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 Monday,

PRESENT:

October 18, 1943,

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

at 10:20 a.m.

Eccles, Chairman

Sproul, Vice Chairman

Szymczak

McKee

Ransom

Draper

Evans

Paddock

Young (alternate for Mr. Fleming)

McLarin

Day

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr. Goldenweiser, Economist

Messrs. John H. Williams, MacKenzie,

Bryan, and Wheeler, Associate

Economists

Mr. Dreibelbis, Assistant General Counsel

Mr. Rouse, Manager of the System Open

Market Account

Mr. Clayton, Assistant to the Chairman

of the Board of Governors

Messrs. Piser and Kennedy, Chief and As

sistant Chief, respectively, of the

Government Securities Section, Division

of Research and Statistics of the Board

of Governors

Mr. Berntson, Clerk in the Office of the

Secretary of the Board of Governors

Messrs. Leach, Davis, and Peyton, alternate

members of the Federal Open Market Com

mittee

Messrs. Alfred H. Williams, Leedy, and

Gilbert, Presidents of the Federal Re

serve Banks of Philadelphia, Kansas City,

and Dallas, respectively

Mr. Hays, First Vice President of the Federal

Reserve Bank of Cleveland

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Messrs. Sienkiewicz, Edmiston, and Upgren,

Vice Presidents of the Federal Reserve

Banks of Philadelphia, St. Louis, and

Minneapolis, respectively

Mr. Langum, Assistant Vice President of the

Federal Reserve Bank of Chicago

Messrs. Robb and Rice, Managers of the Re

search and Statistical Departments at

the Federal Reserve Banks of Kansas City

and Dallas, respectively

Mr. Kincaid, Consulting Economist at the

Federal Reserve Bank of Richmond

Mr. Dolley, Economic Adviser at the Federal

Reserve Bank of Dallas

Upon motion duly made and seconded,

and by unanimous vote, the minutes of the

meeting of the Federal Open Market Commit

tee held on June 28, 1943, 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 minutes

of the meetings of the executive committee

held on June 28 and September 7, 1943, were

approved, ratified, and confirmed.

During the meeting there were distributed copies of a report

prepared by the Federal Reserve Bank of New York of open market opera

tions conducted for the System account during the period June 28 to

October 14, 1943,

inclusive, and Mr. Rouse discussed the principal fea

tures of the report.

He also submitted a supplemental report covering

operations in the account on October 15 and 16, 1943, and copies of

both reports have been placed in the files of the Federal Open Market

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Committee.

Upon motion duly made and seconded,

and by unanimous vote, the transactions

in the System account during the period

June 28 to October 16, 1943, inclusive,

were approved, ratified, and confirmed.

Prior to this meeting the members of the Federal Open Market

Committee and the other Presidents of the Reserve Banks had been fur

nished copies of a memorandum prepared by Mr. Rouse under date of

September 4, 1943, and entitled "The Relationship Between the Federal

Reserve Bank of New York and the Dealers in United States Government

Securities" and a memorandum prepared by Mr. Piser under date of

October 6, 1943, and entitled "Relationship of the Federal Reserve

System to Government Security Dealers".

Chairman Eccles stated that

the executive committee had considered these memoranda at an informal

meeting in Washington on October 13, 1943, and that it

had been agreed

to present the following report to the full Committee:

After thorough discussion the members of the execu

tive committee reached the conclusion that the existing

procedure and relationships established by the New York

Bank as described in Mr. Rouse's memorandum of September

4, 1943, should be approved, and that as to the future

there are three alternative courses of action that might

be taken:

1. The full Committee might give formal approval

to the continuation of the existing procedure and rela

tionships established by the New York Bank with the un

derstanding that any proposed change in substance will

be submitted to the Committee for approval;

2. The full Committee might take the position that

in the future the procedure and relationships should be

governed through formal rules and regulations to be adopted

by the Committee under its existing powers; or

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3.

The full Committee might take the position that

the whole problem shoul be reported to Congress with the

recommendation that express statutory authority to regu

late the operations of dealers in the Government security

market be granted.

