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MINUTES OF MEETINGS of the FEDERAL ADVISORY COUNCIL 1965 MINUTES OF MEETINGS of the FEDERAL ADVISORY COUNCIL February 15-16, 1965 May 17-18, 1965 September 20-21, 1965 October 4, 1965 November 15-16, 1965 BY-LAWS O F T H E F E D E R A L ADVISORY C O UNCIL ARTICLE I. O FFICERS 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 15, 1965 1. OFFICERS AND MEMBERS OF THE FEDERAL ADVISORY COUNCIL F o r th e Y e a r O F F IC E R S : 1965 E X E C U T IV E P r e s id e n t, J o h n A . M oorhead V ic e P r e s i d e n t , L a w r e n c e D ir e c t o r , L . Jo h n H . M a r tin C O M M IT T E E : A . M o orhe ad L a w r e n c e H . M a r tin A . S to n e r L. A. S to n e r D ir e c t o r , E d w a r d B . S m it h E d w ard D ir e c t o r , R a n s o m M. C ook Ransom B. S m it h M. C ook S e c re ta ry , H e r b e r t V . P r o c h n o w A s s is ta n t S e c r e ta r y , W illia m J. K o r s v ik M EM BERS: L a w r e n c e H . M a r tin W illia m H . M o ore W illia m L . D ay L . A . S to n e r Jo h n F . W a t lin g t o n , J r . S am M . F l e m i n g E d w a r d B . S m it h Jam e s P . H ic k o k Jo h n A . M o o rh e a d D is t r ic t N o . 1 D is t r ic t N o . 2 D is tr ic t N o . 3 D is tr ic t N o . 4 D is tr ic t N o . 5 D is tr ic t N o . 6 D is tr ic t N o . 7 D is tr ic t N o . 8 D is tr ic t N o . 9 D is t r ic t N o . 10 D is tr ic t N o . 11 D is tr ic t N o . 12 Roger D . K n ig h t, J r. Jam e s W. A s to n Ransom M. C o ok 2. REP ORT OF THE SECRETARY OF FED ERA L THE A D V IS O R Y C O U N C IL FOR THE YEAR ENDED DECEMBER 31, 1964 S a l a r i e s ................................................... $ B a la n c e o n h a n d D e c e m b e r 3 1 , 1 9 6 3 ................$ 8 ,1 4 1 .4 9 P r i n t i n g & S t a t i o n e r y .................... A s s e s s m e n ts 5 ,0 0 0 .0 0 5 1 2 .9 8 B a la n c e on h a n d — 12 F e d e r a l R e s e r v e B a n k s ....................... ............... 5 ,4 0 0 .0 0 D ecem ber 31, 1 9 6 4 ................ $ 1 3 ,5 4 1 .4 9 8 ,0 2 8 .5 1 $ 1 3 ,5 4 1 .4 9 C h ic a g o , Illin o is F e b ruary 1, 1 9 6 5 T o th e F e d e r a l A d v is o r y C o u n c il: I have a u d it e d th e books, v o u ch e rs, and a c c o u n ts A d v i s o r y C o u n c i l fo r t h e y e a r e n d e d D e c e m b e r 3 1 , of th e S e c re ta ry 1 9 6 4 , a n d c e r tify o f th e F e d e r a l th a t th e a b o v e s ta te m e n t a g r e e s th e r e w it h . R e s p e c t fu lly , Donald O. Noren, Assistant Auditor The First National Bank of Chicago M I N U T E S O F T H E M E E T I N G O F T H E F E D E R A L ADVISORY CO U N C I L F e b ruary T he fir s t 1065 w a s 15. and o r g a n iz a tio n a l convened 1 9 65 , a t 9 :3 0 in Room 932 m e e tin g o f th e of th e F ederal M a y f lo w e r H o t e l , A d v is o r y C o u n c il W a s h in g to n , D .C ., fo r 15, 1965 th e y e a r on F e b ruary A .M . P re s e n t: L aw rence H. M a r tin W illia m H. H o w ard C . P e te rs e n , L. M oore A lte r n a te A . S to n e r D is tr ic t N o . 1 D is tr ic t N o . 2 D is t r ic t N o . 3 D is t r ic t N o . 4 6 Sam M . F le m in g D is tr ic t N o . E d w ard B. S m it h D is tr ic t N o . 7 P . H ic k o k D is t r ic t N o . 8 A . M oorhead Jam e s Joh n D is tr ic t N o . 9 R o g e r D . K n ig h t, J r . D is t r ic t N o . 10 Jam e s D is t r ic t N o . 11 D is t r ic t N o . 12 W. A s to n R ansom M. Cook H e rb e rt V . P ro c h n o w W illia m J. K o r s v ik L . D ay S e c re ta ry A s s is t a n t S e c re ta ry A b s e n t: W illia m Joh n F. W a t lin g t o n , J r . M r. J o h n e le c te d A . M oorhead S e c re ta ry T he pro S e c re ta ry F ederal R eserve w a s e le c te d p ro te m banks, H. A . S to n e r, M a r tin , V ic e to th e e le c tio n h a d b e e n r e c e i v e d fr o m t h e t w e l v e o f t h e ir r e s p e c t iv e r e p r e s e n t a t iv e s on a n d u n a n im o u s ly e le c te d : S m it h , M. C o o k , D ir e c t o r D ir e c to r H e rb e rt V . P ro c h n o w , J. K o r s v ik , m o tio n and d u ly S e c re ta ry A s s is ta n t S e c re ta ry m ade th a t o f th e P r e s id e n t D ir e c t o r B. On th a t c o m m u n ic a tio n s w e re n o m in a te d E d w ard a n n u a lly , p r o t e m a n d M r. H e r b e r t V . P r o c h n o w w a s 1965. R ansom W illia m 5 M o o r h e a d , P r e s id e n t L aw rence L. s ta te d c e r tify in g T h e f o llo w in g o f f ic e r s A. 3 D is tr ic t N o . tem . th e C o u n c il fo r t h e y e a r Jo h n C h a ir m a n D is tr ic t N o . and seconded, th e A s s is ta n t S e c re ta ry 4. s a la r y o f th e S e c re ta ry a t $ 2 ,0 0 0 a n n u a lly . w as fix e d a t $ 3 ,0 0 0 The Secretary presented his financial report for the year 1964, which has been audited by Mr. Donald 0. Noren, A ssistant Auditor of The F irst National Bank of Chicago. The report was approved and ordered placed on file. A copy o f the report is attached and made a part of these minutes. On motion, duly made and seconded, the printed m inutes for the meetings of the Council held on February 17-18, 1964, April 22-23, 1964, September 21-22, 1964, November 16-17, 1964, and the mimeographed notes of the meeting held November 16-17, 1964, copies of which had been sent previously to the members of the C ouncil, 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 C ouncil for the year 1965 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 follow s on pages 7, 8, 9 and 10. The meeting adjourned at 12:15 P.M. H E R B E R T V. PROCHNOW Secretary W ILLIAM J . KORSVIK A ssistant Secretary 5. MINUTES OF THE MEETING OF THE FEDERAL ADVISORY COUNCIL February 15, 1065 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. Lawrence H. Martin, William H. Moore, Howard C. Petersen, Alternate for Mr. William L. Day; Messrs. L. A. Stoner, John F. Watlington, Jr., Sam M. Fleming, Edward B. Smith, James P. Hickok, Roger D. Knight, jr., James W. Aston, and Ransom M. Cook. Absent: Mr. William L. Day. Members of the Board’ s staff gave an audio-visual presentation on domestic, and international economic developments. An outline of the statement was sent to each member of the Council. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary February 15, 1965 At 9:45 P.M., the Federal Advisory Council reconvened in Room 932 of the Mayflower Hotel, Washington, D.C. Present: Mr. John A. Moorhead, President; Messrs. Lawrence H. Martin, William H. Moore, Howard C. Petersen, Alternate for Mr. William L. Day; Messrs. L. A. Stoner, John F. Watlington, Jr., Sam M. Fleming, Edward B. Smith, James P. Hickok, Roger D. Knight, Jr., James W. Aston, 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, 9 and 10, listing 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 11:50 P.M. on February 15, 1965. / The meeting adjourned at 11:10 P.M. