balderston
Gov. Shepardson
Gov. Mitchell
1/
Meeting with Federal Advisory Council
317
A meeting of the Board of Governors of the Federal Reserve
System with the Federal Advisory Council was held in the Board Room
of the Federal Reserve Building in Washington, D. C., on Tuesday,
September 17, 1963, at 10:30 a.m,
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Balderston, Vice Chairman
Robertson
Shepardson
Mitchell
Mr. Sherman, Secretary
Mr. Kenyon, Assistant Secretary
Messrs. Martin, Murphy, Stoner, Hobbs, Mckae,
Zwiener, Maestre, Moorhead, Breidenthal,
Aston, and McAllister, Members of the
Federal Advisory Council from the First,
Second, Fourth, Fifth, Sixth, Seventh,
Eighth, Ninth, Tenth, Eleventh, and
Twelfth Federal Reserve Districts,
respectively
Mr. Prochnow, Secretary of the Federal
Advisory Council
Mr. Korsvik, Assistant Secretary of the
Federal Advisory Council
Before this meeting there had been distributed a memorandum
concerning the topics that had been suggested for discussion.
The
t(Vics, the statement of the Council with respect to each, and a
summary of the discussion at this meeting follow,
1.
What are the views of the members of the Council as to
the probable course of economic activity in the United
States during the remainder of 1963 and the early part
of 1964? In discussing this general question, the
Council may wish to comment on the following items:
(a)
Do recent levels of residential building
activity appear to be firmly based, and
is further expansion anticipated?
317,
9/17/63
-2(b) Does the liquidation of steel inventories
acquired earlier this year appear to have
about run its course, or is further liquidation in prospect?
(c) Has any important change been observed
recently in prospects for plant and equipment expenditures?
(d)
Does the Council continue of the opinion,
expressed at its previous meeting with the
Board, that competitive pressures resulting
from unused domestic capacity, as well as
from manufacturers abroad, will tend to be
sufficient to discourage broad price rises
in the relatively near future?
The members of the Council anticipate that economic activity
in the United States during the remainder of 1963 and the early
part of 1964 will continue to increase moderately. The persistent
deficit in our balance of payments, the reaction which might occur
if a tax cut did not materialize, and the fact that the current
period of expansion has already run over 2-1/2 years are some
uncertainties in the current economic situation.
(a) While certain types of residential construction in
particular areas of the country have been overbuilt, most members
of the Council believe that the recent building of single-family
homes has been relatively firmly based.
One of the facts involved in the strong expansion in apartment building has been the abundance of long-term funds seeking
investment. This probably has resulted in some speculative
building of multi-family units. On the other hand, in many areas
of the country there is a demand for apartments, particularly by
the younger and older population groups. In general, residential
construction will probably experience a sideways movement with no
pronounced upward trend.
(b) The members of the Council are of the opinion that the
liquidation of steel inventories acquired earlier this year has
about run its course.
(c) The expectations of businessmen have improved since
the last meeting with the Board in May. This change in sentiment
increases the prospects for an expansion in plant and equipment
expenditures in the months ahead.
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-3-
(d) The Council continues to believe that broad price
rises are unlikely in the relatively near future. However,
the substantial rise in production since May reduces somewhat
the competitive pressures resulting from unused domestic
capacity which have discouraged price advances in the past.
Recent increases in productivity tend to contribute to price
stability.
In comments supplementing the Council's statement, President
Murphy said it was the consensus within the Council that business
sentiment was good.
Optimistic.
The typical businessman was moderately
A good record for 1963 seemed almost assured, even
though it might be a bit short of the record for which some had hoped.
Looking ahead to 1964, it was believed that the optimistic sentiment
could be justified as far ahead as could reasonably be foreseen.
One
important condition, however, was the enactment of tax reduction
legislation.
The businessman was expecting the passage of a tax bill,
and it seemed imperative to obtain such legislation at this session
of Congress.
In the opinion of the Council, this had been one of the
major factors in developing optimistic sentiment in the business
community.
Current developments in Washington suggested some difficulty
with the tax bill, and the Council would be concerned if the pending
legislation were defeated.
The psychological impact that would result
from failure to enact tax legislation would be substantial.
Mr. Martin said he had little to add from the First District
that departed from the general pattern suggested in the Council's
statement.
However, there was, in addition to what had been mentioned,
a little indication of speculative excesses of all kinds.
There was a
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-4-
high proportion of defense-related work in the District, he noted,
and in this area of activity there were always questions as to what
would happen next, but there had been no significant adverse developments thus far.
Mr. Stoner said that the Fourth District was following the
general pattern rather closely.
The steel industry felt that
liquidation of inventories had about run its course, and orders were
Picking up a bit.
There had been some overbuilding in the apartment
field, but the economy was generally good.
Employment was holding up
quite well.
Mr. Hobbs said that steel operations in the Baltimore area
had snapped back remarkably well beginning in early August.
He sensed
a feeling of optimism on the part of the steel industry.
Mr. McRae commented that over-all business conditions in the
Sixth District were quite good.
satisfactory.
The outlook for retail trade was
Sentiment in the paper industry was definitely better
than it had been for a long time.
