Full text of Minutes and Recommendations of the Federal Advisory Council : Meeting documents, September 18-19, 1967, Box 6, Volume 1966-1968

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

NOTE:
This t r a n s c r i p t of the S e c r e t a r y ’
s n o t e s is n o t
to be r e g a r d e d 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 for the sole use of the
m embers of the F e d e r a l A d v i s o r y Council.
The concise
official m i n u t e s f o r the e n t i r e y e a r are p r i n t e d and
d i s t r i b u t e d later.
H.V.P.
W.J.K.
The S e c r e t a r y ’
s n o t e s of 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 on S e p t e m b e r 18, 1967, at 9:30 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.
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 were
present.
The C o u n c i l a p p r o v e d the S e c r e t a r y ’
s n o t e s f o r the m e e t i n g
of May 15-16, 1967.
I T E M I A, B A N D C
ECONOMIC C O N D I T I O N S A N D P R O S P E C T S .
A.

H O W D O E S T H E f?OTTNf?TT, A P P R A I S E T H E G E N E R A L O U T L O O K F O R T H E
NEXT SIX..MONTHS?
THE. O U T L O O K FOR PRICE.. A N D W A G E D E V E L O P ­
MENTS?

B.

WHAT. I M P R E S S I O N S D.Q. C O U N CIL.,MEMBERS H A V E F R O M T H E I R
CUSTOMER. C O N T A C T S W T T H R E G A R D TO C U R R E N T B U S I N E S S I N V E N T O R Y
P O SITIONS? A R E THERE..ANY I N D I C A T I O N S OF A N E A R - T E R M S T E P UP IN B U Y I N G T O E X P A N D I N V E N T O R I E S ?

C.

WHAT A R E T H E P R O S P E C T S . F O R R E S I D E N T I A L AND. D.THER C O N S T R U C T I O N
IN T H E C O U N C I L M E M B E R S ’ R E S P E C T I V E R E G I O N S ?
ARE MORTGAGE
FUNDS, I N C L U D I N G C O N S T R U C T I O N M O N E Y , J U D G E D TO B E A D E Q U A T E
TO M E E T CU R R E N T A N D N E A R - T E R M D E M A N D S ?

’
resident. 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 the m e m b e r s of the
Council to comment.
An extended discussion followed.
It d i s c l o s e d
wide agreement on the o u t l o o k f o r b u s i n e s s -- a. c o n t i n u e d , g r a d u a l
rise in the ne x t s i x m o n t h s .
S e v e r a l m e m b e r s m e n t i o n e d the i m p a c t
of the strike in t h e a u t o m o b i l e i n d u s t r y a n d s u g g e s t e d t h a t this
would moderate the p a c e of e c o n o m i c a c t i v i t y .
The extent and d u r a ­
tion of the stri k e o b v i o u s l y w o u l d be a factor.
The p r i n c i p a l
expansive force in the m o n t h s a h e a d w i l l c o n t i n u e to be r i s i n g
expenditures b y f e d e r a l , s t a t e a n d l o c a l g o v e r n m e n t s .
This d e v e l o p "ent may be a i d e d b y s o m e s t r e n g t h e n i n g in c o n s u m e r b u y i n g as the
consumer s p e n d i n g - s a v i n g s r a t i o m o v e s to a m o r e t y p i c a l level.
Kost m e m b e r s of the C o u n c i l e x p e c t w a g e s to r i s e r a t h e r s h a r p -7 which will put u p w a r d p r e s s u r e on the p r i c e st r u c t u r e .
It was
C l o n e d , h o w e v e r , t h a t c o m p e t i t i v e p r e s s u r e s m a y l i m i t p r i c e in


s o m e w h a t so t h a t t h e r i s e in wage costs will not be fully
thus n a r r o w i n g p r o f i t m a r g i n s .
The members acknowledged
that b u s i n e s s m e n a p p e a r to be r e a s o n a b l y satisfied wi t h their
c u r r e n t inventory positions.
As a..consequence, there is little or
n0 evidence at p r e s e n t i n d i c a t i n g a n e a r - t e r m step-up in buying to
expand i n v e n t o r i e s .
A f e w m e m b e r s of the Council cautioned, however,
that a st e p - u p in c o n s u m e r b u y i n g c ould quickly change this expecta­
tion.
,r e a s e s

covered,

The o u t l o o k f o r r e s i d e n t i a l c o n s t r u c t i o n varied from district
to district.
In g e n e r a l , h o w e v e r , the m e mbers expect some further
rise in r e s i d e n t i a l a n d o t h e r c o n s t r u c t i o n in the months ahead. In
the C o u n c i l ’
s judgment, t h e r e appears to be adequate mortgage funds
and cons t ruction m o n e y to m e e t c u r r e n t and ne a r - t e r m demands.
Several m e m b e r s m e n t i o n e d th a t the rising costs of land, labor
and m a t e r i a l s , the c o n t i n u e d r e l a t i v e tightness of funds available
for tract d e v e l o p e r s at m o d e r a t e r ates of interest, and the ceilings
on mortgage r a t e s in some areas, are ret a r d i n g influences in the
recovery of h o u s i n g a n d c o n s t r u c t i o n .
I T E M II A
BANKING D E V E L O P M E N T S .
A.

WHAT. I S THE. C.0UN.CILJ.SL-ASSESSMEN1....QE-THE..PROBABLE S T R E N G T H
OF .BUSINESS LOAN. D E M A N D IN THE. P A L L ?

President M o o r h e a d r e a d I t e m II A. A. b rief d i scussion followed
in which the m e m b e r s a c k n o w l e d g e d that l o a n demand currently was
below their e x p e c t a t i o n s b u t t h a t t h e y a n t i c i p a t e d a sustained
seasonal rise in the fall.
T h e r e was some f e eling that the less
than a n t i c i p a t e d s t r e n g t h of l o a n d e m a n d m a y reflect the large
volume of c o r p o r a t e b o r r o w i n g in the c o m m e r c i a l paper and bond
markets.
I T E M II B
B.

IN T H E C O U N C I L ’
S J U D G M E N T , D O .BANK L I Q U I D I T Y POSITIONS
AP P E A R ADEQUATE-TO..MEET-EXPE.GTED....FALL L O A N DEMANDS?

The P r e s i d e n t t h e n r e a d I t e m II B. The members acknowledged
— at the l i q u i d i t y p o s i t i o n s of b a n k s appear adequate to meet
anticipated f a l l l o a n d e m a n d s .
S e v e r a l emphasized, however, that
bankers in the m o n e y c e n t e r s , r e m e m b e r i n g the situation last
- a l l , continue to be c o n c e r n e d a b o u t their ability to meet credit
-elands. S h o u l d the i n t e r e s t r a t e structure move higher, and
7-elds on s h o r t - t e r m i n v e s t m e n t s rise above the R e gulation Q ceil-J-Kt -Last y e a r ’
s r u n - o f f in l a r g e d e n o m i n a t i o n c / D ’
s might be
^peated.
In this e v e n t , the l i q u i d i t y po s i t i o n s of m a n y major
;^rjks would be s e v e r e l y s t r a i n e d .
Ac c o r d i n g l y , the Council deemed
^ desirable to i n c l u d e in t h e i r r e p l y to the Board the suggestion
j'-at the;/ c o n s i d e r n o w the d e s i r a b i l i t y of raising the interest

ceiling on l a r g e d e n o m i n a t i o n n e g o t i a b l e c/D’
s.


ITEM I I

C.

C

H O W WOULD. T H E C O U N C I L .APPRAISE.. RECENT. A N D PROSPECTIVE
CH A N G E S IN D E M A N D . .F..OR. C O N S U M E R ..C./D.t S_ A N D SAVINGS DEPOSITS,
A G A I N S T THE. B A C K G R O U N D . OE..RATES, A V A I L A B L E ON COMPETING
MARKET. I N S T R U M E N T S ? ..
_
President M o o r h e a d r e a d I t e m II C»

A b r i e f discussion followed

which d i s c l o s e d so m e v a r i a t i o n among the districts in the behavior

of passbook s a v i n g s and c o n s u m e r - t y p e c / D ?s. The Council concluded,
however, that t h e r e is l i t t l e e v i d e n c e that the consumer so far has
been attr a c t e d to o t h e r m a r k e t i nstruments.
S h o u l d the difference
in rates widen, t h e r e c o u l d w e l l be a shift of consumer savings
into competing m a r k e t i n s t r u m e n t s c Several, members of the Council
suggested that at p r e s e n t the c o m p e t i t i o n f r o m other savings in­
stitutions was m o r e i m p o r t a n t than the comp e t i t i o n from other
market i n s t r u m e n t s „
I T E M II D
D.

W H A T A R E C U R R E N T POLICIES. O R RANKS.. R E G A R D TNG P R E FERRED
TYPES A N D M A T U R I T I E S OF I N V E S T M E N TS?

The P r e s i d e n t of the C o u n c i l then rea d Item II D. The Council
concluded that m a n y b a n k e r s b e l i e v e the relative easing of credit
is temporary.
A c c o r d i n g l y , t h e y are appreh e n s i v e that they shortly
may be f a c e d w i t h i n c r e a s i n g de m a n ds f o r funds.
Because of this,
there has. b e e n som e r e l u c t a n c e to invest available reserves for any
extended p e r i o d of t i m e 0 W i t h the e x c e p t i o n of bankers in smaller
institutions, m o s t b a n k e r s h a v e c o n f i n e d their investments to the
relatively short e n d of the m a t u r i t y schedule.
Several Council
members v e n t u r e d the o p i n i o n that if l o a n demand continues to be
less than anticipated;, t h e r e m a y be a change in poli c y and bankers
will begin to i n v e s t an i n c r e a s i n g share of their portfolio in
municipals and g o v e r n m e n t s f o r l o n g e r p e r i o d s 0
I T E M II E
E.

HOW. DO C O U N C I L M E M B E R S ..EVALUATE..THEL L A R G E RECENT INCREASES
IN C O R P O R A T E U S E O F T H E C O M M E R C IAL PAPER MARKET?
IS THIS
DEVELOPMENT-LIKELY... IQ-HAVE.. A .L A S T I N G ...EFFECT ON BAN K LOAN
DEMAND?
____________________________________

A b r i e f d i s c u s s i o n f o l l o w e d the r e a d i n g of Item II E by
President M o o r h e a d ,, T h r e e r e a s o n s were cited by the members of
the Council f o r the l a r g e I n c r e a s e s in corporate use of the com m e r ­
cial paper m a r k e t .
T h e s e i n c l u d e d the following:
(1) the desire
to keep open this s o u r c e of funds w h i c h p r o v e d to be very helpful
during the p e r i o d of t i g h t m o n e y last fall; (2) the fact that
commercial p a p e r m a r k e t rates h a v e b e e n b e l o w the lending rates
of commercial b a n k s ; a n d (3) th a t some corporations and banks have
had short-term funds a v a i l a b l e f o r investment.
The Council con


-luded that u n l e s s the ra t e s t r u c t u r e shifts considerably, this
situation is l i k e l y to p e r s i s t ,
A. f e w me m b e r s n o t e d that at some
future time b a n k e r s m i g h t be less w i l l i n g to g r a n t lines, w h i c h in
sone instances are e s s e n t i a l in o r d e r for the b o r r o w e r to obtain
funds in the c o m m e r c i a l p a p e r m a r ket.

