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The attached minutes of the meeting of the Board Of Governors of the Federal Reserve System and the Federal Advisory Council on September 19, 1961, which you have Previously initialed, have been amended at the request °f Mr. Livingston to revise the first paragraph on page 16, Governor Mills Governor Robertson Governor Balderston Governor Shepardson Governor King 1. Minutes for To: Members of the Board From: Office of the Secretary September 19, 1961 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 .elow. If you were present at the meeting, your Initials will indicate approval of the minutes. If You were not present, your initials will indicate °IllY that you have seen the minutes. Chin. Martin Gov. Mills Gov. Robertson Gov. Balderston Gov. Shepardson Gov. King Gov. Mitchell Y Meeting with the Federal Advisory Council A meeting of the Board of Governors of the Federal Reserve System and the Federal Advisory Council was held in the Board Room of the Federal Reserve Building in Washington, D, C., on Tuesday) September 19, 1961, at 10:30 am, PRESENT: Mr, Mr. Mr. Mr. Mr. Balderston, Vice Chairman Robertson Shepardson King Mitchell Mr. Sherman, Secretary Mr. Kenyon, Assistant Secretary Messrs. Enders, Murphy, Petersen, Hays, Hobbs, Persons, Livingston, Murray, McClintock, Betts, and Frankland, Members of the Federal Advisory Council from the First, Second, Third, Fourth, Fifth, Sixth, Seventh, Ninth, Tenth, Eleventh, and Twelfth Federal Reserve Districts, respectively Mr, Allen Morgan, President) The First National Bank of Memphis, Memphis, Tennessee Mr. Prochnow, Secretary of the Federal Advisory Council Mr, Korsvik) Assistant Secretary of the Federal Advisory Council In the absence of Mr, Turner, Member of the Federal Advisory Council from the Eighth Federal Reserve District, Mr, Morgan represented the District at this meeting, There had been distributed before this meeting a memorandum from the Council listing the topics suggested for discussion. The topics, the statement of the Council with respect to each, and the discussion at this ineeting were as follows: 1. What are the views of the Council concerning the current business situation and prospects for the remainder of 1961 'kJ 9/19/61 and early 1962? Is rapid expansion in activity likely to continue without interruption for another six months, as it did after the autumn of l958? How does the demand situation at present compare with the situation at that time? The Council believes that the over-all level of business is good and that there will be further expansion in activity in the remaining months of 1961 and early 1962. The members of the Council expect the expansion in activity to continue without interruption for another six months, but they do not anticipate it will reach boom proportions. The Council believes that the present demand situation is not as strong as it was in the autumn of 1958. At the instance of the Board, there was a general discussion of the sluggishness of retail sales and the reasons that might be assigned. In this connection Vice Chairman Balderston noted that the Board's index °I* industrial production had moved from 102 to 113 over a period of six nIctnths. In 1958 the improvement over a like number of months was 9.1 per cent so the recovery, as far as industrial production was concerned, had been fully as rapid as in 1958. However, the failure of consumer spending to increase in the same proportions was rather perplexing. President Livingston indicated that the Council also was perplexed, The level of consumer income and the available accumulation of liquid "sets would suggest that consumer spending should be more brisk than 4't 'Present. This question had also come up yesterday at the Council's leeting with members of the Board's staff, and the staff likewise apparelltlY was searching for an ans-wer. At the meeting of the Councils there h4d been speculation on various factors that might have a bearing on the eitllation. For example, the thought was expressed that the recent recession 4:11' the continuation of relatively large-scale unemployment might 9/19/61 have produced apprehensions about job security. Also, it was suggested that mounting international tensions might for some reason be causing the consumer to be less willing to buy. However, the Council did not pretend to know exactly why the phenomenon of a reticence on the part of the consumer to spend more freely existed. Perhaps the consumer actually had fairly well caught up on his basic needs and preferred to husband his resources for the time being. At any rate, if the consumer should start to buy with the briskness that one might expect at this stage of the cycle, the resurgence of the recovery would assume large proportions. Question was raised as to whether there were indications of greater discrimination and selectivity in consumer buying, in response to which two members of the Council cited evidence that had come to their attention which indicated that the consumer was searching for quality products, with price perhaps only a secondary factor. In one instance, a lower-priced line introduced by a manufacturer had been withdrawn from the market due to lack of consumer acceptance. A member of the Board expressed the view that disappointment with the serviceability of new products may have created consumer resistance, with the result that products were being retained longer and more of the consumer dollar was going into maintenance and repair costs. It was noted that smaller appliances appeared to be moving better than larger items, which might indicate that consumers were relatively Well supplied with larger appliances