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 6. CO NFIDENTIAL MEMORANDUM TO THE B O A R D O F G O V E R N O R S FROM THE F E D E R A L A D V ISO RY C O U N C IL R E L A T IV E TO THE AG EN DA FO R THE JO IN T MEETING ON F E B R U A R Y 16, 1965 1. Econom ic conditions and prospects. A. several part by strike. pace of How does the C ouncil appraise the general outlook for U.S. economy over the next sev eral months, particularly in the event of an early steel settlement? The C ouncil believes the general outlook for months is favorable. B usiness activity currently the sto ckp iling of steel as users attempt to hedge In the event of an early steel settlem ent, which economic activ ity probably would slow somewhat. B. the U.S. economy over the next is at a high level, stimulated in ag ainst the p o ssib ility of a steel now appears more doubtful, the What importance is attached to an excise tax reduction as a stim ulative factor? A reduction in excise taxes would give some stim ulus to the economy, but it is not generally regarded as an important factor. On the other hand, there is little or no comparable experience on which to base such a judgment. C. Do C o u n c i l members have inform ation, based on current demand for bank credit, on further inventory build-up in steel and autos? Are there indicatio ns that inventory accum ulation is spreading to other indus tries and projects? The strong, contraseasonal demand for bank credit suggests an inventory build up, particularly of steel and autos. Although there is no satisfactory statistical informa tion on inventory build-up by industry, apart from the growing volume of corporate cash flows, the rise in bank loans indicates a p o s s ib ility that sto ckp iling may be spreading to products other than steel and autos. D. What is the current trend in demand for residential mortgage money? 7. The demand for residential mortgage money is not strong in relation to the supply of long-term funds, and rates are tending to soften. E. What are the prospects for continuing the broad s ta b ility in commodity prices that has existed for several years? The members of the C ouncil believe that the broad stability in commodity prices that has existed for several years may now be subject to increasing upward pressure. 2. B anking developm ents. A. What is the present situ a tio n in the market for ne g otiable certificates of deposit and short-term unsecured notes? Is volume lik e ly to increase, de clin e , or remain about stable in the months ahead? There continues to be a good market for negotiable certificates of deposit. Not only is there a co nside rab le volume of funds, but the commercial banks aggresively seek such business. The volume of ce rtificate s of deposit w ill continue to grow, but some members of the C o u n c il believe there may be a tendency to shift these funds to the larger institutions in the money centers. The volume of notes is lik e ly to increase in the months ahead, particularly if the New York State law is amended, permitting the New York City banks to issu e such notes. The volume of both certificates of deposit and notes may increase further if the flow of corporate funds abroad is curtailed. B. Are the 1963 and 1964 rates of growth of to tal time and savings deposits (14.7 and 12-6 per cent) lik e ly to continue in 1965? Prelim inary figures suggest that the rate of growth of savings deposits w ill continue in 1965. The rate of growth of time deposits w ill depend on the aggressiveness of banks in seeking these funds which w ill be largely determined by the strength of loan demand. C. At the end of 1964, the loan-deposit ratio at New York C ity banks passed 70 per cent, for a ll banks the ratio was estim ated at about 61 pe rcent. What is lik e ly to happen to loan-deposit ratios in the months ahead? Will this lim it bank loan expansion im portantly? The members of the C ouncil believe that some further rise in loan-deposit ratios may occur in the months ahead. It is doubtful that this w ill lim it bank loan expan sion s ig n ific a n tly in the immediate future. Banks which have a strong loan demand will attempt to obtain funds by bidding for certificates of deposit and notes. 8 D. Com m ercial bank lo an s to foreigners pro bably amounted to alm o st $2 b illio n in 1964 — an increase of over 25 per cent. Is co ntin uatio n of this rate of increase in prospect? The members of the C o u n cil be lie v e that the recent high rate of increase in commercial bank lo an s to foreigners w ill not co ntin ue in the months ahead, especially in view of the current program of the A d m in istratio n . 3. Does the C o u n c il care to express any view s with regard to the B o ard’s R e g u la tio n F , S ecu ritie s of Member State B ank s, w hich w as is s u e d effe ctiv e January 1, 1965? The members of the C o u n c il b e lie v e that re v isio n s of R egulation F, which became effective January 1, 1965, have been h e lp fu l. It is hoped that there w ill be a continued open-mindedness in interpre tatio n and a w illin g n e s s to make changes that may be necessary for the e ffic ie n t and e ffe ctiv e a d m in is tratio n of the R egulation. 4. How has the b u s in e ss and fin a n c ia l com m unity reacted to recent U.S. b alan ce of payments developm ents? 5. What are the C o u n c il’ s view s on monetary and credit p o licy under current circu m stances? The C o u n cil b e lie v es that the fa ilu re to redress the de ficit in our balance of payments has caused in cre asin g concern in the b u s in e ss and fin a n c ia l community. There is a growing co nvictio n that th is problem is of such im portance to the continuing welfare of our economy and to this n a tio n ’ s le ade rship in the world that a comprehensive program of action is im perative. A voluntary program to restrain tem porarily the outflow of capital from the United States is to be commended and w ill undoubtedly be he lpful. The business and fin ancial community w ill unqu estio nab ly cooperate in supporting the program. However, in the judgm ent of the members of the C o u n c il, the problem is of such magnitude that a broader approach is required for its s o lu tio n . T his would includ e such factors as the follow ing: 1) a further reduction in U.S. econom ic and m ilitary aid overseas; 2) an easing of barriers tending to discourage the repatriation of earnings overseas; 3) a voluntary program to restrict c a p ita l outflow s temporarily (c a p ita l outflow s into foreign inv est ments are the source of s u b s ta n tia l overseas earnings and any program for their curtailm ent should be temporary); 9. 