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For Release
November 19, 1966
10:00 A.M., M.S.T.
(12:00 Noon, E.S.T.)


Remarks by

Andrew F. Brimmer
Board of Governors of the
Federal Reserve System

at the

Annual Convention


The Arizona Bankers Association
Tucson, Arizona

November 19, 1966


Undoubtedly, when the history of monetary management in 1966 is
written, great stress will be placed on the enormous demands for credit
and the rise in interest rates to the highest levels in 40 years.
an emphasis would not be misplaced.


But the more perceptive observers

will probably also notice the nature and extent of innovation in the use
of monetary policy instruments by the authorities in an effort to meet the
heavy responsibilities which confronted them.

And perhaps the most per-

ceptive of all observers will notice the most critical aspect of the entire
operation: there was a careful blending of tradition with innovation ia the
execution of monetary policy this year —

as otfer the whole half

century that our central bank has been upon the national financial scene.
If our future historian combs the financial records of the current
year even more finely, he cannot miss detecting another -- more disquieting -under-current of feeling among contemporary observers as the year unfolded.
This was the persistence of a fear (sometimes vague, sometimes more pronounced)
that a financial panic or monetary crisis was about to occur.

There was

also a conviction on the part of many that the monetary authorities x^ere out
of touch with the money and capital markets,

and — worst of all -- that the

Federal Reserve System was perfectly prepared to push its credit restraint
policies vigorously -- even to the very edge of a market crisis.
Of coarse, I may be completely wrong in my speculations about the
probable concern of future historians. Yet, as I travel about the country, I
hear comments and questions raised by a fairly large number of our own
contemporaries which reflect the same mosiac of anxieties about the course of

monetary affairs.

In responding, I emphasize that, in my personal judgment,

fear of an impending financial crisis (particularly a crisis resulting from
the pursuit of monetary policy) was thoroughly unwarranted.

Nevertheless, I

do recognize that such fears did exist, and the subsequent lessening (at least
slightly) of market pressures since late September may not have fully erased
Consequently, I think this might be an appropriate time and place to
describe carefully the way in which the Federal Reserve System has carried out
its responsibilities this year — and above all to indicate its capacity and
determination to make available to the market at any time whatever volume of
new bank reserves that may be necessary to forestall a financial panic. Of
course, all of this has been said before, but there may be some advantage in
repeating it. Furthermore, it may also be worthwhile to undertake a more
systematic review of the "information system on which monetary management
is based,

Uhile the general outlines -- and even some details —

of this system" are also known, changes have occurred over time and another
sketch may prove helpful.
With these objectives in mind, I will:
Summarize the central strategy of monetary policy during 1966.
Try to answer the question of whether there was an impending
financial crisis during the late Summer.
Review the intelligence sources of . the Federal Open Market
Committee, the central stage of monetary management.

Monetary Management in 1966
As mentioned above, a brief summary of the main developments in monetary
policy this year may add perspective to the comments below. It will be recalled
that the current policy of credit restraint became explicit in the late Fall

of 1965. After more than four years of monetary and fiscal policy designed
explicitly to stimulate economic expansion, it became evident as the year
progressed that the fundamental conditions of the economy had changed

Reflecting the policy measures of the previous few years, the

economy had moved into the neighborhood of full employment by mid-Summer.
Then came the quickening of the military effort in Vietnam, bringing in tandem
a sizable draft on the Nation's resources and manpower.

From this unfortunate

conjuncture of circumstances sprang strong inflationary pressures which are
still with us.
To counter these pressures, a policy of monetary restraint was announced
explicitly in the first week of December.

As the new year progressed, credit

tightness also progressed, becoming particularly restrictive during the
Summer months.

A restrictive fiscal policy was also adopted. But the

contribution to restraint of aggregate demand from this source was of a
smaller magnitude than that originating x ; i t h monetary policy.

It will be

recalled that modest tax increases became effective in late !Jinter and Spring.
These consisted principally:of/restoration of previous reductions in excise
taxes on automobiles and telephone service, and the acceleration of personal
and corporate income tax payments.

Then, about the first week in September,

temporary suspension of the 7 p^r cent investment tax credit was recommended,
and the measure was adopted in October.
This configuration and timing of fiscal action should be kept in mind,
because to a considerable extent they conditioned the configuration and
timing of monetary management in 1966.

