A History of the Federal Reserve, Volume 2 (74 page)

Chairman Wright Patman of the Joint Economic Committee (JEC) had asked for and, on July 21, 1961, received the 1960 FOMC Minutes. This was the first time the Federal Reserve had released its minutes for a full year. Patman and the JEC agreed to keep the minutes confidential. The JEC hired Professor John Gurley of Stanford University and Asher Achinstein of the Library of Congress to summarize the material.

The
New
York
Times
obtained a copy of the summary report and published extracts on August 13 and 14. Patman wrote to ask the FOMC to release the minutes so that the JEC report could be released to the press generally. The letter asked for a prompt response (FOMC Minutes, August 21, 1962, 47). The FOMC’s response remarked pointedly that the minutes had been released under agreement that they would remain confidential. The FOMC asked for a three-week delay to its next meeting before responding to the JEC request. Although Martin favored publication and spoke in favor of regular publication of the complete minutes after a delay, the FOMC favored independence. It voted ten to one, with one abstention, to refuse the request as not in the public interest.
¹⁹⁰
The issue returned in the 1970s.

In October 1962, the staff reported signs of stronger recovery, but it was soon disappointed. Bryan and others who used money supply growth to measure the expansive thrust of policy actions had difficulty most of the year interpreting the much higher growth of time deposits and slower growth of M 1 (currency and demand deposits). They recognized that higher regulation Q ceiling rates had permitted banks to bid for time deposits, but they were uncertain about whether growth of time deposits was as expansive as equal growth of demand deposits would have been. This is one of many subsequent occasions when ceiling rates distorted the money data and confused FOMC members.
¹⁹¹

On October 18, the Board announced a reduction of reserve require
ment ratios for time deposits from 5 to 4 percent, effective October 25 at reserve city banks and November 1 at country banks. This was the first reduction in this ratio since 1954. The alleged purpose was to provide a seasonal increase in reserves without lowering short-term rates. It was based on a belief that lowering reserve requirements spread reserves through the financial system more quickly than open market operations (Board Minutes, October 18, 1962, 16–17). The move released $767 million from required reserves but the desk maintained short-term interest rates, so it absorbed the reserves.
¹⁹²
The manager described the market as uncertain whether this was a first step toward an easier policy.
¹⁹³
Interpreting data for the period is difficult because President Kennedy told the nation about Soviet missile bases in Cuba on October 22. On November 2, the president announced that the bases were being dismantled. Agreement with the Soviet Union had been reached five days earlier.

190. The FOMC voted also that the JEC report “does not reveal a single policy
action
by the Open Market Committee that was not recorded in the Annual Report of the Board of Governors for 1960, along with the economic circumstances of the action, the votes of the Committee members, and the underlying reason why the action was taken” (FOMC Minutes, September 11, 1962, 73). The FOMC added that release of minutes so soon after the meetings occurred would hinder discussion and debate and would not be in the public interest. These discussions show the beginning of awareness that secrecy had costs as well as benefits. Markets had to infer the System’s intention, but secrecy had value if members were more candid at the meeting. Much later, “credibility” became an important consideration.

191. Some members expressed disappointment that the president had chosen not to ask for a tax cut. They wanted more fiscal stimulus to reduce pressure on them. Hayes was most forceful at the October 2 meeting. He complained that the Federal Reserve did not comment on fiscal policy actions, but the administration did not hesitate to comment on monetary policy. He wanted tax reduction for domestic stimulus so that the Federal Reserve could con
centrate on the balance of payments by raising interest rates. Without saying so, he accepted the “assignment model” used by the administration, but he made different assignments.

During the missile crisis, the Federal Reserve followed a “status quo” policy, but the directive called for a further increase in bank credit and the money supply (FOMC Minutes, October 23, 1962, 55). The precise meaning is not clear. In the two weeks following the announcement, the System increased discounts and repurchase agreements by $290 million and purchased $117 million outright.
¹⁹⁴
Float declined more than $800 million, so the monetary base declined by about $400 million from these sources; total reserves increased only $34 million.
¹⁹⁵

192. The federal funds rate was 2.94, 2.93, and 2.91 in October, November and December. Free reserves were $421, $472 and $312 million in the same three months. The FOMC minutes report the manager’s (Stone’s) remark that bond prices rose 0.75 from October 1, but the data in Board of Governors (1976, 749) show little change in average yields on longterm debt (3.90 before the announcement, 3.87 after the release). Early in the year, the Board considered again proposals for classifying cities as reserve bank cities. As on all previous occasions, the members could not agree that the new proposals improved on existing procedures, so they did not change.

