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 Tuesday, February 29, 1944, at 10:15 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Eccles, Chairman

Sproul, Vice Chairman

Szymczak

McKee

Ransom

Draper

Evans

Paddock

Fleming

McLarin

Peyton (alternate for Mr. Day)

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr. Goldenweiser, Economist

Messrs. John H. Williams, MacKenzie,

Bryan, and Wheeler, Associate

Economists

Mr. Wyatt, General Counsel

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

Assistant 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, Young, and Davis, alternate

members of the Federal Open Market

Committee

Messrs. Alfred H. Williams, Leedy, and

Gilbert, Presidents of the Federal Re

serve Banks of Philadelphia, Kansas

City, and Dallas, respectively

2/29/44

-2Mr. Clerk, First Vice President of the

Federal Reserve Bank of San Francisco

Messrs. Sienkiewicz, Edmiston, Upgren,

and Hardy, Vice Presidents of the

Federal Reserve Banks of Philadelphia,

St. Louis, Minneapolis, and Kansas

City, respectively

Mr. Kincaid, Consulting Economist at the

Federal Reserve Bank of Richmond

Mr. Dolley, Economic Adviser at the Fed

eral 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 October 18, 1943, were approved.

Upon motion duly made and seconded,

and by unanimous vote, the actions of the

members of the Federal Open Market Commit

tee (1) on November 19, 1943, in author

izing an arrangement under which dealers

would offer bills to the Federal Reserve

Bank of New York at the posted rate without

a repurchase option and the Bank would pur

chase the bills for the System account, and

(2) on December 1, 1943, in excluding from

the limitation on the authority of the ex

ecutive committee to increase or decrease

the amount of securities held in the System

account bills purchased outright in the market

on a discount basis at the rate of 3/8 per

cent per annum, were approved, ratified, and

confirmed.

Upon motion duly made and seconded, and

by unanimous vote, the actions of the execu

tive committee of the Federal Open Market

Committee as set forth in the minutes of the

meeting of the executive committee held on

October 18, 1943, were approved, ratified,

and confirmed.

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Distribution was made of copies of a report prepared at the

Federal Reserve Bank of New York of open market operations covering

the period October 19,

1943, to February 24, 1944, inclusive.

Mr.

Rouse reviewed the more important matters covered by the report as

well as the transactions effected in

25, 26,

and 28, 1944.

the System account on February

A copy of the report has been placed in the

files of the Federal Open Market Committee.

Upon motion duly made and seconded,

and by unanimous vote, the transactions

in the System account during the period

October 18, 1943, to February 28, 1944,

inclusive, were approved, ratified, and

confirmed.

In connection with Mr. Rouse's report, there was a brief dis

cussion of the Fourth War Loan Drive, the probable further growth in

bank deposits and currency in circulation, Government receipts and ex

penditures,

and the probable amounts of securities that the System

might have to acquire during the coming year in order to supply the

market with needed reserves and to maintain about the present general

level of Government security prices.

In a discussion of the prices at which certificates had been

purchased for the System account in

the recent past and the prices at

which future purchases should be made, Chairman Eccles suggested that

it was desirable that these issues be purchased at prices which would

discourage as much as possible the temptation to sell the issues, par

ticularly during war loan drives, in

order to purchase new issues of

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certificates, and that for that purpose it

would be desirable that

purchases for the System account be as near the offering price as

possible without regard to maturity in order to avoid paying a

premium on the shorter maturities.

Reference was made to the extent to which funds were borrowed

during the Fourth War Loan Drive for speculative purchases of securi

ties, and Mr. Rouse stated that it

appeared from reports from New

York sources and from reports received by dealers from the field that

such purchases were in

greatly reduced volume as compared with the

Third War Loan Drive.

Under date of January 28, 1944, the Examiner in Charge for

the Board of Governors submitted to Mr. Morrill, as Secretary of the

Federal Open Market Committee,

a copy of a report of the examination

of the System open market account as of November 13, 1943, made as a

part of the regular examination of the Federal Reserve Bank of New

York.

