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N O TE:
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 notes is not to be
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 accu r a t e .
The
t r a n s c r i p t is f o r the s o l e u s e of the m e m b e r s of the F e d e r a l
Advisory Council.
T h e c o n c i s e o f f i c i a l m i n u t e s f o r 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 l a ter,
H.V.P.
W. J.K.
The S e c r e t a r y ’
s n o t e s of the 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 20, 1 9 6 7 , 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 the 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 M e s s r s . R.E, M c N e i l l , Jr*
and A . M . B r i n k l e y , Jr.
Mr. G e o r g e A. M u r p h y , C h a i r m a n of the
Board, I r v i n g T r u s t C o m p a n y , N e w Y o r k City, a t t e n d e d as an
A l t e r n a t e f o r Mr. M c N e i l l .
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 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 7 , 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 t h e F e d e r a l R e s e r v e b a n k s .
Mr. John 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
Prochnow was e l e c t e d S e c r e t a r y pro 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 a n d u n a n i m o u s l y e l e cted:
J o h n A. M o o r h e a d , P r e s i d e n t
S a m M. F l e m i n g , V i c e P r e s i d e n t
J o h n A. M a y e r , D i r e c t o r
R o g e r D. K n i g h t , Jr., D i r e c t o r
R o b e r t H. S t e w a r t , III, 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 was
fixed at $ 3 * 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
"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 r e p o r t f o r the y e a r 1966,
wnich had b e e n a u d i t e d b y 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 T h e F i r s t
_ational B a n k of C h i c a g o .
T h e r e p o r t w a s a p p r o v e d a n d p l a c e d on file.
— will be i n c l u d e d in 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
^ 4 5 0 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 the s e c r e t a r i a l and
•""idental 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 y e a r 1967.
by-laws were approved.
T h e 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
^■'63 for the m e e t i n g of N o v e m b e r 11+-!$, 1966.
The printed minutes
of the 1 9 6 6 m e e t i n g s of t h e C o u n c i l a l s o w e r e a p p r o v e d s u b
l e t to s u b s e q u e n t r e v i e w b y t h e m e m b e r s of the C o u n c i l .
President M o o r h e a d o p e n e d the m e e t i n g w i t h a b rief discussion
the C o u n c i l ’
s p r o c e d u r e s o u t l i n i n g the confidential nature of
Council’
s M e m o r a n d u m to the B o a r d of Governors*
I T E M I A, B, C, D A N D E
E C O NOMIC C O N D I T I O N S A N D P R O S P E C T S .
A.
HOW DOES T H E COUNCIL A P P R A I S E THE GENERAL ECONOMIC OUTLOOK
FOR THE F I R S T H A L F OF 1967, AND FOR THE FULL YEAR?
5.
WHAT I M P R E S S I O N S DO C O U N C I L MEMBERS HAVE F R O M THEIR CUSTOMER
C O N T A C T S W I T H R E S P E C T T O THE. O U T L O O K F O R W A G E S , P R I C E S , A N D
P R O F I T S in 1 9 6 7 ?
C.
R E C E N T S U R V E Y S P O I N T T O M A R K E D S L A C K E N I N G IN G R O W T H IN
BUSINESS OUTLAYS. QN P L A N T A N D E Q U I P M E N T . W O U L D COUNCIL
M E M B E R S E X P E C T T H E S E O U T L A Y S TO R E S P O N D P R O M P T L Y A N D V I G O R
OUSLY IF A N D AS F I N A N C I N G BECOMES MORE READILY AVAILABLE?
IF T H E I N V E S T M E N T TAX. C R E D I T W E R E T O B E R E S T O R E D ?
D.
W A T IS T H E C O U N C I L ’
S J U D G M E N T ON T H E L I K E L Y C O U R S E OF
BUSINESS
INVENTORIES OVER THE NEXT FEW MONTHS?
DOES ANY
I N V O L U N T A R Y I N V E N T O R Y A C C U M U L A T I O N A P P E A R TO B E R E F L E C T E D
IN C U R R E N T B U S I N E S S L O A N D E M A N D , OR IN C H A N G E S IN L O A N
REPAYMENT PATTERNS?
E.
IN T H E J U D G M E N T O F C O U N C I L M E M B E R S , H O W L O N G W I L L IT B E
B E F O R E H O U S I N G A C T I V I T Y R E V I V E S S I G N I F I C A N T L Y IN T H E I R
R E S P E C T I V E R E G I O N S , G I V E N T H E R E C E N T S I G N S OF E N L A R G E D F L O W S
OF F U N D S T O M A J O R G R O U P S O F M O R T G A G E L E N D E R 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 I a n d i n v i t e d m e m b e r s of the
Council' to r e p o r t o n " c o n d i t i o n s a n d the o u t l o o k in t h e i r r e s p e c t i v e
districts.
There w a s g e n e r a l a g r e e m e n t of a s l i g h t r i s e in e c o n o m i c a c t i v i t y
iuring the f i r s t h a l f of 1 9 6 7 w i t h s o m e s t e p - u p in the l a t t e r h a l f of
the year. W h i l e a n u m b e r o f m e m b e r s a n t i c i p a t e s o m e f u r t h e r s o f t e n i n g
in the p r i v a t e s e c t o r , p a r t i c u l a r l y in the r a t e of a c c u m u l a t i o n of
inventories, the e x p e c t e d i n c r e a s e in g o v e r n m e n t s p e n d i n g t o g e t h e r
with some r i s e in t o t a l c o n s u m e r e x p e n d i t u r e s a r e l i k e l y to o f f s e t
-ese d e v e l o p m e n t s .
T h e r e a l s o w a s u n a n i m i t y a m o n g the m e m b e r s t h a t
wages will be u n d e r s t r o n g u p w a r d p r e s s u r e d u r i n g the ye a r .
However,
several m e m b e r s c a u t i o n e d t h a t c o m p e t i t i o n is l i k e l y to p r e v e n t p r i c e
•-creases a d e q u a t e to a b s o r b r i s i n g c o s t s f u l l y a n d as a c o n s e q u e n c e
.^ofit m a r g i n s w o u l d n a r r o w .
Mr. M u r p h y i n d i c a t e d t h a t h e t h o u g h t p r e - t a x c o r p o r a t e p r o f i t s
1J ght rise d u r i n g the y e a r ,
Several m e m b e r s of t h e C o u n c i l s t a t e d tha t t h e y w e r e d o u b t f u l
r this d e v e l o p i n g a n d as a m a t t e r of f a c t , t h o u g h t c o r p o r a t e p r o f i t s
not i n c r e a s e .
A n u m b e r of m e m b e r s e x p r e s s e d d o u b t that b u s i n e s s o u t l a y s in
plant and e q u i p m e n t w o u l d p r o m p t l y a n d v i g o r o u s l y r e s p o n d to an
increased a v a i l a b i l i t y of f i n a n c i n g a n d the r e s t o r a t i o n of the i n
vestment t a x c r e d i t .
W h i l e a c k n o w l e d g i n g that these factors w ould
be helpful, s e v e r a l m e m b e r s m e n t i o n e d t h a t in p r e s e n t c i r c u m s t a n c e s
other for c e s m a y b e m o r e d e t e r m i n i n g .
T h e s e w o u l d i n c l u d e the fact
that b u s i n e s s i n v e s t m e n t h a s b e e n r i s i n g f o r a n u m b e r of y e a r s and
is at an e x c e e d i n g l y h i g h l e v e l , p r o f i t m a r g i n s are n a r r o w i n g , a n d
the rate of g r o w t h i n o v e r - a l l d e m a n d h a s l e s s e n e d .
In the d i s
cussion of i n v e n t o r i e s , t h e r e w a s g e n e r a l a g r e e m e n t t h a t the r a t e
of a c c u m u l a t i o n is l i k e l y to m o d e r a t e c o n s i d e r a b l y o v e r the n e x t
few months.
S e v e r a l m e m b e r s n o t e d t h a t m a n y b u s i n e s s m e n feel no
urgency to l i q u i d a t e i n v e n t o r i e s in v i e w of r i s i n g p r i c e s a n d that
this m a y a l t e r l o a n r e p a y m e n t p a t t e r n s .
The d i s c u s s i o n of the h o u s i n g s i t u a t i o n a n d o u t l o o k r e v e a l e d
differences a m o n g d i s t r i c t s .
Most members, however, anticipate
some r e v i v a l of h o u s i n g a c t i v i t i e s in 1 9 6 7 in v i e w of the e n l a r g e d
flows of f u n d s to m a j o r g r o u p s of m o r t g a g e l e n d e r s .
A few members
added
tha t i n c r e a s i n g c o s t s of c o n s t r u c t i o n m a y s e r v e as a
deterrent *
I T E M II A, B, C, A N D D
BANKING D E V E L O P M E N T S .
A.
W H A T A R E T H E P R E S E N T A T T I T U D E S OP B A N K S W I T H R E S P E C T TO T H E
A DEQUACY OP THEIR L I Q U I D I T Y POSITIONS?
B.
W H A T IS T H E C O U N C I L ' S A S S E S S M E N T OP T H E S T R E N G T H OP B U S I N E S S
LOAN DEMANDS C U R R E N T L Y AND OVER THE NEXT PEW MONTHS?
C.
DO C O U N C I L M E M B E R S E X P E C T A N Y S I G N I F I C A N T R E L A X A T I O N OP B A N K
LENDING POL I C I E S IN THE N E A R FUTURE?