The volume of business in that
industry had been consistently good, but price increases instituted
several months ago did not hold up very well.
increases looked quite firm.
However, recent price
As to the price movement generally, he
noted that it should be recalled that many of the current increases
were actually restorations of previous cuts.
The housing market in
the Sixth District seemed softer than in many sections of the country,
With complaints in Florida particularly.
9/17/63
-5Mr. Zwiener stated that the business outlook in the Seventh
District seemed good.
The steel situation had righted itself well.
Automobile business was good, with the new models off to a satisfactory start.
Prospects were for substantial Holiday trade, and
business seemed likely to carry on satisfactorily through the first
quarter of next year.
Although construction of apartments and multi-
family units continued to progress favorably, there were evidences
of overbuilding in some areas, and he did not feel that single-family
units would show up quite as strongly in the period ahead.
inventories were now in reasonably good shape.
Steel
It appeared that the
inventories acquired earlier were substantially against orders, and
that there was no unduly large amount of speculative inventorying.
If orders continued to be as good as seemed likely in the period
ahead, inventories probably would continue in good shape.
Mr. Maestre reported business good in the Eighth District.
The District was suffering in spots from overbuilding, particularly
of apartments and motels.
It seemed likely that parts of the area
would be grossly overbuilt in apartments in the next year, and some
builders and banks probably were going to get hurt.
Outside of that,
the District was in prosperous condition.
Mr. Aston reported overbuilding in the Eleventh District,
Particularly of high-rise apartments, with the principal motivation
appearing to be the availability of credit rather than need for the
construction.
As long as builders could obtain funds and in most
9/17/63
-6-
cases arrange for 100 per cent financing, they would continue to
build.
This signaled trouble ahead that would ultimately be
reflected in the over-all economy.
Otherwise, the pattern described
by the Council's statement seemed to fit the District quite well.
Mr. McAllister reported that conditions were generally good
in the Twelfth District.
The unemployment rate was running a little
higher than in the country as a whole.
There had been some drop-off
in employment in defense industries, which accounted for a substantial percentage of total employment.
There had also been an increase,
as compared with the first quarter, in the vacancy rate on all types
of rental properties.
By and large, however, conditions in the
District were quite satisfactory.
President Murphy reported that in the Second District
construction was running about 12 per cent below 1962 but 13 per cent
above 1961.
However, it was necessary, in considering these figures,
to make adjustments for rather important distortions at particular
times, reflecting strikes in up-State New York and, in the lower part
of the state, the starting of a large quantity of multi-unit dwellings
to get ahead of a zoning law.
Adjusting for these factors, construc-
tion activity in New York State seemed quite good.
As to the labor
Picture, the Newark and the New Brunswick-Perth Amboy areas had
Previously been quite bad in terms of unemployment.
Both, however,
had now been reclassified to moderate from substantial labor surplus
areas, due largely to a pick-up in employment in transportation
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9/17/63
equipment and electrical equipment.
A bright spot in up-State New
York was the Rochester area, where there was tightness in the
employment market, with prospects that the market would get even
tighter.
With regard to the tax bill, question was raised as to how
much importance the Council attached to sentiment in some areas for
reduction, or at least containment, of Federal expenditures.
President Murphy said there was some difference of opinion
on that score within the Council, but it was the consensus that a
tax bill should be enacted regardless.
He felt that if there was
a delay until expenditures were adjusted downward, or until the
Federal budget was close to being in balance, it was unlikely that
there would ever be a tax bill enacted, and the country needed tax
relief badly.
All manner of things were being done because of the
effects taxwise; conversely, some things were not being done.
Mr. Zwiener stated that in his area sentiment seemed to be
running more strongly toward the view that the passage of a tax bill
Should be contingent upon a holding down of Government expenditures,
that there should be a more definite commitment toward reduction of
expenditures.
He thought that this sentiment also was growing among
members of the Congress who had talked with their constituents in the
area and obtained their views.
Mr. Martin reported quite marked sentiment in the same
direction in the First District; people were saying "hold the line."
9/17/63
-8-
There also seemed to be some feeling of discouragement with respect
to the positive benefits that might eventually come out of the tax
Program.
2.
Does the Council detect any substantial slackening
in bank efforts to attract time and savings deposits?
Any change in the pattern of bank investment of these
savings inflows?
The members of the Council believe that banks are
making a somewhat less intensive effort to attract time and
savings deposits. However, this has not been reflected in
an easing of rates paid for such funds.
The changes in Regulation Q were interpreted by many
commercial bankers as an indication that the monetary authorities
would permit them to pay competitive rates in the money markets.
Those funds sensitive to changes in yields in the money market
would therefore be less apt to move out of the banking system.
Many bankers felt that their need for liquidity had been lessened
somewhat, and they changed their investment policies by adding
substantially to their holdings of municipal securities and
mortgages. Although the members of the Council believe that time
and savings deposits in the future will account for an increasing
percentage of total deposits, the rate of increase will not be as
sharp as in the past two years. As a consequence, changes in
bank investment portfolios will tend to be less marked.
President Murphy said there appeared to be some difference of
opinion as to the degree to which commercial banks might be relaxing
their efforts to attract time and savings deposits.
