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 Thursday, May 4, 1944, at 10:45 a.m.

PRESENT:

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Mr.

Eccles, Chairman

Sproul, Vice Chairman

Szymczak

McKee

Draper

Evans

Leach

Young

Davis

Peyton

Mr. Morrill, Secretary

Mr. Carpenter, Assistant Secretary

Mr. Goldenweiser, Economist

Messrs. Williams, Kincaid, and Edmiston,

Associate Economists

Mr. Wyatt, General Counsel

Mr. Dreibelbis, Assistant General Counsel

Mr. Rouse, Manager of the System Open

Market Account

Mr. Thurston, Special 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

Mr. Day, President of the Federal Reserve

Bank of San Francisco

Chairman Eccles stated that, in accordance with the request

made of him and Mr.

Sproul at the last joint meeting of the Board of

Governors and the Presidents of the Federal Reserve Banks, a letter

with respect to attendance at meetings of the Federal Open Market Com

mittee and joint sessions of the Board of Governors and the Presidents

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had been prepared and sent to the Presidents of all the Federal Reserve

Banks in

the following form under date of April 25, 1944, and that in

accordance with the procedure set forth in the letter the first item

on the agenda for this meeting would be statements by Messrs. Golden

weiser and Williams followed by such questions and discussion by the

other economists as they might wish to offer and then by questions from

the members of the Committee:

"When the Board met with the Presidents on March

1, 1944, there was a discussion of the question of attend

ance at meetings of the Federal Open Market Committee and

at joint sessions of the Presidents and the Board of Gov

ernors. At that time it was agreed that Mr. Sproul and I

should work out, in the light of the views expressed, a

plan for future meetings. We have discussed the subject

and feel that the following will tend in the direction of

more orderly procedure:

"Federal Open Market Committee

"Attendance at meetings will be as follows:

1. Members of the Committee;

2. Officers of the Committee;

3. Presidents of the Federal Reserve Banks who are

not regular members of the Committee, when they have occa

sion to be in Washington at the time of the meeting;

4. Messrs. Piser, Kennedy and Thurston;

If there should be need for the attendance of

5.

other members of the staffs of the Board and the Reserve

Banks they will be called at the direction of the Chairman

or the Vice Chairman for attendance during the time when

their participation is desired.

"The established procedure for the Open Market Commit

tee meetings, as you know, provides for reports from the

economists. We believe that they could be more effectively

presented and discussed if, instead of taking them up at

the place on the program heretofore assigned to them, they

were given first place in the order of business of the full

Committee, with an adequate time allowance, preceding other

items on the agenda. The plan which has been suggested to

be followed for the present and which it is expected will

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"be tried out at the next meeting of the Open Market Com

mittee contemplates that the Committee's economists will

agree upon a subject germane to the consideration of open

market policy, of which the members of the Committee will

be advised in advance, and which will be presented in the

first instance by the economist for the Committee and the

associate economist from the New York Bank, followed by

such contributions to the discussion as the other associate

economists may wish to make, and by questions by them and

by members of the Committee. This will enable the members

of the Committee to get the benefit of the thoughts of the

group of economists prior to the Committee's consideration

of open-market policy.

"Executive Committee

of the Federal Open Market Committee

"Attendance at meetings of the Executive Committee of

the Federal Open Market Committee will be as follows:

1. Members of the Executive Committee;

2. Officers of the Executive Committee;

3. Messrs. Piser and Kennedy;

4. If there should be need for attendance of other

members of the staffs of the Board and the Reserve Banks,

they will be called at the direction of the Chairman or the

Vice Chairman for attendance during the time when their par

ticipation is desired.

"Joint Meetings of the Board of Governors

and the Presidents

"The attendance at these meetings will be as follows:

1. Members of the Board of Governors;

2. Presidents of the Federal Reserve Banks;

3. The Secretary of the Board of Governors and

the Secretary of the Presidents' Conference;

4. If there should be need for the attendance of

other members of the staffs of the Board and the Reserve

Banks, they will be called at the direction of the Chairman

of the Board or the Chairman of the Presidents' Conference

for attendance during the time when their participation is

desired.

