A History of the Federal Reserve, Volume 2 (65 page)

This was a big change from “color, tone, and feel” or “resolve doubts on the side of ease [restraint],” but it did not propose a general policy or strategy. The FOMC adopted the new directive after considerable discussion at the December 19 meeting that put a formal end to the bills-only policy.

Martin spoke first. He offered a political explanation urging an end to bills-only not because it had failed but because they had not made their case to the public. “The System has a public relations problem, and changing words would be more prone to misinterpretation than abandoning the statements entirely” (FOMC Minutes, December 19, 1961, 32).
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He also proposed continuing purchases of non-bills but renewing the decision at each meeting.
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He was less certain about making the directive to the manager more explicit. The manager had a great deal of leeway; much of it he thought was necessary, but he acknowledged that the FOMC could make its instructions more explicit (ibid., 33).

The FOMC supported Martin on a twelve to four vote, including the opinions of presidents who were not voting members. The voting members divided eight to four, a rare number of dissents. Governors King, Robertson, and Mills and President Wayne (Richmond) opposed; Martin’s efforts to democratize the System encouraged differences of opinion. Several proponents agreed that public relations was the main reason for formally ending the bills-only policy and related statements of procedure.
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The need for such statements had passed after a decade in which insistence on bills-only attracted much criticism. Opponents included some who wanted operating rules and some (Mills) who wanted the bills-only rule. Robertson gave the best reason for opposing the change: If the FOMC
failed to set procedural rules, the desk would have more authority and less guidance from the committee. There would be standard procedures. At issue was who chose them and how explicit they would be.

107. Martin also gave a more substantive reason for the change. He claimed that billsonly had improved the functioning of the long-term market and the market’s depth, breadth, and resiliency. Further improvement was unlikely (FOMC Minutes, December 19, 1961, 31–32).

108. Sproul and Hayes had proposed repeatedly that the decision about bills-only be made at each meeting. Martin now adopted both their proposal and their policy. New York would have the discretion it sought. They also won their fight to remove the 1953 statement about operating procedures.

109. These included the commitment not to support any pattern of bond yields or prices, use of open market operations only for monetary and credit policy and correction of disorderly markets, and operations “solely for the purpose of providing or absorbing reserves” (FOMC Minutes, December 19, 1961, 69). The last clause especially irritated Hayes because it emphasized reserves and excluded changes in relative interest rates. This was a peculiar decision since the purpose was to change relative interest rates, but Martin wanted to emphasize that they would not peg rates. Those voting for the motion also wanted a published explanation of the reason for the change from bills-only.

The committee also adopted the two-part directive. The first part, a statement of continuing authority, set out the quantitative limits on purchases of government securities and bankers’ acceptances, authorized repurchase agreements with non-bank government securities dealers (now extended to twenty-four months), and permitted but limited temporary direct purchases from the Treasury (up to $500 million at the time).
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The second part contained the economic policy directive. The committee agreed to Irons’s proposal with a few changes. Henceforth the secretary, manager, and committee economists would draft a statement to which each of the members could agree or dissent promptly. Some members said that the purpose was more public relations than substance, since the manager heard the discussion at the meeting, but others wanted quantitative targets to increase the committee’s control of the manager and the policy action.
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Hayes, Deming, and Bopp strongly opposed quantitative targets.
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For the particular meeting, the FOMC for the first time chose an explicit interest rate target, a 2.75 percent Treasury bill rate. This was probably a move toward the administration’s position. Martin began with a looser statement of consensus that did not satisfy the members. Several preferred to reduce total reserve growth to the 3 to 5 percent range.
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Others had
used a specific interest target in their statements for several months. They did not want to give the manager a range of rates. Martin agreed that it was “wiser to use a T-bill rate as a target rather than reserves growth or the money supply as targets; it’s not feasible to pin down the latter” (FOMC Minutes, December 19, 1961, 76).
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110. This vote was ten to two. Mills voted no because he preferred the old directive. Robertson objected because the continuing authority included repurchase agreements with non-bank dealers at interest rates at times below the discount rate. Robertson objected also because the directive no longer said that operations were primarily to supply and absorb bank reserves (FOMC Minutes, December 19, 1961, 82–83). This was another victory for New York.