4) a continuation and expansion of the program to encourage exports; and 5) a continuation of efforts to keep wages and other costs within productivity gains; 6) a reduction in the av ailab ility of credit. The Council believes that monetary and credit policy have contributed signifi cantly to economic expansion. However, recent international developments require a somewhat more restrictive credit policy. The availability of credit has encouraged finan cial institutions to make substantial loans abroad. The C ouncil believes that it is possible to make less credit available without an increase in interest rates. Nevertheless, if the deficit in the balance of payments still persists, a rise in the structure of interest rates may be necessary. Economic activity at present is so strong and at such a high level that some lessening in credit availability and a modest increase in interest rates would have little or no effect on the expansion. The measures which may be necessary to redress the deficit in the balance of payments involve d iffic u lt choices. However, the economic well-being of the nation requires a w illingness to make these choices. 10. MINUTES OF JO IN T C O N FE R E N C E OF THE F E D E R A L ADVISORY COUNCIL AND THE BOARD OF GOVERN ORS OF THE F E D E R A L R E S E R V E SYSTEM February 16, 1965 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 B uilding, 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 A, L. M ills, Jr., J. L. Robertson,Chas. N. Shepardson and George W. M itchell; also Mr. Merritt Sherman, Secretary, and Mr. Kenneth A. Kenyon, A ssistant Secretary, of the Board of Governors. Present: Members of the Federal Advisory Council: Mr. John A. Moorhead, President; Messrs. Lawrence H. Martin, W illiam H. Moore, Howard C. Petersen, Alternate for Mr. William L . Day; Messrs. L . A. Stoner, John F. Watlington, Jr., Sam M. Fleming, Edward B. Smith, James P. Hickok, Roger D. Knight, Jr., James W. Aston, 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 r n 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, 9 and 10 of these minutes. He added that while there was some difference of opinion as to the extent of steel stockpiling, there was little disagreement on the general economic outlook. In re sponse to a query on the prospects for continued commodity price s ta b ility , President Moorhead reported that many Council members saw evidence of upward pressure on prices. The President then read the second item and the conclusions of the Council. In the discussion which followed, Mr. Petersen added that the increasing use of long-term debt instruments by banks may have some lim itin g effect on the growth of negotiable cer tificates of deposit. President Moorhead read the third item and the conclusions of the Council. brief discussion followed. A Governor Robertson added that it was planned not to permit deviation from a uniform policy by having interpretations made by individual reserve banks. Instead, he continued, interpretations would be issued from the Board on a uniform basis. The President then read the fourth and fifth items on the Agenda and the Coun c il’s conclusions. An extended discussion ensued in which most members of the Board and the Council participated. 11. Chairman Martin asked for the C ouncil’s assistance in implementing the volun tary credit restraint program which the Administration had recently proposed. He added that no rules had been formulated as yet. The goal, however, was clear; to reduce the outflow of spending, lending and investing. In response to a question from Chairman Martin, the members of the Council stated that they did not feel that monetary and credit policy should be easier. On the contrary, they unanim ously indicated they favored a slightly less easy credit policy. The meeting adjourned at 12:20 P.M. H ERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 12. NOTE: T h i s t r a n s c r i p t of the S e c r e t a r y ’ s n o t e s is n o t to be r e g a r d e d a s 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 accurate^ The t r a n s c r i p t is f o r t h e sole u s e of the m e m b e r s of the Federal A d v i s o r y Council. The c o n c i s e o f f i c i a l m i n u t e s for the e n t i r e y e a r a r e 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 o n F e b r u a r y 1 $ , 1965, at 9:30 A.M. in R o o m 9 3 2 of t h e M a y f l o w e r H o t e l , W a s h i n g t o n , D. C. All 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 except Messrs,, W i l l i a m L* D a y a n d Joh n F 0 W a t l i n g t o n , Jr. 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 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 an Alternate for Mr, Day. Mr, W a t l i n g t o n w a s d e l a y e d b e c a u s e the a i r p o r t at W i n s t o n - S a l e m w a s f o g g e d in. The 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 all the m e mbers of the C o u n c i l f o r t h e y e a r 1 9 6 5 * 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 with c o m m u n i c a t i o n s 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. Mr. 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 pro tem and Mr, H e r b e r t .. Prochnow w a s e l e c t e d S e c r e t a r y p r o t e m , The 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 and u n a n i m o u s l y elected: J o h n A. M o o r h e a d , P r e s i d e n t L a w r e n c e H. M a r t i n , V i c e P r e s i d e n t L. A. S t o n e r , D i r e c t o r E d w a r d B, S m i t h , D i r e c t o r R a n s o m M. C o o k , D i r e c t o r Herbert V , Prochnow, Secretary 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 was fixed at $ 3 , 0 0 0 a n n u a l l y , a n d t h a t of the A s s i s t a n t S e c r e t a r y at ;'2,000 a n n u a l l y . The S e c r e t a r y p r e s e n t e d the f i n a n c i a l W'iicn h a d b e e n a u d i t e d b y Mr. D o n 0 o N o r e n , *iPSt lal B a n k of C h i c a g o , The r e p o r t °r.j file. It w i l l b e i n c l u d e d in ';he f o r m a l r e p o r t for the y e a r 1961;, A s s i s t a n t A u d i t o r of The w a s a p p r o v e d and plac e d printed minutes. 