fifty-fifth annual report of the board of governors of the

55th,

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

BOARD OF GOVERNORS OF THE

FEDERAL RESERVE SYSTEM

Washington, May 15, 1969

THE SPEAKER OFTHE HOUSE OF REPRESENTATIVES.

Pursuant to the requirements of Section 10 ofthe Federal Reserve Act, as amended, I havethe honor to submit the Fifty-Fifth AnnualReport of the Board of Governors of theFederal Reserve System. This report coversoperations for the year 1968.

Yours respectfully,

Wm. McC. Martin, Jr., Chairman.


Part 1—Review of 1968

3 MONETARY POLICY AND THE ECONOMY9 DIGEST OF PRINCIPAL POLICY ACTIONS

13 CREDIT MARKETS AND FINANCIAL FLOWS16 First half of year21 Second half of year

29 DEMANDS, RESOURCE USE, AND PRICES30 Demands39 Labor markets42 Wages and costs43 Prices

47 U.S. BALANCE OF PAYMENTS47 Transactions in goods and services49 Remittances and pensions50 U.S. Government credits and economic aid grants50 Private capital flows54 Official reserve transactions

57 FOREIGN CREDIT RESTRAINT PROGRAM60 OPERATIONS IN FOREIGN CURRENCIES

Part 2—Records, Operations, and Organization69 RECORD OF POLICY ACTIONS—BOARD OF GOVERNORS99 RECORD OF POLICY ACTIONS—FEDERAL OPEN

MARKET COMMITTEE

226 OPERATIONS OF THE SYSTEM OPEN MARKET ACCOUNT227 Review of Open Market Operations in Domestic Securities275 Review of Open Market Operations in Foreign Currencies

324 SPECIAL STUDIES BY THE FEDERAL RESERVE SYSTEM324 Reappraisal of the Federal Reserve discount mechanism325 U.S. Government securities market study325 Foreign operations of member banks326 Effects of monetary policy on economic activity


328 INTERNATIONAL LIQUIDITY328 Special Drawing Rights331 Gold: The two-tier system

333 LEGISLATION ENACTED

333 Elimination of gold reserve requirement against FederalReserve notes

333 Direct purchases of Government obligations by FederalReserve Banks

333 Truth in lending333 Special Drawing Rights certificates333 Defense production334 Bank protection334 Margin requirements for securities traded over the counter334 "Tender offers" with respect to securities of State-chartered

member banks334 Housing and urban development; real estate loans by national

banks; member bank underwriting of certain municipalrevenue bonds

336 Interest on deposits; reserves of member banks; open marketoperations; Reserve Bank advances

337 LEGISLATIVE RECOMMENDATIONS337 Lending authority of Federal Reserve Banks337 "Par clearance"338 Reserve requirements339 Purchase of obligations of foreign governments by Federal

Reserve Banks339 Loans to bank examiners340 Bank holding companies and bank subsidiaries

341 LITIGATION341 Collateral Lenders Committee et al. v. Board of Governors of

the Federal Reserve System342 United States v. Girard Trust Bank and The Fidelity Bank,

both of Philadelphia, Pennsylvania342 Suits arising out of closing of San Francisco National Bank343 Baker Watts & Co. et al. v. Saxon


345 BANK SUPERVISION AND REGULATION BY THE FEDERALRESERVE SYSTEM

345 Examination of member banks347 Federal Reserve membership348 Bank mergers349 Bank holding companies350 Foreign branches of member banks352 Acceptance powers of member banks352 Foreign banking and financing corporations353 Bank Examination Schools and other training activities

354 FEDERAL RESERVE BANKS

354 Examination354 Earnings and expenses355 Holdings of loans and securities356 Volume of operations357 Loan guarantees for defense production357 Foreign and international accounts358 Bank premises

359 BOARD OF GOVERNORS

359 Building annex359 Income and expenses

TABLES:364 1. Detailed Statement of Condition of All Federal Reserve

Banks Combined, Dec. 31, 1968366 2. Statement of Condition of Each Federal Reserve Bank,

Dec. 31, 1968 and 1967370 3. Federal Reserve Bank Holdings of U.S. Government

Securities, Dec. 31, 1966-68371 4. Federal Reserve Bank Holdings of Special Short-Term

Treasury Certificates Purchased Directly from theUnited States, 1953-68

372 5. Open Market Transactions of the Federal Reserve SystemDuring 1968

373 6. Bank Premises of Federal Reserve Banks and Branches,Dec. 31, 1968

374 7. Earnings and Expenses of Federal Reserve Banks During1968


TABLES—Cont.376 8. Earnings and Expenses of Federal Reserve Banks, 1914—

68378 9. Volume of Operations in Principal Departments of Fed-

eral Reserve Banks, 1965-68379 10. Number and Salaries of Officers and Employees of Federal

Reserve Banks, Dec. 31, 1968379 11. Fees and Rates Under Regulation V on Loans Guaranteed

Pursuant to Defense Production Act of 1950, Dec. 31,1968

380 12. Maximum Interest Rates Payable on Time and SavingsDeposits

381 13. Margin Requirements—Effective Date of Change382 14. Member Bank Reserve Requirements383 15. Federal Reserve Bank Discount Rates, Dec. 31, 1968384 16. Member Bank Reserves, Federal Reserve Bank Credit, and

Related Items, End of Year 1918-68 and End ofMonth 1968

386 17. Principal Assets and Liabilities, and Number of Commer-cial and Mutual Savings Banks, by Class of Bank, Dec.30, 1968, and Dec. 31, 1967

387 18. Member Bank Income, Expenses, and Dividends, by Classof Bank, 1968 and 1967

388 19. Changes in Number of Banking Offices in the UnitedStates During 1968

390 20. Number of Par and Nonpar Banking Offices, Dec. 31,1968

392 21. Description of Each Merger, Consolidation, Acquisition ofAssets or Assumption of Liabilities Approved by theBoard of Governors During 1968

414 MAP OF FEDERAL RESERVE SYSTEM—DISTRICTS

FEDERAL RESERVE DIRECTORIES AND MEETINGS:416 Board of Governors of the Federal Reserve System418 Federal Open Market Committee419 Federal Advisory Council420 Federal Reserve Banks and Branches

444 INDEX


In 1968 restraint of inflationary pressures was the principaleconomic problem facing monetary policy. Federal Reserveefforts to curb such pressures, to foster a sustainable rate ofeconomic expansion, and to help attain reasonable equilibriumin the balance of payments were aided by enactment in June ofa package of fiscal restraint, including a 10 per cent surtax onpersonal and corporate income and certain constraints on Fed-eral spending. As fiscal restraint was added to the monetary-fiscal policy mix, the rate of expansion in economic activitybegan to moderate in the second half of the year. But the rateof economic expansion remained higher than had generally beenexpected, and higher than appeared desirable in view of the needto restrain price advances and reduce inflationary expectations.As a result, monetary policy, which had become somewhateasier in the summer, moved toward greater restraint in the au-tumn. And as the year drew to a close, the banking system wasagain under reserve pressure, and most interest rates had reachednew highs.

During the first half of 1968, expansion in real gross nationalproduct accelerated to an annual rate in excess of 6 per centfrom just under 4 per cent in the second half of 1967. This surgein economic activity was spurred in the early months of the yearby expanded consumer expenditures, continued increases inFederal defense outlays, and growth in residential construction.During the spring, growth in such final demands slowed, but afast pace of expansion in over-all economic activity was sus-tained by a marked increase in inventory investment, partly inpreparation for a possible steel strike in the summer. With de-mands generally strong and unit labor costs rising, price in-creases continued to be large and widespread over the first half.

The strengthening of domestic demand for goods and services,


together with rising prices of domestically produced goods, ledto a sharp increase in imports in the first half of the year. Al-though exports also were rising more rapidly than they hadduring most of 1967, the surplus in U.S. international trans-actions in goods and services dropped markedly.

The surge in economic activity, the deterioration in the U.S.foreign trade position, and the continuing very large deficit inthe Federal budget highlighted the need for measures of fiscalrestraint. While such measures were being considered, monetarypolicy actions were taken to restrain credit expansion and tomake credit more costly. Effective in mid-January, reserve re-quirements against demand deposits in excess of $5 million atall member banks were increased by Vi of a percentage point;this action had been announced in late December 1967. Mone-tary restraint was intensified in subsequent months by restrictiveopen market operations and two increases in the discount rate,and during the March-June period there was little growth inbank reserves.

In mid-March the Federal Reserve discount rate was raisedfrom AVi to 5 per cent to strengthen the international positionof the dollar and to combat domestic inflationary pressures. Evi-dences of domestic overheating were widespread. At the sametime there was a large-scale movement out of many nationalcurrencies into gold, based partly on fears of a change in U.S.gold policy. The Governors of central banks actively participat-ing in the gold pool met in Washington on March 16 and 17and reached agreement on a number of issues connected withthe role of gold and with currency speculation. Pressures in thegold market subsequently abated.

The Federal Reserve discount rate was raised again, to 5Viper cent, in mid-April. This increase, together with more restric-tive open market operations, led to a further rise in marketinterest rates. At the same time, Regulation Q ceiling rates onlarge-denomination time certificates of deposit were raised—from 5¥L per cent to a scale ranging from 5V£ to 6V4 per cent


depending on maturity—so as to avert a sharp contraction inoutstanding bank deposits and bank credit. With market interestrates near the new Regulation 0 ceilings, time deposit growthslowed and bank credit expansion moderated in the secondquarter. Outstanding large-denomination CD's declined some-what during the quarter, and banks with foreign branches greatlyincreased their borrowings of Euro-dollars.

Meanwhile, net inflows of deposits to savings and loan associ-ations and mutual savings banks continued at around the re-duced pace that had come to prevail since the last quarter of1967. These institutions became somewhat more cautious, how-ever, in making commitments for mortgages because they didnot know how large a volume of savings would be withdrawn atthe midyear interest-crediting period.

Passage of fiscal restraint legislation led to market expecta-tions of declining interest rates, predicated for the most part onanticipations of a slower economic growth and an easier mone-tary policy. Longer-term interest rates and Treasury bill ratesdeclined during the first part of the summer. A large volume ofreserves was provided during the summer through System openmarket operations, which were conducted with a view to accom-modating tendencies for short-term interest rates to decline andfor somewhat less firm money market conditions to develop inthe wake of the fiscal restraint legislation. Federal Reserve dis-count rates were reduced from 5Vi to 5VA per cent in mid-August, primarily to move the rate into closer alignment withthe reduced level of short-term rates.

The reduced level of market interest rates enabled banks toacquire more funds through an accelerated expansion of timeand savings deposits, particularly large-denomination CD's. Asa result, banks greatly expanded their investments in U.S. Gov-ernment and State and local government securities, and theprime loan rate charged businesses was reduced in late Septem-ber. Net inflows of funds to thrift institutions did not show aresurgence, but they were sustained at around their previous


reduced rates; and with uncertainties removed, these institutionsincreased their mortgage commitment activity.

As the summer progressed, demands for goods and servicesin the economy turned out to be stronger than most observershad anticipated. Private credit demands were exceptionally largeduring the third quarter—reflecting in part a sharp rise in con-sumer spending on durable goods as well as increased outlaysby State and local governments. Business credit demands weresustained by a renewed expansion in fixed investment and byinventory accumulation at a rate that was only somewhat lowerthan in the second quarter. However, fiscal restraint was begin-ning to take hold. The rate of increase in Federal spendingdropped sharply in the third quarter and declined further in thefourth. And as the higher tax rates reduced the growth of dis-posable personal income, consumer spending showed only aminor further rise after the burst of buying of durable goods inthe summer.

Nevertheless, there was no diminution of price pressures. Andan inflationary psychology was becoming embedded in decision-making for key sectors of the economy. Most notably, businessesenlarged their plans to buy plant and equipment. In financialmarkets, long-term interest rates rose sharply in the last fewmonths of the year to new highs, while stock prices also ad-vanced markedly from around midsummer until the last fewweeks of the year.

In an effort to resist inflationary pressures and psychology,monetary policy actions became more restraining. Reserves wereprovided less readily through open market operations in theautumn, a period when a continued tendency for bank creditto expand rapidly suggested that both credit demands and de-mands for goods and services were remaining relatively strong.In these circumstances member banks were forced to increasetheir borrowings from the Federal Reserve to obtain reservefunds, and the rates on Federal funds and 3-month Treasurybills rose from their lows of the late summer and early autumn.


In mid-December the Federal Reserve discount rate was raisedto 5Y2 per cent, and this action, in combination with firmingthrough open market operations, led to further upward move-ments in interest rates.

As the year drew to a close, short-term market interest rateswere above Regulation Q ceilings. Hence, banks were unable toroll over all of their maturing large-denomination CD's, and asizable attrition of such outstanding deposits began to develop.The reduced supply and higher cost of funds to banks, includingthe high cost of Euro-dollar funds, led the banks to undertakeadjustments that affected the terms and availability of credit toborrowers. In particular, banks raised the prime loan ratecharged businesses by two stages in December to a level of 6%per cent; and they sharply reduced their acquisitions of U.S.Government and—late in the year—State and local governmentsecurities. Net inflows of funds to nonbank savings institutionsincreased at a slower rate toward the year-end—contributing,along with generally higher market interest rates, to a stiffeningof borrowing costs and other terms in the mortgage market.

While monetary restraint was developing in the fourthquarter, the money stock rose at a somewhat faster rate than inthe third. The difference in the rate of increase between the twoquarters was influenced to a large extent by short-run net trans-fers of funds between private demand deposits and U.S. Govern-ment deposits. Over the second half as a whole, the money stockrose at an annual rate of just over 6 per cent, a somewhat slowerrate of increase than in the first half of the year.

For the year as a whole the U.S. balance of payments showedan over-all surplus on either of the two usual methods of calcu-lation, despite the virtual disappearance of the merchandisetrade surplus. A massive net inflow of private capital took placethrough a number of channels. Foreigners supplied ample fundsto the Euro-dollar deposit market, thus facilitating the borrow-ing there by U.S. banks. Foreign investors purchased an un-precedented volume of U.S. equity securities as well as of issues


sold abroad by U.S. companies to comply with the requirementsof the mandatory controls imposed at the beginning of the year.The Federal Reserve's foreign credit restraint program (dis-cussed on pages 57-59), together with market conditions, pro-duced a reversal of the previous year's net outflow of bankcredit. And foreign monetary authorities made large purchasesof U.S. Treasury nonmarketable securities.

The Federal Reserve, together with the U.S. Treasury, con-tinued to participate actively during the year in the cooperativeactions taken by monetary authorities of various countries todeal with speculation in the gold and foreign exchange markets.

The Federal Reserve's reciprocal currency arrangements withcentral banks of other countries were expanded further. Thetotal swap network was enlarged from $7,080 million to $10,505million. Substantial use was made of these swap facilities bycentral banks of other countries during the year. On December31 outstanding swap drawings by the Bank of England and theBank of France totaled about $1.6 billion. Federal Reservecommitments under outstanding swap drawings from continentalEuropean central banks, which had been about $1.8 billion at theend of 1967, were liquidated before the end of July; subse-quently, the System drew again on its swap facilities with theSwiss and German central banks, and at the end of the year ithad outstanding commitments of about $400 million. •


Period orannouncement

date

January 1

January throughlate June

March 11

March 13

Action

Issued revised and substantially more restrictiveguidelines for banks and other financial institutions forrestraint of foreign credits as a part of the President'sbalance of payments program.

Directed that System open market operations beconducted with a view to maintaining firm conditionsin the money market and, from time to time, attain-ing firmer conditions or facilitating adjustments to in-creases in Federal Reserve Bank discount rates, withprovisions for modification of operations depending onthe course of bank credit developments.

Imposed a new margin requirement of 70 per centon loans made by "other lenders" (i.e., other thanbanks, brokers, and dealers) for the purpose of pur-chasing or carrying registered equity securities.

Imposed a new margin requirement of 50 per centon such loans made by banks or "other lenders"against securities convertible into registered equity se-curities. Lowered the margin requirement on suchloans by brokers and dealers to 50 per cent.

Announced revisions in the guidelines for banks andnonbank financial institutions issued under the Presi-dent's balance of payments program.

Purpose

To strengthen the U.S. balance of payments byachieving a net inflow of at least $500 million during1968.

To foster financial conditions conducive to resist-ance of inflationary pressures and to attainment ofreasonable equilibrium in the country's balance ofpayments.

To broaden the coverage of, and in most respects totighten, the Board's regulations governing the use ofcredit in stock market transactions.

To implement an agreement reached betweenGovernments of Canada and the United States.

the


DIGEST—Continued

° Period orannouncement

date

March 14

April 18

June 7

Late Junethrough earlySeptember

Action

Discount rates increased from AV2 to 5 per cent at9 Reserve Banks, effective March 15. (By March 22,the 5 per cent rate was in effect at all Reserve Banks.)

Discount rates increased from 5 to SV2 per centat 3 Reserve Banks, effective April 19. (By April 26,the SVi per cent rate was in effect at all Reserve Banks.)

Maximum interest rates payable by member bankson single-maturity time deposits of $100,000 or morerevised, effective April 19, 1968, from 5Vi per centon all maturities to:

Per cent Maturity group5lA 30-59 days534 60-89 days6 90-179 days6V4 180 days and over

Increased the margin requirement on loans by banks,brokers and dealers, and other lenders for the purposeof purchasing or carrying registered equity securitiesfrom 70 to 80 per cent.

Increased the margin requirement on such loans bythese lenders against securities convertible into regis-tered equity securities from 50 to 60 per cent.

Directed that System open market operations beconducted with a view to accommodating tendenciesfor short-term interest rates to decline and for some-what less firm money market conditions to develop in

Purpose

To strengthen the international position of the dollarand to curb inflationary pressures in the domesticeconomy.

To restrain intensifying inflationary pressures andto strengthen the position of the dollar at home andabroad.

To avoid a sharp contraction in outstanding bankdeposits and bank credit.

To prevent excessive use of credit to finance trans-actions in securities.

To foster financial conditions conducive to sustain-able economic growth, continued resistance to infla-tionary pressures, and attainment of reasonable equi-librium in the country's balance of payments.


August 15

Early Septemberto mid-December

After mid-December

December 17

December 23

connection with enactment of fiscal restraint legisla-tion and to facilitating orderly adjustments to the re-duction (in mid-August) in Federal Reserve Bankdiscount rates, with provisions for modification ofoperations depending on the course of bank creditdevelopments.

Discount rate reduced from 5Vi to 5lA per cent atone Reserve Bank, effective August 16. (By August 30,the SVA per cent rate was in effect at all ReserveBanks.)

Directed that System open market operations be con-ducted with a view to maintaining about the prevailingconditions in money and short-term credit markets,with provisions for modification of operations depend-ing on the course of bank credit developments.

Directed that System open market operations beconducted with a view to attaining firmer conditionsin money and short-term credit markets while takingaccount of the effects of other possible monetarypolicy action, with provision for modification of opera-tions depending on the course of bank credit develop-ments.

Discount rates increased from SVA to 5Vi per centat 9 Reserve Banks, effective December 18. (By De-cember 20, the 5Vi per cent rate was in effect at allReserve Banks.)

Announced revised guidelines for restraint of foreigncredits by banks and other financial institutions.

To align the discount rate with the change in moneymarket conditions that had occurred chiefly as a resultof the enactment of the tax increase and the relatedexpenditure constraints and the associated expectationsof reduced Treasury demand for financing.

To foster financial conditions conducive to sustain-able economic growth, continued resistance to infla-tionary pressures, and attainment of reasonable equi-librium in the country's balance of payments.

To foster financial conditions conducive to the re-duction of inflationary pressures, with a view to en-couraging a more sustainable rate of economic growthand attaining reasonable equilibrium in the country'sbalance of payments.

To foster financial conditions conducive to the re-duction of inflationary pressures, with a view to en-couraging a more sustainable rate of economic expan-sion and attaining reasonable equilibrium in the coun-try's balance of payments.

To continue the President's program, announced onJanuary 1, 1968, to strengthen the U.S. balance ofpayments.


During 1968 the changing mix of fiscal and monetary policies—both as it developed and as it was expected to develop—gaverise to sharp variations in attitudes of credit market participantsand to large swings in both the cost and the availability of lend-able funds. Demands for credit remained generally strong,buoyed by a continued expansion of economic activity, whichslowed only moderately after enactment of fiscal restraint meas-ures at midyear. Demands for credit were larger, in fact, in thesecond half of the year than in the first—reflecting a third-quarter surge in consumer spending, increased activity in realestate markets, large offerings of State and local governmentsecurities, and sizable borrowing by the Federal Government tofinance a larger-than-seasonal deficit.

Early in the year, with the Federal budget continuing to beexpansive, with prospects for fiscal restraint in doubt, and witha progressive firming in monetary policy under way, marketrates of interest rose. By spring, these higher rates had resultedin a moderation of inflows of funds to depositary institutions,particularly banks. Market rates began to decline, however, inresponse to the midyear shift in the fiscal-monetary policy mix.These declines made it possible for banks to more than recouptheir earlier losses of CD funds and to increase sharply the sharethey advanced of total funds raised in credit markets.

As the second half of the year progressed, it became apparentthat demand forces in the economy were stronger than mostanalysts had anticipated and that the restrictive impact of thefiscal legislation was going to be felt much more slowly than hadbeen expected earlier. Monetary policy became more restrictivein the last few months of the year. Although the resulting con-straint on reserve growth and the rise in market rates of interestbegan to slow deposit inflows to banks—and hence the increasein bank credit—it was not until the last few weeks of the yearthat the availability of funds to banks was sharply curtailed.

13


1. Volume raised by nonfinancial 2. Shares in funds supplied by selectedsectors institutions

BILLIONS OF DOLLARS, SEASONALLY ADJUSTED, ANNUAL RATES PER CENT

120

90

60

1966 1967 1968 1966 1967

50

30

1968

TABLE 1: BORROWING BY TYPE OF INSTRUMENTIn billions of dollars

Type of instrumentCalendar year 1967

II III IV Year

Calendar year 1968

III IV Year

U.S. Govt. securities 1,2..State and local govt.

issues iCorporate securities 1....Consumer instalment debt3

Mortgage debt 3

.5 - 8 . 8 9.4 11.6 12.7 6.5 - 2 . 7 8.4 4.7 16.9

4.15 . 4

. 63 . 9

3 .6.

5*.

8161

3616

.1

.6

.0

.6

3 .66.11.17.1

1424

322

.6

.1

.3

.7

3516

.7

.0

.8

.8

3 .85.52.16.5

4 . 65 .02.56 . 4

4 .35 . 42 . 67 .3

16.21 .

9.27.

5001

1 Quarterly and yearly totals, not seasonally adjusted.2 Total net issues, flow of funds data.3 Quarterly and yearly changes, seasonally adjusted.

TABLE 2: BANK CREDITSeasonally adjusted changes, in billions of dollars

Component

Total loans and invest-ments

Investments:U.S. Govt. securities. . .Other securities

Loans:TotalBusinessConsumerReal estateSecurities

I

11 0

3.73.7

3 7

97

. 4

Calendar year

II

4 .

- 1 .3.

2.

- 0 .

7

48

9

89

III

12.9

5.51.5

5.81.5

.71.42 . 2

1967 i

IV

7 . 4

- 1 . 73.7,

5.52 . 0

.71.7

-0 .4

Year

36.0

6.112.7

17.27.71.84.61.3

I

6 .0

.22.2

3 61.51 01.7

- 0 . 5

Calendar

II

4 .1.

1- 0 .

53

88

5

year

III

17 0

3.63.1

10 37 31 S1 33 .8

1968 i

IV

9.7

-2.33.5

8.52.81.62.2

-1.1

Year

38.0

2.09.1

26.98.44.96.51.7

1 Quarterly data are seasonally adjusted.NOTE.—Figures for all commercial banks.

14


3. Bank reserves and borrowings 5. Interest rates

BILLIONS OF DOLLARS, SEASONALLY ADJUSTED

SHORT-TERM 3-MONTH MATURITIES

],/** 26.0AX/

TOTAL RESERVES

1966

BORROWINGS FROMFEDERAL RESERVE

1967TREASURY BILL RATE

NOT SEASONALLY ADJUSTED 1966 : 1967 j 1968

1.0

LONG-TERM

1966 , 1967

4. Cost of reserves

STATE AND LOCAL GOVT. Aaa

4.0

1966 1967 1968 1966 1967 1968

TABLE 3: DEPOSIT FLOWSAnnual rate of change, in per cent

ItemCalendar year 1967 1

III IV Year

Calendar year 1968 i

III IV Year

Total member bank de-posits

Money stockTime and savings deposits

at banksSavings accounts in non-

bank thrift institutions..

15.4 8.7 13.7 7.2 11.76.6 6.5 7.0 4.9 6.4

19.7 16.2 15.8 9.1 16.]

9.5 11.0 9.4 6.4 9.4

7.0 1.2 13.1 12.4 8.64.6 8.7 4.5 7.4 6.5

7.0 3.2 17.9 15.7 11.3

6.1 5.9 6.1 6.3 6.3

1 Quarterly data are seasonally adjusted.

15


FIRST HALF OF YEARDemands for credit were relatively large in the first half of 1968,but as Federal Reserve monetary policy moved further towardrestraint, interest rates rose fairly steadily and bank credit ex-pansion was curtailed by spring. The rise in interest rates wasaccentuated at times by doubts as to whether the Congress wouldenact restrictive fiscal legislation, by uncertainties concerningprospects for peace in Vietnam, and by developments in inter-national gold and foreign exchange markets. As enactment offiscal restraint began to seem more likely in late spring, interestrates tended to stabilize, and some even began to decline. Thistrend was also encouraged by developments with respect to theVietnam conflict and by progress in resolving difficulties relatedto international liquidity and the difficulties in the gold andforeign exchange markets.

With the rapid expansion in economic activity, private demandsfor credit were well sustained during the first half of 1968. Afurther increase in plant and equipment outlays early in the year—together with continued efforts to build liquidity: and restruc-ture outstanding debt—led to relatively heavy public offerings ofcorporate securities, although these offerings were somewhatbelow the exceptional 1967 pace. Business borrowing of ashorter-term nature, through bank loans and dealer-placedcommercial paper, began to accelerate in the spring, probablyin response to financing of increased tax payments as well asmore rapid accumulation of inventories.

A sharp rise in disposable personal income in the early monthsof 1968—when there was a large upward adjustment in socialsecurity benefits and a substantial advance in the minimum wage—led to greatly expanded consumer expenditures. This increasein outlays was concentrated in durable goods and was financedin part by a sharp rise in consumer instalment debt. The expan-sion in mortgage debt outstanding continued at a pace approxi-

16


mately as rapid as that reached in the latter half of 1967, whenthe impact of the late 1966 and early 1967 easing of monetarypolicy was reflected in a marked recovery in housing starts andconstruction outlays.

Borrowing in the capital markets by State and local govern-ments also was large over the first half of the year—nearlyequaling the record volume in the first half of 1967. Most ofthis borrowing was to cover continued heavy expenditures, al-though there was also a pronounced rise in issues of industrialrevenue bonds—generated by fears that Federal tax exemptionon these bonds would be removed.

Cash borrowing by the Federal Government continued to besizable in the first quarter of 1968, when a further sharp rise inexpenditures contributed to a sustained large budgetary deficit.Market doubts about the willingness of the Congress to enactfiscal restraint legislation that would reduce the huge deficit($25 billion in the fiscal year 1968) contributed to upward pres-sures on interest rates. Federal demands in credit marketsdropped sharply in the second quarter of 1968 when the Gov-ernment drew down its cash balances contraseasonally as analternative to borrowing to finance current outlays.

With increasing domestic and international pressures on thedollar and in the absence of fiscal action, the Federal Reservehad begun in late 1967 to implement a variety of measures de-signed to limit the availability and to increase the cost of credit.The discount rate was raised three times—from 4 per cent to5Vi per cent in steps of Vi percentage point—between Novem-ber 1967 and April 1968. An increase of V2 percentage point inreserve requirements against demand deposits in excess of $5million at member banks became effective around mid-January.Moreover, increasing pressure was placed upon member bankreserve positions through System open market operations.

As a result of these various policy actions, nonborrowed re-

17


serves of member banks declined slightly over the second quarterof 1968, after having risen at an annual rate of 4.5 per cent inthe first quarter. Although member bank borrowings at the Re-serve Banks increased, total reserves showed virtually no changein the spring quarter, following a relatively rapid rise in thewinter. On a monthly-average basis, member bank borrowingsreached a peak of nearly $750 million in May, roughly threetimes the January average.

The progressive tightening in money market conditions earlyin the year was reflected in a rise in the Federal funds rate—therate at which banks lend excess reserves on an overnight basis—to 6 per cent and above in late spring as the availability of re-serves to banks was restrained relative to demand. Commercialpaper rates also rose rapidly: two increases in prime lendingrates at banks—in November 1967 and in April 1968—inducedsome borrowers to shift to open market paper for funds. Bymid-May most short-term rates had surpassed the peak levelspreached in 1966, and the market rate on 3-month Treasury billsreached a high of 5.92 per cent. In late May, however, prospectsfor fiscal restraint improved and most short-term market ratesof interest declined, with market yields on Treasury bills drop-ping 40 to 60 basis points by midyear.

Long-term interest rates—while fluctuating widely in responseto developments in the Vietnam conflict, the proposed fiscalpackage, and the gold crisis—also tended to move higher duringthe first half of the year. By mid-May most long-term rates hadalso surpassed their previous highs. However, these rates beganto decline somewhat after enactment of the fiscal restraint pro-gram in late June.

Increased pressure on bank reserve positions, together withrising interest rates, led to reduced inflows of funds to the majortypes of financial institutions in the first half of 1968. As marketyields became more attractive relative to those on time and sav-

18


ings deposits of banks and nonbank savings institutions, flows offunds began to bypass these intermediaries; as a result theseinstitutions accounted for a much smaller share of the tptalcredit supplied than during most of 1967. In the first half of1968 depositary institutions supplied about 40 per cent of netfunds raised in credit markets; this was about half of their sharein 1967, but still a somewhat larger share than in the secondhalf of 1966.

Net inflows of time and savings deposits at commercial banksslowed considerably in late 1967 and early 1968 and haddropped further by the spring of 1968. The bulk of the reductionin time and savings deposit growth in the second quarterstemmed from attrition of large-denomination CD's as short-term market rates surpassed the Regulation Q ceiling rates onsuch deposits.

In the early part of the year banks had been able to maintaintheir outstanding CD's, on balance, at the peak levels prevailingin late 1967 by keeping offering rates on these instruments ator near the Regulation Q ceiling. By late March, however, short-term interest rates on other money market instruments had risenenough that even the maximum CD offering rate of 5Vi percent then in effect for all maturities was relatively unattractiveto large, interest-sensitive investors. In the first 3 weeks of Apriloutstanding CD's at large commercial banks declined by morethan $1.0 billion.

The Federal Reserve revised Regulation Q ceilings on CD'sin mid-April. The ceiling rate on 30- to 59-day maturities wasleft at 5Vi per cent, but rates for other maturities were raised asfollows: to 53A per cent on 60 to 89 days, to 6 per cent on 90to 179 days, and to 6lA per cent on 180 days or more. Never-theless, outstanding CD's continued to decline through mid-June, although much less rapidly than earlier. In an effort tooffset this run-off of CD funds, major banks borrowed heavilyin the Euro-dollar market, and liabilities of head offices toforeign branches increased about $1.5 billion between April

19


and June. By the latter part of June short-term market rates ofinterest had declined enough to enable banks to attract CD fundsagain.

While consumer-type time and savings deposit inflows at com-mercial banks also were sustained comparatively well in the earlymonths of the year, there was a marked slowing in growthfollowing a large outflow of passbook savings deposits after theinterest-crediting period at the end of March. Net savings inflowsat nonbank thrift institutions—after slowing in late 1967—mod-erated only slightly further through mid-1968.

The increase in interest rates during the first half of 1968also made it much more expensive to hold demand deposits, andin spite of an increased need for transactions balances associatedwith the accelerated rate of economic activity, growth in themoney stock—private demand deposits plus currency outsidebanks—over the first quarter slowed to an annual rate of about4.5 per cent from the 6.0 per cent pace in the last half of 1967.Although interest rates rose further in the second quarter, growthin the money stock accelerated to an annual rate of about 8.5per cent. However, much of this increase reflected net transfersout of U.S. Government deposits. Moreover, the sharply in-creased pace of financial activity during the second quarter prob-ably also contributed to the increase in holdings of money.

In view of reduced deposit inflows and heavy demands for credit,banks backed away from security investments and began todraw down liquidity positions, which they had rebuilt in 1967.After having acquired large amounts of U.S. Government securi-ties during most of 1967, major reporting banks liquidated hold-ings of Treasury bills almost continuously from late in thatyear to mid-1968, although they did add to holdings of couponissues during Treasury financings. Banks also found it necessaryto cut back on their acquisitions of other securities, principallyState and local government issues.

Pressures on security markets from bank portfolio adjust-

20


ments were strongest after about mid-March when tight mone-tary policy and sustained attrition of CD's coincided with anaccelerated demand for business loans. Consumer loan demandsat banks were relatively strong throughout the first half of 1968,reflecting the broad expansion in consumer expenditures. Thenet increase in real estate loans at banks continued near therelatively advanced pace of the second half of 1967.

Despite reduced net inflows of funds, savings and loan associa-tions were able to extend mortgage credit in the first half of1968 at a rate only slightly less than that in the second half of1967. In 1967 these institutions had used a substantial portionof new savings flows to rebuild liquid assets and to repay bor-rowing from the Federal Home Loan Bank Board. As in 1967,mutual savings banks devoted a somewhat larger share of theirfunds to the acquisition of corporate securities in the first halfof 1968 than they had in other recent years, apparently to takeadvantage of the relatively attractive yields available on thesesecurities.

SECOND HALF OF YEARIn the second half of 1968 financial markets were influenced byseveral factors: a sharp shift in market attitudes early in thesummer, brought on by enactment of the fiscal restraint pro-gram; continued and unexpectedly strong credit demands; areversal of market expectations later in the year, when infla-tionary psychology became predominant as business activity re-mained relatively strong; and variation in Federal Reserve policyfrom accommodation of market ease to increased monetary re-straint.

The Revenue and Expenditure Control Act of 1968, enacted inlate June, provided for a 10 per cent surtax on personal andcorporate incomes and for certain restraints on Federal spend-

21


ing. In the early summer participants in the securities marketsgenerally anticipated that interest rates would decline as a resultof the fiscal package, which was expected to moderate economicactivity and to reduce reliance on monetary policy, as well asshift the Federal budget position from a large deficit to a modestsurplus.

Reflecting these expectations, interest rates did decline asdealers in U.S. Government securities and other debt instrumentsbid aggressively for securities and increased sharply their inven-tories of Treasury bills and coupon issues. Positions of U.S.Government securities dealers alone nearly doubled from lateJune to early August—reaching a level of $6.1 billion during thefirst week in August. Moreover, commercial banks became largenet buyers of both U.S. Government and State and local govern-ment securities at the attractive yields still available. Banks fi-nanced their purchases in large part through issuance of large-denomination CD's, which became competitive again as short-term market rates of interest declined.

The market yield on 3-month Treasury bills reached a low of4.89 per cent in early August, about 100 basis points below themid-May high. Over the same period long-term interest rates de-clined by 30 to 50 basis points from their earlier highs. In linewith the declines in market rates resulting from the change infiscal stance, Federal Reserve discount rates were reduced from5XA to 5V\ per cent in mid-August.

By the fourth quarter of 1968, however, market attitudes hadchanged noticeably, and interest rates rose steadily during thequarter—reaching new highs in most cases. The continuingrelatively strong business news and upward price pressurescreated doubts about the extent to which fiscal restraint was tak-ing hold and led many to expect that monetary authorities wouldadopt a policy of greater restraint. As price pressures persisted,inflationary expectations became more widespread and wereaffecting business decisions. For example, plant and equipmentsurveys revealed that businesses had increased the volume of fixed

22


investment outlays planned for the future. In financial marketsprices of common stocks rose sharply, partly in response to ashift in investor interest from bonds to stocks. And Governmentsecurities dealers acted to reduce their holdings of both short-and long-term Treasury issues, thereby contributing to upwardpressure on interest rates.

The initial decline and the subsequent sharp rise in interestrates during the second half of 1968, of course, were not whollythe product of changing expectations. The System increased therate at which it supplied bank reserves through open market op-erations in the third quarter but in the autumn it sharply curtailedthe supply of these reserves.

In the months immediately following passage of the fiscal re-straint measures, required reserves of member banks rose sharplyin response to increased deposit inflows. The Federal Reservesupplied these reserves through open market operations. Duringthe third quarter nonborrowed reserves of member banks roseat an annual rate of about 13 per cent. Total reserves, however,rose by less, as banks reduced their borrowings at the FederalReserve Banks.

This expansion in reserves was accompanied by only a slightreduction in the Federal funds rate, since demands for veryshort-term funds were large. These demands stemmed in partfrom the build-up in dealer inventories of U.S. Governmentsecurities that resulted both from anticipation of interest-ratedeclines and from dealer underwriting of the large Treasury billand coupon financings in July and August, which raised $5.7billion of new cash. Banks too bought large amounts of the newTreasury issues, and major money market banks financed theiracquisitions not only through issuance of CD's but also throughshort-term funds raised in the Federal funds and Euro-dollarmarkets.

After the initial favorable impact of the fiscal restraint pack-

23


age on market expectations waned, demands for very short-termcredit and for bank reserves were reduced as dealers pared theirinventories of securities and as banks became less willing buyersof U.S. Government issues. At the same time, however, theFederal Reserve made reserve funds less readily available to thebanking system, thereby exerting additional upward pressure onthe Federal funds rate and on Treasury bill rates.

Nonborrowed reserves of banks increased at an annual rateof only 3 per cent in the fourth quarter as a whole and actuallydeclined during the last 2 months of the year. With open marketoperations providing fewer reserves, banks increased theirborrowing at the Federal Reserve Banks. They were willing topay higher interest rates for Euro-dollar funds abroad, althoughoutstanding Euro-dollar borrowings showed little net changeover the fourth quarter.

In furtherance of its policy of monetary restraint, the FederalReserve raised the discount rate from 5VA to 5Vi per cent inmid-December. Later in the month the market rate on 3-monthTreasury bills reached a peak of 6.29 per cent, an increase ofabout 130 basis points in a little more than 4 months. Yields onnew high-grade corporate issues (with 5-year call protection) hadrisen to 6.92 per cent, and those on long-term U.S. Governmentsecurities to 5.90 per cent, representing increases of 80 and 100basis points, respectively, from their August lows.

During the third quarter of 1968 both the amount of fuaidsraised by all borrowers and the amount raised by the privatesector rose sharply to levels well in excess of previous records.All sectors combined raised about one-third more funds thanthey had on the average during the first two quarters of the year.While cash borrowing by the Federal Government increasedsubstantially, State and local governments, businesses, and con-sumers together accounted for more than half the rise. Privateborrowing was relatively well maintained into the fourth quar-

24


ter, but the net amount of Treasury cash borrowing declined.After having built up its balance in the third quarter throughlarge new security issues, the Federal Government reduced itscash balance to help finance its relatively large fourth-quarterbudgetary deficit.

Consumers increased their borrowing during the summer asthey expanded their outlays further, particularly for durablegoods. They financed their increased expenditures not only byborrowing more but also by reducing their saving rate sharply.

The volume of corporate borrowing in the bond market aftermidyear remained at about the first-half rate as plant and equip-ment expenditures—after declining in the second quarter—roseat a pace nearly as fast as in the first quarter. Short-term borrow-ing by businesses actually accelerated in the second half, par-ticularly in the last few months of the year when inventoryaccumulation increased. Demand for mortgage credit also re-mained large, on balance, as the backlog of housing demandled to a sharp advance in construction activity toward the end ofthe year. And credit demands by State and local governmentsreached new highs, reflecting in part the rush to issue industrialrevenue bonds before the year-end, when under the terms oflegislation enacted at midyear the Federal tax exemption onsuch bonds of over $5 million would terminate.

BANK DEPOSITS AND CREDIT

Although short-term market rates of interest had begun to fallafter mid-May, it was not until the end of June that they haddeclined enough relative to the maximum rate of interest thatbanks could pay on time and savings deposits to permita significant net expansion of such deposits. In the third quarterbanks added nearly $3.0 billion to their outstanding CD's, orabout $1.0 billion more than they had lost earlier. Inflows ofconsumer-type time and savings deposits also began to show arather steady increase from the somewhat reduced pace of thesecond quarter.

25


With market rates of interest rising during the autumn, growthin total time and savings deposits at banks moderated, and towardthe year-end expansion became quite limited. From the end ofSeptember through the first week of December banks were ableto add $2 billion to their outstanding CD's—bringing the totalincrease since midyear to more than $5.0 billion. But by thelatter part of December most short-term market rates were againabove the Regulation Q ceilings applicable to large-denomina-tion CD's. Outstanding CD's declined considerably more thanseasonally during the last 3 weeks of the year.

Meanwhile, inflows of consumer-type time and savings de-posits in the fourth quarter were well sustained, in part becausesome depositors were reluctant to withdraw funds before theyear-end interest-crediting period. Stepped-up promotional cam-paigns and the expansion of the types of time deposit accountsoffered by banks also helped to maintain these inflows.

Growth in private demand deposits at banks in the thirdquarter was reduced sharply from the second-quarter rate, butthen spurted in the last 2 months of the year. The third-quartergrowth in these deposits was restrained in part by net transfersof funds to U.S. Government deposits. In addition, an abate-ment in financial activity probably reduced needs for transac-tions balances. Toward the year-end, reductions in U.S. Govern-ment deposits to finance the budgetary deficit, resurgent stockmarket activity, and possibly expectations of rising interestrates contributed to the expansion in private cash balances. Overthe second half as a whole the money stock rose at an annualrate of about 6 per cent, somewhat slower than in the first half.

With their total deposits—time and demand together—risingsharply after midyear, commercial banks were able to accom-modate a much greater share of the growing demands for credit.They advanced about half of the total funds raised in marketsduring that period, compared with slightly more than 20 percent in the first half.

Banks used a substantial portion of their deposit inflows to

26


acquire securities, in part to rebuild their holdings of liquidassets—which had been depleted earlier in the year—and alsoto take advantage of the relatively high yields on intermediate-and long-term State and local government and Federal Govern-ment issues in a period when interest rates were expected todecline further. In July and August alone banks added $3.5billion to their holdings of U.S. Government securities, mainlyduring the Treasury financings. Moreover, banks acceleratedtheir net acquisitions of other securities markedly after mid-year. Increases in holdings of securities accounted for about 40per cent of total bank credit expansion during the third quarter.

In the fourth quarter, with deposit inflows slowing, banks wereless active in the securities markets. They reduced their holdingsof U.S. Government securities, on balance, in part to help financecontinued large loan demands. And by December banks hadsharply reduced the rate at which they took State and local gov-ernment securities into portfolio.

Growth in bank loans accelerated sharply after midyear.But more than a third of the increase in the third quarter wasin security loans, reflecting the build-up in dealer inventories.The reversal of market expectations in the autumn led to a re-duction in dealer inventories and in outstanding security loansin the last few months of the year.

Business, consumer, and real estate loans at banks all rosemore in the second half of the year than in the first half. Busi-ness borrowing increased as a result of both accelerated taxpayments and a continued high level of economic activity—in-cluding the resumption of large expenditures on plant and equip-ment after midyear and a substantial pick-up in the rate ofinventory accumulation in the fourth quarter. By industry cate-gory, the rise in business loans was much the largest in retailtrade; nevertheless, public utilities, construction, and serviceindustries also increased their borrowing substantially at banks.With sizable demands for loans and with available funds be-coming more limited and more costly, banks raised the prime

27


loan rate in three stages from 6lA per cent (to which it hasbeen reduced by most banks in September) to 7 per cent byshortly after the year-end.

FLOWS TO OTHER DEPOSITARY INSTITUTIONS

The sharp increase in flows of deposits to banks during thesecond half of 1968 was not matched at savings and loan as-sociations and mutual savings banks. Because the savings thatcurrently flow into these institutions are less interest-sensitivethan those that flow into large-denomination CD's, which arean important element in banks' time deposits, the nonbankthrift institutions had not been so adversely affected as banksby the rise in market interest rates in the second quarter. Simi-larly, they were not so favorably affected by the decline in in-terest rates during the summer. Over the second half of 1968as a whole, deposits at nonbank thrift institutions increased atan annual rate of a little more than 6 per cent, only a little fasterthan in the second quarter.

Savings and loan associations extended mortgage credit inthe latter half of 1968 at a somewhat faster pace than they hadearlier in the year. They also increased the rate at which theymade new mortgage commitments, which had been held backin the spring in anticipation, prior to the tax increase, of asubstantial withdrawal of deposits around the midyear interest-crediting period. Mutual savings banks also increased their mort-gage lending in the second half; some of this lending wasfinanced by cutbacks in acquisitions of corporate securities. •

28


Demandsy Resource Use, and Prices1968 marked the eighth consecutive year of expansion in out-put, employment, and incomes from the cyclical low in early1961. Real GNP increased by 5 per cent, double the rise of1967. The 1968 rate had been exceeded in four of the sevenpreceding years, but this had occurred in periods when themargin of unutilized manpower resources had been larger. Bylate 1968 the unemployment rate had declined to 3.3 per cent,its lowest level in 15 years. Although the capacity utilizationrate in manufacturing did not quite match the reduced level of1967, prices throughout the year were under severe upwardpressure. According to the GNP deflator, prices advanced almost4 per cent, the largest increase in more than a decade.

Unit labor costs again rose considerably—by about 4 per cent.Even though the rise in output per man-hour was larger than in1967, it did not equal the exceptionally rapid increases inaverage wage rates, which reflected—among other influences—strong demands for labor, a large statutory increase in minimumwages, and marked advances in consumer prices.

The surplus on U.S. net exports of goods and services in1968 was less than half that of 1967. The sharp decline was at-tributable to the virtual disappearance of the surplus on mer-chandise trade, which amounted to only $100 million as com-pared with $3.5 billion in 1967. Imports continued the rise thathad begun in the final quarter of 1967, and for the year as awhole they increased by 23 per cent. Exports too made gainsduring the year, but the gains were not nearly enough to offsetthe surge in imports.

In view of the continued rapid growth in economic activityand employment and the persistent rise in prices during the firsthalf of the year, fiscal measures to dampen the inflationary ex-pansion were enacted in late June to give support and aid tomonetary and credit policies. As a result, during the second halfthe Federal Government's fiscal position moved from large deficit

29


to balance, and the rate of growth in both current-dollar and realGNP moderated.

Nevertheless, there was an unexpectedly long lag between en-actment of the fiscal restraint program and dampening ofinflationary expansion. The underlying strength of demand waseven stronger than had been anticipated. Futhermore, inflation-ary expectations became still more widespread and were aninfluential element in decisions with respect to capital spendingprograms, wage negotiations, and pricing policies. At the year-end businesses were expanding their expenditures for fixed capitaland inventories at rapid rates and were planning to expand fixedinvestment outlays considerably further in 1969.

DEMANDS

An unusual feature of the pattern of demands during 1968 wasthat final sales and inventory investment alternated as majorsources of short-run expansion in GNP. As Table 4 shows,final sales surged in the first and third quarters; in the secondand fourth quarters these sales slowed, but the rate of inventoryaccumulation increased and tended to take up the slack. Butover-all growth in GNP in both current and constant prices wassignificantly faster in the first half than in the second.

The rapid rise in activity in 1968 had its roots in events dur-ing the preceding year. Thus, in the second half of 1967, aftervirtually no growth in the first half, real GNP was increasingagain, at an annual rate of 3.8 per cent, and price increases werewidespread and substantial. Expansion accelerated in the firstquarter of 1968 as consumer spending climbed at a recordrate. For the most part this upsurge was in response to an ex-ceptionally large gain in consumer income as increases in thestatutory minimum wage and in social security benefits aug-mented a substantial rise in income from much higher employ-ment and higher wage rates. Furthermore, the rate of personalsaving—which had been very high in 1967, especially near theyear-end—declined somewhat.

30


TABLE 4: GROSS NATIONAL PRODUCT

Item

Total .

Inventory change

Final salesPrivate *Federal

Total

Inventory change

Final salesPrivate2Federal

GNP in current dollars

GNP in 1958 dollars

GNP implicit deflator(1958 = 100)

1967 1968I

19681

II III IV

In billions of dollars

789.7

6.1

783.6693.090.6

860.6

7.7

852.9752.9100.0

831.2

2.1

829.1732.097.1

852.9

10.8

842.1742.0100.0

871.0

7.5

863.5762.3101.2

887.4

10.6

876.8775.0101.7

Change from preceding period:In billions of dollars

42.1

- 8 . 6

50.837.613.2

70.9

1.6

69.359.99.4

20.2

- 6 . 2

26.422.83.6

21.7

8.7

13.010.12.9

18.1

- 3 . 3

21.420.2

1.2

16.4

3.1

13.312.7

.5

In per cent

5.6

2.4

3.1

9.0

5.0

3.8

10.0

6.4

3.7

10.4

6.2

4.0

8.5

5.1

3.6

7.5

3.4

3.9

1 Quarterly figures are at seasonally adjusted annual rates.2 Adjusted to include State and local governments.Note.—Basic data from Dept. of Commerce.

In the first quarter of 1968 demand for automobiles benefitedfrom a spillover from the fourth quarter of 1967, when a pro-longed strike at a major producer had greatly limited theavailability of new cars. In addition, outlays for residential con-struction showed a sizable expansion, stemming from an earlierupward trend in housing starts, and business expenditures forfixed capital continued to grow. Finally, there was a further largerise in Federal purchases, particularly for defense. Even thoughinventory investment was much less than in the preceding quar-ter, real GNP and the industrial production index rose at annualrates of about 6.5 and 6.0 per cent, respectively. The labormarket tightened further, and increases in wage rates averaged

31


6 to 7 per cent annually; this was somewhat more than in 1967and appreciably faster than growth in productivity. As a result,unit labor costs rose considerably further, and with demandsbrisk, strong upward pressures on prices continued.

In the second quarter consumer spending rose only half asmuch as it had in the first, and business outlays for fixed capitaldeclined. While defense spending continued to rise strongly, theincrease in total final sales was only about half that for the firstquarter; indeed, after adjustment for price increases privatefinal sales were unchanged. However, inventory accumulationexpanded considerably, and the rise in real GNP almost matchedthe first-quarter growth. The index of industrial productionalso continued to climb, and the rise in the GNP price deflatoraccelerated.

The Revenue and Expenditure Control Act of 1968 imposeda 10 per cent surcharge on corporate income taxes and on mostindividual income taxes. For corporations the surcharge wasmade retroactive to January 1; and for individuals, to April 1.For persons or families with small taxable incomes, however,the surcharge was less than 10 per cent, and for those in thelowest brackets there was no surcharge. Withholdings on per-sonal income were raised enough in July to cover most of theincrease in current liabilities, but the increase in withholdingsdid not cover the increased liability for the April-June period.The Act also imposed limitations on expansion of Federalspending in the fiscal year 1969.

Partly in view of the sharp slowing of expansion in final salesin the second quarter, expectations were widespread that fiscalrestraint would cause an almost immediate and substantial damp-ening of the expansion in real growth and that as a result therapid advance in prices would taper off. As it turned out, thethird-quarter rise in Federal purchases was the smallest in 3years, despite a general pay raise in July for Federal civilian em-ployees and members of the Armed Forces. Defense outlayschanged little, as expenditures connected with the war in

32


Vietnam began to level off. And with the tax surcharge goinginto effect on withholdings about July 15, the third-quarter risein personal disposable income was less than half the averagefor the first half of the year.

But the widespread expectations that the rise in output wouldslow markedly failed to materialize in the short run, mainly be-cause consumers increased their spending by reducing sharplytheir rate of current saving. Moreover, record sales of new auto-mobiles—stimulated in part by forthcoming price advances onthe 1969 models to be introduced in late September—were facil-itated by a rapid expansion of instalment credit.

In addition to the unexpected surge in consumer spending,housing starts in the third quarter increased to the highest ratesince early 1964. This rise reflected in part the release of mort-gage funds that had been held back pending the successful out-come of efforts to raise permissible ceilings on mortgage interestrates in several States. But it also indicated the strength of thebacklog of demand for new homes and the belief in manyquarters that effective fiscal restraint would permit substantialeasing in credit availability. Business spending for plant andequipment rebounded from its dip in the second quarter, but asindicated above, inventory accumulation was less than in thesecond quarter.

Thus, although the Federal deficit declined from an an-nual rate of more than $10 billion in the second quarter to $3billion in the third (as measured in the national income ac-counts), expansion in real GNP was at an annual rate of 5 percent, only moderately below that of the first half. While thequarterly GNP price deflator slowed from its rate of advancein the first half, the monthly consumer price index increased alittle faster than it had earlier because of a sharp jump in mort-gage interest rates, and inflationary expectations became wide-spread.

In the fourth quarter growth of real GNP slowed to an annualrate of 3.4 per cent, with total final sales much less expansive

33


than in the third quarter. Consumer expenditures showed one ofthe smallest increases in recent years in dollar terms, and inreal terms they were unchanged. Auto sales declined somewhatfrom the very high third-quarter rate, and sales of nondurablegoods rose little. Federal spending for goods and services in-creased by only a small amount. Nevertheless, there were stillmany indications of exuberance: businesses, in particular, ap-peared to be preparing for a prolonged period of expansion andwere raising sharply their current and prospective outlays forfixed capital. Housing starts edged up further, and expendituresfor residential construction—which had changed relatively littlein the first three quarters—rose considerably. Inventory accumu-lation increased, and industrial production advanced at an annualrate of 5 per cent. And prices, as measured by the GNP deflator,rose as fast as they had in the first half of the year.

CONSUMER EXPENDITURES AND INCOME

Strong surges in consumer spending in the first and third quartersalternated with much smaller increases in the second and fourthquarters—particularly the fourth. To some extent this patternreflected variations in the growth of personal disposable income,but it also stemmed from large swings in the saving rate. Forthe four quarters, the personal saving rate was successively 7.1,7.5, 6.3, and 6.8 per cent. The big decline in the third quartermade possible roughly $7 billion of additional consumer spend-ing. The high rate of saving for the year as a whole—6.9 percent—had been exceeded to a significant degree only once inthe preceding 15 years—in 1967, when the annual average hadbeen 7.4 per cent.

The recent high rates of saving may reflect to some extent thehigher levels of real as well as money income in the past fewyears. Per capita disposable income measured in constant dollarsincreased 3.0 per cent in 1968 and was 29 per cent above itslevel in 1961—the year when the last recession reached itstrough. High rates of saving in recent years have been accom-

34


panied by a bulge in additions to consumer holdings of financialassets; this was particularly true in 1967 and 1968. However,after 2 years of diminished growth, consumer instalment andmortgage debt rose sharply in 1968 as automobile purchases(including imports) expanded to a record 9.6 million units andhome purchases increased considerably.

In 1968 wage and salary income, transfer payments, and in-terest income all expanded strongly, whereas rents, proprietors'income, and dividends—continuing the pattern of changes inother recent years—showed less rapid increases. Wages andsalaries accounted for 67.6 per cent of total personal income in1968, compared with an average of 67.0 per cent in the period1960 through 1966, a large shift for this component. Disposablepersonal income was 69.0 per cent of GNP in the first half of1968, about the same as the 1960-66 average proportion, butthen it declined to 68.0 per cent in the second half, when thesurtax became effective.

High levels of real income, large reserves of assets, and rel-atively favorable consumer debt positions have been suggested asreasons for the limited impact of the increase in the surtax onconsumer spending in the third quarter. An additional factor mayhave been the greater impact of the tax on high-income groupsthan on lower-middle-income and low-income groups. While it isusual for changes in income to be followed by gradual adjust-ments in expenditures, the big bulge in consumer spending inthe third quarter in the face of a "halving" of the growth indisposable income was unusual.

More than two-fifths of the increase of 8.5 per cent in totalconsumer expenditures from the year 1967 to the year 1968represented increases in prices, but the growth of almost 5 percent in the physical volume of takings was substantial. Pricesof services rose considerably more than did those of goods—re-flecting in part the relatively larger wage component of services.Prices of nondurable goods went up more than prices of durablegoods.

35


Private housing starts exceeded 1.5 million units in 1968, one-sixth more than in 1967 and the largest number since 1964.Starts of both single-family and multifamily units increased, butthe latter rose more in both absolute and percentage terms andfor the year accounted for 40 per cent of all starts, a new high.The increase of over one-fifth in expenditures for residential con-struction reflected higher costs per unit as well as, with some lag,the higher level of starts. The market for new homes and apart-ments remained strong throughout the year, despite higher costsand the highest mortgage interest rates since the 1920's. Vacancyrates continued to decline, reaching the lowest levels in morethan 10 years.

In the first quarter of 1968 housing starts were at an annualrate of 1.5 million, but they declined somewhat in the secondquarter—reflecting tight money conditions and the fact that anumber of States still had relatively low usury ceilings, whichtended to curtail the flow of mortgage funds. By the middle ofthe year ceilings had been lifted in some heavily populated Statesin the Northeast, and a surge in housing starts followed. In thethird quarter, even though mortgage market conditions improvedonly moderately, starts recovered to a 1.5-million annual rate,and in the fourth quarter they rose to an even higher rate—1.6million. In December the volume of outstanding mortgage com-mitments was still very large, but conditions in the mortgagemarket were tending to moderate the expansion in new commit-ment activity.

INVESTMENT IN FIXED CAPITAL

Business investment in fixed capital increased by about 8 percent in 1968. This increase compares with only 3 per cent in1967 but was far short of the average annual rise of one-sixthin the 1964-66 period. About half of the 1968 increase repre-sented higher prices of structures and of producers' durable

36


equipment. Indeed, increased costs apparently accounted for allof the current-dollar increase in outlays for structures.

The sharp fourth-quarter rise in spending for fixed capitalreflected to some extent a make-up for the failure of businessesto realize plans in the first three quarters as indicated by succes-sive shortfalls in actual from planned spending shown in Com-merce-Securities and Exchange Commission surveys. Nonethe-less, the strength of plant and equipment outlays in the fourthquarter may have also reflected an increase in expansion plans,in part in response to widespread inflationary expectations.

The intentions expressed by businesses in late 1968 to increasespending for plant and equipment were somewhat surprising inview of the substantial volume of unused capacity in manufac-turing but not so surprising in view of the further rise of 6 percent in 1968 in corporate profits after tax, including the sur-charge. This rise, inflationary expectations, the rapid pace oftechnological changes, frequent shifts in styles and models, andthe continuing strong pressures to reduce costs—all servedto stimulate plans for new plant and equipment spending. Al-though industrial output rose more than 4 per cent in 1968 andhas risen 15 per cent since 1965, additions to capacity havemore than kept pace with the increase in output. The capacityutilization rate in manufacturing had fallen from more than90 per cent in 1966 to 85 per cent in 1967, and it remainedclose to that level in 1968.

Following the pronounced inventory adjustment during the firsthalf of 1967, which brought the annual rate of accumulationdown from $20 billion in the fourth quarter of 1966 to $2 bil-lion in the second quarter of 1967, inventory investment pickedup after mid-1967. When consumer expenditures showed anunexpectedly strong spurt in early 1968, there was a sharp dropin the rate of accumulation. Subsequently, the rate moved up and

37


for the remainder of the year averaged well above the 1967 rate.In view of the large increase in final sales, however, inventoryaccumulation in 1968 was relatively moderate—about $7.5 bil-lion (GNP basis), compared with $6.1 billion in 1967 and theexceptionally high rate of nearly $15 billion in 1966.

In late 1967 and the first half of 1968 business inventoryaccumulation was augmented by substantial additions to steelstocks in anticipation of a possible strike on July 31. In thesecond quarter of 1968 there was also a large build-up in autostocks. The reduction in steel output after the wage settlementproved to be less than expected as demands from both consumer-goods and producer-durable-goods industries became more vig-orous. Even with auto sales at new record levels during most ofthe second half, there was a sizable further increase in autostocks, and at the year-end such stocks were relatively high.

Stock/sales ratios for durable goods remained high in 1968.At manufacturers, inventories did not appear to be excessive inview of the level of unfilled orders. The stock/sales ratio atdurable goods retailers, which in 1967 had not fully readjustedto levels existing before the Vietnam war, was rising again in late1968. The ratio for nondurable goods, which had been reducedto record low levels in the third quarter of 1968, also movedup somewhat late in the year.

FEDERAL SECTOR, NATIONAL INCOME ACCOUNTS

The Federal deficit fell to an annual rate of about $9.5 billion inthe first half of the calendar year 1968 from about $12.5 billionin the second half of 1967. Receipts rose briskly early in theyear, in part because of rising profits and incomes but alsobecause of the retroactive liabilities under the 10 per cent cor-porate surcharge. Moreover, an increase in the taxable wage ceil-ing effective January 1 led to higher contributions for socialinsurance. On the other hand social security benefits were in-creased in the first quarter, and Federal expenditures, particular-ly for defense, rose rapidly in the first half of the year.

38


In the third quarter the deficit fell sharply as withholdings ofindividual income taxes were increased to reflect the 10 percent surtax. Another factor tending to reduce the deficit was thecutback in Federal expenditures in the fiscal year 1969 fromthe rate of outlays proposed in the January 1968 budget as re-quired by the Revenue and Expenditure Control Act of 1968.Since expenditures for the war in Vietnam were exempted fromthe cutback—as were some other relatively uncontrollable cate-gories such as interest on the debt and social security benefits—the realized net decline from the aggregate expenditure figuresas proposed in January is likely to be considerably smaller.

As a result of the tax surcharge and the constraints on Federalspending, the deficit of the Federal Government as estimated inthe NIA fell from about $12.5 billion in the calendar year 1967to an annual rate of $9.5 billion in the first half of 1968 and ofless than $3 billion in the third quarter. And in the fourthquarter the NIA budget was in balance. For the calendar yearas a whole, the deficit was a little over $5 billion.

LABOR MARKETSReflecting strong demands in most sectors of the economy, thelabor market continued to tighten in 1968. Expansion in employ-ment was most pronounced early in the year and again in thefourth quarter. Employment rose more rapidly than the laborforce, and the unemployment rate dipped to 15-year lows—3.3per cent at the year-end, and 3.6 per cent for the year as a whole.Nonfarm payroll employment rose by 2.1 million persons—slightly more than in 1967—with more than four-fifths of theexpansion occurring in nonmanufacturing activities. Employ-ment increases in trade, in services and finance, and in Stateand local government each exceeded 500,000 in 1968. Manufac-turing employment increased by 300,000. Farm employment,including both farm operators and family and hired labor, de-clined further.

The civilian labor force increased by 1.4 million in 1968—

39


about the expected "normal" rise as estimated from populationgrowth in working-age brackets and trends in participationrates. The increase included 800,000 adult women, 500,000adult men, and 100,000 teenagers.

In manufacturing, employment was essentially unchangedbetween June and October. During the latter part of this period,employment gains in several industry groups were offset by de-clines in steel—where inventories had been built up to recordlevels in anticipation of a late-summer strike, which did notmaterialize. With the inventory adjustment in steel well alongin late 1968, manufacturing employment was again on an up-swing, having spurted by more than 160,000 between Octoberand December. Indications of renewed strength were widespreadamong both durable and nondurable goods industries, but theytended to be more definite in industries manufacturing producers'durable goods, in line with the step-up in business fixed invest-ment programs.

The average work-week in manufacturing in 1968 was littlechanged from the preceding year, but it edged lower from Sep-tember to December as employers in most industries reducedhours of work and increased the number of their employees.

Responding to a turnaround in building activity, employmentin construction rose more than 50,000 in 1968, and the unem-ployment rate fell to 6.9 per cent, the lowest rate since theKorean war. A strong thrust in the final quarter raised con-struction employment to about the 1966 peak.

Developments in the manufacturing and construction indus-tries were especially influential on the demand for men employ-ees; the jobless rate for married men fell to an average of 1.6per cent for the year, and at the year-end it was at a post-World-War-II low of 1.4 per cent. The rate for all adult men averaged2.2 per cent for the year as a whole and was down to virtually africtional rate of 1.8 per cent at the year-end. In 1968 the adultmale labor force registered its second successive large increase,after a decade of much slower growth. These additional men

40


contributed substantially to the fulfillment of increased man-power needs and helped to limit labor shortages during the year.Relatively large increases in the adult male civilian labor forcewill be common in coming years because of high post-World-War-II birth rates.

The bulk of the gain in nonfarm employment was concen-trated in the service sector. Close to four-fifths of the total em-ployment increase was accounted for by trade, finance, services,and State and local government. Since women account for alarge part of employment in these activities, demands for theirservices continued firm, and their unemployment rate edgeddown to 3.8 per cent.

The Federal Government contributed little to the rise in em-ployment in 1968, and after midyear Federal employment beganto decline because of limitations on hiring and spending incor-porated in the revenue and expenditures legislation. At the endof the year Federal employment was nearly 80,000 below itsJune peak.

In general, the pattern of demand in 1968 favored adult, full-time workers; teenage unemployment was virtually unchanged atnearly 13 per cent. As in other recent years, large numbers ofunemployed teenagers were competing for a limited supply ofpart-time jobs during the school year, and during the summerthe labor market was flooded with youngsters seeking full-timesummer jobs or career opportunities. High levels of demand anda tight market for adults apparently are not sufficient to reduceunemployment of youngsters to acceptable levels, even thoughthe number of teenagers in the labor force is no longer expand-ing at the rapid rates of the 1963-66 period. Jobless rates forNegro and other nonwhite youngsters—typically at very highlevels—averaged 25 per cent in 1968. How to motivate, train,and provide job opportunities for young people, especially non-white youth, continues to be a key national problem.

Among nonwhite adults, however, high unemployment yieldedin 1968 to the pressures of strong demand. Employment gains

41


for this group exceeded the increase in the labor force, and theirunemployment rates declined to the lowest levels since theKorean war. Nevertheless, unemployment rates for nonwhite menand women (3.9 and 6.3 per cent, respectively) were still nearlydouble the comparable rates for white adults.

WAGES AND COSTSAverage hourly earnings of workers in private nonfarm indus-tries rose 7.3 per cent over the year ending in December 1968,significantly more than the 5.0 per cent increase in the previous12-month period. The largest percentage increases were recordedin retail trade and in some service industries, where the increasein the minimum wage and the tight labor market had the greatestrelative impact. For production workers in manufacturing,hourly earnings rose by 6.5 per cent.

A key factor making for large increases in wages was the ac-celerated rise in consumer prices, which generated demands forwage increases to offset increased living costs in addition to theusual demands that aim to provide a higher standard of livingand additional fringe benefits. In 1968 more than 4.5 millionworkers covered by renegotiated major collective bargainingagreements received median first-year wage increases of 7.5 percent, compared with a median first-year wage increase of 5.6 percent in 1967 covering about the same number of workers.

The pattern of a substantially higher first-year increase hadbeen a feature of the contract settlement with the major automo-bile companies in the final months of 1967. During 1968 thispattern spread to contracts negotiated in the glass, can, aluminum,aerospace, and steel industries in manufacturing and to the tele-phone, railroad, bituminous coal, and copper industries in non-manufacturing activities. All of these contracts call for subse-quent-year wage increases that are considerably smaller than thefirst-year boosts.

At the end of 1968 major collective bargaining agreementscovering nearly 2.6 million workers contained provisions for

42


cost-of-living adjustments; this number was only slightly morethan a year earlier. The trends in recent years toward (1) estab-lishing a maximum limit on the amount of the adjustment aswell as a guaranteed minimum and (2) the substitution of an-nual for quarterly escalator adjustments were continued. In theautomobile and farm equipment industries the provision for amaximum adjustment limited the size of the annual adjustmentto amounts that were smaller than the increase in consumer pricesin 1968.

Responding in part to the upswing in production, the increasein manufacturing productivity was stepped up in 1968, withoutput per man-hour rising nearly 2.5 per cent; although thisincrease was considerably larger than the 1.0 per cent rise in1967, it was considerably below the average of 3.9 per cent forthe years 1960 through 1965. Despite the productivity gain in1968, unit labor costs rose 4.2 per cent—nearly as much as in1967—because increases in hourly compensation accelerated tonearly 7 per cent; this was the largest rise in hourly compensationsince 1951 and compared with about 5.5 per cent in 1967.

PRICESInflationary pressures, which had begun to accumulate in late1965 with the intensification of the war in Vietnam, becameeven stronger in 1968. As was noted above, pressures of de-mands on labor resources were acute, the rise in wage ratesaccelerated sharply, and unit labor costs continued to show apronounced upward thrust.

In such a setting, and with some industrial materials andfoodstuffs in limited supply, wholesale prices of industrial com-modities increased more than in any other year since 1957;prices of farm products and processed foods and feeds recoveredmuch of their 1967 decline; and both the consumer price indexand the broader GNP implicit price deflator showed the largestincreases in 17 years.

In the course of 1968, as in each of the two preceding years,

43


the pattern of wholesale prices of industrial commodities wasinfluenced by fluctuations in the intensity of demand pressuresas well as by special supply situations. Thus, the year began andended with industrial prices rising at a fast rate, whereas for abrief period in the late spring and early summer these pricesshowed little change. The temporary ebb in the upward move-ment of industrial prices accompanied the abrupt slowing in thesecond quarter of the expansion in private final sales—whichhad been very strong in the first quarter—and widespread expec-tations that fiscal legislation would appreciably reduce the rateof expansion in total demands. Average price increases for avariety of industrial materials and products slowed during thatperiod.

Also contributing to the virtual halt in the industrial pricerise in the spring were the repercussions of the settlement inearly April of the 8V> month strike in the copper industry. Highand rising demands for copper products during that strike hadbeen met by bidding up prices of copper scrap and foreign cop-per, which in turn were translated into sharp increases in pricesof copper and brass mill products. Altogether, average prices ofcopper items increased nearly 30 per cent from early July 1967,just before the strike, to March 1968—and this price increasemade a significant contribution to the sharp rise in averageprices of all industrial commodities over that period. With resto-ration of domestic primary output following settlement of thestrike, copper ingots advanced to 42 cents per pound from thepre-strike level of 38 cents. Nevertheless, average prices in thebasic industry declined 18 per cent from March to July, withscrap, imported copper, and brass and copper products downsharply.

During the late summer consumer and business demands—for housing and autos in particular—held at much higher levelsthan had been anticipated; consumer prices except for foodscontinued to rise at a fast pace; and the rapid pace of wageincreases showed no abatement. Under such conditions, whole-

44


sale prices of industrial commodities resumed their upwardcourse. Major factors in the sharp increase in the industrialaverage from July to December included: a 2.3 per cent in-crease in prices of steel mill products following the July 31 wagesettlement—an increase half as large as the rise for the preceding3 years combined; a sizable increase in prices of new autos; arenewed, fast rate of increase in prices of producers' equipment;and an extraordinarily large further rise in prices of lumber andplywood, supplies of which were limited relative to unexpectedlylarge demands.

Altogether, wholesale prices of industrial commodities in-creased at an annual rate of about 3.5 per cent in the first 4months of 1968—continuing the sharp upswing of the last halfof 1967. In the second half of 1968 they were rising at a rateclose to 3 per cent. The rise for the year averaged 2.5 per cent;this compared with about 1.5 per cent in 1967 and 2 per centin 1966.

The recovery in 1968 in average wholesale prices of foodsand foodstuffs reflected a substantial rise in prices of livestockand products; supplies of these items leveled off following thelarge increase in 1967, while consumer demands expanded sub-stantially further. For the year average prices of livestock andproducts were up 4 per cent and were almost back to the 15-yearhigh reached in 1966. Prices of crops and products on the aver-age were unchanged from 1967 and were less than 1.5 per centbelow the post-World-War-II record of 1966.

Consumer prices rose at a rapid pace throughout 1968. InDecember the index was 4.7 per cent above a year earlier, andthe average for the year was 4.2 per cent above 1967. The ad-vance in 1968 was nearly half again as large as the increase ineach of the two preceding years and was more than three timesthe average annual increase in the first 5 years of this long periodof economic expansion.

Consumer price increases were widespread for both com-modities and services. For commodities the rise at retail gen-

45


erally exceeded by an appreciable margin the rise at wholesale,because upward labor and other cost pressures were generallystronger at the distributive level. Moreover, consumer demands—though varying from quarter to quarter—were generallystrong; total personal consumption expenditures in 1968 werenearly $42 billion—or 8.5 per cent—higher than in 1967. In1967 these expenditures had increased 5.7 per cent.

Retail prices of food, which had been about unchanged in1967, showed a sizable increase in 1968. However, toward theend of the year they tended to stabilize as supplies of meats andof fruits and vegetables were expanding again. Among othercommodities there were especially large increases in prices ofapparel and furniture, and prices of new cars, appliances, andhousefurnishings rose substantially. For the year, retail pricesof nonfood commodities averaged 3.7 per cent higher than in1967; this rise contrasts with increases of 2.5 per cent and 1.3per cent in 1967 and 1966, respectively.

As usual, the rise in prices of services exceeded that for com-modities. For the year service costs included in the consumerprice index were 5.2 per cent above 1967—compared with in-creases of 4.4 per cent and 3.8 per cent in the two precedingyears—-and at the year-end they were running 6 per cent abovelate 1967. Much of the acceleration in the rise in 1968 stemmedfrom a spurt in mortgage interest charges and other costs ofowning and maintaining a home and from a larger rise in rent.In December, rent was up nearly 3 per cent from a year earlier,as compared with a 2 per cent rise during the year 1967, andhousehold services less rent were up nearly 8 per cent, more thandouble the rise during the preceding year. Costs of medical careservices continued sharply upward—rising more than 7 per centfrom December 1967 to December 1968—almost as much asduring 1967. •

46


U.S. Balance of PaymentsDuring 1968 transactions in goods and services between theUnited States and the rest of the world showed the smallest netexport balance this country has had in many years. Neverthe-less, owing to massive inflows of private capital, the net reserveposition of the United States—gold stock, position in the Inter-national Monetary Fund, and net asset-liability position againstforeign official reserve holders—improved somewhat in thecourse of the year.

The shift in private capital flows toward the United Statesinvolved investors, lenders, and business creditors both here andabroad and reflected diverse influences. Among these influenceswere the greatly tightened controls on outflows from the UnitedStates of corporate investment funds and of U.S. bank credit toborrowers abroad; the unusually high interest rates in this coun-try and the interest equalization tax (IET), both of whichserved to reinforce the effectiveness of the capital controls; asharp growth in European investors' holdings of U.S. equitysecurities; and movements of liquid funds out of other currenciesinto the Euro-dollar market, facilitating a great increase in theuse of Euro-dollar resources by U.S. banks.

In addition to the inflows of private capital, investments byforeign monetary authorities in over-1-year time deposits atU.S. banks and in certain types of U.S. Government securitieshelped to reduce the balance of payments deficit as measured onthe liquidity basis. Indeed, the liquidity balance moved intosurplus in the second half of the year, partly as a result of re-patriations of funds late in the year by U.S. companies influencedby changing conditions in financial markets as well as by thedirect investment control regulations.

TRANSACTIONS IN GOODS AND SERVICESThe surplus on goods and services fell sharply early in 1968 andremained low. For the year it amounted to about $2 billion, far

47


below the balance of $4.8 billion achieved in 1967 or the aver-age surplus of $7.0 billion in 1963-65.

Merchandise exports responded well to the general upswingin world demand, and their value in the second half of the yearwas 13 per cent greater than in the second half of 1967. Gainsin exports to Western Europe, Canada, and Latin America wereespecially noteworthy. Increases were concentrated in nonagri-cultural products, particularly in machinery and equipment.

The shrinkage in the trade surplus was the result of an un-precedently large rise in merchandise imports. A new upswing inimports had started in the last few months of 1967—after a13-month pause—and the rise continued through the first threequarters of 1968. For the year as a whole imports were 23 percent greater in value than in 1967; and in the second half ofthe year, at an annual rate of $34.1 billion, they were 25 percent larger than in the second half of 1967. The trade surplus,which in 1967 had amounted to $3.5 billion, nearly vanished inthe first half of 1968 and remained virtually zero in the second

6. As IMPORTS grow much faster than EXPORTS, trade surplus shrinksBILLIONS OF DOLLARS, SEASONALLY ADJUSTED, ANNUAL RATES

EXPORTS

20

IMPORTS

TRADE SURPLUS

48


half, when merchandise exports were at an annual rate of $34.2billion.

The 25 per cent increase in value of imports from the secondhalf of 1967 to the second half of 1968 accompanied a 10 percent increase in the current value of GNP. While excep-tionally rapid growth of automobile imports from Canada underthe 1965 agreement accounted for several percentage points ofthe 25 per cent increase, there were also large advances in almostall other categories of imports. Under the conditions of recentyears, with general prosperity in the United States and with U.S.consumer prices rising since late 1965 by more than 3 per centa year, rapidly growing imports of finished manufactures haveassumed increasing importance within the total. Partly for thisreason, the trend of growth in total imports has accelerated.From 1963 to 1968 imports rose at an average rate of 14 percent a year, compared with an average rate of 5 per cent overthe preceding 10 years. The exceptionally rapid rise in importsafter September 1967 reflected not only the accelerated trendbut also the cyclical acceleration usually seen during a period ofexceptionally rapid growth of national income in money terms.

Net receipts from current transactions other than merchandisetrade increased a little in 1968. Income and fees received fromdirect foreign investments were substantially higher than in 1967,but much of this gain was offset by larger payments of interestto foreigners. Net tourist expenditures were reduced slightly fromthe 1967 peak related to the Canadian EXPO 67. Military ex-penditures abroad, which had risen rapidly in the two precedingyears, increased more slowly and amounted to $4.6 billionin 1968.

REMITTANCES AND PENSIONSPrivate unilateral transfers, at $0.75 billion, were a little smallerthan in 1967, when contributions to Israel had been unusuallylarge. Pensions and other miscellaneous transfers by the U.S.Government were about unchanged, at $0.4 billion.

49


U.S. GOVERNMENT CREDITSAND ECONOMIC AID GRANTSEconomic aid grants by the U.S. Government declined a littlefurther in 1968, to $1.7 billion. U.S. Government credits toforeign countries, net of repayments, were also slightly reduced,at $2.3 billion. Disbursements were somewhat higher, but sowere repayments on outstanding credits despite the postpone-ment of the instalment of the 1946 loan due from the UnitedKingdom at the end of the year. Repayments by foreign govern-ments ahead of schedule amounted to about $250 million.

PRIVATE CAPITAL FLOWSFor the first time in many years, the net flow of private capitalin 1968 was inward—to the United States from the rest of theworld—instead of outward. Total inflows, including $3.4 bil-lion of foreign liquid funds moving to the United States throughcommercial banks abroad, exceeded total outflows by nearly $5billion. In 1967 there had been a net outflow approaching $2billion. (These figures exclude all changes in the liquid and near-liquid claims of foreign monetary authorities on the United Statesand-—in 1967—the U.K. liquidation of its special portfolio ofU.S. securities, and they also exclude some relatively smallchanges in certain nonliquid liabilities of the U.S. Governmentto other foreign official and private creditors.)

Capital and credit transactions by U.S. businesses other thanbanks, apart from transactions in securities of unaffiliated com-panies, gave rise to a net capital outflow of only $0.3 billionin 1968, far below the $2.9 billion outflow of the preceding year.The announced goal for the year 1968 of the mandatory regula-tions imposed on direct investors was to reduce by $1 billion (ascompared with 1967) the amount of direct investment outflowto countries other than Canada—defined, for this purpose, asincluding subsidiaries' undistributed foreign profits but as ex-cluding use of funds borrowed abroad by U.S. companies. Thisgoal was surpassed, primarily by increased borrowing abroadrather than by cutting back on investment outlays. Besides bor-

50


rowings of the foreign operating subsidiaries themselves, newissues of convertible debentures and other bonds in Europe byaffiliated financing subsidiaries incorporated in the United Stateswere very large. These issues exceeded $2 billion, compared with$450 million in 1967. However, some of the proceeds of theseissues were temporarily invested at short term abroad instead ofbeing transferred to operating subsidiaries immediately; suchfunds remained available for financing of direct investment inthe future without use of new funds from the United States.

7. U.S. CORPORATIONS reduce their net capital outflow througha massive increase in BORROWINGS ABROAD

•IJ»llli

-mum ASSETS

mm**,****,.

mmm •

iiliiSI

SAtE 0F||SJ|11

OTHER itiiiii

r~-^—pISiti1966

In addition to bond financing, U.S. businesses increased otherliabilities to foreigners by about $1 billion in 1968. Part of thisincrease reflected loans obtained from banks abroad for financ-ing direct investment; and part represented receipt of advancepayments on aircraft export contracts and other commercialcredits, which are not related to the direct investment controlprogram. Also—as required by the regulations, though notcounting against the ceiling—there was a net return flow of liquidassets held abroad by U.S. businesses apart from the proceedsof past or current bond issues in Europe; this reversed the out-flow of such funds that had occurred in 1967.

Under the Federal Reserve's foreign credit restraint program,

51


discussed on pages 57-59, U.S. banks' claims on foreignerscovered by the program were reduced by about $600 million in1968. The net reflow for all U.S. bank-reported claims, includ-ing those handled by banks for their domestic customers,amounted to $250 million, in sharp contrast to a net outflow theyear before of about $450 million.

The $2.6 billion shift in flows of corporations' investments andborrowings and the $0.7 billion shift in flows of U.S. bank-reported credits were both facilitated by the relatively easy creditconditions during 1968 in some European countries, especiallyGermany. A third important shift in flows was little affected bycredit market conditions: net foreign purchases of U.S. corporatestocks attained in 1968 an extraordinary total of $2.0 billion,Such purchases had begun to increase about the middle of 1967,and the net inflow that year reached $0.8 billion (apart fromnet British sales, mainly from the United Kingdom's official port-folio). Continuation of an inflow of such massive proportionsis not explainable merely as a reaction to political and economicuncertainties abroad, but reflects also a change in investor pref-erences through increased familiarity with the investment ad-vantages of the U.S. equities market. There was also someincrease in the inflow of foreign capital for direct investment inthe United States—to more than $350 million in 1968 from$250 million in 1967.

Transactions in foreign securities resulted in a net capital out-flow from the United States close to that of the preceding year—about $1.3 billion, net of redemptions. Sales of newly issuedforeign bonds in the United States remained relatively high at$1.6 billion, though still concentrated in Canadian issues andthose of the World Bank and other international institutions inconsequence of the diversion of other issuers to the growingEuropean market. The IET continued to play a role in prevent-ing other foreign issues here and also served to hold down netU.S. purchases of outstanding foreign stocks and bonds to aslittle as $0.2 billion.

52


Bond issues of international and regional institutions sold inthis country—included in the figure cited above—reached arecord of nearly $0.5 billion. As a partial offset to this outflow ofcapital, however, the international institutions in 1968 added$0.2 billion to their holdings of liquid and near-liquid assetsin the United States. Foreign private holders other than banksalso increased their liquid assets in this country. The 1968growth in these assets, $0.4 billion, was slightly larger than theannual average of such inflows since 1963.

A fourth major change in capital flows in 1968 was a newmushrooming of the inflow of liquid funds to the United Statesthrough banks abroad. The liabilities of U.S. banks to their foreignbranches operating in the Euro-dollar market together with otherU.S. liquid liabilities to banks abroad rose by $3.4 billion, com-pared with $1.3 billion in 1967 and $2.7 billion in 1966. Theinflow thus generated may be viewed as a response to the effortsof U.S. banks to enlarge their lendable resources, but its verylarge size in 1968 was clearly a result of heavy speculative flowsof foreigners' funds out of sterling and the French franc, whichcontributed to the ready availability of funds in the Euro-dollarmarket. Nearly $2 billion of the inflow occurred during Mayand June, at the time of the civil disturbances in France, whensevere drains on French official reserves of gold and foreign ex-change were occasioned not only by losses of exports but alsoby capital flight from the franc.

Later in the year the acute speculative crisis of November,this time centered on the German and French currencies, wasnot accompanied by any rise in U.S. liabilities to commercialbanks abroad. Speculation on an upward revaluation of theGerman mark was a powerful magnet pulling funds into marksrather than dollars. In December, despite the beginning of areflow out of marks, year-end influences—including repatria-tions of U.S. direct investors' funds—caused extremely tightconditions in the Euro-dollar market and produced a more-than-seasonal decline in U.S. banks' use of Euro-dollar resources.

53


8. LIABILITIES TO FOREIGN COMMERCIAL BANKS increaseby record amount in 1968 and ...

OFFICIAL RESERVE TRANSACTIONS reflect over-all surplusDEFICIT

U.S. RESERVE ASSETS;

OFFICIAL RESERVE TRANSACTIONSWith the massive shift in private capital flows from 1967 to1968, which more than offset the deterioration in net exports ofgoods and services, the over-all balance of payments changedfrom very large deficit in 1967 to considerable surplus in 1968as measured on the official settlements basis. In fact, the changefrom a deficit of $3.4 billion to a surplus of $1.6 billion waseven greater than can be explained by the recorded and esti-mated data available at present. It is possible that additionalcapital inflows that have not been measured served to offset theunmeasured and unidentified outpayments that predominatedall through the earlier years of the decade.

Despite the substantial balance of payments surplus to becovered by official settlements, the gold stock of the United

54


States declined in 1968 by $1.2 billion. Sales of $1.4 billionwere made in the first quarter, largely in support of the gold pooloperations to keep the price of gold in private markets fromrising much above the official price of $35 an ounce. Followingthe devaluation of sterling in November 1967, widespread specu-lation had developed on the possibility of a rise in the officialprice of gold against all currencies. To counter this, massivesales were made by the gold pool. Speculation on a rise in theprivate price of gold—if and when the gold pool operations wereterminated—mounted to a peak of intensity in March.

On March 17 the Governors of the central banks of the activemembers of the gold pool issued a communique in Washington,announcing that they would no longer sell gold except to mone-tary authorities and expressing the opinion that it was no longernecessary, in view of the prospective creation of Special DrawingRights (SDR's) in the International Monetary Fund, for centralbanks to buy gold from the market. During the rest of 1968 theprice of gold fluctuated without rising above $43 an ounce onthe London market. (Developments during 1968 related toSDR's and the March 17 communique are discussed on pages328-32.)

The massive speculative purchases of gold in late 1967 andearly 1968 created a floating supply of gold that played an im-portant role in stabilizing gold prices subsequently. Anothereffect of the purchases, immediately felt, was to put a strain onthe balances of payments and the reserve positions of the coun-tries out of whose currencies speculators on gold were moving.During the period of speculation there was no significant netdecline in private foreign liquid dollar claims on the UnitedStates. It appears therefore that on balance the rush to gold wasfinanced by drains on the net reserves of other countries. Foreignpurchases of gold from the United States, whether through thegold pool or through purchases by monetary authorities directlyfrom the U.S. Treasury, had their counterpart in reducing theoutstanding claims on the United States of foreign monetary

55


authorities (rather than of private holders) or in increasing U.S.holdings of international reserve assets other than gold.

During the year 1968 as a whole U.S. holdings of convertibleforeign currencies (mainly sterling and French francs) increasedon balance by $1.2 billion, and the U.S. net position in the Inter-national Monetary Fund was enlarged by $0.9 billion. Totalreserve assets, including gold, thus showed a net increase of $0.9billion. The effect of the official settlements surplus of $1.6 bil-lion, given these changes in reserve assets, was to reduce out-standing U.S. liabilities to foreign monetary authorities by $0.7billion. Such liabilities fell very sharply during the first half of1968, the period of the rush to gold and of the civil disturbancesin France. During that half year U.S. liquid and near-liquidliabilities to foreign monetary authorities shrank by $2.4 billion.In the second half year, when U.S. reserve assets rose by $1.6 bil-lion, U.S. liabilities to foreign reserve holders rose by $1.7 bil-lion; particularly large increases in both accounts occurred inNovember in connection with the crisis in speculation on theGerman mark. •

56


Foreign Credit kcsir.jh: !}r •:,::;-During 1968 the Board of Governors continued to administerthat portion of the President's balance of payments program thatapplied to banks and other financial institutions, in accordancewith guidelines issued on January 1, 1968, and described in theANNUAL REPORT for 1967.

The President, by Executive Order 11387 dated January 1,1968, made mandatory the program administered by the Depart-ment of Commerce for nonfinancial corporations and gave theBoard of Governors the authority to impose regulations relatingto the foreign transactions of banks and other financial institu-tions. However, in view of the degree of cooperation exhibitedby financial institutions since the program was begun in early1965, the Board elected to continue it as voluntary in nature.

On March 1, 1968, because of a difficult financial situationthat developed for Canada early in the year, all transactions withthat country were exempted from restriction under U.S. balanceof payments programs. Changes in foreign claims by U.S. finan-cial institutions on residents of Canada were excluded from theceiling after February 29,1968. Bank claims on Canada in-creased by $46 million between that date and December 31,1968. Claims of nonbank financial institutions on Canada ofall maturities increased $405 million in 1968.

The objective of the 1968 program was to reduce coveredassets outstanding by at least $500 million—$400 million bythe banks and $100 million by the nonbank financial institu-tions. Actual reductions during the year totaled $852 million.As of December 31, 1968, banks had reduced their coveredassets outstanding by $612 million (Table 5), and nonbankfinancial institutions had reduced such assets by $240 million(Table 6).

Financial institutions continued to follow the priorities setforth in the guidelines. Bank ceilings were reduced by a totalof $226 million related to repayment of term loans to developed

57


TABLE 5: FOREIGN CREDITS OF U.S. BANKS

End of year

1965 1966 1967

1968

Mar. 31 June 30 Sept. 20 Dec. 31

Number of reporting banks .

Total foreign credits subjectto ceiling

Ceiling to end of 1968Net expansion of credit since

December 1964Net leeway for further expan-

sion of credit with ceilingfor 1968

161

9,652

+ 156

148 151 153 153 154

Millions of dollars

910,496,360

-3

864

9,86510,409

+ 370

544

99,396,984

-99

588

9,2039,886

-292

683

9,1569,784

-339

628

161

9,2539,729

-242

476

countries of continental Western Europe. There was a furtherreduction in the ceiling by $222 million representing 40 percent of the amount of short-term credits to those countries out-standing on December 31, 1967. Short-term credits outstandingto those countries declined by $ 118 million during the year.

Long-term investments by nonbank financial institutions indeveloped countries other than Canada and Japan declined by$145 million in 1968.

On December 23, 1968, the President accepted a recom-mendation from the Cabinet Committee on the Balance of Pay-ments that the balance of payments programs be continued in1969 in substantially the same form as in 1968. On the sameday the Board of Governors issued revised guidelines for banksand nonbank financial institutions.

The 1969 guidelines for banks maintain the ceiling at the1968 level—that is, 103 per cent of the end-1964 base figure,or the 1967 ceiling plus one-third of the difference between thatamount and 2 per cent of total assets as of December 31, 1966,whichever is greater. Banks were requested to continue to reducetheir ceilings each month by the amount of repayment of long-term loans to developed countries of continental Western Europeoutstanding on December 31, 1967. Banks also were asked to

58


TABLE 6: FOREIGN ASSETS OF REPORTING NONBANK FINANCIAL INSTITUTIONSAmounts shown in millions of dollars

Type of asset

SUBJECT TO GUIDELINE

Deposits and money market instruments, foreign countriesexcept Canada

Short- and intermediate-term credits, foreign countriesexcept Canada1

Long-term investments, "other" developed countries:2

Investment in financial businesses 3

Investment in nonfinancial businesses3

Long-term bonds and creditsStocks (except those acquired after Sept. 30, 1965,

in U.S. markets, from U.S. investors)

TOTAL holdings subject to guideline .

Adjusted base-date holdings 5 .Target ceiling?

