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 Tuesday, June 10, 1941, at 10:05 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Eccles, Chairman

Sproul, Vice Chairman

Szymczak

McKee

Ransom

Draper

Mr. Fleming

Mr. Leach

Mr. Davis

Mr. Peyton

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr.

Mr.

Mr.

Mr.

Wyatt, General Counsel

Goldenweiser, Economist

Williams, Associate Economist

Dreibelbis, Assistant General

Counsel

Mr. Rouse, Manager of the System

Open Market Account

Messrs. Roy A. Young, Sinclair, C. S. Young,

and Gilbert, Alternate Members of the

Federal Open Market Committee

Messrs. McLarin and Day, Presidents of the

Federal Reserve Banks of Atlanta and San

Francisco, respectively, and Mr. Leedy,

First Vice President of the Federal Re

serve Bank of Kansas City

Mr. Clayton, Assistant to the Chairman of

the Board of Governors

Mr.

Sienkiewicz,

Conference

Secretary of the Presidents'

Mr.

Alfred H. Williams, Class C director

(President-elect), of the Federal Reserve

Bank of Philadelphia

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Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Commit

tee held on March 17, 1941, 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 min

utes of the meeting of the executive com

mittee on March 17, 1941, were approved,

ratified, and confirmed.

There were then distributed copies of a report of open market

operations prepared at the Federal Reserve Bank of New York covering

the period from March 17 to June 7, 1941, both dates inclusive.

Mr.

Rouse reviewed the principal features of the report and stated that

there were no transactions in the account on Monday, June 9.

During the discussion of the report Mr. Young of Boston in

quired why few switching operations had been conducted in

the account

recently as compared with the number of switches that had been made

previously.

Mr. Rouse responded that there had been relatively fewer

opportunities for such switches, that in 1939 and 1940 there were sub

stantial outright purchases and sales for the account which to some

extent eliminated the opportunity or need for switches,

view of the conditions under which operations in

ducted during the recent period, there was little

shifts.

and that in

the account were con

if

any reason for

In this connection Mr. Rouse referred to the informal under

standing at the last meeting of the Committee that there should be no

switches of tax-free securities in

the account into taxable issues

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or vice versa and stated that, while there had been some opportunities

for such switches,

they had not been made because of this understanding.

At the conclusion of the discussion,

upon motion duly made and seconded, and by

unanimous vote, the transactions in the

System open market account for the period

from March 17 to June 9, 1941, inclusive,

were approved, ratified, and confirmed.

At this point Mr. Piser, Senior Economist in the Division of

Research and Statistics of the Board of Governors,

Mr.

entered the room.

Goldenweiser stated that a review of the present business

and credit situation was contained in

the current issue of the Federal

Reserve Bulletin, which would be placed in the hands of the members of

the Federal Open Market Committee today or tomorrow, and that, there

fore, he would review only some of the high spots in that situation.

He referred to the present and prospective volume of industrial pro

duction and the course of prices during the present war as compared

with the World War and distributed copies of a chart showing the trend

of prices during the two periods.

He also referred to the shortages

that were developing in certain commodities and other problems that

were being created by the defense effort, to the increase in

sets during the past year or so, and to changes in

bank as

the holdings of Gov

ernment securities by Federal agencies and private holders.

He stated

that the existing situation did not appear to call for any action in

the monetary field by the System at the present time, that excess re

serves had been decreased temporarily by increases in Treasury balances

with the Federal Reserve Banks and increases in currency in circulation,

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that the System's program should include assistance to the Treasury in

connection with Treasury financing in

such ways as might be agreed upon,

that the System should be given the necessary powers to control install

ment credit and excess reserves of member banks, that the question of

authority over installment sales was now being given consideration,

that he felt that it

and

would be extremely desirable for the System to

have power to regulate member bank reserves for the reason that we were

facing a period of increase in all kinds of bank credit, that some means

of diminishing the pressure of excess reserves was desirable,

and that

unless this were provided the country was likely to proceed further on

the road to inflation on which he felt it

had already embarked.

