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 Wash

ington on Friday, May 8, 1942, at 10:30 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Eccles, Chairman

Sproul, Vice Chairman

Szymczak

McKee

Ransom

Draper

Evans

Alfred H. Williams

Gilbert

Young

Leedy

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr.

Mr.

Mr.

Mr.

Wyatt, General Counsel

Goldenweiser, Economist

John H. Williams, Associate Economist

Rouse, Manager of the System Open

Market Account

Mr. Piser, Chief, Government Securities

Section, Division of Research and Sta

tistics of the Board of Governors

Mr. Berntson, Clerk in the Office of the

Secretary of the Board of Governors

Messrs. Paddock, Fleming, McLarin, and Day,

alternate members of the Federal Open Mar

ket Committee

Messrs. Leach and Peyton, Presidents of the

Federal Reserve Banks of Richmond and Min

neapolis, respectively

Mr.

Attebery, Vice President of the Federal

Reserve Bank of St. Louis

Mr.

Sienkiewicz,

Conference

Secretary of the Presidents'

Upon motion duly made and seconded,

and by unanimous vote, Mr. Evans was se

lected to srve, until the selection of

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his successor at the first meeting of the

Federal Open Market Committee after March

1, 1943, as the third alternate for Messrs.

Eccles, Szymczak, and Draper as members of

the executive committee of the Federal Open

Market Committee.

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meetings of the Federal Open Market Commit

tee held on February 28 and March 2, 1942,

were approved.

Upon motion duly made and seconded,

and by unanimous vote, the actions of the

executive committee of the Federal Open Mar

ket Committee as set forth in the minutes

of the meetings of the executive committee

held on February 28 and March 2, 1942, were

approved, ratified, and confirmed.

Upon motion duly made and seconded,

and by unanimous vote, the transactions in

the System account during the period from

March 2 to May 7, 1942, inclusive, as re

ported by Mr. Rouse at the meeting of the

executive committee just before this meet

ing at which all members of the full Com

mittee were present, were approved, ratified,

and confirmed.

Chairman Eccles referred to the discussions had with representa

tives of the Treasury on the subject of Treasury financing since the

last meeting of the Federal Open Market Committee, and particularly to

the agreement reached at the meeting at the Treasury on March 20, 1942,

when, as a part of a temporary program of war financing, the members of

the executive committee agreed (1) "that the Federal Reserve System, act

ing through the Federal Open Market Committee, would support the Treasury

bill market at approximately the present rates-that is,

we are to use

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our best judgment with respect to this market and with regard for its

relation to the general financing program, which might include beginning

our support if

and when the rate on Treasury bills reaches 1/4 of 1%,

and supporting with increasing strength as the rate approaches 3/8 of

1%",

and (2) "The general market to be maintained on about the present

curve of rates, but this does not mean special support for issues which

may be out of line and specifically does not mean that we must hold the

2's of 1951-55 or the 2-1/2's of 1967-72, or any other issue, at par,

or any other fixed price".

Chairman Eccles also reviewed the discus

sions with representatives of the Treasury subsequent to March 20 which

resulted in the submission to the Treasury on April 29 by the members of

the executive committee of a revised memorandum of recommendations as to

the general principles and methods to be adopted in connection with Treas

ury financing and specific suggestions for May financing operations, the

adoption of the May financing program as announced on April 30, 1942, and

the issuance on that date by the members of the Federal Open Market Com

mittee, following agreement by telephone by all of the members of the

Committee who had not participated in the discussions,

of a direction to

the 12 Federal Reserve Banks to purchase for the System open market ac

count all Treasury bills that might be offered to such Banks on a discount

basis at the rate of 3/8 per cent per annum.

During the discussion by Chairman Eccles, Mr. Thurston entered

the meeting.

The memorandum of April 29, which had been prepared largely to

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meet objections made at the Treasury to the program outlined in the

memorandum submitted to the Treasury under date of January 28, 1942,

was read.

In explanation of the direction to the Federal Reserve Banks

to purchase bills, Chairman Eccles said that the Treasury's original ap

proach to the May financing had been one of increasing excess reserves

of banks, preferably through a reduction in reserve requirements,

the use of market issues,

and

relying on the pressure of excess funds in

the market to effect distribution of the issues.

