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, December 18, 1940, at 11:10 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Eccles, Chairman

Harrison, Vice Chairman

Szymczak

McKee

Ransom

Davis (latter part of meeting)

Draper

Sinclair

Parker

Schaller

Day

Mr. Carpenter, Assistant Secretary

Mr. Wyatt, General Counsel

Mr. Rouse, Manager of the System Open

Market Account

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

Mr. Kimball, Secretary of the Conference of

Presidents

Mr. Clayton, Assistant to the Chairman of the

Board of Governors

Mr. Bethea, Assistant Secretary of the Board

of Governors

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Com

mittee held on September 27, 1940, were

approved.

Upon motion duly made and seconded,

and by unanimous vote, the actions of the

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executive committee of the Federal Open

Market Committee as set forth in the minutes

of the meetings of the executive committee

on September 27 and November 1, 1940, were

approved, ratified, and confirmed.

Prior to this meeting the members of the Federal Open Market

Committee had been furnished with copies of a report prepared at the

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

period from September 27 to December 14, 1940, inclusive, and copies

of the report were furnished to other Presidents of Federal Reserve

Banks at this meeting.

of the report and,

Mr. Rouse commented upon the important features

at Mr. McKee's request,

discussed briefly the factors

underlying the recent increase in prices of Government securities.

Mr.

Rouse's statement was followed by a discussion of factors influencing

the Government securities market.

At this point Mr. Bethea withdrew from the meeting.

Chairman Eccles reviewed briefly the suggestions which had been

considered by the members of the executive committee in

connection with

December Treasury financing when that matter was under consideration

recently, the discussions which they had had with the Secretary of the

Treasury and members of his staff, and the reasons for the decision of

the Treasury to do the financing in

the form finally decided upon.

Prior

to this meeting copies of the memoranda on the subject of Treasury fi

nancing, which had been prepared under dates of December 6 and 7, 1940,

and sent to the Secretary of the Treasury, had been placed in the hands

of the regular members of the Federal Open Market Committee and during

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the afternoon session of this meeting copies of the memoranda were

handed to the Presidents of the Federal Reserve Banks who are not

regular members of the Committee.

Upon motion duly made and seconded,

and by unanimous vote, the transactions in

the System account for the period from Sep

tember 27 to December 17, 1940, inclusive,

were approved, ratified, and confirmed.

Before this meeting the Secretary of the Federal Open Market

Committee had sent to each member of the Committee a copy of the re

port of examination of the System open market account made as at the

close of business on September 7, 1940, by the examiners for the Board

of Governors of the Federal Reserve System as a part of the regular ex

amination of the Federal Reserve Bank of New York.

It was stated that there was nothing

in the report that required action by the

Federal Open Market Committee at this time

and, upon motion duly made and seconded,

and by unanimous vote, the report was or

dered to be filed.

Mr. Smead, Chief of the Division of Bank Operations of the

Board of Governors, was called into the meeting in connection with

the discussion of the report prepared by him and Mr. Rouse on the

basis for the allocation of securities in

the System open market ac

count and the various accounting procedures that might be adopted for

the account.

Copies of this report were distributed to the members

of the Board of Governors and the Presidents of Federal Reserve Banks

at the meeting of the Federal Open Market Committee on September 27,

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1940, when it

was agreed that the report should be placed on the agenda

for consideration at this meeting.

Reference was made to the comments in the report relating to the

basis for the allocation among the Federal Reserve Banks of the securi

ties held in

the System open market account and inquiry was made by mem

bers of the Board as to the consideration given by the Presidents in

their meeting yesterday to this phase of the report.

Mr.

Messrs.

Schaller replied that the Presidents had voted to request

Smead and Rouse to submit a recommendation as to any changes

that they felt

should be made in

the procedure now being followed with

respect to the allocation of securities in

Mr. Smead stated that it

the account.

would be his recommendation that a

procedure for the quarterly allocation of securities be adopted, as

outlined in

the memorandum, which would (1) allocate sufficient securi

ties to each Federal Reserve Bank to cover expenses not covered by ac

crued earnings on Government securities and estimated earnings from

other sources,

(2) allocate a sufficient amount of additional securi

ties to each bank to cover dividend requirements, and (3)

allocate any

remaining securities among the banks on the basis of average daily par

ticipations in the System account since June 30, 1936, which is

on which profits on sales of securities in

the basis

the System account are dis

tributed among Federal Reserve Banks at the present time.

