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 Wednesday, April 19, 1939,

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

at 10:30 a.m.

Eccles, Chairman

Harrison, Vice Chairman

McKee

Ransom

Davis

Draper

Fleming

Leach

Martin

Hamilton

Mr.

Mr.

Mr.

Mr.

Mr.

Carpenter, Assistant Secretary

Wyatt, General Counsel

Goldenweiser, Economist

Dreibelbis, Assistant General Counsel

Thurston, Special Assistant to the

Chairman of the Board of Governors

Upon motion duly made and seconded, and by

unanimous vote, the actions of the executive

committee of the Federal Open Market Committee

as set forth in the minutes of the meetings of

the executive committee on March 7, 13 and 20,

1939, were approved, ratified and confirmed.

Mr. Harrison distributed copies of a report prepared at the

Federal Reserve Bank of New York of operations in the System open

market account during the period since the meeting of the Federal

Open Market Committee on March 20, to the close of April 15, 1939,

and discussed the matters covered by the report.

the transactions effected in

He also reviewed

the account since April 15, 1939.

Upon motion duly made and seconded, and by

unanimous vote, the transactions in the account

for the period from March 20 to April 18, 1939,

inclusive, were approved, ratified and confirmed.

4/19/39

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For the information of the members of the Committee who were

not at the meeting of the executive committee on April 14, 1939,

Chairman Eccles reviewed the meetings held at the Treasury Depart

ment last week for the purpose of considering what action might be

taken by the Government to meet the shock to business and the markets

in this country which might result from the outbreak of a major armed

conflict in Europe.

He stated that at the meeting at the Treasury

on April 15 the Secretary of the Treasury inquired what action the

System was prepared to take to maintain orderly market conditions

in the Government securities markets, that it

was stated to the

Secretary that the System undoubtedly would be willing to take ao

tion for the purpose of attempting to maintain orderly market condi

tions, and that the matter would be given consideration by the

members of the Federal Open Market Committee who were in Washington.

The Secretary stated, Chairmen Eccles said, that he would like to

have an answer by 4:00 p.m. on that day as he desired to be in a

position to advise the President of the program that had been agreed

upon.

Chairman Eccles stated further that at the meeting of the

executive committee which was held on the afternoon of April 15 it

was agreed unanimously that (1)

the executive committee should ask

the Federal Open Market Committee for authority, in the event of

serious disturbance in the Government securities market resulting

from armed conflict abroad, to direct the Federal Reserve banks to

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participate with the Treasury in outright purchases of securities,

and in that connection to increase the System portfolio by not to ex

ceed $500,000,000 with the understanding that in making such purchases

it

might become necessary to exceed the $900,000,000 limitation on

bonds having maturities over five years contained in the second reso

lution adopted at the meeting of the Federal Open Market Committee on

March 20, 1939,

and (2)

to advise the Secretary of the Treasury that

the executive committee had agreed to request the full Committee for

this authority it

being understood that a meeting of the full Commit

tee would be called for the early part of this week to ratify the

action.

Chairman Eccles added that Messrs.

Szymczak, Ransom and

Davis, who were present at the meeting of the executive committee,

expressed agreement with the action of the committee and that Mr.

Leach, who was communicated with by telephone on that day, also ex

pressed approval.

Later in the afternoon of April 13, Chairman Eccles said, he

and Mr. Harrison returned to the Treasury for the purpose of partici

pating in a further discussion, when the Secretary was advised of the

action of the executive committee.

Chairman Eccles made the further statement that after the

meeting at the Treasury he reached the conclusion that the System

should participate equally with the Treasury in any purchases of Gov

ernment securities that might be made only until the Treasury had

invested the approximately $100,000,000 which it

had available for

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4/19/39

investment on account of trust funds administered by the Treasury,

and that thereafter all purchases should be made for the System open

market account.

He said that this point was discussed by the execu

tive committee of the Federal Open Market Committee at a meeting on

the morning of April 14, 1939 when he stated, as his reason for his

position, that any purchases by the Treasury after available trust

funds were exhausted would have to be with funds from the stabilization

fund, which would create in the Treasury an open market portfolio of

Government securities in

addition to the System's portfolio,

this condition would be undesirable for the reason that it

sult in lessening the ability of the System to discharge its

in the field of credit control.

and that

would re

functions

Chairman Eccles pointed out that the

System has adequate authority to purchase large amounts of securities

for the purpose of stabilizing the market and stated that he felt the

System should assume this responsibility.

