FOMC Minutes

TWENTY-NINTH

ANNUAL REPORT

of the

BOARD OF GOVERNORS OF THE

FEDERAL RESERVE SYSTEM

COVERING OPERATIONS FOR

THE YEAR

1942

108

109

ANNUAL REPORT OF BOARD OF GOVERNORS

FEDERAL RESERVE SYSTEM

8, 1942.

Members present: Mr. Eccles, Chairman; Mr. Sproul, Vice Chairman;

Mr. Szymczak, Mr. McKee, Mr. Ransom, Mr. Draper, Mr. Evans, Mr.

Williams, Mr. Gilbert, Mr. Young, Mr. Leedy.

2. Authority to Effect Transactions in System Account.

Upon motion duly made and seconded, the following direc

tion to the executive committee, which was in the same form

as the direction approved at the meeting on August 3, 1942,

was approved unanimously:

"That 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, either in the open market

or directly with the Treasury (including purchases, sales, exchanges,

replacement of maturing securities, and letting maturities run off with

out replacement), as may be necessary in the practical administration

of the account, or 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, or

for the purpose of granting temporary accommodation to the Treasury;

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 directions of the Federal Open Market Committee issued under

dates of April 30, August 3, and September 28, 1942) shall not be in

creased or decreased by more than $1,000,000,000.

Consideration of open market policy at this meeting took into account

(1) the actions which had been taken by the Board of Governors to decrease

required reserves of member banks in central reserve cities effective August

18, 1942, from 26 per cent to 24 per cent of net demand deposits and effective

September 14, 1942, from 24 per cent to 22 per cent of such deposits; (2.)

the discussions by members of the Federal Open Market Committee with

representatives of the Treasury relating to the financing program and to

Federal Reserve policy, and (3) the respective parts that open market opera

tions, changes in reserve requirements and changes in discount rates at the

Federal Reserve Banks might play in carrying out Federal Reserve policies.

It was pointed out that, if reductions in reserve requirements alone were

relied upon to furnish needed bank reserves, required reserves could be ex

pected to decline almost to the vanishing point by the end of 1943, and there

was unanimity of opinion that the System should not rely upon any single

power to the exclusion of others in the field of credit control, but that it

should use any or all of its powers as circumstances might arise. Specifically,

it was the opinion of a majority of those present that, if a further reduction

in reserve requirements of member banks in central reserve cities from 22

per cent to 20 per cent of net demand deposits were made by the Board of

Governors, no further action should be taken by the Board in this field

for the time being and that whatever additional funds were needed to

finance the war should be supplied through open market operations as

directed by the Federal Open Market Committee. It was agreed that, if

this course were followed, substantially larger purchases of securities

for the System open market account would be necessary but that, inasmuch

as purchases of Treasury bills at the fixed discount rate were not to be

limited in amount by the terms of the directions which had been approved

by the Committee, the renewal of the existing directions of the full Com

mittee to the executive committee should be sufficient to meet the situation

for the time being, with the understanding that increased authority for

additional purchases could be granted upon telephonic, telegraphic, or

written approval of a majority of the members of the full Committee if

such action were found to be desirable.

MEETING ON SEPTEMBER

1. Amended Direction to the Federal Reserve Banks to Purchase

Treasury Bills at the Posted Discount Rate.

Upon motion duly made and seconded, the following

amended direction to the Federal Reserve Banks was approved,

Messrs. Eccles, Ransom, Draper, Evans, Williams, Gilbert,

Young, and Leedy voting "aye" and Messrs. Sproul, Szymczak,

and McKee voting "no":

"Until otherwise directed by the Federal Open Market Committee,

the twelve Federal Reserve Banks are directed to purchase all Treasury

bills that may be offered to such Banks on a discount basis at the rate

of 3/8per cent per annum, any such purchases, if desired by the seller,

to be upon the condition that the Federal Reserve Bank, upon the

request of the seller before the maturity of the bills, will sell to him

Treasury bills of like amount and maturity at the same rate of dis

count. All bills purchased outright are to be purchased for the System

open market account. All bills purchased under option to repurchase

are to be held by the purchasing Federal Reserve Bank in its own

account and prompt reports of all such purchases are to be made to the

manager of the System open market account.

"The Federal Reserve Bank of New York, as agent for the System

account, is directed to transfer to the respective Federal Reserve Banks

as promptly as convenient all unmatured bills held in the System

account which were purchased by such Banks for System account under

an option retained by the seller to repurchase and such bills shall be

received and held by such Federal Reserve Banks subject to the first

paragraph of this direction."

It had been the practice of the Federal Reserve Banks in purchasing bills

at the posted discount rate of 3/8per cent to make such purchases for delivery

the following full business day, the customary market practice, it being

understood that in the case of an emergency, in order to provide funds

immediately, the purchase would be made for immediate delivery. Re

purchases by the original sellers of the bills had been on the same basis, i.e.,

for delivery the following full business day. Under this arrangement there

was time for the bills purchased at individual Reserve Banks to be trans

ferred to and held in the System open market account. Inasmuch as the

purpose of the arrangement for the purchase of bills under the repurchase

option was to broaden the market through a wider distribution of bills and

to increase the use of bills as investments for idle funds, it was the opinion

of the majority of the members present that the accomplishment of this

purpose would be promoted if a further step were taken to make the bills

the equivalent of cash such as would be the case if, in addition to the privilege

of selling them to the Federal Reserve Banks for immediate credit, they were

available at the Federal Reserve Banks for immediate delivery when repur

chase was desired. The revised arrangement required that bills subject to

the option be held by each Federal Reserve Bank in a special account separate

from its participation in the System open market account. In published

statements such bills are combined with bills held in the System account.