Mr. Rouse

joined in this recommendation.

Upon inquiry from President Sinclair, Messrs.

Smead and Rouse

12/18/40

stated that they were of the opinion that, if adopted,

the proposed

basis of allocation could be put into effect in connection with the

January 1 reallocation of securities in the account.

Inquiry was made whether the Presidents were willing to ap

prove the recommended procedure and all of the Presidents voted to

approve.

Thereupon, upon motion duly made and

seconded, the proposed procedure was ap

proved unanimously by the members of the

Federal Open Market Committee with the un

derstanding that if possible the new pro

cedure would be followed in connection with

the January 1, 1941, reallocation.

Reference was then made to the comments in the report submit

ted by Messrs. Smead and Rouse with respect to the manner in which

Government securities should be shown in the weekly statement of con

dition of Federal Reserve Bans and with respect to the disposition

to be made of profits on sales of securities from the account.

inquiry as to the action taken by the Presidents'

Upon

Conference on these

matters, Mr. Kimball stated that the Presidents had expressed the

opinion (1) that there should be no change in the manner in which Gov

ernment securities are now shown in the weekly statement of condition

of Federal Reserve Banks,

and (2)

that it

should be the uniform policy

of the Reserve Banks to transfer profits on sales of securities from

the System account to reserves for contingencies to the extent that

such profits are available after the payment of ordinary expenses,

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dividends, and any special charge-offs.

Mr. Peyton stated that there was the feeling on the part of

some of the Presidents that the latter question was worthy of further

consideration but that for the current year the policy should be as

stated by Mr. Kimball.

At this point Mr. Davis, Mr. Goldenweiser, Economist, and Mr.

Williams, Associate Economist, entered the room.

Mr. McKee stated that he would prefer to apply profits on se

curities sold against the premium on securities held in the account.

The decisions of the Presidents' Conference were discussed

in the light of Mr. McKee's comment and it

was the consensus of those

present that the procedure to be followed in the treatment of profits

should be uniform at all Federal Reserve Banks.

There followed a discussion of the pos

sible reasons for the establishment by the

Federal Reserve Banks of contingent reserves

or reserves for other purposes, at the con

clusion of which, upon motion duly made and

seconded, it was voted unanimously to recom

mend to the Board of Governors that no change

be made in the manner in which Government se

curities held in the System open market ac

count are shown in the weekly statements of

condition of Federal Reserve Banks.

Upon motion duly made and seconded, it

was also voted unanimously that for the cur

rent year profits on securities sold from

the System open market account should be

transferred to reserves for contingencies.

Messrs. Goldenweiser and Williams were then called upon for com

ments with respect to the problems before the Committee.

A copy of the

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statement made by Mr. Goldenweiser and a copy of a paper delivered by

Mr. Williams at the annual meeting of the American Economic Association

in New Orleans on December 28, 1940, which he subsequently submitted as

covering a broader field than his statement at this meeting, have been

placed in the files of the Federal Open Market Committee.

During Mr. Williams'

statement Mr. Morrill, Secretary, joined

the meeting.

At 1:00 p.m. the meeting recessed and reconvened at 3:00 p.m.

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

and, in addition, Mr. Piser, Senior Economist in the Division of Re

search and Statistics of the Board of Governors.

There was a discussion of the policy to be adopted by the Com

mittee with respect to the transactions to be effected in the System

open market account and reference was made in this connection to the

proposed submission to Congress of a joint statement by the Board of

Governors,

the Presidents of the Federal Reserve Banks, and the Fed

eral Advisory Council, in

reserve problem.

regard to the present and potential excess

Reference was also made to the substantial sales

that had been made from the account since the last meeting of the

full Committee (which had reduced the total securities in the account

to $2,184,100,000) and to the many uncertainties in the present situa

tion which have a bearing on the Government securities market includ

ing proposals that income from future issues of Government securities

be taxable,

the question of the extension of the debt limit, the form

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that defense financing will take, the extent to which defense expendi

tures will be met by taxation, and the problems growing out of the

large and increasing volume of excess reserves.

given to whether the changes in

Consideration was

the situation since the last meeting

of the Committee were such as to require any change from the existing

policy of making sales of securities from the account when such sales

could be made without adversely affecting the market, whether the

policy adopted should contemplate transactions only for the purpose

of exercising an influence toward maintaining orderly market condi

tions, or whether the authority of the executive committee should be

limited to purchases of securities and to making shifts of securities

in the account.