D.
HOW W O U L D COUNCIL MEMB E R S APPRAISE RECENT AND PROSPECTIVE
C H A N G E S IN D E M A N D F O R C E R T I F I C A T E S OF D E P O S I T ON T H E P A R T
OF V A R I O U S K I N D S OF B A N K C U S T O M E 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 II,
A brief disc u s s i o n followed.
The Council c o n c l u d e d t h a t m o s t b a n k e r s are not s a t i s f i e d w i t h t heir
liquidity p o s i t i o n s a n d a r e d e s i r o u s of i m p r o v i n g t h e m as s o o n as
possible.
S e v e r a l m e m b e r s n o t e d , h o w e v e r , that in some d i s t r i c t s ,
particularly in the r u r a l a r e a s , b a n k l i q u i d i t y l e v e l s are s a t i s
factory and t h e r e is n o p a r t i c u l a r p r e s s u r e to c h a n g e them.
There
was a f a i r l y w i d e s p r e a d b e l i e f t h a t t h e r e is a s t r o n g u n d e r l y i n g
demand for b u s i n e s s l o a n s a n d t h a t this w i l l c o n t i n u e o ver the n ext
fsw m o n t h s . T h i s w i l l r e f l e c t , in p art, b o r r o w i n g s to c o v e r a c c e l
erated tax p a y m e n t s ,
Because of the l i q u i d i t y p o s i t i o n s in m o s t banks, the C o u n c i l
?Ges not a n t i c i p a t e a n y s i g n i f i c a n t r e l a x a t i o n in l e n d i n g p o l i c i e s
n the near f u t u r e .
A d i s c u s s i o n on the o u t l o o k f o r c e r t i f i c a t e s of d e p o s i t i n d i c a t e d
that b a n k e r s a n t i c i p a t e an i n c r e a s e d d e m a n d f o r c / D Ts on the p a r t of
various k i n d s of b a n k c u s t o m e r s .
The r e l a t i v e
increased availability
of funds and the f a c t t h a t r a t e s o f f e r e d a r e c o m p e t i t i v e l y a t t r a c t i v e
are f actors c o n t r i b u t i n g to this d e v e l o p m e n t .
It w a s a c k n o w l e d g e d
that there h a s b e e n s o m e s h i f t of f u n d s f r o m p a s s b o o k savi n g s to h i g h e r
yielding c o n s u m e r c e r t i f i c a t e s ,
I T E M III' A, B,
AND C
B A L A N C E OP P A Y M E N T S .
A.
HOW ST R O N G AND W I D E S P R E A D A R E CURRENT FOREIGN DEMANDS FOR
TERM LOANS, S H O R T - T E R M LOANS, AND A C CEPTANCE CREDITS FROM
U.S. B A N K S ?
H A V E S U C H D E M A N D S S H O W N R E C E N T S I G N S OF
CHANGING SIGNIFICANTLY?
B.
HOW FAR TO W A R D S T H E L E V E L S P E C I F I E D IN THE 1967 GUIDELINES
W O U L D T H E C O U N C I L E X P E C T T H E B A N K I N G S Y S T E M AS A W H O L E TO
.EXPAND I T S H O L D I N G S O F F O R E I G N A S S E T S ?
C.
W O U L D T H E C O U N C I L E X P E C T U. S. B A N K I N D E B T E D N E S S TO T H E E U R O
D O L L A R M A R K E T 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 U N C H A N G E D
IN T H E M O N T H S J U S T .AHEAD?
_____________________________________
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 the t h i r d i t e m on the
Agenda. T h e m e m b e r s r e p o r t e d t h a t t h e y b e l i e v e t h e r e is a s t r o n g
and w i d e s p r e a d c u r r e n t f o r e i g n d e m a n d f o r all t y p e s of c r e d i t f r o m
7.3. banks a n d t h a t t h i s d e m a n d h a s n o t r e c e n t l y c h a n g e d s i g n i f i
cantly, In v i e w of t h e s l i g h t e a s i n g in d o m e s t i c d e m a n d , the C o u n c i l
anticipates t h a t t h e f o r e i g n a s s e t h o l d i n g of the b a n k i n g s y s t e m w i l l
approach the 1 9 6 7 g u i d e l i n e s .
M o r e o v e r , b e c a u s e of t h e e a s i n g in
demand p r e s s u r e s , U . S . i n d e b t e d n e s s to t h e E u r o - d o l l a r m a r k e t is
likely to d e c l i n e as t h e s e o b l i g a t i o n s m a t u r e in the m o n t h s a h e a d .
In general, the r a t e s p a i d f o r E u r o - d o l l a r s h a v e b e e n s o m e w h a t a b o v e
prevailing m o n e y m a r k e t r a t e s i n t h e U . S .
I T E M IV
'•rHAT A R E T H E C O U N C I L TS V I E W S
CURRENT C I R C U M S T A N C E S ?
ON M O N E T A R Y AND CREDIT POLICY UNDER
_________________________________________
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 IV.
In g e n e r a l the C o u n c i l a p p r o v e s
J e easing t hat c h a r a c t e r i z e s c u r r e n t m o n e t a r y a n d c r e d i t p o l i c y .
— ere was some f e e l i n g t h a t in v i e w of the a n t i c i p a t e d h e a v y c o r p o r a t e
Arrowing to c o v e r t h e a c c e l e r a t e d t a x p a y m e n t $ in the m o n t h s ahead,
;;°netary p o l i c y s h o u l d n o t b e c h a n g e d p a r t i c u l a r l y b u t that a k i n d of
.2it tight" a t t i t u d e s h o u l d p r e v a i l .
It w a s s u b s e q u e n t l y d e c i d e d to
;-l>de in the C o u n c i l Ts r e s p o n s e t h e h o p e of f a v o r a b l e c o n s i d e r a t i o n
J1 the C o n g r e s s of a m o r e r e s t r i c t i v e f i s c a l p o l i c y -- a r e d u c t i o n in
/ ^ e f e ase e x p e n d i t u r e s , o r f a i l i n g that, an i n c r e a s e in taxes.
This
permit a m o r e b a l a n c e d m i x of f i s c a l and m o n e t a r y p o l i c y r a t h e r
the u n d u e r e l i a n c e on c r e d i t r e s t r i c t i o n w h i c h m a r k e d m u c h of
66
^ .
http://fraser.stlouisfed.org/
The m e e t i n g
Federal Reserve Bank of St. Louis
a d j o u r n e d at 1 2 : 2 0 P.M.
T H E 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 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 20, 1967*
A L L M E M B E R S O P 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 E S S R S . R.E.
M C N E I L L , JR. A N D A . M . B R I N K L E Y , JR.
Messrs. R a l p h A. Y o u n g a n d D a n i e l H. B r i l l , S e n i o r A d v i s e r s to
the Board, a n d R o b e r t C. H o l l a n d , A d v i s e r to the B o a r d , t o g e t h e r
with other m e m b e r s of t h e B o a r d ’s staff, p a r t i c i p a t e d in an a u d i o
visual r e v i e w of the e c o n o m i c o u t l o o k as o u t l i n e d b y the P r e s i d e n t s
Council of E c o n o m i c A d v i s e r s .
T H E C O U N C I L R E C O N V E N E D A T 5 : 0 0 P . M . ON F E B R U A R Y 20, 1967, IN
THE B O A R D R O O M OF T H E M A DISON.
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 E S S R S . R .E. M C N E I L L , JR. A N D A .M.
B R I N K L E Y , JR.
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
Memorandum 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 h e C o u n c i l a n d t h e B o a r d on
February 21, 1 9 6 7 .
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 R e
serve B u i l d i n g at 6 : 5 0 P . M . on F e b r u a r y 20, 1 9 6 7 .
The m e e t i n g a d j o u r n e d at 6 : l 5 P.M.
CONFIDENTIAL
MEMORANDUM TO THE BOARD OF GOVERNORS
FROM THE
FEDERAL ADVISORY COUNCIL
RELATIVE TO THE AGENDA FOR THE JOINT MEETING
ON FEBRUARY 21, 19 67
1.
Economic conditions and prospects.
A.
How does the Council appraise the general
economic outlook for the first half of
1967, and for the full year?
The Council anticipates a moderate rise in general economic
activity during the first half of 1967. During the latter half of
the year there is some expectation that the rate of rise may increase
slightly. While a number of members of the Council anticipate some
further softening in the private sector, as certain self-correcting
forces assert themselves--a possible topping out of the capital
spending boom, some liquidation of inventories, and a slow-down in
consumer buying of durable goods--the expected increase in Government
spending and some increase in total consumer spending are likely to
offset these developments. As a consequence, the Council believes
that over-all business and economic activity in 1967 will continue to
rise though at a considerably slower and more sustainable pace.
B.
What impressions do Council members have
from their customer contacts with respect
to the outlook for wages, prices, and
profits in 1967?
The members of the Council have the general impression from
contacts with their customers that wages will be under strong upward
pressure in 1967. As competition is likely to prevent price increases
adequate to absorb rising costs fully, profit margins will narrow,
with little or no increase in total corporate pre-tax profits.
C.
Recent surveys point to marked slackening in
growth in business outlays on plant and
equipment. Would Council members expect
these outlays to respond promptly and
vigorously if and as financing becomes more
readily available? If the investment tax
credit were to be restored?
