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, September 27, 1940, at 2:40 p.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Harrison, Vice Chairman

Szymczak

McKee

Ransom

Davis

Draper

Sinclair

Parker

Schaller

Day

Mr. Morrill, 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 Gov

ernors

Mr. Piser, Senior Economist in the

Division of Research and Statistics

of the Board of Governors

Messrs. Young, Fleming, Leach, 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

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Com

mittee held on May 27-28, 1940, were ap

proved.

Upon motion duly made and seconded,

and by unanimous vote, the actions of the

-2

9/27/40

executive committee of the Federal Open

Market Committee as set forth in the

minutes of the meeting of the executive

committee on May 27-28, 1940, were ap

proved, ratified, and confirmed.

There were distributed to the members of the Board and the

Presidents of the Federal Reserve Banks copies of a report prepared

at the Federal Reserve Bank of New York of open market operations

covering the period from May 27 to September 25, 1940, both dates

inclusive.

Mr. Rouse reviewed and commented on the important features

of the report.

He said that there were no transactions effected for

System account on Thursday, September 26, except the exchange of the

System's holdings of $92,500,000 of 1-1/2 per cent Treasury notes

due December 15, 1940 for 2 per cent Treasury bonds of 1953-55 under

the Treasury offering dated September 25, 1940, referred to in the

last paragraph on page four of his report, this exchange having been

authorized previously by the members of the executive committee.

Upon motion duly made and seconded,

and by unanimous vote, the transactions

in the System's account for the period

from May 27 to September 26, 1940, both

dates inclusive, were approved, ratified,

and confirmed.

Vice Chairman Harrison then called upon Messrs. Goldenweiser

and Williams for their reports on the business and credit situation.

Mr. Goldenweiser made a brief report, a copy of which has

been placed in the files of the Federal Open Market Committee and,

at the suggestion of several members, Vice Chairman Harrison requested

-3

9/27/40

that Mr. Goldenweiser send copies of it

to all of the Presidents of

the Federal Reserve Banks.

Following the conclusion of Mr.

ment was also made by Mr. Williams,

Goldenweiser's report, a state

a copy of which has been placed in

the files of the Federal Open Market Committee.

Following the conclusion of Mr. Williams'

Chairman Harrison said that it

statement, Vice

must be borne in mind that there is

the possibility of some sort of an inflation following a business re

covery together with the preparedness program.

find it

He felt

that we might

difficult to use in any substantial volume the only practical

implement of control that we have, which is

the portfolio, at a time

when the Treasury might be borrowing large amounts from the market to

finance

the defense program.

be some rise in

If

we do approach inflation there may

interest rates, whether because of necessity or be

cause of psychology, and we might be faced then with an effort on the

part of banks and other institutions gradually to liquidate some of

their holdings of Government obligations in preparation for the use

of their funds in other channels.

Query,

therefore, whether at that

time because of deficit financing and because of our own responsibility

for the banking situation we might not have to begin to bail out some

of their holdings of bonds and possibly envisage an increasing System

portfolio rather than a shrinking portfolio.

Mr. Harrison said that

the question as to whether or not we should take advantage of every

opportunity to improve the position of our portfolio in

order to meet

9/27/40

-4

such developments brought up for consideration a question raised by

Mr. Ransom in connection with a possible change in the language of

the existing instructions to the executive committee.

Mr. Draper stated that with the defense program beginning to

get under way and the business economy shifting into high gear he felt

that it

would be a mistake for the Committee to take an action at this

time which might be construed as having deflationary implications.

He

added that he felt caution was particularly necessary at this time not

only because of the domestic situation but also because of the dangerous

war conditions abroad.

Mr. Harrison explained that he meant only liquidating some of

the portfolio and that he had not suggested how much or anything as to

details or duration of the operation.

He pointed out that the exist

ing resolutions were to sell or to buy when necessary for the purpose

of exercising an influence toward maintaining orderly market condi

tions and that there was a discussion at the last meeting of the full

Committee of the interpretation of this language.

He called attention

to the statement which he had made during the session on May 28, 1940,

to the discussion of that suggestion,

and to the agreement on the part

of all the members of the Federal Open Market Committee that the exist

ing directions of the Committee should be interpreted as authorizing

the New York Bank to sell securities, which had been purchased in a

period of market weakness for the purpose of exercising a stabilizing

-5

9/27/40

influence, whenever there was a strong buying market and there were

not sufficient offerings.

He said that the executive committee and

the New York Bank had acted in

accordance with that interpretation.

He stated that he felt that we should now consider whether we should

not sell from the portfolio, not only for the purpose of exercising

an influence toward maintaining orderly market conditions,

but to the

extent that such sales can be made without adversely affecting the

market, putting a limit on the extent to which the executive committee

can go with the understanding that the executive committee will put

a lower limit on the New York Bank.

In response to a question, Mr.

Harrison said that the New York Bank had been selling under the ex

isting instructions as interpreted at the last meeting of the full

Committee and that he was not suggesting that greater authority be

given than that conferred by the existing instructions as thus in

terpreted.

However he raised the question whether it

was not desir

able to change the language of the resolution so that it

would conform

more closely to that interpretation.

Mr.

Ransom said he thought the objective he had in mind could

be achieved under the existing resolution or at least with some slight

change in the resolution.

whether the proposal of Mr.

