FOMC Minutes

TWENTY-FIFTH ANNUAL REPORT

OF THE

BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

COVERING OPERATIONS

FOR THE YEAR 1938

UNITED STATES OF AMERICA

WASHINGTON: 1939

FEDERAL RESERVE SYSTEM

RECORD OF POLICY ACTIONS-FEDERAL OPEN MARKET

COMMITTEE

MEETING ON MARCH 1, 1938

Members present: Mr. Eccles, Chairman; Mr. Harrison, Vice Chair

man; Mr. Szymczak, Mr. McKee, Mr. Ransom, Mr. Davis, Mr. Sinclair,

Mr. Newton, Mr. Schaller, Mr. Peyton.

Authority (1) to Replace Maturing Securities and to Make Shifts of Securities

in the System Open Market Account and (2) to Increase or Decrease Sys

tem Open Market Account.

By unanimous vote, the Committee instructed the execu

tive committee, until otherwise instructed by the Federal

Open Market Committee, to direct the replacement of ma

turing securities in the system open market account with

other Government securities and to make such shifts be

tween maturities in the account as may be necessary in the

proper administration of the account, provided that the

amount of securities maturing within two years be main

tained at not less than $1,000,000,000 and that the amount

of bonds having maturities in excess of five years be not

over $850,000,000 nor less than $500,000,000.

The Committee also voted unanimously to authorize the

executive committee upon written, telephonic, or telegraphic

approval of a majority of the members of the Federal Open

Market Committee, and until otherwise directed by the

Committee, to direct the purchase in the open market from

time to time of sufficient amounts of Government securities

to meet the requirements of commerce, business, and agri

culture by keeping at member banks an aggregate volume

of excess reserves adequate for the continuance of the Sys

tem's policy of maintaining credit conditions conducive to

economic recovery; and to authorize the executive commit

tee, upon written, telephonic, or telegraphic approval of a

majority of the members of the Committee, and until other

wise directed by the Committee, to direct a reduction of the

holdings of such securities, to the extent that their reten

tion was found to be unnecessary for the purpose of this

action. It was understood, however, that the executive

committee was not authorized to increase or decrease by

more than $300,000,000 the amount of securities held in

the system open market account.

In the opinion of the Committee the existing amount of excess reserves

of member banks was not too large in view of the low volume of busi

ness activity, declining prices, and business uncertainty and, therefore,

no useful purpose would be achieved at this time by reducing the amount

of the securities held by the System. It was agreed, however, that pro

vision should be made for prompt action in purchasing securities, when

approved by a majority of the Committee for the purpose of keeping at

member banks an aggregate volume of excess reserves adequate for the

continuance of the system's policy of maintaining credit conditions con

ducive to economic recovery, and that similar provision should be made

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for the sale of securities to the extent that their retention would be un

necessary for this purpose. It was agreed also that the existing authority

of the executive committee to replace maturing securities and to make

shifts of securities in the account should be continued in order to enable

the executive committee to meet changing market conditions and to im

prove the distribution of maturities in the account.

MEETING ON APRIL 22, 1938

Members present: Mr. Eccles, Chairman; Mr. Harrison, Vice Chair

man; Mr. Szymczak, Mr. McKee, Mr. Ransom, Mr. Davis, Mr. Draper,

Mr. Sinclair, Mr. Newton, Mr. Schaller, Mr. Peyton.

Authority to Replace Maturing Securities and to Make Shifts of Securities in

the System Open Market Account.

The following resolution was presented by Mr. Harrison,

who moved its adoption:

"In view of the fact that the present and prospective amounts of

excess reserves of member banks are tending to make it more diffi

cult for the System, by means of shifts in the maturities in the open

market account, to exercise its influence towards orderliness in the

Government securities market

VOTED that, until otherwise authorized or directed by the

Committee, and in addition to the authority to make shifts

in the maturities in the system open market account, the

executive committee be authorized to permit fluctuations

in the total amount of the account in order more effectively,

with the means available and in the light of current condi

tions, to exert its influence towards orderly conditions in the

Government bond market, provided, however, that the ac

count shall not be increased or decreased by more than

$200,000,000 from the present level of the account."

The presentation of the foregoing resolution followed a detailed dis

cussion of developments in connection with the recently announced

Government program for the encouragement of business recovery, includ

ing the release of gold held in the inactive gold account of the Treasury,

the reduction made by the Board of Governors of the Federal Reserve

System as of April 16, 1938, in reserve requirements of member banks,

and a reduction in the amounts of current weekly offerings by the Treas

ury of Treasury bills for sale in the market. Mr. Harrison presented

his resolution on the ground that in all the circumstances the executive

committee should have authority to permit some flexibility in the system

open market account by allowing some reduction in the amount of the

account if that should seem desirable as a factor in restraining a dis

orderly rise in the market just as in the past, by purchases of securities,

it had exerted its influence toward maintaining an orderly market on a

decline. In his opinion, some reasonable reduction in the account at

such a time should not be interpreted as a reversal of the policy of the

Government with respect to excess reserves and probably would serve

to make the market less vulnerable in the future.