The members of the Council doubt that business outlays on
plant and equipment would promptly and vigorously respond to an
-2-
incteased availability of financing and the restoration of the
investment tax credit. These factors would be helpful but in present
circumstances other forces may be more determining. These forces
would include the fact that business investment has been rising
rapidly for a number of years and is at an exceedingly high level,
profit margins are narrowing, and the rate of growth of over-all
demand has lessened.
D.
What is the Council's judgment on the likely
course of business inventories over the next
few months? Does any involuntary inventory
accumulation appear to be reflected in cur
rent business loan demand, or in changes in
loan repayment patterns?
Most members of the Council believe that the rate of inven
tory accumulation will moderate considerably over the next few months.
While there may be some involuntary inventory accumulation, this is
not readily documented from a review of current business loan demand.
However, several members reported that some businessmen feel no
urgency to liquidate inventories in view of rising prices, and that
this may be changing loan repayment patterns.
E.
In the judgment of Council members, how long
will it be before housing activity revives
significantly in their respective regions,
given the recent signs of enlarged flows of
funds to major groups of mortgage lenders?
Although the judgment of Council members varies somewhat
by district, most members anticipate some revival of housing activities
in 1967, given the recent signs of enlarged flows of funds to major
groups of mortgage lenders. However, the increasing costs of con
struction may serve as a deterrent.
2.
Banking developments.
A.
What are the present attitudes of banks with
respect to the adequacy of their liquidity
positions?
The Council believes that most bankers, especially in the
larger cities, are not satisfied with their liquidity positions and
are desirous of improving them as soon as possible.
~3-
B.
What is the Council's assessment of the
strehgth ot business loan demands currently
and over the next few months?
The Council believes there is a strong underlying demand for
business loans and that this will continue over the next few months,
reflecting in part, borrowings to cover accelerated tax payments.
However, the pressure is not as intense as it was in the latter half
of last year.
C.
Do Council members expect any significant
relaxation of bank lending policies in the
near future?
The Council members do not expect any significant relaxation
of lending policies in the near future, as banks are not yet satisfied
with their present liquidity positions.
D.
How would Council members appraise recent
and prospective changes in demand for certif
icates of deposit on the part of various kinds
of bank customers?
The Council anticipates an increased demand for certificates
of deposit on the part of various kinds of bank customers. This
reflects some slowing in economic activity and easing of credit
policies, which has increased the availability of funds, and forced
the structure of interest rates lower, making corporate CD rates
competitive with other market instruments. In addition, there has
been a step-up in consumer savings and a shift of funds from passbook
savings to higher yielding consumer certificates.
3.
Balance of payments.
A.
&->w strong and widespread are current foreign
demands for term loans, short-term loans, and
acceptance credits from U.S. banks? Have
such demands shown recent signs of changing
significantly?
The members of the Council believe there is a strong and
widespread current foreign demand for term loans, short-term loans,
and acceptance credits from U.S. banks. The Council is not aware
of any recent significant change in the intensity of these demands.
-4-
B.
How far towards the level specified in the
19 67 guidelines would the Council expect the
banking system as a whole to expand its
holdings of foreign assets?
The members of the Council anticipate that the foreign
asset holdings of the banking system as a whole will approach
the 1967 guidelines.
C.
Would the Council expect U.S. bank indebtedness
to the Euro-dollar market to increase, decline,
or remain about unchanged in the months just
ahead?
The Council anticipates that U.S. indebtedness to the
Euro-dollar market is likely to decline as these obligations
mature in the months ahead. By and large, the rates paid for
Euro-dollars have been somewhat above prevailing money market
rates in the U.S. As a consequence, banks are likely to reduce
these liabilities in preference to others.
4.
What are the Council's views on monetary
and credit policy under current circumstances?
The Council in general approves of the easing that charac
terizes current monetary and credit policy. Moreover, the Council
is hopeful of favorable consideration by the Congress of a more
restrictive fiscal policy— a reduction in nondefense expenditures,
or failing that, an increase in taxes. This will permit a more
balanced mix of fiscal and monetary policy rather than the undue
reliance on credit restriction which marked much of 1966.
Because of the balance of payments and inflationary problems,
any further significant easing of monetary policy should be con
tingent upon a more balanced mix of fiscal and monetary policy or
a further slowing in over-all business activity.
ON F E B R U A R Y 21, 1 9 6 7 , 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 I N 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 ,
WASHINGTON, D.C,
ALL M E M B E R S OF T H E COUNCIL W E R E PRESENT
E X C E P T M E S S R S , R.E. M C N E I L L , JR. A N D A . M . B R I N K L E Y , JR,
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 PR E S E N T :
CHAIRMAN MARTIN, VICE CHAIRMAN ROBERTSON, GOVERNORS SHEPARD
SON, M I T C H E L L , D A A N E , M A I S E L A N D B R I M M E R .
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 L S O W E R E P R E S E N T .
The m i n u t e s of t h e j o i n t m e e t i n g a r e 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 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 the n o t e s of the S e c r e t a r y
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 , the y w i l l
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 the m e m b e r s of t h e 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 : 2 ^ P.M,
The next m e e tin g o f th e C o u n c il w i l l be h e ld on May 15-16, 1967-
A meeting of the Board of Governors of the Federal Reserve
System with the Federal Advisory Council was held in the Board Room
of the Federal Reserve Building in Washington, D. C., at 10:30 a.m.
on Tuesday, February 21, 1967.
PRESENT:
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
Martin, Chairman
Robertson, Vice Chairman
Shepardson
Mitchell
Daane
Maisel
Brimmer
Mr. Sherman, Secretary
Mr. Kenyon, Assistant Secretary
Messrs. Simmen, Still, Mayer, Wilkinson, Fleming,
Bodman, Moorhead, Knight, Stewart, and Larkin,
Members of the Federal Advisory Council from
the First, Third, Fourth, Fifth, Sixth, Seventh,
Ninth, Tenth, Eleventh, and Twelfth Federal
Reserve Districts, respectively
Mr. Prochnow, Secretary of the Council
Mr. Korsvik, Assistant Secretary of the Council
The following officers had been elected by the Federal Advisory
Council to serve for the year 1967:
President
Vice President
Secretary
Assistant Secretary
John A. Moorhead
Sam M. Fleming
Herbert V. Prochnow
William J. Korsvik
The following had been elected members of the Executive Com
mittee to serve with the President (Mr. Moorhead) and Vice President
('Mr. Fleming):
•John
A. Mayer.
Roger D. Knight, Jr., Robert H. Stewart, III, and
2/21/67
-2The following members of the Council had begun their service
as such at the beginning of 1967 and were attending their first
meeting of the Council:
Harold F. Still, Jr., President, Central-Penn National
Bank of Philadelphia, Philadelphia, Pennsylvania
John A. Mayer, Chairman of the Board and Chief Executive
Officer, Mellon National Bank and Trust Company,
Pittsburgh, Pennsylvania
J. Harvie Wilkinson, Jr., Chairman of the Board, StatePlanters Bank of Commerce and Trusts, Richmond,
Virginia
Frederick G. Larkin, Jr., President, Security First National
Bank, Los Angeles, California
George A. Murphy, Chairman of the Board of Irving Trust Company,
New York City, represented the Second District at the Council’
s meeting
on Monday in the absence of R. E. McNeill, Jr., member of the Council
from that District, who was unable to attend because of illness.X1
However, because of a previous commitment, Mr. Murphy was unable to
remain for today's meeting with the Board.
A. M. Brinkley, Jr., member from the Eighth District, also
was unable to attend this meeting of the Council.
There had been distributed a memorandum listing the topics to
be discussed at today's meeting, together with the statement of the
Council on each,
The topics, the Council's statement on each topic,
and a summary of the discussion at this meeting follow.
17
Mr. McNeill, Chairman of the Board of Manufacturers Hanover Trust
Company, New York City, began his service as a member of the
Council at the beginning of this year.
2/21/67
-3-
1.
Economic conditions and prospects.
A.
How does the Council appraise the general
economic outlook for the first half of 1967,
and for the full year?
The Council anticipates a moderate rise in general
economic activity during the first half of 1967. During
the latter half of the year there is some expectation that
the rate of rise may increase slightly. While a number of
members of the Council anticipate some further softening in
the private sector, as certain self-correcting forces assert
themselves--a possible topping out of the capital spending
boom, some liquidation of inventories, and a slow-down in
consumer buying of durable goods--the expected increase in
Government spending and some increase in total consumer
spending are likely to offset these developments, As a
consequence, the Council believes that over-all business
and economic activity in 1967 will continue to rise,, though
at a considerably slower and more sustainable pace.
President Moorhead said not much difference of opinion was
reflected in the reports from the individual districts.
Generally
speaking, it was felt that the second half of the year would show
an upward trend but that the first half would be relatively flat.
Governor Mitchell inquired whether the Council’
s views were
close to the projections of the Council of Economic Advisers, and
President Moorhead replied that the Advisory Council had not attempted
to attach numbers to its forecast.
He added, however, that the CEA
model predicted a growth in GNP in the order of 4-1/2 per cent.
He
thought that might be reasonable; it would represent a growth con
siderably slower than the pace of 1966.
Chairman Martin inquired whether the Council anticipated an
appreciable rise in unemployment, and President Moorhead replied that
he did not.
In the automobile industry and a few others there had
2/21/67
-4-
been reports of substantial layoffs, but over all be would not
anticipate any appreciable unemployment rise.
One factor was that
additions to the labor force should be less than last year.
Another
member of the Council suggested that there might be a substantial
reduction in overtime.