I T E M III A, B A N D C
BALANCE OP P A Y M E N T S .
A.

DO. COUNCIL. M E M B E R S E X P E C T...ANY-SIGNIFICANT C H A N G E IN THE
A Y A H .ABILIT Y ..QF-EI N A N C J.NGLJEQB.- H. S. E X P O R T S IN T H E N E A R
FUTURE?

B.

T)Q C O U N C I L , M E M B E R S , . E X P E C T F O R E I G N D E M A N D S F O R CREDITS
FR O M U. S„ B A N K S T0_ CHANGE-..S.IGNIF.ICANTLY IN THE M O N T H S
AHEAD?

C.

IS T H E R E C E N T R A P I D G R O W T H IN E U R O - D O L L A R B O R R O W I N G S
T H R O U G H - F O R E I G N BRANCHES. QE. II. S. BANKS L I K E L Y TO
_____
CONTINUE.-IN T H E N E A R FUTURE.?
President M o o r h e a d r e a d I t e m III A, B and C.

The m e m b e r s of the C o u n c i l do n o t e x p e c t any s i g n i f i c a n t change
in the a v a i l a b i l i t y of funds f o r U„ S e e x p o r t s 0 As a m a t t e r of fact,
because of the s o m e w h a t e a s i e r p o s i t i o n of banks, such f i n a n c i n g m a y
be more r e a d i l y a v a i l a b l e .
F o r e i g n d e m a n d s for credits f r o m U„ S.
banks continue s t r o n g and are u n l i k e l y to change in the m o n t h s aheado
Because of the u n d e r l y i n g s h o r t a g e of c a p i t a l in the world, a strong
aggregate d e m a n d is a l w a y s maintained,,
Euro-dollar borrowings
through f o r e i g n b r a n c h e s of U, S. b a n k s c o n t i n u e s to grow, r e f l e c t i n g
in some me a s u r e the c o n t i n u e d c o n c e r n of the m o n e y center b anks ab o u t
their ability to m e e t a n t i c i p a t e d l o a n demands.
Thus, w h i l e the
volume ma y f l u c t u a t e f r o m t i m e to time, this source of funds is
likely to be c o n t i n u a l l y u t i l i z e d .
I T E M IV
THAT ARE T H E HOTTNGTT.TS V T E W S ON MO.NETARY.ANH...C RED IT P O L I C Y U NDER
rJHBEHT. C I R C U M S T A N C E S ?
_________________________________________
President M o o r h e a d r e a d I t e m I V and an e x t e n d e d d i s c u s s i o n
‘
Oilowed. It was a c k n o w l e d g e d tha t m o n e t a r y and credit p o l i c y so
:5r this year h a d b e e n h e l p f u l in c u s h i o n i n g the adju s t m e n t s that
'•5ve taken place in the p r i v a t e se c t o r w h i l e at the same time p e r ­
mitting corporations and f i n a n c i a l i n s t i t u t i o n s to r e b u i l d l i q u i d i t y
and the T reasury to f i n a n c e the deficit.
Whi l e r e c o g n i z i n g the
^cessity of f i n a n c i n g the T r e a s u r y , most m e m b e r s of the Council
^ought m o n e t a r y p o l i c y s h o u l d be so m e w h a t less expansive.
Several,
‘
°vever, e x p r e s s e d the c o n c e r n tha t any ch a n g e in the current



posture oi the F e d e r a l R e s e r v e m i g h t prec i p i t a t e an undesirable chain
of events. M o r e o v e r , some o b s e r v e r s m i g h t interpret the action as a
sufficient shift in p o l i c y so as to eliminate the nee d for a tax in­
crease and less e x p a n s i v e f i s c a l p o l i c y 0 The Council went on to
stress the d e s i r a b i l i t y of c u t t i n g e x p e nditures and increasing taxes
on personal income a n d c o r p o r a t e p r o f i t s ,
The m e e t i n g a d j o u r n e d at 12:05> P.M.




THE C O U N C I L C O N V E N E D IN T H E B O A R D R O O M OF THE FEDERAL
R E S E R V E BUILDING., WASHINGT.ONL,.. D.-C.,., AT 2:30 P.M., ON
S E P T E M B E R 18, 1967„
Hr. D a n i e l H 0 Brill, D i r e c t o r of D i v i s i o n of Research and
Statistics, a s s i s t e d b y a n u m b e r of his associates, discussed the
current business a n d e c o n o m i c situation,,

THE. COUNCIL.RECONVENED...AT...£.:..3.0.P.JYL-,. ON SEPTEMBER 18,
1967, IN. THE. B . Q A R D _ R O O M .OE...THE.HADXSON. ALL MEMBERS
OF T H E . C O U N C I L W E R E P R E S E N T .
The Council 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 Confidential
Memorandum to be s e n t to the B o a r d of G o v e rnors relative to the
Agenda f o r the joint m e e t i n g of the Council and the B oard on
September 19, 1967,
The M e m o r a n d u m was d e l ivered to the Federal
Reserve B u ilding at 7: 1 5 P , M 0
The m e e t i n g a d j o u r n e d at 6:1|0 P 0M e

ON S E P T E M B E R 19, 1967, A T 1 0 : 3 0 A.M., THE FEDERAL
A D V I S O R Y COUNCIL-. HELD.. A JOINT M E E T I N G W I T H THE BOARD
QE. G O V E R N O R S OE THE. F E D E R A L ...RESERVE S Y S T E M IN THE
FEDERAL- RESERVE..BUILDING-,.. W A S H I N G T O N , D. C. ALL
MEMBERS. OF THE.. COUNCIL. W E R E P R E S E N T EXCEPT
MR, B R I N K L E Y - W H O W A S O B L I G E D TO RETURN TO LOUISVILLE.
THE FOLLOWING. M E M B E R S OF T H E B O A R D OF GOVERNORS W E R E
PRESENT:
CH A I R M A N M A R T I N , V I C E C H A I R M A N ROBERTSON;
G OVERNORS MITCHELL., BRIMMER., DAANE, M A I S E L AND SHERRILL,
MERRITT S H E R M A N , S E C R E T A R Y , A N D E L I Z A B E T H L. C A R M I C H E L ,
A SSISTANT S E C R E T A R Y , O E T H E B O A R D OF GOVERNORS ALSO
WERE PRE S E N T ,
The m i nutes of the joint m e e t i n g are b e i n g prepared in the
2"‘
ice of the S e c r e t a r y of the B o a r d of Gov e r n o r s of the Federal
"sserve System.
T h e i r c o n t e n t w i l l be c o mpared with the notes
°* the Secretary of the C o u n c i l .
A s s u m i n g they are in substantial
^peement, they w i l l be r e p r o d u c e d and d i s t r i b u t e d to the members
the Council,
~he m e e t i n g a d j o u r n e d at 1 2 : 2 0 P.M.

The next m e e t i n g of the C o u n c i l wi l l be hel d on
Digitized Vember
for FRASER20-21, 1967.


C O N FIDENTIAL
MEMORANDUM TO THE BOARD OF GOVERNORS
FROM THE
FEDERAL ADVISORY COUNCIL
RELATIVE TO THE AGENDA FOR THE JOINT MEETING
ON SEPTEMBER 19, 1967

1.

Economic c o n d itio n s and prospects.
£

A.

How does the C oun cil ap p raise the general
o u tlo o k fo r the next 6 months? The o utlo ok
fo r p r ic e and wage developments?

The members o f the C o un cil expect a co n tin u e d , gradual
rise in the le v e l of business a c t iv i t y in the next s ix months. The
pace of economic a c t iv i t y w i l l be moderated somewhat by the extent
and du ratio n of the s t r ik e in the autom obile in d u s tr y . The p r in c ip a l
expansive force in the months ahead w i l l co ntinue to be r is in g
expenditures by F e d e ra l, S ta te and lo c a l governments. This d e v e l­
opment may be aided by some stre n g th e n in g in consumer buying as the
consumer spending-savings r a t io moves to a more t y p ic a l le v e l.
Most members o f the C o u n c il expect wages to r is e ra th e r
sharply and t h is in tu rn w i l l put upward pressure on the p ric e
structure. However, c o m p e titiv e pressures may l i m i t p r ic e increases
somewhat, so th a t the r is e in wage costs w i l l not be f u l l y covered
re sultin g in a narrow ing o f p r o f i t m argins.
B.

What im pressions do C oun cil members have
from t h e ir customer co ntacts w ith regard
to c u rre n t business inve ntory p o s itio n s ?
Are there any in d ic a t io n s o f a near-term
step-up in buying to expand in v e n to rie s ?

The members o f the C o u n cil have the g eneral im pression
from th e ir customer c o n tac ts th a t most businessmen are reasonably
s a tis fie d w ith t h e ir c u rre n t inve nto ry p o s it io n s . Moreover, there
is l i t t l e or no evidence a t present in d ic a t in g a near-term step-up
in buying to expand in v e n to r ie s .
C.

What are the prospects fo r r e s id e n t ia l
and o th e r c o n s tr u c tio n in the C oun cil
members' re sp e c tiv e regions? Are mortgage
fund s, in c lu d in g c o n s tr u c tio n money,
judged to be adequate to meet cu rre nt
and near-term demands?




-2-

The p ro sp e c t fo r r e s i d e n t i a l c o n s tr u c tio n v a r ie s somewhat
from d i s t r i c t to d i s t r i c t .
I n g e n e r a l, however, the members o f the
Council expect some f u r t h e r r is e i n r e s i d e n t i a l and o th e r c o n s tru c ­
tio n in the months ah ead. M ortgage fu n d s , in c lu d in g c o n s tr u c tio n
money, appear to be adequate to meet c u rre n t and near-term demands.
Among the r e t a r d in g fa c to r s are r i s i n g co sts o f la n d , la b o r and
m a te r ia ls , the c o n tin u e d r e l a t i v e tig h tn e s s o f funds a v a ila b le fo r
tra c t developers a t m oderate r a te s o f i n t e r e s t , and the c e ilin g s
on mortgage r a te s i n some a r e a s .
2.

B anking dev elop m ents.
A.

What is the C o u n c il's assessm ent o f the
p ro b a b le s tr e n g th o f b u sin e ss lo a n demand
i n the f a l l ?

The C o u n c il a n t i c ip a t e s a s u s ta in e d seasonal busine ss
loan demand in the f a l l .
To d a te the demand fo r b u sin e ss loans
has been le s s th an had been a n t i c ip a t e d .
T his may r e f l e c t to some
extent the la r g e volume o f c o rp o ra te borrow ing i n the commercial
paper and bond m a rk e ts .
B.

I n the C o u n c il's ju d g m e n t, do bank l i q u i d i t y
p o s it io n s ap pear adequate to meet expected
f a l l lo a n demands?