Efforts were
Still fairly vigorous in the Second District and had been accelerated
by
the continuing drive of the mutual savings banks and savings and
loan associations, as well as by the fact that the commercial banks
saw their demand deposits moving sideways, or in some instances dropPing slightly.
This sideways movement extended back for some period
of time, and it appeared as though it might be projected into the
31
9/17/63
future.
-9Accordingly, the commercial banks had to find new sources
of funds, and the savings field looked promising.
In his opinion,
commercial banks would be remiss if they did not continue their
efforts to obtain a fair share of the savings dollar.
Further, the
banking system had been able to absorb the payment of higher rates
of interest.
Although bank earnings had not gone up as much as
might be liked, earnings of commercial banks were reasonably high
last year; this year the records of individual banks would range
roughly from a 10 per cent increase to a modest decrease from last
Year.
Commercial banks had been able to weather the storm, and he
felt that they should continue their efforts.
President Murphy went on to say that members of the Council
had cited some instances where banks were cutting back on their
advertising for savings funds, but he saw no cutting back in the
desire of commercial banks to continue to develop this type of business.
The whole situation touched, of course, on the matter of bank
liquidity.
Personally he felt that if banks were to serve the nation
as they should in terms of economic development, and if there was the
expansion of business in the years ahead that was being anticipated
and was necessary to provide employment, there must be general expansion in the banking area.
Deposits would have to be acquired to
Provide the ability to lend.
Mr. Aston said there had been no slackening on the part of
the Eleventh District banks in seeking time and savings deposits.
9/17/63
While banks may have cut down on their advertising, the reason
was that they could get such funds satisfactorily without so much
He knew of no commercial bank that was refusing
advertising.
deposits even when it could not use them profitably.
At his own
bank, interest-bearing deposits represented 38 per cent of the total,
while less than 3 years ago the figure was less than 10 per cent.
The bank felt that it was going to have to keep this money in the
bank somehow.
Commercial banks were experiencing increasing pres-
sure, though, in attracting savings money; for example, Sears was
now advertising 4.85 per cent to "members of the Sears family."
The banks were going to have to stay in the business, and he hoped
the Board of Governors would keep them in a position to be flexible
enough to meet competitive rates in view of the change in deposit
structure that was taking place, and in order to insure that commercial banks would be able to meet the demands upon them.
He
suggested that consideration might be given to some reduction in
reserve requirements applicable to both demand and time deposits.
Mr. Martin said that First District banks were trying to
estimate where they were going and were reappraising their position.
The pattern was distinct:
a reduction on balance in holdings of
Government securities and an increase in holdings of tax-exempt
securities and mortgages.
ment loans.
There was discussion of increasing instal-
A markedly lesser degree of liquidity had been accepted
as the banks went along, and the current attitude was one of constant
9/ 1 7/63
-11-
reappraisal.
First District banks had been increasing their
certificates of deposit slightly, but they had done little in their
thrift accounts.
There had been some advertising of a rather spas-
modic nature, but actually the banks had
done relatively little to
address themselves to the real issue, which was whether they wanted
to be in the thrift business or not.
how much strain they could stand.
They were trying to decide
The general feeling was that it
would not take too much to get the banks into a little trouble from
here on out, subject to monetary policy decisions.
Mr. Maestre said that Eighth District banks were strongly in
favor of accepting time deposits at a rate that was competitive.
As
to portfolios, he had noticed that quite a few banks were lengthening
their maturities in municipal bonds, which could affect their capital
Position in an unfavorable market.
ing their investment standards.
He also felt that banks were lower-
Banks were forbidden by law to under-
write revenue bonds, but were not forbidden to invest in them after
the dealers had underwritten the securities, which to him did not make
much sense.
It should be the other way around.
It should be the
Policy of the Federal Reserve to keep the banks competitive.
The
banks had gone so far they could not afford to lose a substantial
Part of their time money.
Mr. Stoner said he saw no lessening in the efforts of Fourth
District banks to obtain time deposits.
and loan
There were plenty of savings
associations competing in the District.
Part of the
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9/17/63
-12-
District was a 3 per cent area, but the banks were still gaining
time deposits.
Mr. Moorhead saw no lessening in the advertising appropriations
of banks to attract savings deposits.
There had been some let-up in
reaching for corporate time deposits, where the rates were bumping
against the present ceiling.
Mr. McRae said he detected little slackening of efforts on
the part of Sixth District banks to attract time and savings deposits.
At his own institution, he was much concerned at first by the investment money the bank had to take because of customer relationships.
However, during the past six months or a year the amount of such
money had been much less.
savings accounts.
Most of the increase in prospect was in
He did not worry too much about paying 4 per cent
on money that would be with the bank on average, but the bank could
not make money at 4 per cent under its lending and investment policies.
Mr. Breidenthal said the Tenth District conformed to the
general pattern.
There had been no slackening in the desire of the
commercial banks to obtain savings and time deposits despite the fact
Isolated banks had been
that the District was a 4 per cent area.
sending up some trial balloons, cutting the rate of interest by 1/2
Per cent to find out what would happen.
They seemed to find that they
could hold their own and that seemed to satisfy them, but looking at
the history of developments in the District and elsewhere, the only
increase was in time and savings deposits.
