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MINUTES OF MEETINGS of the FEDERAL ADVISORY COUNCIL 1966 February 14-15, 1966 June 20-21, 1966 September 19-20, 1966 November 14-15, 1966 BY-LAWS OF THE FED ERA L ADVISORY COUNCIL ARTICLE I. OFFICERS The Officers of this Council shall be a President, Vice President, three Directors, and a Secretary, all of whom, except the Secretary, shall also serve as the Executive Committee. ARTICLE II. PRESIDENT AND VICE PRESIDENT The duties of the President shall be such as usually pertain to the office; in his absence the Vice President shall serve. ARTICLE III. SECRETARY The Secretary shall be a salaried officer of the Council and his duties and compensation shall be fixed by the Executive Committee. ARTICLE IV. EXECUTIVE COMMITTEE The Executive Committee, as indicated in Article I of the by-laws, shall consist of the President, Vice President, and the three Directors. ARTICLE V. DUTIES OF THE EXECUTIVE COMMITTEE It shall be the duty of the Executive Committee to keep in close touch with the Board of Governors of the Federal Reserve System and with its regulations and promulgations, and to communicate the same to the members of the Council, and to suggest to the Council, from time to time, special matters for consideration. The Executive Committee shall have the power to fix the time and place of holding its regular and special meetings and methods of giving notice thereof. The Executive Committee shall have full power, as officers of the Council, to act for the Council between meetings of the Council. Minutes of all meetings of the Executive Committee shall be kept and such minutes or digest thereof shall be immediately forwarded to each member of the Council. A majority of the Executive Committee shall constitute a quorum, and action of the Committee shall be by majority of those present at any meeting. ARTICLE VI. MEETINGS Regular meetings of the Federal Advisory Council shall be held in the City of Washington on the third Tuesday of the months of February, May, September, and November of each year, unless otherwise directed by the Executive Committee. A preliminary meeting of the Federal Advisory Council shall be called by the Secretary in accordance with instructions to be given by the President of the Council. Special meetings may be called at any time and place by the President or the Executive Committee, and shall be called by the President upon written request of any three members of the Council. ARTICLE VII. ALTERNATES In the absence of the regular representative of any Federal Reserve District, the Board of Directors of the Federal Reserve Bank of that District may appoint an alternate. The alternate so appointed shall have the right to be present at all the meetings of the Council for which he has been appointed. He shall have the right to take part in all discussions of the Council but shall not be entitled to vote. ARTICLE VIII. AMENDMENTS These by-laws may be changed or amended at any regular or special meeting by a vote of a majority of the members of the Federal Advisory Council. February 14, 1966 1. OFFICERS AND MEMBERS OF THE FEDERAL ADVISORY COUNCIL For the Year 1966 OFFICERS: EXECUTIVE COMMITTEE: President, John A. Moorhead Vice President, Ransom M. Cook Director, William L. Day Director, John F. Watlington, Jr. Director, Sam M. Fleming Secretary, Herbert V. Prochnow Assistant Secretary, William J. Korsvik John A. Ransom William John F. Moorhead M. Cook L. Day Watlington, Jr. Sam M. Fleming MEMBERS: John Simmen District No. District No. William H. Moore William L. Day L. A. Stoner John F. Watlington, Jr. Sam M. Fleming Henry T. Bodman District No. 2 3 District No. 4 District No. 5 6 7 District No. District District District District No. No. 8 No. 9 No. 10 District No. 11 District No. 12 A. M. Brinkley, Jr. John A. Moorhead Roger D. Knight, Jr. Robert H. Stewart, III Ransom M. Cook 1 2. REPORT OF THE SECRETARY OF THE FE D ER A L ADVISORY COUNCIL FOR THE YEAR ENDED DECEMBER 31, 1965 S a la rie s ................................... $ 5,000.00 Balance on hand — December 31, 1964........... $ 8,028.51 Printing & Stationery.............. Assessments — 12 Federal Reserve Banks............................... Balance on hand — December 31, 1965 ........... 5,400.00 $13,428.51 418.57 8,009.94 $13,428.51 Chicago, Illinois February 1, 1966 To the Federal Advisory Council: I have audited the books, vouchers, and accounts of the Secretary o f the Federal Advisory Council for the year ended December 31, 1965, and certify that the above state ment agrees therewith. Respectfully, Donald O. Noren, Assistant Auditor The First National Bank of Chicago 3. MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL February 14, 1%6 The first and organizational meeting of the Federal Advisory Council for the year 1966 was convened in the Board Room of The Madison, Washington, D.C., on February 14, 1966, at 9:30 A.M. Present: John Simmen William H. Moore Howard C. Petersen, Alternate L. A. Stoner John F. Watlington, Jr. Sam M. Fleming Henry T. Bodman A. M. Brinkley, Jr. John A. Moorhead Roger D. Knight, Jr. Robert H. Stewart, III Ransom M. Cook Herbert V. Prochnow William J. Korsvik District No. 1 District No. 2 District No. 3 District No. 4 District No. 5 District No. 