NOT SUBJECT TO GUIDELINE

Investments in Canada:Deposits and money market instruments.Short- and intermediate-term credits *. . .Investment in financial businesses3

Investment in nonfinancial businesses 3 . . .Long-term bonds and creditsStocks

Bonds of international institutions, all maturities

Long-term investments in Japan and the developing countries:Investment in financial businesses3

Investment in nonfinancial businesses3

Long-term bonds and creditsStocks

Stocks, "other" developed countries (if acquired afterSept. 30, 1965, in U.S. markets, from U.S. investors)

TOTAL holdings not subject to guideline. . .

AmountDec. 31,

1968

Change fromDec. 31, 1967

Amount

16

234

1128

616

456

1,4431,5971,517

13014958644

7,9061,344

984

2510

768201

370

12,517

- 3 5

- 6 0

8(4)

- 4 2

-110

-240

1015181

404- 4 3

81

133

78- 2 2

75

632

Per cent

- 6 9 . 1

- 2 0 . 4

7.6- 1 . 8- 6 . 4

- 1 9 . 5

- 1 4 . 2

8.411.23.12.85.4

- 3 . 1

8.9

101.938.811.3

- 9 . 9

25.3

5.3

1 Bonds and credits with final maturities of 10 years or less at date of acquisition.2 Developed countries other than Canada and Japan.3 Net investment in foreign branches, subsidiaries, or affiilates in which the U.S. institution has

an ownership interest of 10 per cent or more.4 Less than $500,000.5 Dec. 31, 1967, holdings of assets subject to guideline, less carrying value of equities included

therein but since sold, plus proceeds of such sales to foreigners.6 Not applicable.7 Adjusted base-date holdings multiplied by 95 per cent.

hold short-term credits to those countries to the level requestedby the 1968 guidelines, that is, 60 per cent of the amount ofsuch credits outstanding on December 31, 1967.

The revised guidelines for nonbank financial institutions werenot changed substantively from the 1968 guidelines. •

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Operations in Foreign Currencies1 o

The Federal Reserve System's foreign currency operations in1968, as in earlier years, were designed to moderate and cushiondestabilizing fluctuations in the flows of international paymentsand in monetary reserves, in cooperation with the central banksof other countries and with the U.S. Treasury. The Federal Re-serve participated in actions to counteract speculation, includingthe provision of credit packages to supplement the official reservesof countries whose currencies were under speculative attack.

Potentially disruptive flows of funds were generated in Europeby speculation on changes in gold prices, until the gold pool wasterminated in March; by speculation against the French francafter the civil disturbances in that country during May and June;and later in the year by speculation on the possibility that theGerman mark might be revalued upward. Despite improvementin British exports as a result of the November 1967 devaluationof sterling, confidence in the new sterling parity was not fullyestablished in 1968. And the Canadian dollar was under heavyspeculative attack for a short time early in the year, occasionedlargely by fears that the U.S. balance of payments program an-nounced on January 1 would adversely affect the Canadianbalance of payments.

Despite the strains on the international monetary system, anddespite a further deterioration in the U.S. balance on interna-tional transactions in goods and services, confidence in the dollarwas not seriously affected. Large flows of private capital to theUnited States had the result of giving this country a balance ofpayments surplus as measured by official reserve transactions.The claims of foreign monetary authorities on the United Statesdeclined on balance; they were reduced by $2.4 billion in thefirst half of the year and increased by $1.6 billion in the second.(A discussion of the U.S. balance of payments appears on pages47-56. An account of developments in 1968 related to goldand to SDR's will be found on pages 328-32.)

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At the beginning of 1968 the Federal Reserve had outstand-ing about $1.8 billion of foreign currency commitments arisingfrom drawings it had initiated under reciprocal currency (swap)arrangements with the central banks of Switzerland, Italy, Ger-many, the Netherlands, and Belgium, and with the Bank for In-ternational Settlements. These swap drawings had been madeduring 1967 to provide cover for large amounts of dollars thataccrued to continental European central banks' reserves as theresult of speculative flows out of sterling and other balance ofpayments developments. By mid-July all of the Federal Reserve'soutstanding swap drawings had been liquidated. The centralbanks concerned were adding to their reserve positions in theIMF (to finance drawings by Britain, France, Canada, andothers), but they were experiencing substantial declines in theirtotal claims on the United States, and in order to replenish work-ing balances they reduced their holdings of dollars under thereciprocal currency arrangements. Liquidation of the swap draw-ings was also facilitated by sales of foreign-currency-denomi-nated securities by the U.S. Treasury.

During the summer and autumn, and particularly in Novem-ber, there were large speculative flows of funds into Germanmarks and to a lesser extent into Swiss francs, chiefly out ofFrench francs and sterling and also out of Euro-dollars. To coverthe Swiss central bank's increased holdings of dollars in its re-serves, the Federal Reserve drew on the reciprocal currency ar-rangement with that central bank. The System also made rela-tively small swap drawings of German marks in November, inconnection with forward market operations. To offset speculativeinflows, the German central bank had in various ways been en-couraging outflows of short-term investment funds from Ger-many. For several days following the reopening of exchangemarkets after the Bonn meeting of finance ministers and centra]bankers of the Group of Ten, the German central bank madeoutright forward sales of marks in the market at a rate designedto make covered outflows of funds from Germany attractive; the

61


Federal Reserve participated in this operation. At the end of1968 the Federal Reserve's outstanding commitments on its swapdrawings in Swiss francs and marks were somewhat over $400million.

In April the Federal Reserve terminated its $500 millionparticipation with the U.S. Treasury in giving technical commit-ments in forward lire, related to the dollar/lira swaps transactedby the Italian authorities with the Italian commercial banks. InOctober the Federal Reserve reciprocal currency arrangementwith the Bank of Italy was increased from $750 million to $1billion.

During 1968 several foreign central banks made use of Fed-eral Reserve swap facilities. These included the Bank of Canada,the Bank of England, and the Bank of France, and also thecentral banks of the Netherlands, Belgium, and Denmark.

To help cope with the speculative attack on the Canadian dol-lar, early in March the United States granted Canada completeexemption from the restraints on U.S. capital outflows as out-lined in the President's January 1 balance of payments program.To support the Canadian dollar, a $900 million internationalcredit package was arranged, including a commitment by theU.S. Export-Import Bank. Earlier the Canadian authorities hadmade a drawing from the IMF and also a $250 million drawingunder the reciprocal currency arrangement with the FederalReserve; $500 million was still available under the latter facility.Following the meeting on March 16 and 17 of the Governorsof central banks then active in the gold pool, increases wereannounced in several Federal Reserve swap arrangements, andthese included a $250 million increase in the arrangement withCanada. All of these actions contributed to a turnabout in specu-lative flows of funds, and in June and July the Bank of Canadarepaid its drawing from the Federal Reserve.

From time to time during 1968 the pound sterling was subjectto severe selling pressure in the exchange markets. The rush togold in the early months of the year involved sales of sterling

62


assets by some speculators. The maturing of forward sales ofdollars made by the Bank of England before the November1967 devaluation of sterling, the shifting out of sterling of someparts of the official reserves of several sterling-area countries,and other withdrawals of funds from London—stimulated bydisappointment at the slowness of improvement in the Britishtrade position, and accentuated later in the year by nervousnessgenerated by speculation on French franc devaluation and Ger-man mark revaluation—all put pressure on the United King-dom's reserve position.

At the March 17 meeting in Washington, the central bankGovernors announced that the total of credits immediately avail-able to the United Kingdom (including the IMF standby) wouldbe raised to $4 billion. As part of this package the Federal Re-serve swap arrangement with the Bank of England—previouslyfor $1.5 billion, much of which had already been drawn—wasincreased by $500 million. In September the BIS announced thata group of 12 central banks (acting where appropriate on behalfof their governments) would participate with it in a $2 billionmedium-term credit facility to the Bank of England, to offsetconversions of sterling balances by sterling-area countries. Suchconversions, it was expected, would be limited as a result ofagreements that had been reached between the British authoritiesand the sterling-area countries. To facilitate participation by theU.S. Treasury in this arrangement—by permitting, from time totime as might be necessary, warehousing by the Federal Reserveof sterling acquired by the Treasury—the Federal Open MarketCommittee authorized an increase of $650 million in the amountof foreign currencies the Federal Reserve might hold under com-mitments to deliver to the Treasury's Stabilization Fund.

Under the Federal Reserve reciprocal currency arrangementwith the Bank of England, the latter drew substantial sums inthe spring and summer. A considerable part of the United King-dom's IMF drawing in June was used to reduce outstandingdrawings under the Federal Reserve arrangement. At the end of

63


the year, after large additional drawings during the Novembercrisis, the Bank of England's commitments amounted to $1,150million. In addition, Federal Reserve holdings of sterling in-cluded nearly $300 million under arrangements separate from thereciprocal currency arrangement. The Bank of England also hadsubstantial commitments outstanding to the U.S. Treasury underspecial credit arrangements.

To help relieve pressures on the pound sterling stemming fromstrains in the Euro-dollar market, the Federal Reserve, throughits arrangement with the BIS, supplied some dollars to the Euro-dollar market in June and again in December, for short periods.The BIS drew dollars from the Federal Reserve under the recip-rocal currency arrangement and made the placements.

Faced with massive speculative outflows from the franc fromMay until near the end of November, the Bank of France madesubstantial use of its swap line with the Federal Reserve, inaddition to selling gold, drawing on the IMF, and using otherinternational credits—while taking actions to resist inflationarypressures and to improve the underlying French balance of pay-ments position. The Federal Reserve reciprocal currency ar-rangement with the Bank of France was increased early in Julyfrom $100 million to $700 million. It was again increased, to $1billion, at the time of the Bonn meeting in November. Of the $2billion package of new international credits for France an-nounced in November, the United States made available a totalof $500 million—$300 million through the increase in the Fed-eral Reserve swap line and $200 million in a facility extendedto the Bank of France by the U.S. Treasury. Drawings by theBank of France under the Federal Reserve arrangement reacheda peak of over $600 million in November, but by the end of theyear had been reduced to $430 million.

Drawings on their Federal Reserve swap lines by the centralbanks of the Netherlands and Denmark in June were liquidatedwithin a few months, and drawings by the Belgian central bank

64


in July and October were almost entirely liquidated by the endof the year.

At the end of 1968 the Federal Reserve's reciprocal currencyarrangements with 14 central banks and the BIS totaled $10,505million—having been increased at four times during the year, inMarch, July, October, and November.

A detailed review of Federal Reserve operations in foreigncurrencies during 1968 is given on pages 275-323. •

65


Tart2cRecordsy Operations, and

tiion


Record of Policy Actions of theBoard of Governors

JANUARY 18, 1968

AMENDMENT TO REGULATION 0, PAYMENT OF INTEREST ONDEPOSITS.

Effective January 18, 1968, Regulation Q was amended to alleviate aproblem bearing on the exemption of time deposits of certain foreignofficial depositors from the maximum rate limitations contained in thatregulation.

Votes for this action: Messrs. Robertson, Mit-chell, Maisel, Brimmer, and Sherrill. Votes againstthis action: None. Absent and not voting: Messrs.Martin and Daane.

Under legislation enacted in 1962 and subsequently renewed,but due to expire on October 15, 1968, in the absence of fur-ther congressional action, the time deposits of foreign govern-ments, of the monetary and financial authorities of foreign gov-ernments when acting as such, and of international financialinstitutions of which the United States is a member had beenexempted from interest rate ceilings established under Regula-tion Q. It was not known whether this legislation would againbe extended, but the efforts of commercial banks to attract orto renew official time deposits had been increasingly impededby the banks' inability to guarantee payment of interest in excessof the regulatory ceilings beyond the October expiration date ofthe statute.

In order to alleviate this problem, the Board amended Regula-tion Q so as to exempt such foreign official time deposits withspecified maturities up to 2 years from the interest rate ceilingsof the regulation. The Board derived its authority for this actionfrom legislation enacted in 1966 and renewed in 1967. Thatlegislation placed the regulation of interest rates on a discre-tionary rather than a mandatory basis and authorized the Board

69


to set different limits according to the nature or location of thedepositor or according to such other reasonable bases deemedby the Board to be in the public interest. The legislation wasitself scheduled to expire on September 21, 1968. But even ifthe legislation were not renewed, the present amendment toRegulation Q would allow banks to issue certificates of deposituntil September 21, 1968, with maturities of up to 2 years toqualifying foreign official depositors at interest rates in excessof the Regulation Q ceilings.

(Note: The legislation was subsequently extended for a period of 1 yearfrom September 21, 1968, and in light of that extension the exemption underthis regulation was also continued. See the Board policy record entry for Octo-ber 7, 1968, on page 92 of this ANNUAL REPORT.)

FEBRUARY 1, 1968

ADOPTION OF NEW REGULATION G, CREDIT BY PERSONS OTHERTHAN BANKS, BROKERS, OR DEALERS FOR THE PURPOSE OF PUR-CHASING OR CARRYING REGISTERED EQUITY SECURITIES.AMENDMENTS TO REGULATION T, CREDIT BY BROKERS, DEALERS,AND MEMBERS OF NATIONAL SECURITIES EXCHANGES, ANDREGULATION U, CREDIT BY BANKS FOR THE PURPOSE OF PUR-CHASING OR CARRYING REGISTERED STOCKS.

Effective March 11, 1968, the Board adopted a number of changesto broaden the coverage of, and in most respects to tighten, its regula-tions governing the use of credit in stock market transactions.

Votes for this action: Messrs. Martin, Robertson,Mitchell, Daane, Maisel, Brimmer, and Sherrill.Votes against this action: None.

The effect of adoption of the new regulation (designated Reg-ulation G) was to extend to other lenders margin requirementscorresponding to those that had long been applicable to brokers,dealers, and banks on credit extended for the purpose of pur-chasing or carrying registered equity securities. As a result ofthe adoption of Regulation G and of the continuation of applica-ble provisions of Regulations T and U (relating to loans bybrokers and dealers and by banks, respectively), the margin

70


required on virtually all registered stock transactions was 70per cent, effective March 11, 1968.

Also under the provisions of Regulation G—and in this casewith concurrent changes in Regulations T and U—the marginrequired on all loans for the purpose of purchasing or carry-ing securities convertible into registered stock was established at50 per cent, effective March 11. This requirement, set independ-ently of the margin requirement on stock transactions, was fixedinitially at 50 per cent in recognition of the fact that convertiblesecurities combine characteristics of both stocks and bonds.

The revised regulatory requirements were applicable to allnew loans made on or after March 11, 1968, for the purpose ofpurchasing or carrying registered equity securities. The treatmentof such loans made prior to that date varied, depending upon thecategory of lender. The adoption of margin requirements on loansmade on convertible securities by brokers or dealers had noeffect on loans made before March 11. For loans on convertiblesecurities made by banks between October 20, 1967—the datethe original proposals had been published for comment—andMarch 11, 1968, a fully margined status had to be achievedby April 10; bank loans made before October 20, 1967, werenot affected unless there had been subsequent substitutions ofcollateral or conversion into stock. On all loans for purchasingor carrying registered equity securities made by Regulation Glenders between February 1 and March 11, 1968, a fully mar-gined status had to be achieved by April 10. Loans by suchlenders made prior to February 1 were not affected.

Also included in the Board's action was a requirement, appli-cable to all lenders, that loans on convertible securities havinga margin status below the prescribed 50 per cent be subject toa 70 per cent "retention requirement": That is, 70 per cent ofthe proceeds from a sale of these securities would have to beretained to improve the status of the loan until it was marginedat the full 50 per cent.

The regulations, as adopted by the Board, required that all

71


lenders performing certain services "as agent" for foreign andother stock market lenders obtain a statement from their prin-cipals to the effect that the activities of the principals conformedto the applicable margin regulations. However, this provisionnever became effective. (See the entry for May 7 on page 83of this ANNUAL REPORT.) Also, banks and Regulation G lend-ers were forbidden—as brokers and dealers long had been—toarrange for credit on lower margin than they could extendthemselves.

Among the other provisions of the regulations was a require-ment that banks and Regulation G lenders obtain from the bor-rower a signed statement providing for, among other things, anindication of the purpose of any stock-secured loan; determinein good faith that the statement was correct; and sign it as soaccepted. (Since loans by brokers or dealers are generally forthe purpose of purchasing or carrying securities, no statement ofpurpose would ordinarily be required in connection with suchloans.)

FEBRUARY 1, 1968

AMENDMENT TO REGULATION T, CREDIT BY BROKERS, DEALERS,AND MEMBERS OF NATIONAL SECURITIES EXCHANGES.

Effective February 5, 1968, Regulation T was amended to extend by oneday, to five full business days after the transaction, the period in which abroker or dealer must obtain the customer's margin deposit on a margintransaction.

Votes for this action: Messrs. Martin, Robertson,Mitchell, Daane, Maisel, Brimmer, and Sherrill.Votes against this action: None.

The purpose of this liberalizing change in Regulation T, whichapplied to all loans by brokers or dealers subject to margin re-quirements, was to reduce current pressures on the bookkeepingdepartments of brokerage firms by insuring that a weekend wouldalways be included in the period of time within which the depositmust be obtained.

72


FEBRUARY 5, 1968

AMENDMENT TO REGULATION O, LOANS TO EXECUTIVE OFFI-CERS OF MEMBER BANKS.

Effective March 15, 1968, Regulation O was amended chiefly to bringthe regulation into conformity with recent legislation.

Votes for this action: Messrs. Martin, Robert-son, Mitchell, Daane, Maisel, and Brimmer. Votesagainst this action: None. Absent and not voting:Mr. Sherrill.

Public Law 90-44, enacted on July 3, 1967, liberalized therules governing loans by member banks to their own executiveofficers. Under the new provisions of Regulation O, amended toconform with this law and effective March 15, 1968, executiveofficers could borrow from their own banks up to $30,000 fora home mortgage, $10,000 for the education of children, and$5,000 for any unspecified purpose. Previously, an executiveofficer could not borrow more than $2,500 from his bank.

The amendment to Regulation O also redefined the term "ex-ecutive officer," limiting its applicability to persons participatingin the determination of major policies of a member bank. Asa result, many bank officers with lesser responsibilities weregranted a freer access to the credit facilities of their own insti-tutions.

FEBRUARY 7, 1968

AMENDMENT TO REGULATION K, CORPORATIONS ENGAGED INFOREIGN BANKING AND FINANCING UNDER THE FEDERAL RE-SERVE ACT.

Effective February 8, 1968, Regulation K was amended to require theBoard's specific approval before corporations that were engaged in foreignbanking and financing under the Federal Reserve Act could make anyequity investment in a foreign business.

Votes for this action: Messrs. Martin, Robert-son, Mitchell, Maisel, and Brimmer. Votes againstthis action: None. Absent and not voting: Messrs.Daane and Sherrill.

73


This amendment to Regulation K, intended to be of tempo-rary duration, was adopted in furtherance of the purposes of theGovernment's balance of payments program announced by thePresident on January 1, 1968. The amendment revoked the"general consent" provision of Regulation K, which had per-mitted so-called "Edge Act" and "Agreement" corporations tomake certain investments without application to the Board forits specific approval. As a result, all equity investments abroadby member banks or such corporations, as well as the holdingby them of shares of a subsidiary that made any equity invest-ment abroad, were subject to the specific approval of the Board.

The Board indicated that, in line with the objectives of thebalance of payments program, equity investments in developedcountries of continental Western Europe would not be approvedunless circumstances clearly demonstrated that the transactionwould not be detrimental to the U.S. balance of payments. Ap-plications to make investments elsewhere would be consideredon their merits, provided the investments could be made withinthe ceiling established for the applicant under the voluntaryforeign credit restraint program and provided the priorities estab-lished in that program were being followed.

The Board stressed that all equity investments abroad bymember banks and by Edge Act and Agreement corporationswould continue to be regarded as extensions of credit to foreign-ers for purposes of the foreign credit restraint program.

FEBRUARY 8, 1968

AMENDMENTS TO REGULATION Y, BANK HOLDING COMPANIES.

Effective March 15, 1968, Regulation Y was revised primarily to makethe regulation conform to the provisions of governing legislation.

Votes for this action: Messrs. Martin, Robert-son, Mitchell, Brimmer, and Sherrill. Votes againstthis action: None. Absent and not voting: Messrs.Daane and Maisel.

The principal purpose of this action was to incorporate into

74


Regulation Y certain technical changes and other revisions con-forming to the new provisions that became effective under theBank Holding Company Act amendments of 1966.

MARCH 8, 1968

AMENDMENTS TO REGULATION G, CREDIT BY PERSONS OTHERTHAN BANKS, BROKERS, OR DEALERS FOR THE PURPOSE OF PUR-CHASING OR CARRYING REGISTERED EQUITY SECURITIES;REGULATION T, CREDIT BY BROKERS, DEALERS, AND MEMBERSOF NATIONAL SECURITIES EXCHANGES; AND REGULATION U,CREDIT BY BANKS FOR THE PURPOSE OF PURCHASING OR CARRY-ING REGISTERED STOCKS.

Effective March 11, 1968, the Board adopted technical amendmentsto Regulations G, T, and U designed to clarify certain provisions of themargin regulations announced on February 1, 1968.

Votes for this action: Messrs. Robertson, Mitch-ell, Maisel, and Brimmer. Votes against this action:None. Absent and not voting: Messrs. Martin,Daane, and Sherrill.

On February 1, 1968, the Board had adopted, effective March11, 1968, a number of changes to broaden the coverage of, andin most respects to tighten, its regulations governing the use ofcredit in stock market transactions. Since that time a need forseveral technical improvements in the regulations had come tolight, and the amendments now adopted were designed for thatpurpose.

The amendments clarified that the 50 per cent margin require-ment applicable to convertible debt securities was not applicableto preferred stocks, the latter being subject to the same marginrequirements as other registered equity securities. The amend-ments also sharpened the definition of the term "indirectly se-cured" as used in Regulations G and U. The amendments elimi-nated the requirement that banks obtain "purpose statements"in connection with certain routine transactions. And, finally, theyclarified the method by which short sales of convertible bondswere to be carried out under Regulation T.

75


MARCH 12, 1968

REVISION OF FOREIGN CREDIT RESTRAINT PROGRAM GUIDE-LINES.

The Board adopted revisions in the guidelines for restraint of foreigncredits by banks and other financial institutions.

Votes for this action: Messrs. Martin, Robert-son, Mitchell, Daane, Brimmer, and Sherrill. Votesagainst this action: None. Absent and not voting:Mr. Maisel.

Since the announcement on January 1, 1968, of revised guide-lines for the use of banks and other financial institutions inlimiting foreign credits, an agreement had been reached betweenthe Governments of Canada and the United States under whichsuch institutions would be permitted to increase claims on resi-dents of Canada without reference to the guideline ceilings. Thecurrent revisions were in conformity with that agreement.

MARCH 14, 1968

INCREASE IN RATES ON DISCOUNTS AND ADVANCES BY FEDERALRESERVE BANKS.

Effective March 15, 1968, the Board approved actions taken by theboards of directors of the Federal Reserve Banks of Boston, Cleveland,Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, andDallas establishing a rate of 5 per cent (an increase from 4Vi per cent)on discounts and advances to member banks under Sections 13 and 13aof the Federal Reserve Act.

Votes for this action: Messrs. Martin, Robert-son, Mitchell, Daane, Maisel, Brimmer, and Sher-rill. Votes against this action: None.

Pursuant to the policy established by this action, the Board subsequentlyapproved the same rate for the remaining Federal Reserve Banks effec-tive on the following dates:

San Francisco March 15, 1968Philadelphia March 18, 1968New York March 22, 1968

Effective the same dates the Board approved for the respective Fed-

76


eral Reserve Banks a rate of 5Vi per cent (an increase from 5 per cent)on advances to member banks under Section 10(b) of the Federal ReserveAct. In addition, the Board approved increases at most of the Banks inrates on advances to individuals, partnerships, and corporations other thanmember banks under the last paragraph of Section 13 of the Act.

(In accordance with the provisions of the Federal Reserve Act, theFederal Reserve Banks are required to establish rates on discounts forand advances to member banks at least every 14 days and to submitsuch rates to the Board for review and determination. Prior to this datethe most recent rate changes were made in November 1967, as de-scribed on pages 79 and 80 of the Board's ANNUAL REPORT for 1967.)

Note: The directors of five Federal Reserve Banks had voted initiallyto establish rates other than 5 per cent under Sections 13 and 13a of theFederal Reserve Act, subject to the approval of the Board of Governors.These rates were 43A per cent voted by the directors of the FederalReserve Bank of Chicago, 5Vi per cent by the directors of the FederalReserve Banks of Philadelphia, St. Louis, and Dallas, and 6 per centby the directors of the Federal Reserve Bank of New York. Upon beingadvised that the Board was prepared to approve a rate increase of Vipercentage point, the Federal Reserve Banks in question voted to estab-lish a rate of 5 per cent. In taking action to establish a rate of 6 per cent,the directors of the Federal Reserve Bank of New York had also votedto establish an alternative rate of SVi per cent, if the former rate was notacceptable to the Board of Governors. The Board did not approve eitheralternative, and consequently the Reserve Bank's existing rate of AViper cent continued in force until the directors voted to establish, withthe Board's approval, a rate of 5 per cent.

The action to increase the discount rate was taken at a timeof strong inflationary pressures in the domestic economy and ofmassive speculation in world gold markets based on expectationsof an increase in the price of gold. Such speculation had resultedin substantial sales of gold from the official stocks of the UnitedStates and other countries actively participating in the Londongold pool in order to maintain the market price of gold at alevel close to the official price of $35 per ounce. Expectations ofcontinuing inflation in the United States and speculative attitudesin world markets had been influenced by the recent rapid ex-pansion in U.S. economic activity, strong upward pressures on

77


U.S. prices and costs, and consequent deterioration in the U.S.balance of trade, and also by the uncertain prospects for en-actment of proposed fiscal restraint legislation.

Growth in bank reserves, bank credit, and the money supplyhad slowed on the average since late November 1967, whenthe discount rate had been raised from 4 to AV2 per cent. In theintervening period the System had implemented a policy of in-creased monetary restraint by raising reserve requirements againstmost demand deposits and by pursuing more restrictive openmarket operations. (The policy record entries of the Board andthe Federal Open Market Committee that describe the firmingactions noted above and furnish details on attendant economicand financial circumstances may be found in the ANNUAL R E -

PORT for 1967 and in this ANNUAL REPORT beginning on page122.)

The rates of expansion in bank reserves and in bank creditwere believed to be moderating further in March, but growth inthe money stock was expected to accelerate somewhat from itsminimal February pace. In an atmosphere of unsettled foreignexchange markets and strong inflationary pressures in the do-mestic economy, market interest rates had risen considerablyduring the first half of March. The 3-month Treasury bill ratehad advanced from around 5 per cent early in the month tonearly 5Yi per cent on the day this action was taken; mostyields in capital markets had moved to new highs, exceedingtheir peaks of late 1967.

In this situation the increase of Vi percentage point in thediscount rate was designed to supplement actions already under-taken through other policy instruments. The increase was inaccord with a policy of curbing inflationary pressures in the do-mestic economy and fostering progress toward attainment ofreasonable equilibrium in the country's balance of payments,thereby strengthening confidence in the international positionof the dollar.

In its review of actions by some Reserve Banks initially calling

78


for larger increases in the discount rate, the Board concludedthat such increases were not warranted in the present situationand ran the risk of engendering unduly large market reactions.The Board recognized, however, that domestic or internationaldevelopments might make a further increase in the discount ratedesirable at a later date.

APRIL 18, 1968

1. INCREASE IN RATES ON DISCOUNTS AND ADVANCES BY FEDERALRESERVE BANKS.

Effective April 19, 1968, the Board approved actions taken by theboards of directors of the Federal Reserve Banks of New York, Philadel-phia, and Minneapolis establishing a rate of 5Vi per cent (an increasefrom 5 per cent) on discounts and advances to member banks underSections 13 and 13a of the Federal Reserve Act.

Votes for this action: Messrs. Martin, Robert-son, Mitchell, Daane, and Brimmer. Votes againstthis action: None. Absent and not voting: Messrs.Maisel and Sherrill.

Pursuant to the policy established by this action, the Board subsequentlyapproved the same rate for the remaining Federal Reserve Banks effec-tive on the following dates:

San Francisco April 19, 1968Atlanta April 22, 1968Boston April 23, 1968St. Louis April 23, 1968Cleveland April 26, 1968Richmond April 26, 1968Chicago April 26, 1968Kansas City April 26, 1968Dallas April 26, 1968

Effective the same dates the Board approved for the respective FederalReserve Banks a rate of 6 per cent (an increase from 5Vi per cent) onadvances to member banks under Section 10(b) of the Federal ReserveAct. In addition, the Board approved increases at most of the Banks inrates on advances to individuals, partnerships, and corporations otherthan member banks under the last paragraph of Section 13 of the Act.

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2. AMENDMENT TO REGULATION Q, PAYMENT OF INTEREST ONDEPOSITS.

Effective April 19, 1968, the Board approved an amendment of theSupplement to Regulation Q to increase the maximum rates of interest per-mitted to be paid by member banks on certain single-maturity time de-posits, including certificates of deposit (CD's), of $100,000 or more.The following schedule of maximum rates was adopted:

Maturity Maximum rate(days) (per cent)30- 59 SVL60- 89 5%90-179 6

180 and over 6V4Votes for this action: Messrs. Martin, Robert-

son, Mitchell, Daane, and Brimmer. Votes againstthis action: None. Absent and not voting: Messrs.Maisel and Sherrill.

Since December 6, 1965, the maximum rate payable on such large-denomination time deposits, apart from those of certain foreign officialdepositors, had been 5Vi per cent for all maturities. No changes weremade in the maximum rates of interest payable on other classificationsof time and savings deposits, and time deposits of qualifying foreignofficial institutions remained exempt from the limitations of this reg-ulation (see Regulation Q entries for January 18 and October 7 on pages69 and 92 of this ANNUAL REPORT) .

These actions were taken to supplement policy measures ofmonetary restraint adopted earlier, including successive firmingactions through open market operations and an increase in thediscount rate to 5 per cent in mid-March. (Policy record en-tries describing these actions may be found in this ANNUAL

REPORT, beginning on pages 122, 136, and 76, respectively.)The more restrictive stance of monetary policy had been reflectedin firmer money market conditions and higher short-term inter-est rates, with the 3-month Treasury bill rate rising recently to arange around 5.35 per cent. Growth in total member bank re-serves had slowed sharply since February, and bank credit, asmeasured by the bank credit proxy—daily-average member bank

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deposits—had expanded at an appreciably reduced pace inMarch and was expected to show no further growth in April.Banks had met increasing loan demands in recent weeks throughsizable reductions in their holdings of U.S. Government securi-ties. Growth in the money stock had accelerated in recent weeks,however, reflecting in part sizable declines in U.S. Governmentdeposits.

Despite the increased monetary restraint, expansion in domes-tic economic activity was continuing at an excessive pace andwas being accompanied by substantial upward pressures onprices and costs. Against this background an overt move towardincreased monetary restraint was deemed desirable to reaffirmthe System's determination to help resist inflationary pressuresat a time when enactment of proposed fiscal restraint legisla-tion remained uncertain.

Rising interest rates in short-term debt markets had signifi-cantly reduced the ability of banks to compete for time and sav-ings deposits under existing Regulation Q ceilings, with the re-sult that the outstanding volume of large-denomination CD's hadcontracted substantially in recent weeks and growth in con-sumer-type time and savings deposits at banks and in savingsaccounts at nonbank thrift institutions had remained at a re-duced pace. The further increase of Vi percentage point in thediscount rate was expected to exert additional upward pressureon short-term market interest rates and to make it even moredifficult for banks to replace maturing CD's. In these circum-stances the Board concluded that ceiling rates under RegulationQ should be raised on large-denomination CD's in order to givebanks some leeway to compete for interest-sensitive funds. Itwas believed desirable to set the new graduated scale of ceilingrates at levels that would enable banks to resist further large re-ductions in such deposits, but not so high as to permit a signifi-cant expansion in the outstanding volume of CD's and thus inbank credit.

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APRIL 23, 1968

AMENDMENTS TO REGULATION D, RESERVES OF MEMBER BANKS.

Effective September 12, 1968, Regulation D was amended to ef-fect several changes in the method of computation of reserve requirementsby member banks.

Votes for this action: Messrs. Martin, Robert-son, Mitchell, Maisel, Brimmer, and Sherrill. Votesagainst this action: None. Absent and not voting:Mr. Daane.

The amendments were designed to facilitate more efficientfunctioning of the reserve mechanism. They did not represent anychange in Federal Reserve monetary policy, but were expectedto reduce uncertainties, for both member banks and the Fed-eral Reserve, as to the amount of reserves required to be main-tained during the course of any reserve-computation period.Adoption of the amendments was therefore expected to moderatesome of the pressures for reserve adjustments within the bankingsystem that occasionally develop near the close of a reserveperiod and produce sharp fluctuations in the availability ofday-to-day funds.

The major changes in the rules by which member bankswould compute and comply with System reserve requirements,which were substantively the same as those published for com-ment on January 29, 1968, were as follows:

(1) establishment of a 1-week reserve period for the so-called "country banks" instead of the former 2-week period,thus putting such banks on the same basis as reserve city banks;

(2) use of average deposits 2 weeks earlier in calculatingthe weekly average required reserves for the present period;

(3) use of vault cash held 2 weeks earlier, together withaverage balances at the Federal Reserve Bank for the cur-rent week, in the computation of weekly average reserves heldin satisfaction of the requirements; and

(4) provision that either excesses or deficiencies averag-

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ing up to 2 per cent of required reserves might be carriedforward to the next reserve week.

MAY 7, 1968


The Board amended Regulations G, T, and U to revoke certain pro-visions that would have applied to banks, brokers, and other lenders whenthey acted as agents for others who were in the business of lendingagainst registered equity securities.

Votes for this action: Messrs. Martin, Daane,Maisel, Brimmer, and Sherrill. Votes against thisaction: None. Absent and not voting: Messrs. Rob-ertson and Mitchell.

On February 1, 1968, the Board, in adopting Regulation Gand amending Regulations T and U, included a requirement thatall lenders performing certain services "as agent" for foreignand other stock market lenders obtain a signed statement fromtheir principals to the effect that the activities of the principalsconformed to the applicable margin regulations. This require-ment was originally scheduled to take effect on March 11, 1968.However, on February 29 the Board deferred the effective dateuntil April 10, 1968. The purpose of the delay was to mitigatethe administrative burden connected with handling a substan-tial volume of ministerial agency transactions involved in ef-fectuating the requirement.

Subsequently, on March 27, 1968, the Board amended thepertinent provisions of the regulations to provide that the re-quirement apply only where the bank, broker, or other lenderknew or should know that the services it performed as agentwere connected with a loan secured in such a way that the agent

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would have had to observe the requirement of the regulationsif it had itself made the loan. This change was scheduled to gointo effect on April 17, 1968.

On April 12, 1968, the Board deferred the effective dateto May 17 and on May 7 it revoked these provisions, whichwere thus never actually in effect. The Board deleted the require-ment because of the possibility that it might give rise to dis-proportionate operational problems, particularly with regard totransactions involving foreign principals. The Board noted, how-ever, that a potential for evasion of the regulations throughagency activities did exist and that it planned to keep thisarea under surveillance.

MAY 9, 1968

PROPOSED AMENDMENT TO REGULATION U, CREDIT BY BANKSFOR THE PURPOSE OF PURCHASING OR CARRYING REGISTEREDSTOCKS.

On May 9, 1968, the Board voted not to adopt a proposed amendmentto Regulation U that would have exempted from margin requirementsloans made by banks to dealers to finance their market-making activitiesin convertible bonds.

Votes for this action: Messrs. Martin, Robert-son, Maisel, and Sherrill. Votes against this action:None. Absent and not voting: Messrs. Mitchell,Daane, and Brimmer.

In conjunction with the changes announced February 1, 1968,in its regulations governing the use of credit in stock markettransactions, the Board had published for comment a proposalto exempt from margin requirements loans made by banks todealers to finance their market-making activities in convertiblesecurities. It was originally proposed that this exemption, ifadopted, would become effective not later than March 11, 1968.To aid it in reaching a decision, the Board requested that dealerswho wished to be eligible for the exemption begin to file certainreports.

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The Board, after twice deferring action because of difficultiesencountered in collecting and analyzing sufficient data, decidednot to grant the exemption. Analysis of the reports filed bydealer firms engaged in market-making activities had not re-vealed a clear need for extending credit on a more favorablebasis to such firms, and it appeared that the exemption wouldlead to severe administrative difficulties. It was therefore re-quired that bank loans on convertible securities made .betweenOctober 20, 1967, and March 11, 1968, to those dealer firmsthat had filed reports to establish eligibility for possible exemp-tion be brought up to 50 per cent margin status by May 10.Such loans had been granted temporary exemption pendingfinal Board action.

JUNE 7, 1968


Effective June 8, 1968, the Supplements to Regulations G, T, and Uwere amended to increase margin requirements from 70 to 80 per centon loans made on stocks and from 50 to 60 per cent on loans made onconvertible bonds.

Votes for this action: Messrs. Martin, Robert-son, Daane, Brimmer, and Sherrill. Votes againstthis action: None. Absent and not voting: Messrs.Mitchell and Maisel.

During the month of April margin credit of brokerage cus-tomers had increased by $200 million, bringing the total of mar-gin credit outstanding at brokerage houses to $6.4 billion, andpreliminary indications were that a further rise had occurredin May. The recent increases in stock market credit marked

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a resumption of the upward trend observed during 1967, whensuch credit rose 29 per cent at brokerage houses and 19 per centat commercial banks.

In view of these developments, the Board acted to increasemargin requirements under the authority granted in the Secu-rities Exchange Act of 1934 to prevent excessive use of creditto finance transactions in securities. The margin requirement onloans for the purpose of purchasing or carrying registered stockswas increased from 70 to 80 per cent; that on loans for the pur-pose of purchasing or carrying securities convertible into reg-istered stock was raised from 50 to 60 per cent. These higherrequirements were applicable to all new extensions of credit onor after June 8, 1968, for these purposes by brokers, banks,and other lenders. No change was made in the 70 per cent reten-tion requirement applicable to undermargined accounts.

AUGUST 5, 1968

AMENDMENTS TO REGULATION F, SECURITIES OF MEMBER STATEBANKS.

Effective August 5, 1968, Regulation F was amended to implementrecent statutory amendments to the Securities Exchange Act of 1934.

Votes for this action: Messrs. Robertson, Daane,Maisel, Brimmer, and Sherrill. Votes against thisaction: None. Absent and not voting: Messrs. Mar-tin and Mitchell.

The amendments to Regulation F implemented provisions ofPublic Law 90-439, effective July 29, 1968, insofar as theyapplied to State member banks. Those provisions required dis-closure of certain information with respect to: (1) acquisitionof more than 10 per cent of a class of equity securities regis-tered pursuant to the Securities Exchange Act; (2) making ofso-called "tender offers" (or solicitations favoring or opposingsuch offers); and (3) replacement of a majority of the directorsof an issuer in connection with an acquisition, or tender offer,

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subject to the Act. State member banks engaging in any of theabove actions were required to file prescribed information withthe Board and, in the case of a tender offer, to include such in-formation in the advertisement thereof.

AUGUST 6, 1968

AMENDMENTS TO REGULATION G, CREDIT BY PERSONS OTHERTHAN BANKS, BROKERS, OR DEALERS FOR THE PURPOSE OF PUR-CHASING OR CARRYING REGISTERED EQUITY SECURITIES.

Effective August 8, 1968, Regulation G was amended to relax someprovisions thereof, particularly as they applied to credit unions.

Votes for this action: Messrs. Robertson, Daane,Maisel, Brimmer, and Sherrill. Votes against thisaction: None. Absent and not voting: Messrs. Mar-tin and Mitchell.

Regulation G applied only to lenders with $50,000 in newloans or $100,000 in loans outstanding against registered equitysecurities in a given quarter. Therefore it affected only a verysmall minority of the credit unions in the United States. How-ever, several of the provisions of Regulation G were felt to beunduly restrictive on even this small number of credit unions.

The first of the two major amendments included in this ac-tion permitted a lender subject to the regulation to extend upto $5,000 in general credit along with credit for purchasing orcarrying registered securities. As originally adopted, the regu-lation forbade a lender subject to its provisions to extend bothtypes of credit to the same borrower at the same time.

The second major amendment permitted credit unions whosemembership was limited to employees and former employeesof a corporation to make loans for the purchase of stock in thecorporation under an employee stock-purchase plan withoutregard to initial margin requirements. It was required that theloans be made under a plan that embodied safeguards to dis-courage repayment with proceeds from the sale of the purchased

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stock. Such loans were already exempt if made by the corpora-tion itself under similar safeguards.

AUGUST 13, 1968

OPERATIONS SUBSIDIARIES AND LOAN PRODUCTION OFFICES.

The Board reinterpreted provisions of the Federal banking laws relatingto operations subsidiaries and loan production offices.

Votes for this action: Messrs. Martin, Mitchell,Daane, Maisel, and Sherrill. Votes against this ac-tion: Messrs. Robertson and Brimmer.

These interpretations, which reversed positions taken in 1966and 1967, were as follows:

1, As tar as Federal banking law is concerned, a memberbank of the Federal Reserve System may purchase for its ownaccount shares of corporations to perform, at domestic locationswhere the bank is authorized to engage in business, functionsthat the bank is empowered to perform directly.

2. As far as Federal banking law is concerned, a memberbank of the Federal Reserve System may establish and operate,at any location in the United States, "loan production offices"that perform only servicing activities. Such offices may be es-tablished and operated by a bank either directly or indirectlythrough wholly owned subsidiaries.

In adopting these interpretations, the Board reexamined itsposition concerning the so-called "stock purchase prohibition"of Section 5136 of the Revised Statutes (12 U.S. Code Sec-tion 24), which forbids the purchase by a member bank forits own account of any shares of stock of any corporation,except as permitted by provisions of Federal law or as comprisedwithin the concept of "such incidental powers as shall be nec-essary to carry on the business of banking." The Board con-cluded that the incidental powers clause permits a bank to or-ganize its operations in the manner that it believes will best fa-

88


cilitate the performance thereof, and that a wholly-owned sub-sidiary corporation engaged in activities that the bank itself mayperform is simply a convenient alternative organizational ar-rangement and is permissible unless use of such a subsidiary isinconsistent with other Federal law, either statutory or judicial.

In view of the relationship between the operation of certainsubsidiaries and the branch banking laws, the Board also re-examined its rulings on what constitutes "money lent" for thepurpose of Section 5155 of the Revised Statutes (12 U.S. CodeSection 36), which provides that "The term 'branch' . . . shallbe held to include any branch bank, branch office, branchagency, additional office, or any branch place of business . . .at which deposits are received, or checks paid, or money lent."The Board concluded that a test similar to that adopted withrespect to the servicing exemption under the Bank HoldingCompany Act is appropriate for use in determining whetheror not "money [is] lent" at a particular office, for the pur-pose of the Federal branch banking laws.

Accordingly, the Board listed activities that it considered didnot, individually or collectively, constitute the lending of moneywithin the meaning of Section 5155 and concluded that whenloans are approved and funds disbursed solely at the main officeor branch of the bank, an office at which only preliminary andservicing steps are taken is not a place where "money [is] lent"and therefore is not a branch.

In stating the reasons for their dissent Messrs. Robertsonand Brimmer said that, while they believed it would be in thepublic interest to amend the governing statutes to give nationalbanks and State member banks greater latitude to conduct someof their business through subsidiary corporations, they also be-lieved the problem should have been resolved through legis-lation rather than by changing the Board's interpretation of thelaw. They also stated that to go even further and adopt the po-sition that State member banks may (through these subsidi-

89


aries) establish loan production offices anywhere in the UnitedStates was to take such a long step toward a fundamental changein our banking structure as to call for legislative considerationeven if the legality of that position were unquestionable, whichin their view was not the case.

AUGUST 15, 1968

DECREASE IN RATES ON DISCOUNTS AND ADVANCES BY FEDERALRESERVE BANKS.

Effective August 16, 1968, the Board approved the action taken by theboard of directors of the Federal Reserve Bank of Minneapolis establish-ing a rate of 5V* per cent (a decrease from 5V2 per cent) on discountsand advances to member banks under Sections 13 and 13a of the FederalReserve Act.

Votes for this action: Messrs. Martin, Robert-son, Maisel, Brimmer, and Sherrill. Votes againstthis action: None. Absent and not voting: Messrs.Mitchell and Daane.

Pursuant to the policy established by this action, the Board subse-quently approved the same rate for the remaining Federal Reserve Bankseffective on the following dates:

Richmond August 19, 1968Philadelphia August 23, 1968Cleveland August 23, 1968Chicago August 23, 1968Kansas City August 23, 1968Boston August 27, 1968Dallas August 28, 1968New York August 30, 1968Atlanta August 30, 1968St. Louis August 30, 1968San Francisco August 30, 1968

Effective the same dates the Board approved for the respective FederalReserve Banks a rate of 53A per cent (a decrease from 6 per cent) onadvances to member banks under Section 10(b) of the Federal ReserveAct. In addition, the Board approved decreases at all of the Banks in

90


rates on advances to individuals, partnerships, and corporations otherthan member banks under the last paragraph of Section 13 of the Act.

Market interest rates had fallen considerably on balance inconnection with enactment of fiscal restraint measures in lateJune, as a result of widespread expectations that these measureswould be followed by moderation in the pace of economic ex-pansion and reduction of inflationary pressures, some easingof monetary policy, and smaller Treasury financing require-ments. In short-term debt markets rates on 3-month Treasurybills had declined by more than Vi percentage point to about4.90 per cent by early August but since that time had climbedback up to about 5.15 per cent. Member bank borrowings hadbeen reduced over this interval, but day-to-day rates in the moneymarket, including rates on Federal funds, had remained at highlevels and appeared increasingly to be exerting some upwardpressure on the short-term yield structure.

The decline that had taken place in short-term market interestrates to levels well below Regulation Q ceilings on large-denomi-nation CD's had enabled banks since early summer to replacethe CD's they had lost earlier in the year. Growth in privatedemand deposits and in the money supply had leveled off sinceearly July, but U.S. Government deposits had risen fairlyrapidly. Bank earning assets had grown sharply in recent weeks,as banks had invested heavily in the U.S. Government secu-rities offered in recent Treasury cash financings and had in-creased their acquisitions of State and local government obliga-tions and their loans on securities.

The action to decrease the discount rate by VA percentagepoint moved the rate into closer alignment with the reducedlevel of short-term market interest rates. The Board believedthat such a reduction would tend to moderate the tendencyfor short-term rates to move up from their summer lows andthereby help to forestall developments that might otherwise callfor an enlarged provision of reserves.

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OCTOBER 7, 1968

AMENDMENT TO REGULATION 0, PAYMENT OF INTEREST ONDEPOSITS.

Effective October 15, 1968, Regulation Q was amended with respectto the payment of interest by member banks on certain time depositsof qualifying foreign official depositors.

Votes for this action: Messrs. Robertson, Mitch-ell, Daane, Maisel, and Brimmer. Votes against thisaction: None. Absent and not voting: Messrs. Mar-tin and Sherrill.

Pursuant to the enactment of Public Law 90-505, which be-came effective September 21, 1968, this amendment to Regula-tion Q clarified the authority of member banks to pay interestwithout regard to Regulation Q ceilings on time deposits offoreign governments, of the monetary and financial authoritiesof foreign governments when acting as such, and of internationalfinancial institutions of which the United States is a member.In this respect the amendment, which applied to time depositswith maturities of not more than 2 years, was essentially arestatement and extension of an earlier amendment, effectiveJanuary 18, 1968 (see page 69 of this ANNUAL REPORT) ,

which had been issued in light of the possible expiration of theBoard's authority to regulate interest rates on a discretionarybasis, an authority extended by Public Law 90-505.

The current amendment also modified an earlier position ofthe Board with respect to the payment of interest on depositsin the form of negotiable certificates of deposit (CD's) trans-ferred by a so-called "exempt" organization, as defined above.Formerly, a member bank had been prohibited from paying in-terest at a rate exceeding the generally applicable maximumrate permitted by Regulation 0 at the date of issue if a CDissued to an exempt organization had been transferred to anonexempt holder at any time before maturity. Under theamendment a member bank could pay the contract rate on aCD issued to an exempt organization throughout the time it

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was held by such an organization even though the holder atmaturity was not an exempt organization, provided that (1)in the event of a transfer, the date of transfer, attested to inwriting by the transferor, appeared on the CD, and (2) themaximum rate limitations of Regulation Q in effect at the dateof issuance of the certificate applied during such time as theCD was held by any person other than an exempt organization.

The Board indicated that, in keeping with the intent of theauthorizing legislation, the current amendment was designedto encourage, to a greater extent than before, foreign monetaryauthorities to deposit funds in U.S. commercial banks and thusbe of assistance in solving the nation's balance of paymentsproblem.

NOVEMBER 13, 1968

AMENDMENT TO REGULATION A, ADVANCES AND DISCOUNTS BYFEDERAL RESERVE BANKS.

Effective November 13, 1968, Regulation A was amended with regardto the kinds of assets eligible as collateral for advances, thus bringingthe regulation into conformity with recent legislation.

Votes for this action: Messrs. Robertson, Mitch-ell, Daane, and Maisel. Votes against this action:None. Absent and not voting: Messrs. Martin,Brimmer, and Sherrill.

Public Law 90-505, which became effective September 21,1968, and the conforming changes in Regulation A now adoptedby the Board broadened the definition of obligations eligible ascollateral for advances to member banks to include all "suchobligations as are eligible for purchase under Section 14(b) ofthe (Federal Reserve) Act." Previously, the reference had beento "notes . . . eligible for . . . purchase," which the Boardhad construed as not including obligations generally regarded assecurities.

Obligations thus made eligible as collateral for advances in-cluded "direct obligations of, and obligations fully guaranteed

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as to principal and interest by, the United States or any agencythereof, and municipal obligations, issued in anticipation of thecollection of taxes or in anticipation of the receipt of assuredrevenues, with a maturity from the date of the advance notexceeding six months."

In adopting the amendment, the Board revoked all previousinterpretations with respect to the eligibility of specific obliga-tions included in the above categories.

DECEMBER 16, 1968

REVISION OF FOREIGN CREDIT RESTRAINT PROGRAM GUIDE-LINES.

The Board adopted slightly revised guidelines for restraint of foreigncredits by banks and other financial institutions. It was understood thatthese guidelines would be issued if the administration determined that theover-all U.S. balance of payments program should be continued in 1969in substantially the same form as in 1968.

Votes for this action: Messrs. Robertson, Mitch-ell, Daane, Maisel, Brimmer, and Sherrill. Votesagainst this action: None. Absent and not voting:Mr. Martin.

Adoption of the revised guidelines continued an integralpart of the President's program, announced on January 1, 1968,to strengthen the U.S. balance of payments. In considering theforeign credit restraint program applicable to banks and otherfinancial institutions, the Board concluded that balance of pay-ments prospects for 1969 did not permit any basic change inthe program and that restraint of capital outflows, both publicand private, would continue to be required. Thus, the guide-lines for 1969—announced on December 23, 1968, followingacceptance by the President of a recommendation from theCabinet Committee on the Balance of Payments regarding theover-all balance of payments program—were substantially thesame as those for 1968. However, in view of the importanceof increasing U.S. exports, the Board indicated its intention

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to review the program early in 1969 to determine whether ad-ditional flexibility for financing U.S. exports might be providedin the guidelines.

DECEMBER 17, 1968

INCREASE IN RATES ON DISCOUNTS AND ADVANCES BY FEDERALRESERVE BANKS.

Effective December 18, 1968, the Board approved actions taken bythe boards of directors of the Federal Reserve Banks of Boston, New York,Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, andDallas establishing a rate of 5Vi per cent (an increase from SlA per cent)on discounts and advances to member banks under Sections 13 and 13a ofthe Federal Reserve Act.

Votes for this action: Messrs. Robertson, Mitch-ell, Daane, Maisel, Brimmer, and Sherrill. Votesagainst this action: None. Absent and not voting:Mr. Martin.

Pursuant to the policy established by this action, the Board subse-quently approved the same rate for the Federal Reserve Banks of St.Louis, Kansas City, and San Francisco, effective December 20, 1968.

Effective the same dates the Board approved for the respective FederalReserve Banks a rate of 6 per cent (an increase from 534 per cent) onadvances to member banks under Section 10(b) of the Federal ReserveAct. In addition, the Board approved increases at all of the Banks inrates on advances to individuals, partnerships, and corporations otherthan member banks under the last paragraph of Section 13 of the Act.

Note: The directors of the Federal Reserve Banks of Philadelphia andSt. Louis had initially voted to establish, subject to the approval of theBoard of Governors, a rate of 53A per cent on discounts and advancesto member banks under Sections 13 and 13a of the Federal Reserve Act,with corresponding secondary rates. Upon being advised that the Boardwas not prepared to approve a rate increase of Vi percentage point, theFederal Reserve Banks in question voted to establish a rate of 5Vi percent.

The discount rate increase was approved partly in light ofthe advances in other market interest rates that had occurred overrecent months but also in recognition of the continued excessivestrength of the economic expansion, the accompanying resur-

95


gence of inflationary expectations, and the adverse impact ofrapidly rising domestic prices on the country's balance of pay-ments. In this situation a policy of increased monetary restraintwas deemed appropriate and the discount rate action wastaken, in conjunction with firming actions through open marketoperations, in furtherance of such a policy. Details of the at-tendant economic circumstances and the views of the FederalOpen Market Committee, which voted to foster firmer condi-tions in money and short-term credit markets at its meetingon December 17, 1968, may be found in the entry for thatdate in the Record of Policy Actions of the Federal OpenMarket Committee, beginning on page 219 of this ANNUAL R E -

PORT.

Before approving the increase of VA percentage point in thediscount rate, the Board reviewed the arguments for a Vi pointincrease which had been voted initially by the directors of theFederal Reserve Banks of Philadelphia and St. Louis. TheBoard decided that, together with the firmer stance in openmarket policy, a XA point advance in the discount rate would bea sufficient change under current economic circumstances. TheBoard also recognized that conditions in domestic financialmarkets and in foreign exchange markets were highly sensi-tive and might tend to become unsettled if a larger increase wereannounced at this time.

During the course of the meeting the Board also consideredarguments for a Vi point increase in member bank reserve re-quirements, the action to have an effective date in mid-January1969 rather than immediately for technical reasons. Board mem-bers present were evenly divided in their assessment of thedesirability of such an increase. Those in favor (Messrs. Rob-ertson, Mitchell, and Brimmer) believed that this additionalaction would help reduce the availability of bank reserves with-out: adding as directly to upward pressures on market interestrates as would open market sales of securities designed to absorbthe same amount of reserves, and also that the action, in con-

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junction with the other measures of restraint being adopted,would provide an unmistakable signal of the System's deter-mination to resist inflationary pressures in the economy. Thoseopposed (Messrs. Daane, Maisel, and Sherrill) thought thatconsiderations similar to those underlying the decision againsta Vi point increase in the discount rate militated also against anincrease in reserve requirements—namely, that the other ac-tions agreed upon were adequate in the current economic situ-ation and that such further action would risk undesirably largereactions in financial markets. In their judgment considerationof an increase in reserve requirements should await an assess-ment of the impact of the firming actions being undertakenthrough open market operations and the VA point advance in thediscount rate.

The Board agreed that the effectiveness of the more re-strictive policy undertaken through open market operationsand the increase in the discount rate would be enhanced if themaximum interest rates payable on various categories of memberbank time and savings deposits under the Board's Regulation Qwere maintained at prevailing levels.

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Record of Policy Actions of theFederal Open Market CommitteeThe record of policy actions of the Federal Open Market Com-mittee is presented in the ANNUAL REPORT of the Board of Gov-ernors pursuant to the requirements of Section 10 of the FederalReserve Act. That section provides that the Board shall keep acomplete record of the actions taken by the Board and by theFederal Open Market Committee on all questions of policy relat-ing to open market operations, that it shall record therein thevotes taken in connection with the determination of open marketpolicies and the reasons underlying each such action, and that itshall include in its ANNUAL REPORT to the Congress a full ac-count of such actions.

In the pages that follow, there are entries with respect to thepolicy actions taken at the meetings of the Federal Open MarketCommittee held during the calendar year 1968, including thevotes on the policy decisions made at those meetings as well asa resume of the basis for the decisions. The summary descriptionsof economic and financial conditions are based on the informa-tion that was available to the Committee at the time of the meet-ings, rather than on data as they may have been revised later.

It will be noted from the record of policy actions that in somecases the decisions were by unanimous vote and that in othercases dissents were recorded. The fact that a decision in favorof a general policy was by a large majority, or even that it was byunanimous vote, does not necessarily mean that all members ofthe Committee were equally agreed as to the reasons for theparticular decision or as to the precise operations in the openmarket that were called for to implement the general policy.

Under the Committee's rules relating to the availability ofinformation to the public, the policy record for each meeting is

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released approximately 90 days following the date of the meet-ing and is subsequently published in the Federal Reserve Bulletinas well as in the Board's ANNUAL REPORT.

Policy directives of the Federal Open Market Committee areissued to the Federal Reserve Bank of New York as the Bankselected by the Committee to execute transactions for the SystemOpen Market Account. In the area of domestic open market activ-ities the Federal Reserve Bank of New York operates under twoseparate directives from the Open Market Committee—a contin-uing authority directive and a current economic policy directive.In the foreign currency area it operates under an authorizationfor System foreign currency operations and a foreign currencydirective. These four instruments are shown below in the formin which they were in effect at the beginning of 1968. No revisionswere made in the continuing authority directive during the year;changes in the other instruments are shown in the records for theindividual meetings.

CONTINUING AUTHORITY DIRECTIVE WITH RESPECT TODOMESTIC OPEN MARKET OPERATIONS

(in effect January 1, 1968)

1. The Federal Open Market Committee authorizes and directs theFederal Reserve Bank of New York, to the extent necessary to carry outthe most recent current economic policy directive adopted at a meeting ofthe Committee:

(a) To buy or sell U.S. Government securities in the open market,from or to Government securities dealers and foreign and internationalaccounts maintained at the Federal Reserve Bank of New York, on acash, regular, or deferred delivery basis, for the System Open MarketAccount at market prices and, for such Account, to exchange maturingU.S. Government securities with the Treasury or allow them to maturewithout replacement; provided that the aggregate amount of suchsecurities held in such Account at the close of business on the day of ameeting of the Committee at which action is taken with respect to acurrent economic policy directive shall not be increased or decreased bymore than $2.0 billion during the period commencing with the opening of

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business on the day following such meeting and ending with the close ofbusiness on the day of the next such meeting;

(b) To buy or sell prime bankers' acceptances of the kinds designatedin the Regulation of the Federal Open Market Committee in the openmarket, from or to acceptance dealers and foreign accounts maintainedat the Federal Reserve Bank of New York, on a cash, regular, or deferreddelivery basis, for the account of the Federal Reserve Bank of New Yorkat market discount rates; provided that the aggregate amount of bankers'acceptances held at any one time shall not exceed (1) $125 million or(2) 10 per cent of the total of bankers' acceptances outstanding as shownin the most recent acceptance survey conducted by the Federal ReserveBank of New York, whichever is the lower;

(c) To buy U.S. Government securities, obligations that are directobligations of, or fully guaranteed as to principal and interest by, anyagency of the United States, and prime bankers' acceptances with maturi-ties of 6 months or less at the time of purchase, from nonbank dealers forthe account of the Federal Reserve Bank of New York under agreementsfor repurchase of such securities, obligations, or acceptances in 15 calen-dar days or less, at rates not less than (1) the discount rate of the FederalReserve Bank of New York at the time such agreement is entered into,or (2) the average issuing rate on the most recent issue of 3-monthTreasury bills, whichever is the lower; provided that in the event Govern-ment securities or agency issues covered by any such agreement are notrepurchased by the dealer pursuant to the agreement or a renewal thereof,they shall be sold in the market or transferred to the System Open MarketAccount; and provided further that in the event bankers' acceptancescovered by any such agreement are not repurchased by the seller, theyshall continue to be held by the Federal Reserve Bank or shall be sold inthe open market.

2. The Federal Open Market Committee authorizes and directs theFederal Reserve Bank of New York to purchase directly from the Treasuryfor the account of the Federal Reserve Bank of New York (with discretion,in cases where it seems desirable, to issue participations to one or more Fed-eral Reserve Banks) such amounts of special short-term certificates of in-debtedness as may be necessary from time to time for the temporary accom-modation of the Treasury; provided that the rate charged on such certificatesshall be a rate VA- of 1 per cent below the discount rate of the FederalReserve Bank of New York at the time of such purchases, and providedfurther that the total amount of such certificates held at any one time bythe Federal Reserve Banks shall not exceed $ 1 billion.

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CURRENT ECONOMIC POLICY DIRECTIVE(in effect January 1, 1968)

The information reviewed at this meeting indicates that industrial outputand employment have rebounded following strike settlements in the auto-mobile and other industries, and that prospects have heightened for morerapid expansion of over-all economic activity in the months ahead. Bothindustrial and consumer prices have continued to rise at a substantial rate.The imbalance in U.S. international transactions has worsened, partly be-cause of weakening in the export surplus since midyear. Foreign purchasesof gold have been large following the devaluation of the pound sterling.Bank credit expansion has lessened, with diminished bank buying of Gov-ernment securities and continued moderate loan growth. Most interest rateshave risen further in reaction to the British devaluation and Bank rate in-crease, the rise in Federal Reserve discount rates, and waning expectationsof enactment of the President's fiscal program. In this situation, it is thepolicy of the Federal Open Market Committee to foster financial conditionsconducive to resistance of inflationary pressures and progress toward reason-able equilibrium in the country's balance of payments.

To implement this policy, System open market operations until the nextmeeting of the Committee shall be conducted with a view to moving slightlybeyond the firmer conditions that have developed in money markets partlyas a result of the increase in Federal Reserve discount rates; provided, how-ever, that operations shall be modified as needed to moderate any apparentlysignificant deviations of bank credit from current expectations or any un-usual liquidity pressures.

AUTHORIZATION FOR SYSTEM FOREIGN CURRENCYOPERATIONS

(in effect January 1, 1968)

1. The Federal Open Market Committee authorizes and directs theFederal Reserve Bank of New York, for System Open Market Account, tothe extent necessary to carry out the Committee's foreign currency directive:

A. To purchase and sell the following foreign currencies in the formof cable transfers through spot or forward transactions on the open marketat home and abroad, including transactions with the U.S. Stabilization Fundestablished by Section 10 of the Gold Reserve Act of 1934, with foreignmonetary authorities, and with the Bank for International Settlements:

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Austrian schillingsBelgian francsCanadian dollarsDanish kronerPounds sterlingFrench francsGerman marksItalian lireJapanese yenMexican pesosNetherlands guildersNorwegian kronerSwedish kronorSwiss francs

B. To hold foreign currencies listed in paragraph A above, up to thefollowing limits:

(1) Currencies held spot or purchased forward, up to the amountsnecessary to fulfill outstanding forward commitments;

(2) Additional currencies held spot or purchased forward, up tothe amount necessary for System operations to exert a market influencebut not exceeding $150 million equivalent; and

(3) Sterling purchased on a covered or guaranteed basis in termsof the dollar, under agreement with the Bank of England, up to $200 mil-lion equivalent.

C. To have outstanding forward commitments undertaken under para-graph A above to deliver foreign currencies, up to the following limits:

(1) Commitments to deliver foreign currencies to the StabilizationFund, up to $350 million equivalent;

(2) Commitments to deliver Italian lire, under special arrangementswith the Bank of Italy, up to $500 million equivalent; and

(3) Other forward commitments to deliver foreign currencies, upto $550 million equivalent.

D. To draw foreign currencies and to permit foreign banks to drawdollars under the reciprocal currency arrangements listed in paragraph 2below, provided that drawings by either party to any such arrangementshall be fully liquidated within 12 months after any amount outstandingat that time was first drawn, unless the Committee, because of exceptionalcircumstances, specifically authorizes a delay.

2. The Federal Open Market Committee directs the Federal ReserveBank of New York to maintain reciprocal currency arrangements ("swap"

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arrangements) for System Open Market Account for periods up to a maxi-mum of 12 months with the following foreign banks, which are amongthose designated by the Board of Governors of the Federal Reserve Systemunder Section 214.5 of Regulation N, Relations with Foreign Banks andBankers, and with the approval of the Committee to renew such arrange-ments on maturity:

Amount ofForeign bank arr=ent

dollars equivalent)

Austrian National Bank 100National Bank of Belgium 225Bank of Canada 750National Bank of Denmark 100Bank of England 1,500Bank of France 100German Federal Bank 750Bank of Italy 750Bank of Japan 750Bank of Mexico 130Netherlands Bank 225Bank of Norway 100Bank of Sweden 200Swiss National Bank 400Bank for International Settlements:

System drawings in Swiss francs 400System drawings in authorized European

currencies other than Swiss francs 600

3. All transactions in foreign currencies undertaken under paragraph1(A) above shall be at prevailing market rates and no attempt shall bemade to establish rates that appear to be out of line with underlying marketforces. Insofar as is practicable, foreign currencies shall be purchasedthrough spot transactions when rates for those currencies are at or belowpar and sold through spot transactions when such rates are at or above par,except when transactions at other rates (i) are specifically authorized bythe Committee, (ii) are necessary to acquire currencies to meet Systemcommitments, or (iii)are necessary to acquire currencies for the StabilizationFund, provided that these currencies are resold forward to the StabilizationFund at the same rate.

4. It shall be the practice to arrange with foreign central banks for thecoordination of foreign currency transactions. In making operating arrange-

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ments with foreign central banks on System holdings of foreign currencies,the Federal Reserve Bank of New York shall not commit itself to maintainany specific balance, unless authorized by the Federal Open Market Com-mittee. Any agreements or understandings concerning the administrationof the accounts maintained by the Federal Reserve Bank of New Yorkwith the foreign banks designated by the Board of Governors under Section214.5 of Regulation N shall be referred for review and approval to theCommittee.

5. Foreign currency holdings shall be invested insofar as practicable,considering needs for minimum working balances. Such investments shallbe in accordance with Section 14(e) of the Federal Reserve Act.

6. A Subcommittee consisting of the Chairman and the Vice Chairmanof the Committee and the Vice Chairman of the Board of Governors (orin the absence of the Chairman or of the Vice Chairman of the Board ofGovernors the members of the Board designated by the Chairman as alter-nates, and in the absence of the Vice Chairman of the Committee his alter-nate) is authorized to act on behalf of the Committee when it is necessaryto enable the Federal Reserve Bank of New York to engage in foreigncurrency operations before the Committee can be consulted. All actionstaken by the Subcommittee under this paragraph shall be reported promptlyto the Committee.

7. The Chairman (and in his absence the Vice Chairman of the Com-mittee, and in the absence of both, the Vice Chairman of the Board ofGovernors) is authorized:

A. With the approval of the Committee, to enter into any neededagreement or understanding with the Secretary of the Treasury about thedivision of responsibility for foreign currency operations between the Systemand the Secretary;

B. To keep the Secretary of the Treasury fully advised concerningSystem foreign currency operations, and to consult with the Secretary onsuch policy matters as may relate to the Secretary's responsibilities; and

C. From time to time, to transmit appropriate reports and informa-tion to the National Advisory Council on International Monetary andFinancial Policies.

8. Staff officers of the Committee are authorized to transmit pertinentinformation on System foreign currency operations to appropriate officialsof the Treasury Department.

9. All Federal Reserve Banks shall participate in the foreign currencyoperations for System Account in accordance with paragraph 3 G (1) ofthe Board of Governors' Statement of Procedure with Respect to ForeignRelationships of Federal Reserve Banks dated January 1, 1944.

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10. The Special Manager of the System Open Market Account for for-eign currency operations shall keep the Committee informed on conditionsin foreign exchange markets and on transactions he has made and shallrender such reports as the Committee may specify.

FOREIGN CURRENCY DIRECTIVE(in effect January 1, 1968)

1, The basic purposes of System operations in foreign currencies are:A. To help safeguard the value of the dollar in international exchange

markets;B. To aid in making the system of international payments more ef-

ficient;C. To further monetary cooperation with central banks of other coun-

tries having convertible currencies, with the International Monetary Fund,and with other international payments institutions;

D. To help insure that market movements in exchange rates, withinthe limits stated in the International Monetary Fund Agreement or estab-lished by central bank practices, reflect the interaction of underlying eco-nomic forces and thus serve as efficient guides to current financial decisions,private and public; and

E. To facilitate growth in international liquidity in accordance withthe needs of an expanding world economy.

2. Unless otherwise expressly authorized by the Federal Open MarketCommittee, System operations in foreign currencies shall be undertakenonly when necessary:

A. To cushion or moderate fluctuations in the flows of internationalpayments, if such fluctuations (1) are deemed to reflect transitional marketunsettlement or other temporary forces and therefore are expected to bereversed in the foreseeable future; and (2) are deemed to be disequilibratingor otherwise to have potentially destabilizing effects on U.S. or foreign of-ficial reserves or on exchange markets, for example, by occasioning marketanxieties, undesirable speculative activity, or excessive leads and lags ininternational payments;

B. To temper and smooth out abrupt changes in spot exchange rates,and to moderate forward premiums and discounts judged to be disequilibrat-ing. Whenever supply or demand persists in influencing exchange rates inone direction, System transactions should be modified or curtailed unlessupon review and reassessment of the situation the Committee directs other-wise;

C. To aid in avoiding disorderly conditions in exchange markets. Spe-

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cial factors that might make for exchange market instabilities include (1)responses to short-run increases in international political tension, (2) dif-ferences in phasing of international economic activity that give rise tounusually large interest rate differentials between major markets, and (3)market rumors of a character likely to stimulate speculative transactions.Whenever exchange market instability threatens to produce disorderly con-ditions, System transactions may be undertaken if the Special Managerreaches a judgment that they may help to reestablish supply and demandbalance at a level more consistent with the prevailing flow of underlyingpayments. In such cases, the Special Manager shall consult as soon as prac-ticable with the Committee or, in an emergency, with the members of theSubcommittee designated for that purpose in paragraph 6 of the Authoriza-tion for System foreign currency operations; and

D. To adjust System balances within the limits established in theAuthorization for System foreign currency operations in light of probablefuture needs for currencies.

3. System drawings under the swap arrangements are appropriate whennecessary to obtain foreign currencies for the purposes stated in paragraph 2above.

4. Unless otherwise expressly authorized by the Committee, transactionsin forward exchange, either outright or in conjunction with spot transactions,may be undertaken only (i) to prevent forward premiums or discounts fromgiving rise to disequilibrating movements of short-term funds; (ii) to mini-mize speculative disturbances; (iii) to supplement existing market suppliesof forward cover, directly or indirectly, as a means of encouraging theretention or accumulation of dollar holdings by private foreign holders; (iv)to allow greater flexibility in covering System or Treasury commitments,including commitments under swap arrangements; (v) to facilitate the useof one currency for the settlement of System or Treasury commitments de-nominated in other currencies; and (vi) to provide cover for System hold-ings of foreign currencies.

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MEETING HELD ON JANUARY 9 f 1968

1. Authority to effect transactions in System Account.

Economic activity was expanding vigorously as 1967 drew toa close, and prospects were for further rapid growth in early1968. Prices were rising at a substantial rate; and with demandsstrong and costs increasing, inflationary pressures were expectedto persist in the period ahead.

Industrial production was tentatively estimated to have in-creased sharply further in December to a level above the peak ofa year earlier. Nonfarm employment also continued to expandrapidly; in December nearly 1 million more persons were em-ployed than in August, before the strike in the automobile indus-try. The unemployment rate, which in November had declinedto 3.9 per cent, fell in December to 3.7 per cent, the same as ayear earlier. Housing starts rose further in November, but partof the increase may have reflected an acceleration of schedulesby some builders, in reaction to increasing uncertainties aboutfuture mortgage market conditions.

Average prices of industrial commodities continued to rise inDecember, according to preliminary estimates. Since midyear,such prices had advanced at an annual rate of about 3 per cent.Moreover, wholesale prices of farm products, which had beendeclining earlier, turned up in December—raising the possibilitythat advances in retail prices of food might resume. The con-sumer price index increased considerably further in Novemberdespite a slight decline in food prices.

Real gross national product in 1967 as a whole was estimatedto have been about 2.5 per cent greater than in 1966. Growthwas at a considerably higher rate in the second half of the year,however, and further acceleration appeared likely in early 1968.Recent surveys indicating that consumers were cautious in theirattitudes and buying intentions suggested that personal saving

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would continue in the first quarter at the unusually high rate pre-vailing throughout 1967. Nevertheless, in view of the prospectfor a large rise in incomes, a substantial increase in consumerexpenditures was anticipated. Business spending on plant andequipment was expected to expand sharply, and the rate of in-ventory accumulation—which now appeared to have advancedmore in the fourth quarter than had been estimated earlier—wasexpected to continue rising. Some further increase in outlays forresidential construction appeared probable, in light of the upwardcourse of housing starts through November and advances in con-struction costs. On the other hand, defense outlays—growth inwhich had slackened in the second half of 1967—were expectedto level off.

The U.S. balance of payments worsened sharply in the fourthquarter of 1967. On the "liquidity" basis of calculation the deficitincreased markedly from the third quarter, and on the "officialreserve transactions" basis the balance shifted to a large deficitfrom a surplus in the preceding quarter.1 For the year as a whole,the deficit on the liquidity basis was estimated at about $3.7billion, compared with $1.4 billion in 1966; and the officialsettlements balance was in deficit by an estimated $3.4 billion,compared with a small surplus in 1966. Although detailed infor-mation on fourth-quarter payments was not yet available, itappeared that much of the deterioration was attributable to areduction in the surplus on merchandise trade; in the October-November period exports declined and imports rose from theirthird-quarter rates. Special transactions—including the liquida-

1 The balance on the "liquidity" basis is measured by changes in U.S. reservesand in liquid U.S. liabilities to all foreigners. The balance on the "official reservetransactions" basis (sometimes referred to as the "official settlements" basis) ismeasured by changes in U.S. reserves and in liquid and certain nonliquidliabilities to foreign official agencies, mainly monetary authorities. The latterbalance differs from the former by (1) treating changes in liquid U.S. liabilitiesto foreigners other than official agencies as ordinary capital flows, and (2)treating changes in certain nonliquid liabilities to foreign monetary authoritiesas financing items rather than ordinary capital flows.

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tion of official British holdings of U.S. securities—also con-tributed to the deficit on both bases in the fourth quarter. For1967 as a whole, the liquidity deficit was substantially reducedby the net effect of special transactions.

On January 1, 1968, the President announced a new programwhich was, in his words, "designed to bring our balance of pay-ments to—or close to—equilibrium in the year ahead." Afterstressing the need for a tax increase and other actions to "helpstem the inflationary pressures which now threaten our economicprosperity and our trade surplus," the President outlined elementsof a program through which an improvement of about $3 billionin the U.S. payments balance would be sought in 1968. The mostimportant of these were a mandatory reduction in the flow ofU.S. funds into direct investments abroad, particularly to con-tinental Western Europe, and increased restrictions, under theFederal Reserve's foreign credit restraint program, on lendingabroad by U.S. financial institutions. The program also includedreduction of expenditures by American citizens for travel outsidethe Western Hemisphere, curtailment of Government expendi-tures overseas, and a variety of measures to increase U.S. exportsand the trade surplus.

Gold holdings of the U.S. Treasury were reduced in Decemberby the record monthly amount of about $900 million, mainly asa result of settlement of the U.S. share of sales made by the goldpool in London in November and December. Following thePresident's announcement of the new balance of payments pro-gram, foreign purchases of gold slackened abruptly. In foreignexchange markets the dollar strengthened against all continentalEuropean currencies, and the position of sterling improvedsomewhat.

System open market operations since the preceding meetingof the Committee had been directed at fostering slightly firmerconditions in the money market. An announcement by the Boardof Governors on December 27 of an increase in reserve require-

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ments against demand deposits, effective in mid-January, rein-forced the belief of market participants that the System wasmoving toward greater monetary restraint.2 The Federal fundsrate, which earlier had fluctuated around the AV2 per cent dis-count rate established on November 20, increased somewhat toa range around 45/s per cent. Average free reserves of memberbanks were estimated to have declined to about $80 million inthe three statement weeks ending January 3, from slightly over$200 million in the first 2 weeks of December.

Most short-term interest rates rose somewhat further in thelatter half of December as money market conditions firmed, butlonger-term yields remained stable or edged down. Various fac-tors contributed to an improvement in the atmosphere in capitalmarkets in this period; these included a seasonal lull in new pri-vate security issues, the absence of Treasury financing activity,and an apparent shift in investor expectations toward the viewthat longer-term rates were not likely to rise much further.

Both short- and long-term market interest rates declined fol-lowing the announcement on January 1 of the new balance ofpayments program—which many investors interpreted as reduc-ing the likelihood of greater monetary restraint in the near term—and the downtrend was reinforced by press reports suggestingthat prospects for peace negotiations in Vietnam had improved.As a result, yields on new corporate bonds and on Treasury notes,bonds, and longer-term bills were now considerably below theirlevels at the time of the Committee's preceding meeting, andyields on municipal bonds were slightly lower. Most short-termyields, however, were higher on balance; the market rate on 3-month Treasury bills, at 5.02 per cent on the day before thismeeting, was 12 basis points above its level 4 weeks earlier.

Interest rates on new-home mortgages rose further in Novem-

2 Reserve requirements against demand deposits in excess of $5 million ateach member bank were increased from 16Vi to 17 per cent for reserve citybanks, effective with the reserve computation period beginning Jan. 11, 1968;and from 12 to HV2 per cent for other member banks, effective with thecomputation period beginning Jan. 18, 1968.

I l l


ber and apparently remained under upward pressure in Decem-ber. Net inflows of funds to nonbank depositary institutionscontinued to moderate in late 1967, although the available infor-mation did not suggest that depositary institutions in generalwere facing substantial drains around the year-end interest- anddividend-crediting period. With inflows slackening, and with highyields on marketable bonds offering an attractive alternativeform of investment, lenders in the aggregate were expanding theirnew mortgage commitments at a slower pace than they hadearlier.

Growth in time and savings deposits at commercial banks alsohad continued to moderate recently. Such deposits expanded atan annual rate of 8.5 per cent in December—compared withrates of about 12 per cent in November and about 16 per centover the year 1967. The moderation of growth was a result ofsubstantial run-offs of large-denomination CD's and further slow-ing of the rise in other time and savings deposits. Private demanddeposits declined slightly on average in December, and the moneysupply increased relatively little. With Government deposits con-tracting, the "bank credit proxy"—total member bank deposits 3

—was about unchanged. Banks reduced their borrowings ofEuro-dollars through foreign branches in December, with muchof the decline apparently seasonal in nature.

Over the year 1967 the money supply and the bank credit

3 In recent years the Committee had been making use of daily-averagestatistics on total member bank deposits as a "bank credit proxy"—that is, asthe best available measure, although indirect, of developing movements in bankcredit. Because they can be compiled on a daily basis with a very short lag, thedeposit figures are more nearly current than available bank loan and investmentdata. Moreover, average deposit figures for a calendar month are much lesssubject to the influence of single-date fluctuations than are the available month-end data on total bank credit, which represent estimates of loans and invest-ments at all commercial banks on one day—the last Wednesday—of eachmonth. For statistics on daily-average member bank deposits, see the FederalReserve BULLETIN for October 1966, p. 1478, and subsequent months. Somebrief comments on the relation between the member bank deposit series and thebank credit statistics are given in the note on p. 1460 of the October 1966BULLETIN.

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proxy increased by about 6.5 and 11.5 per cent, respectively. Asmeasured by end-of-month data on loans and investments, bankcredit was estimated to have increased by about 11 per cent in1967.

Business loans at commercial banks, which had been rising ata relatively slow pace in recent months, expanded sharply inDecember. Part of the acceleration reflected special factors, butpart appeared to be related to the increasing pace of economicactivity and to the smaller volume of capital market financing.With growth in their deposits limited, banks accommodated thelarger demand for loans by selling a substantial volume of Gov-ernment securities. Banks also reduced the rate at which theyacquired State and local government issues.

On the day of this meeting the Treasury was offering $2.5billion of tax-anticipation bills, for payment on January 15.Banks were expected to be the initial purchasers of practicallyall of the offering, for which they were permitted to make fullpayment by crediting Treasury tax and loan accounts. Largelyas a consequence of such purchases, bank credit expansion wasexpected to resume in January; the proxy series was projected torise at an annual rate in the range of 6 to 10 per cent if prevailingmoney market conditions were maintained. It appeared likelythat growth in business loans would be slower than in Decemberbut still fairly rapid, and there was some prospect that in meetingloan demands banks would continue to limit their takings ofmunicipal securities. Growth in time and savings deposits wasexpected to continue moderating in light of the high yields avail-able to investors on competing market instruments. Little or noincrease was anticipated in private demand deposits and themoney supply, but Government deposits were projected to risesubstantially.

Concern was expressed in the Committee's discussion aboutthe inflationary environment and outlook, on both domesticgrounds and in light of the recent contraction in the surplus on

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U.S. merchandise trade. The new balance of payments programwas expected to result in a substantial reduction in the over-alldeficit in 1968. It was observed, however, that the various ele-ments of the program directed at improving the balance onspecific types of international flows did not obviate the funda-mental need for slowing the rise in domestic prices.

It was noted in the discussion that since mid-November theSystem had employed all three of the major instruments of mone-tary policy—discount rates, open market operations, and reserverequirements—in shifting toward a posture of somewhat greaterrestraint, that the effects of these policy actions were still unfold-ing, and that growth in bank credit and the money supply hadslowed appreciably in recent months. It also was noted that forth-coming Presidential messages and further congressional hearingson an income tax surcharge would soon be providing new infor-mation on planned Federal expenditures and the prospects for atax increase. Accordingly, the Committee decided to make nofurther change in policy at present. Reinforcing this decision wasthe possibility that higher interest rates resulting from a furtherfirming of monetary policy at this time might have undesiredeffects on flows of funds to financial intermediaries.

The Committee agreed that it would be appropriate to main-tain the somewhat firmer conditions in the money market thathad developed as a result of recent System open market opera-tions and the announced action with respect to reserve require-ments. Some members noted in this connection that a slightlylower average level of marginal reserves might be required afterthe effective dates of the increase in reserve requirements in orderto maintain prevailing money market conditions in other respects.The Committee also agreed that operations should be modifiedas needed to moderate any apparently significant deviations ofbank credit from current expectations. The following currenteconomic policy directive was issued to the Federal Reserve Bankof New York:

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The information reviewed at this meeting indicates that over-alleconomic activity has been expanding vigorously, with both industrialand consumer prices continuing to rise at a substantial rate, and thatprospects are for further rapid growth and persisting inflationary pres-sures in the period ahead. The imbalance in U.S. international trans-actions worsened further in late 1967, but the new program announcedby the President should result in a considerable reduction in the deficitthis year. Following announcement of the program, foreign purchases ofgold slackened abruptly and the dollar strengthened in foreign exchangemarkets. Long-term bond yields have declined in recent weeks but someshort-term interest rates have risen further. Bank credit has changed littleon balance recently as banks have disposed of Government securities toaccommodate strengthened loan demands. Growth in the money supplyhas slackened and flows into time and savings accounts at bank and non-bank financial intermediaries have continued to moderate. In this situ-ation, it is the policy of the Federal Open Market Committee to fosterfinancial conditions conducive to resistance of inflationary pressures andprogress toward reasonable equilibrium in the country's balance ofpayments.

To implement this policy, System open market operations until thenext meeting of the Committee shall be conducted with a view to main-taining the somewhat firmer conditions that have developed in the moneymarket in recent weeks, partly as a result of the increase in reserverequirements announced to become effective in mid-January; provided,however, that operations shall be modified as needed to moderate anyapparently significant deviations of bank credit from current expectations.

Votes for this action: Messrs. Martin, Hayes,Brimmer, Daane, Francis, Maisel, Mitchell, Robert-son, Scanlon, Sherrill, Swan, and Wayne. Votesagainst this action: None.

2. Ratification of amendment to authorization for System foreigncurrency operations.

At this meeting the Committee ratified the action taken bymembers on December 14, 1967, amending paragraph 2 of theauthorization for System foreign currency operations to change(1) the size of the swap arrangement with the Bank for Inter-national Settlements providing for System drawings in Swiss

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francs, and (2) the size of the arrangement with the SwissNational Bank, each from $250 million to $400 million equiva-lent, effective immediately. As indicated in the policy record forthe meeting held on December 12, 1967, these increases supple-mented the enlargements of the System's swap network that hadbeen approved on November 27 and November 30.

Votes for ratification of this action: Messrs.Hayes, Brimmer, Francis, Maisel, Mitchell, Scanlon,Sherrill, Swan, and Wayne. Votes against ratificationof this action: None.

Absent at this point in meeting and not voting:Messrs. Martin, Robertson, and Daane.

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MEETING HELD ON FEBRUARY 6, 1968

Authority to effect transactions in System Account.

According to reports at this meeting, prospects were for con-tinued rapid growth in over-all economic activity and for per-sistent inflationary pressures in the period ahead. Preliminary es-timates of the Department of Commerce indicated that real GNPhad increased at an annual rate of 4.4 per cent in the fourthquarter of 1967, the same as in the preceding quarter, and thataverage prices, as measured by the GNP "deflator," had advancedconsiderably. In his January budget message the President hadagain proposed a 10 per cent surcharge on corporate and personalincome taxes, now to be effective on January 1 and April 1,1968, respectively. The budget estimates indicated that even ifthe tax surcharge were enacted as proposed the Governmentwould incur a sizable deficit in the calendar year 1968.

Average prices of industrial commodities continued to increaseat a substantial rate in January, according to preliminary esti-mates. Prices of farm products, which had turned up sharply inDecember, rose somewhat further. The consumer price indexagain advanced considerably in December, partly because retailprices of food rose after having declined moderately for 3 months.

Growth in real GNP was expected to accelerate in the firstquarter of 1968. Prospects favored substantial increases in con-sumer incomes and spending, a sharp rise in business outlays onplant and equipment, a small increase in residential constructionoutlays, and—contrary to earlier expectations—some furthergrowth in defense expenditures. The rate of business inventory ac-cumulation, which now appeared to have increased considerablyin the fourth quarter of 1967, was expected to rise only mod-erately further in the first quarter of 1968.

The worsening of the U.S. payments balance in the fourthquarter, according to newly available information, was due in

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large part to a marked decline in the surplus on merchandisetrade. With imports rising sharply and exports edging down, thetrade surplus in the fourth quarter was at a rate only about one-third that in the two preceding quarters and the lowest since thefourth quarter of 1959.

The gold stock of the U.S. Treasury was reduced by $100 mil-lion in early February, mainly to cover the U.S. share of salesmade by the London gold pool in January. Although the over-all atmosphere in foreign exchange markets had tended to im-prove in recent weeks, the Canadian dollar had come underheavy pressure. On January 22 the Bank of Canada raised itsdiscount rate for the third time in 5 months, bringing the rateto 7 per cent. Interest rates in the Euro-dollar market had de-clined further from the unusually high levels they had reachedin late November and December, following the devaluation ofsterling.

System open market operations since the preceding meetingof the Committee had been directed at maintaining the somewhatfirmer conditions in the money market that had developed earlier,although operations were complicated by large changes in theexcess reserves of country banks as reserves first flowed out ofmoney centers and then back again. In adapting operations tothese changes in reserve distribution, the net reserve position ofmember banks was permitted to fluctuate over an unusually widerange—from free reserves of $405 million in the statement weekending January 10 to net borrowed reserves of $70 million in thefollowing week.

The Federal funds rate continued to fluctuate around 4% percent, and late in the period interest rates on loans by moneycenter banks to Government securities dealers edged up to a rangeof 5 to 5lA per cent. On the other hand, interest rates on short-term market securities—including Treasury bills, large-denomi-nation CD's, bankers' acceptances, and commercial and financecompany paper—declined on balance during the period, in part

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perhaps because pressures in credit markets proved to be lessintense than many participants had expected. Offering rates onlarge-denomination CD's maturing in less than 6 months moveddown from the 5Vi per cent ceiling established under Regula-tion Q; around the turn of the year banks had been offering theceiling rate on CD's of all maturities. Although the market rateon 3-month Treasury bills had been rising recently, its level onthe day before this meeting—4.91 per cent—was about 10 basispoints below that of 4 weeks earlier.

Conditions in markets for longer-term securities had been gen-erally buoyant in recent weeks, despite deferral of congressionalaction on the President's proposed income tax surcharge and newtensions in the Far East. Yields on long-term Treasury and corpo-rate bonds fluctuated irregularly below the peaks they had reachedin late 1967, and yields on State and local government issues de-clined. On January 31 the Treasury announced that it wouldoffer a new 7-year, 5% per cent note in exchange for Treasurynotes and bonds maturing in February, August, and November1968, with settlement on February 15. Initial market reactionsto the offering were favorable. The Treasury also announcedthat $4 billion of a 15-month note would be offered for cash sub-scription later in the month.

In mortgage markets yields rose further in December—reat-taining the highs they had reached in November 1966—andgrowth in mortgage commitments outstanding continued to mod-erate. Preliminary data suggested that net inflows of funds tononbank depositary institutions slackened further in Decemberand January, but that withdrawals of savings around the year-end interest- and dividend-crediting period were not as large asmany in the industry had feared.

Commercial bank credit expanded at a relatively fast pace inJanuary after slowing markedly in late 1967. Contributing to theexpansion were rapid growth in business loans early in the monthand bank acquisitions of tax-anticipation bills sold by the Treas-ury at midmonth. The bank credit proxy—daily-average mem-

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ber bank deposits—rose from December to January at an annualrate of about 9 per cent, near the upper end of the range that hadbeen projected earlier. Private demand deposits and the moneysupply increased sharply before turning down after mid-January;on the average the money supply rose at an annual rate of 8 percent, in contrast to the expectation of little or no change. How-ever, Government deposits rose less than had been anticipated,and total time and savings deposits—instead of growing relativelyslowly on the average—declined slightly. Despite the reductionsin offering rates on large-denomination CD's of shorter maturity,the volume of CD's outstanding increased over the course ofJanuary by nearly as much as it had declined in December.

Business loans at banks were expected to grow moderately inFebruary—at a rate that was below the rapid pace of Decemberand early January but that, as a result of enlarged business needsfor inventory financing, was above the slow rate of the precedingautumn. Mainly because of Treasury financing operations, how-ever, it appeared likely that total bank credit would continue toexpand at roughly the January pace; growth in the bank creditproxy was projected at an annual rate in the 7 to 10 per centrange if prevailing money market conditions were maintained. Itwas expected that the money supply would change little, andmight possibly decline somewhat, but that growth in time andsavings deposits would resume. A rather sharp expansion was an-ticipated in Government deposits as a result of the Treasury'sforthcoming cash financing.

Considerable concern was expressed in the course of the Com-mittee's discussion about recent and prospective inflationary pres-sures in the domestic economy and about the sharp decline inthe nation's foreign trade surplus. Against this background, anumber of members indicated that they had been disturbed byvarious financial developments in January—including the un-expectedly sharp growth in the money supply and the general de-cline in short-term interest rates other than day-to-day moneymarket rates—which suggested that monetary conditions had be-come less restrictive. There also was widespread sentiment to the

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effect that the growth in bank credit projected for February onthe assumption of unchanged money market conditions was largerthan desirable in the current environment. At the same time, itwas recognized that the forthcoming Treasury financing opera-tions imposed an important constraint on monetary policy atpresent.