of longer useful life. Many such items, it was pointed out, had been acquired as part of the furnishings °f new homes in recent years. Ix 9/19/61 -4There was general agreement that as yet little if any evidence had been seen of an accumulation of goods in the face of the critical international situation, and one explanation suggested was to the effect that the magnitude of any potential calamity may have produced a rather fatalistic attitude. Likewise, while the sluggishness of consumer spending might seem to suggest that the consumer was not particularly apprehensive about inflationary potentialities, the thought was expressed that other factors might have a more direct bearing upon spending decisions, particularly in the case of relatively minor objects of expenditure. With respect to the relationship of the unemployment problem to consumer attitudes, one Council member pointed out that his bank had extended many notes during the period of major unemployment that extended into the second quarter of this year and that these obligations were only " If in the process of being paid off. Thus, in some instances consumers 'night not yet have built up a sufficient cushion to warrant the resumption cf active spending. In this connection, however, question was raised whether a substantial proportion of those who had been unemployed were not the category where buying was limited principally to necessities. This gtlestion suggested that the return of such persons to the ranks of the employed might not create any substantial buying potential. At the same time 3 current statistics showed high levels of employment and of personal ine°me, which would seem to indicate that enlarged consumer spending might have been expected. One Council member reported conversations with persons in retailinfo, which suggested a surge in consumer buying very recently. His comments f),2 C.. • 9/19/61 a180 led into a general discussion of the increasingly important role of the discount houses in the retail trade picture, with many top-line manufacturers now offering their products through such houses, servicing of Products sold becoming more available from the discount houses, and other outlets having to consider competitive steps in terms of price and reducti°4 of overhead. The volume of business of the discount houses was be- lieved to have become so important that the omission of such firms from the Federal Reserve department store sales series seriously weakened the value f those figures for purposes of analyzing retail sales of consumer durables. Governor Mitchell inquired whether it would be fair to say, by way °f interpretation of the Council's statement on this topic, that the Council /las not too bullish about business prospects, that it was quite cautious in its appraisal of the outlook, that although the Council looked for some further increases in the index of industrial production and in gross national 1111°dI1 et, it would expect a moderation of the rate of increase of the past selTeral months, and that the attitude of consumers introduced some uncer tairltY into the future trend of the recovery. Comments by President Livingston and other members of the Council Indicau4 ed general agreement with Governor Mitchell's summarization. The dlecussion concluded with an observation by Mr. Murphy to the effect that illueh faster rate of advance could create problems, whereas the current alld Prospective rate of progress, which could be characterized as a healthy l'ec(3verY, would appear to be sustainable over a longer period of time. 2. Are there indications that increased international tension and the increase in the defense program are 9/19/61 -6having any effect on business buying or on consumer buying? Has there been any shift in recent weeks in business views as to prospects for commodity prices? Is there any concrete evidence that inflationary expectations are developing? The members of the Council have seen no evidence that increased international tension and the increase in the defense Program have had any important effect on business or consumer buying, The Council discerns no shift in recent weeks in business views as to the prospects for commodity prices. There Is little concrete evidence at this time that inflationary expectations are developing, but the members of the Council believe that underlying, long-term inflationary factors are still present. President Livingston noted that these questions had been touched Upon to some extent in the discussion of the preceding topic. In response to a comment by Governor Robertson that he was glad the Council had seen it to include in its statement the reference to underlying, long-term inflationary factors, President Livingston said he regarded this as one of the most serious problems facing the country. All of the movement seemed t° be in one direction, and things happening now would tend in time to accentuate the problem. Governor Shepardson noted that although the defense program was hcn'ing the usual lag in terms of actual expenditures, there was the Pl'"Pect of a considerable bulge in expenditures in the relatively near filture, and the comments made in response by President Livingston were in agl'eenlent with this observation. President Livingston went on to say that the ecmncil was in rather complete agreement that expectations of inflaIlere the basic answer to the behavior of the stock market in recent 111"the and to the lack of interest generally in fixed-income obligations. 