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 draw drafts ^or $14.50 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 for the s e c r e t a r i a l and ~-riCidenta] e x p e n s e 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 for the yea r 1965* The by-L'Wf.: 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 t a r y ’ s notes for the m e e t i n g of N o v e m b e r 16-17, 1961;, The p r i n t e d minutes jCor ail of the 1961; m e e t i n g s of the C o u n c i l , cop i e s of w h i c h had been sent p r e v i o u s l y to the m e m b e r s , also w e r e app r o v e d . ITEM I E C O N O M IC CONDITIONS AND PROSPECTS 0 a HOW DOES T H E C O U N C I L A P P R A I S E THE GENERAL OUTLOOK FOR u. S. E C O N O M Y O V E R T H E N E X T S E V E R A L M O N T H S , P A R T I C U L A R L Y IN T H E E V E N T O F A N E A R L Y S T E E L S E T T L E M E N T ? - W H A T I M P O R T A N C E IS A T T A C H E D TO A N E X C I S E T A X R E D U C T I O N AS A S T I M U L A T I V E F A C T O R ? DO C O U N C I L M E M B E R S H A V E I N F O R M A T I O N , B A S E D ON CU R R E N T D E M A N D F O R B A N K C R E D I T , ON F U R T H E R I N V E N T O R Y B U I L D - U P IN S T E E L A N D A U T O S ? A R E THERE INDICATIONS THAT IN V E N T O R Y A C C U M U L A T I O N IS S P R E A D I N G TO OTHER I N D U S T R I E S AND P R O D U C T S ? D. E. W H A T IS T H E C U R R E N T T R E N D IN D E M A N D FOR R E S I D E N T I A L MORTGAGE MONEY? WHAT A R E T H E P R O S P E C T S FOR CONTINUING THE BROAD STABILITY IN C O M M O D I T Y P R I C E S T H A T H A S E X I S T E D F O R S E V E R A L Y E A R 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 I on the A g e n d a and i n v i t e d the members of t h e C o u n c i l to c o m m e n t * An extended discussion followed which d i s c l o s e d w i d e a g r e e m e n t t h a t t h e g e n e r a l o u t l o o k f o r the 7, S, e c o n o m y f o r t h e m o n t h s a h e a d w a s f a v o r a b l e . S e v e r a l me m b e r s acknowledged t h a t t h e r e w a s s o m e a c c u m u l a t i o n of s t e e l inve n t o r i e s cut that t h i s w a s n o t a p a r t i c u l a r l y s i g n i f i c a n t factor. However, there was s o m e f e e l i n g t h a t an e a r l y s t e e l s e t t l e m e n t p r o b a b l y w o u l d slo'.-r the p a c e of e c o n o m i c a c t i v i t y * M o s t m e m b e r s did not r e g a r d the reduction in e x c i s e t a x e s as a p a r t i c u l a r importtent s t i m u l a t i n g .actor. A l t h o u g h s e v e r a l m e m b e r s s t a t e d tha t it was d i f f i c u l t to relate s p e c i f i c b a n k l o a n s w i t h I n v e n t o r y a c c u m u l a t i o n , there was some a c k n o w l e d g m e n t t h a t t h e s t r o n g c o n t r a - s e a s o n a l b e h a v i o r of b a n k loans s u g g e s t e d s o m e i n v e n t o r y build*~up«, T h i s factor, t o g e t h e r w i t h growing v o l u m e of c o r p o r a t e c a s h f l o w s , i n d i c a t e d a p o s s i b i l i t y that s t o c k p i l i n g m i g h t b e s p r e a d i n g to p r o d u c t s o t h e r tha n steel and autos. It w a s r e p o r t e d t h a t t h e d e m a n d f o r r e s i d e n t i a l m o r t g a g e -"-oney was n o t s t r o n g in r e l a t i o n to the s u p p l y of f u n d s a v a i l a b l e and that r a t e s w e r e l e n d i n g t o s o f t e n * T h e r e a l s o w a s f a i r l y w i d e agreement a m o n g t h e m e m b e r s of t h e C o u n c i l t h a t the b r o a d s t a b i l i t y :r- commo d i t y p r i c e s t h a t h a s e x i s t e d f o r s e v e r a l y e a r s m a y n o w be 8a°ject to i n c r e a s i n g u p w a r d p r e s s u r e * I T E M II SAVING DEVELOPMENTS. W H A T IS T H E P R E S E N T S I T U A T I O N IN T H E M A R K E T F O R N E G O TI AB LE C E R T I F I C A T E S OF D E P O S I T AND S H O R T - T E R M UNSECURED NOTES? IS V O L U M E L I K E L Y T O I N C R E A S E , D E C L I N E , OR R E M A I N A B O U T S T A B L E IN T H E M O N T H S A H E A D ? 5* A R E T H E 1 9 6 3 A N D 1961]. R A T E S O F G R O W T H OF T O T A L T I M E A N D S A V I N G S D E P O S I T S ( I k . 7 A N D 1 2 * 6 P E R CENT) L I K E L Y TO C O N T I N U E IN 1 9 6 5 ? 3. - AT T H E END OF 1 9 6 1 + , T H E L O A N - D E P O S I T R A T I O AT NEW YORK C I T Y BANKS P A S S E D 7 0 P E R C E N T : FOR A L L BANKS THE R A T I O WAS E S T I M A T E D AT ABOUT 6 l P E R C E N T . WHAT I S L I K E L Y TO HAPPEN TO L O A N - D E P O S I T R A T I O S I N T H E MONTHS AHEAD? W ILL T H I S L I M I T BANK LOAN E X P A N S I O N IM P O R T A N T L Y ? C0MMER C I A L BA N K LOANS TO F O R E I G N E R S PR O B A B L Y AMOUNTED TO ALMOST $ 2 B I L L I O N I N 0.961+. — AN I N C R E A S E OF OVER 2 5 P E R CEN T. I S C O N T IN U A T IO N OF T H I S RA T E OF I N C R E A S E IN PROSPECT? President M o o r h e a d r e a d I t e m II. A brief discussion followed, '.ere- w e r e i n d i e a t i o n s t h a t t h e r e c o n t i n u e s t o b e a g o o d m a r k e t f o r eso t i a b l e c e r t i f i c a t e s o f d e p o s i t . F u n d s are p l e n t i f u l a n d the alor b a n k s i n t h e m o n e y c e n t e r s a r e a g g r e s s i v e l y s e e k i n g s u c h '•/iiness, A n u m b e r o f m e m b e r s i n d i c a t e d t h a t t h e y b e l i e v e d t h e r e is a tendency f o r t h e s e f u n d s to m o v e t o t h e l a r g e r i n s t i t u t i o n s in the noney c e n t e r s . I t w a s a l s o a c k n o w l e d g e d t h a t the v o l u m e of n o t e s •,ntou1& i n c r e a s e i n t h e m o n t h s a h e a d i f t h e N e w Y o r k S t a t e l a w is amended, p e r m i t t i n g N e w Y o r k b a n k s t o i s s u e s u c h n o t e s * Several members s a i d t h e y t h o u g h t t h e v o l u m e o f b o t h c e r t i f i c a t e s o f d e p o s i t and n o t e s w o u l d i n c r e a s e i f t h e f l o w o f c o r p o r a t e f u n d s a b r o a d is c u r t a il e d . A l t h o u g h t h e s i t u a t i o n d i f f e r e d s o m e w h a t f r o m d i s t r i c t to d i s trict, t h e C o u n c i l t h o u g h t t h e r a t e o f g r o w t h i n 1 9 6 5 o f o t h e r t i m e isposits p r o b a b l y w o u l d n o t b e a s s t r o n g a s i n t h e p r e v i o u s t w o “ears, as s o m e b a n k e r s m i g h t b e m o r e c o n s e r v a t i v e i n b i d d i n g f o r these f u n d s . I n a d d i t i o n , it w a s n o t e d t h a t the r i s e w o u l d be f r o m a larger b a s e . T h e a g g r e s s i v e n e s s of b a n k s in s e e k i n g s u c h b a l a n c e s will be i n f l u e n c e d c o n s i d e r a b l y b y t h e s t r e n g t h o f l o a n d e m a n d . The d i s c u s s i o n i n d i c a t e d t h a t d e s p i t e t h