C u r r e n tly the l i q u i d i t y p o s it io n s o f banks appear adequate
to meet a n t ic ip a t e d f a l l lo a n demands. Many bankers i n the money
centers, however, remembering the s i t u a t i o n l a s t f a l l , c o n tin u e to
be concerned ab o u t t h e i r a b i l i t y to meet c r e d it demands. Should
the in t e r e s t r a te s t r u c t u r e move h ig h e r and y ie ld s on short-term
investments r is e above the R e g u la t io n Q c e i l i n g , l a s t y e a r 's
run-off in la r g e d e n o m in a tio n CD’ s m ig h t be re p e a te d .
In t h is
event, the l i q u i d i t y p o s it io n s o f many m ajo r banks would be se v erely
s tr a in e d .
In a n t i c i p a t i o n o f the p o s s i b i l i t y o f t h is developm ent,
the Board m ig h t w ish to c o n s id e r now the d e s i r a b i l i t y o f r a is in g
the in t e r e s t r a te c e i l i n g on la r g e d e n o m in a tio n n e g o tia b le C D 's.
C.

How w ould the C o u n c il a p p ra is e re c e n t and
p r o s p e c tiv e changes i n demand fo r consumer
CD's and s a v in g s d e p o s it s , a g a in s t the back­
ground o f r a te s a v a ila b le on com peting m arket
in s tru m e n ts ?

W ith the grow th i n t o t a l passbook sav ings and consumer
type C D 's, th e re is l i t t l e evidence t h a t the consumer has so fa r
been a t t r a c t e d to o th e r m arket in s tr u m e n ts . However, the C o u n c il
believes th a t i f the d if f e r e n c e i n r a te s should widen s u f f i c i e n t l y
there is the p o s s i b i l i t y t h a t sav in g s- ty p e d e p o s its m ig ht move to



-3competing market in s tr u m e n ts . More im portant a t th is time than the
co m p etitio n o f m arket in stru m e n ts is the co m p etition of other types
of savings i n s t i t u t i o n s .
D.

What are c u rre n t p o lic ie s of banks regarding
p re fe r r e d types and m a tu r itie s of investments?

As many bankers b e lie v e the r e la t iv e easing of c r e d it
c o n d itio n s is temporary and t h a t they s h o r tly may be faced w ith
in cre a sin g demands fo r fu n d s, th ere has been some reluctan ce to
invest a v a ila b le reserves fo r any extended p eriod of tim e. Most
bankers have c o n fin e d t h e ir investm ents to the r e la t iv e ly short end
of the m a tu r ity sc h e d u le .
Should lo a n demand continue to be less
than a n t ic ip a t e d , th e re p rob ably w i l l be a change in t h is p o lic y
and banks w i l l tend to in v e s t an in c re a s in g share of t h e ir p o r t f o lio
in m u n ic ip a ls and governments fo r lo ng er periods a t today ’ s a t t r a c ­
tiv e r a te s .
E.

How do C o u n c il members e v a lu a te the larg e
r e c e n t in c re a s e s in co rp orate use of the
com m ercial paper market? I s t h is d e v e l­
opment l i k e l y to have a la s t in g e ffe c t on
bank lo a n demand?

The members o f the C o u n c il b e lie v e the la rg e recent
increases in c o rp o ra te use o f the commercial paper market r e f le c t
three developm ents:
one, the d e s ir e to keep open t h is source of
funds which proved to be h ig h ly d e s ir a b le d u rin g the period of
t ig h t money l a s t f a l l ; two, the fa c t th a t commercial paper market
rates have been below the le n d in g ra te s of commercial banks; and
three, th a t some c o r p o r a tio n s and banks have had short-term funds
a v a ila b le fo r in v e s tm e n t.
Unless the r a te s tr u c tu re s h if t s con­
s id e r a b ly , t h is s i t u a t i o n is l i k e l y to p e r s is t .
On the other hand,
i t is p o s s ib le th a t a t some fu tu r e tim e banks m ight be less w i lli n g
to g rant lin e s w hich i n many in s ta n c e s are e s s e n tia l in order fo r
the borrower to o b t a in funds i n the commercial paper market.
3.

B alance o f payments.
A.

Do C o u n c il members expect any s ig n if ic a n t
change in the a v a i l a b i l i t y of fin a n c in g
fo r U S. exports in the near future?

The members o f the C o u n c il do not expect any s ig n if ic a n t
change in the a v a i l a b i l i t y o f funds fo r U .S. exports in the near
fu tu re . The somewhat e a s ie r p o s it io n o f banks suggests th a t such
fin a n c in g may be more r e a d ily a v a ila b le .




-4-

B.

Do C o u n c il members expect fo re ig n demands
fo r c r e d its from U .S. banks to change
s i g n i f i c a n t l y in the months ahead?

F o re ig n demands fo r c r e d its from U.S. banks continue
strong and are u n lik e ly to change s i g n i f i c a n t ly in the months
ahead. W hile the demand changes from time to time in in d iv id u a l
c o u n trie s , an o v e r - a ll stro n g aggregate demand is m aintained,
r e fle c tin g an u n d e r ly in g shortage o f c a p it a l i n the w orld.
C.

Is the re c e n t r a p id growth in E u ro- do llar
borrow ings through fo r e ig n branches of
U .S . banks l i k e l y to c o n tin u e in the near
fu tu r e ?

The r a p id growth i n E u ro - d o lla r borrowings through fo re ig n
branches o f U .S . banks r e f le c t s the co ntinued concern of the money
center banks ab ou t t h e i r a b i l i t y to meet a n tic ip a te d loan demands.
While the volume o f borrow ing may f lu c t u a t e from time to tim e,
money c e n te r banks are l i k e l y to u t i l i z e the E u ro - d o llar market as
a source o f funds so lo ng as the funds may be advantageously used.
4.

What are the C o u n c il's views on monetary and c r e d it
p o lic y under c u r r e n t circum stances?

The C o u n c il b e lie v e s th a t monetary and c r e d it p o lic y so
fa r t h is year has been h e lp f u l in c u sh io n in g the adjustm ents th a t
have taken p la c e in the p r iv a t e s e c to r , w h ile a t the same time per­
m ittin g c o r p o r a tio n s and f i n a n c i a l i n s t i t u t i o n s to r e b u ild l i q u i d i t y
and the Treasury to fin a n c e the d e f i c i t .
However, w h ile recog nizing
the n e c e s s ity o f f in a n c in g the T reasury, the C ou n cil b e lie v e s th a t
monetary p o lic y sh o u ld now be somewhat le ss expansive. The C ouncil
feels very s tr o n g ly t h a t f i s c a l p o lic y should be co nsiderably less
expansive. T his n e c e s s ita te s a prompt cutback in expenditures and
an increase i n taxes on p e rs o n a l income and corporate p r o f i t s .




A m e e t i n g of the B o a r d of G o v e r n o r s of t h e Federal Reserve
System w i t h

the F e d e ral A d v is o ry C o u n c il was h e ld i n the Board Room

of the Federal Reserve B u ild in g i n W ashington, D .C ., a t 10:30 a.m.
on Tuesday, September 19, 1967.

PRESENT:

Mr.
Mr.
Mr.
Mr.

M a r t in , Chairman
R o b e rts o n , V ice Chairman
M i t c h e ll
Daane

Mr. M a i s e l
Mr. Brimmer

Mr. Sherr i l l
Mr. Sherman, S e c re ta ry
M iss E a to n , G eneral A s s is t a n t , O ffic e
o f th e S e c re ta ry
M essrs. Simmen, M c N e ill, S t i l l , Mayer, W ilk in s o n ,
F le m in g , Bodman, Moorhead, K n ig h t, S te w art,
and L a r k in , Members o f the F ede ral A dvisory
C o u n c il from th e F i r s t , Second, T h ird , F o u rth ,
F i f t h , S ix t h , Seventh, N in th , Tenth, E le v e n th ,
and T w e lfth F e d e ra l Reserve D i s t r i c t s , respec­
tiv e ly
Mr. Prochnow, S e c re ta ry o f the C o u n cil
Mr. K o r s v ik , A s s is t a n t S e c re ta ry o f the C o u n c il
P re sid e n t Moorhead commented th a t Mr. B rin k le y had found i t
necessary to r e tu r n to L o u i s v i l l e

fo llo w in g y e s te r d a y 's m eeting o f

the C ouncil.
1.

Economic c o n d it io n s and p ro s p e c ts .
A.

How does th e C o u n c il a p p r a is e the g e n e ral
o u tlo o k f o r th e next 6 months? The o u tlo o k
fo r p r ic e and wage developm ents?

The members o f th e C o u n c il expect a c o n tin u e d , g ra d u a l
ris e in the le v e l o f b u s in e s s a c t i v i t y in the next s ix months.
The pace o f economic a c t i v i t y w i l l be moderated somewhat by
the ex tent and d u r a t io n o f th e s t r ik e i n the au to m o b ile
in d u s try .
The p r i n c i p a l ex pansive fo rc e i n th e months ahead




9/19/67

-2-

w i l l c o n tin u e to be r i s i n g e x p end itu res by F e d e ral, S ta te ,
and lo c a l governm ents.
This development may be aided by some
s tre n g th e n in g in consumer buying as the consumer spendingsavings r a t i o moves to a more t y p ic a l le v e l.
Most members o f the C o u n c il expect wages to r is e
ra th e r s h a r p ly and t h i s i n tu r n w i l l put upward pressure
on the p r ic e s t r u c t u r e .
However, c o m p e titiv e pressures may
li m i t p r ic e in c r e a s e s somewhat, so th a t the r is e in wage costs
w i ll not be f u l l y covered r e s u lt in g in a narrow ing of p r o f it
m argins.
P re s id e n t Moorhead s a id he saw more u n a n im ity on the o utlo ok
than on most o th e r q u e s tio n s th e C o u n c il had discussed yesterday,
unanimity as to th e s t a t e o f th e economy and a ls o as to the pressure
on prices.
Chairman M a r tin asked w hether the C o u n cil had any in fo rm a tio n
as to the im pact the a u to m o b ile s t r ik e was h av in g .
Mr. Bodman s a id
reported in the p r e s s .

t h a t he had no s p e c ia l in fo rm a tio n beyond th a t
Mr. R euther ta lk e d as though the companies

would be s tru c k one a t a tim e .

I n response to a q u e stio n from Governor

Brimmer, he s a id t h a t in c r e a s e s i n p r ic e s a lre a d y announced by General
Motors of som ething l i k e

$100 a c a r co uld s ig n if y what might be expected

on 1968 models g e n e r a lly .
B.

What im p re s s io n s do C o u n c il members have
from t h e i r custom er c o n ta c ts w ith regard
to c u r r e n t b u sin e ss in v e n to ry p o s itio n s ?
Are th e re any in d ic a t io n s o f a near-term
step-up i n bu y in g to expand in v e n to r ie s ?