The Committee concluded that it would be desirable to main-tain firm money market conditions at this time and to seek firmerconditions, to the extent permitted by Treasury financing, if bankcredit appeared to be expanding as rapidly as projected. The fol-lowing current economic policy directive was issued to the Fed-eral Reserve Bank of New York:

The information reviewed at this meeting indicates that over-all economicactivity has been expanding rapidly, with both industrial and consumerprices rising at a substantial rate, and that prospects are for continuingrapid growth and persisting inflationary pressures in the period ahead.The imbalance in U.S. international transactions worsened further in late1967, primarily because of a sharp reduction in the surplus on merchandisetrade. Although day-to-day money market rates have remained firm, rateson other short-term instruments have declined recently; meanwhile, long-term bond yields have fluctuated irregularly below the peaks reached latelast year. Growth in bank credit resumed in January, reflecting both loanexpansion around the year-end and Treasury financing. The money supplyexpanded sharply following earlier slackening, but flows into time andsavings accounts at bank and nonbank financial intermediaries have con-tinued to moderate. In this situation, it is the policy of the Federal OpenMarket Committee to foster financial conditions conducive to resistanceof inflationary pressures and progress toward reasonable equilibrium in thecountry's balance of payments.

To implement this policy, while taking account of Treasury financingactivity, System open market operations until the next meeting of theCommittee shall be conducted with a view to maintaining firm conditionsin the money market, and operations shall be modified to the extentpermitted by Treasury financing if bank credit appears to be expandingas rapidly as is currently projected.

Votes for this action: Messrs. Martin, Hayes, Brim-mer, Daane, Francis, Maisel, Mitchell, Robertson,Scanlon, Sherrill, Swan, and Wayne. Votes against thisaction: None.

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MEETING HELD ON MARCH 5, 1968


Reports at this meeting indicated that over-all economic activitywas expanding rapidly and that prices were rising at a substantialrate. The outlook was for faster expansion in real GNP in thefirst two quarters of 1968 than in the latter half of 1967, and forpersisting inflationary pressures.

Consumers were expected to provide the major stimulus toeconomic activity in the current half-year. It appeared likelythat disposable incomes would advance rapidly—particularly ifa tax increase were not enacted—as a result of continuing risesin employment and wage rates and of higher social security bene-fits. Thus, even if personal saving remained at the unusually highrate of 1967, marked increases in consumer spending were inprospect.

In addition, it was anticipated that business fixed investmentwould rise sharply in the first quarter and moderately in thesecond and that defense spending would increase at a faster ratethan previously estimated. On the other hand, in light of condi-tions in mortgage markets little or no further increase was fore-seen in residential construction outlays. Growth in the rate ofbusiness inventory accumulation, which had contributed import-antly to the expansion in the latter half of 1967, was expected toslow in the first quarter and taper off in the second.

Retail sales rose substantially in the first 2 months of 1968,according to incomplete information. Industrial production,however, declined somewhat in January and was expected tochange little in February. The unemployment rate moved downin January for the third successive month—to 3.5 per cent, from3.7 per cent in December—although growth in nonfarm employ-ment slowed from its earlier rapid pace, apparently in large part

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because of the effect of bad weather on employment in the con-struction industry.

Average wholesale prices of both industrial commodities andfarm products rose considerably further in February, accordingto preliminary estimates. Consumer prices continued to advanceat a substantial rate in January and were 3.4 per cent higherthan a year earlier. The recent pattern of settlements in wagenegotiations and the increase on February 1 in Federal minimumwage rates suggested that unit labor costs would remain underupward pressure.

Both exports and imports of the United States rose sharply inJanuary, but the surplus on merchandise trade fell somewhatbelow the markedly reduced fourth-quarter 1967 rate. With re-spect to the capital account, outstanding U.S. bank credit toforeigners declined more than seasonally and direct investmentoutflows apparently were reduced by the mandatory restrictionsunder the President's new balance of payments program. On bal-ance, the deficit in U.S. international payments on the liquiditybasis of calculation remained sizable in January, and also in thefirst 3 weeks of February according to tentative figures. Thedeficit on the official reserve transactions basis was considerablysmaller, primarily as a result of large Euro-dollar borrowings byU.S. banks through foreign branches.

Heavy speculative demands for gold reemerged in the Londonmarket at the end of February and in early March, when fearsof a change in U.S. gold policy became widespread. In foreignexchange markets, the generally improved atmosphere that haddeveloped in January persisted for most of February. Late in themonth, however, sterling and the Canadian dollar again cameunder pressure.

The Treasury completed two major financing operations inFebruary. In a financing conducted during the first half of themonth, $3.8 billion of publicly held securities maturing in Feb-ruary, August, and November 1968 were exchanged for new 7-

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year, 53A per cent notes. Also, the Treasury sold about $4.1billion of new 15-month, 55/s per cent notes to the public forcash payment on February 21; commercial banks, which werepermitted to make payment in full for these notes through creditsto Treasury tax-and-loan accounts, initially subscribed for thebulk of the issue. Government securities dealers made goodprogress in distributing the 7-year notes they had acquired, whilebank selling of the new 15-month issue appeared to be relativelylight and was readily absorbed by the market. In February theTreasury also announced that it was resuming the $100 millionaddition to each weekly offering of 3-month bills.

Growth in bank credit and the money supply had moderatedon balance since November 1967, when the System had begunto shift monetary policy toward a posture of somewhat greaterrestraint. In the 3 months through February the bank creditproxy—daily-average member bank deposits—had expanded atan annual rate of 6 per cent, compared with a rate of nearly 11.5per cent over the preceding 7 months; and the money supply hadgrown at an annual rate of 4 per cent, about half that of theearlier period. For February, however, the bank credit proxywas estimated to have increased at an annual rate of 10 per cent.Both loans and investments of banks declined in the first part ofFebruary, but bank credit expanded sharply later in the monthas a result of bank acquisitions of the new 15-month notes offeredby the Treasury. The February advance in bank credit was at theupper end of the range projected at the time of the Committee'sprevious meeting and slightly faster than the pace in January,when growth was also stimulated by a large Treasury cash financ-ing. Private demand deposits and the money supply, which hadnot been expected to grow in February, increased somewhat butsubstantially less than in January.

Time and savings deposits of commercial banks, after declin-ing slightly in January, expanded in February at a rate belowthat of the summer and early fall of 1967. Most of the rise was

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in consumer-type deposits; with business loan demands not par-ticularly strong, banks were not aggressive in seeking to expandtheir outstanding large-denomination CD's. Some banks werenow offering the SVi per cent ceiling rate on certificates withmaturities as short as 4 months—in contrast to a 6-month mini-mum 4 weeks earlier—but rates on shorter-maturity CD's re-mained below the ceiling.

With no major Treasury financings in prospect for March,growth in the bank credit proxy was projected to moderate inthat month to an annual rate in the range of 5 to 7 per cent,assuming no change in prevailing money market conditions. Itwas thought likely that somewhat firmer money market condi-tions would have relatively little effect on bank credit expansionin March. Projections for April suggested some further modera-tion in bank credit growth if money market conditions were un-changed and a quite low growth rate if such conditions weresomewhat firmer, unless demands for business loans strengthenedconsiderably or the Treasury decided to undertake a major fi-nancing. Time and savings deposits were projected to expand inMarch at about the February pace, and private demand depositsand the money supply were expected to grow somewhat morerapidly than in the preceding month.

System open market operations had been directed at main-taining stable conditions in the money market during the firstpart of February. The Treasury's financing operations were underway in that period and staff estimates of bank credit growth forthe month were near the lower end of the range that had been pro-jected at the previous meeting. Subsequently, after estimates ofbank credit growth had been revised upward, operations weremodified to achieve somewhat firmer conditions in the moneymarket. The net reserve position of member banks shifted toaverage net borrowed reserves of about $95 million in the lasttwo statement weeks of February from average free reserves of$120 million in the first 2 weeks, and average member bank bor-

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rowings rose by about $110 million, to about $425 million. TheFederal funds rate, which initially had fluctuated for the mostpart in a range of 4% to 4% per cent, later was predominantlyin a range of 43A to 4% per cent and at times was as high as 5per cent.

Market rates on Treasury bills had risen since the precedingmeeting of the Committee, but the advance was moderated bysustained nonbank demand for bills and, late in the period, bysizable purchases by foreign central banks. The 3-month bill rate,at 4.99 per cent on the day before this meeting, was up 8 basispoints over the interval. Rates on most other short-term marketinstruments also had edged higher.

In longer-term debt markets the generally buoyant conditionsof January had been succeeded by a more cautious atmosphere.Conditions in these markets were affected by a variety of con-flicting factors—including expectations of further tightening ofmonetary policy, the belief that prospects for fiscal restraint hadbeen somewhat enhanced recently, and continuing uncertaintiesrelating to developments in Vietnam. Yields on Treasury notesand bonds had changed little on balance in the last 4 weeks, butadvances in yields on corporate and State and local governmentbonds, particularly the latter, had resumed. While the calendarof new publicly offered corporate bonds remained relatively light,continuing additions were being made to an already large volumeof prospective offerings of municipal securities.

Conditions in markets for residential mortgages appeared tohave changed little in January, after tightening for some time.Primary market yields on conventional new-home mortgages roseslightly, but secondary market yields on FHA-insured homemortgages remained unchanged at the record level reattained amonth earlier. The deposit experience of savings and loan associ-ations and of mutual savings banks was mixed in January, but ingeneral it apparently was better than many observers had antici-pated.

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The Committee decided that greater monetary restraint was

desirable at this time in light of the current and prospective pace

of economic expansion, persisting inflationary pressures, and the

sharply reduced surplus on U.S. merchandise trade. Specifically,

the members agreed that it would be appropriate to seek some-

what firmer conditions in the money market than had been at-

tained in recent weeks, and to seek still firmer conditions if bank

credit appeared to be expanding more rapidly than projected.

In the course of the discussion a number of members ex-

pressed the view that a discount rate increase should be con-

sidered by the System soon. At the same time, it was noted that

action under the Board's Regulation Q to increase the ceiling

rate on large-denomination CD's might be needed at some point

to avoid an undesirably large reduction in the outstanding vol-

ume of such CD's.

The following current economic policy directive was issued

to the Federal Reserve Bank of New York:

The information reviewed at this meeting indicates that over-all eco-nomic activity has been expanding rapidly, with both industrial and con-sumer prices rising at a substantial rate, and that prospects are for con-tinuing rapid growth and persisting inflationary pressures in the periodahead. The foreign trade surplus has been at a sharply reduced level inrecent months and the imbalance in U.S. international payments remainsserious. Interest rates on most types of market instruments have edged uprecently, following earlier declines. While growth in bank credit has mod-erated on balance during the past 3 months, bank credit expansion hasbeen substantial in February, mainly reflecting Treasury financings. Growthin the money supply slowed in February, while flows into bank time andsavings accounts expanded moderately. In this situation, it is the policy ofthe Federal Open Market Committee to foster financial conditions con-ducive to resistance of inflationary pressures and progress toward reason-able equilibrium in the country's balance of payments.

To implement this policy, System open market operations until the nextmeeting of the Committee shall be conducted with a view to attainingsomewhat firmer conditions in the money market; provided, however, that

127


operations shall be further modified if bank credit appears to be expandingmore rapidly than is currently projected.

Votes for this action: Messrs. Martin, Hayes,Brimmer, Ellis, Galusha, Hickman, Kimbrel, Maisel,Mitchell, Robertson, and Sherrill. Votes against thisaction: None.

Absent and not voting: Mr. Daane.

2. Amendment of authorization for System foreign currencyoperations.

The Committee amended paragraph 3 of the authorization forSystem foreign currency operations in two respects. The phrase"Unless otherwise expressly authorized by the Committee" wasadded at the beginning of the first sentence of the paragraph, be-fore language specifying that all foreign currency transactionsshould be at prevailing market rates. Such a qualification hadbeen included at the corresponding point in the Committee'soriginal authorization regarding foreign currency transactionsadopted in February 1962, and had been inadvertently omittedwhen the previous instruments governing foreign currency opera-tions were reformulated in June 1966. The effect of restoring thequalification was to simplify procedures in the event the Com-mittee concluded that because of special circumstances a particu-lar transaction should be undertaken at a rate different from thatprevailing in the market.

At the same time, the second sentence of the paragraph, whichhad read as follows, was deleted:

Insofar as is practicable, foreign currencies shall be purchased throughspot transactions when rates for those currencies are at or below par andsold through spot transactions when such rates are at or above par, exceptwhen transactions at other rates (i) are specifically authorized by the Com-mittee, (ii) are necessary to acquire currencies to meet System commit-ments, or (iii) are necessary to acquire currencies for the StabilizationFund, provided that these currencies are resold forward to the StabilizationFund at the same rate.

128


Restrictions on spot sales of foreign currencies at prices belowpar and on spot purchases at prices above par had been includedin the Committee's foreign currency instruments since theiroriginal adoption in February 1962. The Committee now con-cluded that such restrictions were unnecessary, in light of thelimitations on the purposes for which foreign currency opera-tions could be undertaken given in paragraph 2 of the Commit-tee's foreign currency directive. The restrictions also were con-sidered undesirable on the grounds that spot sales of foreigncurrencies at prices below par and spot purchases at prices abovepar might be useful, on occasion, in furthering the purposesspecified in the directive.

As amended, paragraph 3 of the authorization for Systemforeign currency operations read as follows:

Unless otherwise expressly authorized by the Committee, all transactionsin foreign currencies undertaken under paragraph 1 (A) above shall be atprevailing market rates and no attempt shall be made to establish rates thatappear to be out of line with underlying market forces.

Except for the changes resulting from these amendments, theCommittee renewed the authorization in its existing form.

Votes for this action: Messrs. Martin, Hayes,Brimmer, Ellis, Galusha, Hickman, Kimbrel, Maisel,Mitchell, Robertson, and Sherrill. Votes against thisaction: None.


3. Review of continuing authorizations.

This being the first meeting of the Federal Open Market Com-mittee following the election of new members from the FederalReserve Banks to serve for the year beginning March 1, 1968,and their assumption of duties, the Committee followed its cus-tomary practice of reviewing all of its continuing authorizations

129


and directives. The action taken with respect to the authorizationfor System foreign currency operations has been described inthe preceding portion of the record for this date.

The Committee reaffirmed its continuing authority directivefor domestic open market operations and its foreign currencydirective in the forms in which both were outstanding at the be-ginning of the year 1968.

Votes for these actions: Messrs. Martin, Hayes,Brimmer, Ellis, Galusha, Hickman, Kimbrel, Maisel,Mitchell, Robertson, and Sherrill. Votes against theseactions: None.


130


MEETING HELD ON MARCH 14, 1968


In the period since the preceding meeting of the Committeespeculative demands for gold in London and other foreignmarkets had swelled to massive proportions. On the day of thismeeting, the British authorities had temporarily closed theLondon gold market and had declared a Bank Holiday for thefollowing day; the Board of Governors had approved an increasein Federal Reserve Bank discount rates from 4Vi to 5 per cent,effective March 15; and arrangements were made for centralbank governors of countries that had been actively participatingin the London gold pool to meet in Washington on Saturdayand Sunday, March 16 and 17, to consider their future policywith respect to gold. The purpose of this meeting of the Com-mittee, which was held by telephone, was to review recentdevelopments and make such changes in the Committee's policyinstruments as appeared to be needed in light of those develop-ments.

The Committee agreed that its current policy directive shouldbe modified to permit adaptation of open market operations tothe changed circumstances brought about by recent events,including the discount rate action. After discussion, the followingcurrent economic policy directive was issued to the FederalReserve Bank of New York:

In light of recent international financial developments, System openmarket operations until the next meeting of the Committee shall be con-ducted with a view to maintaining firm but orderly conditions in themoney market, taking into account the effects of increases in FederalReserve discount rates.

Votes for this action: Messrs. Martin, Brimmer,Daane, Ellis, Hickman, Maisel, Mitchell, Robert-son, Sherrill, Clay, Coldwell, and Treiber. Votesagainst this action: None.

131


Absent and not voting: Messrs. Hayes, Galusha,and Kimbrel. (Messrs. Treiber, Clay, and Coldwell,respectively, voted as their alternates.)

2. Amendment to authorization for System foreign currencyoperations.

At this meeting the Committee authorized the Special Managerto undertake negotiations looking toward increases, up to spec-ified limits, in a number of the System's reciprocal currencyarrangements, on the understanding that any such enlargements—and the corresponding amendments to paragraph 2 of theauthorization for System foreign currency operations—wouldbecome effective upon a determination by Chairman Martin thatthey were in the national interest. Specifically, negotiationswere authorized for increases up to varying maximum amounts,ranging from $100 million to $400 million equivalent, in theSystem's two swap arrangements with the Bank for InternationalSettlements and in the arrangements with the central banks ofBelgium, Canada, Italy, Japan, the Netherlands, Sweden, andSwitzerland.

Votes for this action: Messrs. Martin, Brimmer,Daane, Ellis, Hickman, Sherrill, Clay, Coldwell,and Treiber. Votes against this action: Messrs.Maisel, Mitchell, and Robertson.

Absent and not voting: Messrs. Hayes, Galusha,and Kimbrel. (Messrs. Treiber, Clay, and Coldwell,respectively, voted as their alternates.)

This action was taken on the ground that enlargements ofthe swap arrangements should prove helpful in coping with flowsof short-term funds in foreign exchange markets if such flowsbecame heavy in the current highly uncertain environment. TheCommittee concurred in the view of the Special Manager thatunder existing conditions it would be desirable if negotiatedenlargements were to become effective immediately upon a

132


determination by the Chairman that they were in the nationalinterest, thus obviating the need for further Committee action.

Messrs. Maisel, Mitchell, and Robertson dissented from thisaction because of reservations about the desirability, undercurrent circumstances, of authorizing a substantial enlargementof the swap network before discussions were held with monetaryauthorities of other countries on means for coordinating inter-national financial policies. They favored postponing considerationof increases in the swap arrangements until after the forthcomingweek-end meeting of central bank governors.

Subsequent to this meeting, on March 16, available membersof the Committee (Messrs. Martin, Brimmer, Daane, Maisel,Mitchell, Robertson, and Treiber, the last voting as alternatefor Mr. Hayes) voted unanimously to authorize the SpecialManager to undertake negotiations looking toward an increaseof $250 million equivalent in the System's swap arrangementwith the German Federal Bank, on the understanding that anysuch increase, and the corresponding amendment to the author-ization for System foreign currency operations, would becomeeffective upon a determination by Chairman Martin that it wasin the national interest. Messrs. Maisel and Robertson indicatedthat they continued to hold the general reservations concerningswap line increases that they had expressed on March 14,but that they had voted favorably on this action because—inasmuch as the Committee had taken the action it did on thatdate—they thought it appropriate to include the swap line withthe German Federal Bank in an enlargement of the swap net-work.

On March 17, available members of the Committee (Messrs.Martin, Brimmer, Daane, Ellis, Galusha, Maisel, Mitchell, Rob-ertson, Sherrill, and Treiber, the last voting as alternate for Mr.Hayes) voted unanimously to authorize the Special Managerto undertake negotiations looking toward an increase of $500

133


million equivalent in the System's swap arrangement with theBank of England, subject to the same understanding as in theactions taken on March 14 and 16.

On March 17 Chairman Martin determined that increases inthe System's swap arrangements with the foreign banks listedbelow, in the indicated amounts (millions of dollars equivalent),were in the national interest:

Bank of Canada 250Bank of England 500German Federal Bank 250Bank of Japan 250Netherlands Bank 175Bank of Sweden 50Swiss National Bank 200Bank for International Settlements:

System drawings in Swiss francs 200System drawings in other authorized

European currencies 400

Accordingly, effective March 17, 1968, paragraph 2 of theauthorization for System foreign currency operations was amendedto read as follows:

2. The Federal Open Market Committee directs the Federal ReserveBank of New York to maintain reciprocal currency arrangements ("swap"arrangements) for System Open Market Account for periods up to amaximum of 12 months with the following foreign banks, which areamong those designated by the Board of Governors of the Federal Re-serve System under Section 214.5 of Regulation N, Relations with ForeignBanks and Bankers, and with the approval of the Committee to renewsuch arrangements on maturity:

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Foreign bank

Austrian National BankNational Bank of BelgiumBank of CanadaNational Bank of DenmarkBank of EnglandBank of FranceGerman Federal BankBank of ItalyBank of JapanBank of MexicoNetherlands BankBank of NorwayBank of SwedenSwiss National BankBank for International Settlements:

System drawings in Swiss francsSystem drawings in authorized European

currencies other than Swiss francs

Amount ofarrangement(millions of

dollars equivalent)100225

1,000100

2,000100

1,000750

1,000130400100250600

600

1,000

135


MEETING HELD ON APRIL 2, 1968


The domestic economic situation continued to be characterizedby substantial increases in over-all activity and prices. Real GNPwas estimated to have grown rapidly in the first quarter and an-other large rise appeared in prospect for the second quarter.From the preceding autumn, average prices of industrial com-modities had advanced through March at an annual rate ofabout 4.5 per cent, and average consumer prices had risenthrough February at a rate of nearly 4 per cent. The outlookwas for persisting inflationary pressures in the period ahead.

Industrial production was little changed in February; but ac-cording to tentative estimates, it had increased moderately inMarch. Nonfarm employment rose sharply in February, but thelabor force also expanded markedly and the unemployment rateincreased to 3.7 per cent from 3.5 per cent in January. Weeklyretail sales figures for early March suggested that the sharpresurgence of consumer expenditures, under way since the begin-ning of the year, was continuing.

Consumer spending was expected to increase considerablyfurther in the second quarter, even if a tax increase were enacted,because of the prospective rapid gains in income. In addition,defense outlays were running substantially above the levels thathad been anticipated earlier, as had been noted by the Presidentin the March 31 address in which he announced the de-escalationof bombing in North Vietnam. The President also indicated thatestimates of defense expenditures in the fiscal year 1969 had beenrevised upward.

Apart from the consumer and defense categories, changes inactivity in broad economic sectors were expected to be relativelymoderate in the second quarter. It appeared likely that residentialconstruction activity, which had risen slightly in the first quarter,

136


would change little further. Some increase in the rate of businessinventory investment was anticipated, following an apparent slow-ing in accumulation in the first quarter. On the other hand,growth in fixed investment was expected to level off after a sub-stantial rise in the early months of the year. For 1968 as a wholebusinesses planned to increase their spending on new plant andequipment by 6 per cent, according to a recent Commerce-SECsurvey, compared with a rise in actual outlays of 2 per cent in1967. The survey indicated that capital spending would increasemoderately from the first to the second half of 1968.

Uncertainties continued in the markets for gold and foreignexchange, but the heavy speculative activity of early Marchabated following the agreement on gold policy reached at themidmonth meeting of gold pool members in Washington. Specu-lation slackened further after the March 19 announcement by theBritish Government of a broad program designed to restrictgrowth of consumer incomes and spending, and after agreementwas reached regarding special drawing rights (SDR's) in theInternational Monetary Fund at the month-end meeting inStockholm of major industrial countries comprising the "Groupof Ten." On March 21 the Bank of England lowered its discountrate from 8 to IVi per cent. Gold holdings of the U.S. Treasurywere reduced in March by $1.4 billion, largely as a result ofsettlement of the U.S. share of sales by the gold pool beforeoperations of the pool were discontinued at midmonth and ofsales to foreign central banks.

Incomplete data on the U.S. balance of payments in the firstquarter suggested that the deficit was large on both the liquidityand official settlements bases of calculation, although not solarge on either basis as in the fourth quarter of 1967. There hadbeen improvement in flows in some important elements of thecapital account, but the surplus on merchandise trade apparentlyhad remained near the low level to which it had fallen in thepreceding quarter.

137


System open market operations in early March—between themeetings of the Committee held on March 5 and March 14—hadbeen directed at achieving somewhat firmer conditions in themoney market. Subsequently, operations were directed at con-firming the still more restrictive monetary policy signaled bythe midmonth increase in the discount rate from AVi to 5 percent, while maintaining orderly market conditions. In the lasttwo statement weeks of March net borrowed reserves averagedabout $370 million, compared with averages of about $240million in the first half of the month and of about $90 millionin the last half of February. The Federal funds rate moved upto a range around 5 per cent before mid-March and then ad-vanced to a range around 5VA per cent.

Interest rates on most types of market securities fluctuatedwidely during March but rose on balance. These rate develop-ments reflected events relating to gold, shifts in sentiment regard-ing prospects for Vietnam peace negotiations and for domesticfiscal action, and the firming of monetary policy. Yields on Treas-ury securities of all maturities rose sharply until midmonth, whenuncertainties in international financial markets were most in-tense, and subsequently declined somewhat. The swing in themarket rate on 3-month Treasury bills was particularly marked;from an early-March level of close to 5 per cent, the rate roseto a peak of 5.45 per cent on March 14 and then fell irregularlyto 5.13 per cent on April 1, the day before this meeting. Mostother short-term market interest rates were considerably higheron April 1 than they had been 4 weeks earlier, and there hadbeen sizable net increases in yields on long-term corporate andmunicipal securities.

Growth in bank credit slowed considerably in March, a monthin which the Treasury undertook no major financing operations.The bank credit proxy—daily-average member bank deposits—was estimated to have expanded at an annual rate of about 4 percent, compared with 10 per cent in February. Outstanding busi-

138


ness loans at banks increased somewhat, but security loans andholdings of Government securities declined substantially.

With short-term interest rates rising on balance, by mid-Marchbanks were generally offering the ceiling rate of 5Vi per centon large-denomination CD's of all maturities; earlier, the offeringrate for shorter-term certificates had been below the ceiling.Nevertheless, banks experienced a substantial decline in out-standing CD's during March. The pace of growth in consumer-type time and savings deposits increased somewhat, however, andtotal time and savings deposits rose slightly more in March thanin the preceding month. Government deposits declined, andprivate demand deposits increased by a relatively small amount.The money supply grew at a faster rate than in February, withmore than half of the expansion reflecting an increase in currencyholdings of the public.

In the 4 months through March, time and savings deposits andthe money supply had grown at annual rates of about 6.5 and3.5 per cent, respectively, and the bank credit proxy at a rateof about 5.5 per cent—in each case less than half the rate ofthe preceding 7 months. Inflows of funds to savings and loanassociations and mutual savings banks also had been substantiallycurtailed in recent months.

Bank credit was projected to change little in April and toexpand moderately in May—on the assumptions that the Treas-ury would raise a substantial volume of new cash in connectionwith its May refunding but would not undertake a major financ-ing earlier, and that money market conditions would remain un-changed. In an alternative projection, in which a slight finningof money market conditions was assumed, the annual rate ofchange in the bank credit proxy in April was estimated in arange of + 1 to —3 per cent.

It was expected that at the currently higher levels of marketinterest rates banks would find it more difficult in April to attractconsumer-type time and savings deposits and that the banks

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would experience a further run-off of CD's of greater than sea-sonal dimensions. As a result, total time and savings depositswere projected to expand at a relatively low rate in April. On theother hand, growth in the money supply was expected to be morerapid than in March, largely as a consequence of a sizable de-cline anticipated in Government deposits.

The Committee agreed that continued firming of monetarypolicy was desirable in light of present and prospective inflation-ary pressures, the highly unfavorable developments of recentmonths in U.S. foreign trade, the persisting uncertainties in inter-national financial markets, and the still uncertain outlook forfiscal action. Some members expressed the view that circum-stances might soon require consideration by the System of afurther increase in the discount rate.

At the same time, various reasons were advanced for movingcautiously in firming further through open market operations atpresent. These included some improvement in prospects forrestrictive fiscal action by Congress; it appeared likely that theSenate would take affirmative action shortly on a measure provid-ing for an increase in taxes and a reduction in budgeted Federalexpenditures. In addition, it was noted that a considerable degreeof monetary restraint had already been achieved, the effects ofwhich were still unfolding, and that there had been insufficienttime as yet to determine the economic implications of variousrecent events, including the de-escalation of bombing in NorthVietnam. It also was noted that a marked further firming ofmonetary policy at this time might have undesirably largeadverse effects on flows of funds to financial intermediaries. Inthis connection, some members foresaw a possible need at alater point for the Board to raise ceiling rates on large-denomina-tion CD's, although none indicated that he thought such actionwas desirable immediately.

At the conclusion of the discussion the Committee agreedthat slightly firmer money market conditions should be sought,

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but that operations should be modified if unusual liquidity pres-sures developed or if the change in bank credit appeared to bedeviating significantly in either direction from the projection. Thefollowing current economic policy directive was issued to theFederal Reserve Bank of New York:

The information reviewed at this meeting indicates that over-all eco-nomic activity has expanded at a very rapid pace in early 1968, withprices rising substantially, and that prospects are for a continuing rapidadvance in activity and persisting inflationary pressures in the periodahead. Since late fall, growth rates of bank credit, the money supply, andtime and savings accounts at financial institutions have moderated con-siderably. Speculative activity in gold and foreign exchange markets,which was intense in early March, abated after the midmonth agreementon gold policy by gold pool members and appears to have slackened fur-ther following the Stockholm agreement regarding Special DrawingRights. The foreign trade surplus, however, has remained at a sharply re-duced level in recent months and the imbalance in U.S. international pay-ments continues to be a matter of serious concern. Most market interestrates have fluctuated widely, although rising on balance, in reaction tointernational financial developments, the firming of monetary policy, anduncertainties regarding military and fiscal prospects. In this situation, it isthe policy of the Federal Open Market Committee to foster financial con-ditions conducive to resistance of inflationary pressures and attainment ofreasonable equilibrium in the country's balance of payments.

To implement this policy, System open market operations until the nextmeeting of the Committee shall be conducted with a view to attainingslightly firmer conditions in the money market; provided, however, thatoperations shall be modified if bank credit appears to be deviating sig-nificantly from current projections or if unusual liquidity pressures shoulddevelop.

Votes for this action: Messrs. Martin, Hayes,Brimmer, Daane, Ellis, Galusha, Hickman, Kim-brel, Maisel, Mitchell, Robertson, and Sherrill.Votes against this action: None.

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2. Ratification of amendments to authorization for Systemforeign currency operations.

At: this meeting the Committee ratified the actions taken bymembers on March 16 and 17, relating to the System's swaparrangements with the German Federal Bank and the Bank ofEngland. As indicated in the policy record for March 14, 1968,the members authorized the Special Manager to undertake nego-tiations looking toward increases of $250 million equivalent and$500 million equivalent, respectively, in the two arrangements,on the understanding that any such increases and the correspond-ing amendments to paragraph 2 of the authorization for Systemforeign currency operations would become effective upon adetermination by Chairman Martin that they were in the nationalinterest. The Chairman made such a determination on March17, 1968.

Votes for ratification of these actions: Messrs.Martin, Hayes, Brimmer, Daane, Ellis, Galusha,Hickman, Kimbrel, Maisel, Mitchell, Robertson,and Sherrill. Votes against ratification of these ac-tions: None.

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On the day before this meeting, the Board of Governors of theFederal Reserve System had approved an increase in FederalReserve Bank discount rates from 5 to 5Vi per cent and hadraised the maximum rates payable by member banks on newlarge-denomination CD's having maturities of 60 days or more.1

Both actions were effective on the day of this meeting. Followingthe announcement of these actions, interest rates advanced indomestic financial markets—with the market rate on 3-monthTreasury bills rising about 20 basis points to around 5.55 percent—and in foreign exchange markets the dollar strengthenedagainst most currencies. The purpose of today's meeting, whichwas held by telephone, was to consider the need for revision ofthe Committee's current economic policy directive in light ofyesterday's actions.

The Committee agreed that open market operations in theinterval until its next scheduled meeting should be directed atachieving firmer money market conditions in keeping with thehigher discount rate, while facilitating orderly market adjust-ments to the increase in that rate. The following current eco-nomic policy directive was issued to the Federal Reserve Bankof New York:

1 By amendment to Regulation Q the following schedule of maximum ratespayable by member banks on CD's of $100,000 or more was adopted:

Maturity Maximum rate(days) (per cent)30- 59 SVi60- 89 53A90-179 6180 and over 6V4

The maximum rate payable previously had been 5Vi per cent for all maturi-ties.

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System open market operations until the next meeting of the Committeeshall be conducted with a view to achieving firmer but maintaining orderlyconditions in the money market, while facilitating market adjustments tothe increase in Federal Reserve discount rates.

Votes for this action: Messrs. Martin, Hayes,Brimmer, Daane, Ellis, Galusha, Hickman,Kimbrel, Maisel, Mitchell, and Robertson.Votes against this action: None.

Absent and not voting: Mr. Sherrill.

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Over-all economic activity had expanded at a very rapid pacethus far in 1968 and prices had risen substantially. The outlookwas for continued rapid expansion in activity and persistinginflationary pressures.

In the first quarter, according to preliminary Department ofCommerce estimates, real GNP advanced at a 6 per cent annualrate and average prices—as measured by the GNP deflator—ata 4 per cent annual rate. Defense spending and business capitaloutlays expanded considerably, and outlays on residential con-struction increased moderately. Most of the advance in GNP,however, reflected a sharp rise in consumer expenditures; per-sonal income increased at an unusually rapid rate in the quarter,and the percentage of income saved fell below the unusually highfigure of the preceding quarter. Partly because of the large in-crease in consumer expenditures, the rate of business inventoryaccumulation declined markedly.

In March nonfarm employment rose substantially further, andthe unemployment rate edged down to 3.6 per cent from 3.7 percent in February. Industrial production increased moderately,and retail sales continued to advance rapidly. In early April, how-ever, retail sales apparently were adversely affected by civil dis-orders in many cities.

The consumer price index rose considerably further in Marchto a level about 4 per cent above a year earlier. With the cost ofliving advancing at a rapid pace, settlements in recent wage nego-tiations had provided for increases in wages and fringe benefitsof 6 per cent or more per year. The rise in average prices ofindustrial commodities moderated in both March and April,mainly because of large declines for a few major industrialmaterials. Average prices of farm products changed relativelylittle in the 2 months.

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It appeared likely that in the second quarter real GNP wouldadvance as fast as or faster than in the first quarter and thataverage prices would continue upward at about the first-quarterpace. In prospect were further large rises in consumer incomeand spending and another substantial increase in defense outlays.It was expected that business capital spending and outlays onresidential construction would level off, but that business in-ventory accumulation would rebound from its low first-quarterrate,,

Since the establishment of the two-market system for gold onMarch 17, the price of gold in the private market had for themost part ranged between $37 and $40 per ounce. The volumeof foreign official gold purchases from the U.S. Treasury hadincreased considerably in recent weeks.

The deficit in the U.S. balance of payments in the first quarternow appeared to have been smaller than estimated earlier andconsiderably smaller than in the fourth quarter of 1967. Thesurplus on merchandise trade was reduced further in the firstquarter from the low level to which it had fallen in late 1967; inMarch, when exports declined largely because of a longshore-men's strike in New York, U.S. foreign trade was in deficit. Thedeterioration in the trade account, however, was more than offsetby a marked improvement in capital transactions, reflecting inpart; a net reflow of U.S. bank credits during the quarter that wasabout as large as the foreign credit restraint program was in-tended to achieve over the full year. The outlook was for somerecovery in the trade account but for substantial deterioration inthe capital account—especially in view of the likelihood that thereflow of bank credit and certain other favorable first-quartercapital movements would not be sustained.

System open market operations had been directed towardachieving slightly firmer conditions in the money market follow-ing the meeting of the Committee on April 2. After the increasein Federal Reserve Bank discount rates from 5 to 5V4 per centeffective April 19 and the meeting of the Committee on that day,

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operations had been directed at achieving still firmer moneymarket conditions while facilitating orderly market adjustmentsto the higher discount rate. In the first part of April the effectiverate on Federal funds moved up to a range of 5V£ to 5% percent, and subsequently it rose to a range around 6 per cent. Netborrowed reserves of member banks averaged $335 million inthe 4 weeks ending April 24, compared with an average of about$310 million in March; and average borrowings of memberbanks increased to about $690 million in the latest 4 weeks fromabout $650 million in the earlier period.

Interest rates on most types of short- and intermediate-termmarket securities rose substantially over the course of April, inpart as a result of the increase in discount rates and the firmingof money market conditions. The market rate on 3-monthTreasury bills, at 5.48 per cent on the day before this meeting,was 14 basis points above its level on April 18 and 35 basispoints higher than on April 1. Yield changes were more irregularin capital markets, where investor sentiment was influenced byfluctuating prospects for fiscal action and for Vietnam peacenegotiations, but since mid-April long-term yields in general hadalso been rising. Several large additions to the April and Maycalendar of public offerings of corporate bonds and the con-tinuation of a relatively large volume of new issues of municipalbonds contributed to upward pressures on yields of such securi-ties.

The Treasury was expected, on the day following this meeting,to announce the terms on which it would refund securities matur-ing in mid-May, of which about $4 billion were held by thepublic. Estimates suggested that the Treasury would have toraise a substantial amount of new cash before the end of thefiscal year. It was thought likely that some of this would beraised in connection with the May refunding, although theamount was uncertain, and that further cash financing would beundertaken in June.

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Interest rates on new-home mortgages, which had changedlittle in February, edged up in March to postwar highs. Net in-flows of funds to nonbank depositary institutions had improvedsomewhat in February and March, but in the 4 months throughMarch they were at an annual rate about one-third less than inthe preceding 7 months. Although withdrawals during theinterest- and dividend-crediting period in late March and earlyApril were smaller than many observers had anticipated, netinflows in the period shortly thereafter apparently were not aslarge as usual.

Commercial bank credit, as measured by the bank credit proxy—daily-average member bank deposits—was estimated to havedeclined at an annual rate of 3.5 per cent in April. Business loansoutstanding, which had begun to expand more rapidly after mid-March, increased substantially in April. However, banks con-tinued to liquidate their holdings of U.S. Government securities.They also reduced the pace at which they acquired other securi-ties, notably municipal obligations. Following the April 19 in-crease in the discount rate, commercial banks raised their primelending rate from 6 to 6Vi per cent.

The money supply increased in April at a pace considerablyabove that of earlier months of the year. Private demand de-posits rose sharply as U.S. Government deposits declined, andcurrency holdings of the public continued to expand at a higher-than-normal rate. Total time and savings deposits of banks wereestimated to have increased relatively little in April; with short-term interest rates rising, inflows of consumer-type time and sav-ings deposits slackened and the volume of large-denominationCD's outstanding contracted substantially. The CD run-off wasconcentrated in the first half of the month, before offering rateswere increased under the higher ceilings that became effective onApril 19. By the month-end offering rates were at the new maxi-mum levels for shorter-term CD's but were somewhat below theceilings for longer-term certificates.

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In the 5 months through April the bank credit proxy hadgrown at an annual rate of 3.7 per cent, about one-third of therate for the preceding 7 months. In the same period commercialbank time and savings deposits had expanded at a rate of 5.5per cent, less than two-fifths of the earlier pace; and the moneysupply had grown at a 5.6 per cent rate, about two-thirds of thatprevailing earlier.

Changes in bank credit in May and June were expected todepend in part on the pattern of Treasury financing operations.On the assumptions that prevailing money market conditionswould be maintained and that the Treasury would raise only amoderate amount of new cash in connection with the May re-funding—meeting the bulk of its residual needs for the fiscalyear 1968 in June—the annual rate of change in the bank creditproxy was projected in a range of —2 to + 2 per cent in Mayand in a range of + 4 to + 6 per cent in June. On the sameassumptions, U.S. Government deposits were projected to declinesubstantially further in May and private demand deposits andthe money supply to increase rapidly, although not so rapidlyas in April. It was expected that banks would expand their out-standing CD's somewhat, but that consumer-type time and sav-ings deposits would continue to grow at a relatively slow pace.

The Committee agreed that the Treasury's forthcoming refund-ing operation precluded a change in monetary policy at this time.Although members expressed concern about persisting inflation-ary pressures and the recent worsening in the U.S. foreign tradebalance, a number indicated that they would have favored nochange in policy at present even if Treasury financing were notin prospect. Among the reasons they advanced were the con-siderable degree of restraint already achieved by recent monetarypolicy actions, the effects of which were still in train; and theview that prospects for restrictive fiscal action had improved. Atthe same time, the desirability was noted of avoiding any tend-ency toward relaxation in the degree of money market firmness.

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The Committee concluded that the firmer conditions now pre-vailing in the money market should be maintained, with theproviso that operations should be modified, insofar as permittedby the Treasury financing, if bank credit appeared to be deviatingsignificantly from the projection. It was understood that allow-ance would be made in interpreting this proviso for any substan-tial difference between the amount of new cash the Treasuryactually raised in connection with the May refunding and theamount assumed in the projection.

The following current economic policy directive was issued tothe Federal Reserve Bank of New York:

The information reviewed at this meeting indicates that over-all eco-nomic activity has expanded at a very rapid pace thus far in 1968, withprices rising substantially, and that prospects are for a continuing rapidadvance in activity and persisting inflationary pressures in the periodahead. Since late fall, growth rates of bank credit, the money supply, andtime and savings accounts at financial institutions have on balance mod-erated considerably. Market interest rates have risen in recent weeks,partly in reaction to the firming of monetary policy including the furtherincrease in Federal Reserve discount rates. The U.S. foreign trade balancehas worsened further, and the international payments position of theUnited States continues to be a matter of serious concern. In this situation,it is the policy of the Federal Open Market Committee to foster financialconditions conducive to resistance of inflationary pressures and attainmentof reasonable equilibrium in the country's balance of payments.

To implement this policy, while taking account of Treasury financingactivity, System open market operations until the next meeting of theCommittee shall be conducted with a view to maintaining the firmer con-ditions prevailing in the money market; provided, however, that opera-tions shall be modified, to the extent permitted by Treasury financing, ifbank credit appears to be deviating significantly from current projections.

Votes for this action: Messrs. Martin, Hayes,Brimmer, Daane, Ellis, Galusha, Kimbrel, Maisel,Robertson, and Sherrill. Vote against this action:Mr. Hickman.

Absent and not voting: Mr. Mitchell.

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In dissenting from this action, Mr. Hickman expressed theview that the recent upward adjustment of interest rates hadbeen less than contemplated under the policy directive the Com-mittee had issued at its April 19 meeting, and less than was de-sirable in view of the inflationary pressures in the economy. Heagreed that the prospective Treasury financing precluded sub-stantial firming of money market conditions before the Com-mittee's next meeting. Nevertheless, he thought that firmer con-ditions should be sought, if and when feasible after the Treasuryfinancing had been completed, on the understanding that thestance of monetary policy would be reexamined should fiscalaction be taken.


The Committee amended paragraph 1B(3) of the authorizationfor System foreign currency operations to increase, from $200million to $250 million, the limit on authorized System Accountholdings of sterling purchased on a covered or guaranteed basis.With this amendment, the first paragraph of the authorizationread as follows:

1. The Federal Open Market Committee authorizes and directs theFederal Reserve Bank of New York, for System Open Market Account,to the extent necessary to carry out the Committee's foreign currencydirective:

A. To purchase and sell the following foreign currencies in the formof cable transfers through spot or forward transactions on the open marketat home and abroad, including transactions with the U.S. StabilizationFund established by Section 10 of the Gold Reserve Act of 1934, withforeign monetary authorities, and with the Bank for International Settle-ments :

Austrian schillingsBelgian francsCanadian dollarsDanish kroner

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Pounds sterlingFrench francsGerman marksItalian lireJapanese yenMexican pesosNetherlands guildersNorwegian kronerSwedish kronorSwiss francs

B. To hold foreign currencies listed in paragraph A above, up to thefollowing limits:

(1) Currencies held spot or purchased forward, up to the amountsnecessary to fulfill outstanding forward commitments;

(2) Additional currencies held spot or purchased forward, up to theamount necessary for System operations to exert a market influence butnot. exceeding $150 million equivalent; and

(3) Sterling purchased on a covered or guaranteed basis in terms of thedollar, under agreement with the Bank of England, up to $250 millionequivalent.


(1) Commitments to deliver foreign currencies to the StabilizationFund, up to $350 million equivalent;

(2) Commitments to deliver Italian lire, under special arrangementswith the Bank of Italy, up to $500 million equivalent; and

(3) Other forward commitments to deliver foreign currencies, up to$550 million equivalent.

D. To draw foreign currencies and to permit foreign banks to drawdollars under the reciprocal currency arrangements listed in paragraph 2below, provided that drawings by either party to any such arrangementshall be fully liquidated within 12 months after any amount outstandingat that time was first drawn, unless the Committee, because of exceptionalcircumstances, specifically authorizes a delay.

Votes for this action: Messrs. Martin, Hayes,Brimmer, Daane, Ellis, Galusha, Hickman, Kimbrel,Maisel, Robertson, and Sherrill. Votes against thisaction: None.

Absent and not voting: Mr. Mitchell.

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This action was taken on grounds that it would be helpful inconnection with discussions of specific arrangements, includinga drawing by Britain on its $1.4 billion standby facility with theInternational Monetary Fund, for repayment by the Bank ofEngland of outstanding drawings under its swap line with theFederal Reserve. It was understood that initial use of the en-larged authority would be subject to the approval of ChairmanMartin in light of developments in those discussions.

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MEETING HELD ON MAY 28, 1968


Reports at this meeting indicated that over-all economic activitywas continuing to advance rapidly and that inflationary pres-sures were persisting. It appeared likely that growth in real GNPin the second quarter would again be large. Beyond midyear,economic prospects depended in large part on the outcome ofpending fiscal legislation, which provided for a 10 per centsurtax on individual and corporate incomes and for a $6 billionreduction from the Budget estimate in Federal expenditures forthe fiscal year 1969. Such legislation, if enacted, was expectedto contribute to a marked slowing of the pace of expansion inaggregate output and to a gradual lessening of inflationarypressures.

Estimates for the second quarter included a further sizablerise in consumer spending, although not so large as the extra-ordinary advance of the first quarter. Defense expenditures wereexpected to continue to increase at a substantial rate. A sharprise in housing starts in April, although it reflected temporaryinfluences in large part, now suggested a moderate increase inoutlays for residential construction in the second quarter. Itappeared that business outlays for fixed capital would changerelatively little; but inventory accumulation, which had been ata very low rate in the first quarter, was expected to increaseconsiderably.

In April nonfarm employment rose moderately further, andthe unemployment rate again edged down, to 3.5 per cent from3.6 per cent in March. The industrial production index was un-changed from a March level that had been revised upward.Retail sales were advancing in early May, following a decline inApril that was attributable largely to widespread civil disorders.

Gold and foreign exchange markets had been unsettled inrecent weeks; important contributing influences included shifts

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in prospects for fiscal action in the United States and politicaluncertainties in France. The price of gold in the private Londonmarket had risen sharply after mid-May from around $39.50per ounce to a new high of $42.60 on May 21, but subsequentlydeclined somewhat. The Treasury gold stock recently had beenreduced further, as a number of small central banks had pur-chased gold from the United States. Sterling was under renewedpressure in foreign exchange markets, and quotations for theFrench franc were nominal in most markets as a result of thegeneral strike and the closing of French banks.

With respect to the U.S. balance of payments, the deficit onthe official settlements basis was reduced in April and May byan accelerated rise in liabilities of domestic banks to theirbranches abroad. Movements out of sterling and French francshad contributed significantly to the availability of funds in theEuro-dollar market. U.S. exports of goods expanded sharply inApril from the substantially reduced March level while importsincreased slightly. For March and April together, however, themerchandise trade surplus was quite small.

In early May the Treasury marketed two new 6 per cent noteshaving maturities of 15 months and of 7 years for payment onMay 15. The shorter-term note was offered for cash and at-tracted subscriptions mainly from commercial banks, whichwere allowed to make payment by credit to Treasury tax andloan accounts. The 7-year note was offered in exchange forsecurities maturing in mid-May, of which $3.9 billion were heldby the public. After allowing for attrition of $1.3 billion in theexchange offering, the Treasury raised about $2.1 billion of newcash in these financings.

Interest rates had risen substantially on balance in all maturityareas since the preceding meeting of the Committee. Yield in-creases were especially pronounced after the mid-May announce-ment that there would be a further delay in congressional con-sideration of the pending fiscal legislation. Other influences

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included the tightening of monetary policy associated with themid-April increase in the discount rate and the continuing largevolume of new offerings in the corporate and municipal bondmarkets. During the week immediately preceding this meeting,some short-term market rates, particularly on Treasury bills, haddeclined from their peaks as renewed optimism concerning pros-pects for enactment of fiscal legislation emerged. The marketrate on 3-month Treasury bills, at 5.67 per cent on the daybefore this meeting, was down 25 basis points from its May 21high but was still 19 basis points above its level of 4 weeksearlier.

During April interest rates on residential mortgages had risensubstantially and yields on both conventional new-home mort-gages and on FHA-insured mortgages trading in the secondarymarket were at postwar highs. Early in May, as permitted bynew legislation, maximum contract interest rates on Federallyunderwritten home mortgages were increased to 6% per cent.Net inflows of funds to nonbank depositary institutions hadweakened considerably further in April from the reduced inflowof the first quarter.

System open market operations since the preceding meetingof the Committee had been directed at maintaining firm condi-tions in the money market while countering persistent tendenciestoward excessive tightness. In view of the advanced level ofmarket rates, System repurchase agreements were made at aninterest rate of 53A per cent, one-quarter of a percentage pointabove the discount rate. The effective rate on Federal fundsmoved up further to a range around 6Vs to 6% per cent, com-pared with a range around 6 per cent in the latter part of April.Bank rates on new loans to Government securities dealers alsoadvanced sharply. Member bank borrowings averaged $720million and net borrowed reserves $380 million in the 4 weeksending May 22, compared with averages of $690 million and$340 million, respectively, in April.

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Commercial bank credit, as measured by the bank creditproxy—daily-average member bank deposits—was estimated tohave increased only a little in May following a small decline inApril. Business loans, after a sharp rise in early April, hadchanged relatively little through early May while banks hadcontinued to reduce their holdings of U.S. Government securi-ties. The further advance in market interest rates acted to limitgrowth in commercial bank time and savings deposits, and inMay, as in April, such deposits increased very little. Rates onlarge-denomination CD's generally moved up to the new Regu-lation Q ceilings, but the volume of outstanding CD's was littlechanged over the month. Rates on Euro-dollar deposits rosesharply as U.S. banks built up their Euro-dollar liabilities. Themoney supply continued to grow rapidly in May; private de-mand deposits expanded substantially as U.S. Government de-posits declined.

The bank credit proxy was now projected to decline in Juneat an annual rate in the range of 1 to 4 per cent if prevailingmoney market conditions were maintained. Business demand forbank loans was expected to be strong in June, partly to financetax payments. The money supply and private demand depositswere projected to increase at about the rapid April—May rate,and U.S. Government deposits were projected to decline sharply,assuming no large cash financing. Total time and savings de-posits were anticipated to show virtually no growth and possiblyto decline, as relatively high market interest rates were expectedto continue to curtail growth in consumer-type time and savingsdeposits and to result in a sizable decline in outstanding CD'sfor which scheduled maturities were large in June.

The Committee agreed that a restrictive monetary policy wasappropriate in view of the strength of domestic demands andpersisting inflationary pressures, as well as of the deteriorationin the U.S. foreign trade balance that was contributing to con-tinuation of an unsatisfactory over-all payments position. At the

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same time, however, there was general agreement that a numberof considerations militated against any additional tightening atpresent. An important consideration was the possibility that inthe near future Congress would enact the pending fiscal-restraintlegislation. Furthermore, a considerable degree of monetary re-straint had already been achieved; the banking system was beingsubjected to increasing liquidity pressures; over-all expansion ofbank credit appeared to have halted in April and May; andmarket rates of interest had advanced sharply to levels thatcould give rise to a substantial amount of disintermediation.

The Committee concluded that open market operationsshould be directed at maintaining about the prevailing firm con-ditions in the money market, but that operations should bemodified if bank credit appeared to be deviating significantlyfrom current projections or if unusual pressures should developin financial markets. The following current economic policydirective was issued to the Federal Reserve Bank of New York:

The information reviewed at this meeting indicates that the very rapidincrease in over-all economic activity is being accompanied by persistinginflationary pressures. There has been little or no growth on average inbank credit and time and savings deposits over the past 2 months, althoughthe money supply has expanded considerably as U.S. Government depositshave declined. In recent weeks both short- and long-term interest rateshave risen sharply on balance from their earlier advanced levels, partly inreaction to shifting expectations with regard to the likelihood of fiscalrestraint. There has been some revival of speculative activity in the privategold market and in foreign exchange markets. The U.S. foreign tradebalance and over-all payments position continue to be a matter of seriousconcern. In this situation, it is the policy of the Federal Open MarketCommittee to foster financial conditions conducive to resistance of infla-tionary pressures and attainment of reasonable equilibrium in the country'sbalance of payments, while taking account of the potential for severepressures in financial markets if fiscal restraint is not forthcoming.

To implement this policy, System open market operations until the nextmeeting of the Committee shall be conducted with a view to maintainingfirm conditions in the money market; provided, however, that operations

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shall be modified if bank credit appears to be deviating significantly fromcurrent projections or if unusual pressures should develop in financialmarkets.

Votes for this action: Messrs. Martin, Hayes,Brimmer, Daane, Ellis, Galusha, Hickman, Kimbrel,Maisel, Mitchell, Robertson, and Sherrill. Votesagainst this action: None.

2. Authority to purchase and sell foreign currencies.

The Committee amended paragraph IB(3) of the authorizationfor System foreign currency operations to increase, from $250million to $300 million, the limit on authorized System Accountholdings of sterling purchased on a covered or guaranteed basis.


At its previous meeting the Committee had increased thelimit in question from $200 million to $250 million. That actionhad been taken on grounds that it would be helpful in connec-tion with discussions of specific arrangements, including a draw-ing by Britain on its $1.4 billion standby facility with the Inter-national Monetary Fund, for repayment by the Bank of Englandof outstanding drawings under its swap line with the FederalReserve; and it had been understood that initial use of the en-larged authority would be subject to the approval of ChairmanMartin in light of developments in those discussions. Today'saction was taken on similar grounds and subject to the sameunderstanding.

The Committee also amended paragraph 4 of the foreigncurrency directive, by adding the words "and to facilitate opera-

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tions of the Stabilization Fund" to clause (iv). With this amend-ment, paragraph 4 of the directive read as follows:

Unless otherwise expressly authorized by the Committee, transactionsin forward exchange, either outright or in conjunction with spot trans-actions, may be undertaken only (i) to prevent forward premiums ordiscounts from giving rise to disequilibrating movements of short-termfunds; (ii) to minimize speculative disturbances; (iii) to supplementexisting market supplies of forward cover, directly or indirectly, as ameans of encouraging the retention or accumulation of dollar holdings byprivate foreign holders; (iv) to allow greater flexibility in covering Systemor Treasury commitments, including commitments under swap arrange-ments, and to facilitate operations of the Stabilization Fund; (v) to facili-tate the use of one currency for the settlement of System or Treasurycommitments denominated in other currencies; and (vi) to provide coverfor System holdings of foreign currencies.


On November 14, 1967, at a time when an increase in SystemAccount and Stabilization Fund holdings of sterling was underconsideration, the Committee had amended paragraph 1C(1) ofthe authorization for System foreign currency operations to en-able the System Account to "warehouse" part of the Stabiliza-tion Fund's holdings of sterling if the Fund's resources shouldprove inadequate to meet all demands upon them from time totime in the future. Since such "warehousing" operations—noneof which had been undertaken to date—would involve forwardtransactions, the Committee concluded that it was desirable tomake a conforming change in the list of purposes, given inpsiragraph 4 of the foreign currency directive, for which forwardtransactions were authorized.

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MEETING HELD ON JUNE 18, 1968


Reports at this meeting indicated that the continued rapid ad-vance in over-all economic activity was being accompanied bypersisting inflationary pressures. It appeared likely that Congresswould act favorably within a few days on legislation providingfor a 10 per cent income tax surcharge and a $6 billion reduc-tion in expenditures from Budget estimates for the coming fiscalyear. Such legislation was expected to contribute to a consider-able moderation of the rate of advance in aggregate demands.

Staff estimates suggested that both real GNP and averageprices—as measured by the "GNP deflator"—were continuingto increase at rapid rates in the second quarter. According to theestimates, however, business inventory accumulation would beconsiderably larger than in the first quarter and growth in finalsales would be smaller. In particular, consumer expenditureswere expected to rise substantially but at a pace well below theextraordinary advance of the first quarter; and according to arecent Commerce-SEC survey of business spending plans, out-lays on new plant and equipment would change little in thesecond quarter after increasing sharply in the first. It also ap-peared that outlays for residential construction would risemoderately further and that defense spending would advanceat about the rapid first-quarter rate.

Staff estimates for the third quarter suggested that growth inreal GNP would slow sharply if the pending fiscal legislationwere enacted. The rate of increase in disposable income wasexpected to slacken considerably—as a result of both the incometax surcharge and slow growth in employment—and a furtherslowing of growth in consumer expenditures appeared likely,despite an anticipated decline in the rate of personal saving.Prospects for the third quarter also included a moderate declinein residential construction outlays, a leveling off of the advancein defense expenditures, and little further change in the rate of

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inventory accumulation after a large second-quarter rise. How-ever, the Commerce-SEC survey suggested that outlays on plantand equipment would increase somewhat in the third quarter.The lower over-all rate of economic growth in prospect seemedunlikely to have an appreciable effect immediately on advancesin wage and other costs, and average prices in the private econ-omy were expected to rise almost as rapidly in the third quarteras in the first half of the year.

In May the unemployment rate remained at 3.5 per cent.Nonfarm employment was unchanged from April, as an increasein the number of workers on strike offset employment gains else-where. Average hourly earnings continued to rise rapidly. In-dustrial production was estimated to have increased to a newhigh, and according to the advance report, retail sales rosemoderately from an April level that had been held down by civildisorders in many cities.

Preliminary estimates indicated that average wholesale pricesof industrial goods declined somewhat in May, primarily be-cause of further sharp reductions for copper and related prod-ucts following settlement of the copper strike; average prices ofother industrial commodities continued to rise. Prices of foodsand foodstuffs increased considerably, and the total wholesaleprice index edged up further. In April the consumer price indexcontinued upward at about the average rate of other recentmonths and was 4 per cent above a year ealier.

With respect to the U.S. balance of payments, preliminarydata for May suggested that the deficit on the liquidity basisdiminished sharply from its high April level, in part because ofthe favorable effects of various special official transactions. Themerchandise trade surplus was expected to increase in comingmonths from its recent low level, but net outflows of U.S. capitalalso were expected to rise. Such outflows had been unusuallysmall in the early months of the year, following the introductionof the new restaint program on January 1.

On the official settlements basis, a payments surplus was now

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indicated for May and possibly for the second quarter as awhole, primarily as a result of an exceptionally large rise in theliabilities of U.S. banks to their branches abroad. The recentmassive inflow of foreign liquid funds apparently reflected bothincreased demands for funds by domestic banks and large addi-tions to the supply of Euro-dollars as a result of movements outof sterling and French francs. It was thought likely that theinflow would subside soon.

In foreign exchange markets, the position of sterling hadimproved somewhat in recent weeks, but the French franc hadremained under severe pressure. The price of gold in the privateLondon market had continued to fluctuate in a range of about$41 to $42 per ounce.

System open market operations since the preceding meetingof the Committee had been directed at maintaining firm condi-tions in the money market. Early in the period reserves wereabsorbed temporarily, by means of matched sale-purchase agree-ments, in order to counter easing tendencies. Late in the period,however, when tendencies toward undue tightness emerged,reserves were supplied by purchases of Treasury bills fromforeign accounts and through repurchase agreements with non-bank dealers at a 5% per cent interest rate. For the period asa whole, effective rates on Federal funds were usually in a rangeof 6 to 6V4 per cent but occasionally were below 6 per cent.Member bank borrowings averaged about $730 million in the3 weeks ending June 12, little changed from the preceding 4weeks, but average net borrowed reserves increased to about$445 million from $375 million in the earlier period.

Interest rates on most types of market securities had declinedsubstantially on balance since the preceding meeting of the Com-mittee, primarily because of growing expectations that fiscalrestraint legislation would be enacted soon. Yield reductionswere more marked on Treasury bonds than on corporate andmunicipal bonds, for which the calendar of new offerings con-tinued heavy. The market rate on 3-month Treasury bills, at5.58 per cent on the day before this meeting, was 9 basis points

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below its level 3 weeks earlier, and rates on longer-term billswere down by 20 to 30 basis points.

Preliminary data for May suggested an increase in net inflowsof savings funds to mutual savings banks and savings and loanassociations. But with demands for mortgage funds continuingstrong, and with uncertainties increasing about prospects forsavings flows at thrift institutions around the midyear interest-and-dividend-crediting period, conditions in mortgage marketsremained fairly tight. Contract interest rates on conventionalnew-home mortgages, which had been at a postwar high inApril, rose sharply further in May.

At commercial banks, demands for business loans strength-ened after a mid-April to mid-May lull. There was some im-provement in net flows of time and savings deposits in thelatter part of May, but for the month as a whole such depositsgrew at an annual rate of only about 3 per cent, roughly thesame as in April and less than half the first-quarter pace. WithU.S. Government deposits declining further, private demanddeposits and the money supply expanded considerably; growthin the money supply was now estimated at an annual rate of11 per cent in May, compared with 6.5 per cent in April. Bankcredit, as measured by the bank credit proxy—daily-averagemember bank deposits—expanded at an annual rate of 1.5 percent in May, after declining at a 4.5 per cent rate in April.Allowance for changes in the daily average of U.S. bank liabili-ties to foreign branches, which are among the nondeposit liabili-ties of banks omitted in calculating the credit proxy, would haveserved to reduce the decline in April by about 1 percentagepoint and to have increased the rise in May by about 3.5 per-centage points.

New projections suggested that if prevailing money marketconditions were maintained the bank credit proxy would riseat an annual rate of 3 to 6 per cent in June and somewhat moreslowly in July; and that if money market conditions were lessfirm, growth in July would continue at about the rate projectedfor June. Allowance for a further increase in average liabilities

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to foreign branches, expected to occur in June, would haveadded about 3 percentage points to the limits of the range ofgrowth projected for that month. The projections for July as-sumed that the Treasury would raise a substantial amount ofnew cash—about $4 billion—early in the month through a saleof tax-anticipation bills. Further declines in the average levelof Government deposits were anticipated in both June and July,and were expected to contribute to continued vigorous expan-sion of the money supply.

The Committee's policy discussion at this meeting was con-ducted against the background of the widespread expectationthat Congress probably would act affirmatively within a few dayson the pending fiscal legislation. It was thought likely that suchaction would be followed by further declines in Treasury billrates and other short-term market interest rates. The possibilitywas recognized, however, that short-term rates might subse-quently come under renewed upward pressure, partly as aconsequence of the sizable cash financing the Treasury was ex-pected to undertake in early July.

The Committee agreed that open market operations shouldbe directed at maintaining firm conditions in the money marketin the period before Congress acted on the pending legislation,and at countering any tendencies toward disorder that mightresult if such action were negative or delayed. As to the appro-priate course if fiscal legislation were enacted soon, there wassome sentiment for seeking less firm money market conditionson the grounds that over-all economic restraint otherwise waslikely to prove excessive. At the same time, however, concernwas expressed in the course of the discussion about the risk thatpremature monetary easing would offset the effects of fiscalrestraint.

The Committee concluded that if Congress acted affirmativelyon the pending fiscal legislation open market operations shouldseek to accommodate any resulting declines in short-term in-terest rates and to cushion any upward pressures on such rates

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that might emerge subsequently. The proviso was added thatthis course should be followed only so long as bank creditgrowth in June, and also in July, did not appear to be develop-ing at a rate above the range projected for June.

The following current economic policy directive was issuedto the Federal Reserve Bank of New York:

The information reviewed at this meeting indicates that the very rapidincrease in over-all economic activity is being accompanied by persistinginflationary pressures. Enactment of fiscal restraint measures now underconsideration in Congress, however, would be expected to contribute toa considerable moderation of the rate of advance in aggregate demands.Growth in bank credit and time and savings deposits has been relativelysmall on average in recent months, although the money supply has ex-panded considerably as U.S. Government deposits have declined. Bothshort- and long-term interest rates have receded from the advanced levelsreached in May, mainly in reaction to enhanced expectations of fiscalrestraint. The U.S. foreign trade balance and over-all payments positioncontinue to be a matter of serious concern. In this situation, it is thepolicy of the Federal Open Market Committee to foster financial condi-tions conducive to resistance of inflationary pressures and attainment ofreasonable equilibrium in the country's balance of payments, while takingaccount of the potential impact of developments with respect to fiscallegislation.

To implement this policy, System open market operations until thenext meeting of the Committee shall be conducted with a view to main-taining generally firm but orderly conditions in the money market; pro-vided, however, that if the proposed fiscal legislation is enacted opera-tions shall accommodate tendencies for short-term interest rates todecline in connection with such affirmative congressional action on thepending fiscal legislation so long as bank credit expansion does notexceed current projections.

Votes for this action: Messrs. Martin, Brimmer,Daane, Galusha, Hickman, Kimbrel, Maisel, Mit-chell, Robertson, Sherrill, Bopp, and Treiber. Votesagainst this action: None.

Absent and not voting: Messrs. Hayes and Ellis.(Messrs. Treiber and Bopp voted as their alter-nates.)

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MEETING HELD ON JULY 16f 1968


Staff estimates for the second quarter continued to indicate sharpfurther advances in real GNP and in average prices as measuredby the "GNP deflator." It now appeared, however, that growth inconsumer expenditures had been smaller than expected earlierand that business fixed investment had declined somewhat. Muchof the increase in real GNP was a consequence of a marked risein the rate of inventory accumulation, reflecting in part a build-upof stocks of steel as a precaution against a possible strike whencurrent wage contracts expired on July 31.

Industrial production was estimated to have increased some-what further in June and retail sales, according to the advanceestimate, were unchanged. Although the labor market remainedgenerally firm, growth of nonfarm employment had slowed inrecent months. The unemployment rate rose from 3.5 per cent inMay to 3.8 per cent in June, when young workers entered thelabor force in larger numbers than usual.

The consumer price index advanced again in May and wasabout 4 per cent above a year earlier. Average hourly earningshad continued to rise at a substantial rate in recent months, butincreases in consumer prices had held down gains in real earningsand had contributed to demands for higher wages. At the whole-sale level, average prices of industrial goods rose again in Juneafter declining in May. Although increases had become less wide-spread recently, it appeared likely that industrial prices would re-main under upward pressure in coming months.

In late June legislation was enacted that provided for a 10 percent surcharge on income taxes, retroactive to April 1, 1968, forindividuals and to January 1, 1968, for corporations. The legisla-tion also provided for a $6 billion reduction from the JanuaryBudget estimate for Federal expenditures in the fiscal year 1969.However, the exemption from cuts of certain categories of ex-penditures together with upward revisions in estimates of defense

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spending suggested that the net reduction was likely to be lessthan $6 billion.

Staff projections suggested that the pace of advance in aggre-gate demands would moderate considerably in the third quarter,partly as a result of this legislation. It was expected that consumerexpenditures would advance at only about the moderate pace ofthe second quarter—with a decline in the rate of personal savingroughly offsetting the combined effects on disposable income ofthe income tax surcharge and smaller employment gains; that therise in Federal spending would slow; and that residential construc-tion outlays would turn down. On the other hand, some increasein business fixed investment outlays appeared likely. A signifi-cant reduction was now anticipated in the rate of inventory ac-cumulation; businesses were expected to shift from accumulationto decumulation of steel stocks after the strike deadline and toadjust stocks of consumer goods in line with the recently smallergains in sales.

In foreign exchange markets, the French franc continued underheavy pressure in late June and early July. The Bank of Franceincreased its discount rate from 3Vi to 5 per cent effective July 3,and on July 10 announced that it had arranged for $1.3 billion innewr international credit facilities. The exchange rate for sterlingreached a new low in late June, but subsequently strengthenedmarkedly as a result of two developments: (1) an announcementon July 8 that 12 central banks and the Bank for InternationalSettlements had given firm assurances of their willingness to par-ticipate in new arrangements to offset fluctuations in the sterlingbalances of countries in the sterling area; and (2) the publicationon July 11 of figures indicating that British imports had declinedsignificantly in June for the first time since devaluation of thepound. The price of gold in the private London market recentlyhad fallen from around $41 to around $39 per ounce on rumorsof an arrangement designed to encourage sales of gold in themarket by South Africa.

Tentative estimates suggested that the deficit in the U.S. bal-

168


ance of payments on the liquidity basis had declined markedly inthe second quarter. All of the improvement, however, appeared toreflect special official transactions; except for these transactions,the deficit would have been large. The merchandise trade accountwas in deficit in May for the second time in 3 months. On theofficial settlements basis the payments balance was estimated tohave been in substantial surplus in the second quarter, as a resultof a record increase in liabilities of U.S. banks to foreign branches.

On July 2 the Treasury auctioned $4 billion of tax-anticipationbills maturing in March and April 1969, for which commercialbanks were permitted to make payment in full by credits to taxand loan accounts. The Treasury was expected to announce atthe end of July the terms on which it would refund the $8.6 billionof securities maturing in mid-August, of which $3.6 billion wereheld by the public. Current estimates suggested that the Treasuryalso would have to raise a substantial amount of new cash inAugust.

Conditions in securities markets had eased somewhat in re-action to the enactment of fiscal-restraint legislation, and yields onGovernment securities of all maturities had declined moderatelyon balance in the period since the preceding meeting of the Com-mittee. The market rate on 3-month Treasury bills initially fellsharply—from 5.60 per cent on June 18 to 5.20 per cent on June21. The abruptness of this decline was related to heavy reinvest-ment demands by holders of maturing tax-anticipation bills andto substantial purchase of bills by the System on June 19 to offsetthe effects on bank reserves of large-scale international trans-actions. Subsequently the 3-month bill rate came under upwardpressure partly as a result of the Treasury's offering of tax bills inearly July, and on the day before this meeting it was 5.42 percent, 18 basis points below its level 4 weeks earlier. Rates on othershort-term instruments showed smaller net declines over theinterval, and some—such as those on commercial paper—re-mained at their mid-June levels.

Yields on long-term corporate and municipal bonds, for which

169


the volume of new issues continued sizable in June and July, werelittle changed over most of the period since the preceding meetingof the Committee. Conditions in private bond markets had be-come more buoyant in recent days, however, following the goodreception accorded a large corporate issue. Expectations of anear-term relaxation in monetary conditions contributed to theimprovement in bond markets, as did the announcements of newinternational support for sterling and the French franc.

System open market operations since the preceding meeting ofthe Committee had been directed at maintaining firm conditionsin the money market, while accommodating tendencies for short-term interest rates to decline following congressional action onfiscal legislation. The interest rate on System repurchase agree-ments with nonbank dealers was reduced to 5% per cent on July5 from the level of 53A per cent that had been employed since lateApril. The effective rate on Federal funds, which was mainly ina 6V4 to 6Y2 per cent range early in the interval, subsequentlyfluctuated primarly in a 6 to 6Vs per cent range. Member bankborrowings averaged $595 million and net borrowed reserves$260 million in the 4 weeks ending July 10, compared with aver-ages of $720 million and $410 million, respectively, in the pre-ceding 4 weeks.

Conditions in markets for residential mortgages continued totighten through mid-June but appeared to have stabilized there-after. Preliminary indications suggested that the savings flow ex-perience of nonbank depositary institutions during the interest-and-dividend-crediting period around the end of June was betterthan many industry observers had expected.

Growth in time and saving deposits at commercial banks inJune remained at the low annual rate of about 3 per cent that hadprevailed in the two preceding months. However, the net reduc-tion during the course of the month in the volume of large-denomination CD's outstanding was considerably less thannormal for the season, and in late June and early July the out-standing volume was increasing. By the time of this meeting most

170


banks issuing such CD's had reduced their offering rates for cer-tificates of longer maturity to levels below the Regulation Q ceil-ings. Private demand deposits and the money supply continued toexpand rapidly in June, although not so rapidly as in May, andU.S. Government deposits increased slightly after declining stead-ily since February. In the second quarter as a whole, during whichGovernment deposits fell substantially on balance, the moneysupply grew at an annual rate of about 8.5 per cent, comparedwith about 4.5 per cent in the first quarter.

Commercial bank credit, as measured by the bank credit proxy—daily-average member bank deposits—increased at an annualrate of 6 per cent in June after rising relatively little in May anddeclining in April. For the 3 months together, the proxy seriesincreased at an annual rate of 1 per cent, compared with a rate ofabout 7 per cent in the first quarter. Allowance for changes in thedaily average of U.S. bank liabilities to foreign branches, whichare among the nondeposit liabilities omitted in calculating thecredit proxy, would have served to increase the growth rates byabout 2.5 percentage points in the second quarter and 0.5 of apercentage point in the first.

It was expected that the pattern of bank credit growth in Julyand August would be strongly influenced by Treasury financingoperations and by business borrowing to finance additional taxpayments required under the terms of the new legislation. Staffprojections suggested that if prevailing money market conditionswere maintained the bank credit proxy would grow at annualrates in the ranges of 1 to 4 per cent in July, 10 to 12 per cent inAugust, and 6 to 8 per cent in the 2 months taken together. In analternative projection, in which somewhat easier money marketconditions were assumed, the annual rate of increase in the bankcredit proxy in July and August together was estimated in a rangeof 7 to 9 per cent. These projections assumed that the Treasurywould raise a total of about $7.5 billion of new cash in the 2months, including the $4 billion already raised in July throughthe sale of tax-anticipation bills. Allowance for a further increase

171


in average liabilities to foreign branches, expected to occur inJuly, would have added about 1 percentage point to the limits ofthe ranges of growth projected for July and August together.

It appeared likely that private demand deposits and the moneysupply would continue to expand at a substantial rate on averagein July, but to slow sharply in the latter part of the month and tochange little on average in August, a period in which Governmentdeposits were expected to rise substantially on balance. The out-look also favored further rapid growth in large-denominationCD's outstanding, at least in July.

In the course of the Committee's discussion a number of mem-bers indicated that they were inclined to maintain prevailingmoney market conditions for the time being, while awaiting evi-dence of the probable effectiveness of the recently enacted fiscalrestraint measures in containing inflationary pressures and im-proving the underlying position of the balance of payments. Othermembers, while not advocating a substantially easier monetarypolicy at present, thought that the prospective effects of the newfiscal legislation warranted seeking somewhat less firm moneymarket conditions to the extent such a course was consistent withthe forthcoming Treasury financing.

After considering these alternatives, the Committee agreedupon an intermediate course. Specifically, it was decided thatopen market operations should be directed at accommodatingeasing tendencies in money market conditions in the period aheadif such tendencies arose from market forces; and at cushioningupward pressures on interest rates if they should develop. It alsowas agreed that operations should be modified, to the extent per-mitted by the Treasury financing, if bank credit appeared to bedeviating significantly from current projections.

The Committee also discussed the appropriate interest rate forSystem repurchase agreements (RP's) with nonbank dealers.The members noted that market participants had attached somedegree of policy significance to recent changes in the RP rate andto the fact that the rate employed most lately was still Vs of a

172


percentage point above the discount rate. While the views ofmembers differed regarding the desirability of regular use of aflexible RP rate as an instrument for influencing money marketconditions, the Committee thought that under existing circum-stances it would be appropriate to employ a 5Vi per cent ratebeginning with the next occasion on which the Account Manage-ment made repurchase agreements.


The information reviewed at this meeting indicates that over-all economicactivity continued to expand rapidly in the second quarter, with inventoryaccumulation accelerating while the rise in capital outlays and in consumerspending slowed. The new fiscal restraint measures are expected to contributeto a considerable moderation of the rate of advance in aggregate demands.Industrial prices have been increasing less rapidly than earlier but consumerprices have continued to rise substantially and wage pressures remain strong.Growth in bank credit and time and savings deposits has been moderate onaverage in recent months; growth in the money supply has been larger as U.S.Government deposits have been reduced. Conditions in money and capitalmarkets have eased somewhat, mainly in response to the increase in fiscalrestraint. Although there recently have been large inflows of foreign capital,the U.S. foreign trade balance and underlying payments position continue tobe matters of serious concern. In this situation, it is the policy of the FederalOpen Market Committee to foster financial conditions conducive to sustain-able economic growth, continued resistance to inflationary pressures, andattainment of reasonable equilibrium in the country's balance of payments.

To implement this policy, while taking account of forthcoming Treasuryfinancing activity, System open market operations until the next meeting ofthe Committee shall be conducted with a view to accommodating the tendencytoward somewhat less firm conditions in the money market that has developedsince the preceding meeting of the Committee; provided, however, that opera-tions shall be modified, to the extent permitted by Treasury financing, ifbank credit appears to be deviating significantly from current projections.

Votes for this action: Messrs. Martin, Hayes,Brimmer, Daane, Galusha, Hickman, Kimbrel,Maisel, Mitchell, Robertson, Sherrill, and Bopp.Votes against this action: None.

173


(Mr. Bopp voted as an alternate member in placeof Mr. Ellis, whose membership on the Committeehad terminated on June 30, 1968, the effective dateof his resignation as President of the Federal ReserveBank of Boston.)

2. Amendments to authorization for System foreign currencyoperations.

The Committee ratified an action taken by members on July 2,1968, effective on that date, to increase the System's swap ar-rangement with the Bank of France from $100 million to $700million equivalent, and to make the corresponding amendment toparagraph 2 of the authorization for System foreign currencyoperations. As a result of this action, paragraph 2 read as follows:

The Federal Open Market Committee directs the Federal Reserve Bankof New York to maintain reciprocal currency arrangements ("swap" ar-rangements) for System Open Market Account for periods up to a maxi-mum of 12 months with the following foreign banks, which are amongthose designated by the Board of Governors of the Federal Reserve Systemunder Section 214.5 of Regulation N, relations with foreign banks andbankers, and with the approval of the Committee to renew such arrange-ments on maturity:

Foreign bank

Austrian National BankNational Bank of BelgiumBank of CanadaNational Bank of DenmarkBank of EnglandBank of FranceGerman Federal BankBank of ItalyBank of JapanBank of MexicoNetherlands BankBank of Norway


dollars equivalent)

100225

1,000100

2,000700

1,000750

1,000130400100

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Foreign bank dollars equivalent)

Bank of Sweden 250Swiss National Bank 600Bank for International Settlements:

System drawings in Swiss francs 600System drawings in authorized European

currencies other than Swiss francs 1,000

Votes for ratification of this action: Messrs.Martin, Hayes, Brimmer, Daane, Galusha, Hickman,Kimbrel, Maisel, Mitchell, Robertson, Sherrill, andBopp. Votes against ratification of this action: None.

(Mr. Bopp voted as an alternate member in placeof Mr. Ellis, whose membership on the Committeehad terminated on June 30, 1968.)

Although the arrangement between the Bank of France andthe Federal Reserve had been the first negotiated when the Sys-tem's swap network was established in 1962, it had remained at$100 million since early 1963 while various other lines in the net-work had been enlarged from time to time. The increase in thisarrangement served to bring the relative sizes of the arrangementsin the System's swap network into better balance. It formed partof a package of credit facilities provided to the Bank of France atthis time by a number of central banks to help deal with de-stabilizing exchange market pressures.

The Committee also amended the foreign currency authoriza-tion in another respect at this meeting. Under paragraph 1C(1)of the authorization, as it had been amended on November 14,1967, the Federal Reserve Bank of New York was authorized tohave outstanding forward commitments to deliver foreign cur-rencies to the Stabilization Fund of up to $350 million equivalent.The limit had been increased to that level (from a previous figure

175


of $200 million) in November to facilitate the "warehousing" bythe System Account of Stabilization Fund holdings of sterling ifthe resources of the Stabilization Fund proved inadequate to meetall the demands upon them from time to time in the future.

At this meeting the Committee approved an increase in thelimit in question up to an amount not exceeding $1,050 millionequivalent, on the understandings that (1) the specific amountwould be determined by Chairman Martin (or in his absence, Mr.Robertson, Vice Chairman of the Board of Governors) and (2)that the action would become effective upon a determination byChairman Martin (or in his absence, Mr. Robertson) that it wasin the national interest.

Votes for this action: Messrs. Martin, Hayes,Brimmer, Daane, Galusha, Hickman, Kimbrel,Maisel, Mitchell, Robertson, Sherrill, and Bopp.Votes against this action: None.

(Mr. Bopp voted as an alternate member in placeof Mr. Ellis, whose membership on the Committeehad terminated on June 30, 1968.)

This action was taken against the background of discussions atmeetings in Basle, Switzerland, on July 6-8, 1968, and prior dis-cussions between representatives of the U.S. Treasury and theFederal Reserve. At the Basle meetings agreement in principle hadbeen reached among representatives of the Bank for InternationalSettlements, the Bank of England, and 12 other central banksincluding the Federal Reserve regarding new arrangements foroffsetting fluctuations in sterling balances held by countries in theoverseas sterling area (OSA). In general, the agreement pro-vided for the extension of a medium-term facility of $2 billionequivalent to the Bank of England by the BIS, with backing pro-vided by the participating central banks, acting where appropriateon behalf of their Governments. It was understood that the agree-ment was contingent on the satisfactory completion of negotia-

176


tions by the British authorities with the OSA countries concerningthe management by the latter of their sterling reserves.

In the System's preliminary discussions with the U.S. Treasuryit had been agreed that the Treasury should participate as prin-cipal in the arrangement, with the dollars to be made available ona swap basis against sterling by the Stabilization Fund. It was alsoagreed that if the resources of the Stabilization Fund should proveinsufficient from time to time to meet these and other commit-ments, the Federal Reserve would undertake to warehouse tem-porarily for the Stabilization Fund necessary portions of thesterling acquired by the latter.

It was reported at this meeting of the Committee that the U.S.share in the arrangement would be in the neighborhood of $600million to $700 million. After approving System participation inthe arrangement in the manner described, the Committee notedthat the agreement was contingent on certain negotiations by theBritish authorities and that the specific size of the U.S. share hadnot yet been determined. Accordingly, it was decided that boththe effective date of the amendment to paragraph 1C(1) of theauthorization and the new figure for maximum forward commit-ments to the Stabilization Fund to be established by that amend-ment (within the limit set by today's action) should be subject todetermination by Chairman Martin, or in his absence, Mr.Robertson.

Subsequently, agreement was reached on the new arrangementat a meeting in Basle on September 9, 1968, with the U.S. shareestablished at $650 million, and the arrangement went into forceon September 23, 1968. On September 24, Chairman Martindetermined that an increase in the limit on forward commitmentsto deliver foreign currencies to the Stabilization Fund of $650million equivalent, to $1 billion, was in the national interest.Accordingly, effective September 24, 1968, paragraph 1C(1) ofthe authorization for System foreign currency operations wasamended to read as follows:

177


1. The Federal Open Market Committee authorizes and directs the Fed-eral Reserve Bank of New York, for System Open Market Account, to theextent necessary to carry out the Committee's foreign currency directive:


(1) Commitments to deliver foreign currencies to the StabilizationFund, up to $1 billion equivalent;

178


MEETING HELD ON AUGUST 13, 1968


Reports at this meeting indicated that some elements of economicactivity had expanded vigorously in early summer. Staff projec-tions suggested, however, that expansion in over-all activitywould slow considerably in the months ahead as a result of thenew fiscal restraint measures and a marked reduction in inven-tory accumulation.

Retail sales rose sharply in July, according to the advancereport. Industrial production increased moderately, and non-farm employment continued upward at the reduced pace of re-cent months. The unemployment rate edged down to 3.7 percent from 3.8 per cent in June, but remained above the low of3.5 per cent recorded in the two preceding months.

Average prices of industrial commodities advanced onlyslightly further in July, but increases in steel prices were an-nounced following the wage settlement in the steel industry atthe end of the month. Because of a marked, although largelyseasonal, increase in prices of farm products and foods, thewholesale price index rose considerably in July. In June theconsumer price index rose more than it had in other recentmonths. About one-half of the advance reflected higher costsof consumer services, including mortgage interest charges.

The staff projections suggested that inventory accumulation,which had contributed significantly to the rapid growth of realGNP in the second quarter, would slow in the third and fourthquarters. A sharp curtailment of steel production had alreadybegun, and it was expected that liquidation of the stocks ofsteel that had been built up as a precaution against a strikewould continue throughout the rest of the year and perhaps intoearly 1969. Growth in final sales was projected to remain atabout the reduced second-quarter rate, in the expectation thatthe rise in Federal spending would taper off and that the incometax surcharge would damp increases in consumer expenditures.

179


In foreign exchange markets the French franc had remainedunder pressure in recent weeks. The position of sterling hadimproved earlier, following the announcement that 12 centralbanks had expressed willingness to participate in new arrange-ments to offset fluctuations in overseas sterling balances and areport indicating that the British foreign trade deficit had nar-rowed in June. The sterling exchange rate moved lower on theday of this meeting, however, after publication of figures indi-cating that the British trade deficit had widened again in July.The price of gold in the private London market recently hadcontinued to fluctuate in a narrow range around $39 per ounce.

In the second quarter the U.S. foreign trade balance haddeteriorated further. Nevertheless, the over-all payments balanceon the liquidity basis, although still in deficit, had improvedsubstantially, partly as a result of various special official trans-actions. Even apart from such transactions, however, the balancehad improved markedly in May and June, when there weresizable net inflows of private capital; and it appeared that theimprovement had been maintained in July. A substantial surpluswas recorded in the payments balance on the official settlementsbasis in the second quarter, mainly because of a massive increasein liabilities of U.S. banks to their branches abroad. Such liabili-ties increased further in early July, but declined in subsequentweeks.

On July 31 the Treasury offered a new 6-year, 55/s per centnote priced to yield about 5.70 per cent, for payment on August15. Commercial banks were permitted to pay for 50 per cent oftheir allotments by credits to Treasury tax and loan accounts.The issue was very well received, and the Treasury raised about$1.9 billion of new cash in addition to refunding $3.6 billionof publicly held securities maturing in mid-August. This wasthe largest sale to the public of an intermediate-term issue inmore than 20 years.

Most interest rates had declined substantially on balance sincethe previous meeting of the Committee. The declines were largely

180


attributable to market expectations that credit conditions wouldease as a result of slower economic growth, smaller prospectiveTreasury financing needs, and relaxation of monetary restraintfollowing the recent enactment of fiscal legislation. Expectationsof a near-term shift in monetary policy, perhaps including a cutin the discount rate, appeared to have been encouraged by areduction in the interest rate on System repurchase agreementsfrom 55/s to 5Vi per cent on the day after the Committee'spreceding meeting.

Contributing to the rate declines were increases in bank pur-chases of Treasury and municipal securities and a large build-upof dealer inventories of Treasury securities, as well as prospectsfor a substantial reduction in the volume of new corporate bondissues. The fact that only an intermediate-term obligation wasoffered in the Treasury's August financing—in contrast to thecustomary practice of including a short-term "anchor" issue—added to downward pressures on rates in short-term markets,where the declines were most pronounced.

Most recently, however, continued firmness in day-to-daymoney market rates had raised doubts about prospects for animmediate substantial easing of monetary policy. Both short- andlong-term interest rates had turned up and had erased part oftheir earlier declines. On the day before this meeting the marketrate on 3-month Treasury bills was 5.05 per cent, 16 basis pointsabove the low reached in the preceding week but still 37 basispoints below its mid-July level.

Net inflows of funds to mutual savings banks and savings andloan associations slowed in July. There were signs, however, thatconditions in primary and secondary mortgage markets werebeginning to ease, after tightening gradually but steadily formore than a year.

With interest rates on competing market instruments decliningon balance in July, the volume of large-denomination CD's out-standing at commercial banks increased by an unusually largeamount. Banks recently had reduced their offering rates on all

181


CD's except those with short maturities, and by the time of thismeeting such rates were still at the Regulation Q ceilings onlyfor CD's maturing within 2 months. Growth in consumer-typetime and savings deposits continued in July at about the moder-ate pace of previous months. Government deposits declined onaverage, and growth in private demand deposits and the moneysupply accelerated—the latter to an annual rate of about 13 percent, from 8.5 per cent in the second quarter and 4.5 per centin the first.

Business loans outstanding at banks increased more than sea-sonally in July, although the rise was somewhat less than mighthave been expected in view of the additional corporate tax pay-ments required under the new fiscal legislation. Bank investmentsexpanded sharply, however, as did loans to finance securitiesholdings. Total bank credit, as measured by the bank creditproxy—daily-average member bank deposits—grew at an annualrate of 9 per cent, compared with rates of 1 per cent in thesecond quarter and 7 per cent in the first. Allowance for changesin the daily average of U.S. bank liabilities to foreign brancheswould have served to increase the growth rate by 2 percentagepoints in July and slightly more in the second quarter.

System open market operations in the early part of the intervalfollowing the preceding meeting of the Committee had beendirected at accommodating the tendencies for short-term interestrates to decline. Later in the period, however, when it becameapparent that bank credit was increasing at a rate significantlyabove that projected at the time of the previous meeting, oper-ations were modified to the extent permitted by the Treasuryfinancing. Member bank borrowings, which had averaged $555million in the 2 weeks ending July 24, rose to an average of $670million in the following 2 weeks; and average net borrowed re-serves increased from $215 million to $320 million. Since thepreceding meeting of the Committee, the effective rate on Federalfunds had fluctuated mostly in a 6 to 6 V\ per cent range andbank rates on loans to dealers in U.S. Government securities,

182


whose financing needs were heavy, also had remained high.New staff projections suggested that the bank credit proxy

would increase from July to August at an annual rate of 16 to18 per cent if the prevailing stance of monetary policy weremaintained. About three-fourths of the estimated growth re-flected an expected increase in average Government depositsfrom July to August as a result of Treasury cash borrowing.Much slower growth—at an annual rate of 5 to 7 per cent—was anticipated for September, when the Treasury was not ex-pected to engage in new borrowing except in connection withits regular bill offerings. The money supply was projected toremain about unchanged in August and to grow moderately inSeptember when a decline in Government deposits was antici-pated. Expansion in time and savings deposits was expected tomoderate somewhat in August and September.

The Committee agreed that the rate of economic growth waslikely to slow during the second half of the year. Several mem-bers noted, however, that some moderation in the recent rapidpace of expansion would be desirable in light of prevailing in-flationary pressures, and that the evidence available to date wasnot sufficient to indicate the amount of slowing in prospect.Considerable concern was expressed about the rapid rates ofincrease in bank credit experienced in July and projected forAugust, even though it was noted that the spurt was projectedto be temporary. At the same time, it was thought generally thatit would be undesirable for short-term interest rates, which hadbeen advancing in recent days, to rise substantially further.

The Committee concluded that it would be appropriate at thistime to maintain, on balance, about the prevailing conditionsin money and short-term credit markets, with some easing inday-to-day money market rates to be permitted if Treasury billand other short-term rates remained under marked upward pres-sure. It was also agreed, however, that operations should bemodified if bank credit growth in August and Septemberappeared to be significantly exceeding current projections.

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Several members expressed the view that in light of themarked net decline in short-term interest rates since the enact-ment of fiscal legislation, a near-term reduction in the discountrate would be appropriate to bring it into better alignment withcurrent market rates. These members noted that a cut in thediscount rate might have the effect of moderating further up-ward pressures on short-term rates without requiring reserveinjections of the size that might otherwise be needed for thatpurpose.

At the conclusion of the discussion the following currenteconomic policy directive was issued to the Federal ReserveBank of New York:

The information reviewed at this meeting indicates that some elementsof economic activity continued to expand vigorously in early summer." Ex-pansion in over-all activity, however, is projected to slow considerably incoming months as a result of the new fiscal restraint measures and amarked reduction in inventory accumulation. Industrial prices have beenincreasing less rapidly in recent months, but consumer prices have con-tinued to rise substantially. Wage pressures remain strong, and the recentwage settlement in the steel industry was followed by announcements ofsteel price increases. Both short- and long-term interest rates have declinedconsiderably, in large part as a result of expectations of easier credit con-ditions. Bank time and savings deposits, particularly large-denominationCD's, have expanded sharply in early summer; growth in the money supplyhas continued large as U.S. Government deposits have been drawn downfurther on average; and growth in total bank credit has been unusuallyrapid. Although the U.S. balance of payments has recently shown a markedimprovement, the foreign trade balance and underlying payments positioncontinue to be matters of serious concern. In this situation, it is the policyof the Federal Open Market Committee to foster financial conditions con-ducive to sustainable economic growth, continued resistance to inflationarypressures, and attainment of reasonable equilibrium in the country'sbalance of payments.

