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, December 30, 1938, at 10:00 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Harrison, Vice Chairman

Szymczak

McKee

Ransom

Davis

Draper

Sinclair

Schaller

Peyton

Leach (alternate for Mr. Newton)

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Morrill, Secretary

Carpenter, Assistant Secretary

Wyatt, General Counsel

Goldenweiser, Economist

Williams, Associate Economist

Dreibelbis, Assistant General Counsel

Sproul, Manager of the System Open

Market Account

Mr. Thurston, Special Assistant to the

Chairman of the Board of Governors

Upon motion duly made and seconded, and

by unanimous vote, the minutes of the meeting

of the Federal Open Market Committee held on

September 21, 1938, were approved.

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 Sep

tember 15 and 21 and December 7, 1938, were

approved, ratified and confirmed.

With the consent of the members of the Committee, Mr. Piser,

Senior Economist in the Division of Research and Statistics of the

Board of Governors, was requested to attend this meeting.

Mr. Sproul distributed among the members of the Committee

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copies of a report prepared at the Federal Reserve Bank of New York

of open market operations conducted by the bank since the meeting of

the Committee on September 21, 1938.

He referred briefly to the prin

cipal transactions in the account during the period covered by the

report and stated that the bank had experienced considerable diffi

culty during the last three weeks in carrying out the instructions

of the executive committee to replace maturing bills by purchases of

like amounts of Treasury bills or Treasury notes without paying a

premium above a no-yield basis.

In this connection, he said that,

due to a special and insistent demand for Treasury bills in

recent

weeks, the discount on outstanding Treasury bills had been eliminated

completely and bills were being traded in

at prices at or above par,

the most recent issue of bills having been sold at par or above.

He added that a somewhat similar situation existed in the

Treasury note market,

all issues of notes maturing within two years

being currently traded in

as "rights" on a negative yield basis with

the return on longer maturities declining.

This condition, he said,

had been aggravated by the inability of the reserve bank to obtain

sufficient amounts of bills to replace maturities and the resulting

necessity of going into the market and making replacements with notes.

He said that there had not been a sufficient supply of notes freely

available in

the market to make these replacements and the bank had

been forced to solicit banks and others directly and through dealers

to sell notes at

advanced prices or from their investment accounts.

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12/30/38

This, he stated, had established a presumption in the market that the

Federal Open Market Committee would maintain the existing portfolio

at all cost, which,

so long as the present situation in the bill mar

ket continued, would result in cumulative pressure on the market for

notes and in a tendency toward forced lengthening of the maturity of

holdings in the system account.

He stated further that,

to above, it

as outlined in the report referred

was necessary on December 14 to purchase $3,000,000 of

notes to complete replacement of maturing Treasury bills, that on

December 21,

$12,904,000 of notes were acquired, and that on Decem

ber 28 a total of $30,044,000 of notes were added to the portfolio,

the notes purchased amounting to more than 62% of the replacement

purchases as of that date.

He anticipated that, because of the ex

pected heavy demand for bills for tax purposes in the early weeks of

the new year and the increase in

excess reserves which will occur after

the first of the new year, the situation described above would con

tinue, at least to some extent, during the immediate future.

At the conclusion of Mr. Sproul's re

port, upon motion duly made and seconded and

by unanimous vote, the transactions in the

system account for the period from September

20 to December 29, 1938, inclusive, were ap

proved, ratified and confirmed.

Mr. Harrison then called upon Messrs. Goldenweiser and Williams

for statements with respect to the present business and credit situa

tion.

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12/30/38

Mr. Goldenweiser stated that the present recovery movement,

which had carried the index of industrial production up from 75 to

about 103, was quite general, taking in all the major industrial

groups; that the rate of recovery was almost unequalled except for

a short period in

the early part of 1933; and that the conclusion

which he felt could be drawn from the movement was that the decline

in business last year and the early part of 1938 was more radical

than underlying economic conditions appeared to justify and was

principally an adjustment of an inventory situation.

He said that

the severe downturn did not spread to the whole economic system,

as the decline in

consumption, indicated by department store sales,

was not nearly as sharp as the decline in production, and that the

decline in income was considerably less.