The members o f th e C o u n c il have the general im pression
from t h e ir custom er c o n ta c ts th a t most businessmen are reason­
ably s a t i s f i e d w ith t h e i r c u r r e n t in v e n to ry p o s it io n s .
More­
over, there is l i t t l e or no evidence a t present in d ic a t in g a
near-term step-up i n b u y in g to expand in v e n to r ie s .




9/19/67

-3P re s id e n t Moorhead observed th a t he thought some people

were wondering why th e re was n o t more evidence of expanding inve nto ­
ries since everyone was e x p e c tin g p r ic e in c re a se s.
not seem to be an a c c u m u la tio n o f in v e n to r ie s .

S t i l l , there did

One reason was th a t

i t cost about as much to c a rry them as they m ight get on a p ric e
increase.

A no ther f a c t o r was t h a t some were badly burned la s t year

and were b e in g c a u tio u s ab out b u ild in g up in v e n to rie s now.
Governor M it c h e ll asked whether the C ouncil thought in v e n to rie s
were s t i l l b e in g l i q u i d a t e d , and Mr. Mayer r e p lie d th a t they were in
the case o f s t e e l .

Some stocks o f s t e e l were s t i l l very high r e la t iv e

to current s a le s .

He w ould susp ect th a t the reason some firm s did

not s t a r t b u il d i n g

in v e n t o r ie s was th a t they had ju s t been burned

and th is e x p erience was fr e s h i n t h e i r m inds.

They were th in k in g

more about t h a t th a n o th e r t h in g s .
Governor M a is e l suggested th a t the c o r o lla r y was th a t i n f l a ­
tionary f e e lin g s were a lm o st e n t i r e l y on the f in a n c ia l s id e , ra th e r
than being r e f le c t e d

i n goods and s e r v ic e s , and Mr. Mayer r e p lie d he

could not answer t h a t .

P r e s id e n t Moorhead commented, however, th a t

fin a n c ia l peo ple were w o rrie d about i n f l a t i o n .
C.

What are the p ro sp ects fo r r e s id e n t ia l
and o th e r c o n s tr u c tio n in the C ouncil
members' r e s p e c tiv e re g io n s? Are mortgage
fu n d s , in c lu d in g c o n s tr u c tio n money, judged
to be ad equate to meet c u rre n t and near-term
demands?

The p ro s p e c t f o r r e s i d e n t i a l c o n s tr u c tio n v aries some­
what from d i s t r i c t to d i s t r i c t .
In g e n e ra l, however, the
members o f the C o u n c il expect some fu r th e r r is e in r e s id e n t ia l




9/19/67

-4-

and o th e r c o n s t r u c t io n i n the months ahead. Mortgage funds,
in c lu d in g c o n s t r u c t io n money, appear to be adequate to meet
cu rre n t and near-term demands. Among the re ta rd in g factors
are r i s in g c o sts o f la n d , la b o r and m a te r ia ls , the continued
r e la t iv e t ig h tn e s s o f funds a v a ila b le fo r tr a c t developers
at moderate r a te s o f i n t e r e s t , and the c e ilin g s on mortgage
rates in some a re a s .
Mr. L a r k in r e c a lle d th a t i n 1964 there was a larg e inventory
of housing to work o f f i n C a l i f o r n i a .

I t had been p r e tty w e ll worked

down and th e re had been a tu r n around in the p ast 6 months.

B u ild in g

volume was g o ing up a g a in , b u t a t a much more s u s ta in a b le le v e l.
rise was a t about a 5 p e r ce nt r a t e , which was not

The

unreasonable.

Thus, he expected some f u r t h e r sup p ort could be expected from th a t
segment of the economy.

He th o u g h t savings and loans were looking

for a p lace to p u t t h e i r money.

They had a lo t o f money but were not

w illin g to go i n f o r some o f th e kind s o f deals they had gone in to
before.

Some o f them had g o tte n h u r t and they were being more c a u tio u s .

A ll of the fa c to r s o p e r a tin g a t t h is moment were c o n s tru c tiv e and in
the r ig h t d i r e c t i o n .
Governor M i t c h e ll asked where housing demand and a c t iv i t y
were s tr o n g e s t, and P r e s id e n t Moorhead r e p lie d he thought i t was q u ite
good in the M idw est.

M ortgage funds seemed to be p l e n t i f u l except in

a few cases, such as i n S ta te s h a v in g r a th e r low c e ilin g s on mortgage
rates.
Mr. M c N e ill remarked th a t i n New York there was a boom in
re s id e n tia l and o f f i c e b u il d i n g .

There seemed to be no end to i t .

Many observers th o u g h t a year ago th a t t h is segment was o v e r b u ilt ,
but new b u ild in g s seemed to g et f i l l e d




up, alth o ug h now the o lder

9/19/67

-5-

b u ild ing s were b e g in n in g to s u f f e r .

Long-term fin a n c in g s were being

done p r im a r ily on th e le a s e s .
Mr. S t i l l commented t h a t r e s i d e n t i a l b u ild in g in P h ila d e lp h ia
was not moving ahead, a lth o u g h th e re were more o f f i c e b u ild in g s on
the drawing board th a n a t any o th e r tim e .

O lder b u ild in g s were under

pressure because te n a n ts were moving out in t o the newer b u ild in g s
even though they p a id a h ig h e r r a t e .
Mr. F lem ing re p o rte d t h a t h o u sin g was b e g in n in g to b u ild up
again in the S o u th e a s t.

A c t i v i t y was going more in t o condominiums,

e sp e c ia lly in F l o r i d a , b u t i t was sp re a d in g over the o th e r S tate s as
well.

As c i t i e s were grow ing i t was found th a t people who owned land

which had doubled i n v a lu e , were a s k in g h ig h p r ic e s fo r i t .

For

example, F ederal H ousing A d m in is t r a t io n r e s t r i c t i o n s were more severe
such as r e q u ir in g sewage systems i n ord er to get lo a n s , which had not
been req uire d b e fo r e .

On top o f t h a t ,

la b o r , o f co urse, was going

up, and the r e a l in c r e a s e s i n c o s ts were not the co st o f money but
the other fa c to r s e n t e r in g in t o a new home.

There was b e g in n in g to

be a fe e lin g t h a t the c o s t s i t u a t i o n would no t get b e t t e r and one had
better go ahead and buy.
2.

B anking developm ents.
A.

What is th e C o u n c il's assessment o f the
p r o b a b le s tr e n g th o f b u sine ss lo an demand
i n th e f a l l ?

The C o u n c il a n t ic ip a t e s a s u s ta in e d seasonal business
loan demand i n th e f a l l .
To d a te the demand fo r business
loans has been le s s th a n had been a n t ic ip a t e d .
This may
r e f le c t to some e x te n t the la r g e volume o f c o rp o ra te
borrow ing i n th e com m ercial paper and bond m arkets.




9/19/67

-6Governor M it c h e ll in q u ir e d whether a l l C ouncil members agreed

that the demand fo r b u sin e ss loans had been less than a n tic ip a te d .
P re s id e n t Moorhead r e p lie d he thought the C ouncil was unanimous
on th at sta te m e n t; the a n tic ip a te d lo an demand ju s t had not appeared.
Governor Brimmer asked the C oun cil to describe the e ffe c t on
bank loans o f s m a ll c o r p o r a tio n s going to the e q u ity market.
Mr. W ilk in s o n commented th a t a g reat many sm all companies had
gone in to the e q u ity m arket and t h is had had an e ffe c t on bank loans.
President Moorhead added t h a t use o f the commercial paper market might
in t o t a l have a f fe c t e d

lo a n demand a t banks more than the bond market.

Mr. L a r k in re p o rte d t h a t la s t F rid ay he sat in a loan committee
meeting and saw s ix m ajor commitments th a t had been made fo r bank loans
cancelled ju s t because o f h av in g o b ta in e d the money in the bond market.
Mr. Flem ing remarked th a t the proceeds from bond fin a n c in g
were being used to repay bank lo a n s , but he f e l t some o f the money was
also used to p ro v id e funds to buy commercial paper.
Governor M it c h e ll asked whether any of the C ouncil f e l t they
did not have enough money to meet lo an demand, n o tin g th a t fo r a long
time the C o u n c il members had been apprehensive about t h a t.

He also

wondered whether th e re was a la c k o f new lo an demand or whether the
reason t o t a ls were n o t r i s i n g was because o ld loans were being paid
o ff, p a r t ly w ith funds o b ta in e d from sources o th e r than banks.
P re s id e n t Moorhead r e p lie d th a t loan demand by any comparison
except la s t year was s t i l l s tr o n g .

Everyone had been looking fo r i t

to take o f f a g a in , b u t so f a r i t had n o t.




9/19/67

-7Governor S h e r r i l l in q u ir e d how much expansion was tak ing

place in e s t a b lis h in g new lin e s o f c r e d i t , and whether on new lin e s
standby fees were p a id .
Mr. Mayer s a id th a t standby fees were paid only on firm
commitments, and he th o u g h t the p re se nt s it u a t io n was about as i t
had been in th e p a s t.
P re s id e n t Moorhead remarked th a t re v o lv in g c r e d its were being
se t up by a good many c o r p o r a tio n s ,
q u e s t i o n by Governor S h e r r i l l ,

and, in response to a fu rth e r

th a t th e re was co nsid e rab le hedging

by c o rp o ra tio n s t h a t d id n o t want to get caught ag ain .
Mr. S tew art s a id t h a t in the E leventh D i s t r i c t e x is tin g lin e s
of c re d it were b e in g in c re a s e d q u it e a b i t .
Mr. M c N e ill th o u g h t th e re was a good deal of hedging by
borrowers, a lth o u g h n o t as much as la s t y ear.
loans.

The same was true of

His b a n k 's lo a n s were as h ig h now as a year ago but not q u ite

as high as had been a n t ic ip a t e d .
Mr. S t i l l noted t h a t h is bank was not a money market bank.
The normal b u sin e ss lo ans c o n tin u e d to r o l l i n , but some o f the
larger "one-shot" lo a n s made a year or so back were being reduced.
I t took four to f i v e months to run these one-shot borrowers' loans
o ff, and h is bank was no t making any fu r th e r deals o f th a t s o rt.
I n response to a q u e s tio n from Governor Brimmer, Mr. Mayer
said th a t he d id not v i s u a l i z e any g re a t change in the general loan
s itu a tio n i n the next 90 days.




He d id a n t ic ip a t e a s u b s ta n tia l

9/19/67

-8-

increase in lo ans t h a t would in r e a l i t y be fo r tax purposes at the
end of the y e ar.

There were o i l and c o a l payments th a t were being

pushed in t o one c a le n d a r when n o rm a lly they would f a l l in the next,
and these were u s u a lly fo r ta x purposes.

His bank had re s is te d making

such loans l a s t y ear because they were not p ro d u ctiv e .

However, i t

was a gadget to g a in some ad v an ta g e , and there was going to be q u ite
a b it done t h i s y e a r.
Mr. F lem ing th o u g h t a ls o th a t d is p r o p o r tio n a te payment of
taxes in the f i r s t p a r t o f the year had some e ffe c t .