e p r e s e n t l e v e l s of -can-deposit r a t i o s , s o m e f u r t h e r r i s e w a s l i k e l y in the m o n t h s a h e a d , ---e ' o u n c i l d o u b t e d t h a t t h i s w o u l d l i m i t l o a n e x p a n s i o n s i g n i f i c a n t l y — r b an k s w h i c h e x p e r i e n c e a s t r o n g l o a n d e m a n d w i l l a t t e m p t to o b fu n d s b y b i d d i n g f o r c e r t i f i c a t e s o f d e p o s i t a n d n o t e s . In v i e w _“ he r e c e n t l y a n n o u n c e d p r o g r a m o f t h e A d m i n i s t r a t i o n , t h e C o u n c i l not b e l i e v e t h a t t h e h i g h r a t e o f i n c r e a s e in c o m m e r c i a l bank i0B.r,3 to f o r e i g n e r s w o u l d c o n t i n u e i n t h e m o n t h s a h e a d . I T E M III L0~3 T H E C O U N C I L C A R E T O E X P R E S S A N Y V I E T^S W I T H R E G A R D T O T H E S A R D ' S R E G U L A T I O N F, S E C U R I T I E S O F M E M B E R S T A T E B A N K S , W H I C H JAS I S S U E D E F F E C T I V E J A N U A R Y 1, 1 9 6 g ? ________________________________ •, 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 III. A brief discussion followed ;r ^ a n u m b e r o f m e m b e r s i n d i c a t e d t h a t the r e c e n t r e v i s i o n s -,r .e^ J l a t i o n had been helpful. T h e y were h o p e f u l that there 'c.... a c o n t i n u e d o p e n - m i n d e d n e s s in i n t e r p r e t a t i o n and a w i l l i n g v]r.~ '*rj Mak e w h a t f u r t h e r c h a n g e s m a y b e n e c e s s a r y to the e f f i c i e n t lxs t r a t i o n of t h e R e g u l a t i o n . I T E M IV -OW H4S T H E B U S I N E S S A N D F I N A N C I A L C O M M U N I T Y R E A C T E D T O R E C E N T 3 . B A L A N C E O F P A Y M E N T S D E V E L O P M E N T S ? ______________________________ ITEM V WHAT ^RE T H E C O U N C I L ’ S VIEWS ON M ONETARY AND CREDIT POLICY UNDER ■ -TTRRENT C I R C U M S T A N C E S ? ______________________________________________________ _ president M o o r h e a d t h e n r e a d I t e m s I V a n d V* 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 in w h i c h it w a s s t r o n g l y u r g e d -v:at the C o u n c i l ' s s t a t e m e n t s h o u l d i n d i c a t e the i n c r e a s i n g c o n c e r n •n the b u s i n e s s c o m m u n i t y a b o u t t h e f a i l u r e to r e d r e s s the d e f i c i t Jn our ba l a n c e of p a y m e n t s , T h e r e w a s a s t r o n g f e e l i n g t h a t the Problem is of s u c h i m p o r t a n c e t h a t a c o m p r e h e n s i v e p r o g r a m of a c t i o n •‘ ■as imperativeo T h i s w o u l d i n c l u d e n o t o n l y the v o l u n t a r y p r o g r a m :: restrain t e m p o r a r i l y the o u t f l o w of c a p i t a l , but , in a d d i t i o n , should include the f o l l o w i n g : 1) a f urther r e d u c t i o n in U v S c e c o n o m i c and m i l i t a r y aid overseas; 2 ) an e a s i n g of b a r r i e r s t e n d i n g to d i s c o u r a g e t h e r e p a t r i a tion of e a r n i n g s o v e r s e a s ; 3 ) a c o n t i n u a t i o n a n d e x p a n s i o n of t h e p r o g r a m to e n c o u r a g e exports; a n d Jj.) a c o n t i n u a t i o n of e f f o r t s to k e e p w a g e s a n d o t h e r c o s t s within p r o d u c t i v i t y gains; 5) a r e d u c t i o n in t h e a v a i l a b i l i t y of c r e d i t . The m e m b e r s of t h e C o u n c i l d e c i d e d to e m p h a s i z e the v i e w that ~-"e situation r e q u i r e d a s o m e w h a t m o r e r e s t r i c t i v e c r e d i t p o l i c y pd, if n e c e s s a r y , a r i s e in the s t r u c t u r e of i n t e r e s t r a t e s . The -/Uncil a c k n o w l e d g e d t h a t t h e m e a s u r e s n e c e s s a r y to r e d r e s s the deficit i n v o l v e d d i f f i c u l t c h o i c e s b u t t h a t t he s e r i o u s n e s s of t he — oLen r e q u i r e d a w i l l i n g n e s s to m a k e t h e s e c h o i c e s . "resident M o o r h e a d t h e n r e c a l l e d the i t e m on t h e A g e n d a of ;.;e "ovember m e e t i n g w h i c h a s k e d f o r t h e C o u n c i l ’ s j u d g m e n t on J;5r*ges in b a n k i n g l e g i s l a t i o n or r e g u l a t i o n s tha t m i g h t c o n t r i b u t e 9 sounder, m o r e p r o g r e s s i v e or m o r e e f f i c i e n t b a n k i n g s v s t e m * also read the f o l l o w i n g r e p l y of t h e C o u n c i l w h i c h w a s s u b m i t t e d -ne B o a r d in N o v e m b e r s "Yes, I n r e c e n t y e a r s t h e r e h a v e b e e n a n u m b e r of exhaustive s t u d i e s of t h e b a n k i n g a n d c r e d i t s y s t e m w h i c h ^iight b e u s e d as t h e b a s i s f o r c o n s i d e r i n g c h a n g e s in b a n k ing l e g i s l a t i o n o r r e g u l a t i o n s in o r d e r to p r o m o t e s o u n d e r , rcore p r o g r e s s i v e a n d m o r e e f f i c i e n t b a n k i n g o p e r a t i o n s * " Among t h e m o r e i m m e d i a t e p r o b l e m s a r e (l) a m o r e uniform i n t e r p r e t a t i o n of e x i s t i n g s t a t u t e s a n d r e g u l a tions b y t h e b a n k r e g u l a t o r y a g e n c i e s , a n d (2 ) a r e v i e w ° f the a d m i n i s t r a t i v e p r o c e d u r e s of the r e g u l a t o r y a g e n c i e s which s u p e r v i s e t h e b a n k s of the n a t i o n * " A brief d i s c u s s i o n e n s u e d . S e v e r a l m e m b e r s e x p r e s s e d the .ptf that w h i l e t h e y w e r e s o m e w h a t d i s t u r b e d b y t h e d i f f e r e n c e s ' t existed b e t w e e n t h e s u p e r v i s o r y a g e n c i e s , t h e y d i d n o t f a v o r ' consolidation of t h e s e a c t i v i t i e s and r e s p o n s i b i l i t i e s into ;ne agency. in* Fresident M o o r h e a d t h e n r e a d t-Tie C o u n c i l ’ s procedures: the f o l l o w i n g statement r e g a r d - " F r o m t i m e to t i m e t h e r e h a s b e e n d i s c u s s i o n a b o u t the joint m e e t i n g s o f 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 a n d the B o a r d o f 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 * The i n d i v i d u a l 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 a t various t i m e s h a v e r e p e a t e d l y e m p h a s i z e d t h a t the material w h i c h is m o s t h e l p f u l t o t h e m is t h e i n t u i t i v e , i n d i v i d u a l j u d g m e n t s o f t h e m e m b e r s of t h e F e d e r a l Advisory C o u n c i l o n t h e v a r i o u s i t e m s l i s t e d on t h e A g e n d a * These j u d g m e n t s , b y a n d l a r g e , a r e u n i q u e to t h e m b e c a u s e of the p o s