9/19/61 -7- 3. Is the recent shift from inventory liquidation to accumulation likely to be followed by still more rapid accumulation? Most members of the Council do not anticipate in the months immediately ahead a more rapid accumulation of inventories than occurred during the first half of 1961. President Livingston commented that the Council had experienced some difficulty in phrasing its answer to this question in view of the significant shift from inventory shrinkage to inventory accumulation within the first half of this year. For further comment on this point he turned to Mr. Prochnow, who cited statistics indicative of the contrast between the situation in the first quarter of the year and in the second ter. It was the feeling of the Council that this shift was of a ' qual greater magnitude than was apt to be found in succeeding quarters. Governor Mitchell inquired whether the Council members detected aIV tendency on the part of businessmen to expand their inventories 811hetantially beyond present levels, and the responses were generally to he effect that evidence of such a trend was not seen. Mr. Hays reported, however, a good deal of conversation regarding the possibility of acetzmulation of metal inventories in the first and second quarters of 1962 in anticipation of a strike in the steel industry upon the expiration °f the current labor contract about midyear. Governor Shepardson inquired whether the Council foresaw a general trend toward lower inventory levels because of improved inventory control Pr°°edures, and President Livingston replied that somewhat differing °Pinions on that point existed within the Council. In his own opinion, aist 9/19/61 —8— however, the improvement in control techniques was not so important a factor as to account for changes in basic inventory trends. Governor Balderston inquired whether the Council saw any evidence as Yet of the accumulation of inventories for speculative reasons, and the response was in the negative. 4. Are businesses changing their plans for plant and equipment expenditures in response to the recent increase in business activity and profits? Are funds readily available from internal sources or from the capital markets to finance larger capital outlays? The members of the Council do not believe that businessmen are changing their plans for plant and equipment exPenditures in response to the recent increase in business activity and profits. In general, the Council anticipates that While such expenditures will rise in the latter part of the Year, total expenditures for 1961 will be somewhat below outlays last year. Internal sources supplemented by funds from capital markets are likely to be adequate to finance the anticipated increase in investment. The Council's statement was noted, and there was no further diseussi°n of this topic. S. Are consumers likely to continue to buy goods and services in only moderate volume, considering current income levels, or will they tend to borrow more and accumulate liquid assets less rapidly than in the recent past? With the more liberal financing terms provided by new legislation, mortgage rates down from earlier highs, and disposable incomes up, is there evidence of strengthening in demand for residential properties? The members of the Council expect consumers to spend and borrow more in the months ahead than in the recent past. Pathough the demand for residential properties, as indicated by housing starts, applications for FHA commitments, and requests for VA appraisals, is above the low point of December 1960, there le little indication of any important strengthening in this demand. 9/19/61 With respect to residential construction, President Livingston said he continued to feel--and he thought this was the general feeling of the Council--that the absence of greater vigor was not due to any lack of financing at satisfactory terms, but rather to the fact that there were enough houses available for those who wanted them. While there might be some areas where this was not the case, the situation that he had mentioned prevailed generally in the Seventh District and aPParently in other parts of the country as well. 6. Are demands for bank credit developing more or less actively than usual for this season of the year? In what areas is loan demand most active? Does the Councills experience confirm the observation that the slower rate of loan expansion thus far in this recovery period has been due to a heavy volume of loan repayment from the proceeds of security issues rather than a lag in the demand for new loans? The over-all demands for bank credit are developing less actively than usual for this season of the year and do not yet reflect the increase in business activity. Although business loans of weekly reporting member banks are still (as of the close of August) somewhat below their 1960 year-end level, further inventory accumulation and the anticipated expansion in business should increase the demand for bank loans. With the exception of certain types of construction loans in some districts, the members of the Council do not find any areas of loan demand significantly more active than others. The Councils experience does not confirm the observation that the slower rate of loan expansion thus far in this recovery has been due to a heavy volume of loan repayment from the proceeds of security issues rather than a lag in the demand for new loans0 heavy volume of loan repayment from the proceeds of security issues is only one factor in the slower rate of loan expansion in this recovery period. President Livingston said the one area where the members of the C°141cil were able to identify a significant increase in the demand for baro, L` credit was in connection with certain types of construction loans. 