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 Monday, March 20, 1939,

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

at 10:00 a.m.

Eccles, Chairman

Harrison, Vice Chairman

Szymczak

McKee

Ransom

Davis

Draper

Fleming

Leach

Martin

Hamilton

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

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

Mr. Davis stated that the special committee (Mr. Davis,

Chairman, and Messrs. Ransom and Harrison) appointed by the Chairman

in accordance with the suggestion made at the meeting of the Fed

eral Open Market Committee on March 6, 1939,

had considered the

question of the distribution to be made of the minutes of the meet

ings of the Federal Open Market Committee and the executive committee

thereof and recommended that the Secretary of the Federal Open Market

Committee be directed to send to the President of each Federal Re

serve bank copies of the minutes of all meetings of the Federal Open

Market Committee and its

executive committee under the same conditions

as to the confidential nature of the minutes as apply to copies sent

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3/20/39

to the regular members of the Committee.

Upon motion duly made and seconded, and

by unanimous vote, the recommendation of the

special committee was approved with the under

standing that the minutes would first be sent

to the regular members of the Federal Open

Market Committee for review before being sent

to the other Presidents.

Mr. Sproul distributed among the members of the Federal Open

Market Committee a report prepared at the Federal Reserve Bank of

New York of operations in the System open market account since the

last meeting of the Federal Open Market Committee on March 6, 1939.

He then discussed the report briefly and stated that as prices in

the Government securities market had eased somewhat it

it

appeared that

would be possible to replace the $72,710,000 of bills maturing

this week without undue disturbance to the market.

Upon motion duly made and seconded,

and

by unanimous vote, the transactions in the

account for the period from March 5 to March

19, 1939, inclusive, were approved, ratified

and confirmed.

During the discussion of Mr. Sproul's report Mr. Piser,

Senior Economist in the Board's Division of Research and Statistics,

joined the meeting.

Messrs. Goldenweiser and Williams were asked to comment upon

the existing business and credit situation and Mr. Goldenweiser

stated that they had nothing to add to the statements which were

made by them at the meeting of the Federal Open Market Committee on

March 6, 1939.

Upon inquiry Mr. Goldenweiser said that he did not

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anticipate any substantial decline in the index of business activity

because of unsettled conditions abroad but rather that the situation,

resulting in

greater demands for munitions and war supplies, would

tend to greater business activity in

this country.

He added that he

did not feel that the European situation would have an immediately

bad effect on business conditions in the United States even though

war were actually declared.

Chairman Eccles then reviewed briefly the circumstances sur

rounding the calling of the meeting of the executive committee on

March 13, 1939, the discussions with the Secretary of the Treasury

on that date,

and the reasons for calling this meeting of the full

Committee to determine,

among other things, the answer to be made to

the question asked by the Secretary of the Treasury whether the Sys

tem would be willing to participate with the Treasury in the sale of

bonds for the purpose of checking a too rapid rise in the Government

security market.

Mr. Sproul stated in this connection that because

of the subsequent easing of Government security prices the Treasury

had cancelled a second order placed with the Federal Reserve Bank of

New York for the sale of $10,000,000 of Government bonds for the ac

count of trust funds administered by the Treasury.

During a discussion of the question presented by the Secre

tary of the Treasury, Chairman Eccles stated that he had had prepared

a draft of statement which might be made to the Secretary in response

to his suggestion as well as in

response to his statement that any

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3/20/39

action with respect to the problem of excess reserves of member banks

should be initiated by the Federal Reserve System.

ment was read and a copy has been placed in

The draft of state

the files of the Federal

Open Market Committee.

At the conclusion of the discussion, Mr.

Harrison moved that the Chairman, either by

telephone or personally, advise the Secretary

of the Treasury in reply to his question that

(1) the Federal Open Market Committee does not

regard the present as a proper time for a re

duction in the System open market account by

the sale of bonds and that, in view of the

change in circumstances that has occurred

since his question was presented, the Commit

tee assumes that the Secretary is of the

same opinion as indicated by the cancelation

of an outstanding order by the Treasury to

the Federal Reserve Bank of New York to sell

$10,000,000 of bonds for the account of trusts

administered by the Treasury and (2) that

the Committee still

feels that the continuing

and fundamental problem involved is one of

excess reserves and that inasmuch as the

Secretary of the Treasury expressed the

opinion that the primary responsibility

for initiating action with respect to ex

cess reserves rests upon the Federal Re

serve System, the Federal Open Market Com

mittee would suggest that representatives

of the System consult with the Treasury

with a view to determining if a long range

attack can be made on the problem.

Mr. Harrison's motion, after being duly

seconded, was put by the chair and carried

unanimously.

Chairman Eccles inquired what the answer of the Committee

would be if

the Secretary asked whether the Committee would be willing

to cooperate in the sale of bonds in

in Government

security prices.

It

the event of a further sharp rise

was the consensus of the members

3/20/39

that the Committee could not commit itself

in advance on this point

but would be glad to consider the matter in the light of all of the

surrounding circumstances when the problem was again presented.

Mr. Goldenweiser raised the question whether the Board de

sired to renew the suggestion to the Secretary that he meet Treasury

expenditures by drawing on balances with depositary banks rather than

on the balances held at the Federal Reserve banks.

It

was felt that

this question was a part of the general problem of excess reserves

of member banks and that it

should be considered in

that connection

and not as a separate question.

Mr. Harrison then moved that the Commit

tee adopt the following resolutions:

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 subsequent

replacement (a) when market conditions are such as to make

it impossible to procure other bills or notes without pay

ing a premium over a no-yield basis, or (b) when such

notes are not obtainable without undue disturbance 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 arrange for

such shifts in maturities in the System open market ac

count as may be necessary in the proper administration of

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

count are allowed to mature without replacement, the total

amount of securities in the account be not decreased by

more than $200,000,000.

3/20/39

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 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.

During the ensuing discussion consideration was given par

ticularly to the question whether the System open market account

should be allowed to run off to the extent that it was not possible

to obtain replacement bills or notes on a better than no-yield basis.

At the conclusion of the discussion,

Mr. Harrison's motion, having been duly

seconded, was put by the chair and carried,

Messrs. Harrison, Szymczak, McKee, Davis,

Fleming, Leach, Martin and Hamilton voting

"aye", and Messrs. Eccles, Ransom and

Draper voting "no".

Mr. Draper stated that the special committee appointed at

the meeting of the Federal Open Market Committee on March 6, 1939, to

examine the question whether there is any responsibility on the part

of the Committee to audit, or otherwise to verify transactions in,

the System open market account, had requested an opinion of the Com

mittee's counsel with respect to the question, that the opinion had

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been prepared, and that the matter would be considered by the commit

tee with the view to making a report at the next meeting of the Federal

Open Market Committee.

Thereupon the meeting adjourned.

Approved:

Chairman.