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, March 20, 1940, at 10:10 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

Parker

Schaller

Day

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr. Wyatt, General Counsel

Mr. Goldenweiser, Economist

Mr. Williams, Associate Economist

Mr. Dreibelbis, Assistant General Counsel

Mr. Rouse, Manager of the System Open

Market Account

Mr. Thurston, Special Assistant to the

Chairman of the Board of Governors

Messrs. Young, Fleming, Martin, and Peyton,

Alternate Members of the Federal Open

Market Committee

Messrs. Hamilton and Gilbert, Presidents of

the Federal Reserve Banks of Kansas City

and Dallas, respectively

The Secretary reported that records of the election for the

period of one year commencing March 1, 1940, of members and alternate

members of the Federal Open Market Committee representing the Federal

Reserve banks had been received in the office of the Secretary of the

Committee, that each newly elected member and alternate member had

executed the required oath of office (with the exception of Messrs.

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Leach and Martin who shortly would execute their oaths of office as al

ternate members),

and that it

was the opinion of the Committee's counsel

on the basis of the records of election that the following members and

alternate members were legally qualified to serve:

George L. Harrison, President of the Federal Reserve

Bank of New York, with Roy A. Young, President of the

Federal Reserve Bank of Boston, as alternate member;

John S. Sinclair, President of the Federal Reserve

Bank of Philadelphia, with M. J. Fleming, President of

the Federal Reserve Bank of Cleveland, as alternate mem

ber;

Robert S. Parker, President of the Federal Reserve

Bank of Atlanta, with Hugh Leach, President of the Fed

eral Reserve Bank of Richmond, as alternate member;

George J. Schaller, President of the Federal Reserve

Bank of Chicago, with Wm. McC. Martin, President of the

Federal Reserve Bank of St. Louis, as alternate member;

Wm. A. Day, President of the Federal Reserve Bank

of San Francisco, with John N. Peyton, President of the

Federal Reserve Bank of Minneapolis, as alternate member.

Upon motion duly made and seconded,

the following officers of the Federal Open

Market Committee were reelected by unani

mous votes to serve until the election of

their successors at the first meeting of

the Committee after March 1, 1941.

Marriner S. Eccles, Chairman

George L. Harrison, Vice Chairman

S. R. Carpenter, Assistant Secretary

E. A. Goldenweiser, Economist

John H. Williams, Associate Economist

Walter Wyatt, General Counsel

J. P. Dreibelbis, Assistant General

Counsel

Upon motion duly made and seconded, and

by unanimous vote, the Committee selected the

Federal Reserve Bank of New York to execute

transactions for the System Open Market Ac

count until the adjournment of the first meet

ing of the Committee after March 1, 1941.

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Mr. Harrison stated that he proposed to recommend to the board

of directors of the Federal Reserve Bank of New York the selection of

R. G. Rouse as Manager of the System Open Market Account.

Upon motion duly made and seconded,

and by unanimous vote, the Committee ap

proved the selection of Mr. Rouse as Man

ager of the System Open Market Account in

the event of his reappointment by the board

of directors of the Federal Reserve Bank

of New York to act in that capacity.

Upon motion duly made and seconded,

and by unanimous vote, the following were

selected to serve with the Chairman of the

Federal Open Market Committee (who, under

the provisions of the by-laws, is also

chairman of the executive committee) as

members and alternate members of the exec

utive committee until the first

meeting of

the Federal Open Market Committee after

March 1, 1941:

Members

M. S. Szymczak

Chester C. Davis

George L. Harrison

John S. Sinclair

Alternate Members

Ernest G. Draper

Ronald Ransom

John K. McKee

(To serve in the order

named as alternates for

Messrs. Eccles, Szymczak,

and Davis)

George J. Schaller

Robert S. Parker

(To serve in the order

named as alternates for

Messrs. Harrison and

Sinclair)

Mr. Dreibelbis withdrew from the meeting at this point.

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

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meeting of the Federal Open Market Committee

held on December 13, 1939, were approved.

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 meeting of the executive

committee on December 13, 1939, were ap

proved, ratified and confirmed,

Upon motion duly made and seconded,

and by unanimous vote, the transactions in

the System Open Market Account for the

period from December 13, 1939 to March 19,

1940, inclusive, as reported by Mr. Rouse

at the meeting of the executive committee

of the Federal Open Market Committee which

immediately preceded this meeting, were ap

proved, ratified and confirmed.

Statements were then made by Messrs. Goldenweiser and Williams

with respect to the current business situation and copies of their

statements have been placed in the Committee's files.

Both statements

reached the general conclusion that while there was evidence of con

tinuing decline in business activity, which might go somewhat further,

the pace of the decline had considerably diminished in recent weeks.

Both expressed skepticism of the views which have been voiced by some

economists, based largely upon inventory accumulation following the

outbreak of the war, that there would be a substantial further decline

in business from current levels.

At the conclusion of his statement Mr. Goldenweiser referred

to the change which he considered as having taken place in the primary

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purpose of open market operations and suggested that the Committee

undertake to define its

responsibilities under existing circumstances

and to formulate a statement of the principles which should govern

its operations.

Mr. Ransom suggested that Mr. Goldenweiser be asked

to prepare with the assistance of such other members of the staff of

the Committee as he may desire to call upon, a draft of a statement

of suggested responsibilities and principles for submission to the

members of the Federal Open Market Committee for consideration at

its next meeting.

Mr. Dreibelbis returned to the meeting at this point.

During the discussion of Mr. Ransom's suggestion, Mr. Harrison

briefly reviewed the history of open market operations,

since helping to maintain orderly conditions in

commenting that

the Government securi

ties market has been a primary objective of policy, the emphasis has

been placed on buying and not on selling.