6 District No. 7 District No. 8 District No. 9 District No. 10 District No. 11 District No. 12 Secretary Assistant Secretary Absent: William L. Day District No. 3 Mr. John A. Moorhead was elected Chairman p r o t e m and Mr. Herbert V. Prochnow was elected Secretary pro t e m . The Secretary pro tem stated that communications had been received from the twelve Federal Reserve banks, certifying to the election of their respective representatives on the Council for the year 1966. The following officers were nominated and unanimously elected: John A. Moorhead, President Ransom M. Cook, Vice President William L. Day, Director John F. Watlington, Jr., Director Sam M. Fleming, Director Herbert V. Prochnow, Secretary William J. Korsvik, Assistant Secretary On motion, duly made and seconded, the Council approved the by-laws, copies of which are a part of these minuts. 4. The Secretary presented his financial report for the year 1965, which has been audited by Mr. Donald 0. Noren, Assistant Auditor of The First National Bank of Chicago. The report was approved and ordered placed on file. A copy of the report is attached and made a part of these minutes. On motion, duly made and seconded, the printed minutes for the meetings of the Council held on February 15-16, 1965, May 17-18, 1965, September 20-21, 1965, October 4, 1965, November 15-16, 1965, and the mimeographed notes of the meeting held November 15-16, 1965, copies of which had been sent previously to the members of the Council, were approved. On motion, duly made and seconded, a resolution was adopted authorizing the Secre tary to ask each Federal Reserve bank to contribute $450.00 toward the secretarial and incidental expenses of the Federal Advisory Council for the year 1966 and to draw upon them for that purpose. A complete lis t of the items on the Agenda for the meeting and the conclusions of the Council are to be found in the C o n f i d e n t i a l M e m o r a n d u m t o t h e B o a r d o f G o v e r n o r s f r o m t h e F e d e r a l A d v i s o r y C o u n c i l , which follows on pages 7, 8, and 9. The meeting adjourned at 12:50 P.M. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 5. MINUTES OF THE MEETING OF THE FED ERA L ADVISORY COUNCIL February 14, 1966 At 2:30 P.M., the Federal Advisory Council convened in the Board Room of the Federal Reserve Building, Washington, D.C. Present: Mr. John A. Moorhead, President; Messrs. John Simmen, William H. Moore, Howard C. Petersen, Alternate for Mr. William L. Day; Messrs. L. A. Stoner, John F. Wat lington, Jr., Sam M. Fleming, Henry T. Bodman, A. M. Brinkley, Jr., Roger D. Knight, Jr., Robert H. Stewart, III, and Ransom M. Cook. Absent: Mr. William L. Day. Members of the Board’s staff, including Albert R. Koch, Deputy Director, Division of Research and Statistics, and A. B. Hersey, Advisor, Division of International Finance, gave an audio-visual presentation on domestic and international economic developments. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary February 14, 1966 At 5:30 p.m., the Federal Advisory Council reconvened in the Board Room of The Madison, Washington, D. C. Present: Mr. John A. Moorhead, President; Messrs. John Simmen, William H. Moore, Howard C. Petersen, Alternate for Mr. William L. Day; Messrs. L. A. Stoner, John F. Wat lington, Jr., Sam M. Fleming, Henry T. Bodman, A. M. Brinkley, Jr., Roger D. Knight, Jr., Robert H. Stewart, III, Ransom M. Cook, Herbert V. Prochnow, Secretary, and William J. Korsvik, Assistant Secretary. Absent: Mr. William L. Day. The Council reviewed its conclusions regarding the items on the Agenda and sent to the office of the Secretary of the Board of Governors the C o n f i d e n t i a l M e m o r a n d u m which follows on pages 7, 8, and 9 listin g the Agenda items and the conclusions reached by the Council. The M e m o r a n d u m was delivered to the Federal Reserve Building at 10:25 P. M. on February 14, 1966. The meeting adjourned at 6:50 P. M. H ERBERT V. PROCHNOW Secretary WILLIAM J . KORSVIK Assistant Secretary 6. CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON FEBRUARY 15, 1966 1. Economic conditions and prospects. A. How does the Council appraise prospects for ec onomic activity and for industrial prices during the first half of 1966? The Council anticipates a further rise in the level of economic activity during the first half of 1966. This w ill reflect 1) a larger volume of consumer spending as incomes continue upward; 2) an expansion in capital investment as businessmen strive to accommodate growing demands; 3) an increase in outlays by State and local governments; and 4) a growth in expenditures by the Federal Government for domestic programs and for military needs in Southeast Asia. As these aggregate demands are likely to tax the pro ductive resources of the U.S. economy, upward pressures on industrial prices seem certain to intensify. B. Have Council members observed any significant changes in business plans for additions to cap acity or to inventories in response to the gener ally more buoyant expectations now prevalent? Though it is difficult accurately to appraise and quantify the change in bus iness plans, the members of the Council believe that businessmen generally are attempt ing to enlarge and modernize capacity as rapidly as possible. In general, inventories appear to be reasonably well balanced. However, because of rising order backlogs and lengthening delivery schedules, businessmen may seek to build inventories more aggres sively. 