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MINUTES 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 COUNCIL November 16, 1964 The fourth statutory meeting of the Federal Advisory Council for 1964 was convened in Room 932 of the Mayflower Hotel, Washington, D. C. on November 16, 1964 at 9:30 A.M. Present: Lawrence H. Martin George A. Murphy, Alternate William L. Day L. A. Stoner John F. Watlington, Jr. J. Finley McRae Edward B. Smith James P. Hickok John A. Moorhead Maurice L. Breidenthal James W. Aston Ransom M. Cook Herbert Prochnow William J. Korsvik District No. 1 District No. 2 District No. 3 District No. 4 District No. 5 District No. 6 District No. 7 District No. 8 District No. 9 District No. 10 District No. 11 District No. 12 Secretary Assistant Secretary Absent: District No. William H. Moore 2 On motion duly made and seconded, the mimeographed notes of the meeting of the Coun cil held on September 21-22, 1964, copies of which had been sent previously to the members of the Council, were approved. A complete list of the items on the Agenda and the conclusions of the Council are to be found in the C o n f i d e n t i a l M e m o r a n d u m t o t h e B o a r d o f G o v e r n o r s f r o m t h e F e d e r a l A d v i s o r y C o u n c i l , which follows on pages 34, 35, 36 and 37 of these minutes. The meeting adjourned at 12:25 P.M. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 31. MINUTES OF THE MEETING OF THE FE D ER A L ADVISORY COUNCIL November 16, 1964 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, George A. Murphy, Alternate for Mr. William H. Moore; Messrs. William L. Day, L. A. Stoner, John F. Watlington, Jr., J. Finley McRae, Edward B. Smith, James P. Hickok, Maurice L. Breidenthal, James W. Aston, and Ransom M. Cook. Absent: Mr. William H. Moore. Members of the Board’s staff, Division of Research and Statistics, reported on current business and economic conditions. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 32. MINUTES O F T H E ME E T I N G O F T H E F E D E R A L ADVISORY COUNCIL November 16, 1964 At 8:30 P.M., the Federal Advisory Council reconvened in Room 932 of the May flower Hotel, Washington, D. C. Present: Mr. John A. Moorhead, President; Messrs. Lawrence H. Martin, George A. Murphy, Alternate for Mr. William H. Moore; Messrs. William L. Day, L. A. Stoner, John F. Watlington, Jr., J. Finley McRae, Edward B. Smith, James P. Hickok, Maurice L. Breidenthal, James W. Aston, and Ransom M. Cook. Absent: Mr. William H. Moore. 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 34, 35, 36 and 37, listing the Agenda items with conclusions reached by the Council. The M e m o r a n d u m was delivered to the Federal Reserve Building at 11:15 P.M. on November 16, 1964. The meeting adjourned at 10:30 P.M. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 33. CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON NOVEMBER 17, 1964 1. Economic conditions and prospects. A. What is the general outlook for the U. S. economy over the next six months? The members of the Council believe that the general outlook for the U. S. economy for the next six months is favorable. Although the expansion has continued for 45 months and gives little evidence of tiring, there are some factors of the economy, such as housing, which are not expanding. Presently, the areas of strength continue to outweigh the weaknesses. B. What are the views of the Council with respect to the probable impact on the economy of the second stage Federal tax reduction to take place in 1965? It is unlikely that the second stage of the reduction in Federal taxes to take place in 1965 will have a very marked impact on economic activity. The take-home pay of the nation's wage earners has already been adjusted to the reduced rate. Furthermore, it is generally expected that the taxes withheld from salaries this year will be insuffi cient to cover accrued tax liabilities. As a result, a considerable number of persons may be obliged to make additional tax payments in April. Finally, the aggregate reduction in taxes on individual incomes in 1965 will be less than that which went into effect last March. The reduction in taxes on corporate profits, however, should help maintain the rising pattern of after-tax corporate earnings. C. Have there been significant changes with respect to plant utilization and/or production bottlenecks since the September meeting of the Council, or are there indications of developing problems in these areas? Although there are some reports of problems in these areas, the members of the Council are not aware of significant changes with respect to plant utilization and/or production bottlenecks since the September meeting of the Council. One problem that 34. has developed recently is the shortage of employable labor in certain communities. The rising trend in capital investment is tending to lengthen the delivery time of machine tool manufacturers. The automobile strikes have reduced somewhat the demand for steel and the resulting pressure on the mills which appeared to be an area where delivery difficulties might develop. 