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, December 12, 1941, at 10:40 a.m.

PRSENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Eccles, Chairman

Sproul, Vice Chairman

Szymczak

McKee

Ransom

Draper

Fleming

Leach

Davis

Peyton

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr. Wyatt, General Counsel

Mr. Goldenweiser, Economist

Mr. Williams, Associate Economist

Mr. Dreibelbis, Assistant General Counsel

Mr. Piser, Senior Economist in the

Division of Research and Statistics

of the Board of Governors

Mr. Clayton, Assistant to Chairman Eccles

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 27, 1941, 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

minutes of the meetings of the executive

committee on September 27 and November

24, 1941, were approved, ratified, and

confirmed.

Reference was made to the informal

action of the members of the Federal Open

Market Committee on December 8, 1941, fol

lowing the outbreak of war with Japan, in

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increasing to $400,000,000 the limit on

the authority granted to the executive com

mittee to arrange for such transactions

for the System account as in its judgment

from time to time might be advisable in

the light of existing conditions, and up

on motion duly made and seconded, and by

unanimous vote, this action on the part

of the members of the Committee was ap

proved, ratified, and confirmed.

Upon motion duly made and seconded,

and by unanimous vote, the transactions

in the System account during the period

from September 27 to December 11, 1941,

both dates inclusive, as reported by Mr.

Sproul at the meeting of the executive

committee which immediately preceded

this meeting, were approved, ratified,

and confirmed.

Statements were then made by Messrs. Goldenweiser and Williams

with respect to certain aspects of the business and monetary picture

which they felt

the Committee should have in

mind and summaries of

these statements have been placed in the files of the Federal Open

Market Committee.

Following these statements, there was a discussion of the

kinds, degrees, and causes of inflation; possible conditions follow

in

the war; and the kinds of controls that might be applied during

and after the war period.

Mr. Davis made a brief statement of his

reasons for not feeling that there would be a general food shortage

but that it might be necessary to apply controls to agricultural

prices, and Chairman Eccles referred to some of the matters that had

been discussed in conferences which he had attended with other Government

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-3

officials in connection with the Government's tax program.

There

was general concurrence in the suggestion that, in order adequately

to meet the problems that would arise during the war period, it was

highly desirable that a general economic program be developed under

which all elements of the situation could be integrated effectively.

At 12:50 p.m. the meeting recessed and reconvened at 2:20

p.m. with the same attendance as at the morning session except that

Mr. Thurston, Special Assistant to Chairman Eccles, was in attend

ance.

Reference was made to the discussion had by members of the

Board of Governors yesterday with Mr. Bell, Under Secretary of the

Treasury, on the question which had been raised at the Treasury whether

something should be done about issues of Government securities which

were out of line in the market in relation to the two new issues which

were being purchased by the System at par, and to the understanding

had at that time that Mr. Bell might attend the meeting of the Fed

eral Open Market Committee today for the purpose of expressing any

views that he might wish the Committee to consider.

Chairman Eccles

talked to Mr. Bell on the telephone and the latter advised that sev

eral matters had come up which made it

inadvisable for him to be away

from his desk today.

In response to a request from Chairman Eccles that Mr. Sproul

discuss what he felt should be the future open market policy of the

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System in relation to Treasury financing, the latter stated that the

Treasury and the System are in

a better position now, from the stand

point of the rate structure and the national situation, to establish

a pattern of rates which the Federal Reserve System would undertake

to maintain within a range that would be fair

to the Treasury as to

the cost of funds and would provide a living return to banks and in

vestment institutions.

He pointed out that the attitude of the Open

Market Committee had been that a 30-year bond at 2-1/2 per cent was

perhaps a maturity which placed on the market the burden of taking

risks which it

should not be asked to take,

and that the pattern of

rates eventually adopted, while retaining the long-term 2-1/2 per cent

rate, should have a shorter maturity, possibly 20-25 years.

He felt

that unless the market again moved upward substantially the System and

the Treasury were in

a position where such a pattern of rates could be

established without serious dislocation in

the market,

that if

such a

pattern were established the new issue of 67-72s would sell above 98

which would not be serious from the standpoint of Treasury financing

or the banks,

and that,

therefore,

the present was an appropriate time

for the Committee to go back to the Treasury with its

lating to the establishment of a pattern of rates.

suggestion re

With such a pattern,

he said, the Committee could watch with equanimity the further decline

in excess reserves, being prepared through open market operations or bor

rowing by member banks to maintain an easy position so that the banking

system would be in

a position at all

times to take whatever Government

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-5

securities might be necessary at a reasonable rate.

He added that

such a situation would be possible without the existing volume of

excess reserves if

it

were clearly understood that the System intended

to maintain an easy position and if

the respectability of borrowing

from the Reserve Banks were restored.

Mr. McKee raised the question whether, because of the psycho

logical effect on the public, the Committee should permit quotations

on Government securities to fall below par, and there ensued a dis

cussion of whether the new 67-72s should be maintained at par, which

would require that future long-term 2-1/2 per cent issues have a

maturity of 20-25 years in

order to give them the necessary premium

in the market, or whether the pattern of rates should be based on a

15-20 year maturity which might result in the new 67-72

par.

In this connection it

were made in

it was in

the rate it

was agreed that if

falling below

an adjustment downward

should be made very clear to the market that

the nature of a fundamental adjustment and one that would

establish rates to be maintained during the war period.