2. Banking developments. A. What does the Council anticipate as to near-term business demands for bank credit in relation to usual seasonal needs? Is it anticipated that an unusually large proportion of these demands will be in the form of term loans? The Council anticipates strong near-term business demands for bank credit in excess of the usual seasonal needs. These demands are expected to cover all types of business borrowings including term loans. There is some evidence that the tightness of credit in the major money centers is tending to shift loans to banks in other areas. 7. B. How much tightening of bank lending policies has taken place since last fall? To what extent has such tightening extended to reductions in amounts of loans granted or to actual turndowns or deferrals of loan applications? Most members of the Council report a moderate tightening of bank lending pol icies since last fall. The continued growth of bank reserves tended to lessen the pres sure to restrain bank credit expansion. By and large, the tightening of credit is occurring on a selective basis and some loans are being turned down. C. How have recent developments affected the a b il ity and willingness of banks to attract funds in the CD market? Recent developments have caused banks in the major money centers to be even more aggressive in seeking funds in the CD market. This competition for funds has forced rates higher in the last sixty days. Despite the level of rates, the total outstanding has grown only moderately. Moreover, as many suppliers of these funds anticipate a further rise in interest rates, they presently are reluctant to place them in CDs with long maturi ties. D. Do members of the Council have any comments regarding the proposed amendments to Regula tions D and Q announced by the Board on Jan uary 20, 1966, that would in effect define “ de posits” for the purpose of those regulations as including promissory notes and certain other forms of indebtedness of member banks? The Council appreciates the problems which are involved in the issuance of promissory notes especially of very short maturity. The many aspects of this matter pre clude adequate discussion within the limitations of this memorandum. Members of the Council may express their views orally or communicate in writing with the Board. 3. Balance of payments. A. How does the Council appraise the strength of foreign demand for U. S. bank funds? The Council believes there is evidence of increasing strength of foreign de mand for U. S. bank funds. This demand is likely to grow stronger the longer the volun tary foreign credit restraint program continues in force. B. Have the C ouncil’ s views on the effectiveness of the voluntary foreign credit restraint program changed materially since the Council met with the Board in November? In the C ouncil’ s judgment, the effectiveness of the voluntary foreign credit restraint program has not changed materially since the Council met with the Board in Nov ember. However, the program is effective only as a temporary measure and not a solu tion to the basic problem. 4. What are the C ouncil’ s views on monetary and credit policy under current circumstances? In the las t ninety days, the resources of the nation have neared maximum utilization. Despite continuing additions to plant capacity, output is pressing on capacity in many important industries, and there are increasing reports of tight labor situations, particularly of skilled workers. These developments reflect also the nation’s growing involvement in Southeast Asia. As a consequence, aggregate demands are taxing the nation’s productive capabilities with accelarating inflationary pressures. Unless there is a w illingness to risk a serious inflation, or the imposition of controls, aggregate demands must be moderated. To accomplish this objective and thus lessen the threat to price sta bility, the Council believes that monetary policy must be employed. To be specific, the availability of reserves should be gradually reduced to more modest proportions through open market operations. In all likelihood it may also be necessary to increase the dis count rate again. The Council recognizes that monetary policy alone may not be adequate to meet present economic pressures. F is c a l policy involving a reduction in governmental expenditures is required, and an eventual increase in tax rates may also be necessary. 