4 9/19/61 However, the total involved would not be so large as to be indicative of any general trend in construction activity. Speaking further to this point, Mr. Murphy reported evidence of a Pick-up recently at banks throughout the New York City area in lending for general construction purposes, including the construction of apartment houses, shopping centers, and office buildings. There appeared t° be considerable underlying strength, and insurance companies were to make the necessary commitments for long-term mortgages. As to °ffioe buildings, a question might be raised as to when the saturation Point would be reached. However, all of the new buildings seemed to be filled before completion. One expert in the field was inclined to feel that the construction of such buildings could go on indefinitely, due to the tendency for new buildings to render the older ones obsolete. It was 4C41 becoming difficult to lease space in buildings not equipped with air cotiditioning, and it is almost prohibitively expensive to air condition some of the older buildings. Mr. Murphy also reported some indication of a little more activity l'eesrltlY in the field of loans to commodity dealers. He went on to say that a check around the Second District on the strength of loan demand l'61realed mixed reactions, three respondents advising that the demand was strong, three stating that it was light, and two reporting a more or less sideways movement. Mr. Frankland commented that in the Twelfth District it was 4seessarY to take into account a sizeable volume of loans coming into e3cistence as the result of Housing and Home Finance Agency programs; for :11 9/19/61 -11- exalaple, the construction of school dormitories. For the District as a Whole, the total of such programs was quite substantial. President Livingston then referred to the Council's statement on the last of the three questions presented under this topic. As indicated thereby, he said, the Council felt that the volume of security flotations had been a factor contributing to the slower rate of loan expansion thus far in the recovery. However, the Council felt that it should not be construed as the dominant factor. In any event, the usual seasonal increase in commercial loans had not yet been experienced. The Council was still hopeful that the seasonal demand would appear, but time was running out. Governor Mitchell inquired what the experience had been over the Illid-September tax date, and the replies indicated that the experience Illight be classified as about typical or as slightly disappointing. Governor Balderston commented on the steady rise from year to year ill the availability of internal funds, and President Livingston agreed that the increase over a period of time had been large. While he did not think the trend had reached a point such as to suggest that the usual 8eaBonal rise in the demand for credit should not be expected in the latter Part of the year, nevertheless the growth of internal funds was continuing. 7. What does available information concerning particular products suggest as to the course of exports? Will exports generally remain close to the advanced level reached early this year or will they show important changes in one direction or another? Is increased production in this country leading to increased imports? tit 9/19/61 -12- Available information concerning particular products provides little or no guidance as to the probable course of exports. The C°11noll anticipates that the volume of exports will be down moder!uelY from the advanced level reached early this year. Although "he Volume of imports is somewhat below last year, increased Production in this country should lead to increased imports. President Livingston commented on the difficulty encountered by the council in arriving at any responsive statement. Generally, the ectulnet1 believed that with the expansion of production in this country the 44410ortation of a good may parts and basic materials would necessarily asey but the Council found it difficult to measure the significance of 841 allch development. Mr. Petersen said he thought it was hard to measure export and 41)01.t trends according to particular product areas. He gathered the tottra Ifas seeking some kind of estimate from the Council on the course of titracle balance, but he did not think such an estimate could be obtained trot 4 grouP such as the Council. Governor Shepardson inquired whether the Council sensed any serious tl'e/11. t award protectionism, in response to which President Livingston said he cont mined, to feel that the movement of national sentiment, to the extent it e istprl 17E% VAS in the direction of increasing tariffs rather than toward zation• While he deplored this trend, he felt that probably it Ilatuxal When a recessionary period had occurred. General Persor-s expressed agreement with President Livingston's aPpraisr„ Of the trend of national sentiment. Relating this to the southern krt ot the country, he described the activities of textile and pig iron 441414e-tin. --ers in recent years on behalf of measures to discourage competitive 9/19/61 -13-' 111'Ports. He sensed growing apprehension, particularly among the laboring Class, that jobs would be lost because of the import of various products into this country. A similar appraisal of the trend of public sentiment as expressed by Mr. Murray. Mr. Petersen also reported evidence of a considerable rise in protectionist sentiment that he thought it would be difficult to counter... baaance. As to the trade account, he noted that the United States balance °f Payments was favorable; this was one good aspect of the balance of payillents figures. The problems in this area were, he felt, difficult of 8°111tion. In textiles, for example, competitive imports were coming not (411Y from Japan but a number of other countries. At the same time, United States exports were fully as great as the imports, but they were in differ-. ellt categories. Further, in the case of Japan, that country had its own Prtblems. It was running a large trade deficit and losing reserves, and it as one of the best customers of the United States. In fact, most of its 14n-favorable balance could be accounted for by its trade with the United States. Similar examples could be cited involving other products and other f°reign countries. In an effort to obtain protection, resort was being had illel ' easingly, with Governmental sanction, to what might be called "inter-. 