111. Robertson, always alert to expanding the manager’s role, objected to the manager participating in the writing. He received no support.

112. George Mitchell recognized the difficulty of agreeing on a quantitative target when members used different measures, but he said that the FOMC should remain in session until they agreed on the target. Thus, he joined Bryan in recognizing this source of the FOMC’s problem. Martin did not comment, but he did not believe that a precise instruction was desirable. A few years later Bopp (1965) wrote an essay responding to the Federal Reserve’s academic critics. He argued (1) that the FOMC did not know enough about the functioning of the economic system to give precise instructions to the desk and (2) that measures of reserves or money are “influenced by factors over which the manager has no immediate or direct control” (ibid., 15). He did not propose research to improve knowledge, and he did not recognize that the FOMC’s unwillingness to adopt a precise directive shifted responsibility but did not avoid it.

113. The closest weekly new issue yield was 2.579 percent. A dialogue between Shephardson and Martin shows Martin’s concern about public relations, especially relations with the administration. Shephardson, who favored reducing reserve growth, referred to the action
as “tightening.” Martin, conscious of the administration’s concern, insisted that “trending” was a better term. Shephardson asked why reducing reserve growth was not tightening. Hayes replied that it was a “trend toward tightening.” No, Martin said, it’s “a trend toward less ease” (FOMC Minutes, December 19, 1961, 78). The FOMC’s secretary, Ralph Young, referred to this exchange at the next meeting, when Trieber (New York) criticized the first directive prepared under the new procedure, and Hayes accused Young of taking advantage of the new arrangements to mention reserve growth before “less ease.” Hayes thought the consensus called for less ease, not slower growth of total reserves (FOMC Minutes, January 9, 1962, 18–19). Trieber added that the directive should “add clarity . . . without injecting new tests or new interpretations” (ibid., 14). Mitchell responded that if the desk thinks the instructions are inconsistent, it should ask the FOMC to clarify by phone. The exchange suggests that New York viewed the new procedure and its more explicit targets as a renewed effort to reduce its influence. Young noted that each FOMC member used a different phrase to describe his preferred policy. Rouse and Thomas had agreed to include reduced reserve growth in the directive.

There was not enough agreement about what the committee intended the directive to do and how it was supposed to resolve contentious issues. The committee revisited these topics several times, using experience with the changes they made to guide additional changes. At the January 23 meeting, the secretary, manager, and economist prepared the directive at lunchtime, so the FOMC could vote at a second session. By March 1962, enthusiasm for quantitative targets had weakened, and free reserves, feel of the market, and slightly less ease reappeared in the directives.
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At the December 1962 meeting, Martin reopened discussion of the directive by mentioning two problems: the difficulty the desk had hitting and keeping a quantitative target, and the matter of communicating with the public. Several members agreed that the new directive was an improvement. Only Mills wanted to reverse the changes made the year before. Support for quantitative instructions to the desk was greatly reduced, however.
Only George Ellis (Boston), Eliot Swan (San Francisco), and Mitchell spoke in favor. Swan wanted targets to be “quantitative and prioritized.” It was wrong that the manager had to translate the member’s statements into a quantitative target; that should be the FOMC’s job. Clay (Kansas City) was at the opposite extreme. He could not accept any quantitative target. Bryan (Atlanta) made the greatest change, commenting that quantitative targets were not sufficient; the desk had to use discretion. Deming (Minneapolis) submitted a suggested directive that distinguished between long-range goals and near-term targets. His proposal gave specific objectives but did not use quantitative targets. His was a rare effort to direct explicit attention to the longer-term effects of Federal Reserve actions.

114. The vote was eight to four, an unusually large number of dissenters, and a majority of the Board of Governors. Robertson dissented because he did not like to target the Treasury bill rate, Mills because the policy was not sufficiently restrictive, and King and Mitchell because it was too soon to tighten. Martin continued to insist that their action should not be called “tightening.” Balderston called it a deceleration of the acceleration (FOMC Minutes, December 19, 1961, 78). The new issue Treasury bill rate did not reach 2.75 percent until mid-January.