2. B a n k in g d e v e lo p m e n ts . A. What is the Council’s judgment as to business demands for bank financing during the latter part of 1964 and the first half of 1965? The members of the Council anticipate that business demands for bank financ ing during the latter part of 1964 and the first half of 1965 will be somewhat stronger than seasonal. Corporate cash flows may be reduced by the acceleration in tax payments and by some narrowing of profit margins. As a consequence of such developments, to gether with a probable acceleration in inventory accumulation, the members of the Council anticipate a strengthening in business demands for bank financing. B. Is there evidence of increasing use of bank credit to finance precaution ary inventory accumulation? Of term loans to finance plant expansion? The members of the Council have so far seen little or no evidence of an increased use of bank credit to finance precautionary inventory accumulation. While there is a good demand for term loans, there has been no strong upward push to finance plant expansion. C. Have the members of the Council noted any changes of more than seasonal proportions in the demand and time balances maintained by their larger corporate customers since midyear? Demand deposits have increased slightly more than seasonal in recent months, but it is not conclusive that the trend w ill persist. Furthermore, total time deposits of corporations have also apparently increased more than seasonally. However, some mem bers of the Council report reduced totals of time deposits and no significant gain in demand deposits. D. The Board would appreciate the current views of the Council as to prospects for issuance of short-term capital notes to secure loanable funds. The. Council anticipates an expansion in the issuance of short-term notes to secure loanable funds, particularly if interest rates rise above ceilings imposed on time deposits. The growing and continued use of this technique probably will be confined for the present to the larger banks in the major money centers. 3. Are there any changes in banking legislation or regulations that are believed needed at this time in order to promote sounder, more progressive, or more efficient banking operations? 35. Yes. In recent years there have been a number of exhaustive studies of the banking and credit system which might be used as the basis for considering changes in banking legislation or regulations in order to promote sounder, more progressive and more efficient banking operations. Among the more immediate problems are (1) a more uniform interpretation of existing statutes and regulations by the bank regulatory agencies, and (2) a review of the administrative procedures of the regulatory agencies which supervise the banks of the nation. 4. The Board would be glad to have the Council’s evaluation of the current and prospective U. S. balance of payments problem, particularly the bank credit component. Although progress has been made in reducing the deficit in the balance of payments and in providing arrangements which afford us time to redress the deficit, the final solution continues to be difficult and elusive. Thus, while the trade surplus has been growing, Government overseas expenditures continue to be the major factor in the balance of payments deficit. The demand for credit from foreign borrowers is strong and banks are under continuing pressure to accommodate this demand. Most bankers link the bank credit com ponent with world trade and point out that bank loans to foreigners are necessary to finance an expanding volume of international trade. The interest equalization tax has been a factor in the increased volume of foreign bank credit. However, the imposition of the tax on bank credit, without any change in availability, would not necessarily reduce the outflow of capital. 