In fact, throughout the year, most of

us in the Federal Reserve System have been fully conscious of the critical
importance of fiscal policy to the success of our own efforts.

Regarding my

personal position on the question, I said in mid-July that I felt a general
tax increase would have been desirable earlier in the year,

I went on to say

that, in the absence of such a move ~ and in the face of the continued rapid
expansion of outlays on plant and equipment and of bank loans to business
to help finance these outlays — I thought it would be helpful to suspend
temporarily the investment tax credit.

Therefore, I was pleased when this

step was taken.

Conception and Execution of Monetary Policy
This year, probably far more than usual, officials of the Federal Reserve
System have tried to explain not only the main objectives of monetary policy —
but also i7hy particular steps were taken.

Of course, each speaker has made it

clear that the views expressed were his own and not those of the System or
its official organs. Here also I wish to stress that the following account is
my own, personal interpretation of monetary strategy over the last 12 months.
The prime aim has been to moderate the over-all growth of bank credit.
But as the year progressed, a special concern developed with respect to the
rapid expansion of bank loans to business.

In the first eight months of the

year, total bank credit (loans and investments combined) rose at an annual rate
of about 8 per cent, compared with 10 per cent in all of 1965. Also in the
January-August period, total loans at banks climbed at a 12.5 per cent rate,
against 14.7 per cent in 1965 as a whole.
expansion was sharply different:

But the profile of business loan
an annual rate of
these loans increased at/almost 20 per cent

during the first eight months of 1966 -- /

faster than the rate of expansion

registered in all of 1965. Furthermore, during June and July, such loans rose
at a 30 per cent annual rate; this was the most rapid two-month expansion in

msiness loans in
10 years.

But these demands on the banks were not singular; businesses x / r

also raising a record volume of funds in the capital markets, and these, too,
assisted in financing the further accumulation of inventories and fixed
Yet, despite the desire to moderate the grox7th of bank credit, a number
of serious constraints limited both the pace and degree of restraint which the
Federal Reserve System could exert. We were concerned not only with the
liquidity position of commercial banks -- but also \*ith the continued orderly
functioning of the financial markets and the stability of nonbank financial
institutions, particularly mutual savings banks and savings and loan associations.
Under the mounting competition among different institutions for funds -- and
between all institutions and the market -- the ability of savings intermediaries
to cope T7ith a possibly severe loss of deposits became increasingly uncertain.
While my own doubts about the prospects for these institutions were apparently
never as grave as those evidenced by some other observers, nevertheless, I have
felt all along that we could not be insensitive to the situation in which they
found themselves.
Implementation of Policy
In the last year, as one would naturally expect, we have made use of
all of the general credit policy instruments. We have raised the discount rate
and reserve requirements on member bank time deposits, and we have made
extensive use of open market operations.

Moreover, we have given special

attention to the administration of the discount window and the effects on the
competition for savings of the maximum interest rates payable by member banks
on time and savings deposits(governed by the Federal Reserve Board's Regulation Q>

The public announcement of the shift to credit restraint was made
last December when the discount rate was raised from 4 to 4% per cent.
Simultaneously, the maximum rates which banks could pay to attract savings
were established at 4 per cent for regular savings deposits (so-called
passbook accounts) and at 5k per cent on time deposits.

Although I was not

a Member of the Federal Reserve Board at the time, it appears from the
record that the. / moves xyere strongly motivated by a desire to avoid an>
abrupt impact of the shift to restraint on credit flows.

It was known that

as credit restraint spread through the financial system, market rates would
rise. This uptrend would clearly render uncompetitive the existing 4% per cent
ceiling on time deposits — particularly on the large-denominated negotiable
time CD's at commercial banks.

If a heavy attrition in these CD's had occurred

as the credit restraint policy got underway, the resulting cutback in the
availability of bank credit probably would have exceeded that desired as a
policy objective. To avoid this, the decision was made to raise the Regulation Q

It was also felt that such a move


enhance the ability of the

banks to compete for the deposits of business firms and other large holders of
liquid balances. This subsidiary objective was certainly implied by the
decision to keep the maximum rate on passbook savings at 4 per cent, and thus
cushion the effects of the change on S&L's and . mutual savings banks.


more, in lifting the rate on time deposits by one full percentage point to
5% per cent, it was also generally expected that only a few banks at most
would actually move to the maximum within the coming year.