Banks were not

now g e ttin g the norm al lo a n demand fo r tax payments.
Chairman M a r tin in q u ir e d whether the acce le rate d tax payments
had changed the b anks' views on l i q u i d i t y a ls o , and Mr. Fleming re p lie d
there was s t i l l a heavy o v e r a ll lo a n demand.

I f the q uestio n was

directed to b u sin e ss lo a n s , he d id no t t h in k any o f the banks would
have tro u b le g e t t in g lo ans i f

they went lo o k in g fo r them.

M essrs. M c N e ill and Mayer commented th a t most banks were not
out lo o king fo r lo a n s .

Mr. Mayer went on to say, however, th a t the

Council should no t le a v e an im p re ssio n w ith the Board th a t i t
loan demand was r e l a t i v e l y easy.

thought

E v ery th ing was r e la t iv e , and i t had

been hoped th e re would be some surcease.

He would have lik e d to see

loan demand go down a p p r e c ia b ly so th a t there would have been some
leeway fo r m eeting demands, bu t th a t had not happened.

He d id not

know where the money was g o ing to come from to take care of a d d itio n a l
demands.




9/19/67

-9Mr. Bodman s a id h is b a n k 's volume o f o utstanding commercial

loans was about 11 per ce nt below what had been expected several
months ago.

He and Mr. Simmen both in d ic a te d they were receptive

to more lo an volume.
Mr. Flem ing s a id h is bank had not been seeking lo ans, p a r tly
because o f the heavy lin e s o f c r e d it th a t m ight be c a lle d upon.
There was no way f o r a com m ercial bank to a n t ic ip a t e ex actly what
such demands m ig h t be from firm s w ith e s ta b lis h e d lin e s .

In answer

to Governor Brimmer, Mr. Flem ing s a id h is bank found th a t any
corporation th a t had a d e p o s it b a la n c e as a r u le wanted to support
that balance w ith a l i n e o f c r e d it o f some k in d ; a $200,000 balance
was regarded as j u s t i f y i n g a $1,000,000 li n e o f c r e d it .
P re s id e n t Moorhead commented th a t in general h is bank was
trying to pare down i t s

e x is t in g l i n e s , p a r t ly to enable i t to take

care of o th e r demands and fo r in su ra n c e purposes.
Governor R o bertso n in q u ir e d whether there had been an expan­
sion in fir m commitments fo r loans a g a in s t lin e s of c r e d it on which
a fee was p a id .
Mr. M c N e ill s a id t h a t i n New York there was a tendency to
hold these down and t h a t the demand was not as sharp as la s t year.
There was r a th e r l i t t l e

g r a n tin g o f co urtesy lin e s o f c r e d it in

return fo r b a la n c e s , a lth o u g h o f course a bank would make exceptions.
Banks were c u t t in g some lin e s down, and some would go to a company
and t e l l the management t h a t i t was not m a in ta in in g the compensating
balance a t a le v e l d e s ir e d and thus t h e ir c r e d it lin e was being




-10-

9/19/67
reduced.

W hile he co u ld not say p r e c is e ly the extent to which

compensating balan c e s were being m a in ta in e d , Mr. M cN eill f e l t there
had been a s u b s t a n t ia l in c re a s e in such balances during the past two
years and th a t they were perhaps h ig h e r than a year ago.
B.

I n the C o u n c il's judgm ent, do bank l i q u i d i t y
p o s it io n s appear adequate to meet expected
f a l l lo a n demands?

C u r r e n tly the l i q u i d i t y p o s itio n s of banks appear
adequate to meet a n t ic ip a t e d f a l l loan demands. Many
bankers in th e money c e n te r s , however, remembering the
s i t u a t i o n l a s t f a l l , c o n tin u e to be concerned about th e ir
a b i l i t y to meet c r e d it demands.
Should the in te r e s t rate
s tr u c tu r e move h ig h e r and y ie ld s on short-term investments
r is e above the R e g u la tio n Q c e i l i n g , la s t y e a r's run-off
in la rg e d e n o m in a tio n CD's m ight be repeated.
In th is
event, the l i q u i d i t y p o s it io n s o f many major banks would be
sev erely s t r a in e d .
I n a n t i c ip a t i o n of the p o s s i b i l it y of
t h is developm ent, the Board m ight wish to consider now the
d e s i r a b i l i t y o f r a i s i n g the in t e r e s t ra te c e ilin g on large
denom inatio n n e g o tia b le C D 's.
P re s id e n t Moorhead commented he was not sure th is w r itte n
answer was c o n s is t e n t w ith what had ju s t been s a id .

C ouncil members

had suggested on p re v io u s o ccasions t h a t , w h ile l i q u i d i t y seemed
adequate a t the moment, i t was based on CD's and when banks were
operating on

in s tru m e n ts th a t had c e ilin g s on what they could pay

they were u n c o m fo rta b le .

His bank was c lo se to the c e ilin g on six-

month CD's and any upward movement would put i t at the c e ilin g ra te .
In response to a q u e s tio n from Chairman M artin as to where
he f e l t the maximum r a te should be ra is e d t o , P re sid e n t Moorhead
said he would remove i t

e n t i r e l y or a t le a s t r a is e i t to a le v e l

that was tantam ount to i t s




removal on CD's o f $1,000,000 or more.

9/19/67

-11Mr. Mayer commented t h a t i t

seemed in e q u it a b le fo r n e g o tia b le

CD’ s to be s u b je c t to a c e i l i n g when the instrum ents w ith which they
compete are n o t under a c e i l i n g .

The sources o f these funds are la rg e

c o rp o ra tio n s , w hich have o th e r o u t le t s not s u b je c t to c e ilin g s .
Mr. W ilk in s o n s a id th a t l i q u i d i t y today was e n t ir e ly adequate,
but i f n e g o tia b le CD's were th e c o n t r o l lin g in s tru m e n t, th a t forced a
bank in to a d i f f e r e n t concept o f l i q u i d i t y because o f p o t e n t ia l d e p o sit
lo sses.
Governor R obertson s a id he would li k e to pursue t h is
th in k in g a l i t t l e .

li n e of

The purpose o f removing in t e r e s t r a te c e ilin g s

would be to enable banks to get more funds to expand lo a n s .

Yet

the views expressed in d ic a t e d lo a n demand was not up to e x p e c tatio n s
and some banks were r e c e p tiv e to more lo a n s .
P r e s id e n t Moorhead s a id t h a t i f

one looked a t the c e il i n g as

a co n tro l in s tr u m e n t, the C o u n c il d id n o t have much case fo r r a is in g
the r a te , but i f

one looked a t i t

as f a c i l i t a t i n g

liq u id it y ,

the

c e ilin g should be r a is e d or removed.
Governor M it c h e ll noted th a t a h ig h e r c e il i n g would make i t
easier fo r banks to take on a d d it io n a l commitments because they would
know they had t h a t a d d i t io n a l source o f fund s.

Mr. Fleming d id not

th ink the main purpose was to get more money; the idea was fo r banks
to keep what they had; and Mr. Mayer s a id banks were i n business to
make money and such a move would enable them to make lo a n s.
Mr. S t i l l s a id t h a t a lth o u g h such a move would enable banks
to make new tr a n s a c tio n s to make money, the purpose would in r e a l i t y




9/19/67

-12-

be to enable them to s ta y in b u s in e s s .

I f a bank found i t s e l f in a

bad p o s it io n , i t would sim p ly have to c u t back.
P re s id e n t Moorhead p o in te d out th a t the problem had been to
take care o f r e g u la r custom ers.

W ith th a t leeway, banks would have

an o p p o rtu n ity to get r i d o f those loans they d id not want.
Governor Robertson th o u g h t everyone should keep in mind the
whole purpose o f m onetary p o lic y :
cre dit and the money s u p p ly .

to prevent undue expansion of

I t m ig ht be th a t what the C oun cil

wanted to do was to move th e c e i l i n g up so th a t banks could h old
th e ir p la ce b u t n o t expand.
Governor M it c h e ll commented th a t th e re were c o rp o ra tio n s
paying 6-1/8 to 6-1/4 per ce nt up to f iv e y e a rs , in c lu d in g some of
the best c o r p o r a tio n s .

Would they be w i l l i n g to pay, say, 10 per

cent to c o n tin u e t h e i r p la n s ?

That would not be a m a rg in a l use o f

c re d it; i t was much above th e m a rg in , and many c r e d it users were
squeezed out by t h a t type o f demand.
in 1966, and he th o u g h t i t

The Board had run in t o t h is

f a i r to say th a t the c e il i n g was used

as a c o n tro l under those c irc u m s ta n c e s .
Mr. Mayer remarked th a t what Governor M it c h e ll was sug g e sting
was th a t in p e rio d s o f s tr e s s he would li k e to see the weak taken
care of r a th e r th an the s tr o n g .

That was a g a in s t n a tu re .

Governor M a is e l commented th a t t h is p o in te d up the s i g n i f i ­
cance

of the le v e l o f lin e s

of c r e d it.

If

the banks had lin e s of

cre dit three tim es as la r g e as t h e i r lo a n s , and i f the banks could




9/19/67

-13-

no t get a l l the money they wanted in the open m arket, th a t would mean
that the c o r p o r a tio n s t h a t had the e s ta b lis h e d lin e s were the only
ones the banks would take care o f.

This ra is e d the question whether

those were the lo g ic a l users o f c r e d it in such a p e rio d .
P re s id e n t Moorhead commented th a t perhaps the banks did not
want to expand t o t a l c r e d it bu t d id want to be ab le to hold th e ir
own.

He noted t h a t th e re were now $20 b i l l i o n o f c e r t if ic a t e s in

the market, which fu r n is h e d l i q u i d i t y

fo r banks.

Governor R obertson suggested t h a t , i f

banks needed the funds

only for the purpose o f h o ld in g t h e i r own, perhaps they should have
to lim it CD's to a p erce ntag e o f t o t a l d e p o sits so as to keep the
$20 b i l l i o n from r i s i n g .
P re s id e n t Moorhead th o u g h t one o f the advantages of CD's was
that th e ir use p e r m itte d money to flo w where the need was.

He did

not th in k an a r b it r a r y c e i l i n g d e s ir a b le .
Governor Brimmer commented th a t being ab le to buy funds on
CD's perm itted the c e n t r a l bank to m a in ta in some degree of c o n tro l
so th a t, as ra te s were r a is e d and reserve requirem ents were also
raised, the r e a l c o s t went up.
Governor M it c h e ll p o in te d out th a t there were other sources
that could be tap p e d ;

fo r example, th e re was the E uro- do llar market.

Commenting on Governor Brimm er's su g g e stio n , Mr. Mayer said
that one must d e v ise some means th a t made the market place determine
whether funds were a t t r a c t i v e a t a c e r t a in p r ic e .




I f th a t p ric e

9/19/67

-14-

s e e m e d p r o h ib it iv e ,

a bank m ig h t have to draw back, alth o u g h a t some

point along the way i t m ig h t d e c id e to take a chance.
t;ood many bankers went th ro ug h t h i s

He thought a

l a s t year and were w e ll aware

of the problem s, and t h a t CD's under p re se n t c o n d itio n s had to have
a place in th e d e p o s it

p o r t f o l i o and must n o t exceed t h a t .