5. Do the Council’s views regarding the appropriateness of current monetary and credit policy accord with those expressed in the policy statement adopted by the ABA’s 90th Annual Convention? What tendencies in the economy would the Council cite in support of its views in this matter? Specifically. The volume of excess reserves has been steadily reduced with a gradual lessening of credit ease, which is in accord with the previously expressed views of the Council and we believe with the broad objectives outlined in the policy statement adopted by the ABA 90th Annual Convention. A. What evidences, if any, do the members of the Council see of inflationary tendencies developing in the economy? The members of the Council believe that the trend of recent wage settlements and the negotiations now taking place in the auto industry, as well as those soon to begin in steel, point to growing pressures on costs that may finally be reflected in prices. The recent rises in prices of nonferrous metals and in the spot commodity price index in general are further evidence of some inflationary tendencies. 36. B. What are the views of the Council as to price prospects for consumer goods, machinery and industrial equipment, and primary materials? As a consequence of these developments, rises in prices of primary materials seem likely, to be followed by possible increases in prices of machinery, industrial equipment and consumer goods. 37. MINUTES OF JOINT CONFERENCE OF THE FED ERA L ADVISORY COUNCIL AND THE BOARD OF GOVERNORS OF THE FE D ER A L RESERVE SYSTEM November 17, 1964 At 10:30 A.M., a joint conference of the Federal Advisory Council and the Board of Governors of the Federal Reserve System was held in the Board Room of the Federal Reserve Building, Washington, D. C. Present: Members of the Board of Governors of the Federal Reserve System: Chairman Wm. McC. Martin, Jr.; Vice Chairman C. Canby Balderston; Governors A.L. Mills, Jr., J. L. Robertson and J. Dewey Daane; also Mr. Merritt Sherman, Secretary, and Mr. Karl E. Bakke, Assistant Secretary, of the Board of Governors. Present; Members of the Federal Advisory Council: Mr. John A. Moorhead, President; Messrs. Lawrence H. Martin, George A. Murphy, Alternate for Mr. William H. Moore; Messrs. William L. Day, L. A. Stoner, John F. Watlington, Jr., J. Finley McRae, Edward B. Smith, James P. Hickok, Maurice L. Breidenthal, James W. Aston, Ransom M. Cook, Herbert V. Prochnow, Secretary, and William J. Korsvik, Assistant Secretary. Absent: Mr. William H. Moore. President Moorhead read the first item on the Agenda and the conclusions of the Council as given in the C o n f i d e n t i a l M e m o r a n d u m t o t h e B o a r d o f G o v e r n o r s f r o m t h e F e d e r a l A d v i s o r y C o u n c i l , as printed on pages 34, 35, 36 and 37. An extended discus sion followed in which the members of the Council described developments in their respective districts. The President then read the second item and the Council’s conclusions. He added that although the over-all demand for bank financing through the first half of 1965 might be somewhat stronger, the picture differed from one district to another. Thus, in the ninth district, the outlook was for a lessening of demand as compared with the current year. Mr. Cook also anticipated a reduced demand for business loans in the twelfth district. Chairman Martin asked whether it would be fair to say that, because of increased competition, the prime rate was being tendered to a wider range of borrowers. Several members thought this was true, citing in particular the noticeable movement of mortgage rates toward the prime rate level. 38. In response to a query from Chairman Martin on inventory accumulation, several members indicated they expected a build-up in inventories as a hedge against anticipated price increases. Governor Mills inquired if banks were beginning to rethink their credit policies, in view of the fact that purchasers of a bank’s certificates of deposit who were geographic ally more remote from the bank were generally inclined to feel less loyalty to the institu tion than the bank’s local customers. Several members said that this appeared to be the case. Accordingly a difficult situation was developing for a number of banks who had relied heavily on certificates of deposit as a source of loanable funds. The third item and the conclusions of the Council were then read by President Moorhead. After an extended discussion, Chairman Martin expressed appreciation for the frank observations made by the Council members concerning problem areas of the Board’s supervisory responsibilities and activities. He added that the Board would be delighted to receive further views from the Council. The President then read the fourth and fifth items and the conclusions of the Council. A brief discussion followed. The meeting adjourned at 2:30 P.M. HERBERT V. PROCHNOW Secretary WILLIAM J. KORSVIK Assistant Secretary 39. 