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 Wash

ington on Tuesday, August 2, 1938, at 10:40 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Eccles, Chairman

Harrison, Vice Chairman

Szymczak

McKee

Ransom

Davis

Draper

Sinclair

Schaller

Newton

Peyton

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr. Wyatt, General Counsel

Mr. Williams, Associate Economist

Mr. Dreibelbis, Assistant General Counsel

Mr. Thomas, Assistant Director of the Divi

sion of Research and Statistics of the

Board of Governors of the Federal Reserve

System

Mr. Thurston, Special Assistant to the

Chairman of the Board of Governors of

the Federal Reserve System

Chairman Eccles stated, in view of the absence in Europe of Mr.

Goldenweiser, Economist for the Federal Open Market Committee, that, if

agreeable to the other members of the Committee, Mr. Thomas, Assistant

Director of the Division of Research and Statistics of the Board of Gov

ernors, would be present at the meeting and at the proper time make a

statement with respect to business and credit conditions.

There being

no objection, Mr. Thomas was requested to attend the meeting.

Upon motion duly made and seconded, and by

unanimous vote, the minutes of the meetings of

the Federal Open Market Committee held on April

21-22 and April 29, 1938, were approved.

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Upon motion duly made and seconded, and

by unanimous vote, the actions of the execu

tive committee of the Federal Open Market

Committee as set forth in the minutes of the

meetings of the executive committee on April

19, 22 and 29, and May 31, 1938, were approved,

ratified, and confirmed.

It was stated that on July 1, 1938, all of the members of the

Federal Open Market Committee, with the exception of Mr. Davis who was

away, had agreed to waive, until otherwise directed by the Committee,

the requirement contained in the first resolution adopted at the meet

ing of the Comittee on April 29, 1938, that Treasury bills or Treasury

notes purchased in replacement of maturing Treasury bills have maturi

ties within two years.

Mr. Harrison reviewed the conditions which ex

isted when this action was taken pointing out that the New York bank

had experienced considerable difficulty in replacing maturing bills in

view of this restriction and that it had appeared that further replace

ments without paying a premium for bills or notes within the two-year

limitation would be extremely difficult if not impossible.

Mr. Harrison

added, however, that while the New York bank had experienced some diffi

culty in replacing subsequent maturities it had not gone beyond the two

year limitation.

Upon motion duly made and seconded, and

by unanimous vote, the action of the members

of the Committee in waiving the two-year lim

itation was approved, ratified, and confirmed.

Prior to this meeting there had been sent by the Federal Reserve

Bank of New York to each member of the Committee a copy of a report prepared

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at the bank covering open market operations in the system open market

account during the period from April 27 through July 27,

1938, and at

this meeting Mr. Harrison described the transactions which had taken

place in the account during the period from July 27 to the close of

business on August 1,

1938.

In discussing the report Mr. Harrison re

viewed the difficulties which had been experienced by the bank in ef

fecting exceptionally large Treasury bill replacements during the per

iod and expressed the opinion that the problem of replacement would

continue to be difficult.notwithstanding the fact that the Treasury

contemplates issuing $50,000,000 of new bills each week during August.

He stated that the difficulties had been increased to some extent by

the practice on the part of some banks with large excess reserves of

investing idle funds in bills regardless of the small return and of

suggesting to depositors with large idle balances that they invest such

balances in bills, thereby giving the depositors a small return which

they would not otherwise receive and reducing the deposit base for in

surance assessment by the Federal Deposit Insurance Corporation.

In

connection with the discussion of the problem of replacing maturing se

curities, there was also a discussion of Treasury financing in relation

to the operation of the system open market account.

Upon motion duly made and seconded, and

by unanimous vote, the transactions in the

system open market account for the period

from April 28 to August 1, 1938, inclusive,

were approved, ratified, and confirmed.

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At the request of the Committee, Mr. Thomas discussed business

and credit developments as outlined in a memorandum prepared in the

Board's Division of Research and Statistics under date of August 1,

1938, copies of which were handed to the members of the Committee dur

ing the meeting.