The executive committee recommends that the full Com

mittee adopt the second alternative.

If this recommendation be approved it is also recom

mended that the executive committee be instructed to pre

pare a draft of rules and regulations based upon the ex

isting procedure and relationships for submission to the

members of the full Committee for formal action thereon

as soon as practicable, with the understanding that, if

the executive committee should be of the opinion that any

substantial change in, or departure from, the existing

procedure or relationships should be embodied in such

rules and regulations, the full Committee will again con

sider the question whether action thereon should be taken

without submitting the matter to Congress.

It was also

understood that the question of the advice to be given

the Treasury regarding the Committee's decision would

be considered.

Mr. Day inquired why it

was believed to be necessary to for

malize the relationships with the Government security dealers rather

than to leave them on the present informal basis, and Chairman Eccles

outlined the principal reasons considered by the executive committee,

including (1)

that the determination of the relationships with the

dealers was a responsibility of the full Committee and (2) that the

ooerations of the System were becoming so large and important in

their

effect that the Committee should be prepared as a matter of record to

justify the procedures followed in

the event of outside criticism.

He

also said that the recommendations of the executive committee did not

contemplate any immediate change in

the existing relationships or that

any publicity would be given to the matter, and that, if

after study

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by the executive committee it

was decided that substantial changes in

the existing procedure should be made,

it

would be determined at that

time whether these changes should be made by the Federal Open Market

Committee under its

existing authority or whether the matter should be

presented to Congress with a request for authority to regulate the op

erations of the Government security dealers.

Mr. Ransom stated that, by approval of the transactions in the

System account at each meeting of the Federal Open Market Committee,

the Committee had tacitly approved the manner in which these operations

had been conducted and the relationships of the Bank with the Govern

ment security dealers, and that any action to formalize or to change

the existing relationships with the dealers would raise the question

whether reference to such action should be included in the policy

record kept by the Board of Governors pursuant to the last paragraph

of Section 10 of the Federal Reserve Act and published in the Board's

annual report.

In response to a question from Mr. Ransom, Mr. Dreibelbis ex

pressed the opinion that, if

the action related only to the mechanics

under which the Federal Reserve Bank of New York and the Manager of the

System account executed transactions for the account, it

would not be

necessary to include a reference to the action in the policy record,

but that if the action involved decisions on questions of general pol

icy such a reference would be necessary.

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10/18/43

Mr. Day said that the Government security market was sensitive

and of increasing importance, that a formalization of the relation

ships of the System with the dealers might result in injury to the

Market, and that, therefore,

in

he would be inclined to be very cautious

making any change in the existing situation.

Following a discussion of possible

future cnaracteristics of the Government

security market and of the growing impor

tance of the System's operations in that

market, it was moved and seconded that the

recommendation of the executive committee

be approved.

This motion was put by the chair and

carried unanimously.

Mr. Sproul moved that the Federal

Open Market Committee approve the contin

uance of the existing procedure and rela

tionships as established by the Federal

Reserve Bank of New York in order that no

question might be raised as to the status

of the existing relationships with the Gov

ernment security dealers pending the further

action of the full Comittee, and that the

executive committee be instructed to prepare

a draft of rules and regulations for submis

sion to the full Committee for formal action

as soon as practicable.

This motion, having been duly seconded,

was put by the chair and carried unanimously.

Mr. Goldenweiser stated taat, in accordance with the procedure

followed at the last meeting of the Federal Open Market Committee with

respect to statements by economists for the Committee, he had arranged

for Mr. MacKenzie to make a statement to the Committee on the impact

the

of

war on the industrial situation in the Fourth Federal Reserve

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District and for Mr. Wheeler to talk on the manpower problem on the

Pacific Coast, after which he (Mr.

Goldenweiser) would discuss certain

aspects of the price problem and the situation with respect to rates

on short-term Government securities.

Statements were made in that or

der, and transcripts thereof have been placed in the files of the Fed

eral Open Market Committee.

Chairman Eccles then called on John H. Williams for any com

ments he might wish to make.

Mr. Williams concurred in a statement

made by Mr. Goldenweiser that some action should be taken in connection

with the rates on short-term Government securities.

