FOMC Minutes

A meeting of the Federal Open Market Committee was held in

the offices of the Board of Governors of the Federal Reserve Sys

tem in Washington on Wednesday,

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

December 13, 1939, at 10:30 a.m.

Eccles, Chairman

Harrison, Vice Chairman

Szymczak

McKee

Ransom

Davis

Draper

Mr. Fleming

Mr. Leach

Mr. Martin

Mr. Hamilton

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Morrill, Secretary

Carpenter, Assistant Secretary

Wyatt, General Counsel

Goldenweiser, 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

Messrs. Young, Sinclair, Parker, Schaller,

Peyton, Gilbert and Day, Presidents of

the Federal Reserve Banks of Boston,

Philadelphia, Atlanta, Chicago,

Minneapolis, Dallas and San Francisco,

respectively

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Commit

tee held on September 18, 1939, were ap

proved.

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 min

utes of the meetings of the executive

committee on September 18-19 and November

6, 1939, were approved, ratified and con

firmed.

12/13/39

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Reference was made to the action of the board of directors

of the Federal Reserve Bank of New York on November 9, 1939, in ap

pointing Robert G. Rouse,

Mr.

a Vice President of the bank, to succeed

Sproul as Manager of the System Open Market Account subject to

his appointment being satisfactory to the Federal Open Market Com

mittee.

Mr. Harrison moved that the Commit

tee approve the selection of Mr. Rouse

as Manager of the System account.

Mr. Harrison's motion, having been

duly seconded, was put by the chair and

carried unanimously.

The report of open market operations since the last meeting

of the Committee, which had been prepared at the Federal Reserve

Bank of New York, was reviewed by Mr. Sproul at the meeting of the

executive committee, at which all members of the Federal Open Mar

ket Committee were present,

just before this meeting, and for that

reason was not discussed at this time.

Upon motion duly made and seconded,

and by unanimous vote, the transactions

for the System open market account during

the period since that covered by similar

action at the meeting of the Federal Open

Market Committee on September 18, 1939,

to and including December 12, 1939, were

approved, ratified and confirmed.

Under date of November 29, 1939,

there was sent to each mem

ber of the Federal Open Market Committee a copy of a resolution adopted

by the Federal Advisory Council at its

meeting on November 20, 1939,

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recommending that the volume of sales from the System open market

account be promptly expanded in an orderly manner.

The recommendation was discussed

and Mr. Harrison moved that it be re

ceived and placed on file and that the

Secretary address a letter to the Secre

tary of the Federal Advisory Council

stating that the resolution had been

presented at a meeting of the Federal

Open Market Committee and would be given

consideration in the determination of

the policy to be followed in connection

with transactions in the System open

market account.

Mr. Harrison's motion, having been

duly seconded, was put by the chair and

carried unanimously.

Mr. Goldenweiser discussed the present business situation

and reviewed some of the problems with respect to System open mar

ket policy which were created by the large gold imports during re

cent years.

A copy of Mr. Goldenweiser's statement has been placed

in the files of the Federal Open Market Committee.

After a discussion of some of the points covered in Mr.

Goldenweiser's statement and their relation to the open market pol

icy of the System, Mr. Harrison stated that there appeared to be no

reason for a change in the existing authority of the executive com

mittee to effect transactions in

that it

the System open market account and

would be his recommendation that the resolution adopted at

the last meeting of the Federal Open Market Committee be renewed.

Chairman Eccles said that, while he was in

agreement with

the suggestion that the existing authority of the executive committee

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12/13/39

be renewed, he desired to make a statement with respect to his con

ception of the present open market policy so that if

there were any

questions as to the action to be taken under the resolution granting

authority to the executive committee they could be discussed at this

time.

Chairman Eccles then made a statement substantially as follows:

Open market operations during recent months were not directed

toward changing or influencing money rates.

The large volume of ex

cess reserves has removed the System so far from contact with the

money market that the System's purchases and sales of securities

have had little

effect on the market and practically no effect on

the aggregate volume of available funds.

In these circumstances,

transactions for the System open market account should continue to

be in the direction of maintaining stability in the Government se

curities market,

which in turn reflects itself in the entire capital

market.

This does not mean that we should sell for the purpose of

preventing interest rates from going down nor does it

should purchase securities in

particular level.

It

mean that we

order to hold interest rates at any

does mean, however, that if

there were sub

stantial fluctuations which were the result of a small amount of

buying at a time when there was no selling in the market or vice versa

or which were the result of other conditions which did not reflect

fundamental market trends the System might go into the market and

attempt to exercise an influence toward stability of the market by

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counteracting such conditions.

The System would buy or sell on a slid

ing scale rather than at a fixed price so that the market would not rise

too rapidly when there were few or no selling orders in the market and

would not fall too rapidly when there was little or no buying interest

present.

It

is

essential that the System use the open market portfolio

in such manner as to make it

as effective as possible and at the same

time give consideration to the income requirements of the System.

It

should be recognized also that the System cannot and should not attempt

to peg the market on either the up or down side, and that under present

conditions,

with excess reserves more than twice as large as the entire

System portfolio, our responsibility is

one of attempting to maintain

orderly market conditions rather than of attempting to influence market

rat es.

Mr. Harrison said that, in his opinion,

the Chairman's com

ments were an accurate statement of the present policy of the Federal

Open Market Committee.

Thereupon Mr. Harrison moved that the

following resolution be adopted:

"That the executive committee be directed until other

wise directed by the Federal Open Market Committee to ar

range for such transactions for the System open market

account (including purchases, sales, exchanges, replacement

of maturing securities, and letting maturities run off

without replacement) as in its judgment from time to time

may be necessary for the purpose of exercising an influence

toward maintaining orderly market conditions; provided

that the aggregate amount of securities held in the ac

count at the close of this date shall not be increased

nor decreased by more than $500,000,000."

12/13/39

Mr. Harrison's motion was put by the

chair and carried unanimously.

Mr. McKee referred to the fact that the System open market

account contained

$161,705,000 of March 15, 1940 Treasury notes, for

which issue the Treasury is

now offering to exchange 2-1/4% 12-14

year bonds and 1% 4-3/4 year notes.

Mr. McKee suggested that the Com

mittee consider the question of the amounts of the new securities that

should be taken in

exchange for the System's holdings of the old notes.

The matter was considered in

the light of desirable maturity distribu

tions in the System open market account

and it

was the unanimous opinion

that the System's holdings of the March 15, 1940,

notes should be ex

changed for $100,000,000 of the new bonds and $61,705,000 of the new

notes.

Thereupon the meeting adjourned.

Secretary.