Governor Mitchell asked whether the Council was apprehensive
about the secondary effects of layoffs in the automobile industry,
about consumer conditions generally, and about inventory liquidation.
He gathered the Council was not sufficiently apprehensive to depart
from the general framework of the CEA model.
President Moorhead said he thought that was correct.
There
was some opinion within the Advisory Council that the CEA model was
too optimistic with regard to the revival of housing, a subject that
was to be discussed later on today’
s agenda.
B.
What impressions do Council members have
from their customer contacts with respect
to the outlook for wages, prices, and
profits in 1967?
The members of the Council have, the general impression
from contacts with their customers that wages will be under
strong upward pressure in 1967. As competition is likely
to prevent price increases adequate to absorb rising costs
fully, profit margins will narrow, with little or no increase
in total corporate pre-tax profits.
President Moorhead said there was some difference of opinion
on this question.
Mr. Murphy had felt that over=all profits in the
Second District would be up, but he was the only member who felt that
profits would be up, at least by any significant amount.
2/21/67
-5-
Mr. Larkin said he felt it was necessary, in talking about
the West Coast, to divide into two major categories.
Industries
that were construction oriented would continue to have some problems,
but in the broad aerospace category he felt that profits would rise.
Thus, there was likely to be a mixed picture.
Governor Robertson recalled that at this time last year a
rather general feeling existed within the Council that there would
be a significant profit squeeze in 1966, but it did not materialize.
President Moorhead said the Council was more concerned about
wages now than a year ago.
Many instances were seen where the union
leadership seemed no longer to be in control and proposed contracts
were rejected by the union membership.
The Council foresaw a sub
stantial increase in wages throughout the year, with prices unlikely
to increase to the same extent.
Mr. Fleming agreed that the determining factor would be
whether industries could raise prices sufficiently to offset the
almost universal increase in costs.
to do that better than others.
Some industries would be able
The increase in the minimum wage
would squeeze profits drastically for many smaller concerns, while
firms with defense contracts were likely to make good money.
Mr. Still expressed doubt that industries would be able to
increase productive efficiency this year as much as during the past
several years to offset rising wage costs.
Mr. Simmen reported mixed views in the First District..
While
there was some thinking that profits would be off as much as 5 per cent,
2/21/67
-6-
there was also some feeling that over-all profits would be relatively
stable because in certain sectors it would be possible to increase
prices sufficiently to maintain margins.
Mr. Knight noted that the recent boycotting of retail food
stores by women began in the Denver area.
Many businessmen thought
it would not amount to anything, but store profits had suffered as
the consumers turned to cheaper foods.
Governor Brimmer brought out that the recent McGraw-Hill
survey indicated that profits would be much higher in 1967 on an
absolute dollar basis and that margins might not shrink much.
He
then asked whether the Council had assigned any numbers to the
anticipated increase in wages.
President Moorhead observed that 5 per cent seemed to be
almost a minimum in current wage settlements.
Mr. Fleming mentioned
that many companies in his area were not unionized.
Anticipating
union settlements involving increases of about 5 per cent, nonunion
companies were voluntarily increasing wages to beat the gun.
C.
Recent surveys point to marked slackening
in growth in business outlays on plant
and equipment. Would Council members
expect these outlays to respond promptly
and vigorously if and as financing becomes
more readily available? If the investment
tax credit were to be restored?
The members of the Council doubt that business out
lays on plant and equipment would promptly and vigorously
respond to an increased availability of financing and the
restoration of the investment tax credit. These factors
would be helpful but in present circumstances other forces
2/21/67
-7-
may be more determining. These forces would include the
fact that business investment has been rising rapidly for
a number of years and is at an exceedingly high level,
profit margins are narrowing, and the rate of growth of
over-all demand has lessened.
President Moorhead said the Council would expect that if the
investment tax credit was not restored there might be some further
postponements of capital expenditures.
However, capital spending
plans reflect primarily the need of companies for additional plant
and equipment.
If the need is there, a company is likely to go ahead
with its plans whether a tax credit is available or not.
The availa
bility of the tax credit had been a substantial reason for plant
expenditures, but it was not the overriding reason.
Governor Brimmer referred to a Commerce Department survey
published yesterday which indicated that corporations had in fact
postponed a substantial amount of expenditures.
Turning to the
latest McGraw-Hill survey, he noted that it suggested that expenditures
in 1967 would be higher than anticipated earlier.
He inquired whether
the Council members could assign any reasons for this more bullish
outlook.
Mr. Fleming referred, by way of illustration, to a printing
concern in his area that had run into substantial overtime last year
and decided to purchase new equipment in an effort to reduce overtime.
Also, with the increase in the minimum wage, many companies were
realizing that the only way to maintain earnings was to modernize
2/21/67
-8-
equipment.
He believed there were likely to be substantial expendi
tures for equipment in an attempt to offset wage costs.
In the South,
he pointed out, the impact of the minimum wage increases should not
be underestimated, for the operations of many companies were geared
to the minimum wage.
President Moorhead commented, with regard to the Commerce
Department survey, that when companies were asked why they had not
gone ahead with their plans it was easy for them to refer to the
suspension of the investment tax credit.
Actually there may have
been a number of more complex factors involved.
It could be an
oversimplification to say that the whole decision-making process
turned on the suspension of the tax credit.
D.
What is the Council's judgment on the
likely course of business inventories
over the next few months? Does any
involuntary inventory accumulation
appear to be reflected in current busi
ness loan demand, or in changes in loan
repayment patterns?
Most members of the Council believe that the rate of
inventory accumulation will moderate considerably over the
next few months. While there may be some involuntary inven
tory accumulation, this is not readily documented from a
review of current business loan demand. However, several
members reported that some businessmen feel no urgency to
liquidate inventories in view of rising prices, and that
this may be changing loan repayment patterns.
Mr. Wilkinson said a number of businessmen were taking the
position that, if they were under no great pressure, they should not
liquidate inventories because, with prices rising, they would not be
2/21/67
-9-
able to replenish their inventories at existing cost.
There had
been no reflection of strong pressure in the form of requests to
postpone loan repayments.
Retained earnings from 1966 were good,
and companies perhaps were using the liquidity available from those
retained earnings to help carry their inventories.
Governor Mitchell suggested that some bank customers must
have large inventories relative to sales, yet the Council members
apparently were not apprehensive,
Messrs. Wilkinson and Still said they saw no need for great
apprehension.
They pointed out that companies could cut back new
production rather than take discounts to reduce inventories.
They
felt that the existing inventories could be worked off satisfactorily
over a period of time.
Governor Mitchell inquired whether the Council members saw
any evidence that loan repayments were not coming in because of the
inventory problem, and Mr. Wilkinson said there was no such evidence.
He mentioned two construction loans that were to be closed out through
permanent financing, one in May and one in June.
For certain reasons
the builders wanted to close out earlier, and to their surprise found
that the insurance companies were willing to close out earlier than
scheduled.
In his opinion the insurance companies had experienced
quite a turnaround in their positions.
The increase in the volume
of policy loans had made them apprehensive until they could see the
situation topping out, and that had now occurred.
He would say that
2/21/67
-10-
the insurance companies, while not in as easy a position as in 1965,
were in a much easier p o sitio n than they had expected to be a few
months ago.
With respect to loan repayment problems, Mr. Larkin said
there were some in the aerospace industry.
A lo t of loans on the
books of many banks were there because of the inventory jam-up.
The
je t motor problem was perhaps the most important; in that case,
inventories had backed up to sub-subcontractors and supply firms.
Firms were delaying payments for goods because they could not delay
paying th e ir labor costs.
The s itu a tio n was causing a good deal of
d if f ic u lt y , and the end was not in s ig h t.
Asked by Governor M itc h e ll whether that was a more important
problem than the pile-up of inventories in consumer goods ind u strie s,
Mr. Larkin said he was not q u a lifie d to say which was the more impor
tant.
There were some tender spots in the automobile s itu a tio n .
He
fe lt that some of the inventories could be worked o ff only at the
expense of production.
Chairman M artin noted that nevertheless Mr. Larkin had
suggested e a r lie r th at p r o fits in the aerospace industry were lik e ly
to ris e .
Mr. Larkin confirmed that that was his view.
He f e lt that
a f a ir amount of cost could be pushed on to the Government.
Governor M itc h e ll observed that inventory accumulation was
at an annual rate of close to $18 b i l l i o n , a lo t of which showed up
2/21/67
-11-
in goods in process, and Mr. Larkin commented that one might ask why
companies did not slow down production.
The reason often given was
that th e ir s k ille d labor force was too important and that they did
not dare to le t those workers go.
Governor Maisel asked whether there was any feeling as to
how far the inventory accumulation process had proceeded.
In other
words, how much of the inventory problem had already been experienced?
Mr. Bodman expressed the view that a very jo ltin g readjust
ment would be involved i f inventories suddenly stopped increasing.
Mr. S t i l l said i t was f e lt in the Third D is tr ic t that invento
ries, measured in absolute terms, might go down between now and the
middle of the year.
However, that was not the general view w ithin
the Council.
Mr. Knight reported that c a ttle feeders were holding o ff on
their marketings to some extent, follow ing which Governor Shepardson
commented that anyone of experience should know that the longer he
held the stock the more he would increase the supply, with less
prospect of p rice improvement.
The more weight put on the c a ttle ,
the more beef there was to market.
The successful feeder moved his
c a ttle when they were ready to go.