Mr. Draper expressed the opinion that regardless of the tech

nical necessities of the situation it

the country to begin its

would be a serious mistake for

war financing program by allowing long-term

Government bonds to sell at a discount and that, therefore, the

1967-72s should be supported at not less than par to the seller for

as long a period of time as this policy would be effective.

12/12/41

Mr. Peyton inquired whether the Committee was satisfied that a

pattern of rates could be determined upon at this time which could be

maintained throughout the emergency and there was general agreement that,

if the Committee and the Treasury could agree upon a program and that

program were carried out, a pattern of rates could be decided upon and

maintained and that the basic question was at what point the rates and

maturities would be fixed.

The discussion indicated a difference of opinion on the part

of the members of the Committee whether, if

made, it

an adjustment in rate were

should be to a 2-1/2 per cent bond with a 20-25 year or a

15-20 year maturity.

The suggestion was made that a downward adjust

ment might necessitate the retirement from the market of the new

67-72s and 51-55s and it

was felt by some of the members present that

this could be accomplished either by refunding the issue into another

security or by the purchase of the issue by the Federal Reserve Banks

and the Treasury.

In response to the question whether the Treasury would agree

to a downward adjustment in rates, Chairman Eccles stated that if

it

should be decided to maintain the present rates the Committee should

propose to the Treasury that in

the future as few long-term issues as

possible be put on the market, that short-term securities be designed

for banks to the extent that it

was necessary to depend on the banks

to finance the Government's needs, and that other nonmarket issues

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12/12/41

be put out to tap savings funds.

Mr. Williams suggested that the problem should also be con

sidered in the light of the effect of the pattern of rates on the

excess reserve position and that the higher the level of rates the

easier it

would be to maintain a low level of excess reserves.

Mr. Sproul raised the question as to what would be best for

the market and suggested that the market reaction would be better if

the 67-72s were allowed to go below par and future new long-term

issues carried a correspondingly shorter maturity.

At the conclusion of the discussion Chairman Eccles suggested

that the Treasury be advised that it

was felt by the Federal Open

Market Committee that there were two alternatives that might be adopted,

the first

of which would contemplate that the 67-72s would be held at

par which would make it

necessary that future long-term issues have

a maturity somewhere in

the neighborhood of 20-25 years in

provide the premium necessary to sell the securities in

order to

the market,

in which case the Committee would feel that a program should be

adopted which would permit of financing with more specialized issues

such as short-term securities designed for banks and a tap issue de

signed to reach savings funds.

Under the second alternative,

Chairman

Eccles said, the 67-72s would be allowed to go below par to a point,

probably not less than 98, where future issues of 2-1/2 per cent bonds

would carry a maturity of 15-20 years, the market would be depended

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on generally to take these issues, and less emphasis would be placed

or. the specialized issues suggested in the first

During the discussion of Chairman Eccles'

alternative.

suggestion there

was unanimous agreement that, regardless of the basis finally adopted,

before a pattern of rates could be agreed upon it

would be necessary

for the Treasury to decide upon a general program to be followed in

connection with future Treasury financing.

It was agreed unanimously that Chair

man Eccles would advise Mr. Bell that the

executive committee of the Federal Open

Market Comrittee would like to have a meet

ing with him sometime next week for the

purpose of discussing problems relating to

Treasury financing and the Government securi

ties market which were considered by the

Federal Open Market Committee at its meet

ing today.

Mr. Sproul suggested that, in

tainty in

view of the continued uncer

the market and the possibility that the System might be

called upon to buy further substantial amc.mts of Government securi

ties, it

would be desirable to increase to $500,000,000 the limit in

the resolution of authority to the executive committee to direct the

purchase or sale of securities in

standing that if

it

the System account, with the under

should appear that authority was needed beyond

that amount another meeting of the Federal Open Market Committee would

be called.

Thereupon, upon motion duly made and

seconded, and by unanimous vote, the fol

lowing resolution was adopted:

12/12/41

-9That the executive committee be directed

until otherwise directed by the Federal Open

Market Committee to arrange for such trans

actions for the System open market 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 advis

able in the light of existing conditions;

provided that the aggregate amount of securi

ties held in the account at the close of this

date shall not be increased or decreased by

more than $500,000,000.

In connection with the adoption

of the above resolution, Chairman Eccles

stated that the Treasury had advised

that it stood ready to resell the securi

ties which had been purchased this week

for its account whenever the market was

ready to take them, and the action of

the Committee in adopting the resolu

tion was taken with the unanimous under

standing that, when the market recovered

and conditions justified, the System

would participate equally with the Treas

ury in the resale of the bonds purchased

during the current week and that the

System's holdings of bills would also be

disposed of.

Mr. McKee referred to the meeting of Treasury and Federal Re

serve representatives which had been called by the Secretary of the

Treasury in

Chicago on Tuesday, December 16, 1941, for the purpose of

considering methods that might be adopted to increase the sale of de

fense bonds and stated that arrangements were being made to have Mr.

Bethea,

the Board's liaison officer with the Treasury in

with the defense bond campaign,

attend that meeting.

connection

Mr. Sproul said

that, as Chairman of the Defense Savings Bond Committee of the Presidents'

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Conference,

he had asked Mr. Young, President of the Federal Reserve

Bank of Chicago,

Presidents'

to attend the meeting as a representative of the

Conference and suggested that Mr. Peyton, because of the

special experience which he had had with the campaign in

might also be present.

his district,

Mr. Peyton said that he would be glad to at

tend.

Thereupon the meeting adjourned.

Secretary

Approved:

Chairman.