On the question raised by Mr. Draper as to

Harrison meant a change in policy, Mr.

Ransom said so far as his own point of view was concerned it

might be

considered a change in policy because he had a very definite feeling

-6

9/27/40

that he would like to get the portfolio down to the point where it

would not be more than sufficient to meet the earning requirements of

the System, whatever that figure might be, with due regard to the fact

that the System could not go into the market and sell merely for the

sake of selling.

If

the objective were to sell as substantial an

amount as possible regardless of whether the selling was directed at

what some one might regard as a disorderly condition in the market or

as a sale for the purpose of substantially reducing the portfolio,

there might be some difference of opinion, but if it

is

the policy

of the Committee to go steadily ahead with a selling policy the di

rections of the Committee would then be in a form, Mr. Ransom said,

where he would feel that the instructions to the executive committee

were even clearer than they were under the present directions.

He

said that he had had some rewording of the resolution in mind, which

he intended to submit to the present meeting for consideration but

which he did not think should be acted upon necessarily until the

next meeting of the Committee, but that Mr. Harrison had suggested

the possibility of slightly rewording the existing instructions so

that there could be no possible misunderstanding on the part of the

executive committee and the New York Bank and that he thought perhaps

that would be the best thing to do.

Mr. Ransom stated that merely

for the sake of discussion and not as a motion he would read the

language which he had in mind.

He then read as follows:

-7-

9/27/40

Be it resolved that the Federal Open Market Commit

tee instruct the executive committee to direct the New

York Bank to make sales from the System's portfolio when

ever such sales can be made without adversely affecting

the market, provided that: (1) the total of such sales

does not exceed $400,000,000, and (2) that sales of United

States bonds maturing in more than ten years do not ex

ceed $100,000,000.

Following a brief discussion Vice Chairman Harrison suggested

that the language of the present resolution might be changed by strik

ing out the words "necessary for the purpose of exercising an influence

toward maintaining orderly market conditions" and substituting therefor

the words "advisable in

the light of existing conditions",

Thereupon Mr. Ransom 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 Ac

count (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 advisable in the light of existing conditions; pro

vided that the aggregate amount of securities held in the

Account at the close of this date shall not be increased

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

Mr. Ransom's motion was seconded

by Mr. Sinclair.

At this point Mr. McKee and Mr. Davis raised the question

whether the Manager of the System Open Market Account should not be

selling some of the notes maturing in March 1941, which otherwise

might have to be exchanged for a new issue of Treasury obligations,

so as to relieve the portfolio to that extent of the necessity for

such an exchange.

-8-

9/27/40

Mr. Draper said that in

the light of the discussion he would

vote against the proposed new instructions because the change might

be misconstrued by the public as a change in policy with deflationary

implications.

Mr. Parker said that occasionally there is

cism of the System for keeping its

heard some criti

portfolio up to the present level

when the banks want securities and they would like to see some reduc

tion in the portfolio.

Mr. Ransom said that he did not have in mind the desire of banks

for additional securities as the reason for the line of action that he

was suggesting.

He then asked whether the New York Bank would continue

in the market under the proposed change in instructions in

same manner as it

structions.

had been operating in

exactly the

the market under existing in

Mr. Harrison said he did not think there would be any

difference in the attitude of the New York Bank under its

instructions

in view of the interpretation unanimously agreed to at the last meet

ing of the full Committee, his only point in

felt that it

the matter being that he

was wiser to have the language of the directions of the

full Committee to the executive committee and of the executive commit

tee to the New York Bank changed to conform to the interpretation

placed upon those directions rather than rely solely upon the inter

pretation which would appear in the minutes of the Committee but not

in the public record.

9/27/40

Mr. McKee said that he thought that the portfolio would have

been reduced to a greater extent under the existing instructions to

the executive committee and from the executive committee to the New

York Bank if it

had not been for the fact that during the intervening

period there had been substantial sales of Government securities by

the Treasury.

During the foregoing discussion Mr. Young withdrew from the

meeting.

Mr. Ransom's motion, having been duly

seconded, was put by the chair and carried,

Messrs. Harrison, Szymczak, McKee, Ransom,

Davis, Sinclair, Parker, Schaller and Day

voting "aye", and Mr. Draper voting "no".

There was then presented a report by Messrs.

Smead and Rouse

on the basis for the allocation of securities in the System Open Market

Account and the various accounting procedures that might be adopted

for the account.

Copies of the report were distributed

to all members of the Board of Governors

and to all Presidents of Federal Reserve

Banks, and, upon motion duly made and

seconded, it was agreed that it should

be placed upon the docket for considera

tion at the next meeting of the Federal

Open Market Committee.

Mr. Ransom reported that Mr. Eccles had requested him to say

that Mr. Eccles was very much concerned about the provisions of the

Revenue Act of 1940 which would earmark certain taxes for the payment

of certain new Government obligations under the defense program, and

-10

9/27/40

that he would like to have the members of the executive committee con

sider that problem when they are called to consult with the Treasury

Department,

for the purpose of determining what if

want to say about it.

anything they will

In that connection Mr. Harrison called atten

tion to his letter of September 4, 1940,

to the Secretary of the Treas

ury on this subject.

Thereupon the meeting adjourned.

Secretary.

Approved:

Vice Chairman.