He also discussed

briefly the question that might be confronted following the war whether

a number of relatively unproductive projects should be undertaken for

the purpose of achieving full employment or whether we should continue

to use improved methods of production developed during the war period

notwithstanding the fact that they would not increase employment com

mensurately.

There was a discussion of some of the questions raised in the

statements made by Messrs. MacKenzie and Wheeler, and particular refer

ence was made to the point presented by Mr. Wheeler that postwar em

ployment could not be solved by action within a particular district but

would require coordinated consideration and action on a national scale.

Comments made in this connection emphasized the necessity for the ef

fective coordination of the regional research studies of the Federal

10/18/43

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Reserve Banks.

Thereupon the meeting recessed and reconvened at 2:25 p.m.

with the same attendance as at the morning session.

In connection with the discussion of the results of the Third

War Loan Drive, copies were distributed of a tabulation prepared in

the Board's Division of Research and Statistics under date of October

16, 1943, which indicated that as of the close of October 14, 1943, a

total of $18,644,000,000 of securities had been sold during the drive.

Mr. Goldenweiser said that the Division of Research and Statistics was

preparing a statement on the drive for the next issue of the Federal

Reserve Bulletin and that if

copies of the statement were not ready for

distribution before the Presidents left

Washington they would be mailed

to them as soon as available.

Reference was made to the extent to which loans had been made

during the drive for the purpose of purchasing and carrying Government

securities, and Mr. Piser stated that reports indicated that between

September 8 and October 6 loans to others than brokers and dealers for

purchasing or carrying securities increased by $774,000,000 and that

loans to brokers and dealers increased by $892,000,000.

There was also

a discussion of the extent to which securities sold during the drive

had been purchased by banks.

Chairman Eccles expressed the opinion that, if

the Treasury

were willing to do some additional bank financing between now and the

next drive, it

would not be necessary to make the drive before April

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10/18/43

of next year.

Comments were made on changes which, on the basis of experi

ence during the Third War Loan Drive, it

able in the succeeding drive, and it

was believed would be desir

was indicated that all of the

Presidents and the members of the Board were agreeable to the members

of the executive committee making such suggestions to the Treasury De

partment at an appropriate time.

In this connection Mr. Davis read a telegram which he, as Chair

man of the Presidents' Conference Committee on Fiscal Agency Operations,

sent today to Under Secretary of the Treasury Bell who was attending a

conference of representatives of the Treasury and the Federal Reserve

Banks on fiscal agency matters in Chicago, Illinois.

transmitted a statement approved by the Presidents'

The telegram

Conference in which

it was agreed that the difficulty with allocations of securities which

was encountered in the last drive would be largely eliminated in the

next drive if

State, county, and other local quotas were fixed only

for individual subscriptions with no quotas for corporate subscriptions

except for the nation as a whole, but that if

corporate subscriptions

were to be included in State, county, and other local quotas certain

suggestions should be followed as outlined in the telegram.

Mr. Rouse suggested that the Treasury financing program might

be more effective if

the next drive, possibly in January, were re

stricted to individual subscriptions,

named, by (1) a refunding operation,

to be followed, in the order

(2) an offering to savings banks

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and insurance companies,

and (3)

the opening of an outstanding issue

or issues for corporate subscription.

Chairman Eccles stated that during the course of the next four

or five weeks the members of the executive committee should give con

sideration to the whole problem of Treasury financing policy and pre

pare a memorandum for use as the basis for further discussions with

representatives of the Treasury.

Inquiry was made by Chairman Eccles whether it

would be appro

priate for the Federal Open Market Committee to endorse the statement

of the Presidents'

Bell.

Conference referred to in

the telegram sent to Mr.

Mr. Leedy suggested that for the Committee to act on this one

aspect of the financing program would emphasize the point out of all

relation to its

but it

importance.

This opinion was unanimously concurred in

was understood that, in future discussions with representatives

of the Treasury, the members of the executive committee would be au-.

thorized to say that the statement expressed the views of the members

of the Federal Open Market Committee as well as the Presidents of all

of the Federal Reserve Banks.