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 1s 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 accurate. The t r a n s c r i p t is f o r the sole u s e of the m e m b e r s of the Federal 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 for the entire y e a r are p r i n t e d a n d d i s t r i b u t e d later, H.V.P. ¥ . 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 Federal A d v i s o r y C o u n c i l on N o v e m b e r 16, 1961;, at 9:30 A.M„, in R o o m 932 of the 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 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 Mr. W i l l i a m H. M oore, Mr. G e o r g e A. M u r p h y , C h a i r m a n of the B o a r d of D i r e c t o r s , 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, atte n d e d as an alternate for Mr. Moore. The C o u n c i l a p p r o v e d t h e S e c r e t a r y ’s n o t e s f o r the m e e t i n g of September 21-22, 1961+. ITEM I ECONOMIC C O N D I T I O N S A N D P R O S P E C T S . A. B. C. WHAT IS T H E G E N E R A L O U T L O O K F O R T H E U. S. E C O N O M Y OVER T H E NEXT SIX M O N T H S ? WHAT A R E T H E V I E W S O F T H E C O U N C I L W I T H R E S P E C T TO T H E P R O B A B L E IMPACT ON T H E E C O N O M Y O F T H E S E C O N D S T A G E F E D E R A L TAX R E D U C T I O N TO T A K E P L A C E I N 1 9 6 5 ? HAVE T H E R E B E E N S I G N I F I C A N T C H A N G E S W I T H R E S P E C T TO PLANT U T I L I Z A T I O N A N D / O R P R O D U C T I O N B O T T L E N E C K S S I N C E THE S E P T E M B E R M E E T I N G OF T H E C O U N C I L , OR A R E T H E R E I N D I C A T I O N S OF D E V E L O P I N G P R O B L E M S IN T H E S E A R E A 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 a n d i n v i t e d m e m b e r s of the Council to comment. A n 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 d u r i n g w h i c h the m e m b e r s indicated th a t t h e y b e l i e v e d the g e n e r a l o u t l o o k for the U. S. e c o n o m y ^or the nex t s i x m o n t h s is f a v o r a b l e . A s i d e f r o m the decline in housing, f e w m e n t i o n e d a n y i n d i c a t o r s t h a t w e r e n o t s h o w i n g strength,, There w a s g e n e r a l a g r e e m e n t that the s e c o n d s t a g e of the r e d u c t i o n federal t a x e s to t a k e p l a c e in 1 9 6 5 w i l l n o t h a v e a m a r k e d impact on economic a c t i v i t y . T h e t a k e - h o m e p a y of the n a t i o n ’ s w a g e e a r n e r s has already b e e n a d j u s t e d to the r e d u c e d r a t e . F u r t h e r m o r e , t h e r e ha v e been sports that the t a x e s w i t h h e l d f r o m s a l a r i e s t h i s y e a r w i l l be i n e f f icie n t to c o v e r a c c r u e d t a x l i a b i l i t i e s . As a r e s ult, some persons Ir,a7 be o b l i g e d to m a k e a d d i t i o n a l t a x p a y m e n t s in A p r i l . This w i l l be ^-fset to some e x t e n t b y t h o s e p e r s o n s w h o s e s a l a r i e s are not subject ^withholding. T h e r e d u c t i o n in t a x e s on c o r p o r a t e profits, however, w 11 c o n t r i b u t e to a f t e r - t a x c o r p o r a t e e a r n i n g s . ^The m e m b e r s of the C o u n c i l s t a t e d tha t t h e y w e r e n o t aware of any ®*?nificant c h a n g e w i t h r e s p e c t to p l a n t u t i l i z a t i o n a n d / o r p r o d u c t i o n Digitized FRASER ,J° for -lenecks s i n c e the S e p t e m b e r m e e t i n g . S e v e r a l r e p o r t e d a shortage 2. l a b o r in t h e i r communi t i e s * In a d d i t i o n , the d e l i v e r y tine of m a c h i n e t o o l m a n u f a c t u r e r s is t e n d i n g to l e n g t h e n . On the o t h e r hand, the a u t o m o b i l e s t r i k e s h a v e r e d u c e d s o m e w h a t the p r e s s u r e on t h e s t e e l m i l l s w h e r e it w a s a n t i c i p a t ed d e l i v e r y d i f f i c u l t i e s light d e v e l o p . of e m p lo y a b le I T E M II PANKING D E V E L O P M E N T S . A. B. C. D. W H A T IS T H E C O U N C I L TS J U D G M E N T \S T O B U S I N E S S D E M A N D S F O R B A N K F I N A N C I N G D U R I N G T H E L A T T E R P A R T OF 196J; A N D T H E F I R S T HALF OF 196 5 ? IS T H E R E E V I D E N C E O F I N C R E A S I N G U S E OF B A N K C R E D I T T O F I N A N C E PRECAUTIONARY INVE N T O R Y ACCUMULATION? O F T E R M L O A N S TO F I N A N C E PLANT E X P A N S I O N ? H A V E T H E M E M B E R S O F T H E C O U N C I L N O T E D A N Y C H A N G E S OF M O R E THAN SEASONAL P R O P O R T I O N S IN T H E D E M A N D A N D TIME BALANCES MAINTAINED BY THEIR L A R G E R C O R P O R A T E CUSTOMERS SINCE MIDYEAR? T H E B O A R D W O U L D A P P R E C I A T E T H E C U R R E N T V I E W S OF T H E C O U N C I L AS TO T H E P R O S P E C T S F O R I S S U A N C E O F S H O R T - T E R M C A P I T A L N O T E S TO