He

suspected th ere were some banks t h a t had no t found th a t out y e t.
Chairman M a r tin asked what th e C o u n c il
happened

i f th e re had been no c e i l i n g

thought

would have

on CD's d u rin g the p e r io d .

Mr. W ilk in s o n th o u g h t th e re p ro b a b ly would have been an
in te n s ify in g o f th e crunch fo r a very s h o rt tim e u n t i l the banking
system moved out u n d e s ir a b le lo a n s to get back in t o a b e t t e r lo a n
situ a tio n .
Mr. Mayer th o u g h t th e p r ic e c o u ld have been measured by the
Euro-dollar m arket.

A good many banks found t h e i r escape through

that market, a lth o u g h some were n o t i n i t

because they d id n o t have

connections abroad.
Mr. K n ig h t re p o rte d t h a t a survey i n h is d i s t r i c t o f 40
important banks i n th e l a s t th re e months showed t h e i r l i q u i d i t y had
improved, and t h e i r in c r e a s e d d e p o s its o f tim e money had been put
into investm ents.

For th e s m a lle r banks t h a t was n o t tr u e ; t h e i r

gains in d e p o s its went i n t o lo a n s .

He b e lie v e d th a t the e f f e c t o f

using CD's depended on what k in d o f bank one was t a lk in g a b o u t.
C.

How would the C o u n c il a p p ra is e re c e nt and
p r o s p e c tiv e changes i n demand fo r consumer
CD's and s a v in g s d e p o s it s , a g a in s t the back­
ground o f r a te s a v a i la b le on com peting market
in s tru m e n ts ?




9/19/67

-15-

W ith th e growth i n t o t a l passbook savings and consumer
type C D 's, th e re is l i t t l e evidence th a t the consumer has so
fa r been a t t r a c t e d to o th e r market in stru m e n ts. However,
the C o u n c il b e lie v e s t h a t i f the d iffe r e n c e in rates should
widen s u f f i c i e n t l y th e re is the p o s s i b i l i t y th a t savingstype d e p o s its m ig ht move to competing market instrum ents.
More im p o rta n t a t t h i s tim e th an the co m p e titio n of market
instrum ents is the c o m p e titio n o f o th e r types of savings
in s t it u t io n s .
P re s id e n t Moorhead commented there was q u ite a l i t t l e
in passbook grow th:

some banks were showing q u ite good growth, others

were s lip p in g a l i t t l e .
CD's.

d iffe re n ce

Everyone was having a good response on consumer

The C o u n c il d id not f e e l th a t the ra te d i f f e r e n t i a l a t th is

point was enough to cause the r e a lly sm a ll saver to move in to market
instrum ents, but when the d i f f e r e n t i a l was above a h a l f per cent there
would be some tendency fo r the s m a lle r accounts ($25,000 or so) to move
to market in s tr u m e n ts .
D uring the e n su in g d is c u s s io n Chairman M artin r e c a lle d th a t at
the la s t m eeting w ith th e C o u n c il th e re was some d is p o s it io n toward an
increase in th e maximum passbook r a te fo r sav ing s.

He wondered what

the current view o f th e C o u n c il members was.
Responses in d ic a t e d t h a t f iv e o f the C ouncil members were
inclined toward an in c r e a s e i n the r a t e , w h ile seven would oppose a
change a t t h is

tim e .

Mr. Bodman s a id he th o u g h t th a t he had changed h is mind since
tfte la s t m ee ting .

At the moment he would ju s t as soon leave the

savings d e p o s it c e i l i n g where i t

is .

Mr. M cN e ill s a id h is bank found th a t w ith a h a l f percentage
Point d i f f e r e n t i a l i t




co u ld compete s u c c e s s fu lly w ith savings and loans,

9/19/67

-16-

but i t was not a b le to do so when the spread was la r g e r.

This would

argue for r a is in g the maximum on savings accounts from the 4 per cent
level.
P re sid e n t Moorhead commented th a t on the whole he was s a t is ­
fied w ith the 4 per ce nt r a t e .
Mr. K nig ht s a id he was in te r e s te d in changing the savings
and loan r a te .

If

it

came down, h is bank would be happy to stay at

4 per cent.
Mr. L a r k in s a id t h a t he would s t i l l be opposed to an increase
in the maximum r a t e .

He th o u g h t the h ig h e r ra te on CD’ s had solved

a lo t of problems i n t h i s a re a .
rate could get i t

Those who wanted the h igh er in te r e s t

by u s in g C D 's, w h ile those who wanted to be able

to move in and o ut o f t h e i r accounts a t w i l l could use the passbook
savings acco unt.

I n C a li f o r n i a

th e re had been about a $70 m illio n

increase in the 4 per ce nt passbook saving and about $110 m illio n
in the savings and lo a n s in c e the f i r s t o f t h is year.

The present

arrangement seemed to be w orking very w e ll.
D.

What are c u r r e n t p o lic ie s o f banks regarding
p r e fe r r e d types and m a tu r itie s o f investments?

As many bankers b e lie v e the r e la t iv e easing o f c r e d it
c o n d itio n s is tem porary and th a t they s h o r tly may be faced
w ith in c r e a s in g demands fo r fu n d s , there has been some
re lu c ta n c e to in v e s t a v a ila b le reserves fo r any extended
period o f tim e .
Most bankers have co nfined t h e ir investments
to the r e l a t i v e l y s h o r t end o f the m a tu r ity schedule. Should
loan demand c o n tin u e to be le ss than a n t ic ip a te d , there
probably w i l l be a change in t h is p o lic y and banks w i l l tend
to in v e s t an in c r e a s in g share o f t h e ir p o r t f o lio in m unicipals
and governments fo r lo n g e r p e rio d s a t to d ay 's a t t r a c t iv e rate s.




9/19/67

-17P re s id e n t

considerable

M oorhead

difference

tho ug ht

between

that

the

here

large

E.

in

h iS

S t r i c t

How d o

C o u n c il

ie c e n t

in c r e a s e s

c o m m e rc ia l
ment
bank

anrf

dnKS

and

re fle c t
th is

in

three

source

d u rin g
th a t

the

fu nd s

p e rio d

c o m m e rc ia l

le n d in g
a b le

rate s

fo r

of

m ig h t
in

names

to make

m a rk e ta b le
u s in g
in

the

c h an ge

the

if

U n le s s

is

w illin g

of

became

m ost

paper

as

im p o rta n t

P re sid e n t M oo rhead
c o m m e rc ia l

s a id

w h ic h
in

th a t

paper

was

the

he

keep

tw o,

the

b e e n b e lo w

to

the

some

a v a il­
s h ifts

p e r s is t.

lin e s

fact

the

th a t

fund s

some

open

On

fu tu re
w h ic h

tim e

in

borrow er

m any

to

o b ta in

m ark et.
banks

fa ir ly

w ere
when

w ere

In

p r o b a b ly

th is

in

reasons

grow th

of

the
the

w o u ld

b u t,

were
as

th e ir
be
now

in d ic a te d

s itu a tio n

to

c o u ld

p o s itio n

a q

c ite d

by

c o m m e rc ia l
rate

not

a b e tte r

response

the

tho ug ht

it

h e a v ily

banks

of

now l e n d i n g

c o m p a n ie s

com m ent,

d ir e c tly .

to

recent

d e s ira b le

stru cture

A g o o d many

and

la rg e

th re e ,

at

fo r

C o u n c il's

e a s ie r

dem ands

rate

m a rk e ta b le

m arket

the

fa ll;

and

grant

that

nam es.

on

to

th a t

to

the

d e s ir e

lik e ly

order

paper

s a id

paper

B rim m e r




in

the

d e v e lo p ­

be h i g h l y

have

banks.

la ro o

of

e ffe c t

sh o rt- te rm

is

p o s s ib le

the

the
la s t

the

lo n g .

paper m arket

rate s

s itu a tio n

th e ir

t o m e et c u s t o m e r s '

*avor o f

have

fa ir ly

c o m m e rc ia l
to

banks;

c o m m e rc ia l

money

C o u n c il w ere

money

m arket

M oorhead

s e n te n ce

from G o v e r n o r

tig h t

c o m m e rc ia l

c o m m e rc ia l

one,

s m a ll

th is

b e lie v e

the

had

le s s

w ith o u t

la s t

of

proved

e s s e n tia l

the

P re s id e n t

C o u n c il

use

is

m i g h t be

the

use

la s tin g

c o m m e rc ia l

it

be

are

e v a lu a te

banks

th is

hand,

in s ta n c e s
fu nd s

of

a

w h ic h

in v e s tm e n t.

o ther

banks

the

paper

and

c o n s id e ra b ly ,
the

of

out

c o rp o ra te

m ark et?

d e v e lo p m e n ts :

of

c o rp o r a tio n s

in

paper

co rp o ra te

g o in g

members

l i k e l y to have
l o a n dem and?

The m e m b e r s
in c r e a s e s

w ere

the re

banks

6
A 8 ood m a n y b 3 n k S

a e a in
8a i n

the

paper,

d iffe re n

o v e rr id in g

c o n s id e ra tio n .

-18-

9/19/67
3.

B a la nce

A.

of

paym ents.

Do C o u n c il members expect any s i g n i f i c a n t
change i n the a v a i l a b i l i t y o f fin a n c in g
fo r U .S. exports in the near fu tu re ?

The members o f the C o u n c il do not expect any s i g ­
n if ic a n t change in the a v a i l a b i l i t y o f funds fo r U.S.
exports in the near f u t u r e .
The somewhat e a s ie r p o s it io n
of banks suggests th a t such f in a n c in g may be more r e a d ily
a v a ila b le .
B.

Do C o u n c il members expect fo r e ig n demands
fo r c r e d it s from U .S . banks to change s i g ­
n i f i c a n t l y in the months ahead?

F o re ig n demands fo r c r e d it s from U.S. banks co n tin u e
strong and are u n l i k e l y to change s i g n i f i c a n t l y in the months
ahead. W hile the demand changes from time to time in i n d i ­
v id u a l c o u n t r ie s , an o v e r - a ll stro n g aggregate demand is
m a in ta in e d , r e f l e c t i n g an u n d e r ly in g shortage o f c a p it a l in
the w orld.
Governor R o bertso n asked w hether any member o f the C oun cil
knew of any export s a le s

t h a t had been lo s t fo r la c k o f fin a n c in g .

No member o f the C o u n c il in d ic a t e d th a t he knew o f any
such loss of e x p o r ts , a lth o u g h Mr. W ilk in s o n commented th a t there
was a constant p ressure fo r terms when one got in t o the export
guarantee.
In response to a query by Governor Brimmer as to the
extent to which the Japanese were seeking loans in the U.S.
market, Mr. M c N e ill responded t h a t they would borrow an y th in g
U.S. banks would le nd them i n any amount and on any terms.

He

also s a id , in re p ly to a fu r t h e r q u e s tio n from Governor Brimmer,




9/19/67

-19-

that demand from W estern Europe had picked up as compared w ith la s t
year.