193. The manager responded to a question by explaining how he and the market measured the policy thrust. If the federal funds rate and the T-bill rate stayed about where they were, that would signal that the FOMC was not moving toward more ease; if the federal funds rate dropped below 2.5 percent, that would serve to confirm recent headlines that the Fed was seeking more ease (FOMC Minutes, October 23, 1962, 14–15). The CEA interpreted the change in reserve requirement as expansive. Heller wrote to Martin: “We are gratified at your projected move in the direction of greater ease” (memo, Heller to Martin, Heller papers, October 18,1962,1). He urged the Federal Reserve to do more: “reactivate vigorously the policy of open market purchases of long-term Treasury securities” (ibid., 1).

194. Three weeks later, the desk reported that it purchased Treasury bills from foreign accounts to keep these bills out of the market. The aim again was to supply reserves without reducing interest rates. Foreign banks increased holdings of U.S. time deposits.

195. The System went on alert and asked the regional banks to instruct member banks
to improve their emergency preparedness and maintain duplicate records in safe storage locations.

In December, the account manager told the FOMC that the Treasury planned to increase its balances at federal reserve banks by $500 million to reach $1 billion. The Treasury had issued excess bills to raise short-term interest rates. Balances were now in tax and loan accounts at commercial banks. Unless offset, this action would reduce bank reserves and raise interest rates just as if the Federal Reserve engaged in an open market sale. The manager intended to offset the effect on reserves. The Treasury would gain, however, from the implicit 100 percent tax on Federal Reserve earnings. This was the main reason given for the change
¹⁹⁶
(FOMC Minutes, December 4, 1962, 5–6).

As 1962 ended, the staff worried about money growth of 6 percent since August, twice the staff guideline.
¹⁹⁷
Although the FOMC set guidelines for money in this period, it made no effort to achieve them. Stock prices started to rise in October and accelerated through year-end, suggesting that alleged concerns about recession or stagnant growth had dissipated.

Although inflation had not increased, Martin repeated his concern that greater monetary ease would increase unemployment (FOMC Minutes, December 18, 1962, 61). Mitchell urged that FOMC target the covered interest spread relating domestic and foreign interest rates instead of maintaining a fixed level of Treasury bill rates, but no one pursued the idea.

Mills asked Robert Stone (the manager) whether instructions to encourage credit expansion conflicted with maintaining color, tone, and feel. Stone replied that sometimes they did, but not currently. He gave his interpretation of color, tone, and feel, one that differed from previous interpretations. The desk looked not just at interest rates but reserve measures as well, including free reserves and growth of total reserves versus the growth guideline (FOMC Minutes, December 18, 1962, 4). He did not say how he weighed the different measures. His examples suggested that “color, tone, and feel” meant managerial discretion and that he shifted from free reserves to interest rates based on his judgment. The FOMC’s instructions at the time remained imprecise, and the discussions at the meetings continued to use different measures and often multiple measures. Martin’s statement of the consensus maintained the ambiguity, perhaps because he preferred managerial discretion or doubted that the FOMC could agree
on a specific target or improve performance by setting and enforcing a more precise target.

196. Treasury deposits at reserve banks rose from $472 million to $777 million in January. By April the average reached $917 million.

197. Mitchell dismissed the concern and Robertson said he was puzzled because free reserves had fallen. (Monthly data show no change.) Ellis (Boston) described money growth as “unsustainable.”

As the new year began, a staff member summarized the implications of two guidelines used by FOMC members to gauge the stance of monetary policy. Both money growth and interest rates had increased along with growth of output. The report spoke to the three principal groups on the FOMC and their different prescriptions. If a member

believes that for support of maximum sustainable growth in economic activity it is necessary . . . for the money supply to increase consistently in relation to the advance in activity, then he might well be satisfied with the financial performance of recent months. In fact, in the light of the recent rapid monetary expansion, he might feel that its pace ought to be tempered somewhat. . . .