"Whenever there is to be a meeting of the Presidents'

Conference preceding a joint session of the Presidents with

the Board of Governors, it is understood that the Board will

be furnished copies of the agenda of the Presidents' Con

ference in advance and that when the Conference has con

cluded its deliberations the Board will be advised promptly

as to the conclusions reached, with the expectation that

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-4

"sufficient time will be allowed between the receipt of

this information and the joint session to eanble the Board

to prepare for such discussion as may be desired."

In his statement Mr.

Goldenweiser outlined a tentative program

of postwar economic policy which he suggested might be a basis for dis

cussion and for a more systematic preparation of a plan which might in

turn be considered as a basis for the development of a System program.

Mr. Williams addressed his comments primarily to the nature of the

problem with which this country would be faced after the war and com

mented briefly upon some of the points in Mr. Goldenweiser's statement.

Following the two statements, transcripts of which have been placed in

the files of the Federal Open Market Committee,

the other Associate

Economists present raised questions concerning, and commented upon, the

statements of Messrs. Goldenweiser and Williams, and there was a dis

cussion by the members of the Committee.

Mr. Goldenweiser inquired whether the members of the Committee

were in

general agreement with the suggestion that the research depart

ments of the Board and the Reserve Banks undertake to develop their views

of an economic program for the postwar period, the use to be made of such

studies to be decided when they had been completed.

his inquiry, Mr. Goldenweiser made it

In the discussion of

clear that he was not seeking au

thority from the Committee for the study, as that was a matter for de

cision by the Board of Governors and the Federal Reserve Banks, but

that he would like to know whether the members of the Committee felt

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that the preparation of such a program should be undertaken and whether

they were willing to "give their blessing" to the project.

The Members of the Committee indicated unanimous agreement that

the matter was one of direct interest to the Federal Open Market Commit

tee, as the study might serve as a basis for many of the policy decisions

that the Committee might be called upon to make,

and that therefore in

their opinion the preparation of the program should be undertaken as

promptly as possible.

Mr. Williams suggested that in the first

instance the economists

should present their independent analyses rather than try to agree upon

a single report which might involve undesirable compromising of view

points and emphasis.

At a later stage the separate reports could be

drawn together into a combined program.

There was general agreement

with this opinion.

The meeting recessed at 1:15 p.m. for luncheon and to afford

the executive committee an opportunity to meet, and reconvened at 3:00

p.m. with the same attendance as at the morning session except that

Messrs. Edmiston, Dreibelbis,

and Berntson were not present.

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 29 and March 1, 1944,

were approved, ratified, and confirmed.

Upon motion duly made and seconded,

and by unanimous vote, the actions of the

executive committee of the Federal Open

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Market Committee as set

utes of the meetings of

mittee held on February

March 28-29, 1944, were

and confirmed.

forth in the min

the executive com

29, March 1, and

approved, ratified,

Mr. Rouse distributed copies of a report prepared at the Fed

eral Reserve Bank of New York of open market operations covering the

period March 1 to April 29, 1944, inclusive.

points of the report and supplemented it

He discussed the important

with a statement covering

transactions handled for the System account on May 1, 2, and 3, 1944.

In connection with his report, Mr.

Rouse also said that earlier

in the week Under Secretary of the Treasury Bell called on the tele

phone and expressed concern about what appeared to him to be the weak

tone in the market, particularly in view of the decline in excess re

serves of member banks to between 600 and 700 million dollars.

Rouse stated that he emphasized that the decline in

Mr.

reserves was a

normal development, that there was no cause for concern because of it

or because of the market situation, that the volume of dealings was

very moderate,

and that the price changes were small and well within

the range of the agreed pattern for the securities with which the

System was concerned.

Chairman Eccles said that Mr.

Bell had also talked to him, and

that his reply was that in view of the buying rate on bills the amount

of excess reserves was no longer as important as it

had been and that

unless the Treasury wished to peg the market (which, of course, Mr. Bell

5/4/44

-7

did not want to do) some fluctuations and price declines were inevitable.

Mr. Rouse added that following his conversation with Mr. Bell

he made a number of inquiries throughout the country and found that banks

felt comfortable about the way in which the market was being handled,

and that in

a subsequent conversation with Mr. Bell he seemed to be en

tirely satisfied.