44tional cartel arrangements". These had been developed, for instance, in te)(tiles, lead, zinc, and crude oil. In the political sense, such arrange-. Inents might have the effect of diminishing the force of the tariff argument, but it the longer run he felt that the trend toward the use of such agree11t was deplorable. The greatest problem this country was facing in the 04,0*-; 9/19/61 international trade field, Mr. Petersen felt, was the growth of the common niaric'et) which was essentially a form of discrimination against the United S1:8e6. Unless this problem could be dealt with effectively, the economic l''"th of this country could be injured. Governor Balderston commented that for over a year the formulation (3r S'Ir —441ella Policy had had to take seriously into account balance of payments ketol, -s as well as domestic objectives. At present, the System had to remind iteel, constantly that the improvement in the gold outflow since last fall be only temporary. The situation had been smoothed over for a time t circumstances that were fortunate for this country, although perhaps unate for other countries. The trade advantage between exports at "Ilal rate of $19 billion and imports at an annual rate of $13.5 1)1.44 ' 43n that opened up in the second quarter of this year could be -ed largely by the boom conditions in Europe and Japan, and those e°46-iti -°ns could not be expected to last indefinitely. Further, the rate Or 41kTts seemed likely to rise. In short, one might suppose that the tae b a---ance would tend to diminish as the boom abroad receded and the Bs expansion in this country led to an increase in imports. This 1)1'°Ugh t Closer to the System the same type of problem with which it struggled 1/1 ktell ensecond half of 1960; namely, to try to keep the Treasury bill rate °ugh to discourage an exodus of gold and short-term capital, and at the s arne time low enough to encourage expansion of business in this country. 8, Does the Council care to make any comments on the apparently growing tendency to use drafts, some With documents, as cash items in lieu of checks? 9/19/61 —15— d, as cash The use of drafts, some with documents attache Howvolume. large of items in lieu of checks, is presently not it and system, banking the ever, it does represent some abuse of became and ated acceler would be unfortunate if this practice might widespread. Furthermore, the expanded use of drafts items. these of g hamper the encoding and mechanical handlin the Council President Livingston said that while the members of deplored this practice and their banks had tried to resist it, the problem did not appear as yet to be sufficiently important to require that specific stePs be taken. If the problem should assume more importance, all of the Plembers of the Council felt that something would have to be done about it. From a rather careful canvass among the Council members, it appeared that the volume of drafts was a little less than popularly supposed. The practice had existed for a long time, had spread somewhat, and a recent article the Wall Street Journal attracted attention to it. alld the banks were watching it closely. A problem did exist, However, contrary to the impres- sion created by the article that almost a free service on the part of the banks was involved, the discussion of the matter by the Council indicated that in most instances commensurate balances were maintained. In summary, the time to Practice was not believed to be large enough at the present e°11etitute a severe problem, but it must be watched closely. 9. What have been the effects of extension of Federal Reserve operations this year to other than shortterm Governments? It is extremely difficult to evaluate with assurance the effects or desirability of the extension of Federal Reserve The operations this year to other than short-term Governments. above and stable short-term market has tended to be relatively 2 per cent, but the change in operations may have introduced some uncertainty into the long-term Government bond market. 9/19/61 -16In introductory comments, President Livingston said the Council was that total System purchases of longer-term securities in the period August were in the neighborhood of $2.2 billion, of which purchases or 4bout $1.45 billion were in the one-to-five year category. At the same title ) Purchases in the over-10-year maturities totalled about $80 million. thi -ng, he noted, was rather obvious. Whereas some had thought that the Of the Federal Reserve operations would be to hold down long-term irlter„ -8t rates, this had not happened. Such rates were now higher than '4Ien the System operations began, and about seven issues were now yielding ta°l'e than 4 per cent. This comment was made as a factual observation and tict " condemnation of the System's effort. President Livingston went on to say that he interpreted what the 2Ysteal had done as an effort at experimentation in an area where no one 1,/as s ilre of the answer. In other words, it appeared to him to have been an "fort to accommodate, without risking serious danger, the actions of the 2Yste III to the beliefs of those who felt that operations in all maturities 140113.6. be desirable. From his own point of view, he did not think this was Et go °Id thing. In effect, the Federal Reserve was pegging the market, and this 1.7 es basically wrong no matter how small the transaction figures 4light bC. Thus far, as he saw it, the System operations had not been of Qorise luence in accomplishing the objective that apparently had been sought. Mr. Murphy commented that it was rather difficult to know what the -°n would have been like if the System operations had not occurred. ah °rt-term market had been quite satisfactory, and the movement was 9/19/61 -17- " r orderly froru a cyclical standpoint than in 1958 as far as interest l'Itss were concerned. 