115. Martin commented at the January 23 meeting, five weeks after the decision, that use of “concrete figures in the directive has some merit, . . . [but] the directive must recognize the color, tone, and feel of the market” (FOMC Minutes, January 23, 1962, 33). The new procedure accomplished very little of value except perhaps to show why the FOMC issued vague directives.

Several members favored quarterly policy reviews, published in the
Fed
eral
Reserve
Bulletin,
as a way of communicating with the public, particularly academic critics. Martin wanted better communication because he believed the critics were mistaken. He opposed regular quarterly reports, however, because there were times when the FOMC would not want to explain its decision. “Such a review would go beyond the level of disclosure required by the Federal Reserve Act and would cause the press to expect releases on a particular date” (FOMC Minutes, December 18, 1962, 88–89). Martin was willing to consider proposals to release complete minutes after five years. Much later the Federal Reserve implemented this proposal.

Martin accepted a change in the drafting procedure. Instead of having the directive prepared by the secretary, manager, and economist after the meeting, the new procedure required the staff to prepare the directive during a recess, so that the FOMC could vote before leaving. Before long, the directives were as vague as before. The members did not agree on the way to measure policy, so they could not write a precise directive. Martin showed no interest in pushing for more precision or clarity, perhaps because he did not favor it, perhaps because agreement was unlikely, perhaps both.

The problem in choosing targets and deciding where to set them arose in a congressional hearing. Chairman Martin would not give a clear answer when Congressman Patman asked him to “name any reliable barometer or barometers that I could look at to learn just what degree of tightness or ease you are following” (excerpt from House Banking testimony, Correspondence Box 240, Federal Reserve Bank of New York, July 10, 1962). Martin replied that “there is no single barometer or even small group of barometers . . . that can be relied upon at all times and under all economic conditions” (ibid.). He first named total commercial bank reserves, then free reserves, followed by several short-term interest rates and their relation to the discount rate. Later he added growth of bank credit and money. A reader does not learn much from his response. There is no mention of
the relative weights given to each factor of how he resolved divergent movements. And there is no mention of differences between nominal and real values or international payments.

Martin’s answer in one sense seems accurate. Neither he nor most others gave much thought to issues of this kind. As Martin often said, he was a “market man,” concerned like them mainly with today’s market position.

Personnel
Changes

In 1961–62, the FOMC experienced the largestturnover since 1936. Table3.5 shows the six reserve banks that chose new presidents. Also in 1961, President Kennedy made his first appointment to the Board of Governors and two years later reappointed Martin and Balderston as chairman and vice chairman of the Board.

With the strong support of Treasury Secretary Douglas Dillon, President Kennedy decided to reappoint Martin as chairman without considering opposition by the Council of Economic Advisers (Dillon papers, Box 34, January 16, 1963). He was aware of their opposition but decided that the political cost of replacing Martin was too high, especially because of his own commitment to support the fixed exchange rate system. Kennedy claimed to like Martin’s willingness to state an independent view.
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Menc Szymczak left the Board at the end of May 1962. He had served since 1933. His successor was George W. Mitchell, also from Illinois. Mitchell completed the remaining months of Szymczak’s term, then com
pleted a full fourteen-year term. Mitchell was a tax or fiscal economist who had served at the Illinois tax commission and as director of the Illinois Department of Finance under Governor Adlai Stevenson. Immediately prior to his appointment, he was vice president of the Chicago Reserve bank and an associate economist of the FOMC. He was the first professional economist on the Board since 1936.

116. Paul Samuelson wanted Martin replaced in 1961, but he told James Tobin that the United States would lose about $1 billion in gold (Oral History Interview, 1964, Tobin, 190). When Kennedy offered Martin reappointment, Martin asked if the offer “was only because it was of political value to his administration. . . . [I]f that I wouldn’t like to be reappointed. I have served many years, and I have been ready to go elsewhere for a long time” (ibid., 193; the quotation is from James Tobin reporting on a conversation with Martin in 1964). Kennedy agreed that it would be “embarrassing not to reappoint you. But that is certainly not the only reason. . . . I’ve found you to be independent-minded. . . . The president needs people like that” (ibid., 193). Martin accepted. After the decision, Gardner Ackley, who disliked Martin’s policies, had to write the encomiums for the president to state at the reappointment.