Copies of the report were sent to the members of the Federal

Open Market Committee under date of February 1, 1944.

Upon motion duly made and seconded,

and by unanimous vote, the report, which

contained no criticisms or recommendations,

was received and ordered filed.

Chairman Eccles stated that in a meeting just before this

meeting the executive committee approved a recommendation to the full

Committee with respect to the terms upon which the Federal Reserve

Bank of New York would transact business with dealers in United

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States Government securities for the System open market account, and

that this action had been taken by the executive committee with the

understanding that the full Committee would be requested, in the event

of the adoption of the suggested terms, to authorize the executive

committee (1) to make such changes in the form of the statement of

terms as appeared to be desirable following the discussion of the

matter at this meeting,

(2) to make the terms effective at such time

as in the judgment of the executive committee appeared to be desirable,

and (3)

to issue such instructions to the New York Bank in connection

therewith as might be required, including possibly the requirement

that, if

a dealer were removed from the approved list

of dealers for

violating the terms, he should not be restored to the list

without

the approval of the executive committee.

The recommendation of the executive committee was read, and

in the ensuing discussion Mr. McKee inquired whether the language of

the proposed terms was broad enough to cover field representatives of

dealers.

There was general concurrence in the opinion that the sug

gested terms would be applicable to all representatives and agents of

a qualified dealer and that it

would be his responsibility to acquaint

his personnel with the meaning of the proposed terms and the extent

of his commitment in

subscribing to them.

Chairman Eccles stated other ways that had been discussed

of meeting the problem of the relationship with the dealers

included

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(1) the establishment at the Federal Reserve Banks and their branches

of an organization to handle purchases and sales of Government securi

ties now handled by the dealers, (2)

the adoption of a policy requir

ing that transactions handled by the dealers for the System open market

account be on a brokerage basis only, and (3)

the inclusion in the

Board's annual report to Congress of a statement of the problem created

by the present situation in which there is no express statutory basis

upon which dealers in Government securities can be subjected to ade

quate regulation.

He also said that the executive committee felt that

the procedure recommended by it

for the present, that it

was the most satisfactory,

at least

might be necessary at a later date to consider

modification of the procedure or adoption of one of the other avail

able alternatives, but that it

was felt that if

the dealers cooperated

in the proposed arrangement, as the executive committee felt confident

they would,

the procedure should work satisfactorily.

There was a discussion of a second question raised by Mr.

McKee whether, in

the event of large shifts of deposits following the

war which would necessitate substantial sales of securities by the

banks losing the deposits, the existing dealer organization,

operating

under the terms proposed by the executive committee, would be able to

furnish a satisfactory market for such sales, particularly by the

smaller banks, and whether the Federal Reserve Banks should not be

prepared to handle that business.

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2/29/44

In that connection Mr. Davis stated that there had been some

comment in

the Eighth Federal Reserve District about the inability of

holders of 2-1/2 per cent bonds, which are ineligible for bank invest

ment, to find a ready market for small lots of such securities.

Messrs.

Sproul and Rouse stated that there was no question

about the willingness of the System account to take the 2-1/2 per

cent bonds of restricted marketability, particularly in small lots,

that a substantial amount of these issues had been purchased, but

that it

had been the custom of the New York Bank not to facilitate

the sale of larger blocks of $250,000 and up merely to enable the

seller to purchase similar new bonds as part of the war loan drive,

and that in

such cases it

had been suggested that the dealer take

an order for the sale and try to find a customer in the market.

Mr. McLarin inquired whether dealer banks in other cities,

such as New Orleans or Dallas, could qualify under the proposed

terms.

Mr. Rouse replied in

the affirmative,

stating that it

was

not expected that many of such banks would be interested in qualify

ing.

Mr. Davis inquired whether it

was the intention under the

recommendation of the executive committee to qualify all who met the

requirements proposed in the recommendation or only the dealers pres

ently having relationships with the Federal Reserve Bank of New York.