SECURE L O A N A B L E F U N D S * _________________________________________________ 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, In the b r i e f discussion which followed, the m e m b e r s s t a t e d t h a t t h e y a n t i c i p a t e t h a t b u s i n e s s d e m a n d s for b a n k f i n a n c i n g d u r i n g t h e l a t t e r p a r t of 1961]. a n d the f i r s t h a l f of 1965 w i l l b e s o m e w h a t s t r o n g e r t h a n s e a s o n a l . T h e y a t t r i b u t e d this to the p r o b a b l e r e d u c t i o n i n c a s h f l o w s as t h e r e s u l t of the a c c e l e r a tion in t a x p a y m e n t s a n d b y s o m e n a r r o w i n g of p r o f i t m a r g i n s . A possible a c c e l e r a t i o n i n i n v e n t o r y a c c u m u l a t i o n a l s o w o u l d c o n t r i b u t e to this i n c r e a s e d d e m a n d f o r b a n k f i n a n c i n g . T o date, h o w e v e r , the r.enbers h a v e s e e n l i t t l e o r n o e v i d e n c e o f a n i n c r e a s e d u s e of b a n k credit to f i n a n c e p r e c a u t i o n a r y i n v e n t o r y a c c u m u l a t i o n . While a good ier.and f o r t e r m l o a n s is i n e v i d e n c e , t h e r e a p p e a r s to b e no w i d e s p r e a d strong u p w a r d p u s h f o r s u c h f u n d s t o f i n a n c e p l a n t e x p a n s i o n . The m e m b e r s o f t h e C o u n c i l h a v e n o t e d a s l i g h t i n c r e a s e in d e m a n d deposits. T o t a l t i m e d e p o s i t s of c o r p o r a t i o n s a l s o h a v e i n c r e a s e d , though n o t u n i f o r m i l y a c r o s s t h e c o u n t r y . The d i s c u s s i o n also d i s closed t h a t t h e m e m b e r s o f t h e C o u n c i l a n t i c i p a t e an e x p a n s i o n in the issuance of s h o r t - t e r m n o t e s to s e c u r e l o a n a b l e f u n d s . Several members e-phasized t h a t t h i s w o u l d b e p a r t i c u l a r l y t r u e if i n t e r e s t r a t e s r i s e above the c e i l i n g i m p o s e d o n t i m e d e p o s i t s . F o r the p r e s e n t , h o w e v e r , 2^ ~s e x p e c t e d t h a t t h e g r o w i n g u s e o f t h i s t e c h n i q u e w i l l be c o n f i n e d the l a r g e r b a n k s i n t h e m a j o r m o n e y c e n t e r s , I T E M III ARE T H E R E A N Y C H A N G E S 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 THAT ARE B E L I E V E D N E E D E D A T T H I S T I M E IN O R D E R TO P R O M O T E SOUNDER, MORE p r o g r e s s i v e , o r 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 ?_______________ 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 n e x t e n d e d d i s c u s s i o n followed, *.•' r1 o ,! r !~ It was observed that the p r o blem was exceedingly complex and that a s o l u t i o n would require considerable thought and time. Several members s u g g e s t e d that the Council have a special session w i t h the Board of governors to be dev oted to a d i s c u s s i o n of this topic. It was noted that numerous r e c o m m e n d a t i o n s and proposals have resulted from the piany exhaustive studies of b a n k i n g and the credit system that had be e n made in recent years. Among the more i m m ediate problems m e n t i o n e d by members of the were the n e e d f o r a more u n i f o r m interpretation of existing statutes and r e g u l a t i o n s by the b a n k r e g u l a t o r y authorities and a r e view of 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 o.f the r e g ulatory agencies which supervise the b a n k s of the nation. C o u n c il ITEM IV THE BOARD W O U L D B E G L A D T O H A V E T H E C O U N C I L fS E V A L U A T I O N OP T H E CURRENT A N D P R O S P E C T I V E U. S. B A L A N C E OF P A Y M E N T S P R O B L E M , P A R T I CULARLY T H E B A N K C R E D I T C O M P O N E N T . _______________________________________ 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 the b r i e f discussion w h i c h followed it was a c k n o w l e d g e d t h a t a l t h o u g h some p r o g r e s s h a d b e e n made in r e d u c i n g t h e d e f i c i t , t h e f i n a l s o l u t i o n c o n t i n u e s to b e illusive. G o v e r n m e n t o v e r s e a s e x p e n d i t u r e s , f o r e x a m p l e , a r e s t i l l v e r y substantial. T h e d e m a n d f o r c r e d i t f r o m f o r e i g n b o r r o w e r s is str o n g and banks a r e u n d e r c o n t i n u i n g p r e s s u r e to a c c o m m o d a t e this demand. Much of the s h o r t - t e r m c r e d i t e x t e n d e d b y b a n k s is e s s e n t i a l to the financing of f o r e i g n t r a d e , a n d in p a r t i c u l a r , the e x p o r t v o l u m e of the United S t a t e s . I t t h u s