'To implement this policy, System open market operations until the nextmeeting of the Committee shall be conducted with a view to maintaining,on balance, about the prevailing conditions in money and short-term creditmarkets; provided, however, that operations shall be modified if bank creditappears to be significantly exceeding current projections.

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Votes for this action: Messrs. Martin, Brimmer,Daane, Galusha, Hickman, Kimbrel, Maisel, Mitch-ell, Robertson, Sherrill, Bopp, and Treiber. Votesagainst this action: None.

Absent and not voting: Mr. Hayes. (Mr. Treibervoted as his alternate. Also, Mr. Bopp voted as analternate member in place of Mr. Ellis, whose mem-bership on the Committee had terminated on June30, 1968, the effective date of his resignation asPresident of the Federal Reserve Bank of Boston.)

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MEETING HELD ON AUGUST 19, 1968


On Thursday, August 15, the Board of Governors of the FederalReserve System approved a reduction from 5Yi to 5VA per centin the discount rate of the Federal Reserve Bank of Minneapolis.1

In its announcement the Board stated that the change was pri-marily technical, to align the discount rate with the change inmoney market conditions that had occurred chiefly as a result ofthe enactment of the Federal tax increase and its related expendi-ture cuts. The purpose of today's meeting, which was held bytelephone, was to consider the need for a revision of the Com-mittee's current economic policy directive in light of the discountrate action.

Reports at this meeting indicated that the reaction in financialmarkets to the Board's discount rate announcement had beenquite mild. Prices of Treasury notes and bonds had edged upslightly on Friday, August 16. The market rate on 3-monthTreasury bills—which had advanced from 5.05 per cent on Au-gust 12, the day before the Committee's previous meeting, to5.17 per cent on August 15—declined the next day to 5.11 percent. There had been no significant change in the effective rateon Federal funds, which had been fluctuating in a 6 to 6VA percent range in recent weeks. Staff projections still suggested thatthe bank credit proxy—daily-average member bank deposits—would increase at annual rates of 16 to 18 per cent in August and5 to 7 per cent in September, even if there were some easing ofday-to-day money market rates in the wake of discount rate re-ductions.

The Committee agreed that open market operations should bedirected at facilitating orderly money market adjustments to re-

1JThe reduction was effective August 16. Discount rates of the other FederalReserve Banks were subsequently reduced to 5lA per cent, with effective dates asfollows: Richmond, August 19; Chicago, Cleveland, Kansas City, and Philadel-phia, August 23; Boston, August 27; Dallas, August 28; and Atlanta, New York,St. Louis, and San Francisco, August 30.

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ductions in Federal Reserve Bank discount rates. As at the pre-ceding meeting, the desirability was noted of cushioning upwardpressures on short-term interest rates if they should develop.

The Committee also agreed that operations should be modifiedif bank credit appeared to be deviating significantly from currentprojections, on the understanding that this proviso was to be im-plemented as a result of any downward deviations only if suchdeviations were of considerable magnitude.


System open market operations until the next meeting of the Committeeshall be conducted with a view to facilitating orderly adjustments in moneymarket conditions to reductions in Federal Reserve Bank discount rates;provided, however, that operations shall be modified if bank credit appearsto be deviating significantly from current projections.

Votes for this action: Messrs. Hayes, Brimmer,Daane, Galusha, Hickman, Kimbrel, Maisel, Robert-son, Sherrill, and Bopp. Votes against this action:None.

Absent and not voting: Messrs. Martin, Mitchell,and Morris. (Mr. Bopp voted as alternate for Mr.Morris.)

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MEETING HELD ON SEPTEMBER 1O? 1968


Consumer expenditures had been expanding vigorously this sum-mer, according to reports at this meeting. Staff projections sug-gested, however, that the rate of business inventory accumulationwas declining markedly in the third quarter—largely because ofa shift from accumulation to liquidation of steel stocks—and thatgrowth in over-all activity was slowing as a consequence.

Steel production had been cut back sharply following the wagesettlement in the steel industry at the end of July, and as a resultthe industrial production index was tentatively estimated to havedeclined in August. Although nonfarm payroll employment in-creased fairly sharply in August, manufacturing employment wasunchanged for the second consecutive month. Total civilian em-ployment declined in August, but the labor force declined some-what more and the unemployment rate fell to 3.5 per cent from3.7 per cent in July.

Growth in Federal outlays appeared to be slowing in the thirdquarter, but total final sales were now estimated to be rising at arapid rate. Retail sales, which had increased sharply in July, re-mained at a high level in August according to available weeklyfigures. The sizable advance in consumer spending apparentlywas associated with a decline in the saving rate; the new incometax surcharge affected paychecks beginning in mid-July, and dis-posable income was estimated to be advancing less rapidly in thethird quarter than earlier in the year. Housing starts also roseconsiderably in July, and it appeared that residential construc-tion outlays would be somewhat higher in the third quarter thanin the second. A new Commerce—SEC survey, taken in August,indicated that business outlays on plant and equipment would besomewhat lower in 1968 as a whole than estimated earlier, butthat businesses planned to increase their outlays moderately fromthe second quarter to the third.

Staff projections for the fourth quarter suggested that the rate

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of inventory accumulation would be reduced somewhat furtheras liquidation of steel stocks continued and that the expansion infinal sales would slow. It was expected that the increase in Fed-eral expenditures would be quite small and that the rise in con-sumer spending would slacken as a result of continuing slowgrowth of disposable income. Little change was anticipated inresidential construction expenditures, and the recent Commerce—SEC survey suggested that business outlays for plant andequipment would be maintained at about the third-quarter rate.

Average prices of industrial commodities, according to pre-liminary estimates, were unchanged in August after rising onlyslightly in July. It was expected, however, that the industrialaverage for September would be affected by advances alreadyannounced in prices of steel mill products. Prices of farm prod-ucts and foods, which had increased considerably in July, de-clined in August, and the over-all wholesale price index moveddown to its June level. The consumer price index rose substan-tially in July for the second month in a row; as in June, a largepart of the advance reflected higher costs of consumer services,including mortgage interest charges.

In foreign exchange markets, rumors in late August that a re-valuation of the German mark was imminent led to large-scaleinflows of funds into Germany and to sharply increased pressureson the French franc and sterling. On September 4 the FrenchGovernment unexpectedly removed the foreign exchange con-trols it had imposed on May 31. Following the announcement ofthis action and the simultaneous publication of preliminary esti-mates of the French budget for 1969, the position of the francimproved; but pressures subsequently resumed. The sterling ex-change rate strengthened appreciably after the announcement onSeptember 9 that final agreement had been reached by the Bankof England and 12 other central banks on new arrangements tooffset fluctuations in overseas sterling balances. The price of goldin the private London market had risen by about $1 per ounce

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since mid-August and currently was fluctuating narrowly around$40.

U.S. exports increased slightly and imports fell sharply in July—resulting in a small surplus in the foreign trade balance after 2months of deficit. Despite a foreign trade deficit in the May-Julyperiod as a whole, the payments balance on the liquidity basis,apart from special official transactions, had improved consider-ably. However, tentative estimates for August suggested that alarge deficit had re-emerged. The balance on the official settle-ments basis apparently was in surplus in August, as liabilities ofU.S. banks to their foreign branches rose to a new high after de-clining during the last 3 weeks of July.

In domestic financial markets, prior to the reductions in Fed-eral Reserve Bank discount rates from 5Vi to 5V4 per cent—thefirst of which was announced on August 15—interest rates onvarious types of market securities had been rising from the lowsthey had reached early in the month. Market reactions to the dis-count rate cuts were varied; some observers interpreted the actionas a confirmation of earlier expectations of some relaxation inmonetary restraint, while others—who had expected more vig-orous action—thought it indicated that a marked easing of policywas not likely in the near future.

On balance, interest rates on new corporate bonds and onTreasury securities changed little during the latter half of August.However, yields on municipal bonds remained under upwardpressure in the face of continuing heavy flotations of new issuesby State and local governments. In early September yields on newcorporate bonds and on Treasury securities also advanced, ascorporate underwriters released unsold new offerings from syn-dicate and some Government securities dealers acted to lightentheir heavy inventories. The market rate on 3-month Treasurybills was 5.24 per cent on the day before this meeting, 13 basispoints above its level following the mid-August announcementof discount rate action. Rates on longer-term Treasury bills had

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risen only slightly during the interval and currently were close toor below the rate on 3-month bills.

Growth in commercial bank time and savings deposits, whichhad stepped up sharply in July, accelerated further in August.Expansion in large-denomination CD's outstanding was sub-stantial but less than the very large rise of July, when interestrates on competing market instruments had been declining. Theaverage level of U.S. Government deposits increased consider-ably in August as a result of Treasury cash financings, and ex-pansion in private demand deposits and the money supply slowedappreciably—the money supply to an annual rate of about 5 percent from nearly 15 per cent in July.

In August, as in July, banks were heavy buyers in the largeofferings of securities undertaken by Federal, State, and localgovernments. Growth in bank loans to businesses was maintainedat about the recent average pace, and loans to brokers and deal-ers to finance holdings of securities increased moderately further.Total bank credit, as measured by the bank credit proxy—daily-average member bank deposits—expanded at the unusually highannual rate of 21 per cent, after rising at a 9 per cent rate in July.Allowance for changes in the daily average of U.S. bank liabili-ties to foreign branches would have served to increase the growthrate by about Vi of a percentage point in August and 1 Vi per-centage points in July.

System open market operations in the period since the Com-mittee's August 19 meeting had been directed mainly at facili-tating orderly adjustments in money market conditions to thereduction in Federal Reserve Bank discount rates. As the periodprogressed less emphasis was placed on the supplementary ob-jective of moderating upward pressures on Treasury bill rates, inlight of accumulating evidence that bank credit was growing ata higher rate than that projected at the time of the Committee'sprevious meeting. The effective rate on Federal funds, which hadbeen mostly in a 6 to 6VA per cent range prior to the discountrate cuts, subsequently fluctuated in a 5% to 6 per cent range

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and was at the upper end of that range at the close of the period.Net borrowed reserves and member bank borrowings averagedabout $185 million and $480 million, respectively, in the 3weeks ending September 4, down from averages of about $290million and $640 million in the previous 3 weeks.

Growth in bank credit was expected to moderate from the highAugust rate in September and October. The Treasury was notexpected to engage in an another major cash financing until thelatter part of October; and prospects favored some reductionfrom the current high level of outstanding loans to finance hold-ings of securities and also a slower growth in business loans, par-ticularly after the mid-September tax date. New staff projectionssuggested that the bank credit proxy would expand at an annualrate of 7 to 10 per cent in September if prevailing conditions inmoney and short-term credit markets were maintained. Growthin about the same range was foreseen for October, on the as-sumption that the Treasury would raise about $3 billion of newcash in the latter part of the month. The projections suggestedthat expansion in time and savings deposits would moderate inSeptember, and that on the average Government deposits wouldchange little over September and October and the money supplywould rise only slightly.

The Committee decided that no change in monetary policywas warranted at this time. On the one hand, a relaxation ofmonetary restraint was not deemed appropriate in light of thecurrent strength of final demands and the persistence of infla-tionary pressures; on the other hand, greater restraint was notconsidered desirable in view of the outlook for slowing in over-all economic activity, although it was noted that firm evidencewas lacking thus far on the amount of slowing in prospect. How-ever, a number of members—while not advocating a firming ofpolicy—expressed concern about the rapid rates of bank creditexpansion in recent months, and some thought that expansion inSeptember and October at a rate near the upper end of the pro-

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jected range would be higher than desirable in the current eco-nomic environment.

At the same time, it was noted that Treasury bill rates mightwell come under temporary upward pressure as a result ofcredit demands associated with the September tax date and thelarger-scale sales of bills by the System that were expected to berequired in the next week or so to absorb reserves supplied bymarket factors. A number of members expressed the view thatsuch pressures should be moderated if they proved to be undulymarked or prolonged, in light of the risk that persistent large in-creases in bill rates might precipitate a change in market expecta-tions that would result in a new general uptrend in market in-terest rates.

The Committee concluded that it would be desirable at presentfor open market operations to be directed at maintaining aboutthe prevailing conditions in the money and short-term creditmarkets, on the understanding that increases in Treasury billrates in the near term, if moderate, would not be considered in-consistent with this objective. The proviso was added that opera-tions should be modified if bank credit appeared to be deviatingsignificantly from current projections.


The information reviewed at this meeting suggests that, although con-sumer demands have been strong this summer, reduced rates of inventoryaccumulation and tapering growth of Government expenditures are beingreflected in a slowing of expansion in over-all activity. Industrial priceshave been increasing less rapidly in recent months, but consumer priceshave continued to rise substantially and wage pressures remain strong. Mostmarket interest rates have changed little on balance following reductions inFederal Reserve Bank discount rates. Growth in bank credit and time andsavings deposits has been rapid this summer; growth in the money supplyslowed in August as U.S. Government deposits were built up following anextended decline. The earlier improvement in the U.S. balance of paymentswas not maintained in August, according to preliminary indications, and

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the foreign trade balance and underlying payments position continue to bematters of serious concern. In this situation, it is the policy of the FederalOpen Market Committee to foster financial conditions conducive to sus-tainable economic growth, continued resistance to inflationary pressures,and attainment of reasonable equilibrium in the country's balance of pay-ments.

System open market operations until the next meeting of the Committeeshall be conducted with a view to maintaining about the prevailing condi-tions in money and short-term credit markets; provided, however, thatoperations shall be modified if bank credit appears to be deviating signifi-cantly from current projections.

Votes for this action: Messrs. Martin, Hayes,Brimmer, Daane, Galusha, Hickman, Kimbrel, Mai-sel, Mitchell, Morris, Robertson, and Sherrill. Votesagainst this action: None.

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MEETING HELD ON OCTOBER 8, 1968


Staff estimates of GNP in the third quarter had been revisedupward since the preceding meeting of the Committee, mainlybecause consumer expenditures had proved stronger than ex-pected. The estimates still suggested that expansion in real GNPhad moderated from its very rapid pace in the first half of theyear, but they indicated that economic growth had slowed byless than earlier projections had implied. Projections for thefourth quarter, which also had been raised, suggested that ex-pansion would continue at about the rate now estimated for thethird quarter.

According to retail sales figures for August and the first 3weeks of September, consumer spending on both durable andnondurable goods was being maintained at the high level towhich it had risen in July. Since growth of disposable incomein the third quarter had been curtailed by the tax surcharge, itappeared that the rate of personal saving had declined sharply.

Little further change in the saving rate seemed likely in thefourth quarter, and with disposable income expected to continuerising slowly, growth in consumer spending was projected toslacken. The staff projections also suggested that other cate-gories of final demand—including Federal outlays, residentialconstruction expenditures, and business spending on plant andequipment—would provide relatively little stimulus to economicexpansion in the fourth quarter. On the other hand, the rate ofinventory accumulation, which had declined in the third quarter,was now expected to rise in the fourth quarter.

In September output of steel was curtailed further as usersof the metal continued to reduce inventories that had been accu-mulated prior to the wage settlement in the steel industry. As aconsequence, the industrial production index was estimated tohave declined again. Employment in manufacturing—even apartfrom the steel industry—had not increased since June, but labor

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markets remained generally firm and in recent months averagehourly earnings had continued to increase at a rapid pace.

Average prices of industrial commodities rose appreciably inSeptember after having changed little for several months. Therise, which was the largest for any month since late winter, re-flected not only the advance in steel prices following the wagesettlement but also increases for a broad list of other commodi-ties. With average prices of farm products and foods turning up,the over-all wholesale price index rose in September by about asmuch as it had declined in August. The consumer price indexincreased considerably less in August than it had in June andJuly, partly because of a slowing of the advance in mortgageinterest charges.

In foreign exchange markets, pressures on the French francabated for a time in late September but then increased again.However, speculation on an imminent revaluation of the Germanmark had subsided in recent weeks, and market conditions ingeneral had improved considerably. The exchange rate for ster-ling, which had strengthened after the September 9 announce-ment that final agreement had been reached on the new sterlingbalances arrangement, advanced further following the publica-tion on September 17 of figures indicating that the British foreigntrade deficit had narrowed sharply in August. On September 19the Bank of England reduced its discount rate to 7 per cent fromthe IVi per cent rate that had been in effect since March 21.

In August a large rise in U.S. merchandise exports was ex-ceeded by an even larger rise in imports, and the U.S. trade sur-plus declined from the low level of July. Part of the increase inboth exports and imports was attributable to expectations of apossible strike of longshoremen on October 1. With respect to theover-all payments balance, tentative estimates for the third quar-ter indicated that the deficit on the liquidity basis was smallerthan in the second quarter. All of the improvement, however,apparently had occurred in July; preliminary data suggested thatsizable deficits had been incurred in August and September. It

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appeared that there was a moderate surplus in the third quarteron the official settlements basis, mainly as a result of a furtherincrease in liabilities of U.S. banks to their branches abroad.Such liabilities rose sharply from mid-August to mid-September,but declined subsequently.

The Treasury was expected shortly to announce a cash offer-ing of tax-anticipation bills, perhaps in the amount of $3 billionor $3.5 billion, for which commercial banks would be permittedto make payment by credits to tax and loan accounts. Also, anannouncement was expected on October 23 of the terms onwhich the Treasury would refund notes and bonds maturing inmid-November, of which about $4 billion were held by thepublic. The possibility was noted that a pre-refunding of bondsmaturing in mid-December, of which $1.6 billion were publiclyheld, might be undertaken along with the refunding of Novembermaturities.

System open market operations since the preceding meetingof the Committee had been directed at maintaining about theprevailing conditions in the money and short-term credit mar-kets. Although the System undertook an unusually large volumeof operations for this purpose—absorbing reserves on a massivescale in the first part of the period and supplying substantialamounts of reserves later—money market conditions initiallyeased somewhat and subsequently firmed again. Thus, the effec-tive rate in Federal funds transactions, which had averagedabout 5% per cent in the period before the previous meeting,fluctuated below that level for a time and then moved up to the6 per cent area. Rates posted by major banks on loans to Gov-ernment securities dealers followed a similar pattern.

A number of factors combined to complicate operations andto require a large volume of transactions by the System in thisperiod. In addition to normal seasonal fluctuations, these factorsincluded large international transactions affecting reserves; asharp, although temporary, decline in Treasury balances at Re-serve Banks before the September 18 payment date for corporate

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taxes; and the adoption of new methods for calculating requiredreserves of member banks under the revision of Regulation Dthat became effective on September 12.1

With respect to the last of these factors, the introduction of a2-week lag in the deposit balances used for calculating requiredreserves, at a time when deposits were rising seasonally, had theeffect of temporarily reducing required reserves and increasingexcess reserves considerably relative to the levels that would haveobtained under the prior procedures, thus necessitating offsettingopen market operations. In addition, operations were compli-cated by uncertainties as to how member banks would react—particularly during a transition period—to this and the otherchanges in procedures, including the new carryover provisionsfor reserve excesses and deficiencies. The effects of the carryoverprovisions on reserve-management practices of banks were ex-pected to have the incidental consequence of weakening theshort-run relationship between marginal reserves—that is, freeor net borrowed reserves—and the other measures used to assessmoney market conditions. As it turned out, net borrowed re-serves increased on the average in the 3 weeks beginning Sep-tember 12; average borrowings by member banks declined toabout $475 million from $520 million in the preceding 4 weeks,but excess reserves declined more.

Yields on both short- and long-term Treasury securities, likeday-to-day money market rates, moved down after mid-Septem-ber and then rose again—changing little on balance during the

1 Under Regulation D, as amended effective Sept. 12, 1968, all member banksare required to meet their daily-average reserve requirements on a weekly basis;previously, a biweekly settlement period had been employed for country banks.In addition., required reserves are calculated on the basis of average deposits2 weeks earlier rather than on the basis of average deposits in the current settle-ment period. Similarly, the vault cash component of the total reserves maintainedby banks is recorded with a 2-week lag. Also, member banks are permitted tocarry forward into the next reserve week excesses, as well as deficiencies, inreserve requirements averaging up to 2 per cent of required reserves, exceptthat any portion of such excesses or deficiencies not offset in the next week maynot be carried forward into later weeks.

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period since the preceding meeting of the Committee. The mar-ket rate on 3-month Treasury bills, for example, fell from a highof 5.30 per cent reached before mid-September to 5.09 per centlate in the month and then advanced; on the day before this meet-ing it was 5.26 per cent, 2 basis points above its level 4 weeksearlier.

The initial downward pressures on Treasury security yieldswere reinforced by expectations of a reduction in the 6Vi percent prime lending rate of banks that had prevailed since mid-April. The prime rate was reduced in late September, to 6x/4 percent by most banks and to 6 per cent by a few. Among the fac-tors contributing to the subsequent upward pressures on Treas-ury security yields were the failure of the 6 per cent prime rateto become general, indications that economic conditions werestronger than had been expected, and increasing attention amongmarket participants to forthcoming Treasury financing opera-tions.

In private capital markets yields on new corporate bonds hadbeen relatively stable in recent weeks, but yields on State andlocal government issues had declined considerably, mainly be-cause of continued heavy acquisitions by commercial banks. Atthe close of the period, however, both corporate and municipalyields were rising again.

Conditions in markets for residential mortgages appeared tohave eased slightly further in September. Net inflows of depositsto nonbank financial intermediaries increased only moderately inAugust, the latest month for which data were available. How-ever, liquidity ratios at Federal savings and loan associationsdeclined markedly in both July and August after the FederalHome Loan Bank Board reduced minimum liquidity require-ments, and this development helped to sustain mortgage lendingactivity by such associations.

Time and savings deposits at commercial banks, which hadgrown rapidly in July and August, expanded substantially againin September. Inflows of consumer-type deposits increased fur-

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ther, and the outstanding volume of large-denomination CD'sdeclined less than seasonally despite moderate reductions in of-fering rates on all CD's except those of short maturity. Privatedemand deposits and the money supply declined; on balance themoney supply had not increased since the first week of July, afterrising substantially in preceding months.

Growth of business loans at banks slowed in September. Al-though banks' holdings of municipal securities expanded con-siderably further, their holdings of Treasury securities wereabout unchanged—in contrast to the two preceding monthswhen banks had been heavy buyers of securities offered inTreasury financings. Total bank credit, as measured by the bankcredit proxy—daily-average member bank deposits—rose at anannual rate of about 9 per cent in September, compared with arate of more than 21 per cent in August. Allowance for changesin the daily average of U.S. bank liabilities to foreign brancheswould have served to increase the growth rate by about 1.5 per-centage points in September and 0.5 of a percentage point inAugust.

Bank credit growth was expected to accelerate somewhat inOctober as a result of the anticipated cash financing by theTreasury. The latest staff projections suggested that the bankcredit proxy would expand at an annual rate of 10 to 13 percent if the conditions in money and short-term credit marketsthat had prevailed on the average since the Committee's preced-ing meeting were maintained. This projection assumed that theTreasury would offer $3.5 billion of tax-anticipation bills forpayment in the latter part of the month and that commercialbanks initially would acquire the bulk of the offering. Slowergrowth of bank credit was projected for November, when theTreasury was not expected to raise new cash. The October pro-jection allowed for some moderation in the rate of expansion intime and savings deposits and for little growth in private de-mand deposits. A small increase in the money supply, reflectingmainly an expansion in currency, was anticipated.

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The Committee was divided in its views on the appropriatecourse for monetary policy under current circumstances, with amajority favoring no change and a minority advocating at leasta slight increase in monetary restraint. The majority was op-posed to greater restraint at present primarily because it con-tinued to expect the rate of expansion of consumer spending andof economic activity in general to slow down as the effects of therecent fiscal restraint measures were increasingly felt. The factthat the Treasury would be undertaking a major refunding opera-tion before the Committee's next meeting also was cited as aconsideration militating against a change in policy at this time.

The Committee concluded that open market operations shouldbe directed at maintaining the conditions in money and short-term credit markets that had prevailed on the average in theperiod since the preceding meeting, on the understanding thatoperations would not be undertaken to offset any moderate up-ward pressures on Treasury bill rates that might develop. Theproviso was added that operations should be modified, insofar asthe forthcoming Treasury refunding permitted, if the rate ofbank credit expansion appeared to be significantly in excess ofcurrent projections.


The information reviewed at this meeting suggests that over-all economicexpansion has moderated, although less than projected, from its very rapidpace earlier in the year, but upward pressures on prices and costs are per-sisting. Most market interest rates have changed little on balance in recentweeks. Bank credit and time and savings deposits expanded rapidly thissummer, but the money supply has shown no net growth since July afterrising substantially for several months. The earlier improvement in theU.S. balance of payments was not maintained in August and September,according to preliminary indications, and the foreign trade balance andunderlying payments position continue to be matters of serious concern. Inthis situation, it is the policy of the Federal Open Market Committee tofoster financial conditions conducive to sustainable economic growth, con-

201


tinued resistance to inflationary pressures, and attainment of reasonableequilibrium in the country's balance of payments.

To implement this policy, System open market operations until the nextmeeting of the Committee shall be conducted with a view to maintainingabout the prevailing conditions in money and short-term credit markets;provided, however, that operations shall be modified, to the extent permittedby the forthcoming Treasury refunding operation, if bank credit expansionappears to be significantly exceeding current projections.

Votes for this action: Messrs. Martin, Brimmer,Daane, Galusha, Maisel, Mitchell, Morris, Robert-son, and Sherrill. Votes against this action: Messrs.Hayes, Hickman, and Kimbrel.

Messrs. Hayes, Hickman, and Kimbrel dissented from thisaction because they thought that the rates of bank credit growthrecorded in recent months and the rate projected for Octoberwere excessive, particularly in light of the persisting inflationarypressures and the unexpected strength in the economy. Accord-ingly, they favored seeking money market conditions somewhatfirmer than those advocated by the majority, to the extent theTreasury refunding operation permitted.


At its meeting on March 14, 1968, the Committee had au-thorized the Special Manager to undertake negotiations lookingtoward increases, up to specified limits, in a number of theSystem's reciprocal currency arrangements, on the understand-ing that any such enlargements—and the corresponding amend-ments to paragraph 2 of the authorization for System foreigncurrency operations—would become effective upon a determina-tion by Chairman Martin that they were in the national interest.As indicated in the policy record for March 14, the Chairmanhad made the indicated determination for certain of these ar-rangements on March 17.

Among the arrangements covered by the Committee's action

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of March 14 was that with the Bank of Italy, for which negotia-tions looking toward an increase of up to $250 million equivalenthad been authorized. Recently these negotiations had been suc-cessfully completed, and on the day of this meeting ChairmanMartin determined that an increase in the swap arrangement withthe Bank of Italy from $750 million to $1 billion equivalent wasin the national interest. Accordingly, the corresponding amend-ment to paragraph 2 of the authorization for System foreign cur-rency operations became effective on October 8, 1968.

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MEETING HELD ON OCTOBER 29, 1968


The expansion in real GNP moderated somewhat in the thirdquarter, according to preliminary Commerce Department esti-mates. The amount of slowing—to an annual rate of about 5per cent, from more than 6 per cent in the first half of the year—was less than had been implied by recent staff projections.New projections presented at this meeting suggested that the ex-pansion would moderate somewhat further in the fourth quarterand would continue to slow in the first half of 1969.

The strong performance of the economy in the third quarterwas attributable largely to a substantial increase in consumerspending. Growth in disposable income was sharply curtailed bythe tax surcharge, so the rise in consumer spending was associ-ated with a large decline in the rate of personal saving; indeed,the decline in the saving rate was one of the largest in nearly adecade. In addition, business outlays on plant and equipmentincreased substantially after moving down in the second quarter,and Federal outlays expanded further, although at a considerablyslower rate than earlier in the year.

Retail sales in October were remaining close to the advancedlevel of the summer months, according to available weekly fig-ures. Output of steel, which had been cut back sharply followingthe late-July wage settlement in that industry, turned up in earlyOctober, and the industrial production index for October wastentatively estimated to have risen slightly after declining for 2months. In September nonfarm employment expanded only mod-erately, and the unemployment rate edged up to 3.6 per cent from3.5 per cent in August. Labor markets remained firm, however,and wage rates continued under strong upward pressure.

Average prices of industrial commodities, which had increasedappreciably in September following several months of little

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change, rose substantially further in October. In both monthsthe advance encompassed a broad range of commodities. Theover-all wholesale price index was unchanged in October, how-ever, as prices of farm products and foods fell by about as muchas they had risen in the preceding month. The consumer priceindex increased moderately in September.

Conditions in foreign exchange markets had improved in thelatter part of September when speculation on an imminent reval-uation of the German mark abated, and the markets remainedquiet in October. The exchange rate for sterling had been firmin recent weeks. Although the exchange rate for the French francremained at or close to its lower support limit, selling pressuresagainst the franc appeared to have moderated considerably.

The surplus on U.S. merchandise trade in the third quarterwas somewhat above the very low levels of the first two quartersof the year, with part of the improvement reflecting an accelera-tion of exports in anticipation of a possible strike of longshore-men on October 1. New estimates of over-all payments flowssuggested that the balance on the liquidity basis was less un-favorable in September than had been thought earlier and thatthe deficit was smaller in the third quarter as a whole than pre-vious estimates had indicated. However, fragmentary data forearly October suggested renewed deterioration. The latest esti-mates of the balance on the official settlements basis still indi-cated a moderate surplus in the third quarter, mainly as a resultof a further rise in borrowings of U.S. banks through their for-eign branches.

On October 17 the Treasury auctioned $3 billion of tax-anticipation bills due in June 1969. Bidding in the auction wasaggressive, in part because the offering coincided with wide-spread reports that a halt in the bombing of North Vietnam wasimminent. On October 23 the Treasury announced that in ex-change for securities maturing in mid-November and mid-De-cember, of which about $5.6 billion were held by the public, it

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would offer 2 notes—a new 18-month, 55/s per cent note pricedto yield 5.73 per cent, and a reopened 6-year, 5% per cent notepriced at par. It was expected that the Treasury would auctionadditional tax-anticipation bills for payment in late Novemberor early December mainly to compensate for cash redemptionsin connection with the current refunding.

Interest rates on most types of market securities had risen onbalance in recent weeks, although yields had fluctuated in re-sponse to shifting prospects for the de-escalation of hostilities inVietnam. Both short- and long-term markets were influenced bycontinuing reports indicating that economic expansion was vig-orous despite the recent fiscal legislation, and by the associatedexpectations that a firmer monetary policy might be required toresist inflationary pressures. In short-term markets yields in-creased on finance company and commercial paper, bankers'acceptances, and Treasury bills; the market rate on 3-monthTreasury bills, at 5.46 per cent on the day before this meeting,was 20 basis points above its level of 3 weeks earlier. Contribut-ing to the upward pressures on long-term rates were the largevolume of new corporate security offerings and the recordamount of State and local government issues in October, as wellas the Treasury refunding.

In markets for home mortgages, the gradual easing of condi-tions that had been under way since mid-June continued in Sep-tember, although the increase in net deposit inflows to nonbankfinancial intermediaries was again moderate. After the firstweek of October, however, there were indications that conditionsin the secondary market for mortgages were beginning to tightenagain.

Time and savings deposits at commercial banks continued toexpand rapidly in October, according to preliminary estimates.It appeared that inflows of consumer-type time and savings de-posits had accelerated further. In addition, banks increased theiroffering rates on large-denomination CD's slightly—by about the

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amount they had reduced them in September—and the volumeof CD's outstanding rose considerably. Private demand depositsand the money supply were estimated to have increased fairlyrapidly from September to October—the money supply at anannual rate of about 7 per cent—after changing little on balancesince the first week of July.

Business loan demands at commercial banks were relativelystrong in October, and banks continued to add to their holdingsof municipal securities at a substantial pace. Total bank credit,as measured by the bank credit proxy—daily-average memberbank deposits—was estimated to have increased at an annualrate of about 12 per cent in October, compared with 9 per centin September. Allowance for changes in the daily average ofU.S. bank liabilities to their foreign branches would have re-duced the October growth rate by about one-half of a percentagepoint and increased the rate for September by about 1.5 per-centage points.

System open market operations in the period since the preced-ing meeting of the Committee had initially been directed at main-taining about the prevailing conditions in the money and short-term credit markets. Later, however, some slight firming of con-ditions had been permitted, within the limitations imposed bythe current Treasury refunding, because estimates from time totime indicated that bank credit was expanding at a rate at orabove the upper end of the projected range (after some down-ward revision of the projection to allow for a smaller Treasuryoffering of tax-anticipation bills than had been assumed). TheSystem had carried out relatively large operations, alternatelyabsorbing and supplying reserves, to cope with sizable fluctua-tions in market factors affecting reserves and with pressuresgenerated by continuing member bank adjustments to the newreserve computation procedures that had become effective onSeptember 12. In recent weeks the effective rate on Federal fundshad fluctuated mostly in a range of 534 to 6V6 per cent. Member

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bank borrowings averaged about $425 million in the 2 weeksending October 23, down slightly from the average of $455million in the preceding 4 weeks. Excess reserves declined moreon the average, however, and net borrowed reserves increased.

New staff projections suggested that, if prevailing conditionsin money and short-term credit markets were maintained, thebank credit proxy would expand at an annual rate of 9 to 12per cent in November and more slowly in December. The projec-tions, which assumed that the Treasury would offer $2.5 billionof tax-anticipation bills for payment in the last week of Novem-ber, were subject to revision if the size or timing of the offeringwere different. It was expected that business loan demand wouldremain fairly strong in November and that banks would con-tinue to acquire municipal securities at a rapid pace. Prospectsfavored slower growth in the volume of large-denomination CD'soutstanding and in total time and savings deposits at commercialbanks, but it appeared likely that the money supply would in-crease at a rate equal to or slightly above that estimated forOctober.

The Committee agreed that the current Treasury refundingprecluded a change in monetary policy at this time. Some mem-bers indicated that in the absence of the Treasury financing theywould have favored seeking somewhat firmer money marketconditions, on the grounds that recent and prospective rates ofbank credit growth were excessive in light of prevailing infla-tionary pressures. Some other members expressed the view thatan increase in monetary restraint was not warranted at presenteven apart from the financing. While recognizing the uncer-tainties in the outlook, they believed the most likely prospect atthe moment was that the economic advance would slow suffi-ciently under the current stance of stabilization policies.

The Committee concluded that open market operations shouldbe directed at maintaining about the prevailing conditions inmoney and short-term credit markets, with the proviso that op-

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erations should be modified, insofar as the Treasury financingpermitted, if bank credit growth appeared to be in excess ofcurrent projections. The following current economic policy di-rective was issued to the Federal Reserve Bank of New York:

The information reviewed at this meeting suggests that over-all economicexpansion has moderated somewhat from its very rapid pace earlier in theyear, although less than projected, and that upward pressures on prices andcosts are persisting. Market interest rates have risen in recent weeks. Bankcredit and time and savings deposits have continued to expand rapidly, butsavings inflows to thrift institutions have remained moderate. The moneysupply, after growing little on balance during the summer, has increased inrecent weeks. The U.S. foreign trade balance and underlying payments posi-tion continue to be matters of serious concern. In this situation, it is the policyof the Federal Open Market Committee to foster financial conditions con-ducive to sustainable economic growth, continued resistance to inflationarypressures, and attainment of reasonable equilibrium in the country's balanceof payments.

To implement this policy, while taking account of the current Treasuryfinancing, System open market operations until the next meeting of the Com-mittee shall be conducted with a view to maintaining about the prevailingconditions in money and short-term credit markets; provided, however, thatoperations shall be modified, to the extent permitted by the Treasury financ-ing, if bank credit expansion appears to be exceeding current projections.

Votes for this action: Messrs. Martin, Brimmer,Daane, Galusha, Hickman, Kimbrel, Maisel, Mitch-ell, Morris, Robertson, and Sherrill. Vote against thisaction: Mr. Hayes.

In dissenting from this action, Mr. Hayes said he agreed thatthe current Treasury refunding precluded any substantial changein monetary policy. He thought, however, that the implicationsof the prevailing inflationary pressures for the domestic economyand the balance of payments were sufficiently serious to warrantseeking whatever degree of firming in money market conditionswould be consistent with the Treasury financing—however slightthat might be—in an effort to slow bank credit growth from arate he considered excessive.

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MEETING HELD ON NOVEMBER 26, 1968


The information reviewed at this meeting suggested that the ex-pansion in over-all economic activity, while still strong, wasmoderating somewhat further in the fourth quarter from its veryrapid pace earlier in the year. In particular, retail sales in Octoberwere no higher than they had been in August—suggesting thatthe surge in consumer spending was subsiding—and the rise inFederal expenditures was estimated to be slackening further. Staffprojections implied that the rate of economic expansion wouldcontinue to moderate in the first half of 1969.

Recent data of various kinds indicated that the expansion wasstill strong. Industrial production, which was now reported tohave turned up in September, advanced again in October, andnew orders for durable goods increased sharply. Nonfarm payrollemployment rose more in October than in other recent months,and the unemployment rate continued at the September level of3.6 per cent. According to a private survey taken in October,businesses planned to increase their outlays on new plant andequipment in 1969 by about 8 per cent, or more than the risecurrently estimated for 1968.

Average prices of industrial commodities increased slightlyin November after advancing at a substantial rate in the twopreceding months. In contrast, the consumer price index—whichhad increased only moderately in September—rose sharply inOctober. With labor markets remaining firm, sizable furtheradvances in average hourly earnings were widespread amongindustries.

Foreign exchange markets were in turmoil during most ofNovember. Speculative buying of German marks revived on alarge scale in early November in response to renewed rumors ofan imminent revaluation. Selling pressure on the French franc

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intensified, and sterling was also subject to pressure, particularlyafter the publication of figures indicating that the British foreigntrade deficit had increased somewhat in October.

On November 19 the German Government announced that themark would not be revalued, but that in order to reduce theGerman trade surplus the value-added tax rebate would be de-creased by 4 percentage points for merchandise exports and theborder tax would be reduced by 4 percentage points for mostimports. The Finance Ministers and central bank Governors ofthe Group of Ten met at Bonn November 20 through 22. Newcredit facilities totaling $2 billion were made available to France,and the German authorities increased to 100 per cent the reserverequirements on additions to German commercial bank liabilitiesto foreigners.

On November 23, contrary to the expectations of many ob-servers, the French Government announced that the franc wouldnot be devalued, and on the following day President de Gaulleoutlined the policy measures that would be adopted. In additionto the reimposition of exchange controls, these measures includeda sizable reduction in French budget expenditures, a more restric-tive policy toward wage and price increases, and changes in thetax system to favor exports and deter imports. Earlier, on No-vember 13, the Bank of France had increased its discount ratefrom 5 to 6 per cent and had announced measures to limit theexpansion of bank credit.

The British Government on November 22 announced newactions to restrain domestic demand and to improve the balanceof payments. These included a 10 per cent surcharge on existingpurchase and excise taxes; requirement of 6-month non-interest-bearing deposits equal to 50 per cent of the value of imports ofmost manufactured goods; and tighter ceilings on bank loans tothe private sector.

Official estimates of the U.S. balance of payments indicatedthat there had been a small surplus in the third quarter on the

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liquidity basis of calculation, following a moderate deficit in thesecond quarter. Special official transactions operating to reducethe deficit remained large, but were not so large as in the secondquarter. The trade surplus, although still quite small, was largerthan in the first two quarters of the year; this resulted partly fromacceleration of shipments in September in anticipation of apossible strike of longshoremen on October 1. Available data forOctober and the first 2 weeks of November suggested that a siz-able deficit on the liquidity basis had again emerged.

Official data confirmed the earlier expectation that a moderatepayments surplus had been recorded in the third quarter on theofficial settlements basis, largely because of a further increase inborrowings of U.S. banks through their branches abroad. Theoutstanding volume of such borrowings changed little after mid-September, however, and in October the balance on the officialsettlements basis probably was in deficit.

In its November refunding the Treasury offered 2 notes in ex-change for securities maturing in mid-November and mid-De-cember. Of the $5.6 billion of these issues held by the public, $2.5billion were exchanged for a new 18-month, 55/s per cent note(priced to yield 5.73 per cent), and $1.3 billion were exchangedfor a reopened 6-year, 5% per cent note (priced at par). On No-vember 19 the Treasury announced that it would auction $2 bil-lion of tax-anticipation bills due in June, for payment on Decem-ber 2, mainly to raise cash to redeem the $1.8 billion of maturingsecurities not exchanged in the November refunding. This offer-ing was expected to be the Treasury's last financing in the cal-endar year, and its size was near the lower end of the range thathad been anticipated by market participants.

With the Treasury refunding under way, recent System openmarket operations had been directed at maintaining generallysteady conditions in money and short-term credit markets.Operations were complicated, however, by shifts in the distribu-tion of reserves—first away from banks in the money centers and

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then back again—and by the effects on total reserves of a sharpdecline in Treasury balances at the Federal Reserve Banks andof large-scale international transactions. The effective rate onFederal funds was 6 per cent or higher on most days in thefirst half of November, but it subsequently fluctuated around53A per cent. Member bank borrowings averaged about $520million in the 4 weeks ending November 20, above the averageof about $450 million in the preceding 4 weeks, Excess reservesalso increased on the average but less than borrowings, and netborrowed reserves were slightly larger.

Yields on Treasury, corporate, and State and local govern-ment bonds had risen further in recent weeks, partly because ofcontinuing heavy demands on the capital markets. The volumeof corporate and municipal bond offerings in November, whileless than in October, was relatively large. The upward ratepressures also reflected cautious attitudes on the part of investors,against the background of indications of strength in the economy,widespread expectations of inflation, and growing anticipations ofa firmer monetary policy. On the other hand, there was relativelylittle reaction in capital markets to either the late-October an-nouncement of a halt in the bombing of North Vietnam or therecent turbulence in foreign exchange markets.

Interest rates on various types of short-term instruments alsohad risen recently, in response to some of the same factors affect-ing longer-term rates as well as to seasonal pressures. However,there was little net change in yields on shorter-term Treasurybills, the market supplies of which had become limited at a timeof strong domestic and foreign demands. The market rate on3-month Treasury bills, at 5.42 per cent on the day before thismeeting, was 4 basis points below its level of 4 weeks earlier.

Net inflows of deposits to nonbank financial intermediariesagain increased only moderately in October. Yields on homemortgages in the secondary market, which had been declining forseveral months, edged up in October and apparently also in thefirst half of November.

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Rates paid by banks on large-denomination CD's also had ad-vanced further in recent weeks. Most banks were now payingthe Regulation Q ceiling rate of 6 per cent on certificates withmaturities of 90 to 179 days, and some reportedly were payingthe 6V4 per cent ceiling rate on longer-term certificates. Accord-ing to tentative estimates, growth from October to November inthe volume of outstanding CD's, and of other time and savingsdeposits as well, was slower than it had been in other recentmonths. On the other hand, the expansion in private demanddeposits and the money supply accelerated—the latter to an esti-mated annual rate of more than 10 per cent, the highest sinceJuly. Bank credit, as measured by the proxy series—daily-aver-age member bank deposits—was tentatively estimated to haveincreased from October to November at an annual rate of 10.5per cent, compared with 12.5 per cent from September to Octo-ber. In mid-November prime lending rates were raised to thegenerally prevailing level of 6lA per cent by the few large banksthat had reduced such rates from 6V2 to 6 per cent in late Sep-tember.

Staff projections suggested that the bank credit proxy wouldincrease from November to December at an annual rate of 5 to8 per cent if prevailing conditions were maintained in money andshort-term credit markets. The projections assumed that thevolume of large-denomination CD's outstanding would declineseasonally and that growth in other time and savings depositswould slow somewhat further. An anticipated reduction in theaverage level of U.S. Government deposits was expected to con-tribute to expansion in private demand deposits and the moneysupply at a rapid rate, although not so rapid as in November.

Committee members differed in their views on the appropriatecourse for monetary policy under current circumstances, with aminority favoring operations directed at attaining somewhatfirmer money market conditions. The majority thought that,although it would be advisable to resist any easing of moneymarket conditions that might be produced by market forces, a

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shift to a firmer policy stance was not warranted at this time.Members of the majority shared the concern expressed about

the persistence of inflationary pressures, and some indicated thatthey had found the question of appropriate policy to be close. Onbalance, however, they believed that domestic economic con-siderations did not suggest a clear and unequivocal need for afirmer policy at present. In their judgment, despite the unexpectedstrength of the economy since enactment of fiscal restraint legis-lation at midyear, evidences of slowing in the rate of expansionwere likely to become more pronounced in coming months. Otherconsiderations cited as militating against a policy change atpresent were the recent turbulence and the continuing uncertain-ties in foreign exchange markets, and the fact that in financialmarkets the peak seasonal pressures of the year were to be ex-pected in the period just ahead. Several members expressed theview that a slight firming of policy at this time would not beeffectual in combatting the prevailing inflationary psychology,and that a more marked firming would be undesirable on theother grounds cited.

The Committee concluded that open market operations shouldbe directed at maintaining about the prevailing conditions inmoney and short-term credit markets, with the proviso thatoperations should be modified if bank credit expansion appearedto be exceeding current projections. The following current eco-nomic policy directive was issued to the Federal Reserve Bankof New York:

The information reviewed at this meeting suggests that the expansion inover-all economic activity, while still strong, is moderating somewhat fur-ther from its very rapid pace earlier in the year. Upward pressures on pricesand costs are persisting. Most market interest rates have risen further inrecent weeks. Bank credit has continued to expand rapidly. Growth in themoney supply has accelerated from the low average rate of recent months,while expansion in commercial bank time and savings deposits has slowed.

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Savings inflows to thrift institutions increased somewhat further in Octoberbut remained moderate. Following discussions among leading industrialcountries, France, Germany, and Britain have acted to combat the recentspeculation in their currencies by taking steps designed to reduce imbalancesin their external payments. The U.S. foreign trade balance and over-allbalance of payments improved in the third quarter but partial data forrecent weeks suggest that the improvement is not being sustained, and theunderlying U.S. payments position remains a serious problem. In this situa-tion, it is the policy of the Federal Open Market Committee to foster finan-cial conditions conducive to sustainable economic growth, continued resist-ance to inflationary pressures, and attainment of reasonable equilibriumin the country's balance of payments.

To implement this policy, System open market operations until the nextmeeting of the Committee shall be conducted with a view to maintainingabout the prevailing conditions in money and short-term credit markets;provided, however, that operations shall be modified if bank credit expan-sion appears to be exceeding current projections.

Votes for this action: Messrs. Martin, Brimmer,Daane, Galusha, Maisel, Mitchell, Robertson, andSherrill. Votes against this action: Messrs. Hayes,Hickman, Kimbrel, and Morris.

In dissenting from this action, Messrs. Hayes, Hickman, Kim-brel, and Morris indicated that they favored seeking somewhatfirmer money market conditions in an effort to slow the rate ofbank credit growth, which in their view had been excessive forseveral months. They thought such action was required in lightof prevailing inflationary pressures and expectations. In theirjudgment, the latest information on the domestic economy lentsupport to the view that the rate of expansion, while perhapsmoderating somewhat in coming months, was likely to remainexcessive under the current stance of fiscal and monetarypolicies. The view also was expressed that a firmer monetarypolicy was desirable to help maintain the strength of the dollarin foreign exchange markets.

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2. Ratification of amendment to authorization for System foreigncurrency operations.

The Committee ratified an action taken by members on Novem-ber 22, 1968, effective on that date, to increase the System'sswap arrangement with the Bank of France from $700 millionto $1 billion, equivalent, and to make the corresponding amend-ment to paragraph 2 of the authorization for System foreigncurrency operations. As a result of this action, paragraph 2 readas follows:

The Federal Open Market Committee directs the Federal Reserve Bankof New York to maintain reciprocal currency arrangements ("swap" ar-rangements) for System Open Market Account for periods up to a maxi-mum of 12 months with the following foreign banks, which are amongthose designated by the Board of Governors of the Federal Reserve Systemunder Section 214.5 of Regulation N, relations with foreign banks andbankers, and with the approval of the Committee to renew such arrange-ments on maturity:

Foreign bank

Austrian National BankNational Bank of BelgiumBank of CanadaNational Bank of DenmarkBank of EnglandBank of FranceGerman Federal BankBank of ItalyBank of JapanBank of MexicoNetherlands BankBank of NorwayBank of SwedenSwiss National Bank


dollars equivalent)

100225

1,000100

2,0001,0001,0001,0001,000

130400100250600

217



Foreign bank dollars equivalent)

Bank for International Settlements:System drawings in Swiss francs 600System drawings in authorized European

currencies other than Swiss francs 1,000

Votes for ratification of this action: Messrs. Mar-tin, Hayes, Brimmer, Daane, Galusha, Hickman,Kimbrel, Maisel, Mitchell, Morris, Robertson, andSherrill. Votes against ratification of this action:None.

This increase in the Federal Reserve swap line with the Bankof France represented part of the U.S. share of the $2 billion innew credit facilities to France that had been announced in Bonnon November 22, following the meeting of the Finance Ministersand central bank Governors. In addition, the U.S. Treasurymade a $200 million credit facility available to France, so totalU.S. participation in the new facilities was $500 million.

218


MEETING HELD ON DECEMBER 17, 1968


The current rate of expansion in over-all economic activity wassignificantly higher than had been projected earlier, according toa broad variety of economic information that had become avail-able since the preceding meeting of the Committee. New staffprojections suggested that GNP in current-dollar terms wouldincrease about as rapidly in the fourth quarter as it had in thethird. Average prices, as measured by the "GNP deflator," wereestimated to be rising at a faster pace again in the fourth quarter,and growth in real GNP was expected to moderate somewhatfurther from the very high rates recorded in the first two quartersof the year. Expectations of continued inflationary pressuresappeared to be widespread.

The staff projections of GNP in both the fourth and firstquarters had been revised upward from those of 3 weeks earlierlargely because of the indication, from the Commerce-SECsurvey of business plans taken in November, that outlays onnew plant and equipment were rising sharply. Other evidencesof strength in the current business situation were reflected inNovember data on production, employment, and retail sales. Asizable further advance in industrial production in Novemberbrought the index above the previous high recorded in July, whenoutput of steel had been substantially larger. Nonfarm payrollemployment again rose sharply, and the unemployment ratedeclined to 3.3 per cent—its lowest level in 15 years—from 3.6per cent in October. Average hourly earnings continued to ad-vance at the rapid pace of recent months. Retail sales, accord-ing to the advance estimate, rose in November after edging downin September and October. It appeared, however, that consumerexpenditures would expand considerably less in the fourth quar-ter as a whole than they had in the third quarter.

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The staff projections still implied that the rate of increase inreal GNP would moderate considerably in the first half of 1969,partly because of a marked swing from deficit to surplus that wasalready under way in the Federal fiscal position. In addition, itwas expected that expansion in consumer expenditures wouldslow further as a result of slackened growth in disposable incomeand that the increase in residential construction outlays would belimited by tight conditions in mortgage markets. Against thebackground of prospects in these sectors, the resurgence of busi-ness capital outlays and the report that inventories had risenmarkedly in October suggested that imbalances could be develop-ing in the economy as a result of inflationary expectations.

In foreign exchange markets, earlier speculative movementsof funds were partly reversed following the actions taken inlate November by Germany, France, and Britain to reduce im-balances in their external payments. The pound was again subjectto selling pressure in early December, however, and the marketfor sterling remained uneasy even after publication of figuresindicating that Britain's foreign trade balance had improvedsharply in November.

Available information on the U.S. balance of payments inOctober and November suggested that sizable deficits had againemerged on both the liquidity and official settlements bases ofcalculation, following the surpluses—small in the case of theliquidity balance—that had been recorded in the third quarter.Since mid-September there had been relatively little net changein borrowings by U.S. banks through their foreign branches; inthe spring and summer, increases in such borrowings had re-sulted in the payments surpluses recorded then on the officialsettlements basis. U.S. merchandise exports declined sharplyin October after rising considerably in September in anticipationof a longshoremen's strike on October 1. Imports also declinedin October, but more moderately than exports; for Septemberand October together there was a small surplus in U.S. foreign

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trade. With the current Taft-Hartley Act injunction against thestrike scheduled to expire on December 20, continued markedfluctuations in monthly foreign trade figures appeared likely.

In late November the Treasury auctioned $2 billion of tax-anticipation bills due in June 1969, for payment on December 2.Banks, which were allowed to pay for the bills through creditsto Treasury tax and loan accounts, successfully bid for the bulkof the issue. Despite this cash financing, however, Treasury cashbalances at banks were drawn down to very low levels prior tothe quarterly corporate tax date in mid-December, and theTreasury temporarily replenished its balances in the period De-cember 10-17 by selling special certificates of indebtedness tothe Federal Reserve. The volume of such certificates outstandingwas $92 million on December 10, none on December 11, $45million on December 12, $430 million from December 13through 15, $447 million on December 16, and $596 million onDecember 17. (Certificates outstanding on December 17 wereredeemed the following day.)

Interest rates on market securities of all maturities had risensharply further in recent weeks as the steady stream of statisticsreflecting strength in the economy heightened concern about in-flationary pressures and enhanced expectations of a firmer mone-tary policy. Increases in yields were particularly rapid in earlyDecember after commercial banks increased their prime lendingrates from 6lA per cent to the 6V^ per cent level that had pre-vailed before the reductions of late September. Yields on mostlong-term securities rose to levels above the peaks that had beenreached in the spring, and unsettled conditions in the capitalmarkets led to the postponement or cancellation of a number ofscheduled corporate and municipal bond offerings. Conditions inthe secondary market for home mortgages continued to tightenin early December.

In markets for short-term securities, yield advances were par-ticularly pronounced for Treasury bills; on the day before this

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meeting the market rate on 3-month bills was 5.94 per cent, 52basis points above its level of 3 weeks earlier. Upward pressureson bill yields were augmented by seasonal forces, sales of billsby foreign monetary authorities, and sales by domestic commer-cial banks of tax-anticipation bills they had acquired in theTreasury's recent auction.

Rates paid by commercial banks on large-denomination CD'sof longer maturity had increased further in recent weeks, andmost large banks were now paying the Regulation Q ceilingrates for all maturities. The volume of CD's outstanding rosesubstantially in November, particularly after midmonth. Largelyas a consequence, the expansion in total time and savings de-posits from October to November was more rapid than earliertentative estimates had indicated, although somewhat less rapidthan in other recent months.

Estimates of November growth rates also had been revisedupward somewhat for bank credit, as measured by the proxyseries—daily-average member bank deposits—and for the moneysupply; both were now estimated to have increased from Octoberto November at an 11.5 per cent annual rate. Since midyear,bank credit and the money supply had expanded at annual ratesof about 13 and 6 per cent, respectively, compared with ratesof about 4 and 6.5 per cent in the first half of the year. In No-vember banks increased the volume of business loans outstandingconsiderably further and continued to acquire municipal securi-ties at a rapid pace, while reducing their holdings of U.S. Gov-ernment securities. To a large extent, the accelerated growthin the money supply in November reflected a rise in private de-mand deposits in the last half of the month, when U.S. Govern-ment deposits declined markedly.

System open market operations in the first part of the periodsince the Committee's preceding meeting were directed at main-taining about the prevailing conditions in money and short-termcredit markets, and reserves were supplied partly in an effort to

222


cushion the sharp reaction of short-term market interest rates tothe rise in the prime rate. Operations subsequently were shiftedin the direction of reserve absorption when market factors beganto supply a large volume of reserves and when estimates indi-cated that bank credit was expanding at a rate in excess of therange projected at the time of the previous meeting. These opera-tions were tempered, however, in view of the continuing increasesin short-term rates. During the period as a whole, the effectiverate on Federal funds fluctuated mostly in a range of 5% to 6 percent. Member bank borrowings averaged $515 million in the 3weeks ending December 11, little changed from the previous 4weeks. With excess reserves lower on the average, net borrowedreserves rose in the period.

New staff projections suggested that if prevailing conditions inmoney and short-term credit markets were maintained, on bal-ance, the bank credit proxy would expand at an annual rate of8 to 11 per cent from November to December and at a rate of4 to 7 per cent from December to January. Given the currentrelationships between short-term interest rates and Regulation Qceiling rates, it was expected that banks would experience alarger-than-seasonal run-off of CD's in December and a contra-seasonal run-off in January, and that inflows of consumer-typetime and savings deposits would begin to moderate. Growth inthe money supply was expected to slow considerably in Decem-ber—and perhaps to taper off further in January, particularly ifdemands for business loans were reduced.

An alternative projection suggested that a firming of moneymarket conditions would have relatively little effect on bankcredit growth in December but would result in a slower rate ofgrowth in January—an annual rate of perhaps 2 to 5 per cent—mainly as a result of a larger run-off of CD's. For purposes ofthe projections it was assumed that the Treasury would notengage in any new cash borrowing through the end of January.

Prior to this meeting the boards of directors of nine Federal

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Reserve Banks had acted, subject to the approval of the Boardof Governors, to increase discount rates from the present level of5lA per cent. It was reported to the Committee that the Boardof Governors planned shortly after this meeting to take actionwith respect to discount rates and also to consider the desirabilityof a moderate increase in member bank reserve requirements.

The Committee was unanimously of the view that greatermonetary restraint was required at this time in light of the un-expected strength of current economic activity, the persistenceof inflationary pressures and expectations, and the recent rapidrate of growth in bank credit. The members agreed that oneelement of the shift to greater monetary restraint should be afirmer open market policy. There also was general sentiment atthe meeting that discount rates should be increased, althoughthere were some differences of view with respect to the amount;and divergent opinions were expressed about the desirability ofaction now to raise reserve requirements.

A number of members expressed the view that the combina-tion of a firmer open market policy and an increase of one-quarter of a percentage point in discount rates would be appro-priate to the current economic situation. Some of these membersadded that, while additional measures could be taken later ifdeemed necessary, various considerations—including the con-tinuing uncertainties with respect to foreign exchange markets,as well as the sensitive state of conditions in domestic financialmarkets with the attendant risks of unduly large market re-actions—militated against also increasing reserve requirementsat this time or raising discount rates by as much as one-halfpoint. The basic argument advanced by those who favored abroader combination of policy actions now was that more limitedactions were likely to be inadequate to dampen the prevailinginflationary psychology, particularly since it appeared that anincrease of at least one-quarter point in the discount rate wasalready widely anticipated in financial markets.

224


At the conclusion of the discussion the Committee agreed thatopen market operations should be directed at attaining firmerconditions in money and short-term credit markets, while takingaccount of the effects of any other monetary policy actions thatmight be taken. The proviso was added that operations shouldbe modified if bank credit expansion appeared to be deviatingsignificantly from current projections. The following current eco-nomic policy directive was issued to the Federal Reserve Bankof New York:

The information reviewed at this meeting suggests that over-all economicactivity is expanding rapidly and that upward pressures on prices and costsare persisting. Market interest rates have risen considerably further inrecent weeks. Bank credit growth has been sustained by continuing strongexpansion of time and savings deposits, while growth in the money supplyhas accelerated and U.S. Government deposits have declined. The U.S.foreign trade surplus remains very small and the over-all balance of pay-ments apparently worsened in October and November. In this situation, itis the policy of the Federal Open Market Committee to foster financialconditions conducive to the reduction of inflationary pressures, with a viewto encouraging a more sustainable rate of economic growth and attainingreasonable equilibrium in the country's balance of payments.

To implement this policy, System open market operations until the nextmeeting of the Committee shall be conducted with a view to attainingfirmer conditions in money and short-term credit markets, taking accountof the effects of other possible monetary policy action; provided, however,that operations shall be modified if bank credit expansion appears to bedeviating significantly from current projections.

Votes for this action: Messrs. Hayes, Brimmer,Daane, Galusha, Hickman, Kimbrel, Maisel, Mit-chell, Morris, Robertson, and Sherrill. Votes againstthis action: None.

Absent and not voting: Mr. Martin.

225


'operations of the System- Opens t^rkpt Account

The following two reports describe the actions taken during 1968to carry out the policy directives of the Federal Open MarketCommittee.

The report on operations in domestic securities was preparedby Alan R. Holmes, Manager of the System Open Market Ac-count, who supervises these operations. It is written from thevantage point of the Trading Desk at the Federal Reserve Bankof New York, where operations in these securities are effected tocarry out the policy directives of the Federal Open Market Com-mittee. The report outlines the factors that the Manager takesinto account in the day-to-day provision of bank reserves.

The report on foreign currency operations was prepared byCharles A. Coombs, Special Manager of the System Open MarketAccount, who supervises the Federal Reserve's operations in suchcurrencies. The Federal Reserve has been buying and sellingforeign currencies since early 1962 as part of the efforts to defendthe dollar and strengthen the world payments system. All of theseoperations for the System Account are carried out, under theauthorization of the Federal Open Market Committee, by theFederal Reserve Bank of New York, which also handles foreigncurrency transactions for the U.S. Treasury.

The report on operations in foreign currencies begins onpage 275.

226


REVIEW OF OPEN MARKET OPERATIONS INDOMESTIC SECURITIES

Open market operations during 1968 were conducted againsta backdrop of manifold uncertainties. One of the most vexingwas concerned with fiscal restraint—first, as to the likelihoodof enactment of fiscal restraint measures, and later, as to thetiming and extent of the impact of such measures on the econ-omy. Such uncertainties, together with recurring internationalfinancial crises, not only complicated policy decisions but alsogave rise to widespread expectational shifts that in turn exerteda strong influence on economic and financial developments.

Monetary policy, as it was carried out through open marketoperations, passed through four phases during the year. Duringthe first 4 months it became increasingly restrictive as a Federalbudget deficit continued to stimulate an already booming econ-omy and as the dollar was under attack from abroad. Then inMay and June open market operations maintained strong pres-sure on the banking system. This policy over the first half ofthis year served to slow the rate of growth in bank credit afterFebruary and contributed to a rise in interest rates to the highestlevels reached in many years up to that time. With the passage ofrevenue and expenditure control legislation in late June, openmarket operations shifted to accommodating the tendency forshort-term interest rates to decline as the prevailing expectationwas that the pace of economic advance would slow. Beginningin late summer, however, it appeared that inflationary pressureswere not subsiding as had been projected, and with bank creditgrowing rapidly, the System began to move back toward re-straint in its open market operations—thus marking the fourthphase of monetary policy. In December it undertook to increasesuch restraint significantly in order to deal with the excessivedemands and inflationary psychology that still marked theeconomy. Interest rates, which had already regained their Maypeaks, rose to new highs during the month.

227


Open market operations undertook to promote policy objec-tives by varying the degree of pressure on the banking system.The extent of this pressure was reflected in the rise of daily-average borrowing by member banks at their Reserve Banksfrom around $250 million in January to about $700 million inMay-June, followed by an easing to about $550 million in July-September and then by a gradual rise to $750 million in Decem-ber. The Federal funds rate traced a similar path, rising fromaround 45/s per cent in January to 6 to 6 ^ per cent in May-June; it then fell back to 53A to 6 per cent in late summer beforerising above 6Vi per cent in late December. Bank credit growthas measured by daily-average member bank deposits subject toreserve requirements—the bank credit proxy—slowed to a 4per cent annual rate in the first half of the year but bounced backto a 13 per cent rate in the second half.

Open market operations involved outright purchases, sales,and redemptions of $19 billion of Treasury securities in 1968,not including the purchase and redemption of $775 million ofspecial securities issued directly by the Treasury for brief periods.This represented a gain in dollar volume of 9 per cent over the1967 total. But a much larger rise took place in the temporaryprovision and absorption of bank reserves through repurchaseagreements and matched sale-purchase transactions. Almost$67.5 billion of such short-dated contracts were written andmatured in 1968—a 77 per cent increase from the precedingyear. This rise reflected the very extensive use of matched sale-purchase transactions to absorb reserves temporarily in largevolume with a minimum impact on the Treasury bill market.The restrictive tenor of monetary policy during 1968 con-tributed to the more frequent use of this technique, especiallyin the last 4 months of the year when a move toward policy re-straint was carried out alongside the introduction of new re-serve-computation procedures, which altered established patternsof bank behavior and often tended to produce a temporaryeasing of money market conditions.

228


On balance, the System's holdings of Government securitiesrose by $3.8 billion in 1968, considerably less than the $4.8billion increase of 1967. At the end of the year such holdingstotaled $52.9 billion.

JANUARY 1-APRIL 30:IN THE ABSENCE OF FISCAL RESTRAINT, MONETARY POLICYBECOMES INCREASINGLY RESTRICTIVE TO RESIST INFLATION

The economic and financial environment. As 1968 opened, over-all economic activity was expanding at a rapid rate, and infla-tionary pressures were strong and were expected to persist. ThePresident reiterated his call for a 10 per cent income tax sur-charge both on January 1—in a message devoted largely tooutlining restraints on the flow of U.S. capital abroad—and inthe budget message. The proposal for an income tax surchargeran into considerable opposition in the Congress, and its out-come remained in doubt throughout the period under review.The U.S. balance of payments continued in serious disequilib-rium, with the trade balance becoming especially weak, and ex-traordinary speculation in the gold and foreign exchange marketsprecipitated an international financial crisis in March. Concertedactions by international monetary authorities—discontinuing op-erations of the London gold pool and establishing a two-tier goldmarket—again repelled the threat to the international monetarysystem. But the episode underscored the need for halting infla-tion in the United States.

Against this background the Federal Reserve System movedforcefully to resist inflationary pressures and to foster improve-ment in the Nation's balance of payments position. An increasein reserve requirements announced on December 27, 1967, madevery clear to member banks the more restrictive thrust of mone-tary policy. Open market operations persistently increased thepressure on bank reserve positions over the first 4 months of1968. Total member bank borrowings from the Federal Reserverose from a daily average of $237 million in January to $683

229


million in April, while net reserve availability fell from netfree reserves of $144 million to net borrowed reservesof $413 million. On March 15 and again on April 19 FederalReserve discount rates were increased by Vi of a percentagepoint—bringing them to SVi per cent, the highest level since1929. Also on April 19, the Board of Governors raised ceilingrates under Regulation Q on large-denomination certificates ofdeposit to 5% per cent on those maturing in 60 to 89 days, 6 percent on those maturing in 90 to 179 days, and 6V4 per cent onlonger maturities. The ceiling on certificates maturing in 30 to59 days remained at 5Vi per cent, the rate previously applicableto all maturities. Open market operations both facilitated marketadjustments to the higher rate levels and pressed for even firmermoney market conditions.

The restraint exerted by monetary policy—interacting withthe economy's credit demands—was accompanied by a steeprise in money market rates of interest and a pronounced slowingin the pace of bank credit expansion. The Federal funds raterose from a range of AVi to 4% per cent in January to 6 percent, and briefly to 6lA per cent, by the end of April (Chart 1).Rates posted by the major New York City banks on loans toGovernment securities dealers ("call loans" in charts) rose fromaround 434 percent in January to 6V2 per cent in late April.Given the upward pull of financing costs, the rate on 3-monthTreasury bills rose from about 5 per cent to 5Vi per cent overthis period in spite of the seasonal redemption by the Treasuryof $5.5 billion of tax-anticipation bills maturing in March andApril. Bank credit growth—as measured by the bank creditproxy—was at a seasonally adjusted annual rate of 4 per centover the January-April period, compared with an increase of11.7 per cent during all of 1967.

The slowdown of growth in bank credit over the interval re-flected both a more-than-seasonal reduction in average Govern-ment deposits in March and April and a marked slowing in timedeposit growth. Time deposits rose at an annual rate of only 6

230


per cent in the first 4 months of 1968, compared with 16 per centover the year 1967. Higher short-term market interest rates atfirst reduced the growth in negotiable CD's and by March andApril led to a contraction in the volume outstanding; other timeand savings deposits also rose at a somewhat slower pace than in1967. (Savings at other thrift institutions also grew at a moremoderate pace.) The money supply—demand deposits adjustedand currency outside banks—increased at an annual rate of5 per cent, seasonally adjusted, during the first 4 months of1968, compared with 6.4 per cent for the year 1967.

On the whole, bank loans grew at about the same rate duringthe first 4 months of 1968 as in 1967. Business loan demand wasslightly below the 1967 pace, but consumer loans increasedsharply. On the other hand, bank investments, in both Govern-ment and other securities, increased at a much slower rate thanthe rapid pace of 1967.

Short-term interest rates rose irregularly over the first 4 monthsand in fact worked temporarily lower in January. Banks, findingloan demand relatively moderate early in the year, were not ag-gressive in bidding for funds. However, they were able to extendthe maturities on many CD's and to replace borrowings of Euro-dollars at declining rates. As money market rates rose underFederal Reserve pressure in February and March, rates on Treas-ury bills and CD's began to edge higher. During the mid-Marchgold crisis most Treasury bill rates advanced by 20 to 50 basispoints while the rate on 3-month Euro-dollars rose by more than1 percentage point to IVs per cent for a few days. The acutetensions in short-term debt markets were relieved by variousmeasures taken to alleviate the gold crisis. In late March thePresident's announcement of a partial halt of the bombing ofNorth Vietnam also relieved market pressures.

Nevertheless, the strong pressure exerted by increases in day-to-day money market rates and by expectations of a furthertightening of monetary policy in the absence of fiscal restraintled to a renewed rise in short-term rates. The banks experienced

231


1 DECEMBER 27, 1967 - MAY 1, 1968

Reserves and borrowings

MILLIONS OF DOLLARS

750

I I

Basic reserve deficit

46 MAJOR MONEY MARKET BANKS BILLIONS OF DOLLARS

11 i i i -r i i iMorey market rates

I II I II o

PER CENT

7

CALL LOANS

Money market rates: Federal funds, daily effective rate; call loans, daily range on newloans to U.S. Govt. securities dealers posted by New York City banks. Bank credit proxy:projection was made 4 weeks earlier. Short-term rates: bid rate on 3-month Euro-dollars;secondary market rate and Regulation Q ceiling on 3-month CD's; daily bid rate on 3-

232


Bank credit proxy

BILLIONS OF DOLLARS

285

PROJECTED

SEASONAL

I 1 I I i I I I 1Other short-term rates

i l i l l

EURO-DOLLAR

CD'sCEILINGSICOMDARV MARKET

TREASURY BILLS

i l i l i i i i l m i l m i h i i i ( i n i l n i h u t I m l l t i i h m J i m l i M i l i l i i l i i i l i i i l i i i i l n i l i

Long-term rates

BONDS

NEW CORPORATE

U.S. GGVERMNfENT

PER CENT

7

6

5

4

i him27OEC.

3 10 17

JANUARY

24 31 7 14 21

FEBRUARY

28 6 13MARCH APRIL

month Treasury bills; and offering rate on 4- to 6-month commercial paper. Long-termrates: corporate bonds, weighted averages of new publicly offered bonds rated Aaa, Aa,and A by Moody's Investors Service and adjusted to an Aaa basis; U.S. Govt. bondsaverage yield on all bonds due or callable in 10 years or more; tax-exempt bonds, State andlocal govt. bonds (20 issues, mixed quality), Bond Buyer.

233


a run-off of $1 billion in CD's over the 3 weeks ended April 17,nearly double the decline in the comparable 3 weeks around themid-March tax date. The further increase in the Federal Reservediscount rate to SVi per cent on April 19 confirmed the expecta-tions regarding the intentions of the monetary authorities. Afterthis action commercial banks raised the prime loan rate from 6to 6V6 per cent.

In the capital markets, yields fluctuated widely over the 4-month period in response to the changing supplies of new issuesand shifting sentiment concerning the prospects for fiscal and/ormonetary restraint, for an end of hostilities in Vietnam, and forthe restoration of international monetary stability. On balance,yields changed little over the interval. Average yields on long-term Treasury bonds were 5.33 per cent at the end of April,compared with 5.36 per cent at the close of 1967. The BondBuyer's index of yields on 20 municipal bonds was 4.44 percent on May 2, the same as on December 28, 1967. New Aa-rated utility bonds with 5-year call protection were offered atyields of around 6.75 per cent in early May, about the same levelas had prevailed in December 1967.

Treasury and Federal agency financing operations were largeduring the 4 months. In January the Federal National MortgageAssociation (FNMA) took advantage of a buoyant marketatmosphere to sell $1.25 billion of two issues of participationcertificates (including $450 million to Government trust ac-counts) ; the 20-year maturity was offered at a yield of 6.084 percent. Later, the Treasury conducted a successful two-phasedoffering—the first of its kind—to refund maturing securities andto raise new cash. In the first week of February a new 7-year,5% per cent note was offered to holders of issues maturing inFebruary, August, and November; of the $12.1 billion in publichands, $3.9 billion was turned in on February 15. Then onFebruary 13 the Treasury sold for cash $4.3 billion of 15-month,5% per cent notes for payment on February 21.

The gold crisis in March triggered both a 40-basis-point rise

234


in the average yield on long-term Government bonds and a sim-ilar sharp deterioration in the markets for corporate and munici-pal bonds. In the wake of the crisis FNMA's sale of $1 billion ofthree issues of participation certificates on March 26 (including$270 million placed with Government trust accounts) requireda 6.45 per cent yield on the 20-year maturity, the highest on aGovernment obligation since the Civil War. The President'speace initiative and his renewed call on March 31 for a tax in-crease led to a spirited rally in the capital markets, but the pricegains faded in April when the Congress adjourned for the Easterrecess without clarifying the outlook for fiscal restraint legisla-tion—suggesting to many the inescapability of further monetaryrestraint.SYSTEM OPERATIONS IN GOVERNMENT SECURITIES DURING 1968In millions of dollars

Type of operation

Outright purchases:Treasury bills:

From marketFrom foreicn accounts

Coupon issuesSpecial certificates of indebtedness • • •

Outright sales:Treasury bills:

To marketTo foreign accounts .

Coupon issues

Matched sale—purchase transactions:With dealers:

SalesPurchases

With foreign accounts:SalesPurchases •

Redemptions:Treasury bills . . . . .Special certificates of indebtedness . •.

Repurchase agreements:Government securities:

Purchases • • •Sales

Federal agency obligations:PurchasesSales

Net change

Jan. 1-Apr. 30

1,5951,196

574

1,091421

2,4002,400

592

4,5924,459

292318

+ 1,368

May 1-June 20

1,35667570

28698

400400

171

3,8213,958

260223

+ 1,446

June 21-Sept. 25

1,380671285

87

1,194246

4,7154,715

27887

3,8693,997

219268

+441

NOTE—All figures are as of date of delivery.

Sept. 26-Dec. 31

1,5431,888

247688

8911,819

8,8858,885

415415

436688

3,5803,580

204204

+532

Total

5,8744,4301,176

775

3,4622,584

16,40016,400

415415

1,477775

15,86215,994

9751,013

+3,787

235


Open market operations. System open market operations un-folded against the backdrop of the foregoing economic andfinancial developments. (For a statistical summary of Systemoperations in Government securities, see the accompanyingtable.) In January the money market had to cope with the hugeflows of funds that are characteristic of the beginning of the year.Total member bank deposits (not seasonally adjusted) declinedby $5 billion over the month, while large amounts of reservesshifted away from the money centers and then back again. Thebasic reserve deficit of the 46 major money center banks declinedfrom an average of $1.7 billion in the week ending January 10 to$148 million in the week ending January 31 (middle left panel ofChart I ) . 1 Country bank excess reserves also fluctuated widely,averaging as high as $520 million in the week ending January 10and as low as $114 million in the following week.

The wSystem alternately absorbed and supplied reserves—al-lowing net reserve availability to fluctuate widely in accordancewith expected week-to-week changes in the demand for excessreserves. Initially, it supplied reserves in volume to avoid pres-sures arising from the expected early-January accumulation ofexcess reserves by country banks. When float rose beyond ex-pectations and the weekly sample of country bank reserve posi-tions pointed to higher-than-expected reserve availability, theSystem first sold bills outright and then on Wednesday, January10, sold $460 million of bills under 1-day matched sale-pur-chase transactions to counter the influx of Federal funds at de-clining rates.

The matched sale-purchase technique, introduced in July1966, enables the System to effect much greater short-term re-serve absorption than would be feasible through outright salessince dealers do not need to assume the market risks involvedin outright purchases from the System. During 1968 the Account

:LThe basic reserve position of this group of banks is defined as the group'sexcess reserves less its net purchases of Federal funds and its borrowings fromthe Reserve Banks.

236


Manager made much more frequent use of this technique thanearlier as he sought to maintain the desired pressure on bankreserve positions. Several matched sale-purchase operationsduring 1968 absorbed well over $1 billion of reserves for shortperiods.

Over the remainder of January, System operations were in-fluenced by the reserve-management patterns of both the countryand reserve city banks. In the weeks ending January 17 and 31,money market conditions tended to ease early in the week as thereserve city banks anticipated that substantial amounts of theexcess reserves that country banks carried over into the finalweek of their biweekly reserve-settlement periods would floodthe Federal funds market later in the week. In an attempt tokeep money market conditions firm, the System absorbed reservesearly in those weeks. However, the money market banks werecontent to accumulate sizable reserve deficiencies, which theystill hoped to cover at lower rates at the end of the week. As aconsequence, demands for funds far exceeded supplies on theWednesday settlement dates, when these banks scrambled tocover their deficiencies. Rates for Federal funds rose fromaround 43A to as high as 5Vs per cent on January 17 and onJanuary 31 were as high as 5V\ per cent. On both settlementdays the System made overnight repurchase agreements tomoderate the tautness in the market, but even so, member bankborrowing from the Reserve Banks surged to more than $1billion on January 17 and to $800 million on January 31.

The Treasury's February financing operations conditionedopen market operations during the month, but they did not fore-stall an appreciable increase in monetary pressures on the banksafter midmonth. During early February the System suppliedreserves just a little after the needs became apparent, in order tokeep the money market steadily firm; under these conditionsFederal funds generally traded at rates ranging from 4% to 4%per cent. Since indicated reserve needs were relatively short-lived,the System provided reserves entirely through repurchase agree-

237


merits, including some against "rights" to the Treasury refund-ing—that is, issues eligible to be exchanged for the new 7-yearnotes.

Such agreements—written to mature on February 15, the ex-change date—served a dual purpose: (1) to meet a part of thebanking system's reserve needs, and (2) to facilitate the Treas-ury refunding by assisting dealers who purchased rights issues.However, when net reserve availability considerably exceededexpectations over the period February 9 to February 12—theholiday weekend when Lincoln's Birthday fell on a Monday—theSystem quickly switched to selling Treasury bills—at first out-right, and then under 1-day matched sale-purchase transactions.

By about mid-February it became clear that bank creditgrowth was outrunning expectations (Chart 1, top right panel)and that a move toward greater restraint—to the extent per-mitted by Treasury financing—was called for under the provisoclause of the directive of the Federal Open Market Committeeadopted at the February 6 meeting. Inasmuch as the distributionof the new 7-year notes was proceeding smoothly and the sale of$4.3 billion of 15-month notes on February 13 had been success-ful, the Account Manager began to allow the seasonal action offloat and other factors affecting reserves to exert increasing pres-sure on the banks without taking fully offsetting action. Memberbank borrowing from the Reserve Banks rose to an average of$424 million in the last 2 weeks of February from $313 millionin the prior 2 weeks, and net borrowed reserves emerged for thefirst time in a year (except for 1 week in January). In late Febru-ary the System tempered the tautness in the money market bymaking outright purchases of Treasury securities, includingcoupon issues.

Over the next 2 months the System carried out one of theswiftest increases in monetary restraint in history. An inflationaryrate of expansion in the domestic economy and the threat thatpersistently rising domestic prices posed to international con-fidence in the dollar, and hence to the international monetary

238


system, provided the backdrop for this action. In the first 2 weeksof March the Account Manager, acting under the Committee'sMarch 5 directive, allowed conditions in the money market totighten by not offsetting the reserve drains generated by goldlosses and other reserve factors. The Federal funds rate reached5 per cent on several days. Member bank borrowing from theReserve Banks rose to an average of $640 million for the 2-weekperiod, and net borrowed reserves to an average of $253 million.

Reflecting in part the uncertainties of the international mone-tary situation and expectations of a possible increase in the dis-count rate, banks managed their reserve positions cautiously,bidding strongly for Federal funds and borrowing heavily fromthe Reserve Banks—in excess of $1.2 billion over the March8-10 weekend. As a result, a redundancy of reserves appearedin the money market on Tuesday, March 12. However, in viewof the deterioration that developed in the securities markets asforeign demand for gold mounted, the System purchased Treas-ury bills offered for sale by foreign official accounts, instead ofselling the bills for those accounts in an unreceptive market.When the money market displayed signs of marked easing onWednesday, March 13, the end of settlement periods for bothreserve city and country banks, the System roughly offset theimmediate reserve effect of its purchases from foreign accountsby negotiating overnight matched sale-purchase transactions.

The securities markets opened on Thursday, March 14, amidreports that turnover on the London gold market had exceededthe previous daily peak recorded in the aftermath of the devalua-tion of sterling in November 1967. Sentiment in the securitiesmarkets deteriorated rapidly amid rising expectations of an in-crease of a full percentage point in the discount rate. To facilitatean orderly adjustment as market rates moved higher, the Systemconducted a go-around of the market at an unusually early hourand purchased $313 million of Treasury bills. It also purchasedTreasury securities, including coupon issues, from foreign ac-counts. (The Treasury helped to offset the reserve impact of

239


these operations by advancing a scheduled transfer of gold fromthe monetary stock to the Stabilization Fund by 3 days.) Anincrease of Vi of a percentage point in the discount rate to 5 percent was announced on the afternoon of March 14, and pricesof securities rebounded the next day. The announcement onMarch 17 of the termination of gold pool operations served tocalm the debt markets further, and the System conducted no ad-ditional operations in the week ending March 20.

Following the increase in the discount rate, the Federal fundsrate adjusted upward to the area of 5lA to 5% per cent in lateMarch and early April, and New York City banks raised theirrates on new loans to Government securities dealers to a rangeof SVi to 6VAT per cent. On Wednesday, March 27, an unusualkind of strain developed in the market—one that could misleadbanks and others as to the degree of pressure the monetary au-thorities intended to bring to bear on the monetary system. Inview of the large reserve deficiencies accumulated by large banksoutside New York City, the Account Manager had expectedtightness to occur in the market that day. However, the Federalfunds rate did not begin to rise sharply until about 1:00 p.m., bywhich time neither repurchase agreements nor cash trades withdealers were feasible. When the rate for Federal funds rose to anew record high (since surpassed) of 6% per cent later thatafternoon, the System moved to show its concern over the aber-rant tightness (and to meet a part of the following week's reserveneeds) by buying Treasury bills for delivery the next day.

As April unfolded, the slightly greater restraint being exertedby open market operations—in accordance with the Committee'sApril 2 directive—contributed to, and was reinforced by, amarked increase in pressure on the major money market banks.These banks were confronted by the prospect of heavy demandsfor credit on the April 15 corporate tax date at a time when in-terest-rate relationships suggested the likelihood of considerableattrition in banks' outstanding CD's. The major New York Citybanks, which experienced a $700 million deepening in their basic

240


reserve deficit in the week ending April 10, raised their rates onnew loans to Government securities dealers to around 6 ^ percent. The Federal funds rate rose and fluctuated around 53A percent as the 46 major money market banks bid heavily for fundsto cover a basic deficit, which had deepened by almost $1.8 bil-lion to $2.5 billion.

At the onset of these reserve pressures on April 4, the Systemstepped in to supply reserves—in part through outright purchasesof Treasury bills and in part through repurchase agreementsagainst Treasury securities and bankers' acceptances. The repur-chase contracts were written at 5Vs per cent—V% of a percentagepoint above the prevailing discount rate. The use of such a dif-ferential, it was explained to the dealers, was a new and flexibleoperating technique designed to make it possible to write suchcontracts at rates closer to prevailing market rates for short-termsecurities. In the past the Account Manager had on occasionmade repurchase agreements at rates below the discount ratewhen relatively low market interest rates had made it necessaryto depart from the usual practice of setting the rate on Systemrepurchase agreements at the discount rate. However, it had notbeen the System's practice to set the rate on its repurchase agree-ments above the discount rate when market interest rates werewell above the discount rate, and as a consequence the AccountManager had sometimes felt constrained from providing reservesthrough repurchase agreements at such times.

On Friday, April 5, the Manager negotiated additional con-tracts at the 5Vs per cent rate. However, a number of marketparticipants interpreted the premium repurchase rate as suggest-ing that further monetary restraint lay ahead, and this contributedto the upward pressure on Treasury bill rates.

The System reversed direction after the weekend and sold someTreasury bills to mop up a glut of reserves, which stemmed inpart from a bulge in float that resulted from an unexpected bankholiday in New York State on April 9 in honor of Dr. Martin Lu-ther King, Jr. During the following statement week, the System

241


again injected reserves through outright purchases and repur-chase agreements at 5Vs per cent in order to accommodate thechurning of funds over the April 15 tax-payment date and tomoderate strong upward pressures on Treasury bill rates. Theselatter pressures threatened the viability of the existing 5Vi percent ceiling on interest payments on negotiable CD's under Regu-lation Q.

On Thursday, April 18, the Board of Governors announcedthe increase in Federal Reserve discount rates to 5Yi per centand an upward revision in Regulation Q ceilings on large-denomination CD's.2 Earlier that day the System had bought someTreasury bills and short-term coupon issues to meet a part of thesizable reserve need foreseen for the week. Markets adjustedreadily to the new rate levels, and the System stayed on the side-lines the next day.

Reserves bulged unexpectedly after the weekend, however, andthe System sold Treasury bills outright and under matched sale-purchase transactions. Federal funds traded predominantly in a5Vi to 5% per cent range during most of the week but droppedas low as 4 per cent on April 24, the reserve-settlement day.However, after the execution of matched sale-purchase transac-tions that day, the rate rose to 6V4 per cent. On Thursday, April25, trading in Federal funds opened at 5% per cent and in orderto nudge the rate higher, the System sold Treasury bills under1-day matched sale-purchase transactions. (It also purchasedbills directly from foreign accounts to meet part of the week'sreserve needs.) During that day some Federal funds were tradedat rates as high as 6lA per cent. Moreover, trading opened at thatrate on the next 2 days, but most transactions were at 6V& percent. Then on April 30, with the Federal funds rate tending evenhigher, the System injected reserves through repurchase agree-ments executed at a new high rate of 5% per cent, lA of a per-centage point above the discount rate.

2 See p. 80 for revised rates.

242


MAY 1-JUNE 20:CONTINUED MONETARY REST K *L\r'f IT.NMi'^; t <• x, < .\\ v iOF FISCAL RESTRAINT

The economic and financial environment. After several months ofintensifying monetary restraint, System policy shifted to main-taining the degree of pressure on the banks already achieved, inpart because prospects for enactment of fiscal restraint legislationappeared to have improved. As events unfolded, most of the Sys-tem's open market operations during the 7 weeks prior to passageof the bill by the House of Representatives on June 20 wereaimed at tempering a tendency toward undue tautness in themoney market. For the 2 months May and June, member bankborrowings from the Federal Reserve averaged $719 million,compared with $683 million in April. For the same period netborrowed reserves averaged $334 million, compared with $413million in April.

Rates on Federal funds fluctuated during May and Junearound or slightly above the high level attained at the very endof April. Most trading was in a 6 to (ML per cent range, althoughrates occasionally dropped toward the end of statement weeks(Chart 2) . At the beginning of May the major New York Citybanks posted rates on new loans to Government securities dealersas high as IVs per cent, and the higher financing costs to thedealers contributed to the upward push of Treasury bill ratesearly in the period. These loan rates were gradually reduced,however, and they closed the interval at around (ML per cent,about the same as at the end of April.

In early May the major New York City banks raised theiroffering rates on all maturities of negotiable CD's to the Regula-tion Q ceilings that had been put into effect on April 19. Withsecondary market rates at or above these levels throughout theperiod, however, the weekly reporting banks sustained net lossesof nearly $700 million of CD's over the 7-week interval May 2 -June 19. Large banks with access to the Euro-dollar market bidstrongly for such funds, and they succeeded in attracting Euro-

243


2 MAY 1, 1968 - JUNE 26, 1968

Reserves and borrowings Bank credit proxy

MILLIONS OF DOLLARS BILLIONS OF DOLLARS

NET BORROWED RESERVES / 5QQ

-T--X. ' mEXCESS RESERVES

i I 1 i l i i I I

ACTUAL*— -

PROJECTED • SEASONAL

I I I ll I I

285

.280

275

Basic reserve deficit Other short-term rates

BILLIONS OF DOLLARS46 MAJOR MONEYMARKET BANKS

EURO-DOLLAR

COMMERCIAL PAPER

TREASURY BILLS

CD'sCEILING iSECONDARY MARKET

I I 1 I ll I I I I I M M I I M I I M M I M M I I

M( ney market rates Long-term rates

PER CENT B O N D S

CALL LOANS

V F.R. DISCOUNT RATE »FEDERAL FUNDS!

- " '

4

3

NEW CORPORATE

!),$. GOVERNMENT

- — ^TAX-EXEMPT

PER CENT

7

6

5

4

3

11 \ I I I I tI I 1 I I I I I I I I 11 i 1 IE 1 I I t » H 1 t I J I 1 i M M1 I I H i I I I f 1 It I ! I 1 1 ! I 11 I f I I I I 1 I I1 8 15 22 29 5 12 19 26 1 8 15 22 29 5 12 19

MAY JUNE MAY JUNE

For notes see pp. 232-33.

244


dollars in an amount that was more than twice as large as theirloss of CD's. In the process the rate on 3-month Euro-dollar de-posits was driven as high as IVs per cent by the end of May; thiscompared with 6Vi per cent early in the month and was equalto the crisis level of March.

Reflecting the substantial reduction in CD's outstanding, aswell as a slowdown in the growth of other time deposits, the in-crease in total commercial bank time deposits slowed to an an-nual rate of 3.5 per cent in May and June, compared with 6 percent over the previous 4 months and 16 per cent for the year1967. The money supply, on the other hand, grew at an annualrate of 10 per cent during May and June, double the rate of theprior 4 months. In part, the more rapid growth of money reflecteda sharp decline in U.S. Government demand deposits, which arenot counted as part of the money supply. In part, it may alsohave reflected the expanded volume of trading in corporatestocks. The bank credit proxy grew at the same average rate(4 per cent) during May and June as in the first 4 months of theyear. Bank loans generally grew somewhat more slowly than theyhad in the earlier period, with the exception of loans to nonbankfinancial institutions. Meanwhile, banks continued to reduce theirrate of net new investment in securities.

The atmosphere in the securities markets altered dramaticallyas the outlook for fiscal restraint changed during May and June.Prices generally declined until May 23, then began to move up.

After fluctuating irregularly during the first half of May, pricesof debt issues plummeted in reaction to a delay in the vote onthe tax measure announced by House leaders on May 15. Pricescontinued to drop sharply over the following week as dealersattempted to lighten inventories swollen by their underwriting ofthe Treasury's successful May financing (see below). Sizablepurchases of Treasury coupon issues executed for Treasury ac-counts helped to relieve dealers' inventories without impedingsubstantial downward price adjustments. From April 30 to May22, yields on intermediate- and long-term Treasury securities

245


rose by about 30 and 20 basis points, respectively. Corporatebond yields rose some 25 basis points as dealers attempted toreduce their inventories in anticipation of the heavy June calen-dar. The municipal bond market was particularly depressed inlate May, with yields up 30 to 40 basis points from their end-of-April levels (bottom right panel of Chart 2) .