In other words, it

was thought that the ceiling essentially was being put out of reach.

In retrospect, however, is is obvious that such was not the case.
As the enormous demand for credit built up during the Spring and Summer,
more and more banks began to raise their offering rates on negotiable CD's
and to shorten the maturities. By early March, the 5k per cent maximum was
posted by a number of banks, and ultimately it was offered for the minimum
30-day maturities.

Moreover, many banks, even some outside the money market

centers, discovered in the differential between the passbook and time deposit
rate ceilings a gap through which they could greatly enhance their ability to
compete for funds. To fill this gap, a wide variety of instruments was
fashioned, of which "savings bonds11, and "savings certificates" were perhaps
the most popular.

On all of them, a rate in excess of 4 per cent could be

These instruments were aimed squarely at the small savers wherever

they could be found. As it developed, they were frequently found on the
individual bankfs own passbook rolls, from which a fairly large share of the
time deposit inflow at banks actually came. However, undoubtedly the banks
collectively made substantial net gains in time deposits during the first
nine months of the year, and much of their success can be traced to their
ability to by-pass the 4 per cent ceiling on passbook savings.
As this competition for funds intensified through the Summer, we took
a number of steps to help moderate it. Twice we raised reserve requirements
by 1 percentage point on member banks1 time deposits over $5 million, lie also
restricted the use of multiple maturity certificates of deposits.

Finally, we

requested authority to set ceilings under Regulation Q on a number of different
bases, including size. Uhen this authority was granted by Congress, we promptly
set a 5 per cent ceiling on CDfs under $100,000, while leaving the limit


unchanged at

per cent for those at or above this amount.

Other supervisory

agencies fixed maximum rates for the institutions under their jurisdiction.
However, in reducing the ceiling allowed member banks, we were fully aware
that this was by no means an ideal move and that the competition for funds
via market instruments could shave much of the benefits to S&L's and mutual
savings banks that many observers expected to accrue.
During the Summer, market rates again began to press against the
5h per cent ceiling, and the prospect of attrition in bank holdings of CD's

This time, hox^ever, the Regulation Q ceiling was not raised.


stead, it seemed appropriate to allow some attrition to develop and thus
re-enforce the effort to moderate the expansion of commercial banks1 business
loans. This fact has convinced some observers that the most recent approach
was inconsistent with that followed last December.

Actually no such paradox

exists: the need for credit restraint was much greater in the latest period
than was the case a year ago.

By raising the ceiling earlier -- and not

raising it last Summer -- \<re were pointing our efforts at the same target,
that is, a rats* of growth of bank credit more in line with the availability
of the countryfs real resources.
After an increase of h per cent to Uk per cent last December, the
discount rate was not raised again.

Undoubtedly, this fact has given rise to

more comment (and even criticism) than any other aspect of monetary management
this year. In my judgment, an increase in the : discount rate at the outset of
a policy of credit restraint was desirable.

It was needed not only to help

moderate the use of the discount window -- but also to signal the basic change
in policy direction; In contrast, as the year unfolded, virtually all types of

interest rates moved up steadily.

During the Spring and Summer, it appeared

that the movement in one rate served primarily as a peg on which to hang still
another rise. Week-by-week, reference points for the latest advance moved
back through the post-World War II period, through the 1930fs and finally
came to rest in the early years of the 1920fs.

Obviously, these rising

market rates meant falling securities prices and the progressive erosion of
capital values.
In these circumstances, it was no longer mainly a question of restoration
of the historical relationship between the discount rate and other short-term
market rates. Nor was it a matter of employing a traditional central bank
instrument in a conventional manner.

Rather it was a question of judgment

about the net advantages to be gained from an increase in the discount rate
compared with the virtually certain boost to market yields — and probably to
the commercial bank prime rate -- that such a move would have stimulated.


my personal judgment, the balance appears to have been on the side of caution.
Having said this, let me also say that I by no means view the discount
rate as an obsolete instrument of monetary policy.

Far from it.