i t i o n s t h e y o c c u p y as t h e c h i e f e x e c u t i v e o f f i cers of m a j o r b a n k s i n t h e i r c o m m u n i t i e s . These positions make t h e m n o t o n l y l e a d e r s i n t h e c o m m u n i t y at l a r g e b u t in p a r t i c u l a r i n t h e f i n a n c i a l a f f a i r s of t h e p r i n c i p a l businesses a n d c o r p o r a t i o n s i n t h e i r a r e a s . T h u s , as a result of t h e r o l e of t h e m e m b e r s of t h e C o u n c i l , in t h e financial a f f a i r s o f t h e i r c o m m u n i t i e s , t h e y c o m e to h a v e a ’ r e a d i n g * , so to s p e a k , of t h e a t t i t u d e s , f r u s t r a t i o n s , plans and, in t u r n , j u d g m e n t s of m a n y p e r s o n s of i n f l u e n c e * It is th i s t y p e of i n f o r m a t i o n t h a t t h e B o a r d can o b t a i n nowhere e l s e . !rThe B o a r d o f G o v e r n o r s p r o b a b l y h a s t h e m o s t t ech n i c a l l y c o m p e t e n t e c o n o m i c s t a f f in t h e U n i t e d S t a t e s . They al s o h a v e a c c e s s t h r o u g h t h i s s t a f f , as w e l l as t h r o u g h the s t affs o f t h e r e g i o n a l F e d e r a l R e s e r v e b a n k s , of t h e most u p - t o - d a t e s t a t i s t i c a l i n f o r m a t i o n . W h a t t h e y do n o t have is k n o w l e d g e o f t h e c u r r e n t a t t i t u d e of the b u s i n e s s and f i n a n c i a l c o m m u n i t y . O n l y t h e m e m b e r s of the C o u n c i l can p r o v i d e t h i s i n f o r m a t i o n . rtI n p r e p a r i n g r e p l i e s to t h e i t e m s on the A g e n d a , the m e m b e r s of t h e C o u n c i l m a y w i s h to d i s c u s s t h e b u s i n e s s and f i n a n c i a l s i t u a t i o n in t h e i r c o m m u n i t i e s in an e f f o r t to e x p a n d t h e i r i n d i v i d u a l e x p e r i e n c e . P r e s u m a b l y this would n o t n e c e s s i t a t e t h e r e p r o d u c t i o n a n d b r o a d d i s t r i b u tion of t h e e n t i r e A g e n d a a n d s u b s e q u e n t l y the C o u n c i l ’s conclusions a n d t h e m i n u t e s of the j o i n t m e e t i n g w i t h the Board of G o v e r n o r s . Tr The m e e t i n g a d j o u r n e d at 12:15> P# M. THE C O U N C I L C O N V E N E D IN T H E B O A R D R O O M OF T H E F E D E R A L RfeSERVE B U I L D I N G , W A S H I N G T O N , D. C„, A T 2:30 P.M. ON F E B R U A R Y 15, 1 9 6 5 . A L L M E M B E R S OF T H E C O U N C I L WE R E PRESENT E X C E P T MR. W I L L I A M L , DAY. MR. H O W A R D % P E T E R S E N A T T E N D E D A S A L T E R N A T E F O R MR, DAY. Members of t h e B o a r d ’ s s t a f f g a v e an a u d i o - v i s u a l p r e s e n t a t i o n vi domestic i n t e r n a t i o n a l and. e c o n o m i c d e v e l o p m e n t s . An outline of p r e s e n t a t i o n i s to b e f u r n i s h e d to the m e m b e r s of the Council the B o a r d Ts s t a f f . THE C O U N C I L R E C O N V E N E D A T 9 :lj-5 P . M . O N F E B R U A R Y l5> 1965, IN R O O M 9 3 2 O F T H E M A Y F L O W E R H O T E L . 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 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 A T T E N D E D A S A L T E R N A T E F O R MR. DAY. 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 “ er.or&ndum to b e s e n t to t h e 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 j o i n t m e e t i n g of t he C o u n c i l a n d the B o a r d on 'ecruary 16, 1 9 6 5 * 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 '-eserve B u i l d i n g a t 1 1 : 5 0 P . M . o n F e b r u a r y 15, 1965. The m e e t i n g a d j o u r n e d a t 1 1 : 1 0 P . M e CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON FEBRUARY 16, 1965 1. Economic conditions and prospects. A. How does the Council appraise the general outlook for U.S. economy over the next several months, particularly in the event of an early steel settlement? The Council believes the general outlook for the U.S. economy over the next several months is favorable. Business activity currently is at a high level, stimulated in part by the stockpiling of steel as users attempt to hedge against the possibility of a steel strike. In the event of an early steel settlement, which now appears more doubtful, the pace of economic activity probably would slow somewhat. B. What importance is attached to an excise tax reduction as a stimulative factor? A reduction in excise taxes would give some stimulus to the economy, but it is not generally regarded as an important factor. On the other hand, there is little or no comparable experience on which to base such a judgment. C. Do Council members have information, based on current demand for bank credit, on further inventory build-up in steel and autos? Are there indications that inventory accumulation is spreading to other industries and projects? The strong, contraseasonal demand for bank credit suggests an inventory build-up, particularly of steel and autos. Although there is no satisfactory statistical information on inventory build up by industry, apart from the growing volume of corporate cash flows, the rise in bank loans indicates a possibility that stock piling may be spreading to products other than steel and autos. D. What is the current trend in demand for residential mortgage money? -2- The demand for residential mortgage money is not strong in relation to the supply of long-term funds, and rates are tending to soften. E. What are the prospects for continuing the broad stability in commodity prices that has existed for several years? The members of the Council believe that the broad stability in commodity prices that has existed for several years may now be subject to increasing upward pressure. 