In early May the Treasury conducted a financing that wasquite successful in view of the uncertain atmosphere prevailingin the market. In an operation that involved both an exchangeissue and a cash offering, it raised $2.1 billion of new moneyand refunded notes and bonds maturing May 15. Private holdersof $3.9 billion of maturing issues exchanged $2.7 billion of theirholdings into new 7-year, 6 per cent notes, while $10.3 billionof subscriptions were tendered for $3.4 billion of new 15-month,6 per cent notes offered for cash. (Large subscriptions to theshorter-term notes were allotted at a rate of 28 per cent.) In theinitial favorable reaction to the offering, the new 7-year noteswere bid as high as 100%2, but by May 22, when the marketwas generally unsettled by the uncertain outlook for fiscal action,the bid price was 99%2, equivalent to a yield of 6.13 per cent.

Prices of securities rebounded beginning on May 23 in adramatic reversal of market sentiment. Sparked by the statementof the chairman of the House Ways and Means Committee that heforesaw congressional passage of the proposed tax bill, the rallygained renewed vigor following the President's statement onMay 30 that he would accept the $6 billion reduction in expendi-tures demanded by congressional leaders. With the removal of thelast potential obstacle to fiscal restraint, dealers sought aggres-sively to rebuild their inventories. While prices sustained rela-tively mild and brief setbacks in reaction to two further postpone-ments of the vote on the tax and spending bill by the full House,they did rise from May 23 to June 20—when the House finallyapproved the bill; yields on intermediate-term Treasury secur-ities showed declines of about 60 basis points, and those onlong-term Treasury bonds about 40 basis points on the average.

246


The price improvement was more restrained in the corporateand tax-exempt bond sectors, although prices rose sharply duringthe few days just before the House vote. Offerings of new corpo-rate issues were heavy, and they encountered mixed receptions.In fact, some issues ran into investor resistance even at the recordyields available. As the final vote on the fiscal restraint bill ap-proached, however, investor interest in new issues picked up. TheBlue List of dealers' advertised inventories of tax-exempt issues,for example, declined from its mid-May high of $649 million to$427 million as of June 20. On balance, yields on corporate andtax-exempt bonds were virtually unchanged over the May 1-June 20 period.

Treasury bill rates rose generally by 25 to 50 basis points overthe first 3 weeks of May; the steepest increases occurred in thewake of the May 14 decision of congressional leaders to postponeHouse action on the tax bill. Market rates on 3- and 6-monthbills reached record levels (since surpassed) of 5.92 and 6.08per cent, respectively, just before Chairman Mills predicted onMay 23 that the tax bill would eventually pass. Rates droppedsharply in response to that statement but moved somewhat higherin early June in reaction both to a subsequent delay in the Housevote and to seasonal pressures. Rates again declined sharply onthe eve of the House vote—reflecting renewed optimism overthe outlook for fiscal restraint, very large purchases of bills bythe System, and expectations of heavy seasonal demand for bills.By June 20, the market rate for 3-month bills was 5.40 per cent—down 11 basis points from the end of April and 52 basis pointsbelow the interim high.

Open market operations. The System's operations in the openmarket during the May 1-June 20 interval sought to maintainthe firm conditions in the money market achieved by late April.A recurring problem was the need to head off or moderate unduetautness in the money market. During the interval—a period ofseasonal reserve needs—the System injected a net of $1.4 billionof reserves. The Trading Desk arranged $4.1 billion of repur-

247


chase agreements against Treasury and Federal agency securities,while maturities and withdrawals of such agreements totaled $4.2billion. But on an outright basis the System purchased $2.0 bil-lion of Treasury bills—$922 million on June 19 alone. Reserveabsorptions were quite limited during the period; the total re-flected outright sales of $384 million of Treasury bills, sales of$400 million of bills under 1-day matched sale-purchase trans-actions, and redemptions of $171 million of maturing bills.

During the first half of May—while the Treasury's May financ-ing was proceeding smoothly—the System sought to maintain inthe money market the firmer conditions that had been achievedearlier. Its operations were directed largely toward attempting toovercome the excessive tautness that developed in the moneymarket as major banks sought to cover sizable reserve deficits bybidding aggressively for Federal funds. In part these conditionsreflected a growing desire by these banks to conserve their use ofthe Federal Reserve discount window until the June corporatetax-payment date when the pressures of loan demands and run-offs of CD's might pose a major problem.

In resisting the resultant strong upward pressure on the Federalfunds rate, the System repeatedly injected reserves through re-purchase agreements with nonbank dealers in Government secu-rities, and on several days when its first round failed to producethe intended relief to the market, it made a second round of suchagreements. During the May 1-15 interval the Account Managerarranged a total of $2.3 billion of repurchase agreements againstTreasury and Federal agency securities; these were supplementedby $84 million of such agreements against bankers' acceptances.All of these agreements were written at 5% per cent, XA of apercentage point above the Federal Reserve discount rate. Inspite of these persistent reserve injections, Federal funds tradedpredominantly in a 61/s to 6% per cent range in the first half ofMay, and a new record "effective" rate of 6Vi per cent was seton May 14.

Around the middle of May, System operations were condi-

248


tioned somewhat by developments in the securities markets, butthere was no significant departure from money market objectives.At the opening on Thursday, May 16, the markets were very un-settled as a result of news of the postponement of congressionalaction on the tax bill until early June, and Federal funds werequoted at 6V4 per cent bid and 6V2 per cent asked. In order tofacilitate orderly adjustments in the market to the changedoutlook for fiscal restraint and to provide for a part ofthe estimated sizable reserve needs for the week, the Systemconducted an early go-around of the market and purchased out-right $301 million of Treasury bills; it also bought $33 milliondirectly from foreign accounts. (Earlier still, the Trading Deskhad purchased on behalf of a Treasury trust account a substantialamount of the new 7-year notes for which settlement had beenmade just the day before.) Later in the day the System injectedan additional $301 million of reserves through 4-day repurchaseagreements written against Treasury and Federal agency secu-rities and bankers' acceptances; the rate on these agreements was53A per cent.

As it turned out, the System's actions on May 16 more thanfilled the reserve needs for the week, and toward the end of thestatement period conditions in the Federal funds market eased.No attempt was made to counter this temporary ease because ofthe unsettled state of the securities markets and because of thereserve needs projected for the next several weeks. Indeed, inview of these circumstances, the System purchased $265 millionof Treasury bills and $70 million of Treasury coupon securitieson Wednesday, May 22, for delivery the following day, whichwas the beginning of the next settlement period.

On several other occasions during May and June conditionsin the money market eased near the end of a statement week.In view of the very tight conditions generally prevailing—and,at times, the unsettled state of the securities markets—the Sys-tem usually made no effort to counter such temporary ease. Butthere was an exception in the week ending May 29, when easing

249


tendencies manifested themselves relatively early in the statementperiod—on Monday, May 27—as the distribution of reservesshifted in favor of the major money centers. On that day theSystem sold $212 million of Treasury bills outright, and the nextday it sold $400 million of bills under 1-day matched sale-purchase transactions. The only other outright sales during Mayand June took place on Tuesday, May 7, when the System sold$172 million of Treasury bills to combat easing tendencies thatemerged temporarily.

The System was ready to absorb reserves again early in Junebut was inhibited by an unusually marked divergence betweenthe reserve statistics and the tone of the money market. Firmmoney market conditions at the beginning of the statementweek ending June 5 led to heavy member bank borrowing fromthe Reserve Banks—more than $1 billion—over the weekend.These borrowed reserves combined with a sharp decline in ex-cess reserves at country banks in the final week of those banks'biweekly reserve-settlement period to produce a high level ofnet borrowed reserves as well as an easing of money marketpressures after the weekend. The Account Manager stood readyto inject reserves if the money market should tighten—as the re-serve figures indicated was likely. But the expected firming didnot occur during the week, and the System took no action inthe market. Net borrowed reserves for the week averaged $551million (top left panel, Chart 2).

At the end of the period under review the System injected ahuge volume of reserves to moderate unusually heavy pressureson the money market stemming from international transactions.On June 18 and 19 the System provided a total of $1.3 billion ofreserves, largely to offset the reserve effect of an $800 millionnet repayment to the System on June 19 of a British swapdrawing. On the day before the repayment the money markethad been relatively comfortable—with Federal funds tradingat: 6V& per cent—and the System had confined its operations tothe purchase of $134 million of Treasury bills available from

250


foreign accounts for delivery on Wednesday, June 19. On thelatter day, however, the money market became exceptionallytight, as the swap repayment absorbed reserves and as banks inthe money centers scrambled to cover deficits in their reservepositions that had been accumulated earlier in the statementperiod. In these circumstances the System purchased $622 mil-lion of Treasury bills for immediate delivery and arranged$252 million of repurchase agreements at 5% per cent. In addi-tion, as a start in meeting part of the sizable reserve needs pro-jected for the next several weeks, the System purchased $300million of Treasury bills in the market for delivery on Thursday,June 20. In spite of this record injection of reserves, Federalfunds were bid as high as 63A per cent on June 19—althoughtrading was predominantly at 6 ^ per cent—and total borrow-ings by member banks from the Federal Reserve Banks surgedto $1.9 billion.

JUNE 21-SEPTEMBER 25:MONETARY POLICY ACCOMMODATES TENDENCIES FORSHORT-TERM RATES TO DECLINE FOLLOWING PASSAGE OFREVENUE AND EXPENDITURE CONTROL ACT

The economic and financial environment. With passage of therevenue and expenditure control bill by the House of Repre-sentatives on June 20 and by the Senate the next day, the thrustof national fiscal policy changed significantly. This in turn setthe stage for a shift in monetary policy from the maintenance offirm conditions in the money market to the accommodation oftendencies for short-term interest rates to decline. In implement-ing that policy, somewhat less firm conditions were permittedto develop in the money market. Rates on both long- and short-term securities declined substantially over the next several weeks,and many market rates reached their lows for the year in earlyAugust. On August 15 the Board of Governors announced areduction in one Reserve Bank's discount rate from 5Vi to 5V4per cent in a technical realignment with the changed market con-

251


ditions; similar reductions at the other Banks followed withina 2-week period.

In accordance with the Committee's policy directives, openmarket operations accommodated the tendency toward lowershort-term interest rates and somewhat less firm money marketconditions by supplying reserves somewhat more generously thanin the previous period. Meanwhile, time and savings depositsat banks were growing rapidly, and bank credit showed a sharpexpansion in a period when Treasury financing operations werevery large. As the period progressed, however, open market op-erations were directed at maintaining prevailing conditions inmoney and short-term credit markets and, at times, at resisting ina marginal way the tendency for growth in bank credit to outstripexpectations. In the generally less tight money market environ-ment, average member bank borrowings from the Reserve Banksdeclined to $535 million in the third quarter from $707 millionin the second, and net borrowed reserves dropped to $183 mil-lion on the average from $360 million.

The declines in interest rates reflected widely held expecta-tions that the new fiscal restraint measures would producequickly a slowdown in the rate of economic expansion and thatmonetary policy would need to be relaxed progressively. Fora time there was even some talk of economic "overkill" if mone-tary restraint were not decisively lessened. But as the periodprogressed, the strength of various economic indicators keptpushing the expected slowdown further into the future. Themost surprising element was a surge in personal consumptionexpenditures, which reflected in part a sharp cut in the rate ofpersonal saving. Business fixed investment also showed renewedgrowth in the third quarter, and inventory accumulation slowedless than expected. Price inflation continued, and the nation'sunderlying balance of payments situation remained a matterof serious concern.

Anticipation of a relaxation of monetary restraint, reinforcedby some evidence of such relaxation, contributed to a decline

252


in money market rates and an acceleration in bank credit expan-sion. Federal funds traded generally around the 6Vs per centlevel through mid-August and in a 53A to 6 per cent range afterthe reduction in the discount rate (bottom left panel of Chart3). Rates on loans to Government securities dealers posted bythe major New York City banks were reduced somewhat inJuly, but such rates crept upward in the first half of August asdealers added to inventories in expectation of a further rise inprices. Although the cut in the discount rate led to some declinein dealer loan rates, these rates drifted upward again in lateSeptember. Bank credit, as approximated by the bank creditproxy, grew at a seasonally adjusted annual rate of 13 per centfrom June to September, more than three times the rate in thefirst half of the year.

Most of the growth of the bank credit proxy in the thirdquarter was accounted for by time deposits. Such deposits ex-panded at an annual rate of 19 per cent as declining market in-terest rates made the rates offered by banks on time depositsmore competitive. The secondary market rate on 3-month CD'sfell from more than 6 per cent in June and July to a range of5.60 to 5.70 per cent by late September—well below the maxi-mum rate payable on new deposits. In the easier money marketenvironment weekly reporting banks succeeded in adding some$3 billion to their outstanding CD's between June 19 and August28 before experiencing a seasonal dip in September (figures notseasonally adjusted). In contrast to the rapid growth in time de-posits, private demand deposits displayed little growth after earlyJuly. U.S. Government deposits, on the other hand, increasedsharply—in large part as a result of Treasury financings andFNMA sales of participation certificates, which raised $7.0 bil-lion of new money during the period.

On the asset side of the banks' balance sheets, holdings ofsecurities and of loans collateralized by securities rose sharplyduring the third quarter. Increases in these accounts reflected notonly bank participation in the underwriting of new Government

253


3. JUNE 19, 1968 - SEPTEMBER 25, 1968

Reserves and borrowings

MILLIONS Of DOLLARS

750

i l l ! ! IBasic reserve deficit

46 MAJOR MONEY MARKET BANKS

1 1 1 !

BILLIONS OF DOLLARS

4

3

2

1

I I i I i i ! i

Money market rates

I ! t i l t

C A U LOAMS

F.R. DISCOUNT RATE

PER CENT

7

6

11 I i 1 1 1 1 1 1 1 I f I i 1119 26 3 10 17 24

JUNE JULY


AUGUST SEPTEMBER

254


Bank credit proxy BILLIONS OF DOLLARS

i I I I I I I f I i i I I 1 I IOther short-term rates

. EURODOLLAR

CD'sCEILINGSECONDARY MARKET

COMMERCIAL PAPER

TREASURY BILLS

Long-term ratesBONDS

NEW CORPORATE

""""" " " ' - * 1 1 ^

US. GOVERNMENT

TAX-EXEMPT

PER CENT

7

£ 6

5

4

I

PER CENT

7

6

5

4

!19

\ ! i i n26

JUNE

1 i !3

i 1 1 I i10

1 ! 1! !17

JULY

1 i 1 1 1124

hill31

i l l7 14 21 28 4 11 1B 25

AUGUST SEPTEMBER

255


securities issues and record offerings of tax-exempt securitiesbut; also bank purchases of such securities for portfolio. Otherloans also increased, with special strength in consumer loans.

In the Treasury bill market, rates declined irregularly fromJune 20 until early August, with the market rate on 3-monthbills falling from 5.40 per cent to a low of 4.89 per cent. The de-cline began with the System's massive purchases of bills on June19 (described in the previous section). The reduction in therate of interest on System repurchase agreements by Vs of apercentage point to 5% per cent in early July and by anotherVs percentage point to 5Vi per cent on July 17, the day after ameeting of the Committee, was taken by many observers assignaling a more accommodative monetary posture—contributingto sizable demands for bills despite rising prices. Finally, theTreasury's announcement on July 31 that its August refundingwould not include the usual short-term "anchor" issue spurredhopes for strong reinvestment demand for bills.

As bill yields dropped, however, the widening spread betweenthese yields and dealers' financing costs left the bill market vul-nerable to a reaction. When optimism over the prospects fordeclining interest rates diminished and when the New YorkCity banks started to post higher dealer loan rates early inAugust, Treasury bill rates reversed direction quickly. The re-duction of VA of a percentage point in the discount rate, an-nounced on August 15, served to steady bill rates, and theserates fluctuated narrowly for the remainder of the period. OnSeptember 25 the market rate on 3-month bills wag 5.11 percent, down 29 basis points from June 20 and 81 basis pointsbelow the mid-May high. Other short-term rates posted similarnet; declines; rates offered by dealers on prime 4- to 6-monthcommercial paper, for example, declined from 6V4 to 5% percent.

In the capital markets a brief period of profit-taking in thewake of the enactment of the fiscal restraint legislation, whichhad been heavily discounted in the markets for several days prior

256


to final passage, soon gave way to ebullience amid expectationsof lower interest rates in the months to come. Underwriters bidaggressively for new corporate and municipal issues, and insti-tutional interest in such securities revived markedly. Govern-ment securities dealers added heavily to their inventories, en-couraged by the reductions of Ys percentage point in the rateson System repurchase agreements on July 5 and July 17.

The buoyant atmosphere facilitated Federal Government fi-nancing operations, in which substantial amounts of new moneywere raised. First, in early July the Treasury sold $4 billionof tax-anticipation bills due in March and April 1969. In lateJuly the FNMA offered to the public two issues of participationcertificates totaling $800 million (in addition to $530 millionplaced directly with Treasury trust accounts). Both the 10-year,6Ys per cent certificates and the 20-year, 6.20 per cent certifi-cates sold out quickly and moved to substantial premiums insecondary market trading. In connection with the refinancing ofcoupon issues maturing in August, the Treasury raised $1.7billion of additional cash. It sold to the public $5.5 billion of 6-year, 55/s per cent notes, priced to yield 5.70 per cent, in thelargest cash sale of an over-5-year issue in more than 20 years.The notes were heavily oversubscribed—with large subscriptionsallotted at 18 per cent—and they went to a premium in earlytrading.

Dealers in particular subscribed heavily for the new notes—augmenting the large positions they had already built up in out-standing issues in anticipation of capital gains. Faced with thetask of distributing such a large volume of the new notes, dealersoccasionally grew restive with their exposure to changes inmarket conditions, and yields edged irregularly upward fromearly August until early September. On the whole, however, theyield rise was contained by dealers' continuing expectations oflower rates in the months ahead, by sporadic bank demand forthe new 55/& per cent notes, and by a gradual reduction in thepenalty cost of carrying inventories of securities after the re-

257


duction in the discount rate on August 16. Dealers placed con-siderable amounts of securities with investors in August andSeptember; this relieved the congestion and improved the atmos-phere in the market. Yields declined a bit in the last 2 weeks ofthe period amid easier conditions in the money market and talkof an impending reduction in the prime lending rate of commer-cial banks, which finally occurred at the end of the period. Overthe period as a whole, yields on long-term Treasury bonds de-clined an average of 7 basis points to 5.08 per cent (bottomright panel of Chart 3).

In other areas of the capital markets the greatest declinesin yields were in the corporate sector, in which new public offer-ings in the third quarter totaled only slightly more than half thevolume for the similar period in 1967. Yields on high-grade cor-porate bonds declined about 35 basis points over the period;new Aa-rated utility issues with 5 years of call protection wereyielding about 6.40 per cent in late September, compared with6.75 per cent just before passage of the fiscal restraint bill inJune. In the market for tax-exempt bonds, on the other hand,flotations in the third quarter reached a record level, 50 percent more than in the comparable period of 1967. The BondBuyer's weekly index of yields on 20 municipal bonds declined13 basis points on balance over the period to 4.30 per cent onSeptember 26.

Open market operations. System open market operations ini-tially moved to accommodate tendencies for short-term interestrates to decline in the wake of passage of the Revenue and Ex-penditure Control Act by the Congress. In conjunction with theresulting easing of money market conditions, the Account Man-ager in July twice reduced the rate charged on System repur-chase agreements with dealers in Government securities andbankers' acceptances—bringing the rate back to the level of thediscount rate. Moreover, the System's accommodative posture,with its focus on interest rates, entailed the provision of a largevolume of reserves as the banking system helped to underwrite

258


large additions to U.S. Government debt and record flotationsof bonds by States and municipalities, as well as rapid increasesin consumer debt. In the face of the resultant surge in the bankcredit proxy, the Account Manager responded to the provisoclause of the Committee's current economic policy directive ontwo occasions during the period—aiming for somewhat firmerconditions in order to resist excessive expansion of bank credit.

On balance, the System provided $441 million of reservesover the June 21-September 25 interval (table, page 235). Mostof the net addition of reserves was through outright purchases ofTreasury securities—including $2.1 billion of bills, against salesof $1.4 billion and redemptions of $278 million of maturingbills. The System also purchased outright $285 million of Treas-ury coupon securities. In providing additional reserves on a tem-porary basis, the Account Manager arranged $4.1 billion of re-purchase agreements against Treasury and Federal agencysecurities during the interval. In the latter part of the period theSystem relied heavily on matched sale-purchase transactions tooffset extraordinary supplies of reserves brought about by a com-bination of outside factors. The System sold and bought back atotal of $4.7 billion of Treasury bills under such short-term ar-rangements during the period.

During the first 2 weeks after congressional passage of therevenue and expenditure control bill, conditions in the moneymarket varied widely, with the Federal funds rate fluctuatingaround 6% per cent early in each statement week and around5V2 per cent toward the end of each. In both of those weeksthe System injected reserves to combat the early tautness andthen refrained from absorbing reserves as more comfortableconditions emerged in the money market near the end of thestatement week. On July 5, when a nationwide reserve need wasagain indicated, the Account Manager supplied reserves byrepurchase agreements written at 5% per cent, Vs percentagepoint below the rate that had been employed since April 30.

At its meeting on July 16, the Committee issued a directive

259


calling for accommodation of the tendency toward somewhatless firm money market conditions that had developed since thepreceding meeting. The next day, in accordance with discussionat the meeting, the Manager again cut the rate on repurchaseagreements by Vs percentage point to 5Vi per cent, thus realign-ing the rate with the discount rate. Market participants inter-preted the move, coming on the heels of the Committee meeting,as evidence of a modification of monetary policy that, coupledwith the economic slowdown anticipated, was expected to leadto a marked decline in interest rates in the months ahead.

In accordance with this judgment, dealers and underwritersaggressively built up their inventories of Government securities,CD's, and corporate and municipal bonds—financing the bulkof their acquisitions by borrowing at banks. It soon became ap-parent that the growth of bank credit was significantly exceedingthe projections presented at the July 16 meeting of the Commit-tee, and estimates of the increase in bank credit in July andAugust were revised upward over the next several weeks. Ac-cordingly, the Account Manager began to permit some firmingof money market conditions—having been freed to a degreefrom the normal constraints that a Treasury financing imposeson such action by the enthusiastic reception accorded the Treas-ury's offering of new 6-year notes. During the 3 weeks followingthe mid-July cut in the rate on repurchase agreements, theSystem made occasional outright purchases of Treasury billsand repurchase agreements at 5Vi per cent, but it usually did soonly after pressures on bank reserves had pushed the Federalfunds rate up to 6lA per cent. With undue tautness thus relieved,Federal funds traded primarily in a 6 to 6 Vs per cent range overthe remainder of the 3-week period.

The combination of declining Treasury bill rates and firmmoney market conditions, as already indicated, widened thespread between bill yields and dealers' costs of financing inven-tories and left the market vulnerable to any change in expecta-tions regarding the outlook for interest rates. And a correction

260


did begin about August 8 as dealer loan rates mounted furtherand as doubts spread concerning the likelihood of any near-termeasing of monetary policy. At its meeting on August 13 theCommittee indicated its concern about the upward pressures onbill rates, which had been moderated but not contained by Sys-tem injections of a sizable amount of reserves through repurchaseagreements. The reductions in Federal Reserve discount ratesto 5V<\ per cent initiated on August 15 afforded additional reliefwithout presaging immediate further easing moves. On the next2 days the Account Manager arranged repurchase agreements atthe new discount rate and also made some outright purchasesof bills.

Together, the discount rate cut and open market operationsproduced a climate of reserve cost and availability in which thedisparity between dealer financing costs and other short-termrates was significantly reduced, although not eliminated. Whilethe remaining penalty cost of carrying positions encouraged dis-tribution, dealers remained willing to hold heavy positions inhopes of lower interest rates in the future. Reflecting in part bankfinancing of these holdings and in part banks' additions to theirown investment portfolios, the growth of bank credit continuedto outstrip projections throughout August and September.

In view of the rapid growth of bank credit, open market opera-tions by late August shifted their focus away from special con-cern with Treasury bill rates and again sought at the margin toresist excessive expansion of bank credit. During the last 2 weeksof the period under review, moreover, the Account Manager hadto contend with a confluence of extraordinary factors providingreserves. Among these was the inauguration on September 12 ofnew procedures for calculating member bank reserves.3 One con-sequence of the new procedures was that required reserves—based on average deposits for 2 weeks previously—averaged

3 For details, see the Board's Policy Record for Apr. 23, 1968, p. 82, and theFederal Open Market Committee's Policy Record for Oct. 8, 1968, pp. 195-203.

261


some $500 million less in the 2 weeks ended September 25 thanthey would have under former procedures. In these circumstancesand to absorb a seasonal rise in reserves that was augmented bya sharp temporary drop in Treasury balances and foreign draw-ings on the System swap network, the System undertook verylarge-scale open market operations.

In view of the short-lived nature of the bulge in reserves andthe considerable uncertainty over how banks would modify theirbehavior under the new accounting rules, the Account Managerproceeded cautiously, accomplishing most of the reserve absorp-tion on a day-to-day basis. For this purpose matched sale-purchase transactions proved particularly useful, and the Trad-ing Desk arranged a total of $4,715 million of such agreementsin a 2-week interval. On Wednesday, September 11, the Systemabsorbed $1,530 million through open market operations, arecord amount for a single day.

The amounts of matched sale-purchase transactions outstand-ing ranged as high as $1,750 million, the level reached on Sep-tember 18. These massive reserve absorptions provided clearevidence to the market of the System's desire to avoid an easingof money market conditions as a result of redundant reserves.

The Federal funds rate rose from 5% per cent on Wednesday,September 18, to 5% per cent a week later. When pressuresintensified on the latter date, the System injected $362 millionof reserves through outright purchases of Treasury bills.

SEPTEMBER 26-DECEMBER 31:MONETARY RESTRAINT INTENSIFIES AS INFLATIONARYPRESSURES PERSIST

The economic and financial environment. In the fourth quarter,with the economy continuing to advance more robustly and withprices rising faster than previously expected, a growing infla-tionary psychology was reflected in stepped-up business spend-ing. In general, open market operations from September to mid-December sought to maintain firm conditions in the money and

262


short-term credit markets, while not attempting to resist mod-erate upward pressures on other market rates. At times whengrowth in the bank credit proxy was persistently outpacingexpectations, the Account Manager sought, under the authorityof the proviso clause of the directive, to move toward still firmerconditions.

On December 17 System policy shifted toward considerablygreater restraint. The move was signaled by an increase of lAof a percentage point in the discount rates of nine Reserve Banks—the other three quickly followed—and was confirmed byoutright sales of bills by the Trading Desk in a firm money mar-ket pursuant to the directive issued at the Committee's December17 meeting. Interest rates, which had edged upward from earlyAugust through November and had been climbing rapidly earlierin December, spurted in the wake of the System's firming actions.By the end of the year yields on most long-term debt securitieswere well above their previous historic highs.

Inflationary pressures persisted in the fourth quarter, and therate of unemployment sank to the lowest level since 1953. Con-sumer spending grew much more slowly than in the third quar-ter, and retail sales, while fluctuating appreciably over the period,tended to level off on a seasonally adjusted basis. But businessspending for both inventories and fixed investment expandedsharply, and capital spending plans pointed to a further rise in1969. During most of the fourth quarter, indicators suggested aworsening of the balance of payments situation. However, a sharp—and partly temporary—influx of funds in the last few weeks ofthe year produced a substantial payments surplus on the liquid-ity basis for the fourth quarter and a small surplus for the yearas a whole.

The combination of monetary restraint and of heavy demandsfor credit produced a gradual, though irregular, firming of moneyand short-term credit market conditions over the last 3 monthsof the year. Member bank borrowing from the Reserve Banksrose from an average of $515 million in September to $765 mil-

263


4. SEPTEMBER 25, 1968 - JANUARY 1, 1969Reserves and borrowings MILLIONS OF DOLLARS

Basic reserve deficit

46 MAJOR MONEY MARKET BANKS

I I I I I l lMoney market rates

I I

BILLIONS OF DOLLARS

4

SEPT. OCTOBER


30 6 13 20 27 4

NOVEMBER

11 18 25 1

DECEMBER JAN.

264


Bank credit proxyBILLIONS OF DOLLARS

290

PROJECTED

ACTUAL

If I ! I ll I IOther short-term rates

COMMERCIAL PAPER

I I I I I I I i l l M i I I I I I I I I I I I

Long-term ratesBONDS

11 n 111111! 11111

NEW CORPORATE

US. GOVERNMENT

* — "

TAX-EXEMPT

PER CIHT

7

6

5

4

l l25

SEPT. OCTOBER

13 20

NOVEMBER

I ! I I i I 11 1 1 ! I27 4 11 18 25 1

DECEMBER JAN.

265


lion in December, while net borrowed reserves increased from$132 million to $352 million (top left panel of Chart 4) . TheFederal funds rate generally fluctuated around 6 per cent until theincrease in the discount rate announced on December 17. Afterthat it rose rapidly, with trading frequently at rates above 6V2per cent and sometimes—near the end of the year—as high asIVs per cent. Rates on loans to Government securities dealersposted by major New York City banks followed a similar pattern,with the new loan rates generally averaging from VA to % of apercentage point higher than the effective rate on Federal funds.

Within the context of a gradual increase in pressure, therewas considerable variability in money market conditions duringthe period. Although the institution of new reserve computationprocedures for all member banks on September 12 (referred toin preceding section) eventually helped to reduce excess reserves,the characteristic biweekly pattern of reserve management bycountry banks was succeeded by a somewhat similar cycle on thepart of reserve city banks, which at times aggravated tendenciestoward short-term variability in the money market. Given theprivilege of carrying over reserve excesses, as well as deficits,into the next statement week, reserve city banks fell into a patternof alternating surpluses and deficits. These swings had sizable ef-fects on money market conditions during the first few months ofthe new reserve-computation procedures because most largebanks tended to act in phase with one another, instead of somehaving excesses while others had deficiencies. Money marketconditions often tended to be taut early in those statement weeksin which the large banks started with sizable reserve deficienciesand to be relatively comfortable early in alternate weeks whenthese banks began with large surpluses. In addition, as a conse-quence of the lagging of required reserves 2 weeks behind de-posits, the amplitude of swings in the basic reserve positions ofthe major money center banks increased, necessitating larger ad-justments in the reserve positions of these banks and consequentlyplacing greater demands on the Federal funds market.

266


Bank credit continued to expand rapidly, with the proxyseries growing at an annual rate of 12 per cent during the last3 months of the year; this was just a little below the average ratefor the third quarter. Large-denomination CD's outstanding con-tinued to grow rapidly until early December, when they began torun off sharply as an expected seasonal decline was reinforced byrising market rates that rendered CD offering rates noncompeti-tive at the Regulation Q maximums. Other time and savingsdeposits continued to grow throughout the period. The moneysupply grew faster than in the third quarter, and U.S. Govern-ment deposits declined substantially.

On the asset side of banks' balance sheets, there was increasedgrowth in business loans, loans to nonbank financial institutions,and real estate loans. Consumer loans also remained strong.Securities loans declined, along with dealers' positions, as didthe banks' own holdings of U.S. Government securities. Bankscontinued to invest heavily in non-Government securities untilDecember, when they sharply reduced their rate of investmentin such issues.

Short-term interest rates moved progressively higher from lateSeptember until late December. The Treasury bill market waskept under pressure by a variety of forces—firm money marketconditions and the resultant high costs of financing heavy dealerinventories, a belief that the Federal Reserve was shading towarda firmer monetary policy in view of continuing inflationary de-velopments in the economy, and the addition of $5 billion tothe supply of bills outstanding through Treasury sales of tax-anticipation issues during the period. To be sure, there were in-tervals of temporary declines in bill rates as a result of invest-ment demand and of outside influences, such as the rumors inmid-October of an impending break in the stalemated Vietnampeace talks in Paris and the Treasury's announcement on Octo-ber 23 of a "rights" refunding, which encouraged some profes-sional buying in expectation of demand from sellers of maturingrights. Rates on short-term bills edged down during most of No-

267


vember as a result of heavy buying by foreign official accountsand by investors seeking a safe haven amidst the uncertain near-term outlook for interest rates. At the same time, professionalselling continued to push up rates on longer-term bills.

AH types of interest rates advanced sharply in December. Thegenerally unexpected increase in the prime lending rate of ma-jor banks to 6V2 per cent on December 2 strongly affected mar-ket psychology. The System's moves toward greater monetaryrestraint in mid-December and the further increase in the primerate to 6% per cent immediately thereafter were followed byfurther sharp increases in bill rates brought on by price reduc-tions as dealers attempted to reduce their inventories. At thehigher rate levels, strong and broadly based demand for billsappeared after Christmas, and bill rates dipped; dealers were ableto reduce their bill holdings by $1.4 billion over the final weekof the year.

On balance, the bid rate on 3-month Treasury bills rose 116basis points from September 26 to the end of the year—closingat 6.25 per cent. Yields on virtually all Treasury bills were wellabove the Regulation Q ceilings on comparable maturities ofCD's at the year-end. Secondary market rates on CD's also rosesteadily during the period, closing at 6.50 to 6.65 per cent on3-month certificates, compared with the Regulation Q ceilingof 6 per cent applicable to new CD's. Aggressive bidding forEuro-dollars by banks that were losing CD funds—in the faceof a reduction in the supply of Euro-dollars as American firmsrepatriated funds and European banks engaged in the usualyear-end window dressing—contributed to a rise in the 3-monthEuro-dollar rate from 5 1 % 6 per cent on September 25 to nearlyIV2 per cent in late December. Rates on commercial paper rosemore moderately during the period; the offering rate on 4- to6-month paper placed through dealers increased from 5% percent in late September to 6Y4 per cent at the end of the year.

During most of the final quarter yields in the capital marketstrended higher, reaching new historic highs by the year-end.

268


Large volumes of municipal issues, especially, and of corporateissues were floated against a background of uncertainties sur-rounding the strength of the economy and its implications formonetary policy, the national elections, the Vietnam peace talks,and another international monetary crisis. Except for a sharp butshort-lived rally sparked in mid-October by renewed hopes forthe end of hostilities in Vietnam, yields remained under nearlysteady upward pressure for 3 months beginning September 25.

The Treasury offered holders of issues maturing in Novemberand December the right to exchange into the reopened 5% percent note of November 1974 at par or into a new 18-month,55/s per cent note priced to yield 5.73 per cent. The inclusionof the 6-year note came as a surprise to market participants inview of the uncertainties abounding, and underwriters showedlittle interest in the issue; nevertheless, public subscriptionstotaled $1.3 billion, which was higher than generally anticipated.With an additional $2.5 billion of the public's holdings of theeligible issues exchanged into the shorter note, $1.8 billion ofthe maturing issues were redeemed. This attrition made it nec-essary for the Treasury to sell $2 billion of tax-anticipation billsin late November to rebuild the Treasury's cash balance.

Market yields rose sharply in the wake of the boost in thebank prime rate on December 2. And they rose even moresharply in the week following the increase in the discount rateannounced on December 17 and the further rise in the primerate the next day. After Christmas, however, a surge in year-endtax swapping and net demand at the record yields led to a partialrecovery in prices of Government notes and bonds. On balance,from September 25 to December 31 yields on long-term Treas-ury issues rose some 67 basis points to an average of 5.75 percent. Dealers reduced their holdings of Treasury coupon issuesmaturing in more than 1 year to $360 million at the end ofDecember from the year's high of $1.5 billion in early August.

In the corporate and tax-exempt bond markets, a number ofissues were postponed after the first increase in the prime rate

269


in December. But the tax-exempt market was kept under pres-sure by sizable flotations of industrial revenue bonds before theJanuary 1 effective date of legislation removing the tax-exemp-tion privilege on issues of more than $5 million and by a largevolume of undigested earlier offerings. Dealers succeeded inreducing their advertised inventories of tax-exempt issues by$300 million in December to $550 million at the end of the year.By then the Bond Buyer's index of yields on 20 tax-exemptbonds had risen 55 basis points from late September to 4.85per cent. Yields of corporate bonds rose even more than thatduring the fourth quarter. The year's last new Aa-rated utilityissue with 5 years of call protection was floated on December 5 at7.10 per cent, about 70 basis points above the yield on similarissues late in September.

Open market operations. System open market operations fromlate September to mid-December were generally directed towardmaintaining firm conditions in the money and short-term creditmarkets. As the period progressed and the economy continuedto be stronger than had been expected, both short- and long-term interest rates moved up. Reflecting the tenor of the Com-mittee's concern with the rate of bank credit growth, open mar-ket operations offered little resistance to the rate rise. Indeed,under the proviso clause, the Account Manager moved towardfirmer money market conditions in October and again in late No-vember and early December. After the increase in the discountrate announced on December 17, open market operations wereaimed at attaining firmer money market conditions in such amanner as to make clear the System's determination to resistinflationary pressures.

On balance, the System provided $532 million, net, of re-serves through open market operations over the September 26 -December 31 interval (table). It purchased outright $3.4 billionof Treasury bills and $247 million of coupon issues. Repurchaseagreements of $3.8 billion against Treasury and Federal agencysecurities were also arranged and terminated during the period.

270


The System absorbed reserves through outright sales of $2.7billion of bills and redemptions of $436 million of maturingbills. In addition, the Trading Desk arranged $3.9 billion ofmatched sale-purchase transactions, by far the heaviest use ofthis instrument in any quarter since its inception. Finally, forseveral days prior to the influx of corporate tax payments, theSystem purchased varying amounts of special certificates of in-debtedness to tide the Treasury over seasonal low points in itscash balances. The total amounts of these special certificates heldover the period December 10-17 ranged up to a high of $596million.

Conditions in the money market firmed toward the end ofSeptember as a result of the reversal of the seasonal influencesthat had provided reserves in volume earlier in the month. Re-quired reserves, under the new computation procedures, beganto catch up with the mid-September rise in demand deposits atthe same time that the Treasury was rebuilding its balances atthe Reserve Banks and float was declining seasonally. Althoughsome firming of money market conditions from the comfortabletone earlier in the month was appropriate, the System injecteda substantial amount of reserves early in the period to combattendencies toward undue tautness. Indeed, the System purchasedoutright $854 million of Treasury securities during the state-ment week ended October 2 and made overnight repurchaseagreements on the September 30 statement date, when the avail-ability of bank credit to dealers was somewhat curtailed. Never-theless, Federal funds traded primarily at 6 per cent during theweek, compared with 5% to 5% per cent over the two previousweeks.

During October the Account Manager sought to resist exces-sive growth of bank credit by allowing money market conditionsto firm slightly on the average, within the limitations imposed bythe Treasury refunding then under way, as called for by theproviso clause. In addition, frequent open market operationswere undertaken to offset short-run variations in money market

271


conditions that resulted from the new reserve-carryover pro-visions introduced September 12.

Operations in the weeks ending October 16 and 23 are illus-trative of the pattern of monetary actions sometimes needed todeal with such fluctuations. Thus, in the week ending October 16the System injected reserves in large volume to counter unduefirmness in the money market created when banks attempted tocover deficiencies carried over from the preceding week asquickly as possible through various forms of borrowing. Becausethe banks were overly cautious and took this action early in theweek, a condition of ease developed near the end of the state-ment week, and the System absorbed reserves in volume, bymeans of both outright sales and matched sale-purchase trans-actions. Nevertheless, these actions did not match the volume ofexcess reserves accumulated so the large banks carried over siz-able amounts of excess reserves into the next statement week.As a result, bidding for Federal funds was relatively limitedearly in the October 23 statement period, so the System absorbeda substantial volume of reserves in an effort to promote moneymarket firmness and encourage a larger volume of member bankborrowing over the weekend.

However, the banks were content to accumulate deficits, andborrowing remained quite light through Tuesday, October 22.Partly because of the low volume of borrowing early in the week,reserves available in the Federal funds market that day were notsufficient to meet the insistent deferred demands of deficit banks;hence, Federal funds were bid up to rates as high as 6Y2 percent in the scramble for funds. The System then reversed direc-tion and injected reserves to moderate the tightness. Similar pat-terns of alternating ease and tightness in the money market,which the System had difficulty in smoothing out completely, re-curred in succeeding weeks.

Late in November open market operations were complicatedby an unexpected bulge in float, a sharp decline in the Treasury'sbalance at the Reserve Banks, and heavy foreign drawings on

272


the System's swap line stemming from massive speculation on anupward revaluation of the German mark and a devaluation ofthe French franc. In combination, these factors supplied reservesin very large volume, thereby tending to produce ease in themoney market and to relax the pressures on the banks. In thissituation the System was able to absorb reserves—without dis-rupting the securities market—by outright sales of Treasury billsto foreign accounts and by matched sale-purchase transactionswith those accounts; additional reserves were absorbed by meansof matched sale-purchase transactions with Government securi-ties dealers.

Around the beginning of December the Account Managersatisfied seasonal needs for reserves by buying Treasury billsdirectly from foreign accounts, thus avoiding sales of bills forsuch accounts into the market at a time when short-term rateswere already adjusting sharply higher. The System also arrangedovernight repurchase agreements on December 2, the day thebank prime rate was boosted to 6V2 per cent, with a view to fa-cilitating the market adjustment to this unexpected event and toprovide for an indicated reserve need.

After that brief injection of reserves, the System absorbedreserves steadily during the weeks ending December 11 and 18, atime of year when it usually had provided reserves to meet sea-sonal needs. The factors that had been instrumental in easingmoney market conditions late in November were still at work inthe first half of December; increases in float (partly related to theinfluenza epidemic) were especially substantial, and the Treas-ury's balance at the Federal Reserve Banks declined sharply.There were indications, moreover, that bank credit was againoutstripping expectations, thereby calling for implementation ofthe proviso clause. Accordingly, the System absorbed reserveseach day during the 2-week period—employing matched sale-purchase transactions in the market as well as outright sales ofbills in the market and to foreign accounts. Despite these large-scale absorptions of reserves the money market remained rela-

273


tively comfortable, with Federal funds trading at rates around5% per cent.

Open market operations promptly confirmed the firmer stanceof monetary policy that was signaled by the announcement onDecember 17 of an increase in the discount rate to 5Vi per cent—along with the stand-fast on Regulation Q ceilings. With pro-jections indicating the need to absorb some reserves, but withcurrent money market conditions relatively firm, the System soldoutright $187 million of Treasury bills into the market on De-cember 19. This move was promptly interpreted in the marketas confirming a policy of greater restraint. Having provided thissignal, the System remained on the sidelines for the next 2 dayswhile money market conditions tightened further and securitiesyields rose steeply as market participants reacted to the prospectof significantly greater monetary restraint.

During the remainder of the year open market operationssought to maintain the degree of restraint achieved after theincrease in the discount rate, while cushioning somewhat themarket's sharp reaction to the firmer policy stance. From De-cember 24 to December 31 the System injected a large volumeof reserves to combat the undue tautness in the money marketthat had resulted from the combined effects of the delayed risein required reserves under the new computation procedures, ofthe Treasury's repayment of borrowing from the Reserve Banks,and of the rebuilding of the Treasury's balance. Extensive use wasmade of repurchase agreements as well as of outright purchasesof Treasury bills, both in the market and from foreign accounts.Nevertheless, Federal funds traded at rates as high as IVs percent during the final week of the year, and a record high effectiverate of 6% per cent was reached. •

274


REVIEW OF OPEN MARKET OPERATIONS INFOREIGN CURRENCIESThe central bank defenses developed in recent years to protect theworld payments system from disruptive speculative movements offunds were subjected to some of their severest tests in 1968—theMarch gold crisis, heavy pressures on sterling, a political andeconomic crisis in France, and massive speculation on a revalua-tion of the German mark. To deal with these and other possiblestrains the defenses were strengthened during the year. Thus bol-stered, the international financial system weathered the successivestorms and continued to facilitate a growing volume of worldtrade, even against the background of persisting payments im-balances among major trading countries.

During the year the Federal Reserve and the U.S. Treasuryparticipated in concerted action to restrain speculation in the goldand exchange markets and in major packages to bolster the offi-cial reserves of countries whose currencies were under speculativeattack. In early March the United States joined in the $900 mil-lion package mobilized in support of the Canadian dollar—at thesame time granting Canada complete exemption from all the re-straints on U.S. capital outflows under the President's January 1program. In response to the March gold rush and sharp intensi-fication of currency fears, the United States and the other mem-bers actively participating in the gold pool convened an emer-gency meeting in Washington on March 16 and 17 to considersteps for curbing the speculative excesses. Agreement wasreached at that meeting to end official intervention in the Londongold market and to separate private and official transactions ingold into two distinct circuits. These new arrangements not onlyinsulated official gold stocks from further inroads by privatespeculators but also, in conjunction with the Stockholm Agree-ment on Special Drawing Rights, reaffirmed worldwide supportfor maintaining the present official price of gold and the existingcurrency parities.

275


Among the decisions taken at the Washington meeting wasan agreement to increase international credit facilities for theUnited Kingdom, with the Federal Reserve participating throughan increase in the reciprocal currency arrangement with theBank of England. At the same time the entire Federal Reserveswap network was enlarged, and on March 18 it was more thandouble the size of a year earlier. In the calmer atmosphere fol-lowing the Washington meeting private demand for gold sub-sided, and both sterling and the Canadian dollar reboundedsharply as speculative pressures receded. When heavy speculativeselling engulfed the French franc in the summer and fall, theFederal Reserve approved increases totaling $900 million in theswap line with the Bank of France, which raised that facility to$1 billion. The U.S. Treasury also extended a credit line to theBank of France. By the end of 1968 the Federal Reserve swapnetwork stood at $10.5 billion, an increase of nearly $3.5 billionfor the year.

Apart from the very substantial increases in short-run defensesagainst currency speculation, a major step was taken to shieldsterling over the longer term from pressures arising out of con-version of sterling balances by sterling-area countries. On Sep-tember 9, after the monthly meeting of central bankers at Basle,the Bank for International Settlements and a group of 12 centralbanks announced that a $2 billion medium-term credit facilitywas being made available immediately to the Bank of Englandfor that purpose.

At the opening of 1968 U.S. authorities had just over $2 bil-lion of outstanding foreign currency commitments under centralbank swaps and forward sales to the market. These heavy com-mitments had arisen in connection with the speculative flows offunds during the 1967 sterling crisis that culminated in thedevaluation of the pound in November and during the subse-quent period of uncertainty. Some $1.8 billion of these obliga-tions took the form of drawings by the System on its reciprocal

276


TABLE 1: FEDERAL RESERVE RECIPROCAL CURRENCY ARRANGEMENTS

Other party to arrangement

Amount of facility(in millions of dollars

equivalent)

Dec. 31,1967

Dec. 31,1968

Austrian National BankNational Bank of BelgiumBank of CanadaNational Bank of Denmark ,Bank of England

Bank of FranceGerman Federal Bank ,Bank of ItalyBank of JapanBank of MexicoNetherlands Bank

Bank of NorwayBank of SwedenSwiss National BankBank for International Settlements:

Dollars/Swiss francsDollars/authorized European currencies other than

Swiss francs

Total

100225750100

1,500

100750750750130225

100200400

400

600

7,080

100225

1,000100

2,000

1,0001,0001,0001,000130400

100250600

600

1,000

10,505

currency facilities to cover reserve gains of continental Europeancentral banks. Although a substantial reflow of funds from conti-nental European currencies in early 1968 enabled the U.S. au-thorities to make some reduction in these obligations, it never-theless was necessary to employ sizable nonmarket transactions inorder to avoid their undue prolongation. Through the use of for-eign exchange obtained in connection with the Canadian andU.S. drawings on the International Monetary Fund, from issu-ance of U.S. Treasury securities, and in special transactions,Federal Reserve obligations under the swap arrangements werereduced to less than $600 million by early March.

277


During the March gold crisis the United States incurred newswap debts and undertook new forward commitments to themarket. However, in the quieter atmosphere following the Wash-ington meeting it proved possible to liquidate these obligationsas well as some further System swap drawings that had beenundertaken in the spring. In liquidating some $1.3 billion ofswap obligations the Federal Reserve and the Treasury pur-chased a substantial amount of foreign exchange from the cen-tral banks concerned as they replenished dollars sold in the ex-change market. The System also obtained a substantial amountof exchange in connection with the French and British drawingson the IMF in June and from the U.S. Treasury, which issuednew foreign-currency-denominated securities. Thus, by July 16all Federal Reserve and Treasury obligations undertaken in swaptransactions had been repaid. Moreover, during the spring andsummer months the $155 million of outstanding U.S. forwardcommitments to the market were liquidated, and the U.S. Treas-ury redeemed in advance of maturity a $50 million equivalentmark-denominated security.

The events of the latter part of 1968 were dominated by deep-seated fears arising from the May crisis in France, by persistentapprehension over the lack of sustained improvement in the Brit-ish trade position, and by a growing belief in the inevitabilityof a revaluation of the mark. Heavy speculation in marks eruptedin late August and gave rise to unprecedentedly large shifts offunds into Germany before the assault receded. The respite provedtemporary, however, and the inflows resumed on an even moremassive scale in November, when the German Federal Bankpurchased some $2.8 billion in the market as speculative fundsmoved into Germany, at heavy cost to French and British officialreserves. The German Federal Bank's vigorous efforts to channelthe speculative inflows to the market helped to moderate pres-sures on the Euro-dollar market. In the speculative rush of lateAugust the System and the Treasury, participating jointly, sup-

278


ported the German Federal Bank's efforts by selling marks for-ward in the market, and these obligations were liquidated in duecourse. During the November rush for marks, the System reacti-vated its swap line—drawing marks to finance spot sales of thatcurrency in New York. At the same time the System drew on itsline with the Swiss National Bank to absorb most of that bank'sdollar accumulation.

After mid-November the German authorities took measuresto reduce the payments surplus and to restrain speculation whilemaking clear their determination not to revalue the mark. Thesedecisions were supported by the Group of Ten nations in a com-munique following a special meeting in Bonn on November20-22. After the meeting President de Gaulle rejected any deval-uation of the French franc and announced new austerity meas-ures in support of the existing franc parity. When trading re-sumed on November 25, considerable apprehension remainedin the market as traders assessed steps taken by the respectiveauthorities in defense of their existing currency parities. Never-theless, the speculative fever abated considerably.

In order to encourage a reflow of funds from Germany, theGerman Federal Bank provided outright forward marks to themarket and offered attractive swap rates to German commercialbanks. In support of these operations the System also sold marksforward—covering market commitments with swap drawings onthe German Federal Bank. These measures helped to generate asubstantial reflux of funds from Germany, and by the year-endalmost the entire speculative inflow had been reversed. Late inDecember the System was able to begin acquiring cover for itsmarket commitments in forward marks. At the end of 1968 Fed-eral Reserve commitments under all swap lines stood at $432.1million; drawings outstanding were in Swiss francs and Germanmarks.

During the year other countries made substantial use of theFederal Reserve swap facilities. The Bank of England had emergedfrom the November 1967 devaluation with sizable commitments

279


under the Federal Reserve swap arrangement. After further draw-ings and some repayments, the commitment stood at $1.2 billionby June 19, at which time it was liquidated, largely through adrawing on the IMF. Subsequently—in July and during theNovember exchange market upheaval—the Bank of Englandmade further drawings on the swap line, and by the year-end ithad total swap commitments of $1,150 million with the FederalReserve. The Bank of England also had substantial commitmentsoutstanding to the U.S. Treasury under special credit arrange-ments.

The Bank of France also made substantial use of its swap linewith the Federal Reserve System—drawing on the facility for thefirst time in June. Drawings reached a peak of $611 million inNovember, but after the French decision to hold firm on the ex-isting franc parity, reflows of funds developed and by the year-endthe Bank of France had reduced its swap obligation to the Systemto $430 million. The Netherlands Bank and the National Bank ofDenmark also drew on their lines for the first time; each em-ployed moderate amounts, which were repaid before the year-end. The Belgian National Bank also drew dollars from the Sys-tem, but it was able to pay off nearly all of its obligations beforethe year-end.

With the massive movements of funds into and out of Euro-pean currencies, the Euro-dollar market was subjected to consid-erable churning during the year. On the occasions when markrevaluation rumors led to large inflows into Germany and to sub-stantial dollar accumulations on the part of the German FederalBank, that bank effectively channeled its dollar intake out intothe Euro-dollar market. The Swiss National Bank also rechan-neled large amounts of dollars taken in at midyear and at theyear-end. Several other central banks operated in their respectiveforward markets so as to moderate flows into and out of theirmoney markets and thereby ease the effects of these flows on theEuro-dollar market.

For its part, the System, through its arrangement with the BIS,

280


TABLE 2: FOREIGN CURRENCY TRANSACTIONS OF THE FEDERAL RESERVE, 1968

In millions of dollars equivalent

Currency

Belgian francPound sterlingCanadian dollarDanish kroneFrench francGerman markItalian liraDutch guilderSwiss franc

Total

Operations initiated by the System

Transactions under swap lines

Drawings

107.1

412.1175.015.0

498.0

1,207.2

Repay-ments

212.9

650.0675.0185.0828.0

2,550.9

Dis-burse-ments

of swap-acquiredbalances

107.1

340.0175 015.0

498.0

1,135.1

Acquisitionsof funds for

repaying swaps

FromU.S.

Treas-ury

10.0

122.550.0

100.4288.3

571.2

Fromothers

202.5

457.1625 183.9

535.9

1,904.5

Other transactions

With U.S.Treasury

Pur-chases

5.1200.0

37.6

io.6

252.7

Sales

0.5243.2

5.7

1.052.3

302.7

With others1

Pur-chases

6.9203.0

164.3

41.960.8

476.9

Sales

8.75.4

3.6111.8

30.928.0

188.4

Swapoperations

initiatedby others

Draw-ings

210.52,045.0

250.025.0

765.02643.0

54.7

3,993.2

Repay-ments

203.01,945.0

250.025.0

335.02909.0

54.7

3,721.7

to00

1 Includes forward as well as spot transactions; excludes Italian lira forward operations.2 By BIS.


made dollars available to the Euro-dollar market on two occa-sions. In late June, when Euro-dollar rates were rising and ster-ling was under speculative pressure, the BIS placed $ 111 millionof funds drawn from the System to minimize those pressures.Again, in early December, the BIS placed $80 million in theEuro-dollar market, drawing the funds from the Federal Reserve,at a time when Euro-dollar rates were rising and pressures wereconverging briefly on the pound. In both instances, the BIS draw-ings were quickly repaid.

STERLING

Late in 1967 the pound strengthened following reports thatthe British Government was planning sizable cuts in welfare anddefense-spending programs to backstop its devaluation package.These cuts were announced on January 16, and although theirmajor impact was not to take effect until 1969-70, as Britainwould phase out its military operations east of Suez, a significantreduction in programmed spending—by some £ 3 0 0 million—was scheduled for 1968. The trade figures for both December1967 and January 1968 showed major improvements over thepredevaluation deficits, and export orders were reported to be onan encouraging uptrend.

Toward the end of January the sterling rate moved firmlyabove $2.4100, and during both January and February there wasa steady demand for sterling that enabled the Bank of Englandto liquidate a large volume of maturing forward commitmentsthat had been made prior to devaluation. In those months, how-ever, the Bank of England was not able to make any reductionsin its outstanding Federal Reserve swap debt, which at the endof 1967 stood at $1,050 million compared with $1,350 million bythe time of devaluation. In addition, the Bank of England con-tinued to make use of credits from the U.S. Treasury.

But U.K. official reserves were soon subjected to new erosionas a result of a combination of adverse developments. After 3years of disappointed hopes, the market maintained a wait-and-see

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attitude concerning sterling's prospects. Hectic speculation in thegold market from November until mid-March kept the exchangeson edge, and sterling reacted sensitively to each new threat to theinternational financial system. Against this psychological back-ground, and the nagging fear that the government's program tocontrol expenditures and limit private demand would be thrownoff course by labor or political unrest, sterling remained generallyon the defensive. The forward sterling discount widened sharplyat times, not only discouraging any inflow of interest-sensitivefunds, but also contributing to withdrawals from London ofmaturing short-term placements of foreign funds. In addition,several sterling-area countries, having suffered an exchange losson their reserves as a result of the devaluation, reconsidered thequestion of diversifying their reserves and began shifting a por-tion of their holdings out of sterling and into other reserve assets.

In the backwash of the gathering storm in the gold market, thepound dipped below its $2.40 parity for the first time on March4. The following week, amid the climactic scramble for gold inLondon, the February trade figures for the United Kingdom wereannounced; these showed a heavy deficit, with imports at recordlevels. The next day—the last day of the gold pool operations—sterling tumbled to $2.39. The closing of the London gold mar-ket on Friday, March 15, in advance of a meeting in Washingtonof representatives of the central banks active in the gold pool,was accompanied by a declaration of a bank holiday the sameday. With London financial markets closed, there was very littledealing in sterling either on the continent or in New York. How-ever, when isolated trades began to appear at rates below the$2.38 floor, the Federal Reserve—under arrangements workedout with the Bank of England—made small purchases in NewYork that quickly restored the rate to $2.3825.

On March 17, the Washington communique of the Governorsof central banks participating in the gold pool announced severalimportant decisions in support of sterling and the exchange mar-kets in general. Specifically, the Governors "agreed to cooperate

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fully to maintain the existing parities as well as orderly condi-tions in their exchange markets . . . [and] to cooperate evenmore closely than in the past to minimize flows of funds contrib-uting to instability in the exchange markets." Taking note of theimportance of the pound sterling in the international monetarysystem, they also announced that the total of credits immediatelyavailable to the U.K. authorities (including the IMF standby)would be raised to $4 billion. As part of this increase, the Fed-eral Reserve swap arrangement with the Bank of England wasincreased by $500 million to $2 billion. At the same time theBritish authorities announced that the London gold marketwould remain closed for the remainder of March.

On Monday, March 18, the decisions set forth in the com-munique brought about a clear change of atmosphere in the ex-changes. The demand for sterling, in particular, was strong andthe rate rebounded to above par. The next day the British Gov-ernment announced the long-awaited 1968-69 budget, calling forvery substantial increases in indirect taxes on consumer pur-chases, a sharp rise in the selective employment tax (on employ-ment in service industries), and a 1-year tax on investment in-comes, among other provisions. At the same time the governmentannounced that it would seek legislation to limit annual wageincreases to 3Vi per cent and to defer or suspend price or wageincreases for up to a year. In the wake of a favorable marketresponse to the budget and the Washington communique, onMatch 21 the Bank of England reduced its discount rate by V2percentage point to IV2 per cent, the first reduction since themove to 8 per cent at the time of devaluation. Along with thestrengthening of spot sterling, discounts on the forward poundnarrowed from the 10 to 12 per cent per annum range for 3-month contracts, where they had been on March 13 to 15, to 4per cent per annum by early April.

Despite the improved atmosphere in the latter half of March—featured by the successful conclusion of the Group of Ten talksin Stockholm, which ironed out the last major differences on the

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SDR facility—the month as a whole had been costly to U.K.reserves. The Bank of England drew $50 million on its swapwith the Federal Reserve (bringing the amount outstanding to$1,100 million) while making use of other sources of credit, in-cluding the U.S. Treasury.

April was a much quieter month for sterling and for interna-tional financial markets in general. Nevertheless, another month-ly report of a large British trade deficit at a time when observerswere looking for clear signs that devaluation was beginning towork created an uneasy undertone in the market, and this grewmore pronounced in May. The spot rate gradually drifted belowpar, and the forward discount began to widen again, reachingnearly 7 per cent by the end of May. At the same time Euro-dollar rates, which had dropped back from the peaks reached atthe time of the mid-March gold crisis, began to rise once again,with the rate on 3-month deposits moving from just under 6 percent in early April to more than 7 per cent by the end of May.As a result, the covered incentive to move foreign funds out oflocal authority deposits into Euro-dollars shot up to nearly 6 percent, adding to the strains on sterling that reemerged in May.

During the April-May period, U.S. banks—spurred by tight-ening credit conditions in this country—turned heavily to theEuro-dollar market in search of funds. Although the sharp run-up in Euro-dollar rates increased the incentive to switch out ofpounds, developments in the United Kingdom were also causingconcern. Setbacks for the Labor Party in by-elections, reports ofdissension in labor ranks over the continuation of the austerityprogram, and fears—subsequently borne out—that the nextmonthly trade figures would again look bleak, all added to mar-ket pessimism. In mid-May the crisis in France added a newdimension of uncertainty to the international monetary situationand helped to demoralize the market even further. As a result ofthese various disturbing factors, the pattern of heavy pre-week-end selling of sterling reemerged in May for the first time sincedevaluation, and at heavy cost to U.K. reserves.

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In order to bolster the official reserves in May, the Bank ofEngland drew $345 million on the Federal Reserve swap line andmade use of further credits from the U.S. Treasury as well asother international assistance. The bank repaid $245 million ofthe swap drawings in early June. Subsequently, after a furthersmall drawing on the Federal Reserve that was soon reversed aspressures eased, the Bank of England's swap debt stood at $1.2billion in mid-June.

At that point it was announced that the United Kingdomwould draw the full $1.4 billion available under the standbycredit with the IMF to repay outstanding short-term credits tocentral banks. A substantial part of this IMF drawing was usedon June 19 to reduce the $1.2 billion of drawings then outstand-ing under the Federal Reserve arrangement. The remainder ofthese drawings was paid down on the same date by means ofFederal Reserve and U.S. Treasury purchases of sterling on acovered or guaranteed basis from the Bank of England. To per-mit such purchases by the Federal Reserve, the Authorization forSystem Foreign Currency Operations was amended to increasefrom $200 million to $300 million equivalent the amount ofsterling that could be held on a covered or guaranteed basis forSystem working balances. Thus, as of the end of June the $2 bil-lion swap arrangement between the Federal Reserve and theBank of England had reverted to a fully available standby basis(although certain other credit facilities, including those fromthe U.S. Treasury, were still in use).

Official confirmation on July 8 that 12 central banks and theBIS were prepared to participate in a new multilateral creditfacility—amounting to $2 billion—to offset reductions in thesterling balances of sterling-area countries helped to turn marketsentiment, which until that period had been increasingly dis-couraged. More important, June trade figures, showing reducedimports, seemed to offer the first tangible evidence that deval-uation was working. Combined with a number of other encour-aging developments at home and abroad, these announcements

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stimulated widespread buying of sterling, which lifted the spotrate above $2.3950 by the end of July. However, heavy reservelosses at the end of June and in the first week of July had requiredthe Bank of England to reinstitute drawings on the Federal Re-serve swap arrangement, and despite sizable reserve gains in thelast 3 weeks of July, outstanding drawings amounted to $350million at the month-end.

Hopes for further improvement in the trade account helpedto sustain demand for pounds through early August, and theBank of England was able to reduce its swap drawings by $50million to $300 million. But these hopes were dashed with thepublication of July trade results showing that the previousmonth's gains had been reversed. Shortly afterward, Soviet inter-vention in Czechoslovakia brought new uncertainties, which weresoon compounded by mark revaluation rumors, which in turncast new doubts on sterling. The pressures thus generated carriedthrough early September, by which time the spot rate was backclose to the floor and the Bank of England had increased itsdrawings on the Federal Reserve to $400 million.

As in earlier months, the market's appraisal of sterling turnedheavily on the latest trade figures. Relatively favorable resultsfor August and September were thus important factors in ster-ling's improved showing through the end of October. The tem-porary subsiding of mark revaluation rumors and the announce-ment in early September that final agreement had been reachedon the new sterling balances arrangement were further elementsin sterling's stronger market performance during this period.

A sharp run-up in sterling rates, following President Johnson'sannouncement of a bombing halt in North Vietnam, was abruptlyhalted by the new outbreak of mark revaluation rumors in earlyNovember. The sterling market remained roughly balanced atabout $2.39 during the first 2 weeks of November despite un-easiness over the implications for the domestic economy of thegovernment's announcement of new instalment credit restric-

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tions. But news on November 13 of a doubling of the U.K. tradedeficit for October left sterling fully exposed to the mountingpull of funds into Germany in anticipation of an imminent markrevaluation. Before the end of November the Bank of Englandhad been forced to extend heavy support to hold sterling at$2.3827 and had increased its outstanding drawings on the Fed-eral Reserve by $750 million, raising the total to $1,150 million.

During the Bonn meeting of November 20-22, foreign ex-change dealings were suspended in London, as in several othermajor European centers. Meanwhile, the U.K. authorities actedto bolster their austerity program through indirect tax increases,tightened credit curbs, and a 50 per cent deposit requirementagainst imports of manufactured and semimanufactured goods.

Although speculation abated and markets were steadier oncethe Bonn meeting was over, considerable uneasiness remained.When trading resumed on November 25, demand for pounds waslimited to modest covering of short positions. Moreover, in theearly part of December, sterling was subjected to renewed sellingpressure by the market's apprehensions over heightened tensionsin the Middle East and by reports suggesting disagreement withinthe British Government regarding the austerity program. Higherinterest rates in the United States added to the market pressures.

In this atmosphere, the Bank of England sustained substantiallosses in support of spot sterling, and forward discounts againwidened sharply. By midmonth, however, the market had becomeheavily oversold, and traders—spurred by expectations that thenext set of trade figures would show substantial improvement, asin fact was the case—moved to cover short positions. The re-bound enabled the Bank of England to recover most of itslosses earlier in the month, but the market then turned cautiousonce again. On balance, very little of the substantial reflux offunds from Germany found its way back into sterling, with theresult that the Bank of England's commitments to the FederalReserve remained at $1,150 million at the year-end.

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GERMAN MARK

During the early part of 1968 funds flowed heavily from Ger-many, as German banks responded to the pull of relatively at-tractive interest rates in the Euro-dollar market and foreign bor-rowers turned to German financial markets for long-term funds.The substantial outflow depressed the mark rate and enabled theSystem to repurchase the small amount of marks used in marketintervention late in 1967 and to obtain further amounts sufficientto complete the liquidation of the System's outstanding $350 mil-lion swap debt to the German Federal Bank by early March. The$750 millon reciprocal swap facility thus reverted to a fully stand-by basis.

But Germany's trade account remained very strong duringthe early months of 1968, as it had throughout 1967. It wasevident, moreover, that Germany's resurgent growth, as well asits accompanying stimulus to activity in other Common Marketcountries, was being accomplished with few strains on Germany'sproductive potential. Although persistent capital outflows de-pressed the spot mark early in the year, the market remainedaware of the underlying strength in the current account and of thepotential for a rapid reversal of direction with a new outbreakof speculative demand. During the gold crisis that began to eruptin early March, speculation on a revaluation of the mark touchedoff such a burst of speculative demand and consequent heavyflows of funds to Germany. On Friday, March 15, with unpre-cedented uncertainties in the exchanges arising out of the closingof the London gold market and the emergency central bankmeeting convening in Washington over the coming weekend,speculation seemed to focus on the mark, and funds flowed intoGermany from all over Europe and from the United States. TheFederal Bank's intake of $400 million that day raised its grossspot intake in March to some $800 million, including a moderateamount through the Federal Reserve Bank of New York.

These large shifts of funds into marks would have severely

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aggravated the strains then being felt in the Euro-dollar marketand the pressures on sterling had the Federal Bank not immed-iately reoffered the dollars to German commercial banks on aswatp basis for repurchase later at attractive rates. Initially inthe first week of March, the Federal Bank offered swap ratesequivalent to a premium on the forward mark of 2 per cent perannum, more than Vi percentage point below the market. Sub-sequently the bank varied its rates to moderate the reflow, andby the month-end it had raised the total of its swap sales to anamount that about offset the gross spot inflow earlier in March.The System participated in the market swap operation, as it haddone in November 1967, by reactivating its swap line with theGerman Federal Bank to absorb $300 million from that bank.

The firm support for existing currency parities that emergedfrom the Washington meeting helped to reassure the highly ner-vous markets. News of the large general expansion in the FederalReserve swap network, including an increase in the line with theGerman Federal Bank to $1,000 million, contributed impor-tantly to that reassurance. Under these circumstances the under-lying liquidity of the Frankfurt market was quickly manifest, andthe spot mark moved lower through the end of March. In orderto maintain an orderly market as the earlier heavy speculationunwound, the Federal Bank sold a sizable amount of spot dollars.

During the spring, confidence in currency parities was strength-ened by President Johnson's new peace initiative in Vietnam andthe Stockholm Agreement on a plan for SDR's. Moreover, risinginterest rates in the United States and in the Euro-dollar marketafter the V2 point increase in Federal Reserve discount rates to5Vi per cent exerted a strong pull on German short-term funds.At the same time the German Federal Bank continued its easymonetary policy to encourage the investment of excess fundsabroad, and as capital outflows developed, it sold substantialamounts of spot dollars, permitting the spot mark to slide grad-ually lower. The authorities also concluded new market swapswith the German commercial banks to facilitate investment ofshort-term funds abroad by these banks. Thus a very substantial

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part of the dollars that had flowed in as a result of the maturingof the March swap contracts were channeled out.

In April the System began to reduce its swap debt to the Fed-eral Bank; using marks acquired from a correspondent and somemarks from balances, it reduced the $300 million swap obliga-tion by $25 million. International currency uncertainties flaredup again in May, however, triggering a new round of mark reval-uation rumors as apprehensions over the failure of the U.K. tradeposition to show improvement were compounded by uneasinessover further delay in enactment of the proposed U.S. tax sur-charge. Speculative demand for marks boosted the spot ratesharply, and the German authorities again purchased dollars. Butthe buying was not sustained; in fact, it quickly dissipated aftera flat denial of any revaluation plans was issued by Dr. KarlBlessing, President of the German Federal Bank. At the end ofMay the market responded favorably to another official state-ment, which explicitly encouraged German commercial banks toexport capital and stressed that the authorities would providesufficient domestic liquidity for further business expansion de-spite the flow of funds abroad. Thus, with official approval andample resources available, foreign borrowers placed additionalissues in the German capital market.

One notable example of the broadly equilibrating influenceof the outflow from Germany was the Canadian Government's5-year borrowing of 250 million marks in late May. The borrow-ing not only served to bolster Canadian official reserves and tooffset Germany's current-account surplus but also afforded theFederal Reserve the opportunity to purchase a sizable amount ofGerman marks. The Federal Reserve purchased from Canada$25.2 million equivalent of the proceeds of the borrowing andused them, together with $25 million more acquired from themarket, to reduce its swap debt to the German Federal Bank to$225 million equivalent.

The flow of German capital seeking employment abroadstepped up in June when the Federal Bank sold sizable amountsof dollars in the market, partly in response to conversion of the

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mark proceeds of Canadian and Mexican long-term borrowings.In the latter part of that month the persistent demand for dollarsdepressed the spot mark to parity, and since marks werereadily available, the Federal Reserve and the Treasury pur-chased marks in the New York market against outstanding com-mitments. In addition, the System obtained $50 million of marksfrom the German Federal Bank when that Bank replenished dol-lars sold to France in connection with the French drawing onthe IMF. These marks, together with market purchases, wereused to reduce System swap obligations in marks by $100 mil-lion to $125 million as of June 21. Finally, near the end of Junethe U.S. Treasury issued to German banks special mark-denom-inated securities equivalent to $125.1 million. These securitieswere issued in conjunction with agreements reached with theGerman Government to neutralize part of U.S. troop-stationingcosts in Germany. The System purchased these marks and usedthem to liquidate the last $125 million outstanding under theswap line with the Federal Bank.

Selling of marks continued unabated through early August,partly reflecting reflows abroad from German banks after mid-year. By early August the spot mark had declined to $0.2486^,the lowest level since the 1961 revaluation, and the German Fed-eral Bank had continued to supply spot dollars to the market. Inthe New York market both the Federal Reserve and the Treas-ury made sizable purchases of marks. On August 9, the Treasuryused its recent purchases to redeem in advance of maturity a$50.3 million equivalent, 22-month note held by the GermanFederal Bank.

Toward the end of August new rumors of an imminent reval-uation of the mark again touched off heavy speculative demand.Within days the spot mark had risen virtually to its ceiling, andthe German Federal Bank had begun to take in huge amountsof dollars. The bank's market purchases amounted to $1.7 bil-lion in the period August 27-September 6. Some of the inflowrepresented conversions of sterling and French francs, but a large

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part came from the Euro-dollar market. From the outset, theFederal Bank moved to neutralize the potentially disruptive effectof these inflows, as it had in the past, by making dollar/markswaps available at rates that provided a sizable incentive to Ger-man banks to channel the funds to the Euro-dollar market. U.S.authorities assisted in these efforts by selling some $33.8 millionequivalent of marks in the forward market in New York. Afterthe monthly central bank meeting in Basle on the weekend ofSeptember 7-8, the demand for marks declined as speculativeinfluences receded. The German Federal Bank continued withits swap sales, and by the end of September it had returned tothe market virtually all of the funds it had taken in from the ear-lier speculative inflow.

The market atmosphere remained quiet through most of Octo-ber—encouraging renewed capital outflows and consequent sub-stantial sales of dollars by the German Federal Bank. As thespot rate declined, the Federal Reserve Bank of New York mademodest purchases of marks for Treasury account, and the Systemand the Treasury paid off maturing August-September forwardsale commitments.

Market expectations of an eventual revaluation of the markpersisted, however, and by the end of October this undercurrentwas reflected in a strengthening of the spot rate. In early Novem-ber rumors of an imminent revaluation of the mark and deval-uation of the French franc again swept the exchanges. Theserumors triggered a huge demand for marks, and by November 15the German Federal Bank had purchased nearly $2 billion. Al-though the momentum behind the speculation was being gen-erated mainly in Europe, the heavy demand reflected purchasesby U.S. firms as well. To meet some of the demand in New York,the Federal Reserve Bank of New York sold $47 million ofmarks on behalf of the Federal Reserve. These sales were coveredby a $40 million drawing on the swap line with the German Fed-eral Bank and from balances.

Once again the German Federal Bank acted to recycle thefunds by concluding market swap sales of dollars at attractive

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rates. After swapping out some $1 billion of its spot gains, how-ever, the Federal Bank took action to curb the tendency of Ger-man banks to resell the spot dollar proceeds of the swaps ratherthan hold the funds in dollar investments—thereby in effect ob-taining outright forward cover as a result of the swaps. The Ger-man authorities indicated that they would conclude further swapsales of dollars only if the banks invested the spot dollar proceedsin U.S. Treasury bills. But the German banks and their customershad become interested mainly in acquiring outright forwardcover in marks, and they chose not to engage in swap transac-tions with the Federal Bank on these terms; instead, they bid forspot marks and sought forward cover through swaps in themarket.

Speculative buying of marks continued with full fury on Mon-day, November 18, when the regular monthly meeting of centralbankers at Basle ended without the official statement that themairket had expected, and speculators remained convinced thatthe next move would be an upward revaluation of the mark. OnNovember 18 and 19 the Federal Bank purchased $850 million,bringing gross purchases in November to more than $2.8 billion.On November 19, in an effort to calm the market, the Germanauthorities issued a formal communique stating that the markwould not be revalued and, to reduce the German trade sur-plus, announced new tax measures that would raise export priceswhile lowering import costs.

After a holiday on Wednesday, November 20, trading in Ger-many was effectively suspended for the 2 days before the week-end as the Finance Ministers and central bank Governors of theGroup of Ten nations met in emergency session in Bonn. OnNovember 22, the Group of Ten nations issued a communiquefully supporting the German Government's decision to stand firmat the existing mark parity, its new tax measures, and the Fed-eral Bank's decision to impose 100 per cent reserve requirementson new foreign-owned mark deposits held in German banks. Themonetary move, which was designed to discourage further spec-

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ulative inflows, reinforced the ban already in effect on interestpayments on foreign-owned sight or time deposits denominatedin marks. The German authorities also initiated legislation au-thorizing the licensing of mark deposits by foreigners withGerman banks.

When trading resumed in Frankfurt on November 25, substan-tial amounts of funds began to flow from Germany as market ex-pectations of a revaluation receded and long positions were liq-uidated. To encourage these and subsequent reflows, the FederalBank offered outright forward cover back into marks at a 3 percent per annum premium for 3-month maturities. The FederalReserve backed up the German Federal Bank's operations, offer-ing outright cover to the market at the same rates for the samematurities. By the end of November the Federal Bank had resold$880 million spot and sold $246 million of outright forwardmarks. The System's outright forward sales reached $72.5 millionequivalent; all were covered by swap drawings, which raised Fed-eral Reserve swap debt in marks to $112.1 million equivalent.

On December 2 the Federal Bank and the Federal Reservediscontinued outright sales of forward marks, concluding thatsuch sales had served their purpose of encouraging capital out-flows and assuring the market that there would be no paritychange. The Federal Bank offered instead to undertake swaps withits banks at improved rates and for a wider range of maturities.Earlier the authorities had dropped their requirement that theproceeds of the swaps be invested in U.S. Treasury bills and nowrequested only that investments match the maturities of the offi-cial swap contracts. German banks responded to the improvedincentives—enabling the authorities to roll over into 1969 thevery large December maturities of earlier swaps. Moreover,German banks also purchased very substantial amounts of spotdollars, as foreigners withdrew funds from Germany and com-mercial leads and lags began to unwind. These heavy outflowsfrom Germany enabled the Federal Reserve to begin accumu-lating German marks to cover outstanding System commitments.

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FRENCH FRANC

Late in 1967 the French current account began to recover fromthe modest deficit that had emerged during the preceding year.With this favorable development in the background, the francremained above par ($0.2025 V^) during the early months of1968. Nevertheless, there were occasional periods of pressureon the franc, arising from reactions to the new U.S. balance ofpayments program announced on January 1, shifts of funds intothe Euro-dollar market by French banks, and the March specula-tive stampede into gold. By the end of April the franc haddrifted to a level just above par, from which there was littlechange well into May.

On May 17, however, student rioting broke out, followedshortly by labor strikes in Paris and similar disorders elsewherein France. Within days the strikes had virtually paralyzed theFrench economy, and on May 20 the absence of personnel forcednearly all French banks to close. For all practical purposes, thisalso closed the Paris exchange market and complicated the de-livery of francs bought and sold in exchange dealings in othercountries. Trading in spot francs continued in those markets, butat a sharply lower volume.

With the French markets closed, the Bank of France calledupon the Federal Reserve Bank of New York to help maintainfranc quotations within declared limits by purchasing spot francsfor the Bank of France account. Subsequently, the Bank ofFrance made parallel arrangements to cover European marketsthrough the BIS. For a few days the franc fluctuated just aboveits floor ($0.2010Vi), but as the political crisis deepened, the ratefell to the floor level and had to be heavily supported. Eventhough banks were closed in France, speculative flows fromFrance to Switzerland and into the Euro-dollar market grew tosubstantial volume, and at the end of May the French Govern-ment imposed exchange controls over resident capital transfersabroad; nonresident transactions remained free of controls,however.

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In early June the selling abated somewhat after President deGaulle's call for national elections raised hopes that a beginninghad been made toward restoring order in France. Evidence of ascattered return to work by French workers also helped to im-prove the atmosphere. Moreover, the Bank of France was ableto resume its regular activities and make its presence felt in sup-port of the franc on the continent. French commercial banksbegan operating again, and on June 7 the Paris bourse openedits doors for the first time since May 20.

But the reopening of normal channels of foreign exchangedealings brought with it further selling of francs. Despite thegradual return to work by French workers during the month ofJune, it was feared that the large wage increases necessary tobring an end to the work stoppage might initiate a wage-pricespiral that could seriously weaken French international competi-tiveness. As a result, selling of francs stepped up, based in largepart on a precipitate reversal of commercial leads and lagsdespite the exchange controls imposed at the end of May. TheFrench Government's announcement of a program of temporaryimport quotas and export subsidies to bolster the franc did littleto stem the speculative tide. But the sweeping victory of theGaullist forces in the elections at the month-end cleared awayone area of uncertainty besetting the market, and although theselling of francs persisted thereafter, the market fever abated.

For May the Bank of France announced a reserve loss of $307million, and in June a further loss of $203 million was recorded.But sizable credit operations had also been initiated. In Junethe Bank of France bolstered its reserves by drawing the full$100 million then available under its swap line with the FederalReserve, the first drawing by that bank since the inception of thearrangement in March 1962. In addition, France drew $885 mil-lion from the IMF—representing its gold tranche and otherdrawing rights resulting from previous Fund use of French francssupplied by France under the General Arrangements to Borrow.(As described in other sections of this report, the Federal Re-

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serve was able to acquire certain currencies drawn by France,and it used them to reduce System drawings on swap lines withother central banks.) Thus the cost of official support for thefranc in May and June came to $1.5 billion. Part of this reserveloss took the form of gold sales by the French authorities to re-plenish dollar balances, including $220 million of gold sold tothe U.S. Treasury.

With the announcement of the June reserve figures in earlyJuly, Finance Minister Couve de Murville (later named Premier)strongly reaffirmed the government's intention to defend the francparity. As evidence of that resolve, the French authorities broad-ened their defense of the franc to include an increase in the Bankof France discount rate from 3Vi to 5 per cent, a tightening ofexchange controls, and new taxes. Shortly thereafter, on July 10,the Bank of France announced a $1.3 billion package of newcredits from the Federal Reserve, the central banks of Belgium,Germany, Italy, and the Netherlands, and the BIS. The FederalReserve participation took the form of a $600 million increasein the swap line with the Bank of France, which raised that facil-ity to $700 million.

Despite these stabilizing measures, the market remainedskeptical about the future of the franc, particularly in view ofthe inflationary potential of the wage increases in June. Pressureon the franc continued throughout the summer, and it was aggra-vated by recurring rumors of a revaluation of the German mark.Selling pressures eased only temporarily after publication, inmid-September, of the French Government's 1969 budgetaryplans. At the same time removal of the exchange controls im-posed in May had only a short-lived favorable impact.

During the summer the Bank of France drew a further $390million on the expanded swap facility. Net drawings at Septem-ber 30 amounted to only $450 million, however, since the Bankof France had repaid $40 million of its drawings in the summerfollowing a sale of gold to the U.S. Treasury; during the thirdquarter France sold a total of $240 million of gold to the United

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States. The French authorities also made use of other interna-tional credit facilities.

October was a generally quieter month, and the Bank ofFrance was able to repay $75 million of its swap debt to the Sys-tem and to reduce obligations under other international credits.The respite was short-lived, however. The outbreak of renewedspeculation in marks in early November gave rise to a massiveoutpouring of funds from France, with heavy losses to Frenchofficial reserves. The French authorities responded by tighten-ing monetary policy—including an increase in the discount rateto 6 per cent and placement of a ceiling on short-term bank creditgrowth. On November 18, after the November 16-17 monthlymeeting of the central bankers at Basle, Premier Couve deMurville went on nationwide television to declare that Francewas assured of "all the help she might need or will need in thefuture" and promised large cuts in planned government spend-ing to bolster the franc.

But the markets remained convinced that the franc facedimminent devaluation, and heavy selling continued. To meetthe pressures, the Bank of France drew further on the FederalReserve swap facility, raising its debt under that line to $611million, and also drew funds from other participants in theJuly credit package. In view of the continuing feverish specula-tion, the French authorities decided to close the Paris financialmarkets during the period of the Bonn meeting (November20-22). Although the New York market remained open, therewere only scattered quotations for spot francs at deep discountsbelow parity, and forward quotations were essentially unobtain-able as the market believed that a devaluation of the franc wascertain to follow the meeting.

At the conclusion of the Bonn meeting a new central bankcredit facility for France in the amount of $2 billion was an-nounced. U.S. participation in the new credits took the formof a $300 million increase in the Federal Reserve swap line—raising the total to $1 billion—and a $200 million facility ex-

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tended to the Bank of France by the U.S. Treasury. The nextday President de Gaulle confounded market expectations byrejecting devaluation of the franc, and on November 24 he setforth a new program to defend the existing franc parity. Thenew plan included a sharp cut in the government budget deficit,further monetary curbs, price restraints, and tax adjustments toimprove the French competitive position—all backed up bystringent exchange controls.

When trading resumed on Monday, November 25, there wassome immediate covering of short positions and the Bank ofFrance began to take in dollars. In subsequent days the Bankof France continued to gain reserves, as the newly imposed ex-change controls stopped capital outflows and French exporterscomplied with regulations requiring them to repatriate exportproceeds within a short period of time. In early Decemberfurther restrictions required French importers to abrogate asubstantial portion of their contracts to purchase forward coverin foreign exchange, and French banks were obliged to sell tothe Bank of France the currencies held as cover against thosecontracts.

As a result of these moves the Bank of France continued togain reserves, which it used in part to repay official borrowings.By the year-end the bank had liquidated a total of $181 millionof its swap debt to the Federal Reserve—lowering those commit-ments to $430 million. The bank had also repaid substantialcredits drawn from other countries of the European EconomicCommunity and from the BIS. At the same time the Frenchauthorities made further gold sales, bringing those to the UnitedStates to $600 million for the year.

SWISS FRANC

The Federal Reserve had drawn heavily on its Swiss francswap lines in 1967 to absorb inflows of funds seeking refuge inSwitzerland from currency uncertainties in the wake of theMiddle East conflict, the crisis in sterling, and massive specu-

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lation in gold. By the end of that year Federal Reserve swapdrawings amounted to $250 million on the Swiss National Bankand $400 million on the BIS. Moreover, as part of the concertedcentral bank effort to restrain speculation, the Federal Reserveand the U.S. Treasury jointly had underwritten $65.5 millionof forward franc sales in the market by the Swiss National Bankin December 1967. Thus, at the beginning of 1968, total U.S.swap and forward market commitments in francs stood at $715.5million equivalent.

Early in 1968 a substantial but largely seasonal reflux of fundsfrom Switzerland developed as Swiss commercial banks movedto rebuild their dollar investments. The spot franc rate droppedsharply, and the Swiss National Bank extended sizable supportby selling dollars in the spot market. The National Bank coveredthese sales by purchasing dollars from the Federal Reserve inexchange for francs. The System used these francs, along withmodest franc balances obtained in the market and from specialtransactions, to reduce its swap obligations in Swiss francs by$343 million through early March.

At the same time the Federal Reserve was able to pay offan additional $175 million of its drawings on the BIS and theSwiss National Bank through issuance by the U.S. Treasury ofa $100 million equivalent Swiss franc security to the Swiss Na-tional Bank and by purchasing $75 million equivalent of Swissfrancs from that bank. (The Swiss National Bank simultaneouslypurchased $25 million of gold from the U.S. Treasury.) Thus, byMarch 8 the Federal Reserve swap debt in Swiss francs was re-duced to $132 million equivalent, with $77 million outstandingto the Swiss National Bank and $55 million to the BIS. Earlier,in February, the U.S. authorities also paid off the first $10 mil-lion of maturing forward sales contracts falling due to the mar-ket; this left $55.5 million still outstanding, divided evenlybetween the System and the Treasury.

The speculative upsurge in the gold market in March wasaccompanied by a strengthening in the spot franc, although the

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advance was dampened by the demand for dollars by holdersof Swiss francs who wished to buy gold in London. On March15, with the London gold market closed and traders unsure ofthe outcome of the weekend meeting in Washington, the demandfor Swiss francs intensified. The Swiss National Bank indicatedto the market that it would henceforth sell francs at the officialupper intervention point of $0.232814, rather than the unofficiallimit of $0.2317Vi in effect in recent years. The NationalBank did take in some dollars at the new intervention point thatday, but the amounts were not large. Demand for francs washeavier in the forward market, however, and the Swiss NationalBank, acting jointly for the Federal Reserve and the Treasury,sold a total of $56 million equivalent of forward francs, raisingU.S. forward commitments to the market to $111.5 million.

The news of the decisions taken at the Washington meetingcalmed the market considerably. One result of that meeting wasa further increase in the Swiss franc swap facilities with theSwiss National Bank and with the BIS of $200 million each.As a result, the resources available under each arrangementwere raised to $600 million. In succeeding weeks, the liquiditypositions of Swiss banks remained relatively easy, and with theexchange markets generally calmer during April, it provedpossible for the Federal Reserve and the U.S. Treasury toliquidate $43 million equivalent of maturing Swiss franc for-ward contracts, thereby reducing these commitments to $68.5million.

The month of May brought a strengthening of the spot franc.Early in the month, market uncertainties arising from a spate ofrumors of a revaluation of the mark and growing apprehensionsover sterling generated speculative demand for francs. In addi-tion, there were indications that Italian interests were buyingfrancs to liquidate credits that were becoming expensive relative toloan rates elsewhere. Later in the month the political and economicupheaval in France pushed the Swiss franc still higher. By theend of May, the flight of French capital to Switzerland had lifted

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the Swiss franc to its ceiling and the Swiss National Bank hadtaken in a sizable amount of dollars. The System subsequentlyabsorbed most of that intake by drawing $73 million underthe swap facility with the Swiss National Bank—raising Fed-eral Reserve commitments to the Swiss National Bank to $150million. On the other hand, the remaining $55 million equivalentof Federal Reserve swap debt in Swiss francs to the BIS wasfully repaid in May through a U.S. Treasury swap of sterlingagainst Swiss francs with the BIS.

In June quotations for the Swiss franc moved irregularlylower after the middle of the month, as the Swiss National Bankprovided swap facilities to help Swiss banks meet their midyearliquidity needs. Such short-term swaps by the Swiss NationalBank reached a total of $430 million, and the bank rechanneledthe entire amount of the dollar proceeds to the Euro-dollarmarket, both directly and through the BIS. Toward mid-June,the System acquired $15 million of francs from a correspondentand with these francs reduced its commitments to the Swiss Na-tional Bank to $135 million by June 18. In addition, the U.S.authorities liquidated $3.0 million of maturing forward com-mitments to the market—using francs purchased from the SwissNational Bank.

In July money and credit conditions in Switzerland tightened,as heavy seasonal withdrawals of currency drained liquidityfrom Swiss banks and as midyear swaps between the centralbank and the commercial banks ran off. Swiss banks bid stronglyfor francs to meet month-end needs, and interest rates on 1-weekmoney climbed to 8 to 10 per cent per annum. With no immediateprospect of liquidating Swiss franc swap commitments throughmarket transactions, the U.S. authorities moved to wind up thesecommitments by other means. In early July the U.S. Treasuryissued to the BIS a 3-month certificate of indebtedness denomi-nated in Swiss francs equivalent to $54.7 million. The Treasuryused these francs to reverse its third-currency swap of sterling forfrancs with the BIS. Subsequently, on July 16, the Treasury

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issued to the Swiss National Bank a 3-month franc-denominatedcertificate for $133.7 million equivalent; the System used nearlyall of these francs, together with balances on hand, to repayfully the $135 million commitment still outstanding under theswap line with the Swiss National Bank. The $600 million facil-ity with the bank thus reverted to a fully available standby basis.Also during the month the System and the Treasury were ableto liquidate at maturity $29.5 million of forward contracts withthe market.

At the end of July credit conditions in Switzerland tightenedstill further, triggering heavy repatriations of funds into Switzer-land, and the Swiss National Bank took in a large amount ofdollars. The System subsequently absorbed nearly all those gainsby reactivating its swap line with the Swiss National Bank—draw-ing a total of $145 million by August 1. The substantial injectionof francs resulting from these inflows into the Swiss money marketbrought an end to the squeeze and an easing in the spot rate,which lasted well into August. Accordingly, in August, theSystem and the Treasury paid off the last $36 million of forwardfranc commitments to the market that dated back to late 1967and early 1968.

After mid-August the Soviet invasion of Czechoslovakia andthe uncertainties generated by a renewed flare-up of speculationin German marks brought a sharp jump in demand for Swissfrancs. However, the franc rate did not reach the Swiss NationalBank's upper intervention point, and in early September thespot rate eased somewhat as funds began to move out of Switzer-land into Germany. Later in that month, end-of-quarter liquiditydemands resulted in* a firming of the franc, but Swiss bankssold only a small amount of dollars to the National Bank. Inview of the relatively higher rates available on Euro-dollars thebanks met their liquidity needs primarily by rediscounting moneymarket paper with the Swiss National Bank rather than byliquidating dollar assets. In these circumstances, the Swiss Na-tional Bank covered the dollar needs of the Swiss Confederation

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and the dollar requirements for exchange transactions with othercountries through purchases of dollars from the Federal Reserve,thereby providing the System with francs needed to meet short-term obligations. Thus, by early October the Federal Reservehad reduced its outstanding swap debt to the Swiss NationalBank by $105 million to $40 million equivalent.