As a substitute for Mr. Harrison's resolution, a mo

tion was made and carried unanimously that the execu

tive committee be instructed to direct the replacement of

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ANNUAL REPORT OF BOARD OF GOVERNORS

the next maturing Treasury bills in the system open

market account with Treasury bills or notes having ma

turities not to exceed two years, provided that such securi

ties could be purchased without paying a premium above

a no-yield basis, with the understanding that another meet

ing of the Federal Open Market Committee would be held

next week.

Thereupon, by unanimous vote, the Committee instructed

the executive committee, until otherwise instructed by the

Committee and subject to the limitations contained in the

motion previously adopted on this date with respect to the

next maturing Treasury bills in the account, to direct the

replacement of maturing securities in the system open

market account with other Government securities and to

make such shifts between maturities in the account as may

be necessary in the proper administration of the account,

provided that the amount of securities maturing within

two years be maintained at not less than $1,000,000,000

and that the amount of bonds having maturities in excess of

five years be not over $850,000,000 nor less than $500,

000,000.

The foregoing actions were taken by the Committee on the ground

that the question of general policy to be followed by the Committee

required further study in the light of actual developments during an

interval before another meeting of the Committee, which it was agreed

should be held the following week and, therefore, that during such

interval there should be no change in the size of the system account

except to the extent that it might prove to be impossible to replace

maturing securities without paying a premium over a no-yield basis

for replacement securities maturing within two years.

MEETING

ON

APRIL 29,

1938

Members present: Mr. Eccles, Chairman; Mr. Harrison, Vice Chair

man; Mr. Szymczak, Mr. McKee, Mr. Ransom, Mr. Davis, Mr. Draper,

Mr. Sinclair, Mr. Newton, Mr. Peyton, Mr. Martin (alternate for Mr.

Schaller).

Authority (1) to Replace Maturing Securities and to Make Shifts of Securities

in the System Open Market Account and (2) to Increase or Decrease the

System Open Market Account.

It was moved that the following resolutions be adopted:

"That the executive committee be directed, until otherwise di

rected by the Federal Open Market Committee, to arrange for the

replacement of maturing securities in the system open market ac

count with other Government securities and for such shifts in maturi

ties as may be necessary in the proper administration of the

account, provided (1) that maturing Treasury bills shall be re

placed only with Treasury bills or notes maturing within two

years to the extent that they can be purchased without paying a

premium over a no-yield basis; (2) that, subject to the foregoing

limitation, the amount of securities in the account maturing within

two years be maintained at not less than $1,000,000,000; and (3)

that the amount of bonds in the account having maturities in

FEDERAL RESERVE SYSTEM

79

excess of five years be maintained at not less than $500,000,000

nor more than $850,000,000.

"That, in addition to such authority as may be contained in

other resolutions of the Federal Open Market Committee and until

otherwise directed by the Committee, the executive committee be

authorized, upon written, telephonic or telegraphic approval of a

majority of the members of the Federal Open Market Committee,

to arrange for the purchase or sale (which would include authority

to allow maturities to run off without replacement) of Government

securities in the open market from time to time for the system

open market account to such extent as the executive committee

shall find to be necessary for the purpose of exercising an influence

toward maintaining orderly market conditions, provided (1) that

the total amount of securities in the account be not increased or

decreased by more than $125,000,000, and (2) that the amount

of bonds in the account having maturities over five years be main

tained at not less than $500,000,000 nor more than $850,000,000."

Mr. Harrison moved as a substitute for the above motion

that the following resolution be adopted:

"That until otherwise authorized or directed by the Federal

Open Market Committee the executive committee be authorized

(a) to make such shifts in maturities in the system open market

account as may be necessary in the proper administration of the

account, and (b) to permit fluctuations in the total amount of the

account in order more effectively with the means available and

in the light of current conditions to exert its influence toward main

taining orderly conditions in the market, provided (1) that the

amount of securities in the account maturing within two years be

maintained at not less than $1,000,000,000, (2) that the amount of

bonds in the account having maturities in excess of five years be

maintained at not less that $500,000,000 nor more than $850,000,000,

and (3) that the total amount of the account be not increased or

decreased by more than $200,000,000 from the present level of the

account."

The substitute motion was put by the Chair and lost,

the members voting as follows: "aye," Messrs. Harrison,

McKee and Sinclair; "no," Messrs. Eccles, Szymczak, Ran

som, Davis, Draper, Newton, Peyton and Martin.

The original motion was put by the Chair and carried

unanimously.

Mr. Harrison's substitute resolution was offered on the ground that

it might become increasingly difficult for the system to exercise an in

fluence toward orderly conditions in the market by means of shifts

in maturities in the account; that further replacement of maturing

securities with short maturities might accentuate the existing abnormali

ties in short and long term rates; than an effort to exert an influence

toward orderly market conditions at this time was important if we were

to avoid a too rapid or extensive rise in bond prices which might make

the market vulnerable to later reactions; that a reduction in the ac

count at this time, especially if it resulted merely from a failure to

replace maturities and if effected for the purpose of exercising the