There was a discussion of the possible future market trend of

partially tax-exempt Treasury securities, especially in

the light of

the current discussions of the possibility and that the normal income

tax rate for corporations might be reduced and the surtax increased.

Mr. Rouse said that he had suggested to the Treasury that it

should

make a study of the tax situation of the commercial banks, a large

number of which are entering the excess profits tax class this year,

in order to determine whether this event would make it

advisable to

change the types of securities offered or to recommend changes in tax

legislation.

Chairman Eccles was of the opinion that the responsibility of

the System for an orderly market and the pattern of rates did not relate

to the tax-exempt issues for the reason that the amount of these issues

outstanding in relation to the total was not large and was getting

smaller and the successful financing of the war and the stability of

the market did not depend on the market for these issues except to a

minor degree.

5/4/44

Mr. McKee asked what the responsibility of the Committee would

be if the tax exemption were removed entirely, and Messrs. Eccles and

Sproul suggested that there would be no reason for trying to maintain

tax-exempt securities at their current prices and that possibly the

only thing the System should do would be to cushion the decline to the

extent required in the interest of general stability in

the market.

Upon motion duly made and seconded,

and by unanimous vote, the transactions

in the System account during the period

February 29 to May 3, 1944, inclusive,

were approved, ratified, and confirmed.

Chairman Eccles reported that he had received a letter under

date of April 5, 1944, from Mr. Bell reading as follows:

"The Secretary has asked me to acknowledge receipt

of your letter of March 25, 1944, outlining a procedure

to improve the presentation of Federal Reserve recommenda

tions to the Treasury in regard to important matters of

Government financing.

"We have no objection to the formalization of the

presentation of the recommendations of the Federal Open

Market Committee. We believe, however, that it would be

well to keep many of our conferences on an informal basis.

I am sure it was not intended to in any way interfere

with the authority of the Secretary to require the Pres

idents of the Federal Reserve Banks, acting as fiscal

agents of the United States, to submit their comments on

particular situations in their respective districts and

comments on views expressed by bankers in those districts.

"I feel that it would be much better to follow the

informal procedure we have had in the past, but if the

full Committee has decided that it wants it formalized,

the Treasury will be glad to give it a trial."

The Chairman also reported that, with the approval of Mr. Sproul, he had

sent the following reply to Mr. Bell on April 25, 1944:

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-9-

"I have your letter of April 5 in response to my

letter to the Secretary, dated March 25, in regard to

Federal Reserve recommendations to the Treasury concern

ing important matters of Government financing. It seemed

to us that the conference which Mr. Sproul and I, as

Chairman and Vice Chairman of the Federal Open Market

Committee, had with the Secretary and you, which followed

the receipt of my letter regarding the suggested procedure,

was more satisfactory than previous meetings and yet was

free from unnecessary formality. Our earlier letter did

not, in fact, emphasize formality, as such, but rather

the placing of our discussions on a more clearly defined

basis, and we outlined a procedure which it seemed to

us would accomplish this objective. Consistent with

that procedure, we presented to the Secretary a written

memorandum of the views of the Executive Committee of the

Federal Open Market Committee on prospective Treasury

financing, and we noted with pleasure the Secretary's

comment that the memorandum was an excellent one.

"In my letter of March 25 I said that Mr. Sproul and

I would be glad to discuss this procedure with the Secre

tary if he so desired and at his convenience.

I might

add here, by way of further explanation, that the meeting

of the Federal Open Market Committee on March 1, at which

the new procedure was considered, was attended by all the

Presidents of the Federal Reserve Banks (except San Fran

cisco, which was represented by First Vice President Clerk

in the absence of President Day). There was unanimous

agreement on the plan which was approved by the Committee,

on which, in addition to the members of the Board of Gov

ernors, all the Presidents of the Reserve Banks serve as

members from time to time. It was the feeling of the

Presidents, as well as of the members of the Board of

Governors, that the designated representatives of the

Committee were the appropriate channel through which Fed

eral Reserve recommendations should be submitted, because

the statutory responsibility of the Federal Reserve Sys

tem with respect to open market policies is vested in the

Federal Open Market Committee, and because only the members

of the Committee, and particularly its Executive Committee,

can be expected to be informed of the various considera

tions currently affecting Treasury financing and credit

policy, and the relation of one to the other. In recog

nition of its responsibility, and in the light of its

understanding, the Committee, as you know, has undertaken

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"to exercise its influence toward maintaining conditions

in the United States Government security market that will

be satisfactory from the standpoint of the Government's

war financing requirements.