The Swiss money market remained tight in October, andlate in the month the Swiss National Bank had to take in dollars.The Federal Reserve absorbed these gains by drawing $80 mil-lion equivalent on the swap line with the National Bank—raisingits swap debt to $120 million equivalent by early November.Subsequently the spot franc dipped lower and traded quietlythrough mid-November, despite the heavy speculation in theexchanges focused on the German mark, French franc, andsterling. When international currency uncertainties intensifiedseverely during the 3-day meeting of the Group of Ten in Bonn,the Swiss franc rose to the ceiling and the Swiss National Banktook in some $215 million. The Federal Reserve absorbed mostof the Swiss National Bank's intake of dollars by drawing anadditional $200 million equivalent on its swap line with thatbank. These drawings raised the System's indebtedness underthe swap facility with the Swiss National Bank to $320 millionequivalent.

In December, as in past years, the Swiss authorities offeredshort-term swaps to Swiss commercial banks repatriating fundsfor year-end needs. The banks made very heavy use of thisfacility, with total swaps rising to $746 million. Followingpast procedure the Swiss authorities rechanneled these dollarsback to the Euro-dollar market in order to prevent the disturb-ance of that market that would otherwise have occurred.

CANADIAN DOLLAR

The Canadian dollar came under heavy speculative attackduring the early months of 1968. Although Canada's tradingposition remained strong, market sentiment had been shaken

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by the devaluation of sterling and the subsequent gold rush.The market was particularly disturbed by apprehensions thatthe new U.S. balance of payments program announced on Jan-uary 1 would adversely affect U.S. direct investment in Canadaand the balance of short-term capital flows between the twocountries, despite Canada's continued free access to the U.S.bond market under the new program. In February politicaluncertainties added to market tensions as the Canadian Govern-ment encountered temporary difficulties in obtaining legislativeapproval for its anti-inflationary fiscal program. Official reservelosses were heavy in January and February, and the Canadianauthorities accordingly reinforced their reserve position bydrawing $250 million under the $750 million swap facility withthe Federal Reserve and $426 million from the IMF. At thesame time the Bank of Canada's discount rate was raised to 7 percent effective January 22.

In early March, as the gold rush resumed, there was con-tinuing heavy pressure on the Canadian dollar. Against thebackground of speculative pressures, fiscal measures designedto limit domestic demand were reintroduced into—and sub-sequently passed by—Parliament. Domestic measures were im-mediately supported by a bolstering of Canada's internationalcredit lines. New international credits of $900 million—overand above the $500 million still available under the FederalReserve swap line—were made available by the U.S. Export-Import Bank, the German Federal Bank, the Bank of Italy, andthe BIS. At the same time the U.S. Government made clear itswholehearted support for Canada's program to defend the$0.9250 parity by granting Canada a complete exemption fromthe restraints on capital flows announced in the President'sJanuary 1 program.

The Canadian Minister of Finance assured the U.S. Govern-ment that this exemption would in no way impair the effective-ness of the President's balance of payments program. In addi-tion, the Finance Minister announced Canada's intention to

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invest holdings of U.S. dollars—apart from working balances—in U.S. Government securities that do not constitute a liquidclaim on the United States. Effective March 15, the Bank ofCanada raised its discount rate by Vi percentage point to IViper cent. On the previous day most Federal Reserve Banks hadannounced a V2 -point rise in discount rates.

These strong measures to protect the Canadian dollar beganto exert their full effect as soon as the March 16-17 Washingtonmeeting cleared away doubts about central banks' resolve todefend the existing international payments system. The Bankof Canada immediately announced that it would cooperate inthe policies set forth in the Washington communique. It was alsoannounced that the Bank of Canada's swap facility with theFederal Reserve had been increased to $1,000 million, providingfurther assurance of the capacity of the Canadian authoritiesto maintain the existing parity. The market response was favor-able and the Canadian dollar began to strengthen.

The market was also helped by news of a large calendarof Canadian borrowings in New York, which suggested sizableforthcoming demand for Canadian dollars. Moreover, a Provinceof Quebec loan placed in Europe also suggested that Canadianborrowers could tap new capital resources in Europe, wheremonetary conditions had eased as a result of official policy ac-tions designed to foster renewed business expansion on the con-tinent.

With a sharp turnabout in market sentiment toward theCanadian dollar, the Canadian authorities began recoupingreserves in the second half of March and thus offset some ofthe losses sustained early in that month. Buying pressure gatheredmomentum in April, as demand for Canadian dollars wasstrengthened by the conversion of export earnings, which hadbeen at a very high level since the beginning of the year. Thus,the Canadian dollar strengthened gradually, and official reservesincreased substantially in April and May. In May and June theGovernment of Canada sold new issues of bonds in the United

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States, Italy, and Germany in a total amount of $262 millionequivalent. As the exchange market situation continued to im-prove in late June, the Bank of Canada repaid $125 million ofits $250 million of obligations under the Federal Reserve swapline and on July 1 reduced its discount rate by Vi percentagepoint to 7 per cent.

After a brief lull early in July, there was renewed buying ofCanadian dollars as banks began to undo forward positionsagainst the Canadian dollar, which had been undertaken dur-ing the peak of the speculative attack in January. The Bank ofCanada took in dollars while gradually permitting the spotCanadian dollar to advance to its effective ceiling ($0.9324).Against this favorable background, the Bank of Canada an-nounced on July 26 that it was lowering its discount rate by afurther Vi percentage point to 6V2 per cent. With this announce-ment the Canadian authorities also revealed that the Bank ofCanada had repaid the final $125 million outstanding on itsswap line with the System, thereby placing the entire $1,000million facility on a standby basis. At the same time it was re-ported that the $100 million short-term facility with the BISand the facilities of $150 million each with the Bank of Italyand the German Federal Bank had been terminated withouthaving been utilized.

The Canadian dollar was at or near its effective ceilingthroughout August. It then dipped for a time in September afterthe Bank of Canada reduced its discount rate to 6 per centearly in that month. But demand soon resumed in connectionwith conversion of borrowings abroad and the spot rate movedback to its ceiling before the month-end. By the end of Septem-ber Canada's gold tranche with the IMF was reconstituted to thefull $185 million.

The Canadian dollar continued to benefit from optimisticmarket appraisals through the closing months of 1968. In mid-December, an exchange of letters took place between U.S. and

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Canadian Treasury officials, restating the exemption of Canadafrom all U.S. balance of payments programs and the basicprinciple that it would not be Canada's intention to achieve in-creases in its exchange reserves through borrowing in the UnitedStates. Implementation of this principle does not require thatCanada's reserves be limited to any particular figure.

On December 18 the Bank of Canada raised its discount rateby V2 percentage point to 6V6 per cent following announced in-creases in Federal Reserve discount rates. For the month ofDecember the Bank of Canada gained some further reserves.Thus, despite a major crisis early in 1968, Canada's gold andforeign exchange reserves—including the net creditor positionwith the IMF—rose by $332 million for the year as a whole.

DUTCH GUILDER

Late in 1967 there were heavy flows of funds to the Nether-lands, generated mainly by the sterling crisis but also by a briefliquidity squeeze in the Amsterdam market at the year-end.The Federal Reserve drew several times on its swap line withthe Netherlands Bank, and by early January 1968 System com-mitments had reached $185 million. Moreover, the Treasuryexecuted special temporary swaps with the Netherlands Bankfor $126 million equivalent, to provide cover for that bank'sspot dollar accumulations. As part of the concerted centralbank effort in November 1967 to restrain speculation, theNetherlands Bank initiated forward sales of guilders totaling$37.5 million on behalf of the Federal Reserve and U.S. Treas-ury. Thus, U.S. authorities' short-term commitments in guildersreached a peak of $348.5 million on January 4, 1968.

Liquidity conditions in Amsterdam improved significantlywith the new year, and Dutch banks responded by moving ex-cess funds back into the Euro-dollar market. In mid-January,outflows from Amsterdam were sufficiently large for the Nether-lands Bank to provide support for the guilder. The Netherlands

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Bank then restored its dollar position through purchases fromthe Federal Reserve Bank of New York acting for account ofthe U.S. Treasury. Through these transactions the Treasuryobtained $23 million equivalent of guilders, which were usedto reduce Treasury commitments under its swap with the Nether-lands Bank to $103 million equivalent.

These outflows from the Netherlands were short-lived, how-ever, and the Federal Reserve was able to make only a modeststart in repaying its commitments outstanding under the swapwith the Netherlands Bank. Moreover, the Dutch balance of pay-ments, which had been in modest surplus in 1967, showed nosigns of shifting into deficit. To avoid an undue prolongationof the short-term guilder commitments incurred by the Systemand the Treasury, a variety of special transactions were under-taken. On January 29 the U.S. Treasury issued to the Nether-lands Bank a 12-month certificate of indebtedness denominatedin guilders equivalent to $65.7 million. The Treasury used $55.7million equivalent plus a small amount in balances to reduce itsswap commitments to $47 million. The Federal Reserve pur-chased the balance of the guilders and used them to reduce itsswap indebtedness to the Netherlands Bank to $165 million.

On February 21 the Treasury repaid its remaining $47 mil-lion equivalent of swap commitments to the Netherlands Bankwith guilders purchased from that bank. In turn the NetherlandsBank purchased $23.5 million in gold from the Treasury.Shortly afterward, Canada made its drawing from the IMF; thisdrawing included $30 million equivalent of guilders, which theBank of Canada converted to U.S. dollars through the Nether-lands Bank. This reduced the Dutch dollar position enough forthe U.S. authorities to purchase sufficient guilders to liquidate the$37.5 million in forward contracts maturing in late Februaryand early March. Finally, the U.S. Treasury drawing from theIMF included $100 million equivalent of guilders, which wereused by the Federal Reserve to make a further reduction in itsswap obligation with the Netherlands Bank. As of March 8

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Federal Reserve swap debt to the Netherlands Bank was thusreduced to $65 million.

Demand for both spot and forward guilders swelled onceagain in the wake of the March gold rush. The NetherlandsBank purchased about $100 million through March 15 butswapped out a sizable amount of this intake—selling the dollarsspot and repurchasing them forward—in order to mop up excessdomestic liquidity. To absorb the bulk of the Dutch reservegains, the Federal Reserve Bank of New York, acting for theaccount of the U.S. Treasury, concluded a special 45-day swapfor $65 million with the Netherlands Bank. In addition tomarket swaps, the Netherlands Bank offered guilders forwardon an outright basis, to limit the tendency for costly forwardpremiums to result in sales of spot dollars to the central bank.The Federal Reserve and the Treasury underwrote this opera-tion, by each taking over $20.9 million equivalent of guilderforward commitments to the market—in the 1-, 2-, and 3-monthmaturity ranges. These combined operations by the Dutch andU.S. authorities helped to reassure the market and restrainedfurther heavy inflows of funds.

The March 16-17 Washington meeting of the gold poolcentral banks marked a major turning point. (One of the agree-ments reached that weekend was a further increase in the swapfacility between the Federal Reserve and the Netherlands Bankto $400 million.) Speculative influences abated, and the guildermarket resumed a more normal trading pattern. The forwardpremium on guilders narrowed, restoring attractive yield incen-tives in favor of Euro-dollar investments, and a sizable refluxfrom the Netherlands soon developed. Moreover, commercialfirms became buyers of foreign exchange to rebuild balancesand to meet current requirements. With this reversal of pres-sures in the guilder market, the Netherlands Bank sold a sub-stantial amount of spot dollars during the remainder of Marchand into April—replenishing those losses through purchasesfrom the U.S. Treasury and the Federal Reserve.

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The Treasury used the guilders so obtained to liquidate its$65 million special swap with the Netherlands Bank in advanceof maturity, and by the end of April the System had also pur-chased sufficient guilders to repay the last of its swap drawingwith the Netherlands Bank. The U.S. authorities were also ableto liquidate the forward guilder contracts falling due to themarket in April and May. The last $10.7 million of these obliga-tions were covered in early June, when the United States pur-chased from France part of the guilder proceeds of the Frenchdrawing from the IMF.

Moreover, additional conversions of guilders drawn from theIMF by France and the United Kingdom reduced the dollar bal-ances of the Netherlands Bank to the extent that the bank in turndrew a total of $54.7 million under the swap line with the Fed-eral Reserve to replenish its holdings. This was the first timethe Netherlands Bank had drawn on its swap line with the Fed-eral Reserve since the inception of the swap arrangement in1962. In addition, the Netherlands Bank bolstered its dollar bal-ances by selling $30 million of gold to the U.S. Treasury.

Although the guilder drifted lower in July and August, theNetherlands Bank took in sufficient dollars to make a $24.9 mil-lion swap repayment in early September. The downward drift ofthe spot rate continued into late summer, as the Dutch currentaccount weakened and as Dutch funds moved into U.S. corporatesecurities. A slight rise in Euro-dollar rates in early October con-tributed to a further decline in the guilder rate so that by mid-October it had reached $0.2744^—its lowest level since the1961 revaluation. During the course of the decline, however, theNetherlands Bank provided only occasional and modest marketsupport. In fact, in mid-October the bank was able to restorethe full swap facility with the Federal Reserve to a standbybasis by repaying the $29.8 million outstanding balance of theJune drawing.

The downtrend ended when the money market in Amsterdamtightened in the latter half of October. However, the spot guilder

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rate held steady as an increasing demand for marks more or lessoutweighed the influence of the tight money market. At that timethe Netherlands Bank increased its dollar balances by selling $25million of guilders to the U.S. Treasury, which used them tomake an advance repurchase of its obligation to the IMF. Afterthe Bonn meeting on November 20-22, the demand for markseased abruptly and the spot guilder strengthened.

Year-end liquidity requirements in the Netherlands resultedin a further firming of the guilder throughout December. Pres-sures were modest, however, and were relieved through marketpurchases of dollars by the Netherlands Bank, largely on a swapbasis; the bank's swap purchases for December totaled $84 mil-lion. Just before Christmas the Netherlands Bank raised its dis-count rate Vi percentage point to 5 per cent, explaining that themove was made in response to the rise in rates abroad, a weakertrend in the Dutch current account, and the danger of renewedinflationary tensions in the Dutch economy.

Italian official reserves increased substantially in 1967, as Italy'sbalance of payments showed unexpected strength during the yearand the sterling crisis induced large repatriations of funds in thefall. The Federal Reserve absorbed the bulk of these inflowsthrough swap drawings on the Bank of Italy totaling $500 mil-lion, which were still outstanding at the end of 1967. Early in1968 the spot lira eased seasonally but not enough to provide theFederal Reserve with the opportunity to acquire lire in volumethrough market transactions. In late February and early March,however, the Federal Reserve acquired $75 million equivalentof Italian lire and $100 million equivalent of German marksfrom the proceeds of Canadian and U.S. drawings on the IMF;the marks were converted into lire with the Bank of Italy, andthe combined proceeds were used to reduce the swap debt to theBank of Italy to $325 million in early March.

As a new wave of speculation on the London gold market

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spread to the exchange markets in March, inflows of funds toItaly developed, but these quickly tapered off when the Bank ofItaly permitted a rapid rise in the spot rate. The spot lira movedsharply lower after the Washington meeting, but there was nosignificant reflux of funds from Italy as that country's externalposition remained strong. With little change in the market pat-tern through April and with the usual spring and summer build-up of Italian official reserves in prospect, the Italian authoritiesasked the System to absorb $175 million of their dollar holdingsby a swap drawing toward the end of April, again raising Fed-eral Reserve swap debt in lire to $500 million.

During the spring, however, the increase in Italian official re-serves did not develop as expected. A brief period of labor andstudent unrest, together with political uncertainties arising outof the resignation of Premier Moro, may have induced some out-flows of funds. More important, however, were relatively easycredit and liquidity conditions, which encouraged large capitaloutflows, particularly to the Euro-bond market. Such outflows oflong-term funds from Italy continued into the summer, largelyoffsetting the normal rise of reserves during the tourist season.

These developments, along with the French and U.K. draw-ings on the IMF in June, provided the opportunity for the Fed-eral Reserve to liquidate the full amount of its outstanding swapobligations to the Bank of Italy by early July. The currencypackages put together by the IMF for France and the UnitedKingdom provided for $369 million of lire. Of this amount, theSystem purchased $141.5 million equivalent directly from thedrawing central banks, and the bulk of the remainder was con-verted into dollars by the Bank of Italy—depleting its dollarholdings. Moreover, in the absence of a large seasonal increasein reserves, it became clear that the swap drawing effected in an-ticipation of such reserve increases no longer seemed necessary.Therefore, the System purchased an additional $351.1 millionequivalent of lire from the Bank of Italy and used these lire, to-gether with some $7.6 million equivalent acquired from a cor-

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respondent and in the market, to liquidate completely its remain-ing swap debt to the Bank of Italy. The $750 million reciprocalcurrency facility was thereby placed on a fully standby basis.Subsequently in October, the Federal Reserve and the Bank ofItaly agreed to increase their reciprocal currency facility by $250million to $1 billion, bringing it fully into line with the System'sreciprocal currency arrangements with other major countries.

As the Italian balance of payments moved into its period ofseasonal weakness, the lira tended to ease through late October.In November the speculative upheaval in Europe brought thelira under selling pressure as Italians covered commitments inmarks. But normal trading patterns resumed after the Bonnmeeting, and the spot rate held narrowly above par in routinemarkets through the close of the year.

Since early 1965, the U.S. Treasury has assumed technical com-mitments in forward lire, related to the dollar/lira swaps trans-acted by the Italian authorities with the Italian commercial banks.Earlier operations of this type had been conducted in 1962-64.The Federal Reserve joined in these commitments in November1965, under an authorization to participate to the extent of$500 million. No opportunity subsequently appeared to termi-nate these Federal Reserve commitments through a reversal in theItalian banks' forward positions. Consequently, in line with Sys-tem policy of limiting exchange operations to relatively short-term needs, in April 1968 the Federal Reserve transferred to theTreasury the total of its technical forward commitments in lire,which amounted to $500 million. During the year the Treasurytook on a small amount of new technical forward commitmentsthrough the Italian authorities. Such commitments, as they havefallen due, have been rolled over by the Italian authorities.

BELGIAN FRANC

The Belgian National Bank gained substantial amounts of dollarsin 1967 during the Middle East conflict and the subsequent

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sterling crisis. The Federal Reserve drew on the swap line toabsorb some of these gains, and at the opening of 1968, Systemdrawings of $105.8 million equivalent were still outstanding.Moreover, the Federal Reserve and the U.S. Treasury jointly had$11.8 million of outstanding commitments from forward salesof francs to the market through the Belgian National Bank inlate 1967, as part of the concerted central bank effort to main-tain orderly markets after the devaluation of sterling. In additionto these short-term obligations the U.S. Treasury had issued a$60.4 million medium-term franc-denominated note to theBelgian authorities.

In late January 1968 the Belgian National Bank purchased$25 million from the System to cover moderate losses in marketsupport and to meet anticipated dollar requirements of the Bel-gian Government. The Federal Reserve used the franc proceedsto reduce its swap indebtedness to $80.8 million. In February,however, market conditions were briefly reversed, and the Bel-gian central bank once again purchased dollars, which the Sys-tem covered by drawing $7.5 million equivalent of francs on theswap. Subsequently, the System was able to make further reduc-tions in its Belgian franc commitments. Late in February it ac-quired $13.5 million of francs from the Belgian National Bank,when that bank needed dollars, and $30.2 million equivalentfollowing Canada's IMF drawing. Moreover, the System ac-quired $10 million of Belgian francs in connection with the U.S.Treasury's drawing on the IMF. These francs were used to makeswap repayments, and by March 8 such commitments had beenreduced to $34.5 million equivalent. The remainder of theTreasury's $15 million Belgian franc drawing was used in theliquidation of System and Treasury forward contracts, and onMarch 8, $5 million equivalent remained outstanding.

On March 7 the National Bank cut its discount rate by VApercentage point to 3% per cent to promote a lower level of in-terest rates in Belgium and to stimulate domestic economic ac-tivity. But in the following week a violent burst of speculation

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in the gold and foreign exchange markets pushed the franc tothe National Bank's upper intervention point. By March 15 thebank had taken in nearly $60 million. The Federal Reserve ab-sorbed most of this inflow by additional drawings on the swapline; by March 19, System drawings outstanding reached $80.1million.

In the calmer atmosphere immediately following the Wash-ington meeting, however, Belgian banks soon began to channelfunds back into dollar investments. As the National Bank pro-vided occasional support in the spot market and replenished itsdollar holdings through purchases from the System, gradual pro-gress was made in reducing Federal Reserve swap debt in francs.At one stage, however, the System covered $33 million of Bel-gian official dollar holdings through a swap drawing that wassoon reversed, and by early June swap obligations were loweredto $43.1 million. Moreover, the System and the Treasury pur-chased sufficient francs from the Belgian National Bank toliquidate the remainder of their forward franc commitments withthe market.

In June, the French and British drawings on the IMF con-tained Belgian francs that the drawing countries converted intodollars with the Belgian National Bank. After these conversionsthe Belgian central bank replenished its dollar balances by pur-chasing dollars from the Federal Reserve. The System thus ob-tained sufficient francs to liquidate completely its outstandingswap debt in francs, including a $21 million further drawing onthe Belgian National Bank that had become necessary.

During the summer months, the spot Belgian franc continuedto edge downward as a result of the economic recovery and themaintenance of relatively low levels of short-term interest ratesin Belgium, compared with the attractive yields in the Euro-dol-lar market. In July the spot franc dipped below par ($0.02000),and the Belgian National Bank intervened to slow the decline.As part of this operation, that bank utilized $20 million underits Federal Reserve swap line, the first such utilization since

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1963. Selling of francs continued intermittently through latesummer, especially during the period of heavy pressure on theFrench franc. The selling was not severe, however, and in thelatter part of September the Belgian National Bank repaid the$20 million of credits drawn earlier under the swap line with theFederal Reserve—thus restoring the entire $225 million facilityto a standby basis.

Selling pressures resumed near the end of September andcarried into October. Part of the outflows from Belgium re-flected spot sales of francs by some U.S. corporations, whichrefinanced in Belgium dollar credits employed earlier in directinvestments in that country. During most of October the au-thorities held the spot franc moderately above its official floor($0.019851) and covered market losses with drawings on theFederal Reserve swap line. By the end of October, drawings bythe Belgian National Bank totaled $120.5 million.

November's speculative upheaval in Europe gave rise to heavyselling of francs. These pressures cost the Belgian authoritiessubstantial support losses, although they lightened considerablyin the quieter atmosphere after the Group of Ten meeting atBonn. The Belgian central bank drew $65 million under itsswap line with the Federal Reserve in November and another$5 million in December to cover the cost of official exchangemarket support. In early November and late December the U.S.Treasury purchased a total of $216 million of Belgian francsfrom the Belgian authorities; $60.4 million equivalent of thesefrancs were used to redeem in advance of maturity a 2-year noteissued to the National Bank in 1967 (leaving no further U.S.obligations in Belgian francs), and the balance was paid to theIMF to help reconstitute the U.S. gold tranche position with theFund. For its part, the Belgian central bank used the dollarproceeds of the Treasury's franc purchases to replenish its re-serves and repay a total of $183 million of its swap debt to theFederal Reserve—leaving $7.5 million still outstanding at theend of 1968.

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In the meantime, effective December 19, the Belgian NationalBank had raised its discount rate to AVi per cent from 33A percent, to help stem short-term capital outflows and in response toevidence of money market strains associated with larger domesticborrowing requirements. Subsequently the spot franc strength-ened, reaching par just before the year-end.

OPERATIONS IN OTHER CURRENCIES

In 1968 the National Bank of Denmark drew for the first timeon its $100 million reciprocal currency arrangement with theFederal Reserve. In June the bank drew $25 million to meetcash requirements largely associated with conversion of theDanish krone portion of drawings on the IMF by France andthe United Kingdom, and with some shifts of funds into dollarsby Danish commercial banks. The drawing was repaid at ma-turity in September.

EURO-DOLLAR MARKET

Euro-dollar rates eased sharply in early 1968 despite the an-nouncement on January 1 of the more stringent U.S. balance ofpayments program. Sizable reflows of funds from France, Ger-many, and Switzerland added to market supplies, and the heavypressure on the Canadian dollar produced substantial shifts offunds to the Euro-dollar market. At the same time, continuingwide discounts on forward sterling made short-term investmentsin sterling unattractive, diverting more funds into Euro-dollars.

In early March the speculative upheaval in the gold marketinflamed market apprehensions over currency parities and thegeneral stability of the international financial structure. In thisatmosphere the 3-month Euro-dollar rate jumped to 7 per cent,as funds were withdrawn to continental centers. Once again,however, the central banks of Germany, the Netherlands, andSwitzerland, acting in concert with U.S. authorities, took meas-ures to rechannel funds to the Euro-dollar market, and by mak-

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ing forward exchange available curbed the tendency for mount-ing forward premiums on major continental currencies to pulladditional funds from the Euro-dollar market. The GermanFederal Bank, for example, resold nearly $800 million in swapoperations through March 31. In addition, by March 15 theNetherlands Bank had made available $41.8 million of forwardguilders—partly in swap transactions but also on an outrightbasis—and the Swiss National Bank had made available $56million equivalent of forward francs. The Federal Reserve under-wrote the forward commitments in guilders and Swiss francs andparticipated in the German operations by drawing $300 millionon its swap line to absorb dollars from the Federal Bank, therebyproviding cover for part of that bank's forward purchases ofdollars.

News of the decisions taken at the Washington meeting inMarch strongly bolstered market confidence in currency parities.(At that time the Federal Reserve swap facility with the BISunder which dollars can be made available for placement in theEuro-dollar market was increased to $1 billion.) Prospects forstability were further improved late in the month by PresidentJohnson's peace initiative and the agreement at Stockholm on aplan for SDR's. With these favorable developments in the back-ground, Euro-dollar rates dropped back from their mid-Marchpeaks.

Nevertheless, in April interest rates in the United States movedup, and those on Euro-dollars also rose, exerting a strong pullon short-term funds from Europe. Substantial amounts of fundsflowed into the Euro-dollar market from the continent, notablyfrom Germany where the 3-month interbank loan rate of about3Vi2 to 3% per cent per annum was indicative of the relativelylow money market rates in that country. Moreover, in May largeamounts of funds were drained from London as growing ap-prehensions over the pound led to sharply widened discounts onforward sterling, creating an unusually large interest incentivefor shifting funds into dollars on a covered basis. At the same

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time the prevailing uncertainties discouraged uncovered invest-ments in sterling. The outflows from France that began aftermid-May seem also to have gone largely into dollars. On thedemand side, branches of U.S. commercial banks took on anincreased volume of Euro-dollar liabilities and passed the fundson to their head offices.

With the approach of midyear there were indications of apossible developing squeeze of exceptional stringency in Switzer-land, and the Swiss National Bank acted to relieve potentialstrains through market swap operations with commercial banks.The Swiss central bank bought $430 million on a short-termbasis from Swiss commercial banks and rechanneled the dollarproceeds to the Euro-dollar market, both directly and throughthe BIS—thereby averting stress in that market. The Systembacked up that operation by placing $ 111 million in the Euro-dollar market through the BIS. Expectations of easier monetaryconditions in the United States appeared soon after the passageof the income tax surcharge, and once midyear pressures wereout of the way, Euro-dollar rates eased considerably.

Early in July, with funds readily available after the midyearadjustments by continental banks, U.S. banks increased theirborrowings of Euro-dollars sharply, with total takings reaching$7.0 billion. During the rest of the month these borrowings wereallowed to run off somewhat, to a level of approximately $6.2billion at the month-end, only to be followed by a further sharprise in August. Late in August the outburst of speculation overa revaluation of the German mark resulted in a heavy flow offunds—some of which came out of Euro-dollars—into Germanofficial reserves. The German authorities moved quickly to pushthese funds out again through dollar/mark swap operations withGerman commercial banks. Moreover, heavy drains on Frenchreserves also tended to supply funds to the market in earlySeptember. Consequently, funds remained readily available inthe market, and interest rates declined somewhat.

During October the Euro-dollar market was generally much

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quieter, as were the exchange markets. On the other hand, in-terest rates began to move up in sympathy with somewhat firmermonetary conditions in the United States.

The speculative upheaval in the exchange markets in Novem-ber caused only moderate strains in the Euro-dollar market, asthe German Federal Bank once again moved immediately torechannel a major portion of its dollar intake out into the marketthrough swaps. Moreover, the Federal Bank's outright sales offorward marks in the first few days after the Bonn meeting en-couraged additional reflows from Germany; this operation wasbacked up in New York, where the Federal Reserve sold forwardmarks.

Nevertheless, in early December Euro-dollar rates again be-gan to move up sharply as U.S. domestic interest rates advanced.Pressures were apparent particularly in the shorter ma-turities—reflecting not only the generally tighter monetary con-ditions in the United States but also the usual seasonal pressuresassociated with year-end positioning by European banks. At thesame time, exchange market sentiment regarding sterling wassoftening once again, and as discounts on forward sterlingwidened, a substantial incentive developed in favor of Euro-dollars over U.K. investments. To avoid any undue additionalstrain on the pound in view of approaching year-end repatria-tions of funds to the continent, the BIS, using dollars drawn onits swap line with the Federal Reserve, placed $80 million in theEuro-dollar market.

Although Euro-dollar rates rose further in the latter part ofDecember, the increase reflected by and large the higher levelsof U.S. rates (following the lA percentage point increase in Fed-eral Reserve discount rates on December 18 and the further risein prime loan rates of U.S. banks to 63A per cent), and condi-tions in the Euro-dollar market remained orderly. Reflows fromGermany continued. At the same time, repatriations of funds bySwiss commercial banks for domestic year-end needs were again

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accommodated without undue strain on the market, thanks tothe swap operations of the Swiss National Bank. The Swiss com-mercial banks undertook $746 million of swaps with the Na-tional Bank, and the Swiss central bank in turn rechanneled thedollars so obtained back into the Euro-dollar market, both di-rectly and through the BIS. In the latter part of December, tak-ings by branches of U.S. banks dropped sharply—to a total ofabout $6.0 billion—but U.S. corporations took a substantialamount of dollars out of Europe, partly in response to interest-rate considerations and partly to comply with provisions of theCommerce Department's program. •

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Special Studies by the FederalReserve System

Reappraisal of the Federal Reserve discount mechanism. Work onthe fundamental reappraisal of the Federal Reserve discountmechanism, originally announced in the 1965 ANNUAL REPORT,

was highlighted in 1968 by the publication in July of the reportof the System's Steering Committee. This report set forth the con-clusions and recommendations of that committee, which hadbeen appointed to reappraise and, where necessary, recommendredesign of Federal Reserve lending facilities. The report wasadopted unanimously by the three members of the Board ofGovernors and the four Federal Reserve Bank Presidents whomade up the Steering Committee. As of the end of 1968, how-ever, the Board had not acted on the Committee's recommenda-tions.

The Committee's report was made available in July so thatcomments and suggestions of the banking community and thepublic at large could be considered before the Board publishedany revision of Regulation A, its rule governing lending to mem-ber banks. Study of the comments and suggestions received andof the revisions deemed desirable in the published proposals isnow under way. It is expected that a proposed revision of Regu-lation A will be published in the Federal Register in the springof 1969, after which another period will be provided for generalcomment before a redesigned discount mechanism is implemented.

In addition to the final report of the Steering Committee itself,a summary report on the research undertaken in connection withthe study and various of the individual research papers have beenmade available to the public upon request. A number of otherresearch papers are in the process of publication; the availabilityof these papers will be announced in the Federal Reserve Bulle-tin. Papers currently available include the following:

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"Report on Research Undertaken in Connection with a SystemStudy," by Bernard Shull

"The Discount Mechanism in Leading Industrial Countries SinceWorld War II," by George Garvy

"Evolution of the Role and Functioning of the Discount Mechanism,"by Clay J. Anderson

"A Review of Recent Academic Literature on the Discount Mech-anism," by David Jones

"A Study of the Market for Federal Funds," by Parker Willis"The Secondary Market for Negotiable Certificates of Deposit," by

Parker Willis"Reserve Adjustments by the Eight Major New York Banks During

1966," by Dolores Lynn"Discount Policy and Open Market Operations," by Paul Meek"The Redesigned Discount Mechanism and the Money Market," by

Robert C. Holland and George Garvy"Summary of the Issues Raised at the Academic Seminar on Dis-

counting," by Priscilla Ormsby"Discount Policy and Bank Supervision," by Benjamin Stackhouse

U.S. Government securities market study. The final report of theSteering Committee of the joint Treasury-Federal Reserve studyof the U.S. Government securities market has been completedand forwarded to the U.S. Treasury and the Federal Open MarketCommittee.

Foreign operations of member banks. The principal part of thestudy of the foreign operations of member banks was completedin 1968. This part of the study provides a description and analy-sis of the broad range of international activities that have devel-oped in U.S. commercial banks in recent years; the examinationencompasses the operations and activities of head offices of U.S.banks and of their branches abroad, and the uses and roles ofso-called Edge and Agreement corporations and their subsidiariesand affiliates. A second part of the study, which focuses princi-pally on the supervisory responsibilities of the Federal Reservein this area of banking activity, was still in preparation at the endof the year.

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Econometric model construction. Work continued during 1968on the development of econometric models designed to trace theeffects of monetary policy on economic activity. Further progresswas made on the quarterly econometric model of the economybeing developed by economists on the Board's staff and a groupof university economists led jointly by Professor Modigliani ofthe Massachusetts Institute of Technology and Professor Andoof the University of Pennsylvania. Price and wage equations wereadded to the model, and there were some important revisions inthe consumption and housing equations in the light of recentdata. A start was made at using sectors of the model to help inanalyzing the current economic situation. A paper explaining theresponse to fiscal policy in the model and one discussing "TheChannels of Monetary Policy" as depicted in the model werepresented at the December 1968 meetings of the American Eco-nomic Association and the American Finance Association.

The current version of the model, like the preliminary versioncompleted last year, suggests that both monetary and fiscal poli-cies have powerful effects on the economy, though the time lagbetween a change in policies and the economic effect of thechange is longer for monetary policy than for fiscal policy. Theresponse of money income to changes in monetary policies isstronger in this model than in a number of other models, whilethe response to changes in fiscal policies is about the same in thecurrent version of this model as it is in other models.

Progress was also made during 1968 on the construction ofmodels to explain in greater detail the behavior of institutions andindividuals in financial markets. A preliminary version of amonthly model of the money market was developed, and a prog-ress report on this research was presented at the December 1968meetings of the Econometric Society. Work on the aggregate be-havior of nonbank financial intermediaries also was carriedforward.

In the development of econometric models to explain the port-folio adjustments of individual commercial banks, particular

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emphasis was placed this year on the estimation of time lagsbetween changes in monetary policy and the effect of suchchanges on the size and composition of bank portfolios. Work inthis area progressed to the point where it became possible tobegin examining the implications of models developed for in-dividual banks for the behavior of the banking system. •

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International LiquidityIn 1968 the Federal Reserve continued its active participation indiscussions and negotiations concerning international liquidity.The main developments in this field related to Special DrawingRights and gold.

Special Drawing Rights. In August 1964 the Ministers and thecentral bank Governors of the Group of Ten countries partici-pating in the General Arrangements to Borrow, following com-pletion of a study of international liquidity by their deputies,said in a published statement, "The continuing growth ofworld trade and payments is likely to entail a need for largerinternational liquidity. This need may be met by an expansion ofcredit facilities and, in the longer run, may possibly call for somenew form of reserve asset." (The 1964 ministerial statementand the report prepared by the deputies were published in fullin the Federal Reserve Bulletin for August 1964, pages 975-91.) In the following years further studies, followed by actualnegotiations, focused on whether provision should in fact bemade for the establishment of a new reserve asset, and if so, whatform such a new asset should take. The further work done onthese questions through 1967 was summarized in the ANNUAL

REPORTS of the Board of Governors for 1965, 1966, and 1967.Both questions were answered at the annual meeting of the

Board of Governors of the International Monetary Fund held atRio de Janeiro in September 1967 when approval was given tothe Outline Plan for a system of Special Drawing Rights (SDR's).The Outline Plan stated the principles that would govern thecreation, distribution, and use of SDR's. The text of the OutlinePlan was published in the Federal Reserve Bulletin for Novem-ber 1967 (pages 1877-82), and a summary of its main featuresand underlying principles appeared in the ANNUAL REPORT ofthe Board of Governors for 1967 (pages 311-17).

By early 1968 the Executive Directors of the IMF had ad-vanced far toward completion of the task of putting the OutlinePlan into legal language. The Ministers and the Governors of

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the central banks of the Group of Ten, meeting in Stockholmat the end of March 1968, reached a consensus on the mostcontroversial issues posed by an amendment to the IMF Articlesof Agreement, under which the SDR system would be established.The detailed text of the amendment was recommended by theExecutive Directors of the Fund on April 16, 1968, and ap-proved by the Fund's Board of Governors on May 31, 1968.

In the form in which the SDR plan was approved by the Fund,its fundamental principles were unchanged from those embodiedin the Outline Plan of September 1967. When SDR's are created,they will be allocated among participants in proportion to eachparticipant's quota in the Fund. A participating country may useSDR's to meet a balance of payments deficit or a decline in itsreserves resulting from shifts by other countries in the composi-tion of their reserves. The countries that are to receive the SDR'sand therefore to provide convertible currency in return will bedesignated by the Fund, unless the country using SDR's has madearrangements under provisions that enable one or more partici-pants to agree voluntarily to accept SDR's. Under the provisionsgoverning voluntary agreements, a country may use any amountof SDR's (provided it has a need to do so, for either of the pur-poses just mentioned, and subject to later application of the re-constitution provision, which is explained below) to obtain itsown currency held by other participants; a participant may alsoobtain currencies other than its own, provided that such ex-changes of SDR's against currency would contribute to the ac-complishment of one or more objectives prescribed by the Fundfrom a list of possible objectives specified in the amendment. Theprovisions governing voluntary agreements will be helpful to anycountry, but particularly to the United States, whose currency isheld in significant amounts by other countries. Under the otherprocedure for using SDR's—that is, designation by the Fund ofcountries to receive SDR's from, and to provide currency to, acountry using SDR's—the countries designated will normally bethose having relatively strong balance of payments and reserve

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positions, although under certain circumstances the Fund may,in its designations, include countries outside this category.

Under the rules, each participating country is obligated to ac-cept SDR's from other participants and to provide currency, onlyup to the point at which its holdings are equal to three times itscumulative allocations. This is what might be called each coun-try's total "holding" obligation. (Any member may accept alarger amount, either ad hoc or by agreement with the Fund.)If a participating country went into deficit, and used all itscumulative allocations, then swung into strong and continuingsurplus, it would have to accept SDR's—so long as it remainedin the same payments position, and some other countries con-tinued to use SDR's—until its total accumulation equaled threetimes its cumulative allocations.

The use of SDR's is subject to the reconstitution provision.This provision requires that during the initial basic period(which, like subsequent basic periods, is likely to be 5 years inlength, although the Fund may decide otherwise) each partici-pant's average holdings of SDR's must be at least 30 per cent ofits average net cumulative allocations.

Under Article XVII of the existing Articles of Agreement,the amendment providing for the SDR facility, as well as forcertain changes in existing Fund rules and practices, will enterinto force when three-fifths of the members, having four-fifths ofthe total voting power in the Fund, have accepted it. Given theexisting Fund membership of 111 countries, the three-fifths rulemeans that 67 member countries must accept the amendmentbefore it can enter into force. As of April 11, 1969, 45 membercountries, representing 62.4 per cent of the total voting power,had accepted the amendment. Of these 45 countries, 25, with53.6 per cent of total quotas, had deposited the instruments ofparticipation required by Section 1 of the proposed new ArticleXXIII. The United States was one of these 25, having been thefirst member country both to approve the amendment and todeposit its instrument of participation. With strong bipartisansupport the bill authorizing U.S. acceptance of the SDR amend-

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ment and U.S. participation in the SDR system was approved byCongress late in the spring of 1968 and was signed into law bythe President on June 19, 1968.

Gold: The two-tier system. From the early part of 1961 untilMarch 1968 the dollar price of gold in the London gold marketfluctuated within a relatively narrow range a little over $35 perounce. This comparative price stability in the leading privatemarket for gold, in a range just slightly above the official U.S.price of $35 per ounce, reflected a policy of official interventionto hold the price within that range. During most of this periodsuch intervention was conducted on behalf of a consortium ofcountries known as the "gold pool." The gold pool and its mar-ket-intervention policy were established following a wave ofspeculative gold buying in October 1960 that pushed the price inthe London market to more than $40 per ounce.

The devaluation of the pound sterling in November 1967touched off a series of waves of speculative buying of gold,perhaps based initially on the belief that sterling devaluationmight force devaluation of the U.S. dollar, that is, a rise in theofficial U.S. gold price, which would mean a rise in the price ofgold in free markets. Speculative buying continued as expecta-tions of a change in gold-pool intervention policies became wide-spread; rising losses from official gold stocks made the supportpolicy seem less and less credible.

On Friday, March 16, 1968, the London gold market wasclosed by order of the Bank of England. On that weekend theGovernors of the central banks of the seven active members ofthe gold pool—Belgium, Germany, Italy, the Netherlands, Swit-zerland, the United Kingdom, and the United States—met inWashington. On March 17, they issued a communique. In thisdocument the Governors announced termination of their sales ofgold to private gold markets, reaffirmed adherence to the $35per ounce price of gold for official transactions, and stated that" . . . as the existing stock of monetary gold is sufficient in view ofthe prospective establishment of the facility for Special DrawingRights, they no longer feel it necessary to buy gold from the

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market." (For the full text of the communique, see the FederalReserve Bulletin for March 1968, page 254.)

Central banks of other IMF countries were informed of theaction and were invited to support the principles of the Marchcommunique. Assurance of support was subsequently receivedfrom the overwhelming majority of these monetary authorities.

The gold pool policy of stabilizing the market price of goldhad been based on the belief that if the market price divergedtoo widely from the official price, doubts about the viability ofthe official price might arise abroad even in official circles. Thefact that by mid-March 1968 the SDR plan was close to adoptionmeant that the monetary authorities of the world, taken as agroup, would soon have available a means for increasing re-serves that did not depend upon either additional stocks of gold oran increase in the value of existing stocks of gold. With theestablishment of the SDR system there would therefore be lessand less reason to question the possibility of maintaining theofficial price of gold at $35 per ounce. As a result there wouldalso be much less reason than before for concern about the priceof gold in free markets.

Establishment of the two-market system for gold in March1968, although done under the pressure of a speculative crisis,was a logical step in the evolution of the international monetarysystem away from dependence on gold. As the Governor of theBank of Italy pointed out in his annual report for 1967, "TheWashington decisions, while meeting current needs, form partof the continuous process which has been reducing the monetaryfunction of gold, first within individual economies and then onthe international plane." To say that the monetary functions ofgold will be further reduced under the SDR system is not toargue that gold should be, or will be, demonetized. It simplymeans that if, as may reasonably be expected, the bulk of futureadditions to international reserves consist of SDR's, the size ofthe gold component, relative to total reserves, will graduallydecline over time. •

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/ .cgisldtion Enacted

Elimination of gold reserve requirement against Federal Reservenotes. An Act of Congress approved March 18, 1968 (PublicLaw 90-269), eliminated the provision of Section 16 of theFederal Reserve Act under which the Federal Reserve Bankswere required to maintain reserves in gold certificates of not lessthan 25 per cent against Federal Reserve notes.

Direct purchases by Federal Reserve Banks of Government obli-gations. An Act of Congress approved May 4, 1968 (PublicLaw 90-300), extended through June 30, 1970, the authorityof Reserve Banks, under Section 14(b) of the Federal ReserveAct, to purchase direct or fully guaranteed obligations of theUnited States directly from the United States.

Truth in lending. The Truth in Lending Act (a portion of theConsumer Credit Protection Act), approved May 29, 1968(Public Law 90-321), requires the Board of Governors to pre-scribe regulations to assure a meaningful disclosure of creditterms so that consumers will be able to compare more readilythe various credit terms available and avoid the uninformed useof credit.

Special Drawing Rights certificates. The Special Drawing RightsAct, approved June 19, 1968 (Public Law 90-349), mainly forthe purpose of authorizing U.S. participation in the SpecialDrawing Rights facility to be established within the InternationalMonetary Fund, contains incidental provisions authorizing (1)the Secretary of the Treasury to sell to the Reserve Banks certifi-cates against the Special Drawing Rights of the United Statesand (2) the Reserve Banks to use such certificates for specifiedpurposes.

Defense production. An Act of Congress approved July 1, 1968(Public Law 90-370), extended through June 30, 1970,the termination date of certain provisions of the Defense Pro-

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duction Act of 1950, including Section 301, which is the basisfor guarantees of loans for defense production.

Bank protection. The Bank Protection Act of 1968, approvedJuly 7, 1968 (Public Law 90-389), requires the-Board of Gov-ernors and the other Federal supervisors of financial institutionswhose deposits are federally insured to establish minimum stand-ards with respect to installation, maintenance, and operation ofsecurity devices and procedures for use by such institutions inguarding against loss of funds by theft.

Margin requirements for securities traded over the counter. AnAct of Congress approved July 29, 1968 (Public Law 90-437),amended the Securities Exchange Act of 1934 to authorize theBoard of Governors (1) to extend the coverage of margin re-quirements to credit that banks and other lenders may extendfor the purpose of purchasing and carrying securities tradedover the counter (as distinguished from those traded on the na-tional securities exchanges) and (b) to permit brokers anddealers to extend credit on such securities, subject to marginrequirements.

"Tender offers" with respect to securities of State-chartered mem-ber banks. An Act of Congress approved July 29, 1968 (PublicLaw 90-439), amended the Securities Exchange Act of 1934to require disclosure of certain information with respect to (1)acquisitions of more than 10 per cent of a class of equity securi-ties registered pursuant to the 1934 Act, (2) the making of so-called "tender offers" (or solicitations favoring or opposing suchoffers), and (3) the replacement of a majority of the directorsof an issuer in connection with such acquisitions or tender offers.Under the 1934 Act, the Board of Governors is responsible forimplementing these requirements with respect to registered securi-ties issued by State-chartered member banks.

Housing and urban development; real estate loans by nationalbanks; member bank underwriting of certain municipal revenuebonds. The Housing and Urban Development Act of 1968, ap-

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proved August 1, 1968 (Public Law 90-448), amended variouslaws relating to housing and urban development and enactedseveral new laws designed to assist in providing housing for lowand moderate income families. Numerous provisions of the Actrelate directly to the activities of the Reserve Banks and theirmember banks. In summary, such provisions:

(1) make the Reserve Banks depositaries for the GovernmentNational Mortgage Association, a new Federal instrumentality;

(2) expand the powers of national banks in the area of realestate loans by amending Section 24 of the Federal Reserve Act(a) to authorize such banks, without limitation, to make loansor purchase obligations guaranteed by the Secretary of Housingand Urban Development under the portion of the Act describedas the "New Communities Act of 1968," (b) to authorize suchbanks to purchase a participation (as distinguished from theentire interest) in a loan secured by a first lien on improvedreal estate or on forest tracts, (c) to extend from 24 to 36months the permissible maturity of loans by such banks to financecommercial building construction, and (d) to authorize suchbanks to accept a second lien on real estate as security for a loanif the bank relies primarily on the creditworthiness of the bor-rower or other security as collateral for repayment of the loan;

(3) expand the powers of national banks under paragraphSeventh of Section 5136 of the Revised Statutes (and to thatextent remove Federal limitations on the power of State-char-tered member banks) to authorize such a bank (a) to under-write and deal in (i) obligations, participations, or instrumentsof or issued by the Government National Mortgage Association,without limitation on amount, and (ii) so-called "revenue obli-gations" of investment grade that are issued by a State or a politi-cal subdivision thereof, or an agency of either, for housing, uni-versity, or dormitory purposes, in an amount not to exceed, asto each such issuer, 10 per cent of the bank's capital and surplus,and (b) to purchase for its own account stock issued by corpora-

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tions created pursuant to Title IX of the Act for the purpose ofproviding housing for low or moderate income families and toinvest in partnerships or joint ventures formed by such corpora-tions pursuant to that Title; and

(4) expand the powers of national banks by adding a para-graph Ninth to Section 5136 of the Revised Statutes to authorizesuch banks to issue securities guaranteed by the GovernmentNational Mortgage Association backed by a pool of mortgagesinsured under the National Housing Act or Title V of the Hous-ing Act of 1949, or insured or guaranteed under the Servicemen'sReadjustment Act of 1944 or chapter 37 of title 39 of the UnitedStates Code. (In connection with the latter, Section 21 of theBanking Act of 1933 was amended to remove a criminal pro-hibition against banks issuing such securities.)

Interest on deposits; reserves of member banks; open market oper-ations; Reserve Bank advances. An Act of Congress approved Sep-tember 21, 1968 (Public Law 90-505), extended through Sep-tember 21, 1969, the flexible authority of the Board of Governors,the Federal Deposit Insurance Corporation, and the FederalHome Loan Bank Board in regulating the maximum rates ofinterest or dividends payable by insured banks and savings andloan associations on deposit or share accounts. The Act makespermanent the authority of the Reserve Banks to purchase in theopen market direct or fully guaranteed obligations of Federalagencies and the authority of the Board to require member banksto maintain a reserve ratio for time deposits of not less than 3and not more than 10 per cent. The Act also grants (1) thesupervisory agencies referred to above the authority to prescriberegulations governing all aspects of payment of interest on de-posits, including advertising, and (2) the Reserve Banks theauthority to make advances (a) to member banks on the securityof any obligations eligible for Reserve Bank purchase (includingFederal agency issues), and (b) to any person on the securityof obligations of Federal agencies (previously, the security waslimited to direct obligations of the United States).

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Legislative Recommends'Lending authority of Federal Reserve Banks. Under present law,

when a member bank borrows from its Reserve Bank on collat-eral other than obligations that are eligible for purchase by Re-serve Banks (mainly U.S. Government obligations) or short-termpromissory notes of the member bank's customers that meetscertain "eligibility" requirements, it must pay interest at a ratenot less than V2 of 1 percentage point higher than the ReserveBank's basic discount rate. For several years the Board of Gov-ernors has urged legislation that would permit a member bank,subject only to regulations by the Board, to borrow on anysecurity satisfactory to its Reserve Bank without the necessityof paying a higher rate of interest simply because the security is"ineligible" for the basic rate.

The need for enactment of such legislation has increased asmember banks have reduced their holdings of U.S. Governmentsecurities and broadened the scope of their lending in order tomeet the expanding credit demands of their customers. Many ofthese loans cannot qualify as security for Federal Reserve ad-vances except at the "penalty" rate of interest, although theirquality may be equal to that of presently "eligible" paper.

To enable the Federal Reserve System always to be in a posi-tion to carry out promptly and efficiently one 6f its principalresponsibilities—the extension of credit assistance to enable thebanking system to meet the legitimate needs of the economy—and to avoid penalizing those uses of credit that generate soundpaper that is not "eligible" under existing law, the Board againurges legislation that would authorize the Reserve Banks to ex-tend credit on sound collateral without regard to the present"eligibility" provisions.

"Par clearance." Most banks pay the face amount of all checkspresented to them for payment; this practice is frequently de-scribed as "par clearance." In a few areas of the country, how-

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ever, many small banks deduct a so-called "exchange charge"from the face amount of checks presented by mail and remit onlythe balance. In such circumstances the drawee bank shifts all ora portion of the expense incurred by it in connection with thecollection process to the payee of the check or to an indorsee.In the Board's view there is no justification for the increasedcosts, delays, and inefficiencies that result when banks do not payall checks at their face amount.

The trend of legislation in this area at the State level has beentoward requiring banks to pay the face amount of checks drawnon them. In recent years, Florida, Minnesota, Mississippi, NorthDakota, and South Dakota have enacted legislation along theselines. Despite the progress in this direction that has been made atthe State level, the Board favors enactment by the Congress of arequirement that all federally insured banks pay at par all checksdrawn on them.

Reserve requirements. For several years the Board has favoredlegislation that would (1) authorize it to fix required reservepercentages on a graduated basis according to the amount of abank's deposits and (2) make such requirements applicable toall federally insured banks (rather than to member banks only).

The reasons for such changes in the structure of bank reserverequirements have become stronger with the passage of time.Thus, in the Board's judgment, the differences between reservecity and "country" banks, in both size and functions, have de-creased substantially, and the division of member banks intosuch categories has become arbitrary to the point where suchdivision is a major obstacle to the development of a more equi-table system of reserve requirements. Since deposits in non-member banks are part of the country's money supply just as arethose in member banks, nonmember banks should be subject tothe federally imposed reserve requirements applicable to memberbanks.

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Under present law, the Board has authority to establish a sys-tem of graduated reserves. However, implementation of suchauthority on the most rational and equitable basis is impaired bythe outmoded differentiation between reserve city and "country"banks and by the lack of authority in the Board to make reserverequirements applicable to nonmember banks.

In the event that the Congress should consider that extendingthe coverage of federally imposed reserve requirements to non-member banks is impractical at this time—even if accompanied bygranting such banks access to Federal Reserve discount facilities—the Board recommends that the Congress remove the impedi-ment to adoption by the Board of the most rational and equi-table reserve requirements for member banks. This would beaccomplished by legislation establishing a system of graduatedreserve requirements on the basis of the amount of a bank'sdemand deposits.

Purchase of obligations of foreign governments by Federal ReserveBanks. Under present law, balances that the Reserve Banksacquire in foreign central banks in connection with the System'sforeign currency operations may be invested in prescribed kindsof bills of exchange and acceptances. On occasion these invest-ment media have not been conveniently available. To facilitateeconomic use of such balances, for several years the Board hasfavored enactment of legislation that would permit ReserveBanks to invest in obligations of foreign governments or mone-tary authorities that will mature within 12 months and are pay-able in a convertible currency.

Loans to bank examiners. Title 18 of the U.S. Code, "Crimesand Criminal Procedure," prohibits loans to a bank examinerby any bank that the examiner is authorized to examine. Forseveral years the Board has favored modification of this prohibi-tion to permit, under appropriate safeguards, a federally insuredbank to make a home mortgage loan to a bank examiner in anamount not exceeding $30,000.

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Bank holding companies and bank subsidiaries. In 1968 theBoard engaged in an intensive study of the problems presentedby the recent trend toward the formation of one-bank holdingcompanies. The Board has favored inclusion of one-bank hold-ing companies within the coverage of the Bank Holding Com-pany Act since before its original enactment in 1956, and theBoard continues to believe that such companies should bebrought within the purview of the Act.

However, its recent study has led the Board to conclude thatexpansion of the coverage of the Act should be accompaniedby legislation under which banks would have greater freedomto offer new services either directly, or through wholly ownedsubsidiaries, or through affiliates in a holding company system,subject to administrative approval of entry and of acquisitionsto prevent involvement in operations that would be inconsistentwith the purposes of the Act.

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LitigationCollateral Lenders Committee et ah v. Board of Governors of

the Federal Reserve System. On February 1, 1968> the Boardannounced its adoption of Regulation G, "Credit by PersonsOther Than Banks, Brokers, or Dealers for the Purpose of Pur-chasing or Carrying Registered Equity Securities," effective March11, 1968. On March 1, 1968, plaintiffs, a group of lenders whoseloans for the purpose of purchasing registered equity securitieswould thereby become subject to the margin requirements ap-plicable to banks, brokers, and dealers, sought a declaratoryjudgment that Regulation G was invalid and unconstitutional,and a permanent injunction against the Board's enforcement ofRegulation G as to plaintiffs.

A 5-day temporary restraining order against the Board wasgranted on March 1. Extension of this order beyond March 5 wasrefused by the Court, and on March 11, 1968, the effective datefor the Board's Regulation G, the Court denied plaintiffs' motionfor preliminary injunction and ruled that Section 7(d) of theSecurities and Exchange Act of 1934, 15 U.S.C.A. § 78g(d),pursuant to which the Board promulgated Regulation G, as wellas Regulation G itself, was constitutional and valid. The Courtconcluded that in promulgating Regulation G the Board had fullycomplied with applicable administrative law requirements andthat there had been no violation of plaintiffs' procedural or sub-stantive due process of law rights; it also concluded that plaintiffshad failed to establish any irreparable injury by application tothem of Regulation G and that any injury to plaintiffs was over-weighed by the immediate and irreparable injury that would occurto the national economy and the investing public if the effective-ness of Regulation G were delayed. Certain of the plaintiffs ap-pealed to the U.S. Court of Appeals for the Second Circuit thelower court's order in favor of the Board. These appellants volun-tarily dismissed their appeal on September 25, 1968, and an orderof dismissal was entered by the Court of Appeals.

341


United States v. Girard Trust Bank and The Fidelity Bank,both of Philadelphia, Pennsylvania. On August 12, 1968, theBoard approved a merger of Girard Trust Bank, Philadelphia,Pennsylvania, and The Doylestown National Bank & Trust Com-pany, Doylestown, Pennsylvania, and the merger of The FidelityBank, Philadelphia, Pennsylvania, and Doylestown Trust Com-pany, Doylestown, Pennsylvania. On September 10, 1968, suitswere filed on behalf of the United States to enjoin consummationof the proposed mergers, the complaint in each case alleging thatconsummation of the merger would violate Section 7 of theClayton Act in that such consummation "may be substantially tolessen competition or tend to create a monopoly." However, theissues raised by the suits were rendered moot by action of theGirard Trust Bank and The Fidelity Bank, in November 1968, interminating the merger agreements.

Suits arising out of closing of San Francisco National Bank.On January 22, 1965, the San Francisco National Bank, SanFrancisco, California (SFNB), was declared insolvent by theComptroller of the Currency, and the Federal Deposit InsuranceCorporation was appointed receiver of the bank. The FederalReserve Bank of San Francisco, pursuant to the provisions ofSection 10(b) of the Federal Reserve Act and of the Board'sRegulation A, had provided credit assistance to SFNB, throughadvances and discounts. During the latter part of 1964 and thefirst: few weeks of 1965, the Federal Reserve Bank, pursuant tothe statute and regulation cited, received collateral for these ad-vances from SFNB in the form of certain Government bonds andpromissory notes.

In November 1965 certain depositors of SFNB filed suitagainst the Federal Reserve Bank in the U.S. District Court,San Francisco, alleging superior rights to the collateral held bythe Federal Reserve Bank and seeking a declaration of unlawfulpreference, subordination, and constructive trust. On motion filedby the Federal Reserve Bank, the District Court dismissed the

342


complaints—holding, in part, that in making advances to SFNBthe Federal Reserve Bank was acting primarily as an instrumen-tality of the United States and thus was protected from suit by theFederal Tort Claims Act and that the exercise of the discountfunction by the Federal Reserve Bank was the performance of adiscretionary governmental function that was not subject tojudicial review. Four of the cases decided in favor of the FederalReserve Bank were appealed to the U.S. Court of Appeals for theNinth Circuit and argued before that Court in March 1968.

While these and numerous other cases involving parties otherthan the Federal Reserve Bank, but also arising out of the closingof SFNB, were pending before the Court of Appeals, negotiationswere undertaken looking to a settlement of the several cases. InDecember 1968 the Federal Reserve Bank, together with theFederal Deposit Insurance Corporation, numerous creditors ofSFNB, and other parties involved, signed an agreement ofsettlement that assured creditors of the SFNB approximately52 cents on the dollar and provided for dismissal of the appealsinvolving the Federal Reserve Bank and other litigants. Theagreement was approved by the U.S. District Court on December26, 1968, and on January 13, 1969, an order dismissing thepending appeals was entered by the U.S. Court of Appeals.

Baker Watts & Co. et al. v. Saxon. Following rejection by theU.S. District Court of the District of Columbia of an interpreta-tion by the Comptroller of the Currency purporting to authorizenational banks to underwrite and deal in governmental securitiesknown as "revenue bonds" (see ANNUAL REPORTS for 1966,page 314, and 1967, page 335), an appeal from that decisionwas taken to the U.S. Court of Appeals for the District of Co-lumbia by the Port of New York Authority, one of the plaintiffsin the lower court. In March 1968 the Court of Appeals affirmedthe District Court's decision.

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Bunk Supet visionand Regulation hythe Federal Reserve System

Examination of member banks. National banks, all of which aremembers of the Federal Reserve System, are subject to examina-tion by direction of the Board of Governors or the Federal Re-serve Banks. However, as a matter of practice they are not ex-amined by either, because the law charges the Comptroller ofthe Currency directly with that responsibility. The Comptrollerprovides reports of examination of national banks to the Boardof Governors upon request, and each Federal Reserve Bankpurchases from the Comptroller copies of reports of examinationof national banks in its district.

State member banks are subject to examinations made bydirection of the Federal Reserve Bank of the district in whichthey are located by examiners selected or approved by the Board.The established policy is to conduct at least one regular ex-amination of each State member bank, including its trust de-partment, during each calendar year, with additional examina-tions if considered desirable. In most States joint examinationsare made in cooperation with the State banking authorities,while in others alternate independent examinations are made.All but 37 of the 1,262 State member banks were examinedduring 1968.

The Board of Governors makes its reports of examination ofState member banks available to the Federal Deposit InsuranceCorporation, and the Corporation in turn makes its reports ofinsured nonmember State banks available to the Board uponrequest. Also, upon request, reports of examination of Statemember banks are made available to the Comptroller of theCurrency.

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In its supervision of State member banks, the Board receives,reviews, and analyzes reports of examination of State memberbanks and coordinates and evaluates the examination and super-visory functions of the System. It passes on applications for ad-mission of State banks to membership in the System; administersthe disclosure requirements of the Securities Exchange Act of1934 with respect to equity securities of banks within its juris-diction that are registered under the provisions of the 1934 Act;and under provisions of the Federal Reserve Act and other stat-utes, passes on applications for permission, among other things,to (1) merge banks, (2) form or expand bank holding com-panies, (3) establish domestic and foreign branches, (4) ex-ercise expanded powers to create bank acceptances, (5) estab-lish foreign banking and financing corporations, and (6) investin bank premises an amount in excess of 100 per cent of a bank'scapital stock.

By Act of Congress approved September 12, 1964 (PublicLaw 88-593), insured banks are required to inform the appro-priate Federal banking agency of any changes in control of man-agement of such banks and of any loans by them secured by 25per cent or more of the voting stock of any insured bank. In1968, 48 such changes in ownership of the outstanding votingstock of State member banks were reported to the Reserve Banksas changes in control of these member banks. In addition, re-ports of 24 loans secured by 25 per cent or more of the stockof a State member bank were forwarded to the System. Arrange-ments continue among the three Federal supervisory agencies forappropriate exchanges of reports received by them pursuant to theAct. The Reserve Banks send copies of all the reports they receiveto the appropriate district office of the Federal Deposit InsuranceCorporation, the Regional Administrator of National Banks(Comptroller of the Currency), and the State bank supervisor.

Upon receipt of reports involving changes in control of Statemember banks, the Reserve Banks are under instructions to for-

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ward such reports promptly to the Board, together with a state-ment (1) that the new owner and management are known andacceptable to the Reserve Bank or (2) that they are not knownand that an investigation is being made. The findings of any in-vestigation and the Reserve Bank's conclusions based on suchfindings are forwarded to the Board.

By Act of Congress approved July 3, 1967 (Public Law 90-44), each member bank of the Federal Reserve System is re-quired to include with (but not as part of) each report of condi-tion and copy thereof a report of all loans to its executive officerssince the date of submission of its previous report of condition.Since the Board's 1967 ANNUAL REPORT was released, memberbanks have submitted the following data as required by law:

Period covered(condition report

dates)

Oct. 4, 1967—Dec. 30, 1967...

Dec. 31, 1967—Apr. 18, 1968...

Apr. 19, 1968—June 29, 1968...

June 30, 1968—Oct. 20, 1968 . . .

Oct. 21, 1968—Dec. 31, 1968...

Tota1 loans toexecutive officers

Number

8,211

8,804

7,264

9,886

( 2 )

Amount

14,364

16,039

14,861

19,861

(

(dollars)

,199.32

,841.36

,950.15

,431.82

2)

Range ofinterest rate

charged (per cent) i

1-12

2-18

2-18

3-18

( 2 )

1 The rate of 18 per cent reflects the inclusion of rates of 1 Vi per cent per month charged on credit-card and check-credit plans.

2 Compilation of data for condition report of Dec. 31, 1968, has not been completed.

Federal Reserve membership. As of December 31, 1968, mem-ber banks accounted for 44 per cent of the number of all com-mercial banks in the United States and for 63 per cent of allcommercial banking offices, and they held approximately 82 percent of the total deposits in such banks. State member banks ac-counted for 14 per cent of the number of all State commercial

347


banks and 40 per cent of the banking offices, and they held 60per cent of total deposits in State commercial banks.

Of the 5,978 banks that were members of the Federal ReserveSystem at the end of 1968, there were 4,716 national banks and1..262 State banks. During the year there were net declines of42 national and 51 State member banks. The decline in the num-ber of national banks reflected 54 conversions to branches inci-dent to mergers and absorptions and 12 conversions to nonmem-ber banks. The decline was offset in part by the organization of 14new national banks and the conversion of 6 nonmember banksto national banks. The decrease in State member banks reflectedmainly seven conversions to branches incident to mergers and ab-sorptions and 40 withdrawals from membership.

At the end of 1968 member banks were operating 14,352branches, 703 more than at the close of 1967; this included 684de novo establishments.

Detailed figures on changes in the banking structure during1968 are shown in Table 19, pages 388 and 389.

Bank mergers. Under Section 18(c) of the Federal DepositInsurance Act (12 U.S.C. 1828(c)), the prior written consentof the Board of Governors of the Federal Reserve System mustbe obtained before a bank may merge, consolidate, or acquirethe assets and assume the liabilities of another bank if the ac-quiring, assuming, or resulting bank is to be a State memberbank.

In deciding whether to approve an application, the Board isrequired by Section 18(c) to consider the impact of the proposedtransaction on competition, the financial and managerial re-sources and prospects of the existing and proposed institution,and the convenience and needs of the community to be served.The Board is precluded from approving "any proposed mergertransaction which would result in a monopoly, or which wouldbe in furtherance of any combination or conspiracy to monopo-lize or to attempt to monopolize the business of banking in any

348


part of the United States." A proposed transaction "whose effectin any section of the country may be substantially to lessen com-petition, or to tend to create a monopoly, or which in any othermanner would be in restraint of trade," may be approved only ifthe Board is able to find that the anticompetitive effects of thetransaction would be clearly outweighed in the public interestby the probable effect of the transaction in meeting the con-venience and needs of the community to be served.

Before acting on each application the Board must request re-ports from the Attorney General, the Comptroller of the Cur-rency, and the Federal Deposit Insurance Corporation on thecompetitive factors involved in each transaction. The Board inturn responds to requests by the Comptroller or the Corporationfor reports on competitive factors involved when the acquiring,assuming, or resulting bank is to be a national bank or an in-sured nonmember State bank.

During 1968 the Board disapproved one and approved 14 ap-plications, and it submitted 99 reports on competitive factors tothe Comptroller of the Currency and 73 to the Federal DepositInsurance Corporation. As required by Section 18(c) of theFederal Deposit Insurance Act, a description of each of the 14applications approved by the Board, together with other perti-nent information, is shown in Table 21 on pages 392 through413.

Statements and orders of the Board with respect to all bankmerger applications, whether approved or disapproved, are re-leased immediately to the press and the public and are publishedin the Federal Reserve Bulletin. These statements and orders setforth the factors considered, the conclusions reached, and thevote of each Board member present.

Bank holding companies. During 1968, pursuant to Section3(a)(l) of the Bank Holding Company Act of 1956, the Boardapproved nine applications for prior approval to become a bankholding company. Pursuant to the provisions of Section 3(a)(3)

349


of the Act, the Board approved applications by 19 bank holdingcompanies, involving acquisition of shares in 33 banks, and deniedtwo applications. To provide necessary current information, an-nual reports for 1967 were obtained from all registered bankholding companies pursuant to the provisions of Section 5(c) ofthe Act.

Statements and orders of the Board with respect to applica-tions to form or to expand bank holding companies, whetherapproved or disapproved, are released immediately to the pressand the public and are published in the Federal Reserve Bulletin.These statements and orders set forth the factors considered, theconclusions reached, and the vote of each Board memberpresent.

Foreign branches of member banks. At the end of 1968, 26member banks had in active operation a total of 373 branchesin 57 foreign countries and overseas areas of the United States;14 national banks were operating 353 of these branches, and 12State member banks were operating 20 such branches. The num-ber and location of these foreign branches were as shown in thetabulation on the opposite page.

Under the provisions of the Federal Reserve Act (Section 25as to national banks and Sections 9 and 25 as to State memberbanks), the Board of Governors during the year 1968 approved96 applications made by member banks for permission to es-tablish branches in foreign countries and overseas areas of theUnited States.

During the year, member banks opened branches overseas asfollows: The Valley, Anguilla; Buenos Aires, Cordoba, andRosario, Argentina; Marsh Harbour and Nassau, Bahamas;Bridgetown, Barbados; Liege, Belgium; Road Town, Tortola,British Virgin Islands; Conception, Chile; Barranquilla,Bogota, Cali, and Medellin, Colombia; Salcedo and Santiago,Dominican Republic; London, England; Guayaquil and Quito,Ecuador; Paris, France; Duesseldorf, Frankfurt am Main, andMunich, Germany; Athens and Piraeus, Greece; Guatemala City,

350


[Table referred to on opposite page.]Latin America 177

Argentina 33Bahamas 8Barbados 1Bolivia 2Brazil 15Chile . . 18Colombia 17Dominican Republic 7Ecuador 7El Salvador 1Guatemala 3Guyana 1Honduras 3Jamaica 2Leeward Islands . . 3Mexico 5Nicaragua 2Panama 21Paraguay 6Peru 8Trinidad and Tobago 5Uruguay 2Venezuela 4Virgin Islands (Brit-

ish) 3

Europe 80Austria 1Belgium 9Germany 14France 7Greece 5Ireland 2Italy 2

Europe—Cont.Netherlands 5Switzerland 3United Kingdom . . 32

Africa 3Liberia 1Nigeria 2

Near East 6Dubai 1Lebanon 3Saudi Arabia 2

Far East 72Hong Kong 12India 11Indonesia 4Japan 12Korea 3Malaysia 5Okinawa 2Pakistan 4Philippines 5Singapore 8Taiwan 2Thailand 2Vietnam 2

U.S. overseas areas andtrust territories 35

Canal Zone 2Guam 2Puerto Rico 17Truk Islands 1Virgin Islands 13

Total 373

351


Guatemala; Comayaguela, Honduras; Hong Kong; Bombay andMadras, India; Djakarta, Indonesia; Dublin, Ireland; Kingston,Jamaica; Amsterdam and Rotterdam, Netherlands; Belfast,Northern Ireland; Changuinola and Panama City, Panama; Asun-cion, Paraguay; Lima, Peru; San Juan, Puerto Rico; Basseterreand Sandy Point, St. Kitts; San Fernando, Trinidad and Tobago;Charlotte Amalie, Christiansted, and Frederiksted, Virgin Is-lands.

Acceptance powers of member banks. During the year the Boardapproved the applications of five member banks, pursuant to theprovisions of Section 13 of the Federal Reserve Act, for in-creased acceptance powers. Four banks were granted permissionto accept drafts or bills of exchange drawn for the purpose offurnishing dollar exchange as required by the usages of trade insuch countries, dependencies, or insular possessions of the UnitedStates as may have been designated by the Board of Governors.One bank was granted permission to accept commercial draftsor bills up to 100 per cent of paid-up and unimpaired capitalstock and surplus.

Foreign banking and financing corporations. At the end of 1968there were five corporations operating under agreements withthe Board pursuant to Section 25 of the Federal Reserve Actrelating to investment by member banks in the stock: of corpora-tions engaged principally in international or foreign banking.Three of these "agreement" corporations have head offices inNew York, and one has its head office in Miami, Florida. Thefour corporations were examined during the year by examinersfor the Board of Governors. The fifth "agreement" corporationis a national bank in the Virgin Islands and is owned by a Statemember bank in Philadelphia.

During 1968, under the provisions of Section 25 (a) of theFederal Reserve Act, the Board issued final permits to 10 cor-porations to engage in international or foreign banking or otherinternational or foreign financial operations, and 10 corporations

352


commenced operations. At the end of the year there were 56 cor-porations in active operation under Section 25(a): 30 have homeoffices in New York City; five in Philadelphia; three each inBoston, Chicago, and San Francisco; two each in Detroit andSeattle; and one each in Cleveland, Pittsburgh, Norfolk, Winston-Salem, Atlanta, Dallas, Los Angeles, and Portland. One of thecorporations in Seattle has five active branches in Hong Kong, andone of the corporations in Philadelphia operates a branch inLondon. Examiners for the Board of Governors examined 49 ofthese corporations during 1968.

Bank Examination Schools and other training activities. In 1968the Bank Examination School conducted four sessions of theSchool for Examiners, five sessions of the School for AssistantExaminers, and one session of the School for Trust Examiners.The Bank Examination School was established in 1952 by thethree Federal bank supervisory agencies, and since 1962 hasbeen conducted jointly by the Federal Reserve System and theFederal Deposit Insurance Corporation.

Since the establishment of this program, 3,769 persons haveattended the various sessions. This number includes representa-tives of the Federal bank supervisory agencies; the State BankingDepartments of California, Connecticut, Idaho, Indiana, Ken-tucky, Louisiana, Maine, Michigan, Mississippi, Montana, Ne-braska, New Hampshire, New Jersey, New Mexico, New York,North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Penn-sylvania, Rhode Island, Tennessee, Vermont, Virginia, Washing-ton, and Wyoming; the Treasury Department of the Common-wealth of Puerto Rico; and 17 foreign countries.

353


• / ru! Reserve RanksExamination of Federal Reserve Banks. The Board's Division of

Federal Reserve Bank Operations examined the 12 Federal Re-serve Banks and their 24 branches during the year, as requiredby Section 21 of the Federal Reserve Act. In conjunction withthe examination of the Federal Reserve Bank of New York, theBoard's examiners also audited the accounts and holdings relatedto the System Open Market Account and foreign currency opera-tions conducted by that Bank in accordance with policies formu-lated by the Federal Open Market Committee, and rendered re-ports thereon to the Committee. The procedures followed by theBoard's examiners were surveyed and appraised by a privatefirm of certified public accountants, pursuant to the policy ofhaving such reviews made on an annual basis.

Earnings and expenses. The accompanying table summarizes theearnings, expenses, and distribution of net earnings of the FederalReserve Banks for 1968 and 1967.

EARNINGS, EXPENSES, AND DISTRIBUTION OF NET EARNINGSOF FEDERAL RESERVE BANKS, 1968 AND 1967

In thousands of dollars

Item 1968 1967

Current earnings

Current expenses

Current net earnings

Net addition to current net earnings

Net earnings before payments to U.S. Treasury

Dividends paidPayments to U.S. Treasury (interest on F.R. notes)..Transferred to surplus

2,764,446242,350

2,522,096

8,520

2,530,616

36,9602,463,629

30,027

2,190,404220,121

1,970,283

2,094

1,972,377

35,0281,907,498

29,851

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Current earnings of $2,764 million in 1968 were 26 per centhigher than in 1967, reflecting increases of $501 million on U.S.Government securities, $51 million on foreign currencies, and$22 million on discounts and advances.

Current expenses were $22 million more than in 1967, or 10per cent. Statutory dividends to member banks amounted to $37million, an increase of $2 million from 1967. This rise in divi-dends reflected an increase in the capital and surplus of memberbanks and a consequent increase in the paid-in capital stock ofthe Federal Reserve Banks.

Payments to the Treasury as interest on Federal Reserve notestotaled $2,464 million for the year, compared with $1,907 mil-lion in 1967. This amount consists of all net earnings after divi-dends and the amount necessary to bring surplus to the level ofpaid-in capital.

At the request of the Treasury Department, Bureau of theMint, the System began separating the silver coin from clad coin(the three-layered coin that contains no silver, which was author-ized by the Coinage Act of 1965) of the 10<£ and 25^ denomina-tions. The separation process at the Reserve Banks yielded ap-proximately 501 million silver coins at a face value of about $65million. The cost to the System for performing the operation, in-cluding the acquisition and maintenance of equipment, was$320,000, of which $120,000 was expended for the purchaseof coin separating machines in addition to those furnished by theMint.

Expenses of the Federal Reserve Banks also include costs of$717.98 for six regional meetings incident to the Treasury Depart-ment savings bond program.

A detailed statement of earnings and expenses of each FederalReserve Bank during 1968 is shown in Table 7 on pages 374and 375 and a condensed historical statement in Table 8 onpages 376 and 377.

Holdings of loans and securities. The accompanying table showsholdings, earnings, and average interest rates on loans and securi-ties of the Federal Reserve Banks during the past 3 years.

355


Average daily holdings of loans and securities during 1968amounted to $51,935 million—an increase of $5,518 millionover 1967. Holdings of acceptances decreased $31 million,whereas there were increases of $5,158 million in U.S. Gov-ernment securities and $391 million in discounts and advances.

The average rates of interest on holdings were up from 4.33per cent to 5.22 per cent on discounts and advances, from 4.62per cent to 5.75 per cent on acceptances, and from 4.66 per centto 5.17 per cent on U.S. Government securities.

RESERVE BANK EARNINGS ON LOANS AND SECURITIES, 1966-68

Item and year

Average daily holdings: 1

196619671968

Earnings:196619671968

Average rate of interest:196619671968

Total

42,61246,41751,935

1,885.82,164.62,687.4

Discountsand

advances

In millions

649178569

29.27.7

29.7

Accept-ances

of dollar:?

11710473

5.84.84.2

U.S.Govt.

securities 2

41,84646,13551,293

1,850.82,152.12,653.5

In per cent

4.434.665.17

4.504.335.22

4.964.625.75

4.424.665.17

1 Based on holdings at opening of business.2 Includes Federal agency obligations.

Volume of operations. Table 9 on page 378 shows the volumeof operations in the principal departments of the Federal ReserveBanks for 1965-68.

Discounts and advances increased sharply over the previousyear in both number and dollar amount, and the number ofbanks borrowing rose to 1,310 from 1,104 in 1967.

356


Volume continued to rise in most of the other operations,particularly in food stamps redeemed and in transactions in U.S.Government securities.

Loan guarantees for defense production. Under the Defense Pro-duction Act of 1950, the Departments of the Army, Navy, andAir Force, the Defense Supply Agency of the Department of De-fense, the Departments of Commerce, Interior, and Agriculture,the General Services Administration, the National Aeronauticsand Space Administration, and the Atomic Energy Commissionare authorized to guarantee loans for defense production made bycommercial banks and other private financing institutions. TheFederal Reserve Banks act as fiscal agents of the guaranteeingagencies under the Board's Regulation V.

During 1968 the guaranteeing agencies authorized the issu-ance of three guarantee agreements covering loans totaling $51million. Loan authorizations outstanding on December 31, 1968,totaled $72 million, of which $21 million represented outstand-ing loans and $51 million additional credit available to borrowers.Of total loans outstanding, 71 per cent on the average was guar-anteed. During the year approximately $77 million was disbursedon guaranteed loans, most of which are revolving credits.

Authority for the V-loan program, unless extended, will ter-minate on June 30, 1970.

Table 11 (page 379) shows guarantee fees and maximuminterest rates applicable to Regulation V loans.

Foreign and international accounts. Assets held for foreign ac-count at the Federal Reserve Banks increased $615 million in1968. At the end of the year they amounted to $21,826 million:$11,183 million of earmarked gold; $9,120 million of U.S. Gov-ernment securities (including securities payable in foreign cur-rencies); $216 million in dollar deposits; $109 million ofbankers' acceptances purchased through Federal Reserve Banks;and $1,198 million of miscellaneous assets. The latter item con-sists mainly of dollar bonds issued by foreign countries and inter-

357


national organizations. Assets held for international organiza-tions, including IMF gold deposits, declined $1,317 million to$8,121 million.

In 1968 new accounts were opened in the names of the CentralBank of Brazil; Central Bank of Cyprus; Bank of Lebanon; Cen-tral Bank of Malta; Bank of Mauritius; Sultan of Muscat andOman; Board of Commissioners of Currency, Singapore; CentralBank of Trinidad and Tobago; and Central Bank of Uruguay.

New gold collateral loan arrangements amounted to $15 mil-lion in 1968. All drawings during the year under these loanarrangements were repaid by the end of the year. Loans on goldare made to foreign monetary authorities to help them meet dollarrequirements of a temporary nature.

The Federal Reserve Bank of New York continued to act asdepositary and fiscal agent for international organizations. Asfiscal agent of the United States, the Bank continued to operatethe Exchange Stabilization Fund pursuant to authorization andinstructions of the Secretary of the Treasury. Also on behalf ofthe Treasury Department, it administered foreign assets controlregulations pertaining to assets in the United States of North Viet-nam, Cuba, Communist China, and North Korea, and their na-tionals, and to transactions with those countries and their na-tionals.

Bank premises. During 1968, with the approval of the Board,properties adjacent to the Boston, Richmond, and San FranciscoReserve Banks and to the Denver, Omaha, and Los AngelesBranches were acquired for future expansion, and a site wasobtained for a new building for the Baltimore Branch.

Table 6 on page 373 shows the cost and book value of bankpremises owned and occupied by the Federal Reserve Banks andof real estate acquired for banking-house purposes.

358


Board of GovernorsBuilding annex. In accordance with the Board's authorization

as reported last year, plans for an annex to its present buildingwere developed and subsequently approved by the Fine ArtsCommission and the National Capital Planning Commission.

In addition, an agreement was entered into between the Boardof Governors and the Department of the Interior whereby theBoard will build a self-liquidating, underground garage for theuse of Federal Reserve and Department of the Interior employeesunder the present Department parking lot adjoining the Boardsite on the north, and the National Park Service of the Depart-ment of the Interior, with the Board cooperating, will developthe surface as a park in accordance with its present designationas National Park Service land.

Income and expenses. The accounts of the Board for the year1968 were audited by the public accounting firm of Lybrand,Ross Bros. & Montgomery.

ACCOUNTANTS' OPINION

Board of Governors of theFederal Reserve System:

We have examined the balance sheet of the Board of Governors of theFederal Reserve System as of December 31, 1968, and the related state-ment of assessments and expenses for the year then ended. Our examina-tion was made in accordance with generally accepted auditing standards,and accordingly included such tests of the accounting records and suchother auditing procedures as we considered necessary in the circumstances.

In our opinion, the balance sheet and related statement of assessmentsand expenses present fairly the financial position of the Board of Gov-ernors of the Federal Reserve System at December 31, 1968 and the resultsof its operations for the year then ended, in conformity with generallyaccepted accounting principles applied on a basis consistent with that ofthe preceding year.

^ Lybrand, Ross Bros. & MontgomeryWashington, D.C. y 5 y

January 30, 1969

359



BALANCE SHEET

DECEMBER 31, 1968

ASSETSOPERATING FUND:

Cash. $ 2,046,449Miscellaneous receivables and advances 19,925Stockroom and cafeteria inventories at first-in, first-out cost 34,929

Total operating fund ,. 2,101,303

PROPERTY FUND:Land and improvements 792,852Bluilding and building construction 4,894,481Furniture and equipment 1,153,966

Total property fund 6,841,299

$ 8,942,602

LIABILITIES AND FUND BALANCES

OPERATING FUND:Current liabilities:

Accounts payable and accrued expenses $ 642,395Income taxes withheld 483,158Accrued payroll 73,031

$ 1,198,584Fund balance:

Balance, January 1, 1968 (155,866)Excess of assessments over expenses for the year

ended December 31, 1968 1,058,585

902,719

Total operating fund 2,101,303

PROPERTY FUND:Fund balance:

Balance, January 1, 1968 6,285,038Additions 568,583Property adjustments and disposals (12,322)

Total property fund 6,841,299

$ 8,942,602

The accompanying notes are an integral part of the financial statements.[See page 362 for notes.]

360



STATEMENT OF ASSESSMENTS AND EXPENSES

FOR THE YEAR ENDED DECEMBER 31, 1968

ASSESSMENTS LEVIED ON FEDERAL RESERVE BANKS:For Board expenses and additions to property $14,198,200For expenditures made on behalf of the Federal Reserve Banks... 18,811,038

Total assessments 33,009,238

EXPENSES :Expenditures for printing, issue and redemption of Federal Reserve

Notes, paid on behalf of the Federal Reserve Banks 18,811,038For the Board:

Salaries $7,952,415Retirement and insurance contributions 1,650,120Travel expenses 369,055Legal, consultant and audit fees 187,637Contractual services 440,245Printing and binding—net 437,649Equipment and other rentals 752,144Telephone and telegraph 181,284Postage and expressage 153,780Stationery, office and other supplies 103,486Heat, light and power 62,878Operation of cafeteria—net 75,688Repairs, maintenance and alterations 83,741Books and subscriptions 29,980System membership, Center for Latin American

Monetary Studies 28,100Miscellaneous—net 62,830

12,571,032For property additions 568,583

Total expenses 31,950,653

EXCESS OF ASSESSMENTS OVER EXPENSES $ 1,058,585

The accompanying notes are an integral part of the financial statements.

[See page 362 for notes.]

361



NOTES TO FINANCIAL STATEMENTS

ACCOUNTING METHODSThe Board has consistently followed the practice of not providing for

depreciation on fixed assets. Acquisitions are charged to expense and proceedsfrom sales of fixed assets are recorded as income. The property accounts areincreased or reduced at full cost, with corresponding increases or decreases inthe property fund balance when property is acquired or sold.

Assessments and expenditures made on behalf of the Federal ReserveBanks for the printing, issuance and redemption of Federal Reserve notes arerecorded on the cash basis and produce results which are not materially differ-ent from those which would have been produced on the accrual basis ofaccounting.

LONG-TERM LEASESThe Board leases outside office space at an annual rental of $298,415

under a lease expiring in 1972. This lease may be terminated with six monthsnotice after 1969.

CONSTRUCTIONThe cost of the new Federal Reserve North Building and North Garage,

as estimated by the architect, will be approximately $20,000,000. According topresent plans this amount will be expended over the next three years.

362


Tables


1. DETAILED STATEMENT OF CONDITION OF ALL FEDERAL RESERVE BANKSCOMBINED, DECEMBER 31, 1968

(In thousands of dollars)

ASSETS

Gold certificates on hand 1,278Gold certificates due from U.S. Treasury:

Interdistrict settlement fund 5,967,237F.R. Agents' fund 4,057,000

Total gold certificate account 10,025,515F.R. notes of other F.R. Banks 784,712Other cash:

United States notes 3,846Silver certificates 65National bank notes and F.R. Bank notes 73Coin 201,619

Total other cash 205,603Discounts and advances secured by U.S. Govt. obligations:

Discounted for member banks 163,580Discounted for others 163,580

Other discou nts and advances:Discounted for member banks 25,000Foreign loans on gold 25,000

Total discounts and advances 188,580

Acceptances:Bought outright 57,715Held under repurchase agreement

Federal agency obligations:Held under repurchase agreement

U.S. Govt. securities:Bought outright:

Bills 18,756,205CertificatesNoies 28,706,122Bonds 5,474,502

Total bought outright 52,936,829Held under repurchase agreement

Total U.S. Govt. securities 52,936,829

Total loans and securities 53,183,124Cash items in process of collection:

Transit items 10,946,517Exchanges for clearing house 199,019Other cash items 670,719

Total cash items in process of collection 11,816,255Bank premises:

Land 31,769Buildings (including vaults) 123,682Fixed machinery and equipment 67,729

Total buildings 191,411Less depreciation allowances 109,904 81,507

Total bank premises 113,276Other assets:

Claims account closed banksDenominated in foreign currencies 2,060,664Gold due from U.S. Treasury for account International Monetary Fund 230,118Reimbursable expenses and other items receivable 4,206Interesu accrued 455,801Premium on securities 1,294Deferred charges 3,174Real estate acquired for banking-house purposes 4,299Suspense account 9,589Allother 3,035

Total other assets 2,772,180

Total assets 78,900,665

364Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

1. DETAILED STATEMENT OF CONDITION OF ALL FEDERAL RESERVE BANKSCOMBINED, DECEMBER 31, 1968—Continued


LAAlUiJTlESF.R. notes:

Outstanding (issued to F.R. Banks) 47,560,111Less: Held by issuing F.R. Banks 2,037,493

Forwarded for redemption 11,854 2,049,347

F.R. notes, net (includes notes held by U.S. Treasuryand by F.R. Banks other than issuing Bank) 45,510,764

Deposits:Member bank reserves 21,737,916U.S. Treasurer—General account 702,795Foreign 215,966Other deposits:

Nonmember bank—Clearing accounts 66,681Officers' and certified checks 20,969Reserves of corporations doing foreign banking or

financing 75,840International organizations 321,458Allother 262,212

Total other deposits 747,160

Total deposits 23,403,837Deferred availability cash items 8,334,396

Other liabilities:Accrued dividends unpaidUnearned discount 491Discount on securities 380,744Sundry items payable 9,126Suspense account 1,768All other 1

Total other liabilities 392,130

Total liabilities 77,641,127

CAPITAL ACCOUNTS

Capital paid in 629,769Surplus 629,769Other capital accounts1

Total liabilities and capital accounts 78,900,665

Contingent liability on acceptances purchased for foreign correspondents 109,198

i During the year this item includes the net of earnings, expenses, profit and loss items, and accrueddividends which are closed out on Dec. 31; see Table 7, pp. 374 and 375.

NOTE.—Amounts in boldface type indicate items shown in the Board's weekly statement of conditionof the F.R. Banks.


OSOs 2. STATEMENT OF CONDITION OF EACH FEDERAL RESERVE BANK, DECEMBER 31,1968 AND 1967

(In millions of dollars unless otherwise indicated)

Item

ASSETS

Gold certificate account . .F R notes of other BanksOther cash

Discounts and advances:Secured by U.S. Govt. securitiesOther

Acceptances:Bought outrightHeld under repurchase agreements

Federal agency obligations held under repurchaseagreements

U.S. Govt. securities:Bought outright . . .Held under repurchase agreements

Total loans and securities. • .

Cash items in p™™«« "** miwtionBank premisesOther assets:

Denominated in foreign currenciesIMF gold deposited^All other

Total assets

Total

1968

10,026784207

16325

58

52,937

53,183

It 817113

2,061230481

78,902

1967

11,481727360

12912

7589

38

48,980132

49,455

112

1,604233316

75,423

Boston

1968

5546311

2,762

2,762

6053

101

24

4,123

1967

6987123

2

2,512

2,514

6953

77

18

4,099

New York

1968

2,81316221

74

58

12,687

12,819

2,66310

529230118

19,365

1967

2,79217343

417

7589

38

12,318132

12,700

2,14310

41823380

18,592

Philadelphia

1968

494355

2,810

2,810

6352

109

27

4,117

1967

66249

9

1

2,526

2,527

2

83

16

3,998

Cleveland

1968

7396724

11

4,175

4,186

8075

185

39

6,052

1967

9216548

*

3,743

3,743

7405

144

26

5,692

Richmond

1968

8618313

3

3,978

3,981

88610

107

39

5,980

1967

1,0085321

2

3,607

3,609

8877

83

25

5,693


LIABILITIES

F.R. notesDeposits:

Member bank reservesU S Treasurer General accountForeignOther:

IMF sold deoosits1

All other

Total deposits • •Deferred availability cash itemsOther liabilities and accrued dividends

Total liabilities . . . .