Mr. Williams expressed the opinion that we were going through

a revolutionary period during which the controls that were being exer

cised were not merely supplementing central banking policies but were

supplanting them, that as long as the present situation existed the

System could not do much to restrict the supply of credit and, there

fore, finds itself in a secondary or tertiary role, that the question

of specific controls of credit required careful exploration, and that

although the System could not exercise general monetary controls at

this time, it

could be of assistance in

Treasury financing and legiti

mately should be interested in all questions relating to taxation and

borrowing and other control measures.

He also said that the accepted

method prior to the World-War period of preventing inflation, first

the use of monetary controls, second by the use of fiscal policies,

by

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and then by direct control measures, had been turned around and the

direct control measures were being used first.

He added that he was

more worried about other policies than he was about price policies or

the danger of inflation from that direction, that there was more danger

of an income inflation than of a price inflation, that it

might be that

we are now on the threshold of a substantial rise in prices, and that in

any case we should act as though we were.

Copies of Messrs. Goldenweiser's and Williams' statements have

been placed in

the Committee's files.

There followed a general discussion of some of the problems cre

ated by the defense effort in the field of production, wages, and prices;

the possible effects of the war on our social and economic system; and

the importance of the powers of monetary control in the existing situa

tion.

This discussion was followed by a consideration of the instruc

tions to be issued to the executive committee with regard to transactions

in the System open market account and all of the members of the Committee

agreed that there had been no change in the situation which would re

quire a change in the form of the resolution adopted at the last meeting

of the Federal Open Market Committee.

Thereupon, upon motion duly made and

seconded, the following resolution, which

was in the same form as the resolution

adopted at the meeting of the Committee on

March 17, 1941, was adopted by unanimous

vote:

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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, replace

ment 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;

provided that the aggregate amount of securities held in

the account at the close of this date shall not be in

creased or decreased by more than $200,000,000.

Chairman Eccles referred to the request of the Federal Open Mar

ket Committee at its

last meeting that the executive committee have

studies made with respect to desirable changes in

the present methods

of Treasury financing and that when a draft of program had been pre

pared the Presidents of the Federal Reserve Banks be called to Washing

ton for the purpose of discussing it,

program could be agreed upon, it

consideration.

with the understanding that, if

a

would be presented to the Treasury for

He stated that, in accordance with that request, the

members of the executive committee,

and members of the staff, of the

Federal Open Market Committee had discussed the matter informally,

that

the discussions developed certain points of difference as to the sugges

tions that should be made,

that the members of the executive committee

also had met with Messrs. Bell, Under Secretary of the Treasury, and

Haas,

Director of the Division of Research and Statistics of the Treas

ury Department, and, while the Treasury representatives did not indicate

what the views of the Treasury might be as to possible changes in the

present methods of financing, they stated that the Treasury had given

consideration to the matter and would be glad to discuss it

with

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representatives of the Committee at any time.

It was understood,

Chairman Eccles said, that the representatives of the Federal Open

Market Committee would give further consideration to the matter and

if any suggestions were agreed upon another conference with representa

tives of the Treasury would be held.

Chairman Eccles made the further statement that several drafts

of a memorandum on the subject of methods of Treasury financing had

been prepared by Mr.

Williams and Rouse,

Goldenweiser which had been discussed with Messrs.

that a draft of memorandum had been sent to the

members of the executive committee under date of May 27, 1941,

memorandum had been subsequently revised by Mr.

that the

Goldenweiser, and that

Messrs. Williams and Rouse had sent to Mr. Goldenweiser a statement of

their views based on the memorandum of May 27.

Chairman Eccles added

that the revised statement by Mr. Goldenweiser expressed in

very gen

eral terms the views of the members of the Board of Governors, although

they had taken no action on it.

The latest revision of Mr. Goldenweiser's memorandum and the

statement by Messrs. Williams and Rouse were then read and copies of

both were distributed to those present.

Mr. Goldenweiser's memorandum, after reviewing the situation

which made it

desirable to consider changes in the present methods of

Treasury financing, presented the following suggestions as a basis for

discussion:

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"I.