2. Banking developments. A. What is the present situation in the market for negotiable certificates of deposit and short-term unsecured notes? Is volume likely to increase, decline, or remain about stable in the months ahead? There continues to be a good market for negotiable certificates of deposit. Not only is there a considerable volume of funds, but the commercial banks aggressively seek such business. The volume of certificates of deposit will continue to grow, but some members of the Council believe there may be a tendency to shift these funds to the larger institutions in the money centers. The volume of notes is likely to increase in the months ahead, particularly if the New York State law is amended, permitting the New York City banks to issue such notes. The volume of both certificates of deposit and notes may increase further if the flow of corporate funds abroad is curtailed. B. Are the 1963 and 1964 rates of growth of total time and savings deposits (14.7 and 12.6 per cent) likely to continue in 1965? Preliminary figures suggest that the rate of growth of savings deposits will continue in 1965. The rate of growth of timej deposits will depend on the aggressiveness of banks in seeking these funds which will be largely determined by the strength of loan demand. C. At the end of 1964, the loan-deposit ratio at New York City banks passed 70 per cent for all banks the ratio was estimated at about 61 per cent. What is likely to happen to loan-deposit ratios in the months ahead? Will this limit bank loan expansion importantly? - 3- The members of the Council believe that some further rise in loan-deposit r a tio s may occur in the months ahead. I t is doubt fu l that th is w i l l l i m i t bank loan expansion s ig n ific a n tly in the immediate fu tu re . Banks which have a strong loan demand w ill attempt to o b ta in funds by b id d in g for c e r tific a te s of deposit and notes. D. Commercial bank loans to foreigners probably amounted to almost $2 billion in 1964--an increase of over 25 per cent. Is c o n tin u a tio n of th is rate of increase in prospect? The members of the Council dsfe- believe that the recent high rate of increase in commercial bank loans to foreigners will not continue in the months ahead, especially in view of the current program of the Administration. 3. Does the Council care to express any views with regard to the Board’ s Regulation F, Securities of Member S ta te Banks, which was issued e ffe c tiv e January 1, 1965? The members of the Council believe that revisions of Regulation F, which became effective January 1, 1965, have been helpful. It is hoped that there will be a continued open-mindedness in interpretation and a willingness to make changes that may be neces sary for the efficient and effective administration of the Regulation. 4. How has the business and financial community reacted to recent U.S. balance of payments developments? 5. What are the Council's views on monetary and credit policy under current circumstances? The Council believes that the failure to redress the deficit in our balance of payments has caused increasing concern in the busi ness and financial community. There is a growing conviction that this problem is of such importance to the continuing welfare of our economy and to this nation's leadership in the world that a comprehensive program of action is imperative. A voluntary program to restrain temporarily the outflow of capital from the United States is to be commended and will undoubtedly be helpful. The business and financial community will unquestionably cooperate in supporting the program. However, in the judgment of the members of the Council, the problem is of such magnitude that a broader approach is required for its solution. vould include such factors as the following: 1) a further reduction in U.S. economic and military aid overseas; 2) an easing of barriers tending to discourage the repatriation of earnings overseas; 3) a voluntary program to restrict capital outflows temporarily (capital outflows into foreign invest ments are the source of substantial overseas earnings and any program for their curtailment should be temporary); 4) a continuation and expansion of the program to encourage exports; and 5) a continuation of efforts to keep wages and other costs within productivity gains; 6) a reduction in the availability of credit. This The Council believes that monetary and credit policy have contributed significantly to economic expansion. However, recent international developments require a somewhat more restrictive credit policy. The availability of credit has encouraged financial institutions to make substantial loans abroad. The Council believes that it is possible to make less credit available without an increase in interest rates. Neverthe less, if the deficit in the balance of payments still persists, a rise in the structure of interest rates may be necessary. Economic activity at present is so strong and at such a high level that some lessening in credit availability and a modest increase in interest rates would have little or no effect on the expansion. The measures which may be necessary to redress the deficit in the balance of payments involve difficult choices. However, the economic well-being of the nation requires a willingness to make these choices. CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON FEBRUARY 16, 1965 1. Economic conditions and prospects. A. How does the Council appraise the general outlook for U.S. economy over the next several months, particularly in the event of an early steel settlement? The Council believes the general outlook for the U.S. economy over the next several months is favorable. Business activity currently is at a high level, stimulated in part by the stockpiling of steel as users attempt to hedge against the possibility of a steel strike. In the event of an early steel settlement, which now appears more doubtful, the pace of economic activity probably would slow somewhat. B. What importance is attached to an excise tax reduction as a stimulative factor? A reduction in excise taxes would give some stimulus to the economy, but it is not generally regarded as an important factor. On the other hand, there is little or no comparable experience on which to base such a judgment. C. Do Council members have information, based on current demand for bank credit, on further inventory build-up in steel and autos? Are there indications that inventory accumulation is spreading to other industries and projects? The strong, contraseasonal demand for bank credit suggests an inventory build-up, particularly of steel and autos. Although there is no satisfactory statistical information on inventory build up by industry, apart from the growing volume of corporate cash flows, the rise in bank loans indicates a possibility that stock piling may be spreading to products other than steel and autos. D. What is the current trend in demand for residential mortgage money? -2- The demand for residential mortgage money is not strong in relation to the supply of long-term funds, and rates are tending to soften. E. What are the prospects for continuing the broad stability in commodity prices that has existed for several years? The members of the Council believe that the broad stability in commodity prices that has existed for several years may now be subject to increasing upward pressure. 