Chairman Eccles then referred to the discussions which members

of the executive committee had had since the last meeting of the full

Committee with respect to the direct replacement of maturing bills held

in the System and option accounts and stated that it

had been agreed at

the informal conference of the members of the executive committee held

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10/18/43

on October 13, 1943,

that there should be presented at this meeting of

the full Committee (1) the substance of the memorandum read by Mr.

Sproul at the conference in which he made the suggestions, among others,

that the rate on Treasury bills should be increased to 1/2 per cent

and that in the existing circumstances the System should be in a posi

tion to place bids with the Treasury each week for bills in amounts up

to the amount of maturing bills held in the System and option accounts

and (2) the suggestion previously made to the Treasury, and renewed by

Chairman Eccles for consideration at this meeting, that the Treasury

issue a 3/4 per cent 9-month bill instead of continuing the issuance

of the existing bills and certificates.

Mr. Sproul stated that the substance of his memorandum was

given to the Presidents at the Presidents'

October 15 and 16, 1943.

Conference in New York on

Thereupon Chairman Eccles read the memorandum

which had been prepared under date of October 16, 1943, at his request

in which were set forth the reasons why, in his opinion, the issuance

of 3/4 per cent 9-month bills appeared to be the best solution of the

existing situation in the short-term Government security market.

Mr. Sproul stated that he had also proposed to the Presidents

a third alternative suggestion that the Treasury issue a 5/8 per cent

4-month bill to replace existing bills.

He said that, while he agreed

completely that something should be done to increase the rates in the

short-term market, he questioned whether the 3/4 per cent bill was the

way to do it,

since a rate change which appeared to be so substantial

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might have the effect of disturbing the rates on longer-term securi

ties and since the elimination of the present bill and certificate

might look like tampering with machinery which, on the whole,

is work

ing successfully, and since these two reactions might result in im

pairing the confidence of the public to the extent of interfering with

the financing program.

Mr. Sproul's statement was followed by a discussion of the

relative merits of the three alternative courses of action that had

been proposed for making the desired adjustment in

short-term rates

and there was unanimous agreement that some action to correct the ex

isting situation was necessary.

A canvass of the views of the Presi

dents indicated that, while they were in

agreement that the alternative

suggestions of a 5/8 per cent 4-month bill

(to take the place of ex

isting 3-month bills) or a 3/4 per cent 9-month bill (to take the place

of existing bills and certificates of indebtedness)

to the Treasury for decision,

should be presented

there was a majority preference for the

issuance of a 5/8 per cent 4-month bill.

At Chairman Eccles' request, copies were distributed of a mem

orandum addressed to him under date of October 16, 1943 by Messrs.

Dreibelbis and Piser which read as follows:

"In view of the fact that the previously outlined

program for the replacement of Treasury bill maturities

would, in opinion of counsel, involve the necessity of

charging all such purchases against the 5 billion dollar

authority for purchasing direct from the Treasury, it

appears that the System is faced with two alternatives

10/18/43

"in meeting this problem. First, the Treasury could give

the System the privilege of exchanging its weekly maturing

bills for an exactly equivalent amount of new bills at 3/8

of one per cent. In this event, the Treasury would reduce

the public offering each week by the amount of the System's

maturities. If the System's maturities, for example, were

400 million dollars, the public offering would be 600 mil

lion. Second, the System could place tenders at 3/8 of

one per cent in an amount not exceeding the amount of its

weekly maturities. The System would receive the same per

centage allotment as would other bidders at the same rate,

but the Treasury would give the System the privilege of

exchanging maturing bills for whatever amount of the new

bills were allotted to it. The attached draft of a press

statement contains the reasons for the new procedure; al

though it is written on the assumption that the second al

ternative will be followed, it could easily be revised to

substitute the first alternative."

Mr. Dreibelbis stated that he had discussed the procedures re

ferred to in the memorandum with counsel for the Treasury and that there

was agreement that legally the Treasury had the necessary authority to

give the System the privilege of exchanging maturing bills for new bills

as would be contemplated if either of the procedures should be adopted.