c o n t r i b u t e s r e c e i p t s to our b a l a n c e of p a y ments.. S e v e r a l m e m b e r s e m p h a s i z e d t h a t it w a s t h e a v a i l a b i l i t y of f u n d s in the U n i t e d S t a t e s t h a t a t t r a c t e d f o r e i g n b o r r o w e r s . The i m p o s i t i o n of the i n t e r e s t e q u a l i z a t i o n t a x p r o b a b l y w o u l d n o t b e an e f f e c t i v e deterrent as e v e n w i t h t h e t a x , i n t e r e s t r a t e s h e r e are l o w e r t h a n in most c o u n t r i e s a b r o a d . ITEM V DO THE C O U N C I L TS V I E W S R E G A R D I N G T H E A P P R O P R I A T E N E S S OF C U R R E N T MONETARY A N D C R E D I T P O L I C Y A C C O R D W I T H T H O S E E X P R E S S E D IN T H E P O L I C Y STATEMENT A D O P T E D B Y T H E A B A !S 9 0 T H A N N U A L C O N V E N T I O N ? WHAT TENDEN~ CIES IN T H E E C O N O M Y W O U L D T H E C O U N C I L C I T E I N S U P P O R T OF I T S V I E W S IN THIS M A T T E R ? SPECIFICALLY, A. B, W H A T E V I D E N C E S , I F A N Y , D O T H E M E M B E R S OF T H E C O U N C I L SEE OF INFLATIONARY T E N D E N C I E S D E V E L O P I N G IN THE ECONOMY? W H A T A R E T H E V I E W S O F T H E C O U N C I L A.S T O P R I C E P R O S P E C T S F O R CONSUMER GOODS, M A C H I N E R Y A N D I N D U S T R I A L EQUIPMENT, A N D PRI MARY MATERIALS? President M o o r h e a d r e a d I t e m V. The C o u n c i l o b s e r v e d that the monetary authorities h a d b e e n p u r s u i n g a som e w h a t less easy credit policy /'or several w e e k s a n d that a n e g a t i v e free r e s e r v e figure had ^ e n reported a w e e k or so ago. The Cou n c i l concluded, therefore, -nat credit p o l i c y is in a c c o r d w i t h the p r e v i o u s l y e x p r e s s e d views Council and w i t h the b r o a d o b j e c t i v e s of the p o l i c y statement Digitizedthe for FRASER b. by the A B A a t t h e 9 0 t h A n n u a l C o n v e n t i o n . T h e m e m b e r s of t h e to b e l i e v e t h a t t h e trend, of r e c e n t w a g e s e t t l e m e n t s and the n e g o t i a t i o n s n o w t a k i n g p l a c e in a u t o i n d u s t r i e s , as w e l l as those soon to b e g i n in s t e e l , p o i n t to g r o w i n g p r e s s u r e s on c o s t s that f i n a l l y m a y be r e f l e c t e d in p r i c e s * adopted Council continue The m e e t i n g a d j o u r n e d at 1 2 ^ 2 5 P . M 5* 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 N O V E M B E R 16, 1961;. A L L M E M B E R S OP T H E C O U N C I L W E R E PRESENT EXCEPT MR. W I L L I A M H. M O O R E . M R . G E O R G E A. M U R P H Y , C H A I R M A N OF T H E B O A R D O P D I R E C T O R S , 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, AT T E N D E D AS A N A L TERNATE. M e m b e r s o f t h e B o a r d ’s s t a f f , D i v i s i o n of R e s e a r c h a n d S t a t i s t i c s , on c u r r e n t b u s i n e s s a n d e c o n o m i c c o n d i ti on s. reported T H E C O U N C I L R E C O N V E N E D A T 8 : 3 0 P . M . ON N O V E M B E R 16, 1961;, IN R O O M 9 3 2 O P 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 M R . W I L L I A M H. M O O R E . MR. G E O R G E A . M U R P H Y , C H A I R M A N OP T H E B O A R D OF D I R E C T O R S , IRVING 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 ALTERNATE. The C o u n c i l p r e p a r e d a n d a p p r o v e d the a t t a c h e d C o n f idential M e m o r a n d u m to b e s e n t t o 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 A g e n d a for the j o i n t m e e t i n g o f t h e C o u n c i l a n d t h e B o a r d on N o v e m b e r 17, 1961;. 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 t o 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 at 11:15? P . M . o n N o v e m b e r 1 6 , 1961;. The m e e t i n g a d j o u r n e d at 1 0 : 3 0 P.M. I CONFIDENTIAL MEMORANDUM TO THE BOARD OF GOVERNORS FROM THE FEDERAL ADVISORY COUNCIL RELATIVE TO THE AGENDA FOR THE JOINT MEETING ON NOVEMBER 17, 1964 1. Economic conditions and prospects. A. What is the general outlook for the U. S. economy over the next six months? The members of the Council believe that the general outlook for the U. S. economy for the next six months is favorable. Although the expansion has continued for 45 months and gives little evidence of tiring, there are some factors of the economy, such as housing, which are not expanding. Presently, the areas of strength continue to outweigh the weaknesses. B. What are the views of the Council with respect to the probable impact on the economy of the second stage Federal tax reduction to take place in 1965? It is unlikely that the second stage of the reduction in