He pointed out that

throughout the year the rate of consumption was greater than that

of production and that, therefore, inventories were being cut down,

and he said that at the present time the best estimate was that

production and consumption were at about the same level, that if

this condition continued the upward movement might continue for some

time, and that it

was the hope that production would continue to in

crease gradually and that consumption would increase at a comparable

rate.

The crucial point in

the situation, Mr. Goldenweiser said,

was whether there would be a continued upturn in the durable goods

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industries that supply the greater portion of employment, and, if

steel, automobiles, and building continued to advance, the coming

year would be a good one,

reaching a higher level of production for

the year as a whole than the present level.

The weak point at pres

ent, he added, was the low level of agricultural prices which was

not likely to rise in the next year although there might be some im

provement.

He concluded with an expression of his opinion that, aside

from agricultural prices, the fact that prices had been fairly steady

during recent months was an element of strength instead of weakness

in the situation.

At this point Chairman Eccles joined the meeting.

Mr. Williams expressed general agreement with the statement

made by Mr. Goldenweiser.

He felt that recent stability of prices

was a point of strength as contrasted with the condition existing

during the latter

sulting in

part of 1936 when prices advanced very rapidly, re

accumulation of inventories and forward buying and creating

a situation which lent itself

to downward adjustment.

He said he had been interested in the rather general expec

tation that there would be a decline in activity during the first

quarter of 1939,

that such declines had occurred in other recent years,

but that he felt too much importance should not be attached to such a

movement.

The strongest single indication, he said, that a downturn

might occur was that the rate of recovery has been so rapid that it

would not be surprising if

it

should decline somewhat and if

such

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12/30/38

was the result it

would mean that the economy was merely marking time

and that activity might be considerably higher by the end of next

year than it

was at this time.

His own opinion was that 1939 might

turn out to be a considerably better year than the estimates which,

he felt, contained an element of pessimism,

that since the late re

cession was fundamentally an adjustment of inventories it

could be

expected to be of short duration, and that, inasmuch as building and

the durable goods industries were better than they had been, the first

quarter of the new year should be a satisfactory one.

While we now have the elements of a genuine recovery, he said,

he could not venture a guess as to how long it

would last.

The out

look in the durable goods industries for the next few years appeared

good so far as the demand for such goods was concerned.

He referred

to the facts that there were no unhealthy speculative elements of any

importance in the situation and that

than it

the banking situation was better

had been at times in the past as being among the reasons for

expecting a recovery of the economy under its

own power.

He felt

that what was needed more than anything else at the moment was a

demonstration that the economy was capable of staging a recovery,

and that, while he did not feel that the Government should stop its

efforts to maintain consuming power, he did feel that, to the extent

that evidences of recovery appear, the primary policy should be one

of tapering off Federal deficits and giving a demonstration that the

economy is

able to bring about a recovery on its

own power.

12/30/38

-7During the discussion which followed of the problems to be

considered by the Committee in

determining its

future open market

policy, Mr. Williams made the further statement that he recognized

that the country was faced with several important specific problems

which presented substantial difficulties such as the railroad situa

tion, social security and public utilities,

but that he felt that

there was a real possibility that a solution of these problems was

not going to be found as long as the temporary expedient of deficit

spending was used rather than to work out a sound economic solution

of the difficulties.

Chairman Eccles stated that Mr. Sproul had reported to him

currently the difficulty that was being experienced by the New York

bank in acquiring Treasury bills and notes to replace maturing bills,

but that he had been unable to discuss the matter with the Secretary

of the Treasury until this morning when he (Chairman Eccles) had

gone to the Treasury and reviewed the problem with the Secretary and

Assistant Secretary of the Treasury Taylor.

He said he had explained

that the situation had been brought about by the substantial reduc

tion in the amount of bills in

the market following the reduction

in the inactive gold account in April, that the total amount of bills

now outstanding was about half of what it

was formerly, that the

system account held approximately half of the bills maturing currently,

and that the situation was being aggravated at the present time by

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the heavy demand for bills for tax purposes and by the pressure for

investment of idle deposit balances in bills to enable banks to reduce

the expense of assessments of the Federal Deposit Insurance Corporation,

He advised the Secretary, he said, that this condition placed the Fed

eral Open Market Committee in a situation where it

must choose between

the alternative of allowing some of the bills held in the system account

to run off without replacement to the extent that replacements cannot be

made in bills or short term notes without paying a premium above a no

yield basis and the alternative of buying longer term Goverment securi

ties.

