FOMC Minutes

A meeting of the Federal Open Market Committee was held in

the offices of the Board of Governors of the Federal Reserve System

in Washington on Friday, April 29, 1938, at 10:40 a.m.

PRESENT:

Mr. Eccles, Chairman

Mr. Harrison, Vice Chairman

Mr. Szymczak

Mr.

Mr.

Mr.

Mr.

McKee

Ransom

Davis

Draper

Mr. Sinclair

Mr. Newton

Mr. Peyton

Mr. Martin (alternate for Mr. Schaller)

Mr. Morrill, Secretary

Mr.

Mr.

Mr.

Mr.

Carpenter, Assistant Secretary

Wyatt, General Counsel

Dreibelbis, Assistant General Counsel

Burgess, Manager of the System Open

Market Account

Mr. Thurston, Special Assistant to the

Chairman of the Board of Governors of

the Federal Reserve System

Mr. Thomas, Assistant Director of the

Division of Research and Statistics

of the Board of Governors

Mr. Piser, Senior Economist in the Divi

sion of Research and Statistics of the

Board of Governors

Mr. Burgess submitted copies of a report prepared by the Fed

eral Reserve Bank of New York for this meeting, covering operations

in

the system open market account for the period from April 17 to 27,

1938, inclusive, and reviewed briefly the transactions covered by the

report.

In connection with the report there was a discussion of the

relatively large volume of bills held in the account which mature during

the next two months and of the possible future trend of yields on Gov

ernment securities.

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-2.

Upon motion duly made and seconded, and

by unanimous vote, the transactions in the

system open market account for the period

from April 22, to April 28, 1938, inclusive,

were approved,

ratified and confirmed.

Chairman Eccles stated that, in accordance with the understand

ing at the meeting of the Federal Open Market Committee on April 21

and 22, he and Mr. Davis had a further discussion with the Secretary

of the Treasury on Tuesday, April 26, of the problems which were before

the Federal Open Market Committee as a result of the action of the

Treasury in discontinuing the inactive gold account and of the Board

of Governors in reducing reserve requirements and particularly the

problem

created by the proposed retirement by the Treasury of a por

tion of the maturing Treasury bills.

Chairman Eccles said that the

Secretary had a very clear understanding of the difficulties faced by

the Committee and had stated that he desired to cooperate with the Com

mittee in

every way as he realized that its

related to his own.

problem was very closely

Chairman Eccles said that the Secretary had in

dicated that he was in agreement with the position that the system

open market account should not be reduced as long as it

is

possible

to purchase replacement securities without paying a premium over a

no-yield basis, particularly since any reduction in the account might

be regarded as a reversal of policy.

Chairman Eccles stated further that it

was clear that, while

created by the re

the Administration understood fully the difficulties

tirement of maturing bills, it

felt that it

was essential that such

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action be taken as a means of completing its

announced program and

getting into the banks promptly as excess reserves the proceeds of

the desterilized gold.

The Secretary stated during the conference,

Chairman Eccles said, that the Reconstruction Finance Corporation would

very likely require additional funds in the near future with which to

make loans under the authority recently granted to it

and that, if

it

appeared desirable to do so, the Reconstruction Finance Corporation

might offer within the next two weeks $500,000,000 of Reconstruction

Finance Corporation debentures with possibly a five-year maturity, on

a book credit basis, which would tend to reduce the demand for the

shorter term Government securities.

There was further discussion of the question whether, in view

of the intention of the Treasury to retire maturing bills, the Federal

Reserve System had any responsibility with respect to the maintenance

of orderly conditions in the Government securities market.

Chairman Eccles stated that, following the conference with

the Secretary of the Treasury and in

preparing for this meeting, he

had had drafted two resolutions which he desired to submit for consid

eration by the Committee in

connection with its

discussion of the au

thority to be granted to the executive committee to effect transactions

in the system open market account.

The first

draft of resolution read as follows:

"That the executive committee be directed, until other

wise directed by the Federal Open Market Committee, to arrange

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"for the replacement of maturing securities in the system

open market account with other Government securities and

for such shifts in maturities as may be necessary in the

proper administration of the account, provided (1) that

maturing Treasury bills shall be replaced only with Trea

sury bills or notes maturing within two years to the ex

tent 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 matur

ing 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 excess of five years be main

tained at not less than $500,000,000 nor more than

$850,000,000."

The second resolution (with changes made during the discussion)

read as follows:

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

tained 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 maintained at not less than $500,000,000 nor more

than $850,000,000."