In fact,

despite my preference for the cautionary approach described above, there
probably were short periods in the current year during which -- if the question
of raising the discount rate had been presented, the choice for me would have
been quit® a close one. At certain times, especially when the benefits to
the balance of payments are considered, an increase in the discount rate would
have appeared quite an attractive proposition.

But, x ^ e i g h i n g the whole

fabric of events during the last 12 months, including the fact that no
excessive member bank borrowing has occurred, I am convinced that the course
followed was the proper one.

Fear of a Financial Crisis
At this point, let me turn to the question of whether we were on the
verge of a financial panic during the late Summer. Personally, I am convinced
that such fears did not rest on a careful appraisal of on-going events. But
more importantly, I am also thoroughly convinced that, if market pressures
had been moving to precipitate a panic situation, the Federal Reserve would not
have hesitated to inject whatever amount of bank reserves that may have been
required to avoid it. I am certain this would have been done even if it x^ould
have necessitated a substantial easing of the general policy of credit restraint
for a time.
Of course, no one can deny that market strains were severe at certain
times during the Summer, especially in late August and early September, both
because of the pressures of current demand for funds and also because of expectations of still worse pressures to come.

These pressures were particularly

noticeable in the municipal securities markets. Under the combined burdens
of new borrowing by state and local governments and of liquidation of sizable
holdings by commercial banks and other investors, the carrying capacity of this
part of the capital market was sorely tested. Week-by-week during July and
August, offerings in the secondary market mounted. A sizable share of these
originated with large banks, not necessarily in the money market centers,
trying to raise funds to meet loan commitments, especially to business
borrowers. Moreover, a number of banks which traditionally had absorbed a fair
amount of new municipal issues began increasingly to share their participation
in underwriting arrangements.
There is no doubt that in August the volume of offerings, new and seasoned,
generated great pressure and great uncertainty in the municipal market. The
prices at which these securities traded dropped sharply.

Moreover, holders df large blocks of securities which they wanted to sell
at times found bids hard to come by. This was particularly true during the
last few days of August.
Thus, while pressures were obviously severe in the municipal securities
market, in my judgment the evidence does not add up to a financial crisis»
Furthermore, the Federal Reserve was in close and constant touch with the

In fact, the System's letter of September 1 to member banks (one

of our major policy innovations in a year of innovations) had as one of its
clear objectives easing the strains in this sector of the capital market.
In the longer end of the U.S. Government securities market, pressures
were also evident, although this sector of the government securities market
has historically been quite thin.

During August dealers became increasingly

reluctant to add securities to their positions even at declining bid prices.
Sellers encountered even more difficulty than usual in finding buyers. They
had to wait longer, and price discounts were clearly much deeper. But here,
too, the market continued to function, even over the tightest period in the
bond market in the last few days of August.
In the Treasury bill market, the test came somewhat later -- in
September after the Treasury's program for handling Federal agency financing
led the market to expect expanded Treasury bill financing.

The strains were

considerable, but they passed rather quickly. There was heavy pressure in the
market for issues floated by a variety of U.S. Government agencies in late
August, but the Treasury's program immediately relieved the pressure in
this area.

The situation in other sectors of the capital market was also
strained, but they also continued to function. The volume of corporate
issues reaching the market x/as exceptionally large, but these were in time
distributed, even though at record yields in many cases.


participants in corporate underwriting syndicates have displayed a readiness
to disband on schedule with only slight reference to short-run market

They continued this pattern of behavior this year. Moreover,

many investors (such as life insurance companies and corporate pension funds)
obviously found the new high yields extremely attractive. In addition to
absorbing a large proportion of the corporate issues placed directly, numerous
investment officers went shopping for bargains among the public flotations.
Typically, they found them.
The markets for finance company and commercial paper seems to have
fared reasonably well.