Mr. Knight noted that neverthe
less there was always a tem ptation to hold out temporarily in the
hope that prices would go up.
Governor M itc h e ll then inquired whether any of the Council
members were apprehensive about the inventory positions of th e ir
customers.
2/21/67
-12Mr. Larkin re p lie d th a t, while no great pressure was being
exerted, the matter was being discussed a l l the time.
President
Moorhead said he thought there was some pressure on auto dealers.
In his area the used car s itu a tio n was quite good, however, perhaps
because not so many used cars were being taken in recently.
Mr. Knight said th at in his area there were r e la tiv e ly few indepen
dent dealers, the manufacturers having gradually taken over most of
the dealerships.
Governor Shepardson inquired whether any of the Council
members were fa m ilia r w ith the NFO (N ational Farm O rganization)
program to encourage acce le ratin g the slaughter of cows and sows
with a view to c u ttin g down the supply in the longer-run period
ahead.
Mr. Knight said pressure in th at d ire c tio n had been seen in
some instances.
President Moorhead commented th a t, w hile he did
not know how e ffe c tiv e the program had been, at le a st i t was a
better approach than dumping m ilk on the highways.
Mr. Fleming reported th a t conversations w ith representatives
of the Sears and Penney organizations in h is area revealed no p a r tic
ular concern about in v e n to rie s.
Although inventories were regarded
as somewhat h ig h , i t was believed they could be worked o ff w ith in
the next few months.
Undue pressure to work them down might re s u lt
in shortages of selected types of in v e n to rie s, leading in turn to
loss of sales to an extent th a t would cost more than carrying the
2/21/67
-13-
larger inventory.
They were trying hard to get inventories balanced
and not to cut back on fast-moving items.
Mr. Simmen said there had been a lo t of inventory build-up
in the F irs t D is tr ic t in a n tic ip a tio n of defense spending and some
plants had been ordered by company headquarters to reduce inventories
or to postpone c a p ita l expenditures u n t il inventories were cut back.
Mr. S t i l l remarked that he thought a number of banks would
have d if f ic u lt y in keeping th e ir volume of consumer instalment
credit at la s t year's le v e ls.
The man in the street did not seem
to have quite the same sense of confidence as a year ago.
When
that happened, the consumer tended to put more money in savings
and not to spend so fre e ly .
Governor M itc h e ll commented that that was c e rtain ly what
the s t a t is tic s suggested.
However, the s t a tis tic s were sometimes
d i f f i c u lt to in te rp re t.
Mr. Bodman noted that the rate of saving had increased
quite s u b s ta n tia lly in the past couple of months.
His bank had
not expected much of an increase in January and February, but i t
had experienced a large increase.
The rate of decline in passbook
savings had slowed down, and the 5 per cent savings c e rtific a te s
were going w e ll.
The savings and loan associations were enjoying
substantial gains.
Mr. Stewart said that while he doubted that any banks were
gaining in passbook savings in his area, the decline had leveled o ff.
2/21/67
-14Mr. Mayer reported that in his area there were even moderate
gains in passbook savings.
The savings and loans and the mutual
savings banks were doing w e ll.
That s itu a tio n was characteristic
of a period when people could not see so cle arly into the future.
Also, it might be that the rate of debt to disposable income had
reached the point where people were uncomfortable about incurring
more debt.
Mr. Larkin suggested that there had been so much ta lk about
tig h t money th at people might be assuming money was not availab le .
Mr. W ilkinson commented that his bank had stopped advertising
for consumer loans in February 1966.
The volume kept moving up
through November, but now the bank had started advertising again
because repayments were exceeding new extensions of c re d it.
President Moorhead referred to a boat build e r in his area
who could not turn out boats fa s t enough to meet the demand.
same thing was true w ith snowmobiles.
The
The s itu a tio n in many
consumer durable goods areas evidently was quite strong.
Perhaps
after three good years the automobile business was due for some
slowdown.
E.
In the judgment of Council members, how
long w i ll i t be before housing a c tiv ity
revives s ig n ific a n tly in th e ir respective
regions, given the recent signs of enlarged
flows of funds to major groups of mortgage
lenders?
2/21/67
-15-
Although the judgment of Council members varies
somewhat by d i s t r ic t , most members a n ticip ate some revival
of housing a c tiv itie s in 1967, given the recent signs of
enlarged flows of funds to major groups of mortgage lenders.
However, the increasing costs of construction may serve as
a deterrent.
President Moorhead reported some difference of opinion w ithin
the Council and some skepticism that housing starts at an annual rate
of 1.6 m illio n could be achieved by the fourth quarter of th is year.
Mr. Larkin expressed the view that the problem was not going
to be solved q u ite th at fa st in his area.
The peak in re sid e n tia l
starts was reached in 1964, so a considerable decline already had
been experienced before anyone became concerned about the supply
of mortgage money.
The lessening of the supply of such money merely
aggravated the s itu a tio n .
With continued population growth, the
problem would be taken care of in due course; the area had gone
through many such cycles over a long period of time.
While there
were s t i l l vacancies in considerable volume, developments should
follow the n a tio n a l pattern to some degree, and the increased supply
of money would c e rta in ly h elp.
As to single-fam ily housing, however,
i t would take at least s ix months to get new developments in process
and a year before the houses were ready for occupancy.
In short, he
doubted that the recovery in housing would proceed as rapidly as the
model of the Council of Economic Advisers suggested, although the
national to ta ls should begin to ris e .
In response to a question, he
said that the vacancy rate in Southern C a lifo rn ia was well under 1965.
2/21/67
-16Governor Maisel inquired whether any Council members fe lt
that the recovery would proceed faster than anticipated.
He
referred to the impressive January figures as suggesting the possi
b i li t y that the s itu a tio n may have turned around faster than
expected.
Mr. S t i l l said he believed the general feeling was to the
contrary and that the January figures were probably a fluke.
Governor M itc h e ll inquired whether the banks were ready to
go into new housing now or s t i l l preferred to stay away from i t .
Mr. S t i l l commented, in reply, that his bank had not opened
the doors wide.
Mr. Bodman reported that his bank was advertising
for mortgage loans, and President Moorhead said his bank was doing
its f ir s t a dvertisin g for a long time.
Mr. Simmen remarked that
his bank had been in the mortgage loan business con tin u ally for
years.
Mr. W ilkinson predicted that mortgage loans in many bank
p ortfo lios would be down more than desired by June and said his
bank was taking activ e steps to b u ild up it s p o r tfo lio , being aware
of circumstances such as Mr. Larkin had cite d .
Mr. Fleming commented that there had been a lo t of apartment
house b u ild in g in h is area in recent years.
Whereas two-bedroom
apartments were formerly offered at perhaps $95 a month, sim ilar
new apartments would have to rent for at least $120 a month.
In
the single-fam ily dw elling f ie ld many carpenters who called them
selves contractors had now gotten defense jobs and were making good
2/21/67
money.
-17They would not be in c lin e d to leave those jobs and turn to
building a few new houses.
Speculative builders of the type who
obtained tracts of land and the financing to put up houses in
quantity would have trouble g e ttin g started again, one reason being
that there was no s ig n ific a n t unemployment in the construction f ie ld .
I t would take q uite a while for such contractors to get organizations
b u ilt up, buy land, put in u t i l i t i e s , and get tooled up for production.
Mr. Knight said that in his area banks had lo s t savings
accounts while savings and loans had gained s u b s ta n tia lly .
Now the
savings and loans wanted to come around and buy mortgage loans from
the banks.
That would not help the b u ild e r much.
He did not foresee
any b u ild in g boom in h is area.
2.
Banking developments.
A.
What are the present a ttitu d e s of banks
w ith respect to the adequacy of th e ir
li q u id i t y p osition s?
The Council believes that most bankers, e sp e cia lly in
the larger c i t i e s , are not s a tis fie d w ith th e ir liq u id it y
positions and are desirous of improving them as soon as
possible.
President Moorhead reported th at there had been a good deal
of discussion of th is to pic by the Council.
involves many th in g s.
L iq u id ity , he noted,
While loan demand was less fr a n tic at present,
the comparison was w ith a near- crisis period.
The money center banks
were s t i l l depending la rg e ly on c e r tific a te s of deposit for li q u id it y ,
and memories of what had happened la s t f a l l were fresh.
2/21/67
-18Mr. Mayer said his bank would be pleased i f certain customers
would refinance some of th e ir loans on a long-term basis.
A number
of customers had borrowed from the bank p rin c ip a lly to get better
rates, and the loans had no place in a bank p o rtfo lio on a permanent
basis.
The bank would be glad to have some of those loans move out,
as several had already th is year.
Chairman M artin referred to the heavy calendar of new corporate
issues and asked whether they appeared to be directed mainly toward
the repayment of bank loans.
Mr. Mayer re p lie d that some were, some were not.
The steel
industry issues were designed to enable the companies to maintain
programs in which they were already engaged, programs that must be
completed to be worth much in terms of a pay-off.
Governor Brimmer asked i f Council members had views as to
the reasons for the rush in to the long-term market at present.
He
noted that as recently as a month ago no one would have forecast
such a calendar.
Mr. Stewart believed the more favorable rate s itu a tio n was
the p rin c ip a l fa c to r, for example in the case of u t i l i t i e s , which
were moving in to the market h e av ily.
President Moorhead agreed with
that observation, w hile Mr. Simmen pointed out that in the case of
certain corporations liq u id it y was a problem.