Mr. Williams.

Mr. Thomas' remarks were followed by a statement by

Copies of the memorandum prepared by the Division of Re

search and Statistics and a summary of Mr. Williams' statement have been

placed in the files of the Federal Open Market Committee.

At 1:15 p.m. the meeting recessed and reconvened at 2:35 p.m.

with the same attendance as at the morning session.

There ensued a discussion of the Comittee's policy and various

suggestions were considered.

Mr. McKee suggested that consideration be

given to the desirability, when it becomes difficult to replace maturing

securities in any one week, of allowing maturities to run off with the

understanding that they should be replaced through the purchase of a sub

stantially equal amount of securities during the succeeding week thus in

augurating a policy of permitting occasional fluctuations in the size of

the system portfolio.

Mr. Harrison referred to the view which he had expressed previous

ly that maturities might be allowed to run off to the extent that it

is

found impracticable to replace them through the purchase of Treasury bills

or notes within the two-year limitation without paying a premium above a

no-yield basis, as he felt that such action should not be interpreted as

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being in conflict with the general policy of maintaining a large amount

of excess reserves.

He added that if

such action were not taken at this

time he felt that an open mind on the question should be maintained.

Chairman Eccles stated that it

was his opinion that the present

policy of maintaining the system open market account should be continued

at least until more information is

available during the next few months

with respect to the Treasury financing program and other factors affect

ing the short term market.

There was a discussion also of suggestions as to substituting for

the present two-year limitation provisions which would permit the replace

ment of maturing securities with bills or notes of any maturity or, if

this were not considered desirable, with any Government securities having

maturities up to five years.

Another suggestion considered was that the Committee might place

no limitation on the type or maturity of Government securities purchased

in replacement of maturing securities provided that the amount of securi

ties in the account maturing within two years be maintained at not less

than a minimum figure and that the amount of bonds in the account be main

tained at not less nor more than stated amounts.

During the consideration of these suggestions the opinion was ex

pressed that the proportion of the short-term Treasury debt to the total

Treasury debt outstanding was relatively small and that it

would be pos

sible for the Treasury substantially to increase the amount of bills

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outstanding, which would largely, if not entirely, remove the difficulty

of the system in

making replacements and that,

in

any event,

the problem

of the administration of the system account would be affected greatly by

the financing program determined by the Treasury during the next few

months.

At the conclusion of these discussions it was agreed by a majori

ty of the members of the Committee that the policy of maintaining the ex

isting system portfolio should be continued for the present provided and

to the extent that maturing securities could be replaced by the purchase

or notes of any maturity without paying a premium over

of Treasury bills

a no-yield basis.

Upon motion duly made and seconded, and

by unanimous vote, the following resolutions

were adopted:

That the executive committee be directed, until otherwise

directed by the Federal Open Market Committee, to arrange for

the replacement of maturing securities in the system open mar

ket account with other Government securities and for such shifts

in maturities as may be necessary in the proper administration

shall

of the account, provided (1) that maturing Treasury bills

be replaced only with Treasury bills or notes 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 main

tained 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 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

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to allow maturities to run off without replacement) of Gov

ernment securities in the open market from time to time for

the system open market account to such extent as the execu

tive 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 ac

count having maturities over five years be maintained at not

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

Mr. Harrison moved that the request made of

Mr. Williams at the meeting on March 1, 1938, that

he prepare a supplement to the memorandum submitted

by him, relating to the question whether the rais

ing of reserve requirements caused the depression,

be withdrawn.

Carried unanimously.

Mr. Davis stated that the committee (Messrs. Davis, Ransom and

Sinclair) appointed at the meeting on March 1, 1938, to consider Section

6 of Article I of the by-laws of the Federal Open Market Committee and to

submit a report and recommendation thereon was not yet prepared to submit

a report but that it

would be made before the next meeting of the Commit

tee.

Thereupon the meeting adjourned.

Secretary.

Approved:

Chairman.