It is true that, as the year progressed, a sizable

number of finance companies encountered much more stringent credit rationing
at commercial banks. Frequently, they x</ere told to shop for other sources,
including the sale of issues in the open market. The commercial paper
market also provided a financing avenue for numerous firms which ordinarily
would have been accommodated more fully by banks. These sectors of the
market showed strains under the weight of additional supplies pressed on

they seem to have performed well.
do not

The experiences of securities dealers/suggest the presence of a
financial crisis. It is true that the capital positions of many encountered
considerable strain under the impact of falling securities prices. With


interest rates rising steeply, the cost of carrying an inventory became
increasingly burdensome. Moreover, dealers undoubtedly found bank lending
officers far more reluctant than usual, and many may have entertained serious
doubts about the continued availability of their outstanding credit lines.
Nevertheless, the hard core of dealers did not simply become brokers — but
remained vital links in the market mechanism.
But let me admit again that the market developments described above
do reflect correctly the severe pressures that were generated by the frantic
scramble on the part of many borrowers to mobilize funds at a rate far in
excess of what could be accommodated —

if the policy of general monetary

restraint were not to be abandoned. But, I also say again that this pattern
does not add up to a financial panic.

Communication and System Contact with Market Developments
To me, it seems surprising that anyone could believe that the Federal
Reserve would actually be out of touch x;ith the money and capital markets -or would run the risk of permitting a financial crisis to develop. Yet, this
impression did take root in the minds of a number of market participants
and serious observers of the financial scene. Thus, it may be well to review
carefully just how the System keeps in touch with the market developments.

The central stage for monetary management is the Federal Open Market
Committee (FOMC).

This Committee (consisting of the 7 members of the
Federal Reserve Board and
Presidents of/Federal Reserve Banks, including
or four
the one in New York) meets every three/weeks in Washington to assess economic
and financial developments and to provide guidance for the conduct of open
market operations.

But these FOMC meetings also provide a forum for the

coordination of monetary management in general.
In order to formulate policy effectively, the Committee needs a system
of economic intelligence that provides a continuing stream of information and
analysis on economic and financial developments at home and abroad.

The system

that has been developed over the years is comprehensive and efficient.

It is

also highly flexible; it can generate special information to deal with
particular problems on very short notice when necessary.

It enables the members

to follow closely short-run developments in financial markets — from week to
week, day to day, and, when necessary, hour to hour. While this is by no
means its major purpose under ordinary circumstances, at times of financial
stress it can be an exceedingly important function — as it was in the latter
part of August of this year.
The central listening post is the Trading Desk at the Federal Reserve
Bank of Nex/ York, located in the heart of the U.S. money market.

Under the

supervision of an officer of the Committee, the System Account Manager, the
Desk's staff talks continually x*ith dealers in government and other securities,
bankers, officials of financial agencies of the government, and other important
participants in financial markets.

Among other information, the Desk gets

price quotations, information on trading activity and dealer positions,
appraisals of current developments, as x/ell as information on sources and nature

of particular market pressures. The Desk also consults regularly with Treasury
Department officials regarding management of its cash balance, investment
activity of the trust accounts,and planned financing operations. It keeps
continually informed regarding actual and prospective corporate and municipal
security issues; and it receives daily information on bank reserves and factors
affecting them, member bank borrowings, rates on dealer loans and Federal funds,
developments in CD markets, etc.
What the Trading Desk learns is rapidly transmitted to the Committee by
several channels at different times of the day. First is the fIll o'clock call,11
a telephone conference hook-up betx^een officials at the Desk, one of the
rotating President-members of the Committee at his Bank, and senior officers of
the Board's staff in Washington who are frequently joined by one or more Board

A designated President-member x i l participate in the call each day

over the period between two meetings of the Committee, with a different one
taking part for the next inter-meeting interval.
In the 11 o'clock call, x^hich x*as initiated in 1954, the Desk reports in
concise form the information it has gleaned during the morning and indicates
what market operations, if any, it contemplates that day to carry out the
instructions given to it by the Committee at the preceding meeting. In the
discussion, other participants may contribute information they have obtained
independently or may comment on the planned operations.

I might note, hox^ever,

that there is a strong tradition -- shared by individual Committee members
participating as x*ell as the staff -- against attempting to impose personal
judgments on the Manager;

all recognize that the Manager bears the final

responsibility for executing the policies laid down by the full Committee and
that he must be prepared to defend the actions he takes at the next meeting.
Within an hour of the call a staff member at the Board distributes a summary of
the information reported and the plan for operations to all principals.