His bank was t r y in g to l i m i t these demands, and he thought

other banks had been tr y in g to do the same.
Governor Brimmer then asked about the prospects for the
banks using t h e ir f u l l quotas under the v o lu n ta ry fo re ig n c r e d it
re s tra in t program, to which Mr. M cN e ill r e p lie d th a t h is bank was
close to i t s c e i l i n g and he would be frank to say he was glad to
have the c e i l i n g .
money abroad.

As f a r as he was concerned there was enough U.S.

However, the program had not worked f a i r l y because

some of the banks d id no t have enough a t the time the c e ilin g was
put on.
Mr. S t i l l noted th a t P h ila d e lp h ia banks were ju s t g e ttin g
into the in t e r n a t io n a l b u sin e ss a t the time the c e ilin g was fixed
and they had not been a b le to expand a t a l l .
a p r a c tic a l m a tte r ,

lim it e d

The program had, as

in t e r n a t io n a l business to the large

banks th a t were in i t b e fo re the c e il i n g became e f f e c t iv e , such
as those in New York and a few o th e r c i t i e s .
Governor R o bertso n agreed there was no q u e stio n about the
inequity o f the program.

This was a f a c t , but to attem pt to devise

a program th a t would c o r r e c t t h is would mean c u ttin g down the quota
of the banks th a t were a lr e a d y in the business when the program was
started.




9/19/67

-20Mr. K nig h t asked w hether he understood c o r r e c tly th a t

Governor R o b e rtso n 's o p in io n would be t h a t ,

in s p ite o f the fa c t

that fo re ig n loans o f banks t h a t p r e v io u s ly had been in the i n t e r ­
natio n al f i e l d were n o t a t t h e ir c e i l i n g s ,

the prospects o f o th e rs

g etting leeway fo r such c r e d it s was not very good, and Governor
Robertson agreed they were n o t very good.
Chairman M a r tin then asked what the members o f the C o u n c il
would suggest be done a b o u t the b a lan c e o f payments.
Mr. Mayer remarked t h a t i f everyone concerned w ith the
balance of payments had fu n c tio n e d as w e ll as the banks, the
problem would be much le s s .

However, th a t had not been tru e o f

the non-bank program under the Department o f Commerce or o f some
other im portant f a c t o r s .
In response to a q u e s tio n from Governor Brimmer as to why
U.S. banks e s t a b lis h in g overseas branches seemed anx ious to get
into London, Mr. Mayer s a id i t became ap p are nt to h is bank in
trying to solve the problem o f e x p ansio n overseas th a t London was
the f i r s t p lace i t

sh o u ld have a b ra n ch .

No m a tte r what was s a id ,

outside of New York London was the w orld c a p i t a l m arket.
quite c le a r th a t i f h is bank wanted to take care o f i t s

I t was
overseas

customers i t sh o u ld be c lo s e to them and th a t c o u ld not be done
without a London b ra n c h .




I t had been found extrem ely u s e f u l.

-21-

9/19/67
C.

Is the re c e n t r a p id growth in E u ro - d o lla r
borrow ings through fo r e ig n branches o f U .S.
banks l i k e l y to c o n tin u e in the near fu tu re ?

The r a p id grow th i n E u ro - d o lla r borrow ings through
fo re ig n branches o f U .S. banks r e f le c t s the co n tin u e d co n­
cern o f the money c e n te r banks ab ou t t h e ir a b i l i t y to meet
a n t ic ip a te d lo a n demands.
W hile the volume o f borrow ing
may f lu c t u a t e from tim e to tim e , money ce n te r banks are
lik e ly to u t i l i z e the E u r o - d o lla r m arket as a source o f
funds so lo ng as the funds may be ad van tag e o u sly used.
P re s id e n t Moorhead commented th a t what the C o u n c il was
trying to say was t h a t , a lth o u g h use o f E u ro - d o lla rs would f lu c t u a t e
depending upon m arket r a t e s ,

t h a t m arket was here to sta y as a source

of funds.
Governor M a is e l asked w hether the C o u n c il had any f e e lin g
as to how much the use o f E u r o - d o lla r s by U .S. bank£ would have
developed even i f London had n o t been h av in g i t s

d iffic u ltie s .

P re s id e n t Moorhead asked Mr. Prochnow to comment on t h is
question.
Mr. Prochnow f i r s t r e fe r r e d to the p re v io u s q u e s tio n ,
stating th a t h is bank was one o f those t h a t had r e c e n tly e s ta b lis h e d
a branch in London.

The bank had lo ng had overseas custom ers, and

it had had a p o lic y

t h a t i t must do b u sin e ss o n ly through the be st

banks in the c o u n tr ie s co nce rned.

It

found th a t i t was lo s in g co n­

tact w ith i t s c u sto m e rs, however, and i t

s ta r te d in London w ith a

representative o f f i c e b u t l a t e r changed to a branch .

S w itc h in g to

a branch was one o f the b e s t moves the F i r s t N a tio n a l Bank o f Chicago




9/19/67

-22-

had made, not j u s t fo r p r e s tig e b u t because i t p ro v id e d a much
better means fo r s e r v in g the la r g e c o rp o ra te customers w ith which
i t did b u sin e ss.

I t a ls o now had a branch in F r a n k fu r t, which was

proving v a lu a b le .
On the E u r o - d o lla r q u e s t io n , Mr. Prochnow s a id th a t h is bank
used E u ro- do llars whenever i t

found i t advantageous to do so.

It

had used them l a s t y ear even a t a lo s s because i t had to p r o te c t i t s
p o sitio n .

I t bought E u r o - d o lla r s t h is y ear because i t a n t ic ip a t e d

a very large demand fo r c r e d i t .
Governor S h e r r i l l in q u ir e d how many o f the banks re p re se n te d
in the room were now a c t iv e

in

the E u r o - d o lla r m arket, and responses

indicated th a t there were a t le a s t th r e e .
4.

What are the C o u n c il's views on monetary and c r e d it
p o lic y under c u r r e n t circ u m stan c e s?

The C o u n c il b e lie v e s t h a t m onetary and c r e d it p o lic y
so fa r t h is year has been h e lp f u l i n c u s h io n in g the a d j u s t ­
ments th a t have tak e n p la c e in the p r iv a t e s e c to r , w h ile a t
the same tim e p e r m it t in g c o r p o r a tio n s and f i n a n c i a l i n s t i t u ­
tio n s to r e b u ild l i q u i d i t y and the T reasury to fin a n c e the
d e f ic it.
However, w h ile r e c o g n iz in g the n e c e s s ity o f f i n a n c ­
ing the T reasury, the C o u n c il b e lie v e s t h a t m onetary p o lic y
should now be somewhat le s s e x p a n siv e .
The C o u n c il fe e ls
very s tr o n g ly th a t f i s c a l p o lic y should be c o n s id e r a b ly
less e x p ansiv e.
This n e c e s s ita te s a prompt cu tback in
expenditures and an in c re a s e i n taxes on p e rso n a l income
and co rp o ra te p r o f i t s .
Chairman M a r tin s a id the Board would li k e
of what was meant by the C o u n c il's

s u g g e s tio n th a t m onetary p o lic y

should "now be somewhat le s s e x p a n s iv e ."




some d is c u s s io n

9/19/67

-23P re s id e n t Moorhead s a id th a t the C o u n cil f e l t th a t open

market o p e ratio n s sh ou ld be somewhat le ss expansive than they have
been.

The C o u n c il c o u ld not say to c u t the money supply by so many

d o lla rs; i t was a m a tte r o f f e e lin g o n e 's way.

Some members thought

there was reason to w a it to see what a c t io n was taken on the tax
b i l l , but perhaps the time was here when the Fed should s t a r t c u t tin g
down on the r a te o f e x p a n sio n .
Mr. S t i l l

s a id t h a t some o f the C o un cil f e l t th a t le a v in g

free reserves a t about t h e i r re c e n t le v e l in the face o f seasonal
increases in demand fo r lo ans would r e s u lt in a somewhat less
expansive Federal Reserve p o lic y .
Governor R o bertso n asked to what e x te n t the increase in the
money supply rep re se n te d la r g e r com pensating balances re q u ire d o f
co rp oratio ns--a means csed by banks fo r in c r e a s in g in t e r e s t c o s ts .
Mr. Bodman s a id th a t he d id not th in k t h is had had a
measurable e f f e c t .

A c t u a lly , b u sin e ss loans were down.

the purchase o f s e c u r it ie s
to the

He thought

by the Federal Reserve had c o n tr ib u te d

increase in demand d e p o s its th a t was r e fle c te d to some ex tent

i n la rg e r com pensating b a la n c e s

o f c o r p o r a tio n s .

Governor M a is e l commented th a t lo g ic a l l y

the c o r p o r a tio n s ,

rather than the banks, m ig h t buy Government tax b i l l s
their balances out o f the banks.
economy would be b e t t e r




by ta k in g

I t was a q u e s tio n whether the

o f f by h av in g the Government debt bought

9/19/67

-24-

d ir e c tly by corpora Lions r a th e r than through the banks.

He supposed

the banks m ight say th a t c o rp o ra tio n s would be less lik e ly to spend
the money i f

the funds were t ie d up in tax b i l l s

rath er than being

held in the form o f n e g o tia b le CD's.
Mr. Bodman th ou gh t i t would be an im possible undertaking
for the Government to t e l l the banks how to a llo c a te th e ir assets.
However, he would not th in k Governor M a is e l's suggestion would make
a great deal o f d iffe r e n c e to the banks.

So fa r as the co rp oratio n

was concerned, the funds were e q u a lly l i q u i d whether in Treasury
b i l l s or CD's o f a comparable q u a lit y and m a tu r ity .

He c ite d

the

case of a c o r p o r a tio n such as a u t i l i t y which had the proceeds of
a bond issue to be d is b u rs e d over a p e rio d o f tim e, and in the mean­
time i t wanted the funds in a safe p lace a t some re tu rn .

He did not

think i t would make much d iffe r e n c e to the c o rp o ra tio n which market­
able instrum ent was used, so long as i t was o f a comparable q u a lity
and the c o r p o r a tio n knew th a t the money would be a v a ila b le as it s
co nstructio n schedule r e q u ir e d disbursem ent o f the funds.
Governor Daane r e c a lle d th a t Mr. S t i l l had suggested he
would tr a n s la te a " le s s exp ansiv e" p o lic y as one th a t might m aintain
about the p resent le v e l o f fre e reserves w hile accommodating the f a l l
seasonal demands.
expansive.




He d id not see how th a t could be considered less

9/19/67

-25M r.

le t

th e

S till

norm al

e x is tin g

responded

fa ll

le v e l

of

seasonal

fre e

s u p p ly some r e s e r v e s
gesting

th at

the c r e d i t

th e

to m eet

R o b e r ts o n a n d

D aane

n et am ount o f

fre e

fo r

th a t

those

s u p p lie d

rose.

he v i s u a l i z e d

demands

reserves,

am ount

d e m an ds

th a t

c r e d it

th e

be

th is

but

a g a in s t

th e

t h a t h e was s u g ­

in c re a s e d

He a g r e e d w i t h

th a t

press

t h a t w o u ld

F e d e r a l R e s e rv e w o u ld

dem ands,

not

a p o lic y

as

r a p id ly

as

com m e n ts by G o v e r n o r s

w o u l d m ean some r e d u c t i o n

in

th e

reserves.