Mr. Rouse said that the former was intended, and it

was agreed that

the final draft of statement should make this point entirely clear.

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2/29/44

Mr. Leedy inquired whether the proposed procedure would have

any effect on the present practice of the Federal Reserve Banks of pur

chasing and selling Government securities as agents for their member

banks, and it

was agreed that it

would not.

In a discussion of the steps to be taken to put the suggested

procedure into effect, there was unanimous approval of the suggestion

by Mr. Sproul that the Treasury should be informed of what the com

mittee proposed to do so that any objections that the Treasury might

have could be considered before the arrangement was made effective.

At the conclusion of the discussion,

upon motion duly made and seconded and by

unanimous vote, the proposed terms were ap

proved in substance with the understanding

(1) that the executive committee was au

thorized to make such changes in the form

of the statement of terms as appeared to

be desirable, (2) that the procedure would

be put into effect at such time as in the

judgment of the executive committee such

action appeared to be desirable after hav

ing informed the Treasury of the proposed

arrangement, and (3) that the executive

committee was authorized to issue such in

structions to the Federal Reserve Bank of

New York as agent for the System account

in connection with the proposed procedure

as appeared to the executive committee to

be desirable, including the manner in which

advice of the arrangement was to be sent

to dealers who might qualify thereunder.

Chairman Eccles read a review which had been prepared of dis

cussions with the Treasury since the last meeting of the Federal Open

Market Committee with respect to the direct replacement of maturing

2/29/44

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bills held in

the System open market account.

has been placed in

A copy of the review

the files of the Federal Open Market Committee.

Chairman Eccles then stated that it

had been the experience

of the members of the Board and the Presidents of the Federal Reserve

Banks who had served as members of the executive committee from time

to time that the present informal relationship with the Treasury in

connection with discussions of Treasury financing policy and procedures

had not been at all satisfactory,

that it

would be very helpful if

a

more definite understanding with respect to this relationship could

be reached, and that he had had prepared a statement for this purpose

for consideration by the Federal Open Market Committee at this meet

ing.

The statement was read and it

was agreed that further considera

tion should be given to the matter at the meeting of the Federal Open

Market Committee to be held tomorrow.

Thereupon the meeting recessed and reconvened at 2:10 p.m.

with the same attendance as in

the morning session except that Mr.

Thurston, Special Assistant to the Chairman of the Board of Governors,

and Mr. Parry, Director of the Division of Security Loans of the Board

of Governors,

were in attendance.

Mr. Goldenweiser stated that in accordance with the arrange

ment which had been agreed upon for having statements from the econo

mists for the Open Market Committee,

Edmiston and Upgren.

statements would be made by Messrs.

Mr. Edmiston talked on the agricultural situation

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2/29/44

in the South and Mr. Upgren discussed some of the longer-range prob

lems of banking. Mr. Goldenweiser presented a picture of the possible

relationships between the volume of postwar employment and production,

after which Mr. John H. Williams discussed some of the monetary prob

lems of the war and postwar periods.

Transcripts of these statements

have been placed in the files of the Federal Open Market Committee.

In the discussion which followed, Chairman Eccles stated that

the economists had presented some far-reaching questions for which

answers would have to be found if

avoided in

serious difficulties were to be

the postwar period, that the Federal Reserve System was

as well qualified as any organization to supply some of the answers

to these questions, and that he hoped the economists of the System

would direct their studies to this end.

Subsequently and pursuant to author

ity granted at this meeting, the statement

of terms upon which the Federal Reserve

Bank of New York will transact business

with brokers and dealers in United States

Government securities for the System ac

count was approved by the members of the

executive committee in the form set forth

below:

"TERMS ON WHICH FEDERAL RESERVE BANK OF NE YORK WILL

TRANSACT BUSINESS WITH BROKERS AND DEALERS IN UNITED STATES

GOVERNMENT SECURITIES FOR THE SYSTEM OPEN MARKET ACCOUNT

"The Federal Open Market Committee has directed the Fed

eral Reserve Bank of New York (hereinafter referred to as the

Bank) to transact business in United States Government securi

ties for the System open market account with reputable brokers

and dealers in such securities who meet the qualifications and

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"agree in writing to comply with the terms and conditions

set forth below.