Tapping of idle funds

"Use of tap issues for reaching individual savings,

particularly in small and moderate amounts, has already

been adopted in the various forms of non-negotiable sav

ings bonds. It is suggested that consideration be given

to offering one or more additional non-negotiable issues

designed especially to obtain idle funds from corporations

and large individual investors - for example, a two-year

tap issue carrying a higher coupon for each semi-annual

period that the security is held, redeemable by the holders

on thirty days' advance notice.

"II.

Short-term issues

"Bills and notes of the familiar types would continue

to be used for the purpose of compensating for possible

irregularities in the inflow of funds from long-term is

sues. One other type of issue that is now under consider

ation might be useful, namely, a certificate issued in

anticipation of taxes. Such a certificate would encourage

taxpayers to save funds in advance for their tax payments

and would diminish the lag between tax legislation and the

inflow of funds from additional taxation.

"III.

Long-term issues

"For long-term issues the following suggestions are

presented:

1. That a definite rate be established for long

term Treasury offerings, with the understanding that it

is the policy of the Government not to advance this rate

during the emergency. The rate suggested is 2 1/2 per

cent. When the public is assured that the rate will not

rise, prospective investors will realize that there is

nothing to gain by waiting, and a flow into Government

securities of funds that have been and will become avail

able for investment may be confidently expected.

2. That the number and variety of new bond issues

be kept to the minimum and that securities be so planned

as to meet the requirements of different groups of investors,

such as insurance companies, other large corporations,

trusts, and small savers.

3. That the maturities on successive offerings of

new issues be so arranged as to command practically no

premiums in the market. This would greatly reduce over

subscriptions and speculation in new issues.

4. That there be no advance notice of the amount

that the Treasury wishes to raise at the time of an offer

ing. The Treasury would reserve the right to accept any

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"part or all of any subscription.

This would practically

do away with padding of subscriptions and oversubscriptions

and would eliminate any question of whether an issue is a

success.

5. That at least one long-term market issue for new

money be made available on tap at par plus accrued interest.

It could be kept open for a longer or shorter period and

could be closed when conditions favor such a course. A new

tap issue could then be offered whenever it becomes neces

sary. From the point of view of investors, tap offerings

have the advantage that funds may be invested at any time

without waiting for an issue date and from the point of

view of the Treasury that there is a more even flow of

money, with no pronounced concentration on certain dates.

6.

That maturing issues be so handled as gradually

to eliminate practically all

of the value of rights.

In order to assure the success of such a program,

7.

an understanding should be reached between the Treasury

and the Federal Reserve System to do whatever may be neces

sary for the smooth operation of the financing, and for

reducing to minimum fluctuations in taxable United States

bonds.

The authorities will have to stand ready to buy in

the market such portions of an issue as may be necessary

to carry out this policy. They may dispose of securities

so purchased when and if market conditions permit.

"Timing of steps in the program

"As to the timing of the different steps in putting

these proposals into effect, it is suggested that the pub

lic should be informed as soon as feasible of the Govern

ment's decision to finance the defense program at rates

not exceeding 2 1/2 per cent. The authorities could pro

ceed immediately toward stabilization of the market at around

this level.

On the next Treasury bond offering the amount

of the premium on a new bond issue could be reduced from,

say, 1 1/4 points to perhaps 3/4 of a point.

This would

give notice to holders of maturing issues that the rights'

value is to be materially reduced. On the next succeeding

issue, perhaps in September, which would presumably include

refunding of the December notes, it might be possible to

reduce the rights' value further or practically to eliminate

it altogether, and to price the new cash offering with

practically no premium. At the December issue the policy

of not announcing the desired amount might be inaugurated.

In the meantime, perhaps in August, a market issue could

be offered at tap, that is,

be made available until

further

notice at par and accrued interest."

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The statement submitted by Messrs. Williams and Rouse contained

a discussion of reasons for their belief that the program suggested in

Mr. Goldenweiser's memorandum should be regarded as a series of topics

for informal discussion with the Treasury rather than as a statement of

a program to be submitted to the Treasury, and that what was needed was

a series of meetings with the Treasury and if

possible a standardized

procedure for regular conferences, at which consideration would be given

not only to the technique of Treasury financing but also to the entire

field of fiscal and monetary policy.