If they turned downward,
tz.4
,
9/17/63
-13-
the banks would run out of tools with which to work.
In the Tenth
District demand deposits were down while time and savings deposits
continued upward, so most of the banks were not turning any time
and savings deposits away.
There had been some advance refunding
of municipal securities, including revenue bonds, even seven or
eight years in advance of the call date.
This meant that higher
rates on tax-exempt securities apparently were not going to be
available to banks as an offset to higher rates paid on time and
savings deposits.
In his opinion, however, the banks could ill
afford not to attract time and savings money in the face of the
trend that was going on.
He saw no particular advantage in reduc-
ing interest rates if all the banks could do was to hold their own;
they must do better than that.
Another factor was that public
Officials were now demanding interest on public funds.
Legally or
Otherwise, a lot of them were investing in bank certificates of
deposit and Treasury bills.
The theory was that they ought to have
the right to employ their surplus funds profitably, but most banks
were unhappy about the prospect
of paying interest on public funds.
Mr. Hobbs brought out that in his area mutual savings banks
Played a large role.
He had Loticed in the past several months
that the commercial banks were gaining in numbers of thrift accounts
and that the savings banks were losing, indicating that the commereial
banks were competing with the mutuals successfully, probably reflecting
the full range of banking services provided.
He had not noticed
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9/17/63
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any slackening of efforts to attract savings and time deposits,
except possibly in the 4 per cent area.
His bank was now operating
in Montgomery County, where the prevailing rate was 4 per cent, but it
had stopped at a
3-1/2 per cent rate and had noticed no penalty.
He was encouraged about the future of commercial banks in the thrift
field, and thought they could compete with other institutions at a
lower rate.
Mutual savings banks in Baltimore were paying a higher
rate, but the commercial banks were competing successfully.
Mr. McAllister saw no slackening in the efforts of Twelfth
District banks to attract time and savings deposits, which in that
District traditionally loomed large.
At present, 51 per cent of
total deposits consisted of time and savings deposits, this figure
being up from 45 per cent three years ago.
The banks were going
more into mortgages and reducing their holdings of Governments.
They were also increasing their holdings of municipals.
Mr. Zwiener said that in some isolated instances, say in the
case of smaller banks in the outlying Chicago area, there were heavy
amounts of savings deposits with no profitable utilization of the
funds.
Such banks were not sophisticated in municipal investments,
or in finding mortgages, so they were feeling a pinch on earnings.
At the larger institutions there had been a lessening of advertising
for time and savings money, but the money still seemed to be flowing
in.
This was a period of change, and the banks had yet to run
through a complete cycle.
While he was aware of the reports of a
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9/17/63
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lengthening of maturities in municipals and the holding of more
mortgages, there was still a large segment in the District that
felt that the banks had not gone through a complete cycle and were
watching the liquidity factor more closely than usual.
true of many large banks in the District.
This was
It was his bank's feeling
that only about 60 per cent of the time deposits were hard-core
money.
The rest was there only because it was more profitable to
keep the money in the bank at the present time.
corporate loyalty.
There was little
Money tended to flow fast when the rate changed,
Particularly in the time certificate of deposit market.
President Murphy spoke of a competitive development in New
York.
Something over a year ago the State banking authorities
removed the interest ceiling on deposits at mutual savings banks of
over a year's duration, and just recently the ceiling was removed
entirely.
Thus, the mutuals were now free to pay whatever rate
they liked.
This meant that the commercial
banks would have to
intensify their efforts to obtain their share of the savings dollar.
In the small savings account, habit-forming was a factor, unlike the
large corporate account.
It seemed important for the banks to
continue their efforts in the direction of obtaining savings accounts,
as an important part of their tool kit for the future.
Asked for an evaluation of the experience in Indiana, where
the ceiling on interest-bearing deposits had been retained at 3 per
cent, Mr. Zwiener said that apparently the banks, even in the area
311.9:-2):
9/17/63
-16-
near Chicago, had not suffered too much.
Their growth had not been
Spectacular, but he did not think that the Indiana banks felt they
had suffered with the 3 per cent rate.
They had had to forego
corporate time deposits, but they could compete reasonably well
for thrift accounts even at the prevailing differential.
Governor Mitchell inquired whether the Council had any views
as to the possibility of permitting the corporate use of savings
accounts up to a figure of, say, $20,000.
Mr. Martin said that First District banks would be against
such a move, to which Mr. Maestre added that he did not think
corporate money could come properly into the thrift category.
Acceptance of corporate funds as savings deposits would border on
the paying of interest on demand deposits.
Mr. McAllister said
that only the larger corporations put money into certificates of
deposit.
He doubted whether such corporations would be interested
in savings accounts.
Corporate treasurers were now active in the
money market and watched rates all over the country.
Governor Mitchell suggested that such a change would accommodate small corporations; the large ones would not need it.
His
question stemmed from his view that trustees in bankruptcy ought to
be able to use savings accounts.
Mr. Hobbs suggested that banks could take care of small
corporations by certificates of deposit of some kind.
He had not
seen any of this business going to savings and loan associations.
3194
9/17/63
-17President Murphy expressed the view that the banks must
expect more pressure for the payment of interest on deposits; it
was in the air.
The increased use of Federal funds was the same
thing in reverse.