At the end of the day, after the markets have closed, the Trading Desk
reports on market conditions and its own operations by phone to a Board staff
member in Washington, and the latter distributes the information by memorandum
to the Board members and senior staff. The Desk also prepares its own written
report, the so-called


daily letter", which is mailed to all Committee members.

This daily information is supplemented by two other regular written
reports from the Account Manager to the Committee: a weekly report on financial
market conditions and open market operations, and a summary document, covering
the whole interval from a meeting through the Wednesday preceding the next one.
Finally, on the morning of the FOMC meeting day (a Tuesday) the Account Manager
distributes a supplement covering the three remaining business days through the
preceding afternoon.
A roughly corresponding system is employed in connection with foreign
currency operations.

Without going into details, it is sufficient to note

that there is also a foreign currency Desk at the New York Reserve Bank, from
which information on exchange market conditions and System operations is
transmitted daily to the principals; and that the Committee's Special Manager
for foreign currency operations files written reports on the same schedule
as the domestic Manager.
It is evident that the Committee members are kept closely informed on
financial market developments by the two Trading Desks, and they often consult
with the Desks outside of the regular channels. But the Desks are by no means
the only source of information drawn on. The Board, for example, regularly
reviex/s domestic and international financial market conditions with its staff
once each week, and the staff is prepared to report and discuss special

developments at any of the Board's daily meetings.

Beyond this, the Committee

members draw on their own informal contacts with financial market participants
as well as on the press, market letters, and similar sources.
Finally, the Committee capitalizes on the regional structure of the
System and the close contacts maintained by the Reserve Banks with financial
institutions and other businesses in their individual Districts to generate
special data when needed from time to time. This channel was used in May of
this year, for example, to get information on the current availability of
mortgage funds from the major types of institutional lenders.
The Longer-run View
While tracking short-run financial developments is an important, and at
times crucial, operation, for effective policy formation the Committee needs
a longer-run perspective on events in financial markets and comprehensive
information and analyses concerning developments in the economy and in the
balance of payments.

The Board and Bank staffs provide this intelligence orally

and in writing, at meetings and between them.
I might turn first to two written reports distributed by the Board's
staff before every meeting. These documents are known colloquially as the

green book" and the "blue book11 from the color of their covers. Their formal

titles are, respectively, "Current Economic and Financial Conditions,11 and
"Money Market and Reserve Relationships.11

Each reports and interprets recent

developments in its area, by means of text, charts, and statistical tables;
and each looks forward to possible or probable future developments. The
format of each has evolved over the years, as the staff has found increasingly
effective means of transmitting intelligence to the Committee.

The green book is distributed on the Uednesday before the Committee
meets, so that the

principals may have an opportunity to study it thoroughly,

A supplement, including any late information and new interpretations, is
distributed two days later.
The main body of the green book is divided into three sections, dealing,
respectively, with developments in the nonfinancial area, financial developresearch
ments, and international events. These materials are developed by the/staff,
which includes specialists in each of the subject-matter areas, and are
edited by the senior staff. They include thorough, carefully considered treatments of developments in, for example, GNP, employment, prices, industrial
production, construction, business inventories, agriculture, and consumer
spending; in banking, securities markets, Treasury finance, mortgage markets,
and the stock market; and in the U.S. balance of payments and major foreign
These sections, more often than not, are followed by special appendixes
dealing with particular subjects or topical events at greater length. And
they are preceded by an "outlook" section, providing the senior staff's best
judgment about the implications for the future of recent and prospective
events in each of a number of broad areas.
On the whole, the green book is a remarkable carpamlium of fact and
interpretation that warrants -- and receives -- careful study by Committee

Recently the green books, which are turned out every 3 or 4 weeks

depending on Committee meeting dates, have run between 50 and 75 pages in

In contrast, in 1952, when similar written reports by the Board's

staff first began to be distributed regularly in advance of the meetings (then
of the Executive Committee rather than the full group), they were only about

10 pages in length; and as recently ds 2 y a f f ago siich reports to the lull
Committee were running about 30-odd pages.
poor •• and possibly inverse —

Length alone, of coutse* ig a

index of quality; but in this ca$e the added

Material has represented added value.
One of the most valuable recent additions has been the outlook
material with which

the report begins.