It is necessary, therefore,

that recommendations of the Federal Reserve to the Treas

ury, with respect to the Treasury financing program,

should be carefully coordinated with its responsibilities.

Under the procedure we have suggested, it was thought

that this would be accomplished, and that the confusion

and misunderstandings which sometimes arise from a less

clearly defined procedure, which does not permit or pro

vide for consideration of all of the material and opin

ions bearing on the problem, and an exchange of views

based thereon, would be largely obviated. This, it

seemed to us, could not help but be beneficial to the

Treasury as well as to the Federal Reserve.

"It was understood, of course, that the individual

Reserve Banks would gladly continue to obtain and furnish

to the Treasury any market information desired from the

respective districts, including the views and recommenda

tions of bankers and others interested, whenever requested

by the Treasury.

We feel confident that, in the light of further ex

perience with this procedure, you will be satisfied with

the results."

The two letters were read, and Mr. Peyton inquired why it

thought that a reply to Mr. Bell's letter was required.

stated that it

was

Chairman Eccles

was not clear from the letter that the Treasury under

stood that the procedure contemplated that the Chairman and Vice Chair

man of the Federal Open Market Committee would be speaking on behalf

of the Presidents as well as the members of the Board of Governors

and that the Treasury would be expected to obtain directly from the

Presidents only such information as the Treasury desired with respect

to the views and recommendations of bankers and others in

tive Federal Reserve districts.

the respec

He also pointed out that the Federal

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Reserve Banks,

not the Presidents, were the fiscal agents of the Treas

ury, and that all the Presidents from time to time served as members

of the Committee.

Mr. Sproul reported for the information of the full Committee

the discussions with representatives of the Treasury of plans for

the Fifth War Loan Drive.

His review covered the substance of the

points mentioned in the minutes of the meeting of the executive com

mittee on March 29, 1944.

In that connection, he suggested that the

Federal Reserve Banks should exercise their influence in the direction

of discouraging speculative purchases of securities in the next drive,

but stated that it

appeared that the Treasury sales organization was

moving in the opposite direction.

Mr. Davis expressed the opinion that, in the absence of a

strong position on the matter by the Treasury, the Treasury sales or

ganization would not discourage speculative purchases,

tioned whether, in

and he ques

the absence of such a position being taken by the

Treasury, the Federal Reserve Banks should discourage such purchases,

as that would only result in unfairness to the banks and others that

complied with the policy.

This matter was discussed, and there was

agreement that unless a strong stand were taken by the Treasury there

would be a large amount of speculative buying in the next drive.

Reference was made to methods used by banks to obtain bonds

of restricted marketability,

and Mr. Young stated that some insurance

5/4/44

-12

companies had purchased these issues and banks had taken them over

under repurchase agreement, holding them as if

ported by the repurchase agreement.

they had a note sup

He also said that the Treasury

had been asked for a ruling on the practice but that an answer had not

yet been received.

Other methods referred to were the purchase of re

stricted securities by bank officers and directors or by wholly-owned

subsidiaries of banks, and there was agreement that the Treasury should

rule on all such cases so that they could be handled in

a uniform man

ner.

Mr.

Sproul proposed that the System's stand on speculative

purchases of securities during the drive be brought to the attention

of the Treasury again and that particular reference be made to the

fact that the policy of the Treasury would have to be effectively

carried out by the Treasury sales organization or otherwise the Fed

eral Reserve Banks would be faced with a policing job that it

would

be impossible for them to perform.

Chairman Eccles suggested that a letter be sent to the Treas

ury in accordance with Mr.

Sproul's suggestion and that in

the letter

mention also be made of the methods referred to above for the purchase

by banks of restricted-marketability securities and the purchase of

marketable securities during the drives for resale to the banks.