Federal taxes to take place in 1965 will have a very marked impact on economic activity. The take-home pay of the nation’ s wage earners has already been adjusted to the reduced rate. Furthermore, it is generally expected that the taxes withheld from salaries this year will be insufficient to cover accrued tax liabilities. As a result, a considerable number of persons may be obliged to make additional tax payments in April. Finally, the aggregate reduction in taxes on individual incomes in 1965 will be less than that which went into effect last March. The reduction in taxes on corporate profits, however, should help maintain the rising pattern of after-tax corporate earnings. C. Have there been significant changes with respect to plant utilization and/or production bottle necks since the September meeting of the Council, or are there indications of developing problems in these areas? Although there are some reports of problems in these areas, the members of the Council are not aware of significant -2- changes with respect to plant utilization and/or production bottle necks since the September meeting of the Council. One problem that has developed recently is the shortage of employable labor in certain communities. The rising trend in capital investment is tending to lengthen the delivery time of machine tool manufacturers. The automobile strikes have reduced somewhat the demand for steel and the resulting pressure on the mills which appeared to be an area where delivery difficulties might develop. 2. Banking developments. A. What is the Council's judgment as to business demands for bank financing during the latter part of 1964 and the first half of 1965? The members of the Council anticipate that business demands for bank financing during the latter part of 1964 and the first half of 1965 will be somewhat stronger than seasonal. Corporate cash flows may be reduced by the acceleration in tax payments and by some narrowing of profit margins. As a conse quence of such developments, together with a probable acceleration in inventory accumulation, the members of the Council anticipate a strengthening in business demands for bank financing. B. Is there evidence of increasing use of bank credit to finance precautionary inventory accumulation? Of term loans to finance plant expansion? The members of the Council have so far seen little or no evidence of an increased use of bank credit to finance precau tionary inventory accumulation. While there is a good demand for term loans, there has been no strong upward push to finance plant expansion. C. Have the members of the Council noted any changes of more than seasonal proportions in the demand and time balances maintained by their larger corporate customers since midyear? Demand deposits have increased slightly more than seasonal in recent months, but it is not conclusive that the trend will persist. Furthermore, total time deposits of corporations have also apparently increased more than seasonally. However, some members of the Council report reduced totals of time deposits and no signif icant gain in demand deposits. -3- D. The Board would appreciate the current views of the Council as to prospects for issuance of short-term capital notes to secure loanable funds. The Council anticipates an expansion in the issuance of short-term notes to secure loanable funds, particularly if interest rates rise above ceilings imposed on time deposits. The growing and continued use of this technique probably will be confined for the present to the larger banks in the major money centers. 3. Are there any changes in banking legislation or regulations that are believed needed at this time in order to promote sounder, more progressive, or more efficient banking operations? Yes. In recent years there have been a number of exhaustive studies of the banking and credit system which might be used as the basis for considering changes in banking legisla tion or regulations in order to promote sounder, more progressive and more efficient banking operations. Among the more immediate problems are (1) a more uniform interpretation of existing statutes and regulations by the bank regulatory agencies, and (2) a review of the administrative procedures of the regulatory agencies which supervise the banks of the nation. 