He stated that he had pointed out the difficulty that would fol

low from replacing maturing bills with bonds, as the bond market was

strong and additional purchases would drive it

higher with possible ad

verse reactions later on when the system account might be in a less

effective position to lend support to the market.

if

On the other hand,

bills were allowed to run off, Chairman Eccles said, because of the

system's inability to replace, the account would show a reduction from

week to week which might be difficult to explain in the light of other

monetary actions taken by the Treasury and the System and might be con

strued by the public as a reversal of policy.

Chairman Eccles added

that he suggested to the Secretary that the Treasury Department could

avoid the entire situation by issuing additional amounts of bills, that

the reduction in

the amount of outstanding bills did not appear to be

necessary, and that if

the weekly bill offering were increased from

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$100,000,000 to $150,000,000 for ten weeks the Treasury would thereby

obtain the additional funds needed between now and the first of June,

probably without cost to the Treasury.

The reply of the Secretary in which Mr. Taylor concurred,

Chairman Eccles said, was that he did not think it

would be desirable

to issue more bills at this time as to do so would increase Treasury

balances beyond their already high level, which would create what

would amount to a ridiculous situation, that he was beginning to favor

the suggestion that a further increase in the Federal debt be avoided

in the near future by having the Reconstruction Finance Corporation

borrow in the market to the extent of $500,000,000 and use the pro

ceeds to pay its

indebtedness to the Treasury, that if

done he believed it

might be well to have it

refunding of June notes, possibly in

that were

done before the March

February, and that the Treasury

might retire an additional $500,000,000 of bills with the funds re

ceived from the Reconstruction Finance Corporation.

The Secretary

did not seem to see any objection, Chairman Eccles stated, to re

ducing the total amount of outstanding bills, as it

Treasury would then be in a position where it

was thought the

would be assured of a

continued favorable bill market.

Chairman Eccles added that the Secretary had stated that the

decision whether the Federal Open Market Committee should allow ma

turities to run off or should replace current maturities with bonds

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to the extent necessary, with a resultant increase in bond prices,

was a responsibility of the Committee and that he would have no com

ment or criticism to offer at this time or later regarding the deci

sion reached by the Committee in that connection.

felt, Chairman Eccles said, that it

However, Mr. Taylor

would be a mistake for the account

to acquire bonds, that the account should be allowed to run off to

the extent that it

was not possible to acquire bills or notes without

paying a premium above a no-yield basis, and that a reduction in the

account for this reason could be explained easily.

There followed a considerable discussion of the policy to

be adopted by the Committee in the light of the information before

the Committee during which Mr. Harrison suggested the adoption of a

resolution to instruct the executive committee to replace maturing

bills in the account with other bills or with Treasury notes, or to

allow such bills to run off without replacement or pending such re

placement,

(a)

when market conditions are such as to make it

impos

sible to procure bills or notes without paying a premium above a

no-yield basis or (b) when such other bills or notes are not obtain

able without undue disturbance to the market.

gestion Mr. Harrison said that he felt it

In making this sug

was important that the New

York bank should not be placed again in the position in which it

found

itself during the last three weeks of having to solicit banks and

dealers for bills or notes with which to make replacements, a proce

dure which disturbs the whole government security market and, if

long

12/30/38

-11.

continued,

runs the risk of driving up the price of even the longer

term notes to a no-yield basis.

During the discussion there were distributed to the members

copies of a draft of a statement which had been prepared by Messrs.

Goldenweiser and Thurston at the suggestion of the Chairman as a basis

for consideration of a decision not to replace all bills maturing In

the system account.

At 1:15 p.m. the meeting recessed with the understanding that

it

would reconvene in

the afternoon and that during the interim Messrs.

Eccles and Harrison would prepare drafts of a resolution and press

statement for consideration at the afternoon session.

The meeting reconvened at 2:30 p.m. with the same attendance

as at the close of the morning session.

Consideration was given to a draft of press statement offered

by Messrs. Eccles and Harrison which had been prepared on the theory

that there might be a reduction in

the system account because of in

ability to replace maturing bills.

At Mr. Ransom's suggestion Messrs. Goldenweiser and Williams

were requested to comment on the action contemplated by the draft

of statement.