Interestingly enough, this


out of an effort by the Committee to sharpen the focus of its own deliberations.
In December, 1964, the Committee agreed to experiment with the following

First, the staff was asked to send to the Committee about a week

before each meeting a selected list of the major economic and financial
{{neations that, in its judgment, were of central importance for the deteifWination
of monetary policy at the time. Secondly, the staff would then distribute m brief
analysis on each topic, marshalling the relevant information from the green book
and other sources and giving its interpretation of the significance of its
analysis for current policy formation. Finally, the Committee members would be
invited to organize their comments at meetings, at least in part, around this
list of major topics, with members noting their points of agreement and dis~
agreement with the staff's interpretations.
This procedure was followed for nearly a year.

But in October, 1965,

the Committee concluded that the results hoped for with respect to Its own
deliberations had not been achieved. At the same time, the staff analyses
on the various questions that had been posed had been found to be of great
value as a supplement to the kind of material included in the green book.
Accordingly, it was decided that the latter report should be expanded to
incorporate similar analyses9and this has been the practice since.

The blue book, on money market conditions and reserve relationships,
is a much shorter and more specialized report that is distributed on the
Friday morning before the meeting, along with the supplement to the green
book. It discusses recent and prospective developments in short-term markets
and bank reserve and deposit positions; in connection with the material on
prospects, it includes the staff's projections of changes in required reserves,
money supply, and bank credit for the coming month on the basis of various
possible policy decisions at the meeting.
Like the green book, the blue book also has a long history marked by
transformations in form and content. Without detailing the various transformations of this report over the years, I might note that it also assumed its
present form in October 1965. And again as the ultimate result of a Committee

with its own procedures.

Apart from the green and blue books, and the Managers1 reports, the
Committee receives "country papers'1, analyzing economic and financial
developments in major foreign countries on a regular schedule. And, finally,
it gets special staff memoranda on a broad variety of subjects produced either
at the specific request of the full Committee or individual members or at the
initiative of the staff. Altogether, a remarkably large volume of written
material is supplied to each member before a meeting, to help him reach
judgments on the kinds of policy decisions that might be appropriate.
The members also rely heavily on oral briefings and discussions with
their staffs. A regular feature of the Board's meeting on the day before the
FOMC meeting day is the "economic round-up", in which members of the research
staff report orally on recent and prospective developments in their various

areas of specialization, with questions and discussion following.


Board members may also meet personally with staff to pursue particular issues
in more detail. In the days preceding the meeting, each of the Reserve Bank
Presidents and their staffs throughout the country also are making intensive
preparations. IJhile the precise scope and content of this preparation will
vary from one Reserve Bank to another, depending on the interests of the
President and the economic characteristics of his District, the following
procedure is fairly typical.
The research staff at the Bank will develop its own analysis of current
national economic trends. It will have available the green book summarizing
developments as seen by the Board's staff, but it will also draw on independent
sources of information. At the same time, the Bank staff will analyze current
trends within the confines of the District, giving particular attention to those
regional developments that are believed to have special import for the course of
national monetary policy. For this purpose the Bank staff will draw on a great
variety of regional economic and financial data. In some fields where other
sources of information are regarded as deficient, the staff may have initiated
special reporting arrangements of its own to keep abreast of significant
Of key importance in the economic intelligence network of the System are
the close contacts that Reserve Banks maintain with a broad variety of decisionmakers in their business and financial communities, including their own boards of
directors. From such contacts they often can distill a sense of changing attitude'
or intentions before the consequences are reflected in economic statistics. This
Ecind of information is especially valuable because of the significant time lags
between monetary policy actions and their effects on the economy.

Usually this information is assembled and digested in a series of
meetings of the President with his staff advisers. These meetings often will
involve one or more lengthy and wide-ranging discussions in the x^eek preceding
the FOMC meeting, followed by more specific discussions of desirable policy
actions on the day or the evening before the President sits do\m with his
colleagues to deliberate and vote.

The Federal Reserve Assistance to the Market
The foregoing comments should have demonstrated that the System is able
to keep in touch not only with financial markets — but with basic economic
developments as x * e l l . Yet, one may still ask whether the System x;as fully
prepared to forestall a financial crisis.