4. The Board would be glad to have the Council's evaluation of the current and prospective U. S. balance of payments problem, particularly the bank credit component. Although progress has been made in reducing the deficit in the balance of payments and in providing arrangements which afford us time to redress the deficit, the final solution continues to be difficult and elusive. Thus, while the trade surplus has been growing, Government overseas expenditures continue to be the major factor in the balance of payments deficit. The demand for credit from foreign borrowers is strong and banks are under continuing pressure to accommodate this demand. Host bankers link the bank credit component with world trade and point out that bank loans to foreigners are necessary to finance an expanding volume of international trade. The interest -4 - equalization tax has been a factor in the increased volume of foreign bank credit. However, the imposition of the tax on bank credit, without any change in availability, would not necessarily reduce the outflow of capital. 5. Do the Council’ s views regarding the appropriateness of current monetary and credit policy accord with those expressed in the policy statement adopted by the A B A ‘ s 90th Annual Convention? What tendencies in the economy would the Council cite in support of its views in this matter? Specifically. The volume of excess reserves has been steadily reduced with a gradual lessening of credit ease, which is in accord with the previously expressed views of the Council and we believe with the broad objectives outlined in the policy statement adopted by the ABA 90th Annual Convention. A. What evidences, if any, do the members of the Council see of inflationary tendencies develop ing in the economy? The members of the Council believe that the trend of recent wage settlements and the negotiations now taking place in the auto industry, as well as those soon to begin in steel, point to growing pressures on costs that may finally be reflected in prices. The recent rises in prices of nonferrous metals and in the spot commodity price index in general are further evidence of some inflationary tendencies. B. What are the views of the Council as to price prospects for consumer goods, machinery and industrial equipment, and primary materials? As a consequence of these developments, rises in prices of primary materials seem likely, to be followed by possible increases in prices of machinery, industrial equipment and consumer goods. ON N O V E M B E R 17, 1961;, AT 1 0 : 3 0 A . M . , T H E F E D E R A L A D V I S O R Y COUNCIL H E L D A J O I N T M E E T I N G W I T H THE B O A R D OF G O V E R N O R S 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. C. A L L M E M B E R S OF T H E C O U N C I L W E R E P R E S E N T EXCEPT MR. W I L L I A M H. M O O R E . MR. G E O R G E A. MURPHY, C H A I R M A N OF T H E B O A R D OF D I R E C T O R S , I R V I N G T R U S T COMPANY, N E W Y O R K CITY, A T T E N D E D AS A N A L T E R N A T E . 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: CHAIRMAN MARTIN, V I C E C H A IR MA N BALDERSTON, GOVERNORS R O B E R T SON, M I L L S A N D D A A N E . MR. S H E R M A N , SE C R E T A R Y , AND MR. BAKKE, A S S I S T A N T S E C R E T A R Y , O F T HE B O A R D OF G O V E R N O R S ALS O W E R E PRESENT. The m i n u t e s of the 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 office of the S e c r e t a r y of the 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 System. Their 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 the Council. A s s u m i n g t h e y a re in s u b s t a n t i a l agreement, they w i l l be reproduced a n d d i s t r i b u t e d to t h e m e m b e r s of the Council. The n e x t m e e t i n g of the C o u n c i l w i l l be F e b r u a r y l£-l6, 1965. F o l l o w i n g the l u n c h e o n w i t h C h a i r m a n Ma r t i n , the Council r e c o n vened in the C h a i r m a n Ts d i n i n g r o o m in the F e d e r a l Reserve Building, Washington, D. C. A t t h e l u n c h e o n , C h a i r m a n M a r t i n h a d outlined in formally his p h i l o s o p h y of the r o l e of the c e n t r a l b a n k including a review of its r e l a t i o n s h i p w i t h the o t h e r s u p e r v i s o r y agencies. He emphasized t h a t it w o u l d b e v e r y h e l p f u l to h a v e the C o u n c i l ’ s suggestions as to c h a n g e s in s t a t u t e s and r e g u l a t i o n s that it believed would c o n t r i b u t e to s o u n d e r , m o r e p r o g r e s s i v e a n d m o r e efficient b a n k ing operations. After some d i s c u s s i o n , it w a s a g r e e d that the m e m b e r s of the Council w o u l d s t u d y the m a t t e r a n d a t t e m p t to f o r m u l a t e specific suggestions. T h e s e s u g g e s t i o n s m i g h t b e d i s c u s s e d by the Council at its February m e e t i n g . It w a s p r o p o s e d that the me m b e r s w h o have suggestions m i g h t w i s h to s u b m i t t h e m to P r e s i d e n t Moorhead. The m e e t i n g a d j o u r n e d at 2 : 3 0 P.M . H.V.P. W. J .K .
@FedFRASER