CAPITAL ACCOUNTS

Capital paid in.SurplusOther capital accounts

Total liabilities and capital accounts

Contingent liability on acceptances purchased forforeign correspondents

F.R. NOTE STATEMENT

F.R. notes:Issued to F.R. Bank by F.R. Agent and out-

standingLess held by issuing Bank, and forwarded for

redemption

F.R. notes, net2

Collateral held by F.R. Agent for notes issued toBank:

Gold certificate account

U.S. Govt. securities

Total collateral

45,510

21,737703216

230517

23,4038 334

395

77,642

630630

78,902

109

47,560

2,050

45,510

4,057

44,691

48,748

42,369

21,0921,123

135

233430

23,0138,549

296

74,227

598598

75,423

156

44,311

1,942

42,369

6,663

38,606

45,269

2,637

731*

11

13

75564920

4,061

3131

4,123

5

2,714

77

2,637

280

2,451

2,731

2,496

870837

9

969561

15

4,041

2929

4,099

8

2,601

105

2,496

450

2,176

2,626

10,511

5,897681

52

230287

7,1471 292

95

19,045

160160

19,365

28

11,038

527

10,511

500

10,600

11,100

9,854

6,054233

31

233232

6,7831,570

77

18,284

154154

18,592

40

10,321

467

9,854

1,000

9,400

10,400

2,616

870*

12

13

89552020

4,051

3333

4,117

6

2,684

68

2,616

300

2,500

2,800

2,444

872777

26

982493

15

3,934

3232

3,998

8

2,507

63

2,444

525

2,100

2,625

3,700

1,538*

20

18

1,576632

32

5,940

5656

6,052

10

3,933

233

3,700

600

3,400

4,000

3,404

1,4496613

13

1,54161722

5,584

5454

5,692

14

3,644

240

3,404

600

3,100

3,700

4,142

1,0211

11

21

1,054688

30

5,914

3333

5,980

6

4,272

130

4,142

665

3,690

4,355

3,882

941787

19

1,04568222

5,631

3131

5,693

8

4,005

123

3,882

640

3,395

4,035

ON For notes see end of table.


OSoo 2. STATEMENT OF CONDITION OF EACH FEDERAL RESERVE BANK, DECEMBER 31, 1968 AND 1967—Continued

(In millions of dollars unless otherwise indicated)

Atlanta

Item

ASSETS

1968 1967

Gold certificate account. . .F.R. notes of other Banks.Other cash

5248027

Discounts and advances:Secured by U.S. Govt. securities.Other 10

Acceptances:Bought outrightHeld under repurchase agreements.

Federal agency obligations held under repur-chase agreements

U.S. Govt. securities:Bought outright 2,937Held under repurchase agreements

Total loans and securities 2,947

Cash items in process of collectionBank premisesOther assets:

Denominated in foreign currencies.IMF gold deposited1

All other

90718

130

'26'

Total assets 4,659

6596442

2,725

2,725

91320

18

4,540

Chicago

1968 1967

1,4915827

8,698

8,763

2,02817

301

76

12,761

2,0075467

7,817

7,826

1,88118

233

48

12,134

St. Louis

1968 1967

3533325

1,869

1,870

5748

70

17

2,950

4373434

1,768

1,769

5019

56

11

2,851

Minneapolis Kansas City

1968 1967

229183

1,023

1,027

4033

48

1,740

195174

952

954

3363

38

1,553

1968 1967

3383516

2,050

2,058

82419

91

18

3,399

3953518

1,972

1,979

73317

12

3,260

Dallas

1968 1967

3444312

2,253

2,258

5779

118

20

3,381

3883114

2,047

2,053

6269

93

13

3,227

San Francisco

1968 1967

,28610723

7,695

7,702

9089

272

68

10,375

1,3198137

63

6,993

7,056

1,0309

209

43

9,784


LIABILITIES

F.R. notesDeposits:

Member bank reserves. . . . . . .U.S. Treasurer—General accountForeignOther:

IMF cold deoosit 1All other

Total depositsDeferred availability cash itemsOther liabilities and accrued dividends

Total liabilities

CAPITAL ACCOUNTS

Capital paid inSurplusOther capital accounts

Total liabilities and capital accounts.

Contingent liability on acceptances purchasedfor foreign correspondents

F.R. NOTE STATEMENT

F.R. notes:Issued to F.R. Bank by F.R. Agent and

outstanding . .Less held by issuing Bank, and forwarded

for redemption

F.R. notes, net 2

Collateral held by F.R. Agent for notes issuedto Bank:

Gold certificate account


Total collateral

4

4

2

2

2

476

3061

14

12

33374921

579

4040

,659

7

597

121

,476

350

,300

,650

1

4

4

2

2

2

,432

,165839

11

268749

15

464

3838

,540

10

,549

117

,432

450

,150

,600

8

1

V

12

8

8

j

7

8

076

,9881

32

39

060,373

66

575

9393

,761

16

390

314

,076

,000

,650

,650

7

?

1

12

7

7

1

6

7

,408

,90010721

31

059,446

47

960

8787

,134

23

,692

284

,408

,400

,450

,850

1

2

1

1

1

1

,677

78417

8

800415

14

,906

2222

,950

4

,738

61

,677

180

,670

,850

1

?

2

1

1

1

,569

75471

5

7

837394

11

,811

2020

,851

5

,636

67

,569

331

,370

,701

764

678155

6

704234

10

1,712

1414

1,740

2

790

26

764

27

775

802

717

50748

3

5

563238

7

1,525

1414

1,553

4

747

30

717

127

635

762

1

1

1

3

1

1

1

1

,679

,039*10

10

,059591

16

,345

2727

,399

5

,754

75

,679

,775

,775

1

1

3

1

1

1

1

,575

95797

6

9

,069551

13

,208

2626

,260

7

,647

72

,575

225

,450

,675

1

1

1

3

1

1

1

1

,575

,2291

13

11

,254464

16

,309

3636

,381

6

,715

140

,575

155

,630

,785

1,433

1,150618

io1,229

48512

3,159

3434

3,227

9

1,539

106

1,433

180

1,380

1,560

5,657

3,6562

29

79

3,766727

55

10,205

8585

10,375

14

5,935

278

5,657

6,250

6,250

5,155

3,473119

18

58

3,66876340

9,626

7979

9,784

20

5,423

268

5,155

735

5,000

5,735

*Less than $500,000.^ i Gold deposited by the IMF to mitigate the impact on the U.S. gold stock of pur-O\ chases by foreign countries for gold subscriptions on increased IMF quotas. The UnitedVO States has a corresponding gold liability to the IMF.

2 Includes F.R. notes held by U.S. Treasury and by F.R. Banks other than theissuing bank.


3. FEDERAL RESERVE BANK HOLDINGS OF U.S. GOVERNMENT SECURITIES,DECEMBER 31, 1966-68


Type of issueand date

Rate ofinterest

(per cent)

December 31

1968 1967 1966

Increase or decrease (—)during—

1S'68 1967

Treasury bonds:1962-671963-681964-69 June..1964-69 Dec...1965-701966-711967-72 June..1967-72 Sept...1967 Nov . . . . .1967-72 D e c .1968 May1968 Aug1968 Nov1969 Feb1969 Oct1970 Feb1970 Aug1971 Aug1971 Nov1972 Feb1972 Aug1973 Aug1973 Nov1974 Feb1974 May1974 Nov1975-851978-831980 Feb1980 Nov1985 May1987-921988-931989-941990 Feb1995 Feb1998 Nov

Total.

Treasury notes:Feb. 15, 196V—B...Feb. 15, 1967—C...May 15, 1967—D...Aug. 15, 196''—A...Aug. 15, 1967—E...Nov. 15, 1967—F.. .Feb. 15, 19615—A...May 15, 1968—B...Aug. 15, 1968—C...Nov. 15, 1968—D...Feb. 15, 1969—A...May 15, 1969—B...Aug. 15, 1969—C...May 15, 1970—B...Nov. 15, 1970—A...Feb. 15, 1971— C . . .May 15, 1971—A...Nov. 15, 1971—B...Feb. 15, 1972—A...Apr. 1, 1972—EA..May 15, 1972—B...Aug. 15, 1974—B...Nov. 15, 1974—A...Feb. 15, 1975—A...May 15, 1975—B...

Total

3%444443%4441/8

3%4

AVA-

3V4

307,840358,199573,540145,00754,56646,552

169,085307,840358,199573,540145,00754,56646,552

95,858

1,140,500310,750102,850150,400181,900249,900158,650117,150176,250292,450116,150238,45046,70082,3406,250

53,55032,85027,800

246,90023,50037,35072,4502,100

25,750

95,858304,315348,200104,900

,135,100217,55086,150

142,300170,400213,900151,650114,150168,450268,95094,300

213,95046,70073,5906,250

42,65030,40024,800

217,20023,50036,20072,4502,100

25,750

107,560169,085306,740335,199573,540144,00754,56644,052

595,45095,858

291,065315,20097,500

1,117,800193,95064,750

130,200160,600203,450138,000102,900117,650178,00074,700

147,75037,15068,0903,250

34,80023,40023,800

135,10013,50024,40061,450

-169,085-107,560

1,10023,000

1,000

2,500-595,450

-304,315-348,200-104,900

5,40093,20016,7008,100

11,50036,0007,0003,0007,800

23,50021,85024,500

8,75010,9002,4503,000

29,700

1,150

14,250

13,25033,0007,400

17,30023,60021,40012,1009,800

10,45013,65011,25050,80090,95019,60066,2009,5505,5003,0007,8507,0001,000

82,10010,00011,80011,0002,100

11,500

5,474,502 6,086,502 6,198,762 -612,000 -112,260

7,441,343148,05040,500

5,293,4501,128,150

64,5901,557,350

62,65094,850

1,8002,331,8104,864,8821,053,250

934,1503,689,297

839,3003,313,4324,378,5825,975,1657,353,993

342,9002,951,0326,374,082

338,8501,245,0006,694,993

837,100

1,065,50033,100

1,533,30045,80055,5001,800

2,282,860

'46,656

1,017,000

1,500,0001,000

-839,300-3,313,432-4,378,582-5,975,165

87,350148,05040,500

5,293,45062,65031,490:>4,05016,85039,350

-342,900-2,951,032-6,374,082-338,850

-1,245,000-6,694,993

2,2003,313,4324,378,5825,975,1657,353,993

48,9504,864,8821,013,200

934,1503,639,297

48,50033,10033,30044,80055,5001,800

,282,860

''46*656*

28,706,122 26,918,382 21,301,957 1,787,740 5,616,425


3. FEDERAL RESERVE HOLDINGS OF U.S. GOVERNMENT SECURITIES,DECEMBER 31, 1966-68—Continued


Type of issueand date

Certificates:Aug. 15, 1967

Total

Treasury bills:Tax anticipationOther due—

Within 3 mos3 6 mosAfter 6 rnos

Total

Repurchase agreements.

Total holdings

Maturing—Within 90 days91 days to 1 yearOver 1 year to 5 years.Over 5 years to 10 yrs..Over 10 years

Rate ofinterest

(per cent)

5 %

December 31

1968

453,400

10,890,2985,379,0952,033,412

18,756,205

52,936,829

19,584,1418,919,246

12,879,72310,942,879

610,840

1967

278,000

9,245,1604,497,1501,955,023

15,975,333

132,200

49,112,417

9,878,08021,662,43216,184,615

832,400554,890

1966

4,351,015

4,351 015

541,200

6,432,1943,440,7501,389,514

11,803,658

626,800

44,282,192

10,549,82624,881,5147,458,186

990,626402,040

Increase or decrease (—)during—

1968

175,400

1,645,138881,94578,389

2,780,872

-132,200

3,824,412

9,706,061-12,743,186-3,304,89210,110,479

55,950

1967

-4,351,015

-4,351,015

-263,200

2,812,9661,056,400

565,509

4,171,675

-494,600

4,830,225

-671,746-3,219,0828,726,429-158,226

152,850

4. FEDERAL RESERVE BANK HOLDINGS OF SPECIAL SHORT-TERM TREASURYCERTIFICATES PURCHASED DIRECTLY FROM THE UNITED STATES, 1953-68

(In millions of dollars)

Date

1953Mar. 18

19202122*23242526

June 567*89

1011121314*151617

Amount

110104189189189333186

6349

196196196374491451358506506506999

1,172823

Date

1953June 18

19202 1 *222324

1954Jan. 14

151617*18192021222324*2526

Amount

364992992992908608296

22169169169323424323306283283283203

3

Date

1954Mar. 15

16

195519561957

1958Mar. 17

18

1959196019611962196319641965

1966Dec. 9

1011*

Amount

134190

1\ noneJ

143207

)

none

169169169

Date

1967Mar. 10

1112*

June 15Sept. 8

910*

1968Sept. 9Dec. 10

12131415*1617

Amount

14914914987

153153153

879245

430430430447596

•Sunday or holiday.

NOTE.—Under authority of Section 14(b) of the Federal Reserve Act. On Nov. 9, 1953, the F.R.Banks sold directly to the Treasury $500 million of Treasury notes; this is the only use that has beenmade under the same authority to sell U.S. Govt. securities directly to the United States.

Interest rate l/t per cent through Dec. 3, 1957, and lA per cent below prevailing discount rate ofF.R. Bank of New York thereafter. Rate on purchases in 1958 was 2 per cent. For data for prior yearsbeginning with 1942, see previous ANNUAL REPORTS. NO holdings on dates not shown.


5. OPEN MARKET TRANSACTIONS OF THE FEDERAL RESERVE SYSTEM DURING 1968


Month

January.February...MarchAprilM a y . . . . . . . .JuneJulyAugustSeptember...OctoberNovember...December...

Total

JanuaryFebruary...March, . .AprilMayJuneJulyAugustSeptember...OctoberNovember...December...

Total

JanuaryFebruary...March. \ . , .,April.M a y . . . . . . . .JuneJulyAugustSeptember..OctoberNovember..December..,

Total

Outright transactions in U.S. Govt. securities by maturity

Total

Gross

chases

1,488967

1,5501,7611,1681,894

4041,1115,5152,7363,6026,100

28,295

Grosssales

1,593770567982784

409140

5,6052,2463,4306,334

22,861

Redemp-tions

20100305167

2896587

115

150180

1,477

1-5 years

Grosspur-

chases

52

208414138

243127

512

Grosssales

Exch.or

maturityshifts

-8,497

- 7 3-308

142

-3085,586-358

-3 ,816

Repurchaseagreements

(U.S. Govt. securities)

Grosspurchases

1,136968657

1,8322,4881,5601,1452,497

440790980

1,369

15,862

Grosssales

1,0311,205

5961,6272,7531,560

9082,734

1,230980

1,369

15,994

Treasury bills

Grosspur-

chases

1,410917

1,2121,6511,0981,693

4041,0285,4032,6013,6026,100

27,119

Grosssales

1,593770567982784

409140

5,6052,2463,4306,334

22,861

Redemp-tions

20100305167

2896587

115

150180

1,477

5-10 years

Grosspur-

chases

21

648

1850

344550

289

Netchangein U.S.Govt.

securities

- 2 0-140

739815119

1,605166647235

5021

-414

3,824

Grosssales

Exch.or

maturityshifts

839

3,638

4,636

708

9,821

Federalagency

obligations(net re-

purchaseagree-ments)

- 3 8

57- 4 5- 1 2

9- 9

- 3 8

Other within 1 year

Grosspur-

chases

5051581054

143153

319

Grosssales

Exch.,maturityshifts,

orredemp.

7,658

-3 ,566308

-4,778

308-6 ,293

358

-6 ,005

Over 10 years

Grosspur-

chases

5

1531

10

1257

56

Grosssales

Bankers' acceptances

Netoutright

- 1 2- 7- 1

2- 1

3- 2- 5- 4

92

- 1 7

Net re-purchases

- 6 9

- : > o35

- 5- 3 0

75- 3 2- 4 3

39- 3 9

- 8 9

Exch.or

maturityshifts

Netchangei

-139-166

83076675

1,683132599280

1123

-414

3,680

iNet change in U.S. Govt. securities, Federal agency obligations, and bankers' acceptances.

NOTE.—Sales, redemptions, and negative figures reduce System holdings; all other figures increasesuch holdings.


6. BANK PREMISES OF FEDERAL RESERVE BANKS AND BRANCHES,DECEMBER 31, 1968

(In dollars)

F.R. Bankor branch

Boston . . . .

New YorkAnnex . . . .

Buffalo . . . .

Philadelphia .

ClevelandCincinnati .Pittsburgh . . . . .

RichmondAnnex 1Annex 2

BaltimoreCharlotte

AtlantaBirminghamJacksonville . . . .

AnnexNashville .New Orleans

Chicago •Detroit

St. LouisLittle RockLouisvilleMemphis

MinneapolisHelena .

Kansas CityDenverOklahoma CityOmaha .

DallasEl PasoHouston. .San Antonio . .

San Francisco . . .Annex

Los Angeles . . .Portland.Salt Lake CitySeattle

Total

Cost

Land

1,628,132

5,215,656592,679673,076

1,884,357

1,295,490400,891

1,667,994

513 524146 87591 404

250,487347,071

1,304,755410 775164,004107,925592 342

1,557,663

6,275,4901,147,734

1 675 780'800,104700,075128,542

600 52115,709

1,340,5612,828,465

592,435950,689

713,302262 477695,615278,180

684 339247,201777,614207,380480,222274,772

40,522,307

Buildings(includingvaults) i

5,929,169

13,297,1871,526,2032,562,224

4,841,559

6,642,9191,171,2593,043,627

4 207,163256,000

5,755,6442,023,4751,069,026

5,804,7782 000,6191 736,177

76,2361 474,6782,754,271

17,697,1762,869,786

3 191,7441,963,1522,859,819

294,763

5 223,279126,401

6,989,4915,745,3441,511,6001,491,117

5,008,272787 728

1,408,5741,400,390

3 783,530124,000

4,103,8441,678,5121,878,2381,890,966

138,199,940

Fixed ma-chinery andequipment

2,943,179

7,035,953673,458

1,565,400

2,154,452

3,571,9581,587,4952,525,243

2,497,936

1,068,445625,121

3,558,5801,019,618

778,87115,842

1 098,9241,448,181

9,930,5951,466,915

2 285,317962,372

1,041,202218,883

2,688,92162,977

2,879,03491,693

834,845731,925

3,570,804393,301714,187570,847

1 458,02830,000

1,608,576649,432707,575

1,049,264

68,115,349

Total

10,500,480

25,548,7962,792,3404,800,700

8,880,368

11,510,3673,159,6457,236,864

7,218,623402,875

5,847,0483,342,4072,041,218

10,668,1133,431,0122,679,052

200,0033,165,9445,760,115

33,903,2615,484,435

7,152,8413,725,6284,601,096

642,188

8,512,721205,087

11,209,0868,665,5022,938,8803,173,731

9,292,3781,443,5062,818,3762,249,417

5,925,897401,201

6,490,0342,535,3243,066,0353,215,002

246,837,596

Netbook value

2,555,318

6,440,573570,713

2,690,986

2,358,818

1,101,526455,049

3,233,405

1,676,020302,608

5,847,0481,370,1521,140,879

7,945,4181,956,2021,406,624

185,7541,838,4105,243,698

14,731,0432,576,901

1,535,5483,543,8692,961,684

168,562

3,239,68253,811

6,432,9378,149,1142,138,6022,020,107

4,643,485876,905

1,801,3461,342,477

776,565346,401

2,11'4,2291,292,8181,982,8121,568,085

113,276,184

OTHER REAL ESTATE ACQUIRED FOR BANKING-HOUSE PURPOSES

BostonClevelandCincinnatiRichmondB a l t i m o r e . . .MemphisDenverSan AntonioLos Angeles

Total .

500,000395,875341,293326,403548,656602,580551,430170,416115,156

3,551,809

381,000412,500

129,067

922,567

100,000

100,000

500,000776,875853,793326,403548,656731,647551,430170,416115,156

4,574,376

500,000668,925686,234326,403548,656731,647551,430170,416115,156

4,298,867

1 Includes expenditures for construction at some offices pending allocation to appropriate accounts


7. EARNINGS AND EXPENSES OF FEDERAL RESERVE BANKS DURING 1968

(In dollars)

Item Total Boston NewYork

Phila-delphia

Cleve-land

Rich-mond Atlanta Chicago I St. Louis Minne-

apolisKansas

City

CURRENT EARNINGS

Discounts and advancesAcceptancesU.S. Govt. securitiesForeign currenciesAll other

29,702,022 2,232,0844,153,633

8,522,6944,153,633

I536,040 878,276

!1,128,269

I ! I1,715,593 7,089,127 886,927 1,040,781 1,059,138 1,215,553 3,397,5-

2,653,503,69276,539,434

547,163

138,894,925 663,949,4043,748,273

17,82919,676,674

70,765

136,299,6314,054,447

13,788

203,417,300 195,815,7416,888,464

33,4863,980,002

32,809

142,665,634 431,041,0664,819,832 11,172,527

59,195 89,408

94,130,9962,604,402

27,115

52,687,9171,762,479

38,837

105,217,8373,368,652

74,883

112,264,984 377,118,2;10,098,8'

54,3'4,364,788

34,702

Total. 2,764,445,942 144,893,111 696,373,170 140,903,906 211,217,526 200,956,821 149,260,254 449,392,128 97,649,439 55,530,014 109,720,510 117,880,026 390,669,0

CURRENT EXPENSES

Salaries:OfficersEmployees

Retirement and other benefits.Fees—Directors and others .. .Traveling expensesPostage and expressageTelephone and telegraphPrinting and suppliesInsuranceTaxes on real estateDepreciation (buildings)Light, heat, power, and water.Repairs and alterationsRentFurniture and equipment:

PurchasesRentals

All otherInter-Bank expenses

9,965,527119,117,55720,933,715

1,237,9722,831,590

28,688,4762,495,618

10,369,493426,780

6,184,2515,955,9602,400,8851,657,983

193,349

4,178,22010,061,4834,017,802

SubtotalF.R. currencyAssessment for expenses of

Board of Governors

230,716,66320,474,404

14,198,198

Total. 265,389,265

551,1127,637,3291,374,205

101,790184,044

1,768,982113,294722,679

29,858641,815205,621147,35097,94151,737

202,824629,322168,81684,104

14,712,8231,286,529

688,400

16,687,752

2,053,51830,043,5704,924,632

253,997414,476

3,385,958565,031

1,880,54050,886

1,080,351737,466350,276245,755

7,012

1,125,4731,008,180

963,527-1,174,456

47,916,1923,322,472

3,647,200

54,885,864

684,7655,392,314

987,835114,147116,716

1,150,09195,181

541,72017,042

179,90476,59691,438

299,4827,140

185,220384,991149,68787,881

10,562,1501,384,816

749,900

12,696,866

655,3028,557,8851,505,001

91,874184,538

2,508,842167,507793,36340,487

552,381542,475272,359143,66939,581

267,564726,146441,759148,585

17,639,3181,035,850

1,273,000

19,948,168

841,4498,099,6851,459,594

84,530206,251

3,496,360198,308800,974

32,332230,004160,403197,08681,42010,004

249,208989,250171,664

2,239

17,310,7612,402,749

734,000

20,447,510

675,4418,478,2081,484,005

105,685287,187

2,650,930296,715926,893

36,640411,081989,035228,919160,243

644

514,241804,579214,361111,281

18,376,0881,981,549

893,900

21,251,537

977,77816,804,4682,813,325

76,487318,879

3,659,671282,025

1,516,72235,406

1,081,1481,363,318

325,075202,94666,443

384,1002,086,738

707,101245,050

32,946,6802,898,106

2,078,400

37,923,186

818,1196,814,4661,222,359

78,577192,898

1,787,520132,774764,393

29,652262,735324,711167,876102,733

1,572

176,558620,336204,110

60,387

13,761,7761,015,930

483,000

15,260,706

550,1794,255,565

750,17872,721

210,0201,140,328

98,574347,09320,211

350,96175,14599,66035,844

1,468

120,031453,608165,73541,250

8,788,571325,330

332,600

9,446,501

722,2986,698,0011,264,008

78,938175,219

2,198,344167,564745,952

32,141500,925496,351238,81665,7824,579

600,993739,402256,87177,219

15,063,403852,712

624,000

16,540,115

619,5945,235,591

980,70263,026

190,8481,613,926

155,385460,062

26,974318,614554,599130,36553,704

1,591

85,371729,645343,89797,797

11,661,691985,655

815,298

13,462,644

815,911,100,42,167,8

116,2350,5

3,327,5223,2869,175,1

574,3430,2151,6168,4

1,5

266,6889,2230,2218,6

21,977,22,982,7

1,878,5

26,838,4


Less reimbursement for certainfiscal agency and other ex-penses

Net expenses

23,038,895

242,350,370

1,284,592

15,403,160

4,672,299

50,213,565

978,044

11,718,822

2,340,334

17,607,834

1,207,596

19,239,914

1,644,877

19,606,660

4,163,684

33,759,502

1,298,691

13,962,015

694,693

8,751,808

1,603,791

14,936,324

905,717

12,556,927

2,244,5

24,593,8

PROFIT AND LOSS

Current net earnings

Additions to current netearnings:

Profits on sales of U.S.Govt. securities

Profits on foreign exchangetransactions

All other

Total additions.

Deductions from current netearnings

Net addition to or deductionfrom ( —) current net earnings .

Net earnings before payments toU.S. Treasury

Dividends paidPayments to U.S. Treasury

(interest on F.R. notes)...

Transferred to surplus.Surplus, January 1

Surplus, December 31.

2,522,095,572

792,717

8,049,430154,073

8,996,220

476,222

8,519,994

2,530,615,568

36,959,336

2,463,628,983

30,027,250599,741,400

629,768,650

129,489,950 646,159,605

41,727

394,4222,348

438,497

5,855

432,642

1,784,861

126,711,431

30,542,950

191,709

2,068,70316,343

2,276,755

9,856

2,266,899

129,922,592 648,426,504 129,643,768

9,472,606

633,194,098

1,426,300 5,759,80029,116,650 154,313,500

160,073,300

129,185,084

40,879

426,62013

467,512

8,828

458,683

1,933,571

126,754,047

956,15031,825,650

32,781,800

193,609,692

61,657

724,4493,254

789,360

17,631

771,728

194,381,-

3,296,071

188,962,249

2,123,10053,884,600

56,007,700

181,716,906

58,222

418,570572

477,365

9,942

467,422

420 182,184,329

1,909,326

178,500,503

1,774,50031,074,850

32,849,350

129,653,594 415,632,626

43,606

507,11428,370

579,090

322,985

256,104

2,348,186

2,534,05037,627,900

40,161,950

132,340

1,175,21780,615

1,388,171

6,240

1,381,931

129,909,698 417,014,557

5,462,762

125,027,463 405,670,595

5,881,20087,359,800

93,241,000

83,687,425

28,356

273,681

302,845

11,620

291,224

83,978,649

1,273,412

81,055,587

1,649,65020,350,300

21,999,950

46,778,205

15,878

185,137609

201,624

3,989

197,636

46,975,841

860,423

45,726,018

389,40014,085,300

14,474,700

94,784,187

33,201

354,1751,732

389,108

6,835

382,273

95,166,460

1,609,966

92,888,644

667,85026,454,700

27,122,550

105,323,099 366,075,1

33,593

458,8172,697

495,107

13,040

482,067

105,805,166 367,206,5i

2,118,480 4,889,6

102,384,586 356,753,7

1,302,10034,463,650

35,765,750

111,5-

1,062,5:16,7

1,190,7

59,4i

1,131,3:

5,563,179,184,5!

84,747,6

NOTE.—Details may not add to totals because of rounding.


8. EARNINGS AND EXPENSES OF FEDERAL RESERVE BANKS, 1914-68

(In dollars)

Period or Bank

All F.R. Banks,by years:

1914-15.1916.. . .191719181919.. . .

1920. . . .1921 . . . .1922. . . .1923. . . .1924.. . .

1925. . . .1926. . . .1927. . . .1928. . . .1929. . . .

1930.. . .19311932. . . .19331934.. . .

1935. . . .1936. . . .1937. . . .1938. . . .1939. . . .

1940.. . .19411942. . . .1943. . . .1944. . . .

1945. . . .1946. . . .1947. . . .1948. . . .1949. . . .

Currentearnings

- .-J- -_.,

2,173,2525,217,998

16,128,33967,584,417

102,380,583

181,296,711122,865,86650,498,69950,708,56638,340,449

41,800,70647,599,59543,024,48464,052,86070,955,496

36,424,04429,701,27950,018,81749,487,31848,902,813

42,751,95937,900,63941,233,13536,261,42838,500,665

43,537,80541,380,09552,662,70469,305,715

104,391,829

142,209,546150,385,033158,655,566304,160,818316,536,930

Currentexpenses

2,320,5862,273,9995,159,727

10,959,53319,339,633

28,258,03034,463,84529,559,04929,764,17328,431,126

27,528,16327,350,18227,518,44326,904,81029,691,113

28,342,72627,040,66426,291,38129,222,83729,241,396

31,577,44329,874,02328,800,61428,911,60028,646,855

29,165,47732,963,15038,624,04443,545,56449,175,921

48,717,27157,235,10765,392,97572,710,18877,477,676

Net earningsbefore pay-

ments toU.S. Treasury i

-141,4592,750,9989,582,067

52,716,31078,367,504

149,294,77482,087,22516,497,73612,711,2863,718,180

9,449,06616,611,74513,048,24932,122,02136,402,741

7,988,1822,972,066

22,314,2447,957,407

15,231,409

9,437,7588,512,433

10,801,2479,581,954

12,243,365

25,860,0259,137,581

12,470,45149,528,43358,437,788

92,662,26892,523,93595,235,592

197,132,683226,936,980

Dividendspaid

217,4631,742,7746,804,1865,540,6845,011,832

5,654,0186,119,6736,307,0356,552,7176,682,496

6,915,9587,329,1697,754,5398,458,4639,583,911

10,268,59810,029,7609,282,2448,874,2628,781,661

8,504,9747,829,5817,940,9668,019,1378,110,462

8,214,9718,429,9368,669,0768,911,3429,500,126

10,182,85110,962,16011,523,04711,919,80912,329,373

Payments to U.S. Treasury

Franchise tax

1,134,234

' "2,703,894"

60,724,74259,974,46610,850,6053,613,056

113,646

59,300818,150249,591

2,584,6594,283,231

17,308

2,011,418

UnderSec. 13b

297,667227,448176,625119,52424,579

82,152141,465197,672244,726326,717

247,65967,05435,605

Interest onF.R. notes

75,223,818166,690,356193,145,837

Transferredto surplus(Sec. 13b)

-60,323

27,695102,88067,304

-419,140-425,653

-54,456-4,33349,602

135,003201,150

262,13327,70886,772

Transferredto surplus

(Sec/7)

1,134,23448,334,34170,651,778

82,916,01415,993,086-659,904

2,545,513-3,077,962

2,473,8088,464,4265,044,119

21,078,89922,535,597

-2,297,724-7,057,69411,020,582-916,8556,510,071

607,422352,524

2,616,3521,862,4334,533,977

17,617,358570,513

3,554,10140,237,36248,409,795

81,969,62581,467,0138,366,350

18,522,51821,461,770


1950.1951.1952.1953.1954.

275,838,994394,656,072456,060,260513,037,237438,486,040

1955 i 412,487,9311956 I 595,649,0921957 763,347,5301958.1959.

742,068,150886,226,116

1960 1,103,385,2571961 941,648,1701962 1 1,048,508,3351963 1,151,120,0601964 1,343,747,303

1965.1966.1967.1968.

Total 1914-68.

Aggregate for eachF.R. Bank, 1914-68:

BostonNew YorkPhiladelphiaClevelandRichmondAtlanta

ChicagoSt. LouisMinneapolis. .Kansas City. . ,DallasSan Francisco.

Total.

1,559,484,0271,908,499,8962,190,403,7522,764,445,943

22,188,136,324

1,227,238,3535,620,335,7551,271,877,4461,863,698,5601,454,600,0791,190,831,172

3,631,509,124892,716,072512,978,787940,524,328901,675,531

2,680,151,117

22,188,136,324

80,571,77195,469,086

104,694,091113,515,020109,732,931

110,060,023121,182,496131,814,003137,721,655144,702,706

153,882,275161,274,575176,136,134187,273,357197,395,889

204,290,186207,401,126220,120,846242,350,370

4,032,067,872

27-,249,09;86^,882,814240,9^3,978351,074,502282,007,066258,577,685

572,240,890221,806,880140,590,103221,366,323194,450,535409,887,997

4,032,067,872

231,561,340297,059,097352,950,157398,463,224328,619,468

302,162,452474,443,160624,392,613604,470,670839,770,663

963,377,684783,855,223872,316,422964,461,538

1,147,077,362

1,356,215,4551,702,095,0001,972,376,7822,530,615,569

18,228,468,126

958,867,4724,778,386,7841,039,288,3741,517,429,3831,177,338,086

934,584,565

3,065,768,539672,138,877375,144,209721,634,264710,142,348

2,277,745,225

18,228,468,126

13,082,99213,864,75014,681,78815,558,37716,442,236

17,711,93718,904,89720,080,52721,197,45222,721,687

23,948,22525,569,54127,412,24128,912,01930,781,548

32,351,60233,696,33635,027,31236,959,336

727,864,057

41,535,562221,466,547

51,434,06369,472,07133,122,19534,022,458

95,129,09825,027,41817,017,20628,167,19934,175,64577,294,595

727,864,057

149,138,300

7,111,39568,006,2625,558,9014,842,4476,200,1898,950,561

25,313,5262,755,6295,202,9006,939,100

560,0497,697,341

149,138,300

2,188,893

280,843369,116722,40682,930172,49379,264

151,0457,464

55,61564,213102,083101,421

2,188,893

196,628,858254,873,588291,934,634342,567,985276,289,457

251,740,721401,555,581542,708,405524,058,650910,649,768

896,816,359687,393,382799,365,981879,685,219

1,582,118,614

1,296,810,0531,649,455,1641,907,498,2702,463,628,983

16,590,839,682

869,166,4844,291,648,399

934,170,3221,373,800,3481,099,185,565

846,098,300

2,836,593,435617,255,302334,451,705655,209,927635,206,004

2,098,053,891

16,590,839,682

-3,657

135,411-433,413

290,661-9,906

-71,5175,491

11,682-26,515

64,874-8,67455,337

-17,089

-3,657

21,849,49028,320,75946,333,73540,336,86235,887,775

32,709,79453,982,68261,603,68259,214,569

-93,600,791

42,613,10070,892,30045,538,20055,864,300

-465,822,800

27,053,80018,943,50029,851,20030,027,250

758,440,849

40,637,775197,329,87147,112,02269,241,49338,729,15845,428,490

108,569,75427,119;57818,351,91331,262,50040,043,22894,615,067

2758,440,849

1 Current earnings less current expenses, plus or minus adjustment for profit and lossitems.

2 The $758,440,849 transferred to surplus was reduced by direct charges of $500,000for charge-off on bank premises (1927), $139,299,557 for contributions to capital of theFederal Deposit Insurance Corporation (1934), and $3,657 net upon elimination of Sec.

13b surplus (1958), and was increased by $11,131,013 transferred from reserves for con-tingencies (1945), leaving a balance of $629,768,650 on Dec. 31, 1968.

NOTE.—Details may not add to totals because of rounding.


9. VOLUME OF OPERATIONS IN PRINCIPAL DEPARTMENTS OF FEDERALRESERVE BANKS, 1965-68

(Number in thousands; amounts in thousands of dollars)

Operation 1968 1967 1966 1965

NUMBER OF PIECESHANDLED 1

Discounts and advancesCurrency received and counted....Coin received and countedChecks handled :

U.S. Govt. checksPostal money ordersAll other 2

Collection items handled:U.S. Govt. coupons paidAll other.

Issues, redemptions, and exchangesof U.S. Govt. securities

Transfers of fundsFood stamps redeemed

AMOUNTS HANDLED

Discounts and advancesCurrency received and countedCoin received and countedChecks handled:

U.S. Govt. checksPostal monejr ordersAll other 2

Collection items handled:U.S. Govt. coupons paidAllother

Issues, redemptions, and exchangesof U.S. Govt. securities

Transfers of fundsFood stamps redeemed

115,561,500

10,957,259

554,813195,871

5,904,929

13,25526,251

284,6776,059

384,763

84,525,11040,585,320

1,173,761

190,653,5234,640,992

2,350,761,951

6,765,29519,827,053

1,008,454,0737,865,682,832

513,618

65,338,781

10,958,606

540,065205,343

5,419,583

14,35525,203

246,2895,444

273,983

30,968,33238,410,969

1,184,616

175,068,1794,860,925

2,043,772,112

6,693,38315,299,519

820,283,3796,565,594,328

368,569

165,232,8069,304,120

504,049217,473

5,021,454

14,30526,712

235,5554,832

166,615

90,667,64737,001,390

957,282

160,014,3314,626,573

1,893,974,522

5,916,48512,624,804

793,261,9585,555,075,862

226,508

115,144,3455,855,884

491,848223,337

'4,606,907

14,08726,820

222,4774,389

81,885

75,684,39436,075,114

496,582

134,806,4384,507,801

'1,633,863,858

5,380,74810,723,571

763,248,3924,496,230,723

116,498

rRe vised.1 Packaged items handled as a single item are counted as one piece.2 Exclusive of checks drawn on the F.R. Banks.


10. NUMBER AND SALARIES OF OFFICERS AND EMPLOYEES OFFEDERAL RESERVE BANKS, DECEMBER 31, 1968

Federal ReserveBank (including

branches)

BostonNew YorkPhiladelphia

ClevelandRichmondAtlanta

ChicagoSt. LouisMinneapolis

Kansas CityDallasSan Francisco

Total

President

Annualsalary

$ 40,00075,00048,500

48,50037,50037,500

60,00042,50042,500

46,00037,50050,000

$565,500

Other officers

Num-ber

258633

324233

464128

393546

486

Annualsalaries

$ 487,5002,027,500

634,500

606,500792,500574,250

877,500768,500508,000

676,350570,077780,250

$9,303,427

Employees 1

Num-ber

1,1884,153

937

1,3101,4311,506

2,7411,154

714

1,189951

1,835

19,109

Annualsalaries

$ 7,692,34731,048,6135,568,438

8,275,9898,397,4038,291,146

16,517,4086,767,3244,297,130

6,659,6185,321,726

10,902,291

$119,739,433

Total

Num-ber

1,2144,240

971

1,3431,4741,540

2,7881,196

743

1,229987

1,882

19,607

Annualsalaries

$ 8,219,84733,151,1136,251,438

8,930,9899,227,4038,902,896

17,454,9087,578,3244,847,630

7,381,9685,929,303

11,732,541

$129,608,360

1 Includes 1,050 part-time employees.

11. FEES AND RATES UNDER REGULATION V ON LOANSGUARANTEED PURSUANT TO DEFENSE PRODUCTION ACT OF 1950,

DECEMBER 31, 1968

Fees Payable to Guaranteeing Agency by Financing Institution on Guaranteed Portion of Loan

Percentage of loan guaranteed

70 or less7580859095 . . . . .Over 95 . . .

Guarantee fee(percentage of

interest payableby borrower)

101520253035

40-50

Percentage ofany commitment

fee chargedborrower

101520253035

40-50

Maximum Rates Financing Institution May Charge Borrower

Interest rateCommitment rate.

iy-i per cent per annumVi P e r cent per annum

NOTE.—In any case in which the rate of interest on the loan is in excess of 6 per cent, the guaranteefee shall be computed as though the interest rate were 6 per cent.


O

12. MAXIMUM INTEREST RATES PAYABLE ON TIME AND SAVINGS DEPOSITS

(Per cent per annum)

Nov. 1, 1933—July 19, 1966 I Rales beginning July 20, 1966

Type of deposit

Savings deposits:12 months or moreLess than 12 months

Postal savings deposits: i12 months or moreLess than 12 months

Other time deposits: 2

12 months or more6 months to 12 months90 days to 6 monthsLess than 90 days

(30-89 days)

Effective date

Nov. 1,1933

} 3

} 3

> ;

Feb. 1,1935

21/2

21/2

2i/2

2i/22i/2

Jan. 1,1936

2i/2

21/2

21/2

21

Jan. 1,1957

3

3

3

2i/2

Jan. 1,1962

/ 4I 3%

i 3i/2

/ 4\ 31/2

21/2

July 17,1963

4 \31/2/

4 I31/2/

1 ;

Nov. 24,1964

4

4

41/2'

4

Dec. 6,1965

4

4

51/2

Type of deposit

Savings deposits

Other time deposits: 2

Mutiple maturity: 3

90 days or moreLess than 90 days

(30-89 days)Single maturity:

Less than $100,000$100,000 or more:

30-59 days60-89 days90-179 days180 days and over. . .

Effective date

July 20,1966

4

54

51/2

)

5i/2

Sept. 26,1966

4

54

-1

Apr. 19,1968

4

54

5

51/25YA66V4

1 Closing date for the Postal Savings System was Mar. 28, 1966.2 For exceptions with respect to foreign time deposits, see ANNUAL REPORTS for 1962,

p. 129, and 1965, p. 233.3 Multiple-maturity time deposits include deposits that are automatically renewable

at maturity without action by the depositor and deposits that are payable after writtennotice of withdrawal.

NOTE.—Maximum rates that may be paid by member banks as established by theBoard of Governors under provisions of Regulation Q; however, a member bank maynot pay a rate in excess of the maximum rate payable by State banks or trust companieson like deposits under the laws of the State in which the member bank is located. Be-ginning Feb. 1, 1936, maximun rates that may be paid by nonmember insured commercialbanks, as established by the FDIC, have been the same as those in effect for memberbanks.


13. MARGIN REQUIREMENTS

(Per cent of market value)

Regulation

Regulation T:For extension of credit by bro-

kers and dealers on listed se-curities

For short salesRegulation U:

For loans by banks on stocks...













Nov. 1, 1937-Feb. 4, 1945

4050

40

Feb. 1, 1947-Mar. 29, 1949

7575

75

Jan. 4, 1955-Apr. 22, 1955

6060

60

Oct. 16, 1958-July27, 1960

9090

90

Feb. 5, 1945-July 4, 1945

5050

50

Mar. 30, 1949-Jan. 16, 1951

5050

50

Apr. 23, 1955-Jan. 15, 1958

7070

70

July 28, 1960-July 9, 1962

7070

70

Regulation T:For credit extended by brokers and dealers on—

Listed stocksListed bonds convertible into stocks


For credit extended by banks on—StocksBonds convertible into listed stocks

Regulation G:For credit extended by others than brokers and dealers and banks

on—Listed stocksBonds convertible into listed st ocks

July 5, 1945-Jan. 20, 1946

7575

75

Jan. 17, 1951-Feb. 19, 1953

7575

75

Jan. 16, 1958-Aug. 4, 1958

5050

50

July 10, 1962-Nov. 5, 1963

5050

50

Mar. 11,1968-June7, 1968

705070

7050

7050

Jan. 21, 1946-Jan. 31, 1947

100100

100

Feb. 20, 1953-Jan. 3, 1955

5050

50

Aug. 5, 1958-Oct. 15, 1958

7070

70

Nov. 6, 1963-Mar. 10, 1968

7070

70

EffectiveJune 8, 1968

806080

8060

8060

NOTE.—Regulations G, T, and U, prescribed in accordance with Securities Exchange Act of 1934,limit the amount of credit to purchase and carry registered equity securities that may be extended onsecurities as collateral by prescribing a maximum loan value, which is a specified percentage of themarket value of the collateral at the time the credit is extended; margin requirements are the differencebetween the market value (100 per cent) and the maximum loan value.

Regulation G and special margin requirements for bonds convertible into stocks were adopted bythe Board of Governors effective Mar. 11, 1968.

For earlier data, see Banking and Monetary Statistics, 1943, Table 145, p. 504.


14. MEMBER BANK RESERVE REQUIREMENTS

(Per cent of deposits)

Effective date 1

1917—June 211936—Aug. 161937—Mar. 1

May 11938—Apr. 161941—Nov. 11942—Aug. 20

Sept. 14Oct. 3

1948—Feb. 27June 11Sept. 24, 16

1949—May 5, 1June 30, July 1Aug 1Aug. 11, 16Aug. 18Aug. 25Sept. 1

1951—Jan. 11, 16Jan. 25, Feb. 1 . .

1953—July 9,11954—June 24, 16

July 29, Aug. 1. .1958—Feb. 27, Mar. 1..

Mar. 20, Apr. 1 . .Apr. 17Apr. 24

1960—Sept. 1Nov 24Dec. 1

1962—July 28Oct. 25, Nov. 1..

Through July 13 1966

Net demand deposits 2

Central reservecity banks 3

1319%22%26

8*24222022242624

2324222120

I S *

ft*4

Reserve citybanks

101517%20

222120

\l'A

!§*192019

1817%17

16%

Countrybanks

710%

\l*1214

1615141312

131413

1211%11

12

Time deposits

Central reserve andreserve city banks 3

k656

7%

6

5

6

5

4

Countrybanks

34%51/4656

7%

6

5

ON

5

4

Beginning July 14, 1966

Effective date 1

1966—July 14 21Sept 8 15

1967_Mar. 2Mar 1 (>

1968—Jan 11 18

In effect Dec. 31, 1968

Legal requirements—Dec. 31, 1968:Minimum.. . . . . .Ivlaximum

Net demanddeposits 2

Reservecity banks

Under$5 mil-

lion

Over$5 mil-

lion

M6V4

16% 17

16% 17

1022

Countrybanks

Under$5 mil-

lion

Over$5 mil-

lion

5 12

12 121A

12 12%

714

Time deposits 4

(all classes of banks)

Sav-ings

depos-its

5 4

I *

3

310

Othertime deposits

Under$5 mil-

lion

5 4

3%

3

310

Over$5 mil-

lion

56

6

310

For notes see opposite page.


15. FEDERAL RESERVE BANK DISCOUNT RATES, DECEMBER 31, 1968

(Per cent per annum)

Federal ReserveBank

BostonNew YorkPhiladelphia

ClevelandRichmondAtlanta

ChicagoSt. LouisMinneapolis

Kansas CityDallasSan Francisco

Discounts for and advances to member banks

Advances anddiscounts under

Sees. 13 and 13a i

51/251/251/2

51/251/251/2

51/251/25i/i

5i/251/251/2

Advances underSec. 10(b) 2

666

666

666

666

Advances to all othersunder last par. Sec. 133

61/2

61/2

761/261/2

61/261/261/2

6%

1 Discounts of eligible paper and advances secured by such paper or by U.S. Govt. obligations orany other obligations eligible for Federal Reserve Bank purchase. Rates shown also apply to advancessecured by obligations of Federal intermediate credit banks maturing within 6 months. Maximummaturity: 90 days except that discounts of certain bankers' acceptances and of agricultural paper mayhave maturities not over 6 months and 9 months, respectively, and advances secured by Federal inter-mediate credit bank obligations are limited to 15 days.

2 Advances secured to the satisfaction of the F.R. Bank. Maximum maturity: 4 months.3 Advances to individuals, partnerships, or corporations other than member banks secured by direct

obligations of, or obligations fully guaranteed as to principal and interest by, the U.S. Govt. or anyagency thereof. Maximum maturity: 90 days.

Notes to Table 14 on opposite page.

1 When two dates are shown, the first applies to the change at central reserve or reserve city banksand the second to the change at country banks.

2 Demand deposits subject to reserve requirements, which, beginning with Aug. 23, 1935, have beentotal demand deposits minus cash items in process of collection and demand balances due from domesticbanks (also minus war loan and Series E bond accounts during the period Apr. 13, 1943—June 30,1947).

3 Authority of the Board of Governors to classify or reclassify cities as central reserve cities wasterminated effective July 28, 1962.

4 Effective Jan. 5, 1967, time deposits such as Christmas and vacation club accounts became subjectto same requirements as savings deposits.

5 See columns above for earliest effective date of this rate.

NOTE.—All required reserves were held on deposit with F.R. Banks, June 21, 1917, until late 1959.Since then, member banks have also been allowed to count vault cash as reserves, as follows: countrybanks—in excess of 4 and 2% per cent of net demand deposits effective Dec. 1, 1959, and Aug. 25,1960, respectively; central reserve city and reserve city banks—in excess of 2 and 1 per cent effectiveDec. 3, 1959, and Sept. 1, 1960, respectively; all member banks were allowed to count all vault cashas reserves effective Nov. 24, 1960.


0 016. MEMBER BANK RESERVES, FEDERAL RESERVE BANK CREDIT, AND RELATED ITEMS—END OF YEAR 1918-68 AND END OF MONTH 1968


Period

1918.1919.

1920.1921.1922.1923.1924.

1925.1926.1927.1928.1929.

1930.1931.1932.1933.1934.

1935.1936.1937.1938.1939.

1940.1941.1942.1943.1944.

1945.1946.1947.

Factors supplying reserve funds

F.R. Bank credit outstanding


Total

239300

287234436134540

375315617228511

729817

1,8552,4372,430

2,4312,4302,5642,5642,484

2,1842,2546,189

11,54318,846

24,26223,35022,559

Boughtout-right

239300

28723443680

536

367312560197488

686775

1,8512,4352,430

2,4302,4302,5642,5642,484

2,1842,2546,189

11,54318,846

24,26223,35022,559

Repur-chaseagree-ments

3573123

4342

42

Dis-counts

andad-

vances

1,7662,215

2,6871,144618723320

643637582

1,056632

251638235987

531047

336580

24916385

Float

199201

11940782752

6345632434

212014155

1239191791

94471681815

578580535

Allother

294575

262146273355390

378384393500405

372378

4113721

3828191611

81014104

211

Total

2,4983,292

3,355' ,563

,405,238,302

,459,381,655,809,583

,373,853

2,1452,6882,463

2,4862,5002,6122,6012,593

2,2742,3616,67912,23919,745

25,09124,09323,181

Gold^stock 2

2,8732,707

2,6393,3733,6423,9574,212

4,1124,2054,0923,8543,997

4,3064,1734,2264,0368,238

10,12511,25812,76014,51217,644

21,99522,11122,72621,93820,619

20,06520,52922,754

Treas-urycur-

rencyout-

stand-ing 3

1,7951,707

1,7091,8421,9582,0092,025

1,9771,9912,0062,0122,022

2,0272,0352,2042,3032,511

2,4762,5322,6372,7982,963

3,0873,2473,6484,0944,131

4,3394,5624,562

Factors absorbing reserve funds

Cur-rency

circu-lation

4,9515,091

5,3254,4034,5304,7574,760

4,8174,8084,7164,6864,578

4,6035,3605,3885,5195,536

5,8826,5436,5506,8567,598

8,73211,16015,41020,44925,307

28,51528,95228,868

I

Treas-urycashhold-ings *

288385

218214225213211

203201208202216

211222272284

3,029

2,5662,3763,6192,7062,409

2,2132,2152,1932,3032,375

2,2872,2721,336

Depositsother than member

bank reserves,with F.R. Banks

Member bank reserves

Treas-ury

5131

5796113851

1617182329

1954

83

121

544244142923634

368867799579440

977393870

For-eign

9673

51234

19

46566

679194

20

2999

172199397

,133774793

,3601,204

862508392

Oth-

OtherF.R.ac- !

counts 5

2528

1815261920

2119212124

223124

128169

226160235242256

599586485356394

446314569

118208

298285276275258

272293301348393

375354355360241

253261263260251

284291256339402

495607563

WithF.R.

Banks

,636,890

,781,753,934,898

2,220

2,2122,1942,4872,3892,355

2,4711,9612,5092,7294,096

5,5876,6067,0278,724

11,653

14,02612,45013,11712,88614,373

15,91516,13917,899

Cur-rencyand

coin 6

Re-quired 7

1,5851,822

1,654

1,8842,161

2,2562,2502,4242,4302,428

2,3751,9941,9331,8702,282

2,7434,6225,8155,5196,444

7,4119,365

11,12911,65012,748

14,45715,57716,400


1948...1949...

1950...1951...1952...1953...1954...

1955.. .1956...1957...1958...1959.. .

1960...1961.. .1962...1963...1964...

1965...1966...1967...

23,33318,885

20,77823,80124,69725,91624,932

24,78524,91524,238

I 26,347' 26,648

27,38428,88130,82033,59337,044

40,76844,31649,150

1968—Jan...Feb...Mar..Apr...May..June..July..Aug..Sept..Oct...Nov..Dec...

.* 49,092

.1 48,952i 49,748.1 50,519• I 50,625.! 52,230• r 52,397. 53,044.. 53,288. 53,329. 53,350. 52,937

23,33318,885

20,72523,60524,03425,31824,888

24,39124,61023,71926,25226,607

26,98428,72230,47833,58236,506

40,47843,65548,980

48,85548,95249,63150,24250,62552,23052,16053,04452,83953,32953,35052,937

5319666359844

3943055199541

40015934211

538

290661170

237

117277

237

449

22378

671915628143

108505564

458

331303863186

137173141

843166672741

1,026305736529390179471188

541534

1,3681,184967935808

1,5851,6651,4241,2961,590

1,8472,3002,9032,6002,606

2,2482,4952,576

1,4161,8821,6171,2651,7141,9411,6481,8511,0042,3732,3813,361

12

35421

2970664975

745111016294

187193164

8356908756134995186565858

24,09719,499

22,21625,00925,82526,88025,885

26,50726,69925,78427,75528,771

29,33831,36233,87136,41839,930

43,34047,17752,031

51,43451,05652,12752,61253,42154,61054,88055,47554,76855,73756,26056,544

24,24424,427

22,70622,69523,18722,03021,713

21,69021,94922,78120,53419,456

17,76716,88915,97815,51315,388

13,73313,15911,982

11,98411,88310,48410,48410,38410,36710,36710,36710,36710,36710,36710,367

4,5894,598

4,6364,7094,8124,8944,985

5,0085,0665,1465,2345,311

5,3985,5855,5675,5785,405

5,5756,3176,784

6,7896,7986,7916,7906,7906,7086,7106,7246,7436,7666,7866,814

28,22427,600

27,74129,20630,43330,78130,509

31,15831,79031,83432,19332,591

32,86933,91835,33837,69239,619

42,05644,66347,226

45,81945,84646,29746,62147,20247,64041,91948,35348,34048,71949,98950,922

,325 1,123,312 821

,293,270,270761796

767775761683391

377422380361612

7601,1761,344

1,3381,2651,0841,070990838803776772754742752

668247389346563

394441481358504

485465597880820

668416

1,123

,1531,197581

1,035956

1,074,113916

1,0361,086478703

642767

895526550423490

402322356272345

217279247171229

150174135

16019219714042215320212719299220216

547750

565363455493441

554426246391694

533320393291321

355588653

463456703489490507479463485434436747

590706

714746777839907

925901998

1,122841

9411,0441,0071,0651,036

211-147-773

-564-415-593-689-797

9-320

109-246-356

-1,019-1,352

20,47916,568

17,68120,05619,95020,16018,876

19,00519,05919,03418,50418,174

17,08117,38717,45417,04918,086

18,44719,77921,092

21,83821,19521,13321,22121,33421,46221,70221,82221,29722,33422,56721,737

22344

444

543444544444

"iio*,544,823,262,099,151

,163,310,631

,025,948,936,740,668,005,096,139,704,590,628,918

1915

1619201918

1819191818

1820202021

222425

252525,25,24,25,25,25,26,26,26,27,

,277,550

,509,667520,397,618

903,089,091,574619

988114071677663

848321905

504428041248968689908647004162380433

1,2021,018

1,172389

— 570763258

102-30-57-70-135

63796645471574

-238-232-182

1,35971528713

1,034-222890314-3762815

-778

1 Principally acceptances and industrial loans; authority for industrial loans expiredAug. 21,1959.

the following coin and paper currency held in the Treasury; subsidiary silver and minorcoin, United States notes, F.R. notes, F.R. Bank notes, and national bank notes.

5 The total of F.R. Bank capital paid in, surplus, other capital accounts, and otherliabilities and accrued dividends, less the sum of bank premises and other assets.

6 Part allowed as reserves Dec. 1, 1959-Nov. 23, 1960; all allowed thereafter.7 These figures are estimated through 1958. Before 1929 available only on call dates

(in 1920 and 1922, the call dates were Dec. 29).

NOTE.—For description of figures and discussion of their significance, see "MemberBank Reserves and Related Items," Section 10 of Supplement to Banking and MonetaryStatistics, Jan. 1962.


as

17. PRINCIPAL ASSETS AND LIABILITIES, AND NUMBER OF COMMERCIAL AND MUTUAL SAVINGS BANKS, BY CLASS OF BANK,DECEMBER 31, 1968, AND DECEMBER 30, 1967


Loans and investments, totalLoansInvestments

U.S. Govt. securities...Other securities

Cash assets

Deposits, totalInterbankOther demandOther time

Total capital accounts

Number of banks

Loans and investments, totalLoansInvestments

U.S. Govt. securitiesOther securities

Cash assets

Deposits, totalInterbankOther demandOther time

Total capital accounts

Number of banks

471,382321,278150,10368,28481,81984,748

500,16024,696206,502268,96242,275

14,179

425,417288,826136,59166,75269,83978,924

456,78421,889190,817244,07739,371

14,223

December 31, 1968

402,477266,475136,00164,46571,53683,752

435,23824,694205,991204,55337,006

13,679

326,023221,222104,80147,88156,92073,756

356,35123,540169,125163,68630,060

5,978

236,129159,25776,87235,30041,57250,953

257,88415,303

119,904122,67721,524

4,716

89,89461,96527,92912,58115,34822,803

98,4678,237

49,22141,009

8,536

1,262

76,45445,25331,20016,58414,6169,996

78,8871,154

36,86640,867

6,946

7,701

73,55343,37830,17516,15514,0209,305

76,368960

35,34440,064

6,4827,504

2,9011,8751,025

429596691

2,519194

1,522803464

197

68,90554,80314,1023,819

10,283996

64,9222

51164,4095,269

500

60,08848,28611,8032,8558,948

883

56,8592

49056,367

4,481

333

December 30, 1967

361,186237,237123,95062,47361,47777,928

396,29121,888190,362184,04134,384

13,722

294,098197,82796,27146,95649,31568,946

327,01120,880157,508148,62428,098

6,071

208,971139,31569,65634,30835,34846,634

231,37413,963109,632107,77919,730

4,758

85,12758,51326,61512,64913,96622,312

95,6376,916

47,87640,8458,368

1,313

67,08739,40927,67815,51612,1628,983

69,2791,009

32,85435,4176,286

7,651

64,44937,67526,77515,14611,6298,403

67,107831

31,63034,6455,830

7,440

2,6381,735903370533579

2,172177

1,224772457

211

64,23251,59012,6424,2808,362996

60,4941

45660,0384,987

501

55,93645,48910,4473,1117,336881

52,9101

43552,4754,237

331

8,8176,5182,299964

1,335113

8,062

'""ii"8,041788

167

8,2956,1002,1951,1691,026115

7,584

217,563749

170

NOTE.—All banks in the United States.


18. MEMBER BANK INCOME, EXPENSES, AND DIVIDENDS, BY CLASSOF BANK, 1968 AND 1967

Item

In millions of dollars

RevenueOn U.S. Govt.

securitiesOn other securitiesOn loansAll other

Expenses.Salaries and wagesInterest on deposits.. . .All other

Net current earnings beforeincome taxes

Recoveries and profits 1...Losses and charge-offs 2 . .Net increase (or decrease,

-+-) in valuation reserves.

Net income before relatedtaxes

Taxes on net incomeNet incomeCash dividends declared 3..

Ratios:Net current earnings

before income taxest o -

Average total capitalaccounts

Average total assets. .Net income to—

Average total capitalaccounts

Average total assets...Average return on—

U.S. Govt. securities..Loans

J20,819

2,2081,929

14,1432,540

15,7584,7307,1083 919

5,061

3591,185

377

3 8591,0542,8051,385

17,859

1,9341,561

12,1282,236

13,5074,2116,0913,205

4,353

398807

327

3,6161,0072,6071,248

3,675

268280

2,599527

2,640780

1,175685

1,035

60253

107

734228506320

3,080

245232

2,159444

2,189666

1,037485

891

36109

98

721237484284

889

8372

612121

642164327152

246

1466

15

1795512456

763

6960

527106

558150274134

205

2125

11

1895813152

7,777

686701

5,3891,000

5,9501,7692,7081,474

1,827

119424

124

1,3983741,024

546

6,673

611578

4,598885

5,0921,5722,3311,190

1,580

163315

96

1,332362970493

8,479

1,170875

5,543898

6,5252,0182,8991,609

1,953

166442

130

1,5473961,151

463

7,344

1,009691

4,843800

5,6671,8232,4491,396

1,676

179358

123

1,3753511,024

420

In per cent

17.41.30

9.6.72

4.786.82

16.01.24

9.6.74

4.486.39

17.31.34

8.5.65

4.716.41

16.11.31

8.7.71

4.605.81

17.81.40

9.0.74

4.796.38

16.31.33

10.4.85

4.415.88

17.61.29

9.9.72

4.816.90

16.21.22

9.9.75

4.566.45

17.21.28

10.1.76

4.777.01

15.71.21

9.6.74

4.416.69

1 Includes recoveries credited to valuation reserves.2 Includes losses charged to valuation reserves.3 Includes interest on capital notes and debentures.


19. CHANGES IN NUMBER OF BANKING OFFICES IN THEUNITED STATES DURING 19681

Type of officeand change

Allbanks

Number of banks,Dec. 31,1967 14,222

Commercial banks (incl. stock savingsbanks and nondeposit trust companies)

Total

13,721

Member

Total

6,071

Na-tional !

4,758

State2

1,313

Nonmember

In-sured

7,439

Non-in-

sured 2

211

Mutualsavingsbanks

In-sured

331

Changes during 1968

Non-in-

sured

170

Changes during 1968

Newbanks3 89Consolidations and ab-

sorptions :Banks converted into

branches -122Other - 1 1

Reopening of suspend-ed bank 1

Interclass changes:Nonmember to—

National -State member

State member to— l

NationalNonmember

National to—Nonmember *

Noninsured to in- -sured *

Insured to non-insured

Net change —43

Number of banksDec. 31,1968 14,179

Number of branches andadditional offices,Dec. 31, 19674 18,519

87

- 1 2 0- 1 0

- 4 2

13,679

17,690

15

- 6 1- 4

63

— 40

- 1 2

- 9 3

5,978

13,649

14

- 5 4- 3

6

7

- 1 2

- 4 2

4,716

9,991

1

- 7- 1

3

n

— 40

- 5 1

1,262

3,658

64

- 5 6- 4

— 6- 3

40

12

19

— 165

7,504

3,995

8

- 32

- 1 9

1- 1 4

197

46

2

- 1

1

2

333

669

j

— 1

- 3

167

160

De novoBanks convertedDiscontinuedInterclass changes:

Nonmember to—NationalState member

State member to—

National to—

Noninsured to in- |

Facilities reclassified asbranches ;

Net change

Number of branches andadditional offices, jDec. 31,19684

1,105122

- 7 7

6

1,156

19,675

1,036120

- 7 5

6

1,087

18,777

68477

- 6 8

4014

- 2 4

- 2 6

6

703

14,352

48866

- 3 9

40

287

- 1 4- 2 6

4

806

10,797

19611

- 2 9

14

-287- 2 4

14

2

-103

3,555

35143

- 7

- 4 0- 1 4

24

26

1

384

4,379

i

- 1

46

601

- 2

>

60

729

91

i

9

169

For notes see end of table.


19. CHANGES IN NUMBER OF BANKING OFFICES IN THEUNITED STATES DURING 19681—Continued

Type of office Alland change banks

Number of banking fa-cilities, Dec. 31,1967 5 238

Commercial banks (incl. stock savingsbanks and nondeposit trust companies)

Total

238

Member

Total

207

Na-tional i

192

State 2

15

Nonmember

In-sured

31

Non-in-

sured2

Mutualsavingsbanks

In-sured

Non-in-

sured

Changes during 1968

Established 10Discontinued —6Interclass changes:

State member tonational . . .

National to non-,

Facilities reclassified asbranches — 6

Net change —2

Number of banking fa-cilities, Dec. 31,1968 236

10- 6

- 6

- 2

236

6- 5

1

- 6

- 6

201

5- 5

1

1

- 4

- 4

188

1

- 1

- 2

- 2

13

4- 1

1

4

35

1 Includes a national bank (6 branches) in the Virgin Islands; other banks or branches located in thepossessions are excluded.

2 State member bank figures include, while noninsured bank figures exclude, 1 noninsured trustcompany without deposits.

3 Exclusive of new banks organized to succeed operating banks.4 Excludes banking facilities.5 Provided at military and other Government establishments through arrangements made by the

Treasury.


10. NUMBER OF PAR AND NONPAR BANKING OFFICES,DECEMBER 31, 1968

F.R. district,State, or

other areaBanks

DISTRICT

Total

Branches& offices

BostonNew YorkPhiladelphia. .ClevelandRichmond....AtlantaChicagoSt. LouisMinneapolis. .Kansas City...DallasSan Francisco.

380491492816777

1,5902,5501,5061,3571,9311 291

'417

Total :13,598

STATE ;

AlabamaAlaskaArizonaArkansasCalifornia....ColoradoConnecticut...DelawareDistrict of

Columbia...Florida

GeorgiaHawaii 'IdahoIllinois ;Indiana IIowa J

?Kansas !

Kentucky :Louisiana >Maine '

Maryland -Massachusetts.^Michigan :Minnesota.... iMississippiMissouriMontanaNebraskaNevadaNew Hamp-

shire

New Jersey...New Mexico..New YorkNorth

CarolinaNorth

DakotaOhioOklahoma... .OregonPennsylvania..Rhode Island..

2681213

2481562186419

14455

42872607141467260134622940

1221573387221856641344369

76

22663316

117

16852542350

50413

1,3963,1041,3031,7422,5661,1902,049764256250267

4,299

19,186

23655

278141

2,78410

37678

10024

24612:14:455772816128632919

469682

1,09910

296

3'7

41

796114

2,208

933

691,130

56306

1,521158

12,666

Par

Total

Banks Branches& offices

380491492816715

1,1642,5501,3091,1761,9311,226416

20511131701562186419

14430

212726

1,07141467260134612840

122157338722

87632134436

9

76

22663

316

79

77525423

50504

13

1,3963,1041,3031,7422,5021,0692,049

705194250255

4,299

18,868

22155

278124

2,78410

37678

10024

23012214245

577281

6128627319

46968:

1,09910

224

377

41

796114

2,208

872

291,130

56306

1,521158

Member


243374359484378536974474489833651182

5,977

111548182135357

12212

74216

511197159210945827

5510320822346174881396

53

18339

254

26

46344243

358

1,0722,722953

1,4761,613803

1,370432117156150

3,718

14,582

1824620897

2,5136

30237

9313

18643128363737337173191144

29:545910

613:40

c2167

35

69466

2,097

458

97445

2481,173

88

Nonmember


137117133332337628

1,576835687

1,098575234

6,689

94698974832912

2218

138510

5602175133912527013

675413049941458462973

23

432462

53

31181180311468

3243823502668892666792737794105581

4,286

399702727147441

711

4479149

204208241138253

17713718949245

10248

Mil

414

16156115834870

Nonpar(nonmember)


62426

197181

932

78

25

216

101

64121

5962

12

318

15

16

56

72

61

40

For notes see end of table.

390


20. NUMBER OF PAR AND NONPAR BANKING OFFICES,DECEMBER 31, 1968—Continued

F.R. district,State, or

other area

STATE—Cont.

SouthCarolina....

South Dakota.Tennessee....TexasUtahVermontVirginiaWashington...West Virginia.Wisconsin....Wyoming

OTHERAREA

Puerto Rico 2..Virgin

Islands2 . . . .

Total

Banks

118165302

1,1495444

23794

19560270

12

7

Branches& offices

35091

41763

11571

711487

4223

174

19

Par

Total

Banks

9475

2491,127

5444

23794

19560270

12

7

Branches& offices

34769

40163

11571

711487

4223

1

174

19

Member

Banks

305887

5962027

15235

11416653

1

Branches& offices

22356

278288541

545431

266

1

17

19

Nonmember

Banks

6417

1625313417855981

43617

12

6

Branches& offices

12413

123353030

166562

157

157

Nonpar(nonmember)

Banks

24905322

Branches& offices

32216

1 Includes 8 N.Y.C. branches of 2 insured nonmember Puerto Rican banks.2 Puerto Rico and the Virgin Islands assigned to the N.Y. District for check clearing and collection

purposes. All member branches in Puerto Rico and all except 6 in the Virgin Islands are branches ofN.Y.C. banks. Certain branches of Canadian banks (2 in Puerto Rico and 1 in Virgin Islands) areincluded above as nonmember banks; and nonmember branches in Puerto Rico include 8 other branchesof Canadian banks.

NOTE.—Comprises all commercial banking offices on which checks are drawn, including 236 bankingfacilities. Number of banks and branches differs from that in Table 19 because this table includesbanks in Puerto Rico and the Virgin Islands but excludes banks and trust companies on which nochecks are drawn.

391


21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITIONOF ASSETS OR ASSUMPTION OF LIABILITIES APPROVED BY

THE BOARD OF GOVERNORS DURING 1968

APPLICANT BANK OTHER BANK OR BANKS Page

Bank of Virginia, Richmond, Va.

Bankers Trust Company, NewYork, N.Y.

Chemical Bank New York TrustCompany, New York, N.Y.

Citizens State Bank, Sturgis, Mich.

Colonial Bank and Trust Company,Waterbury, Conn.

Fidelity Bank, Philadelphia, Pa.

First Pennsylvania Banking andTrust Company, Philadelphia, Pa.

Girard Trust Company, Philadel-phia, Pa.

Kingston Trust Company, Kingston,N.Y.

Marine Midland Trust Company ofRockXand Cowaty, Nyack, N.Y.

Merrill Trust Company, Bangor,Maine

Middle Tennessee Bank, Columbia,Tenn.

Wachovia Bank and Trust Com-pany, Winston-Salem, N.C.

Wells Fargo Batik, San Francisco,Calif.

Peoples Bank of Reedville, Reed- 394ville, Va.

Peoples Bank of White Stone,White Stone, Va.

Northern Westchester National 405Bank, Chappaqua, N.Y.

Chemical Bank, New York, N.Y. 412(and change its title to ChemicalBank, New York, N.Y.)

E. Hill & Sons State Bank & Trust 402Company, Colon, Mich.

Litchfield County National Bank, 407New Milford, Conn.

Doylestown Trust Company, 399Doylestown, Pa.

Chestnut Street Trust Company, 413Philadelphia, Pa.

Doylestown National Bank and 399Trust Company, Doylestown, Pa.

Kerhonkson National Bank, Ker- 403honkson, N.Y.

Lafayette Bank and Trust Company 409of Suffern, Suffern, N.Y.

Hammond Street Trust Company, 396Bangor, Maine

Hampshire Bank, Hampshire, Tenn. 410

State Bank, Laurinburg, N.C. 397

Bank of Pasadena, Pasadena, Calif. 393

392



THE BOARD OF GOVERNORS DURING 1968 1

Name of bank, and type of transaction 2

(in chronological order of determination)

No. 1—Wells Fargo Bank,San Francisco, Calif.,

to merge withBank of Pasadena,

Pasadena, Calif.

Resources(in millionsof dollars)

4,274.0

10.8

Banking

Inoperation

234

2

I offices

To beoperated

236

JSUMMARY REPORT BY THE ATTORNEY GENERAL (1-10-68)

Wells Fargo—the third largest bank in California—proposes to acquireby merger the Bank of Pasadena. The latter is a growing institution in apredominantly suburban community in Los Angeles County.

Until December 1967, Wells Fargo's offices were confined to the north-ern and central parts of the State, while Bank of Pasadena's were in LosAngeles County in the southern part of the State. However, on December4, 1967, Wells Fargo officially opened its previously approved de novosouthern headquarters office on Pershing Square in downtown Los Angeles.This office, manned by a substantial staff (95 employees), is only 10 milesfrom Bank of Pasadena's main office and 9 miles from its existing branchoffice. Substantial numbers of people in Pasadena commute to downtownLos Angeles to work; and many of these Pasadena customers may findWells Fargo's new office a competitive banking alternative. In addition,Wells Fargo already has substantial amounts of trust business and loanparticipations from customers in the Los Angeles area, and at least someof this existing business is no doubt already directly competitive with theBank of Pasadena. In sum, the amount of direct competition between WellsFargo and Bank of Pasadena—while not precisely measurable at themoment—can be expected to increase in the foreseeable future. The increasewould be particularly great if Wells Fargo, a new banking entrant intosouthern California, were to branch de novo into Pasadena itself. The Pasa-dena area (for which market share data is not presently available) is alreadydominated by branch offices of the large bank networks. The merger wouldeliminate 1 of only 4 independent banks in the area. Thus, existing andpotential competition would be eliminated by the proposed merger.

Banking concentration in the Los Angeles Standard Metropolitan Statisti-cal Area (Los Angeles County) is high; 85.1 per cent of the deposits areheld by the 5 largest banks. The effect of this merger on concentration inthe Los Angeles SMSA is not yet measurable since the new Wells FargoOffice there has just recently been opened. Bank of Pasadena has about 0.1per cent of the total deposits in this entire SMSA. The merger's effect onpresent concentration in the entire SMSA—clearly too broad an area toconstitute the appropriate market here—would be small.

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS (3-7-68)

Pasadena Bank operates its main office in Pasadena, 10 miles northeastof Los Angeles, and its single branch in South Pasadena, 3.5 miles south.Wells Fargo operates 1 branch (established in December 1967) in LosAngeles, 8 miles southwest of Pasadena Bank's branch. Its remaining 233offices are all located at a distance of 200 miles or more from Los Angeles.

For notes see p. 413.



THE BOARD OF GOVERNORS DURING 1968 i—Continued


(in chronological order of determination)Resources

(in millionsof dollars)

Banking offices

Inoperation

To beoperated

BASIS FOR APPROVAL BY THE BOARD OF GOVERNORS—Cont.

In the area from which Pasadena Bank derives the preponderance of itsbusiness, there are 78 offices of 11 banks, including 58 offices operated by5 of California's 7 largest banks. These 5 banks hold 83 per cent of thecommercial bank deposits and operate 73 per cent of the commercial bank-ing offices, in the area. In Los Angeles County they hold 85 per cent of thecommercial bank deposits and operate 76 per cent of the commercial bank-ing offices. The 7 largest banks in California hold nearly 85 per cent of allcommercial bank deposits in the State; Wells Fargo, with 9.7 per cent ofsuch deposits, ranks third. It seems unlikely that meaningful competitionexists between Pasadena Bank and the recently established Los Angelesbranch of Wells Fargo.

Pasadena Bank, which began operations on April 22, 1963, has beenwithout a president since April 11, 1967. The task of filling this post, aswell as that of attracting other needed management personnel, is perhapsmade difficult by other problems of the bank. In 1966 its earnings werecomparable to the average for similar sized member banks in California; in1967, however, its earnings decreased by 8.5 per cent. Pasadena Bank holdsa large volume of poor quality loans, and the bank's capital is lower than isdesirable.

While the existence of feasible alternative solutions cannot be entirelyruled out, the proposed merger would immediately resolve the managerialand other problems of Pasadena Bank, which is in the interests of the com-munity the bank serves.

No. 2—The Bank of Virginia,Richmond, Va.

to merge withThe Peoples Bank of Reedville,

Reedville, Va., andThe Peoples Bank of White Stone,

White Stone, Va.

292.1

3.5

33

2

1

36

SUMMARY REPORT BY THE ATTORNEY GENERAL (2-8-68)

The Bank of Virginia, which has total deposits of $259 million, proposesto merge with 2 small banks in eastern Virginia—The Peoples Bank ofReedville (hereinafter Reedville Bank) and The Peoples Bank of WhiteStone (hereinafter White Stone Bank).

Reedville Bank is located in Reedville in Northumberland County (1960population 10,185), and has a branch office in Burgess. White Stone Bankis located in the small town of White Stone, Lancaster County (1960 popu-lation 9,174). Lancaster and Northumberland are contiguous counties lyingon the Chesapeake Bay end of the "Northern Neck," the peninsula betweenthe Potomac and Rappahannock Rivers.






(in chronological order of determination)Resources(in millionsof dollars)

Banking offices

Inoperation

To beoperated

SUMMARY REPORT BY THE ATTORNEY GENERAL—Cont.

Since the nearest office of The Bank of Virginia is about 85 miles fromReedville Bank and 70 miles from White Stone Bank, there would seemto be little or no direct competition between them. However, the 2 proposedmergers taken together would appear to eliminate some competition betweenWhite Stone Bank and Reedville Bank. The main offices of White StoneBank and Reedville Bank are about 25 miles apart. Two Lancaster Countybanks are located in the intervening area, about 5 miles from White StoneBank and about 20 miles from Reedville Bank, and they compete withboth White Stone Bank and Reedville Bank.

In Lancaster County, White Stone Bank—third largest bank in the county—presently controls 20 per cent of IPC3 demand deposits; in Northumber-land County, Reedville Bank—the largest bank in the county—now holdsabout 44 per cent of IPC 3 demand deposits.

Virginia law—which permits statewide branching only by merger—wouldprevent Bank of Virginia from entering either Lancaster or NorthumberlandCounty by de novo branching. Accordingly, the only adverse effect on po-tential competition would be the elimination of the possibility that Bank ofVirginia would have entered either of these counties by acquisition of asmaller bank; this consideration applies particularly to the merger withReedville Bank, since all the other banks in Northumberland County aresmaller than Reedville Bank.


The head office of Reedville Bank is in Reedville (population 650),which is in the eastern portion of Northumberland County (population10,000), at the Chesapeake Bay end of the Northern Neck Peninsula. TheBank operates a branch at Burgess, 6 miles west of Reedville. A bank withdeposits of $3.3 million is located 5 miles west of Burgess at Heathsville,and a bank (deposits $12.7 million) headquartered in Colonial Beach(Westmoreland County) operates a branch at Callao, 12 miles west ofBurgess. There are no other commercial banking facilities in Northumber-land County. The sole office of White Stone Bank is in White Stone (popu-lation 400), which is about 18 miles directly south of Burgess in south-eastern Lancaster County (population 9,000). There are 3 other banks inLancaster County, including 2 (with deposits of $7 million and $3.3 mil-lion) in Kilmarnock, which is on the highway between White Stone andBurgess. The development of meaningful competition between ReedvilleBank and White Stone Bank seems unlikely in view of the distances separat-ing their offices and the sparsely settled nature of the intervening area,which contains 2 offices of other banks. Furthermore, under State law,neither bank would be permitted to establish a de novo branch outside thecounty in which it is headquartered.

Virginia Bank, the fifth largest bank in Virginia and a subsidiary of aregistered bank holding company, Virginia Commonwealth Bankshares,Inc., is headquartered in Richmond, approximately 70 miles west of WhiteStone and 85 miles west of Reedville. The nearest office of Virginia Bank





Banking officesName of bank, and type of transaction 2 Resources(in chronological order of determination) (in millions

of dollars) Inoperation

To beoperated


to the banks proposed to be acquired is about 57 miles south of WhiteStone and 77 miles south of Reedville. State law would preclude VirginiaBank from entering either Northumberland or Lancaster County by de novobranching.

The replacement of Reedville Bank and White Stone Bank by offices ofVirginia Bank, with its larger lending limit and broader range of bankservices, would afford added convenience for the Reedville-White Stoneareas without having significant adverse effects on banking competition.

No. 3—The Merrill Trust Company, j 81.3 17 17Bang or, Maine §

to merge with jHammond Street Trust j (Newly organized bank;

Company, Bangor, Maine i not in operation.)


The Merrill Trust Company, organized in 1933, proposes to merge Ham-mond Street Trust Company, a proposed new bank. Under the merger planit will be eligible to transact business for only 1 day; its separate existencewill cease upon its merger into Merrill Trust.

Merrill Trust will be the only affiliate of Merrill Bankshares Company, anewly organized corporation under the laws of Maine, which will be a 1-bank holding company.

The purpose of organizing the new Hammond Street Trust Company andits merger with Merrill Trust is to offer an opportunity for stockholders ofMerrill Trust, who may dissent from the plan to make Merrill Trust thesubsidiary of Merrill Bankshares, to surrender their stock and receive cash.Merrill Bankshares plans to become a registered bank holding company byacquiring stock of other banking corporations.

The proposed acquisition will not result in the elimination of any exist-ing competition nor an increase in the concentration of banking.


The proposed merger of Merrill Trust and Hammond Trust, the latterbeing a bank with no operating history, formed solely to facilitate a cor-porate reorganization plan, is one step in a plan of corporate reorganiza-tion whereby Merrill Bankshares Company, Bangor, Maine, a newly or-ganized Maine corporation, would become a 1-bank holding company,owning all of the stock of Merrill Trust. The merger would have no effecton competition, no effect on the banking convenience and needs of theBangor community, and would not alter the financial and managerial re-sources and prospects of Merrill Trust.







No. 4—Wachovia Bank and Trust Company,Winston-Salem, N.C.

to merge withThe State Bank,

Laurinburg, N.C.


1,274.0

11.9

Banking offices

In

operation

106

5

To beoperated

111


Wachovia Bank, the largest bank in the State, has acquired 10 otherbanks since 1956, which, when acquired, had aggregate deposits of $147million and 42 banking offices.

The State Bank operates 5 offices in portions of 2 adjoining counties onthe South Carolina border in the south central part of North Carolina. Itis the second largest of 3 banks, with an aggregate of 10 banking offices,operating in Scotland County and a portion of adjoining Robeson Countyknown as the Maxton area; as of June 30, 1966, State Bank held 54 percent of total IPC3 deposits in the Scotland County-Maxton area. TheScotland County-Maxton area has recently experienced substantial indus-trial growth, and its future prospects appear to be excellent, but the numberof banks there have remained unchanged since 1959. Wachovia does notoperate a banking office in the area; its closest office is some 80 milesdistant. It does derive significant amounts of business from larger firms inthe area that State Bank, because of its size, could not handle. Hence, littleor no existing competition would be eliminated by this proposed merger.

This proposed merger would, however, eliminate Wachovia as a sourceof potential competition through de novo branching in the highly concen-trated Scotland County-Maxton area where State Bank is presently thelargest competitor. North Carolina law permits statewide de novo branch-ing. Wachovia can be considered to be one of the most likely potentialentrants through de novo branching into the Scotland County-Maxton areain the near future. It has the resources to establish such branches, and ithas demonstrated its capacity and willingness to expand through de novobranching—over 50 per cent of its 106 existing offices were created de novo,and it has recently secured approval to open 10 additional offices.

This proposed merger is another manifestation of a significant trend ofacquisition and mergers by North Carolina's largest commercial banks.This acquisition trend, by reducing the establishment of de novo branchesby the State's largest banks, undoubtedly inhibits the development of amore competitive banking structure not only by eliminating those most ableto enter new markets de novo as sources of potential competition but alsoby increasing the barriers to entry de novo for smaller institutions. More-over, acquisitions of this type tend to foreclose the creation, by means ofmergers between smaller banks in separate local markets, of banking insti-tutions capable of competing with the largest banks in the State for thebusiness of large industrial customers. In this connection we note that StateBank had an offer to merge from Waccamaw Bank and Trust Company,Whiteville—which has $58.8 million in total deposits and 20 offices anddoes not now operate in the Scotland County-Maxton area.

We conclude that the proposed merger would cause a significant lessen-ing of potential competition.





Banking officesName of bank, and type of transaction 2 | Resources(in chronological order of determination) I (in millions


To beoperated


State Bank operates its head office and branches in Laurinburg (popula-tion 8,200), the seat of Scotland County (population 25,200). The bankalso operates a branch at the Laurinburg-Maxton industrial park, and abranch in Maxton (population 1,800), which is 7 miles east of Laurinburgin Robeson County. Commercial State Bank (total deposits of $9 million),which is headquartered in Laurinburg, operates 4 offices in this area; theonly other banking office in the area is the Laurinburg branch of SouthernNational Bank of North Carolina (total deposits of $105 million), theState's seventh largest bank. The nearest office of Wachovia to an officeof State Bank is its branch in Asheboro, 80 miles north of Laurinburg, butWachovia derives a sizable dollar amount of business from a few largeaccounts in the Laurinburg-Maxton area.

While Wachovia, with about 22 per cent of total commercial bank de-posits in the State, is the largest bank in North Carolina, its share of depositshas decreased with the largest percentage of deposits ever held by Wachoviabeing 24.1 per cent, which it held as of December 31, 1961. The acquisitionof State Bank would increase Wachovia's share of the State's total com-mercial bank deposits by about 0.2 per cent. Although it would be prefer-able for Wachovia to enter this area by establishing a de novo branch, theNorth Carolina Commissioner of Banks informed the Board by letter thathe doubted that the State Banking Commission would approve the estab-lishment by Wachovia of a de novo branch in the Laurinburg area, whichis already served by 3 banks, and that his office certainly would not recom-mend approval.

In recent years, the economy of the Laurinburg-Maxton area has beenundergoing a transition from agricultural to manufacturing activities. Wa-chovia has been a factor directly, and indirectly through participations, infinancing the larger concerns in this area whose needs are beyond thecapacity of an institution the size of State Bank with its low lending limit.Wachovia has extended commercial credit in Laurinburg in amounts ap-proximating $2 million on the average, almost double the amount of de-posits it derives from businesses and individuals in the area. Thus, Wa-chovia's contribution to the area's banking needs would not only be a com-petently blended range of banking services and a large lending limit butalso the access to credit resources beyond those generated locally.

The proposed merger would not result in any significantly adverse con-sequences for banking competition, and replacement of State Bank by officesof Wachovia would facilitate the economic growth of the Laurinburg-Maxton area by affording a convenient alternative source of credit formedium-sized business concerns, which are to a great extent dependentupon local sources for banking services.







No. 5—Girard Trust Company,Philadelphia, Pa.

to merge withThe Doylestown National Bank and

Trust Company, Doylestown, Pa.

No. 6—The Fidelity Bank,Philadelphia, Pa.

to merge withDoylestown Trust Company,

Doylestown, Pa.

Resources; (in millions

of dollars)

1,333.6

34.9

- 1,121.4t

• 25.8

Banking

Inoperation

61

5

62

1

I offices

To beoperated

66

63

SUMMARY REPORT BY THE ATTORNEY GENERAL

(1) Girard Trust Company and The Doylestown National Bank andTrust Company (12-14-67):

Girard Trust Bank (hereinafter Girard) is the third largest commercialbank in Philadelphia, Pennsylvania, and its environs, and the 32nd largestin the United States.

Doylestown National's main office is located in Doylestown, BucksCounty, Pennsylvania, which is located approximately 25 miles northwestof Philadelphia. It maintains 4 branches in the immediate vicinity and pro-vides general commercial banking and trust services. During the past 10years, Doylestown National's deposits have doubled and its gross incomehas trebled.

The closest offices of the merging banks are less than 2 miles apart inthe town of Westminster, in southeastern Bucks County.

We believe that Bucks County in its entirety constitutes the best marketwithin which to assess the competitive effects of the proposed merger. Thiscounty, consisting of small towns and rural communities, is a chief areaof expansion in the Philadelphia Metropolitan Area; and its commercial,industrial, and suburban features are expected to increase rapidly duringthe next decade.

Within Bucks County, Girard already holds about 5.5 per cent of totalIPC3 deposits at its 2 established branch offices in Westminster and Riegels-ville; its Davisville Shopping Center branch, just opened in November, maybe expected to increase this percentage. Doylestown National controls ap-proximately 10.2 per cent of the Bucks County IPC3 deposit total. As aresult of this proposed merger, accordingly, Girard would control a mini-mum of 16 per cent of total Bucks County IPC 3 deposits.





Banking officesName of bank, and type of transaction2 Resources(in chronological order of determination) (in millions


To beoperated


This merger would eliminate considerable existing competition betweenthese banks in Bucks County and would increase concentration in thatmarket to a significant degree. The merger would also eliminate the possi-bility of additional direct competition between the 2 banks as a result ofthe probable de novo expansion by Girard in central Bucks County. Finally,an especially vigorous and growing independent competitor would be re-moved from the area. We conclude that the effect of this merger on bankingcompetition within the Bucks County market would, therefore, be signifi-cantly adverse.

(2) The Fidelity Bank and Doylestown Trust Company (1-2-68):

Fidelity has 3 branches within a 10-mile radius of Doylestown Trust'sonly office; its closest office (in Lansdale) is about 6 to 7 miles away. Italso has 3 other branches in Bucks County. We believe that the proposedmerger would eliminate significant direct competition between DoylestownTrust and 3 Fidelity offices within 10 miles of Doylestown.

Within Bucks County, a market for which published data is available,Fidelity has 6 offices with IPC3 deposits of $52 million. Doylestown Trust's1 office hasi IPC 3 deposits of about $19 million. The 2 banks account forabout 19 per cent and 7 per cent, respectively, of total Bucks County IPC3

deposits which, on June 30, 1966, amounted to $268 million.The proposed merger is part of a merger trend in central Bucks County.

Three proposed mergers involving banks in Doylestown are now pending:(1) Girard Trust Bank ($1.0 billion IPC3 deposits) and Doylestown Na-tional Bank and Trust Company ($26.9 million IPC3 deposits); (2) Chal-font National Bank ($6.2 million IPC 3 deposits) and The Bucks CountyBank and Trust Company ($29.8 million IPC3 deposits); and (3) Fidelityand Doylesrown Trust, which is under consideration here.

If all of these contemplated mergers were consummated, the 3 localbanks in central Bucks County—Doylestown National Bank and TrustCompany, Doylestown Trust Company, and Chalfont National Bank—would disappear as independent competitors; banking alternatives in centralBucks County would be reduced from 8 competitors to 6. The over-alleffect of these 3 mergers would be to alter significantly the Bucks Countybanking structure, to the serious detriment of competition there.


Doylestown National and Doylestown Trust are headquartered in Doyles-town Township (1960 population 3,800), which is located about 25 milesnorth of Philadelphia in the center of Bucks County (1960 population309,000). An estimated 28,000 people reside in the Doylestown area.Doylestown Trust has no branch offices. Doylestown National operates 4branch offices: 1 in Doylestown; 1 in Buckingham, 4 miles east of Doyles-town; and 1 each in Warrington and Warminster, about 5 miles and 9 miles,respectively, south of Doylestown.





Banking officesName of bank, and type of transaction2 Resources(in chronological order of determination) ! (in millions


To beoperated


Girard, the third largest bank headquartered in Philadelphia, operates3 branch offices in Bucks County. Two are 21 and 11 miles, respectively,from the nearest office of Doylestown National, and because of the distancesseparating these offices from offices of Doylestown National, and thepresence of offices of other banks in the intervening and adjacent areas,there is no meaningful existing or potential competition between Girardand Doylestown National through these offices. There is potential for somecompetition between Girard's other Bucks County office, which is about 3miles from an office of Doylestown National; however, there are offices ofseveral other large banks nearby. Doylestown National derives about 80per cent of its deposits and loans from the central area of Bucks County.The deposits Girard derives from this area equal less than 6 per cent ofDoylestown National's deposits, if the account of one large corporatecustomer with Girard is omitted. Similarly, the loans Girard derives fromcentral Bucks County equal about 6 per cent of Doylestown National'sloans, if one large-line loan that is far beyond the capacity of DoylestownNational is omitted.

Fidelity, the fourth largest bank headquartered in Philadelphia, operates6 branch offices in Bucks County. Its nearest office to the sole office ofDoylestown Trust is more than 14 miles south of Doylestown. There arenumerous offices of other banks operating in the area between Doyles-town Trust and the offices of Fidelity, and there is very little existing orpotential competition between the 2 banks through their present offices.Doylestown Trust derives about 80 per cent of its deposits and loans fromthe central Bucks County area. The deposits and loans that Fidelity derivesfrom central Bucks County equal about 6 per cent of Doylestown Trust'sdeposits and loans.