Mr. Mayer commented
that some corporations had exhausted th e ir bank lin e s.
They did not
have much f l e x i b i l i t y , and they needed money to complete various
programs.
2/21/67
-19Govemor Brimmer inquired about the outlook for the future,
and President Moorhead said that when corporations had been looking
at a 6 per cent market and now found money available at 5-1/4 per cent,
that was tempting to them.
There was also uncertainty as to how long
the present rates would hold.
Mr. Larkin referred to a fe e ling among many in d u s tria lis ts
that the longer-range outlook was in fla tio n a r y .
They knew that they
would need more money sooner or la te r , and with rates down at present
they were moving in fa s t.
Governor M itc h e ll referred to the C ouncil’ s statement that
banks were not s a tis fie d w ith th e ir liq u id it y positions and inquired
what would make them s a tis fie d .
President Moorhead re p lie d th at the banks did not lik e to have
their liq u id it y re ly so h e av ily on c e rtific a te s of deposit that were,
among other th in g s , subject to an in te re st rate c e ilin g .
of the banks' secondary reserves were not tru ly liq u id .
Also, a lo t
In the case
of many banks, v ir t u a lly a l l of th e ir Government securities were
pledged.
There had been a s lig h t easing of loan demand, but that
situatio n could change ra p id ly .
I f i t d id , the banks could quickly
find themselves in a s itu a tio n s im ila r to that of la s t f a l l .
They
were presently more com fortable, but only in comparison with a period
of near c r is is .
Mr. Mayer commented that i f a bank's customer mix was heavily
larded with in d u s trie s lik e ste e l and aluminum and those customers
2/21/67
-20-
were known to have large c a p ita l needs over the next several years,
the bank was impressed that i t would be called upon from time to
time to step up and f i l l the market basket for those customers
before they did long-term c a p ita l financing.
Governor Maisel said he would understand from these comments
that i f a bank had a build-up of CD's i t must put a discount on them
as compared with other types of deposits, and several Council members
replied in the a ffirm a tiv e .
Mr. Fleming observed that customers might come in again and
seek cre d it beyond what would normally be expected.
Then the banks
must look at the composition of th e ir ava ila b le funds.
savings had stopped growing for about two years.
Passbook
C e rtificate s of
deposit had now increased to about $18 b i l l i o n , and the rate c e ilin g
would not permit the banks to compete with other market instruments
beyond a c e rta in p o in t.
Only quite recently the banks had been
struggling to re ta in th e ir CD's on a 30-day basis.
In short, the
banks were depending for th e ir raw m aterial largely on funds on which
they could not count for s t a b ilit y .
Governor M itc h e ll noted that although the Council had fore
cast a r e la tiv e ly f l a t economy, liq u id it y objectives appeared to be
related to the s itu a tio n that prevailed in 1966.
Mr. Fleming pointed out that the banks had been given a good
scare only about four months ago, and Mr. Stewart referred again to
the heavy dependence of banks on c e r tific a te s of deposit as the only
real source of deposit growth.
2/21/67
-21Governor M itche ll said he gathered the Council f e lt some
further downward movement in rates would be required to produce
growth of passbook savings and that otherwise the banks were le ft
in a p o sitio n where they could rely only upon consumer- and
business-type CD's for growth.
Mr. Mayer agreed and said that from the banker point of
view the q u a lity of consumer-type CD's was not as good as the
quality of passbook savings.
The funds represented by the CD's
were a l i t t l e more nervous.
Mr. W ilkinson said that the banker rated consumer-type
CD's midway between passbook savings and large negotiable CD's.
Some of the CD's involved investment money that would move with a
rate d iff e r e n t ia l of as l i t t l e as 1/2 per cent.
Investor sophis
tic a tio n , p a r tic u la r ly in the money centers but in other places
also, was v a stly greater than fiv e years ago.
Governor M itc h e ll then asked whether the banks would use
a 4-1/2 per cent rate c e ilin g on savings accounts i f they were
given that la titu d e .
Several Council members indicated that they would.
However,
Mr. Mayer suggested that banks might want to think about that for a
while because payment of the higher rate would mean a substantial
cut in earnings.
Mr. W ilkinson added that much would depend on the
level of com petitive rates; he was not sure that everyone would jump
to 4-1/2 per cent.
Mr. Bodman indicated that he would be inclined to
go to 4-1/2 per cent, and Mr. Stewart commented that that should be a
2/21/67
-22-
help to bank liq u id it y .
Mr. Fleming observed that banks in Tennessee
could not go higher than 4 per cent due to State law.
Mr. Larkin said his bank had had about $2 b illio n in passbook
savings.
When the 5 per cent savings c e r tific a te was introduced,
about $1/4 b i l l i o n moved in to the c e r tific a te s , but the bank s t i l l
had about $1-3/4 b i l l i o n of savings accounts at 4 per cent.
With
savings and loan associations paying 5.37 per cent (on the basis
of d a ily compounding) a move by the bank to 4-1/2 per cent on savings
deposits probably would have no appreciable re sult except to cost
the bank money.
Mr. Moorhead noted that the s itu a tio n varied by d is tr ic ts .
He f e lt that banks in h is area could make some inroads i f they went
to 4-1/2 per cent.
Chairman M artin recalled that at the la s t meeting of the
Board and Council nearly a l l of the Council members were in favor
of raising the savings deposit c e ilin g rate.
However, there appeared
to be a mixed opinion today.
President Moorhead re p lie d that at the time of the la st
meeting the savings deposit maximum rate was more cle arly put of
line with other rates and that fact influenced the Council to
favor a change.
Mr. W ilkinson suggested that much would depend on the move
ment of bank loan rate s.
Payment of 4-1/2 per cent would have been
a desirable way for banks to acquire raw m aterial under rate conditions
2/21/67
-23-
such as prevailed at the time of the la s t meeting.
But i f lending
rates were going to soften, the s itu a tio n became d iffe re n t.
Mr. S t i l l remarked that with banks depending more and more
on time money, they were looking more closely at the price paid
against the p rice received.
margins.
There was concern about bank p ro fit
Last year the banks showed record per share earnings,
but examination of many annual reports revealed that the re la tio n
ship of net earnings to gross continued to decline.
B.
What is the C ouncil's assessment of the
strength of business loan demands cur
re n tly and over the next few months?
The Council believes there is a strong underlying
demand for business loans and that th is w ill continue over
the next few months, re fle c tin g in p art, borrowing to cover
accelerated tax payments. However, the pressure is not as
intense as i t was in the la t te r h a lf of la s t year.
President Moorhead said the Council could foresee a f a ir ly
f la t economy yet a r is in g demand for loans, p a rtic u la rly in terms
of the tax periods ahead.
Governor Maisel said i t seemed im p lic it in the C ouncil’ s
answers to three of the questions on the agenda that a f la t economy
would not change business views m a te ria lly as to the amount of invest
ment that would be necessary over the next few years.
that had not been the case.
T raditio nally
He wondered why the Council f e lt that
the s itu a tio n was now d iffe r e n t.
Mr. Fleming commented that the economy was fla tte n in g out
at a very high le v e l, and i t would take a lo t of money simply to
maintain the economy at such a le v e l.
2/21/67
-24Mr. Mayer said that the aluminum and steel industries had
made a bet and must liv e with i t .
They realized th a t, and they were
not s u ffic ie n tly worried to change th e ir plans.
They also foresaw
the danger of increased foreign competition and knew the only way
to deal with i t was to achieve greater efficie ncy .
Mr. W ilkinson expressed the thought that the consumer,
barring a severe j o l t , had not turned away from risin g expectations
for him self and h is fam ily .
The consumer apparently was simply
playing i t cool in an uncertain period.
Governor M itc h e ll suggested that a pause in the economy
for six months could do quite a b it in terms of expectations.
There might be a period in the f i r s t h a lf of th is year during which
conditions would be f l a t enough that some people would speak of a
recession, p a r tic u la r ly i f the index of in d u s tr ia l production con
tinued to f a lt e r .
I f the economy was s t i l l f la t a fte r nine months,
that probably would make q u ite a difference in business expectations.
President Moorhead said he did not sense any great degree of
pessimism among businessmen regarding the longer-run future, although
i t might be that a change in psychology could develop over a shorterrun period.
Mr. Bodman s a id , in reply to a question, that he did not
think people in D e tro it were as upset as stories in the press might
suggest.
They f e lt that th is would be a reasonably good year, and
there was no sense of panic.
2/21/67
-25Governor Maisel recalled that in 1957 auto companies walked
away from plants that were p a r t ia lly completed, but Mr. Bodman said
he could not remember th at occurring in any widespread manner.
He
went on to say th a t there could be a rise in GNP and at the same
time a decline in the index of in d u s tria l production, and he asked
what that would mean in terms of the Federal budget.
Governor M itc h e ll re p lie d that while such a trend would have
some impact on the tax y ie ld , offhand he did not think i t would do
much else over a r e la tiv e ly short period of time.
Continuing
a c tiv ity at the current high le ve l was not especially inju riou s to
anything except expectations and what might be called the decelerator
effect.
I f the economy went along on a f la t basis, i t could easily
turn down, p a r tic u la r ly i f expectations were disturbed, and the
situatio n could snowball.
Mr. Bodman observed that a large Federal d e fic it at such a
time could create a re al bind.