84t4sfactorY. Thus, the effects that had been seen had been While not too much had happened in the long-term area, there 16/4 some concern about the character of the long-term Government bond rnarket. If a holder of long-term securities tried to sell today, it was °Ilfricult) without the Federal Reserve support in the background, to find a 1311Yer. It was almost impossible to know today what the market for longteT.,„ " - Governments was, and most market participants would be happier if the of supply and demand was at work. Nevertheless, he considered the SYstem - operations a worthwhile experiment. To have denied the advocates —ch operations a fair trial would not have been right. It would take lore tq„, " - Ile to determine the full effect of the experiment with certainty. Governor King referred to the two parts of the second sentence of the a °U4ci1'5 statement and inquired whether the Council regarded the lritr (3dUction of some uncertainty into the long-term Government bond market a more important development than the fact that the short-term market tended to be relatively stable. P resident Livingston replied that it was difficult to analyze just 1411E haa happened, and what would have happened if the change in System NQedure had not occurred. He did not hold the view that the Council's 1:atsmetit might seem to imply that the relative stability in the shorttell:4 Market was attributable to the change in Federal Reserve practice. tage(1 on the experience of his own bank, and of other large city banks, it Qokkla be said that a rather peculiar thing had occurred. The banks 9/19/61 -18- anticipated a seasonal increase in loans in the latter part of this year, Which was a normal expectation. They also realized that a substantial per- centage of their deposits was already invested in loans, and therefore they were concerned about the impact on their reserve positions and on their liquidity of the superimposition of the anticipated increase in loan volume. Accordingly, they traded in Federal funds rather than acquiring bills, hoping thereby to be ready immediately to take care of additional borrowing requirements. This circumstance, in his opinion, was more responsible for the maintenance of the bill rate than anything the Federal Open Market Ccrnmittee had done policywise. In retrospect, it would have been wiser fcr the large banks to go into bills, and that would have had quite an effect on the yield. Turning to the second part of Governor King's question, relating t° the long-term area of the market, President Livingston said he had some difficulty in analyzing the matter. According to his understanding of the background of the operations in longer-term securities, the Administration was concerned about the fact that interest rates on money borrowed for a lorlg term of years were relatively high. The theory was that if the rate Were lower, people could borrow more freely to buy homes and for similar PlarPoses, and this would be helpful to the economy. fore, The objective, there.. was to bring down long-term interest rates, and a policy was devised tc)ward that end. During the period of the operations in longer-term 8ecunties, numerous factors had exerted a bearing on the rate structure. 411-thmetically speaking, however, the effort had failed because long-term 32/1) 9/19/61 49 rates, rather than going down, had gone up beyond the levels prevailing in February., Governor King inquired whether, going back several months, the banking behavior that President Livingston had outlined could have been forecast, and the latter replied that he did not think so. In the light of developments, the banks had been wrong in not acquiring more bills be- cause they could have had better earnings. Whether Governor King then inquired it would be fair to say that the behavior of the banks and the Federal Reserve operations both were factors contributing to the relative stability of short-term rates, and President Livingston replied that Probably this could be said. Governor Robertson inquired whether, assuming that the Federal Reserve operations were an experiment designed to push down long-term rates, it was felt that the amount of Federal Reserve buying was sufficient to test whether the experiment could or could not succeed, and President IiIringston replied that he thought the answer would be in the negative. Governor Robertson then presented the question whether any critically adverse factors involved in the experiment could be determined until the ttme arrived when the Treasury wanted to extend the maturity of the public debt Portfolio, His opinion was that the test would come at that time. President Livingston replied that he thought this was true. Even Prior thin , to the System operations, he noted, the long-term market was extremely and System operations had added another element to the picture. He not think anyone could tell What rate of interest a 30-year bond