The question was raised as to whether it

would be wise to per

mit the account to be reduced to or below an amount, the income from

which would be sufficient to meet the expense and dividend requirements

of the System.

It

was stated that the amount that would be necessary

for the purpose would depend upon the maturities of securities held

and that, if

turities in

it

should become necessary materially to shorten the ma

the account, earnings on an amount of securities equal to

the present total holdings might be inadequate to meet the expenses of

the System.

Several of the members of the Committee were of the opinion

that under present conditions there was no occasion for further sales

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from the account at this time for the purpose of reducing the account

but that the authority to make purchases and sales for the purpose of

exercising an influence toward maintaining orderly market conditions

should be continued, with the understanding that the whole question of

policy would be reviewed sometime after the first

Mr.

of the year.

Harrison inquired whether any consideration was being given

by the Board of Governors to the exercise of its

to increase reserve requirements.

remaining authority

Mr. Eccles replied that the Board

had not recently discussed that question.

There was also discussion of the conditions under which further

sales from the account might be called for and of the possible effects

on the market of the statement proposed to be submitted to Congress by

the Board,

the Presidents, and the Federal Advisory Council.

As a result of the various discussions the suggestion was made

that there were many uncertainties in

the situation at the present time

which could not be appraised satisfactorily and that therefore the ex

ecutive committee should be in position to act in accordance with its

best judgment in the light of developments from time to time,

especial

ly when it might be deemed desirable to exercise an influence toward

preventing disorderly conditions in the market during the interval be

fore another meeting of the full Committee,

large reduction in

but that, in

view of the

the portfolio that had been accomplished during the

past several months, there was no need for making further sales for

the sole purpose of reducing the account, and that, therefore,

the

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resolution adopted at the last meeting might be renewed, with a limita

tion of

200,000,000 upon the extent to which the holdings in the Sys

tem account might be increased or decreased.

There was general concurrence in

this suggestion and, after a reading by

Mr. Morrill of the resolution adopted at

the meeting on September 27, Mr. Harrison

offered a motion, which was duly seconded,

that the following resolution be adopted:

That the executive committee be directed un

til otherwise directed by the Federal Open Market

Committee to arrange for such transactions for

the System open market account (including pur

chases, 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 condi

tions; provided that the aggregate amount of se

curities held in the account at the close of this

date shall not be increased or decreased by more

than $200,000,000.

Mr. Harrison's motion was put by the

chair and carried, Mr. Draper voting "no".

Mr. Draper stated that he voted "no"

on the above resolution for the following

reasons which were broader in scope than

those outlined by him when voting in the

negative on a similar resolution adopted

at the meeting of the Federal Open Market

Committee on September 27, 1940:

"I do not believe that in the present circumstances

sales from the portfolio are necessary in order to maintain

orderly market conditions. I have seen no recent evidence

of the market being disorderly. In my judgment, also,

sales from the portfolio for the purpose of maintaining

an orderly market should be resorted to much less fre

quently and less vigorously than purchases at a time when

the market is declining rapidly. Rapid declines are apt

to result in a selling wave amounting to panic, which I

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"believe should be prevented when possible. On the other

hand, there is little danger of a panic when the market

advances, and it makes little difference whether a rise

is rapid or slow, so long as the level it reaches is ap

propriate to existing conditions and is not the result

of purely speculative purchases.

"A still

more important reason for my belief that

there is no occasion to sell is that our portfolio has

been reduced very substantially and that we shall need

all the ammunition we can muster when reserve require

ments will have been increased and the time comes to

adopt a policy of credit restriction in order to pre

vent inflation."

Thereupon the meeting adjourned.

Approved:

Chairman.