A bank picked up the phone and sold idle funds.
He did not see much difference in this and the actions of the
corporate treasurer who tried to use his money fully.
President Murphy saw a big plus in all this discussion from
the standpoint of the national economy, including retail sales and
Purchasing power.
growth of savings.
He had recently reviewed estimates of the future
The experts were predicting that the present
level of approximately $225 billion would be up by 1970 to anywhere
from $400 to $475 billion.
The present level was an accumulation
from all previous times, but in about 7 or 8 years the experts
expected the current figure to double.
The commercial banks would
be shortsighted if they did not interest themselves vitally in
fighting to get their share of this money.
It represented purchas-
ing Power; it meant that many people had pulled their incomes above
subsistence levels.
From the standpoint of the economy for the next
few years, this money represented a tremendous potential for sales.
As these funds accumulated, the commercial banks must aggressively
compete for them.
Question was raised whether an increase had been noticed
in the turnover of savings accounts; whether they were coming, in
effect, nearer to use as demand accounts.
9/17/63
-18Mr. Hobbs reported a definite pick-up in turnover of
savings deposits at his bank, and he thought this was also the
case at the mutuals in his area.
was true in Chicago.
Mr. Zwiener said the same thing
President Murphy commented that where the use
of the passbook had been eliminated, the process was made somewhat
easier.
Asked whether, to the extent this took place, it did not
have a bearing on the way the banks used the funds, President Murphy
suggested that some withdrawals from individual savings accounts
reflected the fact that demand balances had been drawn too low.
As
to the aggregate of savings deposits, however, there was a growth
curve that the banks could take into account.
Mr. Martin reported
some segregation of savings accounts, with isolation from the regular
totals.
These funds could be labeled as "hot" money, of a type
between thrift accounts and certificates of deposit.
Mr. Zwiener
reiterated that his bank regarded only 60 per cent of savings
d eposits as hard-core savings.
The remainder was treated differently,
With ways maintained to pay it out quickly if necessary.
Inquiry was made as to the results of the Board's action in
July in raising to 4 per cent the maximum rate payable on time deposits
With maturities from 3 months to one year.
P:esident Murphy replied that this action provided more elbow—
room.
It was a move that he considered essential.
Likewise, he felt
that the earlier legislative action removing certain foreign-owned
319
9/17/63
-19-
time deposits from the purview of the interest rate ceilings was
a good move.
If the Board had not increased the Regulation Q rates,
member banks would not have been able to be as competitive as they
had been with mutual savings banks and savings and loan associations.
However, the rates actually paid on time deposits were again knocking at the ceiling.
Mr. Zwiener added that member banks would have
been out of business in the certificate of deposit market if the
recent change in Regulation Q had not been made.
Governor Balderston referred to the strong flow of savings
through the savings and loan associations, causing them to look
around for opportunities to increase their areas of credit activities.
He inquired whether the Council had given any attention to whether
that would be in the public interest; that is, whether permission
Should be granted to savings and loan associations to enter what
used to be thought of as the field of banking.
On this general subject, President Murphy cited the fact
that in New York there was very heated competition between mutuals
and savings and loans on the one side and mutuals and commercial
banks on the other.
Every day there were new signs that the mutuals
were inching closer to wanting to do a commercial banking business.
He would favor letting them do such things, but making them abide
by the same rules as commercial banks.
The mutuals in New York were
Ilow making personal loans, at low rates, as long as the loan did not
exceed the amount on deposit, and there were indications that some
31.91,s'
9/17/63
mutuals would like to let their depositors use something like
checks and have them charged against their accounts, all of which
represented inching closer to a commercial banking business.
In
his opinion the day would come when this type of legislation would
be on the books due to the pressure within the mutuals to use their
available funds in the most profitable way.
He would not object to
such a development provided the mutuals had to pay taxes on the same
basis as commercial banks and provided they were guided by the same
rules, for example as to reserve requirements.
If such requirements
were not established, the mutuals would be at a competitive advantage
vis-a-vis the commercial banks.
He continued to feel, however, that
there was plenty of room for all kinds of institutions.
If the
savings field developed as he thought it was certain to develop,
there was plenty of room for all institutions.
Mr. Zwiener referred to the financing of automobile purchases
by adding to outstanding mortgages.
This was being done in the
Chicago area in a rather substantial way.
3.
As a result of high levels of activity and of changes
in business tax laws, the flow of internally generated
business funds has increased substantially this year,
while dependence on bank and market financing appears
to have declined. Do the members of the Council expect business needs for bank financing to continue
moderate over the balance of the year or are there
signs of significant increase in business loans?
Does the Council feel that banks, by and large, are
sufficiently liquid to meet a moderate upsurge in
credit demands without substantial portfolio rearrangement?
11:1t.?
_9/17/63
-21-
The members of the Council expect business needs for
bank financing to increase seasonally over the balance of
the year. While the liquidity of the banking system has
declined, the Council believes that the commercial banks
are in a position to meet a moderate upsurge in credit
demands without substantial portfolio rearrangement.
President Murphy said the Council felt that by the end of
this year loans were going to be higher than at present, but that
the Council did not visualize any strong upward thrust.
never seen corporations more liquid.