9. MINUTES OF JOINT CONFERENCE OF THE FEDERAL ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM February 15, 1966 At 10:30 A.M., a joint conference of the Federal Advisory Council and the Board of Governors of the Federal Reserve System was held in the Board Room of the Federal Reserve Building, Washington, D.C. Present: Members of the Board of Governors of the Federal Reserve System: Chairman Wm. McC Martin, Jr.; Vice Chairman C. Canby Balderston; Governors J. L. Robertson, Chas. N. Shepardson, George W. Mitchell, J. Dewey Daane and Sherman J. Maisel; also Mr. Merritt Sherman, Secretary, and Mr. Kenneth A. Kenyon, Assistant Secre tary, of the Board of Governors. Present: Members of the Federal Advisory Council: Mr. John A. Moorhead, President; Messrs. John Simmen, William H. Moore, Howard C. Petersen, Alternate for Mr. William L. Day; Messrs. L. A. Stoner, John F. Watlington, Jr., Sam M. Fleming, Henry T. Bodman, A. M. Brinkley, Jr., Roger D. Knight, Jr., Robert H. Stewart, III, Ransom M. Cook, Herbert V. Prochnow, Secretary, and William J. Korsvik, Assistant Secretary. Absent: Mr. William L. Day. President Moorhead read the first item on the Agenda and the conclusions of the Council as expressed in the C o n f i d e n t i a l M e m o r a n d u m t o t h e B o a r d o f G o v e r n o r s f r o m t h e F e d e r a l A d v i s o r y C o u n c i l , as printed on pages 7, 8, and 9 of these minutes. In the brief discussion which followed, several members of the Council emphasized the possibility of further price rises during the year and that this could generate pressure for the accumulation of larger inventories. The President then read the second item and the conclusions of the Council. An extended discussion followed in which the members of the Council described developments in their particular districts. Chairman Martin said he understood that some corporate borrowers were seeking term money from commercial banks rather than entering the capital market. Several members of the Council said they thought there was some term borrowing as a hedge against the pos sibility of higher interest rates and a rationing of credit. Chairman Martin reported that some observers have suggested that it would be wise for the banking agencies to issue a statement in an effort to slow the rapid expansion of bank loans. He added that it had always been the Board’s position that bank supervision should not be used as a substitute for monetary policy. He added, however, that the question had arisen whether there might not be some purpose in a general statement calling for prudence and selectivity in making loans. 10. President Moorhead read the third item and the conclusions of the Council. In the brief discussion which followed, hope was expressed that the increasing restrictiveness of monetary policy to deal with the domestic situation could have some considerable effect on the balance of payments by inducing a substantial influx of foreign capital. The President then read the fourth item on the Agenda and the Council’s conclusions. A long discussion followed which included comment on the possible use of guidelines in an effort to curb loan expansion. Governor Maisel observed that various types of loans, ordinarily considered useful, such as those to build inventories, were ‘not necessarily useful at the moment. During the discussion mention was made of the possible use of the selective control of consumer credit. The members of the Council indicated they would not favor such action at this time. At the conclusion of the discussion of the fourth item on the Agenda, Governor Robertson inquired about the absorption of exchange charges and asked for the Council’s reaction to the possibility of altering the Board’s position so that the absorption of ex change charges would no longer be regarded as a payment of interest on demand deposits. Several members of the Council strongly stated that they were unalterably opposed to such a change. The meeting adjourned at 12:15 P.M. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 11. NOTE: T h i s t r a n s c r i p t of t h e S e c r e t a r y Ts n o t e s is n o t to b e r e g a r d e d as c o m p l e t e or n e c e s s a r i l y e n t i r e l y a c c u r a t e . T h e t r a n s c r i p t is f o r the s o l e u s e of t h e m e m b e r s of the Federal Advisory Council. The concise o f f i c i a l m i nutes for the e n t i r e y e a r are p r i n t e d a n d d i s t r i b u t e d later. H.V.P. W.J.K. The S e c r e t a r y ’ s n o t e s of t h e m e e t i n g of the F e d e r a l A d v i s o r y C o u n c i l on F e b r u a r y ll;, 1 9 6 6 , at 9 : 3 0 A . M . in the B o a r d R o o m of T h e M a d i s o n , W a s h i n g t o n , D.C, A l l m e m b e r s of t h e F e d e r a l A d v i s o r y C o u n c i l w e r e p r e s e n t e x c e p t Mr. W i l l i a m L. Day. Mr. H o w a r d C. P e t e r s e n , P r e s i d e n t , F i d e l i t y - P h i l a d e l p h i a T r u s t C o m p a n y , P h i l a d e l p h i a , P e n n s y l v a n i a , a t t e n d e d as an A l t e r n a t e f o r M r . Day . T h e S e c r e t a r y p r o v i d e d e a c h m e m b e r w i t h a l i s t of a l l t h e m e m b e r s of the C o u n c i l f o r t h e y e a r 1 9 6 6 , o f f i c i a l l y e l e c t e d in a c c o r d a n c e w i t h communications r e c e i v e d f r o m the F e d e r a l R e s e r v e banks. M r . J o h n A.. M o o r h e a d w a s e l e c t e d C h a i r m a n p r o t e m a n d Mr. H e r b e r t V. Prochnow was e l e c t e d S e c r e t a r y pro t e m . T he f o l l o w i n g o f f i c e r s w e r e n o m i n a t e d a n d u n a n i m o u s l y e l e c t e d : J o h n A. M o o r h e a d , P r e s i d e n t R a n s o m M. C o o k , V i c e P r e s i d e n t W i l l i a m L. D a y , D i r e c t o r J o h n F. W a t l i n g t o n , Jr., D i r e c t o r S.am M. F l e m i n g , D i r e c t o r H e r b e r t V. P r o