should 9/19/61 -20- hear as long as this element was a part of the market picture. It was not Possible to make an objective determination. Governor Mitchell said he did not think it was fair to say that the P°11o3r had failed simply because long-term rates were higher at present than FebrUarY. Rather, one must consider what they might have been. In view of interim developments, including the large volume of State and corporate fills/icing s, there was no question in his mind but that the rate pattern would have been quite different without the participation of the Federal Reserve in the longer-term market. Governor Mitchell went on to say that he was not quite sure what the C°1111011 thought about the long-term market. The Council's statement indicated that the change in System operations might have introduced some uncertainty illto the long-term Government bond market, and he gathered that perhaps the C°Inleil was not prepared to go beyond that point at this time. He would like to ie., 't°w,s, however, whether the Council felt that the consequences of these Srsterti operations would, over the long range, be regarded as uncertain, or vihether they were regarded as certain to be bad. President Livingston replied that he would like to say the former, bilt he believed the latter. Governor Balderston said he 1th WAS one who believed that transactions e short-term area were the most convenient and practical method of c°1114oting System open market operations. Nevertheless, he had come to feel t he fall of 1960 that in view of the international situation, and particui any the gold outflow, the System must protect the bill rate against 9/19/61 -21 a decline such as occurred in the spring of 1958. Also, he realized that the academic fraternity, perhaps through the failure of the System to each and convert, was almost unanimously against the bills preferably Policy. While arguments existed that were plausible to the Federal Reserve staff, the System had not experimented in order to develop the facts. In the latter half of 1960, the System became confronted with a situation that had to be met, and it tried to keep the bill rate from declining severely by using other instruments of policy such as reserve requirements0 Loop- back on the period of System operations in longer-term securities, he found himself unable to make the point convincingly that monetary policy was too much different no matter whether System operations were confined to the short-term area or whether they were conducted across the whole spectrum of the market. By this, he referred to the effect of putting in reserves at °Ile Point or the other. However, when the argument turned to the °Psl'ation of the market, he had more concern. To him, Governor Balderston said, the critical point was whether the game was worth the candle. The question, in other words, was whether, e°11sidering the inconvenience and the possible damage to the breadth, depthi and resiliency of the market, the risk was worth taking. Looking at the results thus far, he could not see that effects were as yet visible that Would demonstrate the incorrectness of operating in longer-term 8ell ' ities as well as short-term. He had been waiting to see the evil erre e's of such operations in terms of the intermediate and long-term areas c't t he Market, but the evidence did not convince him that the case had yet 1)eeh - Proved. k)4eJLo;' 9A9/611 -22Following a reference to the apparent success of the Treasury's ellrrent advance refunding offer, Governor Robertson said that he did not e°11sider the advance refunding a real test. As he had said previously, the test would come when the Treasury wanted to extend the maturity of its 1301'1410110 by offering long-term bonds. Without question, the long-term inarket was extremely thin today, and the volume of transactions was Governor Balderston commented that this again raised the question as the what the long-term market would have been like anyway. He noted that Federal Reserve operations had not been large, and President Livingston Illquired whether it could not be said that a miniature pegging operation Was involved. Governor King expressed doubt that it was fair to say that a pegging °Peration was involved. If it were, he suggested, the changes in rates that halltkan place would not have occurred. In a further comment on rate (levelcPments, he called attention to the changes in bill rates during the 1958 n 4 -er-Lcd and referred to them as a manifestation of uncertainty that had riot Occurred in recent months. Therefore, when mention was made of Iln%tainty in the long-term market, he thought it was well also to keep in IlLtrld the relative stability of the short-term sector. Relating this stability to the outflow of gold and short-term capital, he added that the Federal Reserve probably could not by itself stop such an outflow. Row.ev_ 2 it seemed desirable to avoid the charge of aggravating the outflow Of having done nothing, although actually other factors had brought the °Iltri°1^T into being. ' 9/19/61 -23Governor Shepardson referred to the earlier observation about the criticism of the bills preferably policy on the part of academicians and Pers0115 in Governmental circles. With this in mind, he inquired how the Federal Reserve System and the banking system could have been more effective in stating the rationale of the former policy. President Livingston replied that he did not know how the argument inight have been presented more effectively. As for himself, he held to the IlieW that a free market should set the price of securities, as well as ther Prices, and on this theory the entry of the Federal Reserve into the 1°11ger-terra Government securities