There was unanimous agreement that the second procedure would be the

more desirable one.

Mr. Sproul inquired whether the Manager of the System account

should undertake to replace maturing bills held in the option accounts

with the understanding that bills taken in

replacement would be held in

the System account, or whether, in the light of counsel's opinion, it

would be necessary for the replacements of option bills to be issued to

the individual Banks as owners.

Mr. Piser stated that this question

could be met by the transfer of maturing bills held in the option ac

counts to the System account with the understanding that a bid for

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replacement bills would be made for the System account.

There was a discussion of the necessity for a press statement

in the event arrangements were made for direct replacement of bill

turities, and it

ma

appeared to be the general consensus that a complete

statement on the matter should be made, pointing out, however, that the

operation involved merely the replacement of maturing securities held

by the System.

At the conclusion of the discussion,

upon motion duly made and seconded and by

unanimous vote, the executive committee was

directed to work out with the Treasury and

put into effect an arrangement under which

a tender would be made each week for new

bills in an amount not exceeding the total

amount of maturing bills in the System and

option accounts.

This action was taken with the under

standing that when the arrangement went in

to effect the executive committee was au

thorized to issue a statement to the press

in such form as in its judgment the circum

stances required.

Consideration was then given to the direction to be issued to

the executive committee to effect transactions in

the System account

pending another meeting of the full Committee which it

was felt would

not be necessary before sometime in January of next year.

Messrs.

Sproul and Rouse expressed the opinion that the renewal of the exist

ing authority would be adequate to meet any situation that might be

expected to arise in

that period, inasmuch as a substantial amount of

bills would continue to be purchased in

the option accounts of the

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Federal Reserve Banks.

Thereupon, upon motion duly made and

seconded and by unanimous vote, the follow

ing direction was approved:

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 ac

count, 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 in the

practical administration of the account, or for the pur

pose 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 securi

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

than special short-term certificates of indebtedness pur

chased from time to time for the temporary accommodation

of the Treasury) shall not be increased or decreased by

more than $1,500,000,000.

That the executive committee be further directed,

until otherwise directed by the Federal Open Market Com

mittee, 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 ac

commodation of the Treasury; provided that the amount of

such certificates held in the account at any one time

shall not exceed $1,500,000,000.

This action was taken with the un

derstanding (1) that the limitations con

tained in the direction were understood

to include commitments for purchases or

sales of securities for the System account

and (2) that, in the event the arrangement

worked out for the direct replacement of

maturing bills provided for the transfer

of such bills held in the option accounts

to the System account and the holding of

the bills taken in replacement in the Sys

tem account, the limitations contained in

the direction would not apply to such trans

fers or replacements.

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10/18/43

Reference was made to the informal discussions, which had

taken place in connection with the possible issuance of a 3/4 per

cent Treasury bill, with respect to the question whether any change

should be made in the discount rates now in effect at the Federal Re

serve Banks on advances secured by Government obligations, and there

was unanimous agreement that no suggestion should be made by the Fed

eral Open Market Committee on this matter at this time.

Inquiry was made whether, in the event of a decision of the

Treasury to increase the rate on existing bills or to issue 5/8 per

cent or 3/4 per cent bills, any change should be made in the outstand

ing direction to the Federal Reserve Banks to purchase Treasury bills,

and it

was suggested that, while no action need be taken on the matter

at this time,

it

would be necessary to issue a revised direction at

the time action was taken by the Treasury.

Thereupon, upon motion duly made and

seconded and by unanimous vote, it was de

cided that, in the event action were taken

by the Treasury prior to the next meeting

of the Committee, the members of the Commit

tee would approve by wire the issuance of

a direction to the Federal Reserve Banks

to purchase all Treasury bills that might

be offered to such Banks on a discount ba

sis at the rate at which such bills were

issued by the Treasury, any such purchases

to be upon the condition that the Federal

Reserve Bank, upon the request of the sell

er before the maturity of the bills, would

sell to him Treasury bills of like amount

and maturity at the same rate of discount.

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Thereupon the meeting adjourned.

Secretary.

Approved:

Chairman.