c h n o w , S e c r e t a r y W i l l i a m J. K o r s v i k , A s s i s t a n t S e c r e t a r y On m o t i o n d u l y m a d e a n d s e c o n d e d , the s a l a r y of the S e c r e t a r y w a s fixed at $ 5 > 0 0 0 a n n u a l l y , a n d t h a t of t h e A s s i s t a n t S e c r e t a r y at $ 3 * 0 0 0 annually. The S e c r e t a r y p r e s e n t e d t h e f i n a n c i a l r e p o r t f o r the y e a r 1965? which h a d b e e n a u d i t e d b y Mr. D o n 0. N o r e n , A s s i s t a n t A u d i t o r of The 7irst N a t i o n a l B a n k o f C h i c a g o . The r e p o r t w a s a p p r o v e d and p l a c e d on file. It w i l l b e i n c l u d e d i n t h e f o r m a l p r i n t e d m i n u t e s . A m o t i o n w a s a d o p t e d a u t h o r i z i n g the S e c r e t a r y to d r a w d r a f t s for $1 >000 u p o n e a c h F e d e r a l R e s e r v e b a n k f o r t h e s e c r e t a r i a l a n d i n c i d e n t a l expenses of t h e F e d e r a l A d v i s o r y C o u n c i l f o r the y e a r 1 966. The b y - l a w s w e r e a p p r o v e d . The C o u n c i l a p p r o v e d the S e c r e tary's notes f or t h e m e e t i n g of N o v e m b e r 15>-l6, 1 9 6 5 . The p r i n t e d m i n u t e s f o r all of the 1 9 6 5 m e e t i n g s of the C o u n c i l , c o p i e s of w h i c h h a d b e e n s e n t Previously to t h e m e m b e r s , a l s o w e r e a p p r o v e d . ITEM I ECONOMIC CONDITIONS AND PROSPECTS. A. H O W D O E S THE. C O U N C I L A P P R A I S E P R O S P E C T S F O R E C O N O M I C A C T I V I T Y A N D F O R INDUSTRIAL.. P R I C E S D U R I N G T H E F I R S T H A L F OF 1 9 6 6 ? B. H A V E C O U N C I L M E M B E R S O B S E R V E D A N Y S I G N I F I C A N T C H A N G E S IN B U S I N E S S P L A N S F O R A D D I T I O N S T O C A P A C I T Y OR TO I N V E N T O R I E S IN R E S P O N S E T.O T H E .G E N E R A L L Y M O R E B U O Y A N T E X P E C T A T I O N S N O W PREVALENT? P r e s i d e n t M o o r h e a d r e a d I t e m I A a n d B a n d i n v i t e d the m e m b e r s of the C o u n c i l to r e p o r t o n e c o n o m i c c o n d i t i o n s a n d p r o s p e c t s in t h e i r districts. An e x t e n d e d d i s c u s s i o n f o l l o w e d w h i c h d i s c l o s e d wide agreement that the l e v e l of e c o n o m i c a c t i v i t y w o u l d r i s e f u r t h e r d u r i n g the f i r s t half of 1 9 6 6 , This w i l l reflect 1) a l a r g e r v o l u m e of c o n s u m e r s p e n d ing as i n c o m e s c o n t i n u e u p w a r d ; 2) a n e x p a n s i o n i n c a p i t a l i n v e s t m e n t as b u s i n e s s m e n s t r i v e to a c c o m m o d a t e g r o w i n g d e m a n d s ; 3) an i n c r e a s e in outlays b y s t a t e a n d l o c a l g o v e r n m e n t s ; a n d 1|_) a g r o w t h In e x p e n d i t u r e s by the f e d e r a l g o v e r n m e n t f o r d o m e s t i c p r o g r a m s a n d f o r m i l i t a r y n e e d s in S o u t h e a s t A s i a . As a r e s u l t of t h e s e d e v e l o p m e n t s , the m e m b e r s of the C o u n c i l a n t i c i p a t e t h a t a g g r e g a t e d e m a n d s w i l l t a x the p r o d u c t i v e resources of t h e e c o n o m y a n d t h a t u p w a r d p r e s s u r e s on i n d u s t r i a l p r i c e s will i n t e n s i f y . A l t h o u g h t h e m e m b e r s of t h e C o u n c i l h a d l i t t l e s p e c i f i c d o c u m e n t a tion of c h a n g e s i n b u s i n e s s p l a n s , t h e y a r e u n d e r t h e i m p r e s s i o n that b u s i n e s s m e n a r e a t t e m p t i n g to e n l a r g e and m o d e r n i z e c a p a c i t y as r a p i d l y as p o s s i b l e * M o r e o v e r , It is b e l i e v e d t h a t i n v e n t o r i e s are r e a s o n a b l y well b a l a n c e d . H o w e v e r , b e c a u s e of r i s i n g o r d e r b a c k l o g s a n d l e n g t h e n ing d e l i v e r y s c h e d u l e s , b u s i n e s s m e n m a y s e e k to b u i l d i n v e n t o r i e s m o r e aggressively. I T E M II A BANKING D E V E L O P M E N T S . A. W H A T D O E S T H E C O U N C I L A N T I C I P A T E AS DEMANDS FOR B A N K CREDIT IN RELATION IS IT A N T I C I P A T E D T H A T A N U N U S U A L L Y D E M A N D S W I L L B E I N T H E F O R M OF T E R M TO N E A R - T E R M BU SIN ESS T0_ U S U A L S E A S O N A L N E E D S ? L A R G E P R O P O R T I O N OF T H E S E LOANS? P r e s i d e n t M o o r h e a d t h e n r e a d I t e m II A. The d i s c u s s i o n w h i c h f o l l o w e d i n d i c a t e d t h a t t h e m e m b e r s a n t i c i pate s t r o n g n e a r - t e r m b u s i n e s s d e m a n d s f o r b a n k c r e d i t w h i c h w i l l exthe u s u a l s e a s o n a l n e e d s . T h e s e d e m a n d s are e x p e c t e d to c o v e r all of b u s i n e s s b o r r o w i n g s i n c l u d i n g t e r m l o a n s . The d i s c u s s i o n also ;^sclosed t h a t t h e t i g h t n e s s of c r e d i t in the m a j o r m o n e y centers is te n d lri? to s h i f t l o a n d e m a n d t o b a n k s i n o t h e r a r e a s . 3. I T E M II B B. H O W M U C H T I G H T E N I N G OP B A N K L E N D I N G P O L I C I E S H A S T A K E N P L A C E SINCE LAST PALL? TO W H A T EXTENT HAS SUCH TIGHTENING EXTENDED T O R E D U C T I O N S I N A M O U N T S OP L O A N S GRANTED. OR T O A C T U A L TURN____ D O W N S O R D E F E R R ALS. OF L O A N A P P L I C A T I O N S ?