"1. In determining whether a person (indi

vidual, partnership or corporation, including a

bank) is a qualified broker or dealer with whom

the Bank will transact business, and the extent

to which business will be transacted with such

person, the following factors will be taken into

consideration:

(a) Integrity, knowledge, and capacity and

experience of management;

(b) Observance of high standards of commercial

honor and just and equitable principles

of trade;

(c) Willingness (in the case of a dealer) to

make markets under all ordinary conditions;

(d) The volume and scope of business and the

contacts such business provides;

(e) Financial condition and capital at risk

of business; and

(f) The reliance that can be placed on such

person to cooperate with the Bank and the

Federal Open Market Committee in maintain

ing an orderly market for Government se

curities; to refrain from making any recom

mendations or statements or engaging in

any activity which would encourage or stim

ulate undue activity in the market for

Government securities; and to refrain from

disclosing any confidential information

which he obtains from the Bank or through

his transactions with the Bank.

"2. The Bank will obtain from such person an agree

ment in writing to comply with the following terms and

conditions:

(a) He will furnish the Bank with a statement

for the confidential information of the Bank

and the Open Market Committee showing as of

the close of business each business day:

(1) The total amount of money borrowed

(directly and indirectly);

(2) The par value of all Government se

curities borrowed;

(3) His position, both long and short,

in Government securities, classified

by classes of securities and maturity

groups (or by issues, if so requested

by the Bank);

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"(4) The volume of transactions during the

day in Government securities, classi

fied by classes of securities and ma

turity groups (or by issues, if so re

quested by the Bank); and

(5) Such other statistical data as in the

opinion of the Bank will aid in the

execution of transactions for the Sys

tem open market account.

(b) At or before the completion of each transac

tion with the Bank, he will furnish the Bank

with a written notification disclosing whether

he is acting as a broker for the Bank, as a

dealer for his own account, as a broker for

some other person, or as a broker for both

the Bank and some other person. In the ab

sence of a special agreement to the contrary

with the Bank with respect to a particular

transaction, he will not act as broker for

any other person in connection with any

transaction with the Bank, and he will re

ceive no compensation or profit of any kind

in connection with the transaction other

than the specified commission paid him by

the Bank.

In the absence of special arrangements with

(c)

the Bank, delivery of securities will be made

at the office of the Bank before 2:15 p.m. on

the next full business day following the day

of the contract and all payments by the broker

or dealer will be in immediately available

funds.

(d)

(e)

He will furnish the Bank not less frequently

than once during each calendar year with a

report of his financial condition as of a

date not more than 45 days prior to the de

livery of the report to the Bank in form ac

ceptable to the Bank and prepared or cer

tified by a public accountant acceptable to

the Bank; and, upon the request of the Bank,

he will furnish it with a statement of condi

tion as shown by his books as of a date

specified by the Bank.

Unless the Bank shall have informed him of

its desire to purchase or sell a particular

issue of Government securities, he will not

solicit from any other person offerings of

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"or bids for any issue of Government securi

ties for the purpose of placing himself in

a position to offer to sell to or buy from

the Bank securities of such issue.

"The Federal Open Market Committee has further directed

that the Bank decline to transact any further business with

a broker or dealer in any case in which the Bank has con

cluded that the broker or dealer no longer meets the qualifi

cations set forth above or has willfully violated or failed

to perform any of the terms and conditions set forth in the

agreement.

"To the Federal Reserve Bank of New York:

"The undersigned hereby agrees to meet the qualifications

and to comply with the terms and conditions set forth above.

"Dated:

(Signature)"

Thereupon the meeting adjourned with the understanding that a

meeting of the Federal Open Market Committee would be held tomorrow,

March 1, 1944, at 10:00 a.m.

Secretary.

Approved:

Chairman.