He had
Cash flows were tremendous,
and the balance sheets of corporate customers showed, in addition
to cash, the largest amounts he had ever seen invested in shortterm securities.
Thus, he could not envisage a vigorous upward push
in loans although he felt there would be a general movement upward.
At the moment commercial, industrial, and agricultural loans of all
reporting member banks were running well ahead of 1962, but he
anticipated that the 1963 curve line would move upward at a rate
between 1961 and 1962.
Turning to the ratio of liquid assets to
deposits, banks were now less liquid than since 1960 according to
this yardstick and, except for the 1959-60 period, less liquid than
at any time going back to 1957.
As the situation moved into 1964,
and looking ahead the second and third years, it was his opinion
that the situation could tighten quite fast.
There was not too much
Slack.
Mr. Moorhead said that Ninth District banks were quite
liquid and could finance any foreseeable demand for loans, but only
b ecause of the corporate certificates of deposit.
The banks did not
31
9/17/63
-22-
otherwise generate sufficient deposits to meet loan demand, and
the corporate certificates of deposit had introduced a new note.
With the current 4 per cent ceiling, however, there was danger in
relying too much on the certificates.
Thus, liquidity was not
something that could be counted upon.
Mr. McRae agreed with the view that the banking system
could take care of any increase in loan demand that seemed likely
to occur in the next six months.
However, he felt substantial
discomfort about the decline in liquidity of the banking system as
a whole.
He was concerned about the lengthening of maturities and
increased investments in long-term mortgages and municipal bonds.
Mr. Stoner stated that he looked for only a seasonal increase
in loan demand in the Fourth District and that District banks were
sufficiently liquid to take care of that demand.
Mr. Hobbs said that Fifth District banks were looking for
only a modest seasonal increase.
For some period of time the increase
had been only almost entirely in mortgage and instalment loans, while
business loans had remained about level.
He was not concerned about
the liquidity of District banks.
Mr. McAllister noted that in the Twelfth District the ratio
of loans to deposits was high, running about 65 per cent.
This ratio
could hardly get too mach higher, but member banks had been quite
successful in keeping away from the discount window.
leeway, but the ratio was getting quite high.
There was some
'i2('0
9/17/62
-23Mr. Maestre reported a similar situation in the Eighth
District.
However, if there was going to be only a normal seasonal
increase in loans he was not concerned, assuming that the Federal
Reserve was going to provide reserves to cover seasonal requirements.
Mr. Aston agreed with Mr. Maestre's observation.
Mr. Zwiener said that the composition of loan demand in the
Seventh District had changed quite materially over the past year and
that he foresaw further change taking place.
Because of the financing
being done around the banking system, he no longer saw the large
bodies of loans coming into the area that formally were seen.
A
great deal of the loan increase in the Seventh District had been
accounted for by what might be called the earning asset type of loan.
If banks ceased taking them on, they could build liquidity readily,
accommodate a material seasonal increase in loan demand, and take
care of requirements quite well.
Mr. Martin reported that First District banks expected only
a normal seasonal increase in loans and tha
they should be able to
handle it without difficulty, assuming that monetary policy was of
the nature to support the seascnal increase.
If loan demand should
increase heavily, there could he some volume of member bank borrowing.
Chairman Martin inquired whether any members of the Council
anticipated a much larger than seasonal increase in loan demand, and
ncme of the Council members so indicated.
4-
9/17/63
-244.
What are the Council's observations regarding
current attitudes in the business and financial
community toward U. S. balance of payments
developments? How does the Council appraise the
general reception of the recent actions and proposals designed to deal with this problem?
Although the persistent deficit in our international
payments and the loss of gold are somewhat remote from the
everyday affairs and activities of most businessmen, the
Council believes that there is heightened concern in the
business and financial community regarding U. S. balance
of payments developments.
The actions of the Federal Reserve System designed
to deal with this problem have been favorably received,
especially the increase in the discount rate. There is some
doubt, however, about the merit of the equalization tax
proposed by the Treasury, although many persons were encouraged
by the fact that specific action was being taken in an effort
to cope with our payments difficulties.
As the Council has observed in the past, the solution
to our balance of payments problem involves fiscal policy,
overseas defense expenditures,and foreign aid outlays,which do
not fall within the responsibility of the monetary authorities.
Monetary policy alone can therefore not be expected to meet the
problem of the deficit in our international payments. Nevertheless, the Council believes some further tightening of
monetary policy might be desirable.
5.
How does the Council evaluate the impact of
current monetary and credit policy?
As suggested in Item IV, the Council believes that
current monetary and credit policy has had a favorable impact
on the financial and business community.
In discussion cf these topics, which were considered together,
President Murphy noted that the interest equalization tax proposal
had been a subject of much discussion in financial circles.
The
first reaction was that at least the authorities were trying to do
s omething specific to help solve the balance of payments problem
`Z(`)4„!,
9/17/63
-25-
and that the move appeared to be a reasonable one, although some
sources regarded this proposal as a forerunner to objectionable
direct controls.
On the other hand, looking at the likely effect
from the balance of payments standpoint, it would not appear to be
substantial except in terms of one or two foreign areas.
Further,
since the proposal was announced, an exemption in respect to Canadian
issues had been proposed.