As a result of this discussion at the meeting of the executive

committee,

Chairman Eccles said, it

was agreed unanimously that he

should call the absent members of the Federal Open Market Committee

on the telephone and that, in the event they approved the request of

the executive committee for additional authority, the Secretary of

the Treasury should be advised that the executive committee had au

thority to purchase up to $500,000,000 of Government securities, that

the System would be glad to participate with the Treasury in the pur

chase of securities on an equal basis until all of the available trust

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4/19/39

funds held by the Treasury were invested, and that thereafter the

System would undertake to make all additional purchases required for

the purpose of exercising a stabilizing influence on the market, with

the understanding that if

tion of the Treasury it

at any time the System needed the coopera

would be called upon and if

the Treasury felt

that the situation was not being handled satisfactorily the Secretary

of the Treasury would communicate with the Chairman.

Chairman Eccles added that in

accordance with this decision

of the executive committee he called Messrs. Fleming, Martin and

Hamilton, who were the only members of the full Committee not present

at the meeting of the executive committee on April 14, that they ex

pressed full agreement with the proposed purchase of securities in

the event of an emergency and approved the grant to the executive

committee of the additional authority requested,

and that, thereafter,

the Secretary of the Treasury was advised by the Chairman as agreed

upon by the executive comittee.

Upon motion duly made and seconded, and

by unanimous vote, the action of the members

of the Federal Open Market Committee in author

izing the executive committee to increase the

System portfolio by not to exceed $500,000,000

and to exceed the $900,000,000 limitation on

bonds having maturities in excess of five

years was approved, ratified and confirmed.

Mr. Goldenweiser reviewed briefly the present business situa

tion.

He stated that the production index for March would be approxi

mately the same as in February since the anticipated rise had not

4/19/39

materialized and it

was likely that the level of business activity

in April would be somewhat lower than March because of the strike in

the coal industry.

He said there was nothing in the statistics to

indicate any material change in the situation but that there appeared

to be a great deal more hesitancy on the part of business than was

disclosed by available statistics and that there was no way of deter

mining when that situation might reflect itself

activity.

in reports of business

He added that the rather favorable inventory situation had

not changed and that building activity was continuing at a somewhat

better rate than had been expected.

There was then taken up for consideration

the question of the authority to be granted to

the executive committee to effect transactions

in the System open market account and Mr.

Harrison moved the adoption of the following

resolutions, stating that he did so for sub

stantially the same reasons as prompted the

adoption of similar resolutions at the three

previous meetings of the Committee:

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 paying

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 account as may be

necessary in the proper administration of the account; pro

vided (a) that the amount of securities in the account

4/19/39

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maturing within two years be maintained at not less than

$1,000,000,0000; (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 $1,000,000,000; and

(c) that, if Treasury bills in the account are allowed to

mature without replacement, 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 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 tele

graphic 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 account

having maturities over five years be maintained at not less

than $500,000,000 nor more than $1,000,000,000.

Mr. Harrison's motion having been duly

seconded, was put by the chair and carried,

Mr. Draper voting "no".

Mr. Ransom stated that, in view of the

fact that the executive committee had been

given the power in case of market disturbances

caused by an outbreak of hostilities in Europe

to make much larger changes in the System's

portfolio than those authorized by the pres

ent resolutions, and since flexibility of the

portfolio independently of changes in general

credit policy was thereby recognized as a

part of the System's technique in certain

circumstances, his reasons for opposing the

resolutions were no longer applicable to the

existing situation. Consequently he voted

"aye".

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4/19/9

Mr. Draper stated that he voted against

the adoption of the resolutions because he

was opposed to authorizing the executive com

mittee to allow bills to run off without replace

ment but that he otherwise was in favor of the

resolutions.

There was also a discussion of the au

thority to be granted to the executive commit

tee to increase the amount of securities in

the System open market account in the event

of a serious disturbance to the Government

securities markets as a result of armed con

flict

or political developments threatening

armed conflict abroad and Mr. Harrison moved

that the following resolution be adopted:

That, in the event that armed conflict or political

developments threatening armed conflict abroad result in

serious disturbance to the Government securities market

in this country, the executive committee be authorized,

in addition to the authority granted by the resolutions

set forth above and notwithstanding any limitations or

restrictions in those resolutions, to increase the se

curities in the account by not to exceed $500,000,000,

and upon written, telephonic, or telegraphic approval of

a majority of the members of the Federal Open Market Com

mittee by not to exceed an additional $500,000,000, if

deemed necessary for the purpose of exercising an influence

toward the maintenance of orderly market conditions, and,

if and when market conditions warrant, to sell securities

in the amount of any securities so purchased. Any pur

chases made under the authority of this resolution shall

not be construed as limiting the powers granted under

resolutions previously adopted at this meeting.

Mr. Harrison's motion having been duly

seconded, was put by the chair and carried

unanimously.

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 verify transactions in,

4/19/39

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the System open market account had given consideration to the matter

but was not yet ready to submit a report.

Thereupon the meeting adjourned.

Approved :

Chairman.