2. Banking developments. A. What is the present situation in the market for negotiable certificates of deposit and short-term unsecured notes? Is volume likely to increase, decline, or remain about stable in the months ahead? There continues to be a good market for negotiable certificates of deposit. Not only is there a considerable volume of funds, but the commercial banks aggressively seek such business. The volume of certificates of deposit will continue to grow, but some members of the Council believe there may be a tendency to shift these funds to the larger institutions in the money centers. The volume of notes is likely to increase in the months ahead, particularly if the New York State law is amended, permitting the New York City banks to issue such notes. The volume of both certificates of deposit and notes may increase further if the flow of corporate funds abroad is curtailed. B. Are the 1963 and 1964 rates of growth of total time and savings deposits (14.7 and 12.6 per cent) likely to continue in 1965? Preliminary figures suggest that the rate of growth of savings deposits will continue in 1965. The rate of growth of time* deposits will depend on the aggressiveness of banks in seeking these funds which will be largely determined by the strength of loan demand. C. At the end of 1964, the loan-deposit ratio at New York City banks passed 70 per cent for all banks the ratio was estimated at about 61 per cent. What is likely to happen to loan-deposit ratios in the months ahead? Will this limit bank loan expansion importantly? -3- The members of the Council believe that some further rise in loan-deposit ratios may occur in the months ahead. It is doubt ful that this will limit bank loan expansion significantly in the immediate future. Banks which have a strong loan demand will attempt to obtain funds by bidding for certificates of deposit and notes. D. Commercial bank loans to foreigners probably amounted to almost $2 billion in 1964--an increase of over 25 per cent. Is continuation of this rate of increase in prospect? The members of the Council dfe believe that the recent high rate of increase in commercial bank loans to foreigners will not continue in the months ahead, especially in view of the current program of the Administration. 3. Does the Council care to express any views with regard to the Board's Regulation F, Securities of Member State Banks, which was issued effective January 1, 1965? The members of the Council believe that revisions of Regulation F, which became effective January 1, 1965, have been helpful. It is hoped that there will be a continued open-mindedness in interpretation and a willingness to make changes that may be neces sary for the efficient and effective administration of the Regulation. 4. How has the business and financial community reacted to recent U.S. balance of payments developments? 5. What are the Council's views on monetary and credit policy under current circumstances? The Council believes that the failure to redress the deficit in our balance of payments has caused increasing concern in the busi ness and financial community. There is a growing conviction that this problem is of such importance to the continuing welfare of our economy and to this nation's leadership in the world that a comprehensive program of action is imperative. A voluntary program to restrain temporarily the outflow of capital from the United States is to be commended and will undoubtedly be helpful. The business and financial community will unquestionably cooperate in supporting the program. However, in the judgment of the members of the Council, the problem is of such -4- magnitude that a broader approach is required for its solution. would include such factors as the following: 1) a further reduction in U.S. economic and military aid overseas; 2) an easing of barriers tending to discourage the repatriation of earnings overseas; 3) a voluntary program to restrict capital outflows temporarily (capital outflows into foreign invest ments are the source of substantial overseas earnings and any program for their curtailment should be temporary); 4) a continuation and expansion of the program to encourage exports; and 5) a continuation of efforts to keep wages and other costs within productivity gains; 6) a reduction in the availability of credit. This The Council believes that monetary and credit policy have contributed significantly to economic expansion. However, recent international developments require a somewhat more restrictive credit policy. The availability of credit has encouraged financial institutions to make substantial loans abroad. The Council believes that it is possible to make less credit available without an increase in interest rates. Neverthe less, if the deficit in the balance of payments still persists, a rise in the structure of interest rates may be necessary. Economic activity at present is so strong and at such a high level that some lessening in credit availability and a modest increase in interest rates would have little or no effect on the expansion. The measures which may be necessary to redress the deficit in the balance of payments involve difficult choices. However, the economic well-being of the nation requires a willingness to make these choices. ON F E B R U A R Y 1 6 , 1 9 6 5 , 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 C O U N C I L H E L D A J O I N T M E E T I N G W I T H 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 S Y S T E M IN 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 0 C. A L L M E M B E R S OF T H E C O U NCIL 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. MR. H O W A R D C. P E T E R S E N A T T E N D E D A S A L T E R N A T E F O R MR. DAY. THE 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: C H A I R M A N MARTIN, V I C E CHAIRMAN BALDERSTON, GOVERNORS MILLS, RO B E R T S O N , SHEPARDSON AND MITCHELL. MR. S H E R M A N , S E C R E T A R Y , A N D MR. K E N Y O N , A S S I S T A N T S E C R E T A R Y , O F T H E B O A R D OF G O V E R N O R S A L S O W E R E PRESENT. The 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 the 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 the F e d e r a l Reserve S y stem. T h e i r c o n t e n t w i l l be c o m p a r e d w i t h the notes of the S e c r e t a r y of t h e 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 agreement, t h e y w i l l b e 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 the 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 a t 1 2 : 2 0 P«M« The n e x t m e e t i n g of t h e C o u n c i l w i l l b e h e l d on M a y 17-18, 1965
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