A lot of people felt that if the proposal
was watered down they would be indifferent as to whether or not it
was passed, and it now appeared that the proposal might encounter
d ifficulties in the Congress.
President Murphy went on to say that he detected a great deal
of concern regarding the balance of payments.
Bankers from abroad
invariably brought up the subject, and he saw signs of increased
criticism on their part.
They were saying, in effect, that this
country talked a lot about the problem and yet nothing seemed to
haPPen.
Announcement of the disappointing second-quarter balance
of payments results highlighted the situation.
Efforts were in
Process to try to build more export business, but the export trade
already showed a substantial surplus.
Unless this could be preserved
arid steps could be taken to avoid dissipating the trade surplus, the
Problem would not be solved.
In summary, President Murphy said, it was his feeling that
this was one of the country's most serious problems.
The businessman
l'ho made it part of his job to know something about the balance of
3203
9/ 17/63
-26-
payments was deeply concerned, even worried, and criticism from
abroad continued to build up.
found.
Some sort of solution needed to be
While he had mixed feelings about the interest equalization
tax, he applauded the fact that someone had come up with something
Specific to help deal with this problem.
He was not prepared to say
whether it was the best move.
Mr. Zwiener felt that the equalization tax proposal was a
fringe attempt to meet the problem.
It dealt with only a fraction
of the capital outflows, and taking into account the discretionary
authority that would be granted to the President, the extent of this
attack on the problem might be further reduced.
The only comfort
was in knowing that somebody was looking at the various areas where
something could be done.
The tax implied that there might be moves
into controls of different types, which would be unpalatable in the
light of American traditions.
Further, he doubted whether there
would be any significant net favorable effect on the over-all balance
of payments because of the uncertainties that the proposal created.
For example, one company planning ahead had asked whether it should
immediately transfer abroad half of its estimated needs for the next
three years.
In some instances, therefore, money had already left
the country in view of the tax having been proposed.
Also, there
were several inequities in the proposal from the standpoint of the
individual investor, although some of those, he understood, may have
been corrected.
As a summary statement, he did not think that the
3'(
9/1 7/63
-27-
tax would contribute very much to solving the balance of payments
problem.
Mr. Martin said that well-informed businessmen were beginning to have a depressed reaction to the balance of payments
situation.
Foreigners had commented constantly over the past
several years on the reckless fiscal policies under which this
country was operating its affairs.
This was an important factor
in conditioning the minds of people around the world as to whether
the dollar was a good currency in which to have their money.
Mr. Martin also commented that from the presentation yesterday to the Council by the Board's staff, several members of the
Council had the impression that some foreign sources were suggesting
that the United States embark on a heavy Governmental spending program.
President Murphy noted, in this connection, that the observa-
tion had been made that some foreign sources felt that one move this
country could make to improve its position was to incur a greater
budget deficit.
It was his feeling, President Murphy added, that
the persistent budget deficit had bothered many foreign observers
and that this country's determination to come to grips with the
balance of payments problem wc.Ad be indicated to them most impressively by avoidance of a further deficit, except one that might result
from the proposed tax reduction program.
A stepping up of Government
sPending here and abroad would not appear to the Council to be a
Proper method of meeting the balance of payments problem.
Mr.
Moorhead said he understood the point to be that a further budgetary
05
9/17/63
-28-
deficit would spur the domestic economy and therefore make the
United States more attractive for foreign investments.
As he saw
it, the net effect might be additional investment in the United
States, but also further investments abroad.
Mr. Maestre noted
that the suggestion was hedged with the qualification "without
Inflation"
President Murphy, in a further comment, said the
members of the Council felt that the balance of payments problem
was tied in closely with fiscal policy and that it was difficult
to separate them.
Governor Mitchell commented that he thought the prescription
this country had been getting from many foreign sources was quite
Clear.
It involved a much larger dose of fiscal policy, including
a tax cut, a larger Federal deficit, and increased Government spending, but higher interest rates were also advocated.
Such a program
would be generally consistent with policies that some foreign countries
had pursued in similar circumstances.
This was the impression he
gathered from the tenor of remarks of foreign central bankers, and
it was the type of prescription he understood was being suggested in
various official quarters.
President Murphy observed that the Council members would all
admit that this was a very complicated area.
The problem tied into
almost every facet of economic and political life.
U. S. Government
expenditures abroad were very much a part of the picture, and it was
easy to say that they should be cut.
However, for the State Department
320G
9/17/63
-29-
it was no doubt difficult to decide where reductions could best be
made.
Chairman Martin commented that Governor Mitchell had stated
well one prescription that was being received from abroad.
However,
those who returned from abroad came back with different accounts as
to what people had told them.
It was difficult to get accurate reports.
The Chairman went on to say that the problem of real concern
to the Federal Reserve was this:
leaving aside questions of overseas
expenditures and fiscal policy and considering only the area of
Federal Reserve action, how much could the System contribute?
Council seemed to endorse the increase in the discount rate.
The
However,
there were differences of judgment within the Federal Reserve as to
What, if any, influence this had exerted on the balance of payments.
The problem was extremely difficult because the flows of funds were
d ifficult to measure.