Ultimately, the answer to this

question must be provided in the published Annual Reports of the FOMC and
the Federal Reserve Board covering 1966. But one can infer a great deal from
the steps taken at various times during the year. Some of these (such as
the moves to moderate competition for savings) have already been described.
But one action was designed explicitly to ease market pressures x^hich developed
in August and September.
This action centered in the System1 s letter of September 1 to member

The System1 s determination to allow a continued orderly (though moderate]

growth in bank credit was made unmistakeable.

At the same time, the need to

moderate the expansion of business loans was stressed, and banks x^ere cautioned
concerning the market pressures created by the heavy liquidation of municipal
securities. Finally, a modified approach to the administration of the discount


outlined. Banks x*ere told that, while their Reserve Banksi;would

continue to assist them as usual in meeting seasonal or emergency needs for

funds, they would also keep in mind the extent of the borrowing bank's efforts
to moderate the growth of business loans, in adapting to any shrinkages in their
in their source of funds.
The September 1 approach, as one x?ould naturally expect, was not
prepared in a vacuum.

During August, literally hundreds of contacts occurred

betx^een System officials and participants on the financial scene. These contacts
x*ere personal as xzell as via mail, telegraph and the telephone. Moreover, the
traffic was not one x*ay: System people (at the Board as x^ell as the Reserve
Banks) themselves originated much of it in a continuing effort to keep in touch
with market developments.
The System's concern has not lapsed in the meantime.

The Federal Reserve

Bank's experiences in the administration of the discount window as outlined in
the letter are followed in a systematic way.

Immediately after the letter was

mailed, a System-x/ide weekly telephone conference of Federal Reserve Bank
discount officers and Board staff x/as instituted. This x ; s designed primarily
to ensure as much uniformity as possible in the interpretation of the objectives
sought. While there has been no insistence on adherence to every detail, an
effort has been made to see that differences in basic policy are minimized.
As experience accumulated, the conference has been called at two-x^eek


In the process, this has turned out to be a highly valuable means of exchanging
information about a number of credit policy developments -- well beyond the
special questions raised by the discount administration program.
Now I do not x;ish to claim that the approach outlined in the September 1
letter was the key factor underlying the easing of market pressures in
September. Other factors (particularly the re-appearance of the prospect of
additional fiscal restraint) may have played a far more important role. Nevertheless, this reassurance that the System was prepared to come to the market's
assistance xjas undoubtedly helpful.

The Outlook
IJhile the main objective here has been to review some of the key features
of monetary management during the current year, perhaps a few observations on
the short-term outlook may not be out of order. Over the last fex; months, the
expansion of bank credit has flattened out.

This maybe partly a

reflection of the high level of borrowing early in the year (some of which
was undoubtedly anticipatory) as well as the change in the pattern of business
borrowing to settle tax liabilities.

But given the degree of monetary restraint

exerted since last December, I am personally convinced that a significant
effect has been registered on the demand for credit. Yet, the over-all demand
for funds is/strong and will probably remain so for some time. On the other
hand, I personally doubt that there will be an early return to the frantic
business loan
pace of/growth experienced until recently (or perhaps I should say that I hope
we will not).

The atmosphere in the securities markets is also much

quieter than it was over the Summer. Although the volume of market flotations
remains large, and yields continue exceptionally high, the capital markets are
functioning rather well.
In the meantime, considerable attention is being given to the shaping
of the proper course for monetary and fiscal policy in the year ahead. However, let me say itrmediately that I do not wish to use this forum to add my
voice to the mounting debate over what national economic policy should be for
1967. Naturally^ as a Member of the Federal Reserve Board, I am making every
effort to keep abreast of economic developments, and I obviously have an
interest in the formulation and execution of a policy possessing an optimum
combination of fiscal and monetary measures.

However, official machinery does

exist for the evolution of such a policy -- machinery that involves
consultation and coordination among the key policy-making agencies in the
Administration (e.g., the Council of Economic Advisers, the Treasury
Department and the Bureau of the Budget). Appropriately, the Federal Reserve
Board participates in this process at both the official and staff level.
Moreover, this exchange of views is not confined to a few formally called
and carefully planned interagency meetings. Rather, there is a more or less
continuous dialogue, much of it informal. Given these opportunities, I am
confident that our views will be carefully considered.