He stated that it

is

very

human to regard rising markets as orderly and falling markets as dis

orderly, and that in markets such as we have had recently it

has been

necessary to buy substantially greater amounts to resist declines than

have needed to be sold to restrain sharp rises.

Mr. Harrison then sug

gested that open market policy, under present circumstances, might well

include the selling of securities for the purpose of disposing of pur

chases previously made on the decline, whenever the market would absorb

such sales, instead of waiting for disorderly conditions in rising

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markets to force sales.

Chairman Eccles referred to the fact that dealers in the Gov

ernment securities market act in dual capacities, being both dealers

and brokers, and expressed the opinion that this tends to increase

rather than diminish fluctuations in the market and therefore to

create a problem which should be considered by the Committee.

Mr.

Harrison stated that he had understood that the members of the Com

mittee in Washington were giving some consideration to the question

raised by Chairman Eccles, that there had been drafted at the New

York Bank a preliminary report on the relationships of dealers to the

market, and that when the report was completed he would send a copy

to the other members of the Committee.

At Mr. Harrison's request, Mr. Rouse reviewed briefly the ac

tivities of the dealers in the market just before and after the recent

announcement of the refunding of Treasury notes which mature on June

15,

1940.

Mr.

Piser, Senior Economist in the Division of Research

and Statistics of the Board of Governors,

joined the meeting at this

point and there was a discussion of the market position taken by the

dealers since the Treasury announcement.

Chairman Eccles suggested that a committee of three be ap

pointed to study the whole question of the responsibilities of the

Federal Open Market Committee with respect to the Government securi

ties market as well as the question of the relations of the dealers

to the market.

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In connection with the discussion of the latter point Mr.

Young said that it

had been the practice of the Federal Reserve Bank

of Minneapolis while he was Governor of the bank to buy and sell se

curities for the account of member banks, a practice which was not

followed by the Boston Bank, and that whenever a bank inquired with

respect to the purchase or sale of securities the Boston Bank gave it

a list of several dealers.

Most of the Presidents of the other Fed

eral Reserve banks stated that it

was the present practice of their

banks to buy and sell Government securities for the account of member

banks.

At the conclusion of the discussion

Mr. Szymczak moved that the Chairman ap

point a committee of three to make the

study suggested by him.

Mr. Szymczak's motion having been

duly seconded was put by the Chair and

carried unanimously.

(Secretary's Note: Following the

meeting Chairman Eccles appointed

Mr. Ransom as Chairman and Messrs.

Harrison and Davis as members of

the committee, with Mr. Sinclair

as alternate for Mr. Harrison.)

At 1:10 p.m. the meeting recessed and reconvened at 2:30 p.m.

with the same attendance as at the conclusion of the morning session

except that Messrs. Young and Piser were not present.

Mr. Harrison stated that, in the absence of a change in

open

market policy, there appeared to be no need for a change in the resolu

tion adopted at the last meeting of the Federal Open Market Committee

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directing the executive committee to execute transactions in

System Account.

He added that in

the

the more recent period there had

been occasions when shifts might have been made between maturities

in the System Account which might have been desirable but for which

no definite statement of necessity could be made, that these shifts

had not been made for the reason that it

was felt that, without first

discussing the matter with the members of the executive committee,

such action should not be taken unless there was more apparent reason

therefor, and that the bank would like to feel that the Committee

would be liberal in allowing the bank to make shifts of this character

when they could be made without disadvantage to the System Account.

This point was discussed and Mr. Harrison stated that when another

occasion for such a shift was presented the New York Bank would

present the facts to the members of the executive committee.

Mr. McKee stated that it

the account in larger amounts in

appeared that shifts may be made in

the future than in the recent past

for the purpose of exercising a steadying influence in the market,

that the securities taken in

such transactions might be at high prices,

and that he would like to have consideration given to the use of the

profits on all sales involved in

shift transactions for the purpose

of writing down the book value of the replacement securities pur

chased.

He said that he was not ready to make this suggestion with

respect to profits from outright sales from the System Account but

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that inasmuch as the premium on securities held in the Account now ex

ceeded $42,000,000 he was inclined to the opinion that profits on shifts

should be used to write down the cost of new securities acquired as a

means of preventing the growth of the premium account by the amount of

profits resulting from shifts.

Chairman Eccles referred to the fact that it had been some

time since a review was made of the basis for the allocation of se

curities in the System Account and suggested that Messrs. Smead and

Rouse be requested to study the allocation formula as well as the

suggestion made by Mr. McKee with respect to the treatment of profits

on shifts in the Account.

During the consideration of this

matter Messrs. Smead, Chief of the Divi

sion of Bank Operations of the Board of

Governors, and Piser joined the meeting

and at the conclusion of the discussion

Messrs. Smead and Rouse were requested

to study the present basis for allocation

of securities in the Account and the ac

counting procedure followed in connection

with the Account, to make a report at the

next meeting of the Federal Open Market

Committee which would include a statement

of the various accounting procedures that

might be adopted, and to be prepared to

make recommendations as to the procedure

that should be followed.

Thereupon Mr. Harrison moved the

adoption of the following resolution:

"That the executive committee be directed until

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"otherwise directed by the Federal Open Market Committee

to arrange for such transactions for the System Open Mar

ket Account (including purchases, sales, exchanges, re

placement 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 Account at the close of this date shall not be in

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

Mr. Harrison's motion, having been

duly seconded, was put by the chair and

carried unanimously.

Thereupon the meeting adjourned.

Secretary.

Approved: ,

Chairman.