There were no completely satisfactory statistics
It was known, of course, that the Euro-dollar market had become very
substantial.
There were indications, he believed, that it had reacted
somewhat to the
change in the discount rate and the slightly higher
short-term interest rates that had developed in recent months.
theless,
Never-
how much, if anything, the System's actions had accomplished
remained open to discussion.
The question was whether, even assuming
n° cooperation whatever in terms of fiscal policy or otherwise, there
was something the Federal Reserve could do.
Some people would feel
that it was in the best interest of the national economy to do nothing.
32(re
9/17/63
-30Mr. Breidenthal
referred to the part of the Council's
statement that expressed the belief that some further tightening
of monetary policy might be desirable.
He felt strongly that the
word should have been "necessary" rather than "desirable."
The
case should be proved that it was necessary.
Chairman Martin noted that over a long period he had
c onsistently taken
the position that interest rates should be as
low as possible without producing inflation, because that would
induce the largest amount of capital formation.
The balance of
Payments problem was, of course, a complicating factor.
President Murphy said it seemed to the Council that the
increase in the discount rate had had beneficial results from the
s tandpoint of the international balance of payments problem without
affecting the domestic economy adversely.
Whether the domestic
economic improvement was in such even balance that a further rise
in interest rates would be a deterrent to a continued upward movement, the Council did not know.
Board's major problem.
He felt sure that this was the
In back of it was the question of employment
and unemployment, and the Board no doubt was trying to find some happy
medium.
It could hardly afford to take steps that might tend to
a ggravate the unemployment problem.
It might be that interest rates
should rise a little further in the weeks or months ahead, but the
Problem was more complex than in the case of some of the European
countries.
3208
9/17/63
-31Chairman Martin inquired whether there were any members
of the Council who felt that it would be wise to raise the discount
rate, and several members, perhaps a majority of the Council,
responded affirmatively.
President Murphy related that at a recent meeting attended
by representatives of some of the leading industries in the United
States he had presented the question whether it was felt that an
increase of 1/2 per cent in the discount rate, such as the recent
increase, had a deterrent effect on American industries.
Without dissent, were in the negative.
The replies,
It was brought out that if a
company was considering an addition to its plant, and if the question
was so finely drawn that an interest rate differential of 1/2 per
cent would mean making or losing money, a decision to go ahead probably
would not be made.
This was the consensus of those present.
It was
Pointed out, also, that U. S. interest rates were so low relative to
those prevailing elsewhere in the world that they constituted an ever
Present invitation for foreigners to come to this country and seek
funds.
The net of the remarks was that the recent discount rate
increase
did not involve much of a risk from the standpoint of
de
terring further improvement in the domestic business situation.
Governor Mitehell noted that U. S. bahks were being
importuned to make term loans to foreigners and that there appeared
to be accelerated use of acceptances between countries other than
the U. S., with a selling of the acceptances to investment organizations
9/17/63
-32-
in this country.
He asked whether any difference in these respects
had been noticed since the interest equalization tax was proposed.
Mr. Zwiener responded that up to this point his answer would
be in the negative.
President Murphy agreed as to acceptances.
On
requests for foreign loans at New York City banks, he would answer
in the affirmative.
These frequently involved requests for loans
to be repaid over a period of three or four years.
In more cases
than not, they were guaranteed either by the foreign central bank
of the country concerned or a strong commercial bank.
Factors
underlying the requests included the availability of loanable funds,
the willingness of American banks to make such loans, and the attractive interest rate, both to lender and borrower.
He anticipated
that the volume of loan requests was going to increase rather than
d ecrease.
By and large, moreover, the credit risk was minimal; such
risk as obtained was of a political nature.
The borrowers were some
of the best credits in the respective countries, and there was a
dearth of capital in most of those countries.
On the other hand,
there was a surplus here, and with the savings trend upward there
would be additional pressure to put the funds to work.
Further, the
rates on the loans were attractive to the banks; a 6 per cent rate
was typical.
The Board would also like to have any views that
the Council may care to express on the legislation
that has been recommended to broaden the kinds of
security on which credit can be advanced by the
Federal Reserve banks. These recommendations
321(3
9/17/63
-33were included in the Board's letter of August
21 to the Chairmen of the Senate and House
Banking and Currency Committees.
The members of the Council believe that commercial
bankers generally would strongly favor enactment of
legislation designed to broaden the kinds of security on
which credit can be advanced by the Federal Reserve banks.
In discussion, President Murphy said the Council felt that
the legislative proposal was highly constructive.
If the economy
moved ahead in the next three or five years, this could be very
helpful.
He would be surprised if the banking community did not
take advantage of it.
The Council assumed that it was intended
that the broadening of the kinds of security on which credit could
be advanced by the Federal Reserve Banks would not involve penalty
interest rates.
However, the Council noted that the legislative
Proposal provided that different rates might be fixed for different
classes of paper, which had raised some question.
The response was in terms that the proposed legislation was
designed to assure adequate flexibility.
It was contemplated that
there would be one rate, but the power would be retained to fix
d ifferent rates if necessary to curb any possible abuses.
It was agreed that the next meeting of the Federal Advisory
Council would be held on November 18-19, 1963.
The meeting then adjourned.
Secretary
@FedFRASER