__ ________________________ P r e s i d e n t M o o r h e a d t h e n r e a d I t e m II B a n d i n v i t e d c o m m e n t f r o m the m e m b e r s . An e x t e n d e d d i s c u s s i o n followed. Som e m e m b e r s i n d i c a t e d that there h a d b e e n a m o d e r a t e t i g h t e n i n g of l e n d i n g p o l i c i e s s i n c e l a s t fall t h o u g h t h e p r e s s u r e t o r e s t r a i n b a n k c r e d i t e x p a n s i o n w a s l e s s e n e d bec a u s e of t h e c o n t i n u e d g r o w t h of b a n k r e s e r v e s . O n e or t w o m e m b e r s expressed dou b t s that l e n d i n g p o l i c i e s have t ightened appreciably. Others s t r o n g l y c o n t e n d e d , h o w e v e r , t h a t l o a n a p p l i c a t i o n s w h i c h p r e v i o u s l y w o u l d h a v e r e c e i v e d f a v o r a b l e c o n s i d e r a t i o n are n o w b e i n g r e iected. I T E M II C C. HO W H A V E RECENT DEVELOPMENTS AFFECTED THE ABILITY AND WILLINGN E S S O F B A N K S T.0 A T T R A C T F U N D S I N T H E C / D M A R K E T ?______________ The P r e s i d e n t o f t h e C o u n c i l r e a d I t e m II C. The d i s c u s s i o n d i s c l o s e d t h a t b a n k s in the m a j o r m o n e y c e n t e r s are b i d d i n g a g g r e s s i v e l y f o r f u n d s in t h e C / D m a r k e t . The total, h o w ever, h a d g r o w n l i t t l e . T h e r e is s o m e e v i d e n c e t h a t m a n y b a n k e r s are re luctant to rrc h a s e u p " t h e r a t e s on C / P Ts. As a r e s u l t , t h e l e n d i n g policies of t h e s e i n s t i t u t i o n s p r o b a b l y w i l l t e n d to s t i f f e n . Some banks a p p a r e n t l y a l s o a r e s e r i o u s l y c o n s i d e r i n g l i q u i d a t i n g s o m e of their i n v e s t m e n t s i n o r d e r to o b t a i n f u n d s to a c c o m m o d a t e b o r r o w i n g customers. I T E M II P D. PO M E M B E R S OF T H E C O U N C I L H A V E A N Y C OMM ENT S R E G A R P I N G THE P R O P OSED- A M E N D M E N T S T O R E G U L A T I O N S D A N D Q A N N O U N C E D B Y T H E B O A R D O N J A N U A R Y 20, 1 9 6 6 , T H A T WOULD. I N E F F E C T D E F I N E " D E P O S I T S " F O R T H E P U R P O S E S OF T H O S E R E G U L A T I O N S A S I N C L U D I N G P R O M I S S O R Y N O T E S A N D C E R T A I N O T H E R F O R M S OF I N D E B T E D N E S S O F M E M B E R B A N K S ? _____________________________________________________ P r e s i d e n t M o o r h e a d r e a d I t e m II D. An e x t e n d e d d i s c u s s i o n d i s c l o s e d d i f f e r e n c e s of o p i n i o n in the to.ncil. A c c o r d i n g l y , it w a s d e c i d e d to i n d i c a t e to the B o a r d t hat the C o u n c i l a p p r e c i a t e s t h e p r o b l e m s f a c i n g t h e m o n e t a r y a u t h o r i t i e s the i s s u a n c e b y s o m e b a n k s of p r o m i s s o r y n o t e s of v e r y s h o r t maturity. The C o u n c i l , h o w e v e r , w o u l d n o t r e c i t e s p e c i f i c a l l y on the Proposed a m e n d m e n t s b u t t h e m e m b e r s w o u l d express their views orally 0r> outline t h e m i n w r i t i n g to t h e B o a r d . K. I T E M III B A L A N C E OP P A Y M E N T S . A. H O W D O P S T H E C O U N C I L A P P R A I S E T H E S T R E N G T H OP F O R E I G N D E M A N D POR U.S. B A N K F U N D S ? B. HAVE THE C O UNCIL’ S V I E W S O N T H E E F F E C T I V E N E S S OF T H E V O L U N T A R Y F O R E I G N C R E D I T R E S T R A I N T P R O G R A M CHANGED M A T E R I A L L Y SINCE THE COUNCIL M E T W I T H T H K BOARD IN NOVEMBER? The P r e s i d e n t of t h e C o u n c i l t h e n r e a d I t e m I I I A a n d B. S e v e r a l m e m b e r s r e p o r t e d t h a t t h e r e is e v i d e n c e of i n c r e a s i n g s t r e n g t h of f o r e i g n d e m a n d f o r U . S . b a n k f u n d s a n d t h a t this d e m a n d is l i k e l y to g r o w t h e l o n g e r t h e v o l u n t a r y r e s t r a i n t p r o g r a m c o n tinues in f o r c e . T h e r e a p p e a r s to b e l i t t l e e v i d e n c e in t h e C o u n c i l ’ s j u d gment t h a t t h e e f f e c t i v e n e s s of the p r o g r a m h a s c h a n g e d m a t e r i a l l y since N o v e m b e r . It w a s d e c i d e d to e m p h a s i z e , h o w e v e r , t h a t the p r o g r a m is e f f e c t i v e o n l y as a t e m p o r a r y m e a s u r e a n d n o t as a s o l u t i o n to the basic p r o b l e m . I T E M IV W H A T A R E THE. C O U N C I L TS V I E W S CURRENT CIRCUMSTANCES? ON M O N E T A R Y A N D CREDIT P O L I C Y U N D E R P r e s i d e n t M o o r h e a d r e a d I t e m I V w h i c h w a s f o l l o w e d b y an e x t e n d e d d i s c u s s i o n In w h i c h m o s t m e m b e r s ’of t h e C o u n c i l p a r t i c i p a t e d . It w a s f i n a l l y c o n c l u d e d t h a t the C o u n c i l w o u l d s t a t e t h a t as a result of r e c e n t d e v e l o p m e n t s , a g g r e g a t e d e m a n d s a r e t a x i n g the n a t i o n !s p r o d u c t i v e c a p a b i l i t i e s a n d t h a t i n f l a t i o n a r y p r e s s u r e s are a c c e l e r a t i n g Unless t h e r