As another point of view, one’s interest might be on interest rates and credit availability and their relation to the present state of economic activity. Accordingly, he might feel that monetary policy should operate to keep interest rates, particularly long-term rates, under sustained downward pressure . . . until progress toward reasonably full utilization of resources is more clearly assured. (FOMC Minutes, January 29, 1963, 4–5)
¹⁹⁸

REGULATION Q

Beginning in January 1961, Governor Robertson proposed that the Board raise ceiling rates on time and saving deposits from 3 to 5 percent for deposits having at least six months maturity. He proposed a ceiling rate of 4 percent for maturities from ninety days to six months and 3 percent for shorter maturities. At the time, six-month Treasury bills yielded 2.4 to 2.6 percent. Once again, Robertson intended to put the ceiling rate high enough so that “each bank could exercise its judgment in the light of conditions in its own area, the competition it must meet, and what it could afford to pay” (Board Minutes, January 19, 1961, 15). Hackley, the Board’s general counsel, assured the Board that “there would be no question in his mind as to the legality of the proposed action” (ibid., 15). The law required only that maximum rates be set.
¹⁹⁹

Martin and several ot
her Board members expressed concern that some
key members of Congress would object to the Board’s failure to make the law effective. Woodlief Thomas offered vigorous criticism, citing the need to prevent banks from making risky loans to earn enough to pay competitive rates and pointing out that spillover from demand to time deposits would increase, reducing effective reserve requirements. That was the purpose of the law, and he urged the Board not to neglect that purpose.
²⁰⁰
And Board members knew that higher maximum rates would be unpopular with many bankers who did not want to pay higher rates. These concerns overpowered their support for market competition in setting interest rates, a main reason for bills-only. Martin (Martin speeches, 1953) had presented bills-only as a step toward free markets.

198. A third group wanted higher interest rates to reduce the capital outflow. The report indicated that the staff was divided also, but the consensus favored more stimulus.

199. Balderston asked Robertson why he did not seek to repeal the law. Robertson said that, before asking Congress for repeal, it was better to try “every approach possible under the present law” (Board Minutes, January 19, 1961, 15). He did not oppose repeal. Like most Board members, he had considerable reluctance about asking for legislation.

Robertson proposed increasing ceiling rates several times during the year, modifying his proposal to meet some of the objections raised against his previous efforts. In February, Martin expressed willingness to repeal the law, as suggested in the recent report of a committee appointed by President Kennedy. He soon had a partial opportunity. The administration asked for the Board’s comments on legislation eliminating ceiling rates for foreign time and savings deposits.
²⁰¹
The majority of the Board agreed to tell the Treasury informally that they did not object.

The problem of ceiling rates on foreign time deposits first arose in 1959. Some New York banks favored higher rates at that time, while many other banks opposed. The difference by 1961 was that banking deregulation had started under the direction of a new Comptroller of the Currency, James Saxon, who reduced regulations for the national banks that he supervised. Also, President Kennedy mentioned special Treasury issues for foreigners in his February message. Negotiable certificates of deposits at commercial banks of $1 million and above began trading soon after. Regulation Q ceiling rates applied to these certificates. To avoid the ceiling rates, banks
with branches in London encouraged their large depositors to redeposit the funds as euro-dollars at their London branches. This increased capital outflow from the United States, and hence interfered with the Treasury’s efforts to reduce the outflow.

200. This is a throwback to the 1920s experience, when banks encouraged depositors to shift from demand to time deposits, and the argument in the 1930s that competition in banking caused failures. Governor Mills repeated the argument and added that the proposal would force savings and loans to compete by raising dividend rates and buying risky mortgages. Also, higher rates would reduce bank earnings (Board Minutes, February 13, 1961, 23–24). Benston (1964) showed that the 1930s argument lacked empirical support. In a letter to a banker, Hayes pointed out that during extensive Senate hearings on banking problems in 1931, the issue about increased risk did not arise (letter, Alfred Hayes to Joseph G. Mark, Correspondence Box 240, Federal Reserve Bank of New York, December 8, 1961). Congressman Henry Steagall later suggested that the prohibition compensated banks for the cost of deposit insurance (memo, Correspondence Box 240, Federal Reserve Bank of New York, November 28, 1961).

201. President Kennedy proposed the split ceiling rate in his February 6, 1961, speech on the balance of payments. Secretary Dillon argued that the higher rate would reduce foreign governments’ demand for gold (Dillon papers, Box 33, March 8, 1961).