market was basically undesirable. However, he felt that it was hard to present the argument effectively to he Public. As to what had happened thus far as the result of System irltervention in the longer-term area, he did not think that anything ecrleequential had occurred except in terms of the uncertainty that had elltered into the expectations of those trading and investing in Government "ellrities. The amount purchased by the System in the long-term area had been minimall and he saw nothing irreparable or too serious from that etanApoint. The question of expectations, however, was more serious. Governor King said that in his own mind--and he believed the "4-ng of others also--a pegging of rates was not the intent of the Fed- Reserve operations. Instead, the operations had been undertaken '''Y in an attempt to avoid aggravating the outflow of gold and shorttetra flinds. The apparent alternative was to see the bill rate drop c°"iderably, and this was something that he had not wanted to see happen. r4s# -,11-• 9/19/61 lie had been willing to try some other approach rather than to risk that development* 10. What are the views of the Council regarding current monetary and credit policy? Current monetary and credit policy has effectively contributed to the recovery of the economy. The Council believes the continuation of current monetary and credit policy would seem desirable until considerably stronger credit demands appear, President IivLngston said that while the Council was pleased with the degree of recovery of the economy, it would like to see more concrete evidence of the durability of the recovery than it saw at the moment. Therefore, the Council would recommend no change in the present degree of ease until various factors that were not now discernible became discernible. Governor Balderston commented on the degree of liquidity in the ee°n°mY. The banks had more short-term securities in their portfolios than in 1958 and corporations were more liquid. If and when the Federal Reserve had to return to a policy of restraint, it would find water in the brakes. Governor Shepardson noted the concern expressed in some places from tike to time about the lack of growth of the money supply, narrowly defined to 4 4-4clude demand deposits adjusted and currency. On the other hand, he P°111ted out, there had been a significant growth in so-called near money bstitutes. He inquired whether there was any feeling of concern on the of the Council about the lack of growth in the money supply, narrowly President Livingston replied that he had no feeling of concern, and that he saw no problem at the present time. bY oth -er members of the Council. No different view was expressed $ 4• 9/19/61 This concluded the discussion of the subjects that had been included on the agenda for this meeting. President Livingston inquired whether the Board had any developments to report with respect to the maximum rates of interest permitted to be paid cln tune and savings deposits under Regulation Q, Payment of Interest on DePosits, and Governor Balderston replied that the Board continued to cil uss the subject frequently. He asked whether the Council had any advice, "president Livingston replied in the negative. He added, however, that, without suggesting what should be done on the matter, this was a subject that Perhaps should be included on the agenda for the next meeting of the 8°arcl and the Council, particularly since many views were being expressed. Mr. Murphy noted that there was considerable concern on the part of llelf York City banks with respect to the negotiable time certificates of deP"it• In the opinion of the banks, these had served a real purpose, but the banks did not know how long the funds would remain with them. At Present, something over $1 billion had been written by the New York City banks, and perhaps $2 billion altogether. Therefore, when the problem of the certificates was added to the problem of foreign time deposits and was tied t a 3 per cent interest rate ceiling, it was one to which real attent4 n -tomust be given. If short-term rates should rise above the 3 per erlt ceiling, the time certificates and the foreign time deposits could leave the banks quickly to seek other avenues of investment. In further comments, Mr. Murphy said there were still some corporate trea surers who favored the use of bills, but he thought that feeling would be down. As to the attitude of the banking fraternity toward the eeiling 9/19/61 interest rates he noted that in any group of bankers there were bound to be conflicting opinions. However, it would be unfortunate in his opinion if some solution could not be devised that would meet with the approval of the various segments of the banking community. As he saw it, the beg0 tiable time certificates were a helpful development from the standpoint of the banking community. Funds that had gone elsewhere were now back in the banking stream. Nevertheless, as he had said, these certificates and a larae 5 Part of the foreign time deposits could be pulled out again within a Period of months. If that should happen, it would reflect a situation in loan demand was heavy, and that was the point of concern to the banks. In reply to a question, Mr. Murphy indicated that the problem to, -Ileed on the 3 per cent interest ceiling for time deposits with a maturity cf 3. lX months or more, rather than on the maximum rates on shorter aturities. It was agreed that the next meeting of the Federal Advisory Council 11431114 be held on Monday, November 20, 1961, with a joint meeting of the toz -rd and the Council the following day. The meeting then adjourned. CA. Secretary
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