e is a w i l l i n g n e s s to r i s k a s e r i o u s i n f l a t i o n , or the i m p o s i tion of c o n t r o l s , a g g r e g a t e d e m a n d s m u s t b e m o d e r a t e d . To a c c o m p l i s h this o b j e c t i v e a n d t h u s l e s s e n t h e t h r e a t to p r i c e s t a b i l i t y , the Council b e l i e v e s m o n e t a r y a n d f i s c a l m e a s u r e s m u s t b e e m p l o y e d . The Council, t h e r e f o r e , d e c i d e d to s u g g e s t to t h e B o a r d of G o v e r n o r s that the a v a i l a b i l i t y of r e s e r v e s s h o u l d b e g r a d u a l l y r e d u c e d to m o r e m o d e s t p r o p o r t i o n s t h r o u g h o p e n m a r k e t o p e r a t i o n s a n d t h a t it a l s o m a y be n e c e s s a r y to i n c r e a s e the d i s c o u n t r a t e a g a i n . The C o u n c i l u r g e d a r e d u c t i o n in g o v e r n m e n t e x p e n d i t u r e s a n d n o t e d that e v e n t u a l l y a n i n c r e a s e in t a x r a t e s a l s o m a y be r e q u i r e d . The m e e t i n g a d j o u r n e d at 1 2 : ^ 0 P.M. T H E C O U N C I L C O N V E N E D I N T H E B O A R D R O O M OP T H E F E D E R A L R E S E R V E B U I L D I N G , W A S H I N G T O N , D . C . , A T 2 : 3 0 P.M. ON F E B R U A R Y ll^, 1 9 6 6 . A L L M E M B E R S OF T H E C O U N C I L W E R E P R E S E N T E X C E P T M R . W I L L I A M L. D A Y . M R . H O W A R D C. P E T E R S E N , P R E S I D E N T , F I D E L I T Y - P H I L A D E L P H I A TRUST C O M P A N Y , P H I L A D E L P H I A , P E N N S Y L V A N I A , A T T E N D E D AS A N A L T E R N A T E F O R MR. D A Y . M e m b e r s of the B o a r d Ts s t a f f i n c l u d i n g A l b e r t R. Koch, D e p u t y Director, D i v i s i o n of R e s e a r c h and S t a t i s t i c s , a n d A* B. Hersey, Adviser, D i v i s i o n of I n t e r n a t i o n a l F i n a n c e , p a r t i c i p a t e d in an a u d i o visual p r e s e n t a t i o n on d o m e s t i c a n d i n t e r n a t i o n a l economic conditions. T H E _ C O U N C I L R E C O N V E N E D - A T 5 :30 P . M . O N F E B R U A R Y llj., 1966, IN T H K B O A R D R O O M OP T H E MADISON. A L L M E M B E R S OP T H E C O U N C I L W E R E P R E S E N T E X C E P T M R . W I L L I A M L. DAY . M R . H O W A R D C. P E T E R S E N , P R E S I D E N T , F I D E L I T Y -P H I L A D E L P H I A T R U S T C O M P A N Y , P H I L A D E L P H I A , P E N N S Y L V A N I A , A T T E N D E D AS AN ALTERNATE. The C o u n c i l p r e p a r e d a n d a p p r o v e d the a t t a c h e d C o n f i d e n t i a l M e m o r a n d u m to be s e n t to the B o a r d of G o v e r n o r s r e l a t i v e to the Agenda for the joint m e e t i n g of the C o u n c i l and the B o a r d on February lf>, 1 9 6 6 . T h e M e m o r a n d u m w a s d e l i v e r e d to the F e d e r a l Reserve B u i l d i n g at 1 0 : 2 5 P,M. on .February 1L|_, 1 9 6 6 . The m e e tin g a d jo u r n e d a t 6 ;5 0 P.M . CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FR'jM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON FEBRUARY 15, 1966 1. Economic conditions and prospects: A. How does the Council appraise prospects for economic activity and for industrial prices during the first half of 1966? The Council anticipates a further rise in the level of economic activity during the first half of 1966. This will reflect 1) a larger volume of consumer spending as incomes continue upward; 2) an expansion in capital investment as businessmen strive to accommodate growing demands; 3) an increase in outlays by State and local governments; and 4) a growth in expenditures by the Federal Government for domestic programs and for military needs in Southeast Asia. As these aggregate demands are likely to tax the productive resources of the U.S. economy, upward pressures on industrial prices seem certain to intensify. B. Have Council members observed any significant changes in business plans for additions to capacity or to inventories in response to the generally more buoyant expectations now prevalent? Though it is difficult accurately to appraise and quantify the change in business plans, the members of the Council believe that businessmen generally are attempting to enlarge and modernize capacity as rapidly as possible. In general, inventories appear to be reason ably well balanced. However, because of rising order backlogs and lengthening delivery schedules, businessmen may seek to build inventories more aggressively. 2. Banking developments. A. What does the Council anticipate as to nearterm business demands for bank credit in relation to usual seasonal needs? Is it anticipated that an unusually large propor tion of these demands will be in the form of term loans? The Council anticipates strong near-term business demands for bank credit in excess of the usual seasonal needs. These demands are expected to cover all types of business borrowings including term -2- loans. There is some evidence that the tightness of credit in the major money centers is tending to shift loans to banks in other areas. B. How much tightening of bank lending policies has taken place since last fall? To what extent has such tightening extended to reduc tions in amounts of loans granted or to actual turndowns or deferrals of