Mr. L a rk in posed the q u e s tio n w hether, h av ing had the 1966
experience and i f

the Fed f e l t t h a t i t was d e s ir a b le p o lic y now to

slow things down, i t m ig h t be ru n n in g the r is k of s t a r t in g a move
on the p art o f co rp o ra te tr e a s u re r s

to take money d6wn from t h e ir

lines of c r e d it a t banks in order to be sure they got the funds they
might need.

If

the Fed r e a lly were to put the banks under pressure,

he did not fe e l they were very fa r from another crunch.
prefer to w ait a l i t t l e

He would

to see how the autom o bile s tr ik e s and some

other im portant item s d e v elop ed.

He d id not d i f f e r fund am entally

from the C oun cil view , b u t he d id d i f f e r a l i t t l e

on the tim in g fo r

a move toward t ig h t e n in g .
Governor Brimmer asked whether the C ouncil had discussed in
specific terms the q u e s tio n o f tim in g .
P r e s id e n t M oorhead
^ s s e n in g
p e rh a p s

of

e x p a n s io n

two h e l d




re po rte d

sh o u ld

b e g in

a d iffe re n t

th a t
rig h t

v ie w .

th e

C o u n c il

away.

tho ug ht

However,

th at

a m in o r ity

9/19/67

-26Governor M aise l wondered whether the C ouncil f e l t th at enough

demand had b u i l t up so t h a t ,
the present l i q u i d i t y

i f the Federal Reserve did nothing in

s i t u a t i o n , the demand for funds would drop.

He was not t a lk in g o f an a b s o lu te drop but of a reduction in the
rate o f increase--from a 9 or 10 per cent annual ra te of growth over
the past s ix months t o , say, 6 or 7 per ce nt.

In other words, would

the rate o f growth drop as a r e s u lt o f people being s a t is fie d w ith
the amount o f l i q u i d i t y

they had b u i l t up?

P re s id e n t Moorhead s a id th a t both banks and borrowers a n t ic ­
ipated some k in d o f a c t io n , and an y th in g co nfirm ing th a t would make
the s it u a t io n w orrisom e.
Governor M it c h e ll s a id t h a t i f the C o u n c il's comments re fle c te d
the a t t it u d e and tone o f the banking community as a whole, i t was
s u f f ic ie n t ly c a u tio u s and apprehensive about the fu tu re th a t banks
were not going to do a n y th in g th a t req uired any p a r t ic u la r r e s tr a in t
on the p a rt o f the F e d e ral Reserve.

Professor Friedman would say, of

course, th a t an 8-1/2 per cent r a te o f increase in the money supply
was too much and would produce i n f l a t i o n .

To Governor M it c h e ll, i t

would not seem th a t p u l l i n g back on the banks a l i t t l e

at th is time

would do more th an make them-more ca u tio u s than the comments suggested
they alread y were.

F urtherm ore, t h e ir customers did not seem lik e ly

to do any thing t h a t would r e q u ir e r e s t r a i n t , judging from the rather
slow demand th a t had been in d ic a te d fo r lo ans.

Looking at th is p ic tu r e ,

Governor M it c h e ll th ough t th e re was some inco nsiste ncy between the




9/19/67

-27-

comments th a t the c e i l i n g on la rg e CD's should be raised and the
recommendation fo r a move by the Federal Reserve toward tig h te r
c o n d itio n s .
Mr. Mayer observed th at he was more or less w ith Mr. L arkin.
He could not h e lp b e in g bothered by the ra p id expansion of the money
supply, but the s i t u a t i o n was h ig h ly d e lic a t e .

He did not know how

to q u a n tify the d iffe r e n c e between where banks were now and what
could tr ig g e r an o th e r crunch .
very g e n tly and a very l i t t l e

I f he were doing i t , he would move
b i t , m atching c lo s e ly and maybe p u llin g

back i f there was any adverse r e a c tio n .
Mr. W ilk in s o n wondered i f the Federal Reserve was caught in
the dilemma where any r e s t r a i n t would c o n tr ib u te to a downturn.

It

d id n 't want ano th e r c r e d it crunch, but i t was try in g to b rin g down
demand.

I t was forced to supply enough reserves to give the banks

adequate l i q u i d i t y a t the new h ig h e r le v e l o f demand th a t would come
as the economy found a new e q u ilib r iu m .
Governor M it c h e ll agreed th a t l i q u i d i t y had to be r e b u ilt .
The q uestio n was whether th a t had gone fa r enough, and from the
C ouncil's comments he d id not know the answer.
Chairman M a r tin commented th a t since a year ago there was a
new approach to l i q u i d i t y .

The a c ce le rate d tax payments and the fear

of what might come about re q u ire d a l i q u i d i t y judgment fa c to r th at
was very d i f f i c u l t to a p p r a is e .




9/19/67

-28Mr. Flem ing s a id he in te r p r e te d the C o u n c il's discussion

as in d ic a t in g th a t business was b eg inning to move upward.

Savings

were in c re a s in g and th e re was no q ue stio n but th a t wages and prices
were moving up.

The money supply was a t an a l l time high le v e l.

tax increase was not a t

a l l c e r ta in .

A

He thought the Council was

a fra id o f the i n f l a t i o n a r y im p lic a tio n s of a l l o f those th in g s .
Just what should be done to c o rre c t the s it u a t io n he did not know.
Everyone would li k e to see a tax in c re a s e , but th a t might not be in
the cards a t the moment.

As an in d iv id u a l banker, he would lik e to

have more money and more custom ers, but lo o king a t the s it u a t io n
for the good o f the co u n try as a whole he was sure something had to
be done.
Governor S h e r r i l l asked whether as a banker Mr. Fleming did
not fe e l th a t th e re was t i g h t money now.

Norm ally, banks were out

looking fo r lo a n s , but a p p a re n tly only two of th is group were seeking
loans at p re s e n t.
Mr. Flem ing r e p lie d th a t maybe h is bank could increase it s
loan r a t io a l i t t l e ,

but i t

come in from custom ers.

d id not know what demand was going to

L ast year was ju s t yesterday to him.

His

bank was not about to take a chance on g e ttin g out on a lim b; i t
did not want to be loaned up a t the moment.
Mr. M cN e ill was o f the o p in io n th a t there was a t ig h t money
market now, and t h is made banks fe e l uncomforable w ith the loan
p o r tfo lio s many were c a r r y in g .




9/19/67

- 29Governor S h e r r i l l remarked th a t t ig h t money was a m atter of

judgment.

However, i f c o n d itio n s were alre ad y t i g h t , then what the

Council was a sk in g fo r was a t ig h t e r money m arket.

The uneasiness

that the C o u n cil expressed was not a m atte r o f s t a t i s t i c a l measure­
ment, yet the f e e lin g d e sc rib e d was p robably keeping banks from
doing much more th an m eeting a minimum demand.
Mr. S t i l l s a id one reason g iven fo r not doing something now
was the fe a r o f a cru nch .
be done.

He wondered, however, when something would

I f b u sin e ss dropped o f f ,

tig h te n in g ; and i f

it

th ere would not be much reason fo r

got b e t t e r and b e tte r the p o s s ib le e ffe c ts of

a tig h te n in g a c t io n and the fe a r o f a c r e d it crunch would have to
be considered.
Governor M a is e l suggested th a t the o b je c tiv e was th a t the
banking system f e e l about as t i g h t as i t c o u ld .
help slow the e x p a n sio n .

That fe e lin g should

He th ou gh t Governor S h e r r i ll was suggesting

that the System keep the f e e lin g o f tig h tn e s s and not worry too much
about the s t a t i s t i c s .
Mr. W ilk in s o n s a id i t

appeared th a t the Board wanted in t h is

environment fo r banks to f e e l t i g h t and to stay about where they were.
Mr. Flem ing f e l t

the-problem was not so much where banks were

now but the d ir e c t i o n i n which they were g oing .
s itu a tio n seemed f a i r l y

At the moment the

c o m fo rta b le but bankers d id not lik e the

d ir e c tio n i n w hich th e economy was g o in g .

The Federal Reserve was

to be commended on th e jo b i t had done the past y ear, and the q uestio n
now was whether a s a fe b a la n c e co uld be m a in ta in e d .




9/19/67

-30Mr. Mayer s a id he d id not fe e l too com fortable.

As

Hr. M cN eill had p o in te d out e a r l i e r , banks were p re tty w ell
loaned up and much o f th a t was based on funds of a very sh o rt­
term c h a ra c te r.

He (Mr. Mayer) could not help fe e lin g ji t t e r y .

That was the n a tu re o f banking and he doubted th a t i t was about
to change.
Chairman M a r tin asked how much impact the Council thought
the tax in c r e a s e , assuming i t was passed, would have on business.
He noted th a t t h is was a case o f complementary tax and monetary
p o lic y , and the C o u n c il had come out s tro n g ly fo r a considerably
less expansive f i s c a l p o lic y .
Mr. W ilk in s o n s a id th ere m ight be a d iffe re n c e between the
effe cts on consumers and c o r p o r a tio n s .

The consumer might not

immediately c u t back b u t in tim e the new taxes would have an e ffe c t
and would slow down the v ig o r o f consumer purchasing.
P re s id e n t Moorhead added th a t the C ouncil did not fe e l the
tax program would have much e f fe c t on p rice s because the economy was
in a c o s t- p ric e push and even w ith a tax boost there would be a
large d e f i c i t i n the F ede ral Government's budget.
Going back to Governor S h e r r i l l 's comment on lo ans, Mr. Knight
said he was sure the C o u n c il would not wish to leave the impression
that banks were a c t u a lly tu r n in g down good loans.

Many banks were

out fo r c e r t a in types o f business as in the consumer loan and c re d it
card f i e ld s .




9/19/67

-31Chairman Mar Lin s a id he assumed every member of the Council

was in favor o f the ta x program th a t had been proposed.
No member o f th e C o u n c il in d ic a te d disagreement, although
Mr. Bodman s a id he favored i t ,

provided the program was accompanied

bv a maximum r e d u c tio n i n F ede ral expenditures.

President Moorhead

added th a t he th o u g h t the C o u n c il was in favor of the program anyway.
Mr. Mayer th o u g h t the Treasury made a serious error by
in cluding some ta x reform measures ra th e r than s tic k in g to a s tr a ig h t
surtax.

This had cre a te d a f e e lin g o f r e a l d is t r u s t .

b i l l was to be u n d e rta k e n , i t

I f a tax reform

should be done out in the open.

I t was agreed th a t the next meeting of the Federal Advisory
Council would be h e ld November 20-21, 1967.
The m e e t i n g then adjourned.




Secretary