The central Bucks County area is served by 10 offices of 6 banks thathave their headquarters in Bucks County. Doylestown National and Doyles-town Trust serve as each other's major competitor. The Philadelphia Na-tional Bank, the second largest bank headquartered in Philadelphia, hasreceived approval to establish a de novo branch office in Doylestown andanother in nearby New Britain; in addition, The First Pennsylvania Bank-ing & Trust Co., the largest Philadelphia-based bank, has received approvalto establish a de novo branch office in Doylestown; and Bucks County Bankand Trust Co. (with deposits of $33.6 million) has received approval toestablish a de novo branch office about 5 miles north of Doylestown.

The addition of these competitors will, of course, significantly alter thebanking structure of central Bucks County; and, although State law, per se,would not preclude Fidelity and Girard from establishing de novo branchoffices in the Doylestown area, there is now a serious question whether themarket would support additional de novo branch offices until the areaundergoes substantial growth.

The effect of the mergers on banking convenience and needs would belimited to the central Bucks County area. The present banking needs ofthe area are being served reasonably well; and, with the opening of therecently approved de novo branch offices, it appears that the area's banking






(in chronological order of determination)Resources(in millionsof dollars)

Banking offices

Inoperation

To beoperated


needs will', be met satisfactorily for some time. However, the replacementof the two Doylestown-based banks with offices of Girard and Fidelitywould provide for central Bucks County convenient alternative sources offull banking services. Further, Bucks County is the last undeveloped areafor outward expansion from Philadelphia; from 1950 to 1960 the county'spopulation increased 113 per cent, and the prospects for continued growthare excellent. While most of the growth thus far has taken place in thesouthern portion of Bucks County, the central area is obviously due forsubstantial growth over the next decade or two. The presence of offices ofGirard and Fidelity, full-service banks with large lending limits, wouldfacilitate that growth. The net effect of the proposed mergers on competi-tion would not be adverse, and the mergers would benefit the banking con-venience and needs of the central Bucks County area and contribute toits economic development.

No. 7—The Citizens State Bank,Sturgis, Mich.

to acquire the assets and assume thedeposit liabilities of

E. Hill & Sons State Bank &Trust Company, Colon, Mich.

22.0

5.5


The merging banks are small, serve relatively limited banking areas inthe lower southwest part of Michigan, and are separated by a distance of14 miles. Thus competition between them appears to be minimal. Sinceunder Michigan law, no bank may open a de novo branch in any townother than the town in which it is located, if another bank is already operat-ing there, neither of the merging banks could enter the community of theother; accordingly, this merger would not eliminate potential competitionbetween the 2 banks.


The Citizens State Bank (hereinafter Sturgis Bank) operates its headoffice and sole branch in Sturgis (population about 8,900); the sole office ofE. Hill & Sons State Bank & Trust Company (hereinafter Colon Bank) isabout 15 miles north of Sturgis in Colon (population about 1,100). BothSturgis and Colon are located in St. Joseph County (population about42,000). Because of the size of Sturgis Bank and Colon Bank and thedistances separating their offices, there is little meaningful competitionbetween them. Michigan law does not permit either bank to establish ade novo branch in the community of the other. The closest banking office








Banking offices

Inoperation

To beoperated


to Colon Bank is a branch of a much larger bank (headquartered inBattle Creek) located about 6 miles north of Colon. The closest unit bankis located about 7 miles south of Colon and is slightly smaller than ColonBank. However, that bank is also about 8 miles from Sturgis and currentlycompetes effectively with both banks located there. There are also officesof 6 other banks within approximately 20 miles of either Sturgis or Colon,including offices of 2 substantially larger banks headquartered in Kalama-zoo.

The proposed transaction would benefit the banking convenience andneeds of the area presently served by Colon Bank and would have no ma-terial consequences for banking competition. The lending limit of theColon office would be increased substantially, the interest rate paid onsavings deposits would be increased, and the banking hours of the officewould be extended. In addition, the conversion of Colon Bank into anoffice of Sturgis Bank would provide in the Colon area more convenientaccess to broader credit accommodations and to a generally wider rangeof banking services.

No. 8—Kingston Trust Company,Kingston, N.Y.

to merge withThe Kerhonkson National Bank,

Kerhonkson, N.Y.

42.6

7.8


Both Kingston Trust Company (hereinafter Kingston Trust) and Ker-honkson National Bank (hereinafter National) are located in UlsterCounty, New York, on the Hudson River midway between New York Cityand Albany. Kingston Trust has its main office in Kingston and operates 5branch offices throughout the county. National has its main office inKerhonkson and operates branch offices at Stone Ridge and Hurley.

National's branch in Hurley is located only 2 to 3 miles from KingstonTrust's main office, and the 2 banks should be active competitors. Theproposed merger would eliminate that competition and increase KingstonTrust's share of IPC 3 demand deposits in Ulster County from approxi-mately 28 to 31 per cent and its share of total deposits from approximately24 to 30 per cent.

While National has experienced some management problems in the pastyear, its prospects appear to be good since it is located in a rapidly grow-ing area and has almost tripled its net operating income over the past 5years. National's directors have had several offers to enter into what wouldappear to be less anticompetitive mergers than the one here proposed, butapparently did not seriously consider those offers.





Banking officesName of bank, and type of transaction2 Resources(in chronological order of determination) (in millions


To beoperated


We conclude that the competitive effects of the proposed merger willbe adverse and that National has not fully explored the possibility of be-coming a partner to a less anticompetitive merger.


Kingston Bank operates its head office and 2 of its 5 branches inKingston (population 20,300); the bank also operates a branch 1 milenorth, and 2 others in towns 25 miles from Kingston. Kerhonkson Bank,headquartered in Kerhonkson (population 1,200), about 18 miles southwestof Kingston, operates 2 branches, located 10 and 2 miles, respectively,southwest of Kingston. All offices of the 2 banks are in Ulster County,which is served by 29 offices of 10 banks (excluding 1 office that, due todistance, is not competitive with either bank involved in this proposal).Kingston Bank holds 22 per cent of the deposits held by these 29 offices,and the second and third largest banks in terms of area deposits hold 21per cent and 19 per cent, respectively. The total deposits of the second-ranking bank exceed those of Kingston Trust by 50 per cent, and thebank is a subsidiary of a bank holding company, the sixth largest bankingorganization in the State. Kerhonkson Bank is the ninth largest and holds4 per cent of the area deposits.

Kerhonkson Bank has not been a very effective competitor. UlsterCounty's population of 137,000 represents an increase of 15 per cent since1960, and a 47 per cent increase since 1950. During the period 1960-66population growth in the area from which Kerhonkson Bank derives thebulk of its business represented 13 per cent of the population growth in thewhole of Ulster County, yet the bank's share of the increase in bankdeposits in the county was only 7 per cent. More particularly, the volumeof deposits and loans generated by its branch nearest Kingston (establishedin 1964) is far below what could reasonably be expected for the sole bank-ing office in a community with a population of 6,100 in 1966, a 35 percent increase' since 1960. Further, during 1967, Kerhonkson Bank experi-enced a decline in deposits of 3 per cent, and in recent months the rate ofdecline has accelerated to an annual rate of about 12 per cent. In early1967 Kerhonkson Bank's president, who had served the bank for 20 years,became ill, and in September of that year he died. The directors havemade a reasonable effort to deal with the management problem, but havenot succeeded. The directors of Kerhonkson Bank initiated discussions re-garding a possible merger with 5 banks, including Kingston Bank; 3 otherbanks expressed an interest in merging with Kerhonkson Bank. In theBoard's judgment, the effect on competition of the merger of KerhonksonBank with any 1 of these 7 other banks would not differ so significantlvfrom that of its merger with Kingston Bank as to lend much weight toapproval or disapproval.








Banking offices

Inoperation

To beoperated


The merger of Kerhonkson Bank and Kingston Bank would eliminatesuch competition as exists between them, as well as the potential for thedevelopment of additional competition, and enhance slightly the positionof Kingston Bank. Kerhonkson Bank, however, has not been a vigorouscompetitor, and the merger would remove home office protection fromKerhonkson, thus opening the community to de novo branching by otherbanks. The replacement of Kerhonkson Bank by offices of Kingston Bankwould make a broader range of banking services more conveniently avail-able in the communities presently served by Kerhonkson Bank. The mergerwould, of course, eliminate Kerhonkson Bank as an alternative source ofbanking services. However, it is in the interests of the communities servedby Kerhonkson Bank that the bank's problems be resolved fairly promptly;the proposed merger would achieve that end.

No. 9—Bankers Trust Company, 5,462.0New York, N.Y. ;

to merge withNorthern Westchester 33.9

National Bank, Chappaqua, N.Y.

72

80


Bankers Trust Company (hereinafter Bankers Trust), the sixth largestcommercial bank in New York City and the seventh largest in the Nation,proposes to acquire Northern Westchester National Bank (hereinafterNorthern), the sixth largest of 7 commercial banks with head offices inWestchester County and the only bank headquartered in the northern partof Westchester County.

Bankers Trust has 72 domestic banking offices, all of which are located inNew York City and adjoining Nassau County. Through its parent holdingcompany, Bankers Trust New York Corporation, Bankers Trust is affiliatedwith 3 other New York commercial banks, none of which have Westchesteroffices.

Northern's head office is in Chappaqua (population 5,000), about 25miles north of Bronx County and about 9 miles north of White Plainsin Westchester County; its 7 branches are located in a number of smalland widely separated towns and villages in northern Westchester. Althoughit is the smallest of the 7 banks doing business in northern Westchester,Northern has the third largest share, 12.3 per cent, of the total IPC3

demand deposits held by commercial banks in northern Westchester.Westchester County is a northern suburb of New York City. While

southern Westchester contains the bulk of the county's population and in-




THE BOARD OF GOVERNORS DURING 1968 i— Continued

Name of bank, and type of transaction2



Banking offices

Inoperation

To beoperated


dustry—it now has about 78 per cent of the total county population of853,198—the rate of population increase in northern Westchester since1950 has exceeded that of southern Westchester. As a result of the con-tinuing migration of industry and population from New York City, an in-creasing number of large firms are moving into northern Westchester,thereby indicating a future business growth commensurate with its pro-jected population increase.

The proposed transaction would not eliminate any significant existingcompetition between the participating banks or between Northern and anyof the holding company affiliates of Bankers Trust. However, it would affectpotential competition in northern Westchester since Bankers Trust is one ofthe most likely potential de novo entrants into the area. Bankers Trust hasevidenced a desire to branch de novo into Westchester County and clearlyhas the resources and experience to do so. It has recently applied for ap-proval to open an office in southern Westchester, and the fact that one ofits largest customers, IBM, has established its headquarters in northernWestchester would give it additional incentives to branch de novo in therapidly growing northern Westchester area.

The proposed merger would eliminate one of the most likely potentialde novo entrants into northern Westchester and substitute a large New YorkCity bank for the only bank headquartered in northern Westchester. We,therefore, conclude that the proposed transaction would have an adversecompetitive effect.


In addition to Northern Bank, which operates 8 banking offices, 6 banksoperate 36 banking offices in northern Westchester County (estimatedpopulation 190,000). Of these banks, 3 are large New York City banks,and the other 3 are also considerably larger than Northern Bank. NorthernBank holds about 13 per cent of the estimated $255 million deposits of thebanking offices in northern Westchester County.

Bankers Trust is the key bank of a registered bank holding company,Bankers Trust New York Corporation (hereinafter the Corporation), whichcontrols a total of 4 banks having aggregate deposits of approximately $5.7billion. Bankers Trust presently has no offices in Westchester County buthas received approval to establish a branch in the town of Greenburgh,which is in the southwestern part of Westchester County about 15 milessouth of Chs.ppaqua. One of the Corporation's banking subsidiaries, FirstState Bank of Rockland County, has a branch office located in WestHaverstraw, about 4 miles from a branch of Northern Bank, but the HudsonRiver prevents easy accessibility between the 2 offices. Bankers Trust de-rives about $2.0 million in deposits and $4.3 million in loans fromNorthern Bank's service area, a small portion of total area deposits andloans. The 3 other subsidiaries of the Corporation derive only a nominal








Banking offices

Inoperation

To beoperated


amount of deposits and loans from northern Westchester County. NorthernBank derives only a very small amount of loans and deposits from theareas served by the Corporation's subsidiaries.

There is no meaningful existing competition between Bankers Trust andthe other holding company subsidiaries and Northern Bank. Competitioncould be increased through the establishment of de novo branches byBankers Trust in northern Westchester County. However, since 1960 theNew York State Banking Board has approved only 4 of 10 applications byState banks headquartered in New York City for de novo branches innorthern Westchester County, and it is apparent, through an analysis ofgrowth projections for the northern part of the county and of the avail-ability of suitable banking office locations, that the possibility of futurecompetition between Bankers Trust and Northern Bank is not significant.Furthermore, the village of Chappaqua, under State law, is not open forthe establishment of branches by any banks other than Northern Bank,which maintains its home office there. Consummation of the merger wouldthus permit de novo branching in the Chappaqua community, and 2 bankshave filed applications for branches there contingent upon favorable actionon this merger.

The adequacy of the capital structure of Northern Bank has not beenregarded as completely satisfactory due to a liberal dividend policy and thehigh cost of maintaining a large volume of interest-bearing deposits.The merger would eliminate that inadequacy.

In summary, the effect of the merger on competition would be slightlyfavorable, the banking factors offer some support for approval of themerger, and the banking convenience and needs of northern WestchesterCounty would be benefited through a broader range of banking and trustservices.

No. 10—The Colonial Bank and TrustCompany, Waterbury, Conn.

to merge withLitchfield County National

Bank, New Milford, Conn.

190.1

26.1

16

622


The nearest branch offices of the merging banks are 10.5 miles from eachother, and there are no banks in the intervening area. It thus appears thatthere may be some competition between the banks that would be eliminatedby this merger.

Connecticut law prohibits branching into a town where there is alreadythe main office of another bank. Thus, Colonial cannot branch de novo into





Banking officesName of bank, and type of transaction 2 [ Resources(in chronological order of determination) : (in millions


To beoperated


New Milford. The towns of Bridgewater (population 1,000), Kent (popula-tion 1,686), and Sharon (population 2,141), where Litchfield operates theonly banking offices, may be too small to support additional banking opera-tions at this time. However, as this area expands, Colonial could become apotential competitor in the future if this merger were not consummated.


Colonial operates 16 offices in Waterbury, which has a population ofabout 108,000, and several surrounding communities located in the north-ern part of New Haven County, a heavily industrialized area. LitchfieldBank maintains its head office and 2 branches in New Milford (population11,600), which is located 28 miles west of Waterbury. It also maintains3 branches in rural communities surrounding New Milford.

Litchfield Bank operates the only commercial banking offices in thecommunities in which its offices are located. Competition for some or allof those offices is provided by 4 banks, ranging in deposit size from $4million to $53 million, and by 2 of the larger banks in the State with head-quarters at Bridgeport. The closest offices of Colonial and Litchfield Bankare approximately 11 miles apart over an indirect route. Travel on theroads running east and west connecting the separate areas of Colonial andLitchfield Bank is time-consuming and difficult. The 2 banks derive only asmall number of deposit and loan accounts from one another's service area.

With the exception of New Milford, State law permits de novo branchesin the area served by Litchfield Bank. However, the communities in thatarea, aside from New Milford, have small populations with no sizablegrowth anticipated in the foreseeable future. The removal of home officeprotection from New Milford, therefore, appears likely to increase com-petition in that area; 2 large banks have applied for permission to estab-lish branches in New Milford contingent upon approval of this merger.

Residents of 2 of the 4 communities served by Litchfield Bank do nothave convenient access to a full range of banking services. The mergerwould bring to those residents expanded trust services, an increased lend-ing limit, and a wider variety of credit and deposit instruments. In addition,through the removal of home office protection in New Milford, residentsthere will eventually have convenient access to the services of more than1 commercial bank. Accordingly, the proposed transaction would have afavorable over-all effect on banking competition and would benefit thebanking convenience and needs of the area presently served.







No. 11—Marine Midland Trust Companyof Rockland County, Nyack, N.Y.

to merge withLafayette Bank and Trust Company

of Suffern, Suffern, N.Y.


55.2

15.1

Banking offices

Inoperation

7

2

To beoperated

1 ,SUMMARY REPORT BY THE ATTORNEY GENERAL (8-26-68)

Both banks are in Rockland County (population 193,000), immediatelywest of the Hudson River and near New York City. The eastern part ofthe county, where Rockland Bank has its offices, is already highly indus-trialized, and the central part is currently being developed. The western partof the county, where Lafayette has its offices, is still relatively rural, butis the next area for major industrial development.

The main offices of the 2 banks are separated by more than 11 miles.The nearest Rockland branch to Lafayette is 5.8 miles to the east, andthere are several other intervening banks in this area. Between 80 per centand 90 per cent of Lafayette's business comes from the western part ofthe county, with a relatively small percentage of transactions coming fromRockland Bank's service area. Competition between the 2 banks, therefore,does not appear to be significant.

Seven banks operate 48 offices in Rockland County. As of June 30, 1966,Rockland Bank and Lafayette held about 17 per cent and 5 per cent, re-spectively, of county IPC3 demand deposits. As noted above, however, thebanks do not appear to be operating in significant direct competition witheach other despite location in the same county.

Two company officers, each of whom was being groomed to becomepresident, embezzled more than $700,000 at Lafayette within the last 3years. The result has been to demoralize the remaining personnel and soundermine the operations of the bank (including loss of insurance anddeterioration of public confidence) that general collapse seemed imminent.Thus, there is doubt as to the ability of Lafayette, absent merger, to remainan effective competitor. Considering the possibilities available, Lafayette'smerger with Rockland Bank is probably the least anticompetitive mergeravailable to it.


Rockland Bank is a subsidiary of Marine Midland Banks, Inc., Buffalo,New York, a registered bank holding company that has 11 subsidiary banksin the State of New York. Rockland Bank operates 7 offices in 6 communi-ties, all within a 7-mile radius of the town of Nyack, where its main office




THE HOARD OF GOVERNORS DURING 1968 i—Continued




Banking offices

Inoperation

To beoperated


is located, in the southeastern part of Rockland County (population 193,-000). Lafayette Bank's main office is located in the town of Suffern (popu-lation 5,500) in the southwestern part of Rockland County, and its onlybranch is 3 miles north of Suffern. The nearest offices of the 2 banks arelocated 6 miles apart on an east-west line. The flow of local traffic in Rock-land County is generally in a north-south direction, and there are a numberof other banking offices in the area between the offices of Rockland Bankand Lafayette Bank, but each bank does derive some deposits and loans fromthe service area of the other. Neither bank can establish branches in thecommunity where the main office of the other is located, and much of thesurrounding area is presently not sufficiently developed to support addi-tional banking offices.

Rockland Bank holds about 16 per cent of total deposits in an areaslightly larger than Rockland County, and Lafayette Bank holds about4 per cent. Although the merger would thus result in a bank holding 20 percent of area deposits, there are 47 offices of 12 other banks competing inthat area. One bank holds 29 per cent of total area deposits, and 7 ofthe other banks competing in the area have total deposits exceeding thoseof the bank that would result from this merger.

Lafayette Bank is lacking sufficient managerial depth. In recent years thebank has suffered two serious defalcations, which have had a detrimentaleffect on the confidence of its personnel and customers. In addition, thebank has had difficulty maintaining fidelity insurance coverage.

Consummation of the merger and the resulting affiliation with MarineMidland Banks, Inc. would alleviate the difficulties of Lafayette Bankwithout having a significant adverse effect on competition. Moreover, themerger would have a slightly favorable effect on the banking convenienceand needs of the Suffern community.

No. 12—The Middle Tennessee Bank,Columbia, Tenn.

to acquire ihe assets and assume thedeposit liabilities of

The Hampshire Bank,Hampshire, Tenn.

20.1

1.1


Columbia (population 18,000), the Maury County seat, is a growingindustrial and trading aA~ea; 4 banks have offices in this town. Hampshire








Banking offices

Inoperation

To beoperated


(population 2,500), with 1 bank, is located 15 miles west of Columbia in aprimarily agricultural area.

Although the merging banks are 15 miles apart in a rural area, with nobanks in the intervening area, competition between them is probablylimited because of the small size and limited range of services of HampshireBank. Moreover, 2 banks have offices in Mt. Pleasant, 7 miles southeastof Hampshire.

Furthermore, competition between the merging banks may be even morelimited than would ordinarily be the case since a director on the boardof Hampshire Bank is, also a vice president of Middle Tennessee Bank. Thisindividual and the president of Middle Tennessee Bank, together, own 109of the 300 outstanding shares of the Hampshire Bank.


Middle Bank operates 3 branches and its main office in Columbia (popu-lation 18,000), the seat of Maury County in the central part of the State.Hampshire Bank's single office is the only bank in Hampshire (population200), which is also located in Maury County, 15 miles west of Columbia.The nearest competing banking offices to Hampshire Bank are officeslocated in Mt. Pleasant, Tennessee, approximately 7 miles southeast ofHampshire and 10 miles southwest of Columbia. Middle Bank competesto some degree in all of Maury County. However, although there are nobanking offices along the direct route from Columbia to Hampshire, MiddleBank has not been an active competitor in the Hampshire and Mt.Pleasant communities. It is estimated that less than 2 per cent of MiddleBank's deposits originate in the service area of Hampshire Bank and asimilarly small percentage of its loans originate in that area.

Hampshire Bank has had a serious management problem since the in-capacitating illness of its chief executive officer in 1965, and as a result, thebank's general condition is unsatisfactory. It apparently has been unable toimprove its condition, and its continued existence as an independent institu-tion is in jeopardy. Consummation of the proposal, therefore, wouldassure the continued presence of a banking office in the community ofHampshire. Further, this office would provide the area with a substantiallylarger loan limit and expansion of loan and other banking services. Theproposal would not have materially adverse competitive consequences but,instead, would tend to enhance banking competition in the Hampshire area.



21. DESCRIPTION OF EACH MERGER, CONSOLIDATION, ACQUISITIONOF ASSISTS OR ASSUMPTION OF LIABILITIES APPROVED BY




No. 13—Chemical Bank New York TrustCompany, New York, N.Y.

to merge withChemical Bank,

New York, N.Y.and change its title to

Chemical Bank,New \ ork, N.Y.


8,978.2

0.5

Banking offices

Inoperation

141

0

To beoperated

. .41

J


Chemical Bank was recently organized for the purpose of effecting a planof reorganization whereby Chemical Bank New York Trust Company, aNew York banking organization, will become, through merger with Chemi-cal Bank, a. wholly owned subsidiary of Chemical New York Corporation,a business organization newly organized under the laws of Delaware.

The proposed transaction would appear to have no adverse effects oncompetition.


The proposed merger is one step in a plan of corporate reorganizationwhereby Chemical New York Corporation, New York, New York, a newlyorganized Delaware corporation, would become a 1-bank holding company.Chemical New York Corporation presently owns all of the stock of Chemi-cal Bank; upon the merger of applicant bank with Chemical Bank, stockof Chemical New York Corporation will be exchanged for the stock ofapplicant tank. The proposed merger of applicant bank and ChemicalBank—the latter being a bank with no operating history—would itself haveno effect on either competition or the banking convenience and needs ofany relevant area. Nor would it appear that the proposal would have anyadverse consequences relative to the financial and managerial resources andprospects of applicant bank or Chemical Bank.

For notes see facing page.






No. 14—The First Pennsylvania Bankingand Trust Company,Philadelphia, Pa.

to merge withChestnut Street Trust Company,

Philadelphia, Pa.


2,141.7

0.6

Banking offices

Inoperation

64

0

To beoperated

64


This merger is merely part of a corporate reorganization which will makeThe First Pennsylvania Banking and Trust Company a wholly owned sub-sidiary of a 1-bank holding company and as such will have no effect oncompetition.


The proposed merger is one step in a plan of corporate reorganizationwhereby First Pennsylvania Corporation, Philadelphia, Pennsylvania, anewly organized Pennsylvania corporation, would become a 1-bank holdingcompany. First Pennsylvania Corporation presently owns all of the stockof Chestnut Street Bank; upon the merger of applicant bank with ChestnutStreet Bank, stock of First Pennsylvania Corporation will be exchanged forstock of applicant bank. The proposed merger of applicant bank and Chest-nut Street Bank—the latter being a bank with no operating history—woulditself have no effect on either competition or the banking convenience andneeds of any relevant area. Nor would it appear that the proposal wouldhave any adverse consequences relative to the financial and managerialresources and prospects of applicant bank or Chestnut Street Bank.

1 During 1968 the Board disapproved 1 merger application. However, under Section 18(c) ofthe Federal Deposit Insurance Act, only those transactions approved by the Board must be de-scribed in its ANNUAL REPORT to Congress.

2 Each transaction was proposed to be effected under the charter of the first-named bank,except transactions numbered 13 and 14, which were under the charter of the second-named bank.

3 The abbreviation "IPC" designates deposits of individuals, partnerships, and corporations.


THE FEDERAL RESERVE SYSTEMBOUNDARIES OF FEDERAL RESERVE DISTRICTS AND THEIR BRANCH TERRITORIES

Q

r\.

October I. 1968

* Boundaries of Federal Reserve DistrictsLegend

• Boundaries of Federal Reserve Branch Territories© Board of Governors of the Federal Reserve System

<•> Federal Reserve Bank Cities • Federal Reserve Branch Cities

NOTE.—For a complete description of each Federal Reserve district see Description of Federal ReserveDistricts—Territorial Composition of Each Head Office and Branch, Including Population and Land Area,a pamphlet published in April 1966. This pamphlet is available upon request from the Division of Adminis-trative Services, Board of Governors of the Federal Reserve System, Washington, D.C. 20551.Digitized for FRASER

http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

Federal ReserveDirectories and Meetings


Term

January

January

January

January

January

January

January

expires

31,31,31,31,31,31,31,

1970

1978

1976

1974

1972

1980

1982

BOARD OF GOVERNORSOF THE FEDERAL RESERVE SYSTEM

(December 31, 1968)

WM. MCC. MARTIN, JR., of New York, ChairmanJ. L. ROBERTSON of Nebraska, Vice ChairmanGEORGE W. MITCHELL of IllinoisJ. DEWEY DAANE of VirginiaSHERMAN J. MAISEL of CaliforniaANDREW F. BRIMMER of PennsylvaniaWILLIAM W. SHERRILL of Texas

ROBERT C. HOLLAND, Secretary of the BoardDANIEL H. BRILL, Senior Adviser to the BoardROBERT SOLOMON, Adviser to the BoardMERRITT SHERMAN, Assistant to the BoardCHARLES MOLONY, Assistant to the BoardHOWARD H. HACKLEY, Assistant to the BoardROBERT L. CARDON, Assistant to the BoardJOSEPH R. COYNE, Special Assistant to the BoardROBERT E. NICHOLS, Special Assistant to the Board

OFFICE OF THE SECRETARY

ROBERT C. HOLLAND, SecretaryKENNETH A. KENYON, Deputy SecretaryELIZABETH L. CARMICHAEL, Assistant SecretaryARTHUR L. BROIDA, Assistant SecretaryROBERT P. FORRESTAL, Assistant Secretary

LEGAL DIVISION

DAVID B. HEXTER, General CounselTHOMAS j . O'CONNELL, Deputy General CounselJEROME W. SHAY, Assistant General Counsel

DIVISION OF RESEARCH AND STATISTICSDANIEL H. BRILL, Director

J. CHARLES PARTEE, Associate Director

STEPHEN H. AXILROD, Adviser

LYLE E. GRAMLEY, Adviser

KENNETH B. WILLIAMS, Adviser

STANLEY J. SIGEL, Associate Adviser

TYNAN SMITH, Associate Adviser

MURRAY S. WERNICK, Associate Adviser

JAMES B. ECKERT, Assistant Adviser

PETER M. KEIR, Assistant Adviser

BERNARD SHULL, Assistant Adviser

Louis WEINER, Assistant Adviser


BOARD OF GOVERNORS—Cont.

DIVISION OF INTERNATIONAL FINANCEROBERT SOLOMON, Director

ROBERT L. SAMMONS, Associate DirectorJOHN E. REYNOLDS, Associate DirectorJOHN F. L. GHIARDI, Adviser

A. B. HERSEY, AdviserREED J. IRVINE, Adviser

*SAMUEL I. KATZ, Adviser

BERNARD NORWOOD, Adviser

RALPH C. WOOD, Adviser

DIVISION OF FEDERAL RESERVE BANK OPERATIONS

JOHN R. FARRELL, Director

JOHN N. KILEY, JR., Associate DirectorJAMES A. MCINTOSH, Assistant DirectorP. D. RING, Assistant DirectorCHARLES C. WALCUTT, Assistant DirectorLLOYD M. SCHAEFFER, Chief Federal Reserve Examiner

DIVISION OF SUPERVISION AND REGULATION

FREDERIC SOLOMON, Director

BRENTON C. LEAVITT, Deputy DirectorFREDERICK R. DAHL, Assistant DirectorJACK M. EGERTSON, Assistant DirectorJANET O. HART, Assistant DirectorJOHN N. LYON, Assistant DirectorTHOMAS A. SIDMAN, Assistant DirectorTYNAN SMITH, Acting Assistant Director

DIVISION OF PERSONNEL ADMINISTRATION

EDWIN J. JOHNSON, Director

JOHN J. HART, Assistant Director

DIVISION OF ADMINISTRATIVE SERVICES

JOSEPH E. KELLEHER, Director

HARRY E. KERN, Assistant Director

OFFICE OF THE CONTROLLER

JOHN KAKALEC, Controller

OFFICE OF DEFENSE PLANNING

INNIS D. HARRIS, Coordinator

DIVISION OF DATA PROCESSING

LAWRENCE H. BYRNE, JR., Director

LEE W. LANGHAM, Assistant Director

* On leave of absence.


FEDERAL OPEN MARKET COMMITTEE(December 31, 1968)

MEMBERS

WM. MCC. MARTIN, JR., Chairman (Board of Governors)ALFRED HAYES, Vice Chairman (Elected by Federal Reserve Bank of New York)ANDREW F. BRIMMER (Board of Governors)

J. DEWEY DAANE (Board of Governors)

HUGH D. GALUSHA, JR. (Elected by Federal Reserve Banks of Minneapolis,Kansas City, and San Francisco)

W. BRADDOCK HICKMAN (Elected by Federal Reserve Banks of Cleveland andChicago)

MONROE KIMBREL (Elected by Federal Reserve Banks of Atlanta, St. Louis,and Dallas)

SHERMAN J. MAISEL (Board of Governors)

GEORGE W. MITCHELL (Board of Governors)

FRANK E. MORRIS (Elected by Federal Reserve Banks of Boston, Philadelphia,and Richmond)

J. L. ROBERTSON (Board of Governors)WILLIAM W. SHERRILL (Board of Governors)

OFFICERS

ROBERT C. HOLLAND, Secretary

MERRITT SHERMAN, JOHN H. KAREKEN,

Assistant Secretary Associate EconomistKENNETH A. KENYON, ROBERT G. LINK,

Assistant Secretary Associate EconomistARTHUR L. BROIDA,

A . . . c / MAURICE MANN,

Assistant SecretaryCHARLES MOLONY, Assoclate Economist

Assistant Secretary J- CHARLES PARTEE,HOWARD H. HACKLEY, Associate Economist

General Counsel JOHN E. REYNOLDS,

DAVID B. HEXTER, Associate Economist

Assistant General Counsel R o B E R T S o L O M O N

DANIEL H. BRILL, ^ ^ . ^ E c o n o m i s t

EconomistSTEPHEN H. AXILROD, CHARLES T. TAYLOR,

Associate Economist Associate EconomistA. B. HERSEY, PARKER B. WILLIS,

Associate Economist Associate Economist

ALAN R. HOLMES, Manager, System Open Market AccountCHARLES A. COOMBS, Special Manager, System Open Market Account

During 1968 the Federal Open Market Committee met at intervals of threeor four weeks as indicated in the Record of Policy Actions taken by the Com-mittee (see pp. 99-225 of this Report).


FEDERAL ADVISORY COUNCIL(December 31, 1968)

MEMBERS

District No. 1—John Simmen, Chairman of the Board, Industrial National Bankof Rhode Island, Providence, R. I.

District No, 2—George S. Moore, Chairman of the Board, First National CityBank, New York, N.Y.

District No. 3^Harold F. Still, Jr., President, Central-Penn National Bank ofPhiladelphia, Philadelphia, Pa.

District No. 4—John A. Mayer, Chairman of the Board and Chief ExecutiveOfficer, Mellon National Bank and Trust Company, Pittsburgh, Pa.

District No. 5—J. Harvie Wilkinson, Jr., Chairman of the Board, State-PlantersBank of Commerce and Trusts, Richmond, Va.

District No. 6—George S. Craft, Chairman, Trust Company of Georgia, At-lanta, Ga.

District No. 7—David M. Kennedy, Chairman of the Board, Continental IllinoisNational Bank and Trust Company of Chicago, Chicago, 111.

District No. 8—John Fox, Chairman of the Board and Chief Executive Officer,Mercantile Trust Company National Association, St. Louis, Mo.

District No. 9—Philip H. Nason, President, First National Bank, St. Paul, Minn.District No. 10—Jack T. Conn, Chairman of the Board, The Fidelity National

Bank and Trust Company of Oklahoma City, Oklahoma City, Okla.District No. 11—Robert H. Stewart, III, Chairman of the Board, First National

Bank in Dallas, Dallas, Tex.District No. 12—Frederick G. Larkin, Jr., President and Chief Executive Officer,

Security Pacific National Bank, Los Angeles, Calif.

OFFICERS

JOHN A. MAYER, President J. HARVIE WILKINSON, JR., Vice PresidentHERBERT V. PROCHNOW, Secretary

WILLIAM J. KORSVIK, Assistant Secretary

EXECUTIVE COMMMITTEE

JOHN A. MAYER, ex officio J. HARVIE WILKINSON, JR., ex officio

JOHN SIMMEN HAROLD F. STILL, JR.

ROBERT H. STEWART, III

Meetings of the Federal Advisory Council were held on February 19-20,June 3-4, September 16-17, and November 18-19, 1968. The Board of Gover-nors met with the Council on February 20, June 4, September 17, and Novem-ber 19. The Council is required by law to meet in Washington at least fourtimes each year and is authorized by the Federal Reserve Act to consult withand advise the Board on all matters within the jurisdiction of the Board.


FEDERAL RESERVE BANKS and BRANCHES

(December 31, 1968)

CHAIRMEN AND DEPUTY CHAIRMEN OF BOARDS OF DIRECTORS

Federal Reserve Chairman andBank of— Federal Reserve Agent Deputy Chairman

Boston Howard W. Johnson Charles W. Cole

New York Everett N. Case Kenneth H. Hannan

Philadelphia. Willis J. Winn Bayard L. England

Cleveland. Albert G. Clay Logan T. Johnston

Richmond Wilson H. Elkins Robert W. Lawson, Jr.

Atlanta .Edwin I. Hatch John C. Wilson

Chicago Franklin J. Lunding Elvis J. Stahr

St. Louis Frederic M. Peirce Smith D. Broadbent, Jr.

Minneapolis Joyce A. Swan Robert F. Leach

Kansas City Dolph Simons Dean A. McGee

Dallas Carl J. Thomsen Max Levine

San Francisco O. Meredith Wilson S. Alfred Halgren

CONFERENCE OF CHAIRMEN

The Chairmen of the Federal Reserve Banks are organized into a Conferenceof Chairmen that meets from time to time to consider matters of common interestand to consuli: with and advise the Board of Governors. Such a meeting, at-tended also by Deputy Chairmen of the Reserve Banks, was held in Washingtonon December 5-6, 1968.

Mr. Thomsen, Chairman of the Federal Reserve Bank of Dallas, who waselected Chairman of the Conference and of the Executive Committee in Decem-ber 1967, served in that capacity until the close of the 1968 meeting. Mr. Peirce,Chairman of the Federal Reserve Bank of St. Louis, and Mr. Winn, Chairmanof the Federal Reserve Bank of Philadelphia, served with Mr. Thomsen as mem-bers of the Executive Committee; Mr. Peirce also served as Vice Chairman ofthe Conference.

On December 6, 1968, Mr. Peirce, Chairman of the St. Louis Bank, waselected Chairman of the Conference and of the Executive Committee to servefor the succeeding year; Mr. Winn, Chairman of the Philadelphia Bank, waselected Vice Chairman of the Conference and a member of the Executive Com-mittee; and Mr. Clay, Chairman of the Federal Reserve Bank of Cleveland,was elected as the other member of the Executive Committee.


FEDERAL RESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.

DIRECTORS

Class A and Class B directors are elected by the member banks of the district.Class C directors are appointed by the Board of Governors of the Federal Re-serve System.

The Class A directors are chosen as representatives of member banks and, asa matter of practice, are active officers of member banks. The Class B directorsmay not, under the law, be officers, directors, or employees of banks. At thetime of their election they must be actively engaged in their district in commerce,agriculture, or some other industrial pursuit.

The Class C directors may not, under the law, be officers, directors, employees,or stockholders of banks. They are appointed by the Board of Governors as rep-resentatives not of any particular group or interest, but of the public interest as awhole.

Federal Reserve Bank branches have either five or seven directors, of whom amajority are appointed by the Board of Directors of the parent Federal ReserveBank and the others are appointed by the Board of Governors of the Federal Re-serve System.

Termexpires

DIRECTORS District 1 — Boston Dec. 31

Class A:Lawrence H. Martin Chairman of the Board and Chief Executive

Officer, The National Shawmut Bank ofBoston, Mass 1968

Charles A. Beaujon, Jr.. .President, The Canaan National Bank, Canaan,Conn 1969

William R. Kennedy President, Merrimack Valley National Bank,Haverhill, Mass 1970

Class B:W. Gordon Robertson. . Chairman of the Executive Committee and

Chief Executive Officer, Bangor Punta Cor-poration, Bangor, Maine 1968

F. Ray Keyser, Jr Vice President, Vermont Marble Company,Proctor, Vt 1969

James R. Carter President, Nashua Corporation, Nashua, N.H.. 1970

Class C.-Charles W. Cole President Emeritus, Amherst College, Amherst,

Mass 1968Howard W. Johnson President, Massachusetts Institute of Tech-

nology, Cambridge, Mass 1969John M. Fox Chairman of the Board, United Fruit Company,

Boston, Mass 1970



Termexpires

DIRECTORS—Cont. District 2 — New York Dec. 31

Class A:Robert G. Cowan Chairman of the Board, National Newark &

Essex Bank, Newark, N.J 1968Eugene H. Morrison President, Orange County Trust Company,

Middletown, N.Y 1969R. E. McNeill, Jr Chairman of the Board, Manufacturers Han-

over Trust Company, New York, N.Y 1970Class B:

Milton C. Mumford... .Chairman of the Board, Lever Brothers Com-pany, Inc., New York, N.Y 1968

Maurice R. Forman... .President, B. Forman Co., Inc., Rochester,N.Y 1969

Arthur K. Watson Chairman of the Board, IBM World TradeCorporation, and Vice Chairman of theBoard, International Business Machines Cor-poration, Armonk, N.Y 1970

Class C:Kenneth H. Hannan Executive Vice President, Union Carbide Cor-

poration, New York, N.Y 1968Everett N. Case Former President, Alfred P. Sloan Founda-

tion, Van Hornesville, N.Y 1969James M. Hester President, New York University, New York,

N.Y 1970

Buffalo Branch

Appointed by Federal Reserve Bank:Arthur S. Hamlin President, The Canandaigua National Bank

and Trust Company, Canandaigua, N.Y... 1968E. Perry Spink Chairman of the Board, Liberty National Bank

and Trust Company, Buffalo, N.Y 1969Wilmot R. Craig Chairman of the Board and Chief Executive

Officer, Lincoln Rochester Trust Company,Rochester, N.Y 1970

Charles L. Hughes President, The Silver Creek National Bank,Silver Creek, N.Y 1970

Appointed by Board of Governors:Norman F. Beach Vice President and General Manager, Kodak

Park Division, Eastman Kodak Company,Rochester, N.Y 1968

Gerald F, Britt President, L-BrookeFarms, Inc., Byron, N.Y... 1969Robert S. Bennett . . . . . . General Manager, Lackawanna Plant, Bethle-

hem Steel Corporation, Buffalo, N.Y 1970



Termexpires

DIRECTORS—Cont. District 3 — Philadelphia Dec. 31

Class A:Howard C. Petersen... .Chairman of the Board, The Fidelity Bank,

Philadelphia, Pa 1968Robert C. Enders President, Bloomsburg Bank-Columbia Trust

Company, Bloomsburg, Pa 1969H. Lyle Duffey Executive Vice President, The First National

Bank of McConnellsburg, Pa 1970Class B:

Henry A. Thouron President, Hercules, Incorporated, Wilming-ton, Del 1968

Edward J. Dwyer President, ESB Incorporated, Philadelphia, Pa.. 1969Philip H. Glatfelter, III. .President, P. H. Glatfelter Co., Spring Grove,

Pa.. 1970Class C:

D. Robert Yarnall, Jr...President, Yarway Corporation, Blue Bell, Pa.. 1968Bayard L. England Chairman of the Board, Atlantic City Electric

Company, Atlantic City, N J 1969Willis J. Winn Dean, Wharton School of Finance and Com-

merce, University of Pennsylvania, Philadel-phia, Pa 1970

District 4 — Cleveland

Class A:Everett D. Reese Director, former Chairman of the Board, The

City National Bank and Trust Company ofColumbus, Ohio 1968

Richard R. Hollington. .President, The Ohio Bank and Savings Com-pany, Findlay, Ohio 1969

Seward D. Schooler President, Coshocton National Bank, Coshoc-ton, Ohio 1970

Class B:Walter K. Bailey Director, former Chairman of the Board, The

Warner and Swasey Company, Cleveland,Ohio 1968

R. Stanley Laing President, The National Cash Register Com-pany, Dayton, Ohio 1969

John L. Gushman President and Chief Executive Officer, AnchorHocking Glass Corporation, Lancaster,Ohio 1970



Termexpires

DIRECTORS—Cont. District 4 — Cleveland — Cont. Dec. 31

Class C.-Logan T. Johnston Chairman of the Board, Armco Steel Corpora-

tion, Middletown, Ohio 1968Albert G. Clay President, Clay Tobacco Company, Mt. Ster-

ling, Ky 1969J. Ward Keener Chairman of the Board and Chief Executive

Officer, The B. F. Goodrich Company,Akron, Ohio 1970

Cincinnati Branch

Appointed by Federal Reserve Bank:Jacob H. Graves President, The Second National Bank and

Trust Company of Lexington, Ky 1968John W. Humphrey Chairman of the Board, The Philip Carey

Manufacturing Company, Cincinnati, Ohio.. 1969Robert J. Barth President, The First National Bank, Dayton,

Ohio 1969P;letcher E. Nyce President, The Central Trust Company, Cin-

cinnati, Ohio 1970

Appointed by Board of Governors:Graham E. Marx President and General Manager, The G. A.

Gray Company, Cincinnati, Ohio 1968Phillip R. Shriver President, Miami University, Oxford, Ohio. . . 1969Orin E. Atkins President, Ashland Oil & Refining Company,

Ashland, Ky 1970

Pittsburgh Branch

Appointed by Federal Reserve Bank:Robert C. Hazlett President, Wheeling Dollar Savings & Trust

Co., Wheeling, W. Va 1968Charles M. Beeghly Chairman of the Board and Chief Executive

Officer, Jones and Laughlin Steel Corpora-tion, Pittsburgh, Pa 1969

Thomas L. Wentling President, First National Bank of Westmore-land, Greensburg, Pa 1969

George S. Cook President, Somerset Trust Company, Somerset,Pa 1970



Termexpires

DIRECTORS—Cont. District 4 — Cleveland — Cont. Dec. 31

Pittsburgh Branch — Cont.

Appointed by Board of Governors:F. L. Byrom President and Chief Executive Officer, Koppers

Company, Inc., Pittsburgh, Pa 1968Lawrence E. Walkley.. .President, Westinghouse Air Brake Company,

Pittsburgh, Pa 1969B. R. Dorsey President, Gulf Oil Corporation, Pittsburgh,

Pa 1970

District 5 — Richmond

Class A:William A. Davis President, The Peoples Bank of Mullens, W.

Va 1968Robert C. Baker President and Chairman of the Board, Ameri-

can Security and Trust Company, Washing-ton, D.C ., 1969

Giles H. Miller President, The Culpeper National Bank, Cul-peper, Va 1970

Class B:Charles D. Lyon President, The Potomac Edison Company,

Hagerstown, Md 1968Thaddeus Street President, Carolina Shipping Company,

Charleston, S.C 1969H. Dail Holderness President, Carolina Telephone and Telegraph

Company, Tarboro, N.C 1970Class C.-

Wilson H. Elkins President, University of Maryland, CollegePark, Md 1968

Robert W. Lawson, Jr... Managing Partner of Charleston Office, Step-toe & Johnson, Charleston, W. Va 1969

Stuart Shumate President, Richmond, Fredericksburg andPotomac Railroad Company, Richmond,Va 1970

Baltimore Branch

Appointed by Federal Reserve Bank:Joseph B. Browne President, Union Trust Company of Mary-

land, Baltimore, Md 1968John P. Sippel President, The Citizens National Bank, Laurel,

Md 1969Adrian L. McCardell Chairman of the Board, First National Bank

of Maryland, Baltimore, Md 1970James J. Robinson Executive Vice President and Cashier, Bank of

Ripley, W. Va 1970



Termexpires

DIRECTORS—Cont. District 5 — Richmond — Cont. jyec% si

Baltimore Branch — Cont.

Appointed by Board of Governors:E. Wayne Corrin President, Consolidated Gas Supply Corpora-

tion, Clarksburg, W. Va 1968Arnold J. Kleff, Jr Manager, Baltimore Plant, American Smelting

and Refining Company, Baltimore, Md 1969John H. Fetting, Jr President, A. H. Fetting Company, Baltimore,

Md 1970

Charlotte Branch

Appointed by Federal Reserve Bank:G. Harold Myrick President, First National Bank, Lincolnton,

N.C 1968J. Willis Cantey President, The Citizens and Southern National

Bank of South Carolina, Columbia, S.C 1969C. C. Cameron Chairman of the Board and President, First

Union National Bank of North Carolina,Charlotte, N.C 1970

H. Phelps Brooks, Jr President, The Peoples National Bank, Ches-ter, S.C 1970

Appointed by Board of Governors:John L. Fraley Executive Vice President, Carolina Freight

Carriers Corporation, Cherryville, N.C 1968James A. Morris Commissioner of Higher Education, Columbia,

S.C 1969William B. McGuire... .President, Duke Power Company, Charlotte,

N.C 1970

District 6 — Atlanta

Class A.-John W. Cray President, The First National Bank, Scottsboro,

Ala 1968William B Mills President, The Florida National Bank of Jack-

sonville, Fla 1969A. L. Ellis Chairman of the Board, First National Bank

in Tarpon Springs, Fla 1970



Termexpires

DIRECTORS—Cont. District 6 — Atlanta — Cont. £>ec. 31

Class B:Harry T. Vaughn President, United States Sugar Corporation,

Clewiston, Fla 1968Philip J. Lee Vice President, Tropicana Products, Inc.,

Tampa, Fla 1969Hoskins A. Shadow President, Tennessee Valley Nursery, Inc.,

Winchester, Tenn 1970

Class C.-Edwin I. Hatch President, Georgia Power Company, Atlanta,

Ga 1968John A. Hunter President, Louisiana State University, Baton

Rouge, La 1969John C. Wilson President, Home-Wilson, Inc., Atlanta, Ga... 1970

Birmingham Branch

Appointed by Federal Reserve Bank:Major W. Espy Chairman of the Board, The Headland Na-

tional Bank, Headland, Ala 1968Will T. Cothran President, Birmingham Trust National Bank,

Birmingham, Ala 1969Arthur L. Johnson President, Camden National Bank, Camden,

Ala 1970George A. LeMaistre... President, City National Bank of Tuscaloosa,

Ala 1970

Appointed by Board of Governors:Eugene C. Gwaltney, Jr..President, Russell Mills, Inc., Alexander City,

Ala 1968Mays E. Montgomery.. .General Manager, Dixie Home Feeds Com-

pany, Athens, Ala 1969C. Caldwell Marks Chairman of the Board, Owen-Richards Com-

pany, Inc., Birmingham, Ala 1970



Termexpires

DIRECTORS—Cont. District 6 — Atlanta — Cont. Dec. 31

Jacksonville Branch

Appointed by Federal Reserve Bank:Andrew P. Ireland Chairman of the Board and Senior Vice Presi-

dent, The Barnett First National Bank andTrust Co., Jacksonville, Fla 1968

L. V. Chappell President, First National Bank of Clearwater,Fla 1969

Harry Hood Bassett. . . .Chairman of the Board, The First NationalBank of Miami, Fla 1970

John Y. Humphress Executive Vice President, Capital City FirstNational Bank, Tallahassee, Fla 1970

Appointed by Board of Governors:Castle W. Jordan President, Associated Oil and Gas Company,

Coral Gables, Fla 1968Henry King Stanford... President, University of Miami, Coral Gables,

Fla 1969Henry Cragg Chairman of the Board and Chief Executive

Officer, Minute Maid Company, Orlando,Fla 1970

Nashville Branch

Appointed by Federal Reserve Bank:Moses E. Dorton President, The First National Bank of Cross-

ville, Tenn 1968Andrew Benedict President, First American National Bank, Nash-

ville, Tenn 1969H. A. Crouch, Jr President, The First National Bank, Tullahoma,

Tenn 1970W. H. Swain President, First National Bank, Oneida, Tenn... 1970

Appointed by Board of Governors:Alexander Heard Chancellor, Vanderbilt University, Nashville,

Tenn 1968James E. Ward Chairman of the Board, Baird-Ward Printing

Company, Nashville, Tenn 1969Robert M. Williams President, ARO, Inc., Tullahoma, Tenn 1970



Termexpires

DIRECTORS—Cont. District 6 — Atlanta — Cont. Dec. 31

New Orleans Branch

Appointed by Federal Reserve Bank:Donald L. Delcambre.. .President, The State National Bank, New

Iberia, La 1968A. L. Gottsche President, First National Bank, Biloxi, Miss... 1969Lucien J. Hebert, Jr Executive Vice President, Lafourche National

Bank of Thibodaux, La 1970Morgan Whitney Vice President, Whitney National Bank of

New Orleans, La 1970Appointed by Board of Governors:

Frank G. Smith Vice President, Mississippi Power & Light Com-pany, Jackson, Miss 1968

George B. Blair General Manager, American Rice GrowersCooperative Association, Lake Charles, La... 1969

Robert H. Radcliff, Jr.. .President, Southern Industries Corporation,Mobile, Ala 1970

District 7—Chicago

Class A:Harry W. Schaller President, The Citizens First National Bank

of Storm Lake, Iowa 1968Kenneth V. Zwiener... .Chairman of the Board, Harris Trust and

Savings Bank, Chicago, 111 1969Melvin C. Lockard. . : . . President, First National Bank, Mattoon, 111... 1970

Class B:Joseph O. Waymire Vice President for Finance, Eli Lilly and Com-

pany, Indianapolis, Ind 1968William H. Davidson. . . President, Harley-Davidson Motor Company,

Milwaukee, Wis 1969Howard M. Packard... .Chairman of the Finance Committee, S. C.

Johnson & Son, Inc., Racine, Wis 1970Class C:

Elvis J. Stahr Past President, Indiana University, Blooming-ton, Ind 1968

Emerson G. Higdon. . . .President and Treasurer, The Maytag Com-pany, Newton, Iowa 1969

Franklin J. Lunding.. . . Chairman of the Finance Committee, JewelCompanies, Inc., Melrose Park, 111 1970



Termexpires

DIRECTORS—Cont. District 7 — Chicago — Cont. Dec. 31

Detroit Branch

Appointed by Federal Reserve Bank:B. P. Sherwood, Jr President, Security First Bank and Trust Com-

pany, Grand Haven, Mich 1968John H French, J r . . . . . . President, City National Bank of Detroit,

Mich 1969George L. Whyel President, Genesee Merchants Bank and Trust

Company, Flint, Mich 1969Raymond T. Perring.... Chairman of the Board, The Detroit Bank and

Trust Company, Detroit, Mich 1970

Appointed by Board of Governors:Guy S. Peppiatt Chairman of the Board, Federal-Mogul Cor-

poration, Detroit, Mich 1968Max P. Heavenrich, Jr... President, Heavenrich Bros. & Company,

Saginaw, Mich 1969L. Wm. Seidman Resident Partner, Seidman & Seidman, Grand

Rapids, Mich 1970

District 8 —St. Louis

Class A:Harry F. Harrington Chairman of the Board, The Boatmen's Na-

tional Bank of Saint Louis, Mo 1968Cecil W. Cupp, Jr President, Arkansas Bank and Trust Com-

pany, Hot Springs, Ark 1969Bradford Brett President, The First National Bank of Mexico,

Mo 1970Class B:

Sherwood J. Smith Industrialist, Evansville, Ind 1968Roland W. Richards.... Senior Vice President, Laclede Steel Company,

St. Louis, Mo 1969Mark Townsend Chairman of the Board, Townsend Lumber

Company, Inc., Stuttgart, Ark 1970Class C:

Frederic M. Peirce President, General American Life InsuranceCompany, St. Louis, Mo 1968

William King Self President, Riverside Industries, Marks, Miss... 1969Smith D. Broadbent, Jr..Owner, Broadbent Hybrid Seed Co., Cadiz,

Ky 1970



Termexpires

DIRECTORS—Cont. District 8 — St. Louis — Cont. j)ec. 31

Little Rock Branch

Appointed by Federal Reserve Bank:Louis E. Hurley President, The Exchange Bank & Trust Com-

pany, El Dorado, Ark 1968Ellis E. Shelton President, The First National Bank of Fayette-

ville, Ark 1969Wayne A. Stone President, Simmons First National Bank of

Pine Bluff, Ark 1969Edward M. Penick President, Worthen Bank & Trust Company,

Little Rock, Ark 1970

Appointed by Board of Governors:Carey V. Stabler President, Little Rock University, Little Rock,

Ark 1968Jake Hartz, Jr President, Jacob Hartz Seed Co., Inc., Stutt-

gart, Ark 1969Ralph M. Sloan, Jr President, Terminal Van and Storage Com-

pany, Little Rock, Ark 1970

Louisville Branch

Appointed by Federal Reserve Bank:John H. Hardwick Chairman of the Board, The Louisville Trust

Company, Louisville, Ky 1968Wm. G. Deatherage. . . .President, Planters Bank & Trust Co., Hopkins-

ville, Ky 1969Paul Chase President, The Bedford National Bank, Bed-

ford, Ind 1969J. E. Miller Executive Vice President, Sellersburg State

Bank, Sellersburg, Ind 1970

Appointed by Board of Governors:C. Hunter Green Vice President, South Central Bell Telephone

Company, Louisville, Ky 1968Lisle Baker, Jr Chairman of the Finance Committee, The

Courier-Journal & Louisville Times Com-pany, Louisville, Ky 1969

Harry M. Young, Jr Farmer, Herndon, Ky 1970



Termexpires

DIRECTORS—Cont. District 8 — St. Louis — Cont. j)ec. 31

Memphis Branch

Appointed by Federal Reserve Bank:Wade W. Hollowell President, The First National Bank of Green-

ville, Miss 1968Allen Morgan President, The First National Bank of Mem-

phis, Tenn 1969Con T. Welch President, Citizens Bank, Savannah, Tenn 1969J. J. White President, Helena National Bank, Helena,

Ark 1970

Appointed by Board of Governors:Sam Cooper President, HumKo Products Division, Na-

tional Dairy Products Corporation, Mem-phis, Tenn 1968

William L. Giles President, Mississippi State University, StateCollege, Miss 1969

Alvin Huffman, Jr President, Huffman Brothers Lumber Com-pany, Blytheville, Ark 1970

District 9 — Minneapolis

Class A:Curtis B. Mateer Executive Vice President, The Pierre National

Bank, Pierre, S. Dak 1968John Bosshard Executive Vice President, First National Bank

of Bangor, Wis 1969Warren F. Vaughan President, Security Trust & Savings Bank,

Billings, Mont 1970Class B:

John H. Toole President, Toole and Easter Company, Mis-soula, Mont 1968

Leo C. Studness Manager, Studness Company, Devils Lake,N. Dak 1969

Neil G. Simpson President, Black Hills Power and Light Com-pany, Rapid City, S. Dak 1970

Class C.-Robert F. Leach Attorney, Oppenheimer, Hodgson, Brown,

Wolff and Leach, St. Paul, Minn 1968Joyce A. Swan Vice Chairman of the Board, Minneapolis

Star and Tribune, Minneapolis, Minn 1969Byron W. Reeve President, Lake Shore, Inc., Iron Mountain,

Mich 1970



Termexpires

DIRECTORS—Cont. District 9 — Minneapolis — Cont. Dec. 31

Helena Branch

Appointed by Federal Reserve Bank:Charles H. Brocksmith. .President, First Security Bank of Glasgow

N.A., Glasgow, Mont 1968Glenn H. Larson President, First State Bank of Thompson Falls,

Mont 1968B. Meyer Harris President, The Yellowstone Bank, Laurel,

Mont 1969

Appointed by Board of Governors:C. G. McClave President, Montana Flour Mills Company,

Great Falls, Mont 1968Edwin G. Koch President, Montana College of Mineral Sci-

ence and Technology, Butte, Mont 1969

District 10 — Kansas City

Class A:Burton L. Lohmuller... .Chairman of the Board, The First Natioanl

Bank of Centralia, Kans 1968Eugene H. Adams President, The First National Bank of Den-

ver, Colo 1969C. M. Miller President, The Farmers and Merchants State

Bank, Colby, Kans 1970Class B:

Stanley Learned Director and member of Finance Committee,Phillips Petroleum Company, Bartlesville,Okla 1968

Cecil O. Emrich Manager, Norfolk Livestock Market, Inc.,Norfolk, Nebr 1969

Alfred E. Jordan Vice President, Trans World Airlines, Inc.,Kansas City, Mo 1970

Class C:Dean A. McGee Chairman of the Board, Kerr-McGee Cor-

poration, Oklahoma City, Okla 1968William D. Hosford, Jr.. Vice President and General Manager, John

Deere Company, Omaha, Nebr 1969Dolph Simons Editor and President, The Lawrence Daily

Journal-World, Lawrence, Kans 1970



Termexpires

DIRECTORS—Cont. District 10 — Kansas City — Cont. Dec. 31

Denver Branch

Appointed by Federal Reserve Bank:J. P. Brandenburg President, The First State Bank of Taos, N.

Mex 1968Theodore D. Brown President, The Security State Bank of Sterling,

Colo 1968Armin B. Barney Chairman of the Board, Colorado Springs Na-

tional Bank, Colorado Springs, Colo 1969

Appointed by Board of Governors:D. R. C. Brown President, The Aspen Skiing Corporation,

Aspen, Colo 1968Cris Dobbins Chairman of the Board, Ideal Basic Industries,

Inc., Denver, Colo 1969

Oklahoma City Branch

Appointed by Federal Reserve Bank:Guy L. Berry, Jr President, The American National Bank and

Trust Company, Sapulpa, Okla 1968C. M. Crawford President, First National Bank, Frederick,

Okla 1968Howard J. Bozarth President, City National Bank and Trust Com-

pany, Oklahoma City, Okla 1969

Appointed by Board of Governors:F. W. Zaloudek Manager, J. I. Case Equipment Agency, Krem-

lin, Okla 1968C. W. Flint, Jr Chairman of the Board, Flint Steel Corpora-

tion, Tulsa, Okla 1969

Omaha Branch

Appointed by Federal Reserve Bank:W. B. Millard, Jr Chairman of the Board, Omaha National Bank,

Omaha, Nebr 1968John W. Hay, Jr President, Rock Springs National Bank, Rock

Springs, Wyo 1969S. N. Wolbach President, First National Bank of Grand Is-

land, Nebr 1969

Appointed by Board of Governors:Henry Y. Kleinkauf President, Natkin & Company, Omaha, Nebr... 1968A. James libel Vice President and General Manager, Corn-

husker Television Corporation, Lincoln,Nebr 1969



Termexpires

DIRECTORS—Cont. District 11 — Dallas Dec. 31

Class A:Ralph A. Porter President, The State National Bank of Deni-

son, Tex 1968Murray Kyger Chairman of the Board, The First National

Bank of Fort Worth, Tex 1969J. V. Kelly President, Peoples National Bank, Belton,

Tex 1970

Class B:J. B. Perry, Jr Real Estate Investments and Development,

Lufkin, Tex 1968C. A. Tatum, Jr President and Chief Executive Officer, Texas

Utilities Company, Dallas, Tex 1969Carl D. Newton President, Fox-Stanley Photo Products, Inc.,

San Antonio, Tex 1970

Class C:Chas. F. Jones President, Humble Oil & Refining Company,

Houston, Tex 1968Max Levine Retired Chairman of the Board, Foley's,

Houston, Tex 1969Carl J. Thomsen Senior Vice President, Texas Instruments In-

corporated, Dallas, Tex 1970

El Paso Branch

Appointed by Federal Reserve Bank:Joe B. Sisler President, The Clovis National Bank, Clovis,

N. Mex 1968Robert W. Heyer Director and Consultant, Southern Arizona

Bank & Trust Company, Tucson, Ariz 1969Archie B. Scott President, The Security State Bank of Pecos,

Tex 1969Robert F. Lockhart President, The State National Bank of El Paso,

Tex 1970

Appointed by Board of Governors:Joseph M. Ray H. Y. Benedict Professor, Department of

Political Science, The University of Texas atEl Paso, Tex 1968

C. Robert McNally, Jr. . Rancher, Roswell, N. Mex 1969Gordon W. Foster Vice President, Farah Manufacturing Com-

pany, Inc., El Paso, Tex 1970



Termexpires

DIRECTORS—Cont. District 11 — Dallas — Cont. Dec. 31

Houston Branch

Appointed by Federal Reserve Bank:Henry B. Clay President, First Bank & Trust, Bryan, Tex 1968W. G. Thornell President, The First National Bank of Port

Arthur, Tex 1969John E. Whitmore President, Texas National Bank of Commerce

of Houston, Tex 1969A. G. McNeese, Jr Chairman of the Board, Bank of the Southwest

National Association, Houston, Tex 1970

Appointed by Board of Governors:R. M. Buckley President and Director, Eastex Incorporated,

Silsbee, Tex 1968Geo. T. Morse, Jr President and General Manager, Peden Iron

& Steel Company, Houston, Tex 1969M. Steele V/right, Jr President and General Manager, Texas Farm

Products Company, Nacogdoches, Tex 1970

San Antonio Branch

Appointed by Federal Reserve Bank:James T. Denton, Jr President, Corpus Christi Bank and Trust,

Corpus Christi, Tex 1968J. R. Thornton Chairman of the Board and President, State

Bank and Trust Company, San Marcos, Tex. 1969T. C. Frost, Jr President, The Frost National Bank of San

Antonio, Tex 1969Ray M. Keck, Jr President, Union National Bank, Laredo, Tex. 1970

Appointed by the Board of Governors:Francis B. May Professor of Business Statistics, Department of

General Business, The University of Texas atAustin, Tex 1968

W. A. Belcher Veterinarian and rancher, Brackettville, Tex... 1969Lloyd M. Knowlton.. . . General Manager and Partner, Knowlton's

Creamery, San Antonio, Tex 1970



Termexpires

DIRECTORS—Cont. District 12 — San Francisco Dec. 31

Class A:Ralph V. Arnold Chairman of the Board and Chief Executive

Officer, First National Bank and Trust Com-pany, Ontario, Calif. 1968

Carroll F. Byrd Chairman of the Board and President, The FirstNational Bank of Willows, Calif 1969

Charles F. Frankland. . . Chairman of the Board and Chief ExecutiveOfficer, The Pacific National Bank of Seattle,Wash 1970

Class B:Herbert D. Armstrong.. Treasurer, Standard Oil Company of California,

San Francisco, Calif. 1968Joseph Rosenblatt Honorary Chairman, The Eimco Corporation,

Salt Lake City, Utah 1969Marron Kendrick President, Schlage Lock Company, San Fran-

cisco, Calif. 1970

Class C.-Bernard T. Rocca, Jr Chairman of the Board, Pacific Vegetable Oil

Corporation, San Francisco, Calif. 1968S. Alfred Halgren Senior Vice President and Director, Carnation

Company, Los Angeles, Calif. 1969O. Meredith Wilson President and Director, Center for Advanced

Study in the Behavioral Sciences, Stanford,Calif 1970

Los Angeles Branch

Appointed by Federal Reserve Bank:Harry J. Volk President, Union Bank, Los Angeles, Calif.... 1968Carl E. Schroeder President, The First National Bank of Orange

County, Orange, Calif. 1968Sherman Hazeltine Chairman of the Board and Chief Executive

Officer, First National Bank of Arizona,Phoenix, Ariz 1969

T. H. Shearin President, Community National Bank, Bakers-field, Calif. 1970



Termexpires

DIRECTORS—Cont. District 12 — San Francisco — Cont. Dec. 31

Los Angeles Branch — Cont.

Appointed by the Board of Governors:J, L. Atwood President and Chief Executive Officer, North

American Rockwell Corporation, El Segun-do, Calif 1968

Leland D. Pratt Executive Vice President, Kelco Company,San Diego, Calif. 1969

Norman B. Houston Senior Vice President and Treasurer, GoldenState Mutual Life Insurance Company, LosAngeles, Calif. 1970

Portland Branch

Appointed by Federal Reserve Bank:E. W. Firsi:enburg Chairman of the Board and President, First

Independent Bank, Vancouver, Wash 1968Charles F. Adams President, The Oregon Bank, Portland, Oreg... 1968Ralph J. Voss President, First National Bank of Oregon,

Portland, Oreg 1969

Appointed by Board of Governors:Robert F. Dwyer Dwyer Forest Products Company, Portland,

Oreg 1968Frank Anderson Rancher, Heppner, Oreg 1969

Salt Lake City Branch

Appointed by Federal Reserve Bank:Alan B. Blood President, Barnes Banking Company, Kays-

ville, Utah 1968Newell B. Dayton Chairman of the Board, Tracy-Collins Bank

and Trust Company, Salt Lake City, Utah.. 1968William E. Irvin President, The Idaho First National Bank,

Boise, Idaho 1969

Appointed by Board of Governors:Peter E. Marble Rancher, Deeth, Nev 1968Roy den G. Derrick President and General Manager, Western Steel

Company, Salt Lake City, Utah 1969



Termexpires

DIRECTORS—Cont. District 12 — San Francisco — Cont. Dec. 31

Seattle Branch

Appointed by Federal Reserve Bank:A. E. Saunders President, The Puget Sound National Bank,

Tacoma, Wash 1968Philip H. Stanton President, Washington Trust Bank, Spokane,

Wash 1968Maxwell Carlson... President, The National Bank of Commerce of

Seattle, Wash 1969

Appointed by Board of Governors:Robert D. O'Brien Chairman of the Board and Chief Executive

Officer, Pacific Car and Foundry Company,Renton, Wash 1968

William McGregor Vice President, McGregor Land and LivestockCompany, Hooper, Wash 1969



PRESIDENTS and VICE PRESIDENTS

FederalReserve

Bankor branch

PresidentFirst Vice President

Boston.

New York. . .

. j Frank E. MorrisI E. O. Latham

.} Alfred Hayes! William F. Treiber

Buffalo

Philadelphia. Karl R. BoppRobert N. Hilkert

Cleveland. W. Braddock HickmanWalter H. MacDonald

CincinnatiPittsburgh

Richmond. Aubrey N. HeflinRobert P. Black

BaltimoreCharlotte

Vice Presidents

D. Harry AngneyAnsgar R. BergeL. M. Hoyle, Jr.Laurence H. StoneParker B. Willis

Harold A. BilbyJohn J. ClarkeFelix T. DavisEdward G. GuyAlan R. HolmesBruce K. MacLauryPeter D. SternlightThomas O. Waage

Daniel AquilinoR. W. EisenmengerHarry R. MitiguyG. Gordon Watts

William H.Braun, Jr.Charles A. CoombsPeter FousekMarcus A. HarrisRobert G. LinkFred W. Piderit, Jr.T. M. Timlen, Jr.

Angus A. Maclnnes, Jr.

Edward A. Aff Hugh BarrieJoseph R. Campbell Norman G. DashDavid P. Eastburn William A. JamesDavid C. Melnicoff G. William MetzL. C. Murdoch, Jr. Harry W. RoederJames V. Vergari

George E. Booth, Jr. Paul BreidenbachRoger R. Clouse Elmer F. FricekWilliam H.Hendricks John J. HoyHarry W. Huning Frederick S. KellyMaurice Mann Clifford G. Miller

Fred O. KielClyde E. Harrell

J. G. Dickerson, Jr. W. S. FarmerUpton S. Martin Arthur V. Myers, Jr.John L. Nosker James ParthemosR. E. Sanders, Jr. Joseph F. Viverette

D. F. HagnerE. F. MacDonaldStuart P. Fishburne



PRESIDENTS and VICE PRESIDENTS—Cont.

FederalReserve

Bankor branch

Atlanta

* BirminghamJacksonvilleNashvilleNew Orleans

Chicago

Detroit

St. Louis

Little RockLouisvilleMemphis

M i n n e a p o l i s . . . .

Helena


Monroe KimbrelRobert E. Moody, Jr.

Charles J. ScanlonHugh J. Helmer

Darryl R. FrancisDale M. Lewis

Hugh D. Galusha, Jr.M. H. Strothman, Jr.

Vice Presidents

Harry BrandtJ. E. McCorveyRichard A. SandersCharles T. Taylor

Edward C.

Billy H. HargettBrown R. RawlingsR. M. Stephenson

RaineyJeffrey J. WellsArthur H.

Ernest T. BaughmarElbert O. FultsL. H. JonesRichard A. MoffattHarry S. SchultzJack P. Thompson

Russel A. J

Leonall C. AnderserGerald T. DunneWilbur H. IsbellStephen KoptisHoward H. Weigel

Kantner

1 Daniel M. DoyleA. M. GustavsonWard J. LarsonJames R. MorrisonBruce L. Smyth

Swaney

l Marvin L. BennettW. W. GilmoreHomer JonesJohn W. MengesJoseph C. Wotawa

John F. BreenDonald L.Eugene A.

W. C. BronnerKyle K. FossumC. W. GrothHoward L. KnousClarence W. Nelson

Clement A

HenryLeonard

F. J. CramerL. G. GableDouglas R. HellwegJohn A. MacDonald

Van Nice

*Has no Vice President at this time.


FEDERAL ItESERVE BANKS and BRANCHES, Dec. 31, 1968—Cont.PRESIDENTS and VICE PRESIDENTS—Cont.

FederalReserve

Bankor branch

K a n s a s C i t y . . . .

DenverOklahoma CityOmaha

Dallas

El PasoHoustonSan Antonio

San Francisco...

Los Angeles

PortlandSalt Lake CitySeattle


George H. ClayJohn T. Boysen

Philip E. ColdwellT. W. Plant

Eliot J. SwanA. B. Merritt

Vice Presidents

Wilbur T. Billington D. R. CawthorneRaymond J. Doll J. R. EuansCarl F. Griswold, Jr. M. L. MotherseadMaurice J. Swords R. E. ThomasClarence W. Tow

John W. SniderHoward W. PritzGeorge C. Rankin

R. E. Bohne Robert H. BoykinJames L. Cauthen Ralph T. GreenJames A. Parker W. M. PritchettThomas R. Sullivan

Frederic W. ReedJ. Lee CookCarl H. Moore

J. Howard Craven D. M. DavenportIrwin L. Jennings Gerald R. KellyE. J. Martens R. Maurer, Jr.W. F. Scott J. B. Williams

P. W. CavanW. G. DeVriesWilliam M. BrownArthur L. PriceW. R. Sandstrom



CONFERENCE OF PRESIDENTS

The Presidents of the Federal Reserve Banks are organized into a Conference ofPresidents that meets from time to time to consider matters of common interest and toconsult with and advise the Board of Governors. Mr. Ellis, President of the FederalReserve Bank of Boston, and Mr. Clay, President of the Federal Reserve Bank ofKansas City, were elected Chairman of the Conference and Vice Chairman, respectively,in March 1968, and served in those capacities through June 1968. At the June meetingMr. Clay and Mr. Scanlon, President of the Federal Reserve Bank of Chicago, wereelected Chairman and Vice Chairman, respectively, and served in those capacitiesduring the remainder of the year.

Mr. Philip A. Shaver of the Federal Reserve Bank of Boston and Mr. J. DavidHamilton of the Federal Reserve Bank of Kansas City were appointed Secretary of theConference and Assistant Secretary, respectively, in March 1968. Mr. Hamilton wasappointed Secretary, and Mr. William J. Hocter of the Federal Reserve Bank of Chicagowas appointed Assistant Secretary in June 1968, in which capacities they served duringthe remainder of the year.


Index

Page

Acceptance powers of member banks 352Acceptances, bankers':

Authority to purchase and to enter into repurchase agreements 100-01Federal Reserve Bank holdings 356, 364, 366, 368Federal Reserve earnings on 356, 374Open market transactions during 1968 372

Assets and liabilities:Banks, by classes 386Board of Governors 360Federal Reserve Banks 364-69

Balance of payments {See U.S. balance of payments)Bank Examination Schools 353Bank examiners, home mortgage loans to, legislative recommendation. . . . 339Bank holding companies:

Board actions with respect to 349Revision of Regulation Y 74

Bank Holding Company Act, legislative recommendations 340Bank mergers and consolidations 348, 392-413Bank premises, Federal Reserve Banks and branches . .358, 364, 366, 368, 373Bank Protection Act of 1968 334Bank supervision and regulation by Federal Reserve System 345-53Banking offices :

Changes in number 388Par and nonpar offices, number 390

Board of Governors:Audit of accounts 359Building annex 359Income and expenses 359-62Legislative recommendations 337-40Litigation 341-43Members and officers 416Policy actions 69-97Regulations {See Regulations)Salaries 361

Branch banks:Banks, by classes, changes in number 388Federal Reserve:

Bank premises 358, 373Directors 421-39Vice Presidents in charge 440-42


INDEX

Page

Branch banks—ContinuedForeign branches of member banks, special study and number of. 325, 350-52Loan production offices as branches, reinterpretation

by Board of Federal banking laws 88Capital accounts:

Banks, by classes 386Federal Reserve Banks 365, 367, 369

Chairmen and Deputy Chairmen of Federal Reserve Banks 420Clearing and collection:

Par clearance, legislative recommendation 337Volume of operations 378

Commercial banks:Assets and liabilities 386Banking offices, changes in number 388Foreign credit restraint program 57-59, 76, 94Number, by class of bank 386Par clearance, legislative recommendation 337

Condition statement of Federal Reserve Banks 364-69Credit:

Stock market transactions, regulatory changes andpolicy actions by Board affecting credit in 70, 72, 75, 83, 84, 85, 87

Truth in Lending Act 333Credit markets and financial flows 13-28Credit unions, amendment of Regulation G pertaining to 87Defense Production Act, extension 333Defense production loans 357, 379Deposits:

Banks, by classes 386Federal Reserve Banks 365, 367, 369, 384Reserve requirements {See Reserve requirements)Time and savings deposits:

Foreign time deposits, exemption of interest oncertain deposits 69, 92

Maximum permissible interest rates on:Flexible authority to set, extension of law 336Large-denomination, single-maturity time deposits,

amendment of Regulation Q 80Table 380

Deputy Chairmen of Federal Reserve Banks 420Directors, Federal Reserve Banks and branches 421-39Discount rates at Federal Reserve Banks:

Decrease 90Increases 76, 79, 95Table 383


INDEX

Page

Discounts and advances by Federal Reserve Banks:Collateral for Federal Reserve credit, amendment of Regulation

A, new provisions of law, and legislative recommendation. . . .93, 336, 337Earnings on 356, 374Special studies 324Volume 356, 364, 366, 368, 378, 384

Dividends:Federal Reserve Banks 354, 375, 376Member banks 387

Earnings:Federal Reserve Banks 354, 374, 376Member banks 387

Econometric model construction, special study 326Examinations:

Federal Reserve Banks 354Foreign banking and financing corporations 352Member banks 345State member banks 345

Executive officers of member banks, loans to:Reporting requirements 347Revision of Regulation 0 73

Expenses:Board of Governors 359-62Federal Reserve Banks 354, 374, 376Member banks 387

Federal Advisory Council 419Federal agency obligations:

Authority of Reserve Banks to buy and sell, lawmade permanent 336

Federal Reserve Bank holdings 356, 364, 366, 368Open market transactions of Federal Reserve System

during 1968 372Federal Open Market Committee:

Audit of System Account 354Continuing authorizations 129Domestic securities operations, review 226, 221-1AForeign currency operations, review 60-65, 226, 275-323Meetings 99, 418Members and officers 418Policy actions 99-225

Federal Reserve Act:Section 14(b), extension of authority of Reserve Banks

to purchase Govt. obligations directly from United States 333


INDEX

Page

Federal Reserve Act—ContinuedSection 16, elimination of provision relating to gold

reserve requirement against Federal Reserve notes 333Section 24, amendment relating to real estate loans by national banks. . 334

Federal Reserve Agents 420Federal Reserve Banks:

Advances by, collateral for, amendment of Regulation A,new provisions of law, and legislative recommendation 93, 336, 337

Assessment for expenses of Board of Governors 361, 374Authority to buy and sell Federal agency obligations,

law made permanent 336Authority to purchase Govt. obligations directly from

United States, extension 333Bank premises 358, 364, 366, 368, 373Branches (See Branch banks, Federal Reserve)Capital accounts 365, 367, 369Chairmen and Deputy Chairmen 420Condition statement 364-69Directors 421-39Discount rates (See Discount rates)Dividends 354, 375, 376Earnings and expenses 354, 374, 376Examination 354Federal agency obligations (See Federal agency obligations)Foreign and international accounts 357Lending authority of, legislative recommendation 93, 336, 337Officers and employees, number and salaries 379Presidents and Vice Presidents 440-42Profit and loss 375Purchase of obligations of foreign govts., legislative recommendation. . 339U.S. Govt. securities (See U.S. Govt. securities)Volume of operations 356, 378

Federal Reserve notes:Condition statement data . 364-69Cost of printing, issue, and redemption 361Gold reserve requirement against, elimination 333Interest paid to Treasury 354, 375, 376

Federal Reserve System:Bank supervision and regulation by 345-53Foreign credit restraint program 57-59, 76, 94Foreign currency operations (See Foreign currency operations)Map of Federal Reserve districts 414Membership 347Special studies 324-27


INDEX

Page

Federal Reserve System—ContinuedTraining activities 353

Financial flows and credit markets 13-28Foreign banking and financing corporations:

Amendment of Regulation K 73Examination and operation 352

Foreign branches of member banks, special study and number of. .325, 350-52Foreign credit restraint program 57-59, 76, 94Foreign currency operations:

Authorization and directive 100, 102-07, 115, 128, 129, 132, 142,151, 159, 174, 202, 217

Federal Reserve earnings on foreign currencies 374Legislative recommendation regarding purchase of obligations

of foreign govts. by Reserve Banks 339Review 60-65, 226, 275-323

Foreign time deposits, exemption of interest on certain deposits 69, 92Gold:

Reserve requirement against Federal Reserve notes, elimination,amendment of Federal Reserve Act 333

Tables showing gold certificate accounts of ReserveBanks and gold stock 364, 366, 367, 368, 369, 384

Two-market system for 331Government securities (See U.S. Govt. securities)Guidelines for banks and nonbank financial institutions 57-59, 76, 94Home mortgage loans to bank examiners, legislative recommendation. . . . 339Housing and Urban Development Act of 1968 334Income, expenses, and dividends, member banks 387Insured commercial banks:

Assets and liabilities 386Banking offices, changes in number 388Graduated reserve requirements on demand deposits,

legislative recommendation 338Par clearance, legislative recommendation 337

Interest on deposits:Exemption of interest on certain foreign

time deposits 69, 92Maximum rates on deposits or share accounts, flexible

authority for supervisory agencies to set, extension of law 336Maximum rates on large-denomination, single-maturity time

deposits, amendment of Regulation Q 80Interest rates:

Discount rates at Federal Reserve Banks (See Discount rates)Regulation V loans 357, 379Time and savings deposits:

Exemption of interest on certain foreign time deposits 69, 92


INDEX

Page

Interest rates—ContinuedTime and savings deposits—Continued

Maximum rates on deposits or share accounts, flexible authorityfor supervisory agencies to set, extension of law 336

Maximum rates on large-denomination, single-maturity timedeposits, amendment of Regulation Q 80

Table of maximum permissible rates 380International liquidity, discussions and negotiations 328-32International Monetary Fund (See Special Drawing Rights)Investments:

Banks, by classes 386Federal Reserve Banks 364, 366, 368Revenue bond underwriting by member banks, legislation 334

Legislation:Bank examiners, home mortgage loans to, legislative recommendation. . 339Bank holding companies, bank subsidiaries, legislative recommendations 340Bank Protection Act of 1968 334Collateral for advances by Reserve Banks, new provisions of law

and legislative recommendation 93, 336, 337Defense Production Act, extension 333Federal agency obligations, authority of Reserve Banks to buy and

sell, law made permanent 336Gold reserve requirement against Federal Reserve notes, elimination. . . 333Housing and Urban Development Act of 1968 334Lending authority of Reserve Banks, new provisions of law

and legislative recommendation 93, 336, 337Margin requirements, extension of law to over-the-counter securities. . 334Par clearance, legislative recommendation 337Purchase of obligations of foreign govts. by Reserve

Banks, legislative recommendation 339Rate ceilings on deposits or share accounts, flexible authority for

Federal supervisory agencies to set maximum, extension 336Real estate loans by national banks, amendment of Section 24 of

Federal Reserve Act 334Reserve requirements:

Graduated reserve requirements on demand deposits,legislative recommendation 338

Time deposits of member banks, law made permanent 336Revenue bond underwriting of certain municipal bonds by member banks 334Special Drawing Rights Act 333"Tender offers" with respect to securities of member State banks,

amendments to Securities Exchange Act of 1934 334Truth in Lending Act 333


INDEX

PageLegislation—Continued

U.S. Govt obligations, authority of Reserve Banks to purchase directfrom U.S., extension 333

Liquidity discussions and negotiations 328-32Litigation:

Baker Walts & Co. et al v. Saxon 343Collateral Lenders Committee et al. v. Board of Governors

of the Federal Reserve System 341Suits arising out of closing of San Francisco National Bank 342United States v. Girard Trust Bank and The Fidelity Bank 342

Loan production offices as branches of State member banks,reinterpretation by Board of Federal banking laws 88

Loans:Banks, by classes 386Executive officers of member banks, loans to (See Member banks)Federal Reserve Banks (See Discounts and advances)Home mortgage loans to bank examiners, legislative recommendation. . 339Real estate loans by national banks, legislation 334Regulation V loans 357, 379Slock market transactions (See Stock market transactions)

Margin requirements:Exemption from, proposed amendment to Regulation U regarding loans

to dealers engaged in market-making activities in convertible bonds. . 84Extension of, to over-the-counter securities, legislation 334Regulatory changes by Board 70, 72, 75, 83, 84, 85, 87Table 381

Member banks:Acceptance powers 352Advances by Reserve Banks to (See Federal Reserve Banks)Assets, liabilities, and capital accounts 386Bank Protection Act of 1968 334Banking offices, changes in number 388Examination 345Executive officers of, loans to:

Reporting requirements 347Revision of Regulation O 73

Foreign branches, special study and number of 325, 350-52Income, expenses, and dividends 387Number 348, 386Operations subsidiaries and loan production offices of State member

banks, reinterpretation by Board of Federal banking laws 88Par clearance, legislative recommendation 337Reserve requirements (See Reserve requirements)Reserves and related items 384


INDEX

Page

Member banks—ContinuedRevenue bond underwriting, legislation 334"Tender offers" with respect to securities of member State banks,

legislation and amendment of Regulation F 86, 334Membership in Federal Reserve System 347Mergers {See Bank mergers and consolidations)Monetary policy:

Digest of principal policy actions 9-11Econometric model construction, special study 326Review of 1968 3-65

Mutual savings banks 386, 388National banks:

Assets and liabilities 386Banking offices, changes in number 388Foreign branches, special study and number of 325, 350-52Number 348, 386Real estate loans, legislation 334Revenue bond underwriting, legislation 334

Nonbank financial institutions, foreign credit restraintprogram 57-59, 76, 94

Nonmember banks:Assets and liabilities 386Banking offices, changes in number 388

Operations subsidiaries of State member banks, reinterpretation byBoard of Federal banking laws 88

Over-the-counter securities {See Securities)Par and nonpar banking offices, number 390Par clearance, legislative recommendation 337Policy actions, Board of Governors:

Discount rates at Federal Reserve Banks:Decrease 90Increases 76, 79, 95

Foreign credit restraint program guidelines, revision 76, 94Member bank reserve requirements, consideration of i n c r e a s e . . . . . . 96Operations subsidiaries and loan production offices,

reinterpretation of Federal banking laws 88Regulation A, Advances and Discounts by Federal Reserve Banks:

Amendment to conform to new provisions of law 93Regulation D, Reserves of Member Banks:

Reserve requirements, changes in method of computation 82Regulation F, Securities of Member State Banks:

Amendments to conform to Securities Exchange Act of 1934 86


INDEX

Page

Policy actions, Board of Governors—ContinuedRegulation G, Credit by Persons Other Than Banks, Brokers, or Dealers

for Purpose of Purchasing or Carrying Registered Equity Securities:Adoption of new regulation and amendments 70, 75, 83, 87Margin requirements, increase 85

Regulation K, Corporations Engaged in Foreign Banking and FinancingUnder the Federal Reserve Act:

Equity investment abroad, Board approval necessary 73Regulation O, Loans to Executive Officers of Member Banks:

Revision 73Regulation Q, Payment of Interest on Deposits:

Foreign time deposits, exemption of interest on certain deposits.... 69, 92Maximum rates on large-denomination, single-maturity time deposits 80

Regulation T, Credit by Brokers, Dealers, and Members ofNational Securities Exchanges:

Amendments 70, 72, 75, 83Margin requirements, increase 85

Regulation U, Credit by Banks for the Purpose of Purchasing orCarrying Registered Stocks:

Amendments 70, 75, 83Margin requirements, increase 85Proposed amendment to exempt from margin requirements loans

to dealers engaged in market-making activities in convertible bonds 84Regulation Y, Bank Holding Companies:

Revision 74Policy actions, digest 9-11Policy actions, Federal Open Market Committee:

Authority to effect transactions in System Account, includingcurrent economic policy directive 99-225

Continuing authority directive on domestic operations 100Continuing authorizations 129Foreign currency operations, authorization and directive 100, 102-07,

115, 128, 129, 132, 142, 151, 159, 174, 202, 217Presidents of Federal Reserve Banks:

Conference 443List 440-42Salaries 379

Profit and loss, Federal Reserve Banks 375Real estate loans by national banks, legislation 334Record of policy actions {See Policy actions)Regulations, Eioard of Governors:

A, Advances and Discounts by Federal Reserve Banks:Amendment to conform to new provisions of law 93


INDEX

Page

Regulations, Board of Governors—ContinuedD, Reserves of Member Banks

Reserve requirements:Changes in method of computation 82Consideration of increase in by Board 96

F, Securities of Member State Banks:Amendments to conform to Securities Exchange Act of 1934 86

G, Credit by Persons Other Than Banks, Brokers, or Dealers forPurpose of Purchasing or Carrying Registered Equity Securities:

Adoption of new regulation and amendments 70, 75, 83, 87Margin requirements, increase 85

K, Corporations Engaged in Foreign Banking and FinancingUnder the Federal Reserve Act:

Equity investment abroad, Board approval necessary 73O, Loans to Executive Officers of Member Banks:

Revision 73Q, Payment of Interest on Deposits:

Foreign time deposits, exemption of interest on certain deposits.... 69, 92Maximum rates on large-denomination, single-maturity time deposits 80

T, Credit by Brokers, Dealers, and Members of NationalSecurities Exchanges:

Amendments 70, 72, 75, 83Margin requirements, increase 85

U, Credit by Banks for the Purpose of Purchasing or CarryingRegistered Stocks:

Amendments 70, 75, 83Margin requirements, increase 85Proposed amendment to exempt from margin requirements

loans to dealers engaged in market-making activitiesin convertible bonds 84

Y, Bank Holding Companies:Revision 74

Repurchase agreements:Bankers' acceptances 101, 364, 366, 368, 372Federal agency obligations 364, 366, 368, 372U.S. Govt. securities 101, 364, 366, 371, 372, 384

Reserve requirements:Federal Reserve Banks, gold reserve requirement against

Federal Reserves notes, elimination 333Graduated reserve requirements on demand deposits,

legislative recommendation 338Member banks:

Changes in method of computation, amendmentof Regulation D .-•••, 82


INDEX

Page

Reserve requirements—ContinuedMember banks—Continued

Increase, consideration by Board of Governors 96Table " 382Time deposits, authority of Board of Governors to set

reserve ratio for, law made permanent 336Reserves:

Federal Reserve Banks:Gold reserve requirement against Federal Reserve notes,

elimination 333International liquidity discussions and negotiations 328-32Member banks:

Reserve requirements (See Reserve requirements)Reserves and related items 384

Revenue Bond underwriting by member banks, legislation 334Salaries:

Board of Governors 361Federal Reserve Banks 379

Savings bond meetings 355Savings deposits (See Deposits)Securities (See also U.S. Govt. securities):

Federal agency obligations (See Federal agency obligations)Margin requirements for over-the-counter securities, legislation 334Revenue fcond underwriting by member banks, legislation 334Stock market transactions (See Stock market transactions)"Tender offers" with respect to securities of member State

banks, legislation and amendment of Regulation F 86, 334Special Drawing Rights 328-32, 333Special studies by Federal Reserve System 324-27State member banks:

Assets and liabilities 386Bank Protection Act of 1968 334Eianking offices, changes in number 388Changes in control of, reports 346Examination 345P'oreign branches, special study and number of 325, 350-52Mergers and consolidations 348, 392-413Number 348, 386Operations subsidiaries and loan production offices of,

reinterpretation by Board of Federal banking laws 88Re venue bond underwriting, legislation 334"Tender offers" with respect to securities of, legislation

and amendment of Regulation F 86, 334


INDEX

Page

Stock market transactions, regulatory changes and policyactions by Board affecting credit in 70, 72, 75, 83, 84, 85, 87

System Open Market Account:Audit 354Authority to effect transactions in 99-225Domestic securities, review of operations 226, 227-74Foreign currencies, review of operations 60-65, 226, 275-323

Time deposits {See Deposits)Training activities 353Truth in Lending Act 333U.S. balance of payments:

Foreign credit restraint program 57-59, 76, 94International liquidity discussions and negotiations 328-32Review 47-56

U.S. Govt. securities:Authority of Reserve Banks to purchase directly

from U.S., extension 333Bank holdings, by class of bank 386Federal Reserve Bank holdings 356, 364, 366, 368, 370, 384Federal Reserve earnings on 355, 374Open market operations 99-225, 226, 221-1 A, 372Repurchase agreements 101, 364, 366, 371, 372, 384Special certificates purchased directly from United States 371Study of market by Treasury and Federal Reserve 325U.S. Govt. agency obligations {See Federal agency obligations)

V loans 357, 379


fifty-fifth annual report of the board of governors of the

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