At 12:55 p.m. the meeting recessed and reconvened at 2:10 p.m.

with the same attendance as at the morning session and in addition

Mr. Thurston, Special Assistant to the Chairman of the Board of Gov

ernors.

Mr.

Sproul stated that the question raised by the memoranda

before the Committee was whether it

should undertake to formulate a

definite plan for Treasury financing which would be submitted to the

Treasury in the form of a memorandum or whether the Committee should

seek an opportunity for a series of conferences with representatives

of the Treasury at which all of the points that might be suggested by

representatives of the System would be taken up,

and that he was satis

fied that the best approach from the standpoint of the most satisfactory

solution of the problem would be the latter course.

Mr. Davis pointed out that the two memoranda expressed dif

ferences as to procedure rather than policy and inquired whether there

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were any differences of opinion other than those disclosed in the two

memoranda and whether, if

the subject of continuing conferences with

the Treasury were agreed upon, there would be other differences which

would prevent the members of the executive committee from agreeing

upon the suggestions to be presented for discussion.

and Mr.

Chairman Eccles

Sproul responded that there were such differences and Chairman

Eccles said that in his opinion there would be no useful purpose of

discussing the matter with representatives of the Treasury unless the

Committee had a program to present as a statement of its

views which

it wished to submit to the Treasury for the purpose of discussion.

In accordance with a suggestion by Mr. McKee,

Presidents was then called upon to express his views.

each of the

These state

ments indicated differences of opinion as to the procedure that should

be followed.

The Presidents'

comments and the intervening discussion

raised numerous questions particularly with respect to the need for

substantial changes in present methods of financing; whether, if

change in procedure were desirable, it

a

should be made at this time

when the Treasury was faced with the necessity of issuing large amounts

of new securities; the alternatives that might be available in addi

tion to those suggested in

Mr. Goldenweiser's memorandum; what was

meant by a tap issue; whether the program contemplated the offering

of a tap issue and other issues at the same time and,

this was practicable;

if

so, whether

the effect of a tap issue on the market and on

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outstanding issues; the desirability of a statement by the Treasury

as to the rate at which its

long-term financing would be done; the

extent to which any commitment by the System to stabilize the market

should go; and whether it

would be more desirable for the Treasury

to undertake the necessary stabilization operations or for the System

to accept responsibility for such operations either entirely or in

cooperation with the Treasury.

Toward the end of the Presidents'

statements Mr. Alfred H.

Williams left the meeting.

Several of the Presidents suggested that the Federal Reserve

Banks could be of very material assistance to the Treasury in

further

ing the savings bond campaign and, while there was some question whether

the Treasury would welcome an offer of such assistance because of its

position that the sale of savings bonds should be entirely voluntary,

the Presidents and members of the Board felt

that the System is

in posi

tion to give such assistance, and that an offer of help beyond the mere

handling and sale of the securities should be made to the Treasury.

Chairman Eccles suggested that the Presidents, in

their separate

meeting tomorrow, give consideration to the desirability of formulating

a proposal for presentation to the Treasury under which the Federal

Reserve Banks would use their facilities in furthering the campaign,

and to the appointment of a committee to consider the matter further

with the Board and the Treasury.

In connection with this matter, Mr. Davis suggested that com-

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mercial banks be permitted to purchase Series F and G Savings Bonds

up to the limit of say $10,000 in any one year on the theory that this

would add a relatively small amount to bank deposits and would be in

the nature of compensation to the banks for services rendered in

con

nection with the sale of savings bonds.

In a further discussion the suggestion was made that the whole

problem of Treasury financing be referred back to the executive commit

tee with the understanding that the committee would be free to discuss

the matter with representatives of the Treasury, and Mr. Davis suggested

that the executive committee be instructed to prepare a statement of

the points on which agreement of the members of the Board and the Pres

idents had been indicated as a starting point for further consideration.

At the conclusion of the discussion

of these suggestions, upon motion duly

made and seconded, and by unanimous vote,

the whole matter was referred again to

the executive committee for further study.

Thereupon the meeting adjourned.

Secretary.

Approved:

Chairman.