When this procedure

was opposed by the Federal Reserve representatives, the suggestion was

made by the Treasury representatives that the Federal Reserve Banks

post a buying rate of 3/8 per cent for bills, and, when this was agreed

to, the Treasury concurred in the program suggested by the members of

the executive committee in the memorandum of April 29 above referred

to which was designed to attract as many funds as possible from sources

other than banks.

Chairman Eccles concluded with the statement that,

if an effective organization were set up in

the various Federal Reserve

districts for the distribution of Government securities,

a great deal

of progress would have been made toward establishing a program for war

financing.

Following a discussion of various

points commented on during Chairman Eccles'

statement, upon motion duly made and seconded,

and by unanimous vote, the agreement reached

by the members of the executive committee

with the Treasury as a part of the temporary

program of war financing discussed and agreed

upon at the meeting at the Treasury on March

20, 1942, was approved, ratified, and con

firmed.

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The members of the Committee were in

complete agreement that, in accordance with

the understanding reached with representatives

of the Treasury on April 30, 1942, the direc

tion to the Federal Reserve Banks to purchase

bills at a rate of 3/8 per cent per annum

should be continued, and, upon motion duly

made and seconded, it was voted unanimously

to approve, ratify, confirm, and continue in

effect, until otherwise directed, the direction

issued on April 30 to the 12 Federal Reserve

Banks to purchase for the System open market

account all Treasury bills that might be of

fered to such Banks on a discount basis at

the rate of 3/8 per cent per annum.

The above action was followed by a discussion of the future open

market policy of the Committee and the instructions to be issued to the

executive committee to implement that policy.

Mr. Sproul suggested that

it would be desirable to amend the resolution adopted at the last meet

ing of the Committee so as to recognize the present authority of the Fed

eral Reserve Banks to purchase and sell Government securities directly

from and to the Treasury, and, as a means of relating the resolution more

closely to existing conditions, to provide for such transactions as might

be necessary for the purpose of maintaining about the present general

level of prices and yields of Government securities or for the purpose

of maintaining an adequate supply of funds in the market.

In connection

with the first point, Mr. Sproul stated that the Treasury regulations

which had prohibited the sale by the Treasury of bills directly to the

Federal Reserve Banks had been revised to permit such sales.

Mr.

Rouse stated that from time to time some of the Federal Re

serve Banks might find it

necessary to purchase Treasury bills for cash

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delivery, and said that there was a question of accounting procedure

involved, which might make it

purchases temporarily in

necessary for the Banks to carry such

their investment accounts, with the understand

ing that they would be transferred to the System account on the next

business day.

This point was discussed, and it was

agreed unanimously that the procedure should

be left

to the Manager of the System account

and the staff of the Board of Governors to

work out.

A draft of resolution incorporating the suggestions made by Mr.

Sproul was then read, and the opinion was concurred in

be further revised so as to make it

that it

should

clear that the resolution imposed

no limitation on the amount of bills purchased pursuant to the direction

issued to the 12 Federal Reserve Banks, but that it

would apply to other

bills purchased for the System account by the New York Bank as agent to

accomplish the purposes of the resolution.

Mr. Ransom inquired what the responsibility of the executive

committee was for the bill

purchases made by the Federal Reserve Banks

in accordance with the direction of the full Committee, and the response

was made that the authority for such purchases was given to the Federal

Reserve Banks directly by the full Committee and that for that reason

the direction by the full Committee to the executive committee should

relate to open market transactions other than the purchase of bills pur

suant to that authority.

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Thereupon, upon motion duly made and

seconded, the following resolution was

adopted by unanimous vote:

That the executive committee be directed until other

wise directed by the Federal Open Market Committee to

arrange for such transactions for the System open market

account, either in the open market or directly with the

Treasury (including purchases, sales, exchanges, replace

ment of maturing securities, and letting maturities run

off without replacement), as may be necessary for the

purpose of maintaining about the present general level

of prices and yields of Government securities or for the

purpose of maintaining an adequate supply of funds in the

market; provided that the aggregate amount of securities

held in the account at the close of this date (other than

Treasury bills purchased pursuant to the direction of the

Federal Open Market Committee issued under date of April

30, 1942) shall not be increased or decreased by more than

$500,000,000.

Thereupon, the meeting adjourned, with the understanding that

the Presidents and the Board of Governors would meet immediately to dis

cuss the problem of an organization to further the distribution of Gov

ernment securities, other than war savings bonds.

Secretary.

Approved:

Chairman.