Governor Brimmer asked the Council members to comment on the
trend of loan demand since around November, and President Moorhead
replied that the s itu a tio n varied somewhat by d is t r ic t .
loan demand had been f l a t , w ith v ir t u a lly no change.
In his area
Mr. Bodman
said that loan demand in h is area had followed a high-level seasonal
pattern so fa r th is year, and Messrs. S t i l l and Wilkinson concurred
in that observation.
2/21/67
-26Governor Brimmer then inquired whether greater loan demand
was expected p rim a rily for tax purposes, and President Moorhead said
he f e lt there was a great deal of pent-up demand for loans that the
banks had been turning down la s t year.
In response to a question by Governor Daane, several Council
members said th at the banks had not yet opened the doors for that
type of loan.
Mr. W ilkinson observed that i t took some time for
banks to a d ju s t.
They had gone through a trying period and could not
be expected to turn around in a matter of 30 days.
But he was con
vinced that th at could come about la te r.
Mr. S t i l l said that in the Third D is tr ic t loans always went
up in the spring.
They had done so since World War I I , and he
expected to see that kind of seasonal pattern superimposed on the
high current loan levels th is year.
He did not an tic ip a te that the
rise would be comparable to la s t year on a percentage basis, but the
banks would be making more loans in d o lla r volume.
C.
Do Council members expect any s ig n ific a n t
re lax atio n of bank lending p o lic ie s in the
near future?
The Council members do not expect any s ig n ific a n t
relax ation of lending p o lic ie s in the near future, as banks
are not yet s a tis fie d w ith th e ir present liq u id ity positions.
President Moorhead said that that was the m ajority view.
In
his own view, i f monetary p o lic y continued to be re la tiv e ly easy,
there would be some re la x a tio n .
Generally speaking, however, the
banks appeared to be holding about the pattern of la s t year in terms
of loans they would make and those they would not.
2/21/67
-27Governor Brimmer inquired whether pressure on the prime rate
was foreseen, and President Moorhead replied that that was a great
puzzle.
He had thought a few weeks ago that the trend was downward
and that the Chase prime rate of 5-1/2 per cent might pre vail, but
he was less sure now.
The banks saw a substantial loan demand
ahead; they did not know what the tax periods might bring.
I f he
was rig h t in h is fe e lin g that loan demand was s t i l l strong, and i f
the business s itu a tio n did not d e te rio rate , he thought loan rates
might hold or even increase.
Mr. Fleming said th at the consumer sector was s t i l l the main
source of bank funds, and the cost of those funds was high.
It
would be d i f f i c u l t to cut loan rates and s t i l l make a p r o fit.
The
cost of bank operations was up s ig n ific a n tly , with salary costs
increasing at perhaps 5 per cent a year.
Mr. W ilkinson thought i t was in e v ita b le , with operating
costs increasing, that banks would have to stay quite f u lly loaned
in comparison with past standards.
They could not move th e ir loan-
deposit ra tio s much below 65 per cent and hope to carry the p re v a il
ing cost structu re .
Mr. Mayer observed that bank customers were growing faster
than the banks, and Mr. Bodman agreed.
Mr. Wilkinson added that
he thought i t would be necessary to produce a whole new set of
liq u id ity standards over a period of time.
The banks, by virtue
of their experience la s t year, were going to find themselves
2/21/67
-28-
examining and re lying more on in te rn a l liq u id ity and turnover than
before, but the new standards would take some time to develop.
Mr. Mayer observed that pledging requirements presented a
serious problem.
The government was growing, and the government’ s
share of deposits was already su b sta n tia l.
funds were being tie d up.
government insurance.
Thus, a lo t of bank
He would personally favor some form of
There should be some relationship to the
size of bank c a p ita l, however, for one should not place a premium
on loose handling of government funds.
There followed some discussion of the volume of government
deposits re la tiv e to to ta l deposits and of c o lla te ra l requirements,
along with p o s s ib ilit ie s for achieving some relaxation of c o lla te ra l
requirements for State and lo c al government deposits over a period
of time.
Mr. Larkin mentioned that one part of the problem lay in
the fact that most government treasurers wanted c o lla te ra l main
tained up to the maximum amount of th e ir deposits in the bank on any
one day during a year.
Thus, the securities pledged were far in
excess of the average deposit le v e l.
D.
How would Council members appraise recent
and prospective changes in demand for
c e r tific a te s of deposit on the part of
various kinds of bank customers?
The Council a n tic ip a te s an increased demand for
c e rtific a te s of deposit on the part of various kinds of
bank customers. This re fle c ts some slowing in economic
a c tiv ity and easing of c re d it p o lic ie s , which has increased
the a v a ila b ilit y of funds and forced the structure of
interest rates lower, making corporate CD rates competitive
2/21/67
- 29-
w it h other market instruments. In add ition , there has
been a step-up in consumer savings and a s h ift of funds
from passbook savings to higher yielding consumer
c e r tific a te s .
President Moorhead commented that the Council was saying
essentially that ample funds should flow into CD's when the rates
were com petitive, but th at those funds would flow out i f the rates
were not com petitive.
3.
Balance of payments.
A.
How strong and widespread are current
foreign demands for term loans, short
term loans, and acceptance credits from
U.S. banks? Have such demands shown
recent signs of changing s ig n ific a n tly ?
The members of the Council believe there is a strong
and widespread current foreign demand for term loans, short
term loans, and acceptance credits from U.S. banks. The
Council is not aware of any recent s ig n ific a n t change in the
in te n s ity of these demands.
B.
How fa r towards the level specified in the
1967 guidelines would the Council expect
the banking system as a whole to expand its
holdings of foreign assets?
The members of the Council a n tic ip a te that the foreign
asset holdings of the banking system as a whole w ill approach
the 1967 g uid e lin e s.
C.
Would the Council expect U.S. bank indebted
ness to the Euro-dollar market to increase,
d e c lin e , or remain about unchanged in the
months ju s t ahead?
The Council a n tic ip a te s that U.S. indebtedness to the
Euro-dollar market is lik e ly to decline as these obligations
mature in the months ahead. By and large, the rates paid for
Euro-dollars have been somewhat above p revailing money market
rates in the U.S. As a consequence, banks are lik e ly to re
duce these l i a b i l i t i e s in preference to others.
2/21/67
-30President Moorhead said the Council members were somewhat
surprised that U.S. bank indebtedness to the Euro-dollar market had
not decreased more ra p id ly than i t had up to th is point.
He then
turned to Mr. Prochnow, who commented that his bank was le ttin g such
obligations run o ff as they matured.
The rate paid for Euro-dollars
was out of lin e w ith U.S. money market rates la s t f a l l , and i t s t i l l
was, although recently i t was a toss-up ratewise between borrowing
Euro-dollars or Federal funds.
Mr. Prochnow added that there was, of course, a broad,
complicated problem in terms of where the Euro-dollars would go i f
U.S. banks reduced th e ir l i a b i l i t i e s .
He thought they would run into
the same market as before, so he was not sure that the liq u id ity
position dom estically would re a lly change a great deal.
A risk
would be involved to the extent that the Euro-dollars found them
selves in the hands of monetary a u th o ritie s abroad.
Governor Brimmer inquired why the Council was so convinced
that the foreign asset holdings of the banking system as a whole
would approach the le v e l specified in the 1967 guidelines of the
voluntary foreign c re d it re s tra in t program.
President Moorhead said Mr. Murphy had f e lt there was a
great deal of pent-up foreign demand, and that view was shared by
the Council.
Mr. Larkin reported having talked with several bankers
about th is question.
The consensus was that banks had held back
2/21/67
-31-
from taking on foreign commitments when the domestic pressures were
so great and corporations were pressing the banks so hard.
That
pressure having eased somewhat, there would be a tendency for dollars
to move out w ith in the lim its of the guidelines.
His bank had had a
number of s itu a tio n s presented to i t in the past week or so; one
looked a ttr a c tiv e , the others did not.
The people with whom he had
talked said that they detected no increase in the interest of for
eigners, but only because the inte re st had been there continuously.
The key point was that many banks were interested in foreign business.
Last year, because of the pressures and problems in the domestic
economy, the banks tended to hold back, but they would gradually
start increasing th e ir foreign asset holdings again.
Thus, i t
appeared probable that the banking system would come closer to the
guideline c e ilin g th is year than la s t year.
Mr. Mayer said h is bank had seen more proposals in the past
month than in a long time.
I t had turned them a l l down, but under
other circumstances i t probably would not.
Chairman M artin asked for the Council’ s views about the
balance of payments problem in general, and President Moorhead
replied that i t was a d i f f i c u l t s itu a tio n to which he did not pre
tend to have an answer.
Among other things, the Council had in
mind the matter of in te rn a tio n a l rate re lation ship s.
I f domestic
short-term rates were to drop much fu rth e r, that could mean a
substantial outflow of d o lla rs .
solution.
I1ie Council did not see the
2/21/67
-32Mr. Larkin mentioned that the figures shown to the Council
yesterday by the Board's s ta ff were somewhat encouraging in terms
of the trade balance, but that was only a part of the to ta l problem.
Mr. Bodman commented that he did not think the Federal budget was
very encouraging to the so lu tion of the problem because of the
budget's in fla tio n a r y c h a rac te ristic s.
Mr. Fleming referred to various elements of the balance of
payments problem, inclu d in g the war in Vietnam, foreign travel by
U.S. residents, and the m aintaining of U.S. troops abroad.
It
might be possible to achieve a better trade surplus, but only i f
costs did not rise too much dom estically.