Following reference by Mr. Davis to

the action of the last Conference of Pres

idents on this matter, which was concurred

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in by the Federal Open Market Committee

at its meeting on March 1, 1944, Mr. McKee

moved that the suggestions made by Messrs.

Sproul and Eccles be referred to them to

handle with the Treasury through the medium

of a letter or an informal discussion, which

ever in their opinion would be the more ef

fective.

This motion was put by the chair and

carried unanimously.

Mr. McKee referred to the probable decline in the reserve po

sition of the Federal Reserve Banks over the next year and suggested

that, in order that the System might be prepared to meet any situation

that might develop in

the reserve position of the individual Banks,

consideration be given to changing the basis upon which securities in

the System account are allocated among the 12 Federal Reserve Banks.

Mr. Rouse stated that he and Mr.

Smead, Director of the Divi

sion of Bank Operations of the Board of Governors, had been working

on the matter of allocation and had prepared a memorandum which dis

cussed various aspects of the problem.

Copies of the memorandum,

which was dated May 4, 1944, were distributed, and Mr.

Rouse made

the further comment that the memorandum contained no recommendations

but that it

was hoped that the full Committee would indicate its

preference as to its

approach to the matter so that a definite plan

could be prepared for approval by the Committee.

In the discussion which ensued, Mr. Peyton suggested that as

a means of meeting a possible reduction below a satisfactory level in

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the reserve position of individual Federal Reserve Banks all bills

purchased by the Banks be transferred to the System account so that

they could be allocated as a part of that account in

such manner as

to prevent the reserve ratio of a Reserve Bank from falling below a

stated figure.

Mr.

Sproul proposed (1) that, with respect to the long-range

problem of reserve ratios,

the executive committee be requested to

study and report on the action to be taken, its

preparation necessary for its

Committee at its

timing, and the public

successful execution,

next meeting would be in

so that the full

a position to approve a

program which would meet the anticipated decline over the next year

or two in Federal Reserve Bank reserves,

and (2)

that, with respect

to the short-range problem, the members of the full Committee read

the memorandum prepared by Messrs.

Smead and Rouse and send in any

suggestions that they might wish to make with respect to the method

to be used to meet reductions in

the reserve ratios of the individual

Reserve Banks and to the method used in allocating the System open

market account, with the understanding that the executive committee

would be authorized to work out a procedure for handling this problem

which would be recommended to the Banks and, if

accepted by them, put

into effect.

Upon motion duly made and seconded,

and by unanimous vote, Mr. Sproul's pro

posal was approved, it being generally

agreed that for the time being the reserve

5/4/44

-15ratio of a Federal Reserve Bank should not

be allowed to drop below 45.

Inquiry was made whether there might be

need for action before the procedure as out

lined above could be carried into effect, and

it was agreed that if action were called for

the situation could be met in the same way as

was done recently when bills were purchased

from the Federal Reserve Bank of St. Louis by

the Chicago and San Francisco Banks.

There was unanimous agreement on the

part of the members of the Committee that

no change should be made at this time in

the direction issued to the Federal Reserve

Banks at the meeting of the Committee on

March 1, 1944, with respect to the purchase

by the Banks of Treasury bills at a discount

rate of 3/8 per cent with an option on the

part of the seller to repurchase.

In connection with this decision, upon

motion duly made and seconded, it was voted

unanimously that, in the event the procedure

worked out by the executive committee for

allocation of the securities held in the

System and option accounts should require

any change in that direction, the executive

committee would be authorized to make such

changes as might be found to be necessary.

All of the members of the Committee were of the opinion that

there was no occasion at the present time to change in any way the au

thority granted to the executive committee at the last meeting of the

full Committee to direct the execution of transactions for the System

account.

Thereupon, upon motion duly made and

seconded and by unanimous vote, the follow

ing direction was approved with the under

standing that the limitations contained in

5/4/44

-16the direction would include commitments for

purchases or sales of securities for the

System account:

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

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 in the prac

tical 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 (1) bills

purchased outright in the market on a discount basis at

the rate of 3/8 per cent per annum and bills redeemed at

maturity and (2) special short-term certificates of in

debtedness purchased 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 accommoda

tion 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.

Thereupon the meeting adjourned.

Secretary