FOMC Minutes

THIRTIETH

ANNUAL REPORT

of the

BOARD OF GOVERNORS OF THE

FEDERAL RESERVE SYSTEM

COVERING OPERATIONS FOR

THE YEAR

1943

FEDERAL RESERVE SYSTEM

RECORD OF POLICY ACTIONS

FEDERAL OPEN MARKET COMMITTEE

MEETING ON JANUARY

26,

1943

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

Mr. Szymczak; Mr. McKee; Mr. Ransom; Mr. Draper; Mr. Evans; Mr. Wil

liams; Mr. Gilbert; Mr. Young; Mr. Leedy.

1. 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 issued at the meeting of the Federal Open

Market Committee on December 14, 1942., was approved by

unanimous vote:

"That the executive committee be directed, until otherwise directed

by the Federal Open Market Committee, to arrange for such transac

tions for the System open market account, either in the open market

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

placement of maturing securities, and letting maturities run off without

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; provided that

the aggregate amount of securities held in the account at the close of

this date (other than special short-term certificates of indebtedness

purchased from time to time for the temporary accommodation of the

Treasury and Treasury bills purchased pursuant to the direction of the

Federal Open Market Committee issued under date of September 28,

1942) shall not be increased or decreased by more than 1 billion dollars.

"That the executive committee be further directed, until otherwise

directed by the Federal Open Market Committee, to arrange for the

purchase for the System open market account direct from the Treasury

of such amounts of special short-term certificates of indebtedness as may

be necessary from time to time for the temporary accommodation of the

Treasury; provided that the amount of such certificates held in the

account at any one time shall not exceed 1 billion dollars."

The open market policy under which purchases of Government securities

were made in 1942. was determined with a view to adapting the System's

open market operations as effectively as possible to the program of the

Treasury for war financing and to carrying out the commitment of the System

to use its powers to assure that an ample supply of funds would be available

at all times for financing the war effort and to exert its influence toward the

maintenance of conditions in the Government security market that were

satisfactory from the standpoint of the Government's requirements.

With the continued growth in the volume of production for war and in

the absence of a very large increase in taxes, it was realized that the require

ments of the Government for borrowed funds would be larger during the

current year; that the needs of banks for reserve funds would continue to

expand because of the growth in their deposits as a result of Government

91

borrowing and because of increases in currency circulation, and that it would

be necessary for the System to continue to supply these reserve funds. It

was agreed, therefore, that the existing policy of authorizing the executive

committee to purchase or sell securities for the System account within stated

limits for the purposes stated in the direction set forth above should not be

changed and that the renewal of the existing direction to the executive com

mittee would carry that decision into effect.

2. Replacement of Maturing Securities.

Upon motion duly made and seconded, it was understood

that, under the authority granted to the executive committee,

it would undertake to arrange with the Treasury for an amend

ment to the terms under which the various issues of Govern

ment securities were offered so as to permit full allotment to the

System of securities issued to refund maturing direct obligations,

to the extent that replacement of such maturing securities held

in the System account appeared to the executive committee to be

desirable.

On this motion Messrs. Eccles, Szymczak, McKee, Ransom,

Draper, Evans, Gilbert, Young, and Leedy voted "aye" and

Messrs. Sproul and Williams voted "no."

This action was taken following consideration of the procedures that

might be used to supply needed reserve funds to the market and was designed

particularly to open the way for the direct replacement of maturing bills

held by the Federal Reserve Banks. It was the majority view that inasmuch

as the Reserve Banks held substantial amounts of maturing bills each week,

which would have to be replaced with other securities in order to maintain

the necessary volume of funds in the market, that could be accomplished

most effectively if arrangements were made for full allotment of new bills

in the amount of the maturing bills held by the Federal Reserve Banks.

It was pointed out that this procedure, which was the same as that gen

erally followed in the past in connection with the replacement of maturing

certificates, notes, and bonds held in the System account, would not result

in placing any additional funds in the market but would obviate the necessity

on the part of the Treasury of redeeming the weekly maturities of bills fol

lowed by competition on the part of the Federal Reserve Banks in the market

for a similar amount of new bills, in order to effect an indirect replacement

that could be accomplished with less disturbance to the market by direct

replacement. The availability of this arrangement was believed to be partic

ularly desirable during a period when it was expected that the System would

have to purchase in the market a very substantial amount of additional securi

ties for the purpose of supplying needed reserve funds.

It was the minority view that nothing should be done which might create

public concern about the credit of the Government; that to embark on a

program of direct buying of bills from the Treasury might create such con

cern; and that therefore direct purchases of bills from the Treasury, to replace

maturing bills held by the Federal Reserve Banks, should not be resorted to

until necessity forced such action, which could then be clearly explained.

The minority felt that, for the present, the better procedure would be to

continue to let the market take the bills it wanted, and, in so far as neces

sary, to replace System bill maturities indirectly through the market, or

with other securities the market might wish to sell, this procedure having

the advantage of public acceptance through previous experience.