In connection with the first resolution it

was stated that the

replacement of maturing bills with bills and notes maturing within two

years to the extent that they could be purchased without paying a premium

over a no-yield basis would not only tend to increase the price of all

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such securities up to two years to a no-yield basis, but would very

likely result in higher prices for notes of all maturities.

Mr. Harrison said that he felt that the executive committee

should be given authority to reduce the account within certain limita

tions, as suggested in the resolution offered by him at the last meet

ing of the Federal Open Market Committee.

He pointed out that, follow

ing the recent decrease in reserve requirements of member banks, coupled

with the desterilization of approximately $1,400,000,000 of gold, ex

cess reserves of member banks already had been largely increased and

would likely reach $3,800,000,000 before the end of the year, and that

this increase had already resulted in a rapid and substantial rise in

Government security prices.

Looking ahead, he said, it

might become

increasingly difficult for the System, by means of shifts in maturities

in its

account, to exercise an influence toward orderly conditions in

the market; many of the shorter maturities were selling on a no-yield

basis; and further shifts into such maturities or forced replacement

of maturing securities with short maturities would accentuate the pres

ent abnormalities of both short and long term rates.

He also stated that, in his opinion, the Committee should con

tinue to recognize its

responsibility, when possible, to exercise its

influence toward maintaining orderly conditions in the market, not only

on the down-side but on the up-side as well; that the latter was im

portant at this time if

we were to avoid a too rapid or extensive rise

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in bond prices which might make the market more vulnerable to later

reactions; and that, to meet this responsibility most effectively

under conditions such as exist now, the Committee should have authority

to reduce the account,

either by sales of securities or by allowing

maturities to run off without replacement.

He added that a reduction

in the account at this time, especially if it

resulted merely from a

failure to replace maturities, would probably run little

of the risk

previously feared that a decrease in the account might precipitate

disorderly liquidation by banks, and that a reduction now, effected

for the purpose of exercising the System's influence toward the main

tenance of orderly market conditions, could not fairly be interpreted

as in conflict with or as counteracting the Government's recent program

to increase excess reserves, as the amounts involved would be rela

tively too small as compared with the total amount of excess reserves

now outstanding to warrant such an interpretation.

Chairman Eccles expressed the opinion that any action to re

duce the account so long as replacements could be purchased without

paying a premium over a no-yield basis would be interpreted as in

consistent with the Government's program.

He stated that, as a member

of the executive committee, he would not want the executive committee

to take the responsibility of reducing the account,

and that, while

he would be willing to vote for the second resolution, he felt that

if

conditions arose which called for a reduction in the account another

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meeting of the full Committee should be called.

There was a discussion of what action the executive committee

would be expected to take under clause (1)

and Chairman Eccles stated that it

of the first resolution

was intended to instruct the execu

tive committee to replace maturing bills so long as such replacements

could be made by the purchase of bills or notes, with maturities not to

exceed two years without paying a premium over a no-yield basis and

that, to the extent that such replacements could not be made, maturi

ties would be allowed to run off without replacement.

The discussion

also made clear that the authority proposed in the second resolution,

if

given, would be construed to be independent of any authority or

action under the first resolution.

Further consideration was given to the possibility of acquir

ing for the system account securities, other than direct obligations

of the Government,

serve banks, and it

that are eligible for purchase by the Federal re

was stated that, since these securities were

small blocks,

available only from time to time in

substantial pur

chases thereof would be difficult to make and might substantially

increase prices, and that, therefore, such purchases would not be de

sirable from a market standpoint.

It

of the large volume of maturities in

next two months, it

was also stated that, in

view

the system account during the

was quite possible that unless replacements were

made with notes running as high as five years it

might be necessary

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to allow a substantial amount of securities in the account to mature

without replacement.

At the conclusion of the discussion

Mr. Newton moved that the two resolutions

set forth above be adopted. Mr. Newton's

motion was duly seconded.

Mr. Harrison moved as a substitute for

Mr. Newton's motion that the following res

olution be adopted for the reasons which he

had outlined earlier in this meeting:

"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 matur

ing 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 than $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."

Mr. Harrison's motion, having been

duly seconded, was put by the chair and

lost, the members voting as follows:

Mr. Harrison

Mr. McKee

Mr. Sinclair

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Ecles

Szymczak

Ransom

Davis

Draper

Newton

Peyton

Martin

4/29/38

Mr. Newton's original motion was put

by the chair and carried unanimously.

Thereupon the meeting adjourned.

Secretary.

Approved:

Chairman.