Mr. Goldenweiser stated that he was not in

favor of reducing

the amount of securities held in the system account at the present

time; that he did not favor the policy which had been advocated of

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having a fluctuating portfolio; that he did not think that the reasons

given in the proposed press statement would be widely accepted; and

that the action might be regarded as contemplating a reduction in the

portfolio as a matter of policy.

He saw no reason why the Federal

Open Market Committee should limit itself to the replacement of matur

ing bills with other bills or with Treasury notes; and he felt that,

while the decision would be a fairly close one, the Committee would

be less likely to regret an action requiring the maintenance of the

present portfolio than it

added that if

it

would action contemplating a reduction.

He

were decided to allow bills to run off without re

placement a full statement should be made for the reason that there

has been no reduction in

the portfolio for approximately six years

and such action would require something more than a brief explana

tion.

Mr. Williams said that he favored action allowing maturing

bills to run off without replacement to the extent they could not be

replaced with bills or notes without paying a premium above a no-yield

basis; that he felt it

would not be regarded as an important action;

and that he would favor a brief statement to the press to the effect

that the action was taken because of the inability to obtain bills

and notes for replacement purposes without paying a premium or with

out undue disturbance to the market for such securities.

He expressed

the opinion that in view of the present high prices of Government

12/30/38

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securities it

would not be difficult to explain the Committee's ac

tion, and that there was not much danger of its

anyone as a change of policy, but that if

being regarded by

full replacements were con

tinued and the prices of Government securities were driven higher the

system would be in

danger of criticism for having carried its

policy

beyond reasonable limits, which might result in discrediting the sys

tem's open market policy altogether.

During a further discussion Mr. McKee suggested that consid

eration be given to the question whether it

would be desirable to

continue during the next week or two the efforts to make full re

placement of maturing bills, by purchasing not only bills and notes

but also bonds to the extent that bills and notes were not available

in the market,

for the purpose of seeing what the effect of that pro

cedure would be.

Chairman Eccles referred to the fact that the President's

budget message to Congress would be delivered next week and that if

the system account were reduced and there were any unfavorable re

action in the Government securities market resulting from the budget

message, the result might be attributed to the action of the Federal

Open Market Committee in reducing the account.

After a further discussion, Mr. Harrison read a revised draft

of statement for the press, which was considered by the Committee. He

also presented a draft of resolution directing the executive committee

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to effect transactions in the System account which he suggested for

the consideration of the Federal Open Market Committee.

During the discussion of Mr. Harrison's draft, consideration

was also given to the desirability of (1) continuing the existing

directions to the executive committee to make complete replacements

of maturing bills during the coming week or two and of recessing

this meeting with the understanding that it

would reconvene before

January 11, 1939 (on which date there would be a maturity of bills

held in the account) for reconsideration of the entire matter in the

light of the situation then existing, and (2) directing the executive

committee to replace maturing bills with bonds to the extent that

bills and notes were not available in the market without paying a

premium.

At the conclusion of the discussion Mr.

Sinclair moved that the resolution offered

by Mr. Harrison be adopted as follows:

That the executive committee be directed until other

wise directed by the Federal Open Market Committee, (1)

to arrange for the replacement of maturing Treasury bills

in the system open market account with other Treasury

bills or Treasury notes, or, from time to time, to allow

such bills to mature without replacement or pending sub

sequent replacement (a) when market conditions are such

as to make it impossible to procure other bills or notes

without paying a premium over a no-yield basis, or (b)

when such notes are not obtainable without undue disturb

ance to the market; (2) to arrange for the replacement of

maturing Treasury notes and bonds in the system open market

account with other Government securities; and (3) to ar

range for such shifts in maturities in the system open

market account as may be necessary in the proper adminis

tration of the account; provided, (a) that the amount of

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securities in the account maturing within two years be

maintained at not less than $1,000,000,000; (b) 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 $900,000,000; and (c) that, if Treasury

bills in the account are allowed to mature without re

placement, the total amount of securities in the account

be not decreased by more than $200,000,000.

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, tele

phonic or telegraphic approval of a majority of the mem

bers 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 Gov

ernment securities in the open market from time to time

for 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 by

more than $200,000,000 nor decreased by more than

$200,000,000 including such decreases as may result from

allowing Treasury bills in the account to mature without

replacement, 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 $900,000,000.