loan applications? Most members of the Council report a moderate tightening of bank lending policies since last fall. The continued growth of bank reserves tended to lessen the pressure to restrain bank credit expansion. By and large, the tightening of credit is occurring on a selective basis and some loans are being turned down. C. How have recent developments affected the ability and willingness of banks to attract funds in the CD market? Recent developments have caused banks in the major money centers to be even more aggressive in seeking funds in the CD market. This competition for funds has forced rates higher in the last sixty days. Despite the level of rates, the total outstanding has grown only moderately. Moreover, as many suppliers of these funds anticipate a further rise in interest rates, they presently are reluctant to place them in CDs with long maturities. D. Do members of the Council have any comments regarding the proposed amendments to Regulations D and Q announced by the Board on January 20, 1966, that would in effect define "deposits" for the purposes of those regulations as in cluding promissory notes and certain other forms of indebtedness of member banks? The Council appreciates the problems which are involved in the issuance of promissory notes especially of very short maturity. The many aspects of this matter preclude adequate discussion within the limitations of this memorandum. Members of the Council may express their views orally or communicate in writing with the Board. 3. Balance of payments. A. How does the Council appraise the strength of foreign demand for U.S. bank funds? The Council believes there is evidence of increasing strength of foreign demand for U.S. bank funds. This demand is likely to grow -3stronger the longer the v o l u n t a r y foreign credit restraint program continues in force. B. Have the Council's views on the effective ness of tir.e voluntary foreign credit restraint program changed materially since the Council met with the Board in November? In the Council's judgment, the effectiveness of the voluntary foreign credit restraint program has not changed materially since the Council met with the Board in November. However, the program is effective only as a temporary measure and not a solution to the basic problem. 4. What are the Council's views on monetary and credit policy under current circumstances? In the last ninety days, the resources of the nation have neared maximum utilization. Despite continuing additions to plant capacity, output is pressing on capacity in many important industries, and there are increasing reports of tight labor situations, particularly of skilled workers. These developments reflect also the nation's growing involvement in Southeast Asia. As a consequence, aggregate demands are taxing the nation's productive capabilities with accelerating inflationary pressures. Unless there is a willingness to risk a serious inflation, or the imposition of contiols, aggregate demands must be moderated. To accomplish this objective and thus lessen the threat to price stability, the Council believes that monetary policy must be employed. To be specific, the availability of reserves should be gradually reduced to more modest proportions through open market operations. In all likelihood it may also be necessary to increase the discount rate again. The Council recognizes that monetary policy alone may not be adequate to meet present economic pressures. Fiscal policy involving a reduction in governmental expenditures is required, and an eventual increase in tax rates may also be necessary 6. ON F E B R U A R Y l5, 1 9 6 6 , A T 1 0 : 3 0 A . M . , T H E F E D E R A L A D V I S O R Y COUNCIL. H E L D A JOINT. M E E T I N G W I T H THE. B O A R D OF G O V E R N O R S O F T H E F E D E R A L R E S E R V E S Y S T E M IN T H E F E D E R A L R E S E R V E BUILDING, W A S H I N G T O N , D.C. A L L M E M B E R S OF T H E C O U N C I L W E R E PRESENT. E X C E P T M R . W I L L I A M L. DAY . MR. H O W A R D C. PETERSEN, P R E S I D E N T , F I D E L I T Y - P H I L A D E L P H I A TRUST COMPANY, P H I L A D E L P H I A , P E N N S Y L V A N I A , A T T E N D E D AS A N A L T E R N A T E . T H E F O L L O W I N G M E M B E R S OF T H E B O A R D OF G O V E R N O R S W E R E PRESENT: CHAIRMAN MARTIN, V I C E CHAIRMAN BALDERSTON, GOVERNORS ROBERTSON, SHEPARDSON, MITCHELL, DAANE AND M A I S E L . MR. S H E R M A N , S E C R E T A R Y , A N D M R . K E N Y O N , A S S I S T A N T S E C R E T A R Y , OF T H E B O A R D OF G O V E R N O R S A LSO W ERE PRESENT. T h e m i n u t e s of t h e j o i n t m e e t i n g are b e i n g p r e p a r e d in t h e o f f i c e of the S e c r e t a r y of t h e B o a r d of G o v e r n o r s of t h e F e d e r a l R e s e r v e System. T h e i r c o n t e n t w i l l b e c o m p a r e d w i t h t h e n o t e s of the S e c r e tary of the C o u n c i l . A s s u m i n g t h e y are in s u b s t a n t i a l a g r e e m e n t , t h e y will be r e p r o d u c e d a n d d i s t r i b u t e d to t h e m e m b e r s of the C o u n c i l . The m e e t i n g a d j o u r n e d at 1 2 : 1 5 P.M. The n e x t m e e tin g o f th e C o u n c il w i l l be h e ld on June 20-21, 1966
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