In sum, he f e lt that the
balance of payments s itu a tio n was c r i t i c a l.
Mr. W ilkinson said he f e lt m ilita ry expenditures might well
be greater than predicted in the budget figures.
Mr. S t i l l referred to the concern that had been expressed
about ris in g costs and said that i f they went up as much as a n tic
ipated the trade balance might not develop as favorably as the s ta ff
charts had indicated yesterday.
Mr. Fleming added that ris in g steel
costs might stim ulate imports.
4.
What are the C ouncil's views on monetary
and c re d it p o licy under current circumstances?
The Council in general approves of the easing that
characterizes current monetary and credit policy. Moreover,
the Council is hopeful of favorable consideration by the
Congress of a more r e s tric tiv e f is c a l policy--a reduction
in nondefense expenditures, or f a ilin g th a t, an increase
2/21/67
-33-
in taxes. This w ill permit a more balanced mix of
fis c a l and monetary p olicy rather than the undue
reliance on cre d it re s tric tio n which marked much of
1966.
Because of the balance of payments and in f la
tionary problems, any further s ig n ific a n t easing of
monetary p o lic y should be contingent upon a more
balanced mix of f is c a l and monetary policy or a
further slowing in over-all business a c tiv ity .
President Moorhead remarked that the Council was saying,
in essence, that i t favored m aintaining the status quo for the
time being as fa r as monetary p olicy was concerned.
When Governor Brimmer inquired how the Council defined
status quo, President Moorhead replied that the Council favored no
p artic u la r furth e r easing of monetary policy at th is time.
It
favored no change in reserve requirements, the discount rate, or
the thrust of open market operations.
equilibrium judged by former standards.
Conditions were in a pleasant
The Council would want to
wait and see what happened to loan demand in March and A p r il, what
happened in terms of the economy over the next few months, and
what fis c a l action was taken by the Congress.
Governor Brimmer observed that the three-month b i l l rate
was now around 4.6 per cent, Federal funds were trading in the 5
to 5-1/4 per cent range, and there was a heavy forward calendar of
corporate issues.
He inquired whether these were conditions that
the Council had in mind in recommending a continuation of the status
quo, and President Moorhead indicated that he thought so.
2/21/67
-34Mr. S t i l l pointed out that there had been a substantial
reduction of net borrowed reserves since November, from roughly
$400-$500 m illio n to around zero.
He guessed that h is to r ic a lly
this was a sharp movement during such a short period, and i t would
take time for the money markets to adjust.
The Council would like
to stay about in the present s itu a tio n for a while and le t the
markets ad ju st.
Governor M itc h e ll inquired whether the Council would be
lik e ly to favor a change a fte r the A p ril tax date, and President
Moorhead said that could happen.
Mr. Mayer said he could not see
beyond the tax date very c le a rly , but he did foresee an increase
in loans at that time.
Messrs. Wilkinson and Larkin agreed.
The
la tte r added th at the banks were sensitive because of th e ir
experience la s t f a l l .
They foresaw some increase in loans around
tax time, and they were not about to get tied up too much in the
meantime.
Balance of payments.
Governor Robertson said that he would
like to explore what s p e c ific steps the Council members would pro
pose to deal w ith the balance of payments problem, assuming that
there was a deep in te re st in the problem and that i t was regarded
as serious.
He asked f ir s t whether the members would favor p u llin g
back U.S. troops from Western Europe, and several indicated that
they would.
He then inquired whether the members would favor
2/21/67
-35-
placing re s tric tio n s on foreign travel by U.S. residents, and only
one member (Mr. Fleming) replied in the affirm ative.
Mr. Fleming
explained that although he would place no re s tric tio n on le ttin g
U.S. residents trave l abroad, he would make that travel somewhat
more costly.
Mr. Bodman said he would use every opportunity to c u rta il
nondefense expenditures in order to defend the d o lla r.
He fe lt
that that would improve the confidence of foreigners, p a rtic u la rly
Europeans.
Governor Robertson inquired how that would cut down the
outflow of d o lla r s , and Mr. Bodman replied that he thought the
confidence of foreigners who controlled d o lla r balances and short
term investments that could be converted into gold would be improved
i f the U.S. showed evidence of a v a lia n t e ffo rt to m aintain the
purchasing power of the d o lla r .
I f such evidence was seen, foreigners
should be more in c lin e d to hold d o lla rs .
Also, such an e ffo rt would
indicate that the U.S. was trying to be more competitive pricewise
in foreign markets and thus achieve a better trade balance.
Governor Brimmer inquired whether Council members would
favor extending the in te re s t e q u aliza tio n tax to short-term bank
loans or d ire c t foreign investments.
Mr. Fleming replied that whenever an e ffo rt was made to pick
out measures to deal se le c tiv e ly with any p a rtic u la r facet of the
balance of payments problem, i t might be found that correction of
the one problem would give rise to other d if f ic u lt ie s .
In his
2/21/67
-36-
opinion the balance of payments s itu a tio n was so c r it ic a l that every
thing possible should be done to try to correct i t .
With only $2-1/2
b illio n of free gold a v a ila b le , there should be a massive attack on
the over-all problem in order to restore confidence.
He fe lt that
the American p u blic would go along with such an approach in the
circumstances.
President Moorhead then asked Governor Robertson for his
so lution , and the la t te r replied that he refused to pass judgment
on m ilita ry requirements, for he could not pose as an expert in that
area.
As to foreign tra v e l, he agreed with the view that that was
a very d e lic a te area.
He did know, however, that a large volume of
dollars continued to be invested and loaned abroad.
The only effec
tive method that he saw of correcting the d o lla r outflow was to
impose a tax to elim inate the inte re st rate or p r o fit gap between
investments abroad and investments in the U.S.
He would favor a
fle x ib le tax that could be applied according to the circumstances
prevailing at any given time.
Governor Robertson noted that there had been efforts on the
part of the Government to c u r ta il the outflow of dollars through
foreign aid and through the m ilita r y establishment.
The travel
situ a tio n had been explored, with careful consideration given to
the benefits and disadvantages of imposing re s tric tio n s .
The
judgment had been that for the long p u ll i t was better to concentrate
2/21/67
-37-
efforts on inducing foreigners to travel more in this country, as
opposed to preventing U.S. residents from traveling abroad, and he
agreed with that judgment.
Mr. Prochnow observed that Governor Robertson's solution
ran toward placing re s tric tio n s on the private sector.
However,
i f such re s tric tio n s were re lie d upon increasingly, that would
c u rta il the inflow from foreign earnings in the future.
Also, a
pressing down on private transactions would probably tend to
encourage foreign aid expenditures.
And i t was clear from the
record that the m ilita r y establishment would spend several times
as much abroad i f the d o lla rs were a v a ila b le .
In short, he f e lt
that exertion of pressure on private investment might simply open
the floodgates for outflows of dollars through m ilita ry spending
and foreign aid .
Governor Robertson commented that he would favor pressing
down on private investment but not opening the gates on the other
side.
He would favor p u llin g back troops to the extent possible,
and he would in s is t on more e ffic ie n t use of foreign aid funds.
In substance, he would focus on the entire problem, both public
and private, at the same time.
Governor Daane remarked that the Council might well get
seven d iffe re n t solutions from members of the Board.
Personally
he would emphasize the need for maintenance of re lativ e price
s ta b ility .
I f the in fla tio n a r y b a ttle was lo s t, that would
necessitate one r e s tr ic tio n a fte r another.
2/21/67
-38Governor Robertson agreed that i t was v ita l to strive for
price s t a b ilit y , without which the chances for an improved export
position would be lo s t.
He thought everyone would agree on that
point; i t was, in fa c t, the fundamental basis on which the Federal
Reserve System operated.
I t was a condition precedent to anything
else that might be suggested to deal with the balance of payments
problem.
Nevertheless, despite everything that had been done to
maintain price s t a b ilit y in the past several years, there had
s t i l l been a large d o lla r outflow.
In reply to a question about the impact of expenditures
for the war in Vietnam, Governor Robertson brought out that even
i f the war should terminate soon, troops could not be pulled back
immediately.
And the program of foreign aid to that area might
well have to be increased for some time.
Chairman M artin inquired how the Council members would
propose to handle a gold c r is is i f i t should occur; that is ,
whether they would prefer demonetization and an embargo or, in
the a lte rn a tiv e , removal of the gold cover requirement and a
paying out of gold to the extent necessary.
Mr. Mayer indicated that he would consider the la tte r
alternative preferable.
He believed that the imposition of an
embargo would cause the d o lla r to lose standing as a reserve
currency a l l over the world.
2/21/67
-39Chairman Martin remarked that the longer-run solution to
the balance of payments problem re a lly lay in an increase in the
trade surplus s u ffic ie n t to cover the d e fic it in other accounts.
How to achieve that goal was another question.
Mr. Fleming expressed the view that a fundamental decision
was needed quickly.
Removing the gold cover against note li a b i li t i e s
would, he thought, have a more pronounced psychological impact than
removing the gold reserve requirement against Federal Reserve Bank
deposits, p a r tic u la r ly in the ru ral parts of the country.
Before
that move became necessary, he f e lt there should be massive over-all
attack on the balance of payments problem.
In a s itu a tio n such as
Chairman Martin had described, no good alternatives would be available.
I t was agreed that the next meeting of the Federal Advisory
Council would be held on May 15-16, 1967.
The meeting then adjourned.
Secretary
@FedFRASER