Mr. Sinclair's motion having been duly

seconded, was put by the chair and carried,

Messrs. Harrison, Szymczak, McKee, Davis,

Sinclair, Schaller, Peyton and Leach voting

"Aye", and Messrs. Eccles, Ransom and Draper

voting "No".

Chairman Eccles voted "No"

lowing reasons:

for the fol

Last spring, as a part of the Government's program

for the encouragement of business recovery, the Board of

Governors reduced reserve requirements for member banks

by $750,000,000. The Chairman voted for this action for

the purpose of cooperating with the Government in its

recovery program of last spring. The Chairman's view

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was that this addition to excess reserves at a time when

deflation and credit contraction were in progress could

not have an adverse effect and might possibly have a de

sirable psychological effect. The Government's recovery

program is now being carried out and the business situa

tion and prospects are not such as to require a change

in policy. Since a failure to replace maturing bills in

the System's portfolio would reduce reserves, it might

be interpreted as a reversal of policy, which would not

be justified under present business conditions, and would

be inconsistent with the action taken last spring to in

crease reserves. The Chairman thought it particularly

inadvisable at this time to fail to replace maturing bills

for technical operating reasons, unless an effort had

first been made to replace them with bonds or long term

notes to the extent that it proved impossible to do so

with bills or short-dated notes except by paying a pre

mium above a no-yield basis. He also thought that if

the effort were made to replace with longer term notes

or bonds, it would tend to ease the demand for bills and

short-dated notes and thus tend to make them more readily

available without paying a premium above a no-yield

basis.

In voting against the adoption of the resolutions

Mr. Ransom stated that, without reviewing all of the

considerations that influenced his vote, he felt that

it was preferable under existing circumstances to make

no reduction in the portfolio. A reduction should be

reserved to be used at such time as a reversal of pol

icy is intended, or at such other time as conditions

or reasons other than those now before the Committee

would, in his opinion, require a reduction in the port

folio. If the portfolio were now reduced without in

tending a change of policy, an explanatory statement

would be necessary. If later a change of policy were

intended in connection with a reduction in the portfolio,

it would then appear necessary to issue a further ex

It seemed to him that the Commit

planatory statement.

its actions to speak for

upon

more

tee should rely

themselves and less upon the use of statements to give

effect to or limit the effect of the actions themselves,

and that statements should support and explain rather

than controvert action.

Mr. Harrison stated that Mr. Matteson, Assistant Vice President

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of the Federal Reserve Bank of New York, had just advised Mr. Sproul

over the telephone that because of the reduced demand for bills for

year-end statement purposes it

appeared that it

might be possible to

replace next week's maturities of bills with other bills that would be

available in the market,

Mr. McKee moved that the proposed state

ment for the press be approved subject to such

changes of form as might be thought necessary

by Messrs. Sproul and Thurston.

Mr. McKee's motion, having been duly

seconded, was put by the chair and carried,

Messrs. Eccles, Harrison, Szymczak, McKee,

Davis, Sinclair, Schaller, Peyton and Leach

voting "Aye", and Mr. Ransom not voting.

(Secretary's note. It had been necessary

for Mr. Draper to leave the meeting before the

foregoing vote was taken and he advised the

the Secretary subsequently that, in view of

the earlier action of the Committee, he wished

to be recorded as approving the statement.)

The statement as released to the press

was as follows:

"The Federal Open Market Committee announced, following

a meeting today, that weekly statements of the total hold

ings in the Federal Reserve System's Open Market Account

may at times show some fluctuation depending upon condi

tions in the market affecting the committee's ability to

replace maturing Treasury bills held in its portfolio. The

volume of Treasury bills available on the market has de

clined materially during the year and, owing to the large

and increasing demand, such bills are already selling

either on a no yield basis or at a premium above a no

yield basis. It has, therefore, become difficult and in

some weeks impossible for the System to find sufficient

Short

bills on the market to replace those that mature.

term notes are also selling on a no yield basis and longer

term notes have at times been difficult to obtain. In

these circumstances, it may be necessary from time to time

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"to permit bills held in the portfolio to mature without

replacement, not because of any change in Federal Reserve

policy but solely because of the technical situation in

the market.

Because no change in Federal Reserve policy is

contemplated at this time, maturing bills will be replaced

to the extent that market conditions warrant."

Thereupon the meeting adjourned.

Secretary.

Approved:

Chairman.